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CASE 52 Sanofi-Aventis’s Tender Offer for Genzyme

On the foggy morning of October 5, 2010, Henri Termeer, the chairman and CEO of Genzyme Corporation, drove
to the firm’s headquarters in Cambridge, Massachusetts. Termeer usually spent his early mornings working from
the indoor garden on top of the building, but on that day he went straight to his office, grabbing a cup of coffee on
his way. One thing was on his mind—the letter he had received from the CEO of Sanofi-Aventis (Sanofi)
announcing the company’s intention to commence a tender offer for Genzyme (Exhibit 52.1).

EXHIBIT 52.1 | Sanofi’s Tender Offer Letter to Genzyme Shareholders

Source: “Sanofi-Aventis Commences Tender Offer to Acquire All Outstanding Shares of Genzyme for $69 per Share in Cash,”
Sanofi-Aventis press release, October 4,
2010,http://www.prnewswire.com/news-releases/sanofi-aventis-commences-tender-offer-to-acquire-all-outstanding-shares-of-genzyme-for-
(accessed Sept. 29, 2014).
 Termeer had been Genzyme’s CEO for more than 25 years, leading its growth from an entrepreneurial venture
to one of the country’s top five biotechnology firms. Yet the past two years presented a significant test. Genzyme
was just recovering from an unexpected contamination in 2009 at its major production facility in Allston,
Massachusetts, which had led to shutting down the plant and limiting the supply of life-sustaining drugs for
Genzyme’s patients. As a result of the economic and reputational damages, the company’s stock had plummeted
before rebounding as a result of the news of the tender offer (Exhibit 52.2). When compared to the industry and
the overall stock market during the previous decade, however, the stock had performed very well (Exhibit 52.3).
The recent downturn in the stock price had attracted activist investors, which resulted in Genzyme entering into a
cooperation agreement with Relational Investors and subsequently fending off a proxy battle with Carl Icahn.1
But Termeer fully understood that together the two activists controlled a substantive position of Genzyme shares
and wanted to exit their positions at a gain (Exhibit 52.4).

EXHIBIT 52.2 | Genzyme (GENZ) Daily Closing Stock Price and Timeline of Events (October 2008–October

2010) and Market Indexes

Data Sources: Capital IQ and case writers.

EXHIBIT 52.3 | 10-Year Stock Price Performance of Genzyme (GENZ) versus Sanofi-Aventis (SAN)
 Note: Daily stock price performance is compared to the Standard & Poor’s 500 Index (S&P 500) and the Standard & Poor’s—
Biotechnology Industry Group Index (S&P 500—Biotech). Base 100% = October 1, 2000.
Data Source: Capital IQ.

EXHIBIT 52.4 | Genzyme—Top Institutional Shareholders as of September 30, 2010

Data Source: SEC form 13-F filing by each institution.

Sanofi, the leading French pharmaceutical company, had approached Genzyme as a potential Page 688
acquisition at the start of the summer. After a few rounds of negotiating, Termeer and his board
publicly rejected Sanofi’s cash offer of $69 per share on August 29, 2010.2 The letter from Sanofi’s CEO
conveyed frustration with Termeer’s unwillingness “to engage in constructive discussions” (Exhibit 52.1) and
announced that Sanofi would be circumventing Termeer by taking the $69 tender offer directly to Genzyme’s
shareholders.
A biotech veteran, Termeer was familiar with M&A activity in the industry. In fact, Genzyme itself had grown
to become a diversified business through a series of acquisitions (Exhibit 52.5).3 A fervent believer in Genzyme
and its mission, Termeer thought the Sanofi offer significantly undervalued Genzyme for a number of reasons.
First, the market was just beginning to see the evidence that Genzyme had turned the corner on its production
problems. Also, Termeer knew that there were many promising new drugs in the company’s pipeline that would
add to an already successful portfolio of drugs. A meeting of Genzyme’s board of directors was scheduled for
October 7, 2010, and he needed to prepare a proposal for Genzyme’s response to the tender offer.

EXHIBIT 52.5 | Genzyme’s M&A Activity, 1997–2009

Data Sources: LexisNexis, “Genzyme Corporation” Mergers and Acquisitions; Genzyme Corporation SEC 10-K filings, 2000–
2007.

Genzyme
Genzyme began in 1981 with the goal of developing drugs that would cure enzyme deficiency conditions that
caused severe suffering for those affected. Because these diseases typically affected a small percentage of the
world’s population, drugs used to treat them were considered to be “orphan drugs.” In the United States, orphan
status was given to drugs that cured diseases affecting fewer than 200,000 people. In order to give
pharmaceutical companies an incentive to develop drugs for such rare diseases, the Orphan Drug Act (1983)
gave orphan drugs distinct legal and economic advantages.4
Genzyme was one of the first biotechnology companies to exploit the benefits provided by the Orphan Drug
Act. Since its founding, the company started developing the drugs against rare genetic diseases such as lysosomal
storage diseases (LSDs), in which patients lacked enzymes that removed and recycled proteins, causing harmful
deposits to accumulate in organs. Because of the limited number of patients, the extensive R&D required, and the
complex manufacturing process, the cost of these drugs often exceeded $200,000 per patient per year.5 For
example, Genzyme’s leading product was Cerezyme, an enzyme replacement therapy used to treat Page 689
Gaucher’s disease. Gaucher’s was a rare disease (affecting 1 out of 100,000 people) that could be
life-threatening and was caused by a deficiency in the enzyme glucocerebrosidase. This deficiency led to a
variety of symptoms, including anemia, spleen and liver enlargement, and bone deterioration. Though people
with a mild case could have normal life expectancies, children whose illness began during infancy generally did
not live longer than two years. Originally approved by the United States Food and Drug Administration (FDA) in
1991, Cerezyme generated $1.23 billion in sales in 2008 (Exhibit 52.6), almost 30% of Genzyme’s total
revenue, prior to the 2009 manufacturing problems.6

EXHIBIT 52.6 | Genzyme—Revenues by Segment

 Data Sources: Genzyme Corporation SEC 10-K filings, 2008 and 2009.

The strategy of focusing on rare diseases had worked exceptionally well for Genzyme. By 2009, the company
had become the third-largest biotech company in the world, employing more than 11,000 people and selling
drugs in more than 90 countries. With annual revenue of over $4 billion in 2009, the company’s market
capitalization was above $13 billion by year-end. The company’s stock price had been increasing since the
summer amid shareholder-friendly initiatives, including the recent sale of a genetics unit for $921 million and the
announcement of a share buyback program.
Genzyme divided its business into five reporting units (see Exhibit 52.6): Genetic Diseases (GD), which
included treatments against genetic and chronic diseases such as LSDs; Cardiometabolic and Renal (CR), which
included treatments against cardiovascular and chronic renal disease; Biosurgery (BI), which included
biotherapeutics and biomaterial products used in surgical areas; Hematologic Oncology (HO), which included
treatments for cancer and multiple sclerosis (MS); and Other Products, which included diagnostic products,
transplant products, and bulk pharmaceuticals.
In addition to the products in the market, Genzyme also had a robust pipeline of products under development
(Exhibit 52.7). Some of the late-stage potential drugs were widely considered to have very high market
potential. For example, an MS drug called alemtuzumab (previously marketed under the name Campath) showed
promise to become the most efficacious drug against this inflammatory central-nervous-system disease, and some
analysts suggested it had the potential, upon FDA approval, to bring more than $12 billion in revenue through
2020.

EXHIBIT 52.7 | Genzyme’s Drug Portfolio and Selected Late-Stage Pipeline Products as of 2010

**Genzyme estimation.
Data Sources: Genzyme Corporation SEC 10-K filings, 2008 and 2009; Sanofi-Aventis tender offer, Genzyme shareholder
presentation, SEC website, October 4, 2010,http://www.sec.gov/Archives/edgar/data/732485/000119312510223033/dex99a5c.htm
(accessed Sept. 30, 2014).

Genzyme’s impressive sales growth during the last two decades suffered a setback on March 2, 2009, when
Genzyme disclosed an FDA warning letter that identified manufacturing deficiencies at the company’s Allston
plant. To address the problem, Genzyme had to shut down the plant in June 2009 to clean up a virus
contamination. The stoppage resulted in a shortage of Cerezyme and Fabrazyme, two drugs that accounted for
more than 40% of Genzyme revenue in 2008. As the cleanup operation dragged on, the supply of these two drugs
continued to suffer. This forced doctors to ration these life-saving drugs to patients, which in turn caused
numerous patient complaints and sour patient relationships. As a result of the cleanup costs, the shutdown, and
lost sales associated with the contamination, Genzyme’s sales growth was arrested and operating income
suffered (see Exhibit 52.8 for Genzyme’s financials).

EXHIBIT 52.8 | Genzyme Financials Genzyme—Income Statement (in thousands of dollars)

 *The cash position at the time of tender offer in October 2010 should be assumed to be higher by $921 million to reflect
the sale of a genetics unit in September 2010.
Data Source: Genzyme Corporation SEC 10-K filings, 2007–2009.

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The Pharmaceutical Industry

The pharmaceutical industry developed and marketed drugs licensed as medications. Given the importance of
proper research and safety measures, the industry was heavily regulated. In the United States, the drug approval
process was tightly controlled by the FDA. Exhibit 52.9 details the typical drug R&D and FDA approval
process.

EXHIBIT 52.9 | Drug R&D and FDA Approval Process

*May vary significantly in different diseases and scenarios.

Data Sources: “The FDA’s Drug Review Process: Ensuring Drugs are Safe and Effective,” FDA
website,http://www.fda.gov/drugs/resourcesforyou/consumers/ucm143534.htm (accessed Sept. 30, 2014); Hay et al.,
“BIO/BioMedTracker Clinical Trial Success Rates Study,” February 15, 2011.

In order to successfully complete an FDA approval process, every drug needed to go through years or
decades of intensive scientific laboratory research. After being identified as a worthy candidate, the drug
compound was first tested on animals during its preclinical stage, and then tested on human subjects in
subsequent clinical studies. Clinical trials usually ran for several years, and only about 5% to 10% of drugs
ultimately received FDA approval after the trials.7 Not surprisingly, the pharmaceutical industry’s R&D
spending as a percentage of revenues was among the highest of any U.S. industry group.8 The lengthy drug-
development process required not only significant costs but also precious time. Most drugs were protected by
patents, but the patent application was filed very early in the drug-discovery process, and it took, on average,
four to five years to get patent approval. Although the typical patent life was 20 years, by the time a drug went
through the preclinical, clinical, and FDA approval stages, there were usually fewer than 10 years of patent life
left to market the drug.9
Given the long development cycle, high R&D costs, and risks associated with the high failure rate, many
companies adopted a blockbuster-drug model by targeting diseases and drug compounds that were more likely to
bring in big sales quickly. After spending billions of dollars during the decade-long R&D process,
pharmaceutical companies needed to recoup their investments. Increasingly, pharmaceutical companies sought
drugs that had the potential of $1 billion or more in sales—the so-called blockbusters. For example, Lipitor, the
drug that earned the highest revenue in 2009, accounted for $11.4 billion or 23% of Pfizer’s $50 billion total
revenues.10
The pharmaceutical industry had a significant amount of M&A activity in the previous decade. A number of
companies, including Genzyme, turned to M&A to acquire promising drug compounds from companies that often
did not have the resources to go through the FDA approval process and marketing (see Exhibit 52.10 for recent
major M&A deals in the biotech and pharmaceutical industry).

EXHIBIT 52.10 | Selected Major M&A Deals in the Pharmaceutical Industry, 2007–2009

Data Source: Andreas Scherer, “M&A in Big Pharma: Holy Grail or Buying Time?,” Contract Pharma, March 21, 2012,
http://www.contractpharma.com/contents/view_expert-opinions/2012-03-21/ma-in-big-pharma/ (accessed Sept. 30, 2014).

The M&A activity in the pharmaceutical industry had picked up in recent years in large part due to the
“patent cliff ” phenomenon. Under the Drug Price Competition and Patent Term Restoration Act of 1984, generic
drug makers could file an application with the FDA to replicate a branded drug once its patent had expired.
Additionally, the Abbreviated New Drug Application allowed a generic drug to be approved in as Page 691
few as six months, giving generic drug makers the ability to start producing a drug as soon as its patent
protection expired. Without the burden of a lengthy R&D period, generic drug manufacturers could charge a much
lower price than the original manufacturer, which enabled them to cannibalize as much as 90% of a
pharmaceutical company’s sales.11 As a result, when a blockbuster drug approached its patent expiration, the
company was said to be approaching a patent cliff. As of 2010, almost all the “Big Pharma” companies faced
patent cliffs. For example, Pfizer was facing patent expiration for Lipitor in November 2011 (see Exhibit 52.11
for top drugs facing patent expiration).

EXHIBIT 52.11 | Selected Top-Brand Drugs with 2011–2015 Patent Expirations

 Data Source: “Table 1: Selected Top Brand-Name Drugs with Patent Expirations from 2011 to 2020,”
USpharmacist.com,http://www.uspharmacist.com/CMSImagesContent/2012/6/USG1201-Patent_Table1.gif (accessed Sept. 30, 2014).

Sanofi-Aventis
Sanofi, based in Paris, France, traced its roots back to the 18th century, when Laboratoires Midy was founded in
1718 by a family of pharmacists. The modern Sanofi was founded in 1973 by Elf Aquitaine, a French oil
company, which took control of the Labaz Group, a pharmaceutical company. In 1999, Sanofi merged with
Synthélabo, a pharmaceutical company controlled by the French cosmetics group L’Oréal. In 2004, Sanofi-
Synthélabo merged with Aventis, which was itself formed by the combination of Rhône-Poulenc and Hoechst in
1999, to create Sanofi.12 By 2009, Sanofi had annual sales of more than EUR29 billion,13 making it the fourth-
largest pharmaceutical company in the world and the second-largest pharmaceutical company in Europe. The
company had more than 105,000 employees and sales in more than 170 countries. Emerging-markets sales were
expanding and accounted for more than 25% of sales.14
Sanofi mainly operated in two segments: pharmaceuticals and vaccines. The pharmaceuticals division
contributed more than EUR25 billion of 2009 revenues. In pharmaceuticals, Sanofi was a major player in the
diabetes market with the world’s leading insulin product, Lantus. Other blockbusters included chemotherapy drug
Taxotere, cardiovascular disease drug Plavix, antiplatelet agent Lovenox, sleep disorder medicine Ambien CR,
multiple sclerosis drug Copaxone, and other internal medicines such as Allegra, an antihistamine. Sanofi was
also a world leader in vaccines through its vaccine division, Sanofi Pasteur (EUR3 billion in sales in 2009).
Lastly, Sanofi participated in a number of industry partnerships and joint ventures, such as an animal-health
business with Merck that produced household names such as Frontline (which accounted for more than EUR2
billion in sales in 2009).15
Just like many other major pharmaceutical companies in the first two decades of the twenty-first century,
Sanofi started to feel the effects of its looming patent cliffs. According to Deutsche Bank Securities Inc., as much
as 45% of Sanofi’s 2009 revenue was at risk of patent expiration by 2015 (see Exhibit 52.12).16 On Page 692
July 23, 2010, the FDA decided to allow Momenta Pharmaceuticals and Sandoz to sell a generic
version of Sanofi’s Lovenox anticlotting medicine.17 This development put additional pressure on Sanofi’s new
CEO, Chris Viehbacher, to offset the looming patent cliff. Viehbacher was previously a president of
GlaxoSmithKline, and his appointment as CEO of Sanofi in December 2008 was a signal for change in a
company long controlled by a small group of big French shareholders and homegrown management. Viehbacher,
both a Canadian and German citizen, was seen as a sign that Sanofi’s board of directors was serious about the
lagging sales, poor drug pipeline, and expiring patents issue.

EXHIBIT 52.12 | Sanofi-Aventis’s Drug Portfolio and Patent Cliff

 *U.S./European patent shown; patent lives may vary in other parts of the world but in most cases are similar.
**European patent lives shown are for most of Europe; some European countries may have slightly different patent lives.
***Expired patents shown are for compound patents; formulation patents may provide further protection.
Data Source: Sanofi-Aventis SEC 20-F filing, 2009.

By early 2009, Viehbacher had indicated his intentions to review Sanofi’s R&D efforts and pipeline and to
seek diversification through M&A deals, actively talking to banks in preparation for a shopping spree.18 By June
2009, Sanofi had cut 14 of its 65 internal-development programs, paving the way for acquisition of external
drugs under development.19 By the end of 2009, the company has spent $9 billion in acquisitions, most notably a
$1.9 billion deal with Chattem, a maker of over-the-counter drugs and cosmetics that was based in Chattanooga,
Tennessee.20 When asked about his strategy, Viehbacher indicated a preference for drugs and treatments that did
not rely solely on patents as barriers against competition. “Above all, what I’m looking for is businesses that are
not dependent on patents,” he told the Associated Press. “This is my fourth patent cliff in my career, and I’m
looking to avoid a fifth.”21

Sanofi Approaches Genzyme

Genzyme had appeared on Sanofi’s radar screen as an ideal acquisition target in early 2010 for several reasons.
First, the majority of Genzyme’s products had patent lives that extended well beyond 2015 (Exhibit 52.7),
providing relief to Sanofi’s patent-cliff position. Biologics drugs were far more complex to produce than the
chemical-based drugs produced by most of the large pharmaceutical companies. This complexity effectively
extended the patent life, because the drugs were not only difficult to manufacture, but even more difficult to prove
equivalent to the originals they copied. Because these drugs targeted specific patient and physician populations,
Genzyme’s existing relationships with these communities—and their brand recognition—provided additional
protection against generic competitors.22
Second, a Genzyme acquisition was in line with Sanofi’s drive to diversify its business to avoid Page 693
relying on a few specific disease areas and drugs. With a focus on rare genetic diseases, renal
diseases, and MS, Genzyme’s product portfolio was very different from Sanofi’s, which was more focused on
diabetes, vaccines, and oncology.
Third, Genzyme would bring a highly talented U.S. research team and access to Boston’s world-leading life-
science research universities. As Sanofi’s global head of R&D put it, a Genzyme purchase would enable Sanofi
to “inherit many years of investments in one transaction.”23
Fourth, Genzyme’s recent stock price provided favorable timing for Sanofi to “buy low.” The manufacturing
problem that first emerged in early 2009 appeared to still be a drag on Genzyme’s stock price. In order to settle a
proxy battle with Carl Icahn, Genzyme announced that it would repurchase $2 billion of stock, shed three
noncore business units, as well as appoint two Icahn nominees onto Genzyme’s board.24 The settlement was
generally viewed favorably; however, the stock was still fluctuating in the mid-$50 range as of June 2010
(Exhibit 52.2). After obtaining board seats, an active investor such as Icahn could facilitate the sale of the
company, which is why Ichan’s involvement in Genzyme was generally viewed as favorable for potential buyers
such as Sanofi. But when a deal seemed about to take place and Sanofi put forth its offer of $69 per share in
August 2010, Termeer and the rest of Genzyme’s board rejected it as insufficient.

The Valuation of Genzyme

After the failed attempt to buy Genzyme from Termeer and the board in August 2010, Sanofi announced on
October 5, 2010, that it would make a $69-per-share tender offer directly to Genzyme’s shareholders.25 Termeer
remained very optimistic about the future of Genzyme and was not ready to relinquish his company’s
independence. Although the $69-per-share offer valued the company at $18.5 billion, Termeer continued to view
it as low considering the higher stock prices Genzyme enjoyed in 2008. He also thought the company should be
worth more in light of its recently launched shareholder-friendly initiatives, Cerezyme and Fabrazyme’s return to
normal production, and alemtuzumab, its promising new drug for MS.
Termeer was saving the morning to review the valuation of Genzyme. For the previous year, Genzyme had
used Credit Suisse and Goldman Sachs as advisors to provide valuation data for a set of biotech companies that
served as “market comparables” (Exhibit 52.13) as well as information about corporate and government interest
rates (Exhibit 52.14). The comparables data included commonly used valuation multiples: price-to-earnings
ratio (P/E), enterprise-value-to-EBITDA (EV/EBITDA), and enterprise-value-to-sales (EV/S). A Page 694
recent Sanofi investor presentation argued that the $69-per-share offer was justified when compared
to the valuation multiples in the biotech industry (Exhibit 52.15) and was also in line with stock price premiums
paid in other large biotech transactions (Exhibit 52.16).

EXHIBIT 52.13 | Genzyme—Financial Data for Market Comparables as of Year-End 2009

Data Sources: Company 10-K filings, Capital IQ, Bloomberg, Value Line, Standard & Poor’s, GEO Investing.

EXHIBIT 52.14 | Market Interest Rates on October 5, 2010 (10-year maturity, yield to maturity)

Data Source: Bloomberg.

EXHIBIT 52.15 | Investor Presentation by Sanofi-Aventis—“Sanofi-Aventis Tender Offer to Acquire

Genzyme” (October 4, 2010)
 Source: “Sanofi-Aventis Tender Offer to Acquire Genzyme,” SEC website, October 4,
2010,http://www.sec.gov/Archives/edgar/data/732485/000119312510223033/dex99a5c.htm (accessed Sept. 30, 2014).

EXHIBIT 52.16 | Investor Presentation by Sanofi-Aventis—“Sanofi-Aventis Tender Offer to Acquire

Genzyme” (October 4, 2010)

Source: “Sanofi-Aventis Tender Offer to Acquire Genzyme.”

Note: all permiums are relative to unaffected stock prices; Genzyme 1-day premium based on 7/1/10 and 1-month premium
based on 1-month VWAP of $52.63 (as of 7/22/10): Genzyme net deal value adjusted for announced divestitures
(1) Date Novartis announced purchase of 25% state and call/put option; blended purchase price of the intital 25% for
$10.4bn and remaining 75% at $180/share
(2) Date of intitial Roche offer, value grossed up 100% of Genentech (Roche owned ~55% at time of offer)

In addition to the valuation multiples and transaction premiums, Termeer wanted to construct a discounted
cash flow analysis to value Genzyme. As a first step, Genzyme’s investment bankers had presented the Genzyme
finance team with two sets of operating profit (NOPAT) projections: a management scenario (Exhibit 52.17) and
a market scenario (Exhibit 52.18). The market scenario reflected the average estimates of Wall Street analysts
and was decidedly less optimistic than the projections from Genzyme management. Much of the difference
between the two scenarios was in the pipeline revenues, the vast majority of which was due to alemtuzumab.26
According to the investor presentation, Sanofi’s $69-per-share offer was based on a valuation derived from
estimates by Wall Street analysts (Exhibit 52.19).

EXHIBIT 52.17 | Genzyme—Financial Forecasts (Management Scenario) in Millions of U.S. Dollars

Sources: Analyst reports and case writer estimates.

EXHIBIT 52.18 | Genzyme—Financial Forecasts (Market Scenario) in Millions of U.S. Dollars

Sources: Analyst reports and case writer estimates.

EXHIBIT 52.19 | Investor Presentation by Sanofi-Aventis—“Sanofi-Aventis Tender Offer to Acquire

Genzyme” (October 4, 2010)
 Source: “Sanofi-Aventis Tender Offer to Acquire Genzyme.”

■ “According to our analysis, alemfuzumab can reach operating margins of only 28% by 2018. This is due to high payments
to Bayers, relatively high COGS due to production at a third party, and building a global sales force that will be
required in Multiple Sclerosis.” —September 17, 2009
■ “Genzyme will pay Bayer a 20–35% royalty on sales in Multiple Scierosis once the drug is approved in 2012” —March
31, 2009

■ “While Campath MS remains one of the more compelling disease modifying therapies for MS, we believe that unique
autoimmune toxicities and pricing challenges remain to be addressed” —June 14, 2010
■ “We assume use in tysabri failures at a new patient add rate comparable to current Tysabri rate of 200/week” —May 7,
2010

To estimate Genzyme’s fundamental value, Termeer and his finance team would need to complete a cash flow
forecast and then conduct a discounted cash flow (DCF) analysis. The DCF model would also allow Termeer to
show the board of directors the impact of specific line items, such as alemtuzumab revenues, upon the estimate of
Genzyme’s stock price. Armed with a solid understanding of the value drivers for the company, Termeer
believed he and the board would be better positioned to respond to Sanofi’s tender offer and potentially
convince Sanofi to raise the offer to something closer to Genzyme’s true value.