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When science collides with stock market pressure

By Pedro Matos,

The big idea: Over 26 years, Henri Termeer, chief executive of Genzyme, had turned his entrepreneurial venture into a top biotechnology firm with $4.6 billion in revenue in 2008 and a stock that had outperformed the market over the previous decade. In April 2009, Genzyme became the target of Relational Investors (RI), an activist investment fund. It had built a 2.6 percent stake and demanded that Termeer focus on returning cash to shareholders. Should he fight RI and risk being ousted, or should he welcome the activist’s advice on creating shareholder value and risk losing control?

The scenario: Founded by a group of scientists and funded by venture capital, Genzyme established its footprint in targeted drugs to cure rare genetic disorders, despite the small populations that were afflicted. Genzyme’s most rewarding products were the first enzyme replacement therapies for patients with crippling conditions.

Raising funds through public offerings allowed the firm to absorb the high cost of research and development and endure the long process required to get new drugs to market. Genzyme acquired nascent firms with products in cardiometabolic and renal diseases, biosurgery and hematologic oncology. Given the low probability of taking a new drug to market, Termeer acquired technologies and moved the firm toward creating treatments for more common diseases. Genzyme was expected to generate increasing cash flow.

Despite Termeer’s successes, however, his diversification strategy was viewed unfavorably by Ralph Whitworth of RI. It had a history of engagements with companies which, at times, had resulted in CEOs being forced out. RI was backed by large investors such as the California Public Employees Retirement System. Whitworth argued that the company’s share price was trading below its fundamental value because, while its genetic diseases division was profitable, the newer segments were not generating an acceptable return. Whitworth argued that instead of pursuing further acquisitions, Genzyme should return money to shareholders.

In late February 2009, news of an operational problem in one of Genzyme’s plants, followed by a warning letter from the Food and Drug Administration, pushed Genzyme’s stock price down 20 percent. This bolstered RI’s bid with other shareholders.

The resolution: The next 18 months would be among the most challenging in Termeer’s career. He welcomed Whitworth onto Genzyme’s board as chair of a new capital allocation committee. Acquisitions were put on hold and businesses were sold. And a $2 billion share buyback plan was announced. However, operating issues continued, causing production shortages in medications and hurting Genzyme’s revenue. A more hostile activist, Carl Icahn, bought 4.9 percent of Genzyme’s stock, but Termeer and RI cooperated to thwart Icahn’s takeover attempt. With Icahn out of the picture, a “big pharma” company, Sanofi, made its own takeover bid. Genzyme sold for $20 billion in February 2011. RI exited its position at a gain and Genzyme, a subsidiary of Sanofi, remains a leading innovator.

The lesson: Genzyme illustrates the power of capitalism to attract resources to meet big challenges, such as treating rare diseases. Ultimately, however, a public company has a responsibility to its investors, which can create conflicts between management’s vision and shareholders’ return.

— Pedro Matos

Matos is an associate professor of business administration at the University of Virginia Darden School of Business.

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