Associate Managing Editor

In a move that pleased Genzyme General shareholders but not those of one of its units, Genzyme Corp. announced it was gathering its three divisions - Genzyme General, Genzyme Biosurgery and Genzyme Molecular Oncology - under one trading stock, beginning July 1.

The arrival of the Genzyme Corp. quarterly report is usually a seismic event, as the three public units have products spread across a range of areas and the money twists and turns, but beginning in the third quarter, all three will be represented under GENZ, the stock symbol for Genzyme General.

"We were very aware of the distractions that the tracking stock structure was causing in the investment community," said Henri Termeer, chairman and CEO of Genzyme Corp., in a conference call. "But what was really driving it, in the end, was that the capital markets for the small-cap stocks clearly started to get into a territory where they had become ineffective as a financing mechanism."

The move calls for Genzyme Biosurgery shareholders to receive 0.04914 of a share of Genzyme General stock for each share of Biosurgery stock. Genzyme Molecular Oncology shareholders will receive 0.05653 of a share of General stock for each of their shares. The company's charter states that the exchange ratios represent a 30 percent premium to the value of the divisions' shares, based on average closing prices for each of the three stocks for the 20-day trading period leading up to April 23. Cash will be paid for fractional shares. Therefore, the optional exchange value for the Biosurgery stock is $1.77, and, for the Molecular Oncology shares, $2.03.

The charter provisions of Genzyme Corp. state that the board has the ability to act in the best interest of all three divisions, and therefore shareholder approval was not required for the consolidation.

Given that the General division's stock had an average closing price of $35.98 for the 20-day period and it will issue about 3 million shares to Biosurgery and Molecular Oncology shareholders, Genzyme General has consolidated its financial reporting and brought in additional products for about $107.9 million.

In general, the move was well received.

"This has been a huge overhang on the stock," said Christopher Raymond, analyst with Robert W. Baird & Co. in Milwaukee. "So, it's gone. And it's pretty amazing, when you look at it, that for a little more than $100 million they were able to eliminate this difficult capital structure and get [the addition] of a biosurgery business of a couple of hundred million bucks."

In Raymond's eyes, the transaction was "the right deal for the right price."

What The Market Will Bear

Few doubt the deal is a bonus for Genzyme Corp. However, there was some distaste - at times extreme - expressed in the conference call over the value given to Biosurgery.

Molecular Oncology traded in the $30s in biotechnology's high times of 2000. Genzyme Biosurgery's stock opened trading in December 2000 in double digits. It closed Thursday at $2.51, but now suddenly will be valued at $1.77 under the consolidation. However, Termeer defended the move on the call, and Raymond agreed.

"I can see the reaction [of Biosurgery shareholders] to the price and the loss of market value," Raymond told BioWorld Today. "But Termeer had a good comeback to that. He said [the Biosurgery] stock was a free-trading stock for a good period of time."

In other words, those stocks are trading at what the market will bear. Mike King, analyst with Banc of America, when considering disgruntled shareholders, said, "What can I tell you? I'm sorry that the market didn't recognize whatever value that the shareholders thought was in the stocks."

Consolidation Of Two Divisions Strengthens Third

For Genzyme General, it now expects 2003 revenue of between $1.35 billion and $1.42 billion, after adding the second-half guidance of the Biosurgery and Molecular Oncology businesses. When looking at the new additions to Genzyme General, the most notable is Synvisc, for osteoarthritis, which is bringing in about $150 million yearly in sales, according to King's research note. Genzyme General said its earnings-per-share guidance, excluding amortization, will "continue to be in the range of $1.25 to $1.35" for 2003. Also, the move will bump General's tax rate from the 25 percent or 26 percent range up to about 30 percent, it said.

Genzyme Corp. began housing its varied interests in divisions in the early 1990s. It first formed Genzyme Transgenics, then Genzyme Tissue Repair. That was followed by Genzyme Molecular Oncology and Genzyme Surgical Products. Genzyme Transgenics was never a tracking stock but a subsidiary, which Genzyme no longer controls. In the spring of 2000, Surgical Products and Tissue Repair were merged with Biomatrix Inc., of Ridgefield, N.J., to form Genzyme Biosurgery. (See BioWorld Today, March 7, 2000.)

Biosurgery is what's left of the Biomatrix merger - a transaction King said was "ill-fated" from the beginning - and in today's environment, small-cap biotechnology companies are being punished. Left with little ability to raise funds in the public markets, the divisions had lost some of their purpose. Now a question is whether General will keep everything it is consolidating.

When asked if he expected any "housecleaning" as a result of the consolidation, King simply said, "Yes."

If Biosurgery shareholders are lamenting the price given their shares, they might take solace in the receipt of shares of a less-confusing, potentially stronger Genzyme General. In the past two weeks or so, General has received approval for Aldurazyme and Fabrazyme, treatments for mucopolysaccharidosis-1 and Fabry's disease, respectively. King told BioWorld Today the company appears to have inventory for its nonabsorbed, polymer-based phosphate binder, Renagel, under control and that Genzyme seems to have "a clear runway going forward."

The move should only help the operation as a whole, Raymond said.

"If I'm a Genzyme [General] shareholder, I'm elated," Raymond said. "The nice surprise is that when we went to model [the consolidation], it made sense the first time."

Genzyme General's stock (NASDAQ:GENZ) rose $2.02 Friday to close at $41.15. Genzyme Biosurgery's stock (NASDAQ:GZBX) fell 41 cents, or 16.3 percent, to close at $2.10. Genzyme Molecular Oncology's stock (NASDAQ:GZMO) rose 22 cents, or 10.5 percent, to close at $2.31.