A pair of leading shareholders in Genzyme Biosurgery have taken to federal court their move to block the forced sale of Biosurgery stock, disclosed last month by Genzyme Corp. as part of a plan to consolidate all three divisions into a single-stock trading unit.
"It's a non-event," said Janet Gearlds, analyst and portfolio manager with Private Asset Management, Wells Fargo, in San Francisco, noting that Wall Street seemed to think so, too. Genzyme General's stock (NASDAQ:GENZ) closed up 36 cents Wednesday, at $46.09.
Dan Quinn, associate director of public relations for Cambridge, Mass.-based Genzyme Corp., told BioWorld Today the company's charter was approved by shareholders in 2000 and "the terms of this transaction follow the terms of our corporate charter exactly."
Quinn declined further comment, and a spokeswoman for the shareholders said they would not comment beyond the complaint either. In a press release, Genzyme said it believes the case "is without merit," and said it "intends to defend [against] it vigorously."
The shareholders, Rory Riggs and John Lewis, claim the consolidation would let Genzyme acquire the Biosurgery division - worth at least $1.5 to $2.0 billion, they say - for about $72 million in stock. Genzyme has said it intends to consolidate the three tracking stocks, which also include Genzyme General and Genzyme Molecular Oncology, as of June 30. (See BioWorld Today, May 12, 2003.)
Riggs and Lewis want an injunction to stop Genzyme from eliminating its tracking stock structure and from exchanging the shares. They also ask for a rescission of the December 2000 merger between Genzyme and Biomatrix Inc., of Ridgefield, N.J., or an order for Genzyme to spin off Biosurgery to its shareholders.
The plaintiffs own or control about 6.35 million shares of Biosurgery stock, or about 15.6 percent of the total shares outstanding. Riggs owns about 750,000 shares and Lewis about 1.1 million shares, and the firm of which he is president, Gardner Lewis Asset Management, of Chadds Ford, Pa., holds about 4.5 million shares for its clients.
Under the plan, Biosurgery's stock would be exchanged for shares of Genzyme General at a price of $1.77 per share. Biosurgery stock (NASDAQ:GZBX) closed Wednesday at $2.66, up 4 cents.
Specifically, Biosurgery shareholders would get 0.04914 of a share of Genzyme General stock for each share of Biosurgery stock. Molecular Oncology shareholders would receive 0.05653 of a share of General stock for each of their shares.
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.
For Molecular Oncology (NASDAQ:GZMO), shares of which closed Wednesday at $2.58, down 2 cents, the exchange value works out to $2.03. Charter provisions for the main company also let the board act on the consolidation without shareholder approval - although now Genzyme Corp. apparently will need a court's go-ahead to complete the change, which Genzyme said was brought about by the weakness of small-cap stocks as a financing mechanism.
Shareholder Riggs is the former president of Biomatrix, the company with which two Genzyme entities (Genzyme Tissue Repair and Genzyme Surgical Products) merged in December 2000 to form Biosurgery.
Riggs and Lewis claim - among other things - that in the merger, Genzyme's senior management induced Biomatrix and its shareholders to agree to the deal by committing to maintain a tracking stock that would protect their interest, and claim that Genzyme never meant to keep that promise.
Gearlds said it would be "kind of ridiculous for them to make money that way. I would think there would be easier ways."
What's more, the shareholders claim, Genzyme has withheld information and intentionally mismanaged Biosurgery to manipulate its tracking stock price so the former could force an exchange when the share price dropped low enough. And Genzyme deliberately chose a valuation period for the exchange ratio when Biosurgery was at a historical low.
Not only will Genzyme gain hugely by the deal if it goes through, they say, but the complaint alleges the company already has. Since May 8, when the plan was disclosed, Genzyme General's stock and the company's options have sharply risen in value as the market anticipates the exchange.
Gearlds noted the oncology division has been "going through cash pretty quickly" and "the parent company is responsible" for getting the money to continue, and for taking whatever steps make that possible.
Lack of market response is particularly indicative of the complaint's minor nature, she said.
"When it comes to big news items, the press hasn't been kind to Genzyme," she said, and referred to a delay in reporting data from a trial with Renagel, a phosphate binder for patients with end-stage renal disease on hemodialysis, which sent the company's stock down $2.28, closing that day at $33.51, despite a strong showing in the first-quarter financial report. (See BioWorld Today, April 13, 2003.)
"Any kind of bad news has hit the stock particularly hard," Gearlds told BioWorld Today, but the general indifference to the shareholder lawsuit might also be an indication of how the "sentiment has turned" in favor of biotechnology in general.
"Maybe if this had been a year ago, you might have seen more press about it," she said, although the case would still be shaky.
"The burden of proof lies on the shareholders and it's going to be a tough case to prove," she said.