Genzyme: a Biotech Spec

09/11/2002 12:00 am EST

Focus:

Michael Murphy

Former Editor, New World Investor

I have followed Michael Murphy for over two decades and have always been impressed with his in-depth knowledge of the technology markets. In more recent years, he has extended his expertise to cover healthcare and biotechnology. Here is the latest buy recommendation from his Biotech Investing newsletter.

Genzyme General (GENZ OTC) is offering investors a great opportunity. This profitable biotech company is selling for a tremendous discount right now. In fact, it has the lowest P/E of all the major biotech companies at 16 times earnings. Genzyme focuses on developing drugs for rare diseases (affecting fewer than 200,000 people). While you might not think a company dealing in such small markets would ever become profitable, Genzyme has.

The company’s main focus has been on diseases involving metabolism--the process of breaking down chemicals (like food) into energy and the building of raw material for new proteins and other needed components. Some metabolic disorders are quite rare (and often fatal) and result from a genetic flaw that causes the inability to produce sufficient quantities of a key enzyme necessary for a metabolic process. Genzyme’s concentration on developing drugs to treat various metabolic disorders, such as Gaucher’s disease, Fabry disease, Pompe’s disease, and MPS I (Mucopolysaccharidosis Type I) has proven to be a profitable niche.

The company has already built a good product franchise with its drug Cerezyme, a replacement protein used to treat Gaucher’s disease (a lysosomal storage disorder). This is a very rare, congenital disease occurring in only a few thousand patients worldwide. In fact, most of the people affected with this disorder are Ashkenazi Jews from Eastern Europe, France, and Germany. Estimates show that there are 5,000 to 10,000 affected with the disease with an incidence of one in every 40,000 to 60,000. Gaucher disease patients have a mutated gene that prevents the production of a vital enzyme called glucocerebrosidase. Without this protein, this ultimately leads to the storage of lipids (fat-like chemical) in the cells. Eventually, these abnormal cells store up in the patients liver, spleen, and bone marrow, all leading to severe disability and eventual death. 

With Cerezyme, Genzyme provides a long-term treatment option. The product requires a two-hour infusion time and a twice-weekly administration. Patients with this disease require Cerezyme for the rest of their lives. While inconvenient, this is the only viable long-term therapy available for there patients. We estimate that the treatment for each Gaucher patient costs $225,000 per year.

Cerezyme sales accounted for 51% of the company’s product sales for 2001 and form the foundation for the company’s revenues. However, it lead growth product is Renagel (sevelamer), a drug that lowers blood phosphorus in patients with end-stage renal disease (ESRD) and targets a much larger market than Cerezyme. According to company statistics, there are 320,000 patients with end-stage disease, and 95% of these require control of phosphate levels. The problem with these patients is that the damaged kidneys retain phosphorous resulting in a condition that could cause abnormal calcification. Ultimately, this could lead to endocrine problems resulting in bone disease. So, for this large group of patients with ESRD, managing phosphate levels is a chronic battle.  

Based on our estimates, the total market potential for the existing group of ESRD patients is close to $1 billion, with Renagel sales in this market reaching about $300 million, by our estimates. And that’s just for the use with dialysis patients. There is also a significant population of those who are in mild to mid-stage kidney failure who also need to manage serum phosphate levels. This patient population is estimated at ten million individuals. We expect Genzyme to eventually work towards expanding the product’s application.

Shares of GENZ have taken a nosedive since late March because the company failed to meet sales expectations of Renegal, and investors had high expectations for the drug. Part of the short-fall, however, was the result of an inventory problem, which we believe the company will learn to address as time goes on.  Meanwhile, the company is facing two FDA milestones in the coming weeks. First is the FDA’s ruling on Aldurazyme, a potential enzyme replacement treatment of a rare and fatal genetic disease called MPS I which has no current drug treatments. The other milestone event is the Genzyme’s FDA committee review for Fabrazyme on September 26.

We now have the opportunity to buy the stock at a huge discount. As I said earlier, this stock has the lowest P/E of all the major biotech stocks. And remember: this is a profitable company--just the kind of opportunity we look for. At these levels GENZ is trading at near-52-week lows. The key is getting through the end of this month and seeing an improvement of Renagel sales. We could wait, but the price is likely to be higher. Buy GENZ under $19.50, with a stop loss of $17."

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