Mark Mitchell's  Instablog

This is a follow up to my previous post on November 18^th regarding the news that development of Genzyme’s follow-on product to its Renagel/Renvela franchise is being discontinued. The product, named GENZ-644470, is an advanced phosphate binder (APB) that was hoped to have demonstrated a superior clinical profile compared to predecessor Renvela. The drug worked at reducing serum phosphorus levels in patients with chronic kidney disease; however, it did not outperform Renvela in this regard.

 

In my opinion, this is a significant setback for Genzyme. Sales of its Renagel/Renvela franchise were approximately $680 million in 2008, making it Genzyme's second-best selling product behind flagship Gaucher disease drug Cerezyme. The product also has significant opportunity for label expansion, particularly in CKD patients not on dialysis. As a result, this is a product with significant growth potential for Genzyme in coming years.

As I indicated before, my biggest worry with this pipeline setback is that the core patent estate for Renagel/Renvela expires in 2014. As a result, Genzyme will not likely be able to employ a switch strategy to a newer branded product before patent expiration. Additionally, there was an ANDA (generic drug filing) filed earlier in 2009 by Impax Labs. A 30-month stay of approval following a legal challenge by Genzyme would push potential approval of this generic competitor until late-2011/early-2012. Under each of these scenarios, Genzyme stands to lose hundreds of millions of dollars by 2014, and potentially as early as late-2011/early-2012.

 

I defer the reader to my previous post for further analysis on this clinical setback. However, below the reader will find my views on how this news has impacted my valuation of the company.

 

Valuation reduced again; recommendation lowered to SELL from HOLD

 

Based on my analysis of this news, I have elected to downwardly revise my valuation of Genzyme, taking into account the likely genericization of its Renagel/Renvela franchise in 2014 (see Valuation #1 and #2 figures below). I have also taken account the potential for a 2012 genericization of this franchise (see Valuation #2; worst-case scenario).

 

In addition to the above changes, I have increased my expected launch year for mipomersen in homozygous familial hypercholesterolemia (HoFH) from 2011 to 2012 based on a recent update on this clinical program from Genzyme and partner ISIS Pharmaceuticals (ISIS). This has had a modest impact on my risk-adjusted NPV of mipomersen in this indication. Overall, I now value the company's late-stage pipeline, which includes mipomersen and alemtuzumab, at $14.77 per share (previously $14.90 per share). See the figures below for a more detailed look at my valuation methodologies.

Valuation #1
	2010E	Multiple	Value (US$)
Non-GAAP EPS (diluted)	2.91	12x	$34.97
Drug name	Launch year	Clinical & Regulatory Probability of Success	Peak sales (US$000s)	GENZ profit	NPV (US$)
Alemtuzumab	2012	60%	$1,999	63.00%	$10.08
Mipomersen	2012	72%	$151	56.00%	$0.81
Mipomersen	2014	45%	$2,445	35.00%	$3.88
Total risk-adjusted NPV					$14.77
			Total valuation	$49.74

 

Valuation #2
	NPV (US$)	Clinical, Regulatory & Commercial Probability of Success	Risk-adjusted NPV (US$)
Worst-case scenario	$45.12	53%	$23.80
Best-case scenario	$56.15	47%	$26.53
Total DCF valuation			$50.33
Drug name	Launch year	Clinical & Regulatory Probability of Success	Peak sales (US$000s)	GENZ profit	NPV (US$)
Alemtuzumab	2012	60%	$1,999	63.00%	$10.08
Mipomersen	2014	45%	$2,445	35.00%	$3.88
Total risk-adjusted NPV					$14.77
			Total valuation	$64.30

 

When using my blended valuation methodology, which incorporates both valuations at a 50/50 rate, my target price is reduced from $59.00 per share to $57.00 per share. Although this target price still represents a BUY at the current share price, I believe that investors are largely focused on the continued negative sentiment from the manufacturing setbacks at Allston, the Lumizyme Complete Response Letter, and possibly the discontinuation of the APB program. Therefore, I do not believe that there is much upside potential at this point in time.

 

Additionally, I note that investors sold off shares of Genzyme by approximately 8% following the FDA’s announcement on November 13th that the five products produced at the company’s Allston plant were found to be tainted with foreign particles, including non-latex rubber and stainless steel fragments. Although this has been known (and accepted) by the FDA for years, these findings were largely responsible for the company receiving another Complete Response Letter for its promising Pompe disease drug, Lumizyme (issued on November 16th).

 

The share price, however, did not drop further on the November 18th announcement that the company was discontinuing development of its APB, likely reflecting a lack of concern over a product believed to have patent protection until 2014. This is indeed a long time from now; however, I believe that there is a chance that Impax Labs could succeed in launching a generic version of Renvela by late-2011/early-2012. Based on the impact of this likely genericization to my valuation, I would have expected this news to have dropped the share price by a minimum of $2.00 per share, with the potential for an additional $1.00 per share drop if you believe in early genericization.

As a result, I see downside to current levels of approximately $3.00 per share, or 6%, and am lowering my near-term recommendation to SELL from HOLD to reflect my analysis. I note that my 12-month recommendation remains a BUY at a target price of $57.00 per share.  

I pointed this out before, and I will note it again for something to think about. When you take away the valuation I attribute to the company's late-stage pipeline, my valuation suggests a target price range of $35.00 per share to $50.00 per share (previously $35.00 per share to $54.00 per share). Although I am tempted to remove the value attributable to these products (since investors are not likely thinking about the late-stage pipeline right now), I believe that it would be negligent to exclude these highly promising drugs from my valuation of Genzyme.

Disclosure: the author does not own, nor is he short shares of Genzyme or ISIS Pharmaceuticals

This morning, Genzyme announced more bad news. This time, however, it was related to one of its late-stage pipeline products; its advanced phosphate binder (APB), which is a next-generation version of Renvela. The company announced that it is halting developing of its APB after it found that the drug was no more effective than Renvela. These results came early as they were previously expected to be announced in H1/10. Of note, Renvela is indicated for the control of serum phosphorus in patients with chronic kidney disease (CKD) on dialysis in the US.

This is another setback for Genzyme, and a significant one in my opinion. Sales of Renvela were approximately $680 million in 2008, making it Genzyme's second-best selling product behind flagship Gaucher disease drug Cerezyme. The product also has significant opportunity for label expansion, particularly in CKD patients not on dialysis. As a result, this is a product with significant growth potential for Genzyme in coming years.

My biggest worry with this setback is that the core patent estate for Renegal/Renvela expires in 2014, and there was a ANDA (generic drug filing) filed in 2009. A 30-month stay of approval following a legal challenge by Genzyme would push potential approval of this generic competitor until late-2011/early 2012. However, Genzyme's APB could have been approved by 2011 (pending positive clinical results and regulatory filing), potentially enabling Genzyme to switch patients to its APB before possible entry of generic competition for Renvela. This will not be possible now after Genzyme announced that it will be discontinuing the development of its APB.

What this means: I expect shares of GENZ to fall this morning, maybe by as much as 3-5% if investors come to the realization that there could be generic competition much earlier than 2014 (in my opinion). Impact to valuation and recommendation to be disclosed later.

Disclosure: the author does not own, nor is he short shares of Genzyme

This is a follow up to this morning's post regarding the news that promising Pompe disease drug, Lumizyme, received a Complete Response Letter from the FDA. I defer the reader to that post for full details and analysis regarding my views on the Lumizyme Complete Response Letter and the recent manufacturing setback at the Allston plant. However, below the reader will find my views on how this news has impacted my valuation of the company.

Negative impact to valuation:

Based on my analysis from this morning's post, as well as new information from the company's conference call earlier today, I have elected to downwardly revise several aspects of my financial model for Genzyme. Of note, I have lowered 2010 (and beyond) sales estimates for Lumizyme given that I don't believe that Genzyme will receive approval for its 4000L bioreactor-produced product until late 2010 (at the earliest, in my opinion). Additionally, the company indicated that there will likely be a minor impact on the shipment of Fabrazyme as a result of this manufacturing issue. I have therefore moderately reduced my 2010 sales estimates for Fabrazyme to account for this impact.

Furthermore, although the company indicated that Cerezyme would not be impacted by this manufacturing issue, I believe that competitors velaglucerase alfa and PLYSO (formerly prGCD), sold by Shire PLC (SHPGY) and Protalix BioTherapeutics (PLX), respectively, will gain market strength as a result of Genzyme's highly publicized manufacturing setbacks. Consequently, I have lowered my 2010-2014 sales estimates for Cerezyme.

These sales estimate revisions, along with a moderate increase to my Q4/09 and F2010 COGS estimates, have led to a reduction in my 2010 EPS estimate from $3.05 per share to $2.91 per share. 

I have also reduced my earnings multiple to which I value Genzyme from 13x to 12x. This is due to the ongoing negative sentiment related to the company's manufacturing issues and the Complete Response Letter for Lumizyme. This reduction in my earnings multiple also has a negative impact on my valuation of the company's late-stage pipeline, which includes mipomersen and alemtuzumab. I now value these products at $14.90 per share (previously $16.14 per share). See the figures below for a more detailed look at my valuation methodologies.

Valuation #1
	2010E	Multiple	Value (US$)
Non-GAAP EPS (diluted)	2.91	12x	$34.97
Drug name	Launch year	Clinical & Regulatory Probability of Success	Peak sales (US$M)	GENZ profit	NPV (US$)
Alemtuzumab	2012	60%	$1,999	63.00%	$10.08
Mipomersen	2011	72%	$151	56.00%	$0.93
Mipomersen	2014	45%	$2,445	35.00%	$3.88
Total risk-adjusted NPV					$14.90
			Total valuation	$49.86

Valuation #2
	NPV (US$)	Clinical, Regulatory & Commercial Probability of Success	Risk-adjusted NPV (US$)
Worst-case scenario	$45.12	53%	$23.80
Best-case scenario	$65.11	47%	$30.77
Total DCF valuation			$54.57
Drug name	Launch year	Clinical & Regulatory Probability of Success	Peak sales (US$M)	GENZ profit	NPV (US$)
Alemtuzumab	2012	60%	$1,999	63.00%	$10.08
Mipomersen	2014	45%	$2,445	35.00%	$3.88
Total risk-adjusted NPV					$14.90
			Total valuation	$68.53

When using my blended valuation methodology, my target price is reduced from $63.50 per share to $59.00 per share. Although this target price represents a BUY at the current share price, I believe that investors are largely focused on the current manufacturing setbacks and the Lumizyme Complete Response Letter. Therefore, I do not believe that there is much upside potential at this point in time, and I now recommend that investors HOLD shares of Genzyme in the near-term. My 12-month recommendation remains a BUY at a target price of $59.00 per share.  

Interestingly, when you take away the valuation I attribute to the company's late-stage pipeline, my valuation suggests a target price range of $35.00 per share to $54.00 per share. Although I am tempted to remove the value attributable to these products (since investors are not likely thinking about the pipeline right now), I believe that it would be negligent to exclude these highly promising drugs from my valuation of Genzyme.

Disclosure: the author does not own, nor is he short shares of Genzyme, Shire PLC or Protalix BioTherapeutics