Genzyme and Relational Investors: Science and Business Collide
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Genzyme and Relational Investors: Science and Business CollideTable of Contents1. Introduction 2. Relationship between Genzyme and Relational Investors 2.1. Genzyme 2.2. Relational Investors 2.3. Conflicts between Termeer and Whitworth 2.3.1. Whitworth’s requests 2.3.2. Termeer’s incentives 3. Conflict resolution 3.1. Objectives of a firm 3.2. Recommendations References 1. IntroductionIs there conflict between science and business? This interesting question was raised in the case study by Eades, Matos, and Green (2011). As being described in the case study, Genzyme prefer to expand itself through investing in research and development (R&D). This activity not only require vast amount of time and money but also is risky because of the uncertainty of the outcomes. Meanwhile, most investors would like to see their investments bring benefit quickly. It seems to be the root cause of conflicts.Being inspired by the question above, this report aims to (1) examine the business model of Genzyme and one of its largest institutional shareholders (Relational Investors – RI), (2) analyse the conflicts of interest between Genzyme’s CEO and RI’s co-founder, (3) investigate agency problem, capital structure and other reasons that lead to the downfall of Genzyme, (4) advise solutions to tackle these problems.2. Relationship between Genzyme and Relational Investors2.1. GenzymeGenzyme was founded in 1981 by Henry Blair and Sheridan Snyder, and has being managed by Henri Termeer since this time. Under the watch of the CEO Termeer, from a small company with only 11 employees, Genzyme had become one of five largest biotechnology firms in the world in 2008 with the revenue of nearly five billions USD (Eades et al., 2011).Since the day of being founded, Genzyme have consistently focused on biotechnology research to create drugs that could cure rare diseases relating to genetic disorders and enzyme deficiency. Selling these products created main revenue for Genzyme (during 2006-2008, product sales accounted for around 91% of total revenue of Genzyme). These drugs allow human genetic system producing necessary enzymes by itself, then completely cure these diseases. Therefore they bring extraordinary benefit to the suffering patients. It cannot be denied that this kind of business is essential for society, as it could assist to improve human living standard directly.Biotechnology drugs are far more complicated than chemical products, and investments on the former are also riskier. First, biotechnology drugs strongly rely on basic science research and as a result, and require vast amount of money spending on R&D (as shown in Table 1, it was normally 20-30% of total revenue of Genzyme). Second, similar to most other kinds of research, the possibility of achieving results and then applying them into the real life in short term is relatively low. It leads to the riskiness of investment in this sector, especially for short term investors. Another aspect of riskiness is the uncertainty of receiving legal approval. As the drugs will be utilized by the patients, they must pass numbers of strict test before going to the market. In case of being rejected, all effort may be wasted. As a result, the price of biotechnology products are extremely high. For example, the price of Ceredase (a main product of Genzyme) was $150,000 per patient per year in 1991 (Eades et al., 2011).
Table 1. Revenue and costs of Genzyme (in $ millions)200620072008Revenue3,1873,813.54,605Net product sales2,88790.6%3,45890.7%4,19791.1%Research and development65020.4%737.723.1%1,30828.4%Selling and administrative expense1,01031.7%1,18731.1%1,33829%Source: Eades et al. (2011)Perceiving the great benefit biotechnology drugs could bring to the society, the U.S Government wanted to offset these disadvantages and encourage them to develop through the Orphan Drug Act 1983. The Act allows a seven-year monopoly on sales for successful products as an incentive for biotechnology firms. However, seven years seems to be not sufficient, as there were increasing numbers of companies faced to difficulties when their key products were becoming expired. One of these troubles was takeover pressure from Big Pharma. In order to avoid it, these companies must spend more on R&D to introduce new drugs or curing methods, which ensure their sustainability.The demand for new products, combined with Termeer’s ambition of bringing diagnostics and therapeutics to be closer together, cure more diseases and expand groups of patients benefited (Eades et al., 2011), lead to obvious strategy of Genzyme: diversification and retaining all earnings. It expanded the operation through searching for new biotechnology research companies which had worthy R&D basis, but were lack of capital and market competence. Then, Genzyme would carry out takeovers, or cooperate with them to create joint ventures and alliances. Through these, Genzyme could take advantage of in-process R&D by spending more on them to create final products. Through time, it gradually became a diversified company with four main segments: genetic diseases (GD), cardiometabolic and renal (CR), biosurgery (BI), and hematologic oncology (HO). Clearly, Termeer would like to establish Genzyme to become a large, diversified corporation in long term.