Sanofi Genzyme Merger Shows Future Value May Not Be All It’s Made out to Be

Merger and acquisition agreements are known to have many moving parts, and it is not uncommon for merger/acquisition agreements to incorporate milestone payments based on one of the companies achieving certain research and development, or approval, milestones.

The 2011 merger agreement between Sanofi and Genzyme included such a provision. When Sanofi acquired Genzyme in 2011 for $20 billion, Genzyme was in the midst of conducting clinical trials of Lemtrada, a seemingly promising multiple sclerosis drug. Genzyme’s shareholders did not think that the $20 billion offer reflected the future upside of Lemtrada. In an effort to keep the purchase price of Genzyme low, but to appease investors, Sanofi agreed to issue one contingent value right for every Genzyme share in the buyout. These rights gave their holders an additional $3.8 billion valuation – if Lemtrada could clear certain hurdles.

Some of the required hurdles included Lemtrada gaining approval by the Food and Drug Administration by March 31, 2014, and reaching specified sales targets within certain time frames. The agreement also required Sanofi to make “diligent efforts” to steer Lemtrada through the FDA approval process and, once approved, to promote Lemtrada with as much vigor as any other drug. In addition, Sanofi agreed to “ignore any cost of potential milestone payments in working to gain regulatory approval and commercialize Lemtrada.”

At the time of the merger, Genzyme estimated that each contingent value right was worth $5.58, and recommended that its shareholders approve the merger deal. The shareholders did approve the merger, but some are now concerned about their contingent value rights and the diligence with which Sanofi worked to keep their end of the bargain.

As it turns out, at the time of the merger, Sanofi was working on its own, “competitor,” multiple sclerosis drug, Aubagio. In a lawsuit filed on Monday, November 9, 2015, investors allege that Sanofi opted to focus on developing and promoting Aubagio, thereby generating profits that did not have ties to expensive payments to rights holders.

American Stock Transfer & Trust Company, the trustee representing the Genzyme rights holders, alleges that Sanofi failed to fulfill its agreed-to obligations under the deal, and as a result, investors have not received at least $708 million they are owed.

The lawsuit charges that Sanofi did not follow the FDA’s recommendation that Genzyme conduct a double-blind clinical trial with Lemtrada. In a double-blind clinical trial, neither the researchers nor the subjects know whether Lemtrada, another drug, or a placebo was being administered. Genzyme instead did the opposite, by conducting the trial with both the subjects and the researchers knew which treatment was being administered. When Genzyme submitted its application for Lemtrada to the FDA in the summer of 2012, it was denied in December 2013 because Genzyme had not submitted sufficient “evidence from adequate and well-controlled studies,” demonstrating that the drug’s benefits outweighed any possible adverse effects.

The FDA finally approved Lemtrada in November 2014, over seven months past the approval deadline specified in the rights agreement. However, Lemtrada was not approved fully – it was approved only as a third-line therapy to be used after other treatments had been tried and failed. The limited approval was because Sanofi never addressed the FDA’s safety concerns, and likely limited Lemtrada’s sales potential.

In the complaint, the trustee takes issue with how long it took Lemtrada to gain FDA approval. Among the ten MS drugs with the highest sales in 2013, the FDA approval process took an average of thirteen months, less than half the twenty-nine months it took for Lemtrada to be approved. According to the trustee, Sanofi deliberately ignored the FDA’s feedback about Lemtrada’s trial design, leading to the initial rejection. Then, Sanofi failed to establish Lemtrada’s safety, leading to the ultimate third-line therapy indication.

With the delay in Lemtrada approval, the price of the Genzyme contingent value rights fell significantly. In April 2011, immediately following the acquisition, the rights were trading for as high as $2.63. It didn’t take long for them to decline in value, especially as the FDA approval deadline neared. They were trading around $0.50 as that deadline came and went, and currently trade at $0.14. Further complicating the situation, Lemtrada is expected to lose patent protection in September 2017, further limiting its prospects. Once the patent protection runs out, Sanofi will not have to pay any of the promised milestones, according to the trustee.

Aubagio, Sanofi’s multiple sclerosis drug, on the other hand, has had a much smoother path to market. The FDA in approved Aubagio in just over a year and Sanofi created a sales force to market Aubagio almost immediately. The complaint also alleged that Sanofi has conducted more consumer marketing events for Aubagio than for Lemtrada.

As a comparison, after one year on the market, Lemtrada generated sales of $36.8 million, compared to Aubagio’s sales of $179.5 million.