My firm has held a long position in biotechnology firm Genzyme (
) since long before Sanofi Aventis (
) decided to make a play for the company in an effort to boost its
future growth potential in the face of pending drug patent
expirations. Prior to Sanofi's interest, Genzyme had plunged below
$50 per share on manufacturing woes for its largest drugs, creating
huge opportunities for contrarian investors such as myself.
However, the tables have shifted now, as Sanofi has offered $69 per
share and is in discussions to increase their offer and seal a deal
with Genzyme, whose management team has played hardball so far.
These negotiations have made the situation complicated for value
investors, I believe. There is no doubt that the stock would be
much lower without Sanofi's involvement, making it clear that
holders of Genzyme stock today are simply waiting for a deal to
take shape. With Genzyme trading in the $71-$72 area and rumors of
a final price being in the $75-$80 range, at first blush it might
appear to make sense for shareholders to sit tight given the
potential upside. However, I am strongly considering exiting my
clients' Genzyme positions, and I think others may want to think
about the opportunity costs involved with waiting out these merger
The issue is that in order to bridge the perceived value gap
with the two companies, a contingent value right ((
)) is being discussed as a way to consummate a deal. Rather than
pay $80 cash today, which Sanofi believes is too rich, they might
be more willing to pay somewhere between $72 and $75 cash today,
with an additional bonus payment being paid to shareholders should
future sales of Genzyme's Campath exceed certain targets, which
Sanofi believes are overly optimistic but Genzyme is using to
justify holding out for a higher bid.
The problem for current Genzyme shareholders is that even if
they can squeeze out an $80 bid from Sanofi, it could takes years
to actually get your hands on that much money. Campath is still in
clinical trials for the indications that would allow it to generate
the level of sales required (several billion) to get the full CVR.
Investors need to factor in the time value of waiting for their
money when deciding how to proceed with this deal.
Even if we assume that Genzyme shareholders get the very best
price possible (I would say this type of offer would be $75 cash
and a $5 CVR, for a full price of $80 per share), the returns are
not that exciting with Genzyme already trading at $71.50 or so.
Does it really make financial sense to hold Genzyme stock for a 5%
gain over 3-6 months (the time it will likely take for a deal to be
agreed to and officially close) if it might take 2 years or more to
get the other $5 per share (an additional 6.6% gain). I would think
that I could find more attractive investments in the meantime.
Think about it this way; if you were researching a new
investment opportunity today and you estimated you would make 5%
over the next quarter or two and then average a 3.3% annual profit
for the next two years after that, would you make the investment? I
know I definitely would not, but even with an eventual $80 per
share buyout, that is what current Genzyme shareholders can likely
expect if they wait for every last penny from the Sanofi offer.
I am long
Investors Take Heed: Population Growth, Not
Upheaval, Remains Egypt's Greatest Challenge