Adding to the legal drama between Genzyme General and the remnants of its Biosurgery unit, a class-action lawsuit was initiated on behalf of the division's stockowners through an amendment to the original suit filed by two of its largest.
The suit, which stems from Genzyme Corp.'s decision in early May to consolidate its three divisions - Genzyme General, the Biosurgery unit and Genzyme Molecular Oncology - into one trading stock, is an amendment to the suit filed by Rory Riggs and John Lewis. Riggs, former president of Biomatrix Inc. before it was bought and molded into Genzyme Biosurgery, and Lewis, president and chief operating officer of Gardner Lewis Asset Management, together owned 847,282 shares of Biosurgery when the tracking stocks were consolidated. (See BioWorld Today, May 12, 2003, and June 5, 2003.)
The class-action complaint states, "On May 8 . . . [Genzyme] announced [the board] decided to effect a forced sale of all outstanding Biosurgery shares for shares in Genzyme General based upon a valuation of Biosurgery at $1.36 per share." The complaint notes that price is "the lowest share price in the history of Biosurgery."
Although Riggs and Lewis originally filed to block the forced stock sale, they withdrew their request. However, as Jonathan Sherman, a partner with Boies Schiller & Flexner in Washington and representative for the holders, put it, "We saw no real reason not to make it a class action now because we are seeking damages."
The amendment, filed in the United States District Court for the Southern District of New York, names as defendants Genzyme Corp.; its CEO, president and chairman, Henri Termeer; board members Constantine Anagnostopoulos, Douglas Berthiaume, Henry Blair, Robert Carpenter, Charles Cooney, Victor Dzau and Connie Mack; and Chief Financial Officer Michael Wyzga.
John Donovan, partner at Ropes & Gray in Boston who is representing Genzyme, said that the amendment is simply a legal maneuver by Riggs and Lewis.
The suit to block the injunction was shot down by the judge, Donovan told BioWorld Today, and Genzyme filed to dismiss the case. In response, Riggs and Lewis dropped their suit rather than defend it, instead deciding to amend it to the class action, something he called their "one free shot."
Donovan pointed to the open-market price of the stock as concrete reasoning for the exchange rate of 0.04914 Genzyme shares per Biosurgery share and pointed out that the $1.36 value for Biosurgery shares used in the suit climbed to $2.28 today, based on Genzyme's close of $46.39 Monday. He added that those stockholders now are holding Genzyme shares, including all its potential upside.
With the consolidation now finished, the class-action suit attempts to muddy the way the transaction happened.
"Genzyme's point is, We have the right to roll this stock back because it's in our charter,'" Sherman told BioWorld Today. "We respond to that by saying, Sure, but you don't have the right to take the stock back in a way that violates the duties you have to the stockholders.'"
The amended complaint claims Genzyme never intended for Biosurgery to be a self-sustaining entity and that the company repressed Biosurgery's stock price by withholding or delaying the disclosure of information. The delayed disclosures include waiting until April 16 to report that sales of Synvisc, a device for the treatment of osteoarthritis and a Biosurgery product, were up 32 percent for the first quarter, compared to 2002, the complaint says. It also waited until April 16 to report it expected to obtain FDA approval this year for Synvisc in hip applications, the suit alleges. Also, Genzyme did not disclose until May 8 that it expected to divest Biosurgery's unprofitable cardiothoracic business, which would have then made Biosurgery profitable, according to the suit. Finally, the suit claims Genzyme did not disclose until May 29 that a third-generation Synvisc product would "actually modify the disease" of osteoarthritis itself.
And thus, the suit states, Genzyme was able to use a 20-day trading average that set up very favorable terms for a tracking stock consolidation.
Those claims have no merit, Donovan said. In Genzyme's brief for its motion to dismiss the case, the company refutes several of those allegations, providing when the information was disclosed and how. For example, it states that on Feb. 4, it disclosed in a press release that it expected annual revenue growth for Synvisc to be about 27.8 percent, or the high end of its range.
The suit asks for damages - specifically that the difference in stock price between what the deal went through at ($1.36) and what the plaintiffs feel is a more appropriate price ($20 to $40 per share) - and covers shareholders who bought the stock between Dec. 19, 2000, and May 8, 2003. Considering the suit covers 40.6 million shares, any award would be substantial.
The next moves are expected by mid-September.
"Genzyme has asked us for three weeks to respond to the amended complaint," Sherman said. "On Sept. 12, some form of paper will be filed by Genzyme. I expect they will file another motion to dismiss."
When asked what the next move for Genzyme will be, Donovan told BioWorld Today, "We expect to file a motion to dismiss."
Genzyme's stock (NASDAQ:GENZ) rose $1.04 Monday to close at $46.39.