CORRECT: Sanofi Needs To Avoid Pitfalls Of Past Pharma-Biotech Deals

Sanofi-Aventis SA's (SNY) long courtship of Genzyme Corp. (GENZ) has finally ended in an acquisition deal, but now comes the hard part: making the marriage work.

The track record of large pharmaceutical companies purchasing smaller biotechnology and specialty-drug makers is mixed. Buyers tend to overvalue the acquired assets, and the talent that made the acquiree attractive frequently depart to a new project.

Roche Holding AG (RHHBY) said it had tried to avoid those pitfalls following its acquisition of full control of biotech company Genentech in 2009 for $46.8 billion, but then it got hit by another risk from these deals--unforeseen challenges.

In Sanofi's case, the company has taken some steps to mitigate the risks in its planned purchase of Genzyme for at least $20.1 billion, unveiled earlier Wednesday. In addition to the cash consideration, Genzyme shareholders will receive rights eligible for future cash payments if Genzyme hits certain milestones, an arrangement that addresses some of the speculative risk inherent in drug development.

What's more, Genzyme is no baby biotech. It's a more mature company that has had profitable drugs on the market for years. So the company isn't making a big bet on unproven research-and-development, as much as expanding its drug-making operations.

"Biotechnology had never really been embraced by Sanofi-Aventis in the past, and I think that proved to be a weakness of the company," Sanofi Chief Executive Christopher Viehbacher said Wednesday.

But there are always risks in such combinations that Viehbacher will have to carefully navigate. Aside from the potential for drug setbacks, the slow-moving hierarchies at big drug makers can chase off talented executives and scientists at the smaller companies they snatch up, undercutting the future potential of the acquired assets.

"There's a tendency to overpay," said Morningstar analyst Damien Conover. "The innovative spirit of the entrepreneurial nature of biotech, that tends to be the hardest thing you can keep."

Roche Chief Executive Severin Schwan said in a recent interview that Roche has for the most part tried to leave Genentech's R&D labs alone.

"Innovation and science need a decentralized management approach," he said. "In research and development, it is not a matter of scale. I would rather have a bit of duplication at the centers in the world, than lose productivity."

Roche did streamline administrative, financial and back-office functions immediately--including scaling back an operation in Nutley, N.J.--but Schwan said the company has been successful in retaining scientists and researchers because the culture hasn't changed. He said he believes that many companies approach integrations by using accountants and spreadsheets to squeeze out savings, something that forces an internal focus and distraction among workers.

"If you think that you have to align everything around the globe, that everybody has to do it along one recipe, then you kill innovation. That is the beginning of the end," he said.

However, the Roche-Genentech deal also illustrates the risk that acquired products can encounter, namely challenges that may not have been fully apparent at the time of the transaction. Sales growth for Roche's Avastin cancer drug, which was developed by Genentech, are now seen slowing partly because of U.S. regulatory scrutiny of its effectiveness.

"I think the big concern with integrating any deal like this is the larger company not absorbing the culture of the smaller companies," said Christopher Bowe, a health-care analyst with research and publishing firm Informa.

"There's a tendency for the acquiring company to come in with an attitude that it probably knows best," Bowe said. Big companies need to be more open to adapting the best practices of the acquired company, especially in making research labs more productive, he said.

When deals between large pharmaceuticals and smaller biotechs pay off, the upside is often so big that it offsets the failed deals. As a result, big drug makers--especially those facing patent-expiration challenges like Sanofi--are often willing to continue to shell out big bucks.

Johnson & Johnson's (JNJ) $5 billion purchase of Centocor in 1999 succeeded because Centocor's Remicade anti-inflammatory drug went on to become a blockbuster and J&J inherited talented personnel. But the jury is still out on whether AstraZeneca PLC's (AZN) 2007 purchase of MedImmune was worth its $14 billion price tag, as the acquired products haven't provided a big lift to overall financial performance.

AstraZeneca, in an emailed statement, called the MedImmune buy "a long-term strategic investment" and noted that the "product development timeline in our industry is long and relatively unpredictable." The company touted MedImmune's research expertise in biotechnology-style drugs.

Eli Lilly & Co. (LLY) bought ImClone Systems in 2008 for $6.5 billion on hopes for continued sales growth for cancer drug Erbitux, as well as the expectation that one or more of ImClone's experimental drugs would reach the market and have commercial success.

But Erbitux sales have slowed after the discovery that it wasn't effective in people with a certain genetic profile, and Lilly and partner Bristol-Myers Squibb Co. (BMY) recently halted a late-stage trial of experimental cancer drug necitumumab because of safety concerns. Another late-stage trial for the drug continues.

-Peter Loftus, Dow Jones Newswires; +1-215-656-8289; peter.loftus@dowjones.com

--Thomas Gryta contributed to this article.

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