Clolar Decision Aside, Genzyme's Still a Near-Term Sell

by: Mark Mitchell

On Tuesday morning, the FDA's Oncologic Drugs Advisory Committee (ODAC) voted 9 to 3 against the label expansion of Genzyme's (GENZ) leukemia drug, Clolar, in acute myeloid leukemia (AML). The FDA does not have to follow this recommendation, however, it usually does, which suggests that the agency will not likely approve this label expansion in December of this year. This announcement is not surprising given that the published FDA briefing documents indicated concern over the lack of a control-arm in Genzyme's pivotal trial to support this label expansion, along with other questions related to the drug's true benefit.

The company was looking for a label expansion into the adult AML population (>60 years of age) that were not able to undergo chemotherapy. Given that the drug is currently approved for use solely in younger patients (<21 years of age) with relapsed or refractory acute lymphoblastic leukemia (ALL), this expansion into adult AML would have represented a significant market expansion for the drug.

However, my take on this news is... who really cares right now? Revenues derived from Clolar currently represent <1% of the company's total revenues (FY2008 revenues), or less than $50 million based on my estimates (see Appendix A for Clolar estimates). Label expansion into AML would no doubt significantly expand revenues attributable to Clolar.

However, when I push back sales of Clolar in adult AML from 2010 to 2012 (accounting for the FDA's request for a randomized, comparison study with Clolar in adult AML), my long-term target price drops from $62.60 to $62.47 per share. Furthermore, if I remove these adult AML revenues out of my model completely (~$150 million per annum at peak), my long-term target price drops from $62.60 to $61.97. Nothing to stress about, other than the added negative sentiment to shares of Genzyme.

More importantly, the company continues to receive negative press related to the contamination and resulting shut-down at its Allston manufacturing plant, which is where its blockbuster gaucher disease therapy Cerezyme and Fabry's disease drug Fabrazyme are produced. On Tuesday, competitor Shire PLC (SHPGY) announced that it has sent its experimental gaucher disease therapy, velaglucerase alfa, to the FDA for approval. This is ahead of schedule, and should continue to drive negative sentiment into shares of Genzyme, in my opinion.

However, I do not believe that this announcement from Shire will have any added damage to future sales of Cerezyme, and I have therefore not made any changes to my financial model as a result of this news. Please see my article titled "Genzyme: more negative news" published on August 18, 2009 for my reasoning behind this analysis.

Teva takeover rumors?
Based on my view that there are limited upcoming impactful catalysts for Genzyme, and the continued negative sentiment around lead drug Cerezyme, I am confounded by the recent run-up in the company's share price. Then I recently read a rumor about the possibility of Teva Pharmaceuticals (NYSE:TEVA), the world's largest generics drug manufacturing firm, acquiring Genzyme. This rumor followed the recent rumors of Teva having potential interest in acquiring ViroPharma (VPHM). As always, take-out rumors can attract investors over the short-term and can lead to artificial share-price appreciation. However, I believe that these rumors are likely unfounded and should be ignored.

Let's analyze this for a second from a financial point of view. Teva acquired Barr Pharmaceuticals for under $8 billion in 2008. Does it have any remaining financial leverage to acquire a company like Genzyme, likely at a premium in the range of $20 billion? With only $1.8 billion in cash on the balance sheet as of June 30, 2009, I believe that a takeover by Teva is highly unlikely at this point in time. Additionally, Teva may be more interested in acquiring a Genzyme competitor, namely Protalix (NYSEMKT:PLX), based on its plant-based (read: bio-generic) manufacturing technologies. In my opinion, this transaction would make more strategic sense for a generic pharmaceutical company such as Teva.

Near-term investment thesis remains intact:
Based on the analysis above, I remain committed to my near-term SELL recommendation for Genzyme, with a target price of approximately $45.00 per share. I believe that investors should either sell, or remain on the sidelines until the dust settles on all issues related to the Allston plant contamination and shut-down. In my opinion, the most opportune time to buy back into Genzyme could be after Q3/09 financial results have been announced in October, which I expect will likely disappoint given the aforementioned Cerezyme/Fabrazyme manufacturing issues.

Following which, I believe that investors could potentially have an opportunity to buy back into Genzyme in advance of the FDA action date (November 14) for the company's pompe disease therapy, Lumizyme. I anticipate an outright approval, which would likely provide some spark while investors wait for news surrounding the company's late-stage pipeline. Please note that my long-term target price remains $63.00 per share, which supports my long-term BUY recommendation.


ALL financial estimates:
It is estimated that the incidence of ALL in pediatric patients is 5,000 cases in the U.S. and EU. Using a generous average selling price of $20,000 per year, and a 90% penetration rate of the estimated 500 patients who experience a second relapse, I estimate that sales of Clolar in ALL could represent approximately $10 million per year. Please note that sales of Clolar are likely higher than that due to the potential for off-label use in adult AML. I also note that a label expansion into first-line therapy in ALL could potentially push sales of Clolar in pediatric ALL up to $60-$80 million.

Adult AML financial estimates:
It is estimated that the annual incidence of AML in adult patients is approximately 13,000 cases in the US alone. As above, using a generous average selling price of $20,000 per year, and a 50% penetration rate in those patients who are not able to undergo chemotherapy (~70% of AML patients older than 65 years do not receive chemotherapy according to Medicare records), I estimate that sales of Clolar in adult AML could represent approximately $80 million per year in the US. One could double this value as a crude estimate of the potential US and EU sales of Clolar in adult AML, which would result in a rough sales estimate of approximately $160 million.

MDS financial estimates:
It is estimated that the annual incidence of MDS is approximately 25,000 cases in the U.S. and EU. As above, using a generous average selling price of $20,000 per year, and a 30% penetration rate (to account for competition), I estimate that sales of Clolar in MDS could represent approximately $150 million per year.

These estimates include only the U.S. and EU. When including additional global territories in these three indications, total sales of Clolar could reasonably hit $600 million per annum, in-line with company estimates.

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