Agreement Between Genzyme and San Diego Activist Shareholder Suggests Truce

Xconomy San Diego — 

In what may be a pre-emptive move to turn down the heat, beleaguered Genzyme (NASDAQ: GENZ) says today it has entered into a “mutual cooperation agreement” with Relational Investors, the $6 billion activist investment fund based in San Diego.

The private investment firm began to acquire Genzyme shares in 2008, and Relational co-founder Ralph Whitworth began to publicly call for changes late last year at the Cambridge, MA-based biotech. Whitworth’s expertise in corporate governance and his reputation as an activist investor triggered a flurry of media speculation about the prospects for a shakeup at Genzyme. The San Diego fund now owns about 4 percent of the company’s stock.

Whitworth praised Genzyme’s appointment of former Schering-Plough executive Robert J. Bertolini to its board in early December, but called for “significant further improvements” in the composition of Genzyme’s board. At the time, Whitworth would not rule out waging a proxy battle to bring about such changes, according to a Dow Jones report. (Whitworth’s office did not respond in December to my request for an interview.)

Whitworth, who joined investor David Batchelder at Relational Investors in the early 1990s, prefers to work for change inside the boardroom. In his profile on the Relational Investors website, Whitworth describes the time he served as chairman of Waste Management in 1999 “as a major crisis management assignment in the midst of an accounting scandal.” Whitworth, who served on Waste Management’s board from 1998 to 2004, assumed responsibility for overall management at the company in 1999, including an extensive audit and a recruiting effort to replace the management team. In 2000, during Whitworth’s tenure as chairman at Apria Healthcare Group, Institutional Shareholder Services named the home health provider the “best governed company in North America.” At the same time, Whitworth’s not afraid to get into a public scrap—such as the 2007 battle that Relational Investors waged over the compensation package awarded to Home Depot CEO Robert Nardelli.

As part of the agreement announced today, Relational Investors has pledged to support Genzyme’s slate of board candidates and other proposals in 2010. If Relational is not satisfied with those changes and still wants a representative on Genzyme’s board, the biotech says it will appoint Whitworth to its board in November 2010.

Genzyme has had its share of troubles. Shares of the company’s stock fell by more than 25 percent in 2009, and the stock hit a five-year low of $47.09 in August. As Ryan noted in December, Genzyme lost ground last year after halting production at its Allston plant of its best-selling drug for Gaucher’s disease after viral contamination was discovered there last June. The ensuing shortages of that drug, imiglucerase (Cerezyme), and Genzyme’s drug for Fabry disease, agalsidase beta (Fabrazyme), prompted the Cambridge biotech to lower its sales forecasts and urge doctors to conserve their supplies of the drugs. Sylvie Gregoire, president of Shire Human Genetic Therapies, told Ryan that Genzyme’s missteps enabled her firm to make inroads in the U.S. markets for Fabry and Gaucher’s diseases. In another setback, Genzyme halted development of its next-generation drug for kidney disease in November.

In its statement, Genzyme says it has made progress “overcoming manufacturing challenges, strengthening its operating structure, and enhancing its board composition.”

But Whitworth is not the only major shareholder calling for additional changes. Indeed, a source cited today by Reuters indicates that activist investor Carl Icahn—who has been lobbying for control of Genzyme’s Cambridge neighbor Biogen Idec (NASDAQ: BIIB) for the last couple of years—might now be considering launching a proxy battle against Genzyme as well. Reuters’ Toni Clarke speculates that Genzyme’s agreement with Whitworth might be “a pre-emptive strike against Icahn.”

Meanwhile, Genzyme Chairman and CEO Henri Termeer, who has headed Genzyme since the mid-1980s has come under increasing pressure to step down. After columnist Adam Feuerstein named Genzyme’s Termeer “worst biotech CEO of 2009,” he reported that Genzyme founder Sheridan Snyder agreed, and called him to say, “a CEO change at Genzyme would be a good idea.”