Genzyme Adds Director As Major Investor Pushes For Change

Genzyme Corp.'s (GENZ) addition Tuesday of an independent director to its board comes after pressure from activist hedge fund Relational Investors LLC and could signal the beginning of a push for more changes at the struggling biotech.

Genzyme's stock is trading near its lowest levels since 2004 as the Cambridge, Mass., company has suffered from multiple manufacturing and regulatory setbacks. Relational Investors, which has a history of shaking up companies, praised the board news but wouldn't rule out waging a proxy battle to ensure further moves.

"This is positive, but there is a lot more change that needs to take place," Ralph Whitworth, head of San Diego-based Relational, said in an interview. "There needs to be significant further improvements in the board composition."

Genzyme said it had been looking to add another member to its board, as mentioned in a filing with the Securities and Exchange Commission earlier this year.

"We are open to change, and bringing in Bob Bertolini, with his fresh perspective and experience, is part of a broader set of steps we're implementing to strengthen the company," Genzyme spokesman Bo Piela said in an emailed statement.

Bertolini was the former chief financial officer at Schering-Plough Corp. until its recent merger with Merck & Co. Inc. (MRK). Genzyme highlighted his experience in "transforming" Schering's operations and driving decisions that "turned the company around" to double its sales over four years.

Indeed, Genzyme is in need of a turnaround as its shares are down 26% this year. In August, the stock hit a five-year low at $47.09. As of late September, Relational fund owned 2.6% of Genzyme--valued at about $340 million at the recent stock price of $49.19.

The fund has been pressuring Genzyme to add directors with financial and capital allocation experience in recent months and believes the board needs to be "more assertive and proactive." Whitworth would like to see improvement to "major deficiencies" at Genzyme in managing compensation, allocating capital, communicating with Wall Street and regulators, and managing risk.

Whitworth has a history of working through boards to shake up companies, including efforts that got Robert Nardelli ousted as Home Depot Inc.'s (HD) chief executive in 2007 and Jay Sidhu removed as head of Sovereign Bancorp Inc. in 2006.

With Genzyme, Whitworth's focus is on the board, which he believes has the responsibility about making decisions related to management.

Although Whitworth stressed the need for more changes at Genzyme, he said the company has been responsive. Earlier this year, his fund encouraged the company to change its accounting practices to be more similar to its peers, an issue that drew criticism from many Wall Street analysts.

Genzyme's move to yield to such investor suggestions contrasts with strong resistance in recent years at other notable biotechs like Biogen Idec Inc. (BIIB) and Amylin Pharmaceuticals Inc. (AMLN). Both companies unsuccessfully fought high-profile battles to keep dissident directors off their boards.

The company's woes include its multi-year failure to get regulatory clearance to increase production of Pompe disease treatment Myozyme and its struggles to overcome ongoing manufacturing issues at the Allston, Mass., plant. The problems have caused shortages of top products because of a lack of both inventory and back-up manufacturing facilities, allowing competitors to grab market share.

Separately, the Allston plant didn't pass a recent government inspection, even though Genzyme had time to address the problems after a failed May inspection, prompted by a previous warning letter.

Not surprisingly, the multiple missteps have led to criticism of Chief Executive Henri Termeer, who has been at the helm since 1985 and is by far the longest serving head of the major biotech companies.

Genzyme has made changes to address its recent problems, including transforming its manufacturing operations; bringing in new senior leaders within manufacturing, regulatory and clinical affairs; and consolidating oversight of day-to-day business operations under three executives who report to Termeer.

-By Thomas Gryta, Dow Jones Newswires; 212-416-2169; thomas.gryta@dowjones.com

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