Genzyme Cuts 2011 Outlook - Analyst Blog

Genzyme Corp. (GENZ) recently provided a preliminary look at its results for the fourth quarter and full year ended December 31, 2010. While fourth quarter revenues increased 23% to $1.15 billion, full year revenues increased 2% to $3.97 billion. Both fourth quarter and full year revenues missed the Zacks Consensus Estimate of $1.18 billion and $4.34 billion, respectively.

The company expects to deliver fourth quarter earnings in the range of 80-85 cents per share, below its guidance of 90 – 95 cents. Preliminary earnings were below the company's guidance mainly due to lower than expected Cerezyme revenue and gross margins which were impacted by manufacturing costs.

Prelim Results in Details

Fourth quarter revenues from Genzyme's Personalized Genetic Health segment increased 46% to $508 million. However, full year revenues declined 10% to $1.7 billion. The Personalized Genetic Health segment was most adversely affected by the temporary shutdown of the company's Allston Landing facility in June 2009. The production and supply of two products – Cerezyme and Fabrazyme − were mainly affected by the temporary shutdown.

While the company is working on improving the supply situation, a delay in orders in Brazil, the loss of a lot in Japan, and a late lot release worsened by delayed shipping in Europe impacted Cerezyme revenues.

Cerezyme sales came in at $224 million in the fourth quarter, significantly above $105 million sales reported in the year-ago quarter. For the full year, Cerezyme sales were $722 million, down 8.9%.

Fabrazyme sales increased 6.9% to $62 million in the fourth quarter. For the year, sales declined from $430 million to $188 million.

Genzyme reported that full supply is available to patients on Cerezyme therapy. Meanwhile, Fabrazyme allocation has increased 82% in the fourth quarter on a sequential basis. Genzyme should be able to provide full supply of Fabrazyme in the second half of 2011 following the regulatory approval of Fabrazyme production at the company's Framingham manufacturing facility.

Other segments like Renal & Endocrinology, Biosurgery and Hematology and Oncology continued to grow during the fourth quarter. While Renal & Endocrinology grew 13% to $291 million, Biosurgery grew 10% to $157 million. The Hematology and Oncology segment increased 6% to $179 million.

2011 Outlook Cut

Based on preliminary results for 2010, Genzyme cut its guidance for 2011. The company now expects earnings in the range of $4.10 - $4.35 on revenue of $5 billion. Earlier, the company was expecting to earn $4.30 - $4.60 per share on revenues of $5.1 billion.

The company expects to divest or partner its non-core businesses in the first half of 2011. We note that the company has already sold its genetic testing business to Laboratory Corporation of America (LH) and has entered into an agreement for the sale of its diagnostics business to Sekisui Chemical Co. Other businesses which the company expects to divest or partner include the pharmaceuticals business and the cell therapy and regenerative medicine business.

As far as Genzyme's cost reduction program (Value Improvement Program) is concerned, the company said that it achieved savings of $26 million during the fourth quarter of 2010. This program should help Genzyme reduce operating costs and improve margins over the next 15 months. The full impact of this program is expected to materialize by 2012. The company expects to achieve savings of $275 million in 2011 and $385 million in 2012.

Pipeline Update

Genzyme also provided an update on its pipeline that will help drive growth beyond 2011. Some of the pipeline candidates that show promise include mipomersen for familial hypercholesterolemia (filing in 2011), alemtuzumab for multiple sclerosis (phase III ongoing; US approval expected in 2012) and eliglustat tartrate for type 1 Gaucher disease (phase III ongoing; US approval expected in 2013).

Recommendation

We currently have a Neutral recommendation on Genzyme, which is supported by a Zacks #3 Rank (short-term “Hold” rating). The company recently confirmed that it is in expanded talks with French pharma giant, Sanofi-Aventis (SNY), which is looking to acquire Genzyme.

Genzyme said that the companies are discussing the possibility of using a contingent value right (CVR) for alemtuzumab as part of a potential deal. A CVR allows shareholders of the acquired company to receive additional benefits on the occurrence of a specified event.

We expect investor focus to remain on the outcome of Genzyme's expanded negotiations with Sanofi. Meanwhile, the company will be presenting full results for 2010 on February 16, 2011.