Genzyme: Robust Growth Prospects at Clearance Prices

Aug. 7.09 | About: Sanofi (SNY)

In late July, Genzyme (NASDAQ:GENZ) reported 2Q09 results, including revenue of $1.23 billion (up 5% from $1.17 billion during 2Q08 and up 11% excluding unfavorable currency exchange rates). The Company's Non-GAAP net income (which excludes stock compensation and certain business acquisition items) rose to $232.5 million or $0.85 per diluted share versus $107 million or $0.38 per diluted share in the year-ago period. During 2Q09, Genzyme generated about $281 million in cash (primarily derived from operations) and used about $157 million (primarily for investments in manufacturing facilities).

During June 2009, Genzyme announced the presence of a virus that impairs cell growth in a bioreactor used for Cerezyme production at its Allston facility, which resulted in a temporary interruption of production from the facility that produces Cerezyme, Fabrazyme and Myozyme for sanitization. All Myozyme/Lumizyme (alglucosidase alfa) production will occur at the company's 4,000 L scale facility in Belgium. Genzyme The sanitization of the facility has been completed and production of Fabrazyme (agalsidase beta) and Cerezyme (imiglucerase for injection) has resumed.

The Company also reported that FDA approval of the 4,000 L process, which is now expected during 1Q10, will be necessary to expand supply and support an increase in U.S. sales. GENZ will begin to transition U.S. patients in the Myozyme Temporary Access Program from the product produced at the 2,000 L scale to that produced at the 4,000 L scale and will be providing 4,000 L data to the FDA to support this transition. The PDUFA date for Lumizyme (the 2,000 L product) is 11/14/09. Upon approval, Genzyme will submit a supplemental BLA (sBLA) for the 4,000 L process, and the Company anticipates a four-month FDA review of the sBLA, and if the FDA acts by the PDUFA date, a potential approval by the end of March 2010.

Genzyme announced it is preparing to begin enrollment in two global, multi-center, phase 3 trials of GENZ-112638, a potential new oral therapy for Gaucher disease type 1 as a follow-on product to succeed the intravenously (IV) infused Cerezyme (which posted $1.2 billion in sales during 2008). The first, a randomized, double-blind, placebo-controlled study, will include untreated Gaucher disease patients. It is expected to enroll 36 patients who will be treated for 9 months. The second trial will be a randomized conversion study involving patients who have previously received Cerezyme, with an anticipated enrollment of approximately 96 patients and a 9-month treatment period. Genzyme is seeking to accelerate the regulatory process for this product globally in order to speed its approval.

On 7/31/09, Genzyme announced that the FDA will re-inspect the company's Allston Landing manufacturing facility. The re-inspection is a follow-up to an inspection the agency conducted in May 2009 and is intended to verify that all corrective and preventative actions identified in a February warning letter have been implemented. In its letter to Genzyme, the Agency indicated that all promised actions had not been either fully or adequately implemented at the time of the May inspection. Genzyme will work with the FDA to schedule the re-inspection as soon as possible with the resolution of all outstanding issues with the Agency before year-end as my current expectation and a potential upside catalyst for the stock - in addition to a deep and diversified pipeline of compounds in development.

Genzyme and Isis Pharma (NASDAQ:ISIS) announced on 5/20/09 that the Phase 3 clinical trial of mipomersen in patients with homozygous familial hypercholesterolemia (hoFH) met its primary endpoint, with a 25% reduction in LDL cholesterol after 26 weeks of treatment compared to a 3% placebo reduction. This study also met each of its three secondary endpoints of reduction in levels of apolipoprotein B, total cholesterol, and non-HDL cholesterol. Data from this phase 3 study of mipomersen in patients with hoFH will form the basis of Genzyme's initial regulatory filing for marketing approval, which is expected to occur during 2H10, with a similar filing in Europe shortly afterwards. Data from the Company's Phase 3 study in severe hypercholesterolemia patients is expected to be available at the time of these U.S. submissions and may provide the basis for a broader indication.

ISIS has now completed enrollment in the mipomersen Phase 3 study in heterozygous FH patients, which is the second of four Phase 3 studies and expects to report the data from this study during 1H10. In May 2009, ISIS reported positive top-line results (with final results still pending) from a Phase 3 study of mipomersen in the largest, placebo-controlled Phase 3 study in homozygous FH patients which met its primary endpoint with a 25% reduction in LDL-C after 26 weeks of treatment with mipomersen versus 3% for placebo and all of its secondary endpoints in a highly statistically significant manner.

On 5/21/09, Genzyme announced that it has submitted the final documentation to address all items in the FDA's complete response letter from 3/2/09 (CRL) for Lumizyme (alglucosidase alfa), which is produced at the 2,000 L bioreactor scale. The submission included clinical data requested by the FDA from Genzyme's Pompe Registry. The FDA has agreed that these data can fulfill the requirements for a verification study to demonstrate the clinical benefit of Lumizyme. Also included in the submission were the Risk Evaluation and Mitigation Strategy (REMS) and the final label for the product.

Genzyme also has a pending supplemental New Drug Application (sNDA) to expand the FDA-approved use of anti-cancer drug Clolar (clofarabine) in the treatment of adults with acute myeloid leukemia (AML). Specifically, the sNDA seeks approval for the use of Clolar as a single agent in patients 60 years or older who have at least one unfavorable prognostic factor with previously untreated AML. Clolar is already approved for the treatment of acute lymphoblastic leukemia (ALL) in relapsed and refractory pediatric patients between the ages of one to 21 years who have received at least two prior treatments. The PDUFA decision date for the sNDA is 9/24/09.

In early June, Genzyme announced a deal with Bayer (OTCPK:BAYRY) to acquire the worldwide rights to Campath/MabCampath (alemtuzumab), giving GENZ primary responsibility for the development and commercialization, including two rapidly progressing Phase 3 studies of alemtuzumab in relapsing-remitting multiple sclerosis (MS) patients. The first trial, for which enrollment is complete, treats early, active relapsing-remitting patients who have received no prior therapy. The second study, which is expected to complete enrollment before the end of 2009, is studying relapsing-remitting patients who had active disease while on other MS therapies. Data from the trials are expected to be available in 2011, and approval is anticipated in 2012.

Genzyme has also completed enrollment in a pivotal trial of an advanced phosphate binder (APB) (which reduces elevated serum phosphorus levels in kidney dialysis patients) and results are expected during 1Q10. The APB is designed to more effectively bind phosphate for a substantial improvement in potency while maintaining all the benefits of sevelamer. The company anticipates that the APB would be approved by the time the core patent estate for sevelamer expires in 2014, which is currently marketed by GENZ as Renagel and Renvela (a buffered formulation of the same compound) which posted combined sales of $678 million during 2008.

Genzyme is also collaborating with PTC Therapeutics on the development of ataluren, which is a novel oral therapy for the treatment of genetic disorders due to nonsense mutations. A pivotal phase 2b trial of ataluren in Duchenne muscular dystrophy is fully enrolled and results are expected during 1H10 while a Phase 3 trial evaluating the compound for cystic fibrosis is expected to begin during 3Q09. Another collaboration for the Company is with Osiris Therapeutics (NASDAQ:OSIR) to commercialize the adult stem cell treatment Prochymal. Enrollment has been completed in the two phase 3 studies of Prochymal in graft vs. host disease and data are expected during 3Q09, with OSIR already initialing the rolling BLA process for potential FDA approval.

Genzyme issued the following guidance for 2009 full-year results: (1) gross margin range of 72-73% of revenue; (2) revenue of $4.6-5 billion; (3) Non-GAAP EPS of $2.35-2.90, which represents a downward revision and wider ranges for revenue and income to reflect the estimated impact of the temporary Allston plant closure and uncertainties over the timing of Lumizyme availability in the U.S. The Company's 2009 revenue guidance by business segment illustrates the diversified nature of Genzyme's biotech operations, including (1) treatment of genetic diseases (enzyme replacement therapies) = 40.8%; (2) Cardio, Metabolic, and Renal Disease Therapeutics = 21.9%; (3) Bio-Surgery (Synvisc-One) = 11.6%; (4) Hematology, Oncology (cancer drugs) = 8.0%; (5) Other (transplant, genetics, and molecular diagnostics) = 17.7%. The preceding calculations are based on the midpoint of the Company's guidance for total year revenue and each business segment.

According to data on Yahoo! Finance as of 8/6/09, consensus analyst estimates for Genzyme during 2009-2010 include (1) revenue of $4.8B and $5.8B; (2) EPS of $2.81 and $4.23; (3) 22.5% annual growth over the next five years; (4) a PEG ratio of 0.78X; and (5) an average price target of $64.59 per share within a range of $52-$83 among 17 analysts. With shares of the Company trading at multi-year lows (the stock first broke over 50 bucks in late 2000) and at nearly the exact same levels as five years ago; Genzyme represents a compelling buy as large cap biotech with diversified, global operations that trades at value parameters well below its peer group with a return to over 20% long-term annual top-line growth likely to occur during 2010 based on the successful resolution of manufacturing issues and the deep, late-stage development pipeline outlined above.

Disclosure: Long GENZ