Icahn Emerges From His Corner in Genzyme Fight, But Lacks a Killer Blow

Last Updated May 27, 2010 12:03 PM EDT

Billionaire activist investor Carl Icahn makes a good case in his battle to install new directors on Genzyme (GENZ)'s board, but his argument is weakest on the one point where it needs to be strongest: The future of Campath, Genzyme's blood cancer drug that could also be an multiple sclerosis blockbuster.

You can read Icahn's slideshow here. It's entertaining stuff, right down to the choice of typefaces (it begins with the words "Time to Change the Old Guard," with the last two words picked out in "ye olde" lettering.) But Icahn is late to the game: Genzyme has had its materials out to shareholders for weeks, and it also added a new web site dedicated to the fight.

Everything Icahn says about Genzyme's manufacturing failures is true: The company allowed its cell production lines to become infected, and the FDA stopped production and allowed competing genetic therapies onto the market in their place, breaking Genzyme's lucrative monopolies. But investors know that that's not the key issue going forward at Genzyme. Those issues are being fixed.

Rather, the company's future hinges on Campath. Currently, Campath is on the market for chronic lymphocytic leukemia, a blood cancer. But tests indicate it's incredibly effective in stopping the progress of MS, giving patients up to four years of freedom from the disease. The problem is that if Genzyme sells the drug for MS at the same price it's charging for cancer, it will leave millions, possibly billions, of dollars on the table. The company needs to find a way to launch Campath for MS at a much higher price without annoying patients or racketeering.

Icahn not only fails to put forward a plan to solve the Campath situation, he has nominated two directors who are on the board of Biogen Idec (BIIB), which makes Tysabri, an MS drug that will compete with Campath. The candidates, Alexander Denner and Richard Mulligan, therefore have an impassable conflict of interest. Denner admits this. He told Bloomberg:

To the extent that conflicts do come up at the board level, which we don't expect very often, we obviously will not participate.
And Icahn's slideshow says the pair will "avoid being in a situations in which they are conflicted."

This will be impossible. Even if they recuse themselves from votes on Campath, they will inevitably learn the drug's launch schedule, market and pricing strategy. It will be impossible for them not to take that information to Biogen.

In a recent interview with BNET, Genzyme's evp/legal and corporate development Peter Wirth said that Campath was the company's largest development program, but how it would solve the price issue was unresolved. "We would have to figure out a way to reprice the drug," he said. "Truthfully we haven't figured out how we're going to do that." The company may give the drug away free to cancer patients and then jack the price up for MS patients, he said.

Genzyme's lack of a strategy for Campath ought to be Icahn's killer blow, but his slideshow completely avoids this issue even though it's key to the company's stock: If you believe Genzyme can reprice Campath exhorbitantly for MS patients then the price should go up. If you believe that the Campath supply for blood cancer will simply be diverted on the cheap for MS then the price won't be affected as much.

Icahn does make some interesting points about cutting manufacturing and admin costs, but given his history with ImClone they look a bit like a plan to goose the company's margins for a sale in hopes of taking a premium on the stock.

Bottom line: Icahn's slideshow is mostly bluster. If he was serious he'd want CEO Henri Termeer gone, directors who can't leak things to Biogen, and a plan for Campath. (Termeer, by Icahn's own slides, is the guy who screwed up this company, after all.) Instead, Icahn meekly proposes that Termeer give up his role as chairman. That's an easy compromise that will leave Termeer at the helm: Why bother fighting if you don't want to win?