Sanofi-Aventis SA plans to continue discussions this week with takeover target Genzyme Corp, aiming to finalize a deal worth more than $19 billion in the next few days, sources familiar with the situation said on Sunday.
The boards of both companies were scheduled to hold separate meetings on Sunday to discuss the status of a potential deal, but no final decision was likely to be made, said the sources, who declined to be named because the talks were not public.
French drugmaker Sanofi is still conducting due diligence on Genzyme's financial records and manufacturing operations, and discussions between the sides could linger into the week, sources said.
An agreement would come nearly nine months after Sanofi first put the idea to the U.S. biotech group.
Buying Genzyme will give Sanofi a new area for growth in the high-margin business of rare diseases as it seeks to make up for patent losses that will take out roughly a third of its 2008 sales base until 2013.
A deal is likely to be priced at roughly $74 per share in cash, or $19.2 billion, based on Genzyme's outstanding shares of 258.99 million as of October 29, plus a contingent value right, or CVR, with an intrinsic value of $5 to $6 a share, the sources said.
The CVR is a tradable instrument, which promises a payout to shareholders over time, based on the performance of Genzyme's experimental drug Lemtrada for multiple sclerosis. The drug is already sold under the brand name Campath for leukemia.
The nominal value of the CVR is expected to be between $12 and $15 a share, to be paid out over seven or eight years, assuming Lemtrada fulfills Genzyme's highest sales projections, according to one source.
That nominal CVR value is above what Wall Street had been expecting, said Mark Schoenebaum, an analyst at ISI Group.
We suspect the market will deeply discount the vehicle, Schoenebaum said. Our back-of-the-envelope calculations suggest that a $13.50 CVR that pays out over 7.5 years might trade at around $3 a share today. This assumes a 10 percent discount rate and 40 percent probability adjustment.
Since many Genzyme shareholders are short-term investors, the CVR could trade closer to $2 a share, according to one source. In that case, the deal would give Genzyme a tradable value of about $19.68 billion.
A BETTER DEAL
Sanofi Chief Executive Chris Viehbacher first told Genzyme CEO Henri Termeer he was interested in a deal on May 23 last year. He took an initial bid of $69 a share directly to Genzyme shareholders in October. But the two companies have entered direct negotiations on a higher price in recent weeks.
A $74 cash deal makes financial and strategic sense for Sanofi. It removes a substantial overhang and gives a bridge over the patent cliff they face, said Marc Booty, a fund manager at Pictet.
Genzyme's stock traded at about $50 as recently as July, 2010. The stock closed Friday at $73.40.
A price of just below $80 is not bad at all, particularly because there are no other buyers, said Lionel Melka, co-manager of Bernheim, Dreyfus & Co's Diva Synergy Fund in Paris.
A deal will change Sanofi's profile; as soon as they have Genzyme it becomes a growth story. Investors bought the stock for its dividend not because of growth prospects, Melka said.
A Sanofi spokesman said on Sunday that the French drugmaker was continuing to review Genzyme's business and declined to say when a deal might be concluded.
As we have already indicated, we have signed a confidentiality agreement with Genzyme and we are still looking at non-public information. We have no further comment, he said.
Sanofi is due to release its full-year financial results on Wednesday and a deal could be announced before then, sources said. The timing of the deal announcement is not dependent on the earnings date, however, one source cautioned.
The management and advisers for the two companies have been discussing a potential deal, including a CVR, for several weeks, trying to bridge a wide gap in their expectations for Lemtrada. Genzyme has forecast peak annual sales of $3.5 billion, while Sanofi, using the average of several analyst estimates, expects only about $700 million.
Helvea analyst Karl-Heinz Koch said a CVR was a smart way for Sanofi to deal with the unknowns surrounding Lemtrada.
They are not paying upfront for a lot of uncertainty -- that's important, he said. At $74 plus a CVR, the deal terms would be within reason ... The earnings leverage to Sanofi is substantial. They can extract a couple of billions in profit by integrating Genzyme.
Credit Suisse and Goldman Sachs are advising Genzyme. JPMorgan, Evercore Partners and Morgan Stanley are advising Sanofi.
(Additional reporting by Caroline Jacobs, Noelle Mennella and Ben Hirschler; Editing by David Holmes and Gunna Dickson)