Inside the battle for Genzyme’s future

Raman, a business professor at nearby Harvard University, scoured the internet and spoke to dozens of scientists. They told him that if his daughter Nandita could hold on, a treatment being developed by Genzyme Corp might soon be available. In April, 2006, US regulators approved the drug, Myozyme, in time to save Nandita’s life.

“For motivating thousands of employees who collectively added years to our child’s life, and restored a smile to her face, we thank you,” Raman said, addressing Termeer before a packed auditorium at Babson College, which on April 7 inducted him into its Academy of Distinguished Entrepreneurs.

As the 64-year-old Termeer accepted his honor “with humility,” he was painfully aware that trouble was brewing. Federal regulators were about to sanction his company for manufacturing violations that led to shortages of two of its other life-saving drugs: Cerezyme, a treatment for Gaucher disease, and Fabrazyme, a treatment for Fabry disease.

And so it goes for Termeer, an urbane and charismatic Dutchman who has emerged as one of the biotechnology industry’s most celebrated – and controversial – figures. As a result of the latest setbacks, though, he is now in danger of losing control of the company he has spent the better part of three decades building.

Production problems
Patients with Gaucher, Fabry and Pompe disease are deficient in certain enzymes that break down fats or sugars in the body, leading to organ damage and, without treatment, death. Last year, a viral contamination forced the company to shut down its manufacturing plant in the Allston neighbourhood of Boston. To conserve supplies of Cerezyme and Fabrazyme, patients were forced to skip or take less of their medication. And though the plant is up and running again, Genzyme has repeatedly pushed back the time it will take to fully meet demand.

That has strained Termeer’s relationship with patient groups, and enraged Wall Street. Genzyme’s shares fell 26 percent in 2009 as the company scaled back earnings projections and yielded ground to competitors. For 16 years Genzyme monopolised the $1.2bn market for Gaucher disease. But in February, the US Food and Drug Administration approved Vpriv, a rival drug made by British drugmaker Shire Plc. It is expected to approve an experimental treatment made by Protalix BioTherapeutics Inc of Israel by the end of the year.

“As a large organisation, the challenges are different from those you face as an entrepreneur, and I’m sure you have read about the challenges we are facing,” Termeer told his Babson audience dryly.

Angry investors
The manufacturing crisis has also opened the door to activist investors. Carl Icahn, the billionaire known for taking control of underperforming companies and shaking up management, has nominated himself along with three other representatives to Genzyme’s board. Ralph Whitworth, another activist who runs the investment firm Relational Investors LLC, and who Genzyme recently appointed to its board, has called on the company to sell off parts of its business – such as its treatments for kidney disease – that are unrelated to its manufacture of drugs for rare diseases.

On June 16 investors will gather to vote on whether they consider Termeer the right person to steer the company out of its crisis.

Termeer insists he is. “We are on our way to overcoming the manufacturing challenges we have faced,” he said in an interview, “but still ahead is the need to regain the trust of our patients and physicians. I have known this community for many years. In fact, I developed this market from its inception. This isn’t the time to have someone else try to understand it.”

Some industry experts agree.

“Clearly there is a challenge to the company’s reputation, and clearly the products were not being made to the quality that is needed, and he needs to take ownership of that,” said Fred Hassan, the former chief executive of drugmaker Schering-Plough, who turned that company around after it suffered its own manufacturing crisis in 2002.

“But it is important that if investors ever consider changing him, whoever they replace him with must be immediately experienced in handling major manufacturing problems, and there are very few people like that,” he added. “Sometimes it is better to bring in the right crew and get on with it.”

Persuading investors to reinstate their trust in Termeer, however, won’t be easy.

“I think there is a good chance Icahn will get nominated to the board,” said Karen Andersen, an analyst at Morningstar. “A lot of investors are very unhappy at the way he has been leading the company.”

Icahn and his three other board nominees said in proxy filing in April they “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.'”

Key to his chances of holding on will be whether Termeer can convince investors that the problems are confined to manufacturing and can be “surgically” removed, as he insists, or whether investors believe they reflect a broader breakdown in leadership and operations.

Biotech pioneer
To chart how Genzyme and Termeer have reached this perilous position is to depict the arc of the industry itself. Genzyme is one of the oldest biotechnology companies in the world, and one of the last to remain independent.

It was founded in 1981 by Henry Blair, an enzymologist who had been collaborating with the National Institutes of Health (NIH) to develop a treatment for Gaucher disease using an enzyme known as glucocerebrosidase. The enzyme is found in human placentas, and Genzyme’s job was to collect the placentas, extract and purify the enzyme, and ensure enough quantity to support the clinical trials.

Termeer, a boyish-looking man who still retains his Dutch accent, joined the fledgling company in 1983 after a 10-year career at Baxter, a healthcare company known for producing successful young entrepreneurs.

From the start, Termeer wanted Genzyme to remain independent. To do that he believed it needed to be diversified and it needed to manufacture its own products, not just discover them. With the help of venture capital financing, Genzyme acquired two companies in England that produced raw materials for use in diagnostic testing and pharmaceuticals, and by the time the company went public in 1986, at $2.50 a share, it was generating revenue of nearly $10m.

“We didn’t want to become the research arm of a large pharmaceutical company,” he said. “The notion of building a business, rather than building a research company, became a very important characteristic of Genzyme.”

Independence had its cost. Genzyme was launched on the 15th floor of an old garment building in the red light district of Boston – known as the Combat Zone.

“I would park my car and walk to the office and before I got there I would be propositioned at least three times,” Termeer said. “It was an unusual kind of environment.”

Trials and tribulations
In 1984, the NIH ran its first trial of glucocerebrosidase in a Gaucher disease patient – Brian Berman, who was four. Berman’s belly had swollen to the size of a basketball and surgeons were about to take out his spleen.

“It was pushing all his other organs out of the way,” Termeer said.

The enzyme worked, and Berman’s belly shrank. The result had a powerful impact on Termeer, as well as on Berman’s family. To this day Termeer keeps a picture of Berman on the wall of his office in Cambridge, Massachusetts, and the two remain in touch.

“He is married, he has kids, and he still has his spleen,” Termeer says with pride.

But Genzyme’s scientific advisers were not convinced the company should try to develop a commercial product. It would require expensive clinical trials and, they argued – incorrectly as it turned out – gene therapy was around the corner.

Termeer was determined to press ahead. “I had so many detractors in those days, people who said you are out of your mind,” he said. “But I had seen this boy.”

To make matters worse, the NIH had conducted a new trial, of eight juvenile patients with Gaucher disease, and it failed – mainly because the patients had been bigger than Berman but had not received a greater dose of the drug. When the results were published, most researchers wrote it off.

Termeer, though, remained a believer, as did pioneering Gaucher disease researcher Dr Roscoe Brady and Brian Berman’s mother Robin, a physician. They decided to try to raise $10m to run a new clinical trial.

“We were in a tough situation,” Termeer said. “We had to prove that it worked.”

In June 1987, though more than eight months pregnant, Robin Berman joined Termeer and Brady as they criss-crossed the country in search of funding. It was an arduous task. No-one would give them a cent. The trial results, after all, appeared to speak for themselves.

Then, one day, as Berman was speaking to brokers and wealthy individuals in Albany, New York, her water broke.

“She turned to me for help,” Termeer said. “What was I to do? I’m an economist!”

The episode seemed to jolt the audience.

“Suddenly they got it,” Termeer said. “They called their friends and we raised the money.”

Three weeks later the stock market crashed.

“If we had been any later it would have been a very different story as all financing was then off the table.”

“Crazy dreaming”
The US Food and Drug Administration agreed to let Genzyme conduct a trial of 12 patients – a bold move since it was the height of the AIDS crisis and the agency was concerned about pooling placental fluid.

Patients came from around the world. One flew in twice a month from Germany, courtesy of the German government. Another family moved to Washington DC from South Africa. Two patients in the trial nearly died. And the leg-work involved in producing the enzyme was grueling.

“Every time we ran out of the enzyme we would go around with a little car to all the hospitals in New England and get the placentas,” Termeer said. “Then we would carry them up to the 15th floor where we would fractionate and purify them.”

The purification process took place in two tiny centrifuges. When they were turned on, the entire building, and all the garment workers on the lower floors, shook.

“They tolerated it. They knew it was for a good cause,” Termeer said.

In the end, the drug worked in all the patients, and in 1991 the FDA approved the product, which became known as Ceredase.

“We had a reunion 20 years later,” Termeer said. “We sat together in a hotel here. A lot of crying went on.”

The collection of placentas to produce Ceredase for a larger number of patients became an enormous undertaking. But it happened that Pasteur Merieux, a company in Lyon, France, was using placental blood to produce immunoglobulins and albumin, a substance used to expand blood supplies for use in wars or accidents.

“They would process these placentas in beautiful French wine presses,” Termeer said. Then they would hand over the remaining tissue to Genzyme, which would extract the enzyme. Ultimately, around 30 percent of all placentas from births in the US, and around 70 percent of placentas from Europe, found their way to that plant. Eventually, Genzyme created a genetically-engineered version of Ceredase using Chinese hamster ovary cells. That drug, Cerezyme, was approved by the FDA in 1994, and Genzyme opened its plant in Allston – the plant at the centre of today’s troubles – in 1996.

“When you look at the history of Ceredase, how Henri had to convince the people to do the trial, how it failed, how he went back, it was almost crazy dreaming,” said John Crowley, the chief executive of Amicus Therapeutics Inc and co-founder of Novazyme, a company that had also been developing a treatment for Pompe disease and that Genzyme acquired in 2001. “This was the kind of risk-taking innovation and dreaming that made biotech great. Henri absolutely broke the mold and the paradigm.”

Polarising figure
Termeer is hoping that his history of achievement will be enough to persuade investors to give him the chance to steer Genzyme through its current crisis. But he has his work cut out for him.

“It’s going to be a very difficult thing for him to get a second shot and retain the authority to do the things he wants to do,” said Oliver Pursche, executive vice president at Gary Goldberg Financial Services.

Termeer is in many ways, a polarising figure, having transformed himself from a scrappy entrepreneur into a leading figure in Boston’s financial, scientific and artistic community. Besides running Genzyme, he sits on the boards of the Massachusetts General Hospital and Massachusetts Institute of Technology; is chairman of the Federal Reserve Bank of Boston’s board of directors and is a member of Massachusetts Governor Deval Patrick’s Council of Economic Advisors.

“Henri is the ultimate renaissance man, the Thomas Jefferson of Boston,” said Jack Meyer, a friend who formerly managed Harvard University’s endowment fund and is now chairman of the Boston ballet’s board of trustees. “He thinks deeply, he thinks broadly, he sees all of life and is involved in all.”

But to hear others tell it, there is a darker, more calculating side to Termeer.

In December, 2000, Genzyme acquired Biomatrix Inc, which had developed an injectable treatment for osteoarthritis called Synvisc. Genzyme combined Biomatrix with two of its separately traded units, Genzyme Surgical Products and Genzyme Tissue Repair, to form a new company, called Genzyme Biosurgery. Biosurgery traded independently as a tracking stock.

Tracking stocks are equities tied to the performance of a particular segment of a company’s business and can be a way to unlock the value of a high growth unit without spinning it off to shareholders. They were popular during the dot.com era of the 1990s but fell out of favor after the Enron accounting scandal in 2001 cast a pall over complex financing vehicles.

Lawsuit challenged buyback
In May 2003, Genzyme eliminated its tracking stock structure. Under its articles of organisation Genzyme could force Biosurgery shareholders to sell their shares back at 130 percent of fair market value. Genzyme acquired Biosurgery shares for $1.77 each.

To Biosurgery shareholders, the payment amounted to highway robbery. Rory Riggs, the former president of Biomatrix, and John Lewis, a partner at investment firm Gardner Lewis Asset Management and Biosurgery shareholder, filed a class action lawsuit against Genzyme and its executives, including Termeer.

The lawsuit, amended in 2005, charged Genzyme’s executives with deliberately driving down the value of Biosurgery’s stock in order to buy it back at a price beneficial to Genzyme’s shareholders but grossly unfair to Biosurgery shareholders.

“Henri intentionally, with ill will, defrauded his own shareholders to whom he had a fiduciary duty, to make himself more wealthy,” Lewis said. “In my opinion he belongs not in the jail but underneath the jail.”

According to the suit, Genzyme’s own internal valuations reflected their belief that the true value of Biosurgery’s shares ranged from $12.75 to more than $50 a share. It alleged that by March 1, 2002, Termeer had already decided to eliminate Biosurgery’s stock. A memorandum from that day’s meeting obtained in discovery states that “we are working toward reabsorbing GZBX,” Biosurgery’s stock symbol.

Between January and July, 2002, Genzyme’s shares fell more than 70 percent amid earnings downgrades and suspicions that the company had kept inventory levels of its kidney disease drug Renagel high in order to artificially boost sales – a practice known as channel-stuffing.

The decline meant a repurchase of Biosurgery could be dilutive to Genzyme’s earnings.

“Against this backdrop, on May 24, 2002, Termeer met with one of his senior colleagues to prepare for the May 2002 Board meeting, to be held five days later,” the suit states. “A remarkable note from that May 24 meeting – ‘letting GZBX success occur – compare pluses and minuses’ – suggests that he decided to solve this problem by turning to an unusual method for a chairman and chief executive of a public company: he decided to work to limit Biosurgery’s apparent success to enable its tracking stock to be repurchased on favourable terms for Genzyme’s shareholders.”

In 2007, shortly before the case was due to go to trial, Genzyme agreed to settle for $64m – or twice the amount it had originally paid Biosurgery shareholders.

To the shareholders, the settlement was an implied admission of guilt. But Termeer says he settled the case to avoid the risk of a trial, and said $64m was a small amount – an indication that the case was “not that big.”

“There was no interest on any of our parts to be anything other than fair.”

Still, Genzyme has never been considered an especially transparent company. Investors have criticised it over the years for its opaque compensation structure, accounting practices and excessively passive board.

Cognizant of that distrust, Termeer has moved to more closely align senior executive pay with performance, alter the company’s accounting practices to bring them in line with its peers, and introduce new people onto the board.

He recently scaled back his own compensation. In 2009, his total package declined 25 percent to $9.5m from $12.7m. Even so, he still received an increase in salary of 8.7 percent and kept the car and driver that ferry him back and forth from his $4m ocean-front home in Marblehead, on Boston’s north shore, at a cost of $81,386.

Termeer concedes there is a price to be paid for a CEO to be at the helm too long.

“I need to move on, both for myself and the health of the company,” he said. “But I want to get us through this problem and start to prepare the company for its next phase in 2011.”