Case Study Title: Genzyme and Relational Investors:

Science and Business Collide?

Student Name:

Course ID:
Abstract

This project is entirely based on the case study of Genzyme and Relational Investors:
Science and Business Collide. In this project, critical analysis has been conducted by
taking into account the capital structure theory and agency theory. Furthermore, in-
depth analysis has been conducted on the basis of different questions such business
model adopted by Genzyme and Relational Investors.

Keywords: Genzyme Corporation, Relational Investors, Henri Tremeer (CEO)

Contents

Abstract..............................................................................................................................2
Case Overview..................................................................................................................4
Problem Definition..........................................................................................................5
Course of Action or Recommendation...........................................................................6
1.0. What is the business model for Genzyme? What does Tremeer want for his
company going forward?...................................................................................................7
2.0. What is the business model for relational investor?...................................................7
3.0. Should Tremeer fight Whitworth, or can he manage him by agreeing to some of
Whitworth's demands but avoid giving into demands that might compromise the core
mission of Genzyme?........................................................................................................8
4.0. Why is Whitworth arguing that Genzyme needs to implement a share repurchase
program? What problem would a share repurchase solve? Could'nt Genzyme just as
easily announce a dividend to achieve the same objective of returning cash flow to the
shareholders?....................................................................................................................9
5.0. Is there any way that Tremeer could have avoided this conflict with Whitworth, or
was it unavoidable.............................................................................................................9
Conclusion (Supporting Analysis)....................................................................................10
Bibliography.....................................................................................................................12
Case Overview
For more than 20 years, Henri Tremeer had been the CEO and CM of Genzyme
Corporation. Genzyme Corporation is based in Cambridge, Massachusetts. During his
tenure, there has been a significant growth of Genzyme Corporation as Henri Tremeer
converted an entrepreneurial venture into a leading biotechnology firms globally
[CITATION Her17 \l 1033 ].

There are almost 100 countries in which all of the established services and the products
are serving and facilitated the patients. Different efforts are being conducted for
introducing and then implementing the latest and the advanced technologies and
Genzyme is the leader in this act. The organization is focusing on delivering the
services and different products that assist in kidney disease, inherited disorders,
immune disease, cancer, diagnostic testing, transplant and orthopaedics. And that
commitment made by Genzyme's is still in existence and the continuous efforts made
the development programs that are the substantial part. The main focus of the programs
is on all these fields along with the neurodegenerative diseases, cardiovascular disease
and some other areas of the unmet medical need.

Although they had great success, a few bumps had also occurred along with Tremeer's
achievements. The most current one having to do with the activist investor is Ralph
Whitworth. Whitworth was the cofounder and principle of a large activist investment
fund, Relational Investors. He now had a 2.6% stake in Genzyme which was 9th on the
list. This is a problem to Tremeer because Whitworth has a record of making CEOs
resign [CITATION Ken17 \l 1033 ].

Tremeer had a good track record of accomplishments, which were shown by the
number of people with rare diseases being treated with Genzyme's products and being
successful in that. Another accomplishment is that while he was there, the stock price
grew which outperformed the market from January 2004 to January 2009. Even through
the financial crisis of 2008, Genzyme posted their record revenue number of $4.6 billion.
Genzyme, along with the biotechnology industry, were doing well compared to other
companies during the financial crisis.

The largest blow to Genzyme came after a month past Termeer's first encounter with
Whitworth. The organizational plants in Massachusetts, Allston were facing some of the
issues which were preceded by the warning letters from the U.S. Food and Drug
Administration in year 2009. Tremeer responded by disclosing Genzyme's
manufacturing issues. After that, Whitworth started to make his voice heard by
expressing confidence in the company's actions to addressing these issues. In addition
to that, the news of the recent health care bill also hit companies in the health care
sector hard. Genzyme's stock price that once beat the market had now declined 21%
over five trading days and had not recovered [CITATION Ken17 \l 1033 ].

The schedule indicated that the next act would the annual meeting of shareholders on
May 21. However Tremeer was following the sequence of all of the previous events and
then he was suggested the Whitworth's RI fund that its modus operandi would be the
relationship building. However, Whitworth has the intention to help the Genzyme that
how the wealth of the shareholders would be enlarged. Until now the Whitworth has not
been considered as any of the treat. He was of the opinion that in the presence of other
corporate activities or some sort of hedged funds which are monitoring the organization
so he needs to consider that the has the option of the activist investors.

Problem Definition

Three different ways can be used by Tremeer to resolve the issued being faced by him:

1. Tremeer needs to fight him in the same way as he fought with Icahn. In
order to do this, Tremeer need to recruit him on the board in the battle of public
relation for the support of shareholders.

2. He should welcome Whitworth on the board to serve the organization with

his experience in the ways to develop value for the shareholders.
 3. He can also manage Whitworth by providing him some of the things listed
in the demands however he must also ensure that these items must not
compromise in the main mission Genzyme

Tremeer had arranged a phone call with Whitworth and expected that he would request
a hearing with the board members. In this meeting the key objective is to focus on the
significance of strategy that must be developed by Tremeer for the future call with
Whitworth and decisions will be made that will be most beneficial for the company.

Another issue was with the valuation of Genzyme. RI calculated Genzyme's present
value by each division plus its R&D pipeline. RI's calculation showed that Genzyme's
stock price was trading for $34 below value which is a significant discount. RI had a few
recommendations to how Genzyme could react:

1. Decision making for allocation of the capital must be improved for

ensuring that spending is dedicated on investments with highest return.

2. More members with expertise in finance mist are added in the board to
improve the composition of the board.

3. Share buyback or a dividend program must be implemented

4. Executive compensations must be focused on achieving the performance

metrics.

Course of Action or Recommendation

Tremeer should respond by welcoming Whitworth into the company by voting him in as
a member of the board. Not only will this benefit Genzyme by giving the shareholders
more confidence in the company due to his drive to increase their wealth, but also
because he brings free advisory and consulting. Due to RI's valuation, Genzyme's stock
is trading very low compared to what it should be at. Tremeer should consider improving
the company's capital allocation to focus on investing in the highest expected returns.
Genzyme's current investment strategy is not working showed by the low net profit
margin of 9.1% compared to the average of other similar companies of 21.43%.1
Also, Tremeer should increase their investment in a stock share repurchase agreement
and leverage it with debt in order to raise the price of their undervalued stock.
Genzyme's debt to equity ratio of 1.8% proves that they have very little debt within the
company compared to the average of other companies of 36.84%.2 Doing a larger
stock repurchase would increase the shareholders wealth without paying a dividend
because there would be less stocks in the market and would therefore increase the
price per share. Tremeer should also work on adding more members on to the board
that have financial backgrounds in order to improve board composition.

1.0. What is the business model for Genzyme? What does Tremeer want for his
company going forward?

The business model for Genzyme is the treatment that targets the small population with
genetic disorder. His goal was to create targeted drugs for the small population that had
very rare diseases, and to cure them completely. Genzymes R&D focused on
developing cures for lysosomal storage disorder (LSD) patients. Also they didnt pay
cash dividends on their shares of stock. Genzyme also conduct philanthropy through a
partnership with Project HOPE in order to provide treatments at no cost to patients of
developing countries. Tremeer wants to create solutions for more common diseases by
diversifying Genzyme capital into different segments such as genetic disease (GD),
cardiometabollic and renal (CR), hematologic oncology (HO) and Biosurgery (BI),.

The business model for Genzyme is based on being equity financed. The low debt to
equity ratio of 1.8% proves that they are mostly equity financed. They also wanted to
grow inorganically and have a strong reinvestment policy [ CITATION JUD09 \l 1033 ]

2.0. What is the business model for relational investor?

There are three factors on which RI business model is based:

1. Investment fund activist.

 2. Organizations with poor or improper capital allocation and poor corporate
governance are targeted by them.

3. Management is engaged by tem with questions that are supported with an

in-depth analysis

Profit is the core factor that is being emphasized by the Relational Investors business
model. Capital would be allocated with the surety that hugest expected return would be
the gained by having the spending on the investments. As per the opinion of
Whitworths the main focus of investors must be on allocating the capital in the efficient
way so that highest return could be gained. Moreover according to Whitworth, the firm
CEO does not meet the standards of performance by CEO so he needs to be replaced
so that all of the profitable decisions could be taken. Some examples of this would be in
the companies that RI engaged in like Baxter, Home Depot, and Sovereign Bancorp
[ CITATION Jon09 \l 1033 ].

3.0. Should Tremeer fight Whitworth, or can he manage him by agreeing to some
of Whitworth's demands but avoid giving into demands that might compromise
the core mission of Genzyme?

Tremeer should not fight Whitworth, but should negotiate to the point of agreeing with
most of his terms, except the ones that compromises their mission to "Discover and
deliver transformative therapies for patients with special and rare unmet medical needs,
providing hope where there was none before." Tremeer saw Whitworth as someone
who was only worried about the cash flows. There are two major demands that Tremeer
should agree to:

1. Increase the amount of stocks that they repurchase and leverage it with
debt.

2. Improve board member composition by hiring more board members with

financial expertise.
Neither of these will compromise their mission and they will help the company bring up
their stock price and also the shareholder's wealth.

For the first one, Genzyne is able to leverage the amount of stock repurchasing in the
open market with debt because they have a very low debt to equity ratio. The average
ratio among similar firms is 36.84% whole theirs is at 1.8%. This tells Tremeer that when
leveraging the repurchase with debt, it will increase the stock price due to the less
amount of shares [CITATION Ros06 \l 1033 ].

The second comprimise is with the board of directors. Tremeer should put Whitworth on
the board along with adding a few financial saavy people while negotiating to keep the
current members on the board. This will allow the financial people to keep the company
alive while being able to fund the biotechnological people's research [ CITATION
Ton10 \l 1033 ].

4.0. Why is Whitworth arguing that Genzyme needs to implement a share

repurchase program? What problem would a share repurchase solve? Could'nt
Genzyme just as easily announce a dividend to achieve the same objective of
returning cash flow to the shareholders?

Due to the existence of so much room for leveraging the debt, Genzyme is pressurized
by Whitworth to start the share repurchasing program. One of the common techniques
is known as buying back shares that enlarges the earning per share artificially. This
process assists the company in exceeding or meeting the estimates of the analysts and
also the own internal targets of the organization. The share repurchases would assist in
keeping the stock price floating either temporarily. For purpose of staring the dividend
the cost would occur to Genzyme but it would give them benefit in the long run. If the
company is paying the solid dividend I would indicated the strong reputation and the
strength of the organization in future cash flows. For bearing or affording the ongoing
payouts for the shareholders the corporation is flexible and comfortable. Due to dividend
the shareholders would get the chance to make back investment in the organization.
Some of the investor should have made the long term investments would prefer to make
the automatically reinvestments that would facilitate both the organization and the
shareholders of the organization. Dividend also includes the less risk in making the
payments in comparison with the share buybacks [ CITATION Ton10 \l 1033 ].

5.0. Is there any way that Tremeer could have avoided this conflict with
Whitworth, or was it unavoidable.

This conflict was unavoidable because not only was Whitworth interested in Genzyme,
but there were multiple companies that had to have analyzed them to have more
intrensic value. One example of this is with Carl Ichan. Ichan even started a proxy fight
with Tremeer to try and add four members to the board including him. The activist
investor Whitworth would not have been and was not the only person interested in
Genzyme so this conflict would have happened with someone else if not with Whitworth
[CITATION The11 \l 1033 ].

If I were Tremeer, I would stick to the company's mission above all and not stray away
from that. I would stick to being a company that was based on making cures for rare
diseases and that also had a large amount of funds going into R&D in order to
accomplish that goal. However, I would also be prepared to negotiate a deal in order to
start a dividend with the excess cash flow instead of a repurchase program because
dividends benefit the investor and the company whereas repurchase agreements
benefit the company more than investors. I would also negotiate to keep all current
members on the board and be willing to add a few new members with the voting of the
shareholders. My overall strategy would be to negotiate as much as possible without
giving into my companies core mission while above all keeping the shareholders best
interests in mind [CITATION The11 \l 1033 ].

Conclusion (Supporting Analysis)

1. I calculated the average net profit margin by adding all of the similar
companies' percentages and then dividing that number by the amount of
companies. (28.0% + 19.1% + 11.3% + 32.5% + 37.7%)/5 = 21.43%

2. I calculated the average debt to equity ratio by adding all of the similar
 companies' percentages and then dividing that number by the amount of
companies. (49.9% + 19.2% + 68.8% + 14.9% + 31.4%)/5 = 36.84%

(All of the above information was given in the case's financial data in Exhibit 4)

When researching about what Whitworth is looking for in companies that RI is interested
in, I used a Q&A given on economy. It gave information like what problems they looked
for in companies and how much they would invest in a company in order to get the
companies attention.

I also used data from the case's Exhibit 5 to get information on what companies
Whitworth ousted the current CEO. This allowed me to research those companies and
look at what similarities they had with Genzyme.

When researching about repurchase agreements and dividends, the site that I used the
most was dividend.com. This site gave me information like what the benefits of both are
and how each of them is executed.
Bibliography
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