Friday, November 16, 2007

Why Genzyme's Unlikely to be the Next Target

The Boston Globe reported yesterday that Carl Icahn has taken a sub-1% stake in Genzyme. Is this company his next target for a sale or restructure, the article asks, after the billionaire investor more or less forced the sale of MedImmune to AstraZeneca, and more recently put Biogen Idec on the block?

It's a reasonable question. But there are reasons why Genzyme is less likely to be acquired than Biogen or MedImmune. For one thing, it’s not a big blockbuster company like most of its Big Biotech peers. Notwithstanding its one $1 billion-plus drug, rare disease treatment Cerezyme, Genzyme, in one of its own executive’s words, “is a company of many small ideas, rather than one big one.”

Sure, small, specialist ideas are cool these days, and small ideas add up. Genzyme's had over $3 billion in revenue last year (and is on track for as much as $3.8 billion this year). But Big Pharma at least needs more than a diverse bunch of highly niche and often highly complex products to solve its near-term problems.

And then there’s Genzyme’s structure—it’s organized as half-a-dozen quasi-autonomous business units, operating in area like transplant, surgery, or rare diseases. That means Genzyme “would not be the easiest company to incorporate,” notes Stelios Papadopoulos, former vice chairman of Cowen & Co.

So maybe Icahn’s idea is to split it all up and sell off the divisions? Analysts will certainly point you to one or two under-performing ones. But that would miss the point—the leverage, de-risking, and choice of where and when to compete for deals that Genzyme’s diversified model offers the corporate whole. (And anyway, the company tried issuing separately-listed tracking stocks during the 90’s and it was a disaster.)

Granted, the Street hasn’t considered Genzyme as the sexiest of Big Biotechs—call it the diversification discount. But as purists like Biogen and Amgen stumble, Genzyme’s breadth and global reach begin to look smart, as does its long embrace of external R&D. (You can read more about this in the forthcoming IN VIVO.) Maybe that’s why Icahn’s jumping on board—to enjoy the ride (Genzyme’s promising 20% compounded earnings growth or thereabouts over the next five years).

Ok, maybe not. But if he is up to something, he’ll have Genzyme’s Chairman & CEO Henri Termeer to contend with. And Termeer’s been set on an independent Genzyme since he joined the company in 1983, two years after it was founded. “It was quite deliberate that we should be diversified, global, and independent,” he tells us. Not for Genzyme the kind of vulnerability that would “at some point” come to the likes of Biogen, which, points out Termeer, “never really diversified in the way that we did.”

Termeer told IN VIVO on Wednesday, the day before the Globe's story, that he wasn’t aware of any activist shareholders buying into the stock. (Surprise!) In any case, he doesn’t dismiss activists, either. “They’re a good thing in one sense,” he says, since they force management to understand where their vulnerabilities are, and to unlock maximum value from the business.

In other words, who needs Icahn?

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