Full Transcript of Genzyme’s 3Q05 Conference Call — Prepared Remarks (GENZ)

Here’s the entire text of the prepared remarks from Genzyme’s (ticker: GENZ) Q3 2005 conference call. The Q&A is here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

Operator

Good morning. My name is Elizabeth and I will be your conference facilitator today. At this time I would like to welcome everyone to the Genzyme Corporation third quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. If you would like to ask a question during this time simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I will now turn the call over to Ms. Curly. Please, go ahead.

Sally Curley, Genzyme Corporation – IR

Thank you and welcome to Genzyme Corporation's third quarter 2005 earnings conference call today. I would like to remind everyone that the earnings release in this call are available on the investors page of our website at Genzyme.com. Today we will discuss Genzyme's business outlook on the call.

Forward-looking statements include our expectations regarding the timing of regulatory responses on our Myozyme marketing application, anticipated progress of several clinical trials, drivers of our future growth and financial trends. These statements are subject to a number of risks and uncertainties and our actual results may differ materially. Please refer to our SEC filings on file for any information that could cause our actual results to differ. If during this call we use any non-GAAP financial measure you will find on our website at Genzyme.com a reconciliation to the most directly comparable GAAP financial measure. I'd also like to remind everyone that our fourth quarter earnings conference call will take place on February 15th at 11:00 a.m. Eastern time. You may access the live webcast on our website.

Lastly, as always, please limit yourself to one question per turn during the Q and A in order to allow others to participate. Thank you, and I'd now like to turn the call over to Genzyme's Chairman and CEO, Henri Termeer.

Henri Termeer, Genzyme Corporation - Chairman, CEO

Thank you very much Sally, and thank you very much everybody participating this morning. I have with me a number of different executives of the corporation who will be available for Q and A, and Mike Wyzga, our Chief Financial Officer, will go through the details of third quarter.

Third quarter was an actually, excellent quarter, very strong quarter following pretty strong performance in the second and the first quarter earlier this year. Revenues were up 24%, non GAAP earnings per share were up 38%. It's very clear now that we will end out the year well on the high end of our guidance. We will not provide guidance for '06 in this call. We will do that in January, as we usually do. But I can state that we're maintaining our goal to grow earnings per share, non-GAAP earnings per share at 20% per year. We've been doing so for quite awhile now since 2003, not always in an entirely linear way, but certainly in a very consistent and sustainable way. And that's really the picture that's now developing around the Company that explains the continuation of very good performance that we are seeing.

Since 2003, we have really fundamentally transformed the corporation. We now have three drivers for sustainable growth. One is product diversification. We have a number of different products now in the market that are each, in their space, standards of care products that are very reliable in terms of their performance that still have, in most cases, very long legs left with a lot of market share and a lot of convergence still to take place, and where the most mature product, Cerezyme, that has been with us since 1991, is still performing very well as well. We are continuing to invest in Cerezyme and in _____.

As the press release indicated, we are about to enter the phase 2 clinical trial for small molecules that will further support this marketplace, but it is a mature market. We are treating pretty much all patients that we are becoming aware of, including many patients that we are treating free of charge because they are in areas where there's no healthcare support. It's our objective to meet that responsibility to continue to look out for all patients wherever these patients are, and make sure that they find the right kind of clinical support.

The second platform driver for growth in the future is manufacturing. We pretty much manufacture all our products, and we recently brought on line two additional, very significant manufacturing operations in Europe earlier this month. I opened a plant in Belgium, where we now are starting to produce Campath. In the future we will also be producing Myozyme there. In fact, all of our proteins as a backup to our Allston facility. We expanded the Allston facility by 50% in order to bring Myozyme into that, in fact, we are running Myozyme in that plant right now. And we also opened a very significant state-of-the-art biological fill finish facility in Ireland.

Manufacturing is a very important component of the corporation, and a very, very important component behind our continuously stable but improving gross margins, which improved to 78% during this last quarter. We have a global reach. This is something we've built early on, and we continue to expand on it. Our revenues in Europe for many products are exceeding our revenues in the United States.

In Japan we have a very successful operation where we sell most of our products directly ourselves through our own sales force. We do our own regulatory and clinical work in Japan, and we are in the process of developing a presence in China. We are opening an office in Shanghai and Beijing shortly, and we are looking at many different opportunities in China to become a participant in what we believe to be a very important market over the next 10 years.

Similarly in India, as we speak, we have a team in India to look at opportunities to become an active participant in the Indian market. Not necessarily looking at India as an inexpensive resource or source for manufacturing, but really looking at India as a market. We believe there's a tremendous opportunity for our whole industry between these two countries given the population, size and the speed of economic development.

There's tremendous leverage as a result of these platforms that we've been building, and in the third quarter a number of things happened that further emphasize that. We filed Myozyme in the United States in July, and expect action during this year and early next year. We filed Myozyme in Europe late last year, and also there we expect action late this year, early next year. We fully expect to launch Myozyme in the first half of next year, pending positive outcomes of regulatory reviews. I have long said that Myozyme, which, of course, leverages all we've learned in enzyme replacement therapies for Lysosomal storage diseases is maybe our greatest accomplishment in this space. It's a an extremely serious disease. It is a very, very complex picture from a manufacturing point of few as the doses are about 20x, the dose that we use for instance for Fabrazyme indicates a _____ disease. So our manufacturing capabilities and our ability to do clinical development in these very rare diseases has really been tested in this area, and we are enormously gratified that we are now reaching this point, where hopefully in the early part of next year we can start to make this product available to this population.

In the case of Renagel, a product that has been doing very well for the corporation over a number of years, during the quarter we released top-line data on a very large trial comparing Renagel against calcium for phosphate binding, and looking at mobility mortality, and at the ASN, the American Society of Nephrology, meeting, coming up in Philadelphia in November, we will be showing in a peer environment what these clinical results really are. We are very excited about those results, because for the first time as a result available now in this space, end-stage renal disease, where a product shows mortality benefit.

Earlier in the quarter we closed the transaction with Bone Care International that brings Hectorol as part of the Company. We booked only 14 million in revenues for Hectorol during the quarter. That's primarily a result of us taking a view on the inventories in the field as we have done for Renagel, minimizing the inventories in the field, to avoid the kind of problems that we experienced many years ago, indicates Renagel was too high an inventory. So, we feel quite gratified that this product did perform in terms of scripts, according to plan, and we are very much looking forward to the coming year to market Hectorol because of Renagel in this particular arena. Also, Hectorol is not currently marketed internationally, and that's a fairly open opportunity for us.

Earlier this month we talked about Campath in M.S. Very exciting. There we showed 75% relapse benefit against Rebif, obviously tremendous show of efficacy, also showed some severe adverse events, and it's now up to us in the Phase III trial that we will start first half of next year to absolutely show that we can manage these patients safely and so we can bring this level of efficacy to the marketplace. This is a longer term opportunity. It may take three, four years to go through this process and to go through the process of regulatory approvals, but we're enormously determined to get there, and we think it does change a very important part of the corporation. Again, adding a very severe disease into the picture with a very, very significant product moving at really creating a step function in terms of therapy of that disease. Very similar to what we've been able to do in many other diseases such as the Lysosomal Storage diseases.

There were different announcements around genetic diagnostics. On the Oncology front, we made the statement when we did acquire the oncology business of Impasse. It was our intent to try and help the process to get to more targeted medicines, diagnostics, of course, are the difference there. And we've started to bring the first products to market to accomplish this. We think this will have a very long future as more and more products become available where targeted diagnostics are going to be playing an important role.

During the quarter we had an interruption of our Tolevamer trial for C. difficile colitis as a result of comparative products being recalled, difficulty of one of the suppliers. I'm very happy to say that that trial is now rolling forward again. We have replaced the product, supplied new kits to all of our clinical investigators around the world. It is the largest trial that we've ever undertaken, in terms of the number of centers involved. Very, very exciting product, indeed, which we believe has potential to completely change not using antibiotics the way that C. difficile colitis is being handled in hospitals.

All these products in many different ways are playing off of the platform of skills and capabilities that we have developed over the last three or four years, as far as our manufacturing and products and in terms of global marketing. And I think they're going to be playing a very important role in our ability to continue to grow the company along the lines as we have described with the kind of earnings goals that we have. We do want to maximize our R&D investment. We see many opportunities, too many to go into in this particular call, many opportunities for investments, and we will maximize our ability to make these investments in new products while still meeting the earnings expectations that we have set for you. With that let me now ask Mike Wyzga to go into the financial details. Mike.

Mike Wyzga, Genzyme Corporation – CFO

Thank you very much, Henri. We're once again reporting very strong top and bottom line results. As Henri mentioned, and as you can see from our press release, our overall revenue increased by 24% over last year. And, while the revenue increases in Renagel, Synvisc, Fabrazyme continue to be really the key drivers, if you really break it away, all of our product areas increased on a quarter by quarter and on a year by year basis. Our top-line performance and the leverage that we're now getting in the infrastructure is really driving the bottom line. Compared to prior periods, our bottom line has increased for over 15 consecutive quarters. And, as Henri mentioned, this sort of underscores the consistency that we're now seeing on the bottom line.

Cash generation remained strong. Cash from operations and proceeds from options were about $330 million in the quarter. A little over $200 million generated just from operations. So we're seeing some very nice cash flows from operations as well. As you can see by our press release and our attached earnings per share crosswalk, our diluted GAAP earnings per share was $0.43 and that includes impact of the convertible debt. The EPS impact of this convert was about $0.01 for the quarter. Amortization was $51 million. And during the quarter we completed the acquisition of Bone Care International. Associated with this transaction, we had a charge of $12.7 million for in-process R&D.

Our non-GAAP net income, which excludes the impact of convertible debt, amortization and IP R&D, was about $160 million, and that comes out to $0.61 per diluted share. Non-GAAP net income increased by 38% over Q3 of last year. And if you factor in the increased shares associated with the ILEX transaction and the in the money options, our Non-GAAP earnings per share increased by 24% over last year's Q3. Now, our earnings per share was really driven by three major factors. The first was the top line revenue increases. Again, in all product areas. Secondly, as Henri mentioned, our gross margins have really increased. They came up to about 78% this quarter from 73% in Q3 of 2004. And while we continue to invest in our businesses our operating expenses were very well controlled during the course of the quarter.

The diversity that we're now seeing in our product set continues to drive our top-line increases. Cerezyme revenue came in at $238 million. Now this product line continues to mature and decrease as a percentage of our overall revenue. Over the past 12 months it's declined from 37% to 34% of the total Genzyme revenue picture. Going forward we anticipate Cerezyme will continue to decline as a percentage of total revenue as the other products and product lines continue to step up. Cerezyme patient numbers increased to over 4500 patients worldwide, with the largest percentage increase in new patients have been in the Genzyme international Charitable Access Program.

Fabrazyme's revenue increased 36% to $79 million with continued very strong growth worldwide. In the renal area we increased by 30% over Q3 of last year with inclusion of Hectorol. Renagel alone increased by 15% despite increased competition. As Henri mentioned, Hectorol came in at $14 million as we took the opportunity to reduce our inventory levels in this product line. Synvisc revenue came in at $58 million. Now to remind you that we believe this business is somewhat seasonal with second and third quarters being the strongest. Diagnostics products and testing increased to $85 million. That represented a 9% increase over last year. With the stabilization of the FX particularly in the euro there was very little impact if any to the foreign exchange of our P&L.

In the third quarter our gross profit increased to 78%. Now that continues the trend that we saw in the first half of the year. Compared to last year our margins improved due to the purchase of the Synvisc marketing rights. The increased margins associated with Renagel as we brought in the manufacturing in-house. And the continued leverage of our manufacturing facilities of greater capacity absorption, most of that due to volume. Within our operating expense, our Q3 R&D expenses before the impact of FIN 46 came in at $121 million or about 17% of revenue. R&D expenses in the quarter reflect the impact of our recent strategic collaboration with a company called RenaMed. The R&D expense also includes the impact of Bone Care International into our pipeline this quarter. Increases over prior year are predominantly the incorporation of the ILEX pipeline.

SG&A expenses, again, before the impact of FIN 46, came in at $202 million, and that represents about 29% of revenue. These expenses reflect the impact of the Bone Care acquisition this quarter. Versus prior year, we did have SG&A expense increases associated with the headcount programs related to the acquisition of the Synvisc marketing rights. As well as Impasse and the ILEX acquisitions. Within our equity method income we saw continued acceleration within the Aldurazyme revenue. Aldurazyme was doubled versus last year to about $20 million. And this really drove a material improvement to it's joint ventures profitability. Our tax rate before amortization came in about 30%. Our share count increased by about 30 million shares over last year. That's due to two major factors, the first being the ILEX acquisition, which we closed off last year. The second is the increases associated with the option exercise and employee stock purchases. With the rise of the stock price we also showed in our diluted EPS an increased amount of in the money options.

Our capital expenditures for the quarter were $52 million, with most of the expenses again taking place in Ireland and Belgium facilities. As I mentioned, our cash is in a very nice position, our ending cash came in about $950 million. Now, this reflects the increased cash that was generated from operations as well as option exercise. That was somewhat offset by the purchase of Bone Care which came in about $600 million of net cash and marketable securities. During the quarter we also took the opportunity to pay down a $350 million on our revolving line of credit, so now this is completely paid off. And as we exit the quarter our balance sheet reflects only about $30 million of short-term debt. That's mostly in the form of capital lease obligation. I'd like to remind you that you can find the line item detail reconciliation’s that are either attached to the press release or on our website. So let me stop there and turn it back to Henri and open up to questions and answers.

Henri Termeer, Genzyme Corporation - Chairman, CEO

Operator, now we can open up for Q and A.

Related:

• The Q&A from this call is here.
• A list of full conference call transcripts available on the Seeking Alpha Network.

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