UPDATE: Biotech Investors Shift Focus After Genzyme Deal

French drugs giant Sanofi-Aventis SA's (SNY) acquisition of Genzyme Corp. (GENZ) for at least $20.1 billion eliminates another U.S. biotech firm from the scene and raises questions about where portfolio managers invested in this space will now deploy their capital.

The deal's official announcement early Wednesday ended months of uncertainty since Sanofi began its pursuit of Genzyme last summer. But analysts said that as short-term investors have swarmed to Genzyme, fundamental biotech investors have been cycling out of the stock for months and pursuing other options in anticipation of further consolidation within the industry.

Fund managers invested primarily in biotech were in a similar position in 2009 when Roche Holding AG (ROG.VX) acquired Genentech for $46.8 billion. In that instance, some of the larger biotech names like Amgen Inc. (AMGN), Celgene Corp. (CELG), Gilead Sciences Inc. (GILD) and Biogen Idec Inc. (BIIB) saw their stocks rise immediately after the deal was announced as capital flowed out of Genentech and into those names.

But in 2011, the Sanofi-Genzyme deal amounts to less than half of the value Roche paid for Genentech, meaning it will have a far less impact on the entire biotech sector.

"At the end of the day, it isn't like $20 billion has suddenly become available to be invested in biotechnology. It never happens that way," said Orbimed Advisors partner Sven Borho, noting that the shareholders have been moving away from the stock for a while and the deal's price tag isn't large enough to lift the entire sector.

"It gets spread pretty fast," he said, especially as many Genzyme shares have been held by arbitrage players. Analysts said fund managers over the past few months have been dividing their money between the big names and some of the smaller companies for months.

Orbimed is a health-care investment firm with about $5 billion in assets under management, according to FactSet Research.

"I'm sure there are some dollars flowing out of Genzyme and into Amgen," said Chris Raymond, an analyst at Robert W. Baird & Co. "But for the typical fundamental health-care specialist investor, you usually pay for growth. And the highest growth opportunity lies in the mid-cap space."

Raymond said stocks like BioMarin Pharmaceuticals Inc. (BRMN) and Alexion Pharmaceuticals Inc. (ALXN) have been big beneficiaries from the available capital that has flowed out of Genzyme in recent months. Upon completion of the deal, Human Genome Sciences Inc. (HGSI) and Dendreon Corp. (DNDN) could benefit, but Raymond added a shift of fund flows has largely occurred already.

"I'm expecting a whole lot of nothing," he said. "The deal has been announced, but that flight into other names has already happened."

Sanofi-Aventis said Wednesday that it had agreed to acquire Genzyme for $20.1 billion plus a contingent value right in a deal that will likely close early in the second quarter of this year. The CVR, a pledge of future payment, could reach as much as $14 a share depending on whether some of Genzyme's treatments reach specific targets.

Some portfolio fund managers that invest primarily in biotech are left wondering where to deploy their money once Genzyme is no longer an option.

"If you're a health-care fund and you have to reinvest, then some of these smaller biotech companies naturally could benefit," said Rajiv Kaul, a fund manager of Fidelity's Select Biotechnology Portfolio (FBIOX), which has more than $1 billion in assets under management, according to Morningstar. "This deal forces you to look for new opportunities, and there are many companies with valuations that aren't too bad."

As merger activity increases in health care, analysts believe some smaller biotech companies are the next to benefit.

"A lot of bellwether names are getting picked off one by one," Raymond said. "There are pretty slim pickings in biotech. Beneficiaries in recent history and going forward will be midcap companies in very early stages of their growth trajectory."

Shiv Kapoor, an analyst at Morgan Joseph & Co., said investors should turn more risk averse regarding midcap biotech stocks. Midcaps offered the lowest risk with the best return over the past couple of years, but it's an area that's "not as lucrative as it once was," he said.

"There's going to be very few areas within biotech that people can invest in," Kapoor said. "I'm expecting the money to spread out. Some of it will end up in pharmaceuticals instead of biotech because they are more diverse and have better value, which was the appeal behind Genzyme."

-By Steven Russolillo, Dow Jones Newswires; 212-416-2180; steven.russolillo@dowjones.com

--Thomas Gryta contributed to this report.

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