Thursday, March 25, 2010

Termeer Under Pressure, But Consent Decree Could Lift Cloud From Genzyme

It’s been nearly nine months since viral contamination in a bioreactor caused a temporary shutdown of Genzyme’s Allston Landing, Mass., manufacturing plant. And repeatedly, Genzyme’s executives, especially CEO Henri Termeer, have asserted that the company’s problems were fast receding into the rearview window. (Those little bits of rubber from the fill process were just a speed bump.)

But on Tuesday, March 23, the FDA said “not so fast,” informing Genzyme it would take an enforcement action—likely a consent decree—to ensure products made at Allston Landing comply with good manufacturing practices.

Looks like a full stop—at least temporarily--for Genzyme and Henri Termeer, in what has already been a long and winding journey to regain the good graces of investors. Activist shareholder Carl Icahn has been beating the drum of managerial change and in recent months has boosted his ownership of Genzyme stock and advocated that he, Alex Denner, and two other people be nominated to the biotech’s board of directors.

In the wake of this most recent announcement, investors may begin to come round to Icahn’s view point. On March 24th, the day the news broke, investors sold off shares at record pace. Genzyme’s share price slid roughly 6% with more than 14 million shares trading hands. Icahn has until May 20—the date for the biotech’s annual shareholder meeting--to make his pitch and he certainly has a shot at placing his recruits on the board. Unlike Biogen, which has also occupied Icahn lately, all 9 of Genzyme’s board members are up for election annually.

Will Termeer stay or go? Much likely depends on the exact nature of the enforcement action, including the time span of the consent decree and the size of the accompanying financial penalty. In recent months Termeer has taken important steps forward to right Genzyme’s woes, including outsourcing manufacturing to a third party, Hospira, and hiring an experienced quality of control manager, Ron Branning, from Gilead Sciences.

But these steps were clearly not enough to satisfy FDA. In an effort to put the news in the best possible light to investors, Termeer stressed in a conference call that the parameters of the consent decree will be negotiated between the biotech and FDA in the coming weeks and that the agency’s action would pertain only to Allston Landing and the products—Cerezyme, Fabrazyme, and Myozyme--manufactured and/or filled and finished there.

“This is something that always was one of the possibilities -- not something that we were hoping for. And we worked very hard indeed to get beyond this, to be something to expect. It did come, but we are very well prepared,” said Termeer.

But as our sister publication “The Pink Sheet” DAILY points out, pharma companies subject to consent decrees—a group that has included Abbott, Baxter, Lilly, GlaxoSmithKline, and Teva--rarely extricate themselves from oversight quickly. Indeed, according Raghuram Selvaraju, an analyst with Hapoalim Securities, in the past decade, only one company—Vintage—has met all the requirements of a decree to where it has been formally lifted. “Many of the others are still forced to abide by their agreements in totality,” Selvaraju wrote in a same-day note to investors.

And beyond the additional hassle required by third party oversight, there could be significant financial costs associated with the consent decree. Recall in 2002 FDA fined Schering-Plough, now part of Merck, $500 million as part of the consent decree for failing to comply with good manufacturing practices related to the production of its albuterol inhaler products. Beyond that, the agreement specified that FDA could assess royalties up to 24.6% on US net sales on products for which re-validation did not occur within the timelines specified under the decree.

Imagine if a similar agreement were imposed on Cerezyme precisely at a time when the medicine is under pressure from competing products from Shire and Pfizer.

Not everyone agrees the FDA will be so punitive. In a note to investors, Leerink analyst Joshua Schimmer wrote that while Genzyme's "failure to maintain its facility for a prolonged period of time may result in a punitive fine to set a precedent for other biologic manufacturers, we doubt the penalty would be nearly as sizeable" as Schering Plough's. But in what may a telling point for both Termeer and Genzyme, Schimmer went on to write, “That said, this is an area where visibility is poor.” Talk about damning with faint praise.

Paradoxically, the consent decree may actually be a good thing for Genzyme. The company has historically misread cues from regulators, repeatedly reassuring investors that its fixes were more than sufficient to take care of the problems at hand. But with consistent oversight from an unbiased third party, investors can finally have faith in the products manufactured at Allston. As analysts like to say, that ought to reduce the overhang from the stock price.

Will the consent decree lift those same clouds for Termeer? Well, that’s another question entirely.
--Ellen Licking
image from flickr user Grant Palmer Photography used under a creative commons license

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