Genzyme Corporation (GENZ) reported second quarter earnings of 6 cents per share (excluding one-time items but including the impact of stock-based compensation expense), well below the Zacks Consensus Estimate of 36 cents and the year-earlier earnings of 64 cents. Excluding the impact of stock-based compensation expense, earnings came in at 18 cents.

With the company yet to emerge from manufacturing problems, we were not surprised to see the dismal second quarter results. Second quarter revenues declined 12% to $1.08 billion, mainly due to restricted supplies of Cerezyme and Fabrazyme.

Genzyme’s Personalized Genetic Health business was the most adversely affected by the temporary shutdown of the company’s Allston Landing facility in June 2009. The Personalized Genetic Health segment posted sales of $350.5 million, down 40%. Production and supply of two products, Cerezyme and Fabrazyme, were mainly affected by the temporary shutdown. While Cerezyme sales declined 53% to $138.7 million, Fabrazyme revenues declined 71% to $39.5 million.

Other segments like Renal & Endocrinology, Biosurgery and Hematology and Oncology grew during the quarter. While Renal & Endocrinology grew 4% to $258.4 million, Biosurgery grew 18% to $164 million. The Hematology and Oncology segment increased 58% to $176.5 million.

Update on Supply Schedule

Genzyme is still struggling with its supply schedule. The company reported that it expects to increase supply of its Gaucher disease treatment, Cerezyme, in August. Genzyme said that patients should be able to return to normal dosing in the fourth quarter and it should also be in a position to cater to the needs of new patients. Cerezyme was being provided at 50% of demand during the second quarter.

We remain concerned that a further delay in resuming full supply of Cerezyme could lead to loss of share to Shire plc’s (SHPGY) Vpriv and Protalix BioTherapeutics Inc.’s (PLX) Uplyso. While Vpriv was launched earlier this year, Uplyso may receive approval in February 2011. Both products were made available under the US Food and Drug Administration’s (FDA) expanded access program while Cerezyme supply was affected.

Although Genzyme holds a leading position in the treatment of Gaucher disease, the patient population for the disease is not large. Therefore, the entry of additional players in the market could restrict its future growth opportunities.

Genzyme also provided an update on Fabrazyme. While the company is working on improving productivity, it expects the current shipping allocation (30% of demand) to continue through the third quarter of 2010. Genzyme expects to increase shipments in the fourth quarter.

Consent Decree

Genzyme said that it has started making changes so as to meet the requirements of the FDA’s consent decree. Under the consent decree, Genzyme will have to shift its fill/finish operations for Cerezyme, Fabrazyme and Thyrogen sold in the US to another plant by Nov 28, 2010. For products sold outside the US, the deadline for shifting operations is Aug 31, 2011.

Genzyme has a supply agreement with Hospira Worldwide Inc. (HSP), under which Hospira will perform fill/finish activities for several products in Genzyme’s portfolio including Cerezyme, Fabrazyme, Myozyme, Lumizyme, Thyrogen, Thymoglobulin, Campath, and select pipeline candidates. Genzyme said it is on track to meet the November 2010 deadline for its US products.

2010 Guidance Slashed

With the consent decree in place, Genzyme provided new guidance for fiscal 2010. Genzyme expects earnings in the range of $1.90 – $2.00 (excluding the impact of stock-based compensation expense) on revenues of $4.4 billion – $4.5 billion. This is well below the previous guidance of earnings in the range of $2.80 – $3.20 on revenues of $5.2 – $5.5 billion. The Zacks Consensus Estimate is currently $1.94 for 2010.

The company slashed its revenue guidance for Cerezyme to $725 million – $775 million (earlier guidance: $980 million – $1,037 million). Fabrazyme revenues are now expected in the range of $200 million – $220 million (old guidance: $360 – $380 million).

Third and fourth quarter earnings are expected in the range of 40-50 cents and 90 cents – $1.00 per diluted share, respectively. The updated guidance does not include revenue and expenses in the second half of the year for Genzyme’s genetic testing, diagnostic products and pharmaceutical intermediates businesses. Genzyme is looking to divest these businesses in the second half of the year.

Long-Term Neutral Stance on Genzyme

We currently have a Zacks #4 Rank (Sell) on Genzyme which indicates that the stock is expected to underperform the broader U.S. equity market over the next 1-3 months. Genzyme has been under a lot of pressure over the past few quarters following the temporary shutdown of its Allston manufacturing facility.

We believe that near-term challenges remain before the company will be able to go back to a normal production and supply schedule. Moreover, the FDA’s consent decree could result in Genzyme incurring additional costs in case of non-compliance. These factors will remain an overhang on the shares in the near-term.

However, longer-term, we have a Neutral stance on the stock. We are pleased to see that Genzyme is taking steps to emerge from the impact of the temporary shutdown of the Allston plant. We view the recent approval of Lumizyme as a major positive and are pleased to see the company working on expanding its product portfolio and pipeline so as to reduce its dependence on a handful of products for growth.
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