Another Manufacturing Setback for Genzyme

Earlier this morning, Genzyme (GENZ) received another Complete Response Letter for its Pompe Disease drug Lumizyme. I had anticipated an Approval late last week. However, that was before the FDA and Genzyme announced last Friday that foreign particles, e.g., stainless steel fragments, non-latex rubber and fiber-like material, were found in several of the company's drugs, including Cerezyme, Fabrazyme, Myozyme, Aldurazyme, and Thyrogen. Each of these drugs treat severe genetic disorders except for Thyrogen, which is used in the treatment of thyroid cancer and hypothyroidism.

Last Friday, the FDA and Genzyme both issued a letter to healthcare professionals indicating that approximately 1% of lots tested were contaminated with foreign particles (1 in 100). Although this is clearly negative for the company and another setback at its Allston manufacturing plant, the letter did not sound inflammatory and did not indicate that any of the lots would be recalled. Additionally, the FDA did not indicate any further regulatory action at this time related to the future sale of these critically-important medicines. Most importantly, no serious adverse events related to these contaminants have been reported as of yet, and physicians are being advised to screen and filter these products before injecting patients to help avoid any potential harm.

Lumizyme decision a no-brainer

In the previous Complete Response Letter from the FDA, Genzyme was to provide the agency with a Risk Evaluation and Mitigation Strategy (REMS) and a product label. There were also post-marketing requirements, which included a clinical trial demonstrating clinical benefit with Lumizyme. Genzyme believes that these criteria have all been satisfactorily addressed (as do I). However, the big blow was that the Allston manufacturing facility also needed approval by the FDA under good clinical manufacturing practices (cGMP). Based on the recent detection of foreign particles in products produced at this facility, this was a no-brainer that Lumizyme would not receive an Approval. As a result, I see minimal additional downside to Genzyme from its current levels as shares were already beaten down last Friday after the contamination announcement.

Future growth of Myozyme/Lumizyme franchise delayed again

Based on this announcement, near-term growth of the company's Myozyme/Lumizyme franchise will be further delayed, with the 2000L Lumizyme product now expected to be potentially approved in H1/10, in my opinion. The company plans to submit a sBLA to produce Lumizyme from a 4000L bioreactor (in Belgium) shortly after approval of the 2000L product, which could delay future growth of Lumizyme in the global market well into H2/10.

Overall, I believe the delay is likely in the 4-6 month timeframe, depending on the timeline for reinspection of the Allston facility and the type of complete response requested by the FDA (Class 1 response = 60 day review; Class 2 response = 6 month review). Since this is likely only a cGMP issue, the company may escape with a Class 1 response following a satisfactory clean-up and mitigation plan at the Allston facility. Note that a Class 2 response could potentially push approval of the 2000L Lumizyme product into H2/10, and the 4000L product into H1/11.

Impact to valuation?

Obviously my target price for Genzyme will be negatively impacted by this regulatory delay (and manufacturing setback). However, I will provide this update later tonight. I reiterate that Genzyme shares have likely factored in this Complete Response Letter from the FDA based on the product contamination announcement released last Friday. As a result, I see minimal downside at current levels, particularly given the fairly benign press release issued by the FDA on Friday. However, I won't go as far as recommending that investors accumulate shares at these prices given the unpredictable nature of the FDA. I would wait and see if the FDA flexes its muscles in the near-term, potentially asking that product be recalled, or that product shipments be delayed until the Allston plant is cleaned up.

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

Comments

[lennywon:]

Fill and finish is the last element in production before storage and distribution and, theoretically, the no brainer part. Having a manufacturing background, I can only guess the human error(S) involved here. I am wondering about the discipline levels and the morale as well as the plant oversight by the ops. Management team. Seems like there is more to this. Any insight or inside management rationale for the hiccups? Thanks

Nov 16 09:08 PM

[Mark Mitchell:]

I'm going to put in a call to the company, see what they have to say.


On Nov 16 09:08 PM lennywon wrote:

> Fill and finish is the last element in production before storage
> and distribution and, theoretically, the no brainer part. Having
> a manufacturing background, I can only guess the human error(S) involved
> here. I am wondering about the discipline levels and the morale as
> well as the plant oversight by the ops. Management team. Seems like
> there is more to this. Any insight or inside management rationale
> for the hiccups? Thanks

Nov 17 08:54 AM

[MarketGuy:]

Interested what they say to you Mark. Another note is Icahn's announcement he's buying into GENZ. This is not necessarily a good thing knowing Icahn's over-meddling ways.

Nov 17 10:29 AM

[BioGuy:]

I agree with Lennywon- the process development/validation people at Genzyme probably know exactly where the particles are being introduced. Not to say they knowingly made this error, but they know where the riskiest steps in the process are. And there will already be a plan B, C, D......
The FDA will probably just have them submit the manufacturing changes, with a little extra attention to validation data due to the previous virus problem at the site (bad luck in my opinion).

Overall, pharma needs to start paying more attention to manufacturing ASAP. Reason being there will be tighter regulatory demands, and senior management knows this. See PDF at bottom of this link;
www.deloitte.com/lifes...

And sadly, in spite of your imagination and what you see in movies, pharma manufacturing (overall) is only a tad beyond turn of the century beer brewing technology. This link is from last year, but is a quick summary of how the FDA is saying "get with it guys".
www.genengnews.com/art...

"With a notable sense of irony, Stephens recalls a Wall Street Journal article that claimed potato chip manufacturers use more advanced manufacturing technology than pharmaceutical manufacturers. Silicon chip makers, he noted, have increased their manufacturing efficiencies by more than 10,000% in the past few decades by using new technology. In contrast, the pharmaceutical industry has used the same basic manufacturing processes for the past several decades, with the only improvements being made in the equipment, not the process."

The concepts mentioned in the first few paragraphs apply to small molecule and protein manufacturing. Improvement, already occurring in some places, needs to be a collaboration of not only FDA and industry, but also academia and, yikes, the U.S. patent office.

Nov 17 12:00 PM

[Mark Mitchell:]

Thanks for the articles. I can understand that manufacturing technology wouldn't have advanced that much with pills given the lack of complexity in manufacturing most small molecules. However, you would think that the biologics would be a different story, especially given that we're dealing with living organisms at this point. Validation and Q/A are crucial with these types of drugs (and all drugs for that matter). I do understand that the capital costs associated with upgrading these facilities is likely high, and these companies need their cash to maintain healthy dividends and a solid M&A war chest.

Lastly, I know it feels like the FDA is picking on Genzyme, and it could just be that Genzyme is a bad apple, but I feel as though other companies will likely come under fire over the next several months. It's like mice, if you've found one in your house, you'll likely find more soon enough.

Still waiting to hear from the company, they usually get back to me fairly quickly.


On Nov 17 12:00 PM BioGuy wrote:

> I agree with Lennywon- the process development/validation people
> at Genzyme probably know exactly where the particles are being introduced.
> Not to say they knowingly made this error, but they know where the
> riskiest steps in the process are. And there will already be a plan
> B, C, D......
> The FDA will probably just have them submit the manufacturing changes,
> with a little extra attention to validation data due to the previous
> virus problem at the site (bad luck in my opinion).
>
> Overall, pharma needs to start paying more attention to manufacturing
> ASAP. Reason being there will be tighter regulatory demands, and
> senior management knows this. See PDF at bottom of this link;
> www.deloitte.com/lifes...
>
> And sadly, in spite of your imagination and what you see in movies,
> pharma manufacturing (overall) is only a tad beyond turn of the century
> beer brewing technology. This link is from last year, but is a quick
> summary of how the FDA is saying "get with it guys".
> www.genengnews.com/art...
>
> "With a notable sense of irony, Stephens recalls a Wall Street Journal
> article that claimed potato chip manufacturers use more advanced
> manufacturing technology than pharmaceutical manufacturers. Silicon
> chip makers, he noted, have increased their manufacturing efficiencies
> by more than 10,000% in the past few decades by using new technology.
> In contrast, the pharmaceutical industry has used the same basic
> manufacturing processes for the past several decades, with the only
> improvements being made in the equipment, not the process."
>
> The concepts mentioned in the first few paragraphs apply to small
> molecule and protein manufacturing. Improvement, already occurring
> in some places, needs to be a collaboration of not only FDA and industry,
> but also academia and, yikes, the U.S. patent office.

Nov 17 01:58 PM

[MarketGuy:]

Now Isis announced it's Mimomersen, co-developed with GENZ, will be delayed a year further out from it's original forecast of mid 2010 to mid 2011. The good news keeps rolling in for GENZ...whew.

Nov 17 03:23 PM

[Mark Mitchell:]

Yeah, I saw that. Wouldn't consider that market-moving news for GENZ though as it's still a long ways from now and that indication represents a small market opportunity. However, I do agree that it represents more unfavorable news for this stock. No real upside to the share price right now given the lack of meaningful catalysts in the near-term. Although Icahn could potentially stir the pot with acquisition rumors or Executive reshuffling...

No response from company, will try again tomorrow.

Nov 17 05:03 PM

[Mark Mitchell:]

Spoke to Genzyme rep today. As expected, no real concern with the particle 'contamination' issue at Allston. Apparently this issue has been present for years and has historically been around the 1% 'contamination' level. This is why the company had recommendations on its product labels to filter before injecting into patients. Seems like the FDA either has it in for Genzyme, or it is cracking down on these types of things. If it's the latter, I expect this issue to start popping up at other Biotech's in the near future. Of note, the Waterford plant has a lower incidence of particle contamination, but it really can't get much lower than 1% can it?

With regard to Lumizyme, the company didn't say it, but it seems like it could be a possibility that they may bypass trying to get approval of the 2000L bioreactor product and focus on direct approval of the 4000L bioreactor product given the continued struggles in approving the 2000L product. The FDA definitely wants the 4000L product on the market, so it's a matter of meeting with the FDA and finding out the most expeditious path for approval (either try to get approval of 2000L product, then sBLA of 4000L product, or simply try to get approval of 4000L product). Nonetheless, either way sounds like it could be another year before eventual approval of this important drug.

No real comment on morale at the company and plant oversight at Allston. However, they didn't answer that things were positive, so read whatever you want out of that.

I reiterate the potential for generic competition for Renvela/Renagel by 2011. ANDA was filed earlier this year; 30-month stay of approval puts a potential generic on the market late in 2011/early 2012 if it can get past Genzyme patents. If this should happen, Genzyme will likely only have approximately 2 years left of strong revenues from Renvela/Renagel franchise. Not so good for GENZ, especially when you also factor in the new competition against the company's cash cow (Cerezyme). Overall, 2010-2012 could be shaky with respect to sales.

Nov 18 11:47 PM