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Executives

Patrick Flanigan - VP, IR

Henri Termeer - Chairman, President & CEO

Mike Wyzga - EVP, Finance & CFO

Scott Canute - EVP; President, Global Manufacturing and Corporate Operations

Mike Vasconcelles - VP, Clinical Research

John Butler - SVP; President, Personalized Genetic Health

Pam Williamson - SVP and Global Head of Regulatory Affairs and Corporate Quality Compliance

Roger Louis - CCO

Analysts

Eun Yang - Jefferies

Michael Yee - RBC Capital Markets

Jim Birchenough - Barclays

Josh Schimmer - Leerink Swann

Geoff Porges - Bernstein

Geoff Meacham - JPMorgan

Robyn Karnauskas - Deutsche Bank

Rachel McMinn - Bank of America/Merrill Lynch

Ian Somaiya - Piper Jaffray

Philip Nadeau - Cowen & Company

Mark Schoenebaum - ISI Group

Jon Stephenson - Summer Street Research

Genzyme Corporation (GENZ) Q3 2010 Earnings Call October 20, 2010 11:00 AM ET

Operator

Welcome to the Genzyme Corporation's third quarter financial results conference call. All participants will be in a listen-only mode until the question-and-answer session. (Operator Instructions) Also this call is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the call over to Mr. Patrick Flanigan, Vice President of Investor Relations. Sir, you may begin.

Patrick Flanigan

Thanks Tori, and welcome everyone to Genzyme Corporation’s third quarter earnings conference call. I know many of you are interested in discussing Sanofi's pending tender offer however the purpose of today’s call is to focus on our Q3 operating and financial results in addition to Q4 guidance.

We will be hosting an event in New York City this Friday to discuss our thoughts on the tender offer with the investment community. We ask that you wait to ask your questions regarding this topic until that time. Space too is limited to this, so please RVP with the member of the Genzyme Investor Relations team as soon as possible.

Finally during today’s call we will making forward-looking statements including those regarding our fourth quarter guidance, our Cerezyme and Fabrazyme supply and allocation plans, our manufacturing operations, our shareholder value creation plan, our product development plans and timetables including alemtuzumab for MS and our assessment of the future profitability of the business.

These statements are subject to risks and uncertainties that may cause actual results to differ from those forecasted. Please refer to the Risk Factor section of our June 30, 10-Q on file with the 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

Patrick, thank you so much, and thank you everybody participating this morning. I did lose my voice for unknown reason so I will be short and hand over to Mike Wyzga, our CFO who will give the financial details. With me is also David Meeker, our Chief Operating Officer; Scott Canute, our President of Manufacturing Operations, and he will make some update, comments about where we are in the recovery of our manufacturing operations; John Butler, our President of Personalized Genetic Health (PGH), he will make some comments as regards to the recovery in the marketplace for Gaucher disease and Fabry disease and other, the introduction of Lumizyme in United States.

We also make some comments; so Dr. Mike Vasconcelles, who is the head of the clinical unit for Oncology, putting in perspective the Clolar trial that was announced also I believe early this morning, the CLASSIC I trial for AML, for Clolar.

So quarter three was a quarter that really described the beginning of our financial recovery as a result of starting, restarting the supply of Cerezyme in the market place in the United States in particular. And we expect this to continue throughout the world in quarter four and as a result we have been able to increase how we think about quarter four and Cerezyme, for the first time in more normalized terms we would expect of doing this quarter almost all patients that are still on Cerezyme are under rolled will be on full dose. And we are protecting a revenue number for the fourth quarter of $235 million to $245 million.

The other important driver of growth in quarter was Lumizyme, they got approval very late in the second quarter as you remember we started introduction during the quarter by mid quarter we stopped the ATAP program and we are extremely happy indeed how that progress during the quarter, revenue went for 4.5 million due its combination of Myozyme for the classical infertile babies and Lumizyme for 4.5 million in quarter two went to 19.1 million at quarter three and we are projecting for quarter four to reach 2 million, making it now a material product in our portfolio.

The recovery of Fabrazyme will start this quarter we are expecting to double the shipments during the quarter and we are expecting revenues in 70 to 75. Quarter four then is becoming as we have often guided throughout the year the first more normal quarters since the manufacturing interruptions started in the third quarter of 2009. And so a combination of the improved revenues and the implementation of the valiant improvement program that we also spoke about at prior calls. We now expect a very significant change more normalized position around the earnings per share, and the non-GAAP projections are $0.90 to $0.95 for the fourth quarter, and that then becomes the base for how we think about 2011 and we will talk more about that as we start our non-deal roadshow later this week. So let me now ask Mike to give sort of financial details and then after Mike, Scott Canute talk about our manufacturing update.

Mike Wyzga

Thank you very much Henri. As Henri mentioned in his opening remarks this is a interesting quarter for Genzyme sort of marked the, quite a turning point for this operation. We made significant progress on our manufacturing operations on our way to re-supplying the market. We also took a number of steps beyond the manufacturing operations. As you recall earlier this year we talked about a number of initiatives to increase shareholder value. One of those things was the strategic alternatives to some of our non core businesses. As part of this, we recently announced the asset purchase agreement with LabCorp to acquire Genzyme Genetics for $925 million in cash.

The remaining businesses divestures remain on track and as they are on target for completion by the end of the year. Our financial results for this period also reflects the full quarter impact under our stock repurchase programs. Under this program we have purchased approximately 15.7 million shares at an average price of about $63.90. And this represents the first half of our announced $2 billion stock repurchase program.

And finally we continue to make progress on our operational efficiency program. Henry touched on it’s color Value Important Program or VIP. The first steps of this multi-year program are now under way.

Our third quarter GAAP earnings per share were $0.26. Our GAAP to non-GAAP cross work reflects the impact of our stock compensation expense, purchase accounting associated with the transaction with buyer. The restructuring costs and discontinued operations. The pre-tax expenses associated with stock options were $41 million, the pre-tax acquisition costs associated with the deal with Bayer, $5 million and finally we recorded up $3 million associated with severance to non-GAAP to non-GAAP earnings. Our third quarter non-GAAP earnings for diluted share was $0.42 and this is inline with our overall non-GAAP EPS guidance that we gave earlier this year of $0.40 to $0.50. Its also a substantial increase in our Q3 of last year order came in at $0.26 again on a non-GAAP basis.

Let me turn on to our quarterly result and then say a few words about the guidance. For Q3 of last year, our top line increased by 8% to approximately $1 million, the revenue increases having met this is predominantly driven Cerezyme which we increase almost double or $180 million. Patients in the US begin returning to normal dosing levels in September. Fabrazyme revenue was $34 million and that was impacted predominant by the supply constraint. We started the process of doubling the current allocations of Fabrazyme here in the United States and we expect to roll this out globally in the fourth quarter. Myozyme revenue came in at a $106 million and that’s an increase of $20 million year-to-year, that was following the US Lumizyme approval here in the United States and the transition of the ATAP patients to commercial therapy throughout the third quarter.

We'll see the full quarter impact of this in the upcoming quarters. Revenue in the Renal and Endocrinology area increased 4% to $270 million. Renagel and Renvela revenue came in at a $179 million, Hectorol revenue came in at $49 million and Thyrogen increased to $42 million. Biosurgery revenue increased to $157 million or 8%. Synvisc revenue on a year-to-year basis increased by 14%. The Synvisc third quarter revenue reflects some seasonal pattern that we have seen historically in this product.

The Hema and Oncology area increased to $267 million or 17% over last year. This increase is driven largely by Mozibil which increased to $24 million, almost double that of last year. Now the overall revenue was impacted by foreign exchange which was negative decreasing our revenue by approximately $16 million on a year-to-year basis. Our non-GAAP gross margin for the first quarter assuming for the third quarter was $706 million or 70.5% of revenue. On a year-to-year basis, the gross margin as a percentage of revenue was impacted by both product mix and product margins. The margins in both Cerezyme and Fabrazyme reflect some of the incremental costs associated with our quality investment and operating on a consent degree.

As we start to get higher capacity, both will decapitate. The margin will also reflect the impact of approximately $8 million of remediation costs associated with our facility in England. This facility has now restarted and we now expect to see these costs again. And finally, the gross margin increased approximately $6 million of manufacturing related discrete costs associated with various inventory write offs. Our operating expenses continued below than our initial 2010 estimates. That really reflects the increased focus that we have on sustainable operational efficiency.

And on a year-to-year basis, you should be noted that revenue increased by about 8%, our operating expenses actually decreased as both the dollar amount as well as a percentage of revenue. Compared to Q3 of last year, our non-GAAP R&D expenses decreased to $193 million. And as I pointed out, as a percentage of revenue R&D decreased from 22% last year to about 19% this year. Our non GAAP SG&A expenses came in at $313 million compared to Q3 of last year.

That’s an increase of about $12 million but as a percentage of revenue again, we saw a decrease as our SG&A decreased from 32% last year to approximately 31% this year. Our amortization decreased $6 million year-to-year. That’s largely due to the increased revenue projection of Fludara. Our non-GAAP tax rate was 21%. That’s really consistent with last year. Our basic weighted average share has decreased to 255 million shares, now reflects the stock repurchase of approximately 15.7 million shares offset by about 4 million options that were exercised during the quarter.

Our cash position is $1.2 billion. Our capital expenditures for the quarter are about $167 million and those were focused mostly on our manufacturing operations.

Turning to our guidance for 2010, we have retained our guidance range to $0.90 to $0.95 for the fourth quarter. The expected increase per share from Q3 to Q4 is broken out on a step charge that we attest to our earnings, but it is really driven by four major factors.

The first is a return of normal dosing for service on a worldwide basis. Remember Q3 reflects only the US patients returning to normal dosing. Q4 reflects the first quarter where we get to a full dosing on a global basis.

The second is a doubling of the allocations of Fabrazyme globally. Again in the third quarter, the allocation of doubling was limited to United States and Q4 will start to capture the full increase of that increased allocation worldwide. The third factor is the impact of the full quarter of Lumizyme patients on commercial products as well as additional patient accruals that we expect during the quarter.

And then lastly we expect to continue to capture the impact of the expense reductions associated with our company-wide initiative to improve both efficiency in effect of our spending. We will discuss all of these in more detail on our investor event on Friday as well as talk about what it all means for 2011.

So with that let me turn it back to Henri.

Henri Termeer

So before we go to Q&A let me ask Scott to make some comments on the manufacturing.

Scott Canute

Certainly, thanks Henri. I’d like to briefly provide an update on a number of important aspects of our strategy across global manufacturing. In Allston Landing, all six bioreactors continue to be operational and running well. Since restart we successfully completed 12 Cerezyme and 10 Fabrazyme runs. Cerezyme productivity continues to run at or above historical trends. For Fabrazyme, we have now completed 5 runs with the new working cell bank and have seen approximately a 30 to 40% improvement in productivity.

Our most recent run was the highest productivity we have seen since Q4 of 2008. We are continuing to work on the optimization of critical process parameters that we believe should lead to even further productivity improvement. Our project to move all of our fill/finish operations out of Allston is progressing well.

We previously transferred all of our Cerezyme 400 unit filling to our Waterford plants as well as Myozyme 160 liter. We've now completed nine validation runs for Thyrogen, and Fabrazyme at Hospira today. These lots have run well, we‘ve released our first Thyrogen lot to the market from Hospira and our first Fabrazyme lot released is in that. The remaining lots are currently under batch review. We remain on track for US product exit out of Allston by November 2010 and for all other markets by August of 2011.

Outside of Allston, the timeline for our major capacity addition programs are all holding firm as well. Our new cell culture bioreactors suite in Framingham continues to progress very well. Engineering run began on schedule in September. We’re currently more than halfway through our first run and everything is going extremely well.

It's important to note that we will begin building Fabrazyme inventory when we begin validation lots in Q1, this material will be available upon facility approval which remains on track for end of year 2011. Our additional capacity plans of both Waterford and Belgium also remain on track.

While we are clearly returning to a more normalized production situation, I do want to be clear that we are working with minimal inventories of Cerezyme and Fabrazyme while we complete these 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 manufacturing issues until we are able to build inventory after Framingham comes online. Henri?

Henri Termeer

Okay, thank you very much Scott. So, here are some comments on the Clolar clinical trial results, Mike before we go to Q&A.

Mike Vasconcelles

Thank you, Henri. We welcome the opportunity to share with you this morning the top line study results for CLASSIC I. The Phase III randomized double-blind, placebo-controlled trial compared Clolar in combination with cytarabine to cytarabine plus placebo in patients of 55 years of age or older with relapse of refractory acute myeloid leukemia or AML. Relapsed AML, meaning AML that recurs after an initial response to treatment, it’s a challenging disease. Refractory AML, in other words AML that has not responded to prior therapy is an even greater challenge. The only care to therapy in both scenarios is hematopoietic stem cell transplantation. No chemotherapy agent or regimen has demonstrated the trivial advantage over any other and that’s no single standard of character.

Single agent cytarabine is among the existing treatment choices and served as a standard comparative on the CLASSIC I. As with newly diagnosed patients with AML, the primary goal of treatment in relapsed on refractory has been induced with clinical remission, meaning that no residual leukemia is present in the blood or bone marrow and peripheral blood counts have normalized or nearly so.

Clinical remissions in this disease are important for two reasons: first, with normalization of blood counts the risks of infection, anemia and bleeding are the markedly reduced. This allows patients time away from the hospital to be with family and friends, a meaningful clinical outcome for patients with a fatal disease; second, the outcomes for patients undergoing stem cell transplant are improved if they enter the transplant procedure in a clinical remission. Whereas historically, only clinical remission was relevant for older adults like those enrolled in CLASSIC I, remission is a bridge to transplant is now becoming increasingly important since advances in transplantation are extending this treatment option to more and more older patients.

So in an effort to improve these outcomes, the CLASSIC I study was designed in order to enroll patients 55 years of age or older with relapsed or refractory AML. The study assumptions provided 90% statistical power to detect a 50% improvement in overall survival of the primary study endpoint. Pre-specified secondary efficacy endpoints were included in the trial design in order to capture the full clinical impact of the study treatment, specifically complete remission or CR, overall remission or OR and overall and four-month event free survival or EFS and four-month EFS respectively were assessed.

Event-free survival has particular clinical meaning because this composite endpoint comprises remission, remission durability, in other words how long a remission lasts, and survival while in remission for the entire study population. In other words, EFS captures the importance of durable remission and survival in remission in a clinically meaningful manner.

We enrolled 326 patients across North America and Europe in CLASSIC I. Preliminary review of the patient demographics show that the two treatment arms were well balanced for the pre-specified strata based upon each patient’s response to their first treatment regimen administered prior to study entry. Although the study did not show a difference between the arms and the primary endpoint of overall survival, the combination on our Clolar plus cytarabine demonstrated statistical significance across all four of the pre-specified secondary efficacy endpoints reviewed above. In other words, complete remission, overall remission, event-free survival and four-month EFS compared to the cytarabine plus placebo arm.

Of particular note, the overall remission rate of 47% in the Clolar combination arm was double that of the cytarabine plus placebo arm, and the composite endpoint of EFS demonstrated a 37% improvement in the Clolar combination compared to cytarabine alone. A preliminary review of the adverse event revealed no new safety signals for Clolar. These clinical trails data reaffirm our commitment to Clolar and AML. Now we would have welcomed the doubling of the overall emission rate and the improvement in EFS in the Clolar combination on translating into an overall survival benefit for the entire patient population, regardless we anticipate that these data will be meaningful to physicians and patients as they face difficult treatment decisions for this disease. We look forward to presenting these data to relevant upcoming scientific meetings and discussing these results in their totality with regulatory authorities. As additional randomized clinical trial data become available anticipated as early as next year, such as the United Kingdom’s National Cancer Research Institute's AML-16 trial in newly diagnosed AML patients over 60 years of age. We look forward to sharing those results with you as well and discussing their place within the spectrum of regulatory and clinical utilities for Clolar and AML.

Henri Termeer

Thank you very much Mike. I did go out of order here a little bit, so now let me ask John Butler to give us an update on the PGH business.

John Butler

Thanks Henri. Q3 was an important quarter for the PGH business as it really marked the beginning of our recovery for both Fabrazyme and Cerezyme. For Cerezyme in September in the US we began shipping two doses for all patients with patients now moving to a dose every two weeks in October in other words normal dosing.

In July we opened up a list in the US for physicians to make us aware of patients who wanted to start Cerezyme therapy. Few patients joined the list before we started shipping in September at our increased quantities. We now have 50 patients who've requested to start Cerezyme therapy including restart patients, naïve patients and 10 patients who are looking to switch back to Cerezyme from alternative therapies. Now this is of course early data and we don’t have a reason for switching back to Cerezyme for all patients but for most, it’s the patient's choice to return to Cerezyme from a competing therapy.

We’ve started the same process to return all Cerezyme patients to normal dosing worldwide and we expect to have this completed for all patients by the end of this quarter. Patient numbers are now harder to estimate, but we believe approximately 47,000 patients are on Cerezyme treatment today or about 85% of the patients treated worldwide.

Turning to Fabrazyme, in the market we’ve begun to communicate the availability of significantly more Fabrazyme supply in Q4 worldwide allowing current patients to significantly increase their dose. In the US, since September and October patients doubled the dose from the previous two months and we still anticipate we'll have supply for these patients globally to return to their normal dose in the first half of 2011.

As we see increased volume from Allston in 2011 and anticipation of the approval of the Framingham plant in late 2011. We're working to be prepared to move patients back to Fabrazyme from competitive therapies and begin to treat the many Fabry patients looking to start treatment with enzyme.

As mentioned before Q3 mark, the first full quarter of revenues for Lumizyme in the US and our first focus was on transiting the 196 ATAP patients to commercial therapy while working under our first REMS program and we are very pleased with the progress. The ATAP program officially closed on August 20th so no patients remain on that program. Now we expect it will have 185 of these patients on commercial therapy with the balance moving to charitable treatment not seeking treatment, where unfortunately one patient who passed away.

Today we have 179 of these ATAP patients on commercial product and are working through the final six patients insurance issues. Additionally we’ve added a significant number of naïve patients to Lumizyme therapy as well. So for ease of reporting, we had about 100 commercial patients on Myozyme prior to the approval of Lumizyme. We currently have over 320 patients on Myozyme or Lumizyme therapy in the US and of course as Lumizyme patients are heavier adult patients. Our current priority is to continue to identify Pompe patients in the US and build our pipeline.

On the development side, the three Phase 3 trials for eliglustat continue to enroll patients. The enrollment in ENCORE, the switching trial has been slowed by the Cerezyme shortage but we’ve made adjustments to the protocol and now are starting to see an increase in screening and enrollment.

And In Q3 we also reported our final Phase 3 studies from mipomersen. We now have four positive Phase 3 studies and we are working towards our NDA and MAA filings in the first-half 2011 and we are working towards meeting with the FDA to discuss our proposed indication for our first filing in homozygous FH and severe heterozygous FH. Henri?

Henri Termeer

Thank you, John. Operator, now we can turn to Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Eun Yang with Jefferies.

Eun Yang - Jefferies

Your guidance for Cerezyme in the fourth quarter; the quarterly run rate, is it still about 20% below the levels that you saw prior to manufacturing issues? So can you comment on what percentage of that difference is coming from due to competition overseas yet to be fully recovered citizens apply?

John Butler

Yes Henri. Thanks for the question. To a significant extent it is the competitive entry of VPRIV into the market, and Shire has talked about something on the order of 850 patients who've moved on to VPRIV and that is, directionally sounds correct. Additionally of course we move patients on to eliglustat clinical trials et cetera, and that I think are the main reasons for the difference in the run rate from before.

Operator

Our next question comes from Michael Yee with RBC Capital Markets.

Michael Yee - RBC Capital Markets

Question on the update at Waterford and Hospira.. You said that there were lots that were coming off. I guess the question is do you expect FDA to come in now to inspect there? I mean what actually is your definition of meeting the deadline. Is there actually stuff that has to be signed and is that an announceable event in November?

Scott Canute

Sure. Yes, I think we continue to progress very well at Hospira and as I said we’ve released one Thyrogen lot to the market and then we have Fabrazyme model that will be released very imminently, most likely in this week timeframe. Technically the only think we need to do to able to meet the consent decree commitment is to write a letter to the FDA indicating that we have exited manufacture of Allston for the US market and are now exclusively at Hospira. We really don’t have to do anything else. We have some more data we want look at. There is a through review that occurred actually this week in the (inaudible) at the Hospira plant with both Genzyme as well Hospira personnel to ensure that we continue to like what we see, are there any improvements we need to make, but we are really in a pretty strong position right now just to right that letter prior to the commitment towards the end of November.

Pam Williamson

Just the portion of the question with respect to potential inspections, both of those sites have actually been inspected by the major health authorities in the recent past and while the FDA may choose to go in and inspect again there is no reason to expect that in any way would interfere with our ability to proceed as Scott has just described.

Henri Termeer

Pam Williamson is our Head of Global Regulatory Affairs. Next question?

Operator

Thank you. Our next question comes from Jim Birchenough with Barclays.

Jim Birchenough - Barclays

Just wondering of the 4700 patients on Cerezyme right now, just wondering if you could maybe detail your exposure to Brazil and Israel, there has been some talk about Taliglucerase contracting with Brazil and I think Israel is supposed to make a decision at some point on a national basis, so just wondering if you can let us know what your exposure to those two countries are. Thanks.

John Butler

We haven't broken out country specific patient numbers. It’s true that Pfizer did sign a contract in Brazil for Taliglucerase though the product isn't registered there. We continue to ship and sell Cerezyme in Brazil as well as Israel. Again Taliglucerase hasn't been approved anywhere in the world yet and obviously that's factored into our thinking around this marketplace.

Jim Birchenough - Barclays

Any ballpark of what we should think about you know 200 patients in Brazil and 500 in Israel, just trying to get some sense of this?

Henri Termeer

I guess what's public and what they announced is they had that one order which was purchased, that was purchased at a time when we were unable to supply and so perhaps a understandable though as John highlighted it was unusual in a sense that they purchased a product that was not available or had been approved anywhere else in the world. So I think the next step there whether they have purchased again and like I think all that remains to be seen we now are in a position as John highlighted to completely re-supply the Brazil market and so those discussions are ongoing.

Israel although there is a very high concentration of Gaucher patients in Israel is a very small fraction of our overall global market and I think the patients who are on competitive therapy are actually disproportionately on VPRIV in that market and are part of the 850 number that John referenced. So, I don’t think we can give better calibration in terms of the risk there, but I think Taliglucerase at this point in time remains a small potential impact factor in terms of the overall picture.

Operator

Our next question comes from Josh Schimmer with Leerink Swann.

Josh Schimmer - Leerink Swann

First wondering what's going on with Lumizyme patient ads in Europe, it seem like it was maybe strong a little bit last quarter if you have seen any pick up this quarter and also if you can help me understand for the Cerezyme inventory. Why is it so light when you really spend most of the year trying to build up inventory? Aside from the interruption in Austin for the power issue, I guess we are confused with all that, how net net you are still tracking very light on inventory for Cerezyme and that’s going to have disruptions on supply potentially. Thanks very much.

Scott Canute

Let me talk about Cerezyme, just inventory in general. A couple of things going on there clearly as you indicated, when we have the WFA issue associate with the Polaroid, its back in the spring of this year really. Due to some material clearly that we lost and as a result of that. Not significant amount, but certainly some of that. But we also, it caused an impendence or a slowdown our overall production and because the cycle time associated with Cerezyme and particular quite long we are running our produced reactors for a 100 days plus in some cases and to for that material to actually cycle through it takes us a while to recover from insurance like that. And so, it’s just a matter of giving our self back up into a routine pace of operation and the cycle times are in fact on to the nature of these biological processes that we have run. As I said we preparing very well right now, we have run very consistently and very well since we have that outage in the March-April timeframe and definitely we’re in a position to be able to re-supply the market as John indicated earlier.

John Butler

I'm just going to read it again, just to re-employ so. The key factor both Cerezyme and Fabrazyme as we highlighted many times is as we’ve increased our ability to supply, we basically made shift and distributed that in the market place. So the change overtime as we’ve been able to return as we are now to normal supply but we have not yet reached the point where we can build inventory. So that’s again this next step.

Josh Schimmer - Leerink Swann

So why are you comfortable now operating on minimal inventory where as at the beginning of the year, you chose to ship at 50% in order to build inventory, what’s the difference between now and then that you are now comfortable with the low inventory?

John Butler

Just to be clear, that decision we made earlier in the year and most part, think it’s semantics. So we shipped at a lower level to create a small amount of inventory which was basically over logistics inventory rather to keep, two weeks plus in the channel and smooth out some of the delivery issue but that was not building an amount of inventory that allowed us to mitigate you can say larger manufacturing disruption. So we’re at a better position now where we’re working with that logistical buffer but.

Henri Termeer

So, this is the same. We reckon on the same basis as logistical inventory that David mentioned that we instituted during the first quarter because we found, we could invert this no such inventory, just logistically impossible but this is not an inventory that really backs out we want to have to six to nine months of inventory in the system to really feel much more comfortable and that’s something we discussed, talking about for that we need not only to re-supply the market but to re-supply the market and produce 50% more for a period of time and all to get there and framing in, also we may create some inventory doing next year because the yields are very good and run very well. But we really need the additional capacity of the framing of plants to give us the space to set up true safety inventory.

John Butler

The other question was on European Myozyme patients and we do actually do continue to build the pipeline in Europe for Myozyme and actually very consistently. What you have in the third quarter that you do have some adherence issues in the summer some missed doses obviously any missed dose with a product like this has a significant impact on revenue.

And you have seen some patient debts as well. The more severe patients who started. So the netting is not as much as you saw earlier in the launch cycle but as we look at continuing to do wide screening initiatives etcetera across Europe they continue to yield really significant results. So we do continue to see that pipeline build in Europe and we are undergoing those same kind of screening efforts in the US with the MDA clinics to build that a robust pipeline in the US as well.

Operator

Our next question comes from Geoff Porges with Bernstein.

Geoff Porges - Bernstein

Thanks very much for taking the question and sorry to push on this issue of the ramp-up but again on Fabrazyme struck could you give me a sense of first is the run rate that your now forecasting in guidance for Q4 likely to be the run rate throughout 2011 or do you anticipate that you will get above that run rate with further improvements in the productivity of the second working sale bank. And then could you give us a sense of what the capacity is going to be of Framingham, when you get back that facility online presumably in 2012, how much of a step-up will that be?

Scott Canute

In terms of productivity, two points. We clearly will run the plant at a more aggressive rate than we do use in our overall planning. So for example I said we have this range right now what we are seeing in 30-40% range. We have seen a recent run that would be closer to 50% improvement in productivity from the previous working cell bank and so we do think there is some upside that we continue to try and optimize going forward. We do not build that into our planning model, so the are financial guidance as well as the supply guidance that John has talked about is built on a lower end of that range.

And as we demonstrate it will become more comfortable with that, than of course we will build that into our ongoing commitment, but right now we are planning on a conservative side but driving the plant to be able to deliver more on the upside piece of it and I think that’s a prudent approach.

In terms of Framingham, the capacity that we have will immediately, well upon release, approval of the product I mean remember we are building inventory, when we start validation loss in Q1 of next year and under current assumptions we will have approximately 2 to 3 months of inventory that will immediately be available upon approval of that product of Fabrazyme which will immediately be available for sale in the markets that approve this and the first approval will most likely be the US.

At this point, we will have two bioreactors and then we have got existing two bioreactors that we currently have in Allston that we can choose to keep on Fabrazyme for as long as we need to and/or switch to Cerezyme and so we are in a much, much stronger position increasing our overall capacity and we have lot more degrees of freedom and flexibility and/or optimized depending on what the demand of both products are quite honestly. So we will be, I wouldn’t say in a comfortable position, but certainly in a much more comfortable position when Framingham comes online and then it will allow us to build the inventory levels for both products that we clearly desire both David and Henri had said in the basically six to nine month inventory as quickly as we possibly can and that will be clearly a very, very good place to be.

Operator

Our next question comes from Geoff Meacham with JPMorgan.

Geoff Meacham - JPMorgan

Manufacturing question for you on the Waterford facility so, how much of the new fill/finish capacity will be there versus Hospira and then the follow-up to that would be what would you expect the increased in fill/finish capacity at Waterford to be and does that have any FDA consequences?

Scott Canute

Sure, in Waterford, I mean the current capacity, have we have got one filling line and two freeze dryers. We’re adding additional filling and two more freeze dryers. Freeze dryers are the bottleneck, so we’re basically going from one to four really up there. So, a significant increase in our overall capacity. When Waterford fully approves in all markets, we’d have capacity to make all of our products really there without actually using Hospira. So, it’s very important for us in terms of our redundancies, in terms of our overall drug product manufacturing strategy where we want to cross registration. What we will do though is we will keep Hospira online because we want to make sure that we’ve got two approved sources, both for Cerezyme and Fabrazyme and for Thyrogen.

We will cross register the products and keep both in play at least in terms of minimal level, so that we have practice that we can maintain a validate date for the products if in fact we would need to, that we would have an issue at one facility or the other. Over a longer period of time I would suspect that we will see a greater proportion of our overall production in the Waterford facility, but right now we want to make sure that we get both facilities in play and we are very comfortable with the quality of the product made as well as the operational capability in both cases.

Geoff Meacham - JPMorgan

And just a quick follow-up so you mentioned that you've already had one Thyrogen lot released and you expect Fabrazyme lot to be released pretty soon. When would you expect Cerezyme lot to release from Waterford and/or Hospira, and is that an indicator again of FDA comfort?

Scott Canute

Yes, we transferred Cerezyme, the 400 unit Cerezyme which is 80% of demand to Waterford immediately because it was already approved basically in December last year. So that material has been released and continues to be released and that's our full Cerezyme supply right now.

Right now we've not run Cerezyme at Hospira because the focus is on Fabrazyme and Thyrogen getting those lights. We will go back in and validate Cerezyme once we're back up. We are up and running on those two products, again as a backup redundant source for Waterford.

Operator

Our next question comes from Robyn Karnauskas with Deutsche Bank.

Robyn Karnauskas - Deutsche Bank

Just a complete, the Clolar runs will finish, can you give us an update on the so finished timelines on sales of products for the EU? And if I remember the deadline is August of next year, do you think you can make it? And lastly, if you can't, can you remind us of the penalty?

Scott Canute

I mean we're currently on track because we've been able to run these validation lots. We've been able to start the process of generating the data we need for regulatory submissions around the world. The current expectation on consent decree is that we would exit Allston completely for all markets up by the US by August 31 of 2011. We currently feel that we're on track for that at this point. Pam, you want to comment more on that?

Pam Williamson

Sure. This is Pam Williamson, so as described what we are looking at here is making sure that we gather all of the needed data from the PV lots and to enable a discussion with the major health authorities and we continue to be on track for the August 2011 date. As you can imagine many of the other countries in the world also build their approvals off of the approvals in the United States and in Europe, so that will be an important milestone for us and we are on track to meet that.

Robyn Karnauskas - Deutsche Bank

And in terms of the penalty, this is a great incentive of course for us to make sure that we are there. On a timely basis if we were to use the facility beyond August of next year then there would be an 18.5% royalty payment to the government, and we have no intent to be in that position at that time.

Robyn Karnauskas - Deutsche Bank

That’s helpful. Did you have a question?

Unidentified Analyst

I was just wondering how close you are to a deal on diagnostics, and if you can remind me of the margins on that business?

Henri Termeer

We would expect us as the press release as to finalize the post the genetics deal and the diagnostic deal towards the end of the year and the margins are, Michael…

Mike Wyzga

In the 40% range

Henri Termeer

In the 40% range.

Operator

Our next question comes from Rachel McMinn of Bank of America/Merrill Lynch.

Rachel McMinn - Bank of America/Merrill Lynch

Yes, just a couple of quick financial questions. I am just trying to understand your 4Q at 90% to 95% EPS guidance a little bit better. Should we, I guess infer from your guidance of $0.05 in expense cuts, is that basically like $19 million, $20 million or so in OpEx. So, I guess what share count are you using and the late piece of it is the $28 million development of tender, is that going to be in 4Q or is that something that just gets spread out over 2011? Thanks.

Henri Termeer

Okay, let me ask answer the Brazilian tender that is for the next 12 months so each quarter we look at one set or one fourth of that so about $7 million. And Roger, this was not part of the third quarter, we had no shipments in the third quarter, right?

Roger Louis

Yes, that’s right.

Henri Termeer

We had actually to wait the tender for two months, waiting so there was an impact in the third quarter that was negative in the third quarter and there is an upside that we will have in the fourth and beyond fourth quarter. And then Mike on the financial question.

Mike Wyzga

Yes, the other two questions, it’s approximately $20 million of VAP savings operating expense in the third quarter still going to the fourth quarter and I believe your last question was around the share count. We assume the same basic in diluted shares for the fourth quarter in other words we didn’t envision the stock repurchase, second tranche of stock repurchase until we actually get the money for the sale of the divestures which will probably occur before the end of the year which would mean we initiate it in the January timeframe.

Rachel McMinn - Bank of America/Merrill Lynch

And just as a quick follow-up on the second tranche, is it still the company’s plan given the change in its stock price to go in an act and buy that second billion dollars back?

Mike Wyzga

Currently that's still the plan but of course we haven’t disciplined it as we were looking for the best possible return for these investments If you look at it in a very disciplined way and when that decision start to be made towards the end of the year, we will go through a process to confirm but currently we have not changed our plans.

Operator

Our next question comes from Ian Somaiya with Piper Jaffray.

Ian Somaiya - Piper Jaffray

I had a couple; the first for Mike. Can you just walk us through the headcount reductions that you have seen with the asset sales or the potential additional headcount reduction with the remaining assets that you have spoken to before? And what if any additional measures are you taking internally to potentially streamline operations?

Henri Termeer

The business as we are divesting, you're talking about headcount, it’s 1,900 people equivalent for the genetics business about 600 for the diagnostic product business, about 100 for the pharmaceutical intermediates, manufacturing operation in Switzerland. So it’s about 2,600 people.

Ian Somaiya - Piper Jaffray

Is there a way to put a dollar cost to those employees?

Henri Termeer

No. If you want to get to the detail of the impact of those related 28th 1:13 to debt level, maybe we should give Mike a call offline.

Ian Somaiya - Piper Jaffray

Just as you think about divesting some of these assets, I was wondering if there was ever a consideration to potentially divest Aldurazyme. Now there's been a lot of market talk related to BioMarin’s interest in reacquiring that asset. It would potentially enable you to maybe focus more on the transplant side. Just curious when or if you would consider that sale?

Henri Termeer

It’s very unlikely, Aldurazyme isn’t a product that fits very, very closely in to the PGH business. It is a product line Cerezyme, it’s a product like Fabrazyme, it’s a product like Myozyme and it’s a product like Elaprase which is also MPS disease product that we have a collaboration on this Shire. So we are fairly happy with the collaboration was vibrant, happened for many, many years. It’s very strongly integrated into how we think about our future and our business. So its extremely unlikely that we would ever divest of something that’s so in the middle of our core.

Operator

Our next question comes from Philip Nadeau with Cowen & Company.

Philip Nadeau - Cowen & Company

I apologize; I'm going to go back Fabrazyme because I am still a bit confused. My impression of the situation is that you were shipping at a 30% allocation through the summer. You were able to double that in the late summer, early fall so that would get you to about 60% allocation. And based on your manufacturing comments it sounds like maybe you can get some incremental improvements over the next several months perhaps not but you're guiding to fully supply in a global market during the first half of 2011. So I guess how do you get from just over a 50% allocation to fully supplying the market without dramatic process improvements?

Henri Termeer

We were supplying at 30% in US late in the quarter, third quarter. We increased that such to double it. Because of lots of leases we weren’t able to that on a global basis. We will do it on a global basis in the fourth quarter, which leads us to $70-75 million forecast for the fourth quarter. Then going into next year, we are continuously producing as Scott was describing, and the way that the leases and production planning and the assumptions are, we will continue to see improvements going into next year so that sometime during the fourth quarter, first half rather of next year, we would expect to reach a level where we can fully supply the marketplace and today we will give our own guidance for next year you will see what that guidance is as part of our guidance for the year will include specific guidance of 10% for next year but it does include an assumption that's based off of the current experience in manufacturing that allows us to deliver at a much higher level next year. So John do you want to add to that.

John Butler

It is also Henri, it’s built off the current patient numbers we are serving with Fabrazyme. We have lost patience from the beginning of the supply issue. So it’s based on a lower demand number as well.

So we will be able to fully supply the existing market essentially with these modest improvements and as Henri said the expected improvements in manufacturing as Scott has described as those build in, that will allow us to increasingly look at re-supplying the full marketplace either of the existing patients on a competitive therapies and may or may not want to come back but also in expanding a group of patients who are not in any therapy today and clearly no need some options. So all of that will be probably your greater guidance as we get closer to that moment.

Philip Nadeau - Cowen & Company

Can you give us some estimation of where you are today in supplying the current demand for you, it sounds like you are not at 60%, it does I'm sure, maybe you are at 75% or 80%.

John Butler

No for this quarter we are at about two-thirds, for the quarter four we will be, that's the assumption that we are describing when we say $70 million to $75 million.

Operator

Our next question comes from Mark Schoenebaum with ISI Group.

Mark Schoenebaum - ISI Group

I'll make it brief. Maybe I missed it, I heard you give out the patient numbers on Cerezyme and that was super helpful. I didn’t hear patient numbers on Fabrazyme.

Henri Termeer

Yes, Fabrazyme is a little more complex picture and maybe John you can add to that.

John Butler

We do have a current estimate, we have about 1750 patients worldwide today on Fabrazyme.

Scott Canute

It has that very much moving target, they were about 2100 patients on prior to the supply issues and most of those players 2700 I think the key thing Mark what's challenging was the Fabrazyme number here more so than Cerezyme is that that number that we are treating actually decreased strictly in Europe where these is a heavy emphasis on insuring that the most severe patient could access the full dose of 1 milligram. So, the number which was initially larger and there was an active collaborative effort to move as many patients possible to competitive therapies to ensure that our supply could go to the more severe patients at the full dose.

So, again when you look at total patients treated I would say to a large extent that number reflects closer to full dose for Fabrazyme.

Mark Schoenebaum - ISI Group

Okay, 1715 versus 2100 roughly for the supply, that’s like 2700, so you lost about 950, okay. That’s super I appreciate guys.

Operator

Our final question today comes from Jon Stephenson with Summer Street Research.

Jon Stephenson - Summer Street Research

Just wanted to ask a few questions with regards to long-term gross margins on the genetic side. I mean you guys obviously kind of laid out some ground work for duplicating your still finished capacity for some of these products. I would assume you are going to have to increase profits and controls of some of these plants even after the consent decree is resolved. So maybe if you kind of give us a little bit of clarity in terms of what impact that might have on the long-term gross margins in that business? I might add at a consent decree?

Henri Termeer

Yes. We are not distorted of the size of gross margin on any one of our specific businesses but you can lean from a financial reporting private bid but Scott make a comment on the efficiency of the productivity impacts that you would expect use to move forward.

Scott Canute

Yeah I mean clearly, I’ve been through this before. So I’ve got some experience with it and there’s no question you make additional investments when you are going to like something like this. I mean obviously in terms of the quarter re-mediation, the consent decree impact as well as it’s obviously critical that we get to product supply capabilities restore this quickly and as completely as we can and so you’ll certainly air on the side during much of the effectiveness over efficiency but as you improve our systems, you get a low run site.

You’ll be able to get more volume through the site. It’s made of higher quality and everything just starts to run. And so, we might see a short term blip, I think we’ll probably will see a short-term blip in terms of incremental cost. But over a period of time when you can define time in the two or three year time period, we will see a more efficient operation at the end of the day. I have absolutely no question about it whatsoever. So all things being equal, I would expect to see actually an improvement in gross margins just because the efficiency of the operation.

Now a lot of things play into that clearly; overall demand, capacity utilization et cetera, et cetera. So you can’t necessarily draw a straight line from -- and to what we’ll see but because of the investments we’re making, we will see a more efficient operation. I have no doubt about that whatsoever.

Jon Stephenson - Summer Street Research

And just one quick follow-up and I’m done. Obviously you got a lot of CapEx to complete the Framingham facility. When you look out beyond the Framingham facility, how much does the CapEx really come down or is that in terms of long run CapEx assumptions?

Scott Canute

I mean most of capital from Framingham is respectively spent at this point. We really just have what we are going to capitalize in terms of the engineering validation loss at this point. And we clearly were making some additional investments for actually for myozyme and Belgium would be the biggest single investment we have.

Most of our capacity additions are really winding down in the start up phase so Framingham what it referred we added third reactor to Belgium and we will, when it process of adding couple of additional reactors to Belgium were in the design phase right now. And we will move forward shortly so that’s the biggest chunk so in general you will see our capital expenditures begin to decrease as time goes on.

Henri Termeer

I believe towards the last question so thank you all very, very much participating we will have a lot interaction with many of you. I hope in the coming weeks as we travel around particular at the meeting that Patrick was alluding to in New York on Friday we can talk more about our exportations for next year as we look forward to that. And if any questions were outstanding that didn’t get answered make sure you connect with us today. Thank you very much we will look forward to see you later this month.

Operator

Thank you for joining today’s conference that does conclude the call at this time. All participants may disconnect.

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