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What Sanofi-Genzyme Means for the Rest of Biotech

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sanofi-aventis (NYSE: SNY  ) is buying Genzyme (Nasdaq: GENZ  ) . Shocker, I know.

Rather than talk about the acquisition, which we've been analyzing for the past seven months as both sides leaked information to the media, it seems more apropos to look at what this means for the rest of the industry.

Opportunistic? You bet.
While there are plenty of ecstatic investors that bought in last summer thrilled about their returns, keep in mind that Genzyme traded north of $80 in 2008. Investors that bought back then lost money on the deal.

Sure, Sanofi needs Genzyme. Lovenox, a multi-billion dollar blockbuster, has generic competition from Momenta Pharmaceuticals (Nasdaq: MNTA  ) and Novartis, and top-selling Plavix will fall to the same fate shortly.

But Sanofi also saw an opportunity to pounce. Much like Johnson & Johnson, which bought Mentor in the depths of a recession when women weren't getting breast implants, Sanofi saw the turnaround potential for Genzyme.

Pharma may be the best investors of all because they've got a lot of dry powder and the ability to use time arbitrage to their advantage. Drugmakers with a legitimate chance for a turnaround could be decent investments as potential takeover targets.

The problem for individual investors is separating the companies with potential from those that will never have any. MannKind (Nasdaq: MNKD  ) looks ripe for picking off, but I wouldn't touch it at this point because if it isn't acquired, you're stuck with management that hasn't been able to gain approval on an otherwise promising technology. Clinical Data (Nasdaq: CLDA  ) is clearly undervalued if Viibryd can gain any kind of traction in the depression market, but investors are hoping for a buyout. And if the company has to launch on its own, it'll have to prove it can sell Viibryd before investors will price in its blockbuster potential.

Biotech investing isn't easy, and guessing whether a company will be acquired doesn't make it any easier.

Two's company, three's a money maker
At one point, Genzyme's management was clamoring for $89 per share. That didn't happen for one simple reason: No other bidders arrived.

Bristol-Myers Squibb (NYSE: BMY  ) tried to lowball ImClone Systems, similar to Sanofi and Genzyme, but ImClone got taken out for nearly 17% over the initial offer because a white knight in the form of Eli Lilly (NYSE: LLY  ) came in and outbid Bristol-Myers. By contrast, the lack of an additional bidder killed Genzyme's hopes for a serious increase in a takeout offer.

I'm not sure if there's a take-home message to be applied to other biotechs. It's hard enough to figure out how one potential acquirer will react; it's nearly impossible to determine if a second bidder will enter the fray.

Perhaps the best move is to invest in companies with desirable drugs and platforms. Then again, that's a pretty good strategy regardless if you're hoping for a takeout.

The check is in the mail
Contingent value rights have become an increasing feature of the drug company acquisitions. They allow sellers to potentially capture some of the upside that the acquirer is buying and allow the seller to hedge its bet by only having to pay if the upside comes to fruition.

In addition to the $74 in cash, investors that own shares of Genzyme at close will receive one CVR worth potentially $14 if all the conditions for manufacturing Cerezyme and Fabrazyme, and approval and sales of Lemtrada are met.

Investors are currently valuing the CVR at just $1 and change. Investors will have to be content to cash out at that amount or wait until the conditions are met, which for some of the conditions is likely years away if ever.

On one hand, this is every biotech investor's dream: Watch a biotech develop and launch a few drugs and then get taken out by a big pharma. Genzyme has quadrupled over the past 15 years, handily beating the broader market.

But the days of easy cash-outs and pharma overpaying for biotech are gone. The larger companies need the smaller ones more than ever, but if pharmas can't get good prices, they're going to use their cash to buy back shares where they can get a better return on investment.

There will still be opportunities to make money investing in biotech, but Sanofi-Genzyme just goes to show that it isn't going to be easy.

Spec pharma is another good place to look for takeout targets.

Johnson & Johnson is a Motley Fool Inside Value selection. Momenta Pharmaceuticals is a Motley Fool Rule Breakers recommendation. Novartis AG is a Motley Fool Global Gains selection. Johnson & Johnson is a Motley Fool Income Investor choice. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson. The Fool owns shares of Johnson & Johnson. Motley Fool Alpha owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 17, 2011, at 10:40 PM, markzzzzzz wrote:

    The guy is a billionaire~he can do anything he wants to.He don't need someone to do it for him unless he chooses to.

    Like you said he named the company after himself

    which btw is not uncommon for buisness owners to do at all.

    That being said I don't believe he will let his good name go down with the ship and or not find a way to

    make his dream and extremely lucrative dream come true.

  • Report this Comment On February 18, 2011, at 12:18 PM, biotech101invest wrote:

    Regarding your clinical data comments - there are likely multiple party in serious buyout talks are going on. REAL negotiations.

    Bought some CLDA on the hold of 25 when AF lied about a secondary 3 wks ago. Still no secondary.

    CLDA mgt on the original approval call said clearly that they have been multiple pharmas interested - talking for months - and now the talks turn to "change of control discussions". Forest Labs is desperate - they lose 56%-60% of their TOTAL revenues in a matter of months when their top selling depression drug goes generic and their savior replacement for Lexapro failed Phase 3 trial Thursday. Forest would have liked to have bought CLDA before this came out - RJ Kirk played poker and won. Now FOREST is DESPERATE and will use some of their $3 billion to buy CLDA or their stock will get crushed. They also lose AN ADDITIONAL 30% of their revenues in 2015. Desperate.

    Problem is Forest will have competition. LLY and BMY almost certainly will come after CLDA and have been talking with them for months - both have been mentioned in analyst reports for a yr. PFE almost certainly is in the mix. .

    Its checkmate for the shorts. Hope they short more. This company will be sold. And then Kirk will move on and will buy a lot more ZIOP, his new venture.

    Gut says Forest Labs will make an offer by next week.

    o Depression Experts

    o Largest drug Lexapro (56%-60% of their TOTAL revenues) goes generic in a matter of months.

    o Lexipro replacement savior late stage depression compound just failed phase 3 pivotal trial in January the day before Viibyrd approval.

    o 30% of their revnues also go generic in 2015. After that only 10% of their current revenues will continue.

    o Scores of experienced depression salesmen will leave if they don't do something soon. There stock will drop $15 analysts think if they do nothing.

    o Forest has $3 billion in cash. Can have CLDA for $40 share if not other bidders. With BMY, LLY and PFE likely to bid as well - $45-$50 deal likely.

    o Forest HAS to get this deal done. Perfect timing for their sales team to ramp up.

    o Kirk played poker and waited for Forest Ph 3 results - he won. Checkmate. He now has all the leverage.

    After he gets the offer Kirk and many CLDA shareholders who follow kirk and have not sold yet will buy a lot more ZIOP imo. I Last week we see the Kirk Form 4 buying 1,910,000 more shares of ZIOP. Buy ZIOP before the CLDA offer is announced - CLDA investors and Kirk himself will buy a lot more ZIOP once the CLDA news is announced. I know one small branch of a large Wall St firm who will buy 1 million shrs following Kirk to ZIOP once CLDA is announced - they have already made a klling on CLDA and will buy a ton of ZIOP. They are not alone

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