Is Genzyme (Nasdaq: GENZ ) cheap enough to justify sanofi-aventis (NYSE: SNY ) or GlaxoSmithKline (NYSE: GSK ) buying the beleaguered biotech? Maybe.
On Friday, The Wall Street Journal reported that Sanofi and Genzyme are courting each other, trying to figure out whether a price can be agreed upon. That was good enough for investors, who sent the stock up 15% on Friday. Today the rumor spread to Glaxo, and Genzyme is up another 7% or so, despite the latest news that Genzyme rebuffed Sanofi's bid.
On the one hand, Genzyme is clearly cheap compared to its potential. The company is well off its 2008 highs and is valued at just 3.9 times its trailing-12-month sales even after Friday's run-up.
Genzyme would have been a nice fit for Sanofi. The French drug company has been diversifying over the past few years, buying Chattem with its over-the-counter products and Czech generic-drug maker Zentiva. It would fit well with Glaxo, too. It is already fairly well diversified and has moved into emerging markets recently; Genzyme's biologic drugs would round out either nicely.
On the other hand, the pharma giants would be buying a turnaround candidate, which comes with substantial risk. Genzyme has an FDA consent decree hanging over it, which could result in additional fines if milestones like moving production out of its manufacturing plant aren't completed in a timely manner. For the right price maybe the risk is worth the potential for a turnaround.
The question is whether the price would be acceptable to shareholders, specifically large shareholders Carl Icahn and Ralph Whitworth, who both control board seats. Icahn orchestrated the sale of MedImmune to AstraZeneca (NYSE: AZN ) and ImClone Systems to Eli Lilly (NYSE: LLY ) , both for substantial premiums. I doubt he'd be willing to take less this time.
I'm not one for buying the rumor. The Journal's report reads like a couple of schoolkids are passing notes back and forth to find out if they're interested in each other rather than a serious couple on their way to a union. If you buy Genzyme today and it doesn't get acquired, you're still getting the risk that it'll run into another roadblock, but you've already lost a chunk of the upside if management is actually able to turn Genzyme around.