Genzyme's Renagel / Renvela Franchise: Investors Would Be Wise to Reevaluate

This is a follow up to my previous post regarding the news that development of Genzyme’s (GENZ) follow-on product to its Renagel/Renvela franchise is being discontinued. The product, named GENZ-644470, is an advanced phosphate binder (APB) that was hoped to have demonstrated a superior clinical profile compared to predecessor Renvela. The drug worked at reducing serum phosphorus levels in patients with chronic kidney disease; however, it did not outperform Renvela in this regard.

In my opinion, this is a significant setback for Genzyme. Sales of its Renagel/Renvela franchise were approximately $680 million in 2008, making it Genzyme's second-best selling product behind flagship Gaucher disease drug Cerezyme. The product also has significant opportunity for label expansion, particularly in CKD patients not on dialysis. As a result, this is a product with significant growth potential for Genzyme in coming years.

As I indicated before, my biggest worry with this pipeline setback is that the core patent estate for Renagel/Renvela expires in 2014. As a result, Genzyme will not likely be able to employ a switch strategy to a newer branded product before patent expiration. Additionally, there was an ANDA (generic drug filing) filed earlier in 2009 by Impax Labs. A 30-month stay of approval following a legal challenge by Genzyme would push potential approval of this generic competitor until late-2011/early-2012. Under each of these scenarios, Genzyme stands to lose hundreds of millions of dollars by 2014, and potentially as early as late-2011/early-2012.

I defer the reader to my previous post for further analysis on this clinical setback. However, below the reader will find my views on how this news has impacted my valuation of the company.

Valuation reduced again; recommendation lowered to SELL from HOLD

Based on my analysis of this news, I have elected to downwardly revise my valuation of Genzyme, taking into account the likely genericization of its Renagel/Renvela franchise in 2014 (see Valuation #1 and #2 figures below). I have also taken account the potential for a 2012 genericization of this franchise (see Valuation #2; worst-case scenario).

In addition to the above changes, I have increased my expected launch year for mipomersen in homozygous familial hypercholesterolemia (HoFH) from 2011 to 2012 based on a recent update on this clinical program from Genzyme and partner ISIS Pharmaceuticals (ISIS). This has had a modest impact on my risk-adjusted NPV of mipomersen in this indication. Overall, I now value the company's late-stage pipeline, which includes mipomersen and alemtuzumab, at $14.77 per share (previously $14.90 per share). See the figures below for a more detailed look at my valuation methodologies.

Valuation #1
	2010E	Multiple	Value (US$)
Non-GAAP EPS (diluted)	2.91	12x	$34.97
Drug name	Launch year	Clinical & Regulatory Probability of Success	Peak sales (US$000s)	GENZ profit	NPV (US$)
Alemtuzumab	2012	60%	$1,999	63.00%	$10.08
Mipomersen	2012	72%	$151	56.00%	$0.81
Mipomersen	2014	45%	$2,445	35.00%	$3.88
Total risk-adjusted NPV					$14.77
			Total valuation	$49.74

Valuation #2
	NPV (US$)	Clinical, Regulatory & Commercial Probability of Success	Risk-adjusted NPV (US$)
Worst-case scenario	$45.12	53%	$23.80
Best-case scenario	$56.15	47%	$26.53
Total DCF valuation			$50.33
Drug name	Launch year	Clinical & Regulatory Probability of Success	Peak sales (US$000s)	GENZ profit	NPV (US$)
Alemtuzumab	2012	60%	$1,999	63.00%	$10.08
Mipomersen	2014	45%	$2,445	35.00%	$3.88
Total risk-adjusted NPV					$14.77
			Total valuation	$64.30

When using my blended valuation methodology, which incorporates both valuations at a 50/50 rate, my target price is reduced from $59.00 per share to $57.00 per share. Although this target price still represents a BUY at the current share price, I believe that investors are largely focused on the continued negative sentiment from the manufacturing setbacks at Allston, the Lumizyme Complete Response Letter, and possibly the discontinuation of the APB program. Therefore, I do not believe that there is much upside potential at this point in time.

Additionally, I note that investors sold off shares of Genzyme by approximately 8% following the FDA’s announcement on November 13th that the five products produced at the company’s Allston plant were found to be tainted with foreign particles, including non-latex rubber and stainless steel fragments. Although this has been known (and accepted) by the FDA for years, these findings were largely responsible for the company receiving another Complete Response Letter for its promising Pompe disease drug, Lumizyme (issued on November 16th).

The share price, however, did not drop further on the November 18th announcement that the company was discontinuing development of its APB, likely reflecting a lack of concern over a product believed to have patent protection until 2014. This is indeed a long time from now; however, I believe that there is a chance that Impax Labs could succeed in launching a generic version of Renvela by late-2011/early-2012. Based on the impact of this likely genericization to my valuation, I would have expected this news to have dropped the share price by a minimum of $2.00 per share, with the potential for an additional $1.00 per share drop if you believe in early genericization.

As a result, I see downside to current levels of approximately $3.00 per share, or 6%, and am lowering my near-term recommendation to SELL from HOLD to reflect my analysis. I note that my 12-month recommendation remains a BUY at a target price of $57.00 per share.

I pointed this out before, and I will note it again for something to think about. When you take away the valuation I attribute to the company's late-stage pipeline, my valuation suggests a target price range of $35.00 per share to $50.00 per share (previously $35.00 per share to $54.00 per share). Although I am tempted to remove the value attributable to these products (since investors are not likely thinking about the late-stage pipeline right now), I believe that it would be negligent to exclude these highly promising drugs from my valuation of Genzyme.

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

Comments

[Geoffreygc40]

Good post, except that you completely fail to mention Clolar in AML patients. Granted, the drug is already prescribed off label to a majority of the cancer patients, but I don't see this included anywhere in your analysis. I know they were shot down by the FDA recently and asked to run a phase IIII trial for the drug, but I don't even see a mention of it. The drug holds potential for significant market share and is already recommended in the NCCN cancer guidelines for treatment. I think if you added in the potential approval in 3 years then you estimate would seem on the low side. Best.

2009 Nov 28 12:41 PM

[Mark Mitchell]

Geoffrey, thanks for the comment. However, this post is strictly related to the company's renal franchise. As an analyst, you don't provide an update on the company's other products unless it is somewhat related to this press release, or if there is an upcoming catalyst related to those other products. Neither of which are true for Clolar in this particular case.

As a result, I see no need to publish on Clolar at this point in time. The focus right now is largely on the manufacturing issue at Allston. Lumizyme would be next up, and then Renagel/Renvela setback.

If you want further info on Clolar, see my post on September 2, 2009. I outlined the market potential in all hematologic cancer indications, including AML. Clolar is a small drug in the grand scheme of things for Genzyme, only a modest driver of growth. I also note that I do include these other indications in my financial model, but pushed back any growth in sales for Clolar due to the necessity for a Phase III clinical trial in AML. Very low contribution to my financial model as it stands.

Further comments are appreciated as I'm striving to provide the best and most accurate analysis of Genzyme.


On Nov 28 12:41 PM Geoffreygc40 wrote:

> Good post, except that you completely fail to mention Clolar in AML
> patients. Granted, the drug is already prescribed off label to a
> majority of the cancer patients, but I don't see this included anywhere
> in your analysis. I know they were shot down by the FDA recently
> and asked to run a phase IIII trial for the drug, but I don't even
> see a mention of it. The drug holds potential for significant market
> share and is already recommended in the NCCN cancer guidelines for
> treatment. I think if you added in the potential approval in 3 years
> then you estimate would seem on the low side. Best.

2009 Nov 29 02:36 PM