Genzyme to pay $64m to settle buyback claims

Genzyme Corp. will pay $64 million to settle claims that the Cambridge biotech company schemed to buy back its Genzyme Biosurgery division from shareholders for less than it was worth.

The tentative settlement, which requires a judge's approval, would end a simmering four-year dispute involving thousands of shareholders of the former division. A trial over a lawsuit filed by some of them was scheduled to begin Monday. The settlement could also end a similar shareholder complaint pending in Middlesex Superior Court.

The case involved Genzyme's use of tracking stocks, an unusual Wall Street tactic in which a company sets up a separate stock representing the performance of a single division within the larger parent firm.

In December 2000, Genzyme set up a tracking stock called Genzyme Biosurgery when it acquired Biomatrix Inc. of New Jersey. The Biosurgery stock was to follow the performance of the new division, which produced surgical instruments and an injectable material, Synvisc, to relieve arthritis pain in knees.

Genzyme's purchase of Biomatrix was worth about $860 million, according to the shareholders. Over the next two years, Genzyme tried to put a value on the Biosurgery division -- formerly Biomatrix -- and produced studies showing it was worth between $560 million and $1.1 billion, according to company documents filed in the case. It also began to plan to reabsorb Genzyme Biosurgery into the parent company.

When it announced the repurchase on May 8, 2003, Biosurgery shares had been trading near record lows. That set the repurchase price at $1.77 a share -- a fraction of what shareholders claimed the stock was worth, and significantly less than its closing price that day of $2.57. The total price paid was $72 million.

In the complaint, Genzyme Biosurgery shareholders claimed Genzyme had put off the purchase, or "roll-up," of the division when its stock was doing well. They also claimed Genzyme manipulated the Biosurgery share price lower by publicizing bad news and withholding good news.

Genzyme said in a court pleading that the shareholders couldn't prove there was a scheme to defraud investors. It also said that even if it had failed to disclose material information as required, the shareholders couldn't prove that failure influenced their investing decisions.

"Genzyme believes that settling the case at this time is in the best interests of all parties, and continues to believe that its consolidation of the tracking stock structure was done in accordance with the terms of the company's charter, and the benefit of its shareholders," the company said.

Jonathan Sherman, lead attorney for the plaintiffs, declined to comment on the settlement.

Genzyme had used tracking stocks starting in 1994 for a series of ostensibly separate divisions. The tracking stocks gave it a valuable currency it could use for acquisitions without having to sell more shares of the parent firm. And losses at the separate divisions can be used to reduce income taxes for the parent.

But the weak stock market for small biotechnology firms in 2002 and 2003 stripped away many of those benefits. The tracking stocks were an accounting and management hassle, and investors weren't interested in them. Genzyme decided to end tracking stocks.

The legal issue was whether Genzyme plotted to buy them back at the lowest possible price, to the detriment of investors.

Jeffrey Krasner can be reached at krasner@globe.com.