Genzyme Corporation Q2 2009 Earnings Call Transcript

Jul.22.09 | About: Sanofi (SNY)

Genzyme Corporation (GENZ) Q2 2009 Earnings Call July 22, 2009 11:00 AM ET

Executives

Henri Termeer - Chairman & Chief Executive Officer

Mike Wyzga – Chief Financial Officer

Geoff McDonough – General Manager of LSD Therapeutics

David Meeker – Executive Vice President, Therapeutics

Patrick Flanagan – Senior Director of Investor Relations

Alison Lawton – Senior Vice President, Global Product Access, Quality Systems & Regulatory Affairs

Analysts

Michael Yee – RBC Capital Markets

Brian Abrahams – Oppenheimer and Company

Jim Birchenough – Barclays Capital

Geoffrey Meacham – J.P. Morgan

Yaron Werber - Citi

Salveen Kochnover - Collins Stewart

Davis [Wu] – Goldman Sachs

Ian Somaiya – Thomas Weisel Partners

Geoffrey Porges – Sanford Bernstein

Chris Raymond – Robert Baird & Co

Phil Nadeau - Cowen & Co.

Eun Yang – Jefferies

Bill Tanner – Lazard

Mark Schoenebaum – Deutsche Bank

Sapna Srivastava – Morgan Stanley

Maged Shenouda – UBS

Aaron Reames – Wells Fargo Securities

Shiv Kapoor – Morgan Joseph

Josh Schimmer – Leerink Swann

Jon Stephenson - Summer Street Research

Operator

Welcome to the Genzyme Corporation’s second quarter financial results conference call. (Operator Instructions). I would now like to turn the call over to Mr. Patrick Flanagan, Senior Director of Investor Relations.

Patrick Flanagan

Welcome everyone to Genzyme Corporation’s second quarter earnings conference call. On this call, we will be making forward-looking statements, including our estimate of the financial impact of the temporary shutdown of our Allston facility, our estimated timelines of resuming production at the facility, and for supply of Cerezyme and Fabrazyme, our ability to finish and release Cerezyme work in progress, our product development and regulatory plans and timetables, including for Lumizyme in the US, and expected drivers of revenue growth going forward.

These forward-looking statements are subject to a number of risks and uncertainties and our actual results may differ materially. Please refer to the Risk Factors section of our March 31st 10-Q for more information on those risks. If during this call we use any non-GAAP financial measures, you will find on our website reconciliations to the most directly comparable GAAP financial measure.

I would now like to turn the call over to Genzyme’s Chairman and CEO, Henri Termeer.

Henri Termeer

I have with me as usual a group that can respond to Q&A. Comments will be before Q&A by Mike Wyzga, our Chief Financial Officer. David Meeker will specifically comment on the Allston manufacturing status, and Geoff McDonough will comment on the business impact for Cerezyme, Fabrazyme, and Myozyme off the interruption that we’re experiencing in Allston.

The second quarter was a strong quarter, and outside of the manufacturing interruptions that we’ve experienced, business was very strong despite the very touch economy and despite a very difficult comparison. Last year in the second quarter, the FX translation was the most beneficial that we’ve ever experienced in the past, and of course that comparison was not helpful in this quarter. Despite that, we had a record quarter with $1.2 billion in revenues—nicely up from the first quarter, driven by businesses that are already in their market introduction and in their business development.

Myozyme re-acceleration in Europe was extremely pleasing to see. Synvisc-One launch in the US was excellent. Actually it surpassed our expectations. Quite surprisingly four months after the launch in the US, 50% of revenues are from Synvisc-One, and total Synvisc franchise increased about 16% from last year, and this is a very interesting market place that we’ve already talked about, and the first few months of experience is very encouraging.

Mozobil continues to be strong, and we’re reconfirming the range that we have for the year. The oncology franchise is much expanded now. We had one month of benefit of the Bayer transaction, and of course it’s comparison year to year is up 100%, and therefore we can have expectations of significant future growth as a result of Clolar in AML and the profits that have come to us.

Thymoglobulin had an excellent quarter. It was up 19% from last year, and again the Genetic Diagnostic Division had a very strong quarter, up 19% from last year, and now at $93 million for the quarter.

Fabrazyme had a good quarter as well, compared to the last quarter despite the translation in terms of currency. Fabrazyme is, of course, impacted by the Allston situation, but we’re very optimistic indeed on how its future will look and develop. The focus of course and the focus of this call is much directed to the Allston manufacturing interruption, and that’s impacting us in the short term. It’s impacting us in terms of our revenues and earnings in the second half of this year, and it’s impacting primarily three products. It’s impacting Cerezyme, Fabrazyme, and Myozyme.

For Myozyme, very simply it means that we are no longer intending to produce Myozyme or Lumizyme for that matter in Allston. We have moved all of our programs to Belgium, and in the press release, you could see that we have changed our guidance in terms of US approval and the PDUFA date accordingly. The PDUFA date was actually always in November. We would expect the Lumizyme action by the FDA to take place by that timeframe, but then the approval of the 4000 L would be four months after that, which would be the end of first quarter next year. Things could go faster, but that’s where we are at the moment, and it’s probably best for the guidance to take these dates. Most importantly is the restarting up of Allston to start to produce products.

On that point, Dave will go into a lot of detail, but just very briefly, we completed the sanitization, and that was an incredible amount of work. The plant essentially was pulled apart and sanitized top to bottom, and it’s now being put back together, with the first reactor starting up next week—a tremendous achievement in m view, a tremendous amount of work that was done by the people who were involved in that work. So by next week the healing process in terms of putting product back into the pipeline will be starting, and the first product will be released from that production will be in November-December of this year.

As I said, we’ve dedicate this plant entirely all 6 bioreactors to Cerezyme and Fabrazyme. We will no longer be producing Myozyme there which will significantly simplify operations in Allston, and we have decided to increase the Belgian capacity by an additional 4000 L reactor which we’re prepared to do within there. We would expect it to be available for commercial production by mid 2011.

In addition, we’re accelerating the completion of the plant in Framingham, which will substantially increase our productive capacity for Cerezyme and Fabrazyme. This plant is mechanically complete by the end of the year. We are currently hiring staff. We will be having more than 100 people there on site during this quarter that we are now in, and we will be producing product there throughout next year, and we would expect that the approval of that plant will take place by mid 2011. That very significantly changes the whole capacity picture for the corporation in our future.

The guidance has a broad range, and that will be explained in more detail, but the guidance is determined by the work in process, on the one hand assuming that no work in process can be further finished which will be the low end of the guidance, on the other hand that a substantial amount of the work in process will be usable, and Dave will go through how these brackets have been reached. Fabrazyme by comparison to Cerezyme will have limited impact.

Throughout this year, we will have to manage our way through the impact of Cerezyme. On the other hand, it is very clear that we’re working our way through this. The most important thing in my view is that production is restarting. When we look through to next year, we can look at that having in mind that we will be in full production with a large amount of capacity available to Cerezyme and Fabrazyme to reinstall the pipeline and filling the channels necessary for safe support of the market place.

The other businesses beyond Cerezyme and Fabrazyme are very solid. So actually we look at our next year beyond the period of managing through this interruption in a very robust way. We think next year actually can be by comparison a very good year for the corporation across the board. I have to say our company doesn’t often go to these kinds of experiences, and this kind of a test is a very material one, and I’ve been very impressed by areas of the corporation, how they are reacting to this, the manufacturing side in particular, but also the science department where great work took place in terms of identifying the virus and getting to an assay and continuing to improve the assay to allow us to really manage the situation better and better going forward.

The marketing and the field is reacting very well, and there is tremendous cooperation that we’ve received throughout the world, also from regulators throughout the world working with us to make sure that we do the right thing, and we are striving forward in a good way so that we can bring product to patients in a secure way. Most gratifying has been in my view the reaction by patients and by physicians and patient organizations throughout the world. The cooperation I think is outstanding, and it bodes extremely well for us being able to manage through this situation in a very good way and for the situation that occurs once we come through it in terms of the support that we in the market place.

With these comments, let me hand over to Mike Wyzga to go through the financial details.

Mike Wyzga

I am going to try to break down some of the key areas financially impacting us in Q2 as well as the rest of 2009. First we have the impact of the Allston shutdown, and while there was some impact this quarter with regard to the facility expense and some loss of revenue and margin, the major impact is obviously in the second half of the year. The second focus area is the acquisition of the oncology production of Campatho from Bayer. There is a related adoption of a new accounting rule called FAS-141R. It’s new and a bit complex for all of us, so what we’ve done is we’ve placed on the website a primer going through the new standard, and this will be the subject of our focus for the next investor roundtable which is next Thursday. And then lastly, I’ll go through the quarterly earnings.

The overall business, as Henri mentioned, is very healthy, and Q2 really reflects the health of that business, so let me walk through the financial impact of the Allston plant interruption. The impact can really be placed into three categories. First is the cost associated with the sanitation of the facility as well as the idle capacity and overhead while the plant is being shutdown. Secondarily the cost associated with the impairment of the assets in the plant and the write-off of some of the material, and then finally there is a impact of the lost revenue and lost margin due to supply shortage.

Now as reflected in our guidance, Cerezyme revenue is now in the range of $750 to $1 billion, and as Henri mentioned, this reflects the range of work in process material that may or may not be used. Fabrazyme revised guidance is now $510 to $520, and Myozyme guidance is now $330 to $340 million. The impact of these changes will lower our gross margin estimates from 75% of revenue to a range of 72-73% of revenue. Now, that’s mostly due to the expected shift in the mix of products.

Our non-GAAP EPS is expected to be in the range of $2.35 to $2.90, and again this includes the revenue and gross margin impact associated with the product shortages as well as the impact of the facility expenses, idle capacity, and associated material write-off.

I’d like to go through the implications of the new accounting standard, FAS-141R, on the Bayer deal. This rule applies to all business combinations that were closed after January 1, 2009, and what is requires is all assets and liabilities including the contingent consideration which is part of this deal to be recorded at the fair market value of the market participants. As I mentioned, the bookkeeping is a bit complex on this. As the agreement with Bayer is determined to be a business combination, we have to determine the fair market value of the assets and a contingent consideration using what’s called a market participant approach. This market participant approach may result in differences between what you actually paid for the assets versus the calculated market participant of the fair market value.

We did this calculation in conjunction with an independent valuation expert, and this resulted in approximately $21 million of negative goodwill. That means that the consideration paid is less than the fair market value of the consideration that we received, so it actually turned out to be a better deal than we thought. The amount of this was recorded through our P&L as an actual gain. The deal requires that the business have an earn-out structure with no upfront payments. Now, under the new standard, we recorded the fair market value of these contingent payments as a liability in Q2, and we’ll measure these obligation based upon the likelihood of outcomes to our P&L on a quarterly basis.

As I mentioned, we posted on our website a Powerpoint presentation which will help you through some of the accounting and some of the details around this, and this will be the focus of our investor roundtable on Thursday of next week. With all that said, our ongoing business is very solid.

Topline revenue increased 4% over last year to $1.23 billion. The foreign exchange, as Henri mentioned, was fairly material. The topline impact of FX was $66 million, with the more mature and the more global product lines bearing the brunt of the impact. If we exclude the impact of foreign currency, the revenue would have increased by 11%. Within the genetic disease area, the FX impact was approximately $42 million. Year over year, this impact negated much of the volume increase associated with the new patient accruals. The impact of the Cerezyme supply constraint was about $13 million in the second quarter.

The total revenue associated to cardio, metabolic, renal area increased by 4% to $243 million. This is due to increases in both Renagel and Renvela as well as continued strong performance of Thyrogen. Thyrogen increased by 9% on a year over year basis.

The biosurgery area, as Henri mentioned, grew very nicely. It grew by 6% year over year basis, with a specific focus on the Synvisc revenue which grew by about 16%, and this reflected the nice demand that we saw in the launch of Synvisc-One. Revenue in the heme/onc and oncology area increased to $56 million from the $28 million last year. Two components of that—the first is the association with the deal that we just closed with Bayer which closed in June, and second was Mozobil which is a strong driver of growth following its launch at the end of last year.

Rounding out the topline, we saw our genetics business increase by 19%, and lastly the transplant business increased by 17% on a year over year basis. Our non-GAAP gross margin in the second quarter was about 73% of revenue. Our gross margin reflects the impact of the Allston costs that I mentioned before of about $14.2 million as well as the impact of the fair market step-up of the inventory associated with Bayer.

Our operating expenses again were closely managed. Our non-GAAP R&D expenses were about $191 million or 16% of revenue. Last year, as you recall, our R&D expenses included $175 million of costs associated with the payment from Isis for the licensing deal. If you set aside this fee from last year, R&D expenses were relatively flat on a year to year basis.

Our non-GAAP SG&A expenses were $315 million for the quarter, and that came in at about 26% of revenue, which is one full percentage point reduction from last year. So what you can see is that our SG&A expenses remain relatively flat as a dollar amount or down as a percentage even as we increased our topline.

Amortization increased relatively small due to the Bayer transaction, and our overall operating expense as a percentage of revenue decreased to 47% for the year. Our non-GAAP tax rate was 28%, and that reflects a greater utilization of the foreign manufacturing in our ex-US operations.

Year to year, our GAAP EPS increased from 25% last year to $0.70 this year. During the second quarter on a pre-tax basis, we absorbed two discrete items. The first was the costs associated with the Allston shutdown. The total cost including both the COGS as well as other costs was about $16 million. The second expenses were those associated with the inventory step-up of $7 million that was closed with the Bayer deal. Both of these amounts are included in both our non-GAAP as well as our GAAP earnings.

As we discussed during our analysts day, our financial presentation will set aside the impact of only stock option expensing as well as the acquisition-related expenses. Expenses associated with stock options were about $65 million, and the acquisition related expenses were two-field—first you had the contingent consideration, an expense of $9 million and you also had the gain of the negative goodwill of about $21 million.

Our non-GAAP EPS was about $0.85 for the quarter based on 275 million shares outstanding, and that should be compared against $0.38 from Q2 of last year. Our cash generation remained very strong. Our non-GAAP cash from operations increased by $281 million, with about $157 million of those capital expenditures gong towards manufacturing and mostly focused on the manufacturing facilities here in the US.

We exited Q2 with about $1 billion in cash on our balance sheet and virtually no debt, and before I turn back over to Henri and open it up for question and answers, I’d like to remind that you can find the line item detail on both revenue and expenses on our press release or on our website.

David Meeker

I’d like to provide brief updates on four areas related to the Allston remediation, first investigation around the viral contamination itself, and update on the plant sanitation and where we are on the restart. As Henri indicated, we will be dedicating the Allston plant completely to the production of Cerezyme and Fabrazyme, so I’ll stick to the bioreactors. I’ll briefly update you on our risk mitigation strategy and finally the disposition of the work in process material.

With regard to the investigation, as we told you on our original conference call, the identified virus is Vesivirus 2117 which is a member of the Calicivirus family. This is a strain which infects CHO cells but is not known to infect humans. The Cerezyme process is also known to or has been shown to remove 12 to 14 logs of a model non-enveloped RNA virus which would be the model virus for the Vesivirus, and we will be testing for clearance of Vesivirus specifically once we have test virus available to do that.

In short, the current situation we do not believe poses a risk to patients, and therefore our focus has been on completing the sanitation of the plan and optimizing our ability to make appropriate risk assessment with regard to the handling of the work in process material within the plant, recognizing the significant patient need. So these decisions are being made in close collaborations with the regulatory agencies.

With regard to the investigation, the viral contamination was noted at two different sites, and this pattern of involvement pointed us to a common raw material source although there is no specific lot that is common to each of the three bioreactors which have been affected. We have now developed a more sensitive PCR, quantitative PCR assay, which allows us to begin to understand the viral replication kinetics, and testing of raw materials is ongoing and has been negative to date, but is continuing.

In conclusion, with regard to the investigation, the negative results are not unexpected. There has been a number of companies within the industry who have been reaching out and extremely collaborative in sharing their experience, and the failure to identify a source is not unusual.

Moving on to the plant sanitation, as Henri said, we have made tremendous progress. Site sanitation has been completed with all cell culture and downstream purification areas having been cleaned and sanitized using a vaporized hydrogen peroxide and bleach. All targets for microbial kill were achieved, and we’ve also taken the opportunity to do the preventive maintenance work which will allow us to run the plant without needing to take it down for that as a specific stoppage.

The initial cell growth phases have been inoculated, and the rebuild of the 2000 L bioreactors is ongoing, and those 2000 L bioreactors will be inoculated next week. Downstream purification is also ready to start this week. In short, we’re on track, as Henri said, to release material from both the Cerezyme and Fabrazyme bioreactors in November and December.

With regard to the risk mitigation strategy, testing will be a key part of this going forward. We’re working with vendors to implement appropriate controls and testing potentially on their side, and we’re also working to determine the appropriate level of testing of the raw materials and in process material within the Genzyme plants going forward.

Finally, I’d like to take a couple of minutes to speak to the issue of disposition of the work in process material. For this part of the discussion, I’m going to limit it to Cerezyme since that is the issue. There is no Fabrazyme work in process material, and all our prior communications around this were based on the assumption that the Fabrazyme bioreactors would be inoculated by the end of the month, and we’re on track to meet that target.

With regard to Cerezyme, a metabolic decline in bioreactor cell activity occurred of day 99 of a 100-day harvest, so it was right at the end of that bioreactor run. Harvest material from the first half of that bioreactor run has been processed and released for use by the regulatory authorities, and the late harvest day material which has tested positive by this quantitative PCR as well as some of the late harvest day material which is most closely connected with that which has tested negative has already been discarded. So the remaining material is part of an active investigation and ongoing discussion with the regulatory agencies.

Our original communication assumed use of all of the available WIP, and what we talking about today is recognizing that we have discarded some of the WIP from the late day harvest as I just indicated. The guidance we’ve provided today covers the full range of possibilities around the remaining material. The low end of the guidance, as Henri said, reflects the possibility that no further work in process would be released, and the high end of the guidance assumes that approximately half of remaining work in process material could be released. Now, this point is determined based on the extrapolation from harvest days with known viral contamination to a point where the viral replication kinetics would suggest the presence of less than 1 viral copy—just to emphasize that point, it’s 1 viral copy, not an infectious particle, but a viral copy—so just the ability to recognize the presence of any viral RNA in a 2000 L bioreactors, and this is as close to zero as we can get based on the testing, so the principle behind this is that low end would reflect the use of material which mathematically would not be believed to have any virus RNA in it, and the additional testing which is ongoing will be used to further improve our understanding of viral replication kinetics to better define this point.

So finally, we have restarted production, and by the end of this month, we will begin releasing the material as I noted, and the construction, to reemphasize the point Henri made, construction of our new Framingham facility is very much on track with that expected to come on line in mid 2011 which will again provide significant increased capacity.

In summary, the current situation poses no safety risk to patients, but is a plant production and product supply issue. Inability to supply products to patients does pose some risk, and we’re working to minimize that risk, and as we work to optimize and determine the appropriate use of WIP in discussion with the regulatory agencies, and we’ve made tremendous progress with regard to the remediation of the plant which will allow us to release product as scheduled in November-December.

Henri Termeer

Here is Geoff McDonough now on the business impact.

Geoff McDonough

As you said earlier, the second quarter was a very strong quarter across the portfolio with volume driven growth for Fabrazyme, Myozyme, and Aldurazyme, and the volume-driven growth in Cerezyme was actually quite good, especially if you adjust for the revenue impact that Mike referred to earlier of $13 million. That provides a platform for understanding the strength of the underlying business, a platform upon which we will resume building as we contain this overall situation at the end of 2009.

I would like to step through the portfolio and make some comments on each of Fabrazyme, Cerezyme, and Myozyme, and before I do that, I’d like to just remind you of some general principles which have guided our translation of the financial and supply situation to the consequences for patients and families and for their treating physicians.

The principles which have adopted in managing this situation have been roughly fourfold. They are as follows: First, we treated this as a situation of global equity. We are not giving preference or any difference in treatment across different countries in their contribution to managing this situation. Second, we’re not differentiating between charitable or commercial programs, and they are being considered equally in the same way. Third, we’ve been working with stakeholders on a broad based including treating physicians, regulators, as well as patient organizations to think about how to define those patients most vulnerable to an interruption in supply and to endeavor to protect them by asking “less” vulnerable patients to lower their consumption over a longer period in order to minimize or eliminate shortages for these vulnerable patients.

To that end, we have convened a series of stakeholder working group meetings based in North America and in Europe for both Cerezyme and Fabrazyme which have been published in a variety of forum and are now resulting in action resulting from discussion between individual patients and their physicians on how to best accommodate this guidance into their practice. In addition to patients missing or lowering doses, the sources of dose conservation during this period also includes the management of Genzyme’s inventories, ex-Genzyme channel inventories, as well as modified shipping frequency for our largest accounts.

I’d like to make a few comments about the portfolio specifically. For Fabrazyme, as you will notice, quarter 2 is a very strong quarter, in both quarter over quarter and year over year terms, reflecting the ongoing growth in volume in most markets where Fabrazyme is present. Its inclusion in this situation is relatively mechanical in the sense that is has been affected only by the shutdown of the facility and the lost productivity that has resulted. There is no WIP, and there is not now and nor has ever been a safety issue related to this bioreactor contamination.

We believe today that based on our current analysis with production of new material coming back into supply in the November timeframe, that this will be a relatively brief period of constrained supply beginning in mid October, a period which based on our current understanding of the compliance with the guidance will not result in any patient non-electively missing doses. In other words, those less vulnerable patients are complying very well at this point to the best of our ability to see it, with missing doses during the summer period in a way which will allow this period of shortage to be brief and to be resolved within the timeframe of 2009 in a satisfactory way. That will allow us to bring Fabrazyme back into the portfolio heading into 2010, confirmed in its place within the portfolio as a very strong growth driver next year.

For Cerezyme, as I mentioned, the second quarter in spite of this $13 million loss is actually a good quarter for us in volume terms, but obviously it’s the product most affected by the current situation, as David has outline, with respect to the WIP. Our current understanding of the available inventory based on material that has been cleared to date and material that we anticipate clearing and releasing for use is that the initial stakeholder working group guidance remains appropriate. In other words, those vulnerable patients, defined as pediatric patients, those with type 3 or neuronopathic disease, pregnant women, and adults with severe progressive disease may still expect to go through this period without an interruption in their therapy, and that the projected duration of dose conservation for less vulnerable patients with the reduced consumption of 50% is still expected to conclude by year’s end, with the reintroduction of new production material in the November-December timeframe.

We anticipate continuing to work with the stakeholder working groups on a global basis on an ongoing basis throughout this period, and we will tailor and update guidance in collaboration with those groups as needed as further information become available. To date, as Henri started off by saying, response in the physician and patient community to this situation has been overwhelmingly supportive and positive. We’re enormously grateful for their help in managing through this difficult period.

One important element in this moment has been the accelerated development and expanded access to own small molecule, the Genzyme 112638, whose phase III trials are currently moving through the process of startup and where we would begin enrolment for both the engaged trial, which is a 36-patient 9-month duration treatment of naïve patients and the ENCORE trial where will bring 96 patients into a switch design moving from Cerezyme to the small molecule over 9 months. Both of these trials would have their first patients in in the mid August timeframe.

In addition to these planned phase III trials which we now would expect to enroll in a more accelerated fashion, we also are in discussions with the FDA around the submission of a protocol to allow TIND access to 112638 in the US, and they expect us to submit this protocol by the end of next week.

So all in all, we expect to exit 2010 with a firm footing for Cerezyme in the Gaucher space, and this introduction of a potentially accelerated experience with the 638 molecule does change potentially the dynamics going into 2010 in a positive way.

For Myozyme, as Henri said, we’ve been very reassured to see a resumption of the growth trajectory in Europe based on the approval of the Geel facility and the removal of a temporary supply constrained we experienced and managed through earlier in 2009. That’s in part also supported by the discussions with regulators around the LOTS data and our expectation that that could be reflected in a label in Europe as early as October this year. It has already been incorporated into the label at Health Canada, and it is part of the ongoing discussions with the FDA around Lumizyme.

Our guidance, as Henri said, is reflecting a more conservative interpretation of the existing approval timelines for Lumizyme in the US, which we expect a PDUFA date for on November 15th—a roughly 4-month review period for the submission of the sBLA for the 4000 L material by the end of the first quarter of 2010. This move reflects a more conservative view of guidance for Lumizyme/Myozyme in the US. It does not reflect a change in the current status or progress of our discussions with the FDA regarding the approval of this product and scale.

As part of our ongoing effort to make sure that we have continuous access to Myozyme/Lumizyme in the US, we’re currently in the process of transitioning patients into a program which will allow them to access 4000 L material, and we would expect the first patients in this program to begin transitioning in the August timeframe.

As with Fabrazyme, I think 2009 will allow us to enter the 2010 timeframe with Myozyme as a very strong growth driver for us as we’ve always intended and planned for it to be in the portfolio.

With that, I’ll turn the floor back to Henri.

Henri Termeer

Now we can turn to Q&A.

Question-and-Answer Session

Operator

(Operator instructions) Our first question is from Michael Yee – RBC Capital Markets.

Michael Yee – RBC Capital Markets

I have a question on the viral decontamination. What is your confidence that the FDA would not have to revisit/reinspect the facility after the decontamination, and what are the gating steps to get the written confirmation on the 483?

Alison Lawton

As far as getting the facility back up and running, we’ve been in close communication with the FDA every stop along the way, so they’re very familiar with what we’re doing. We do not anticipate that they need to come out and re-inspect before we actually get that plant up and running, but obviously we do anticipate given the routine nature of how they conduct GNP audit, we certainly would anticipate that they would probably want to come out and visit, but it is not a negating step in getting the facility back up and running. You mentioned the 483, with regard to that and the warning letter status, I think we had already communicated that the FDA had indeed been out and confirmed that we had addressed all of the outstanding items in the warning letter, and at this point, we believe that that’s been communicated, or we had anticipated that’s been communicated within the FDA, and we do not anticipate that that would be a rate limiting step for the Lumizyme approval either at this point.

Michael Yee – RBC Capital Markets

So there’s a scenario where you could actually get approval for Lumizyme without the written confirmation?

Alison Lawton

What I anticipate happening is that there are separate pieces here. One is that they had confirmed that we’ve complied with all of the warning letter items, and how I anticipate how that will happen is that we may not necessarily get notified from the FDA, but certainly the district office who did that inspection and check against the warning letter will communicate with the compliance group at FDA who will also then communicate with the review division, and we’ve not had any indication at this point in our ongoing discussions with the review division that this is a rate-limiting step for the approval.

Operator

Your next question comes from the line of Brian Abrahams – Oppenheimer and Company.

Brian Abrahams – Oppenheimer and Company

I have a question for David. How long it might take this viral extrapolation to be made in order to determine whether the additional WIP Cerezyme material is indeed going to be releasable, and does the low end of your Cerezyme guidance incorporate any potential for altered practice patterns like physicians keeping patients on lower doses of Cerezyme even once the supply is restored.

David Meeker

Maybe I’ll just take the latter part first. The guidance is a financial guidance which means that that is all the available material that we would have to sell, and that lower end of the guidance assumes that we would not be able to release any additional WIP at all, so that’s the most conservative view. As Geoff was saying, how patients handle this and how the patient community participates with regard to managing their own dosing might limit, that’s a way of managing the amount of time that patients might be out sequentially for doses by reducing their dose, so there is no point at which people stock out and it allows to preserve material for the most severely affected patients.

With regard to the question around the timing to improve our understanding of the release of the WIP, we’re in weekly conversations with the FDA and exchanging information as soon as it becomes available. As I said, the guidance is based on our best available understanding to date of those viral kinetics, and again until we get the next set of data or the next set of experiments and have a chance to discuss that with the FDA, I’m not sure the extent to which that will be refined, but I would anticipate that by the end of August, there’s some parts of this which will need to be wrapped by the end of August, so we should have a much better handle on the availability of WIP.

Operator

Your next question comes from the line of Jim Birchenough – Barclays Capital.

Jim Birchenough – Barclays Capital

I just want to understand a little bit better the timelines here. To begin with on the supply constraint, do you still have inventory available until August? I think you previously said the supply constraint for Cerezyme would begin in August; I just want to confirm that, and then trying to understand what extends the time from production beginning to release of product. Why does that take so long at your end?

Geoff McDonough

The question you’re asking about the inventories is relatively easy to answer. The first half of the inventories that has been released is sufficient to take us into August, and we would always have anticipated the period of shortage to Cerezyme to begin in the early to mid August timeframe. With respect to the time of the release or the delay, obviously we are asking patients to reduce their consumption in advance of the shortage in order to attenuate consumption throughout the period so that no one is non-electively asked to miss or to lower a dose. The delay that we have before a new product comes into production is just related to the cycle time from the initial inoculation of the commercial scale reactor that David referred to and working its way through the production process to a finished and released vial.

Operator

Your next question comes from the line of Geoffrey Meacham – J.P. Morgan.

Geoffrey Meacham – J.P. Morgan

I have a question on the 4000 L. Can you walk us through the approval steps from an FDA perspective for Myozyme? Do you need the 2000 L approval? Does that even matter if you have already run comparability with the 160 material? Then, the second part of the question is, since you are now expanding MTAP to include patients on the Belgium facility, will you now put patients who haven’t had access before to Myozyme, will you give them now access with an expanded MTAP?

Alison Lawton

As far as the approval process for the 4000 L, we have been in close communication with the FDA, and they have seen a lot of the information around the 4000 L, and at this point, we anticipate filing the 4000 L biochemical comparability data, if you like, to the Lumizyme, the 2000 L BLA. Now, in order to do that, we want to allow the FDA to proceed with straightforward Lumizyme BLA approval that they are currently working on so that we would anticipate to allow them to finish, give us approval of the Lumizyme BLA, which the PDUFA date is November. On obtaining approval of that BLA, we would immediately file a supplement containing the 4000 L information, and then that is the CMC supplement, so we anticipate the PDUFA being 4 months from there.

With regards to the MTAP question before Geoff answers, just to comment, again in discussions with FDA and in order to transition those patients on MTAP to the 4000 L, of course, we will also be officially filing the 4000 L information to the IND in order to accomplish that.

Geoff McDonough

I think with respect to MTAP, what you are seeing there, Jeff, is us trying to accomplish two goals. The first is to ensure continuous access to Myozyme for patients who have been in MTAP who are now going on almost 2-1/2 years, during the course of this transition from a regulatory perspective from 2 K to 4 K material. The second goal is to allow ourselves to maximally use and make available 2000 L inventories. It may be possible for us to offer access to naïve or new patients based on our 2000 L inventories and based on the timing and status of our discussions around the 4000 L approval with the FDA at the time of the initial Lumizyme approval, but we are not today expanding MTAP beyond its current population.

Geoffrey Meacham – J.P. Morgan

A quick followup if I could, I thought you guys had previously talked about the 4000 L showing better comparability with 160 versus the 2000?

Alison Lawton

Yes, I think we had certainly talked about the fact that the 4000 L, we had targeted it so that some of the glycosylation was much more similar to the 160 than the 2000 L, and obviously we have been in close communication with the FDA. I think the important piece to remember here is that of course we have 2 patient populations here now, the infants with the 160 and the late onset with 2000 of the Lumizyme approval. I think given that we don’t have clinical data on the 4000 L, I think that from a risk-benefit perspective, it probably makes more sense at this point for the FDA to be able to approve the 4000 L for that older less severe patient population.

Yaron Werber - Citi

The sensitivity of the new assay that you have, it doesn’t sound like you really understand where the viral contamination came from, so I am trying to understand how do we get comfortable that this contamination won’t pop up again, and how sensitive is your new assay because it sounds like FDA is holding obviously some of the release pending confirmation as to how sensitive the second assay is? I am just trying to get an understanding of how do we get comfortable and you get comfortable that this won’t happen again.

David Meeker

I think those are 2 questions. So, how do we get comfortable that it won’t happen again? That goes to first and foremost the sanitization around the plant, so the goal there is to ensure that any potential ongoing contamination in parts of the plant are eliminated, and therefore, when we start up again, we are not at increased risk. I think with regard to the sensitivity of the assay, this assay has pretty good sensitivity. I think the things that we will be working on to potentially improve the sensitivity of the overall process is how we process the sample itself that goes into the assay, so there are still some things to do which may give us some additional insight or improve sensitivity, if you will. That said, we will then be working in this just the way I described, which is to say extrapolating from points of known contamination down to a point which will be below the level of detection of the assay but to allow us to determine to the best our ability what is the point at which we believe there was essentially no virus in the plant, and the point I made when I was providing my initial comments was we are using a PCR assay, so we are measuring viral copies which are not infectious particles. As a rule, the number of viral copies to the number of infections particles may be 1, 2, or 3 logs higher. So, there are number of factors which would say this kind of analysis hopefully will get us through a fairly conservative view of what would be unreasonable to continue to process through the plant.

One last thing to the prior point, this isn’t an all or none phenomenon. We are in continual discussions as I said with the FDA, and it may well be that we are able to release part of this as opposed to all of this as we get additional information and determine jointly of what the risk/benefit is of moving forward.

Henri Termeer

Dave, do you want to make a general comment, maybe not for your own but for the audience about the appearance of viral infections in these kinds of manufacturing operations?

David Meeker

As I said, it is not uncommon. They tend not to be publicized, and so this event is not uncommon. We currently screen for 9 viruses which is part of the compendium, so these are standard testing which are done by our vendors, so the world has its own risk mitigation strategy in which we will be adding to now with the identification of this virus, but there is always going to be some uncertainty in the world that we live in. There are, of course, innumerable number of viruses out there that are currently not being tested for, and that is why each one of these processes has a downstream viral removal step which allows you to get to a risk-benefit position where it is safe to release these products.

Henri Termeer

In our case, it is a 12 to 14-log reduction?

David Meeker

There is a 12 to 14-log reduction.

Salveen Kochnover - Collins Stewart

In regard to the 4000 L scale material being comparable to 2000 L, initially, there were plans to file as comparable to the 160. Just to go back to that question that was asked earlier, was that plan rejected by the FDA? Are they now pointing you towards 2000 L?

Alison Lawton

As I mentioned in an answer to a previous question, I think the key thing is in the discussion where we have been moving towards is that from a risk-benefit perspective in the patient population with a late onset versus the infant that it is easier for FDA to get comfortable with a filing at this point to the 2000 L, but we have not ruled out filing for the 160 at this point. It is an ongoing discussion, but my sense af this point is it’s more likely to be for the 2000 L Lumizyme BLA

Operator

Your next question comes from the line of Davis [Wu] – Goldman Sachs.

Davis [Wu] – Goldman Sachs

With regard to the Cerezyme inventory and use, on the demand side, I was wondering if you had any sense of how physicians or patients to date has been adjusting their use, and how much of a decrease have you seen, and secondly, if I do my math right, it looked like you had anywhere from 6 to 10 weeks of inventory at the time of the plant shutdown, but now extending this out to November-December, it looks like you would need well over 50% dose reduction on average to stretch that supply that. I was wondering if you can comment on that math and how the supply meets the dose reduction by physicians and patients.

Geoff McDonough

First with respect to the physicians and patients, we are seeing on a global basis quite a good compliance or cooperation if you will with this treatment guidance overall, and we see that reflected in our order pattern and in the overall actuals since this began. We’re not quite yet on a global basis to the anticipated 50% level, but we are well on our way, and one of the things we are working with the stakeholder working group as well as with other members of the community is to figure out how to further increase the awareness and the adoption of this treatment guidance, and just to put that in perspective, we have some experience of course with managing a situation like this as we did for Myozyme earlier this year and biweekly infusion setting. We are right at the point where we would expect to be in a process that is global and understandably has a different rate of uptake and adoption in different countries, so I think we’re roughly where we would like to be.

With respect to your question around the backend of this situation, in other words, what contains the period of constrained supply, and I think it’s two fold. First is the degree to which that the channel inventories can contribute to the period of shortage. They will be over this period expected to draw down to close to zero in almost every geography which contributes to our ability to limit the duration. Secondly is contribution of the work in process that David mentioned. As it goes through the process of being processed and released, it creates ongoing supply throughout the period of this shortfall, so there is not a simple mathematical relationship between the resumption of new supply and the time at which this period constraint is concluded.

Operator

The next question comes from the line of Ian Somaiya with Thomas Weisel Partners.

Ian Somaiya – Thomas Weisel Partners

I fully understand the decision to move the 2000 K facility to the manufacturing of Cerezyme and Fabrazyme. Just curious why pin the relaunch of Myozyme on the 4000 L facility, because I think at some point next year, you would be comfortable with the supply you have on hand for Cerezyme and Fabrazyme, and if the Lumizyme plant is approved, why wouldn’t you manufacturing that drug there?

Henri Termeer

It’s a reasonable question, but we will need the Allston plan throughout next year, and the recovery is not that quick. We need full production. It may have lost a little bit the influence of channels here. We clearly need safety inventories into the system throughout the world. This has clearly shown that we were out of material safety inventory throughout the world. It’s not a good situation, so we must dedicate this plant. It’s only after we get the approval or the Framingham plant which will add very material step function to the production capacity that we have again the flexibility to utilize part of the capacity in Allston for production such as Myozyme. The other point is that Myozyme and Lumizyme is the same product, and now because we are only going to produce in the 4000 liter, the Belgian plant is a very good facility, and it was approved earlier this year in record time for European use by the EMEA, and all European patients have been on 4000 liters since that time, and we have a good experience there, and it is a very efficient operation, and of course that’s a concentration with an additional reactor going in there at this critical moment and an experience level that is very helpful, but of course over time, we don’t want to be dependent on the single plant. We will take actions over time at also Allston again once we have the capacity available through Framingham can also produce Myozyme, so that’s the approach we have taken. These things can’t be moved in a very quick way, and I think it is by far the clearest way and also allows the Allston plant to dedicate all of its focus on just two products rather than three.

Ian Somaiya – Thomas Weisel Partners

When do you think you will be at more normal comfortable inventory levels for these three drugs?

Henri Termeer

For Myozyme, we are at a comfortable inventory level at the current time, and I think we will stay at a comfortable inventory level provided that we do produce with the 4000 liter. For Cerezyme and Fabrazyme, we will be tight, I think, throughout the next year as we rebuild the inventory because we do not set a criteria to have more channel inventory available. Personally, I don’t feel comfortable until that additional plant capacity is available which would be 2011.

Operator

The next question comes from the line of Geoff Porges with Bernstein.

Geoff Porges – Bernstein

Henri, just to get out the weeds a little, you’ve got long-term guidance out there of $5.84, I think, in 2011. It looks like you are going to take them all again on this year, and last year obviously the restatement reflected all the investments you made. Are you prepared at this point to commit that 2010 EPS is going to be on the growth trajectory that would take you from 2007, which was more or less the last clean year, towards that $5.84 number? Do you have that visibility and confidence at this point?

Henri Termeer

I think this is early. We are as I said earlier very confident that 2010 is going to be a very good year and certainly a good year compared to a year with these interruptions that we are currently experiencing. We feel very good about the new products that we have been talking about that were at risk in the past, but now are really showing the kind of progress that were hoping for, like Synvisc-One and Mozobil. We also have a program starting up in Europe, so we feel good about that. We are somewhat ahead of our expectations in things like genetic diagnostics, but for 2010, the appropriate moment here is to let us work through this stuff through the remainder of the year and to get together to talk about the guidance for 2010 at the time that we usually do which would be February of next year, early in the year, and topline guidance maybe in San Francisco in January. That’s generally what we have done, and there is no reason for us to change our goals into our future, but this may be not the best moment to talk about these goals. At the moment, we want to get our manufacturing plant back on stream. We want to see the Myozyme approved in United States so that it becomes a positive contributor. Most of these things by themselves will make a dramatic difference into our progress in the future.

Operator

The next question comes from the line of Chris Raymond with Robert Baird & Co.

Chris Raymond – Robert Baird & Co

I’m still struggling with the timelines that you guys talked about with regard to releasing the Cerezyme inventory. Can you maybe walk us through some of the steps? I mean 4 to 5 months is kind of the math I guess that you derived here from start of production to release. What are the extra steps perhaps that that you are adding in this instance that may be didn’t exist before this contamination issue?

David Meeker

No extra steps. The cycle time remains absolutely the same. It is roughly 110 to 120 days for the Cerezyme and Fabrazyme cycles. The additional steps which are from a viral risk mitigation step, we will be looking at points in this process where we would introduce testing, specifically for the Vesivirus since we know we have been at risk for that, but there is no anticipation that that will slow down the cycle time, so those discrete events, risk mitigation events but not prolongation of the timeline. Then maybe the other point of confusion was just around the WIP again which is independent of the cycle times for the release of the new material. That is an ongoing investigation where over the next couple of months we will through our investigations and discussions with the FDA get to a better understanding of how much of that WIP will be available for release.

Operator

The next question comes from the line of Phil Nadeau with Cowen & Co.

Phil Nadeau – Cowen & Co.

I’m not looking for guidance but maybe more qualitative understanding of the impact of this situation on 2010. Maybe you can get us there by doing just a few things, like first could you quantify what every quarter of additional MTAP program in 2010 would do to revenue and EPS? Second, more qualitatively, if the plant is up and running as you suggest it will be but your inventory is tight, what does that mean for supplying the market for Fabrazyme and Cerezyme next year? Is the market fully supplied and it just takes a long time to build inventory or is there still some people who have to push out doses?

Geoff McDonough

I certainly can’t give you, Phil, what you are looking for in the quantitation of the quarterly piece, but certainly with respect to our expectations around supply, it is the former case that we would expect to able to supply the market but to take our time in rebuilding the channel inventories as Henri mentioned earlier. One thing to recall is that capacity to supply both Cerezyme and Fabrazyme in 2010 is materially higher for having pulled Myozyme out of the Allston facility, so we have confidence as we work through this situation in ’09 that we set ourselves up well to supply in 2010.

Phil Nadeau – Cowen & Co.

On the quantitation, did you say that you could do that or you could not?

Henri Termeer

The MTAP program is about 170 or so patients that we have been supplying free of charge now for a few years, and to the extent that that is what we are doing, it is an expensive program, and we haven’t quantified the specifics here other than that the cost per year is about $400,000. The revenue loss per year would be about $400,000 per patient.

Geoff McDonough

We’ve quantified the cost in past quarters, of course, the running cost of the program over time has shifted slightly, so if that’s of interest, we can certainly include that in further updates as we go forward, but we would expect that program to wind its way down to the extent that there are patients who have not transitioned by the time of Lumizyme approval, they would move over to commercial therapy, and those who are on 4K at the time of approval would remain in the program until such time as 4K was approved. In that sense, you can imagine those curves will move at different rates depending on the timing of approval and the number of patients who have shifted over.

Operator

The next question comes from the line of Eun Yang with Jefferies.

Eun Yang – Jefferies

In previous calls, you mentioned that you’re expecting Lumizyme approval well before the PDUFA date in November, but now you sound like you are expecting around PDUFA date, so the question to you is what has changed, and is there something that FDA requires or wants to see prior to approving Lumizyme at this point?

Alison Lawton

I think as far as the PDUFA date, we continue to work closely with the FDA around the Lumizyme delay, and that has continued as I have mentioned in the past. I think that we are still hopeful that we can get approval before the PDUFA date, but I think that it is more appropriate at this time for us to reset expectations with that date as the goal in mind, and I’m sorry I missed the second part of your question.

Eun Yang – Jefferies

Is there something that FDA requires or wants to see prior to approving Lumizyme such as seeing start of production and release of Cerezyme and Fabrazyme at the plant?

Alison Lawton

No. As I said, discussions have continued with FDA, and I think at this point a big part of what we continue to discuss is the REMS, and I think many of you probably know from reading many information that it’s well known that looking through the FDA around the REMS and with Safety and Epidemiology Group at FDA as well as the Review Division, that’s an ongoing discussion that is a vital piece obviously for approval, but nothing else has changed.

Operator

The next question comes from the line of Bill Tanner with Lazard.

Bill Tanner – Lazard

The question I had goes back to the Cerezyme revenue range, and maybe it’s for David. I’m assuming that the ultimate sales could fall somewhere in between. It’s not going to necessarily be bracketed one side or the other. I guess I’m struggling a little bit trying to understand, if I go back to the June 16th call, my understanding and I think Alison alluded to perhaps some column chromatography to decontaminate the finished products, so I’m wondering what’s the difference with the WIP that cannot be decontaminated or in fact if the finished product that was released actually was not decontaminated, and so what’s the reason for perhaps your being less confident that you could get that drug out the door?

David Meeker

I’ll take your second part of question first in terms of our confidence in being able to use the WIP, and that risk assessment is around what is the risk of putting material that may potentially be contaminated through the downstream processing. It’s not that we think as I have said all along that there is a risk to the patients around this specific virus or as you said once it has gone through a full downstream purification, that you would have significant clearance of any potential residual virus that might be in it, so it’s really a goal of minimizing the risk to the plant, and that’s what we will be working through, and the guidance that we have given you as I said is to determine to the best of our ability in conjunction with the FDA what material is reasonable to put through additional processing in the plant after we have gone through the work of sanitizing the plant, so it’s really that straightforward. Handicapping that at this point is hard, and as I said, the range which is most conservative says that we wouldn’t put any material from this point forward down back to the plant to this other end of the range which says we will use the data from the testing which will allow us to draw some assumptions as to the probability of having any virus in a sample that we then wanted to process downstream, and that’s the frame that we will be working into the next month or so.

Bill Tanner – Lazard

So this then truly could be bracketed on either side by none and 50% and then somewhere between.

David Meeker

Yes. It could be bracketed on either side. Again as we get a little more data, that could be higher or lower. We could be either side of the upper end as well if we do find that we can begin to process some of this material through or we could end up at that absolutely low end where we can’t process anything.

Bill Tanner – Lazard

Then would there be contemplation of a revised guidance as to when you get decision on that?

Henri Termeer

Yes. We will update you obviously when this range shrinks and the impact that has on the guidance, and I think you quite rightly focused on that. It is of course a very short-term impact. It will impact this quarter and next quarter, but we will clearly be able to communicate to you. We didn’t think there was any way for us to not give you the full range because the full range is the range in discussion, but if it changes and the range narrows, we will give you an update at that point.

Operator

The next question comes from the line of Mark Schoenebaum with Deutsche Bank.

Mark Schoenebaum – Deutsche Bank

David, how can you help us, the analysts and investors, this time around get comfortable that the FDA is going to deem the 4000 liter material is bioequivalent to 160 and that additional clinical trials won’t be required? Is there any way you could possibly walk us through some of the PKPD data so those of us that want to stay in the weeds can try to get some comfort around this? The second part was if you could tell what the capacity in dollars is of the 4000 liter facility with and without the new reactor.

David Meeker

I think with regard to the filing strategy, we basically in our discussions with the FDA made it clear that we are looking for the absolutely most rapid route to approval of this product and that we are open to either of the scenarios, whether we reference the 2000 liter or the 160 liter. Now that said, when you just look at this biochemically as Alison highlighted, the 4000 liter was developed with an eye to having it as close as possible to the 160. Some of the discussions I know I have had previously in investor conferences had been trying to explain how we got into this situation. We had the 2000 and the 160 liter approved essentially at the same time in different regulatory jurisdictions, so in essence we are locked in as final product, whereas normally when you scale up a product, you have the opportunity of continuing to work your next scale to make the adjustments to make it as close as possible to the scale you’re starting out from, and in this case, the 4000 liter, we had that opportunity. Without going through the specifics of the changes there as Alison said related to glycosylation, the glycosylation of the 4000 liter, if you looked at it, is closer to 160 than 2000, but in the overall evaluation, working with the FDA, it may be perfectly reasonable as is currently the plan to file this as a 2000 and get us a more rapid route to approval.

Mark Schoenebaum – Deutsche Bank

The capacity question?

David Meeker

Right now, the capacity in Belgium is on the order of 2000 patients. Adding an additional bioreactor will take that to a 3000-patient capacity, and as Henri said, we are continuing to move to create additional opportunities for additional capacity.

Mark Schoenebaum – Deutsche Bank

How many patients on drug now?

Henri Termeer

A little over 1000.

Operator

The next question comes from the line of Sapna Srivastava with Morgan Stanley.

Sapna Srivastava – Morgan Stanley

One on the Cerezyme franchise, ould you help us understand how do you view the potential accelerated approval for competitors as well, and what impact that could potentially have on Cerezyme, and secondly I guess I’m still a little confused about the 4000 liter facility approval. You said it’s similar to 160, but it’s contingent still on 2000, and I know you have given a lot of color, but maybe just a little bit more color as to why the letter remains hinged on the 2000 L facility approval.

David Meeker

I think the way to think about it is and maybe we are getting a little bit hung upon it, it is between the 2000 and the 160. Since it sits between, it’s a little closer to 160 than the 2000, but it’s between the two, so you clearly have the option as you are looking at this to reference either product.

Geoff McDonough

At a certain level, the FDA and others are looking for the widest possible array of choices to support the patient community during the duration of this constrained supply. As Henri said, we anticipate this duration to be quite short in a big picture setting. I think in the same way, the FDA has asked other companies to provide a TIND, they similarly have asked us to do so for the small molecule, so I think the net impact in the end will just be to provide a broader set of experiences with these experimental therapies earlier than would otherwise have been available. I think the consequences for approval timelines and resulting uptake for competing drugs and also for the small molecule are to be determined because these treatment INDs are neither easy nor quick, and they are not generally speaking high capacity kinds of programs, so at this point I think we are looking to stay focused on providing choice and access for patients in the near term, and then we will be looking for a better sense how 2010 will evolve as we get closer to it.

Sapna Srivastava – Morgan Stanley

How many patients do you expect will go on the new treatment INDs?

Geoff McDonough

Actually, I have no way to answer the question because today the characteristics of eligible patients have not yet been determined. That’s part of the process of working through this with the FDA.

Alison Lawton

If I could just add a comment, one thing I would like to emphasize, it’s really important, obviously is the enrollment of the patients in the studies that we have up and started. That’s really the focus, and that’s obviously also very important for the FDA as well. In opening up the treatment IND, we want to make sure that we are not jeopardizing not being able to enroll patients into those clinical studies in order to get the product ultimately approved which is our goal of course as well.

Henri Termeer

Generally to visualize this, patients that are on chronic long-term therapy, they don’t tend to change very casually. It’s quite a process for a patient to make the decision and a physician to make the decision to go through a change, so this short-term interruption, we don’t think will guide people to make very long-term changes. Of course, long-term shortages will guide people to make those changes, but for us it is very important that we show that we are back on line and that the supply will lighten up within a reasonable period of time, and I think will most importantly determine how many patients would choose alternative therapies as enzyme replacement therapies or our small molecule.

Operator

The next question comes from the line of Maged Shenouda – UBS.

Maged Shenouda – UBS

If you don’t get the 4000 liter scale Myozyme approved in March in the US, how long would it take you to scale up in the US, in the Allston facility, with the 2000 liter production process?

Henri Termeer

As we said, we have made the firm decision to dedicate the Allston plant to Cerezyme or Fabrazyme. We need all the reactors in Allston for the production of Cerezyme and Fabrazyme, so it’s not a choice that is available in this case, and we have been very clear with the FDA to this point. It’s not a threatening point at all, and the FDA has been very constructive among others encouraging us to change the MTAP patients, and we will start next month to change MTAP patients to 4000 liter material, so we are quite confident that we will be able to supply patients globally. To the earlier question by Mark, we can supply at least 2000 patients through the currently available 4000 liter reactors in Belgium, and another 1000 patients will be added by the next 4000 liter reactor. It’s about 250 per 1000 L capacity, so that will get us to 3000 patients. We are treating about 1100 patients right now, so we can significantly expand over the next few years, but all of it may not be sufficient, so once we have the capacity in place in Framingham, that will for the first time again open up the 2000 liter capacity which will for sure have depth in terms of process to be the same as the 4000 liter, so we don’t have any confusion around the 2000 liter material being different from the 4000 liter material. Also I think we have communicated to all of you that as part of the approval of the 4000 liter capacity in Europe, we did make the commitment to the EMEA to no longer supply at least European patients with 2000 material as of the end of the first quarter next year, so all of this fits quite nicely. I think it is very clarifying indeed.

Maged Shenouda – UBS

You wouldn’t reconsider this if the FDA required an additional clinical trial with the 4000 liter material?

Henri Termeer

We would not, and it is extremely unlikely that such an event were to occur.

Operator

The next question comes from the line of Aaron Reames with Wells Fargo Securities.

Aaron Reames – Wells Fargo Securities

I just wanted to may be better understand the competitive dynamics that taking all things into consideration in terms of being able to maintain patients on Cerezyme, so I think last year there were roughly about 5800 patients that were on Cerezyme. Are you expecting to have about 5800 patients either on Cerezyme or 638 in the 2010 timeframe being able to maintain most of those patients on Genzyme drugs?

Henri Termeer

From a capacity point of view, certainly. We will be able to maintain all patients. Everything is designed, not just those patients that we are currently treating but also new patients in addition. We would fully expect, and that’s part of our planning. As we said earlier, there will be competition. We’ve always known there will be competition. The enzyme replacement therapy competition has been developing in terms of clinical trials over many years now, and we don’t think that the treatment INDs will make a significant short-term difference in this regard, but competition will enter this field. We think the competition will particularly be around new patients, and it will be a clinically driven competition where patients that are being chronically treated and feel very well treated, and physicians make clinical decisions rather than just because there is a short-term alternative situation available. That has been the experience with many other similar kinds of disease situations, and I think it will be like that here as well.

Operator

The next question comes from the line of Shiv Kapoor with Morgan Joseph.

Shiv Kapoor – Morgan Joseph

Given the strategic implications of the possible extended delay for Cerezyme manufacturing, especially in light of upcoming competition, what steps apart from fixing manufacturing are you taking now that will strengthen your position in the Gaucher market in the next 3 to 5 years? Are you thinking about increasing the size of the phase III study with 638 for instance or perhaps looking at a combination 638 with lower Cerezyme dosage? That could effectively help you compete with treatment INDs.

Henri Termeer

It’s a fair question. Of course, talking about competitive strategies, this is a call. Given that it is a competitive world, it is sometimes not so comfortable. Geoff, if you could make some comments about the 638 molecule and what we are thinking of there.

Geoff McDonough

So I’ll just maybe go back to a couple of the comments perhaps quickly in my introductory remarks around 638. We’ve been developing that drug for many years and are exiting a period of our phase II trial where we were quite pleased to learn that in moderately severe patients with Gaucher, over a 12-month observation period, we are seeing results that are in the range of results that we have seen historically in similar patients with Cerezyme, and we saw our first evidence in the bone compartment that we are in fact having an impact in that most critical compartment of the disease with this orally available twice daily dose product, so our view of the eligible population and the impact that this 112638 molecule can have is getting brighter and brighter, and we are very hopeful that if the product continues on its current trajectory, it will have a revolutionary impact on the care landscape for Gaucher. Recall that the majority of patients who have been on chronic therapy over years have been on an infused therapy, and the unmet need in this group is for therapy that’s safe, effective, able to impact the bone, but that does not involve infusions, and so I think that describes the trajectory of development which is unchanged in terms of its impact ultimately. I think what we are seeing in this circumstance is that we will see not only more rapid enrollment and development of our pivotal trials which are about to begin enrollment next month, as I’ve said, but also acceleration of our already planned wider development for the drug which will explore additional applications within Gaucher, so I think you’re right to focus on the role of this product in a more complex landscape, but it’s a more complex landscape we have been planning for many years.

Operator

The next question comes from the line of Josh Schimmer with Leerink Swann.

Josh Schimmer – Leerink Swann

How should we think about Synvisc and Synvisc-One revenue line going forward? If you frontloaded from individual patient revenue into Q2 by giving them the Synvisc instead of getting subsequent Synvisc injections into Q3, should we expect a drop off in that line at some point or a steady growth or some other dynamic that I’m not appreciating?

David Meeker

Let me just speak very briefly to the whole Synvisc situation. As Henri said very bullishly in his upfront comments, Synvisc-One has been a remarkable story out of the gate here. The 16% year over year growth hides a bit the fact that by far the largest contributor to the overall Synvisc franchise is the US market, and US market year over year has grown 21% and we’re ramping as you would expect with a launch. If you look at the last two months, June and then going into July, and again a very small timeframe, but we’re 30% plus up year over year in terms of those months, and it’s been driven both from a physician side. A large percent of our existing Synvisc accounts again have switched to Synvisc-One. As Henri said, this represents more than about 50% of our current Synvisc portfolio at this point. On the patient interest side, patients are responding well to website activities and the like, very high level of activity there. When patients go to the site, they spend 6 minutes on the site on average, which again is a very long time for that kind of interaction, and then when they see their physicians, they are asking for Synvisc-One specifically. So, we’re in a very good place. With regard to guidance, of course, we’re not prepared to do that, and we have a lot to learn as we go forward, but we would leave you with the message that this is a pretty exciting place to be in a franchise that’s already $500 plus million.

Josh Schimmer – Leerink Swann

What is the market share or proportion of Synvisc that is now Synvisc-One?

David Meeker

The proportion of the Synvisc franchise that is Synvisc-One is approximately 50%, and in terms of total share, I haven’t seen number for the last few months on this one, but we are in the high 30 percent share of the total viscosupplementaion market.

Henri Termeer

About half of that is Synvisc-One, so that would be around 20%

Operator

Your next question comes from the line of Jon Stephenson - Summer Street Research.

Jon Stephenson - Summer Street Research

On the Cerezyme and Fabrazyme side, you will be able to supply all the market plus sales for replenishing the inventories, so that would actually imply revenues could exceed end-market demand whereas on Lumizyme and Myozyme, the end of 2009 or early 2010 will be negatively impacted as you don’t produce for the market out of the 2000 L facility. Is that the way to think about it?

Henri Termeer

No. We have no limitations for Myozyme at this time. You saw nice growth in the second quarter compared to the first quarter. In the first quarter, we did have limitations. We have, for Myozyme, sufficient capacity. We expect to need more capacity. That’s why we’ve put in the 4000 L which will be operational by mid 2011. We also don’t expect that once we have approval in the US that we will have a capacity limitation during 2010, but over time of course we have decided to expand the capacity which will then become available in 2011.

Jon Stephenson - Summer Street Research

But until the 4000 L approval comes through in the US, you would not be able to ship to those MTAP patients until say March or April, right?

Henri Termeer

No. We are shipping to them. We are changing them over to 4000 liters.

Jon Stephenson - Summer Street Research

Right, but from a commercial standpoint, from revenue generated.

Henri Termeer

MTAP patients have never been commercial. They have always been free of charge.

David Meeker

I think the question is are we constrained in the ability to have a broader launch in the US until the 4K approval? What we have been saying for the last year or so is that 4K approval is essential to full commercial supply in the US.

Jon Stephenson - Summer Street Research

So it is right to think though you don’t get to accelerate US revenues until the 4000 liters which is now 2010, whereas before you would have been able to ship the 2000 Lumizyme product, so you would have gotten a US bump at the end of this year?

David Meeker

I think that’s the right way to look at it.

Jon Stephenson - Summer Street Research

In terms of this Fabrazyme-Cerezyme question, should we assume that you’ll actually ship revenues above and beyond what the end market demand is as you build up the stock? Is that the other implication?

Henri Termeer

Yes. To the extent that we have more supply that’s being consumed, we have a completely empty pipeline out there, that will be a place where the some of the production will go for certain.

Jon Stephenson - Summer Street Research

Thank you.

Henri Termeer

I think this was the last question. There were probably many more questions, and I would encourage everybody to continue to make sure to connect with Patrick so we hear those questions and can respond to those questions. There’s a roundtable I think next week that Patrick will communicate on. We want to make sure that everybody does have a full understanding of this particular moment. We look forward to continue to report to you the progress that we are making. This will clearly be a very event-driven few months as we get the plant back online, and we start to get experience of producing again, and I think all of us will feel a lot better once we are more in the routine again of normal production as the many questions today indicated. It is something that all of us are very focused on. We feel encouraged by the progress that we have made and that the progress has stayed on schedule in terms of getting the plant sanitized and restarted before the end of July. We’ll talk to you all very soon.

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