Replies to post #8717 on Biotech Values

[DewDiligence]

Re: Sanofi’s Acomplia

Welcome, Dave. You raise an excellent question.

Surely, long-term safety will be the paramount issue for the FDA when evaluating a drug like Acomplia that has the potential to be used chronically by tens of millions of people.

If SNY were a small-to-midsized biotech firm in need of Wall Street’s continual support for capital, I suspect that investors would have been privy to more of Acomplia’s preclinical data by now. However, for a BP like SNY (which now ranks third in global drug sales behind only PFE and GSK), keeping as much preclinical data as possible under wraps to avert tipping off competitors may make more sense than revealing these data.

I was long SNY until recently when I sold based on the rise in valuation. At 40+ I think the shares are fully-valued in light of the Plavix risk, modest as that may be.

Among the big pharma, I think PFE now offers a better value than either SNY or NVS, the other two BP’s I have owned in the not-too-distant past. Regards, Dew

[DewDiligence]

Musings on Sanofi-Aventis from thedeal.com

[I owned SNY briefly a few months ago but sold it for valuation reasons after a quick (and unexpected) pop.]

http://biz.yahoo.com/deal/050404/patentchallengesplaguemerger.html?.v=2

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Patent challenges plague merger

Monday April 4
By Paul Whitfield in Paris

A year ago this month, French pharmaceuticals company Aventis SA succumbed to a €53.3 billion ($69.1 billion) takeover by its smaller Gallic rival Sanofi-Synthélabo SA after Paris intervened to fend off a Swiss interloper [Novartis].

Investors and analysts are still debating whether that move resulted in a sensible merger or was a political faux pax.

A key to that answer lies in American courts, where Sanofi-Aventis SA faces patent challenges to its three biggest-selling drugs — blood thinners Plavix and Lovenox and allergy drug Allegra. The patent on a fourth blockbuster drug, Ambien , which is used in the treatment of insomnia, expires in 2006.

If Sanofi-Aventis loses the court cases, generic drugmakers will launch cut-price versions of the medicines, deeply cutting into the $5.3 billion in sales revenue the three products earned last year, more than half in the U.S.

So far the merger, which created the world's No. 3 drug company, has gone reasonably smoothly. Since its August close, Sanofi-Aventis shares have outperformed the global pharmaceuticals sector by more than 15%. Its 2004 sales rose 10% to €25.4 billion. Six of the group's drugs — three of which came with Aventis, including Lovenox and Allegra — topped €1 billion in sales last year.

And in April, Sanofi-Aventis warded off a Canadian patent challenge to Plavix. But the company is downplaying expectations for the American case. "This is not the U.S., so you cannot extrapolate anything else from it," Sanofi-Aventis said in a statement.

A preliminary hearing slated for Friday, April 1, to hear the U.S. Plavix patent challenges has been delayed a third time, now to May 13.

"We believe the generics have a strong case" on Plavix, said Alexandra Hauber, an analyst in London with Bear, Stearns & Co. Owing to that sentiment, Bear Stearns recently called Sanofi-Aventis "the most controversial pharma stock in Europe."

U.S. challenges to the patent's governing Lovenox and Allegra could be in court as early as September.

The outcomes of all three trials will go a long way to determining whether the merged Sanofi-Aventis is viewed a success. By broadening its sales range, Sanofi hoped to become less dependent on any single product.

But if drugs that sprang from both companies lose their patents, that could neutralize such a benefit. Such a scenario would surely bring out the critics.

Many shareholders from both Aventis and Sanofi remain unhappy with the takeover, and in particular the role of the French state in clinching a deal that had looked doomed to fail.

The deal was never a popular one, least of all with Aventis, which for three months mounted a robust defense against Sanofi. It hired three investment banks — Goldman, Sachs & Co., Morgan Stanley and Rothschild — which employed a groundbreaking legal defense to slow the bid, had constructed a poison-pill warrant and attracted a white-knight bidder in the form of Basel, Switzerland-based Novartis AG that threatened to ruin chairman and CEO Jean-François Dehecq's dream of a French pharma giant.

Then the French government, which had openly supported Sanofi's bid, stepped in. Former Finance Minister Nicolas Sarkozy called in Dehecq and his Aventis counterpart Igor Landau and leaned on them to consummate a deal.

The intervention "wasn't popular with anyone," said Benjamin Chang, a Paris-based analyst with Fortis Investments. "Aventis shareholders were unhappy because they never got the benefit of a bidding war between Sanofi and Novartis. Sanofi shareholders were unhappy because they thought they would be acquired and found themselves backed into being a buyer."

The final price of around €69 a share — more for those willing to take part of the payment in Sanofi shares — seemed to be reasonable. It was about 35% higher than Aventis' share price before rumors of the takeover spread, and more than 50% higher than in April 2003, a year before the deal. Yet a feeling lingers that Aventis shareholders were shortchanged. "Sanofi got Aventis for cheap; there is little doubt about that," Chang said.

There is also a widespread belief that Aventis was forced into the wrong deal. "It was clear that a tie-up with Novartis would have been the better strategic fit for Aventis," says a London-based pharmaceuticals analyst who asked not to be named.

Few doubt that Sanofi benefited most from the takeover. The deal secured the company's independence by making it too large for its peers to swallow.

It also ensured Sanofi's security before the company's biggest shareholders, French petrol company Total SA and cosmetic group L'Oréal SA, emerged from a lockup period in December — a date that was expected to herald open-hunting season on the company.

Another business case for the deal, from Sanofi's perspective, was access to Aventis' American sales force. The lack of a U.S. sales division had forced Sanofi to outsource the American sales of Plavix and Avapro to Bristol-Myers Squibb Co.

Aventis did reap some benefits from the merger, such as Sanofi's superior drug pipeline and a bigger R&D budget to help the pipeline remain strong.

What's more, both companies will benefit from an expected €1.6 billion in cost savings. On March 1, Sanofi-Aventis announced that it was ahead of schedule in realizing these savings, in part from the elimination of 4,000 jobs in 2004.

But the U.S. patent cases are still the litmus test to the merger's success. Analysts believe a loss of the U.S. Plavix patent is already priced into Sanofi-Aventis shares and a surprise victory would give them a bounce. [This is debatable, of course.] However, any loss of the Allegra or Lovenox patents is not fully accounted for, analysts say, because the court cases are farther away and the generic challenge looks weaker.

The merger's backers could argue that a loss of Plavix reinforces the deal's wisdom by providing justification for reducing Sanofi's dependence on a single drug. But a second loss, of such Aventis drugs as Allegra and Lovenox, will leave the merger looking far less smart.
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