DEFINING THE ORGANIZATION’S STRATEGIC DIRECTION

In 2012, Genzyme (a full-owned subsidiary of Sanofi, which purchased the company in 2011)
was one of the world’s leading biotechnology companies. It produced more than twenty-five
products sold in ninety countries. Genzyme’s products and services focused on rare, inherited
disorders, kidney disease, orthopedics, cancer, transplant and immune diseases, and diagnostic
testing. Genzyme was consistently recognized as a leader across many dimensions of its
operations. In 2007, Genzyme received the National Medal of Technology, the highest honor
awarded by the President of the United States for technological innovation. The journal Science
had regularly named Genzyme a “Top Employer” in its annual survey of scientists, and Fortune
magazine named it one of the “100 Best Companies to Work for.” The company had also won
numerous awards for practicing environmental sustainability and ethical responsibility.
Humble Beginnings
Genzyme was founded in Boston in 1981 by a small group of scientists who were researching
genetically inherited enzyme diseases. People with these rare disorders (e. g., Gaucher disease,
Fabry disease, MPS- 1) lack key enzymes that regulate the body’s metabolism, causing sugar,
fats, or proteins to build up in the body and resulting in constant pain and early death. In 1983, the
scientists were working out of the 15th floor of an old building in Boston’s seedy “Combat
Zone,” when they were joined by Henri Termeer, who took the role of president and eventually
chief executive officer of the company. Termeer had left a well-paying executive vice president
position at Baxter to join the 2-year-old start-up, and many people thought he was crazy to do so.
However, Termeer thought Genzyme was well positioned to pursue a novel strategy in the drug
industry: target the small markets for rare diseases.
Focusing on rare diseases was close to heresy in the pharmaceutical industry. Developing a drug
takes 10 to 14 years and costs an average of $800 million to perform the research, run the clinical
trials, get FDA approval, and bring a drug to market. Pharmaceutical companies thus focused on
potential “blockbuster” drugs that would serve a market that numbered in the millions. A drug
was considered a “blockbuster” if it earned revenues of $1 billion or more, and achieving this
level required many thousands of patients, with chronic diseases such as hyper-tension, diabetes,
or high cholesterol. Genzyme, however, challenged the notion that a firm needed a blockbuster
drug to succeed. Genzyme would focus on drugs that were needed by only a few thousand
patients with severe, life-threatening diseases. Though there would be few patients for these
drugs, there would also be few competitors. Furthermore, the small number of patients and the
severity of the diseases would make insurance companies less likely to actively resist
reimbursement. Both of these factors suggested that drugs for rare diseases might support higher
margins than typical drugs. Additionally, whereas pharmaceutical companies typically needed

1 Strategic Management of Technological Innovation, 4th edition, Schilling, Melissa A. (2013), p.105.
2 You are responsible for preparing your own individual report based on the “case study format” as discussed in the
class lectures. Please do not forget to write your name on cover. Post a copy of your report in the discussion section on
Blackboard by midnight on the due date.
Prof. Hugh B. Marriott
Long Island University (Brooklyn)
large sales forces and considerable marketing budgets to promote their drugs, a company focusing
on drugs for rare diseases could have a much smaller, more targeted sales approach. There were
only a small number of physicians specializing in rare diseases so Genzyme could go directly to
those doctors rather than funding a large sales force and expensive ad campaigns. Finally,
therapies with significant clinical value in smaller populations required much smaller clinical
trials (though it was more difficult to find the study candidates).
The Orphan Drug Act
Genzyme’s timing was auspicious. In 1983, the Food and Drug Administration established the
Orphan Drug Act to induce development of drugs for rare diseases. The act provides significant
tax breaks on research costs and 7 years of market exclusivity to any company putting an orphan
drug on the market. This market exclusivity amounted to significantly more protection from
rivalry than a typical patent. When a firm secures a patent on a drug, that patent only prevents
another firm from marketing the same drug; it does not prevent another firm from marketing a
drug that achieves the same or similar action through other means. Thus when a firm introduced a
patented drug that met an important medical need, the race was on by competitors to introduce a
different (hopefully improved) version of the drug that could also be patented and compete with
the original drug. Drugs for orphan diseases would be shielded from such competition for 7 years,
hopefully permitting them to recoup their development costs and earn a rate of return that would
make the venture attractive.
To qualify for orphan drug status, a disease had to afflict less than 200,000 people worldwide.
Big pharma remained uninterested because of the small market sizes and high risks of developing
therapies for them. Even most biotech firms failed to see the opportunity in the act that might suit
their rapidly evolving technologies. Genzyme’s eventual success, however, would ultimately
attract their attention to this small but lucrative market.
The First Big Success
Genzyme’s first commercial product was Ceredase— a replacement protein designed to treat
fewer than 10,000 people afflicted with a deadly, rare genetic disorder called Gaucher’s disease.
Children born with this disease rarely live past their 10th birthday, and adults who develop this
fatal disease suffer from chronic liver, kidney, heart, and spleen damage. Clinical trials for
Ceredase began in 1984, and in March of 1985 the U. S. Food and Drug Administration
designated Ceredase an orphan drug. Genzyme was first allowed to make Ceredase available to
patients outside of the United States in 1990, and was approved by the FDA to market Ceredase
in the United States in 1991.
Creating a therapy to treat a patient with Gaucher’s disease required extracting proteins from
human tissue, and the most productive source of these proteins was found in human placentas.
The expense and difficulty of this provided a substantial barrier to competitive entrants. Not
many experts believed Genzyme could be commercially successful with this product. As Termeer
noted, “The FDA thought we were out of our minds.” In an interview, Termeer explained, “The
hurdles to raise more finance for the trials were formidable. Not least was the fact that human
placentas were the source of the enzyme and to provide a year’s dose for just one patient, more
than 22,000 placentas were needed. To overcome this, Genzyme built a plant in France to take
unwanted placental tissue which would have otherwise been burnt and extracted the enzyme. At
one point 35 percent of all placentas from the United States were passing through the French
plant. Ceredase was the only drug made from placentas that the U. K. government allowed to be
Prof. Hugh B. Marriott
Long Island University (Brooklyn)
used in Britain. By 1991, Genzyme was collecting a million placentas a year, and knew it could
not produce enough of the enzyme to treat all the patients who needed it. Fortunately, by 1993,
Genzyme had developed a recombinant form of the enzyme, Cerezyme, which obviated the need
for human tissue and made efficient production possible. In the meantime, Genzyme had also
begun work on gene therapies and had begun investigating potential treatments for another rare
enzyme disorder, Fabry disease.
Remaining Independent
Genzyme also broke with industry norms in its decision to not work with large pharmaceutical
companies. Whereas most biotech companies license their technologies to large pharmaceutical
firms to tap the larger company’s greater capital resources, manufacturing capabilities, and
marketing and distribution assets, Termeer felt strongly that the company should remain
independent, stating, “If we worked with a very large corporation, we would lose our strategic
direction and be dependent . . . we’ve tried to stay as self- sufficient as we possibly can.”
Performing its own testing, manufacturing, and sales would mean much greater risks to the
company, but it also meant that the company would keep all of the profits its drugs earned. To
generate revenues to fund the research, Termeer entered into a number of side ventures including
a chemical supplies business, a genetic counseling business, and a diagnostic testing business. He
also took the company public in 1986, raising $ 27 million. Termeer’s gamble paid off: Patients
taking Cerezyme paid an average of $170,000 a year for their medication, and with about 4,500
patients committed to taking the drug for life, this amounts to more than $800 million in annual
revenue from Cerezyme alone.
The Competition in Biotech
From 2000 to 2008, biotech companies were the fastest growing sector in the drug industry.
Global biotechnology product revenues were $153.7 billion in 2006, and were forecasted to grow
to $271.4 billion by 2011, with the United States accounting for over half and the balance from
Europe, Japan, and Latin America and the rest of Asia. Globally, there were approximately 4,400
biotechnology companies in 2007. Of those, nearly 800 were publicly held, and had combined
revenues of nearly $85 billion, up from $78.4 billion in 2006. Over half of that revenue, however,
was earned by the 10 largest biotech firms: Amgen ($14.3 billion), Genentech ($9.3 billion),
Genzyme ($3.2 billion), UCB ($3.2 billion), Gilead Sciences ($3.0 billion), Serono ($2.8 billion),
Biogen Idec ($2.7 billion), CSL ($2.1 billion), Cephalon ($1.8 billion), and MedImmune ($1.3
billion). Genentech was the oldest, formed in 1976; Amgen, Chiron, and Genzyme were
established in the early 1980s. The remaining competitors were small, emerging companies with
less than 500 employees. In fact, more than 50 percent of biotech companies had fewer than 50
employees. Profitability had accrued to only a handful. The aggregate net loss for the industry
was $2.7 billion in 2007.
Most biotech start- ups followed a similar path of evolution. The firms would start out as a
research and development firm, with employees coming from university science labs or big
pharma. If the start- up survived the lean years and had prospects for producing a commercially
viable therapy, the young firm would seek alliances with large pharma firms for late-stage
development, manufacturing, and marketing. For example, both Genentech and Gilead formed
relationships with Roche, and Amgen formed a relationship with Abbott Laboratories. If a firm’s
drugs achieved commercial success, it could negotiate higher royalties and attract capital
investment.
Prof. Hugh B. Marriott
Long Island University (Brooklyn)
Genzyme differed from all its peers and from later biotech companies by being profitable early on
( Genzyme posted a profit of just over $20 million in 1991, losses in 1992 and 1993, and a profit
of over $16 million in 1994), and remaining independent of partners. “We wanted a diversified
company that could use technology to make a difference for people with serious diseases, and to
get profitable so we can continue to develop new medicines,” Termeer said. Even with the
benefits offered under the Orphan Drug Act, most analysts believed that no other developer was
likely to pursue Genzyme’s strategic path. While both Amgen and Genentech had produced
orphan drugs, it was not their strategic focus.
Positioning for the Future
It is estimated that there are between 5,000 and 8,000 known rare diseases in the world. In the
decade leading up to 1983, only 10 orphan drugs entered the market, according to the FDA. Since
the act was passed, over 300 orphan drugs have been developed and approved. Most were
developed by biotechs and nearly all of them have been clinically important. Genzyme proved
that a business could be built around small disease populations and demonstrated its ability to
profitably serve markets that seemed financially unjustified. Since Cerezyme, it has introduced
three more “zyme” therapies— drugs for genetic diseases caused by enzyme deficiencies.
Aldurazyme treats 400 children and adults in over 30 countries who have MPS- 1 in what is
referred to as an “ultraorphan” disease. More than 1,700 patients in over 40 countries receive
Fabrazyme for Fabry disease. In 2006, Myozyme was approved in Europe and the United States
for Pompe disease, a debilitating and often fatal muscle disorder that affects fewer than 10,000
people.
Genzyme maintained the diversified posture that had enabled it to survive the early years of
developing Cerezyme, and in 2008 its businesses were organized into four reporting units: genetic
diseases (the division that homed the enzyme disorder treatments), cardiometabolic and renal
(which produced treatments for renal diseases and cardiovascular diseases), biosurgery (which
produced biotherapeutics and biomaterials), and hematologic oncology (which produced
treatments for cancer). In 2009 the company had seven major late-stage projects in its pipeline,
including alemtuzumab for multiple sclerosis, Clolar for adult acute myeloid leukemia, and
mipomersen for familial hypercholesterolemia. In 2011, Sanofi (a French drug company) bought
Genzyme for $20 billion. Both companies argued that the deal expanded their reach: For Sanofi,
Genzyme offered deeper know-how in biological drugs and a greater research presence in the
United States; for Genzyme, Sanofi offered broader manufacturing and sales resources.
Instructions

  1. Based on your reading of the case, please provide a report in the case study format giving
    (a) a brief summary of the case, (b) the key issues you identified and why you consider
    them issues, and (c) your recommendations for addressing the issues you have identified.
  2. Respond to the discussion questions below in the discussion section on Blackboard.
    DISCUSSION QUESTION
    Does Genzyme’s focus on orphan drugs make sense? Do you think Genzyme has a longterm strategic intent?