Sanofi-Aventis' Zentiva win will focus attention on strategy

It has been a long and at times rocky road, but it finally looks like Sanofi-Aventis has secured the majority it needs to successfully conclude the €1.8bn ($2.3bn) takeover of Czech generics group Zentiva.

Yesterday afternoon PPF, the combative Czech investment group, which has dogged both Sanofi-Aventis and Zentiva from the beginning, finally said it would accept the Kc1,150 offer, which closes today. With an official announcement expected in the next few days, attention will now turn to whether the acquisition was a good idea in the first place.

The sudden volte-face by PPF was, although unexpected, fairly typical of the unpredictable and often inexplicable tactics the group has employed since it first sparked the situation in May last year (PPF pursuing high risk strategy to force higher bid for Zentiva February 04, 2009). Its own inflammatory Kc950 per share bid dragged Sanofi-Aventis, which already owned a 24.9% stake, into the fray in the first place.

Initially it was assumed Sanofi-Aventis was content with its majority holding and would have preferred to maintain the status quo. Since then, however, with many in the pharma industry making increasingly positive noises about emerging markets and generics and now with new chief executive Chris Viehbacher at the reins, it has become clear Zentiva is part of the game plan.

Central strategy

Last week, Sanofi-Aventis was rumoured to be in talks to buy a Brazilian generics group, which if true would put the strategy squarely centre stage. However, not everyone is convinced that pursuing such low margin businesses, with high barriers to entry and entirely different business models, is the answer to the company’s problems.

Sanofi-Aventis’, and Mr Viehbacher’s, biggest challenge is not unique to the pharma industry; reinvigorating a lacklustre R&D pipeline and handling a couple of huge patent expiries. The former GlaxoSmithKline executive has not been in the job long, but shareholders have high expectations.

Whether the Zentiva move will help reach them remains to be seen. The business certainly has potential, as it has very strong positions in a number of central and eastern European countries where healthcare spending is growing and it has a valuable portfolio of products; the company focused on developing generic versions of modern, primary care products such as statins and heart burn pills, rather than bulk producing older drugs.

However, Sanofi-Aventis would need to buy a lot more businesses like that to make a difference, and whether that is possible considering the competition that exists for these assets is questionable.

Foot on the ladder

What changed PPF's mind is not known; perhaps behind the scenes platitudes quashed their concerns, or maybe it simply realised how much more generous the offer now seems, considering the general economic climate.

What is certain is that had the bid failed Zentiva shares would have dropped significantly, not a pleasing prospect for PPF or Zentiva’s other big shareholders, who may have had a quiet word in the ears of the Czech fund managers. Belviport, owner of around 10% of Zentiva, was reported to have come out in favour of the bid last week.

Whether it becomes a significant strategy direction or a small sideline, PPF’s capitulation means Sanofi-Aventis has made a definite step in the direction of emerging market generics.

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