Genzyme Acquisition

Sanofi-Aventis (SNY) offered to buy Genzyme (GENZ) for $69 per share last year; GENZ wants $89 a share. The main reason for the discrepancy in valuation is Campath, an experimental multiple sclerosis drug. GENZ believes Campath can generate as much as $3.5B in sales, while SNY is forecasting less than $1B.

I believe SNY will eventually get a deal done for a number of reasons. Mainly, SNY has a huge revenue hole to fill due to upcoming patent expirations. The French drug maker is also very interested in GENZ’s biologics technology. Many of SNY’s competitors, such as Pfizer, Merck, etc., have already made biologics acquisitions in recent years.

So what is the probability that SNY and GENZ will close the deal? If the two companies fail to reach an agreement, one could argue that the price of GENZ shares will fall to approximately $53, the price prior to SNY’s announced acquisition intentions. It’s difficult to say exactly what the price will be if the two companies do reach an agreement. Let’s assume that SNY will be willing to pay $79 (half way between $69 offered by SNY and $89 that GENZ is asking for). I actually think it will be more like $75 + $4 with CVRs, but I’m not accounting for CVRs just to keep the math simple. GENZ is now trading at about $73.5 a share. Based on these assumptions, the market is forecasting a 79% probability that SNY will acquire GENZ for $79 and a little over 93% that the acquisition price will be $75 (see calculations below).

(79% x $79) + (21% x $53) = $73.5

(93% x $75) + (7% x $53) = $73.5

These probabilities seem pretty reasonable considering how close to an agreement the two companies are. Keep in mind that these numbers should be taken with a grain of salt. The probability calculations are simple but flawed; there’s no chance that the final price will be greater than $89 and the numbers break down if you assume the acquisition price is less than the current share price. Nonetheless, the probabilities provide you with an idea of what the markets might be thinking.

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