Genzyme and Relational investors
Introduction to the Case – who is the progenitor, what is the company, what is the industry, what does the company do, what are the problems, what are the pertinent historic events.
Genzyme is a biotechnology company, created in 1981 by Henry Blair to develop products based on enzyme technologies. Genzyme purchased Whatman Biochemical. Termer left Baxter to become CEO of Genzyme in 1983. In 1986, Genzyme began trading on the NASDAQ after raising $28 million. After meeting Robert Carpenter, CEO of Integrated Genetic, Genzyme purchased IG for $31 million to improve its capabilities in molecular biology, protein and nuclear acid chemistry and enzymology. Genzyme became one of the leader in the treatment of genetic disorder. Genzyme focused the R&D department on the lysosomal storage disorder. Genzyme most beneficial treatment was the Ceredase, used for Type1 Gaucher’s disease. Then, Genzyme developed the Myozyme and the Fabrazym. Myozyme,Fabrazym and Ceredase became the core business of the company. Genzyme got involved in hydraulic acid based drugs to help reduce the formation of postoperative adhesions. Genzyme raised funds in 1989 through a secondary stock offering and a R&D limited partnership and acquired Biomatrix to form its biosurgery segment. In 1997, Genzyme acquired GelTex Pharmaceutical that treat conditions in gastrointestinal tract. Most of the acquisitions were risky because the drugs produced were not approved yet by the FDA. The, Genzyme began to acquire companies on the base of its R&D results. Termer wanted to cure common diseases and treat a large number of people. Genzyme was building a new facility in Framingham and had some international facilities in England, Ireland, and Belgium. However, 2009, the facilities in Allston showed deficiencies and Genzyme received a warning letter from the FDA. The deficiency was caused by Termer decision to expand the facility to produce Myozyme beyond its capacity.
Strengths Genzyme owns a skilled workforce. In fact its scientific team created the Myozyme that had a result of 100% at the first trial. Genzyme is highly profitable: Ceredase cost around $150,000 for a year supply and the return on Cerezyme is about 29.5% while the return for Renagel is 16.1%. Also, the overall revenue grows at a rate of around 20% each year. The cash flows are expected to grow at a rate of 18.45%
-barriers of market entry: Orphan Drug act
Being a large company, Genzyme resist market crisis since demand for drugs does not decline during crisis.
Weaknesses: There is a small market for the drugs offered. In fact, Temeer targets rare diseases that affect less than 200,000 people in the U.S. Genzyme develops drugs that are complex to produce. In fact, 20000 protein rich placentas are required to produce one year of Ceredaze supply for one patient. Genzyme’s management does not allocate its resources efficiently. According to exhibit 8, 40% of the capital invested in Genetic Diseases produces a return of 25.8%. However, the remaining 60% make up less than 8.8% in return. There is more capital invested in projects with small return.
Opportunities: There is a growing demand in biotechnology drugs. Biotechnology drugs are an alternative for chemical drugs. In fact, in 2008 biotechnology companies improved the cure for diabetes, cancer, and multiple sclerosis. Therefore, more people are turning to biotechnology drugs. Genzyme have the opportunity for new acquisitions and joint-venture. In fact, many biotechnology companies are still attractive and undervalued. For example, CoLucid Pharmaceutical is a small cap that succeeded its first two trials of oral Lasmiditan.
Threats: One of the main threats to Genzyme is the government regulations: U.S. drug approval process takes around eight years and only 5%-10% of drugs submitted are approved.
Genzyme faces competitors that fight to get more market shares. Some of the competitors are Pfitzer and Johnson and Johnson.
What is the business model for Genzyme? What does Termer want for his company going forward?
The business model for Genzyme is to create drugs to treat genetic disorders that affect small population. In fact, Genzyme focused on developing cures for lysosomal storage disorder patients. Lysosomal storage disorder are inherited diseases and there is1/100,000 chance that an individual contract the disease. They also developed an enzyme replacement therapy for the type 1 Gaucher’s disease that affects only 1 per 57,000 people. This enzyme is the most rewarding product on Genzyme. It was sold for about $150,000 a year. The core business of Genzyme is Fabrazyme, Myozine, and Cerezyme that are developed in the Genetic Disease segment. The Genetic disease segment is the most profitable segment of Genzyme. In fact, the estimate of CFROI in exhibit8 shows that the cash return on capital invested in the Genetic Disease segment is around 25.8% but the overall company ROIC is only 14.2%. Genzyme implemented a diversification strategy through the acquisition or alliances with biotechnology companies that have good products but a limited capital. Genzyme formed a joint venture with GelTex Pharmaceutical that developed drugs to fight chronic kidney dysfunction. They also acquired PharmaGenics, Inc that created the molecular oncology for Genzyme, Avigen that created AV201 to fight Parkinson’s disease. Genzyme is organized in four main sections: Genetic Diseases segment that make up 51.3% of the revenue, Cardiometabolic and Renal segment that make up 22.7% of the overall revenue, Biosurgery segment that make up 10.7% of the revenue, and the Hematologic oncology segment that make up 13.5% of the revenue. Genzyme does not pay dividends to its shareholders. The biotechnology financial metrics in exhibit 4 shows that none of the biotechnology firm pays dividend to its shareholders. Genzyme is also involved in philanthropy through a partnership with Project HOPE. They provide free treatments to patients of developing countries. Termer wants to create drugs for common diseases by diversifying Genzyme capital into different segments such as genetic disease, cardio metabolic and renal, bio surgery, and hematologic oncology. He also wants to extend the number of people that will beneficiate from the company cure. In fact, many life-saving treatments have been provided by Genzyme to people with inadequate health insurance. In fact, they provided free treatment for more than 6400 for the Lemtrada drug.