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Genzyme Corporation (GENZ)

Q2 2006 Earnings Conference Call

July 12, 2006 11:00 am ET

Executives

Henri Termeer - Chairman, CEO

Michael Wyzga - CFO

Mark Enyedy – President, Oncology

David Meeker – President, Lysosomal Storage Disorder Therapeutics

John Butler – President, Renal Division

Ann Merrifield – President, Biosurgery

Sally Curley - VP IR

Analysts

Craig Parker - Lehman Brothers

Yaron Werber - Citigroup

Adam Walsh - Jefferies

Mark Schoenebaum - Bear Stearns

Meg Malloy - Goldman Sachs

Shiv Kapoor - Montgomery & Co.

Phil Nadeau - Cowen

Bill Tanner - Leerink Swann

Analyst – Robert W. Baird & Co.

Geoff Meacham - JP Morgan

Presentation

Operator

At this time I would like to welcome everyone to the Genzyme Corporation quarter two earnings conference call. (Operator Instructions). Ms. Curley, you may begin your conference.

Sally Curley

Thank you, and welcome to Genzyme's second quarter 2006 earnings conference call. I would like to remind everyone that the earnings release and this call are available on the Investors page of our website at Genzyme.com.

We will discuss Genzyme's business outlook on the call. Forward-looking statements about our projected future financial results and all other statements made on this call that are not historical facts are subject to a number of risks and uncertainties. Our actual results may differ materially. Please refer to our Form 10-Q for the quarter ended March 31, 2006 on file with the SEC for more information on these risks.

Forward-looking statements include our expectations regarding 2006 earnings, EPS, revenues and product sales, expected drivers of future growth, timing of regulatory filings and actions of clinical trial data and financial trends.

If during the call we use any non-GAAP financial measures as defined by SEC and Reg G, you will find on our website at Genzyme.com a reconciliation to the most directly comparable GAAP financial measure. I would also like to remind everyone that our third quarter earnings conference call will take place on October 12 at 11 a.m. Eastern Time, and the dial-in information is available on our website.

Thank you, and I would now like to turn the call over to Genzyme's Chairman and CEO, Mr. Henri Termeer.

Henri Termeer

Thank you, Sally and thank you everybody for participating this morning. In our usual format I will make a few comments, and then Mike Wyzga, our Chief Financial Officer, will go through more of the detail of the financial performance for the quarter. Then we go into Q&A. I have presidents around me here, all the Presidents of the different business units.

The second quarter was a very robust quarter for us. It is extremely pleasing. It ended up somewhat ahead of our expectations. It really continued pretty much what we have been seeing over the last few years in terms of growth of the broad range of diversified products that we have currently have in the market.

Revenues were up 19% from the second quarter last year. They were up 8.5% from the first quarter of this year. When you look at the analyst schedule that you have been sent with the press release, you can see that all the major products reached new highs, which is something we are striving for.

I was very pleased that three product areas that we talked about that were somewhat below expectation in the first quarter really recovered beautifully. Synvisc was up 19% from the first quarter, clearly indicating that we do have seasonality with that product line.

Fabrazyme was up $9 million or 11% from the first quarter, clearly back on track. We will probably have some questions around Fabrazyme. It continues to be a very, very exciting growth driver for us.

Hectorol was up 18.5% from the first quarter and we now expect Hectorol after the start up difficulties we had with the product with some of the accounting charges during last year, and lining up the inventories in the field correctly, we expect Hectorol to start to become increasingly a more important contributor to the renal product line.

I was very, very pleased personally -- and I'm sure you were too -- with the growth of Renagel. Renagel was up 26% from last year. The results were really driven by global volume, somewhat price, but mostly global volume in the United States and international markets. The product shows real vigor, real strength. We probably see some effect of the enlarged sales force that we implemented in the third quarter of last year, but mostly we are seeing the effect of the good clinical results that was shown in DCOR and other trials that came out over the last six months.

We would expect that to continue as we go forward. There is a lot more to be shown on the trials that we have done. We expect economic results to be shown out of the DCOR trial at ASN later this year, which will make more clear the power of this product; the clinical benefit that can be gained with a very reasonable economic investment.

The top line growth was strong and that drove the bottom line: $0.68 non-GAAP per share, up from $0.59 non-GAAP per share in the first quarter. From a financial point of view, we are on track to deliver the guidance for the year. Revenues we expect, as you know, between $3.1 billion and $3.3 billion, and non-GAAP EPS we expect between $2.65 and $2.75 per share.

It is a very diversified picture that we have often talked about over the last quarters and the last years. Increasingly, we see that although Cerezyme continues to be a strong product, growing about 7%, clearly the other pipelines are growing faster. Cerezyme now in this quarter was only 13% of total revenues.

During the quarter we got a very important event in terms of the creation of a future growth driver through the approval of Myozyme, both in Europe and in the United States for all patients with Pompe disease, both infantile and late onset. This is a very exciting development. We started to sell during the quarter, as we stated, a very modest first quarter revenues that were accomplished primarily in the last month of this quarter. We expect it to grow during this year and become material next year. We did $6.5 million in the quarter.

Tolevamer is making very good progress. Tolevamer is a disruptive technology for the treatment of C. difficile colitis, an increasingly larger problem in the hospital environment. The enrollment has gone very well. We are on track to show results in the first half of next year.

Campath MS is our other disruptive technology that we are working on that you all know about. We would expect two-year results in the second half of this year of the currently ongoing Phase II trial. We would expect that during the remainder of this year, we will give you further details on the start of the Phase III trial, which we still expect to start this year.

Synvisc has a number of trials ongoing, Synvisc 2 Hylastan that are directed to make the product much more efficient in terms of efficacy and in terms of patient burden. We're trying to move to lesser injections. Currently we are at three injections, and we hope that the clinical trials currently ongoing will show that we can go to two or maybe one injection. That of course will be very exciting in that marketplace. It would make the product much more user-friendly in a much broader sense for many more patients.

Sevelamer carbonate for CKD, chronic kidney disease, predialysis patients. Those trials are ongoing. We will see results from that work during this year and next year. We would fully expect that that product line will become available also. All of these are very late stage trials, including also the Campath and Clolar trials that go on to larger patient populations for early stage treatment of certain cancers.

During the quarter two we worked very hard starting up the manufacturing operations in Ireland and in Belgium. That has had some cost impact, as we mentioned before. But eventually as our manufacturing records shows, it will give us tremendous leverage on the margin. So there is robust momentum both in the product portfolio in terms of sales, but also robust momentum in terms of late stage products that will drive future growth.

Obviously revenues will be visible on an ongoing basis quarterly, but also in the next six months the number of these late stage trials will start to become more visible, so that it becomes clear where the growth will come from in the medium term going forward.

Let me now hand over to Mike Wyzga, and then after that we go to Q&A.

Michael Wyzga

Thank you very much, Henri. Good morning, everyone. Let me try to add a little bit of color to some of Henri's comments on our financial results. As Henri mentioned, our revenue increased significantly this quarter to $793 million. That is a very nice increase of about 19% on a quarter-over-quarter basis over last year. Our diluted GAAP EPS per share earnings were $0.49.

As you can see from our GAAP to non-GAAP crosswalk, there are three major items impacting this quarter: First, our annual stock option grant was done in May, so there was a charge for expensing this new option pool in conjunction with the previously issued option pools. The total net income impact of the option grant this quarter was $55 million, and that equates to about $0.20 per diluted share.

Second, was a gain associated with our investment in the equity securities. The majority of this gain was in connection with AstraZeneca's offer to acquire Cambridge Antibody Technology. That includes the shares that are owned by Genzyme Corporation. Our shares were unconditionally tendered as of June 21, and therefore we booked a gain this quarter. The net after-tax impact of this gain was about $42 million, or about $0.15 per diluted share.

Third, amortization for the quarter was about $33 million on an after-tax basis.

Our non-GAAP earnings exclude the impact of the convertible debt on our diluted EPS, as the stock price did not exceed the conversion strike price. The EPS impact of this is about $0.01.

The net income for the quarter, prior to these events and amortization, was $181 million or $0.68 per diluted share. Our non-GAAP earnings this quarter should be compared against the Q2 2005 net income of $149 million or $0.57 per diluted share.

Now, it is important as you review our financial results, there are two important trends that I would like you to keep in mind. The first is the strong growth with regard to earnings. Our revenue growth is very solid across all business lines, increasing both on a year-to-year basis as well as on a quarter to quarter basis.

While our R&D expenses increased at a similar rate as our revenue, our SG&A expenses were heavily leveraged. Our non-GAAP SG&A decreased from about 29.4% of revenue last year at this time to about 27.8% of revenue this year. These two factors increased our non-GAAP net income by 22% and our earnings per share by 19% over Q2 of last year.

The second key trend to keep in mind is the strength of our cash position. We continue to generate operational cash, and this augments our already strong cash position. In the first half of this year we generated $542 million of cash, predominately from operations. We ended the quarter with approximately $1.4 billion in cash. This increased cash position allows us to have a high degree of freedom as we invest in the Company going forward.

So let me spend a few minutes talking about our revenue. Cerezyme increased by 8%, driven by patient accruals, particularly in the international area.

Fabrazyme came in at $89 million, representing a 20% increase year-to-year. Now recall in Q1 of this year that increase was only about 15%. Again, the increased patient accruals drove this business in Fabrazyme revenue.

Renagel increased by 26% year-to-year due to the increased volume, as well as Henri mentioned, the price adjustments . Hectorol revenue was up to $22 million, and that is up from both Q1 and Q4. That was driven by volume increase.

Synvisc revenue was approximately $64 million, and that represents an 8% increase over last year. More importantly, we talked about the seasonality and seasonality trends. Revenue increased from Q1 of this year by about 19%. Again, the primary driver there was seasonal trends.

What is also interesting in this area, we are seeing a nice leverage with our extended sales force and our increased marketing efforts. We're really getting some leverage in this area.

Transplant revenue increased to $41 million, representing about an 18% increase year-to-year. Thyrogen revenue posted about a 15% increase year-to-year. Oncology revenue was approximately $14 million. Finally, our diagnostics product and services area increased by 14% to about $87 million this quarter.

On a year-to-year basis the impact of changes in foreign exchange was relatively minor, very diminimus, impacting our top line negatively by less than $1 million.

Our gross margin came in at 77% of revenue. The gross margin was somewhat impacted by the near-term fluctuation of our foreign exchange rate. Now this on the inventory that is held outside of the United States. Our gross margin trend is expected to continue to be strong as we increase the capacity utilization in the manufacturing facility that we're now putting online. This should take place throughout the upcoming quarter.

On our operating expense, our Q2 non-GAAP R&D expenses were about $139 million or 17% of revenue. The major drivers in the R&D area again remain Myozyme late onset trial, Tolevamer Phase III trial, and Sevelamer Carbonate for CKD patients.

In the non-GAAP SG&A area our SG&A expenses were $220 million, or 28% of revenue. As I mentioned earlier, we are seeing some nice leverage points, particularly with the investments that we're making in sales and marketing in Synvisc, Renagel, Transplant, and in the LD area. We also continue to highly leverage our corporate G&A structure.

Aldurazyme revenue came in at $24 million for the quarter, and that is up 23% year-to-year, so that is a nice growth. You can really see the impact of this increase in our equity income line. The bottom line impact on our joint venture with BioMarin has increased nicely to about $5 million. And that is mostly as a result of continued revenue strength and growth.

Our tax rate before amortization of one-time events was 31%. We see this as a relatively stable tax rate throughout the rest of the year. Two offsetting entries: we're beginning to see some favorable impact of our facility in Ireland as we scale that up. This benefit is somewhat offset by the lower impact of the orphan drug credit on a much larger profit before tax base.

Our non-GAAP share count remained at 267 million shares on a diluted basis prior to the impact of continued convertible dilution.

Our capital expenditures in the second quarter were $92 million. These investments were focused mostly here in the United States. Our ending cash, as I mentioned, was $1.4 billion with a free cash flow in this quarter of $208 million. That is a record for us, the highest our free cash flow has ever been.

Just as a note, the proceeds associated with the tender of our equity in Cambridge Antibody Technology, we captured these as a receivable in the second quarter, as the funds that we got for this sale were received after the quarter closed. The amount we received was approximately $100 million. You will see this showing up as increased cash in the third quarter.

Now before turning you back to Henri, I would like to remind you that you can find all the line item detail and reconciliations attached to our press release or on our website. With that, let me stop, turn it back to Henri, and open it up to Q&A.

Henri Termeer

Thank you very much, Michael. Operator, we can open up for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Craig Parker - Lehman Brothers.

Craig Parker - Lehman Brothers

Hi, good morning. A question about strategy. It seems that the one division where you aren't really seeing the kind operating leverage that you're seeing in the other divisions is in oncology. Could you elaborate a bit on the mid-term and long-term strategy for the oncology division?

Henri Termeer

That is a long question for this kind of a setting, but we will give a go at it. Mark Enyedy, the President of Genzyme Oncology, will make some comments.

Mark Enyedy

We are pursuing a three-tiered strategy for oncology that involves continued investment in our internal R&D. The Company continues to make considerable investment there, particularly involving line extensions for the two marketed products, Campath and Clolar. As well as moving ahead our earlier stage portfolio, which is less visible to you, but we're making considerable progress there; hoping to initiate our first patient with TGF-Beta, for example, in solid tumors to complement the hematology focus of the later-stage products.

We also look at additional products on a single product acquisition basis to complement the existing portfolio.

An ongoing effort is the third tier to look at potential acquisitions to change the scale and scope of our operations and participate in those opportunities as they arise.

I think we're making good progress across each of those tiers and I think that is reflected in at least the revenue performance this quarter, which was up a little over 40% from Q2 of last year.

Operator

Our next question comes from Yaron Werber - Citigroup.

Yaron Werber - Citigroup

Good morning. Congratulations on a nice quarter. Mike, you're particularly emphasizing your cash position as a potential way to "invest in the business". Could you maybe elaborate on that a little bit? Are you referring to an acquisition strategy, or is it any other sort of investments on your planning?

Henri Termeer

Let me have a go at that, Yaron. We have done transactions over the last 25 years, I guess. We have always done transactions as part of our business strategy. Usually we have done transactions that were bite size. In many -- particular recent transactions -- we have used cash as a component, like Bone Care last year was a $600 million cash transaction. Similarly, Impasse was a cash transaction.

The cash position of the Company, which gives us some flexibility with regard to those considerations we hope to or will continue to augment our business with strategic transactions as we have done in the past. We are very concerned that transactions are accretive, and therefore, a significant cash component of total cash is clearly beneficial.

We have also made significant investment in our infrastructure, as Mike mentioned. We spent $90 million last quarter in capital expenditures associated with new research laboratories here in Framingham and the further expansion of the European manufacturing operations, also in Austin.

That will continue. As new products start to become interesting and reach late stage trials, or products that currently haven't been produced inside yet or are expanded, our tendency is to build the manufacturing operations internally. We have seen tremendous leverage of doing so, and we will continue to do so in the future.

Thymoglobulin is, to my point, that gives a good example here. Thymoglobulin is doing extremely well, as you may have noticed from the results. We will make probably some increasing manufacturing investments around that product to have it continue to show the kind of margins that it can show and to expand its revenue.

Those are the kind of things that Mike had in mind when he mentions that this cash position gives us the flexibility to do the right things in terms of building infrastructure of the Corporation and to look at transactions in a non-dilutive manner. Next question.

Operator

Our next question comes from Adam Walsh with Jefferies.

Adam Walsh - Jefferies

Good morning, guys. Thanks for taking my question. My question is on Fabrazyme. I wonder if you can give us an idea what new patient starts look like in the second quarter?

Really what I'm trying to get at is should we expect lumpy revenues going forward like we saw in the past two quarters, based upon variability in new patient starts, or would you expect new patient starts to be smooth going forward? Thank you.

Henri Termeer

Given the rarity of these product lines, and if you look at the history of Cerezyme you will find that things do happen not precisely regularly on a quarterly basis. So it is likely it will be that one quarter will outstrip another quarter depending on the timing or start of new patients.

But to give more specifics to this question, David Meeker, the President of the business unit will make some more comments.

David Meeker

The first point that Henri made is exactly right, that it is a rare population, so it is virtually impossible that you're going to have a totally smooth quarter to quarter transition.

The second fact to keep in mind on the Fabry population, unlike the Cerezyme, overall the patients accruals I think have been quite robust and relatively consistent quarter to quarter. Clearly there is that unevenness.

But the other factor which weighs heavily on any quarter is the number of patients who come off. Unlike Gaucher disease, we do see more patients who go on hold, take a break from therapy. Compliance issues are definitely more difficult in the area of Fabry disease than Gaucher. It is just a different disease and the improvements that the patients are seeing, which aren't necessarily seen within a few weeks or a few months of going on treatment, which is the case of Gaucher.

We're really looking at preventing the longer-term renal failure and stroke complications that may be a decade or more away, so the incentive for those patients is down. It is just more difficult.

Operator

Our next question comes from Mark Schoenebaum with Bear Stearns.

Mark Schoenebaum - Bear Stearns

Hi, thanks for taking my question. My line of questioning is around Tolevamer. Can you help us please understand the market opportunity? I know you're not going to go into to dollars, but perhaps you can talk to us about potential numbers of eligible patients.

Is this a drug that would be eligible for a six-month review, do you believe, at FDA versus a standard review? Can you help, at least qualitatively, describe the need for incremental G&A expense to launch this product next year? Thanks a lot.

Henri Termeer

There is a whole business plan around Tolevamer. We may not quite be able to get to all of those answers precisely, but to give some feel for where the direction the program is, John, can you make some comments.

John Butler

Sure, Henri. It is not quite as easy to get to a patient number for C. difficile associated diarrhea as it is looking at U.S. RDS and seeing how many dialysis patients there are, but there are a couple of different ways that we can triangulate to it.

There is data to suggest that about 1% of hospitalizations result in a C. diff infection. If you look at the U.S. and top five European countries, this would get you to a number of around 1 million cases per year. If you look at 25% of all antibiotic associated diarrhea being C. diff, this gets you to a slightly higher number, up to 1.75 million cases, again U.S., top five EU.

This gives you a sense of the eligible patients. We're certainly pursuing a primary therapy strategy so that this product would be appropriate for any of those patients.

This is a hospital-based product. Genzyme has a presence in hospitals across different business units. We expect to be able to leverage that. At the same time, this will be a product that needs some focus. While we're still crunching the numbers, there will be incremental SG&A investment needed both for the European launch, as well as the U.S. launch.

Based on the timing of the studies, you had asked about review time. U.S. has designated this as fast-track, so it will get a six-month review. We're looking at filing late next year. You can work the timing around that. Europe, we are planning for more traditional 12-month reviews. Those investments will really come more in the 2008 timeframe than in 2007.

Operator

Our next question comes from Meg Malloy with Goldman Sachs.

Meg Malloy - Goldman Sachs

Thanks very much. Just a quick question for Mike, and I was hoping you could also talk a little bit about the Myozyme launch, given that it is very early days; we will keep that in perspective.

Mike, what kind of guidance should we expect given the higher ESO expense in Q2 for the year? Thanks.

Michael Wyzga

The way to think about it is, I think our guidance that we gave initially is pretty close. If you break out the non-2006 portion of the $82 million pre-tax, about $35 million. That is pretty close I think on a quarterly basis to what we gave initially as our guidance going forward. It was about $45 million that was associated with the 2006 grant. If you add those two numbers together you should get pretty close to $82 million.

Meg Malloy - Goldman Sachs

Should we think about the Q2 charge as kind of a one-time item?

Michael Wyzga

Absolutely. Because remember --

Meg Malloy - Goldman Sachs

The rest is the same?

Michael Wyzga

That is correct. Because you do have the eligible stuff going forward for the first year associated with the 2006 grant.

Henri Termeer

Next question.

Meg Malloy - Goldman Sachs

Thank you.

Michael Wyzga

The next question is Myozyme.

Henri Termeer

Myozyme, David.

David Meeker

Obviously I think with Myozyme I appreciate your comments that this is extremely early, and we view it the same way. That said, we are quite pleased with how this is starting. We have reimbursement obviously both in the U.S. and in the majority of the European countries.

At the U.S. level we are getting, in my mind, a remarkably low level of push back, which is not to say that we're not getting push back. We're getting some, and we have seen some denials which we worked through on appeal, and that is a process that we have seen with all of our other products as well.

Many of the plans are coming up and just listing this as a product that needs prior authorization, which again would be something that is fully consistent with the other products.

At the Medicaid level again, state by state. There is a willingness as we have worked through each of these cases to reimburse. U.S. reimbursement overall I would say is positive and the challenges are not unexpected.

At the European level, again the majority of the markets are reimbursing, either through a formal reimbursement process or through the ongoing named patient basis. Countries like France, where we get early reimbursement through named patient, and then the formal reimbursement comes on actually somewhat later as compared to many of the other countries.

The general experience in terms of infantile versus late onset, I would break down into the pediatric -- which would include the infantile versus the late onset. At the current time about two-thirds of the patients are in the pediatric group, defined as less than 16, and one-third are in the late onset. I think that reflects the relatively higher number of patients who were treated who are in that age group and being treated under extended access programs. So if they were transferred over to commercial that is weighted to early experience towards the younger group.

My general sense, without hard numbers so much, is that as we go further out there will be, of course, an increasing number of late onset patients that will be coming in.

Operator

Our next question comes from Shiv Kapoor with Montgomery & Co.

Shiv Kapoor - Montgomery & Co.

Thanks for taking my question. I wanted to get some more granularity on how the Myozyme launch is going. Do you have an idea of what kind of mix you are seeing between late onset patients and pediatric patients?

Second, what is the mix between patients who were transferring from clinical trials and naive patients?

David Meeker

The late onset, as I just said, that mix is about two-thirds of pediatric. I am lumping together there the juvenile patients and the infantile, less than one-year-old patients. Then one-third in the late onset group.

Now with regard to the transition from clinical trials, the patients who are eligible to transition from clinical trials are the patients who were in the 1602 and 1702, and those were approximately 18 and 20 patients each. Right off the top, I don't have that exact number, but a significant number of those patients have transitioned to commercial.

Shiv Kapoor - Montgomery & Co.

Are you now getting naive patients to take Myozyme?

David Meeker

Yes.

Henri Termeer

Newly identified patients that have not been in clinical trials. That is what you meant? Absolutely.

Shiv Kapoor - Montgomery & Co.

Yes. Great, thanks.

Operator

Our next question comes from Phil Nadeau with Cowen.

Phil Nadeau - Cowen

Good morning. Congratulations a good quarter. Two questions for Mike. Mike, in your prepared remarks you discussed the gross margins and said that they were down this quarter because of FX, and then would strengthen in future quarters. Could you quantify those two things? How much were they down this quarter because of FX, and how much strengthening can we expect in future quarters?

Second on SG&A, you also pointed out the leverage was decreasing as a percentage of sales. How low could that go as a percentage of sales in future years?

Michael Wyzga

Let me talk about the gross margin first. Gross margin was actually impacted by two major factors. The first is associated with the start-up costs associated with the still unfinished facilities, particularly in Ireland. As we get greater capacity and capacity utilization you will see that that lowering of the impact there.

The second is the one that you talked about and I talked about as well, the strong euro this quarter. As you know, we place inventory overseas. We place it there and we value it at the spot value. When we use that inventory we pull it off the shelf at the new spot value.

In this case we had Q2 replaced inventory overseas in Europe at 1.18 euro rate a few months ago. Now the euro rate is somewhere around 1.26, 1.27, and that is what we're pulling off the shelf. That quantifies to about $5.5 million to $6 million of impact in the second quarter. As that stabilizes, obviously you won't have that impact going forward.

Further, as you have higher utilization of the capacity, again in both Ireland as well as in England, you will see that stabilize and you won't see that factor impacting it as well. Those are the trends that we see going forward.

On the SG&A leverage, what I was referring to is if you go all the way back to Q2 of last year, our percentage SG&A and non-GAAP percentage as a percentage of revenue was 29.4%. That has somewhat steadily declined throughout the quarters. The mid quarter of last year was about 28.5%, and this quarter it is 27.8%. So it continues to get high amounts of leverage.

Going forward, we have already given guidance and we will stick with that guidance on a go-forward basis for this year. But we again, we look to any leverage points, particularly in the SG&A side, and particularly on the G&A portion of that SG&A number.

Phil Nadeau - Cowen

Thank you.

Operator

Our next question comes from Bill Tanner with Leerink Swann.

Bill Tanner - Leerink Swann

Thanks for taking my question. I had a question either for you, Henri, or perhaps for Mike on the guidance. Sort of unchanged from the first quarter, and obviously recognizing a pretty sizable gain from the Cambridge Antibody stock. So just curious on that. Certainly that wouldn't have been something that would have been anticipated.

Henri Termeer

You mean the GAAP guidance?

Bill Tanner - Leerink Swann

Right.

Henri Termeer

Because we took it out of non-GAAP. Mike, there were two offsetting items here. Let me ask Mike to answer the question, because he told me precisely what it was too.

Michael Wyzga

Henri asked the exact question just before we came in here. There are two separate, almost offsetting entries. The first was the impact of the Cambridge Antibody Technology. That impact was about, as I recall, $0.15 to our overall GAAP to non-GAAP earnings, which we set aside.

The second was the impact of the roll forward of the stock options. That came back to, if you look at the non-2006, the one-timers that Meg Malloy was talking about with regard to the 2006 forward vesting in the first year, that came out to around $0.13 to $0.14. So they almost offset each other. There would be no change to the non-GAAP numbers as well, if you set aside the non-GAAP and the GAAP numbers, if you set aside those two numbers.

Bill Tanner - Leerink Swann

That's helpful. Then maybe just another question, I guess for John. On Renagel -- and I don't know if there has been comment as to the actual publication of DCOR data, where and when. What are we thinking then in terms of Part D? I know Henri commented that the drug looks like it is doing pretty well, and if you wanted to break out what is U.S. and ex-U.S. that would be helpful too. But is there really any traction that you're seeing now from the Part D implementation?

John Butler

I think that there definitely is. We clearly are getting good results on the product across the globe. 51% of sales in the quarter were U.S., which is about the same as last quarter, slightly more.

We have had very strong growth in the U.S. And I do attribute that to a couple of things. To Part D clearly. There is greater access to patients through the Part D program. But as was pointed out also, in September of last year we increased our sales organization from 80 reps to 120 reps. This is a very call-sensitive product as well, so it is hard to differentiate what is driving it, but those things clearly are.

Also globally it is the clinical data. If you look, DCOR still isn't published. It is still going through the process. We still have an expectation that that will be out before the end of the year. But the clinical story here isn't just about DCOR, though obviously we would like to see the paper published, the delay has allowed our sales force to spend more time on the RIND study.

Jeff Block's study, that really confirms the treat to goal data. That shows an increase in calcification in these patients. These are patients who are new to dialysis, which really allows us to tell the story of starting patients early in treatment versus waiting until they get into some trouble. I think the sales organization really has focused on that, telling that story this year.

Additionally, we have done a lot of medical education to increase people's knowledge of DCOR and communicate that, plus the RIND outcomes data which confirmed DCOR as well. That is all being done through medical education since the papers are not published yet.

I think when you look at all those pieces coming together, that is why you do see strong growth for Renagel not just in the U.S. where we are getting the Part D benefit, but internationally as well.

Bill Tanner - Leerink Swann

Do you just see this grinding out, as it were, or do you see a point in time where with the publication, maybe with more broad implementation of Part D, that you're going to see a change in the trajectory, or are you just looking at a fairly slow and steady growth?

Henri Termeer

26% year-on-year is not fairly slow, it is pretty good. It is certainly more than the patient population is growing. The addition of the CKD market over time also will provide additional growth and may change trajectory somewhat.

We firmly believe that this is the right treatment for these patients. We will continue to work very hard to help the medical community understand what benefits can be gained by patients being put on treatment, to the extent we don't treat all patients. We will continue to work on that. About 50% of the U.S. physicians are there, market patients are there. There is another 50% that are not, and we will continue to work on that in a very consistent and good way. It will help, I think, when we show the economic benefit of this product as well at ASN, which will come out of the CMS analyses of particular results.

It is just absolutely a fabulous product in terms of safety and efficacy for the purpose, because it is delivered to patients. We have a long ways to go to saturate this market and we haven't started the CKD yet.

Operator

Our next question comes from Robert W. Baird & Co.

Analyst – Robert W. Baird & Co.

Two questions. First Hectorol, you mentioned in your written comments that the ex-U.S. commercialization program is underway. Can you maybe give a little bit more detail on that? I guess specifically two parts to that question. Will you be leading with the oral in these countries, especially in Europe? And then also how extensive is the European program as you see it today in terms of the clinical program to gain market acceptance?

Henri Termeer

John.

John Butler

Sure. As was mentioned, we had our first international filing in Argentina in the last quarter and we plan others this year. We do need to do clinical trials in Europe. Where we're really going with that is to look at developed studies that will allow us to augment our clinical data package for Europe, and at the same time deliver data that will help us drive the U.S. market.

They're not simply simple registration studies, but they are clearly data that will help us grow. Really, growing the U.S. market is what we need to focus on over the next number of years as these international filings come online. But we do have this organization and we are excited about the opportunity internationally.

The oral formulation is, at least as far as vitamin D therapy today, oral is by far the dominant therapy, and we have a great oral product. We are clearly moving forward with that. But we're certainly not closing the door on the IV, because there are certain patients who will benefit from that as well.

Analyst – Robert W. Baird & Co.

That's helpful. Quickly, on also GENZ-112638, the Phase I data with 120 patients, any chance of publication on that this year?

Henri Termeer

This was primarily a set of safety trials. There were different trials. 120 patients have been exposed to the product, but the efficacy trial is really just now starting. We would expect the first patient to be this month.

Operator

Our next question comes from Craig Parker with Lehman Brothers.

Craig Parker - Lehman Brothers

Thanks for allowing the call. Mike, could you tell us what the foreign currency translation contribution to Fabrazyme, Cerezyme and Renagel was?

Michael Wyzga

It was under $1 million for the full top line, simply because as you recall, last year I think the FX rate, particularly for the euro, was 1.26. In this quarter it ended at about 1.25, as I recall. It was relatively diminimus. In the aggregate it was less than $1 million -- it was actually a negative.

Craig Parker - Lehman Brothers

Do you have that quarter over quarter?

Michael Wyzga

Quarter over quarter I do not have. From Q1 to 2Q, no, I don't have that. I can get that.

Craig Parker - Lehman Brothers

Thanks. We will call back.

Operator

Our next question comes from Mark Schoenebaum with Bear Stearns.

Mark Schoenebaum - Bear Stearns

Thanks. A quick question on Campath for MS. If you guys in the full two-year data set can show statistically significant benefit on disability progression versus Rebif, is there any chance at all you might explore an accelerated filing? That.

Henri Termeer

I can tell you that we will explore to make that efficacy available to patients in any which way that is appropriate and that is understandable and acceptable to regulators.

At this moment we are issuing that we will do a full Phase III. That includes all the activities that we want to include particularly a risk management program so that we really can create confidence in the product. Of course we are really designing the program and the product direction to make it available to as many patients as possible. For that we have to make sure that the risk management program is very, very well designed and very practical.

Yes, we will try and we will listen to regulators in this regard. We will make our own judgment but we will also do the work necessary to make sure that we have a very robust offering to the patient population.

Operator

Our next question comes from Geoff Meacham with JP Morgan.

Geoff Meacham - JP Morgan

A question for you on Synvisc. Your U.S. market share has been a little bit flattish, and I guess that is why you have a campaign here. Can you talk about your priorities in the 2006 campaign, just with respect to growing the U.S. market, and then perhaps increasing EU share?

Henri Termeer

Yes. Ann Merrifield, who is on the call from Budapest, she is the President of Biosurgery. Could you make some comments?

Ann Merrifield

Surely. The focus of our campaign this year in the U.S. is all about getting back to the basics of critical differentiation. We have been benefited by the Coppen met analysis, which I have spoken about before, which showed both the class and Synvisc to be very efficacious.

And most recently, by a study in the UK presented at UR last month, a head-to-head study of our product versus Hyalgan, which again the data was dramatically in our favor. So clinical differentiation is literally the thrust of our focus.

In the U.S. market we have also expanded our sales investment and our consumer advertising investment to obviously drive the patients to the docs and make that all come to fruition in terms of revenue.

In the EU, similarly we are focusing on the same message. It is a more cluttered market competitively and so it is going to take more time to differentiate, but again the data is there. Our pipeline, as Henri mentioned in the earlier comments, moving to fewer injections I think will be huge step forward in the more cluttered European market, in terms of making the competitive superiority of Synvisc more clear.

Geoff Meacham - JP Morgan

Why do you think that the U.S. market has been so flat over the past few years? I am just trying to get a better sense for specifically that aspect of your marketing campaign.

Ann Merrifield

The U.S. market is growing, we believe low double digits. Synvisc share had been declining over time. We have stabilized that as best we can tell, and I could talk to off-line. It is hard to get a very precise share definition, but every way we look at it suggests we're stabilizing. Obviously the objective for '06 is to turn that around and start regaining share.

Geoff Meacham - JP Morgan

Thanks.

Operator

Our next question comes from Atif Rahim with JP Morgan.

Atif Rahim - JP Morgan

My question has been answered. Thank you.

Operator

Our next question comes from Meg Malloy with Goldman Sachs.

Meg Malloy - Goldman Sachs

Just a quick follow-up on the timing of the CKD data. Please could you remind us when we should see that data and what the filing expectations are?

John Butler

Yes, the filing expectations for Sevelamer Carbonate is early next year. I have to be reminded, the CKD the first bioequivalent data we will have, they are analyzing that data now. We should have it towards the end of this year.

Meg Malloy - Goldman Sachs

Thank you.

Operator

There are no further questions at this time.

Henri Termeer

Thank you very much everybody for participating. We are very much looking forward to talking to all of you again next quarter and during the quarter about the difference results of the clinical work that is currently ongoing.

We feel extremely good about the business of the Company at this time, the momentum we have in the marketplace in a very, very large number of markets throughout the world, and the growth rate of all the individual products, which was shown so beautifully during this quarter results. We look forward to talking to you next quarter and during the quarter when new clinical results become available. Thank you all very much.

Operator

This concludes today's conference call. You may now disconnect.

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Source: Genzyme Corporation Q2 2006 Earnings Conference Call Transcript (GENZ)
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