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Executives

Patrick Flanigan – Senior Director, IR

Henri Termeer – Executive Chairman, CEO, President

Mike Wyzga – CFO

Ron Branning – SVP, Global Product Quality

Scott Canute – President of Manufacturing & Corporate Operations

John Butler – SVP; President, Cardiometabolic & Renal

Pamela Williamson -- Head of Global Regulatory Affairs

Mark Enyedy – SVP and President Genzyme Oncology

Analysts

Jim Birchenough – Barclays Capital

Eun Yang – Jefferies

Michael Yee – RBC Capital Markets

Brian Abrahams – Oppenheimer

Josh Schimmer – Leerink Swann

Yaron Werber – Citi

Geoff Meacham – JP Morgan

Ian Somaiya – Piper Jaffray

Geoffrey Porges – Bernstein

Chris Raymond – Robert Baird

Rachel McMinn – Merrill Lynch

Mark Schoenebaum – ISI Group

Phil Nadeau – Cowen & Co.

Jon Stephenson – Summer Street Research

Shiv Kapoor – Morgan Joseph

Salveen Kochnover – Collins Stewart

Genzyme Corporation (GENZ) Q2 2010 Earnings Conference Call July 21, 2010 11:00 AM ET

Operator

Welcome to Genzyme Corp. Second Quarter Financial Results Conference Call. (Operator Instructions) I would now like to turn the call over to Mr. Patrick Flanigan, Senior Director of Investor Relations. Sir you may begin.

Patrick Flanigan

Thanks, (Scott), and welcome everyone to Genzyme Corp.'s second quarter earnings conference call. As a reminder on this call we will be making forward-looking statements, including those regarding our 2010 financial guidance, our Cerezyme and Fabrazyme shipping plans and product allocations, the shareholder value creation plan that we outlined last May, our manufacturing operations, our product development plans and time table and our assessment of the future of the business.

These statements are subject to risks and uncertainties that may cause actual results to be different from those forecasted. Please refer to the Risk Factors section of our March 31st 10-K on file with SEC for more information on these risks. These statements speak only as of today's date and we undertake no duty to update or revise them.

I will now hand the call over to Genzyme's Chairman and CEO, Henri Termeer.

Henri Termeer

Thank you, Patrick, and thank you everybody participating this morning. As usual we have a number of Senior Executives here who can respond to – in the Q&A session. Mike Wyzga's here, our Chief Financial Officer; Scott Canute will talk about present manufacturing operations, we'll talk about where we are in the recovery of our manufacturing capacity; Ron Branning, our Senior Vice President, Global Quality, is here for a Cabarticle Degree; John Butler will talk about where we are at DGH and managing this tough moment very calm, quite supply of Cerezyme and Fabrazyme that needs in the marketplace and of course he will talk about Lumizyme introduction. David Meeker's not here but he's on the call and he's available for response. He's in Singapore. He's our Chief Operating Officer and he can chime in as we go along.

And a number of senior executives are here for this comp to till the Q&A.

The second quarter, as expected, was a difficult quarter financially. At the beginning of the quarter, we guided that we would supply Cerezyme at 50% of demand through July and Fabrazyme is 70% of demands through September, and the results to be reported today are consistently set.

We see supply constraints ease, currently for Cerezyme and in the next quarter for Fabrazyme, and we have attached a new guidance accordingly. We also adjusted guidance for the divestitures and exchange rate, changes in Health Care Reform impact and the (percent) degree impact from a number of (various) details that were attached to the press release. But I think in a very detailed way gets us to where we were in the beginning of the year intentions guidance to where we now are expected to be for the total year. We also took into account the revenues for to be the best of businesses for the second half.

We are very focused on the value creation activities that we've spoken about in recent calls of this kind. There's clearly no more impactful element here is to resupply the Cerezyme and Fabrazyme market needs. And we will get in a picturesque where are – it is encouraging where we are. We are seeing the kind of progress that we're hoping for since our becoming much more novelized. We are working our way risk this product to the point that can become released and can be – supply patients around the world. It's a very encouraging moment. We are at the tail end of this very, very tough year that lift all together.

Very exciting is of course the launch of Lumizyme. It's as expected to go with the ramps and setting up the ramps and certifying et cetera, et cetera. It is a little bit – it takes a little while to get that going. But you'll not (inaudible) if you pull updates. It's obviously quite exciting to be able to bring that product to all patients in the United States and not having the limitations that we've lived on that for two years.

We deeply engaged in an effort to really understand all the costs and cooperation and ways to work more efficiently and stream line operations. And in the full, we will be communicating with you what the impacts of the actions that will follow this review. We're very much engaged in preparing for the Alemtuzumab (MS story). This is a very important driver. It's not just a new product but this is a major new element for the corporation. We are now half way through the clinical trials. We'll see the results next year summer for the first trial, a few months later for the second trial. We have many meetings reviewing the regulatory approach, the regulatory standard use and the cause of due trials. Well, the (inaudible) faster than we expected. And then so close together, we will be filing for regulatory actions dispose trials at once. This is a very exciting program that is taking increasing resources in the preparation of the launch that you would now expect late 2012 and abroad 2013.

We're optimizing – not on the optimizing but we'll be accelerating a number of the products that we recently launched. And some of those was else you can see. Well you take Cerezyme and Fabrazyme out of the equation, the rest of the business grew 13% despite the impact – not too great an impact but some impact of the exchange rates. Since this one did extremely well in the second quarter as it did in the first quarter of 30 percent plus. Most of you again had a very good quarter. Clover had a very good quarter up, almost 30%. Renvela is still a very exciting program but didn't have a very small potter and we are still in the launch base and many comes as a Europe on the CTD indication and all indications actually as we got pricing set up for this product . But it has a very interesting future half of it, no.

Of course here we have see a C durations in fact 2014, 2015, we will have the patent C duration occur. I guess you saw was during the quarter and take actions and implement some of the capital structure of decisions that we announced earlier. We did announce the debt of $1 billion and buyback programs for the $1 billon and the second $ 1 billion. The second $1 billion will be within the next 10 or so months. We also prepared the three businesses that we decided to announce to you that we would divest the Genetic Diagnostic business; the Diagnostic product business; a Pharmaceutical business that we took the second half sales out of the guidance. So you have seen and we are still planning that these transactions will happen before the end of the year.

So with this (inaudible) let me hand over to Mike Wyzga for the financial detail. Mike?

Mike Wyzga

Thank you very much, Henri. As Henri mentioned, the second quarter was challenging financially. But we did make a lot of progress in a number of different areas. As we mentioned that on our Analyst day in May, we talked about our capital discipline. We outlined the number of (earnings) against that discipline. And after we find strategic alternatives to our genetics, our diagnostics and our pharmaceutical business and we're making good progress and have target to have these transactions to be complete by year end.

We also mentioned that we would seek a $1 million transits. June we issued an inaugural bond issuance in two transits. The first front was $500 million in a 5-year note. Net price was very well at 3.6%. In the other $500 million was in 10-year note, now it's priced at 5%. We immediately used the proceeds of those transits to do an accelerated stock repurchase program. This repurchase program represents the first half of our announced $2 billion stock repurchase program.

As we mentioned before, we're committed to an operation efficiency program. We made a lot of progress on that. It's a multi-year program. We expect a full implementation in the fall. We'll also discuss in the fall as well.

So lead my attention to the quarterly results and then I can say a few words about our guidance. From Q2 of last year, our top line decreased by about 12% to approximately $1.08 billion. The overall impact of foreign exchange is relatively immaterial. It decreased our top line revenue by about $6 million. That's not the case as you have see in our guidance package but it soon was the case on a Q-to-Q basis. And that's specific because while the Euro was unfavorable on a year-to-year basis, other currencies moves in the opposite direction from Q2 of last year. Now with all that said, the geographic dispersion can cause a different impact on the product-by-product basis and I'll talk through a little bit about that in a second.

Cerezyme decreased to $139 million, again due to the supply limitations. Fabrazyme revenue decreased on a year-to-year basis to $39 million, again impact by those reductions. Myozyme came in at $92 million and that's an increase of 16% year-to-year. The majority of the sales were in Europe and therefore the most severely impacted by the Euro foreign exchange. Revenue decreased by a little over half of the FX impacts for the overall corporation at the top line or about $3.7 million.

Revenue in the Renal and Endocrinology area increased by 4% to $258 million, Renagel and Renvela came in at $170 million and Thyrogen increased nicely by 8% due to strong growth here in the United States as well as in the international markets. Biosurgery revenue increased to $164 million or 18%. Again, due to Synvisc which demonstrate very, very strong revenue growth, compared to last year, Synvisc revenue increased by 31%, driven by increase in market share.

In the Hema and Oncology area, we increased by about 58%. And that follows the close of a deal with Bayer last June, and the incremental revenue of Leukine, Fludara and Campath. Mozibil continue to be a strong growth driver in this area increasing by 90% to $22 million. And Thymoglobulin, which is now part of the (inaudible), increased to $58 million due to the growth that we saw in the Asia-Pacific area.

Our non-GAAP gross margin for the first quarter came at 68% of revenue. This gross margin increased $22 million of manufacturing related discreet item. As we disclosed in our last quarterly filing with the SEC, the majority of this costs are associated with the maturity that was just started due to the power interruption in Allston. This material was concluded on the QA, QC testing and written off in the second quarter. We also incurred the cost of a temporary shutdown of our facility in the U.K.

Our operating expenses continued to be lowered than our original estimates in 2010. Compared to Q2 of last year, our non-GAAP research and development expenses were $211 million. The increase that we saw on a year-to-year basis, about $21 million, and that was primarily focused on the Gaucher small-molecule program as well as the MTAP program, (Pomiva).

The non-GAAP SG&A expenses came in at $336 million for the quarter. Now compared to Q3 of last year, these expenses increased due to the full quarter of the oncology infrastructure following the (inaudible) Bayer. More importantly it also included what I'll call discreet type vitals, such as the proxy contest cost, the legal expenses due to the consent decree as well as costs associated with our business improvement program. We also increased our reserves against our accounts receivable increased by approximately $6.5 million. In motivation increased on a year-to-year basis due to the full quarter of a bigger transaction.

Let me talk a little bit about Isis investment. It is upon a policy we determine that the decrease in our equity investment in Isis was other than temporary, and we record an impairment charge of $32 million against that stocking in the second quarter. Our non-GAAP tax rate reflects the impact of a low (NYSE:PBT) against our permit tax benefits. And you'll see that occur in the guidance as well.

Our second quarter GAAP includes the pre tax expenses associated with stock options which came in at a relatively flat $45 million as well as a pre tax acquisition cost related to the deal with them. Our non-GAAP earnings per share was $0.18 on a basis of 270 million shares outstanding. Now the stock buyback protocol didn't made an impact as it came at the very end of the quarter. There's much more impact when Q3 and Q4 and beyond.

Our cash (inaudible) was $974 million in cash and cash equivalents. Our capital expenditures where $178 million for the quarter and those are mostly focused on manufacturing facilities.

So with that let me turn my attention 2010 guidance. In any I mentioned, our updated guidance takes in due account a number of factor, including the impact of supply estimates, any changes in the foreign exchange rate versus our original guidance, the first trans of our share repurchase, European pricing (elections), national health care reform here in the United States as well as the divested business these impact, both on the revenue line as well as on the expense line.

We have not included at this point any estimates for the cash benefits to devise the business on the second trans of stock of the repurchase under the new guidance. It typically it's really estimates this accurately.

So the revenue. Let me talk about the revenue a little bit. The easiest way to think about the changes in our top line revenue from the original guidance is in four major categories. The first are the volume decreases associated with supply constraint. The supply constraint can be related to some degree impacted Cerezyme, Fabrazyme and Thyrogen and decreased our original revenue guidance by approximately $315 million. The second category is the foreign exchange rate. As you recall, our original guidance was originally set at 1.5 for the Euro, which was the spot rate that time we put our bunch together. So using the con spot rate for the Euro, we adjusted the other ex-U.S. currencies that the decrease in product revenue is approximately $170 million. And again this should be compared against our original guidance.

The third category is the impact of the proposed divestitures to the business in the second half of the year. Our guidance includes the first half of the actual results of the three proposed strategic divestitures; the proposed divestitures reduced our revenue guidance by $336 million. And again this impacts the second half of the year. We've also adjusted and reflected our reduced operating expenses for the guidance for these divestures as well.

Lastly, we incorporated the impact of the U.S. health care reform and the European pricing on the revised top line guidance. As I mentioned on our last call, in the U.S., approximately it's about $20 million for the U.S. portion of it. The combined pricing actions for both U.S. as well as international at this point is $30 million for the year,

Our spent guidance we revised as well. SG&A and R&D expenses were revised to capture the impact as I mentioned of the devise to businesses as well as the additional operating cost reductions that we're seeing for remaining businesses.

We trued up our in motivation guidance a bit. And that was due to the impact of primarily the Bayer products as well is in risk. Now both of these products and both of these assets are amortized on the basis of revenue. As long-term revenue projections for both of these assets are expected to increase in the future year. The current period revenue is proportion amount of the total is smaller and therefore the amortization decreases proportionally.

We estimate our tax rate will be lower as percentage or probably before tax or lower property before tax dollar number against our six permanent tax benefits. Now with all that put together, our 2010 non-GAAP EPS guidance is in the area of $1.90 to $2 per diluted share.

Let me stop there and turn it back to Henri.

Henri Termeer

Thank you, Mike. We'll now go through more comments then we turn to Q&A. first I would like to ask Ron Branning to talk about consent decree where we stand on that regard.

Ron Branning

Okay. Thank you, Henri. The consent decree was filed on the U.S. district court on May 24th and we anticipate it will be signed by the dead shortly. We've selected Quantic LLC as our consent decree expert consultant, which will continue the good working relationship that we've had over the past 18 months. Henri have also notified the FDA of our selection.

Two aspects of the consent decree are first of all the inspection that is required as a base line for our work plan. In this case that inspection which will result in a report to FDA in Q4 from Quantic and then our Genzyme comprehensive remediation work plan will be submitted to FDA by the end of this year.

Now the second part Is a batch record review and we are working with Quantic to synchronize our batch record review so that we will minimize the impact on release of product in a very timely way and that we will need to begin at the beginning of self convert. In addition we anticipate that there will be a number of regulatory inspections that will currently routine ongoing inspection process of our facilities at Allston and around the world.

Henri Termeer

Scott, you have way so many metric.

Scott Canute

Absolutely. I'd like to briefly just provide an update s Henri said, on a number of important aspects. Starting first with Allston Landing. Currently all six fire hatches are up and running. That's we start from approximately a year ago. We've been successfully completed eight Cerezyme runs in addition to the runs that are currently ongoing. The new working cell bank for Cerezyme has received both U.S. and EU approval. I would now completed three runs with the new working cell bank and have seen approximately 30% improvement in productivity. Our continuing to work on the optimization of the clinical process parameter, that we believe should lead to additional productivity improvements based on (parliaments).

We continue to profess well other plans to upgrade facilities, systems and equipments in Allston, increasing our levels of redundancy in overall level of reliability. Our new admin, lab and infrastructure expansion, including a cogent facility for back up steaming power is complete and will be operational in August.

Our project to move all of our fill/finish operations of Allston is progressing well. We have previously transferred all of our Cerezyme 400 units from our Waterford plants as well as Myozyme 160 liter. We've completed three validation runs for Thyrogen, and Fabrazyme and (Hatzpera). These lots ran well and are currently batch review. We remain on track for U.S. product exit by November 2010 and for all other markets by 2011.

Outside of Allston. The timeline for our major capacity programs is continuing to hold very firm. Our new bioreactors lead at Framingham is operational. We have run two bioreactors simultaneously and they ran well. Engineering runs will start in September. The validation beginning in Q1 of 2011. It's important to note that we will begin building Fabrazyme inventory when we begin the validation lots early next year and this material will be available for facility approval, which remains on track for end of year 2011. Our additional fill finish capacity at Waterford continues to be on track for approval on mid '11 and we have also added a third Myozyme bioraft at our facility in Belgium and that is also on track – continues to be on track for mid 2011 approval as well. In addition we have initiated detail design engineering to add two more 4000 meter biorafters for Myozyme at this point.

While we are returning to a more normalized production situation, as Henri said in his opening remarks, I do want to be clear that we are working with minimal inventories with Cerezyme and Fabrazyme while we complete the capacity addition projects and we strive to improve operations at our Allston manufacturing facility. Therefore our ability to supply these drugs can be impacted by non-routine manufacturing issues until we are able to build inventory after Birmingham comes online. Henri?

Henri Termeer

And then John Butler will finish with some comments on the PJH (ph) business.

John Butler

Scott and Ron have pointed out, we are making significant progress in our manufacturing at Allston. From a market perspective, we are squarely focused on the long-term strength of the business. Now key to this focus is maintaining open and accurate communication with patients and healthcare providers who have been very loyal to Genzyme through this process.

We are report to you today our current supply plan and our expectation of returning particularly returning Cerezyme patients to full dose by the end of the year. I do want to stress for patients, the details of when and how much drug will be available are still being refined. So as you can see from the range of our financial guidance, we will be continuing to communicate more specifically with patients and prescribers at the country level over the coming months, so the physicians can make appropriate treatment choices for their patients.

In addition to focusing on returning (inaudible) and fabry business to health, our other main priority is the growth of our business in pompe disease. Myozyme volume growth has been strong internationally with commercial patients increasing by 19% in the quarter versus Q209 and volume increasing by 23% reflecting the fact that new patients are more frequently now adult patients. As Henri mentioned, the Lumizyme launch is just beginning in the U.S. and this is our first experience with managing a REMS program and I have to say that we are quite pleased with the progress we have made.

To remind you, initiating the Lumizyme ace program, our REMS program consists of three pieces. First we have to train and enroll the sites, then train and enroll the individual prescriber and then enroll the patient. And in two months since approval, we have now trained and enrolled a 113 infusion sites, 156 prescribers and as of today, we have enrolled a 122 patients in the Lumizyme ace program. Recall that there are a 196 ATAP patients in total. This program, the ATAP program will remain open until August 20 to ensure patients have uninterrupted therapy while we work through the ace program. We expect to add these patients to treatment and now, of course, our sales team can also focus on increasing our pipeline of naive patients, which currently stands at about a 100 patients.

Henri Termeer

Thanks very much. With this we can turn to Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Jim Birchenough with Barclays Capital.

Jim Birchenough – Barclays Capital

Just wondering if you can give us an update on where we are at in terms of patients on therapy for Cerezyme and Fabrazyme and how many switches occurred during the quarter to competitors?

John Butler

It's very difficult to give a patient number in the middle of a competitive situation. There clearly have been switches (inaudible) in the U.S., particularly and as you know now, Shire has (inaudible) for patients. So that switching has stopped. So I think when we get through the supply situation and get back to normal, dosing for patients would be the time where it makes more sense to update you on the patient numbers at that time.

Henri Termeer

We are just still – in fact, we use the number 85%, went back on Cerezyme time once we reinstituted early in the year that plus or minus that (inaudible).

John Butler

As I mentioned in my remarks, the patient population has been extremely loyal through the process. And so, I think those projections made are still reasonable for us to expect.

Jim Birchenough – Barclays Capital

And that sounds like for Cerezyme but for Fabrazyme where would you target full demand being when you get back on track?

John Butler

Fabrazyme is a different situation because there is so much growth opportunity left in that product in identifying fabry patients. So while clearly in Europe where Replagal is still available, more patients are being maintained on the one main (inaudible) dose of Fabrazyme and other patients switch to Replagal. As we come out of that situation – of our supply situation, we really do see significant opportunity to continue to grow that market and we still believe that the dosing differences really matter clinically for patients, and so our opportunity to regain share there is significant.

Operator

Eun Yang with Jefferies.

Eun Yang – Jefferies

When you – provide a guidance on the sales impact from the pricing pressure in Europe, did you assume inclusion of orphan drugs in countries like Germany?

Mike Wyzga

Yes, I did. So let me walk through with the exact prices that we did include. For Italy, for example, there was no broadbased pricing cut; Spain for example, they started at discount of 4% excluding the impact on orphan drugs; Germany was about 10% increased discount across the board; UK was 1.1% beginning in 2010; Greece was 27% as you recall, but orphan drug was excluded and Turkey was 12% priced at. So all those were included.

Eun Yang – Jefferies

In terms of pharma taxes starting next year under the U.S. healthcare reform, did you include that one in your healthcare reform impact? I think it's about $40 million that you guys have provided guidance.

Mike Wyzga

Well, it was provided in the guidance, yes. The last we said, it was I think was $20 million for the impact of the –

Eun Yang – Jefferies

That is for this year, how about next year? I think next year was about $40 million –

Mike Wyzga

Yes, next year the run rate would be $40 million, that's correct.

Eun Yang – Jefferies

So does that include exercise tax?

Mike Wyzga

That would include the exercise tax. The exercise tax is, at this point from what we understand is focused on just U.S. sale. So what would be excluded, it would be the orphan drug life products with (inaudible), biosurgery would be excluded because the device would be – majority would be focusing the renal area and be U.S. sales in most part that's like 4% and about (ph) 40%. So it's relatively de minimus number of about $6 million to $7 million.

Operator

Michael Yee with RBC Capital Markets.

Michael Yee – RBC Capital Markets

We get a lot of questions about the November deadline and moving things out of Allston. Can you actually sort of walk us through what actually needs to happen to "meet" the deadline? And what actually goes on when you are moving fill-finish processes and what would be the risks involved with not hitting that, like what would I think to have to happen?

Scott Canute

It's really pretty straightforward. The actual production process itself is a reasonably straightforward in process, a simply three joint process. We have a lot of experience at Hospira. We know their systems, we know how they work because we deal other products and have done so successfully. And it's basically running some engineering runs to ensure that you can in fact make the product successfully that the technology transfer has occurred. And then you run validation runs, basically say you are going to run the process, this way you run it and then you assess did in fact work the way you thought it was, it's really that simple. And in this case, from a regulatory standpoint, we are actually for the U.S. market, releasing the products in your comparability protocol, which means once we run a validation lot, a single validation lot, and we run it successfully, the batch is in fact approved and meet the criteria embedded in the comparability protocol, it is releasable to the marketplace.

So where we are at right now is we have successfully run engineering runs, we have run three validation lots, they are currently under batch review. If they in fact are approved lots, they will in fact releasable to the marketplace immediately. And that's why we can say with good confidence that we will be able to meet that November deadline. We have additional validation lots planned in August and September. The more you run, of course, your level of confidence increases but we feel very good about where we are at right now.

Michael Yee – RBC Capital Markets

Does that FDA have to actually come in and look at stuff, or you are just saying that these things – the batch review works and you can just release it – the FDA actually have to come in?

Henri Termeer

The FDA does not have to come in. They can if they choose to, they always have that right to look at any things we do, but as long as we meet the criteria in the comparability protocol, the batches are in fact releasable.

Operator

Brian Abrahams with Oppenheimer.

Brian Abrahams – Oppenheimer

I was actually wondering if you had any clarity on what the regulatory paths might be internationally for making the transition out of the Allston and what your level of confidence is that you are going to be able to initiate the process, get the regulatory approvals that you need and complete the transition for the international distributed products by deadline next year?

Henri Termeer

Let me ask Pamela Williamson to respond to the question. She is the head of our global regulatory affairs.

Pamela Williamson

Sure, Henri, I would be happy to answer that question. In fact, we had initiated discussions with the various health authorities out of the United States a couple of months ago and are making great progress all over the world. We have in many cases actually had face to face meetings to talk about the tech transfer activities that we are undergoing as described by Scott, and actually are making great progress. We are on track to transfer all of the applications that are currently with Allston as an approved site, the site to move Hospira into those applications.

So those discussions and those activities are going quite well.

Operator

Josh Schimmer with Leerink Swann.

Josh Schimmer – Leerink Swann

Last quarter I thought there was going to be an 8 million spillover for Myozyme, Lumizyme. So, maybe a little bit surprise we didn't see a bit stronger performance over Lumizyme in the second quarter. Can you just help me understand, which batches have (inaudible), what were the net adds for Lumizyme expenditures-U.S. and how many patients were shifted to the ATAP program in the U.S.?

John Butler

I will focus on the Lumizyme fees. In the quarter we saw very little, I think there is about $250,000 of Lumizyme in Q2. It was very early days of actually getting patients treated. With the 122 patients who are enrolled in the age program now, and that's current as of today, so the – we have been accelerating greatly. So very little revenue obviously was reflected in the Q2 number. There were shipments that fell into the Q2, that was the European, I believe, shipment. So when you look at the growth numbers that are reflected, those were global growth numbers. Our European growth numbers have been running a little bit slower, which is kind of reflected in our slightly lower guidance, but you still had very strong growth, I believe it was 15% patient growth quarter-on-quarter, year-on-year Q2 versus Q2, and stronger volume growth as well.

So there was a shift of revenue, you didn't see the uptake of Lumizyme in Q2, yet you will start to see that reflected in Q3 but the underlying patient demand growth has been very strong.

Josh Schimmer – Leerink Swann

When you say U.S. is running slower, is that identifying patients or can you comment a little bit on that and the reversibility of that trend?

John Butler

So it's really versus where were budgeted in our expectations. If you look at patient approval year-on-year, first half 2009 versus first half 2010 in Europe almost identical. Some might be speed with which you get the patient out of the treatment, but we are still identifying patients at a very good rate. I think to a significant extent you didn't see any of the Lumizyme, again with an approval on May probably would have had an expectation to see more. It's that – getting that REMS program up and running really kept us from having significant impact. But international again, guidance reflects that we are slightly below where we expected to be from a growth rate in our budgeting process, but I reflected the actual growth, which is again close to 20% on patient basis.

Operator

Yaron Werber with Citi.

Yaron Werber – Citi

Yes, hi thanks for taking my question. So I just had a follow-up, so help us understand maybe John, just how fast are we going to see those 122 patients from ACE coming on to commercial product, are they pretty much un-commercial product now and that the 100 patients quote, unquote on the pipeline, what does that mean that they are in the pipeline, you know how that's convert them on to ACE.

John Butler

Great question Yaron. So not all of those 122 on therapy yet. So again the process is you get through the provider and the site enrollment, you got to enroll the patients at that point you're also start doing your insurance verification, process that takes variable amounts of time depending on the patient and at that point you can start to ship product and infuse the patients. So not all of the 122 patients are being infused yet, again the numbers of patients that we're enrolling we're seeing increasing from yesterday to today that increased by six.

So with perspective we are significantly moving that number forward. And important date to remember is August 20 is when the ATAP program closes. We wanted to give time so that patients didn't get – have the opportunity to miss infusions but we won't be supplying product through ATAP any longer as of August 20 and that's a 196 patients who are ATAP patients. So an expectation that say the vast majority of those patients will be either being infused or very close to being infused by that date.

Yaron Werber – Citi

John, is it fair to say that you should potentially expect all these patients to be commercial drug during this third quarter?

John Butler

That's exactly right. That's exactly right and then I mentioned the 100 pipeline patients that about half of those patients are consented now and are into actively in the process about half are still working through that process and when that 100 patients as generated without sales force with any effort in defining new patients in the space as we weighted for the Lumizyme approval. So now we have a sales organization that's quite focused on increasing our pipeline. So that's a current number but certainly not, by no means the limit of where we feel the patients are.

Operator

Geoff Meacham with JP Morgan.

Geoff Meacham – JP Morgan

Hey guys, thanks for taking the questions. I wonder if you can maybe go over the inventory that you're targeting for Cerezyme, Fabrazyme in the second half of this year and then where do you see this normalizing for 2011, are there sort of on a dollar basis or on a monthly basis?

Scott Canute

Yes Geoff, as couple of indicating we will be working with minimal inventories to minimal enough to achieve the logistical requirements and we need to be able to patients plan infusions, we need to be able to support those particular dates because it's extremely tough for patients when they have to change their fusion times for hospital support care takers (ph). So that is the month that you talked about later in the year and we want to be about month of stuff that allows us to (inaudible) out there. So for next year until we get room that comes out of the inventory that gets created with the additional plan we have to assume that we're working with these level of inventories.

But our upside scenario is that to get you ahead of that curve and I don't know (inaudible) you want to talk about some of these upside scenarios and productivity.

Scott Canute

Yes and that came to me very quickly and a very conservative manufacturing guy that we got the comments with very beautifully here. It's fairly upside in any production cost us. In fact (inaudible) themselves are aimed extraordinarily well right now and certain periods of time the bottleneck actually moves down for even downstream processing and we have a number of bottlenecking activities that we're currently proceeding with hopefully to be able to fully capture and utilize that what we can produce in a (inaudible) presuming that we maintain the particular that we're currently seeing on an ongoing. So there is bottlenecking activities there we're doing.

We're doing a number of things, actually on our ability to approve last and more efficiently going forward which will help us as we move forward. Fabrazyme productivity, we still think there is upside in this new working cell bank but we're not resting there. We have two new working cell banks that we've actually laid down and are continuous starting to run small scale data and we've also have laid down a master cell bank so we've got multiple shots on goal now. We're being appropriately conservative in terms of the assumptions we make we're very obvious and I think very appropriate reasons, but there is always upside the only caution l would stress at this point is because of the length of our cycles as we see upside in the plant it will take time for it to work its way through the system and be approved into the product and that's why I think we very appropriately articulated our ability to start increasingly our supplies in Q3 and Q4 as we roll into next year and we can clearly update you on our progress in terms of driving some of this upside in the next call as an (inaudible) business.

Geoff Meacham – JP Morgan

That's really helpful, just a quick follow-up question, I guess for Mike. Mike correct, you said you assumed the divestiture of the three businesses in the new guidance. Do we look to the details from your LS state for some of the new launches there, can you help us with that.

Mike Wyzga

Well some of the new launches with regard to the impact with pending transactions?

Geoff Meacham – JP Morgan

Correct, yes.

Mike Wyzga

Yes, we put that in the cross lock if you look in index we have both the revenue and the expense backed out. Yes, you should expect that coming around soon, I know the offer memorandums went out I believe it was the last week of June, it's a fairly robust process as you can imagine. The conference call began this week and we should have I think the final thesis are expected to be in by the first couple of weeks of September. So it will be a pretty quick turnaround process, but the updates for that should be in the pending transaction, you'll see that on the cross lock.

Geoff Meacham – JP Morgan

And then the fourth quarter would be kind of a full impact of that or maybe it's such in the third quarter.

Mike Wyzga

Well again we'll see when the (inaudible) and that type of thing.

Geoff Meacham – JP Morgan

Okay, thanks a lot.

Mike Wyzga

By the end of the year.

Operator

Ian Somaiya with Piper Jaffray.

Ian Somaiya – Piper Jaffray

Yes, well thank you for taking my question. Just on the guidance Mike, for the fourth quarter. Is that a good baseline to use as we think about modeling our 2011? Are there other considerations that maybe you can point us to?

Mike Wyzga

I think it's a good baseline to use. We talked about the fourth quarter as more normalized quarter, but (inaudible) that is more that we can achieve was a great inventory flexibility and that of course is something that would beyond what we can achieve in the first quarter, but first quarter is the more normalized quarter, the only normalized quarter actually this year that we have. There is a reasonable based on what do you think.

Scott Canute

Yes I think that's correct, with the two caveat that, remember the divestitures and the proceeds for that are not included nor is the second tranches stock repurchase.

Ian Somaiya – Piper Jaffray

Okay.

Scott Canute

Next question.

Operator

Geoffrey Porges with Bernstein

Geoffrey Porges – Bernstein

Just to Scott, first could you just tell us whether you've had any positive hits from the PCRSA (ph) viral containments since you've had the sensitivity assay and then secondly any other quality variances that have held up any loss in the persistence (ph). Could you just re clarify your comments on Fabrazyme, the productivity you said 30% data but could you bridge that back to the yield that you were getting say the first half of 2009 and where that leaves you, thanks?

Scott Canute

Okay. So my question the let me start and if I don't catch him all I mean hold me to it and I'll come back around. In terms of PCHS (ph) and hits that we've had, we've had no genuine hits on it fairly I mean anywhere in our process. We've seen a positive I mean at one point but it's fairly that was a lab issue clearly identifiable from that standpoint and just as a follow-on to that we continued to progress very well with our overall viral risk mitigation programs across all the dimensions and one of the big ones is our ability to detect something if we were to see it very, very early on and we're very happy we have that PCR test at this point.

In terms of any colliding variances or deviations, I may let Ron comment, but deviations would be a normal process, I mean in fact if you don't see deviations you would be confirmed that you're not really taking a close enough look and what's going with your process so we clearly seen on the vast majority of them are easily resolvable, we put in corrective actions preventive actions across the board, I mean now we've seen several things that would lead to lot that we would lose, yes absolutely and again but that's a routine part of operation and we've seen nothing that would be out of the ordinary at this point in time. In fact we're actually approving our ability quite effectively to be able to deviations as they come up and not impact our ability for a lot release in terms of Fabrazyme productivity, yes we saw, it's about 30% increase from what we were seeing in old working cell banks where we're at and if you recall what we said in the past was that we were hoping that we would be able to see somewhere 60% increase or so or we thought there was another 30% upside overall in our productivity from working cell bank standpoint.

We've not seen that additional productivities that we thought that was upside that we was demonstrated and poly scale activity. The model is pretty good but it's not a perfect predictor of what happens in the plant. We understand the critical process parameters more around solid density specific pieces in the process that if we control at appropriately we think we'll be able to get the additional productivity out and that's where we're focused right now.

So Fabrazyme productivity in general, if you go back and look it from the early days to now there is still some basic process understanding that we would like to improve and it does. There is some variation in it. So just go back historically in doing apples-and-apples comparisons is a little bit difficult from around but we're definitely significantly better off than we were before we changed this working cell bank up.

Geoffrey Porges – Bernstein

Thanks.

Scott Canute

I think that answers your question.

Geoffrey Porges – Bernstein

Yes.

Operator

Chris Raymond with Robert Baird.

Chris Raymond – Robert Baird

Thanks for taking the question, yes just building out an earlier question, you know as we think about Q4 maybe as a model for looking at 2011, just can you give a little bit more color on this efficiency program that you guys talk about in your press release. Are we do assume this is primarily in the SG&A area and that's going to be implemented in the fall would we have more color on exactly the magnitude of the benefit as we think about 2011. Thanks.

Henri Termeer

Yes, we were saying that we are working our way through understanding what the opportunities are and it is not just (inaudible) this is global, strike all functions and all operations of the corporation of course in manufacturing, corporate control we're very much focused on the recovery but eventually to link to it all those operations as well and it is a multiyear program and while talking about in the fall would be for us to be able to give you an inside as to what we think the potential is here. So we will but then it would be potential of a multiyear program that provide benefits over a number of years clearly a very important set of benefits in 2011 and 2012.

Chris Raymond – Robert Baird

Okay. Thank you.

Operator

Rachel McMinn with Merrill Lynch.

Rachel McMinn – Merrill Lynch

Yes, thanks very much. A couple of questions, I am a little bit confused by your Cerezyme statement of I guess adding new patients and the part that confuses me is that if you're still working with minimal inventory and you've got to wait for framing hands to come online to really provide you with that cushion,. How can you go on and take on new patients if you don't really have enough inventory to supply that in the case of sort of normal course of business disruptions. I also wanted to clarify your Myozyme comments and try to understand whether the 196 ATAP patients were overlapping with the 122 that have gone through the system so far. And then last question is just on the Consent Decree in whether the slower release times and lower yields were included in your guidance. Thanks.

Henri Termeer

And let me just answer the last which is yes, that has been included in the guidance and we are obviously would like very, very carefully both Ron and Scott made comments in terms for our us working those issues and trying to further improve on it and those would be parts of the opportunities that we still have in the system but we did look at it very carefully and of course we also included a very broad range that takes into account. We can't predict that we're seeing perfectly at this stage.

Then attempts of the taking on new patients what we're still are in another short situation. Ron, can you address to that.

Ron Branning

Sure. And so again with that competitors in starting at waiting list now I mean these are patients that need to be treated and obviously this is as a leader in the area we want to have that commitment and really when we look, we took this announcement out I think about three weeks ago and asked for physicians to communicate with us when they have an interesting starting a new patient. Today we've had six patients who have looked to patients who've looked to start on Cerezyme and we're going to begin working them through the process.

So when you think in terms of inventory, six patients really does an impact, our inventory but treating those six patients obviously significantly impacts them and we think we need to live up to their commitment. The time it takes to move them from the enquiry through the treatment as we said we expect to start increasing those since in September so their treatment will probably line up quite well with when we're beginning to be able to increase doses for a current patient also so we're not compromising increasing doses for our current patients between these new patients.

And then your last question was around the ATAP program the 196 ATAP patients. When I talk about the 122 patients, the vast majority of those consists of the 196 ATAP patients. So there are small numbers of naïve patients we've already enrolled in the Lumizyme ACE Program but that's a reflection of mostly moving those 196 out of ATAP onto Lumizyme ACE Program and onto commercial treatment.

Rachel McMinn – Merrill Lynch

Okay, thank you very much.

Operator

Mark Schoenebaum with ISI Group.

Mark Schoenebaum – ISI Group

Hey guys I don't know if Mark Enyedy is on the call, but I had a question on MS. Some of the check we've done in the case of their maintenance there has nothing on the (inaudible) syndrome in the Phase III (inaudible). I was just wondering if there was any, if you can comment on that at all?

Henri Termeer

Mark?

Mark Schoenebaum – ISI Group

Yes.

Mark Enyedy

Yes, so just in general we're seeing no new safety signals coming from the Phase III studies and I can confirm to you that there are no new good past cases in the Phase III studies.

Mark Schoenebaum – ISI Group

That's excellent.

Mark Enyedy

Okay.

Mark Schoenebaum – ISI Group

Thanks Mark.

Mark Enyedy

Good a hear thing from you Mark.

Mark Schoenebaum – ISI Group

Good to hear from you.

Operator

Phil Nadeau with Cowen and Company.

Phil Nadeau – Cowen & Co.

Good morning, thanks for taking my question. My question is specifically on the impact of the Consent Decree on yields, I believe when you gave your June manufacturing update, it still seemed like it was a very uncertain, how much of the product that you were able to produce was going to have to be front away after (inaudible) J&P (ph) compliance analysis and that's much time has arrived from June till now. So can you give us some idea of what you are assuming for the amount of material that will need to be throwing away and how you arrive at those assumptions?

Henri Termeer

I think it's an excellent question and (inaudible) Ron because you probably communicated in that way that allowed you to think that we have ongoing set of quality issues that will lead to that but Ron I think you can answer that.

Ron Branning

Thank you Henri. I just want to add with what Scott has to say as we are operating in constrained supply situation and we'll continue for the next several months to do so. But we do not anticipate that there are going to be significant problems because we don't see those now as part of Quantic process we are synchronizing our review with the mandate that the Quantic all of our records going forward under the Consent Decree and that will process will be complete by the end of August and for beginning in September. So that process is well underway so any problems that we see as Scott said we'll be hunt for seeing problems that we don't see now and we'll have could have a potential impact on supply but there is nothing that is directly related to the Consent Decree or with Quantic's audit that will constraint supply or cause us to (inaudible) product.

Henri Termeer

I think Ron also when we talk about that supply update it was really the timing of release is critical to providing product to patient as well and what was unclear was exactly how much adding the Quantic piece would impact the timing of our release not the quality of product.

Ron Branning

Yes exactly and I think that's the key point there is that we are synchronizing that process with Quantic so that we do not have significant delays and we're looking that how we can even simplify our processes as Henri was talking about to be sure that we get timely release supply.

Phil Nadeau – Cowen & Co.

Okay so it doesn't seemed to be any risk that you'll produce product at Quantic will say at some point violated J&P (ph) procedures it needs to be thrown away that's not a real concern?

Ron Branning

I think it's a real concern only as it happens in normal operations we do not anticipate anything like that but we could have something unexpected happen.

Operator

Jon Stephenson with Summer Street Research.

Jon Stephenson – Summer Street Research

Great. I just had a couple of questions related to the guidance. First on the PGH side. It seems that when I look at the midpoints of the key products and then back end to what the implications are for the rest of the PGH business. It seems implies like 176, 236 million in expenses when you booked about 154 in the first half. So I was just really wanted to understand what factors would be driving meaningful sequential impacts upwards for that leg of the business of the PGH business in the back half of the year.

Henri Termeer

I'm sorry, are you talking about revenue or you talking about…?

Jon Stephenson – Summer Street Research

Revenue guidance.

Mike Wyzga

So the high end of the guidance those reflect the ability for us to return on the Cerezyme side to having patients to be able to get normal doses in the fourth quarter.

Jon Stephenson – Summer Street Research

That I understand, what I did is I took the total PGH business I subtracted out the midpoint of the Cerezyme, Fabrazyme and Myozyme and the implications suggest that there is going to be a big uptick in the other line the other PGH, I was wondering what would drive that?

Henri Termeer

I think that's a good question that a cardio and (inaudible) all those products are in depth number and as well and (inaudible). So these are products that we have not called out separately and they are relatively small products. (inaudible) is one of them in Asia and (inaudible) is one of them that's marketed through Daiichi and (inaudible) which we market ourselves relatively small product in Europe.

Jon Stephenson – Summer Street Research

Right but I am saying the total contribution for those in the first half was 154 million if that was (inaudible) correctly and so the implied guidance suggests that those are going to be a 176 to I think it was 236 what's the meaningful step up.

Mike Wyzga

It is a reflection of those businesses.

Jon Stephenson – Summer Street Research

Okay and then I had a similar question on the Biosurgery side, stripping out the total guidance on Biosurgery, stripping on Synvisc-One on the total guidance implies and equally similar step up from I think the other Biosurgery was 114 million in the first half and the guidance implies that 141 to the back half?

Henri Termeer

And you have show him that again that is reflection of the business.

Mike Wyzga

Let me can I clarify on the PGH side, we just recognized that the (inaudible) piece of the business was part of our pharmaceuticals business in the first half of the year so it wasn't included in our first half numbers. Those (inaudible) cells are now being managed in our cardio business, so that's included in our second half guidance.

Jon Stephenson – Summer Street Research

And what was the contribution in the first half in that?

Henri Termeer

Can we take this offline because it is a detailed – we will be very happy to respond all of those questions and if you could get Mike a call then you can take it offline.

Mike Wyzga

Exactly I'll get those exact.

Henri Termeer

Operator we are little past time. We were (inaudible) right now. We'll take two more questions and then we'd invite everybody else to make sure that you get your questions answered by calling either Mike or Henri.

Operator

Thank you Shiv Kapoor with Morgan Joseph.

Shiv Kapoor – Morgan Joseph

Thanks for taking my question. Can you give us an update on (inaudible) please, are you still on track to have the data from a couple of Phase III historically and are you still on track to have a filing for the homozygous in second half of the year?

Henri Termeer

John?

John Butler

Yes. We are still in track for having data from to check into phase III and files shortly and (inaudible).

Henri Termeer

Last question.

Operator

Salveen Kochnover with Collins Stewart.

Salveen Kochnover – Collins Stewart

Thanks for taking my question according to guidance it seemed that you will be at Cerezyme supply levels of about 90% of premium charges and demand levels in the fourth quarter and then double 3Q Fabrazyme supply levels in the fourth quarter. Is that the right way to look at this?

Henri Termeer

Yes you can derive it that way. It of course we are sure we will (inaudible) broad range but I think that's not too far removed.

Salveen Kochnover – Collins Stewart

Okay. Thank you.

Henri Termeer

All right, thank you all very, very much participating. I'm sure we didn't quite get to all questions and I would invite everybody to make sure that you do get your questions answered by calling Patrick or Mike or myself or whomever and we can just come to whole set of questions. We very much look forward to the remainder of this year. First half has been very constraint but sure as since we spoke about there is long of very exciting things as we spoke about this morning happening over the next three or four months and it is really, it was great optimism that we look at reporting to you in October for the Phase III results. Thank you for participating. We'll talk to you then.

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Source: Genzyme Corporation Q2 2010 Earnings Call Transcript
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