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Following the release of first quarter results on April 21, 2010, several analysts covering Genzyme Corporation (GENZ) have lowered their earnings estimates for 2010 and 2011. Genzyme is still suffering from the impact of the temporary shutdown of its Allston Landing manufacturing facility last year and has yet to resume normal supply of the key products that were affected by the shutdown.

First Quarter Highlights

Genzyme reported first quarter earnings of 24 cents per share, above the Zacks Consensus Estimate of 19 cents but well below the year-ago earnings of 70 cents. With the company facing manufacturing problems from mid-2009, we were not surprised to see first quarter revenues decline 6.5% to $1.07 billion, mainly due to restricted supplies of Cerezyme and Fabrazyme.

Agreement of Analysts

Following the release of first quarter results, most of the analysts following Genzyme have lowered their estimates for fiscal 2010. Of the 4 analysts covering the stock, 3 have lowered their estimates for fiscal 2010 over the last 30 days with only one analyst moving in the opposite direction.

Estimates for the second and third quarters of 2010 are down as well, with 2 of the 5 analysts covering the stock reducing their expectations. Meanwhile, 2 of the 5 analysts covering the stock have reduced their estimates for fiscal 2011 over the past 30 days with only 1 analyst moving in the opposite direction.

We believe the estimate revisions reflect the impact of the disruption in supply schedule. On the first quarter call, the company reported that it is currently providing for 50% of Cerezyme demand. Genzyme stated that the supply situation for Cerezyme will remain this way for another 2-3 months, mainly due to a disruption in operations at its Allston facility late in the first quarter. The disruption was due to an unexpected electrical power failure.

Meanwhile, Genzyme is currently catering only 30% of Fabrazyme demand. Though the company is working on improving productivity, it expects the 30% shipping allocation to continue through the third quarter of 2010. (Click to enlarge)

Magnitude of Revisions

Estimates for fiscal 2010 have gone down by 2 cents over the past 30 days. The current Zacks Consensus Estimate is $1.97. 2011 estimates have, however, gone up by 4 cents. Meanwhile, estimates for the second and third quarter of 2010 are down 3 cents and 2 cents, respectively.

Genzyme recently announced that a consent decree will be implemented by the US Food and Drug Administration (FDA). The FDA decided to adopt this course so as to ensure that the products manufactured at the facility are made in compliance with good manufacturing practice regulations. Genzyme took a $175 million charge in the first quarter related to the consent decree, and is currently in discussions with the FDA regarding the terms of the decree.

The consent decree will not only be in force for an extended period, it would also require Genzyme to make payments to the government and incur other costs. Genzyme intends to update its guidance once the consent decree is finalized.

Recommendation

Following the release of first quarter results, we downgraded Genzyme to Underperform (Zacks #4 Rank - Sell). Genzyme has been under a lot of pressure over the past few quarters following the temporary shutdown of its Allston manufacturing facility due to contamination issues.

While we are pleased to see that Genzyme is taking steps to emerge from the impact of the temporary shutdown of the Allston plant, we believe that the company may have to face additional challenges before it is able to go back to a normal production and supply schedule. We remain concerned that a delay in resuming full supply of Cerezyme could lead to loss of share to Shire plc’s (SHPGY) Vpriv and Protalix BioTherapeutics Inc.’s (NYSEMKT:PLX) Uplyso. Meanwhile, the FDA’s consent decree will result in Genzyme incurring additional costs.

Although the company could receive some positive news in the form of FDA approval of Lumizyme (June 17, 2010), we expect investor focus to remain on the company’s emerging pipeline, updates regarding the supply schedule of Cerezyme and Fabrazyme, the FDA's enforcement action and updated guidance. The recurrence of manufacturing issues would be a major setback for the stock.

Source: Earnings Scorecard: Genzyme