Mark Mitchell's  Instablog

Genzyme (GENZ) released its Q3/09 financial results last week, with non-GAAP earnings coming up short of both mine and the markets expectations. Non-GAAP earnings were reported at $0.31 per share, significantly lower than my estimate ($0.39 per share) and the Street’s estimate ($0.44) for non-GAAP earnings.

Earnings were reported lower than expected due to remediation efforts (~$24 million charge) and start-up costs at the company’s Allston manufacturing plant, which is where its blockbuster Gaucher disease drug Cerezyme and Fabry disease drug Fabrazyme are produced. Results were also negatively impacted by the recent acquisition of the full rights to oncology drugs Leukine, Fludara and Campath. In particular, Q3/09 marked the first full quarter of sales and marketing personnel attributable to these oncology products. Additionally, Genzyme had to work its way through the management of inventory of these oncology products as there was a significant amount of inventory in the channel at the time of acquisition close.

Revenue for the quarter was reported to be approximately $1.06 billion, slightly lower than my Q3/09 revenue estimate of approximately $1.10 billion, and significantly lower than Q2/09 revenues of $1.22 billion (representing a Q/Q drop of 13.9%). However, this drop in revenues was expected given that Q3/09 was the first full quarter impacted by the manufacturing shutdown of the company’s Allston facility.

Individual product revenues were largely in-line with my estimates, with only the Hematologic oncology and Other product segments coming up meaningfully short of my estimates. See the figure below for further detail on the company’s Q3/09 financial results. 

Allston plant fallout; uncertainty over Cerezyme’s recovery:

Following the release of the Q3/09 financial results, I believe that investors now have a good handle on the operational impact of the shutdown at the Allston plant. However, I believe that the main uncertainty remaining from this manufacturing setback is how Cerezyme revenues will bounce back when full production will reach the Gaucher disease patient population in Q1/10. As previously discussed, competitor products from Shire PLC (SHPGY); velaglucerase alfa, and Protalix BioTherapeutics (PLX), prGCD, are now commercially available through an FDA-approved treatment protocol. These approvals are well-ahead of schedule and could pose a serious threat to future recovery of Cerezyme revenues.

However, I continue to believe that revenues will bounce back into blockbuster territory given Genzyme’s presence in the lysosomal storage disorder space and its impending upgrade in manufacturing capacity (expected by 2011), which should provide reassurance to the Gaucher and Fabry disease community regarding future product supply. I do not, however, believe that revenues of Cerezyme will hit its previous peak of approximately $1.2 billion.

Investors should focus on potential Lumizyme approval:

Now that the Q3/09 financial results are out of the way, and investors are more informed of the financial impact from the Allston plant shutdown, investor focus can shift to the company’s impending FDA action date for its potential blockbuster Pompe disease drug, Lumizyme.

Recall that Genzyme had difficulties with respect to the regulatory hurdles in getting approval of its Myozyme product being produced at a new manufacturing facility (2000L at Allston). The FDA considered the product manufactured at its 2000L bioreactor to be substantially different biologically that it required a new BLA. Genzyme submitted a new BLA for this 2000L product, now branded Lumizyme, which has an impending FDA action date (PDUFA) on November 14.

Following potential approval of the 2000L product, Genzyme intends to submit a sBLA for its 4000L produced Lumizyme. The company expects a 4-month review, which would result in a potential approval of this 4000L product in Q1/10. If approved, the 4000L product will be the sole source of Lumizyme. The company also plans to transition US patients from its temporary access plan using product from the 2000L scale to its 4000L scale, with data from the 4000L scale being used to support this transition.

My take on the Lumizyme PDUFA date; tough call:

Reasons for approval:

• Temporary access plan is not accepting any new Pompe disease patients in the US, leaving a potential 50-150 very sick patients without treatment. Of note, there are no competitor products that can be tentatively approved to provide treatment for these unfortunate patients.
• The FDA agreed that Genzyme’s Complete Response (to the FDAs Approvable Letter back in March) could fulfill the requirements for a verification study to demonstrate the clinical benefit of Lumizyme. The company also included a Risk Evaluation and Mitigation Strategy (REMS), which should provide some reassurance over any potential safety concerns with approving this drug
• Potential impact to shares of Genzyme: I believe that an Approval will add some spark to GENZ, potentially boosting shares to the $55.00 - $60.00 range, and maybe as high as $65.00.

Reasons for non-approval:

• The FDA has pre-existing concerns with the Allston manufacturing facility, and has previously issued warning letters to Genzyme asking that it address deficiencies at the plant. The FDA is currently inspecting the plant and should complete its inspection before the November 14th PDUFA date. HOWEVER, the final reports from these inspections are not typically completed until approximately 3 months after inspection, which would suggest a response from the FDA in January/February 2010. If a formal response from the FDA is required following its inspection of the Allston plant before approving any new drug produced at the plant, investors could expect Genzyme to receive another Approvable Letter for Lumizyme. The result could be another 4-6 month delay in approval in both the 2000L product and the impending sBLA for the 4000L product.
• Potential impact to shares of Genzyme: I believe that an Approvable Letter could bring the shares back down to 52-week lows, between the $45.00 - $50.00 range.

Overall, this is a tough call, and I suggest that investors tread carefully and do their own due diligence if buying or selling GENZ ahead of this date. I do however, believe that the reward is greater than the risk at the current share price for GENZ.

Valuation:

I have revised my valuation of Genzyme in light of the Q3/09 financial results as well as the overall state of the market and global economy. Firstly, I have upwardly revised my multiple of the company’s forward earnings from a 12x multiple to a 13x multiple, which better reflects the current multiple of Genzyme's peers. I have also modestly lowered my revenue estimates for Cerezyme in the near and longer-term, as well as my near-term revenue estimates for Leukine, Fludara and Campath. I believed these changes necessary given my dampened expectations for Cerezyme as well as the necessary inventory management issues with the company’s newly acquired oncology products. As a result, my 2010 forward earnings estimate for GENZ is now $3.05 per share (previously $3.64 per share).

With respect to my risk-adjusted NPV of the company’s late-stage pipeline, I have elected to include a valuation for mipomersen in homozygous familial hypercholesterolemia (HoFH) and severe hypercholesterolemia. My reasoning behind this addition is that the inclusion of severe hypercholesterolemia as a potential near-term indication adds a significant potential market for mipomersen, and a valuation should therefore be assigned for this indication.

I continue to value alemtuzumab in multiple sclerosis as before, but have lowered my probability of success and expected launch year for mipomersen in heterozygous familial hypercholesterolemia (HeFH) given the likely need for a long outcomes study prior to approval in this broader indication. Based on this analysis, I pushed my expected launch year for mipomersen in HeFH from 2012 to 2014, and reduced my probability of success from 59% to 45%. Overall, my risk-adjusted NPV for the company’s late-stage pipeline increased to $16.14 per share (previously $15.60). Blending this valuation with my 13x multiple of 2010 earnings results in a valuation of $55.72 per share. 

My second valuation methodology is a 10-year DCF of the current business combined with a risk-adjusted NPV valuation of the company’s late-stage pipeline (alemtuzumab in MS & mipomersen in HeFH and HoFH and severe hypercholesterolemia). In this case, I have blended a potential worst-case scenario DCF (genericization of Cerezyme in 2014 and Renvela in 2012) with a potential best-case scenario DCF (follow-on oral Cerezyme therapy approved by 2012/2013 and next-generation Renvela approved in 2011). I have also included the risk-adjusted NPV of the company’s late-stage pipeline (as above). The combination of the DCF and risk-adjusted NPV valuation results in a total valuation of $71.33.

Switching near-term call to BUY from SELL

Despite the uncertainty surrounding the impending Lumizyme PDUFA date, I am changing my near-term recommendation for Genzyme to a BUY from a SELL given that the upside potential of a Lumizyme approval is likely greater than the downside of an Approvable Letter at current levels, in my opinion. I also believe that the dust has now settled on the Allston facility problems; long enough to see a full quarters worth of operational impact. I am therefore suggesting that investors may be ready to move past this issue and place their focus on Lumizyme and the company’s late-stage product pipeline. My near-term target price is $55.00 - $60.00, and is pending an Approval for Lumizyme on November 14, 2009.

Upcoming catalysts of interest:

Nov. 14, 2009 – PDUFA date for 2000L scale Lumizyme

Q1/10 – potential approval of sBLA for 4000L scale Lumizyme

Q1/10 – all patients back on full dose of Cerezyme and Fabrazyme

H1/10 – results from the pivotal trial with Genzyme’s advanced phosphate binder (potential follow-on product to Renegal/Renvela)

H1/10 – results from Phase IIb trial with ataluren in Duchenne muscular dystrophy

H1/10 – results from Phase III trial of mipomersen in HeFH

H2/10 – submission of a NDA application in HoFH

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