Thursday, October 15, 2009

Genzyme: Rare Buying Opportunity

Third-Quarter Bloodbath Offers Rare Buying Opportunity

By Rob Fannon, Editor, Phase 1 Investor | 9 October 2009

Vesivirus 2117 has turned this year into a nightmare for Genzyme. In June, the rogue virus attacked the Boston-based biotech, infecting its main manufacturing plant. Vesivirus 2117 isn't harmful to people. Rather, it disrupts the cells Genzyme uses to manufacture its drugs. The FDA forced the company to halt production at the facility, jeopardizing nearly 40% of its $4 billion in annual sales.

Genzyme's top-selling drug, Cerezyme, will likely lose $150 million to $200 million in sales. A second drug, Fabrazyme, will fall $50 million to $60 million behind its $500 million goal. The two drugs treat Gaucher and Fabry disease, respectively. These rare genetic disorders cause particular fats to build up in the body, severely damaging organs. They affect about 10,000 patients worldwide.

Right now, Cerezyme and Fabrazyme are the only FDA-approved drugs to treat these disorders. But since Genzyme will fail to meet demand, the FDA granted a British drug company and an Israeli biotech special licenses to sell their similar drugs— even though neither has won official approval. With those lost sales, Genzyme will come up well short of its previous 2009 revenue guidance. The biotech sector is up 15% year-to-date. But Genzyme shareholders are down 15%. And they're likely in for more pain. That's great news for the rest of us…

On October 22, Genzyme will be one of the first large-cap biotechs to kick off third-quarter earnings season. The company didn't get production up and running again until late last month. And its newly-issued guidance falls well below previous Wall Street estimates. So Genzyme's stock will suffer in the short term.

I expect shares to drop about 10% after the earnings announcement, to below $50. Risk-takers could buy cheap Genzyme puts with strike prices above $50. If the stock falls as much as I think it will, the puts could prove to be a lucrative speculation.

For more conservative investors, Genzyme's third-quarter earnings miss could turn out to be a rare buying opportunity… Despite its near-term struggles, the company remains a best-in-class large-cap biotech. Its protein-based therapies, manufacturing plants, and expertise are valuable assets. And its rich pipeline includes several late-stage drug candidates.

Before the Vesivirus 2117 infection, the company grew revenue at a healthy 20% a year. While this year will be flat, that growth will return next year and beyond. I expect Genzyme to resume its earnings expansion, as well. Bottom-line growth should reach the high-teens next year.

Long-term investors would be wise to load up if the stock falls below $48 (about 15% below today's levels). That would price shares around 16-17 times next year's earnings, a downright bargain for this biotech bellwether. Buying Genzyme after its coming earnings miss could be one of the easiest ways to earn 10%-20% a year for the next decade.

Good investing,

Rob Fannon

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