Genzyme Corporation (GENZ) reported first quarter earnings of 24 cents per share, above the Zacks Consensus Estimate of 19 cents but well below the year-ago earnings of 70 cents.

With the company facing manufacturing problems from mid-2009, we were not surprised to see first quarter revenues decline. They fell 6.5% to $1.07 billion, mainly due to restricted supplies of Cerezyme and Fabrazyme.

Genzyme’s Personalized Genetic Health business (previously referred to as the Genetic Diseases 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 $392.5 million, down 29%. Production and supply of two products, Cerezyme and Fabrazyme, were mainly affected by the temporary shutdown. While Cerezyme sales declined 39% to $179 million, Fabrazyme revenues declined 56% to $53.2 million.

Other segments like Renal & Endocrinology, Biosurgery and Hematology and Oncology grew during the quarter. While Renal & Endocrinology grew 4% to $252.4 million, Biosurgery grew 15% to $137.4 million. The Hematology and Oncology segment increased 76% to $156.3 million.

Update on Supply Schedule

Genzyme is still struggling with its supply schedule. The company reported that it is currently providing for 50% of Cerezyme demand. Genzyme stated that the supply situation for its Gaucher disease treatment will remain this way for another 2-3 months, mainly due to a disruption in operations at the company’s Allston facility late in the first quarter. The disruption was due to an unexpected electrical power failure.

We remain concerned that a 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 recently, Uplyso may receive approval later this year. 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. As such, the entry of additional players in the market could restrict its growth opportunities in the future.

Genzyme is currently catering for 30% of Fabrazyme demand. While the company is working on improving productivity, it expects the 30% shipping allocation to continue through the third quarter of 2010. We expect to hear more on the company’s supply schedule in the coming months.

FDA Issues Draft Consent Decree

Genzyme also announced that the FDA has provided the company with a draft consent decree. This news does not come as a surprise, as late last month the company had announced that the FDA intends to take enforcement action related to its manufacturing facility at Allston Landing.

The FDA decided to adopt this course so as to ensure that the products manufactured at the facility are made in compliance with good manufacturing practice regulations.

Genzyme took a $175 million charge in the first quarter related to the consent decree. The company is currently in discussions with the FDA regarding the terms of the decree. The FDA’s consent decree will result in Genzyme incurring additional costs.

More information regarding the time period and costs involved with the FDA’s action will be available during the second quarter following Genzyme’s discussions with the agency. Genzyme intends to update its guidance once the consent decree is finalized.

Our Take

We currently have a Neutral recommendation on Genzyme. The company has been under a lot of pressure over the past few quarters following the temporary shutdown of its Allston manufacturing facility due to contamination problems. Genzyme is now working on emerging from the impact of its manufacturing issues.

We are also pleased to see that the company is working on expanding its product portfolio and pipeline so as to reduce its dependence on a handful of products for growth. However, we believe that Genzyme may have to face additional challenges before it is able to go back to a normal production and supply schedule.

We expect investor focus to remain on the company’s emerging pipeline and updates regarding the supply schedule of Cerezyme and Fabrazyme and the FDA’s final consent decree.
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