Genzyme: Geared for Growth

S&P likes the biotech's diverse product pipeline and considers the shares a compelling buy

by Steven Silver From Standard & Poor's Equity Research

We consider Genzyme (GENZ; recent price $65.15) among the most diversified biotechs, with solid core product growth, a promising late-stage pipeline, and a strong financial position of nearly $1.5 billion in cash as of Mar. 31, 2007.

By 2009, we expect the company to have initiated, conducted, or completed 20 pivotal trials that could expand and further diversify its portfolio. We believe that success in just a few of these trials would help the company maintain our projected long-term growth rate of 18%-20% EPS growth.

We expect key new offerings—Mozobil, initially in transplant settings; Tolevamer in hospital-borne C.difficile diarrhea; and Renvela in dialysis indications—to launch within the next two years. In our view, these new products should help Genzyme to further move from sales of its mature flagship product Cerezyme. In the first quarter of 2007, Cerezyme accounted for 32% of total revenues. We expect Cerezyme sales to account for roughly 30% of full-year 2007 sales, down from 35%, 38%, and 42% in 2006, 2005, and 2004, respectively.

Enzyme Replacement Therapy

In addition, we are encouraged by the planned expansion of Genzyme's nascent oncology platform, acquired in 2004's purchase of ILEX Oncology, and with the proposed $345 million acquisition of Bioenvision (BIVN), subject to necessary approvals, with whom ILEX co-developed leukemia drugs Clolar and Campath.

We believe Genzyme shares are compelling at current levels and our 12-month target price is $80. The stock carries Standard & Poor's highest recommendation of 5 STARS, or strong buy.

Genzyme develops, manufactures, and markets therapeutic and diagnostic products. In its largest segment, Therapeutics, the company's lead product is Cerezyme, an enzyme replacement therapy (ERT) for Gaucher disease, a debilitating genetic disorder causing fatigue, anemia, and bone erosion. In 2006, Cerezyme sales totaled $1.0 billion (up 7% over 2005), representing 35% of total revenue, down from 38% in 2005. As Cerezyme is a mature product, Genzyme is pursuing a next-generation oral therapy for Gaucher disease, which recently yielded positive initial Phase II results.

Going for Next Generation

Other marketed ERT products include Fabrazyme, which was approved in the U.S. and Europe for the treatment of Fabry disease, a rare genetic disorder. Fabrazyme sales were $359 million in 2006, up 18% over 2005. Most recently, Genzyme developed Myozyme, for treating Pompe disease, a rare and often fatal disorder with an estimated worldwide patient population of fewer than 10,000. Myozyme was launched in the U.S. and Europe in mid-2006 and ended the year with more than 550 patients in about 35 countries.

The company's next largest unit, Renal, is led by Renagel, a treatment to reduce elevated serum phosphorus in patients on kidney dialysis. Sales in 2006 rose 23% to $515 million. In April 2007, Genzyme announced positive study data for Renvela, a next-generation form of Renagel, for which a New Drug Application has been filed and is under review by the Food & Drug Administration (FDA).

We see this field becoming increasingly competitive, as Amgen (AMGN: Buy; $57) recently acquired a midstage development drug that may challenge Renagel/Renvela by 2010. The other key drug in the Renal group is Hectorol, acquired in the 2005 purchase of Bone Care International, which treats secondary hyperparathyroidism in patients with chronic kidney disease.