A Five-Star Biotech Star

08/17/2009 11:30 am EST

Focus: STOCKS

Paul Larson

Editor, Morningstar StockInvestor

Paul Larson, editor of Morningstar StockInvestor, and analyst Karen Andersen say Genzyme has a strong pipeline and significant insulation from competition.

Genzyme (Nasdaq: GENZ) focuses on developing, manufacturing, and marketing products to treat genetic disorders and other chronic debilitating diseases. Acquisitions and licensing deals have expanded Genzyme’s pipeline in renal, oncology, and transplant segment and added innovative RNA and stem-cell-based drugs.

The foundation of [Genzyme’s wide] moat rests in its virtual monopoly in the treatment of [rare] diseases and is able to charge high prices. These products are also difficult to manufacture, making them less vulnerable to any potential generic biologic competition.

Improved versions of established products (Renvela, Synvisc-One) have also arrived on the market and should serve to broaden the firm’s already sizeable market shares in renal care and osteoarthritis, as well as protect against price declines and generic competition.

Genzyme’s in-house innovation and smart acquisitions have brought the firm to success on a global level. Core products still show signs of strong growth, and we’re enthusiastic about [its] pipeline prospects.

Genzyme has overcome significant cost and manufacturing challenges to create enzyme-replacement therapies for patients with genetic disorders. These products provide enormous benefits to a small number of patients, so insurance coverage is usually strong despite sky-high prices. For example, while Gaucher disease drug Cerezyme is prescribed to roughly 5,400 patients worldwide, sales of the drug surpassed $1.2 billion in 2008.

Cerezyme isn’t the only therapeutic responsible for this segment’s recent history of 60%-plus operating margins; Fabrazyme sales reached almost $500 million in 2008, and newly approved Pompe disease treatment, Myozyme, brought in almost $300 million in sales despite continued manufacturing headaches. Newborn screening for these diseases—slowly being implemented across the US—could help Genzyme achieve full potential in these markets.

[Five-Star rated] Genzyme’s product portfolio has extended beyond rare diseases, offering stability to support its wide moat. Market-leading kidney-disease drug Renagel and next-generation version Renvela offer cardiovascular benefits to competing drugs and should continue to grow in an expanding market.

Profitability in Genzyme’s biosurgery segment has risen steadily and should further benefit from product improvements. Genzyme’s blood-related cancer segment should see the swiftest growth, as Clolar and Campath prescribing labels expand and as Genzyme launches the newly approved stem-cell mobilizer Mozobil.

Mozobil and pipeline stars Campath and mipomersen play significant roles in Genzyme’s long-term value. We think that cholesterol-lowering drug mipomersen could receive approval in 2011, and that Campath could receive approval to treat multiple sclerosis in 2012; we see both drugs holding annual sales potential north of $1 billion.

Our fair value estimate for Genzyme is $89 per share. (It closed below $51 Friday—Editor.) We still think its core genetic disease and renal segments form a solid foundation for future growth, and we’re anticipating overall ten-year annual sales and operating income growth to average 11% and 17%.

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