Sanofi's Best Bet Still May Be Smaller Deals

Study Shows Large Acquisitions in Healthcare Can Erode Value

Sanofi-Aventis has grabbed the headlines with its $18.4 billion bid for Genzyme, but the French drugmaker may be wiser to stick with smaller, bolt-on acquisitions.

Sanofi is trying to balance the need for new areas of growth and the loss of key drug patents with its desire to remain disciplined in its purchases.

It might do well to review a Bain & Co study of 13 industries that found large acquisitions in the healthcare sector tended to erode value for acquirers. Only three sectors - industrials, transportation and technology - did worse, Bain found.

Bain defined large acquisitions as those that topped 5% to 10% of an buyer's market capitalization. Sanofi has a market capitalization of about $78.5 billion.

"Pharma has begun to stagnate. Companies are having to do deals from a position of weakness rather than strength and that's not a good starting place," said Tim Van Biesen, head of Bain & Co's North American healthcare practice.

"It can make sense if you're leveraging core capabilities, but if you're trying to enter new categories with new customers and new geographies - for every degree of complexity you're adding more risk," Van Biesen said.

With Genzyme, Sanofi would be tackling the rare-diseases market and absorbing the risk of past manufacturing problems.

If Genzyme proved to be too pricey, other acquisition targets such as Gilead Sciences, Biogen Idec, Celgene and Amgen might also be too unwieldy for Sanofi to swallow.

High Healthcare Deal Premiums
Sanofi has offered $69 per share for Genzyme, a 27% premium to the stock price before news of Sanofi's interest first emerged. Industry watchers, however, see a deal getting sealed only at a price closer to $75, or even higher, representing a premium of nearly 39%.

The average premium in healthcare deals was 36.8% in the first half of the year, compared with the average premium of 27.9% for deals across industries, according to data from Thomson Reuters.

"Sanofi should be careful not to overpay, especially when Genzyme has manufacturing issues and they haven't looked at the books yet," said one healthcare investment banker who declined to be named because he was not authorized to speak to the media.

"Plus, there's no obvious white knight to offer competition to drive the deal price higher."

Sanofi may be smarter to stick to its strategy of multiple small acquisitions, some bankers said.

Last year, Sanofi made more than 30 bolt-on transactions worth about $9 billion. This year, it has done only $3 billion to date. It has said it would remain "disciplined" and target up to $20 billion worth of deals.

Acquirers that make several small acquisitions deliver sustainable, higher returns and post excess returns close to 3.5%, compared with less than 1% for companies that pursue only large acquisitions, the Bain study found.

Over the past two decades, companies such as Abbott Laboratories, Medtronic, Pfizer and Roche Holding AG have made more than two dozen acquisitions each, Bain found.

Gilead Seen As Vulnerable
For companies with a bigger appetite, the most vulnerable of the large-cap biotech companies is Gilead Sciences , industry experts say. The company is a leader in the development of HIV drugs but faces many of the problems of pharmaceutical companies since its pills can be replicated by generic manufacturers.

Drugmakers like Genzyme and Biogen Idec make complex biologic drugs that are infused or injected, and therefore harder to copy.
Gilead's shares have fallen nearly 40% over the past two years amid concerns that its pipeline of experimental drugs may not make up for sales lost to generic rivals.

"It would not surprise me to see activists come in to Gilead," said Scott Harrison, an analyst at Argent Capital. "The stock performance has been poor over past two years and the valuation of the company is very appealing from the standpoint of its growth rate."

Biogen Idec, which makes the multiple sclerosis drugs Avonex and Tysabri, has been on the block for several years, having already tried once to sell itself.

However, safety concerns surrounding Tysabri, its key growth driver, have deterred buyers, and Biogen is tied up in a complex arrangement with partner Elan Corp that gives Elan the right to acquire Biogen's 50% share of Tysabri in the event of a change of control at Biogen.

The pool of big biotechnology company assets is also shrinking. Last year Roche Holding acquired the stake in Genentech it did not already own for $47 billion, and in 2007 AstraZeneca bought MedImmune for $15.6 billion.

Sanofi may be smarter to keep its ambitions smaller. In June, Sanofi said it would buy U.S. biotech TargeGen, which is developing treatments for blood diseases, for as much as $560 million to boost its cancer treatments.

For a graphic on biotech companies, click here.

For a Sanofi-Genzyme price calculator, click here.

Register now!

The latest information directly via newsletter.

To prevent automated spam submissions leave this field empty.