After Manufacturing Problems, Genzyme CEO's Golden Parachute Means "Failure = Success"

In late 2009, I posted about problems at a Genzyme plant that manufactured some fabulously expensive drugs, e.g. Cerezyme whose cost to patients approximated $160,000 a year. We thought then that for a drug costing that much, the company ought to have figured out a conservative process to provide pure and unadulterated product. In a later post I asked why a company that could afford to make its CEO very rich could not afford to adequately maintain its manufacturing facilities. In May, 2010, I posted about a legal settlement of charges related to its manufacturing problems requiring Genzyme to pay a $175 million fine and function under US government supervision.  And in August, 2010, I posted about how this series of management missteps could lead to the company's CEO becoming even richer because they lead to a declining stock price, which increased the likely that the company would be bought out, which could trigger the CEO's golden parachute.  I suggested then that were this to happen, it would be a gross example of how massively perverse incentives stupendously reward the top brass of health care organizations for mediocre, or worse leadership and bad results for both patients/ clients/ customers and stock-holders alike.

Now it  looks like this will happen.  Yesterday, the Boston Globe reported:

Ggenzyme Corp., the largest biotechnology company in Massachusetts and one of the industry�s historic pioneers, has struck a definitive agreement to be bought by French pharmaceutical giant Sanofi-Aventis SA, in a deal valued at about $20.1 billion.

As a result of this deal,

Genzyme�s high-profile president and chief executive, Henri A. Termeer, who has run the company for 28 years, will resign following the close of the transaction. But he will advise Sanofi on integrating the two companies. Termeer built the company into a global operation with 10,000 employees worldwide and a business model that has been the envy of the biotechnology industry. He turns 65 on Feb. 28.

Termeer, though fiercely proud of Genzyme�s independence, stands to make more than $23 million when the sale is completed, according to a 'change of control' clause in his employment contract. In addition, as a major Genzyme shareholder, he would be in a position to cash out shares that last year were worth more than $275 million.

That and several other articles s noted that it was Genzyme's manufacturing problems that lead to the buy-out:

the string of events that made Genzyme vulnerable to a takeover began in the summer of 2009 when workers discovered viral contamination at Genzyme�s Allston Landing plant overlooking the Charles River.

Genzyme was forced to temporarily shut down and clean up the plant and ration shipments of its best-selling Cerezyme and Fabrazyme drugs, both of which treat enzyme deficiencies. The events created an opening for competitors such as Shire and Israel�s Protalix Biotherapeutics and sent Genzyme�s stock tumbling on the Nasdaq.

The dip in Genzyme�s share price drew activist investors, including Carl C. Icahn of New York and Ralph Whitworth of San Diego, who accumulated shares they hoped to sell at a rich premium. They pressured management to take steps to boost shareholder value, including a stock buyout and the elimination of 1,000 jobs worldwide.

Ultimately, the company gave Whitworth a seat on its board, and, after Icahn threatened to unseat Genzyme directors in a proxy battle, it granted two seats to his associates.

In many ways, industry watchers said, an acquisition became inevitable once Genzyme stumbled at its Allston plant.

A Bloomberg article noted that this sequence of events would lead to

The departure package [which] makes him 'one of the biggest all- time winners in biotech,' said [University of Michigan business professor Erik] Gordon, who has studied the pharmaceutical industry for three decades.

Our criticism of the Genzyme CEO's potential for reaping hugely perverse incentives was paralleled by Jim Edwards' critique of what actually happened:

Here�s how crazy CEO incentive compensation is: Genzyme (GENZ) CEO Henri Termeer walked away from his company with a payout that may be worth $300 million yesterday when Sanofi-Aventis (SNY) acquired his company. But the only reason Genzyme was acquired � triggering Termeer�s gargantuan change-of-control package � is because Termeer nearly ran his company into the ground, making his stock cheap enough for Sanofi to buy.

In other words, failure = success when it comes to change-of-control packages for CEOs.

So let me just repeat my conclusion from last August: As long as being a health care CEO is effectively a license to loot the company, is it any wonder that health care organizations continue to be badly lead, and health care costs soar while quality and access suffer?

Once more with feeling: real health care reform would require us to make health care executives truly accountable for their actions, and penalize them for those that are ill-informed, contemptuous of health care values, self-interested, or corrupt.

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What is the "Worst Biotech CEO" Worth?

Recently, we posted about misadventures of the leadership of biotechnology giant Genzyme.  Although the company has long priced its drug Cerezyme for the rare Gaucher's disease at a stratospheric level, it did not sufficiently reinvest money in its manufacturing facility for the drug.  Deferred maintenance at a production facility running at maximum capacity has apparently lead to two different kinds of contamination problems, forcing a shut-down of the plant, and now a shortage of the drug.  For this, Genzyme CEO Henri Termeer was just labeled the "Worst Biotech CEO of '09" by TheStreet.com.

It was not always thus.  A 2008 profile of Mr Termeer in Boston Magazine chronicled the rise of Genzyme from a "startup [which] operated 15 stories above the Combat Zone in an old garment building on a dodgy stretch of Kneeland Street."  Termeer pushed the company to develop a practical way to manufacture Cerezyme, and had the vision that the company could make money selling the drug to a relatively small number of patients.   Of course, his solution was to price the drug so high as to "drop jaws."  However, perhaps that was what was needed to get a innovative drug to a small number of patients.

Furthermore, Termeer posited that the revenues derived from drugs such as Cerezyme would lead to innovations that would help many more people.

The biotech tycoon's immodest goal is to change healthcare. That is what he's trying to do, after all. That's part of why he doesn't sweat the bad press, which he regards as the penance of the innovator. His therapies for ultrarare diseases, he says, point the way forward, toward a day when very targeted drugs cure ailments perfectly, precisely. Don't think of his niche therapies as being used by tiny, statistically inconsequential groups; think of them as being deployed in ways that get results every time. Now contrast this with the trial-and-error approach that dominates medicine as it's practiced today, in which doctors pick and choose from the menu of drugs available and calibrate dosages until finally, hopefully, they land on what works best for that particular person. What if instead every condition had a drug that was the smart bomb that Cerezyme is for Gaucher's?

While we wait for these marvelous new innovations, however, patients with Gaucher's disease must wait for their effective but amazingly expensive drug apparently because Mr Termeer presided over the failure to pay enough attention to mundane issues like manufacturing plant maintenance while he touted his vision of the future.

Whether that vision is realistic depends on one's view of Mr Termeer's predictive abilities. The Boston Magazine article suggested he is not a good fortune teller.  In 1994, Mr Termeer "suggested to the [New York] Times that the cost [of Cerezyme] would soon drop. 'Once we have the new plant running and approved, we will start to see some economies of scale,' Termeer told the paper in 1994. 'We can start to pass on some of these economies to the marketplace while at the same time improving the financial results of the company.' Fourteen years later, the price of Cerezyme has never come down.

In my humble opinion, the tale of Henri Termeer's and Genzyme's current woes tells a lot about the culture of leadership now prevalent in health care. On one hand, it seems that some of the business-people who took over leadership of health care organizations had administrative skills that turned innovative ideas into reality. This success may have derived from real vision about the possibilities of high-technology medicine and health care.

On the other hand, as their administrative abilities and vision lead to success, their judgment was liable to become over-confident, if not arrogant. This may have been fueled by the a business ethos that celebrates executives and managers, and their administrative skills and vision, beyond all else.

However, Mr Termeer's success was dependent on the painstaking and often thankless work of physicians and scientists, particularly those who first developed the drug that became Cerezyme, the initial funding of this work by the US National Institutes of Health, and the work by scientists and engineers to develop a practical way to manufacture this drug. Termeer also benefited from the Orphan Drug Act which "allowed companies that brought drugs to market seven years of monopoly sales." Without federal research money, favorable laws, and multiple dedicated scientists, physicians, and engineers, Mr Termeer's administrative skills and vision would have yielded nothing.

Nonetheless, it was Mr Termeer who was so richly rewarded. In 2006, Boston Magazine listed him as among the 50 wealthiest Bostonians, with an estimate worth of $342 million.  The 2008 profile noted "Over the past three years, Termeer has earned more than $50 million in total compensation, and thanks to the performance of Genzyme's stock, his stake in the company is now worth about $260 million."  He was interviewed at his waterfront home in tony Marblehead, Massachusetts.  He skippers his (only) "36-foot Hickley Pilot" which is "docked near the new home he's built outside Kennebunkport [Maine]..." the town in which former US President George HW Bush keeps a summer home. 

The US (and global) health care business culture disproportionately rewards managers and executives for "innovation," as opposed to the scientists and professionals who actually developed the innovation, or the other people whose money funded these efforts.  These leaders are rewarded them sufficiently to make them into a sort of pseudo-aristocracy.  I hypothesize that such rewards make them believe that they have actually done things worthy of them, breeding over-confidence, arrogance, and a sense of entitlement that puts them beyond the usual rules of society.  The result is leadership that may be ignorant of physicians' values, self-interested, and even corrupt, and health care that is too expensive, inaccessible, and that fails to deliver quality and value commensurate with its cost. 

To truly reform health care, we need to reform how health care oganizations' culture and leadership.

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