Genzyme: Time to Sell?

"We have to earn our independence, every day, by doing good things for all our constituents." The words of Genzyme's CEO Henri Termeer, from late 2007, speaking to IN VIVO.

The constituents include shareholders, of course. But the good things certainly don't include major manufacturing snafus, the latest of which those constituents were first made aware of in mid-June when Genzyme declared it was voluntarily closing down its Allston Landing, Mass., production facility, if temporarily, for sanitization following viral contamination.

So does Genzyme no longer deserve its independence? Is it time to sell up? Certainly one or two observers think so. Especially since there's suspicion that the current problems are a lot more severe than Genzyme is letting on.

Genzyme's track record meeting FDA plant inspection requirements hasn't exactly helped preserve shareholders' trust in management. Genzyme apparently received a warning letter in February 2009 as to its plant standards, and a further inspection in May revealed that the company had failed to carry out all of the necessary corrective actions. FDA then informed Genzyme on July 31 that it will re-inspect the Allston plant yet again.

As far as drug supply is concerned, back in June the company said that production of the key rare disease drugs Cerezyme (the only treatment for Gaucher's disease) and Fabrazyme (for Fabry's disease) was scheduled to re-start in late-July. Half the bioreactors at the Allston plant are indeed up and running again, but the company yesterday announced it would have to discard far more--80%--of in-process Cerezyme drug material than initially expected, pushing annual sales estimates down to the lower end of already low guidance--about $750 million. (That may slip even further if the regulators fail to allow two lots of finished drugs, made before the plant was shut down, to be released. Given the company's track record, it's a real possibility.)

As we report in this Pink Sheet DAILY piece, analysts are split on how damaging this whole process has been to Genzyme. Goldman Sachs have the group on their conviction sell list, whereas Leerink Swann reckons concerns are overblown.

No one can argue that Shire is grinning broadly, however, at the golden opportunity it has had to get its own Gaucher's treatment, velaglucerase (Vela), in via the back door. Even though the drug's NDA isn't quite ready yet, FDA has approved a treatment protocol for patients with type 1 of the disease. That means doctors can prescribe the drug, which Shire has agreed to provide free of charge so long as there's no Cerezyme available. Meanwhile the drug has passed its first Phase III trial, the company reports, and is on a fast-tracked NDA submission process.

But let's get back to independence and whether this is the end of Genzyme's. It's hard not to draw a bit of pattern from the fate of a handful of other major biotechs that suffered similarly serious manufacturing problems--think MedImmune, Immunex and Chiron. All of them ended up being sold.

MedImmune went to AstraZeneca in 2007, following FDA warnings that it had failed to address multiple manufacturing problems at a European plant of its nasal influenza vaccine FluMist. Chiron was dogged with similar issues before it eventually became part of Novartis in 2005; its UK production facility for 'flu vaccine Fluvirin was contaminated. For Immunex, which Amgen bought in 2001, the problem was a lack of manufacturing capacity--it couldn't produce enough of RA treatment Enbrel.

If Genzyme is due the same treatment, who will do the honors? Plenty of Big Pharma are now totally converted to the idea of specialist drugs--even the very specialist drugs that Genzyme's into, so there's no philosophical block there. Financially, Novartis might have a problem given its commitment to buy the remainder of Nestle's stake in eye-care firm Alcon (an IN VIVO Blog deal-of-the-year nominee that now looks somewhat less worthy). But what about GlaxoSmithKline or Sanofi Aventis? Both those have admitted that the future isn't about blockbuster oral drugs ; Sanofi knows that growth for the next few years can come only from bolt-on acquisitions and partnerships.

Termeer in his 2007 interview also gave his view of activist shareholders (this was shortly before news emerged of Carl Icahn's stake in Genzyme). "They're a good thing in one sense," he says, "since they force management to understand where their vulnerabilities are, and to unlock maximum value from the business."

Termeer undoubtedly knows where the company's vulnerabilities are right now. (If it's not manufacturing, then he could take a look at how the firm adjusts its earnings, oftentimes rather too heavily in its favor; the sort of tweaking that doesn't do much for confidence at times like this.)

The question is whether or not he can continue to prove that current management is best-placed to unlock maximum value from the business. It was all looking pretty good up until this latest snafu. Genzyme was, after all, diversified and specialist before it was fashionable to be so. But now that it is, and that Genzyme has very definitely tripped up (and seen its share price do the same; it's at a 12-month low), the time for a change may have come.

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