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Genzyme Corporation (GENZ)

Q3 2006 Earnings Call

October 12, 2006 11:00 am ET

Executives

Henri Termeer - Chairman, CEO

Michael Wyzga - CFO

John Butler – President, Renal Division

David Meeker – President, Lysosomal Storage Disorder Therapeutics

Ann Merrifield – President, Biosurgery

Mark Enyedy – President, Oncology

Georges Gemayel – EVP, Therapeutics

Sally Curley - VP IR

Analysts

Chris Raymond - Robert W. Baird

Phil Nadeau – Cowen

Tim Smith – Citigroup

Shiv Kapoor - Montgomery & Co.

Bill Tanner - Leerink Swann

[Do Kim] - Thomas Weisel Partners

Meg Malloy - Goldman Sachs

Aaron Reames - AJ Edwards

Mark Schoenebaum - Bear Stearns

John Craighead - Lehman Brothers

Geoff Meacham - JP Morgan

Jennifer Chao - Deutsche Bank

Matt Duffy - Black Diamond Research

Yaron Werber – Millennium Partners

Presentation

Operator

At this time, I would like to welcome everyone to the Genzyme Corporation third quarter earnings conference call. (Operator Instructions) I would now like to turn the call over to Sally Curley, Vice President, Investor Relations.

Sally Curley

Thank you and welcome to Genzyme Corporation’s third quarter 2006 earnings conference call. I would like to remind everyone that the earnings release and this call are available on the Investor’s page of our website at genzyme.com.

Today we will discuss Genzyme’s business outlook on the call. Forward-looking statements about our projected future financial results and all other statements made on this call that are not historical facts are subject to a number of risks and uncertainties. Actual results may differ materially. I would refer you to our Form 10-Q for the quarter ended June 30 for any information on risks that could cause our actual results to differ.

Forward-looking statements include our expectations regarding 2006 earnings, EPS, revenues, product sales, expected drivers of future growth, timing of regulatory filings and actions, Clolar’s clinical trials and the expected release of data and financial trends.

If during this call, we use any non-GAAP financial measure as defined by the SEC in Reg G, you'll find on our website at genzyme.com a reconciliation to the most directly comparable GAAP financial measure.

I'd also like to remind everyone that our fourth quarter earnings conference call will take place on February 14th 2007 at 11 a.m. Eastern.

Thank you and I’d now like to turn the call over to Genzyme’s Chairman and CEO, Mr. Henri Termeer.

Henri Termeer

Thank you, Sally and thank you everyone for participating this morning on our third quarter 2006 earnings call. I will make a few comments and then Michael Wyzga, our Chief Financial Officer will make more detailed financial comments. Then we will have a Q&A and I have present here with me most of the business unit presidents of Genzyme, so we can go into more detail as you like during the Q&A.

Third quarter was a very robust quarter for us. There was one weakness in this quarter, and I will confront that upfront. That was Synvisc. Synvisc came in lower than our expectations and there was a lot of noise in this marketplace with a new competitive entrant, lots of trampling going on. Nonetheless, we were not happy with this result, but we feel still a very fair robust sense of future here. Synvisc is a very, very strong product in a very interesting market that has a long ways to go.

As you may recall from the different times that we have talked, we became interested in this because we had in development for some time, we became interested in the marketing rights that we acquired from Wyeth about a year or so ago. We became interested in that because we had some second-generation programs in our pipeline, in the works, that gave us a sense that we could indeed change the market dynamics around Synvisc in the future. We are now approaching the point where we are going to know whether we can actually do that.

This quarter, we will see the results of Synvisc 2, which is placebo-controlled trial where we will show, hopefully, efficacy in a single injection. That clearly is the Holy Grail in this marketplace. Currently patients have to come back three or five times, depending on the product they use, in consecutive weeks, to be injected in the knee with this supplement. With Synvisc 2, this will be reduced to a single injection, which will very much change the treatment burden to patient, very much change the cost of the treatment, because patients don't have to be re-injected a number of times. And will, we think, significantly expand the market and also strengthen Synvisc in terms of its competitive position in a material way; not just in the United States but globally.

We have a second program in the works that is a more ambitious program, that's a fairly modified form of hyaluronic acid which produces fermentation that is in extensive trial both with two and single injections. It's now almost fully enrolled. We will know the results by mid-year next year. So we have two shots at goal here to get to this Holy Grail.

That makes us very, very bullish about what the potential of this program is within the Genzyme picture. It’s a very, very interesting market and a clearly established need because patients are prepared to undergo significant treatment burdens currently and we can, I think, materially improve on that in the near future. So that was Synvisc in the quarter.

We are very, very optimistic, indeed, about the work that was going on. We weren’t happy with the results that Synvisc showed during the quarter, and we are much looking forward to the results of the clinical trials that will come out starting in the fourth quarter.

Everything else in the picture was strong in terms of top line. Earnings were strong too. Earnings, in fact, came in stronger than we have expected at $0.78 non-GAAP and Michael will go through that in more detail.

We were enormously pleased with the first full quarter of Myozyme. Myozyme’s treatment for Pompe disease, a glycogen storage disorder, was approved during this second quarter. In the third quarter we had the first full quarter of revenues in, I think it's about 20 countries at this time. It's off on the strongest start, like what we have experienced around Aldurazyme or Fabrazyme in the near past. We think it’s going to be a very significant driver as part of the overall LSD franchise that we have. Very, very exciting; very, very important clinical contribution to these patients and we are very, very pleased indeed that reimbursement for the product in Europe has gone actually faster than normal procedures would expect.

We will start to pay royalties on Myozyme. That's [balance sheet] positive because the royalties are going to be paid based on the patent that we now have exclusive access to. They are going to be 13.5% of sales in those territories where the patent is issued and half of that, or 6.75%, of sales elsewhere. It provides us a strong proprietary position around this product for a long time to come.

As we have experienced with Gaucher disease with Cerezyme, and will be experiencing also with the other products, these are very long-term markets; very, very much within the sweet spot of what Genzyme does so very well.

The second thing that worked beautifully during this quarter, again, after a strong second quarter, was Renagel. In fact, Renagel has grown more ever since the introduction of the competitor's product, Phosrenol, in the early part of last year. We have seen Renagel really pick up very, very nicely, not only internationally, but also in the United States. It was up 26% from last year. It's really being presented to the market with increasingly strong clinical evidence that Renagel does help patients in a multiple number of factors, not only just in phosphate management.

The other product that starts to show -- I'm very gratified -- some strengths is Hectorol. Hectorol became part of the Company in the third quarter last year. We did $14 million last year in the third quarter, we have $25 million this year in the third quarter. It's up from $22 million in the second quarter this year. So Hectorol is starting to make a really nice contribution to the corporation going forward.

Cerezyme, Fabrazyme, Aldurazyme, Thymoglobulin, the Sepra products, Thyrogen, all those products produced pretty much the kind of growth rates and results that we have achieved over a number of quarters and we feel quite satisfied that will continue in the future.

The Oncology revenues grew 35%. We can go into more details when we get to the Q&A there. Clolar was strong and we saw some very nice results in the CLL trial for Campath so that product can go to first line treatment.

We made great progress in the manufacturing equation. Manufacturing is, as you know, a very important element of what we do. We manufacture all of our products pretty much ourselves and we started to operate some new plants in Ireland and in Belgium in the early part of the year. We got approval for Thymoglobulin in our new fill/finish facility in Ireland, just quite recently, and we would expect that in the coming future, these manufacturing contributions will start to make the kind of contribution that we have seen from our Allston plant.

We had very strong cash flow, as Mike will comment. We finished the quarter with about $1.7 billion in cash. We made very good progress in a number of other programs, particularly in two, I would say, from a clinical point of view, that are of a disruptive nature in terms of what they mean for the clinical field that they are directed to. One is Tolevamer, for the treatment of C. Difficile colitis. This is two very large trials that are against antibiotics that are currently the standard of care. We need to show not only priority in terms of time to resolution of the diarrhea problem for these patients; and then superiority in terms of recurrence. We should know by mid next year clearly where this product stands and then we would expect it to make an important contribution to the corporation moving forward.

We showed during the quarter the results around Campath-MS, the second year in the Phase II trial, and now we have reconfirmed the benefit of Campath-MS against Rebif in both relapses and regression. We are preparing a very elaborate, in-depth program to make sure that we can bring this kind of benefit to patients in the future. Very intensive in-depth design program to take this program through Phase III, with great consideration towards the risk management and the kind of doses that will be required.

Sevelamer carbonate, a product that we are developing to get access to the CKD market for Renagel for phosphate management. We got some nice results during the quarter in terms of the comparability of results against Renagel in dialysis patients. We fully enrolled non-dialysis patients and we should see results in CKD for Sevelamer carbonate in the near future.

All in all, what we are seeing is some very robust momentum around the material elements that will drive the future for the Company. We keep very, very broad-based strength in the use of these products and where we do have competition, in their ability to compete very, very effectively.

So with that, let me hand over to Michael, and then we'll go after that to Q&A.

Michael Wyzga

Great. Thank you, Henri. Good morning, everyone. As you can see from our press release, the revenue this quarter increased to $809 million. That represents a 14% increase over last year. Our diluted GAAP earnings per share were $0.06.

Our GAAP earnings were impacted by a one-time charge for the impairment of goodwill. As most of you are aware, beginning back in 2002, the accounting rules changed a bit and they replaced the amortization of goodwill with the requirement to test for goodwill impairment on an annual basis. We do this test in the third quarter for Genzyme.

During the quarter, this test showed that the goodwill associated with the Genetics business unit was impaired and we took a charge this quarter for the impairment of that, a charge for $219 million.

We also concluded the IRS audit for the years 1996 through 1999. That resulted in a benefit of approximately $32 million. Expenses associated with stock options for the third quarter were $45 million. Amortization of intangibles were $51 million. The net income for the quarter prior to these items and amortization was $196 million, or $0.73 per diluted share. Our non-GAAP earnings this quarter should be compared against the Q3 of 2005 non-GAAP income of $160 million or $0.61 per diluted share.

As Henri somewhat summarized, during the quarter we continued building on the trends that we really saw in the first half of this year. We had strong growth in our earnings, which were the result of really two factors. Our revenue continued to increase with many of the business lines growing both on a year-to-year basis, as well as on a Q-to-Q basis. But what is really impressive is the operational leverage that we got. This operational leverage allowed to us get our 14% revenue growth to translate that to a 24% pre-tax income growth.

Our cash position also continued to grow. We exited the second quarter with a cash position of approximately $1.4 billion. Increases in our operating income moved our third quarter ending cash position to approximately $1.7 billion.

Let me talk a little bit about the revenue drivers. Revenue drivers, as Henri touched on, were Cerezyme, which grew to $252 million. That's a 6% increase over last year. Fabrazyme came in at $93 million, and that represents an 18% year-to-year increase. We saw a solid Fabry patient increases, both internationally as well as here in the United States. Myozyme revenue was particularly dramatic, which grew from about $7 million last quarter to $20 million in the third quarter. The third quarter is our first full quarter of sales. So it's very impressive.

The Renal division was also a major contributor, as Henri mentioned, in the quarterly revenue growth. Renagel revenue significantly increased to $135 million in the third quarter. That represented 26% year-to-year growth. Hectorol revenue was up $25 million and that's up from both last year as well as last quarter. Synvisc revenue, as Henri touched on, was lower than anticipated for the quarter. During the quarter, Synvisc revenue was impacted by increased competition. The Synvisc revenue for the third quarter was $56 million and that's relatively flat with last year.

Transplant revenue increased to $39 million and that's a 15% increase over last year. Thyrogen revenue increased 21%; Oncology revenue increased to about $17 million. And finally, our Diagnostics Products and Services area increased by 5% over last year to $89 million.

On a year-to-year basis, the impact in changes of foreign exchange to the top line was approximately $6 million. Most of the impact we saw was in the Cerezyme and Fabrazyme product areas. Our non-GAAP gross margin was 78% of revenue. That's due to favorable manufacturing capacity utilizations, which we are now leveraging on a global basis.

Within our operating expense, our Q3 non-GAAP R&D expenses were $143 million or about 18% of revenue. The major programs within R&D remain the Myozyme late onset trial, the Tolevamer phase III trial, and Sevelamer carbonate.

Our non-GAAP SG&A expenses were $215 million, and that came in at 27% of revenues. This is really an area where we are continuing to see nice leverage with our investments in sales and marketing, and particularly we see that in the Renal division. Last year, as you recall, our SG&A represented about 29% of revenue. Last quarter it represented 28% of revenue and this quarter it's 27% of revenue. So we are seeing some nice trends in this area. Aldurazyme revenue was about $25 million for the quarter and that's up 24% on a year-to-year basis. The bottom line impact of our joint venture with BioMarin was a profit of about $5 million and, again, this was due to the continued revenue growth.

Our tax rate before amortization and one-time events came in at 31.5%. That's a little higher as a percentage than last year. That's due to the lower impact of the orphan drug credits on a much larger profit before tax base.

Our non-GAAP share count increased to 269 million shares on a diluted basis and this is prior to the impact of the contingent convertible dilution. This share increase on a quarter-to-quarter basis, as well as on a year-to-year basis and has to do with two things. It's the employee stock purchase program as well as the option exercise program.

Our capital expenditures totaled $83 million for the quarter. This is focused on our investments mostly here in the United States as well as our Belgian facility.

As I mentioned in my opening comments, our ending cash balance increased to approximately $1.7 billion during the quarter. This increase was due primarily to the operating activities within the organization, which generated about $227 million. I should also point out that our year-to-date cash flow from operations was a little over $700 million, so we are seeing, again, nice net cash flow.

During the quarter we also recorded approximately $100 million in proceeds associated with the tender of our equity in Cambridge Antibody Technologies. As I always remind you, you can find any of our line item detailed reconciliations on both our press release or on our website. So let me stop there, open it up to question and answers, turn it back to Henri.

Henri Termeer

Operator, we can turn to Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Chris Raymond - Robert W. Baird.

Chris Raymond - Robert W. Baird

Thanks for taking the question. Just on Renagel, you mentioned in your prepared comments and in the press release some commentary on the doughnut hole and the Medicare Part D patients. I wonder if you can quantify, if possible, or put some brackets around some range of patients that are running into the doughnut hole problem now in the U.S.? And what sort of impact that might have on Q4 numbers?

A second part of the question is, do you have any sort of color -- I know this just came out today -- but any comment on the Fresenius deal to purchase PhosLo from Nabi? Thanks.

Henri Termeer

Let me give a shot at that and John Butler, the President of the division, will give you more detail. But on the announcement this morning, we don't think that will have any particular impact on our business. Physicians are prescribing these drugs. Fresenius is an ethical company, and they for sure will not get themselves into any kind of complex position by inappropriately influencing how physicians prescribe. Fresenius is a very good customer of ours, as are most other major dialysis chains in the country. We think actually that this may even help the overall picture, because there is less kinds of inappropriate -- what we saw was sometimes quite inappropriate -- promotional activity in the future. I would imagine that to be the case.

Also, Fresenius has been in this field in Europe for years, and it was a product that was approved in Europe and not here and we are doing very well in Europe as well. So we don't think this has any particular influence on prescriptions for Renagel in the future.

Personally I was quite interested in the price that was part of the transaction, given what's being paid, or was not being paid for this product some years ago, and it seems like this particular asset has not gained much value over the many years that they have run it.

So John, any thoughts on that or on the first question in terms of the doughnut hole and the impact of that?

John Butler

Sure, just to, certainly agree with you on Fresenius. Fresenius has been a good customer and a good partner for as long as we have been selling Renagel and very appropriately they allow physicians to make the choice of phosphate binder. We think, again, whoever owns PhosLo, the data is the data and the wealth of the data has come out to support Renagel. So we're still very, very confident in where we will be.

It's important to point out that while Fresenius is a direct customer that we sell Hectorol to, they don’t buy Renagel directly. Physicians write a prescription and they get the Renagel at the retail pharmacy.

On the doughnut hole, we did launch the program through the AKF this quarter on providing access to Renagel through the doughnut hole. Because it's such a competitive environment, we won't give absolute numbers, but it's really been a very modest number of overall calls that we have gotten, to look for that support. The number of patients who have actually qualified is about half of the number of calls we have gotten, often because they actually do have coverage in another place and we can help direct them towards that so they stay very much paying customers for Renagel. So we do not expect that there will be a significant impact at all in the fourth quarter.

Part D continues to be very, very positive for Renagel. About 40% of our sales in the U.S. now are through Part D. We have seen that continue to increase through the year, and we expect that to continue to increase. It does look like more and more plans next year will be offering coverage through the doughnut hole, which, again, will only be positive for Renagel.

Chris Raymond - Robert W. Baird

Just as a follow-up, John, are you confident in that you haven't had a ton of calls on your free drug program, that there aren't people switching? I guess the question is, is it possible that people are moving their patients to the cheaper therapies?

John Butler

The prescription data would indicate that that's not the case. We continue to see prescriptions increase for Renagel month in and month out. We don't have the September prescriptions yet, those come next week, but we expect that trend to continue.

Chris Raymond - Robert W. Baird

Thank you.

Operator

Your next question comes from the line of Phil Nadeau - Cowen.

Phil Nadeau – Cowen

Thanks for taking my questions. My first question is actually on Synvisc reimbursement. I believe we're going to get, within the next month, a final word on what 2007 reimbursement looks like. Do you have any update on what that might be?

Henri Termeer

There's no way to precisely predict what that might be. We have obviously been very much involved, just as everybody else in that process. We would hope that since this field, as I had talked about earlier, will be moving to single injections in the future as of this year or next year depending on Synvisc 2 or Hylastan, that per injection equalized reimbursement rate will not be utilized.

It makes really no sense for the cause of innovation and it is something that has been discussed and communicated with everybody that wants to listen to this at CMS. We'll hope that they make a sensible decision, probably this month.

Phil Nadeau – Cowen

Great. My second question is on Myozyme. The press release notes that Myozyme has retained reimbursement for both classes of patients, the young and the old. Could you let us know what the current breakdown is of sales between early onset and late onset?

Henri Termeer

Mike or David? Would you know?

Michael Wyzga

Yes. These are ballpark numbers, obviously, but there’s about 50% that would be in the juvenile, which is 16 or less. Of that group, 10% is “infantile”, less than a year. So the balancing 50% would be adult. In that latter number, it will continue to increase as we continue to penetrate this market.

Phil Nadeau – Cowen

A last question is a follow-up on Fresenius acquisition. You know that they already have a phosphate binder in Europe and Renagel continues to do well over there. What type of synergies have you had to confront in the European market because of that relationship? Are there any?

Henri Termeer

No, these products are being sold in a very straightforward manner to physicians. There's nothing special that's done by people that actually own these chains to influence specific drugs. It will be very, very difficult and very, very inappropriate if such influences were being exercised. It doesn't happen.

Phil Nadeau – Cowen

Great. Those are all my questions. Thanks a lot.

Operator

Your next question comes from the line of Tim Smith - Citigroup.

Tim Smith – Citigroup

We saw an increase in gross margins in the quarter to about 77.9%, 78%, versus a little lower than that in 2Q. I was wondering how much of that increase was due to the absence of start-up costs that were associated with the Ireland and Belgium facilities that you didn't incur this quarter? How much of that improvement might just be associated with any efficiencies that you guys might be seeing?

Then also related to the manufacturing facilities, if we can expect any sort of tax benefits as they get up and running; and if so, can you give us an idea of what that might be?

Henri Termeer

I will ask Mike to comment on the tax benefits. Let me just make a comment on the first. We have been building these operations over the last number of years. That was much of the capital expenditure that you saw. We started to operate them in the latter part of last year and we said that during this year we would carry some burden as we bring these operations into production.

Of course, as you get commercial product coming out of these operations, that's when you start to see the efficiencies start to become visible. These efficiencies will grow, the more you put through these plants. So since these plants are not at full capacity at this stage and they won't be for sometime, you can expect that manufacturing costs associated with the operation of these new manufacturing operations will improve the overall picture.

So should you look at that 78% and explode it to a much higher number, I wouldn't advise it at this stage, because we have many programs that are earlier stages that are being brought into manufacturing. But I would say that we have a very solid gross margin, cost of goods picture for the corporation now that we have access to these additional plants.

In addition, of course, we see the Irish plant with its tax impact that I would like Mike to report on.

Michael Wyzga

I agree with your first comments, Henri. As we get more capacity utilization to those facilities you will see that part of the picture. You are seeing relatively little amounts of expenditure that goes through underutilized lines on the cost of goods sold for this quarter.

With regard to the tax rate, as you know, there's a 14.5% maximum tax rate outside of the United States, in Ireland; about 36% here in United States. So clearly, you have to balance out how much capacity you put through the Irish facilities, also in the fill and finish facilities as well in the satellite facilities. We see that as sort of a dampening as we go forward.

Think of it – and I hate to sound too much like an accountant -- but its almost like offsetting entries. As your profit before tax increases, the impact of your orphan drug credit decreases because that's on a dollar-for-dollar basis. Offsetting the loss of those credits will be the facilities in Ireland, which will tend to dampen the overall tax rate going forward. So you won't see an overall decline in the tax rate, you will just see a dampening, decrease.

Tim Smith – Citigroup

Thanks.

Operator

Your next question comes from the line of Shiv Kapoor - Montgomery & Co.

Shiv Kapoor - Montgomery & Co.

Thanks for taking my question. I have a question on Myozyme. If you look back at the Fabrazyme launch in 2003, it happened in the second quarter, the first full quarter was the third quarter and sales for Fabrazyme in the U.S. were around $6 million to $7 million in that quarter. So the $20 million that you show on Myozyme seems a much stronger launch than Fabrazyme.

I want to understand what the reason for this strong launch is? Do you think that this is because the market is larger, or do you think there has been pent-up demand driving early penetration?

Henri Termeer

Let me give a comment and then Dave can comment some more. Of course, you are referring to the U.S. and not the international. Really the comparator here is, what did we do in Europe the first year with one product, and what we do here. It's clearly stronger with the case of Myozyme.

There clearly is always pent-up demand. In the case of Fabrazyme there was pent-up demand too because it was such a long delay, almost two years between the European introduction and the United States; long pent-up demand. We had a pretty fast take-up, actually, in the United States because it was a two-year delay.

In Europe, the Fabrazyme versus Myozyme comparison is probably more directly comparable and in that sense, Myozyme is clearly outperforming what we experienced around Fabrazyme at the time.

But these are different clinical pictures. Myozyme is dealing with a much more severe clinical picture than Fabrazyme is. With Fabrazyme, that gives us more time to start therapy; with Myozyme there is a more severe clinical picture that patients are confronted with and physicians are trying to manage.

So to explain that, David, do you have some comments to make?

David Meeker

I think that is exactly the point. The apples-to-apples comparison being Fabrazyme launched in Europe in 2001 was launched at the same time Replagal was. So that market was split. The total number of patients actually going on therapy was probably not so different. The pent-up demand in Europe was not what it was in the U.S.

So, the U.S. launch on Fabrazyme and the U.S. launch Myozyme is not so different given the relative levels of [inaudible].

The other thing about the diseases out there, they are comparably severe in that they are both fatal diseases in about the same timeframe, you know, the 40 to 50-year-old range. The difference is the visibility as Henri highlighted and the understanding. I think there is a very strong understanding out there about the life-threatening nature of this disease.

We are still very early but I think there's an increasing understanding of the potential to appear in the late onset population. We don't have proof, of course, the last trial won’t be out until mid next year. But the anecdotal evidence is increasing. I think there's a greater level of comfort that that late onset population [inaudible].

Operator

Your next question comes from the line of Bill Tanner - Leerink Swann.

Bill Tanner - Leerink Swann

Henri, I certainly appreciate your comments relative to what Fresenius could or could not do or will or won’t do. Just thinking about it though, one could argue that their interest is not the ESRD but it's more in the CKD. I don't know if Steve Berk is there, but if you could help out, just helping us understand?

If somewhere down the road that Fresenius is going to try to influence perhaps, treatment in the CKD, how should we be thinking then about the comparison of Sevelamer carbonate to a calcium-based drug? And what you guys could potentially do to highlight any kind of differences or relative safety profile differences?

Henri Termeer

The same differences that we've seen in the use of Renagel against calcium, whether this is Foslo or Tums; in [advanced] renal disease would exist in Stage 4 or Stage 3 predialysis patients. You know, loading patients up with a great deal of calcium is not a good solution in the minds of many physicians. Steve is not here, he would give you the clinical picture of that in a more direct way.

But calcium has been available for predialysis patients through just simply Tums for forever, at a very low cost. So the use of Renagel is rarely compared against calcium because there is a very, very big difference in terms of the actual cost of Renagel therapy versus calcium therapy. People choose Renagel for reasons of clinical benefit. That same clinical benefit will exist in the CKD markets.

Renagel Sevelamer chloride was not designed for the predialysis market and that's why Sevelamer carbonate had to be developed in order to give us access to that marketplace.

Bill Tanner - Leerink Swann

Is it the thought then that at some point in time, so if you get Sevelamer carbonate approved initially for dialysis patients, and then you move on to CKD, that there would be some kind of comparative studies; or is it that the market is going to be so big that there may be the ability for calcium-based and non-calcium-based drugs for habitat?

Henri Termeer

It's a tougher study to do. John, any thoughts on that?

John Butler

No, it is a tougher study and we are talking about a longer term clinical development for the product. But, again, amplification, if you look at Dr. Block's RIND data that was published in new dialysis patients -- these are patients coming on to dialysis -- 60% of them are calcified. So clearly this is a process that begins before the patients start dialysis. That data really has been the key, I think this year, the key piece of clinical data that's helped moved Renagel to the first line position in dialysis patients. That is the kind of data that we expect to move it into CKD as well.

Currently, off label, there is Renagel use in CKD. Obviously we are very excited about the opportunity for Sevelamer carbonate in the CKD area as well. You know, exactly what clinical studies are done, I would describe that as to be determined, but clearly we are seeing in dialysis that there is still a significant amount of calcium used and growth opportunity for Renagel, is the way we look at it, in the face of all the clinical data that we have described. When you look at the size of the CKD market that's just magnified.

Bill Tanner - Leerink Swann

John, since you mentioned publication, I was just curious an update on the DCOR trial data publication and what is the impact if, for whatever reason, that you can't really publish that data in terms of marketing ability?

John Butler

Well, we expect to publish it. I mean it's going through process. I don't have an update on it. But we certainly do expect that we will publish that. The increase, as you have seen this year, are increases without that data available in the sales reps hands because of part D, because of an increased sales force and because of, as I mentioned, the RIND data in new dialysis patients is really a critical piece of data for us. We expect to get DCOR published.

Then there's the outcomes component of RIND as well, which Dr. Block has submitted for publication also, which confirms in looking at those same RIND patients, patients new to dialysis, followed for five years of statistically significant difference in mortality favoring Renagel in the overall result in those patients.

I think when you put those pieces together, the clinical data -- and those don't stand on their own. They stand with the RIND data, the treat-to-goal data, all the other data that's been generated. It's really an incredible package of information that we have for physicians. So, you know, the growth potential is still very, very strong.

Bill Tanner - Leerink Swann

CMS data?

John Butler

Right. Thank you. And at ASM this year there will be two abstracts presented on hospitalization and health economics cost data from the DCOR study, comparing Renagel to calcium and we'll see that data about a month from now.

Bill Tanner - Leerink Swann

Just I was thinking back on the second quarter, I think you said that the DCOR data maybe published by the end of the year, so it sounds like it's probably going to slip into ’07?

John Butler

Well, certainly it's not under our control when it's published. I think that is likely.

Bill Tanner - Leerink Swann

All right. Thanks.

Operator

Your next question comes from the line of [Do Kim] - Thomas Weisel Partners.

[Do Kim] - Thomas Weisel Partners

Hi, thanks for taking my question. My question is on the AnorMED acquisition you guys are pursuing. I wonder if it was possible if you could go over how you are viewing the market opportunity for Mozobil?

Henri Termeer

That's a great question. It was a long time coming, that question. I thought that would be the first question to be asked. Georges Gemayel will be going through some comments there. It's almost deserves a complete call just on that, but we are so much in the middle of this process that we will just try to be very precise; quite obviously we like this product. We like it for very good reasons and Georges, give us some detail.

Georges Gemayel

Thank you for the question. First of all Mozobil is meeting a very unmet medical need. We have thousands of patients who cannot go into transplant, bone marrow transplant, because they do not have enough stem cells to be able to go into transplant. So it really plays very well into what we do to bring this kind of drug to market and to make them available to patients as soon as possible.

We have very many reasons to believe that we are in unique position to profit from this opportunity. The first thing which has happened with Mozobil is bring it through the regulatory process. I think that throughout the last three years, we have proven that we could bring many [NDAs] into Europe and in the United States in a timely manner and in a very efficient manner. We can bring as well a lot of impact into all the reimbursement and pricing discussion into this market, which is going to be very important.

In addition, this opportunity fits very well with our two franchises which are the Transplant franchise which is global with medical, commercial and regulatory infrastructures worldwide and as well with our oncology infrastructure.

So, we look at this market with very high unmet medical needs and with a unique position to serve it. As you know, there are about 55,000 transplants across the world. About 40% of them are done in the United States. A big measure is done in Europe and European countries. About 25%, 30% outside these two major markets.

We are counting on a quick uptake of this drug just because of the benefit it brings in terms of letting patients who do not have access to transplant today being able to mobilize enough cells to get to transplant. For those patients who mobilize a non-optimal number of cells we will help them hopefully to get into the range of cell mobilization, which will make that transplant survive better and give them a better survival rate.

So this is why we are excited about the opportunity and we think that we will do the best out of it and we are uniquely positioned to really bring it as fast as possible to the patients who need it.

Henri Termeer

Thank you, Georges.

Operator

Your next question comes from the line of Meg Malloy - Goldman Sachs.

Meg Malloy - Goldman Sachs

I actually wanted to switch back a little bit to Sevelamer carbonate. I was hoping, you could walk through the timeline in terms of filing, manufacturing a scale up and commercialization. How might you leverage the Hectorol presence in the CKD market? Thanks.

John Butler

As we mentioned, the bioequivalents trial in dialysis patients was completed. We will be filing Sevelamer carbonate in U.S. before the end of the year for dialysis. The CKD trial is fully enrolled currently, as is the once-a-day carbonate powder trial. Both of those will be filed as a new formulation, a new indication after the approval. We expect to launch carbonate in the U.S. early 2008.

As you mentioned, one of the key strategic opportunities for us when we bought Bone Care was to be in CKD prior to the launch of Sevelamer carbonate and as you saw the increasing Hectorol number, the 0.5 microgram capsule is one of the fastest-growing products there, or the fastest-growing and that's the CKD offering.

So we are already making, I think, great strides in that area, developing relationships with those physicians for their CKD patients and that will clearly assist us as we launch carbonate.

On the manufacturing side, that scale up is ongoing as we speak. We are making great strides there and we will be quite prepared for launch.

Meg Malloy - Goldman Sachs

Just to be clear, are you going to file for dialysis first and then CKD?

John Butler

That's correct.

Meg Malloy - Goldman Sachs

When do you expect to file on CKD?

John Butler

We'll file on CKD after the approval of the MDA for dialysis. If we file during, your clock would start over. So we'll have the product approved and then file the CKD indication, as well as the once-a-day dosing option in the formulation of powder.

Meg Malloy - Goldman Sachs

If you file for dialysis this year and it's a 12-month review then you wouldn't file the CKD until 2008?

John Butler

That's right.

Henri Termeer

We expect not a very long review time here. We will file this year, later this quarter. It's a question of how long that review time will take before we can file the other product. It will then be just be a label expansion.

Meg Malloy - Goldman Sachs

Okay. Great. Thanks a lot.

Operator

Your next question comes from the line of Aaron Reames - AJ Edwards.

Aaron Reames - AJ Edwards

Thank you for taking the call. A lot of questions have been answered. Can you go over the Myozyme royalties real quickly again?

Henri Termeer

The royalties are 13.5% of revenues in those territories where we do have patent issues, where the dual patent is issued; and half that, 6.75% elsewhere. At this time the patent is only issued in the United States. So for the coming quarter, it will be some mix of these two royalty rates on total revenues that will count towards royalties to be paid. Ultimately, we expect it to be 13.5% everywhere.

Aaron Reames - AJ Edwards

Then quickly, just on Synvisc, how should we think about modeling for the next quarter? Is the impact coming from one particular competitor like Uflexa? If you could just comment on that and provide with us a little bit of guidance, that would be appreciated.

Ann Merrifield

Sure. The new player on the field this year is Uflexa. They launched at the tail end of last year and really got their strength as they moved into second quarter of this year. They are a three-injection product with 12 weeks of efficacy. Ours is three-injection with six months. They have been blitzing with heavy sampling, heavy price discounting, half price. They neglected to say they have half the efficacy to finish the equation out.

We are obviously responding aggressively, getting the facts out and early successes in flipping accounts back as they see the whole picture. But I don't want to forecast at the moment the rate at which that will progress through the fourth quarter. But you are right, Uflexa has been the new player and as is often in the device field, the sampling phenomena is not atypical. So as we work through that, we are optimistic for the future. But I don't want to describe the pace or forecast at this point.

Aaron Reames - AJ Edwards

Yes. Thank you. And then The last question with Mozobil, if it is consummated and it goes through, are you going to aggressively pursue the therapeutic applications in AML and COL as well? Was that part of your equation? I guess countering Millennium's bid?

Henri Termeer

We will be focusing really on what the program is designed for today, which is bone marrow transplant. We will be looking into all of the other indications which are possible for Mozobil. There are many besides the one you have mentioned, but we will not pursue them as a priority. The priority is get it to the market for bone marrow transplant.

Aaron Reames - AJ Edwards

Thank you.

Operator

Our next question comes from Mark Schoenebaum - Bear Stearns.

Mark Schoenebaum - Bear Stearns

Thanks a lot. John, just a housekeeping question. Can you tell us either year-over-year or sequentially for Renagel, whichever metric you’ve got, what was the volume growth and then what was the price growth in the U.S.?

The second question I had was around a recent Genetics meeting in New Orleans, I think you guys had first in mandate of your oral Gauche product. I was wondering if you could summarize those data and update us on your plans for that program? Thank you.

Henri Termeer

John, can you make some comments?

John Butler

Sure, we’ve never really broken out volume versus price. We have had growth in both areas year-over-year; we’ve actually seen an increase in volume growth if you compare Q3 ’05 versus ’04 to Q3 ’06 versus ’05 there has been a reacceleration of the volume growth in the U.S. A large part of that will be part D and also clinical data in the sales force, of course. But in addition to that we have had a price benefit from part D, the patients moving from Medicaid as well and the price increase we took at the end of the year. So there has been a balance of growth.

Again, a greater part of the growth year-over-year has come from outside of the U.S., very much volume related but some price benefit there also.

Mark Enyedy

In terms of the oral therapy for Gaucher Disease, the abstract was presented, it reviewed the in vitro data highlighting the greater potency -- about 2,500 times that any currently available alternatives. Also described the animal data which showed the effect and Phase 1 data which we talked about previously, which shows the medication is well tolerated. We have just started over the last quarter enrolling patients in our Gaucher trial.

Mark Schoenebaum - Bear Stearns

When might we have data from that?

Mark Enyedy

You know, it will be in '07, but, again, it depends on the rate of enrolment and the penetration of our BRT around the world. We are making good progress.

Mark Schoenebaum - Bear Stearns

Thanks a lot. I will get back in the queue.

Operator

Your next question comes from the line of Geoff Meacham - JP Morgan.

Geoff Meacham - JP Morgan

Good morning. A question on Campath and MS. Based on the data that you guys have had so far, what’s your sense for the frequency of ITP monitoring and then its variable onset of action? I'm just wondering in terms of the Phase III design and then commercially.

Henri Termeer

Mark, would you like to make a comment?

Mark Enyedy

Sure. The risk management plan that we instituted for the Phase III study calls for monthly blood counts and then those are offset by biweekly calls from the physician out to the patient to check for signs and symptoms of ITP. So the patient is educated to look for petechiae, or the rash that's typically associated with ITP. So, essentially we are in contact with the patients every two weeks.

The expectation is that we will continue to do that. That has been effective to pick up all the five subsequent cases that we have had in the study following the initial patients. So I think the expectation for the Phase III will be to implement the same scheme as this one has been effective and was endorsed by the independent data safety monitoring board that we have for the study.

You know, it's a little bit difficult to project out into a commercial setting here, but I think it would not be unduly burdensome to have a similar arrangement as part of a program of care for this product once it's on the market.

Geoff Meacham - JP Morgan

Just a follow-up on Myozyme. But just wondering if you could give us any color on new patient finds or basically use outside of those in the registry?

David Meeker

Yes. So the registry lagged, as with all of our products, behind the number of patients who are currently on NL replacement therapy. It’s a little over 200 patients now that are in the registry. Worldwide we have about 450 patients currently on therapy, of which about half of those are currently on commercial.

Henri Termeer

How many patients are identified in total?

David Meeker

Total identified, these numbers are always soft in terms reliability of whether the patient is there or not. Over 1,000 patients are identified at this point.

Geoff Meacham - JP Morgan

Thanks.

Operator

Your next question comes from the line of Jennifer Chao - Deutsche Bank.

Jennifer Chao - Deutsche Bank

Just a little follow-up here on AnorMED. First on Mozobil could you give us a sense of the 55,000 that you’re approximating as the potential target population, how many would fall into the multiple myeloma and non-Hodgkin's lymphoma indications?

How do we think, just in general terms, about the pricing for a therapeutic in this area. Can you offer us any comparables to better think that through?

Henri Termeer

Now, Jennifer, let me answer the pricing, so that we can take it off the table. We have, as a company, never talked about pricing ahead of knowing the label of the product. And, of course, we are putting it in our models but at this stage, it's too early. We are, at least several months away if this transaction does happen before we really get to the point where we say this is going to be the pricing.

But we have some sense of it, but we won't be able to talk about it at this stage. But on the other question, to the number of patients, Georges, can you help Jennifer?

Georges Gemayel

The 55,000 are all the BMTs, you know there’s about 15,000 of them are [inaudible], about 40,000 are [inaudible]. These are divided in many categories. The bigger one of them is myeloma and then the second bigger one these days is non-Hodgkin’s.

If you look at the data for the last couple of years it looks like in the U.S., for example, there are about 10,000 patients doing bone marrow for myeloma and about 8,000 for non-Hodgkin’s and these numbers are increasing.

Jennifer Chao - Deutsche Bank

That's helpful. And then on Synvisc 2, it seems like this is an opportunity that's somewhat under-appreciated. First, I just wanted to clarify, is the primary endpoint on Synvisc 2 identical to that of Synvisc 1? In other words, will we be able to compare directly Synvisc 2 versus Synvisc 1? Is the strategy then to potentially replace Synvisc 1 with Synvisc 2 all together?

Then, if you could just give us numbers in terms of the percentage of the OA market that you've already penetrated currently in the U.S. and Europe. Thanks.

Henri Termeer

It's great questions, Jennifer, and you are trying to get to what's really the ultimate potential here. We will only be able to give you some answers.

Particularly, the place where I wouldn't like to give too many answers at this stage is what is precisely the strategy between Synvisc 1 and Synvisc 2 from a pricing and positioning point of view. It's a very exciting answer to get to, because it gives you some very interesting possibilities, particularly on a global basis because of the very unfortunate pricing differentials in this marketplace. We can really get a lot of stuff cleaned up in a very prudent, very constructive way. But how we are going to do that precisely, I don't want to go into right now. It is something to be worked on between now and the point where we can introduce these products.

But in terms of the Synvisc 2 endpoint, it is a placebo-controlled trial, it is a state-of-the-art trial, if you'd like, as compared to maybe the historical trials that we've done around Synvisc that date back now to some ten years or nine years. So it's a great update of the efficacy of this product in this picture against placebo.

Hylastan is measured against steroids, which is also a common way to measure the efficacies of these kinds of products. The direct comparison is possible, because there's a lot published around Synvisc. These are different kinds of trials, and so the impact to some extent, comes from knowing precisely what the comparison is.

So here, what we are trying to establish with Synvisc 2 clearly that in a single injection you can get six-month pain relief. That is a very simple picture that we are trying to show in this particular trial.

The direct comparisons, there was one done recently around Synvisc 1, the current product on the market against Hyalgan, which is the number two market share product. It was done independently in the United Kingdom with over 300 patients. Synvisc came out extremely strong in that trial as the press release indicated. It was up to 12 months pain relief versus six months or less for the other product, and being less expensive because of the lower number of injections that were necessary for Synvisc 2.

We feel very good about the power of this product, and that works and it has now been independently for the very first time, tried out against another product on the market. That data is just now becoming part of the marketplace. The first presentations around that result were given during the third quarter.

Jennifer Chao - Deutsche Bank

Just the penetration into the OA market in the US?

Henri Termeer

Ann, do you have a sense for how far we have penetrated?

Ann Merrifield

If you look at total OA knee patients for example, we're 5%, 6% penetrated with a long way to go. If you looked at patients who are actually seeing orthopedists or rheumatologists or specialists who on average usually gives these injections, we're maybe about 20% penetrated in our most recent market research into the patient safety.

We think with a single injection product, we can go more deeply into the specialists, but also there's an opportunity with only a single injection to do more training of other practitioners where many of the unpenetrated OA patients are. So I think that has a double impact for us in that regard.

Operator

The next question comes from the line of Matt Duffy - Black Diamond Research.

Matt Duffy - Black Diamond Research

Good morning. Thank you for taking my question. A lot of good questions have been asked already. But looking out a little further, just what you have seen in terms of market research on two potentially important markets, as you look at the current profile as it stands with two-year data in the Phase II trial with Campath for MS, what's your sense of where it might fit into therapy, this profile in two-week monitoring and so forth? Or two-week patient contact would hold up through Phase III in a regulatory review? Where that might fit in relative to first line therapies in MS?

Henri Termeer

That's a great question, and I'd like Mark to give that a shot.

Mark Enyedy

So we undertook a market research exercise with almost 400 neurologists across the globe this spring to ask just that question. They were shown product profiles with Campath profiles from the Phase II results which include both safety and the efficacy measures. Also profiles for products that look a lot like [Sabry] and FTY720, which is the oral agents by Novartis.

The research showed a couple of things. The first was that this continues to be a market that indeed has significant unmet needs remaining in this market. Second, that there is among physicians, a desire for products with greater efficacy and as part of that desire, are willing to trade off perhaps the more benign side effect profiles, the beta interferon for more serious side effects in exchange for significantly greater efficacy.

So against that backdrop, we tested these product profiles and what we saw was a significant penetration, over 25% for Campath in treatment of naive patients and an even greater percentage in treatment experienced or treatment failures.

So we feel very good about this profile both using it as initial therapy for newly diagnosed patients as well as to treat patients who are progressing on their current therapies.

Matt Duffy - Black Diamond Research

Perfect. That's great information. And a parallel thought process, looking at CKD, going out in the next several years, I mean obviously there's already a less frequent [rithroplitan] out there with Sevelamer carbonate coming along and then potentially improved or at least more convenient [Strivinavirants] coming along, What's the sense of how large the CKD treatment market could become over the next three to five years?

John Butler

Just to give you a perspective today, you have about 350,000 dialysis patients in the U.S. You have about 1 million patients with CKD who are currently being seen by a nephrologists, so very much our target audience. Now all of them are not being treated with a phosphate binder or vitamin D therapy for that matter, but we expect that to continue to grow. As more products are available on the market there is more emphasis put on the market and the data is generated to support that. So it's a very significant opportunity for us.

One of the things we didn't mention earlier, around the reasons to choose Sevelamer carbonate over a calcium product in that marketplace is all the other benefits that you get from Sevelamer. The lipid lowering will have a potentially much greater impact in a CKD patient than it will in a dialysis patient; the toxin binding, et cetera. So lots of rationale for physicians to use it earlier. As we come out with a once-a-day option, and as I mentioned in dialysis, the once-a-day study is fully enrolled.

If you just think about, even the dialysis, if you think about the current compliance rates with these products, we have to take multiple pills multiple times a day and you start looking at mixing 7 grams with 8 ounces of water and taking with your largest meal, the opportunity to impact compliance in dialysis and make it an easy offering for patients, early stage Phase 3 patients in CKD, really for us is a very, very attractive opportunity.

Matt Duffy - Black Diamond Research

Excellent. Thank you very much.

Operator

Your next question comes from the line of John Craighead – Lehman Brothers.

John Craighead - Lehman Brothers

Hi, I think you may have just answered my question, but I was wonder if you could give us some more information about the powder form of Sevelamer carbonate and what the dose is in that study, and maybe what the endpoints are also in that study?

John Butler

Yes. It is a non-inferiority trial. Three times a day Renagel versus once a day Sevelamer carbonate powder. Our expectation is that doses for individual patients will be equal, there is no reason to suspect that more or less of the powder dose will be necessary. We've seen reasonably equivalent dosing in the tablet carbonate study and that's what we are looking at. Again, you are looking at non-inferiority for phosphorous control, calcium, calcium phosphorous product, PTH, LDL and total cholesterol.

Again we did a small pilot study in with Renagel, with once-a-day dosing with the tablet form and did find -- and this has been published -- they found non-inferiority. So our expectations are high for the once-a-day dosing in the powder dose.

Operator

Our next question comes from [Yaron Werber] – Millennium Partners.

[Yaron Werber] – Millennium Partners

Good morning. Just curious, going back to the AnorMED acquisition, I appreciate all of your comments. I am curious what your thinking was when you went from $8.55 offer to $13.50? Was there something that you found during the due diligence process that changed your valuation assumptions? If you could give us a little more color, I would very much appreciate it.

Henri Termeer

It is a discussion we could talk about for a long time, but it is highly inappropriate to talk about it for a long time. The way that we evaluate things is very much merit, and how does it in fit in? What synergies does it deliver? What is its future?

We have a track record of working with products that reach the market and that are sustainable in these marketplaces for long periods of time. So we look at many different characteristics around the market. But the most important thing is that product makes an important, as Georges described, very important clinical contribution in the space, where we can translate the clinical evidence to something that the marketplace can adopt. That's what we looked at.

Then, of course we put it in all kinds of financial models and out of that comes a value. But that's how these things work. To go into the tactics of this particular environment or situation as you probably understand, is not the right place to do that. So I won't be able to give you any further comments.

Operator

At this time there are no further questions.

Henri Termeer

All right, thank you all very, very much. We stayed pretty much on schedule, 10 minutes past. But as the questions indicated it's a very exciting moment for us and it's exciting on many different dimensions. We talked about the LSD space, and what's happening there, particularly with Myozyme. We talked about the Renal space what is happening there with CKD and Hectorol and Renagel. We talked about oncology, and what's happening with Campath and the additional use of Campath for M-Systems; and Clolar which showed real life in the third quarter. We talked about biosurgeries, Synvisc particularly where we are much looking forward to really make some important progress in terms of the clinical development of next-generation programs.

So very, very exciting time for us with lots of new things falling into place on top of an infrastructure and business penetration on a global basis that is very, very solid, indeed as the earnings picture has shown. So we much look forward to talking to you again next year, in February I understand from Sally, to give you the results for the full year. Thank you very much.

Operator

This concludes today's Genzyme Corporation third quarter earnings conference call.

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Source: Genzyme Q3 2006 Earnings Call Transcript

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