Feature
Friday, January 17, 1997

Genzyme Investor Relation-ships

Last year, as the stock of semiconductor equipment manufacturer APPLIED MATERIALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMAT)") else Response.Write("(Nasdaq: AMAT)") end if %> was falling, an AMAT employee ventured onto the Motley Fool message board and began reporting on how production was going. Shortly thereafter, someone with the screen name "AMAT IR" posted a message saying that only the Investor Relations (IR) department was authorized to speak on behalf of the company. Neither the first poster nor AMAT IR returned to the folder.

Like other investors with a stake in Applied Materials, Steve Push was concerned about the stock's plunge and had been quite interested in the production worker's comments. Looking for some feedback on the recent analyst downgrades, he sent an e-mail with his questions to AMAT IR. He never received a response.

The story is unsurprising. Companies need to control the release of their information, and only investor relations staffs are trained to know what kinds of things are appropriate to disclose. With few exceptions, companies have so far shunned online message boards as a means of addressing the investment community. Their reasons range from the perceived chaos of such discussions to the sense that there are simply not enough investors online for the effort to pay off. Further, the idea of even professional spokespersons participating in online discussions sends the typical corporate counsel into an apoplectic fit. The lawyers have a hard time seeing past the potential legal liability of an inappropriate earnings projection or a selective disclosure of material information. Better to just play it safe.

What's ironic in this case, however, is that Steve Push is in the IR business himself. He's the Vice President for Corporate Communications in charge of investor relations and public relations for GENZYME CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GENZ)") else Response.Write("(NASDAQ: GENZ)") end if %>. The company's main units trade separately, with the general division and GENZYME TISSUE REPAIR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GENZL)") else Response.Write("(NASDAQ: GENZL)") end if %> being the two stocks of wide interest in Fooldom. Since May of 1995, Push and his wife, Lisa Raines, the company's Vice President of Government Relations, have been actively responding to the questions posed by investors in the GENZ and GENZL Fool folders.

Posting under the screen names "StevePush" and "Lisie Pie," Push and Raines have pioneered the art of doing investor relations on an online message board. Their persistent and detailed responses to essentially every investor question make the Genzyme and Genzyme Tissue Repair folders models for how companies can take advantage of The Motley Fool or other online financial bulletin boards to communicate with investors.

Poster "Jaydubs" put it well in a note last February addressed to Steve. "Thanks for the amazing job you're doing. I know quite a few companies who could learn a great deal from the shining example you've set, and continue to set, regarding the disclosure of information to the public. You have raised the bar for IR immeasurably."

Indeed, it's probably no exaggeration to say that these Fool folders should be mandatory reading for every corporation's investor relations staff. Foolish investors should also take a look at these boards to get a sense of how a company's day-to-day involvement in an online message board can raise the quality of the discussion and provide the kind of consistent access to, and clarification of, information that no other medium can offer. In fact, it would be entirely appropriate to ask the companies you own whether they have considered participating in such online discussions, and to point them to the Genzyme folders as a model they might want to follow.

"I don't want to say what companies should do," Push told Rogue in a recent phone interview that included Raines, too. "But if a company is interested in cultivating the market for individual investors, if they want to increase the percent of their stock owned by individual investors, they ought to seriously consider electronic communications including The Motley Fool because that is an excellent way to get information out to a fairly sophisticated audience of individual investors."

THE GENZYME STORY

With its headquarters in Cambridge, Massachusetts, Genzyme is one of the top five biotechnology companies in the world, and one of the few with a history of revenues and earnings. Its general division operates in the diversified areas of biopharmaceuticals, surgical products, gene therapy, genetic testing, and diagnostic products.

More than half of the company's revenues and an overwhelming majority of its earnings come from sales of its products to treat the debilitating genetic problem known as Gaucher's disease. Though this market is small, with only about 5,000 patients, it's a lucrative niche since Genzyme's enzyme replacement therapies Ceradase, and the second generation recombinant product Cerazyme, have special protection under the Food and Drug Administration's (FDA) Orphan Drug rule.

However, Genzyme is expected to become less dependent on these therapies in the next year or so as the new surgical products business, acquired in the latter half of 1996, will be launching new products this year. Revenues from this division are expected to surge from $51 million in 1996 to between $125 to $140 million in 1997. Last week, Genzyme reported 1996 revenues rose 35% to $512 million from $379 million in 1995.

In 1996, the FDA also approved the company's Seprafilm bioresorbable membrane for use after abdominal surgery. As part of the body's normal healing process following surgery, fibrous structures known as adhesions can connect tissues or organ surfaces that are not normally joined together. Seprafilm helps prevent these undesirable adhesions from forming.

The partially owned subsidiary Genzyme Tissue Repair is a development-stage company with products on the market but no earnings expected until sometime in 1998. However, since 1988 this unit has marketed a remarkable skin repair technology called Epicel which allows a skin sample no bigger than a postage stamp to be grown into replacement skin the size of a flag. The technology is used to treat severe burn victims.

Tissue Repair's immediate future rests with a related cell-processing technology called Carticel, which has shown tremendous efficacy in repairing damaged cartilage. Early last year, analysts were estimating that GENZL would turn profitable in 1997 on the strength of Carticel sales. Both doctors and patients have shown enthusiasm for the surgical procedure that uses Carticel. But while close to 300 insurers and HMOs have approved the procedure, including the two most progressive HMOs, many others have hesitated.

New follow-up data to be released in February are expected to consolidate the medical community's support for Carticel; formal FDA approval for this novel product should come around midyear. With a $15 million backlog of patients waiting to be treated, limited acceptance by insurers is currently the principal limitation on sales, which could surge in the latter half of the year.

The Tissue Repair division opted to build the company's long-term value at the expense of short-term profits, by partnering last fall with Diacrin on research into new products for treating common neurological problems such at Parkinson's disease and Huntington's disease. (Last week the FDA granted orphan drug designation to these NeuroCell-PD and NeuroCell-HD products.) As a result, GENZL shares are expected to be further diluted this year by cash-for-stock arrangements with the Genzyme general division as well as an additional equity offering.

RAINES AND THE FDA

Push and Raines met while she was an undergraduate at the State University of New York (SUNY) and he was in graduate school, after studying biology at the City College of New York. Push later went on to work as a medical journalist for International Medical News Group, an organization based in Washington, D.C. which publishes newspapers for physicians. He next got a job in the public affairs office at the Johns Hopkins Medical Association, and worked on an MBA at night. After a stint at Hill & Knowlton's doing biotech public relations, Push moved to the National Academy of Sciences, where he headed the office of public information. Three years later, he followed Raines to Genzyme when the company expanded its IR department.

After SUNY, Raines picked up a law degree on the way to a six-year stint working for Congress's now defunct Office of Technology Assessment, a kind of in-house think tank that assessed the public policy aspects of new technology. This was the early '80s, a time when biotechs were just beginning to explode, and Raines soon developed an expertise in regard to this new industry. She was hooked.

When she left the Congressional office, she moved to the biotechnology industry's trade association, where she spent six years, before joining Genzyme three and a half years ago. "What you gain from working for Congress or for a congressional office is an insight into how the policy process works," she said. With Genzyme, she's had the chance to apply her knowledge of that process.

Every biotech depends on having a good relationship with the FDA, and investors, in turn, depend on knowing exactly how good that relationship really is. Both Genzyme and Foolish investors have benefitted from Raines's discussions with the FDA and with investors who frequent the folder. In fact, because Genzyme Tissue Repair's Carticel is so novel, Raines has effectively helped the FDA devise a whole new category for regulating it.

"What we're doing is something that doesn't fit neatly into any of the existing FDA pigeonholes," she said. "And it's taken a lot of energy, both on our part and on the FDA's, to find ways to think outside of the box of the traditional way of regulating drugs. Carticel is simply the result of taking a patient's cartilage cells from a small biopsy and growing more of them and then re-implanting them into the patient. It's not a drug. It's not an artificial substance. It doesn't have any of the toxic effects of some artificial substances. It doesn't have any of the carcinogenic potential of some artificial substances. It's specific to each individual patient, so it's not mass-manufactured. It's very different from the kind of thing that the FDA is used to looking at."

Indeed, the FDA had allowed the similar Epicel product on the market without formal Pre-Market Approval, and the agency has allowed Genzyme Tissue Repair to market Carticel while it determined how or if it would seek to regulate the therapy. The guidelines the agency created in the middle of last year resulted in part from the lengthy discussions Raines held with FDA officials to help them understand the nature of the product.

"Carticel has really been the driving force behind the FDA's action here. In fact, the FDA created a new category, which they call Manipulated Autologous Structural cells, or MAS cells, and right now Carticel is the only product in that category. But the theory is that you can take other kinds of tissue, bone tissue, ligaments, other things that you might want to grow more of in order to repair damage, so it's appropriate for the FDA to look at the big picture.

"That's really been the most difficult challenge in this. The FDA doesn't want to, and shouldn't, make ad hoc decisions on individual products. So it needs to look at the big picture and understand the precedent they're setting for other products that we don't even know about that might appear in the future, and whether this is an appropriate way to regulate those as well. How do you differentiate this class of products from other products that share some, but not all, of the characteristics?"

The FDA is now going to require Carticel and other products like it to attain Pre-Market Approval in the future. But as Raines explained, the FDA's "recognition of the patient benefits of Carticel and the low degree of risk led them to decide to allow us to continue on the market even though we don't have approval yet."

Though the process may seem painfully slow to GENZL investors, Raines thinks it's worked pretty well. And formal FDA approval for Carticel will likely be the key to really pushing insurers to accept the therapy as the standard of care.

"If the FDA had never gotten involved in this area, if they had done the same thing with Carticel as they did in 1988 with the skin cell product [Epicel], we would have the same reimbursement situation that we have today. That is, it's a new technology, it does not have the FDA seal of approval on it, so it would take a period of time before payers were convinced that there was sufficient clinical data to prove that the product worked and therefore for them to pay for it as a medically necessary and appropriate treatment. I think that if and when we get FDA approval, that will jump start the reimbursement process. But if the FDA had not gotten involved, we would not have the opportunity for that jump start."

THE ONLINE REVOLUTION

Given the importance of GENZL's discussions with the FDA, Foolish investors have no doubt benefitted from getting updates directly from Raines. But those talks with the FDA, as well as the Fool folder itself, became more important last March in the wake of a misleading article on the company in The Wall Street Journal.

In highlighting a special session on Carticel at the February meeting of the American Academy of Orthopedic Surgery, the Journal offered a thoroughly skeptical account of whether the therapy even worked. Yet the available data clearly showed that more than 80% of patients, many of whom had not been helped by other therapies, experienced significant improvement with Carticel. The piece raised related questions, some of which had come from a research report issued by an analyst downgrading the stock.

As Push recently explained, the article was written by a new reporter who had just joined the Journal's national staff after working in the Texas office. "Being somewhat naive, she was fed a story by a bear who got her ear. And, she wrote what was, quite frankly, a one-sided view of the issue."

He said that he spoke with this reporter extensively, as did the principal investigators and executives of Genzyme Tissue Repair. But "little or nothing of that got into the story. So it was depressing. When The Wall Street Journal decides to do a number on you like that, you really have no defense. You know, they say never get into an argument with someone who buys ink by the barrel."

Foolish investors had the chance to hear the part of the story the Journal refused to print as Push worked through a number of individual responses, before composing a press release offering the company's official point-by-point rebuttal and clarification, which was also posted in the folder.

"The Motley Fool, even though it reaches a smaller audience than the Journal, has the advantage that you can have your voice heard," Push said. "You're not dependent on someone who filters everything."

Of course, online communications presents some other problems. "I think that it's worth pointing out that one of the downsides of The Motley Fool and other Internet message board-type formats is that the ability to post information anonymously can be abused," Raines said. "We've seen many instances where there appeared to be a lack of responsibility by people who have posted information. Certainly it's an opportunity for short sellers to post information -- that may or may not be accurate -- that makes investors panic and sell the stock."

Push agrees, but he also seems to have come to terms with this widespread problem. "I have two feelings about that. When someone posts something anonymously without citing a reliable source, I think that most people who read that tend to discount it. The other thing is that rumors are going to spread through the investment community with or without The Motley Fool. I actually find it an advantage to know what these rumors are, and to counter them. Sometimes rumors spread through the investment community and you have no way of dealing with them because they're never out in the open."

Push said he checks the folder about twice a week and spends maybe two hours answering questions. "I enjoy doing it, so I often do it on my own time. But I also find it valuable in that it helps keep me sharp. Some of the questions that I get on the board are very incisive, and some of the analyses are very sophisticated. And by discussing these issues with these people, it helps me think through the issues I need to deal with the institutional investors as well."

"One of the nice things about The Motley Fool is that the people who post there are very frank with their comments," he said. "Unfortunately, institutional investors don't tell you when they have a problem. They just sell the stock. So if I'm going to anticipate what their problems are and present my side of the story, I actually find some of the things I do on The Motley Fool very useful. I have a number of sources of intelligence about what's going on in the investment community, and I consider The Motley Fool one of the important sources."

Apparently, some institutional investors feel the same way. "I've also discovered that what we're doing on The Motley Fool has an effect on the institutional investors," Push said. "Although they tend not to ask questions, I know that a lot of them are lurking on the board because almost every time I go to an investment conference, there are at least one or two institutional investors who come up to me and go, 'Oh, you're Steve Push. You're the guy on The Motley Fool.' So they're looking. Institutional investors will look for any opportunity they can to glean information."

Push said that those institutional investors who have expressed an opinion appreciate his involvement in the Fool folder and have said they think more companies should be doing the same thing.

While Raines and Push have handled many basic questions from folks who really should have spent an hour looking over the annual report to learn what the company does, they've also entertained some questions that are a step above what they hear from some institutional investors.

"You expect that maybe some lazy people will ask some lazy questions," Raines said, "but what really is surprising is that some of the posters have put together some very sophisticated models that are comparable to what Wall Street analysts do, and they ask for reactions to the models. It's really quite impressive."

Genzyme certainly hasn't abandoned institutional investors, or simply gone digital, leaving the old world behind. The Fool just provides another channel of communications, one in which Push and Raines clearly enjoy participating. But Push said the company's "major ways of communicating have not changed. We still depend heavily on the annual report, on press releases, on meeting with institutional investors, on investment conferences that are heavily attended by institutional investors."

Still, he said that "technology is going to move the investment community in a different direction. I think that, increasingly, individual investors are going to take more responsibility for their own investment decisions. I think that, increasingly, individual investors are going to have access to information that was once only available to institutional investors. And so I see this participation in The Motley Fool as a valuable experiment in how a company can communicate more effectively with a broader audience beyond the institutional community."

Indeed, Genzyme is creating an open-door policy designed to offer investors a variety of ways to keep up with the company's stocks. In September, the company started a 24-hour-a-day automated investor information line providing recorded messages about recent company news, short descriptions of the general division (GENZ), the tissue repair unit (GENZL), and a smaller unit called Genzyme Transgenics (GZTC); a fax-on-demand feature offering instant fax access to any news release issued within the last year; and a voice mail service to order an investor packet (1-800-436-1443).

Last November, Genzyme started its own Web site, where investors can find press releases and other company information (http://www.genzyme.com). It will soon include a FAQ sheet to which Push and Raines can refer people for the basics. Genzyme offers real-time access to a Fool reporter for conference calls and dial-up, tape-delayed access to individual investors. The company also posts press releases to the Fool folder right when they hit the wires.

Of course, the message folder offers something more than simply information or even official corporate commentary on developing issues. It gives Genzyme a very human face. As Raines said, "One of the things that our participation on the Fool board says is that we really do have confidence in the company's future. We're proud of what the company is doing. We can show our faces, at least figuratively."

The folder offers a place to nurture relationships with investors, some of whom have owned Genzyme stock since its IPO more than decade ago. According to Raines, that kind of dialogue "creates a bond that I think helps us all feel good about this as a mutual endeavor, because, really, we and our investors are all hoping for the same things. It's our job to try to make them happen, and it's their job to evaluate whether we're doing that effectively."

In many ways, the Fool folder has offered an especially important forum for that process because 1996 proved to be an especially frustrating and disappointing year for Genzyme investors. On the one hand, both the General Division and Tissue Repair units hit major milestones necessary for achieving long-term goals. The underlying businesses were developing as planned. But the company's optimistic forecasts for sales of new products, particularly Seprafilm and Carticel, built up earnings hopes that neither GENZ nor GENZL could fulfill. The momentum investors jumped ship, the shorts piled on, and both stocks tanked.

As Push said, "I take partial responsibility and the company takes partial responsibility for letting investor expectations get out of hand. We were talking about the market potential in such a way that it was easy for people to think that the stock was going to go wild. In fact, we went even further than that. We gave specific projections about what we thought sales were going to be. When it became clear that we were not able to make accurate predictions in this particular situation, that's when we started pulling back, being much more conservative in the types of projections we can make. I think we've learned a lesson from that."

A difficult lesson, no doubt. Yet even in the face of some significant forecasting errors, the almost daily presence of Push or Raines in the Fool folders spoke to the company's basic integrity. No one was hiding from the shareholders. Since some studies indicate that individual investors can be far more loyal than the institutions, that full disclosure policy no doubt shored up Genzyme's shareholder base in the face of short-term market uncertainties. Most individuals investors are focused on long-term performance, and they like to see management take them seriously and address them honestly.

Genzyme has more than passed the test. Steve Push and Lisa Raines have shown how a company can use online message boards to get its story out to investors, even when the old offline financial media get in the way. It's an idea whose time has come.

-- Louis Corrigan (RgeSeymour)