Genzyme’s Termeer, Biotechnology Pioneer, May Sell

Genzyme Corp. CEO Henri Termeer
Genzyme Corp. chief executive officer Henri Termeer, seen here, says he will fight the Sanofi's $69-a-share offer, saying it undervalues Genzyme’s research pipeline. Photographer: Pankaj Nangia/Bloomberg

Henri Termeer, a biotech industry pioneer and chief executive officer at Genzyme Corp., is on the verge of losing control of the company he transformed from a start-up in 1983 into a cutting-edge drugmaker with $4.5 billion in annual sales.

Pressured by an unsolicited $18.5 billion buyout offer from Paris-based Sanofi-Aventis SA, activist investors on his board and shareholders, Termeer says he will consider selling, if he can get the right price.

The CEO, 64, stands to make about $300 million from a sale to Sanofi. At the same time, Termeer is under siege. He says he will fight the drugmaker’s $69-a-share offer, saying it undervalues Genzyme’s research pipeline. He is contending with billionaire investor Carl Icahn, who gained control of two seats on the board in June, and is pressing for a higher stock price. And he has yet to resolve manufacturing glitches that led to product shortages, drove shares down as much as 43 percent from a 2008 high, and made the company vulnerable to a takeover.

“He’s caught between a plant in Allston that is a disaster, Icahn in bed with him and Sanofi banging on the door,” said Erik Gordon, a professor at the University of Michigan’s Stephen M. Ross School of Business in Ann Arbor, who has followed the biomedical industry for 30 years. “If Sanofi doesn’t fire him I think Icahn will.”

Offer Rejected

Genzyme, based in Cambridge, Massachusetts, rejected Sanofi’s offer Aug. 30, saying it undervalued the company’s experimental medicines, including treatments for Gaucher disease and multiple sclerosis, as well as its progress in fixing manufacturing deficiencies. Sanofi made public its $69-a-share bid on Aug. 29 after two months of trying to get Termeer and his board to negotiate.

Though Termeer will receive about $23 million if he loses his job in a Genzyme sale, and he owned about 1.5 percent of the stock as of April, valued at about $283 million at $69 a share, the CEO said yesterday that he won’t hand over the company he built without a battle over price.

“The company is not for sale at $69 and we made that clear,” Termeer said in a telephone interview. “What the shareholders deserve is a fair value.”

Genzyme rose 27 cents to $70.38 at 4 p.m. New York time in Nasdaq Stock Market composite trading. The shares closed $1.38 above Sanofi’s bid, and at the highest closing price since July 22, last day of trading before the French drugmaker’s interest was first reported.

Especially Valuable

Termeer’s stance reflects his oft-stated position that the company’s business model, which the Dutch-born chief is widely credited with creating, and which other biotechs have since copied, makes Genzyme especially valuable to drugmakers like Sanofi. Unlike the pills produced by traditional drug companies, Genzyme’s medicines are made using biological processes and can’t be readily copied by generic-drug makers. Genzyme garners premium prices from insurers and government payers because the therapies provide life-saving benefits.

“That’s the number one thing he’ll be known for -- the orphan-drug business model,” Robyn Karnauskas, an analyst at Deutsche Bank Securities in New York, said in a telephone interview. “It’s been very successful.”

Genzyme’s best-selling medicine, with $793 million in sales last year, is Cerezyme, a mass-produced version of a human enzyme missing in patients with the inherited illness Gaucher disease. Fabrazyme, for the genetic illness Fabry disease, and Myozyme and Lumizyme for Pompe disease, similarly provide patients with enzymes their bodies fail to make or produce adequately on their own.

New Sector

“We created a completely new sector in the health-care field,” Termeer said yesterday. “It’s interesting that companies like Sanofi and others are considering a strategic marriage like this in a very important way to reshape and form their future.”

Sanofi’s $69 offer represents a 31 percent premium over Genzyme’s average share price in the 20 days leading up to July 22, when the stock was unaffected by speculation the French drugmaker would make a bid. That compares with an average premium of 58 percent paid for 494 U.S. biotechnology companies acquired in the last five years, according to Bloomberg data.

Termeer is regarded as one of the fathers of biotechnology, said Robert Coughlin, CEO of the Massachusetts Biotechnology Council, an advocacy group based in Cambridge, Massachusetts. Coughlin, whose son has cystic fibrosis, an inherited chronic disease that affects about 70,000 people worldwide, said he appreciates Termeer’s focus on rare illnesses.

Rare Diseases

“When I talked with him about his commitment to rare disorders, especially in a day and age where everyone’s looking for the next blockbuster, I said, ‘What makes you think this is important when there aren’t so many patients?’,” Coughlin said. “He said, ‘Well, it’s pretty important to the person who has it.’”

The strategy has paid off. Cerezyme costs about $260,000 a year per patient in the U.S., according to Oppenheimer & Co. analyst Brian Abrahams. The drug was a blockbuster for Genzyme, surpassing $1 billion in annual sales in 2007 and 2008 before revenue declined last year amid the drug shortages.

Shareholders felt Genzyme didn’t take the problems at the Allston plant seriously enough, said Michael Obuchowski, chief investment officer of First Empire Asset Management in Hauppauge, New York. In another company, the CEO might have been fired, Obuchowski said. First Empire owns about $600,000 of Genzyme shares.

Rising Demand

It was a commitment to meet a rising demand from patients for products they otherwise can’t get that led to the manufacturing breakdowns at the company’s plant in Boston’s Allston neighborhood, Termeer said in a June interview. The need for Myozyme, which treats an illness that leads to a buildup of sugar harmful the heart, was higher than Genzyme anticipated.

To increase supplies, the company started producing the drug at the Allston site, which threw the plant out of compliance and reduced its stock of other medicines.

Then, when a virus contaminated the plant, there wasn’t enough inventory of the other drugs to prevent a shortage, Termeer said.

“It was life and death, so the pressure was enormous,” he said in June. “You get extreme reactions from families. Patients get very aggressive.”

Genzyme’s shares dropped 2.6 percent from June 15, 2009, the day before it reported it would have drug shortages because of the contamination, through July 22 of this year, the last day of trading before Sanofi’s buyout interest was reported. In that period, the Standard & Poor’s 500 Index climbed 18 percent.

Stock Drop

The company’s stock had dropped as much as 43 percent, to $47.16, in June of this year from a 2008 high of $83.25 in the aftermath of the manufacturing issues. The decline opened the door for Icahn to buy in, and he launched a proxy fight in February.

Termeer and Icahn brokered a compromise by adding two Icahn-approved board members in June. During the proxy contest, Genzyme said it would buy back $2 billion in stock and sell or spin off three units that aren’t part of its main business in rare-disease drugs.

Icahn “puts money in and he wants money out,” the University of Michigan’s Gordon said. “Icahn is not cuddly.”

Icahn didn’t return calls seeking comment yesterday.

Sanofi is also aiming to take advantage of the biotech company’s depressed stock, said Sven Borho, a Genzyme investor. Anything less than $75 a share doesn’t accurately value Genzyme after it remedies the manufacturing problems, he said Aug. 4.

Losing Revenue

“Sanofi is losing revenue and needs to address its problems,” Borho, a partner at OrbiMed Advisors in New York, which holds about 2.5 million Genzyme shares, said in an interview last month. “Don’t come through Genzyme and try to get a discount.”

Borho didn’t return calls yesterday.

Led by CEO Chris Viehbacher, Sanofi is seeking new products to help replace medicines accounting for more than 20 percent of revenue that face generic competition by 2013. The drugmaker has spent about $17 billion on 25 acquisitions since Viehbacher took the helm in 2008, according to data compiled by Bloomberg.

Termeer said in June that he was considering retiring in 2011, after helping resolve Genzyme’s manufacturing defects and establishing a market for its Pompe disease drug, Lumizyme, which was approved in May.

“Next year I’m 65 years old,” Termeer said in an interview at the time. “I’m thinking 2011 would be a logical year when a transition could be organized.”

Termeer said then that drug shortages due to the manufacturing failures were his “greatest disappointment.”

‘Enormous Regrets’

“I have enormous regrets,” the CEO said. “This will never happen again.”

Those problems won’t taint Termeer’s legacy as a business leader, said Bill George, a professor at Harvard Business School in Boston and former CEO of device maker Medtronic Inc. of Minneapolis.

“There’s enormous pressure on him from Icahn and others who aren’t interested in the long-term growth of Genzyme but want to make a sale, a quick gain on the stock,” George said in a telephone interview. “This is a long-term industry faced with short-term shareholder pressures.”

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