Of late, what passes for good news at Genzyme is that things aren't as bad as they could be. That was the case April 21 when the biotech detailed its first-quarter financial results, attempting to spin a large year-over-year decrease in Cerezyme sales as an increase from the previous quarter and noting that a draft consent decree from FDA did not appear as onerous as some had feared.

On the latter point, industry analysts largely agree with Genzyme. Following last June's shutdown of its Allston Landing, Mass., manufacturing plant to remediate viral contamination and a variety of problems that ensued, including shortages of top sellers Cerezyme (imiglucerase) and Fabrazyme (agalsidase beta), Genzyme was informed last month that FDA would place the facility's operations under a consent decree (Also see "Genzyme's Manufacturing Problems Lead To Enforcement Action By FDA" - Pink Sheet, 24 March, 2010.).

The company reported April 21 that the proposed draft consent specifies that it pay a $175 million upfront disgorgement of past profits. In addition, draft language raises the possibility of an 18.5 percent royalty on products filled and finished at Allston following a mutually agreed-upon deadline and daily $15,000 fines if good manufacturing milestones are not met by a to-be-determined date.

CEO Henri Termeer noted on the earnings call that discussions with FDA on the consent decree were ongoing, with Genzyme most concerned about setting up a feasible schedule for transferring Allston fill-finish operations to its Waterford, Ireland, plant and to contract manufacturer Hospira. The company would try to negotiate "as good a way, predictable way, a safer way so we don't interrupt supply [of] product but we do meet the schedule that we agreed on."

"Genzyme essentially dodged a bullet here with the initial terms of the consent decree not being particularly punitive," Hapoalim Securities Senior Vice President, Healthcare Research, Raghuram Selvaraju said in an interview. "The $175 million fine is really a slap on the wrist compared to what it could have been and the 18.5 percent royalty payment on products being manufactured at the Allston facility really only extends to products that are fill-and-finished there."

J.P. Morgan analyst Geoffrey Meacham, in a same-day note, said he had expected the upfront fine to be about $100 million, but conceded the draft consent decree was "perhaps better than the disaster some had feared."

Meanwhile, Bernstein Research's Geoffrey Porges wrote April 21 that the provisions appeared "in line with those seen in prior consent decrees. Critically, these provisions are only triggered upon continued failure to meet [consent degree] requirements."

Genzyme Chief Legal Officer Thomas DesRosier said the key to minimizing the consent decree's impact would be moving Cerezyme and Fabrazyme fill-finish work completely out of the Allston plant. The firm already has moved about 50 percent of such work related to Cerezyme to Waterford.

"We will come up with a timetable agreed upon with FDA for that exit. We expect that to be a reasonable time period," DesRosier said. "We don't think there is risk in missing the deadline [which] would result in the 18.5 percent royalty disgorgement. So we have a lot of incentive to move quickly out [of Allston] and FDA is going to work with us to get an appropriate timeline in place."

Sales declines, further delays for Cerezyme, Fabrazyme

Genzyme also reported that first-quarter sales of Cerezyme and Fabrazyme, orphan drugs for the rare enzyme deficiency disorders Gaucher disease and Fabry disease, had declined significantly from one year earlier. Cerezyme sales totaled $179.1 million during the first quarter, down 39 percent from $296.0 million in first-quarter 2010. The company pointed out, however, that the first-quarter 2010 number was up 70 percent from fourth-quarter 2009 ($105.4 million).

Even that argument was not available to deflect Fabrazyme's performance, however. Sales for the quarter totaled $53.2 million, a 59 percent decline from $122.2 million a year earlier, and down nearly $5 million from the fourth-quarter total of $58.0 million.

Once, the two enzyme replacement therapies had the worldwide Gaucher market and U.S. Fabry market to themselves. But since shortages resulted from the Allston problems, FDA has permitted patients to receive experimental drugs for those conditions under a treatment IND from Shire (velaglucerase for Gaucher; Replagal , already on the market in Europe, for Fabry) and Protalix (taliglucerase for Gaucher).

Asked about patient losses to those drugs, Genzyme Senior VP John Butler said the company had lost about 100 Gaucher and 100 Fabry patients during the first quarter, bringing the total of departed patients within each disease community to about 400 apiece.

Exacerbating the ongoing supply problems, however, were a pair of mishaps that led to additional production stoppages during the first quarter. Scott Canute, president, global manufacturing and corporate operations, said Genzyme detected higher than normal bioburden levels in the Allston water-for-injection systems in early March, which resulted in replacement of a heat exchanger. Then, after a municipal power outage March 29, the company again found high bioburden levels in the same system, necessitating a remediation program of chemical cleaning and sanitization.

As a result, Genzyme again had to push back its timelines for restoring delivery of full demand for Cerezyme and Fabrazyme. Initially hoping to return to full supply of Cerezyme this month, Genzyme now says it will continue shipping the product at 50 percent of demand for another two to three months. Likewise, Fabrazyme will continue to ship at 30 percent of patient demand through the third quarter - previously the company had projected return to full demand in May.

Genzyme still needs to determine whether it can make drug from work-in-process material manufactured during the period of higher than normal bioburden levels, Canute said. "No product manufactured during this period has been released or will be released until we complete an investigation report including product quality and medical assessments as part of normal routine procedure," he explained.

Canute did not indicate what the impact would be on supply if the WIP material has to be discarded, but said Genzyme would update its supply expectations for the two drugs within the next month.

Moves to head off Icahn takeover efforts

About a week before the earnings call, Genzyme made what appears to be an effort to forestall attempts by activist investor Carl Icahn and associates to force a proxy fight for control over the company (Also see "Agreement Averts Another Proxy Fight Between Biogen Idec, Icahn" - Pink Sheet, 22 March, 2010.). Having agreed previously to add Relational Investors Principal Ralph Whitworth to its board in November in exchange for his support for the company's board candidates and positions, Genzyme accelerated that plan, adding him to the board on April 15.

In addition, the company said it would seek to add another independent board member, one who would bring "substantial expertise in biopharmaceutical manufacturing and operations." Whitworth's election brings the board's membership to 10 and another member would bring that total to 11 - Icahn, who has nominated a slate of four candidates to the board, also plans to propose limiting the Genzyme board to nine seats.

In a release, Genzyme said Whitworth's term would last until the company's annual meeting, recently pushed back from May 20 to June 16. Genzyme's proxy statement for that meeting will nominate Whitworth and the other current nine members of the board for reelection, the company said.

With Genzyme's continuing production problems, Selvaraju and Meacham both predicted the company is unlikely to meet its 2010 financial guidance, resulting in more stock price fluctuation and increasing heat on the board. Meacham rated the company "overweight," noting the "the likelihood of supply disruptions imply that financial guidance could go lower."

"Whatever Genzyme said on the call was obviously not very inspiring with respect to the likelihood that it will be able to meet the 2010 revenue estimates for its most profitable drugs," Selvaraju added. "Already, we've seen additional manufacturing interruptions for Cerezyme [and] a new disclosure that Fabrazyme is not going to be up to meeting 100 percent of worldwide demand."

-Joseph Haas (j.haas@elsevier.com)

Genzyme, Industry Analysts Relieved By Particulars In Draft Consent Decree

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