Markets & Finance

Genzyme's Winning Combination


By Frank DiLorenzo Standard & Poor's believes Genzyme (GENZ), with a market leading position in the field of enzyme replacement therapies and a potential blockbuster on its hands with Renagel, is one of the most undervalued and lowest-risk opportunities in the U.S. biotechnology industry. The company is one of only a few biotechs with a diversified line-up of strong selling products, a promising pipeline, and savvy management. S&P ranks Genzyme 5 STARS (Buy), its highest investment ranking for equities.

The company's largest selling product is Cerezyme for the treatment of Gaucher disease. Patients with this disease can suffer from anemia and bone erosion because they are unable to produce sufficient amounts of the enzyme glucocerbrosidase. Cerezyme is a recombinant form of glucocerbrosidase and is used as an enzyme replacement therapy. Sales in 2000 were $537 million. While the growth in revenues from this product has slowed, we at S&P still expect sales to reach $600 million in 2002. Gaucher disease is one of many lysosomal storage disorders, a family of genetic diseases characterized by enzyme deficiency. In addition to Cerezyme, Genzyme is developing several other therapies in this area.

In August 2001, Genzyme's enzyme replacement therapy for Fabry disease (deficiency of the enzyme alpha galactosidase A), Fabrazyme, received marketing approval in the European Union (EU). Replagal, a competing product from Transkaryotic Therapies, also was awarded marketing approval in the EU. Both of these products are currently under review by the FDA, with a decision on approval possible by the end of 2001. While Fabrazyme may not have the market potential of Cerezyme, we feel annual sales can reach $200 million by mid-decade.

In collaboration with BioMarin Pharmaceutical, Inc., Genzyme is also developing Aldurazyme as an enzyme replacement therapy for MPS-1, another lysosomal storage disorder where patients have a deficiency of the enzyme alpha-L-iduronidase. This product is currently in Phase III trials and Genzyme expects to file for regulatory approval by early 2002. Genzyme is also developing an enzyme replacement therapy to treat Pompe disease, which results from a deficiency of the enzyme acid alpha-glucosidase. This treatment is currently in Phase II testing. S&P estimates these two candidates have annual sales potential of at least $250 million.

A SAFER THERAPY? Renagel is an orally available (tablet and capsule form) phosphate binder used by kidney dialysis patients to reduce elevated serum phosphorus levels. Elevated phosphorus levels can lead to secondary hyperparathyroidism, which may cause skeletal problems and further kidney complications. Traditionally, phosphate binders were aluminum or calcium-based. Aluminum binders could lead to bone disease and other problems, while calcium binders could lead to calcification, which may result in heart complications. Since Renagel is calcium and aluminum free, it may be a safer alternative to competing therapies.

Due to this advantage, we expect Renagel to be Genzyme's primary growth driver, with sales growing strongly over the next several years. There are an estimated 280,000 patients in the U.S. and 170,000 in the EU with end-stage renal disease. Standard & Poor's projects 2001 Renagel sales of $165 million, up from $56 million in 2000, and 2002 Renagel sales of $259 million. S&P estimates peak annual sales could eventually reach $500 million.

In addition to marketing therapeutics, Genzyme manufactures and sells diagnostic products and supplies used in a variety of settings, including the monitoring and diagnosis of diseases. In addition, the company provides genetic diagnostic services that are used to screen for certain genetic abnormalities. We expect sales from Genzyme's diagnostic business of $147 million in 2001, with an advance to $171 million in 2002. S&P also projects the diagnostic business can grow at a low double-digit rate into mid-decade.

SMART BUYS. In S&P's view, Genzyme has one of the strongest, if not the strongest, management teams in the industry. We at S&P feel management has made wise spending decisions, with an expected growth rate relative to R&D expenditures that is very attractive relative to its peers. The company acquired GelTex Pharmaceuticals in December 2000. GelTex developed Renagel and prior to the acquisition the two firms were co-promoting the product. We believe this was the best biotech acquisition of 2000.

In August 2001, Genzyme agreed to acquire privately held Novazyme Pharmaceuticals for $137.5 million in stock, plus future milestones totaling $87.5 million. Novazyme is developing enzyme replacement therapies. We feel this is a good strategic fit and will strengthen Genzyme's leadership position in this field. Additionally, based on our sensitivity analysis, we consider the price paid by Genzyme to be reasonable. Novazyme's lead candidate is NZ-1001, a treatment for Pompe disease. Phase I trials are expected to begin by the end of this year.

MAKING THE CASE. Standard & Poor's expects Genzyme's total operating revenues to approximate $963 million in 2001, $1.20 billion in 2002, and $1.46 billion in 2003. Excluding amortization charges, we estimate earnings per share (EPS) of $1.16 in 2001, $1.47 in 2002, and $1.96 in 2003. Genzyme is trading at approximately 10 times S&P's 2002 operating revenue estimate, compared to a market weighted average of 12 times sales for the peer group of 14 biotech stocks with ongoing profitability that S&P covers. S&P also projects a four-year EPS growth rate of 29% between 2001 and 2005.

Using our estimates, Genzyme's 2002 PEG ratio (price-to-earnings ratio to EPS growth) is 1.3, which is lower than the 1.8 market weighted average multiple for our profitable biotech basket. We feel these multiple discounts are unwarranted owing to Genzyme's superior earnings visibility.

Using our discounted cash flow analysis (assuming an initial discount rate of 18%, a four year period of 29% growth followed by slowing growth falling into the teens, and terminal values of 12% for the discount rate and 4% for growth) results in a share price of $87. A separate net present value analysis of Genzyme's products and pipeline leads to a price of $84 per share. Finally, based on our relative valuation EPS model, which adjusts a firm's price to reflect its growth rate relative to the S&P 500, we derived a target price of $79. Blending these prices results in a target price of $83 for Genzyme shares. DiLorenzo is an equity analyst covering biotechnology stocks for Standard & Poor's


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