Genzyme's Very Bad Year

Even before the FDA’s ominous announcement last week that it had found things that really should not be there in vials of Genzyme’s (GENZ) enzyme replacement products, the US biotech was certainly having a personal annus horribilis.

With calls for heads to roll growing louder from the investment community and commentators alike, the company is heading into 2010 in a bruised and battered state. Manufacturing problems are still not sorted to the regulator’s liking at Genzyme’s now infamous Allston facility and niggling negatives are cropping up elsewhere, and concerns are mounting that things could get a lot worse before they get start getting better.

List of woes

The list of Genzyme’s problems is long and seems to be growing every week. Concerns that deficiencies at the manufacturing plant will take a lot longer to resolve than the company believes are doing the most damage. The shut down, prompted by a viral contamination, meant sales have already been hit and the company has lowered financial guidance four times this year; severely denting the share price and confidence in management.

With the company’s weakened Cerezyme now facing competition in the Gaucher disease market much sooner than anticipated, a swift resolution is sorely needed (Therapeutic focus - Spotlight falls on new Gaucher treatments amid Genzyme's woes, August 6, 2009).

The knock on effect to other products is already happening: Last week the FDA refused to approve Lumizyme, a bigger batch Myozyme product for Pompe Disease, until problems at Allston are sorted, news that was widely expected but disappointing all the same.

And then the FDA’s announced the discovery of foreign particulates. This was certainly bad for the Genzyme image, but the reality was probably not so disastrous. The levels discovered, in less than 1% of products, was in line with the industry norm for these sorts of products and looks more like the regulator wanting to remind doctors that filtration should be used before administration. The timing of this reminder could not have been worse however.

Pipeline setbacks

On top of all this the pipeline has also been disappointing. This week brought news that the follow-on product for its kidney disease franchise was being scrapped after phase II/III trials found it was no more potent than the existing products, Renagel and Renvela. They lose patent protection in 2014, sales in 2013 are forecast to reach almost $800 million, and Genzyme is now without a new option to switch those patients on to.

Another setback came with news that an experimental cholesterol lowering drug in development with Isis Pharmaceuticals (ISIS), mipomersen, will not be filed until 2011, 12 months later than anticipated. Still, this product is incredibly high risk and hopes for its commercial potential were already dimming (Genzyme and Isis could see mipomersen fears grow, November 18, 2009).

Another very high risk in-licensed product that Genzyme threw a lot of money at to secure rights to was Prochymal, which crashed out spectacularly a couple of months ago (Osiris left clinging to a niche after Prochymal failure, September 9, 2009).

Neither mipomersen nor Prochymal has painted Genzyme's in-licensing strategy in a particuarly favorable light.

No return

All these setbacks have already prompted financial analysts to scale back their forecasts for the next couple of years, but several are maintaining a much more pessimistic stance than the company’s already deflated share price suggests.

The influential Goldman Sachs (GS) has come out as particularly downbeat. They believe all these problems could hurt a lot more over the longer term than currently appreciated. They recommend investors sell the shares and have placed a $44 price target on the stock, possibly the lowest amongst financial analysts. On Monday, Genzyme shares were trading at $49.80; if Goldman Sachs is right they still have a long way to fall.

Other than a brief spell in August of this year, the last time the stock was trading below $50 was in July 2004, and at that point it was definitely on an upward trend. The company has already lost a quarter of its market value this year.

Genzyme has never paid a dividend, so the only return available to investors is through a rising share price. Since September 2008, when the stock touched a record high of $83.50, the trend has been decidedly southwards.

If signs that the situation is under control do not emerge very quickly, calls for heads to roll will get louder. The arrival of one Carl Icahn, the notoriously demanding activist investor, on the shareholder roster last week could indicate an escalation in the debate is about to happen.

Comments

[stockinvestor]

I agree with the facts that you provide in your article, but I also like how this company has gone after rare non-mainstream diseases that have proven to be very lucrative. They remind me of a small company (Genethera) who appears to want to follow the same model with animal diseases: Johnne's Disease, Mad Cow Disease; Chronic Wasting Disease, and even E. Coli, but they appear to need alot more funding for the last one. Anyway, thank you very much for a wealth of information on what has been happening with Genzyme this past year! What has Mr. Icahn done for other companies stock, that he has taken large positions in?

2009 Nov 24 03:22 AM

[Justin M. Hall]

Regarding Icahn, check out Biogen Idec (BIIB) mid-2007. As I recall, shares hit somewhere around $75 to $85.

EP, thank you for the excellent article. Our friends at GENZ have had a damn tough road this year. OSIR's GVHD treatment was a huge disappointment for many investors.

GENZ holders in need of some hope, please reference: Michael Becker's prior coverage of GENZ from a few months ago.

Nevertheless, another excellent article my friend!

Justin

2009 Nov 24 08:28 AM

[San Juan]

The article highlights all the known information that has produced the current price. If GS is correct then you have ~10% downside. The valuation is similar to 2004, yet you have more sales and earnings from more products and you have the upside of increasing sales as these issues are corrected (upside to current estimates). Shareholder unrest means unlocking value (upside), or sale of the company (upside). GENZ model of going after rare and unmet indications provide for a more defensible revenue stream. Upward revisions to eps or sale of company could yield a $75 stock or 50% upside. GENZ has had a horrible year and the stock reflects that, as you look into 2010/2011 the upside more than offsets the downside.

2009 Nov 24 12:49 PM

[frosty]

Mr. Icahn is interested only in turning a fast buck. People like him used to be called corporate raiders. If he becomes a major owner and has his way, kiss Genzyme goodbye as he would likely try to sell all or parts of the company. He attempted this and failed at Yahoo last year and this. His history is full of similar strategies with some failures but far more successes as he is a billionaire. For all his prowress, other investors in his targets don't always make out so well. Beware of this man. Personally, I hope that Genzyme straightens out and becomes the top flight biotech science company it was before industrial and management issues became such a major distraction. It may otherwise have bright, prosperous, and long-lived future.

2009 Nov 24 01:05 PM

[Pierr Johnson]

Kudos for the insights. Still, it is important to point out the Lumizyme approval and related manufacturing issues are separate from the viral infection that halted production of Cerezyme and Fabrazyme at the Allston plant. The company has moved beyond remediation and is well through its first run of production on both therapeutics. It has transferred production of Myozyme to the Belgian plant as is seeking approval there, which should remove pressure for the approval of the related Lumizyme. (An aside: because Myozyme displayed slight variations when manufactured in 2000L bioreactors, the FDA required a new appellation and approval track.)

The impact on the marketability of competing products to Cerezyme is unclear to me. Anecdotal evidence suggests many patients could adapt to the temporary shortage of both Cerezyme and Fabrazyme. But consensus estimates encompass a return to 20% annual growth. A stock that serially stumbles deserves its detractors. That said, if the company meets its established mileposts (at long last, indeed), the smarter money will be long at this point in time

2009 Nov 24 02:07 PM

[Gumby]

The silver lining may be that Big Pharma will lose appetite on takeovers of biotechs. I hope that there will be mergers of peer biotechs instead of being sucked up by Big Pharma with billions of shares outstanding. I dont want to see many biotechs ending up as footnotes in Big Pharma balance sheets..

Jan 18 03:33 PM