Genzyme's annus horribilis shows no sign of improving

Even before the FDA’s ominous announcement last week that it had found things that really should not be there in vials of Genzyme’s enzyme replacement products, the US biotech was certainly having a personal annus horribilis.

With calls for heads to roll growing louder from the investment community and commentators alike, the company is heading into 2010 in a bruised and battered state. Manufacturing problems are still not sorted to the regulator’s liking at Genzyme’s now infamous Allston facility and niggling negatives are cropping up elsewhere, and concerns are mounting that things could get a lot worse before they get start getting better.

List of woes

The list of Genzyme’s problems is long and seems to be growing every week. Concerns that deficiencies at the manufacturing plant will take a lot longer to resolve than the company believes are doing the most damage. The shut down, prompted by a viral contamination, meant sales have already been hit and the company has lowered financial guidance four times this year; severely denting the share price and confidence in management.

With the company’s weakened Cerezyme now facing competition in the Gaucher disease market much sooner than anticipated, a swift resolution is sorely needed (Therapeutic focus - Spotlight falls on new Gaucher treatments amid Genzyme's woes, August 6, 2009).

The knock on effect to other products is already happening: last week the FDA refused to approve Lumizyme, a bigger batch Myozyme product for Pompe Disease, until problems at Allston are sorted, news that was widely expected but disappointing all the same.

And then the FDA’s announced the discovery of foreign particulates. This was certainly bad for the Genzyme image, but the reality was probably not so disastrous. The levels discovered, in less than 1% of products, was in line with the industry norm for these sorts of products and looks more like the regulator wanting to remind doctors that filtration should be used before administration. The timing of this reminder could not have been worse however.

Pipeline set backs

On top of all this the pipeline has also been disappointing. This week brought news that the follow-on product for its kidney disease franchise was being scrapped after phase II/III trials found it was no more potent than the existing products, Renagel and Renvela. They lose patent protection in 2014, sales in 2013 are forecast to reach almost $800m, and Genzyme is now without a new option to switch those patients on to.

Another set back came with news that an experimental cholesterol lowering drug in development with Isis Pharmaceuticals, mipomersen, will not be filed until 2011, 12 months later than anticipated. Still, this product is incredibly high risk and hopes for its commercial potential were already dimming (Genzyme and Isis could see mipomersen fears grow, November 18, 2009).

Another very high risk in-licensed product that Genzyme threw a lot of money at to secure rights to was Prochymal, which crashed out spectacularly a couple of months ago (Osiris left clinging to a niche after Prochymal failure, September 9, 2009).

Neither mipomersen or Prochymal has painted Genzyme's in-licensing strategy in a particuarly favourable light.

No return

All these set backs have already prompted financial analysts to scale back their forecasts for the next couple of years, but several are maintaining a much more pessimistic stance than the company’s already deflated share price suggests.

The influential Goldman Sachs has come out as particularly downbeat. They believe all these problems could hurt a lot more over the longer term than currently appreciated. They recommend investors sell the shares and have placed a $44 price target on the stock, possibly the lowest amongst financial analysts. Today Genzyme shares were trading at $49.80; if Goldman Sachs is right they still have a long way to fall.

Other than a brief spell in August this year, the last time the stock was trading below $50 was in July 2004, and at that point it was definitely on an upward trend. The company has already lost a quarter of its market value this year.

Genzyme has never paid a dividend, so the only return available to investors is through a rising share price. Since September 2008, when the stock touched a record high of $83.50, the trend has been decidedly southwards.

If signs that the situation is under control do not emerge very quickly, calls for heads to roll will get louder. The arrival of one Carl Icahn, the notoriously demanding activist investor, on the shareholder roster last week could indicate an escalation in the debate is about to happen.

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