Biotech Genzyme stumbles on disclosure, credibility

Corporate credibility is based on a lot of factors, one is the timely, candid delivery of information — especially information that can influence share price. Indeed, the SEC has rules about such things.

So, it is with some amazement — and disappointment — to learn that the Boston-area biotech firm Genzyme held material product information from the media and, thus, investors.

Forbes.com reports that the Food and Drug Administration notified Genzyme in two letters on a Friday afternoon that it was “delaying a key product,” Lmuizyme, an approval Genzyme had expected. The company did not reveal the news until the next Monday — three days, including one trading day, later and then only after NASDAQ had closed.

Such material strategic information leaves plenty of room for insider trading before the knowledge becomes widely distributed, as required.

Even so, Genzyme share fell 4% on Friday and 7% on Monday, outpacing declines in the broader market and biotechs in particular.

When Genzyme did disclose the news, the company said the FDA’s action would cut 2009 profits by about 12 cents per share, and the share price fell another 5% in after-market trading.

Forbes wrote that an SEC enforcement attorney believes that Genzyme may have complied with disclosure laws, but that doesn't mean it made the right choice. After all, investors and analysts do read newspapers over weekend, and even on Mondays.

While legitimate business reasons may have motivated the delay, the incident makes one think back to the ImClone Systems scandal, in which former CEO Sam Waksal was alleged to have tipped off Martha Stewart and his family before telling the market about an FDA delay. Waksal went to jail for insider trading; and Martha did too, but that was for lying to investigators.

The financial pressures on all companies today are enormous, but so are credibility pressures.

In such a situation, share price is going to take a hit, but management’s integrity and credibility shouldn’t have to.

"The quicker you get out that kind of material announcement, the less scrutiny is invited. Anybody who sold [Genzyme shares] from the time of receipt until the company made its disclosure should be expecting a call from the SEC." Jacob Frenkel, a partner at Shulman, Rogers and a former SEC enforcement attorney told Forbes.

Here’s the full Forbes article.