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Executives

Patrick Flanigan - Director of IR

Henri Termeer - Chairman and CEO

Mike Wyzga - CFO

David Meeker - President, Lysosomal Storage Disorder Therapeutics

John Butler - President, Genzyme Renal

Mark Enyedy - President, Genzyme Oncology

Thomas DesRosier - SVP, General Counsel and Chief Patent Counsel

Joe Lebockey - General Manager of the Transplantation Business

Ann Merrifield - President, Genzyme Biosurgery

Analysts

Jim Birchenough - Lehman Brothers

Brian Abrahams - Oppenheimer

Geoff Porges - Sanford Bernstein

Geoff Meacham - JP Morgan

Mark Schoenebaum - Bear Stearns

Yaron Werber - Citigroup

Chris Raymond - Robert W. Baird

Phil Nadeau - Cowen

Meg Malloy - Goldman Sachs

John Sonnier - William Blair

Jeffrey Portis - Sanford Bernstein

Genzyme Corp. (GENZ) Q4 2007 Earnings Call February 13, 2008 11:00 AM ET

Operator

Welcome to Genzyme's Fourth Quarter Financial Results and Guidance Conference Call. (Operator Instructions).

I would like to turn the call over to Mr. Patrick Flanigan, Director of Investor Relations.

Patrick Flanigan

Thank you, Maryanne, and welcome everyone to Genzyme Corporation's year-end 2007 conference call. I would like to remind everyone that the earnings release and the webcast of this call are available on the website at www.genzyme.com.

On this call we will discuss Genzyme's future financial outlook, business plans, and strategies. We will be making forward-looking statements regarding earnings, revenue, expense estimates and growth rates; our product development plans; timetable for Clolar, Renvela, Synvisc-ONE, mipomersen, alemtuzumab and Mozobil; our assessment of the Myozyme supply constraints; and our assessment of the market potential of some of our products and product candidates.

These forward-looking statements are subject to a number of risks and uncertainties and our actual results may differ materially. Please refer to the "Risk Factors" section of our September 30th, Form 10-Q for more information on these risks.

If during this call we use any non-GAAP financial measure, you will find on our website reconciliation to the most directly comparable GAAP financial measures. We have several analysts and investor events coming up during the next few months, so I would encourage you to please check our website, and Investor Relations events for more information on these. Finally, our first quarter earnings will take place on April 23rd at 11 o'clock Eastern Standard time.

I would now like to turn the call over to Genzyme's Chairman and CEO, Mr. Henri Termeer.

Henri Termeer

Thank you, Patrick, and welcome everybody. I have, as usual, with me our business leaders and Mike Wyzga, our Chief Financial Officer. He will make the more detailed comments in terms of our financial performance.

2007 was an absolutely outstanding year. Revenues ended on the high end of our guidance. Non-GAAP earnings were $3.47 per share, versus our original guidance at the beginning of last year of $3.05 to $3.15. We changed that in July of last year to $3.35, $3.40. So we exceeded our latest guidance by $0.07 as a result of the second half performance.

Today we reconfirmed that it is our goal and commitment to grow non-GAAP earnings per share by 20% a year. We made that statement last year. We are reconfirming that today it's from 2006 to 2011. We reconfirmed today $4 a share non-GAAP for 2008, and for 2011 that would be $7 a share.

The three things that we would like to be measured by as we go through this period of time, including this year, is first the ongoing and consistent financial performance that we showed over the last 10 years. We feel that we can be measured on that and create confidence and develop our challenges.

We have challenges and we still are in the middle of that challenge, somewhat, around the Thymoglobulin production that is costing us some gross margins. But we are getting beyond that point, as mentioned in the press release, and that we will turn into a positive as we get truly beyond that stage.

We expect that still during this quarter in March, we'll be able to increase production in France of Thymoglobulin. So, we can start to bring some relief to product constraints that we have, and also as a result of increased production start to get better margins. We have the Myozyme situation in the United States. You'll hear more about that. That is in short term, clearly a short-term challenge. We are working our way through that. As we go forward, it will clearly turn into very significant positive for our financial performance.

The second thing we would like to mention is our ability to not only produce these consistent financial results, but to bring new programs on board while we do so, without integrating these new programs, and without impacting the financial commitments that we have in terms of 20% earnings per share growth.

Three examples, that you all are very familiar with Campath MS. That is a very big program. This is currently our largest program. We are starting to build a significant manufacturing capacity for this product in Belgium, and of course we have started starting in the year. Beginning of the fourth quarter, we will be starting a significant clinical program; two Phase programs that we'll talk about some more.

This program will cost us money through this period through 2011, but it will create a fantastic opportunity going beyond that, and that is a typical example of the kinds of things we have to be able to do.

Mipomersen, we talked about this cholesterol-lowering program that we are licensing from Isis. It is again, a very exciting program, and there is a very significant unmet medical need for the group of patients who can't get to their goal with current therapies. It's a very important program.

By 2009, we have a chance to file the first indication for this program. But by 2011, it clearly can start to play a significant role to continue our growth. Mozobil is an very interesting example. In addition to that we have 25 programs in different stages of Phase II clinical trials, some of which will mature to late-stage trials during this period of time.

So, we would like to be measured on a consistent financial performance, 20% earnings growth, but at the same time an ability to continue to build in programs that continue the growth curve beyond 2011. In addition, of course we have to continue to build our global infrastructure, both in manufacturing and marketing, and sales that of course provides us the kind of leverage that we've spoken about before.

Genzyme is in a very robust position at this time and has been for some time, and it will continue on an independent long-term growth path. I very much look forward to reporting the progress that we are making during this year.

And for the financial details, I now hand over to Mike Wyzga. Mike?

Mike Wyzga

Thank you very much, Henri. As Henri mentioned, we exited 2007 on a very positive note. Our full year revenue increased to $3.8 billion, and that represents a 20% year-to-year growth. Our Q4 revenue increased over $1 billion for the first time in our history and that's a 21% growth rate from Q4 of last year.

Now, the revenue growth combined with the operating expense leverage that we saw pushed up full year non-GAAP net income increase to over 27% over 2006. Equally important, our cash generation had been very, very strong. Our cash from operations increased to a little under $1 billion for the year. This allowed us to increase our ending cash balance, while continuing to fund our acquisitions, our stock repurchase program and capital expenditures, and that was all done exclusively from the cash that we generated during the course of the year.

Let me walk you through the crosswalk if I may. During the fourth quarter our GAAP income before taxes were $133 million. The income was affected by the impact of the in-process R&D write-off associated with the Bioenvision transaction, which occurred during the course of the quarter, which was $106 million. During the quarter, we also recorded manufacturing-related charges of about $15 million, due to the write-off of tolevamer related fixed assets, some purchase commitments, and some Thymoglobulin finished good lots.

Expenses associated with stock options in Q4 were $44 million. Amortization remained relatively flat with prior quarters at about $53 million. During the quarter, we absorbed the full P&L impact of the Bioenvision acquisition. The additional operating expenses, as well as the foregone interest, had about a $0.01 impact to our earnings per share in the fourth quarter. Our Q4 non-GAAP net income was $249 million, or $0.91 per diluted share. Now you should compare getting us $209 million or $0.77 per diluted share in Q4, '06.

Our full year non-GAAP net income was $940 million or $3.47 per diluted share. As we have previously talked about our top line at the JP Morgan Conference, I am going to limit my conversation to the few key drivers and some of the more impactful business factors in 2007.

Now, as I mentioned, the revenue increased on a year-on-year basis by about 20% to $3.8 billion. That revenue increase really came from continued growth across all business sectors. Within the Therapeutics division, we increased by about 24% on a year-on-year basis, predominantly due to continued new patient accruals. The therapeutic top line also reflects the first full year of Myozyme. Because of the delay in the US 2000-liter approval, our revenue was negatively impacted by approximately $18 million in 2007. This loss of revenue was related to the free support of those patients on both the MTAP and the clinical extension program.

At the end of Q4, there are about 130 patients on both of these programs. Within the Renal division, there was an increase to about $718 million for the year and $196 million for the quarter. Renagel increases for both the year and the last quarter were due to increased market penetration, as well as the impact of pricing which we saw during the course of the year. The increased market penetration was driven by data which highlights both the clinical as well as the economic benefit of utilizing Renagel.

The Diagnostic Services area was a nice area of increased for us, and it increased by over 18% for both the fourth quarter as well as the full year. These strong increases reflect a growing emphasis that we are seeing in the more personalized medicine area.

Synvisc increased to about $242 million in 2007, and for the year, the Synvisc volume was increased by about 8%, now somewhat offset by the pricing decline that we saw. Non-GAAP gross margin for the full year was approximately 77% of revenue with Q4 coming in at 76%. Now gross margin was impacted by three major elements.

Over the course of the year we saw the growing influence of the product mix and you can refer to the analyst's schedule that we sent out to see the impact of that mix. The margin was also impacted by the scale of our manufacturing facilities in both Ireland and in Belgium.

And finally, our ex-U.S. cost of production was subject to the negative impact of foreign exchange. Within our operating expenses, our non-GAAP, R&D for the year increased to $641 million and that's about 17% of revenue as we continue to invest in both the late-stage programs that we have in our portfolio as well as some early-stage programs.

The costs associated with the clinical material for Myozyme and the MTAP program also affected the R&D expenses (inaudible) expenses occur. Full year non-GAAP SG&A expenses were approximately [$1 billion], and for the quarter those expenses increased to $284 million. On the fourth quarter SG&A expenses were due to the global roll out of Myozyme sales expansion and the expenses associated with the Elaprase launch in Japan. In addition we did some work around our Renvela pre-launch expenses. And much like our HUS manufacturing infrastructure, the SG&A infrastructure outside of the United States is subject to the negative impact of foreign exchange.

Our SG&A expenses continue to show positive leverage, decreasing as a percentage of revenue from 28% in 2006 to 27% in 2007. For the full year, our total operating expenses were heavily leveraged. Overall, operating expenses decreased as a percentage of revenue from over 45% in 2006 to almost 43% in 2007, and that's a definite leverage point for us.

Our interest income increased significantly in 2007, and reflected both the increased cash balances and the cash generated that I mentioned before as well as an improved yield. Our tax rate before one-time events and amortizations was 31% for the year. In the fourth quarter, that rate was about 29%, and that was due to the impact of increased benefits of the low tax manufacturing that we did outside of the United States.

Our capital expenditures for the year are about $413 million. There was a focus on the manufacturing expansions in both Belgium and Waterford. And during the course of 2007, we have also completed the conversion of our facility in the UK to the Renvela production.

As I mentioned in my opening comments, our cash generation was very good. In 2007 we ended the year with $1.3 billion in cash. During the year we funded capital expenditures of $413 million, acquisitions of approximately $400 million, and we repurchased about 3.5 million shares of Genzyme stock at a cost of approximately $230 million. Despite all those expenditures, we exited the year with more cash than we began at $1.5 billion in cash and cash equivalent.

So that will close the books on 2007. Let me turn my attention now to the 2008 guidance. As Henri mentioned in his opening remarks, we're not changing our non-GAAP EPS guidance for 2008. Last year we detailed our earnings growth of 20% compound average growth rate for the years 2006 and 2011.

And as we said then, our 2008 guidance for non-GAAP EPS would be $4, and would remain 2011 at $7. The strong performance that we saw last year reinforces our confidence in this number, for not just this year but for the beyond years as well.

Some of the key drivers in 2008 actually start with the top line. Worldwide revenues are expected to increase to between $4.5 and $4.7 billion in 2008. With the change in the joint venture with our relationship with BioMarin, Aldurazyme is going to be captured above the line in our revenue. The top line impact of Aldurazyme in 2008 is between $135 and $145 million.

So this year instead of sharing all the costs and profits equally through the joint venture, Genzyme is going to record the sales of Aldurazyme and then pay BioMarin a percentage on the worldwide net product sales. To exclude that on an apples-to-apples basis, our top line increases year-to-year by 17%. Myozyme revenue will be somewhat constrained in the first half of the year in 2008, due to the manufacturing limitations here in the United States.

Our non-GAAP gross margins are expected to come in at about 77% of revenue. And we have a number of moving parts here on the gross margin line. We expect a further scale-up of our new manufacturing facilities outside of the United States in particular. We also expect increased productivity yields of Thymoglobulin, and those who would drive greater efficiencies on our margins.

This increased efficiency will be somewhat masked by the recording of BioMarin payments as a cost of goods sold. These payments will reduce our gross margin by almost 4 percentage points in 2008.

Our non-GAAP SG&A expenses will be impacted by the costs associated with the global rollout of Myozyme. As I mentioned earlier, the Renvela and Synvisc-ONE launch, we also plan to begin some of the pre-launch activities around Mozobil. Now with that said, we are going to include these expenditures within the relatively flat percentage of revenue of about 27%. Our non-GAAP R&D is also expected to remain at about 17%, relatively flat compared to 2007. (inaudible) includes the increased spending associated with the full year expenses of Campath MS trials as well as the impact of Mozobil in a therapeutics small molecule program. And I also mentioned before, the spending will also reflect some of the clinical material associated with the Myozyme MTAP program at least through the first half of the year.

Our net interest and expense will be flatten a bit with the tightening of the yields that we are seeing, as well as the impact of the cash used in both the Isis and Bioenvision transactions.

Just a quick word about taxes as of January 1st in 2008, the US Federal R&D tax credit had expired. We haven't included that benefit in the R&D tax credit in 2008 in our rate complications that we set aside. In the event that Congress extends the R&D credits, the company will record the tax credit at that time. So, despite this and the increased profitability, we expect to remain on the non-GAAP basis tax rate at about 31%. That's due predominantly to the continued shift to the foreign manufacturing strategies that we initiated about three, four years ago.

Our weighted average shares outstanding, including the impact of the contingent convert, is expected to come in at about 274 million shares. Our capital expenditures are about $500 million this year, and we expect to complete quit some of the build-out of the Belgium facility, as well as the Ireland facility, but we are taking on the Thymoglobulin facility in France.

But with quite bit of activity in the first quarter, we expect a number of things to take place. The first is the launch of Renvela here in the United States. We also expect to ramp up the MS trial and the expansion of clofarabine in Europe, which is also the top and bottom impact of the Myozyme prior to the 2000-liter approval.

So as you think about Myozyme in the first half of the year, it's important to kind of walk through what I can say are the three factors that will make up this impact. The first is a foregone revenue associated with the US patients. This foregone revenue translates to lower gross profit for us, and finally there is also the actual cost of both the delivery as well as the clinical material. Those patients are either on the MTAP or the extended clinical trial. As we've stated in our press release, this equates to almost $0.03 in the first quarter. So in the first quarter, our non-GAAP EPS is expected to come in the low $0.90 range.

Now before I turn it back to Henri and open it up for question-and-answers, I would like to remind you that you can find a line item detail on both revenue and expense attached either to press release or you can go to our website.

With that let me stop and turn it back to Henri and open it up for questions and answers.

Henri Termeer

Alright, thank you very much, Mike. Before we go to the Q&A, let me just ask three of our business leaders to make a few comments about some important current stuff that they are managing. First, David Meeker will talk about the Myozyme US situation. David?

David Meeker

Yeah, thank you, Henri, I'm going to make a few comments about across the product portfolio and then I'll address the Myozyme issue.

So we had an outstanding year in 2007 and we are set up very well for 2008. Cerezyme growth continues to be extremely strong where we put on again in excess of 300-plus patients for the year. Cerezyme remains, of course, a remarkable drug. If you are a patient or child with gaucher disease and you start treatment with adequate therapy, you can achieve a normal outcome and essentially live a normal life. So we focus very much from a research standpoint on ways to improve the convenience of this therapy.

And to that end, we are releasing information at the World Meeting in Las Vegas this week on our Q2, Q4 study, which looks at the ability to administer Cerezyme once a month. It's a same total dose of Cerezyme, but it's again at a more convenient way. The outcome of that study is that 88% of the patients have been able to maintain the therapeutic goals on that monthly regimen. So, again it will create some options.

You have heard about the small molecule previously which is also designed to increase the choices these patients have, where we are providing additional data on the 12-month status of the patients in that trial in mid-year.

Fabrazyme continues to gain strength and we are greatly encouraged. We again added about 250 patients, two Fabrazyme for the year. We recently received full approval in Europe coming off our exceptional approval status, the only product to hold that in the Fabry space. That reflects both the fact that we have completed our post-marketing requirements, and the demonstrated clinical benefit that we achieved in our Phase IV trial.

There is an abstract being presented at the World Meeting as well, which reinforces the importance of treating early, secondary to the fact that fibrosis starts much earlier than I think physicians appreciate, and we'll work to educate the community about that. And that will again allow or highlight the importance of earlier intervention, which we are investing in with our field study, which is looking at the use of a lower dose in very early treatment.

Myozyme, which as Henri highlighted, is a key issue for us: We came off a remarkable year in 2007 despite the U.S. challenges with greater than $200 million in revenue despite the $18 million impact in the second half that Mike highlighted. We successfully managed the patients who had to come off to 160 liter material through the MTAP program and again, was very strong in our responsibility to do best of our ability to try to maintain those patients with good access. The cost of that program is significant. Again as Mike highlighted and just to frame it.

On average it's about $3.5 million per quarter to our actual cost, so I'm not counting the lost opportunity costs which we'll come to in a moment. That translates into about a $140,000 per patient for us to maintain, one of the patients in the MTAP program for a full year. So it's very much akin to the costs running at clinical trial for these patients.

The lost opportunity costs, of course where we are now at the MTAP program, exceed $10 million in the quarter, and were added to the $3.5 million of actual costs. We're working to the originally indicated May approval. We have no further updates in terms of likelihood of that occurring, but we are working to that point.

The Belgium facility continues to make good progress and we are currently in engineering runs at the 4000 meter scale, and expecting to have approval of that facility in early to mid-2009. The approval of that facility will address completely the current shortfall. So what we're looking to do now is to bridge the gap between now and then.

Globally we continue to make progress and recently approved in Brazil. We currently approved in 36 countries worldwide. Finally, Elaprase launch continues to go strong with over 80 patients on treatment. And I'll stop there.

Henri Termeer

All right, thanks very much, David. John Butler on, Renvela. John?

John Butler

Thanks, Henri. The renal business had a very successful Q4 in 2007. First, the FDA Cardio Renal Advisory Committee gave feedback to the agency that CKD patients not on dialysis, would benefit from the phosphate binder therapy. Additionally, we received our first approval for Renvela in the U.S. for patients on dialysis.

And finally, strong revenue performance for both Renagel and Hectorol was driven by increases in both price and volumes. In the U.S., Renagel became the first phosphate binder to pass one million prescriptions for the year in 2007.

I am going to provide a little more clarity on the CKD indication. Responding to positive feedback from the October Advisory Committee, FDA has come back to Genzyme to discuss a path forward for the use of phosphate binders in CKD patients not on dialysis.

We are currently engaged in positive constructive conversations. Based on this, we do not expect to file a supplemental NDA in 2008, but feel we are currently in an active process of seeking approval for this indication in the U.S.

We are still planning our comprehensive European filing as well as our powder filing in the US in the first half of this year. We have been gearing up for the Renvela launch since receiving approval.

Final manufacturing and packaging has been ongoing. We have received our initial stocking orders and our first wholesaler shipments will happen next week. We have also been working on formulary approval at U.S. payers. We have determined our pricing strategy to price Renvela equal to Renagel to drive this formulary placement. We are making very good progress and we are prepared for the sales force to launch the product officially on March 1.

To support this launch, we have increased our sales effort by about 25% in the U.S., increasing to 152 sales reps. We make this investment to take advantage not only of Renvela now being available, but also of the momentum we are seeing in the U.S., driven by the support of clinical data, the mortality data from Renagel, new dialysis in D-COR, and most recently the positive results from the D-COR study that show a significant benefit for sevelamer versus calcium for multiple hospitalization and hospital days. It was just published this month in the AJKD. As we have mentioned before, our sales efforts will center not on switching patients to Renvela, but really will focus on growing the overall sevelamer brand on the strength of this clinical data.

Henri Termeer

Thank you very much, John. Mark Enyedy, you are the last one. Talk a little bit about Clolar, AML; Alemtuzumab for MS.

Mark Enyedy

Thank you, Henri. Like the other businesses you have heard about this morning, 2007 was a terrific year for oncology and MS. We grew our revenue by almost 50% and achieved a number of important milestones including initiating the pivotal studies for Campath and MS, completing enrollment in our registration trial for Clolar in the adult AML setting and establishing a global business with the acquisition of Bioenvision.

So as we move into 2007 or into 2008, we are looking to build on that momentum by focusing in three key areas. First, MS development, where we expect to enroll the majority of the patients in the two pivotal studies for Campath; and MS and where we will also present the three-year data, the final three-year data from our Phase II studies comparing Campath head-to-head against Rebif in the platform presentation at AAN in Chicago in April.

The second area of focus will be oncology development where we will, again, present data from the Clolar pivotal study in front-line AML at ASCO and we will then file on those data in the second half of 2008. And then finally on the commercial front, we will look to build on our experience with Bioenvision and build out our international sales organization and fully integrate the Bioenvision sales team and then expand into new markets focusing, specifically on Latin America and Asia-Pacific. So, it will be a busy year ahead and we look forward to reporting on our progress.

Henri Termeer

Thank you, Mark. Operator now we can go to the Q and A.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Jim Birchenough of Lehman Brothers.

Jim Birchenough - Lehman Brothers

Yeah, hi, guys. Just a question on the distribution of sales effort behind Renvela and Renagel. And with the 152 reps, how the effort is going to be distributed and what the relative messages are going to be between the two groups that are promoting those two drugs?

Henri Termeer

John?

John Butler

Yeah. So, our promotional efforts will really focus on Renvela. You could actually go out and try to get positions to switch patients on Renagel to Renvela. We don't want to do that. If the patient is well controlled on Renagel, we are not focusing on that. We are focusing the sales efforts on patients not currently on sevelamer.

So, we are still looking at its competitive market with calcium still having 40% of scripts in U.S. This is a very robust area based on the clinical data for us to focus on. So, you have patients who are not on Renagel because of issues with their bicarbonate level or their dose wasn't continue to be titrated because they had lower bicarbonate levels or they had some GI intolerability.

Our bioequivalents for allergy was a little better, GI toxicity or GI tolerability for Renvela. Those are the kinds of patients we are focused on. New patients are coming onto dialysis. We are focused on continuing that first-line message. Again, focusing on the clinical benefits of sevelamer regardless of whether it's Renvela or Renagel. It's really sevelamer versus the other competitors in that market. So, not really differentiating between Renagel and Renvela.

Jim Birchenough - Lehman Brothers

If I can just follow up on that line, presumably you've got pretty good coverage of nephrology market with your Renagel sales force. So, where is the 25% incremental sales force being guided?

John Butler

Again, these extra 30% reps are being incorporated into our current sales organization. Preparation for CKD, we will spend more in the nephrologists office versus the dialysis center, but it's all going to be one, it's not going to have these 30 reps as separate sales organization. This is one sales organization that's going to increase our penetration into the nephrologists to deeper in the call list and more frequent to the high prescribing nephrologists particularly those that are focused on continuing to prescribe calcium.

Henri Termeer

Next question.

Operator

Our next question is from Brian Abrahams of Oppenheimer.

Brian Abrahams - Oppenheimer

Hi, thanks for taking my question. A question on 112638, I was wondering if you could talk a little bit more about some of the signals that you've observed to-date in the study relative to maybe what your expectations were going in, and help us understand what feedback what you're getting in your ongoing discussions with the FDA and EMEA on potential for expedited review of this drug? Thanks.

Henri Termeer

David?

David Meeker

Yeah. So the data we've released to-date if you have a chance to see it at the Analyst Day basically shows that we are getting significant reduction in spleen size on the order of 30% reduction and concomitant increases and all other improvements in all the other parameters including hemoglobin platelets and a reduction in the biomarker when we directionally want to see it.

So your question was, are we pleased or surprised by that? And this does exceed what we had expected to see with this drug, some of those changes approach what we have seen with Cerezyme at some of the doses. So we are very encouraged by what we're seeing to-date. As I said we'll be releasing more 12-month data come mid-year, that was the data on the six-month viewpoint for those patients.

With regard to the regulatory discussions, we've had discussions with both the FDA and the EMEA in terms of how we might go forward here. I think the most specific feedback we've gotten for them, is they are looking as many small molecules have to do to have a QT study done, which we are in the process of putting in place, at the completion of that study then we will move forward with what we anticipate to be both in naïve trial and a switch trial in patients who are well maintained on Cerezyme to test the ability of this molecule to maintain those patients in that same state.

Brian Abrahams - Oppenheimer

Great, thanks for that information.

Henri Termeer

Next question.

Operator

Our next question is from Geoff Porges of Sanford Bernstein.

Geoff Porges - Sanford Bernstein

Thanks very much for taking the question. Just a sort of financial question for Mike. Could you give us a sense of the currency contribution to your revenue growth? And just the second part of same question, guidance on taxes, if the tax credit is renewed what do you think the tax rate would go to? Thanks.

Mike Wyzga

The second one is relatively straight forward. The tax credit is renewed. It's a little under a percentage point in fact to the overall tax on a non-GAAP basis. With regard to the foreign exchange, if you look at on a Q3 to Q4 basis, so, for example, the Q3 average Euro rate was a EUR137.5 as I recall in the Q4 where it was a $1.44.

So if you titrate and if you look at the Q3 rate going into the Q4 numbers, the top line impact was about $18.5 million of revenue. However, this is where it gets interesting, the total PBT contribution is under a million. And that's for a number of very good reasons, we have a natural business offset that help us dampen the impact of volatility of FX rates.

A large portion of our top line sales as well as our interest structure outside of the United States. So as you kind of go through the worldwide interest rate and the fluctuations that you see with the foreign exchange, it does impact on top line but it virtually touches every line of our P&L. The best example is probably Renagel in John Butler's area. 50% of the sales come from outside of the United States, but 100% of the manufacturing is done in Waterford in the UK.

So while the 50% revenue fluctuates up or down, 100% of the manufacturing fluctuates up or down. So to take within the whole thing is to keep in mind that FX changes don't just affect the top line but they affect the bottom line as well.

Henri Termeer

Next question.

Operator

Our next question is from Geoff Meacham of JP Morgan.

Geoff Meacham - JP Morgan

Hi, thanks for taking my questions. My question is about the leverage in the model, I am just thinking about you guys, the '08 guidance that you've given, the margins are expected to be a flattish consistent with '07 as SG&A, R&D as a percent of sales same thing. So I'm just, my question really is when do you think you will start to see some of the leverage in the model and how much of your long-term EPS guidance really depends on operating margin expansion?

Henri Termeer

Mike, do you want to make comments on that?

Mike Wyzga

Yeah, I can do, I can do it in two ways. I think we've already seen the leverage in the model. As I mentioned in our '06 to '07, we went from a little over 45% operating expense as a percentage of revenue down to about 43.

So we are still seeing good leverage in the model. As you go out to 2008, there will be year-to-year fluctuations with high to the $8 per share as well $4 per share rather going out to the 2011 going out to $7 per share. And as you manage through the P&L you will see pickups on the gross margin for example in the latter portion of the year as we get the approval for the year 2000 leader for Myozyme for example. So you'll see some of that in the gross margin, you also see in the latter portion in sales and marketing area.

Henri Termeer

Geoff, just in addition to add to it, this margin expansion is the leverage that we have, that we have experienced over the last number of years and expect to continue to experience. It is almost inevitable that you experience it particularly since growth currently is coming from products that we have, are on the market list. So they produced in facilities that currently are in existence, they sold by and infrastructure is currently in existence.

That does create space and it does allow us to expand expenses in certain areas and it does also allow us at the current time to bridge the certain challenges like the challenges on Thymoglobulin.

So, this leverage is continuously in play. How much precisely this leverage allows us to get to the $7 in 2011, I wouldn't know how to answer. But the 2011 numbers are numbers that we arrived at assuming that we would continue to expand investments in areas where that feed the future beyond 2011 like mipomersen, like alemtuzumab MS, and that's really where we want to balance it. It is not an end of game, it is something that we at the leverage on current programs allow us to make the investments necessary to continue growth beyond this medium term.

Geoff Meacham - JP Morgan

Very helpful guys. Can I just have one quick follow-up, just to confirm that your Myozyme guidance for the year assumes that you fully resolved the manufacturing issue by May?

Henri Termeer

(inaudible) so the demand outside the U.S. is very strong.

Geoff Meacham - JP Morgan

Operator

Our next question is from Mark Schoenebaum of Bear Stearns.

Mark Schoenebaum - Bear Stearns

Hi, sorry about that. Just may be a question for Henri and John, just kind of broad strategic, I mean, it looks like Renagel and Renvela patents start to runoff in 20, I think its 2014, not that far away and to my knowledge, you haven't talked a lot of about life cycle extensions there that will help you on the patent side?

Could you maybe talk just a little about what your plans are and when you're going to give The Street more visibility on how you're going to cope with cliff on the renal franchise that's getting closer every year I guess?

And then just the housekeeping question, does the revenue guidance contemplate a view on the dollar, the value of the dollar?

Henri Termeer

No, we are not speculating any particular moments around the dollar, we obviously we're budgeting on the basis of an exchange rate assumption. But we are not speculating beyond 2008, we actually are not thinking about it beyond 2008.

And the way that the operation is the diversified both geographically, both from an infrastructure point of view, home manufacturing point of view throughout the world, exchange rate really will continue to have as Mike explained a relatively minor influence.

In terms of the patent situation, 2014 is the date which is still about seven years from now. But we are clearly are very aware of this and we are continuously working or have been working for quite some time on next sort of fourth-generation programs to continue to improve on the efficacy and on the safety. Also it is very though because Renagel is a very excellent product, Renvela is a very excellent product.

But we have some developments that are very exciting, we will be limiting ourselves in our comments, because this is a competitive area, as let's say that we have something that will reach the clinic still this still this year. John, but if you want to make any comments, go ahead.

John Butler

I think you have pretty much covered me. Clearly around sevelamer we are continuing to do what we can to augment our IP position on that product and we think there are some opportunities for us there.

But we have moved a next generation program into preclinical development. I think we certainly hoped today to file an I&D before the end of the year and probably be in the clinic early next year and we are obviously moving as quickly as we can on that. And again set a bar high around improving efficacy, potency of the product and again in a competitive situation that's probably enough to say at this point until we do a more clarity around it. But it's clearly high on our radar screen.

Mark Schoenebaum - Bear Stearns

Okay, thanks a lot.

Operator

Our next question is from Yaron Werber of Citigroup.

Yaron Werber - Citigroup

Yeah, hi. Thanks for taking my question. I have a kind of one question that has to do in general with the guidance. I mean if you look at your guidance last year and SG&A, you assume SG&A as a percentage of revenue is going to between 27 and 28 and you came about 40 BPS below that and you basically were at the high end of it to beat top end of your revenue guidance and you dramatically beat the EPS. I guess when I am grappling with is just trying to understand a little bit.

On the revenue side you gave pretty good revenue guidance for '08. On the expense side, you are little high. But you have been talking about tremendous operating leverage. I am just trying to understand how conservative is this guidance and maybe you can give us a little bit of sense as to what's different about '08 relative to '07, given the tremendous increase here in operating expenses which seems like you might not necessarily be needed? Thank you.

Henri Termeer

When we give guidance, we are intent on meeting it and we talked about $4 a share months ago, we talked about $4 a share today, (inaudible) today had passed and you are absolutely right, the company from top line development point of view is in a very strong shape. We are managing some conditions.

We talked about the Myozyme position in the US. We are managing mipomersen program into the company. We are fully observing that. We are managing the Bioenvision a company into the company. We are full observing that. And that we mean to meet this kind of the guidance that we give and to handicap it in terms of how conservative it is.

I don't want to do it as want to say, we look at this kind of an effort at this early stage in the year where you have the kinds of things going on that we have go on. We look at things very carefully as the years goes on and we learn more. We'll share the issue as we did last year but we want to deliver 20% earnings per share, non-GAAP earnings per share growth with 2006 as a base.

We want to build into the company new programs that today may not have exists yet (inaudible) at the beginning of this year and so on, that's what we want to be do and we will have the space to be able to do so and to be able to build these new programs in without coming back to you and say now we haven't diluted impact for sometime because we start something exciting.

So that that's the way we operate the company and I think that's a good way, that's a liable way and generally creates a discipline within the corporation as we look at opportunities how we build demand and how talent we are for tolerant we’re for short-term earnings impacts. It's a philosophy more than anything else Yaron.

Yaron Werber - Citigroup

I appreciate it, can I just make a quick follow-up for John, if you don’t mind. Just on Renagel looking at that guidance too and can you -- I am not sure if you can comment, but if you can just help us understand a little bit on your guidance for Renagel and Renvela. Is there any price increases at all baked in or again that looks like if you look at the year-over-year on the kind of price increases you have taken historically. I am not sure if you're planning on laying off price increases maybe in the upcoming 12 months or not?

Henri Termeer

I don't think that to get to that level of detail. We did take a significant price increase back earlier last year in anticipation of the launch of Renvela and being able to launch that here in the US at the same price as Renagel. We do need to have that run through our payers and the formulary acceptance process is not done with Renvela.

This is something that’s going to happen over the course of the year. Our coverage for Renagel is outstanding. We want to get at the same place. It is mostly executional now, you have to -- when is the formulary meeting et cetera. So, to do pricing actions in the middle of that really complicating the process, so we’re kind of thinking longer term but we certainly have the opportunity and based on last price increase, we know that we’ve more room to increase the price, particularly based on the clinical data that's come out.

Yaron Werber - Citigroup

All right, thank you very much.

Operator

Our next question is from Chris Raymond of Robert W. Baird.

Chris Raymond - Robert W. Baird

Thanks for taking the question. I want to explore a little bit what you're thinking on Hectorol a little. When I do the math with your guidance for the renal franchise, it looks like your guiding to sort of essentially a flat year in '08 for Hectorol over '07. When you look at the script trends for Zemplar for example Abbott's drug the oral Zemplar what I see is almost a doubling in script numbers over the last year largely I think on pre-dialysis. Now with this Renvela potential to have an earlier label in pre-dialysis for Renvela.

What is the thought process there, is this something where there could be upside to the guidance or have you sort of deemphasized Hectorol or should we also maybe sprinkle in some comments there if you would? And that's what you're thinking relative to this paragraph for challenge? What kind of I guess importance should we place on this drug?

John Butler

Sure. Yeah, Chris, we are very positive about Hectorol. We do know that a lot of the sales effort this year is going to be focused on the launch of Renvela. But we have seen really significant growth rate, great growth in 2007 for the product a lot of is driven by the point fives in CKD. This is an area we are putting our efforts around Hectorol more than any other.

Abbott as you said, Zemplar continues to grow significantly in the market that grows the market forward by Vitamin D2s versus calcitriol. Remember in CKD that's the main competitor there is, is generic calcitriol and overall that's where we're seeing our growth. We are also focusing on the IV in the dialysis centre.

We still continue to have significant expectations for Hectorol. It is an important product given it's great leverage in the US and really has allowed us to make these kinds of investments in the sales organization which I think has been a significant contributor to Renagel's growth over the past couple of years as well since we've done that deal.

So Renagel will continue to be -- Renvela will continue to be the premier products in our portfolio, but Hectorol is a very, very important contributor for us as well. I will ask Tom DesRosier to make the comment on the drug report filing.

Tom DesRosier

Yeah sure, John. We certainly believe our Hectorol patent is stated strong through 2021. We are in the process of evaluating the ANDA filings, evaluating our litigation options. We haven't till the end of the week next week to make a decision whether to file under the statute and until then we won't comment any more on the tactics of the situation, but stay tuned.

Chris Raymond - Robert W. Baird

Okay. Well, so, maybe I just have a follow-up on that I mean, it's just striking to me that Abbott has done so well with their oral and I understand that you have seen some growth as well. But you know can you maybe John just describe, what is it that Abbott is doing that there might be something you could strive for. What’s the difference, in your view in those two drugs trajectories?

Henri Termeer

Yes, I think there is a couple of things. We are gaining in the point fives where our focus is and offsetting that we have had some losses in the 2.5s where our CKD patients were on. So when you look at our Hectorol oral numbers you are seeing kind of somewhat of an offset going on there. But Abbott does have a larger sales organization selling the oral product. So, there is a larger share of voice for that product and I think they really are taking advantage of their penetration in the dialysis market. Zemplar has still about 70 plus percent of the dialysis share in the IV setting and that brand recognition et cetera, their comfort with that product has reflected into their ability to penetrate into CKD as well.

We're quite pleased with the growth we've seen in the 0.5s in CKD and we think that's set us up very well. I remember one of the strategic reasons for doing the Bone Care acquisition was the ability to get in and talk physicians about CKD and with Hectrol and prior to the Renvela launch in that space and we think that has serviced very well and will service there also. So they are clearly, there is a large share of voice for Zemplar, larger share of the dialysis market, it reflects the brand recognition in CKD as well. But again we are very comfortable at that both products can compete successfully because 70% of the scripts are still being written for [caps] trial.

Chris Raymond - Robert W. Baird

Okay, thank you.

Operator

Our next question is from Phil Nadeau of Cowen.

Phil Nadeau - Cowen

Good morning and thanks for taking my question. I just wonder if you could talk a little bit more about Thymoglobulin. Seems like your guidance for 2008 contemplates reasonable growth from that product, some of the reasons for the growth are discussed in the press release, but I was wondering if you could go into those in a bit more detail first and then second discuss when the stability problem could be rectified? Thanks.

Henri Termeer

Okay, Joe did you hear this question. Joe is in Japan and he can give the answers from there.

Joe Lebockey

I did. Well thank for the question, we actually continue to see Thymoglobulin slowing throughout last year and into this year as we grow in geographical locations opening up new markets. We plan to launch this year in the UK, Australia and here in Japan and so we continue to see geographical growth as well as clinical growth. We're currently doing studies in MDS and Aplastic Anemia, we look to expand the growth of Thymoglobulin as well as looking to the BMT area where Thymoglobulin is a standard around the world. I think we continue to grow that along with the synergies that we see with most of you'll coming on board.

So we are getting past our manufacturing issues and we did average an opalescence issue or [cloudiness] of the product that led to the product going out of spec early and that's why we lost some of those batches last year. That hurt us running into this year because the product that's made over the past four to six months is what we'll be currently selling now. So for the first half of this year we will be tight in supply, but we do have still some good supply to meet the demand and most of the world. So, we continue to expand and grow geographically.

So, currently the opalescence issue that we've seen, has been resolved, though the last 30 active ingredients has been produced. I've not seen the opalescence problem, so we are very positive about moving forward with that and that again will be tied to the first part of this year. But moving to the second half of the year, we are looking to have adequate supply to continue to grow clinically and geographically with (inaudible) continue to grow the product.

Phil Nadeau - Cowen

Could you give us some idea of what that supply constraint has done to sales in Q4?

Joe Lebockey

So, in Q4 we continued to grow actually Q4 '06 over Q4' 07, and Q3' 07 to Q4' 07. So, we continue to see growth. Again, it constrained us in a lot of area that's having adequate supply to really grow to I think the level that we could. But the impact on the revenue was there, just because we are in short supply. But, again we continue to see growth quarter-over-quarter.

Henri Termeer

And Phil it is very difficult to put a precise number on it. We just went public it wasn't available. We made sure that we didn't sell stuffs that we didn't have. So, to precisely know what the impact is little bit too speculative I think to mention. But it speaks for itself with supply freeing up through the first half of this year than the second half of this year. We can put a much greater marketing emphasis on this program globally.

Phil Nadeau - Cowen

Thank you.

Patrick Flanigan

Next question.

Operator

Our next question is from Meg Malloy of Goldman Sachs.

Meg Malloy - Goldman Sachs

Thanks very much. On the renal guidance, are you contemplating a CKD approval in 2008 and then separately I was wondering if you could expand on the significance of providing the diagnostic reagents for newborns screening to the CDC? Thanks.

Henri Termeer

Okay, let me ask David to refresh upon on that there is indeed some very exciting moment as we now have reached a point where the CDC has started to distribute this reagents to do newborn screening and we are getting some very interesting reactions already around the world. And the first communication is from the CDC haven't really have taken place. But David, give us some color there.

David Meeker

Yeah. So we've provided as we've described previously on the reagents for testing for Gaucher disease, Pompe diseases, Fabry disease, Niemann-Pick A and B, and the Crab A reagents will be going out shortly. I think this is all part of an increasing interest as reflected in a recent Illinois legislation approval for example. And incorporating newborn screening for glycogen storage disease into existing panels.

One of the best examples, we talked about previously is Taiwan where they are doing that broadly. They've now screened 188,000 infants, newborns and have identified six month day patients all of whom are currently on therapy. And all of which I mean again it's very early in terms of their course, but certainly they seem to be doing well and seem to be benefiting from the fact that they were diagnosed at birth.

So I think what we're going to see overtime is the value of newborn screening and that of course a diagnosed patient gives you options, you can then make the best of the treatment decisions for that patient, you have to start the enzyme replacement therapy at birth but you can follow them closely. I think that's increasingly going to have an impact on this marketplace. But it's extremely early but as you noted it is an exciting moment.

Henri Termeer

It's kind of the optimum of personalized medicine in some sense. John, make a comment on the CKD expectation for this year.

John Butler

No, Meg, we haven't included the fiber having a CKD approval in the US into our guidance. As I said before, we are in a really positive conversation with the FDA. We are really encouraged by it. But no, we don't have an active filing from them. So we are not working under a PDUFA date. So it is very difficult to judge exactly how long the process will take. But considering our expectation we are going to file an SNDA by the middle of this year, we are quite encouraged by where things are and as we know more we will inform you.

Meg Malloy - Goldman Sachs

Thanks very much.

Henri Termeer

We have three more callers left in the queue so I understand. So we will take these three callers and then anybody that still has some review, some questions, please do not hesitate to connect with us directly. Operator?

Operator

Your next question comes from of John Sonnier of William Blair.

John Sonnier - William Blair

Thanks for taking the question. Henri, long term guidance is obviously very exciting. But the one revenue vertical I am trying to get my arms around is Biosurgery. The 2007 base is about $427 million and I think in your January 9th, release you said that the goal for that business is to approximate $1 billion and that the driver would be Synvisc-One. I didn’t hear Ann Merrifield on the call but maybe you can help us think about that is it broadening into new physician specialties, is it new joints. How do you basically double that business?

Henri Termeer

Okay. Ann is on the call and I am going to give this, she is in Mexico but she will be responding immediately. The guidance for Biosurgery is $490 million to $500 million for this current year and we do indeed have very significant ambitions here as we go forward and one great program is the sample program that's growing 20% a year it has been for some time and is still in the early phase of development. But, Ann give us some color on your expectations going through 2011?

Ann Merrifield

Certainly that's a good question some times people do underestimate the power of Synvisc-One as a single injection product, ease of use and the systems economic savings we think will drive up very substantial expansion of the market the new patient types will be younger active patients for whom the three injection protocol was inconvenient but also co-morbid patients from whom injections are high risk, so there is a fairly substantial market expansion, we've done market research in Europe, market research in US and Asia and you get the same answer no matter what geography you cast that there will be a substantial up tick in the market and actually fairly rapid that you are selling into a customer who knows you already, knows the modality already, and then just adds additional treatments.

Also in the Synvisc growth for the five year timeframe is an assumption of approval in Japan and we are in the dialog around that now and that's $350 million market which we don't flay currently. That would be the three injection product, but a substantial step ahead as viscosupplements are currently operating in that environment.

Those are the two largest drivers on the Synvisc side as Henri said Sepra continues to grow in excess of 20% and we expect that we are under penetrated in all geographies with that product. We anticipate launching spray in Europe in the early years of the five year timeframe and in the US in the 2011 timeframe and spray again will enable us to do laparoscopic surgery and lets have a ease of use frankly even some smaller incision surgeries that we operate into.

Almost Synvisc-One like kind of impact on the separate franchise in terms of ease of use same customers, are they sold on separate who can then use the product under laparoscopic surgery, so a pretty rapid ramp post introduction of revenue, so those are the two drivers and we remain very excited about the prospects and very committed to the billion dollar number.

John Sonnier - William Blair

That's helpful. Thank you.

Patrick Flanigan

Next question?

Operator

Your final question comes from Jeffrey Portis of Sanford Bernstein.

Jeffrey Portis - Sanford Bernstein.

Thanks very much for allowing me to follow-up. Just wanted to quickly ask for Mozobil your $400 million guidance, does that include both allogeneic and autologous, and or any revenue for chemosensitization?

Henri Termeer

Joe can you respond to that?

Joe Lebockey

Yes. I can. So looking at those numbers it does include allogeneic and autologous. So, as you know, our studies were done in autologous. But we are currently looking at studies in allogeneic as well. We believe that we've some studies on going at allogeneic and believe that Mozobil can play a great role and that's quite a significant transplant as well. It does not include any of the chemosensitization work that we're currently very excited about and actually community is very excited about and we've started developing in that areas as well but it does not include the chemosensitization.

Jeffrey Portis - Sanford Bernstein

Well, thanks very much.

Henri Termeer

All right operator, thank you very much. Thank you very much everybody participating this morning. We look very much forward to reporting on our results as we go through this year and we'll talk to you as we were saying April 23rd, for our first quarter and its goal. Thank you so much, bye-bye.

Operator

This concludes today's conference call. Please disconnect at this time. Today's conference has concluded. Please disconnect your phone at this time.

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Source: Genzyme Corp. Q4 2007 Earnings Call Transcript
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