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Genzyme, Inc. (GENZ)

Q1 2006 Earnings Conference Call

April 19, 2006, 11:00 a.m. EST

Executives

Henri A. Termeer - President, Chairman and CEO

Michael Wyzga - Chief Financial Officer

David Meeker - President, Lysosomal Storage Disorder Therapeutics

Georges Gemayel - EVP, Therapeutics, Transplant and Renal

Ann Merrifield, President, Genzyme Biosurgery

Sally Curley - Investor Relations

Analysts

Ian Somaiya - Thomas Weisel

Yaron Werber– Citigroup

Chris Raymond - Robert W. Baird

Jean Lee – Hartmore

Phil Nadeau – Cowen Company

Meg Malloy – Goldman Sachs

Bill Tanner – Leerink Swann

Eric Ende – Merrill Lynch

Geraldine O’Keeffe – Fortis Bank

Salveen Kochnover – Jefferies

Mark Schoenebaum - Bear Stearns

Jeff Meecham – JP Morgan Chase

Craig Parker – Lehman Brothers

Matt Vessie – CDR Research

Operator

Good morning. My name is Tiffany and I will be your conference operator today. At this time, I’d like to welcome everyone to the first quarter earnings conference call. (Operator Instructions)

Ms. Curley, you may begin your conference.

Presentation

Sally Curley

Thank you and welcome to Genzyme Corporation's first-quarter 2006 earnings conference call. I would like to remind everyone that the earnings release and the call today are available on the investor page of our website, at www.genzyme.com.

Today we will discuss Genzyme's business outlook on the call. Forward-looking statements about our projected future financial results and all other statements made on this call that are not historical facts are subject to a number of risks and uncertainties. Our actual results may differ materially. Please refer to our 2005 annual report on Form 10-K on file with the SEC.

Forward-looking statements include expectations regarding 2006 earnings, revenues, product sales, expected drivers of future growth, the timing of our regulatory filings and actions, the timing of clinical trial data and financial trends. If during the call we use any non-GAAP financial measure as defined by the SEC in reg G, you'll find on our website a reconciliation to the most comparable -- directly comparable GAAP financial measure.

I would like to remind everyone that our second-quarter earnings conference call will take place on July 12th at 11:00 a.m. Eastern. In addition, our analyst and investor day will be web cast live on Friday, May 12th, beginning at 8:00 a.m. Eastern. You can access the live web cast from our website.

And lastly, please limit yourself to one question per turn during the Q&A in order to allow everyone to participate.

Thank you and I’d now like to turn the call over to Genzyme's Chairman and CEO, Mr. Henri Termeer.

Henri Termeer

Thank you, Sally, and thank you everybody for participating this morning. We have quite a few things to go through here, so bare with me.

You know, 2006, it has to be said that in February when we talked about the guidance call is really in the first half as we started to see in the fourth quarter a year of significant investments. These investments are extremely strategic and very, very important for the future of the Company, and I am enormously gratified that we are making tremendous progress.

The two new manufacturing operations, one in Belgium and one in Ireland, have now started up. We have had visits from the FDA and other regulatory authorities, at least in the Waterford fill/finish facility, and we’re looking forward to these manufacturing operations to start to produce commercial product. In the case of Ireland, that will be still within this year.

We started a number of late stage trials late in the year last year, and that's started to shape the picture in terms of the expense side of the equation. These trials are continuing. They are expanding and some other trials are still in the queue to be started up, like the MS/MS trial, and we are enormously pleased with the progress that we're making in terms of enrollment.

The tolevamer trial made tremendous progress during the first quarter in terms of enrollment. We enrolled in absolute record time a 90-patient, placebo-controlled trial for Myozyme in late onset patients. That is now fully enrolled. And we now have most of these programs, which are all quite strategic for the future of the company, running very, very well.

The other thing that was very important in this quarter, expensive but important, was the whole preparation around Myozyme and the introduction of Myozyme. We're very happy indeed that in Europe we got the broad label approval signed up by the commission now and we are in the final stages of starting to ship our first commercial product. We are expecting that the FDA will act on Myozyme at the PDUFA date, which is April 28th. I will not make any particular predictions what that action will be. We look forward with some confidence, given the importance of the product. It has been a product that has been very expensive to develop. It is still quite expensive, given the trials are still ongoing and the manufacturing scale-up issues around it. This will start to turn into a very important economic driver for the company going forward increasingly through this year, but it will be more visible in the economics next year.

Sales during the quarter were generally on track. We had very, very gratifying results around Renagel. With me here is John Butler, President of the Renal division, and he will go into some more detail during the Q&A session, but Renagel, which was relatively stable in terms of revenues in the later three quarters of last year, really started to pick up very, very nicely indeed, more as a result of D-COR and the results that were strong late last year, and possibly the early results around the Medicare Part D benefits that started to work earlier this year.

We had three programs that were somewhat below our expectations. In the one case of Hectorol, also part of the Renal division, and that was somewhat influenced in terms of an allowance that we had to take during this quarter. We are quite confident, given the scripts around this product in terms of the remainder of the year. It fits extremely well within the picture of the Renal division and it has significantly changed our ability to reach a very much broader market with a greater sales force.

Synvisc is the other product that was a little less than what we had expected, so year-to-year very nicely up 21%, but this program is actually more seasonal than we had in our projections. We still are getting some experience here. We only took over the sales and marketing in the United States in the beginning of last year.

We are quite confident. We see the effect in terms of current run rates in April that the seasonality will show that the second quarter and the third quarter in particular are significantly better quarters than the first quarter. So we feel quite confident about the remainder of the year for this very important program.

Fabrazyme did also produce less of a result. It was up 15% year-to-year. We had expected growth between the fourth quarter and the first quarter. On analysis, it shows that accruals in the fourth quarter took [inaudible] place in the early part of that quarter. Maybe the holiday season was cause for accruals to be less than the later part of the fourth quarter. And then the first-quarter accruals took place towards the end of the first quarter, so also here we are expecting this picture to pick up quite significantly in the remainder of the year starting in the second quarter.

So we understand what happened with these three particular areas. All the other areas did perform very well to our plan. For that reason, we feel quite confident indeed that we will be able to meet our financial goals for this year, which is revenues of $3.1 billion to $3.3 billion.

The most important things, as on the financial performance, where we take financial performance enormously serious. We are very much geared to that and we will influence the expense curve and further investments depending on what we can actually afford in order to make sure that we do meet the financial goals. But the most important thing really is are we making progress to making the new programs for the future work. Myozyme I spoke about -- clearly a very important program in our future. Tolevamer -- very, very important program indeed for C. Difficile Colitis. I spoke for years at these kinds of calls, a lot about Pompe disease and Myozyme. We now are delivering on that work and you will hear us speak a great deal in the next year or so about the Tolevamer work that we’re doing.

This is a very important program clinically. C. Difficile Colitis is a very, very expensive problem in the hospital systems both here and in Europe. If we can bring a non-antibiotic approach to this clinical problem, expensive clinical problem, it will be a tremendous breakthrough and economically I think very important as well.

The expansion of Renagel beyond end stage renal disease towards CKD as sort of development of sevelamer carbonate -- again, a very important program making very good progress. A number of different clinical trials are ongoing, including a trial that develops the possibility to bring a powder to the market, the same powder to the market that we hope will protect [inaudible] on the compliance.

Synvisc II and Hilastin, which were follow-on programs from Synvisc, which tried to decrease the number of injections necessary for pain relief in osteoarthritis. These trials are in full strength right now. Synvisc II is totally enrolled. We will see results this year. Both very, very exciting programs, quite strategic in areas where we have a great deal of experience.

The later stage trials for Clolar for adult AML also now starting up.

We are our ongoing trials on Campath for first-line therapy in CML.

Campath MS, here we expect that we will start a trial later this year. During the Q&A session, Mark Enyedy, who is the President of the Oncology division, will make some comments on the progress there. We are enormously excited about the possibilities of Campath MS. In the summer -- late summer – we’ll see the results of progression, two-year results of the current Phase II trial and we look forward to communicating with you on that.

So all in all, first-quarter tracked very strongly in terms of the kinds of things we have set out for ourselves to get done this year. Two or three programs that I mentioned were below our expectations. We know the reasons why they were below our expectations and we fully expect them to correct through the remainder of the year.

So we stay very confident indeed that this year will deliver to the financial goals that we’ve set, while at the same time we feel quite confident to be able to execute on the kinds of things that are going to be quite important for us to continue our growth in the future. So at this moment, let me hand over to Michael Wyzga, our Chief Financial Officer.

Michael Wyzga

Thank you, Henri. Good morning, everyone. As you can see from our press release, the revenue for this quarter increased by over $100 million from last year, and that represents about a 16% year-on-year increase. Our diluted GAAP earnings per share is about $0.37. This quarter, we changed our GAAP to non-GAAP crosswalk a little bit to incorporate the impact of stock option expensing.

During the first quarter, the impact of stock option expense is approximately $22 million, or about $0.08 a share. The crosswalk that we attached details of the impact of the stock option expense by functional area.

Amortization for the quarter increased to about $53 million. Our non-GAAP earnings exclude the impact of convertible debt on diluted EPS as the stock price did not exceed the conversion strike price. The EPS impact of this is about $0.01.

The net income for the quarter prior to these events and amortization was $157 million or $0.59 per diluted share. Our non-GAAP net income increased 19% on a year-on-year basis.

Now, as Henri mentioned, the first-quarter results were affected in a number of key areas, and let me kind of walk through those a little bit. The revenue line was generally solid but was impacted by several factors, which include the timing of the patient accruals for Fabrazyme, the seasonal shifts that we experienced in Synvisc and a one-time chargeback associated with Hectorol discounts.

This quarter, if you measure on a year-to-year basis, was also reflective of the year-to-year fluctuations of the foreign exchange rate.

R&D expenses increased in the first quarter due to the acceleration of a number of late stage programs.

Our SG&A expenses increased to reflect the Myozyme pre-launch costs, increased Synvisc sales expense and incremental sales associated with the Bone Care acquisition.

This quarter, we also incurred startup costs associated with our new manufacturing capabilities in both Ireland and in Belgium.

Our revenue growth from last year was fairly solid. Cerezyme, which increased by 6%, was driven largely by additional international patients. Fabrazyme revenue was $81 million and, as Henri mentioned, that represents about a 15% year-to-year increase.

Within the Renal division, the revenue increased by 38% over Q1 of last year. Renagel increased 19% year-to-year, and while it’s a little too early to tell whether the impact was Part D pricing, it’s pretty fair to say that we're seeing a lot of positive trends within Renagel.

Hectorol revenue was slightly down versus Q4 at $19 million, and during the quarter, as we mentioned, contractual allowances were adjusted by $3 million for a non-reoccurring chargeback.

Synvisc revenue was $53 million. Now, as a reminder, there is significant seasonality associated with Synvisc. Historically, Q2 and Q3 are the biggest volume quarters, with Q1 usually slower.

Transplant revenue was $34 million for the quarter, and as we've seen in the past, transplant revenue also tends to be a bit cyclical, with the first quarter representing the lowest revenue quarter.

Thyrogen revenue came in pretty strong, posting a 30% increase over last year and came in at about $23 million.

Oncology was $12 million.

The negative impact of foreign exchange on our revenue line was about $18 million. The largest year-to-year fluctuation that we saw was on the Euro. Now recall the Euro fell from $1.31 in Q1 of 2005, to the current rate of $1.20, with most of the revenue impact being felt in Cerezyme, Renagel and Fabrazyme product areas.

Now, while our global manufacturing and commercialized infrastructure dampened some of the impacts of our bottom line, our operating margin was still adversely impacted on a year-to-year basis due to the [FX] rate.

Our gross margin was 77% of revenue. The gross margin was impacted by a write-off of about $4 million of Myozyme work in process.

This quarter, we also incurred some startup costs associated with the manufacturing facilities in Ireland and Belgium.

Turning to our expenses, our Q1 non-GAAP R&D expenses were $137 million, which is an increase of about 19% of revenue. This should be compared against $110 million, or 18% of revenue last year. And as we indicated in our guidance call, we have a number of late stage clinical trials ongoing.

The major components of our R&D expense this quarter were the Myozyme late onset trial, the Tolevamer Phase III trial, the Sevelamer Carbonate trial for CKD patients, and the first of three Phase III Clolar carbonation trials.

Our non-GAAP SG&A expense came in at $211 million, or 29% of revenue, which is the same percentage as last year. The major drivers here were the sales investment that we did with Synvisc, increased costs associated with the Myozyme pre-launch activities, and the headcount in marketing programs related to the acquisition of Bone Care.

Within our equity line, we saw solid growth within the Aldurazyme revenue. Aldurazyme revenue came in for the quarter at $21 million.

Our tax rate before amortization and one-time events increased to about 32%.

Now, we're starting to see some of the favorable impact of our facility in Ireland, but this benefit was offset in this quarter by the impact of lower organ drug credits on a much larger profit before tax base.

Our share count increased to 267 million shares outstanding on a diluted basis prior to the impact of contingent convertible dilution. Our capital expenditure for the quarter totaled about $64 million, with most of the investment focused on Ireland, Belgium and the new Framingham science facility.

Our ending cash increased to $1.2 billion.

As Henri mentioned, we are reconfirming our full-year EPS guidance, our GAAP guidances of $1.78 to $1.88, and on non-GAAP basis, the guidance is $2.65 to $2.75.

And as we discussed in our first conference call this year, our first half earnings will be impacted by the product launches in the manufacturing investments, as well as the late stage trials that we're doing. We expect our second half will reflect a more rapid EPS increase.

Before turning it back to Henri, I'd like to remind you that you can find the line-item detailed reconciliation attached to our press releases or on any of our websites. With that, let me stop and turn it back to Henri and open it up for question and answers.

Henri Termeer

Thank you very much. Operator, we can open up for Q&A.

Questions and Answers

Operator

At this time, if you’d like to ask a question, press star, then the number 1 on your telephone keypad. Press star, then the number 1 on your telephone keypad. We’ll pause for just a moment to compile the Q&A roster.

And your first question comes from Ian Somaiya with Thomas Weisel Partners.

Ian Somaiya - Thomas Weisel

Thank you for taking my question. I just wanted to get your thoughts on the evolving competitive landscape for Fabry's and Gaucher's disease. Particularly, if you could just comment on the Amicus product and how you see that fitting in relative to your portfolio?

Henri Termeer

Yeah, it’s always difficult to project on something that is not really yet in clinical trials. There are -- we don't expect the competitive landscape around, in terms of enzyme replacement therapy or small molecules, to change for the next three to four years. That’s the earliest, if everything goes well with current enzyme replacement therapies that are being tried, and the potential of still extremely untried technology in terms of the chaperone technology and things like that, that we are very, very familiar with.

It’s impossible to project what these technologies really will do, whether they will be competitive or whether they will work for so few patients that it is difficult to really see what the impact will be.

But in the way we project our programs, we are specifically not to think about these more speculative technologies. We're thinking about enzyme replacement therapy technologies that we know work, and thus we don't expect, in the case of Gaucher’s disease for the next three to four years, while for Fabrazyme it may be longer because there is a product in Europe on the market and the rest of the world called Replagal that is currently completed.

I don't know whether David Meeker, our President of the division, wants to make any other comments on these technologies, [new] technologies.

David Meeker

No. I think that’s right, Henri. I think with regard to the chaperone technology as most people are aware, the issue there is the individual nature of that product and that each mutation would need to be, or we believe will probably need to be, tested to confirm that it does respond. It is targeted as the missense type of mutations and, as Henri said, we have done a lot of work in this area and it’s clear that not all missense mutations are created equal. So the importance of the individual testing is certainly there. So I think in everything else we said, we covered it.

Henri Termeer

Next question.

Operator

(Operator Instructions) Your next question comes from Yaron Werber from Citigroup.

Yaron Werber - Citigroup

Yeah, hi, good morning, Henri, good morning everybody else. I had a quick question on Myozyme. Henri, is there any way you can just discuss with us what the pricing is in Europe of Myozyme? And then, you mentioned, you know, for two or three years ongoing now the incredible investment in this program and there's about 200 or 300 patients right now in clinical studies. You know, from what I understand, it's up to maybe 1,000, maybe 1,500 patients out there. As of now, can you just give us a sense, you know, as to how do you justify this? I think it’s been more than $500 million you’ve spent so far. Pricing wise, how would you be able to capture that investment back? Thanks.

Henri Termeer

Yeah, we have not disclosed pricing around the European programs because they’re not yet in the introductory phase. We generally want to wait until we have the final labels, and we’re waiting for the final label in the U.S. It’s kind of pretty soon that we will have that.

But what I have said over quite a while now is that the pricing of this program will be in the same range as the pricing that we currently have, which is something that people are used to, like the reimbursement agencies around the world are familiar with. It’s pricing that we currently have for Gaucher’s disease, Fabry’s disease and for MPS 1. So they’ll be in that same range.

In the initial phase, we would expect that smaller patients will be treated, eventually larger patients will be treat, but it will be on average within that same experience that we have for Gaucher’s disease.

The question, do you get a return, given that the cost of developing programs for these types of diseases is quite enormous, and I do agree with you. That is a very, very important question. To get a return on a very small patient population does result in a very high per-patient yearly cost. There’s really no way around it. Additionally, we are providing products free of charge when there’s no coverage for a patient in a particular geography or country, which we see as part of the responsibility that we have.

We have found tremendous support for the treatment of these [ultra-organ] diseases around the world, including the United States. And I guess that support comes because of the importance of these treatments for these diseases. These are, in clinical terms, quite efficacious products. It changes the life of these patients in a very significant way, and a there are a very limited number of patients out there.

So the justification really is one of balancing the tremendous cost and health-care burden, clinical burden, life burden that these patients have in a responsible way, in cooperation with the people that are treating patients and the reimbursement authorities around the world, making sure that patients do get access in all cases, regardless of their financial conditions, but also making sure that the program that we provide is sustainable and that we can reinvest into the next program.

It’s a long answer of an excellent question, and one where we now have experience since 1991, and we are confident that we will continue to [portray] positive experiences around Pompe disease.

Yaron Werber- Citigroup

If I could just follow up with a question for David, could you just talk about your ceramide inhibitor, the JNZ112638, and what gives you confidence in the [synthicity] of this enzyme inhibitor as opposed to the previous substrate inhibitors?

David Meeker

Sure. So that program, for those who are not aware of it, is a, as you said, a substrate inhibitor. It differs from what’s currently on the market in that it is ceramide as opposed to the glucose analogs. So it blocks the same enzyme but in a slightly different way. Our confidence comes from the fact that, or our high level of interest, perhaps I should say, and confidence comes from the fact that in vitro, comparing the different available substrate inhibitors, this is quite a bit more potent, 100 to a 1000-fold more potent than the available alternatives. Another major limitation of the existing therapies is the lack of specificity, which is associated with some of the side effects that you see with those drugs.

So our goal, given the availability of a very effective, very safe treatment in the case of Cerezyme is we would bring this forward only to the extent that it truly address an unmet medical need and offered something incremental to the Gaucher community. I think the profile that we're entering clinical trials with is one that has that potential, and the test will tell us whether that optimism is justified. So we're looking to start clinical trials in the second quarter and we’ll go from there.

Henri Termeer

Next question.

Operator

Your next question comes from Chris Raymond from Robert W. Baird.

Chris Raymond - Robert W. Baird

Thanks for taking the question. Just a quick clarification on Myozyme. I noticed you mentioned that you are gearing up for production to ship soon, and I know you're probably adverse to talking about price, but what are you prepared to do in the case that there is a delay in the U.S. approval? Will you launch in Europe and price it accordingly? How will you reconcile, for example, what might or might not happen in the U.S. in terms of the label?

Henri Termeer

Yeah, it’s tough to speculate too much on what might or might not happen. We are only two weeks away from knowing. But we are introducing in Europe. Patients need this product. We are, like we have with other products, we have gone to global prices. There's going to be very little difference between European cost for therapy versus U.S. cost for the therapy. We are moving forward. There’s no way back now. We are talking, have started to talk with different countries in terms of the normal pricing discussions. And like we’ve done with Fabrazyme, like we've done for Renagel, like we’ve done for Cerezyme, like we've done for Aldurazyme, we will use a global pricing strategy.

Chris Raymond - Robert W. Baird

Thank you.

Operator

Your next question comes from Jean Lee from Hartmore.

Jean Lee - Hartmore

Hi, I was wondering, could you explain again the 100 basis point decline in gross margin?

Henri Termeer

This has mainly to do with some write-off of some material.

Michael Wyzga

There’s two separate factors involved in the impact to the gross margin. The first one is a write-off of about $4 million of Myozyme material that was in a work-in-process. We took that hit this quarter and did not carve that as a one-timer.

The second is the impact of the new facilities coming on board, particularly in Ireland. We have some capacity that was generated there, and so that was taken through the cost of goods sold as well.

Jean Lee - Hartmore

Okay, so then for the balance of the year, is it still in aggregates on the 8% or just going forward, it is 78%?

Henri Termeer

There is no reason to change from the guidance that we’ve given.

Jean Lee - Hartmore

Okay. Thank you.

Operator

Your next question comes from Phil Nadeau with Cowen Company.

Phil Nadeau – Cowen Company

Good morning, thanks for taking my questions. First question is a follow-up I guess to what you just said on Myozyme. How much Myozyme inventory has been expensed? When would we start to actually see the cost of goods for Myozyme flow through the P&L once that product’s commercially launched?

And then second is a follow-up to I think Ian's question where he was asking about the competing drug and development for Fabry's. To my understanding, that drug’s enrolling patients into its trial who have 3% residual enzyme activity. Could you give us some idea of what percent of patients with Fabry's disease have 3% residual enzyme activity? Thank you.

Henri Termeer

Yeah, the last question is impossible for us to answer. We do not know. David, do you have an answer?

David Meeker

Yeah, I mean, I’ll confirm that we don't know, but I think it’s not so much a function of how much residual enzyme activity. It’s really a function of whether the mutation that individual patient has is amendable to the chaperone approach. So you may have more or less enzyme to be eligible. The more enzyme you have may increase the likelihood that you have a mutation that might be responsive, so I think that’s the way to look at it. But the key here is really which mutations do you have.

Phil Nadeau – Cowen Company

Okay.

Henri Termeer

Mike, can you answer the other question?

Michael Wyzga

On the cost of goods sold, there’s only two methodologies to capture non-approved product at this point. What some companies do is they’ll expense it entirely at 100% through their P&L as part of the R&D expenses. What we do is we truncate that and start inventorying when it becomes what we call an approvable product. That’s usually based upon the last infusion of the patient group for clinical trials. So in fact we have been manufacturing there at risk as it were in inventorying those costs already. So you'll come out with a more normal, what I would call a more normal cost of goods sold and more normal gross margin rather than everything being expensed and capturing it at 100% margin upon shipment.

Phil Nadeau – Cowen Company

Okay. That's very helpful. Thank you.

Henri Termeer

Next question.

Operator

Your next question comes from Meg Malloy with Goldman Sachs.

Meg Malloy – Goldman Sachs

Thanks very much. Good morning, everyone. Two questions on the products. First, could you give us an idea in terms of the Fabrazyme being a little bit light, was that global or is that U.S. or Europe?

And secondly, along those lines, you mentioned that you saw patient numbers pick up. Could you maybe elaborate on that a little bit more?

And then, unrelated, Synvisc, any chance that you can elaborate on the direct-to-consumer campaign that you’ve initiated, and how much pull through you might expect in Q2, Q3? Thanks.

Henri Termeer

Thanks, Meg. David, the first question you can answer and the second question is for Ann Merrifield, the President of Genzyme Biosurgery.

David Meeker

Meg, so with regard to the nature of the softness around the Fabry numbers, is it global or is it more regional, I think it is more global, and I think again that’s why, to Henri's point, I wouldn't put so much store in a specific quarter-to-quarter analysis of this market.

There were, as he noted, a few smaller number of patient accruals in the fourth quarter this year. When we look back, it was a similar pattern last year. And that actually is pretty much where we are, reminding you that we launched this product in 2003. So we're just beginning to get some experience with the seasonality around this. There may be a little bit of seasonality in the Fabry world.

So U.S., Europe and Japan were all a little bit light from what we had expected. With regard to the pick up in the first quarter, again both most prominently in the U.S. and Europe. There is a significantly higher, I would say approximately double the number of patients accrued in the first quarter as compared to what we had accrued in the fourth quarter. Its those numbers that drive, of course, the run rate for the subsequent quarters.

So we’ll see. I mean, to be tested, but I think we are quite optimistic, as Henri said, that this is not a long-term trend evolving here.

Meg Malloy – Goldman Sachs

Thanks very much.

Henri Termeer

Ann?

Ann Merrifield, President, Genzyme Biosurgery

Hi. Yes, our DTC campaign began rolling out in February with a new branded television commercial. We're also doing online work, as well as new print advertising targeting a younger audience, driving males as well as females, and learning from the program that we put in place last year, where we had 275,000 leads and, by our calculation, a 14% conversion rate.

So in the story of continuous improvement, we're learning from that and have the program in place. I wouldn’t want to forecast our revenue next quarter, but I’m willing to say our guidance is there for you to look at.

And the seasonal trends that Henri referenced, if you go back five years in terms of U.S. shipments year after year, first quarter was lower than fourth, and year after year second quarter showed a substantial boost over first. So we are hoping that trend continues and have every confidence that we will get that yield, if it's there to be had.

Meg Malloy – Goldman Sachs

Thank you.

Henri Termeer

Next question.

Operator

Your next question comes from Bill Tanner from Leerink Swann.

Bill Tanner – Leerink Swann

Hi, thanks for taking the questions. A question for you, Mike, on the SG&A expense. I thought you indicated in your remarks that there was some increased expense there attributable to the startup costs for the various plants, and I know you guys aren't really going through line by line in terms of guidance today, but if you could sort of break out what that is.

Then it looks like, to come in line with guidance, this is going to be kind of the high watermark in terms of SG&A expense for the year, and then I actually had a real quick follow-up for John please.

Michael Wyzga

Sure. Within the SG&A, again, when you bring a plant online, there are two separate costs. There's the cost that goes with the cost of goods sold, which is more period expenses, but then you have what we call overcapacity or under-capacity costs. As you have under-capacity, capacity that is not utilized in the plant, it goes through an unabsorbed page. That unabsorbed page rolls up through our SG&A costs, particularly the G&A portion of it.

So when I talk about the capacity costs, again, you need to think of it in two separate realms -- the startup costs, which are more period in nature, and then the under-capacity, underutilization, which shows up on our G&A.

Bill Tanner – Leerink Swann

So then in terms of looking at this quarter specifically, I mean, I don't know if you can break that out or is it, I mean, assuming that there’s really been no change to the SG&A guidance, again it looks like this might be the high watermark for the year in terms of expense?

Michael Wyzga

Well, I can address the trends, I mean, as you consume that capacity, that capacity will utilized for inventoriable product, which we placed on the balance sheet, so that will show up through your cost of goods sold.

Henri Termeer

Generally, the guidance that we gave in February was that the startup of these two manufacturing facilities will have some impact on costs during this year and specifically higher as a great step function in the earlier part of the year or late last year, something that we didn't experience before and now we've started to experience.

We fully expected this and we fully planned it into the numbers as we gave you the earnings guidance for the year. There are no surprises here, but it’s something we just have to work our way through and get to the point where we produce commercial product and benefit from the actual efficiencies as we now do so fantastically in Austin.

Next question.

Operator

Your next question comes from Eric Ende from Merrill Lynch

Eric Ende – Merrill Lynch

Actually my question’s already been answered.

Operator

Your next question comes from Geraldine O’Keeffe with Fortis.

Geraldine O’Keeffe – Fortis Bank

Good morning. Thanks for taking my questions. Just a few quick ones for you, Mike. Just R&D and amortization were much higher than I expected based on your guidance for the full year. Can you update us on that or should I just -- are you sticking with your full-year guidance on those, and therefore should we expect those to drop down in the next few quarters?

Michael Wyzga

Within the R&D, we already addressed that. I think with the number of clinical trials that are going on, obviously we’ll stick with our guidance there.

With regard to the amortization, there was a change in the amortization because of the Synvisc marketing rights. As you recall, when we did the Synvisc deal, when we bought back the rights -- or purchased the rights, rather, from Wyeth -- Synvisc marketing rights were amortized over the percentage of current year incremental revenue over the total revenue that was realized from the deal structure. The incremental revenue increased in 2006, so the amortization was adjusted. As part of our carve-out, we’ll continue to carve that out as a crosswalk, but that explains the increase from Q4 to Q1.

Geraldine O’Keeffe – Fortis Bank

Okay, thanks. Maybe just a few other points. You went a little fast for me in your introduction. Was Fabrazyme also impacted by foreign currency?

Michael Wyzga

Yes it was.

Geraldine O’Keeffe – Fortis Bank

That also impacted it?

Michael Wyzga

Yes, the three major areas that were impacted by foreign currency particularly were the ones that, not surprising to anyone, are the ones that basically go through Europe more heavier than, let's say genetics and Synvisc area, in almost rank order, where Cerezyme was the biggest impact, Renagel was second, and then Fabrazyme was third.

Geraldine O’Keeffe – Fortis Bank

And my last question, again, I didn't quite catch what you said about Hectorol. You said that you had some contractual obligations, [could introduce] some extra charges. Was that reflected in the revenues reported for Hectorol?

Michael Wyzga

That was indeed reflected in the revenue for Hectorol. There is a $3 million decrease for the accrual of chargebacks. Bone Care historically accrued for chargebacks when they processed it, rather than when the invoice sent out. This resulted in an under-accrual for the reserve, which we adjusted in Q1. The method has now changed to accrue when invoiced rather than when processed.

Geraldine O’Keeffe – Fortis Bank

Okay, thank you.

Michael Wyzga

You’re welcome.

Operator

Your next question comes from Adam Walsh with Jefferies.

Salveen Kochnover – Jefferies

It's actually Salveen Kochnover. I was wondering if you could provide us with an update on the DX88 program?

Henri Termeer

Yes. Georges Gemayel, our EVP, who’s involved with the program more directly. George.

Georges Gemayel

I think that we are continuing the accrual on [EDMC] as we have said. The number of patients which are getting in the study is continuing to increase, and we are still very much looking forward for being able to finish the study sometime before the end of this year.

Salveen Kochnover – Jefferies

Okay, and we’re going to see data this year?

Georges Gemayel

Probably the beginning of next year.

Salveen Kochnover – Jefferies

Okay.

Georges Gemayel

And, you know, there is really nothing more to report at this stage. The study is progressing very nicely.

Salveen Kochnover – Jefferies

Thank you.

Henri Termeer

Next question.

Operator

Your next question comes from Bill Tanner with Leerink Swann.

Bill Tanner - Leerink Swann

Thanks, just a real quick question for John. I understand that obviously you guys are getting inundated with questions regarding the emerging competition. I would think that nobody knows Gaucher better than you guys, and I think we all understand that the genetic mutations are pretty broad in terms of, or there’s a lot that is going on in Gaucher patients that may be different from one patient or another.

I guess it would be helpful if you were to put brackets around some of these things, as you pointed out, would probably not be amenable to chaperone technology. I would think that you guys would have some inkling as to what percentage of patients.

If you could bracket that or maybe point us in the direction of any kind of literature that would support the breadth or the narrowness of this approach.

Henri Termeer

Let me just make one comment and then David can make a more scientific comment. This is very early…

Bill Tanner - Leerink Swann

I mean Dave rather, not John. Sorry.

Henri Termeer

Yes, this is very early stage technology that’s not yet in the clinic for Gaucher disease. These are a number of hypotheses and they need to be tried, as so many things are in the biotechnology industry, that may or may not amount to something so many years from now.

This is not technology that you will be able to just see overnight and identify precisely how to do either the clinical trial or identify precisely the patients. There is stuff to be done. It’s great that it’s being done. We are extremely familiar with what is being done, but it is way too early to say it will have an “x” amount of impact. It is extremely speculative at this early stage.

Now, David, you want to give a more scientific response to Bill's question?

David Meeker

Actually, I think that is the scientific response. I won't elaborate much on that. I think a lot of the work, of course, to date has been in vitro type of systems, and of course they generate hypotheses.

But until we get into patients I think it is going to be very hard to know. I will stick to what I said earlier, which is I think this is going to be very much on a mutation by mutation, patient by patient testing basis. Once we get some data, we’ll be able to react to that.

Maybe I'll discuss a little bit more on analyst day, but I think that’s going to be where we're going to come out until we, like the rest of the world, see some more data.

Bill Tanner - Leerink Swann

And so internally then, what has been the effort or the experience in a similar avenue?

David Meeker

Well, internally we have a scientific group which is obviously extremely knowledgeable on Gaucher, so we look at all kinds of approaches to the disease whether it’s a gene therapy approach, whether it’s substrate inhibition, whether it's trying to understand how a chaperone technology might work, or whether exploring ways to modify our Cerezyme to make it better.

So that’s part of our usual staying current with the field, being contributors to the field. In that context, we haven't learned anything that’s different from what I told you at the start of this call. It’s very mutation specific and all missense mutations are not created equal.

Bill Tanner - Leerink Swann

Okay, thanks.

Henri Termeer

The biggest problem that technology that deals with a subset of an ultra, ultra orphan disease, that is a very problematic approach. There are so few patients, and to tie it up to yet fewer patients and to do a clinical trial on yet fewer patients, that’s a problematic approach.

That’s why the subset approach that David explained earlier, that may work for all Gaucher patients. That may provide an oral approach. And a highly specific safe way for all Gaucher patients is in the interim until we get to a gene therapy approach, possibly a step forward for Gaucher patients who are today treated obviously very well with enzyme replacement therapy.

So this is a field that it’s very encouraging indeed, that people are really focusing on trying to do the very best science can do for these diseases. It’s a tough area and to jump to conclusion on the basis of in vitro data, as may be done from time to time -- is not unusual in biotechnology -- but it is not something that necessarily defocuses the work that we are doing to make sure that we do the absolute very best that’s possible for Gaucher disease.

Next question.

Operator

Your next question comes from Mark Schoenebaum from Bear Stearns.

Henri Termeer

Mark?

Operator

Your next question comes from Jeff Meecham, JP Morgan Chase. Mr. Meecham, your line is open.

Henri Termeer

Operator, can you check the lines?

Operator

Yes, sir. The line is open.

Henri Termeer

Next question.

Operator

Okay. You have a follow-up question from a Yaron Werberwith Citigroup.

Yaron Werber - Citigroup

Thanks for taking my follow-up. Henri, can you maybe just talk a little bit about, you know, one of the things that you've been interested in doing is acquisitions. You know, when you look across all your different therapeutic categories and your different businesses, which one do you think you'll be interested in boosting up?

Henri Termeer

We are not discriminatory in that sense. We really are developing these business units, these businesses and maximizing as we are developing them, the connecting points, the synergies, you know, the same way as we did the transaction around the renal area last year. It was Hectorol that was very, very supportive of that area.

We also did, earlier in the year, a transaction around biosurgery with a company in Europe that supports the Carticel development.

And of course, late in '04, we closed the transaction on oncology with ILEX.

We are in these businesses. The year before we did Impasse in terms of genetic testing for oncology. We are in these businesses to build them and to the maximum extent possible. We run them in a way that they are self-supporting.

Now we are clearly choosing R&D investments, as everybody does, where the opportunities are. Sometimes they fall outside of these businesses, like Tolevamer in the case of C. Difficile Colitis, which gets us into hospital [infections].

And that by itself could also increase our interest in that whole point and how we can fortify that. Potentially, a transaction could make sense in that area, but there’s no need to be done in that area. We think the product has a tremendous identity by itself.

So we very much run the businesses as businesses, maximize the synergies as we get into these businesses and look for opportunities across the businesses that we have.

Next question.

Operator

Your next question comes from Mark Schoenebaum with Bear Stearns.

Mark Schoenebaum - Bear Stearns

Hi, can you guys hear me?

Henri Termeer

Yeah, we can.

Mark Schoenebaum - Bear Stearns

Okay, excellent. I just have a couple of housekeeping questions. Can you tell us, are you able to quantify exactly what the FX impact was on Fabrazyme and on Synvisc and on Renagel? Can you give us the ex U.S. number?

Henri Termeer

Michael, can you help with that? The total number is $18 million, and that just goes depending on European sales.

Michael Wyzga

Sure. As I mentioned before, the most impactful one was for Cerezyme, which is approximately $8.5 million of impact on a year-to-year basis. The second was Renagel, it was about $3 million. And the other one was Fabrazyme at about $3 million as well.

Those are the predominant ones that were impacted by the UFX rate in Europe. There were some changes in shifts that took place within other countries, but those are the major ones.

Mark Schoenebaum - Bear Stearns

And EX U.S. Renagel?

Michael Wyzga

I'm sorry?

Mark Schoenebaum - Bear Stearns

EX U.S. Renagel, please.

Michael Wyzga

EX U.S. Renagel, that's $58.7 million.

Mark Schoenebaum - Bear Stearns

Okay, great. How much of the price increase in the States did you see in the quarter?

Henri Termeer

John, can you answer that question? These are highly specific questions. Very tough to…

John Butler

Yeah, it’s again within a 9.5% price increase at the very end of last year, and as we’ve always said, that bleeds in over the course of the quarter, depending on the Medicaid population, our contracted rates, etc. So we will recognize that over the course of the year.

Mark Schoenebaum - Bear Stearns

Thanks.

Operator

Your next question comes from Jeff Meecham, JP Morgan Chase.

Jeff Meecham – JP Morgan Chase

Hi, can you hear me?

Henri Termeer

Yes, we can.

Jeff Meecham – JP Morgan Chase

Good. Can you remind us of the upcoming events for Tolevamer and your commercial strategy there as a hospital-based product?

Henri Termeer

Yes, John, can you respond to those questions?

John Butler

Again, as we said before, the Phase III trial we do expect to complete early 2007, the beginning of 2007 and file obviously subsequent to that as quickly as possible and launch in the U.S. and Europe end of 2008, or mid to end of 2008.

Jeff Meecham – JP Morgan Chase

Are there any differences that you guys see among the markets in different geographies?

John Butler

Certainly there’s different levels of awareness of the disease. If you look at Canada, for instance, where they've had tremendous outbreaks, the U.K. as well, there's a very, very high awareness of it. Other markets, we're just starting to understand what the awareness levels are and helping to influence that prior to launch.

But you're seeing more and more publications in the lay press as well as in scientific journals that are bringing people's awareness to higher levels. So we think that by the time we're launching we can have a significant impact on that. And as Henri mentioned, the non-antibiotic option here we think will give us a very significant place in the market.

Henri Termeer

Why don't you comment about the sales point?

John Butler

Right. This is very much a hospital sell. Obviously this is a disease that's been associated with the use of antibiotics in the hospital. A very, very accessible call point, very much in line with what Genzyme does well. We're already in the hospital in a number of different business units, and we think we can build out that capacity to fully launch this product in each market.

Jeff Meecham – JP Morgan Chase

Not to dwell on this, but a quick follow-up on the LSD business. Can you talk a little bit about your small molecule in development for Gaucher’s mechanistically?

Henri Termeer

We made a few comments about it earlier which you may have missed. David, do you want to make a comment on where we stand and what kind of the approach is?

David Meeker

Just to reinforce, so the mechanistic part, which I think was your question, so it's a ceramide analog as opposed to a glucose analog, and so that's what differentiates it. And then the rest of what we've observed is that, you know, the greater potency and the greater specificity, at least in our in vitro and animal models. So we’ll now go in and test this in humans. Although we’ve already -- let me back up. We’ve done Phase I testing, so it's already been through the normal volunteer pathway and looks fine in that group. So we're now entering into our Phase II, which is the Gaucher population.

Henri Termeer

Next question.

Operator

Your next question comes from Craig Parker with Lehman Brothers.

Craig Parker – Lehman Brothers

Hi. Could you provide a geographic breakout of the Fabrazyme sales -- U.S., Europe and Japan? And if you have an assessment of your market share in Europe, that would be great, and any comments on any changes in the competitive dynamics with Shire now marketing your product, if there have been any.

Henri Termeer

You asked for more details than we’ll be able to provide you, but we can give you some of the details that you’re asking for. David, we have been providing international sales and European sales. We haven't broken out Japan. Historically, I think we should stay to that and any comments you can make with regards to market share.

David Meeker

Yeah, so the U.S. sales for the quarter were at $30.1 million, and the international sales were at $49.6 million.

I think your question about the market share in Europe, again, our insight into that is sort of our feeling on the ground and then, of course, what is reported and we don't have all those numbers, as you know.

I think the general feeling on the ground is that we continue to feel very good about the receptivity to the issue of dosing and the recognition in the market that dose is a critical issue. I think there will be some important information that will come out at the end of this year.

Again, we’re waiting for those results as with everybody else, but the AMC trial, which is the only direct comparison of the 0.2 milligram Fabrazyme and 0.2 milligram Replagal study that is ongoing. Our best understanding is that will be reported at some point later in this year, and I think that could be important to helping people understand this.

So again, just to summarize, I think we feel still quite bullish about what the data is saying and what investigators and treaters are saying in terms of understanding the importance of that difference.

One correction -- I misspoke on the U.S. sales. That is $30.9 million, not $30.1 million.

Craig Parker – Lehman Brothers

And maybe since everyone seems interested in some of the small molecule, other mechanism drug candidates for LSD’s, perhaps you could answer a regulatory question. What do you think the regulatory hurdle is for those candidates that have mechanisms other than enzyme replacement therapy? You know, because obviously there are adverse event risks, for example, that you wouldn't have with enzyme replacement therapy.

David Meeker

I think, you know, I'll make a general comment just about developing any drug in this area, and I think Henri said it at the beginning – it’s difficult. We don't expect certainly any easier regulatory pathway.

And to your point, will we need more safety data than we did with the enzyme replacement therapy? I suppose that’s possible. I think the whole enzyme replacement therapy regulatory pathway has evolved, or is evolving significantly, from when we first launched back in 1991. It was a very different world then.

So we're prepared for a more rigorous regulatory pathway, as we suspect everybody else in this field is.

Craig Parker – Lehman Brothers

All right, thanks for those comments.

Operator

Your next question comes from Matt Vessie with CDR Research.

Matt Vessie – CDR Research

Hi, thanks for taking my call. Henri, I wonder if you could give us a little more color on some of the specific advantages of sevelamer carbonate relative to Renagel, the size of the market that may open up, and what the IP looks like?

Henri Termeer

I’m going to delegate that question to John Butler. It's a good question and it's an important program for us. John.

John Butler

As we’ve said in the past, the desire to do sevelamer carbonate allows us to go into the CKD market, the pre-dialysis patient market. The number of patients who are available there who need phosphate binded therapy, again, when you break down stage three, stage four, stage five not on dialysis, as you get closer and closer to dialysis, your phosphorus levels do increase.

So we do know that today, we get a significant portion of Renagel sales from those patients and again, the ability to promote the product in those patient numbers will allow us to continue to increase sales.

Additionally, remember that all the other benefits of sevelamer therapy -- the LDL lowering, the CRP lowering, the toxin binding -- all of those things we think will be able to play out much more significantly in that CKD market.

So if you think only in terms of those patients who have an elevated phosphorus level, our thought is, particularly with the powder formulation that’s easier for patients to use, we can drive physician use earlier in the treatment of CKD before you see a markedly elevated phosphorus level.

So exactly what those patient numbers are, you know, we’re still working through that in the clinical studies. The results of those studies will help us to define that as well.

Sevelamer carbonate on the IP side, we’ll have to get back to you on that.

Operator

You have a follow-up question from Ian Somaiya from Thomas Weisel Partners.

Ian Somaiya - Thomas Weisel

Thanks for taking my follow-up. A question for Henri, and I'd love to get Mike's feedback as well. What would trigger or what would lead for you to get a little bit more active managing the dilution you're seeing related to the stock options, as well as the [inaudible]?

What type of a financing vehicle, you know, makes sense to utilize to offset some of the dilution you're seeing?

Henri Termeer

Well, it's a philosophical question. We obviously, like every company in this area, have discussed this whole field of stock option expensing over years now. In the building of Genzyme, stock options have been a very important ingredient, and the cost to shareholders in terms of other vehicles, it is very similar.

It doesn't provide any particular benefit for shareholders that we feel is compelling. I do think that aligning all the [inaudible], now more than 8,000, with the interest of the shareholders, has proven to be a very, very strong approach for the Corporation, and it will completely prove itself in that direction in the future.

So we feel very good about the power of stock options and the benefits that shareholders have as a result of that. The [analogy] that [large] to develop in a very large group of people, trying to build and move things forward.

So that’s where we are at at this stage, not for lack of studying numerous other ways to do this, numerous gimmicks that have been suggested by all the different consultants that are trying to figure out gimmicks.

In the end, we like the simplicity of the stock option approach and we will make sure that we do it in a very responsible way. We have been decreasing the yearly dilutive impact of that over a number of years now, and we will continue to be very frugal in that sense, very diligent in that sense.

But we like to think that stock options really provide a tremendous vehicle for the shareholders, for shareholder value creation. Mike, any other comment?

Michael Wyzga

No, I think what he’s also commenting on is the number of biotechs that are doing convertible notes, or large notes to do stock repurchase.

Ian Somaiya - Thomas Weisel

Exactly.

Michael Wyzga

I think as the industry matures, you’ll see a number of companies going down that path. Yeah, I think it becomes not as interesting for Genzyme as you go down the path of just doing a note for the purchase of a repurchase of stock. We tend to be opportunistic and I think if we were to do any sort of financing, it’s certainly around potential acquisitions or reaffirming our balance sheet.

So I think the repurchase of stock in and of itself is less interesting because you do get a one-time blip when you do buy back the stock. It does change the outstanding shares, but then you kind of right yourself back to the [mandate] of the business.

Ian Somaiya - Thomas Weisel

Thank you.

Operator

(Operator Instructions) And your next question comes from Mark Schoenebaum from Bear Stearns.

Mark Schoenebaum - Bear Stearns

Hi, I was just wondering on Synvisc, why were you surprised by the seasonality here? There must’ve been something going on with demand too, I think.

And number two, can you comment on the HCPCS’ recent proposal to lump potentially -- non-final proposal -- to potentially lump Synvisc in with the other AJ derivatives and 1J code? Thanks.

Henri Termeer

I guess we weren’t surprised by seasonality – the degree of seasonality was maybe a little larger than we had anticipated in our plans. We always were aware of seasonality, just a matter of degree.

Ann, can you respond to the CMS question?

Ann Merrifield

Surely. We were not surprised the HCPCS working group came out with two options for consideration by CMS, one that the status quo be maintained; the second that all products be put in the same code. It’s a process of review and appeal between now and final ruling in November. We’re preparing for that dialog and we feel we have a pretty compelling case, both on the scientific differentiation of our products, the ghosting differentiation of our product, and the fact that innovation in this class is all about reducing the number of injections, increasing efficacy, and punctual equivalence doesn’t allow for innovation and doesn’t allow for patient benefit to be created [inaudible]. We’re pretty confident we’ll prevail in our argument.

Mark Schoenebaum - Bear Stearns

Thanks.

Operator

At this time, there are no further questions. Are there any closing remarks?

Henri Termeer

Thank you very much everyone for participating. We will look forward to seeing many of you at analyst day, coming up May the 12th, and then we will have, of course, the second quarter call in July, at which time we will have quite a bit of progress to go through, such as the Myozyme PDUFA date and what came off of that, and of course the quarterly results itself. Thank you very much for your participation.

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Source: Genzyme, Inc. Q1 2006 Earnings Conference Call Transcript (GENZ)
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