Genzyme Corporation (GENZ) reported third quarter earnings of 32 cents per share (excluding one-time items but including the impact of stock-based compensation expense), a penny shy of the Zacks Consensus Estimate, but 88% above the year-earlier earnings of 17 cents.

Excluding the impact of stock-based compensation expense, earnings came in at 42 cents, up 50% from the year-ago period, and in line with the guidance provided by the company. Third quarter performance was driven by increased shipments of lead product, Cerezyme, sales contribution from the recently launched Lumizyme and lower costs.

Third quarter revenues increased 8.2% to $1 billion. Although revenues were slightly short of the Zacks Consensus Estimate of $1.1 billion, we were pleased to see that Genzyme is finally showing signs of emerging from its manufacturing problems, which hampered results over the past few quarters.

The company restated its operating results for the third quarter of 2009 to include the impact of the upcoming sale of its Genetics and Diagnostics businesses, which the company intends to divest by year end. Genzyme has an agreement with Laboratory Corporation of America Holdings (LH) for the sale of its Genetics business.

Genzyme’s Personalized Genetic Health business, which was the most adversely affected by the temporary shutdown of the company’s Allston Landing facility in June 2009, bounced back in the third quarter with sales increasing 9% to $404 million.

While Cerezyme sales jumped 92% to $179.8 million, Fabrazyme revenues declined 71% to $33.9 million. Meanwhile, the recent US launch of Myozyme helped boost Myozyme/Lumizyme revenues by 24% to $106.2 million.

Other segments like Renal & Endocrinology, Biosurgery and Hematology and Oncology continued to grow during the quarter. While Renal & Endocrinology grew 4% to $270.4 million, Biosurgery grew 8% to $156.7 million. The Hematology and Oncology segment increased 17% to $167.3 million.

Update on Supply Schedule

Genzyme has made significant progress with its supply schedule. Production and supply of two products, Cerezyme and Fabrazyme, were mainly affected by the temporary shutdown. The company reported that patients in the US are back on normal dosing levels of Gaucher disease treatment, Cerezyme. Ex-US patients are expected to resume normal dosing from the fourth quarter. The company expects Cerezyme revenues to increase to $235-$245 million in the fourth quarter.

Genzyme should also be in a position to increase shipments of Fabrazyme during the fourth quarter. With the company working on improving productivity, full supply in the global market should resume in the first half of 2011. Genzyme has already started doubling Fabrazyme shipments in the US and expects to do the same in the global markets during the fourth quarter. Fabrazyme sales are expected in the range of $75 – $75 million during 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. Genzyme said that it is on track to meet these deadlines. 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.

Fourth Quarter Guidance Narrowed

Genzyme narrowed its fourth quarter EPS guidance and now expects earnings in the range of 90 – 95 cents per share. The company was previously guiding towards fourth quarter EPS in the range of $0.90 – $1.00.

The revised guidance includes the impact of the cost reduction program (Value Improvement Program) that is being implemented by the company. Genzyme expects to reduce operating costs and improve margins over the next 15 months. The full impact of this program is expected to materialize by 2012.

Genzyme intends to hold an Analyst and Investor meeting on October 22, where financial guidance for 2011 will be provided.

Our Take

We currently have a Neutral recommendation on Genzyme. We are pleased to see that Genzyme is taking steps to emerge from the impact of the temporary shutdown of the Allston plant. The company has made significant progress with its supply schedule and should be able to resume normal supply of Cerezyme and Fabrazyme in the coming months.

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. Meanwhile, we note that French pharma giant Sanofi-Aventis (SNY) recently launched a hostile bid to acquire Genzyme.

 
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