Genzyme Appears Overbought: Reiterating Near-Term Sell

Since I initiated coverage of Genzyme (GENZ) back on August 6, shares of the company have climbed more than 14%. This is contrary to my view that shares could drop a modest 8%-10% and reach the $45.00 level over the next 2 - 3 months.

My view was based on a number of factors, which I have outlined below.

1. Shares of GENZ recently closed below the $50.00 level for the first time in 5 years. I believe that the $50.00 level represented a significant technical and psychological support level, and breaking through this floor could potentially have a near-term negative impact on the stock. I believe that the next level of support is at the $41.00 level, which is relatively close to my base valuation of the company at approximately $45.00 per share. Please note that my base valuation is derived from a 12x multiple of my 2010 non-GAAP EPS estimate and excludes any value attributable to the company's late-stage pipeline, including the MS drug alemtuzumab and the high-risk hypercholesterolemia drug mipomersen.
2. Overblown or not, the continued negative news surrounding the manufacturing setback at the company's Allston plant, which produces blockbuster drug Cerezyme and Fabrazyme, should, in my opinion, act as a drag on the stock until more positive news emerges. Additionally, I do not view the Leerink Swann analyst upgrade on August 21 (from Market Perform to Outperform) to be a significant catalyst for the stock. As a result, I was surprised to find that this announcement caused the shares to rise from $52.42 to $55.88 (as of August 26), an increase of almost 7% The analyst stated that the expected negative impact from competitive entrants in the Genzyme-dominated Gaucher disease market is overblown and that Genzyme will likely escape with a 'flesh wound instead of a decapitation'. While I fully agree, and posted similar comments a few days earlier on my blog (see my GENZ article from August 18), my valuation and analysis continued to suggest downside risk for GENZ.
3. I expect there to be limited meaningful clinical and/or regulatory news from Genzyme over the next 2 months. In my opinion, the next meaningful (and likely positive) news to emerge from the Genzyme camp is the November 14 PDUFA date for its Pompe disease drug, Lumizyme. Yes, there is a September 1 FDA Oncology Drug Advisory Committee meeting to discuss Genzyme's supplemental NDA (sNDA) for Clolar (proposed indication for the treatment of previously untreated adults aged 60 years or older with acute myeloid leukemia with at least one unfavorable baseline prognostic factor). However, regardless of the outcome, I do not believe that this news will have much of an impact on shares of Genzyme given the intense focus on Cerezyme. Recall that this was evident when the company recently announced EU approval for Mozobil - there was no impact on the stock; albeit, the announcement was largely expected.

Q3/09 financial results are also expected to be announced in October, and could move the stock. However, you must ask yourself, is the upside potential from an EPS beat more attractive than the downside potential from an EPS miss?

Based on the current share price appreciation, I believe that an EPS beat may not have much of an effect on the stock (could already be priced in following the upbeat note from Leerink).

On the flip side, a miss will likely cause great pain.

Lastly, I continue to view the real growth engine for Genzyme to be related to Lumizyme, alemtuzumab and mipomersen, not the upcoming quarterly results.

Further reasoning to support my near-term sell recommendation:

• There has been NO insider buying of Genzyme stock while shares have hovered around a 5-year low. In fact, insiders sold shares of Genzyme in May and June while the stock traded between $55.00 and $60.00 per share. Investors should question a lack of insider buying at these bargain-basement prices.
• There has been no unexpected positive news to improve investor confidence in this near-term rally (other than the analyst upgrade).
• I believe that Q3/09 financial results (out in October) will likely disappoint, with Cerezyme revenues expected to decline sharply. There could also be additional unexpected costs and write-downs related to the manufacturing issues that could surface in the third quarter, adding further pressure on earnings.
• I remind investors that Genyzme has 20% of unfinished Cerezyme product that could be discarded. This 20% would likely further reduce the company's 2009 Cerezyme sales guidance, which currently stands at approximately $750 million. Therefore, I believe that there is likely no upside potential to this 20% being released for sale, only downside.

Reiterating near-term SELL and long-term BUY recommendation:

Overall, I see no reason to own this stock right now. However, I recommend that investors look into buying back into the stock in October/November in advance of the November 14 PDUFA date for Lumizyme.

Additional meaningful clinical and regulatory catalysts will flow in Q4/09 - Q2/10, which could support my longer-term BUY recommendation and $63.00 target price for Genzyme.

Disclosure: the author does not own, nor is he short, shares of Genzyme.