Six years ago, the biotech embarked on a secret mission, dubbed ‘Project Eleanor,’ to buyback shares of its biosurgery division, which was, essentially, the former Biomatrix, a company Genzyme purchased in 2000. To pay for the deal, Genzyme created separate tracking shares, but six months later, soured on the unit and sought to reabsorb it. However, Genzyme Biosurgery shareholders filed suit, claiming Genzyme attempted the buyback at an unfairly low price, according to The Boston Globe.

Last month, days before the case was to go to trial in New York, Genzyme agreed to pay $64 million to settle the case and the paper obtained court records and company documents that were unsealed after a federal judge lifted a secrecy order. The documents provide an interesting - and disturbing - behind-the-scenes look at the sort of financial maneuvering surrounding such transactions, and also raise questions about the biotech’s credibility.

The sordid episode includes a testy conference call between Genzyme execs and analysts, some of whom called the buyback price unfair. An estimated buyback price by the head of Genzyme’s own biosurgery division, who calculated the unit was worth $12.75 to $75 a share, compared with the $1.77 eventually paid. And Genzyme directors who repeatedly sought legal advice to protect them from shareholder lawsuits (of all things).

The mess began because “Genzyme preferred to use its stock rather than cash (for the buyback). But its stock had dropped by two-thirds between January and June of 2002 because of poor sales of Genzyme’s dialysis drug, Renagel. That meant Genzyme would have to use more of its own shares, making the deal more expensive. Internally, Genzyme expected sales to improve, and its stock to bounce back. The company decided to wait, keeping Genzyme Biosurgery intact until that happened,” the paper writes.

When the board met in October 2002, the directors discussed “in detail” plans to eliminate Genzyme Biosurgery. One estimate had the division ‘rolled up’ for only 60 percent of what Genzyme actually thought Biosurgery was worth, giving shareholders $3.55 a share. And Genzyme directors also “discussed steps to protect themselves from lawsuits that might result from the buyback,” the paper writes. But Genzyme didn’t act immediately.

Instead, Genzyme allegedly tried to drive down the price of Biosurgery shares so the buyback would be even cheaper. How? The paper writes Genzyme disclosed bad news about the Biosurgery division but withheld good news….

1 - The biotech allegedly knew for two years the US distributor of the key biosurgery product was reducing inventories, but suddenly disclosed the news.

2 - Genzyme kept secret a renewed effort to sell the Biosurgery’s instrument biz. The disclosure might have sent boosted Genzyme Biosurgery stock, because the unit would’ve become profitable upon sale of the division.” Shareholders weren’t told until after the buyback price had been set.

3 - Genzyme also kept secret news that the Food and Drug Administration had given Biosurgery approval to conduct clinical trials on Synvisc’s use in hip joints.

A Genzyme spokesman told the paper that the biotech tried to delay the inventory reduction, and made “all appropriate disclosures” regarding the other two developments. And “in legal filings, Genzyme disputes shareholder interpretation of the events leading up to the buyback. For instance, it said it didn’t control the timing of the sale of the instrument business, which was handled by a consultant who had no interest in Genzyme Biosurgery. Genzyme said there was no scheme to buy the Biosurgery shares for less than their true value, and that all material events…were properly disclosed.”

But as the Globe points out, on the May 2003 conference call with investors, Wirth, the general counsel, didn’t explain that Genzyme had been laying the groundwork for buying back the tracking stock two years earlier. He told investors the company “really didn’t know” that it would eliminate the Biosurgery division until the special committee of the board met in March 2003.

All of this raises an important issue. How believable is a drugmaker - or biotech, in this case - when it appears to bend the truth for the sake of profit? As Roy Poses wrote in Health Care Renewal, “If one cannot trust many of these companies’ financial dealings, why should one believe what they say about their products, and why should one believe the research they sponsor, and their educational programs for doctors?” This episode only worsens the impression that profits come before everything else.

Hat tip to Health Care Renewal