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Make 50% from Billionaire Carl Icahn's Latest TargetBy Dr. George HuangFriday, February 26, 2010 Carl Icahn is ready for a brawl...
Back in October, we told you how a rogue virus had infected the manufacturing facilities of Genzyme, the biotech bellwether. The FDA ordered Genzyme to shut down its plant and cease producing Cerezyme and Fabrazyme, two of the company's most lucrative drugs. Revenue and earnings plunged.
Besides crippling sales and destroying physician and patient confidence, the snafu created worldwide shortages of the drugs. The shortage gave an opening to competing products from Shire and Protalix to enter Cerezyme's lucrative $1 billion-plus market.
Genzyme shares have dropped 35% from their 2008 peak. It's trading at levels last seen more than five years ago. But if you bought on our advice in Growth Stock Wire and grabbed Genzyme when it dipped below $48 per share, you're up about 16%. And I think there's plenty more upside.
You see, despite the short-term execution problems, Genzyme is not hopeless. The company's core biologic drugs enjoy tremendous pricing power, lengthy patent protection, and little competition. Its impressive pipeline features a breakthrough drug for multiple sclerosis, a pill version of Cerezyme (it's an IV drug now), and a novel treatment to lower cholesterol.
But disgruntled shareholders have been calling for the resignation of long-time CEO Henri Termeer. And finally, someone is willing to take Termeer head on...
On Monday, activist investor Carl Icahn, with 2% ownership in Genzyme shares, nominated himself and three associates to the board. In a statement, Icahn wrote, "Given that Genzyme's management has performed so poorly in the past, our first task will be to attempt to help fix what is broken..."
The situation is similar to his most famous triumph, ImClone, maker of the blockbuster cancer drug Erbitux (and the stock that sent Martha Stewart to jail). Icahn ousted ImClone's corrupt, incompetent management and made himself chairman. In 2008, he engineered a bidding war and sold the company to Eli Lilly for more than $6 billion. In the process, he made shareholders billions... and booked a $500 million profit for himself.
Like it did at ImClone, the proxy fight at Genzyme will turn nasty over the next few months. Despite multiple missteps in the past, Termeer has decent relations with many of the fund managers who hold Genzyme shares. In a shrewd move this January, for example, Termeer entered into a "mutual cooperation" agreement with Relational, a $6 billion hedge fund. Relational agreed to support the board's nominees and proposals in 2010. In return, Relational cofounder and principal Ralph Whitworth can become a board member if he wants to later this year.
Still, I expect Icahn to win at least two seats in the contest, bringing his "fix it and flip it" brand of activism to the boardroom.
Bottom line, the spotlight is good for Genzyme shareholders. It'll keep the management honest and hasten the turnaround. If you followed our October advice, you're in good shape. If you haven't bought yet, look to pile in whenever shares fall below $50.
Once the manufacturing problems are behind it, Genzyme can earn $4-$5 per share next year. If it hits even a modest price-to-earnings ratio of 15 in the next year or two, the stock should sell for about $75... That's another 50% from here.
Good investing,
George Huang
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