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.


This article originally posted on The Washington Post

About the Expert

Pedro Matos

Academic Director of the Richard A. Mayo Center for Asset Management; John G. Macfarlane Family Chair and James A. and Stacy Cooper Bicentennial Professor of Business Administration

Matos is an expert in the fields of asset management, investments, corporate governance and international finance. His research focuses on international corporate governance and the growing importance of institutional investors in financial markets worldwide.

Before Darden, Matos served as an economist for the Portuguese Ministry of Finance and as a consultant for the World Bank in Washington, D.C., and taught at the University of Southern California. He is a research associate at the European Corporate Governance Institute.

Matos is one of the authors of “Are US CEOs Paid More? New International Evidence,” published in February of 2013 in The Review of Financial Studies.

B.A., Universidade Nova de Lisboa; M.S., IST Universidade Tecnica de Lisboa and INSEAD; Ph.D., INSEAD