The Price of Expansion

The Price of Expansion

Executive Summary

This report equips our audience with broader approaches to the case of Genzyme and Relational Investor. After an examination of existing issues and accountability of companies operating framework, it can be concluded that companies have a primary responsibility to their shareholders. Nevertheless, this case has a lot of nuances that are relevant to the analysis that we will point out. This analysis is expected to showcase for upcoming and existing organizations to adopt operations and management practices that are more benefic to shareholder even when science is involved.

This report consists of an introduction to the case. This is followed by recommendations and alternatives that individually provide different implications to the case and conclude with some recommendations for the company.

Introducing the case, the first section of this report examines current issue of Genzyme, such as diversification and its implications. Science sits at the most basic level of a biotechnology company, followed by diversification, a trend where businesses integrate its daily operation. The development of the issue shows clearly its source.

The recommendations are based on the analysis made by an external company, Relational Investor that suggested a path to follow to lift up the decline in the stock price and the business in general.

The alternatives are presented in the case as the dilemma the current CEO faces as a response to the recommendation given by Relational Investors.

The conclusion highlights the points considered in the recommendations and tries to reconcile them with the different alternatives.

Introduction of the case

Genzyme Corporation is an American biotechnology company based in Cambridge, Massachusetts. The company is primarily devoted to finding drugs that would cure enzyme deficiency conditions that were essential to human survival and which usually afflict a very small percentage of the world’s population. Drugs used to treat such conditions are considered to be “orphan drugs”, given an incentive sale of 7 years monopoly by the FDA. The company has three primary genetic drugs, Cerezyme, Fabrazyme, and Myozyme. These star drugs formed the core business of the company. The CEO Henri Termeer also searched for nascent biotechnology research companies that had good products but limited capital or marketing capabilities. As a result, he created numerous alliances and joint ventures, providing funding in exchange for a share of future revenue streams. After 1997, Termeer completed a host of acquisitions. To some extent, the opportunity for these acquisitions resulted from the economic woes of other biotechnology firms whose clinical failures affected their funding abilities, resulting in research cuts and layoffs. Smaller start-up firms were vulnerable to economic stress if their flagship drug failed to succeed in time. These conditions suited Termeer, who had begun a broad strategy to diversify. But his strategy had risks as the drugs acquired in late-stage development had not yet been approved by the FDA. The company was doing well until it received a warning letter from the FDA in February 2009, outlining significant objectionable conditions falling in four categories involving maintenance of equipment, computerized systems, production controls and the failure to follow procedures aimed at preventing microbiological contamination. The company responded to the FDA by publicly disclosing its manufacturing issues and Genzyme’s stock price had declined by 21% over five trading days The problems in the Allston plant could be traced back to Termeer’s decision to stretch the production capacity of the plant to meet an unanticipated demand for Myozyme. Production had increased, but the strain placed on the complex processes eventually led to the problems cited by the FDA. After looking at the different exhibits presented to the case, we have realized that the projects Genzyme reinvested in, represent 60% of the capital base and generate less than the total company cash return on invested capital compare to the initial genetic disease segment representing 40% of capital base and generating 12% over the total company cash return on invested capital. 69.4% of the acquisition where made in Hematologic Oncology segment generating 2.4% of revenues

Recommendations

Whitworth, Relational Investor (RI) fund is a shareholder for less than a year and held only 2.6% of the shares. After analyzing the company RI then offered recommendations as to how Genzyme could address this: