Genzyme in “Tough Spot” with Icahn Proxy Challenge—CEO Termeer Courting Key Shareholders

5/13/10

With his leadership under attack and FDA regulators cracking down on his company’s manufacturing, Genzyme chairman and CEO Henri Termeer is traveling to meet with the firm’s top 30 shareholders over the next month.

The road trip, discussed yesterday in an interview with Genzyme spokesman Bo Piela, comes just over a month before the company’s annual meeting on June 16. At the meeting, the billionaire investor Carl Icahn aims to unseat Termeer and three others on the firm’s board of directors. And Icahn, who has a 4.9 percent stake in the firm and a record of ousting executives from troubled companies, holds plenty of ammo for his campaign to gain greater control of Genzyme.

A litany of mishaps has riddled Cambridge, MA-based Genzyme (NASDAQ:GENZ), the world’s largest maker of rare disease drugs, during the past year. Viral contamination caused a temporary shutdown at its Allston, MA, drug plant. Shortages of key products have slowed sales. The FDA has slapped fines on the firm for manufacturing violations. And some unhappy investors, Icahn the most vocal among them, want changes—including an end to Termeer’s nearly three-decade reign at the company.

Henri Termeer, CEO of Genzyme

Henri Termeer, CEO of Genzyme

David Meeker, Genzyme’s chief operating officer, candidly summarized the situation at his company when, during his speech at an industry meeting in Cambridge last month, he said: “We’re obviously in a tough spot.”

Many of Genzyme’s problems stem from its manufacturing problems. In June, the company revealed that it was temporarily closing the Allston Landing plant because a virus was found in a bioreactor needed to produce the firm’s top-selling product, imiglucerase (Cerezyme), which is used to treat a rare genetic illness called Gaucher’s disease. Sales of the drug fell from $1.23 billion in 2008 to $793 million last year. The incident also hurt sales of the company’s No. 2 seller, agalsidase beta (Fabrazyme), for Fabry disease.

In November, not long after Genzyme finished sanitizing the Allston plant, the FDA warned doctors that bits of potentially dangerous stainless steel, non-latex rubber, and a fiber-like material were found in drug vials from the facility. The agency proposed initial fines of $175 million in March for violations at the plant, and the company faces more expensive penalties if it does not remedy the problems by yet-to-be-set deadlines.

The firm’s production woes aren’t limited to Allston, either. An explosion and fire hit the company’s Haverhill, England, plant in December, destroying equipment used to make the majority of ingredients for its kidney disease drugs, and costing the biotech $7.5 million so far to cover damage there.

Piela says the company has taken steps to improve its manufacturing. Genzyme has hired new heads of manufacturing and quality control, and it moved an employee who led the launch of its Belgium drug plant to take over management of the Allston facility. It’s planning to move operations for filling drug vials—the cause of the steel, rubber, and other foreign particles found in drug supplies from Allston—to a contract manufacturer and one of its own plants, in Waterford, Ireland. There’s also a search for a new company director with manufacturing expertise.

Still, concerns linger about Genzyme’s inability to meet full demand for its Gaucher’s and Fabry drugs, and the company could end up paying an additional $315 million to the FDA in 2011 because of manufacturing violations, according to an April 22 note to investors from analysts at Jeffries & Company.

The drug shortages and violations have played into Icahn’s argument that Genzyme’s manufacturing system is “broken,” as he wrote last week in a letter to shareholders. He and three of his associates are challenging for four of 10 seats on the company’s board of directors that are up for reelection. Further, he’s telling fellow investors not to reelect Termeer and three others on the board.

Icahn often clashes with the leaders of biotech companies where he owns stock. At Cambridge, MA-based Biogen Idec (NASDAQ:BIIB), for instance, Icahn won two board seats last year with the election of his associates Alex Denner and Richard Mulligan to the company’s board of directors. In January, Biogen CEO James Mullen, whose leadership Icahn has criticized, revealed his decision to step down as chief executive and a member of the board in June.

Genzyme’s Termeer has more detractors than just Icahn. David Katz, the chief investment officer of New York City-based Matrix Asset Advisors, told Bloomberg News last month that Genzyme’s long-time CEO should be replaced. Katz added that he planned to vote his firm’s 242,000 shares of Genzyme stock for Icahn and his slate of nominees.

Still more shareholders have filed lawsuits against Genzyme and its leaders. The legal complaints accuse certain company executives and directors of withholding information about manufacturing issues in Allston, misleading shareholders about the timing of approval for the Pompe disease drug alglucosidase alpha (Lumizyme), and using insider information to sell their company stock before bad news became public.

“We have a number of major institutional investors who are on our side,” says Denner, a fund manager for Icahn, who is one of Icahn’s nominees for Genzyme’s board. Other than Matrix, however, Denner declined to identify his slate’s institutional supporters.

Termeer is proving to be a formidable adversary to Icahn. His plans to meet with top shareholders over the next month indicate that he’s fighting for their support of Genzyme’s slate of directors. Genzyme has already garnered the backing of Ralph Whitworth, a principal at San Diego-based Relational Investors, which controlled 4 percent of Genzyme’s stock at the end of 2009.

Previously a vocal critic of Genzyme’s management himself, Whitworth was elected to the board last month and is now criticizing the chief remaining critic, Icahn. “We don’t begrudge investors their appropriate influence, but I do scratch my head and wonder why Carl would want to do this,” Whitworth told the Boston Globe this week. “It just seems a little duplicative of efforts that are underway. I assume he just wants [to exert] more pressure.”

Even as Termeer goes on his road show to talk with investors, there is little doubt Icahn will be courting many of the same folks. Next month’s board election could well turn out to be a referendum on which group makes the better case for how to best extricate Genzyme from its tough spot. We’ll follow the action leading up to June 16.

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