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Sar Medoff

GENZ AT A GLANCE

P/E ► 27.9 AVG EV/EBITDA ► 11.3 AVG ROA ► 5% AVG ROE ► 6.5% AVG Debt to Equity ► 0.309 AVG Current Ratio ► 2.55 AVG Interest Coverage Ratio ► 839 VERY HIGH

 

 

 

 

 

 

Genzyme is a leading biotechnology firm focused primarily on developing drugs for rare diseases and chronic illnesses. In 2006, Genzyme had nearly $3.2 billion in revenue and 5-year growth rate of 22.6%. The company had a net loss in 2006 of $17 million, due to its acquisition of two smaller biotechnology firms. Genzyme’s rare disease treatments account for 47% of the company’s revenue, and treatments for dialysis patients with late-stage kidney disease provide nearly 20%.

Genzyme's most important product is Cerezyme, an injectable enzyme-replacement treatment that is the standard of care for patients with Gaucher Disease. Cerezyme accounts for approximately 35% of Genzyme's total revenue. Cerezyme's future growth is limited because of the small patient pool and because the majority of Gaucher patients already use the treatment.

Genzyme’s continued success relies on its ability to continue to dominate specialized, rare disease markets that have small patient populations, as well as its ability to expand market share for existing drugs. Genzyme’s recent acquisition spree has brought it a number of new products that exhibit growth potential, but their market share must continue to grow steadily to allow for Genzyme’s continued success. Genzyme faces similar obstacles to most other biotechnology firms, including concentrated risk in a small number of products, FDA regulation and approval, Medicare reimbursement levels, and litigation. Genzyme has a diverse product pipeline with twenty drugs in clinical trials and the company’s long-term success depends on their ability to develop effective drugs, get FDA approval for these drugs, and bring these drugs to market. Additionally, any changes to Medicare reimbursement plan could adversely affect Genzyme’s revenue if clinics and doctors become less willing to use Genzyme’s products due to reduced reimbursement rates.

Company Overview

Genzyme, Inc. (NAS: GENZ) is a leading biotechnology firm that focuses on developing treatments for rare diseases and chronic illnesses. The company’s products are split between six different areas: Genetic Diseases, Renal Disease, Orthopaedics/Biosurgical Specialties, Oncology/Endocrinology, Transplant/Immune Diseases, and Genetics/Diagnostics. Genzyme’s two flagship treatments – Cerezyme for treating Gauchers Disease, and Renagel for treating patients who are on kidney dialysis – account for more than 50% of the company’s sales. Genzyme also has an extensive array of treatments in its development pipeline, including potential treatments for Multiple Sclerosis, bone marrow transplants, and Pompe Disease.

Products

Genetic Diseases

Because of Genzyme’s focus on rare diseases, the company has been able to capture a majority market share in many of its treatment areas. Since 1992, Cerezyme has been the standard treatment for Gaucher’s Disease, which affects approximately 30,000 people worldwide. Gaucher’s Disease is caused by an enzyme deficiency that leads to fatty material accumulating in many vital organs; patients' symptoms may include severe pain, liver failure, neurologic complications, and anemia. Cerezyme continues to see steady growth because of the consistent identification of new cases. There are no significant competitors or threats to Cerezyme's market leading position. It has proven to be safe and effective, and there are currently no advanced commercial efforts to develop alternative therapies. Cerezyme treatment costs up to $750,000 annually.

Genzyme produces two other drugs targeted at rare diseases: Fabrazyme and Myozyme. Both have market-dominating potential because there are no effective standards of care for these illnesses. Fabrazyme is a treatment for Fabry Disease, which afflicts less than 10,000 people worldwide. As treatment is adopted in new geographic markets and more patients are identified, Genzyme could see significant revenue growth from this drug. Myozyme is the first treatment available for the oft-fatal Pompe Disease, known to affect at least 10,000 patients worldwide. Most babies born with this disease die withing a year, but the growth of diagnostic testing in utero and through the first three months, the potential number of patients could expand to 20-60,000 patients worldwide. These two drugs are potential blockbusters that may replace Cerezyme as Genzyme's largest revenue source in the future.

Renal Disease

Genzyme has two products to treat secondary hyperparathyroidism, a mineral metabolism disorder common in patients with kidney disease -- the approximately 400,000 individuals in the U.S. who require dialysis. About half of U.S. dialysis patients take Genzyme’s Renagel, and the remainder take PhosLo, produced by Fresenius. Patients with advanced ]kidney disease are unable to excrete phosphate -- a natural ingredient in food -- and the phosphate that accumulates in a patient's body can lead to cardiovascular disease. Patients take Renagel with meals, and the Renagel binds to the phosphorus in a patient's food. This prevents the phosphates from being absorbed into the patient's bloodstream. Renagel's key commercial advantage is that cheaper phosphate binders such as Phoslo or over-the-counter TUMS, Renagel does not contain calcium, which may cause complications for patients with kidney disease. Calcium's harmful effects on dialysis patients have yet to be confirmed by researchers. Thus, Renagel’s sales may be affected by future calcium-related studies, since there are less expensive calcium-containing alternatives.

The 2005 acquisition of Bone Care included the patent to Hectorol, a special form of Vitamin D for dialysis patients that competes with Abbott Labs' Zemplar. Hectorol and Zemplar are both injectable drugs, which are reimbursed differently than pill products. The drugs are purchased by dialysis centers – two companies, Fresenius and Davita, operate ~80% of US dialysis centers and are Hectorol's primary customers. These dialysis centers purchase the drug and are reimbursed by Medicare. Although Hectorol is much less expensive than Zemplar and few clinical studies have shown any difference in efficacy between the two drugs, Hectorol has a small market share. This discrepancy may be due to Medicare’s current reimbursement system, which leads to the dialysis clinics earning a larger profit margin on Zemplar than Hectorol.

Pipeline Products

Genzyme has more than twenty drugs in late-stage clinical trials with results expected from ten of these trials in 2007. The results of three trials are of particular importance to the company, as it expands into larger disease markets: Tolevamar is designed to treat severe diarrhea contracted in the hospital, Mozobil is meant to improve the efficacy of bone marrow transplants, and Alemtuzumab is a foray into treating Multiple Sclerosis. These drugs could help Genzyme penetrate three major markets that have multiple competitors but have not yet adopted a single proven, effective, consistent drug as the standard treatment.

Risks

Genzyme’s risks are similar to those encountered by most biotechnology firms: majority of revenue concentrated in one or two main products, FDA approval, medical litigation, and over-aggressive acquisition and integration of other companies.

Concentrated Risk

Genzyme has an impressive stable of diverse products, but together, Cerezyme and Renagel account for more than 50% of the company’s revenue. Because of the small patient pool and possible alternative treatments, both of these drugs are vulnerable to competition, however their proven efficacy makes them more stable fixtures and they will prove difficult to displace unless a competing treatment is discovered to be significantly more effective.

FDA Regulation

As with all medicines in the United States, Genzyme’s products are subject to FDA approval and regulation. FDA approval requires tremendous research and at least three large clinical trials that prove the drug’s safety and success rates. Because Genzyme’s products are used across the globe, its drugs are also subject to the regulatory and approval processes of other countries’ drug regulation departments.

Medicare Reimbursement

Because most of the patients who use Genzyme's treatments are eligible for Medicare, Genzyme's revenue is vulnerable to changes in Medicare reimbursement rates. Any reimbursement rate change would have a direct impact on Genzyme's revenue. Indirectly, rate changes may also cause doctors and clinics to be less willing to use Genzyme's products at the current market price for these products.

Litigation

Despite the FDA’s stringent regulations, there is always the risk of unforeseen side effects that don’t become apparent until after the drug has come to market. Depending on the severity of the side effects, affected patients could potentially pursue medical litigation against Genzyme.

Aggressive Acquisition

Since May 2004, Genzyme has acquired nine other specialized biotechnology firms that have greatly contributed to the Genzyme product pipeline. The risk of an aggressive acquisition policy is that Genzyme may fail to optimize new profit opportunities and lose focus on its core products

Competition

Because of Genzyme’s diverse product pipeline, multiple companies compete with Genzyme. The landscape of competitors shifts quickly due to constant innovations and discoveries in biotechnology. Shire PLC and Amicus Therapeutics are Genzyme’s primary competitors in rare disease markets. Shire has products to treat Fabry's Disease and Gaucher's Disease, two of Genzyme’s key markets. While neither of Shire’s drugs are currently available in the United States and would need to undergo head-to-head trials with Genzyme’s products before coming to market, Shire's drugs are potential competitors because of the small patient pool targeted by these treatments. Comparable in size to both Shire and Genzyme, Biogen Idec produces Avonex, the leading Multiple Sclerosis drug in the U.S. Should Genzyme’s Alemtuzumab MS treatment come to market, Avonex will be its primary competition.

Shire, Biogen, and Genzyme are similar in market capitalization and revenue. Genzyme's products also compete with biotech giants Abbott Laboratories and Amgen in larger patient markets. Both Abbott Labs and Amgen have products in the renal, orthopaedic, and diagnostic sectors, and while their products are not yet in direct competition with Genzyme, their larger financial resources allow them the flexibility to quickly commercialize lucrative products.

Amicus Therapeutics, a small, privately-held biotech firm, is currently developing three drugs that would directly compete with Genzyme's main products. Amicus has products in phase II trials targeting both Fabry and Gaucher disease. Their third drug, meant to treat Pompe disease, is in pre-clinical trials. While none of its drugs are ready for the market, Amicus's focus on these three niche markets could make them a serious competitor in the future.

Many of Genzyme's products are so effective and specialized that generic drug companies are expected to stay away from Genzyme's smaller markets; additionally, Genzyme's earliest patent expirations won't occur until in 2010.

References