Genzyme acknowledged on Monday that it was discussing a takeover deal with French drugmaker Sanofi-Aventis, but hopes for a quick agreement cooled as both sides noted differences remain.

Genzyme's statement that the two companies were holding direct talks about a deal after months of contacts held mostly at the level of their advisors mirrored an announcement by Sanofi on Sunday.

The disclosures followed reports on Friday that the companies are moving closer to a deal that would value Genzyme above the $18.5 billion, or $69 per share, hostile offer that Sanofi has extended to shareholders.

"It clearly isn't a done deal yet. Maybe on first read it sounded like this was going to happen pretty quickly and now it still may take them some time, so you're seeing a little bit of a pullback," said Jon LeCroy, analyst with Hapoalim Securities.

Investors were hoping a deal would be clinched before the Jan. 21 deadline for Sanofi's tender offer, LeCroy said, "but I don't know if it can actually get done that quick. It may take another month or two."

Genzyme has rejected Sanofi's takeover offer as too low, but the two sides are now talking about a way to bridge the valuation gap by focusing on prospects via a deal structure known as a contingent value right (CVR).

A CVR would offer Genzyme shareholders an additional payout based on its Campath medicine being approved for multiple sclerosis and meeting certain revenue targets.

"There remain significant differences on the terms and conditions of the potential CVR and the value of our offer, and there is no guarantee that the parties will come to an agreement," Sanofi said late on Sunday. Genzyme put out a statement on Monday mirroring those comments.

The statements come ahead of back-to-back investor presentations by Sanofi Chief Executive Chris Viehbacher and Genzyme CEO Henri Termeer on Tuesday at the annual JP Morgan Healthcare Conference in San Francisco. It is not known if they plan to meet while there.

CVR Component Undetermined
Advisers of the two companies have bandied about figures in a broad range around $80 a share, but the amount to be attributed to a CVR has yet to be determined, according to sources familiar with the matter.

Genzyme estimates its new MS drug could generate peak annual sales of $3.5 billion, compared with an estimate of around $700 million cited by Sanofi.
The CVR could yield an additional $5-$8 per share, depending on Campath's market approval and meeting certain sales targets, Sarasin analyst David Kaegi wrote.

"Once the parties agree on this issue, Sanofi may get finally access to Genzyme's books by raising its offer by an additional $1-2 per share," Kaegi said. "It seems quite probable that a deal will be finally reached because no white knight has stepped up for Genzyme so far."

Use of a CVR is relatively rare, especially in major company acquisitions, but not unheard of.

A CVR was employed in Celgene Corp's purchase last year of Abraxis BioScience based on potential new approvals and commercial royalties achieved on the acquired cancer drug Abraxane. A CVR also was used when Fresenius bought infusion drugmaker APP Pharmaceuticals in 2008 based on APP hitting certain earnings targets.

Buying Genzyme would give Sanofi a new area for growth in the high-margin business of rare diseases as it seeks to diversify to make up for patent losses that will take out roughly a third of its 2008 sales base through to 2013.