Tuesday, August 11, 2009

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.

image by flikrer burienundressedblog used under a creative commons license


Anonymous said...

What this leaves out is that Genzyme has made the decision to send the remaining stocks of drugs only to children leaving thosands of adults with no treatment for 4-5months. Genzymne wishes to underplay the seriousness of this problem but it is very probable that there will be many serious and life threateing events if not deaths from this decision. This decision was handed to physicians and patients.

Anonymous said...

Genzyme hits its first major bump in the road and everybody wants to hang them out to dry? Nonsense! It is worrisome how today's media is only willing to focus on the negative. How about you blog about the millions of dollars in free treatments Genzyme gives away daily? Where is that blog? How about you interview one of the hundred's of thousands of patients whose life has been saved by a Genzyme treatment? Curious this is missing from your blog. Here's a novel idea...look at the track record of Genzyme's managament as a whole! Compare how many bumps in the road to how many positive accomplishments in the last 25 years and report on what you find! You'll observe that the track record is overwhelmingly positive. It is amazing how the "what have you done for me lately" mentality permeates society today, especially the investment culture. The fact of the matter is that there are vultures, driven by shareholder activists, who lay in wait for a company's mistake. They wait for the stock price to take a hit and then claim "I and my puppet board of directors know how to run your company better than you do and thus I should manage it." They force their way in, drive up the stock prices with a couple of suspect press releases and flip the company; similar to what real estate investors do. Let's call a spade a spade here people.

Marla A. Phillips, Ph.D. said...

I couldn't agree more that the future of Genzyme is concerning. It's not every day that the FDA announces a 2nd re-inspection. You can be sure that a final decision will be made as a result - either they are miraculously OK and "get it" now, or the FDA will be gathering evidence to take action - leads to understanding why the FDA might have chosen the cryo-shippers as one of the issues to assess (can help build the case that adulterated product has crossed state lines).

Also interesting that Genzyme is discarding 80% of it's raw material inventory. If their new vesivirus assay can detect the presence of vesivirus, then why would they have to discard inventory...just to be safe?

Anonymous said...

Let's be frank Dr. Phillips. The FDA is reinspecting to cover it's own arse. Given the FDA's recent stellar record regarding approved drugs that have since become dangerous to consumers they are looking to reinforce their new and supposedly improved "tougher standards" image. In it's simplest terms, Genzyme is the FDA's test case. Had any other big pharma had a product or process related problem they would currently be suffering through the aformentioned tougher FDA standards. Your inference is correct; Vesivirus has no clinical implications in humans so it doesn't need to be discarded. But if the product is contaminated with vesivirus why keep it in the production facility where they risk recontaminating the facility where it's produced? As I stated previously, there are far, far more positives to Genzyme than negatives. It smells of a witch hunt here. Genzyme has been producing quality science for years while others struggle to move one product to pipeline. It appears others are letting their envy color their view.