Decision is part of settlement for proxy battle initiated by the billionaire activist investor last year.

Genzyme and billionaire activist investor Carl C. Icahn have settled their proxy contest with the company agreeing to appoint two out of four Icahn nominees to its board. Icahn has been trying to gain influence over the company ever since Genzyme hit manufacturing problems at its Allston Landing, MA, facility in June 2009, which led to major shortfalls in drugs for orphan diseases.

Under the terms of the settlement, the Icahn funds will withdraw its slate of four nominees, which comprised him and three others, for Genzyme’s board of directors. Icahn will vote its Genzyme shares in favor of the company’s nominees.

Genzyme will appoint Steven Burakoff, M.D., and Eric Ende, M.D., to its board. Dr. Burakoff, one of the Icahn’s nominees, is professor of medicine, hematology, and medical oncology at the Mount Sinai School of Medicine and director of the Tisch Cancer Institute. Dr. Ende, a participant in the Icahn’s proxy solicitation, is a former biotechnology analyst with Merrill Lynch & Co.

“I am always pleased when a proxy fight can be avoided,” Icahn remarks. “I believe Drs. Burakoff and Ende will add significant medical and financial expertise to the Genzyme board. I am also very heartened that the Genzyme board recently brought on Ralph Whitworth, a long-time activist, as a director, and announced that Dennis Fenton will shortly be added to the board as well.”

Genzyme’s board currently consists of 10 members including Whitworth and all of them have been nominated for re-election. Following the appointment of Drs. Burakoff, Ende, and Fenton, former evp of operations at Amgen, the company’s board will consist of 13 members.

As a result of the plant shutdown in Allston, revenue loss was estimated to be between $100 million and $300 million as of July 2009. Facility closure affected four products: Cerezyme for Gaucher disease, Fabrazyme for Fabry disease, Thyrogen for the diagnosis of thyroid cancer, and Myozyme for Pompe disease. After viral contamination was identified in one of the bioreactors in June 2009, FDA officials found that the company’s systems for ensuring manufacturing quality were inadequate.

On May 25, Genzyme signed a consent decree, agreeing to pay the federal government $175 million in unlawful profits from the sale of products that were made at the plant. The company will have to shell out additional fees if it fails to meet the timetable set up by the FDA to bring the plant in line with the agency’s requirements.

On May 7, the company reported plans to start a $2 billion stock buyback and its intention to sell, spin-out, or facilitate a management buy-out of its genetic testing, diagnostic products, and pharmaceutical intermediates businesses. The decision was made to boost the firm’s growth, bolster its manufacturing operations, and likely to help the company gain ground in its proxy battle with Icahn.

“Over the past year, we have made substantial progress in enacting operational and organizational changes to return to our historical path of sustainable growth,” says Henri A. Termeer, Genzyme’s chairman and CEO. “This agreement provides a pragmatic and constructive solution that allows us to focus on continuing to strengthen and build the company to create value for our shareholders.”

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