Sell Genzyme Near Term Due to Continued Manufacturing Challenges

 |  Includes: FOLD, PLX, SHPG, SNY
by: Mark Mitchell

Yesterday, Genzyme (GENZ) provided a manufacturing update with regard to the production of its blockbuster drug Cerezyme, and Fabrazyme - treatments for Gaucher disease and Fabry disease, respectively. The company reiterated that the it has sanitized and restarted the bioreactors that produce both drugs. Importantly, Cerezyme remains on track for shipment in Q4/09. However, Fabrazyme shipments are expected to be delayed until mid-December. The reasons for this latest setback are two-fold.

  1. The Fabrazyme bioreactors were the last to be sanitized and ultimately restarted for production; and
  2. The Fabrazyme bioreactors are not producing as much product as they were before the Allston plant was shut-down for cleansing.

Based on these challenges, the company has revised its FY2009 revenue guidance for Fabrazyme to $450 million from a previous range of $510 to $520 million. Cerezyme revenues were guided to come in at approximately $800 million for FY2009, which compares to the company's previous guidance for the lower end of between $750 million to $1 billion.

Who benefits from this news?

The Cerezyme issue has been beaten to death, so I refer readers to my previous articles for my views on the Cerezyme manufacturing setback and the early introduction of competitor products velaglucerase alfa from Shire (SHPGY), and prGCD from Protalix (NYSEMKT:PLX) in the Gaucher disease market.

In the Fabry disease market, Shire markets its enzyme replacement therapy Replagal, and competes with Fabrazyme in the EU. Based on the Orphan Drug status of Fabrazyme in the US, Genzyme enjoys market exclusivity in its home market. Overall, I do not anticipate much fallout from this announcement on 2010 sales (and beyond) of Fabrazyme.

I do, however, believe that drug developer Amicus Therapeutics (NASDAQ:FOLD) could come out as the winner following this announcement. Amicus is currently developing Amigal, an oral pharmaceutical chaperone for the treatment of Fabry disease. The drug recently entered Phase III testing, and this announcement from Genzyme could potentially result in accelerated enrollment in this trial. Given that Fabrazyme has been guided to meet full patient demand in Q1/10, I don't anticipate any regulatory action by the FDA to provide early approval of Amigal to make up for the shortfall in Fabrazyme product.

Limited impact on valuation of Genzyme

I had previously estimated FY2009 sales of approximately $508 million for Fabrazyme, and approximately $765 million for Cerezyme. When factoring in the company's new guidance, and a modest decrease to my FY2010 sales estimates for Fabrazyme (now $540 million; down from $590 million) the net effect is a slight reduction to my valuation of the company. As a result, I am maintaining my near-term target price of approximately $45.00 per share, and my 12-month target price of $63.00 per share. I also reiterate my near-term SELL recommendation as I view this announcement as having an overall negative sentiment and it continues to demonstrate the challenges associated with manufacturing biologic drugs, in my opinion.

Very brief comment on MS drug alemtuzumab

Four-year follow-up results from the company's Phase II trial continue to demonstrate the potential clinical benefit of alemtuzumab in MS. The data from this trial tracked those previously reported last October (three-year findings), which had suggested a durable and potential disease-modifying effect. These data were expected and therefore do not change my overall positive view on this potential blockbuster MS drug. The real test will come from the ongoing Phase III trials, both of which are now fully enrolled. Data from these trials are not expected until 2011.

Disclosure: The author does not own, nor is he short, shares of Genzyme, Shire PLC, Amicus Therapeutics or Protalix BioTherapeutics.