Howard Anderson

Carl Icahn’s battle to take down Genzyme

Icahn’s hunger for short-term profits risks lifesaving drugs. Icahn’s hunger for short-term profits risks lifesaving drugs. (Chip East/ Bloomberg News)
By Howard Anderson
June 2, 2010

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CARL ICAHN is trying to take down another biotech company, but investors should think twice before they back him in the fight.

Operating as a “shareholder activist,’’ Icahn is employing his signature strategy of exploiting investor anger for short-term gain — this time against the Cambridge-based biotechnology company Genzyme, which develops drugs to treat rare diseases.

At first glance, this battle seems to be little more than another in a line of proxy contests initiated by Icahn in recent years. But when shareholders decide whether to elect Icahn and three associates to the Genzyme board on June 16, they will be sending a signal about whether or not we have moved beyond the culture of quick profits that nearly unraveled the global economy.

The problem Icahn is exploiting at Genzyme is a virus that forced the company to shut its plant temporarily last year, leading to shortages of two of its leading drugs and a consequent dip in its stock price. Icahn’s refrain is familiar: Management made mistakes, so management must go.

But this appeal has less to do with shareholder activism than opportunism. Icahn acquired the bulk of his Genzyme stake after the plant troubles. His goal is to incite shareholder frustration to win board seats and impose policies possibly including selling or breaking up the company, as he did in the case of ImClone and attempted at Genzyme’s biotech neighbor in Cambridge, Biogen, that he claims will produce rapid upticks in stock.

Call it “greenmailing 2.0,’’ a new strain of his old strategy. Greenmail 1.0 was the tactic of using just the threat of proxy battles to elicit what amounted to payoffs to go away. Greenmail 2.0 is a variation: Blame management and convince stockholders to trade the long-term future of their company on the hazardous bet that the stock will appreciate in the short term. Genzyme, under pressure from this new tactic, has already agreed to spend $2 billion to buy back its shares. The move produced the desired effect: the company’s stock pulsed upward. But spending the $2 billion to develop new drugs would have yielded far more value for stockholders.

This is not to say either that Genzyme’s management is free of blame or that investors should not look critically at their past actions and plans to correct the company’s problems. But shareholders are casting proxy ballots, not jury ballots. Their task is not to assign blame or mete punishment. It is to decide who is best positioned to lead Genzyme to better times.

Genzyme chief executive Henri Termeer helped found the company and has led it for 27 years, in the process creating one of the country’s most successful biotech firms. He responded to adversity as executives should: he assessed the situation, stabilized the company and took decisive steps without under- or overreacting. Just as important, Termeer did so while keeping the company focused on its mission. The company has also added another shareholder activist to its board, Ralph Whitworth, who has praised the steady progress Genzyme is making to improve its operations.

Exactly how Icahn would lead Genzyme to better times remains unclear — perhaps because his time horizon is rarely long enough to actually revitalize the companies he criticizes. But the biotechnology sector in particular does not operate on such a short timeframes — or hindsight. Even more than other industries, it requires long-term investment.

The results are lifesaving treatments that benefit patients as well as investors. Success in biotechnology, one of the remaining sectors in which America still retains global preeminence, is incompatible with Icahn’s demand for instant results. Innovation thrives on the fast-changing biotechnology landscape but withers as part of slow-moving dinosaurs like the drug conglomerates Icahn would likely entertain as suitors for Genzyme.

After all that has happened to the American economy in the last two years, investors now know, or should, that the ultimate goal in business should be to create companies that can sustain value for the long haul. They should think twice before they allow their frustration to be exploited as part of a grab for short-term gains. “He who the Gods would destroy,’’ according to the Greek expression, “they first make angry.’’ Icahn has turned that proverb into a strategy. Shareholders should heed it as the warning that it is.

Howard Anderson is the founder of the Yankee Group and the Battery VC and a professor at MIT.

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