Genzyme's Controversial Buyback was Predictable

| About: Sanofi (SNY)
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After mentioning orphan drugs a few days ago, I note that Kyle at The Chemblog has remarked on Genzyme's pricing for Cerezyme. It is indeed spectacularly expensive, which is a matter over which Genzyme and the various insurance companies involved have had, I'm sure, many a spirited discussion.

As it happens, Genzyme was in the newson Monday (front page of the Boston Globe), with the kind of story that no one at a company likes to see. It's all about a shareholder lawsuit, just recently settled, which maintains that Genzyme bought back shares of a tracking stock (for their biosurgery division) at a deliberately depressed price. The existing shareholders were deeply unhappy about the deal they were offered, but basically had to roll over and take it (until they went to court, anyway).

There are some lurid figures in the story. Genzyme bought the shares back at $1.77. Meanwhile, a price of $75 per share had been mentioned just days before, which sounds like piracy, for sure. But when you read the story closely, you find that this figure was mooted by the head of the biosurgery division, who actually quoted a range of 12.75 to 75. Three things come to mind: (1) those sure are some error bars, (2) any estimate with that kind of spread to it is a worthless one, and (3) this figure is from a person who had an incentive to make his division (and his leadership of it) look as good as possible.

At any rate, the buyback cost $72 million at 1.77, and adding in the settlement makes the actual price per share about 3.34. If there were a remote chance that that 12.75 price could have been enforced in court, the lawyers involved wouldn't have gone for it, I think. (Much less that 75-dollar figure).

That said, it was in Genzyme's interest to buy back the shares at the lowest possible price. If I'd been a shareholder of the tracking stock, I wouldn't have been happy - after all, 1.77 was below the market price at the time (about $2.50). But the company had the right to do what it did, and their actions could have been anticipated by someone who took the trouble to read the fine print. I also have no doubt that Genzyme tried, as much as possible, to keep that price low so they could get the best deal, but whether they broke the law while doing so I have no idea.

Personally, I wouldn't want to take the other side of any equity deal with Genzyme. Henri Termeer, their CEO, is a wily sort and generally doesn't offer bargains to anyone. This article only confirms that opinion.