Icahn Calls Genzyme’s Manufacturing “Broken,” Advises Against Termeer’s Re-Election to Board

5/4/10

Billionaire investor Carl Icahn ratcheted up his campaign to get himself and three of his associates elected to Genzyme’s board of directors next month, telling shareholders that the Cambridge, MA-based biotechnology company’s manufacturing system is “broken,” according to a proxy statement filed with the SEC today.

Icahn, who controls 4.9 percent of Genzyme’s (NASDAQ:GENZ) common stock, is angling to gain four of the 10 board seats up for reelection at the company’s annual meeting slated for June 16. In the proxy statement, the activist investor is also advising shareholders not vote to reelect Henri Termeer, Genzyme’s chairman and CEO, to the board, as well as three other existing directors who Genzyme has recommended for reelection.

Termeer’s leadership has come under fire amid production delays and manufacturing woes at Genzyme, the world’s largest maker of enzyme-replacement drugs for rare genetic diseases. The company found viral contamination in a bioreactor and temporarily halted production at its Allston Landing plant last June, leading to supply shortages and reduced sales of its two best-selling drugs, imiglucerase (Cerezyme), for Gaucher’s disease, and agalsidase beta (Fabrazyme), for Fabry disease. Last month the firm announced that it would be paying at least $175 million in fines to the FDA because of violations at the Allston plant.

“The Icahn parties…believe that Genzyme’s inability to fully manufacture and supply certain of its products leads to the conclusion that the manufacturing system at Genzyme is broken,” Icahn and his affiliates wrote in their letter to shareholders.

Genzyme has recommended that shareholders reelect all 10 of its current board members. The company has argued in press releases that it has made progress in addressing deficiencies at the Allston plant, as evidenced in part by the February hiring of former Eli Lilly executive Scott Canute to lead the company’s manufacturing operations at 17 sites around the world. But Icahn and a growing number of major investors have shown their dissatisfaction with the company’s efforts to improve its manufacturing systems.

Last month, Genzyme elected Ralph Whitworth, a principal at Relational Investors and another activist investor, to its board. San Diego-based Relational, which owned about 4 percent of Genzyme’s stock at the end of 2009, agreed in January to support Genzyme’s slate of board nominees if Relational in exchange for the option to take a director’s seat in November if the $6 billion fund wasn’t satisfied with the company’s progress in addressing its manufacturing problems. Clearly, Relational wasn’t happy with Genzyme’s progress on that front, prompting Whitworth to join the board more immediately.

Genzyme has fought back at Icahn’s attempt to gain four seats on its board. The company’s top lawyer has said that two of Icahn’s nominees to the Genzyme board, Alex Denner and Richard Mulligan, would not be able to fulfill their duties as directors because of their status as current board members at Cambridge, MA-based biotech firm Biogen Idec (NASDAQ:BIIB). Genzyme’s lawyer has argued that Denner and Mulligan would not be suitable for board seats because Genzyme is developing alemtuzumab (Campath) for patients with multiple sclerosis, and Biogen is a leading maker of MS drugs, presenting a conflict of interest.

Denner, a fund manager for Icahn, told Bloomberg News last month that Genzyme’s argument was meant to distract investors from the company’s manufacturing problems, and that he and Mulligan (a genetics professor at Harvard Medical School) would not participate in matters on the board where there were conflicts. Denner could not be reached for comment at his office this afternoon.

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