BOSTON (Reuters) - Genzyme Corp GENZ.O said the U.S. government will take enforcement action and likely impose fees on the company following a series of manufacturing violations that lead to shortages of two of its life-saving drugs and now threaten to topple its chief executive.
The company’s shares fell nearly 6 percent.
Genzyme, which makes drugs for rare diseases, is one of the world’s oldest and biggest biotechnology companies. Last year it was forced to temporarily close its Allston Landing plant in Boston due to a viral contamination.
The closure lead to shortages of Cerezyme, its treatment for Gaucher disease, and Fabrazyme, its treatment for Fabry disease. Both diseases are caused by an enzyme deficiency and can cause critical organ damage and death.
The Cambridge, Massachusetts-based company, which also faces a proxy battle from activist investor Carl Icahn, said the U.S. Food and Drug Administration notified the company on Tuesday that the agency’s enforcement action will likely result in a consent decree.
A consent decree is an agreement that effectively puts a company’s manufacturing operations under third-party control for an extended period of time. Under such an agreement, Genzyme would be required to make payments to the government and could incur other costs.
The agreement can either be negotiated, or enforced by the U.S. Department of Justice. Genzyme said it has elected to negotiate with the FDA. The scope of the expected consent decree, which according to the company was not prompted by any one event, but rather a series of violations over time, is not yet clear. Neither are the financial implications. The company said it could take a month or so to work through the process with the FDA.
The news can only strengthen the hand of Icahn in his bid to shake up the company, analysts said. The billionaire investor plans to nominate himself and three others to the company’s board this year. All nine members are up for re-election.
“The case for activist involvement, including restructuring of the company and changes to top management, is now stronger than ever,” said Geoffrey Porges, an analyst at Sanford Bernstein.
Henri Termeer, the company’s chief executive, said on a conference call with analysts that a proxy fight would be a distraction and hinder the company’s ability to focus on resolving its problems.
“It is very important for us to continue to focus on getting the marketplace re-supplied and implementing the changes needed to get this behind us,” he said.
The company said it will likely be required to ‘disgorge’ profits from past and future sales of products made under substandard conditions.
Genzyme declined to estimate what its costs and penalties might amount to, but Brian Abrahams, an analyst at Oppenheimer, said consent decree agreements can often be essentially permanent, and fees can accumulate into the “several hundred million dollar range.”
Genzyme, which has been racing to fix its problems, said that based on its initial communication with the FDA, it expects shipments of Cerezyme, Fabrazyme, and Myozyme, a treatment for Pompe disease, to continue uninterrupted during the enforcement period.
That is because the drugs, which accounted for about a third of Genzyme’s $4.5 billion in sales last year, are essential for patients and there are few other products available.
Shortages of Cerezyme and Fabrazyme fueled a 73 percent drop in the company’s fourth-quarter earnings.
The FDA is less convinced that the company’s Thyroid drug Thyrogen, which generated a relatively small $170.6 million last year, meets the definition of “medical necessity” that would justify continued shipping of the product during the enforcement period. The company said it will seek to convince the agency that the drug is indispensable.
Imposition of a consent decree could help rival drugmakers Shire Plc SHP.L SHPGY.O of the UK and Protalix BioTherapeutics Inc (PLX.A) of Israel. Shire won U.S. approval in February for its Gaucher drug Vpriv. Approval of an experimental Protalix drug for Gaucher disease is expected by the end of the year.
Shire shares rose as much as 3.2 percent to an all-time high of 15.26 pounds following news of the FDA action against Genzyme. Shares of Protalix rose 1.9 percent to $7.09 on the American Stock Exchange.
Genzyme has already moved to strengthen its board and management team. It recently added Robert Bertolini, who was previously chief financial officer at drugmaker Schering-Plough Corp, to its board.
Bertolini was instrumental in turning Schering-Plough around after a manufacturing crisis led U.S. regulators in 2002 to place the company under a consent decree. Schering-Plough was fined a record $500 million.
Genzyme also recently hired industry veteran Ron Branning to take charge of global quality control, and Scott Canute, the former head of manufacturing at drugmaker Eli Lilly & Co (LLY.N), to lead its global manufacturing and corporate operations.
“At least they don’t have to go out and fire people and bring in new people to ensure they are compliant with the consent decree,” said Bill Tanner, an analyst at Lazard Capital Markets.
Genzyme’s shares fell 5.9 percent to $55.64 in afternoon trading on Nasdaq.
Reporting by Toni Clarke, editing by Dave Zimmerman, John Wallace and Bernard Orr