As Sanofi-Aventis hunkers down for a long battle to buy Genzyme, the specter of a new proxy battle for control of the U.S. biotech will become an increasingly real threat, according to sources familiar with the situation.

Sanofi Chief Executive Chris Viehbacher raised the possibility in theoretical terms last week when he took his $18.5 billion bid for Genzyme directly to shareholders.

But at least three sources close to Sanofi have since noted the French drugmaker wouldn't balk at a direct effort to overturn Genzyme's board if it can't woo Genzyme CEO Henri Termeer in the coming months.

"If Sanofi keeps extending its tender offer again and again, then getting to a proxy battle isn't that far away or unrealistic. It's definitely part of the playbook," said a source familiar with the situation, who declined to be identified by name. The source was not authorized to speak with the media.

Regardless of the outcome of Sanofi's tender offer, Genzyme's board must approve a deal under Massachusetts law.

Others note that Genzyme has no shortage of forces agitating for change, including dissident investors Carl Icahn and Ralph Whitworth, who won representatives on the board earlier this year.

Genzyme also faces at least eight shareholder lawsuits, according to a filing with securities regulators.

Sanofi's tender offer expires on Dec. 10, but it could potentially be extended several times until Genzyme's entire 13-member board faces reelection at the next shareholder meeting in the spring.

"Sanofi can afford to be patient. It can sit back, wait, file for its own slate of directors to put maximum pressure on Genzyme's board to sit down and negotiate," said one healthcare industry banker who declined to be identified by name because he was not authorized to speak to the media.

"If Genzyme continues to refuse to negotiate, Sanofi can try to get its own slate elected and work towards a deal that way," the banker said.

Genzyme could be vulnerable by an attack on another front if institutional shareholders get frustrated by Genzyme's refusal to negotiate with Sanofi, analysts said.

Relational Investors and Carl Icahn hold 3.8 percent and 4.9 percent of Genzyme, respectively, giving them a key role in getting a deal.
In June, Icahn abandoned an earlier proxy fight against Genzyme in return for the biotechnology company's acceptance of two of his representatives to its board. Icahn and Relational could reemerge to launch a new proxy battle to try to get a board that would be more receptive to a deal.

"A proxy fight is possible but it doesn't necessarily have to be fought by Sanofi-Aventis. If there are enough frustrated shareholders it'll be interesting to see what happens, they might be expected to step up to the plate. In the end it might be Genzyme shareholders fighting the battle for Sanofi," said Mike Ward, an analyst at Ambrian in London.

Relational and Icahn could not be immediately reached for comment.

Sanofi Ready For Long Battle
Sanofi's chief executive, Chris Viehbacher, has said all options remain open, though it is too early to speculate about its exact battle plan.

"The Genzyme board needs to be reelected every year in its entirety at an annual shareholders meeting and one could anticipate a proxy contest at that point theoretically," Viehbacher said in a recent conference call with analysts.

"Viehbacher doesn't have to do anything until December, when he gets feedback from shareholders," Ambrian's Ward said.

"He may be prepared to let events take their course, see how many shares are tendered and then assess where to go from there. The question then comes up, do you raise the bid or extend the offer period? It might be a stronger signal from Sanofi to keep the $69 and say 'this is it,'" Ward said.

Sanofi and Genzyme could not be immediately reached for comment.

Viehbacher has indicated that walking away from a deal with Genzyme was "an unacceptable option" given its potential value to Sanofi and the time already invested in it, according to Genzyme's filing with the U.S. Securities and Exchange Commission.

That disclosure came as Genzyme said it would evaluate alternatives for its assets, including reaching out to other companies, to prove it is worth more to investors than what Sanofi has offered.

Genzyme stressed that despite the move to review its value, it was not putting the company up for sale. So, the actual logistics of probing its market value remain unclear.

If Genzyme launched a formal auction process, Sanofi would want to participate and get a chance to look at Genzyme's books along with other potential suitors, sources familiar with the situation said.

Viehbacher has publicly acknowledged that Genzyme may be worth more than $69 a share, but it would need to justify a higher price with more information on Genzyme's potential recovery from a manufacturing crisis and the sales potential of an experimental multiple sclerosis drug, Campath.

Genzyme To Make Its Case For More Value
Genzyme has several big events looming that could help it - or hurt it - in its efforts to leverage more money out of Sanofi.
If Genzyme fails to prove its case that it is worth more than $69 a share, it could become more vulnerable to Sanofi and an eventual proxy battle, analysts said.

Genzyme plans to host a meeting for shareholders to discuss its financial outlook, release its data on Campath, the experimental multiple sclerosis drug, and announce its quarterly earnings on Oct. 20. It also is looking for a buyer for two non-core units.

Meanwhile, as part of the consent decree with the U.S. government, Genzyme is required to move its filling and finishing operations for products sold in the U.S. out of its plant in Boston by Nov. 28. due to a viral contamination.

"This is a battle for the hearts and minds of Genzyme shareholders. In the next few weeks, Genzyme has to be compelling in its argument that it can deliver more on its own," said the industry banker.