Genzyme Corporation (GENZ) recently announced that the terms of the consent decree that will be implemented by the US Food and Drug Administration (FDA) for the company’s Allston Landing manufacturing plant have been finalized. The United States District Court for the District of Massachusetts is yet to approve the consent decree.
Per the terms, Genzyme will have to pay $175 million to the FDA as past profits from the sale of certain products. While the FDA is allowing Genzyme to continue supplying Cerezyme, Fabrazyme as well as Thyrogen from the Allston plant, the agency said that Thyrogen will be provided based on medical necessity until the product is filled and finished from another facility. Batches of Thyrogen distributed from the Allston plant will contain a letter drafted by the FDA for physicians.
Under the consent decree, Genzyme will also 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 U.S., the deadline for shifting operations is Aug 31, 2011.
Genzyme will be liable to pay 18.5% of revenues for these products if it is unable to meet these deadlines. Late last year, Genzyme had said that it intends to transfer its fill/finish activities from Allston to other locations. The company is currently filling 80% of Cerezyme supply at its Waterford, Ireland facility. Myozyme will also be filled at this facility.
Genzyme also needs to submit a remediation plan to the FDA which has to be drafted with Quantic, the company’s third party consultant. Genzyme believes it will take two to three years to complete the remediation plan. Genzyme may be required to come up with $15,000 per day for each affected drug if it is unable to meet certain milestones during the remediation period.
Once the remediation plan is completed, the agency will require Quantic to oversee operations and submit annual reports for five years.
Genzyme has yet to provide updated guidance for 2010 based on these latest developments. The company said that it still expects to exit the fourth quarter of 2010 with earnings of $1.00 per share. Genzyme intends to provide an update on its supply schedule in June.
The company is still struggling with its supply schedule. Genzyme reported that it is currently providing for 50% of Cerezyme demand. Genzyme said that the supply situation for Cerezyme 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.
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 currently have an Underperform recommendation on Genzyme. Genzyme’s financial results in 2009 were severely impacted by the temporary shutdown of the Allston manufacturing facility due to contamination issues. Results will be impacted further with the implementation of the consent decree which will lead to Genzyme incurring additional costs.
We believe that the company 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, updates regarding the supply schedule of Cerezyme and Fabrazyme, and new guidance.
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