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Genzyme, Sanofi boards meet to clinch $20-billion deal

Sanofi-Aventis SA is close to clinching a deal worth around $20-billion to buy Genzyme Corp., nearly nine months after the French drugmaker first put the idea to the U.S. biotech group.

The boards of both companies are scheduled to meet on Sunday to decide on Sanofi's proposed acquisition, according to sources with knowledge of the situation.

The deal is expected to be priced at $74 a share in cash, or more than $19-billion, plus a tradable contingent value right, or CVR, with an intrinsic value of $5 to $6 a share, the sources said.

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Buying Genzyme will give Sanofi a new area for growth in the high-margin business of rare diseases as it seeks to diversify to make up for patent losses that will take out roughly a third of its 2008 sales base through to 2013.

"A $74 cash deal makes financial and strategic sense for Sanofi. It removes a substantial overhang and gives a bridge over the patent cliff they face," said Marc Booty, a fund manager at Pictet.

Sanofi Chief Executive Chris Viehbacher, who first told Genzyme CEO Henri Termeer he was interested in a deal on May 23 last year, took an initial bid of $69 a share directly to Genzyme shareholders in October. But the two companies in recent weeks have entered direct negotiations on a higher price.

The CVR is a tradable instrument, which promises a payout to shareholders over time based on the performance of Genzyme's experimental drug Lemtrada for multiple sclerosis. The drug is already sold under the brand name Campath for leukemia.

It is not possible to pin down what the CVR will begin to trade at, but a reasonable estimate may be $2 a share, since many of Genzyme's shareholders are short-term investors who will want to sell immediately.

A Sanofi spokesman said the French drugmaker was continuing to review Genzyme's business and declined to say when a deal might be concluded.

"As we have already indicated, we have signed a confidentiality agreement with Genzyme and we are still looking at non-public information. We have no further comment," he said.

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Sanofi is due to release its full-year financial results on Wednesday and a deal could be announced before then, possibly as early as Monday, although unresolved issues mean the timing is uncertain, according to sources familiar with the matter.

The two companies have been discussing a potential deal, including a CVR, for several weeks, trying to bridge a wide gap in their expectations for Lemtrada. Genzyme has forecast peak annual sales of $3.5-billion, while Sanofi, using the average of several analyst estimates, expects only about $700-million.

Helvea analyst Karl-Heinz Koch said a CVR was a smart way for Sanofi to deal with the unknowns surrounding Lemtrada.

"They are not paying upfront for a lot of uncertainty - that's important," he said. "At $74 plus a CVR the deal terms would be within reason ... The earnings leverage to Sanofi is substantial. They can extract a couple of billions in profit by integrating Genzyme."

The nominal value of the CVR is expected to be between $12 and $15, to be paid out over seven or eight years, according to one source.

But a standard discount is applied to those figures to determine their present value. That figure is then risk-adjusted depending on investors' assessment of the likelihood of the company meeting its goals.

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Credit Suisse and Goldman Sachs are advising Genzyme. JPMorgan, Evercore Partners and Morgan Stanley are advising Sanofi.

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