Activist investor Carl Icahn filed a proxy statement with the Securities and Exchange Commission shortly before Genzyme's May 6 investor day presentation, reiterating Icahn Partners' gambit to get four new directors elected to Genzyme's board of directors at the company's annual meeting June 16.

Icahn went a step further, however, in his proxy statement, specifying which board members he will seek to oust from the board, including current CEO and Chairman Henri Termeer. The statement urges the election of Icahn and his associates Stephen Burakoff, Alex Denner and Richard Mulligan to the board, in the place of current members Termeer, Charles Cooney, Richard Syron and former U.S. Sen. Connie Mack, R-Fla.

" [We] believe that Genzyme's inability to fully manufacture and supply certain of its products leads to the conclusion that the manufacturing system at Genzyme is 'broken'," the proxy statement reads. "This conclusion is further evidenced by Genzyme's subsequent announcement of the Food and Drug Administration's enforcement action. As board members, the nominees will work, subject to their fiduciary duties, to understand and then help Genzyme correct what they believe is 'broken.'"

Termeer and his management team have come under increasing scrutiny since the shutdown due to viral contamination last June of a Boston-area manufacturing facility where the company's top-selling drugs Cerezyme and Fabrazyme are made. Although the plant went back online within six weeks, the drugs, both for rare, life-threatening enzymatic deficiencies, have been in short supply since. And Genzyme has not yet returned to full production of either medicine. In March, FDA informed the company that it would take enforcement action, likely a consent decree, to remedy the situation (Also see "Genzyme's Manufacturing Problems Lead To Enforcement Action By FDA" - Pink Sheet, 24 March, 2010.).

Termeer attempted to make light of the situation while opening Genzyme's investor presentation May 6, conceding he had read the papers and calling the situation "quite an amazing moment" in the company's history.

He defended Genzyme's performance since the shutdown of the Allston Landing, Mass., plant, asserting the firm had made "material progress" each day, week and month since. But Termeer also admitted the obvious - that the manufacturing difficulties had resulted in a decline in Genzyme's share price.

To keep investors happy, Genzyme announced a major share buyback program worth $2 billion as part of its investor R&D day.

Five-point plan to keep shareholders in the fold

Furthermore, to reassure the company's shareholders, Termeer highlighted additional efforts that management believes will increase shareholder value. These include:

· Focus on core business, by continuing to provide products that meet unmet medical need and by establishing operational excellence in manufacturing.

· Capitalize on near-term revenue growth drivers, both recent launches like Myozyme , Synvisc One and Mozobil , and also late-stage pipeline candidates such as alemtuzumab for multiple sclerosis, mipomersen for severe hypercholesterolemia and eliglustat, a small molecule Termeer called a potential game-changer in type 1 Gaucher disease.

· Balance revenue and earnings growth with cash flow return on investment, in part by addressing shareholder interest by focusing on cash flow return at the business segment level.

· Improve operating margins by reducing costs company-wide, with a goal of performing at best-in-class level among its peer companies.

CFO Michael Wyzga said a stock buyback scheme is the best use of the company's capital at present because the stock is undervalued. The biotech will purchase $1 billion through debt in the short-term, with plans for buying up another $1 billion by 2015. Wyzga also noted that Genzyme has purchased nearly $800 million in stock through a buyback plan initiated in 2007.

As part of focusing on core business, Termeer said Genzyme will pursue "strategic alternatives" for three units - genetic testing, diagnostic products and pharmaceutical intermediates. These alternatives, which should be completed during 2010, might include divestiture, spin-out or management buy-out, the company said.

Termeer noted the genetic testing and diagnostic product units are profitable, but argued that bringing those businesses to their full potential would require an outlay of capital that would not fit well with Genzyme's core mission.

"As we evaluated our company to create a mix of businesses that will deliver sustainable growth and stronger returns on invested capital, it became clear that these businesses do not fit within this strategy," he said. "Focusing on our core businesses will enable us to continue to build a portfolio of high-value therapies for patients."

It's not clear whether these efforts are sufficient to sway Genzyme's investors away from Icahn's cause. Certainly, the stock didn't jump favorably following management's presentation, with the company's closing May 6 share price falling 2 percent from the day prior to $51.97. The company's stock hit its 52-week high at $62.44 on June 3, 2009, days before the plant shutdown.

-Joseph Haas (j.haas@elsevier.com)

Icahn Tries To Rain On Genzyme's Investor Day Parade With Proxy Seeking Termeer's Ouster

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