U.S. biotechnology company Genzyme Corp and Sanofi-Aventis have executed a nondisclosure agreement, effectively giving the French company the ability to examine Genzyme's books as they continue talks on a possible merger.

While the two companies previously disclosed they are in talks, Genzyme will be sharing certain nonpublic information with Sanofi, leading to the need for the agreement, according to a U.S. securities filing.

Sanofi previously launched an $18.5 billion hostile offer, or $69 a share, to acquire Genzyme, which rejected the bid as too low. Genzyme shares closed on Friday at $71.10 and have consistently traded above the offer price. Sanofi shares rose 0.6 percent on Monday.

This is a critical step that will allow Sanofi to conduct official diligence, ISI Group analyst Mark Schoenebaum said.

The decision to sign a confidentiality pact follows positive comments on the potential for a deal from the chief executives of the two companies last week. Chris Viehbacher of Sanofi and Genzyme's Henri Termeer both told Reuters during the annual meeting of the World Economic Forum in Davos, Switzerland, that they had made progress in takeover discussions.

Termeer added that a proxy battle for control of the U.S. biotech company was unlikely, since both sides were constructively engaged.

One critical issue in the discussions has been the potential use of a contingent value right, an extra fee shareholders would receive should Genzyme's experimental multiple sclerosis treatment Lemtrada hit certain targets.

Genzyme has forecast peak annual sales of $3.5 billion for Lemtrada, while Sanofi, using the average outcome of several analyst estimates, expects only about $700 million.

Despite the discussions, Sanofi has hired a search firm to look for potential candidates to nominate to Genzyme's board of directors, sources familiar with the situation have told Reuters.

Sanofi, which believes buying Genzyme would give it a new area for growth in the high-margin business of rare diseases, recently extended its offer once again at the same price until February 15.

(Reporting by Lewis Krauskopf and Toni Clarke, additional reporting by Ben Hirschler in London; Editing by Lisa Von Ahn and Gerald E. McCormick)