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Executives

Henri Termeer - Chairman and CEO

Mike Wyzga - CFO

Jeff McDonough, General Manager of the Lysosomal Storage Diseases

Ann Merrifield - President, Genzyme Biosurgery

John Butler - President, Genzyme Renal

Rich Moscicki - CMO

Patrick Flanigan - Director of IR

Analysts

Ian Somaiya - Thomas Weisel Partners

Jim Birchenough - Lehman Brothers

Tom Shrader - Rodman

Yaron Werber - Citi

Chris Raymond - Robert Baird & Company

Jeffrey Meacham - JPMorgan

Geoffrey Porges - Sanford Bernstein

Phil Nadeau - Cowen and Company

Meg Malloy - Goldman Sachs

Mark Schoenebaum - Deutsche Bank

Brian Abrahams - Oppenheimer & Company

Geraldine O'Keefe -Fortis.

Bill Tanner - Leerink Swann

Maged Shenouda - UBS

Matt Osborne - Lazard

Genzyme Corp. (GENZ) Q2 2008 Earnings Call July 23, 2008 11:00 AM ET

Operator

Welcome to the Genzyme Corporation's second quarter financial results conference call. (Operator Instructions).

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

Patrick Flanigan

Thank you, Mary-Announced. Welcome everyone to Genzyme Corporation second quarter earnings conference call.

On this call we will be making forward-looking statements, including providing EPS guidance, discussing our product development plans and timetables and addressing Myozyme manufacturing and supply, including approval timetables for the 2000 and 4000 liter production processes. These forward-looking statements are subject to a number of risks and uncertainties that may cause the actual results to differ materially.

Please refer to the section titled, Risk Factors in our Q1, 10-Q for the more information on those 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 measure. Finally, just a reminder that our third quarter conference call is scheduled on October 22nd at 11:00 am.

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

Henri Termeer

Thank you, Patrick. Welcome everybody on this call. I will have, with me as usual most of our business leaders and Mike Wyzga, of course, the Chief Financial Officer will make the financial comments, and then we will hear a few comments from Jeff McDonough, General Manager of the Lysosomal Storage Diseases area and Ann Merrifield, Biosurgery and Joan Butler, of the Renal Area. And as are available for the Q&A.

The second quarter was a very solid quarter financially. And it was an extremely productive quarter in terms of building for the future, just debt balance, having the short-term results, consistent to this including the building blocks in place for the future that we're trying to manage in a very, very active way. Revenues had strong traction up 25%, almost $1.2 billion, 25% up from last year. Expenses also were up. We are making significant investments.

One area of significant investment is Campath, the Phase III clinical trials. Clearly as this moment is an expensive moment for the Myozyme program but an extremely exciting moment, as well and we'll come back to that in a minute. We are preparing for the Mozobil launch. We expect some action by the FDA by the end of the year and we expect to launch next year both in Europe and the United States.

We did some deal with Isis around mipomersen, that's also is reflected in the finances to some extent. We recently also did the deal with PTC Therapeutics, around a very, very exciting program for again, rare genetic diseases. We are making significant investments in manufacturing to keep up with the overall demand of the products. We are staying solidly on track in terms of our short-term and long-term guidance. The guidance for this year non-GAAP is 390. We feel very good about that.

And the guidance for 2011 based on the 20% CAGR from 2006 is $7 a share and we very much have those numbers in mind, as we operate the Company and operate the expense lines. The balance of doing things that allow us to build for the future, while meeting the short term guidance is maybe the most important thing that we keep in mind. We're not trying to leverage in the very short term. We are making the investments value, where we have the opportunity to make investments for the future.

Before I hand over to Michael, I will make the few comments about Myozyme because Myozyme is turning into an extremely exciting opportunity and it is well ahead for anything that we could have expected early on, as well as ahead of anything that I read about in terms of investor expectations. The second quarter results were $77 million and this is almost entirely outside the United States, up 65% from last year, by far, the fastest growth rate that we have seen in any of our Lysosomal Storage Diseases or any product for that matter. The two important short term catalysts here that we need to keep our eye on. As we think about our way to the future potential is product, which we think is very, very significant.

The first one is the US approval of the 2000 scale product. We filed the BLA as we told you earlier, I believe it's May or June, and we are expecting the advisory committee in October, we've very much to report to that advisory committee. We've had advisory committees for all our Lysosomal Storage Diseases on approval. We didn't have it for the 160 material, that was a very much an urgent moment because of the nature of that product and the critical need for the infantile population. And now, that we have the LOTS data, the late-onset data that we announced the top line results of late last year, we now filed on this part to BLA in May or June. Now we have the opportunity at the Advisory Committee meeting, in October to explain. The basis for the BLA is to ask for approval for the late-onset patients for the 2000 liter scale product.

The second catalyst here is the EMEA approval for the 4,000 liter scale product, produced in Belgium. Many years ago, and I am now so very pleased that, we had the courage to do so many years ago. We decided to build this plant, our fusion plant in Belgium, for purposes of producing this product. And I could not have imagined at the time that we would get so close to the wire, in terms of this plant coming on stream and the need for the output of the plant. And we are now in a phase where we do the product validation runs. We are in the middle of those. We know what's required. We know that we will have for the EMEA we will have to meet the specifications of the 2000 liter product.

And we have learned a great deal from the interaction with the FDA, around the 160 to 2000. We are very focused on that. We have a lot of confidence that we are able to get there. And we would expect to file this EMEA before the end of the year. That is our goal. It's a very, very significant effort that's behind this. Once we have this in place that increases the production capacity for this product by more than threefold and that would be an very significant. It would get us well beyond the $1 billion sales mark. We may need production beyond that and we are clearly looking in that as well. But we will be obviously, will be covered for sometime this increased production when, it becomes available.

These two catalysts are very, very important for us to drive this product to its potential, and its potential is really based on the clinical needs in the marketplace. It's quite remarkable, what we are finding out in some highly organized markets, such as The Netherlands or Germany in this regard. We are seeing many more patients than we had anticipated early on and we see them being put on therapy, on treatment faster than we have seen with other products of similar nature. And it's primarily because these patients develop such morbidities, when they get in the more advanced stages of the disease. So fantastic opportunity, it's very much up to us to be able to execute, getting this opportunity translated into something that we can see on the top line and the bottom line of the corporation. Everything is in place to do so, and it is extremely short term.

So with that let me hand to Mike Wyzga, our CFO, to talk about the financial details for the quarter.

Mike Wyzga

Thank you, Henri. As you can see the momentum on the top line continued again this quarter as our revenue increased by 25% over Q2 of last year. Particularly important to note that every single product line, once again contributed to this strong top line increase. Our Q2 non-GAAP earnings per diluted share was $0.98 and that should be compared against the $0.88 last year. Let me spend a few seconds walking through the GAAP and non-GAAP crosswalk. As you can see from the attached crosswalk, on a pretax basis, the expenses associated with stock options were $54 million.

Amortization expenses in the second quarter were $56 million. That's a slight year-to-year increase, due to the acquisition of Bioenvision. During the quarter, we also finalized a licensee agreement associated with Isis, for the rights for mipomersen. And that came in at $175 million. In the second quarter we also recorded a net gain of investment of $9 million, that's associated predominantly with the sale of our Sirtris to GSK during the quarter. Our non-GAAP net income was $269 million and again that should be compared against $239 million in the prior year. Again, our earnings per share came in at $0.98 cents for the quarter. Let me review some of the major components that drove our top line in the second quarter, and again, just to reiterate our top line increased by 25% on a year-to-year basis.

With the change in the joint venture with BioMarin at the beginning of the year, Aldurazyme's now captured above the line. So on an apples-to-apples basis excluding Aldurazyme our top line actually increased by about 21%. Aldurazyme increased nicely to just over 33% versus last year to $39 million. Cerezyme increased to $319 million and that's 13% over last year. That reflects new patient accruals predominantly outside of the United States. Now, despite this continued solid performance that we see with Cerezyme, Cerezyme now represents about 27% of our overall revenue. Last year as you recall, Cerezyme represented about 31%. So what you are seeing is the product diversification of the corporation as it continues to evolve. Fabrazyme increased to $127 million or 21% increase, with volume largely driven from increases in both the United States, as well as, in Europe.

As Henri mentioned Myozyme revenue came in about $77 million with continued market penetration outside the United States. Last year just as a guided post, second quarter revenue was up $47 million, so it's a very strong increase. Renagel increased 16%, again very solid and very strong across the product line. In the bio surgery area including Synvisc and Sepra revenue increased 22% over last year in Q2. That's due to increased volume as well as the Synvisc seasonality. Our most particular interest was the Sepra line of products, which grew especially strong during the quarter by growing by 39% over last year. That's directly attributable to the investment that we made in the expansion of the Sepra US sales force last year. Thyrogen also increased nicely to $39 million or 34% over last year.

And as I mentioned before, all of our other major businesses including oncology, transplants and generics all increased on a year-to-year basis. The foreign exchange rates continue to strengthen against the US dollar. The euro increased from an average of $1.35 last year to an average of $1.56 this year. The revenue impact on the top line of this increase was approximately $50 million. And on the bottom line it was an increase of about $20 million. Our non-GAAP gross margin in the second quarter came in at $877 million or about 75% of revenue. And the gross margin was impacted by a number of factors. The first is on a year-to-year basis, the gross margin reflects the payments that we made to BioMarin on Aldurazyme sales. These payments reduced our gross margin by a four percentage point again on a year-to-year basis.

In the second quarter, our ex-US manufacturing expenses were also negatively impacted by $10 million of foreign exchange. We also continue to see the impact of the product mix associated with diversification of our product set. We see increased sales in Myozyme, Aldurazyme and oncology they are now all playing a larger role in the product mix. And finally the gross margin reflects increased costs associated of the absorption of our manufacturing capacity investment that we made on a worldwide basis. With the increased utilization and efficiencies that we see gross margins as a percentage of revenue are expected to improve, as we've said in the past in 2009 and beyond.

Within our operating expenses our non-GAAP research and development expenses came in at $119 million, and that stayed fairly consistent at 16% of total revenue. Year-to-year the R&D spending increased by $36 million, as we continue to invest in our near-term pipeline. Specifically this quarter, the increased spending was associated with the Phase III studies of MS, the doctors associated with Clolar and also with the Bioenvision acquisition we absorbed the full expenses of the European clinical trials there. The R&D also reflects the Myozyme access program. Our non-GAAP SG&A expenses came in at $319 million for the quarter. The year-to-year increase was focused on mostly sales and marketing investments.

Within the LSD area, we increased our sales force, mostly associated with Myozyme. We also took the opportunity to invest in a launch activities in both Renvela, as well as the pre-launch activity associated with Mozobil. Now we've seen in the past particularly with Sepra, we expect these investments to have a fairly quick turnaround with the increasing sales volume. Total operating expenses impacted by about $12 million due to the changes in the FX rate. Our non-GAAP tax rate came in at 30% and this is a direct reflection of the greater reutilization of our foreign manufacturing infrastructure. The cash on our balance sheet and cash generation continued to be strong in the second quarter. Cash from operations in option exercises, net of one-time events came in at about $329 million.

Now the cash usage during the course of the quarter was fairly typical for Genzyme. The cash that we generated allowed us to do the stock buyback program, where we repurchased an additional 1 million shares during the quarter. In addition, we continued to augment our infrastructure with capital expenditures of $130 million. Now most of those were focused on our manufacturing infrastructure. We also used the $175 million of cash generated to augment our future pipeline development with mipomersen in the Isis deal. And finally, we also had our expense payment of $175 million, associated with the State and Federal taxes. So we exited Q2 approximately $1.3 billion in cash.

With continued uncertainty in the credit markets, we believe that the strength of our balance sheet will continue to be a strategic advantage for the corporation. Now, before turning it back to Henri and opening up the questions, I like to remind you that our line item detail in both revenue and expenses is attached on the press release, as well as, on our website.

With that let me stop and turn it back to, Henri.

Henri Termeer

Thank you very much, Mike. And I will now ask three of our business leaders to make the few comments, so that, we then can turn to Q&A. Jeff.

Jeff McDonough

Thank you, Henri, I like to make a few comments across the LSD portfolio, beginning with Cerezyme which as highlighted had a very strong year-on-year growth due to a combination of geographic expansion, which continues and to further penetration in developed markets. Within the Gaucher franchise I like to highlight and update briefly the development of 112638, our orally available small molecule for the treatment of Type 1 Gaucher. At the EWGGD meeting last month, we did present twelve months data for 26 patients. We remain increasingly positive and excited about the substantial impact this therapy can make in the Gaucher world. The program continues to move forward.

We have completed our thorough QT study, with data being available later this year and we do anticipate bringing our Phase III program into play in the beginning of 2009. Fabrazyme with similar drivers of geographic expansion and penetration also turned in a very strong year-on-year performance, as Mike mentioned with 21% growth. Here in this field, we remain very confident in the role of dose, in bringing the optimal outcomes forward in this patient population and the second paper from the AMC, where the head-to-head dose comparison study was done. Now, I think it's highlighting the role of dose in bringing outcomes forward.

In this case, in the cardiac compartment, where sustained decreases in cardiac mass were seen in a comparison between low and high dose patients and over the course of two-year study. Finally the field trial, which was highlighted by David last quarter, where we are going to introduce 0.5 milligrams per kilogram of Fabrazyme for very young boys, has begun screening and we expect to develop data from this program over the ensuing five-year period. Aldurazyme again a very nice component of our growth story year-on-year, here I think the combination of geographic expansion, as well as, further successes in securing reimbursement for Aldurazyme have contributed to the growth. And I think a nice highlight here as the sustained effort on our global platform that can provide results as seen here.

With respect to Myozyme just to provide a little bit of color to Henri's comments with respect to the rate of growth of this product over the last year. We continue to see a very brisk patient accrual worldwide and will be pass the 1,000 patient mark this month. At the moment fully two thirds of the existing treated population are adult's in the late-onset category. And we have had seven new approval in key markets this year and we expect to have a further two approvals coming before year's end. As Henri said, we remain focused on these two events later this year and early next year.

The first related to the action by the FDA, which we continue to expect for the beginning of December, which as we now know will be preceded by the panel meeting in October. The approval in the first half for the 4,000 liter facility inhale is an important milestone as well as Henri mentioned. We know this will be important to managing and supplying this population over the long term. And we do expect supply to be tight through that approval in a way that we will be very focused on managing in the best way. Finally, outside the portfolio of interest is the progress within the field of newborn screening. It's a place where, we are seeing increasing traction around the world and some important milestones could occur in August here as, Secretaries Advisory Committee considers the inclusion of the several of the LSDs and a Federal recommendation for newborn screening in the United States.

Finally, with respect to the PTC Collaboration, which was announced last week, we're just enormously pleased with this deal which as Henri highlighted, gives us an opportunity to invest further in our presence in the genetic disease area, meeting areas of very strong operational synergies, as we consider bringing our presence forward in Duchenne muscular dystrophy, as well as, very nice strategic synergies as we consider other genetic diseases like CF. DMD is in a Phase IIb program, which is currently enrolling. We believe this trial to be a registration trial if it meets its endpoints and last patient in will occur in the first half of 2009 with data available during the year in 2010. The CF protocol, which is also Phase IIb, which we in the same way expect could be a registration trial if it is successful, is in the final phases of bringing a protocol to a final draft. So we would expect enrollments to occur towards the end of this year.

So, I will stop there, Henri and turn it back to you.

Henri Termeer

Thank you, Jeff. Ann Merrifield on Biosurgery.

Ann Merrifield

Thanks Henri. We were very pleased with biosurgery performance this quarter both because all product lines performed consistently and strongly, but also because Sepra had a real breakout quarter. As Mike mentioned, the 39% growth was driven primarily and directly by the expanded investment in US, sales and marketing made during the first half of '07. We expected to pay back. But to be honest, we didn't expect this rapid and this large return on that investment. And I am pleased at the sense that, this allows us to think now about new investment strategies that will allow us to penetrate procedures even more deeply. We are yet only 10% penetrated, if you look at all the procedures we're pursuing in the US market.

So ways to go in the markets where we participate, and we only participated US, Japan, and few European markets. So ways to go in terms of geographic expansion. Sepra spray, as well coming in Europe next year, it allows us to being to target laparoscopic procedures, as well as open procedures. So a lot of growth ahead of us here, exceeding our own expectations, and we are resizing our investment strategies to match those broadened expectations. Strong performance also for Synvisc at 9%, strengthening position in the US, going direct in sales in Latin America, and beginning to get some traction with Synvisc-ONE in Europe and Malaysia and Singapore. So while we're all out a strong story, solid performance and a breakout quarter for Sepra.

Henri Termeer

Thank you very much, Ann. And John Butler on Renal.

John Butler

Thanks, Henri. I'd like to make some comments regarding our Cardiorenal line in different businesses. Sevelamer sales were $168.6 million, an increase of 16% versus last year. Now and 52% of those sales were in the US in Q2, compared with 54% last quarter. The reason for this was, in Q1 we sold $4.6 million in Renvela to stock the wholesale and retail channels. In Q2 Renvela sales were $800,000 as we sold through that inventory. Now we sold through that initial stocking and now expect sales in Q3 and beyond to reflect prescription demand. An important key to Renvela's success is a formulary access.

At launch in March we had about 11% of patients covered on formulary. When I spoke to you in May, we had moved that number to about 68% of formularies with Renvela available on Tier II or Tier III. We are currently at 85% formulary access in Tier II and Tier III, about 70% of that is Tier II. And we now believe we'll have Tier II access equal to Renagel, which is about 85% of patient lives by the end of this quarter, ahead of our previous expectation of year end. We are starting to see that improved access reflected in prescription growth with significant progression each week.

Also driving this growth of course is the experience of our clinicians and patients with Renvela. Clinicians are reporting very positive experiences with the product, as far as efficacy concerned and both patients and clinicians are reporting better GI tolerability. We are very encouraged by these reports and really confident in the product's performance. And we are now working on other strategies to continue to accelerate the transition of product to Renvela. We also continue our international Renvela strategy with filings in India, Canada and Argentina in Q2, to go along with earlier filings in Europe and Brazil. We still expect to begin introduction of Renvela in 2009 internationally.

Expanding our indication to include CKD patients not on dialysis is critical as well. In Q2 we submitted our position paper to the FDA to support the use of phosphate binders in this patient population. We still expect to be able to add this indication to our label by the middle of next year. In our endocrine business, I would like to highlight the performance of Thyrogen, which grew by 34% versus Q2 of 2007 to $39.4 million. This growth is really being driven by the expansion of our US label to include, remnant ablation, and increasing rate of diagnosis of thyroid cancer in Europe, and continuing to introduce the product in new markets internationally.

Our cardiovascular business has moved to a new level with the completion of our transaction with Isis for mipomersen. We're sure this is a very important product that has the opportunities to really change standards of care for a high-risk population. We've been working closely with Isis team since January. But we stepped up that collaboration since the deal closed. A joint development committee is now in place and we are in the process of transferring the IND and other regulatory documents to Genzyme. We still expect to start to a study in the apheresis-eligible population, along with three other high-risk patient population studies, before the end of this year. We've been consulting with outside advisors regarding design of or outcome study. And we're starting the process in Europe and seeking guidance from country regulatory authorities. So we're still on track for our first filing in the second half of 2010.

Henri Termeer

All right, John. Thank you very much. Operator, let's move to Q&A.

Question-and-Answer Session

(Operator Instructions). Our first question comes from Ian Somaiya of Thomas Weisel Partners.

Ian Somaiya - Thomas Weisel Partners

Thanks for taking my questions. Just on the Myozyme front, I just wanted to confirm a statement that Henri made, that the 4,000 liter plant equates to about 1 billion in revenues. Is that the plant itself or combination of those all the plants you would have approved, in the following the 4,000 liter approval?

Henri Termeer

No, what I said was that with the plants being approved, the 4,000 liter product being approved, we will expand capacity by about 3.5 times. And that gets us well into the more than $1 billion revenue basis, if all the products was produced and all the products were sold at the current levels, than you would have more than $1 billion product. And just to indicate that, this is a very significant step up from where we are at the current time.

Ian Somaiya - Thomas Weisel Partners

What is the current capacity?

Henri Termeer

I don't quite know. It must be close to the current sales levels.

Mike Wyzga

Part of the reason I think for not being able to pinpoint that is that of course it remains a question of the number of patients and their relative wait, as well as, the rate of accrual. So there is no way to directly correlate capacity to...

Henri Termeer

Capacity, it is whatever it is, if we sell all the units. The capacity that we have available is what you currently see, almost reflected in revenues also we have still some growth coming through the remainder of the year.

Ian Somaiya - Thomas Weisel Partners

Okay. Thank you.

Operator

Our next question comes from Jim Birchenough of Lehman Brothers.

Jim Birchenough - Lehman Brothers

Hi, guys. I am just focusing on Myozyme again, heading into the panel review in October. What issues are you going to be focused on in preparing for the panel? Have you had any guidance from FDA as to whether they are more focused on the manufacturing side of it or the clinical data part of it?

Henri Termeer

We have to have no guidance in terms of what kind of questions will be asked. But almost no doubt it will focus on the clinical data. Because the manufacturing site is this what it is and then the products are well characterized and the clinical data is really what to be (inaudible) about. That makes us feel very good about that moment because, we know what the clinical data told us and I think we have shared at least top line with you in December, what we did see though in the LOTS trial.

Jim Birchenough - Lehman Brothers

Great, thank you.

Operator

Our next question is from Tom Shrader of Rodman.

Tom Shrader - Rodman

Good afternoon, thanks for taking the question. I am intrigued by the KRAS comments. You don't generally talk about individual tests. Can you give a sense of how big the increase was, what percentage increase you have there, maybe the percentage of the total tests you do in the market?

Henri Termeer

No, it's tough. It's a good question. I can't say and I have no genetic people in the room. It is unusual for us to get to that level of detail. But it is very much in news and we saw a nice spike. And I personally have to say nobody in the room is volunteering the number. Just in terms of sharing that level of specificity in the competitive environment, we may not want to go there. But it is true that these kinds of tests, not just for us, but so for the general world of genetic testing, our growth areas is very exciting because this is about the beginning of personalized medicine.

Tom Shrader - Rodman

Okay. Well, then I am sorry for the question.

Henri Termeer

No problem.

Operator

Our next question is from Yaron Werber of Citi.

Yaron Werber - Citi

Yes, hi. I have a question, it's for Mike. I wanted to discuss a little bit better understand the guidance for gross margins for the year. So gross margins went down as you mentioned 100 bps or so because, of BioMarin and little bit because of FX and product mix. The margin guidance for the year has been 77%, do you think that's still achievable or should we look at this from what I calculated it was 74.9% this quarter, is that a better run rate into the back end of the year?

Mike Wyzga

Yes. The way to look at it is remember when we gave the guidance of 77%; we had not incorporated and made the change on the Aldurazyme. Now with that said we continue to diversify the product set so you are going to see that. The way I would look at it as I have talked about in the past, we expect that with the volume improvements and the utilization estimates that we currently have, what you probably see is increases according to both of those as we utilize the capacity, probably beginning in 2009 and beyond. So I would be cautionary with regard to about the 77%, it's probably going to be more like 76% as we go forward through this year.

Operator

Our next question is from Chris Raymond, Robert Baird & Company.

Chris Raymond - Robert Baird & Company

Hi, thanks for taking the question. I know that the renal franchise a little bit. I know you guys have talked a lot about the position paper that you collaborated with your competitors with the FDA. Obviously, this is a little bit outside the normal procedure of a label expansion where FDA has sort of a well spelled out time frame. Can you maybe give a little bit more color on the nature and the content of the position paper and at least give us some feeling that as FDA digests this that can give us a little bit level of confidence that you will get the label expansion on a timely basis, maybe the same level of confidence that you guys have?

Henri Termeer

Yes. Let me just join you in saying this is an unusual procedure. And certainly the first experience of Genzyme in doing this and is very unusual experience to work with two competitors. I have to say all three companies did very well in accomplishing a very professional piece of work. We reacted to the request from the FDA in doing this work. But John, can you make some more comments about that?

John Butler

Yes, I can. So it has been an unusual process, there is no question about it. But it has been a good process, in some ways more straight forward as you were in comparing products in this paper. But you were talking about the use of phosphate binders in general in a patient population. What the advisory committee asked for October or what they recommended was that the product should be available for patients who have elevated phosphorous levels and what FDA came to us to ask our opinion on, is to help define that patient population. And a lot of the data in the position paper is consistent with what we talked about at the advisory committee. We continue to do more work to try to put a finer point on some of that.

But that's the nature of it. It's helping to define who are the patients, who are going to benefit from therapy with phosphate binders, so confidence in the timeline; of course, we don't have an NDA here. We don't have a PDUFA date. But this with the NDA either. It's not the same kind of submission. So we certainly have confidence that FDA can get through it. I think we are confident because they came back to us so quickly after the panel meeting, when they didn't need to come back to us at all. There was no active NDA under review that they want to resolve this issue. And having submitted it at the end of June, the middle of next year becomes a regulatory cycle as if it was in NDA.

So I think that gives us quite a bit of confidence that they can hit that that timeline. As I said before, we expanded our sales force in the US, the beginning of this year for Renvela launch. We did that anticipating CKD indication. So we are ready to launch that indication whenever it comes, if it comes early and we obviously hope it will.

Chris Raymond - Robert Baird & Company

Did FDA explain to you why they decided to go down this path rather than the traditional NDA path?

John Butler

Well, I think what we could say is an NDA would show that the product lowers phosphorous and I think that they agreed that all of these products lower phosphorous. So that's not a question here, it's that who are the patients, who will benefit the most from that phosphorous lowering, and that's what we're trying to answer.

Henri Termeer

I think they have reacted to the advisory committee's advice, right. This was the way to approach it, rather than lots of individual NDAs filed. It was more an indication of phosphate lowering indicated for the patient population that was not currently covered by the label and so.

John Butler

Fingers crossed, if we get there early.

Henri Termeer

Next question.

Operator

Our next question comes from Jeffrey Meacham of JPMorgan.

Jeffrey Meacham - JPMorgan

Hi, guys. Thanks for taking the question, question for you on the EMEA approval of the Myozyme manufacturing facility, the 4,000 liter. Is the six month review based on your discussions with the EMEA and what's the risk of a delay there? And then to follow up that what if any clinical material has been actually manufactured with the 4,000 liter material?

Henri Termeer

Now as I've said, we are in the middle of the PV runs, the product validation runs. We've done engineering runs prior to that. But validation runs are currently running and there are three of them that need to be filed. So that's the status of the current final product production. And we are very pleased actually with the collaboration with the EMEA, they I think have scheduled a normal G&P kind of visits to the plant. They've not yet taken place but they are scheduled. They're very aware of the need in the marketplace. This product is a very visible product in Europe. It was approved little while ago and many of the trials were done in Europe, and it is something that many people are focused on and the regulators are very aware of. Their greatest point of interest and sensitivity is that they approved the 2000 liter scale product in the EMEA approval few years ago, that this product meets those specifications. And that's where their focus of review will be and that's where the focus of our work is as well. It is in a scale not from, 10X from 160 to 2,000 is 2X from 2,000 to 4,000, but as you may know Jeff, it is a lot of work and we are really focused on doing it right to make sure that the product that we currently are producing for the PV runs is actually product that can be made available upon approval to patients.

Jeffrey Meacham - JPMorgan

Thanks for that. Just as a follow-up, what if any implications, does the approval of the 4,000 liter material have on potentially the FDA and would you file eventually for the 4,000 liter reactor for US approval?

Henri Termeer

We fully expect to file in the United States as well. It's not the first thing we do quite obviously we need to get through the 2000 liter product approval first. But we fully expect once all of these things are behind us to do the same in the United States. The need for that is a little different but we like to have two plants available for the supply. It's too confusing just to have one plant for one geography, another plant, for another geography. So just from the logistical point of view, we just want to have these plants be able to produce products that can be sold throughout the world.

Jeffrey Meacham - JPMorgan

Thank you.

Henri Termeer

Next David or Jeff you may add...

Jeff McDonough

I think to just add a little color to your initial comments and Jeff (inaudible) and enter that primarily, very collaboratively and proactively with the EMEA around that timeline. So we are not necessarily expecting a fixed or necessarily traditional six-month review. But I would hope for a substantially accelerated review process with the EMEA for this specific approval.

Operator

Our next question is from May-Kin Ho of Goldman Sachs. Please check your mute button we're not able to hear you. Our next question is from May-Kin Ho of Goldman Sachs. There is no response from that line. Our next question is from Geoffrey Porges of Sanford Bernstein.

Geoffrey Porges - Sanford Bernstein

Henri thanks very much. Can you hear me?

Henri Termeer

Yes, I can.

Geoffrey Porges - Sanford Bernstein

Great, great. So I don't want to be the dead horse, but I do want to make sure I understand what you are saying, Henri, about Myozyme. It sounded to me as though you were saying that both the 160 liter and the 2,000 liter capacity were fully deployed now. Does that mean that we shouldn't then expect any revenue ramp until you get the approval of the 4,000 liter? And it would be helpful if you could give us a sense of how much of the Myozyme revenue now coming in actually comes from the 2,000 liter material and how much from the 160 liter and that will be really helpful?

Henri Termeer

On the last question, it is a tiny fraction that comes from the 160s as you can imagine, and it is just almost entirely dedicated to US infantile patients. So, about 90% or something comes, it's from the 2000 liter. And the question of the growth rates for remainder of this year until the 4,000 liter becomes available. We do expect growth in Myozyme sales through the remainder of the year. So it is not that we are flattened out, but we are working down inventories and that is something, of course that needs to become replenished with the new capacity.

Geoffrey Porges - Sanford Bernstein

Right, Henri. I wasn't clear, though, if you get the approval from the FDA for the 2,000 liter expansion. Should we expect any revenue ramp after that, or will Europe, the European demand have fully utilized their capacity from the 2000 liter, by the time that happens?

Henri Termeer

No, at this time, as you know, we are treating through in the compassionate program we call it the MTAP program about 150 patients, free of charge, in the United States with the 2000 liter material. And we anticipate that those patients will stay on treatment and once approval occurs, these patients will become of course commercial patients if you like. So but the 4,000 liter is very much required to create a ramp because the backlog in the United States is much more than the 150 patients that are currently on treatment. And that makes the combination of these two events such an tremendous opportunity.

Geoffrey Porges - Sanford Bernstein

Right. Thank you very much.

Operator

Our next question is from Phil Nadeau of Cowen and Company.

Phil Nadeau - Cowen and Company

Good morning, and thanks for taking my question. My question is also on Myozyme. It's on the FDA review of the LOTS trial. Can you remind us whether the LOTS study was designed with the FDAs input as a registration study? In particular, I remember that there was some nontraditional aspect of the LOTS study where at the time in which the primary endpoint analysis was done was extended kind of midway through the trial. Was that at any point in time bounced off the FDA to get their opinion of this?

Henri Termeer

I think with respect to that question, because this was an extremely well designed trial and very much in collaboration with the FDA. But David and Rich Moscicki, our Chief Medical Officer is also here, you can both comment on the details. David.

Rich Moscicki

No, I think that's the answer, Henri. So that trial was designed in collaboration with them. The two primary end points which are very traditional endpoints of (inaudible) we had used previously in our MPS-1 trial. So that was an endpoint that they quickly understood and I think agreed to. And then the forced vital capacity, which measures the respiratory capacity of these individuals and is in fact the major contributor to long-term morbidity and ultimately death in these patients and again was readily accepted. The change part way through, meaning the adaptive part of this design was again done in consultation with the FDA and was to ensure that we had long enough follow-up of these patients to get the power we needed.

Phil Nadeau - Cowen and Company

Okay, great. Thank you.

Operator

Our next question is from Meg Malloy of Goldman Sachs.

Meg Malloy - Goldman Sachs

Thanks very much. I was hoping you could one quick question on Myozyme, that is do you have a wait list of patients in the US that are not getting materials for the MTAP program? Then I was hoping, I could ask a separate question about the field study and what the end gain would be there? Thanks.

Henri Termeer

Jeff, can you give us?

Jeff McDonough

Sure, both are great questions. So, we do have a waiting list of patients in the US, who are not currently within the scope of the clinical criteria for MTAP. And that would be a group that as Henri said as the 4,000 liter approval follows the 2,000 liter approval, we will be very comfortable to see coming to therapy in the United States. With respect to the field study I think the goal there is to explore the possibility that a lower dose of Fabrazyme in patients who are very early. So in this case very young boys, who are detected early with fabry disease, could actually prevent their disease progression. So the thought in that trial is to look at the early institution of this dosing regime over five years to understand if such an outcome is possible. Another element in that trial is to offer a full dose on a less frequent basis, so 1 milligram every four weeks which in addition to exploring the same idea of preventing disease progression, would provide a much more sustainable and convenient regimen for young patients. So, these are the dual goals of that study.

Meg Malloy - Goldman Sachs

And I'm sorry. It's like a follow-up. Can you tell us how many people are on the wait list currently for US Myozyme?

Jeff McDonough

We don't have any exact figure. We expect that number will be in the range of 50 to 150 at the time of the approval. But today we don't have an exact figure.

Meg Malloy - Goldman Sachs

Thanks a lot.

Jeff McDonough

Sure.

Operator

Our next question is from Mark Schoenebaum of Deutsche Bank.

Mark Schoenebaum - Deutsche Bank

Okay, thanks, for taking the question. I have got sort of a big picture question, Henri, for you. There has been a lot of talk this is my team, I am asking all biotech CEOs. But there has been a lot of talk right now in biotech around what's the ideal level R&D expense as a percent of revenue? And the range for the big bioteches all over the map, you guys were actually at the lower end of the range, below I mean at 16%. Can you give us your view on how you think about that line and what the ideal level of R&D expenses are, where you see those trends going longer term if possible?

Henri Termeer

Mark, it is such a tough question and every Company makes their own financial decisions in this regard. We've have had at this level of 16% 17% for a long time. And of course, you remember that we have an diagnostic component in our revenues that makes it a little lower. So if you adjust for that's probably around 20%. And we try and make that investment reliable and predictable because you can't stop start these R&D programs very easily. So, you can plan on a certain level of expenses and investments in R&D as opportunities for those investments become clear. There have been moments that companies because of their circumstances were able to double that rate and there have been moments, where these companies adjusted that rate downwards and it's very complex to do that, to upscale and downscale R&D investments is quite costly.

Mark Schoenebaum - Deutsche Bank

Mike, I know you've talked a lot about leverage over the last several years lowering community at the SG&A line. Are you pretty cautious not to assume that there's any leverage coming here in R&D line longer term?

Mike Wyzga

I am sorry, I think what we've talked about through 2011, as we target back to our 20% target, what we talked about is relatively flat R&D line going out to about 17% as I recall as a percentage of revenue. We don't see that changing dramatically through the 2011 timeframe.

Mark Schoenebaum - Deutsche Bank

Okay, thanks a lot.

Operator

Our next question is from Brian Abrahams of Oppenheimer & Company.

Brian Abrahams - Oppenheimer & Company

Hi, thanks for taking my question A question for John, now that the Renvela reimbursement landscape seems to be improving, I was wondering if you could talk in a little bit more detail about what specific strategies you are planning in order to improve the uptick of Renvela? And is there a specific goal in terms of where you would like to be with regards to the mix of Renvela versus Renagel in terms of scripts prior to next years label expansion? Thanks.

Henri Termeer

John?

John Butler

Sure. So, it is a competitive market. So, how specific we want to be about the best strategies is to be a little bit careful about that. But, again I mean we've got great confidence with what we are seeing from physicians, the market research that's been done, how they are reacting to the product and most importantly the patients, particularly on the GI tolerability side that we are really getting some significant reports of that. We think that's going to help accelerate this without any other strategies to do that. But there is a great advantage of, Renagel is the best product in the market and the market share reflected that. Renvela is better, and that's being borne out in the marketplace as well. So I think our long term desire would be to have the best product alone in the marketplace. So, we would like to get to a point where Renvela is the product that we are selling globally in the market and replace Renagel. Exactly how long that takes is still to be determined. But there are a number of triggers.

And as you said, I think certainly it's advantageous for us, since Renvela is the product we want to see adopted in chronic kidney disease not on dialysis patients. We want patients to have good strong experience using the product in advance of that and that's by the middle of next year. We think that a very significant percent of patients will be on Renvela at that point. Remember, it's not just about switching Renagel patients to Renvela. This is about gaining patients who are on PhosLo and Lanthanum today, that's where the real advantage. The market is not growing as robustly as it had in the past. So it becomes and growth is very much about taking share away from our competitors. And with the product that was already number one in the market and proving that gives us a great opportunity to do that. We had kind of a pause in that in the first quarter as we introduced the product. But I think you are seeing that momentum back again in prescription numbers as we've gone back to over 50% share of the prescriptions.

Brian Abrahams - Oppenheimer & Company

Thanks very much.

Operator

Our next question is from Geraldine O'Keefe of Fortis.

Geraldine O'Keefe -Fortis

Hello, good morning. Just a follow-up question really again on Myozyme. You mentioned earlier, Henri, that you are seeing great traction outside of the US. And I am just wondering, that's really just driven that you are focusing on those markets due to manufacturing constraints or are there other factors, which are making this product so successful outside of the US rather than to the US?

Henri Termeer

Now, we are clearly limited in the United States because of the lack of approval of the 2000 liter product, and we of course are treating many more patients in the United States non-commercially and that makes it very expensive for us at this time. But it is true that in certain European countries, and Holland is one of them, where there was a Professor Pompe who was of course an Dutch physician, who identified the disease there is an tradition around the disease that made the awareness much greater. And the numbers we're treating I don't know, Jeff, how many patients maybe…

Jeff McDonough

About 110.

Henri Termeer

About 110, if you put it on a population basis and you translate that throughout Europe, you get very large numbers. We treat more patients with Myozyme with Pompe disease in the Netherlands than we treat Gaucher patients in the Netherlands or Fabry patients in the Netherlands or MPS patients in the Netherlands. So that kind of pointed us to the kind of potential that we can look forward. Germany has a very significant marketplace for us at this stage. But throughout Europe and throughout Asia, too, we have a very, very important traction in Taiwan where there also wasn't a tradition around this disease, particularly the classical infantile form that had created great awareness.

Geraldine O'Keefe -Fortis.

Could I just ask a quick question then on Genzyme, the Genz-112638 product? So you said you're really starting Phase III trial in 2009, perhaps this is a naïve question. But I am just wondering why it's taking so long to start those trials, are they particularly complicated to run?

Henri Termeer

Jeff?

Jeff McDonough

No, we don't believe they are particularly complex to run. We are in the midst of a Phase II program, which we'll draw to a close in the latter half of this year. And we would hope to have the totality of that data to work through in the normal regulatory process to set up the Phase III trial. So we don't view this as particularly complex or as particularly slow.

Geraldine O'Keefe -Fortis.

Okay. Thank you.

Jeff McDonough

Thank you.

Operator

Our next question is from Bill Tanner of Leerink Swann.

Bill Tanner - Leerink Swann

Thanks. Mike, just a couple of questions, I guess getting back to the gross margin guidance. It sounds like that's changed a bit, but just confirming though, the other expense guidance. And then looking at the product guidance certainly looks at least for most products in the LSD portfolio that you are on track to come in higher than the high end of guidance, just any help how we should look at that? Thanks.

Mike Wyzga

Sure. Let me talk about the operating expenses guidance that we have given. If you look at the operating expense guidance we've gotten a good deal of leverage out of our operating expenses and out of our top line and continue to drive that through our operating expenses. Now with that said, we always have quarterly fluctuations in the operating expenses and it usually has to do with investments that we make in launch activities, some seasonality, clinical accrual rate those type of things. In the second quarter the operating expenses were largely driven by the investments that we made in sales and marketing, particularly in the global Renvela launch, Mozobil pre-launch activities, things I talked about in the past. As Henri mentioned, we continue to invest in our late stage pipeline.

Well again, with that all said, we continue to see leverage on a go forward basis. So I don't think we will make any macro level changes to our operating expenses on a go forward basis. Again, we will make the investments that we have to make within the guidance of the overall bottom line number and on a go forward basis through 2007. With regard to the top line guidance, I don't think we are going to make any changes there either simply because overall we've balanced out the balanced portfolio with regard to diversification of the product sets. So I don't think we will make any changes on that either.

Henri Termeer

The range for the top line guidance that we have is up to $4.6 billion.

Bill Tanner - Leerink Swann

Yeah I mean I'm just looking at them, looks like for most of your LSD drugs that they will be on track to go above the top end. But I could understand perhaps waiting for another time to actually update that.

Henri Termeer

Yes. We have not, this guidance business is so complex and it will be confusing for all of you. The trends are clear and you can follow the trends, you would understand these products and you know where we are. The point that I want to emphasize again that Mike was making is that we invest on the expense side and the opportunities for to invest in the expense side grow when the top line allows us more opportunities to do so. And because the place where we draw the line is that we meet the financial EPS guidance that we gave you. That is very, very hard for us. And then how we get there, we try to find opportunities of course to invest earlier and in some case as we have to do in the case of Myozyme where we had to delay in the US, we had to make an adjustment which we did last quarter.

Bill Tanner - Leerink Swann

Understood, thank you.

Operator

Our next question is from Maged Shenouda of UBS.

Maged Shenouda - UBS

Hi, thanks for taking the question. Can you help us quantify the impact of the Federal recommendations for newborn screening? How much upside can this provide?

Henri Termeer

That's such a difficult question. We do not look at that in an upside sense. We look at this as a good clinical affect. Patients with the kind of diseases that we treat, particularly Pompe patients are better off if they are identify as such a patient very early, so that it can be followed and therapy can be started at the appropriate time in the early part and time. So we will not stop until this newborn screening for these kinds of patients becomes available on a global basis. Which hopefully, will enable us to catch all these patients early and to create the best possible therapy chances for these patients. So, I don't want to put this in financial terms. So just, we see it very much in terms of providing the best possible service to this community.

Maged Shenouda - UBS

Okay. Thank you.

Henri Termeer

And operator, we will take one more question because we are past our time, I notice here.

Operator

Thank you. We'll take our next question from Matt Osborne of Lazard.

Matt Osborne - Lazard

Great, thanks for taking the question. Just quickly on Renvela, John, can you comment on the use of the product now, are you seeing it more in stage III disease or stage IV, and are you seeing more demand from PhosLo patients and others or is it primarily new patients coming on? Thank you.

John Butler

So the majority of the use today is in dialysis patients not so much in CKD patients yet, at least this is kind of our initial read from market research that we've seen. It is more from Renagel patients than from either of our competitors at this point. But if you have to point to a competitor where most recently we are starting to make more inroads against this PhosLo and that makes sense because that's where our strongest clinical data is in comparison to PhosLo. So we really do not expect to see significant penetration into CKD until we have that indication in our label since we can't promote in that market.

Matt Osborne - Lazard

Thank you.

Henri Termeer

Thank you very much. I think this was then the last question, operator. Thank you very much for the participating. To the extent that there are questions out there that we didn't respond to, please do not hesitate to connect with us directly with Mike, if the financial questions or Patrick to make sure that we respond to clarify anything that's not quite clear. We very much look forward to reporting to you again in October on the second quarter. This is going to be a very active quarter with lots of things.

So, I have a feeling that we may have conversations between now and then. And we will very much focus I think because I am in the same place and most of the questions were directed that way to make sure that you really understand the progress that's being made through this period of time when we were sorting out these two very important catalysts around Myozyme, because they are important and very important for the patients. There are a moment and time we feel very focused on that as a corporation to make sure that these things happen. So, when news occurs in this area, we will make sure that you all become aware of it.

Thanks a lot.

Operator

This concludes today's conference call. You may disconnect at this time.

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Source: Genzyme Corp. Q2 2008 Earnings Call Transcript
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