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.