Carl Icahn Seeks Management Shake-Up at Genzyme

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Over the past several days, the U.S. Food & Drug Administration has been playing good cop, bad cop with Genzyme (GENZ). On Monday, the regulatory authority fined the biotech giant $175 million for quality violations at its Allston, Mass. plant, then on Tuesday it approved Genzyme's Lumizyme -- a drug for the treatment of a rare genetic disorder called Pompe disease.

But perhaps even more interesting than the FDA's moves were those of activist investor Carl Icahn. Despite the fact that the company's shares bucked the general market trend Tuesday, closing 5.5% higher, Icahn is none too pleased with the company. In a SEC filing Wednesday, he asked the board to remove CEO Henry Termeer from his position as Chairman.

In the filing that he entitled "Genzyme, Time to Change the Old Guard,"
Icahn said there has been "extreme mismanagement" of manufacturing problems that date back to 2008. Many of those problems caused delays in production and shortages of some of the company's key drugs, including two blockbusters -- Cerezyme and Fabrazyme -- that treat rare disorders. Last June, the company shut down its Allston plant for three months because of a viral contamination. Other problems included foreign particles in the drugs, including metal, fiber and glass.

The FDA has taken enforcement action against the company, including Monday's disgorgement payment of $175 million for unlawful profits from the sale of products that were made at the plant. Genzyme has agreed also to several other requirements.

A Case of Extreme Mismanagement?

In the SEC filing, Icahn outlined how each of the problems have caused significant destruction of near- and long-term shareholder value. Genetic disease business sales, he wrote, declined from $2.23 billion in 2008 to $1.77 billion in 2009. Management, he said "destroyed significant long-term value in its 'cash cow' Genetic Disease franchise as a result of the manufacturing problems."

Icahn also accuses Genzyme management of disregarding warnings from the FDA, thereby ruining its relationship with the federal agency, as well as damaging its reputation among doctors, patients and investors. That, he claimed in the filing, has resulted in a loss of market share. Because Genzyme's strategy is to find and make treatments for rare diseases, it is often the only supplier. However, the severe shortages of its drugs prompted the FDA to allow treatment with yet-to-be approved drugs from competitors.

Given that fact, there was no doubt a sigh of relief in the halls of Genzyme's headquarters on Tuesday when the FDA finally -- after tworejections -- approved Lumizyme for patients ages 8 years and older with late-onset Pompe disease, a rare muscular disorder affecting 5,000 to 10,000 people worldwide. Analysts expect the drug to become a blockbuster, with sales over $1 billion annually.

But the drug's approval won't be enough for Icahn, who is seeking four seats on the board (one for himself) and will likely try to oust Termeer completely at some point as he aims to turn the company back to its glory days. "[W]e believe if any real progress is to be made in normalizing relations with the FDA , we must immediately change the board to show that Termeer is no longer 'king of the company; even if he does remain CEO," he said in the filing.
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