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Genzyme says no to Sanofi’s $18.5b offer

French suitor could start hostile takeover attempt

Some expect a higher bid for Genzyme and say the company may be trying to spur that, despite saying it isn’t for sale. Some expect a higher bid for Genzyme and say the company may be trying to spur that, despite saying it isn’t for sale. (Michael Springer/ Bloomberg News)
By Robert Weisman
Globe Staff / August 31, 2010

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Genzyme Corp. swiftly rejected an $18.5 billion takeover bid by Sanofi-Aventis AG yesterday, setting the stage for a protracted tug of war between the two drug makers, with the fate of the state’s biggest biotechnology company hanging in the balance.

Henri A. Termeer, Genzyme’s longtime chief executive, wasted no time in dismissing Sanofi’s offer, made public Sunday.

“The Genzyme board is not prepared to engage in merger negotiations with Sanofi based upon an opportunistic proposal with an unrealistic starting price that dramatically undervalues our company,’’ Termeer wrote in a terse letter to Sanofi’s chief executive, Christopher A. Viehbacher.

Two influential major investors represented on Genzyme’s board, Carl C. Icahn and Ralph V. Whitworth, joined other directors in turning thumbs down on the $69-a-share proposal from Sanofi. With the Cambridge company presenting a united front, it will be up to the Paris-based pharmaceutical giant to make the next move.

Among its options would be to raise its bid, walk away, or launch a hostile takeover attempt by asking shareholders to sell their shares to Sanofi over the objection of Genzyme’s management and board. To do that, it might take an offer of closer to $80 a share, some investors said.

Viehbacher, in a conference call with analysts yesterday, called Termeer’s letter a “relatively unsurprising response.’’ He said it “continues the approach of stonewalling we have seen up to now.’’

He added: “You’ve got a management that has had kind of a history of overpromising and underdelivering here. And when they say that our starting point is unrealistic, I’m not sure we’re the ones who are unrealistic.’’

Despite the tough talk, Viehbacher hinted Sanofi might be willing to sweeten its offer if it could open negotiations.

Termeer, who has repeatedly said Genzyme is not for sale, was not available for comment.

Market watchers said Genzyme’s chances of remaining independent hinge on several factors: how much Sanofi is willing to pay, whether competing bidders emerge, and whether Termeer can convince big investors — including Icahn and Whitworth — that the company will be worth more after it has fixed its production problems and brought new drugs to market.

For now, some institutional investors are wary of Sanofi’s bid and support the stance taken by Genzyme’s management.

“We think the $69 offer is too low, that the company on a take-out basis is currently worth in the area of $80,’’ said Gary R. Mikula, principal at Birch Hill Investment Advisors, a wealth management firm in Boston that holds more than 350,000 shares of Genzyme. “But as a long-term investor, we like Genzyme a lot, and we think it’s worth substantially more than $80 three years or so down the road.’’

Not everyone was as dismissive of Sanofi’s bid.

Biotechnology analyst Christopher J. Raymond, managing director at Robert W. Baird & Co. in Chicago, said his “sum-of-parts analysis’’ values Genzyme shares at considerably less than $69 apiece. “Go On . . . Take the Money and Run,’’ he wrote in a note to investors.

“We’re surprised Genzyme’s not even engaging Sanofi in discussions,’’ Raymond said. “We think the company is valued in the mid-$60s, so the bid is fairly priced.’’

The public debate over Sanofi’s overture, which emerged after more than a month of Wall Street rumors and speculation, pushed Genzyme’s share price higher yesterday. It closed up $2.29, or 3.4 percent, at $69.91, higher than Sanofi’s bid. But analysts said the shares would probably drop in value if Genzyme does not complete a deal with Sanofi.

One reason for disagreement about the value of the shares is a string of manufacturing problems that caused the temporary shutdown of Genzyme’s Allston Landing plant, rationing of a pair of expensive drugs to treat rare genetic disorders, the loss of market share for its best-selling treatment, and a $175 million federal fine for quality problems.

Company executives say they are making progress in putting the production setbacks behind them, but the French company’s management contends those recovery steps already are incorporated in its share price.

Derek Taner, a portfolio manager for Invesco Global Health Care Fund, said he would consider tendering Genzyme shares to Sanofi if it increases its bid by about 10 percent. The fund owns 400,000 shares of Genzyme, making the company the portfolio’s seventh-largest holding.

“I’m expecting a higher offer, and I think the market is expecting it, too,’’ Taner said, noting buyers in biotechnology deals typically have raised their initial bids by 7 to 20 percent in recent years. “This may be a case where management doesn’t want to sell, but they see the writing on the wall, and they’re trying to get a more attractive price.’’

Mark Schoenebaum, senior biotechnology analyst at ISI Group in New York, agreed, saying Genzyme’S management appears to be trying to extract a higher starting bid as the price of dialogue.

“Sanofi was clear they would be willing to raise the bid if Genzyme is willing to sit down and talk,’’ said Schoenebaum, who participated in the conference call with Viehbacher.

“Genzyme’s making the gamble that Sanofi really, really wants Genzyme and wants to raise the floor before they sit down and talk. It’s a stalemate. My guess is the next step is for Sanofi to take it hostile.’’

Robert Weisman can be reached at weisman@globe.com.