Full article reprinted from IN VIVO 9/01/2009
Genzyme looks increasingly vulnerable after the temporary closure of its Allston manufacturing facility resulted in shortages of one of its primary products, Cerezyme. Analysts remain divided on the long-term consequences, but there's no denying the the gaffes have created an opening for medicines from competitors Shire and Protalix. Read more...
Full article reprinted from IN VIVO 9/01/2009
In a town hall-style teleconference held August 26, Genzyme Corp.'s long-time CEO Henri Termeer admitted that the shutdown of its Allston Landing, MA-based manufacturing facility because of viral contamination earlier this summer resulted in "many, big expensive lessons." We are only beginning to know just how expensive the tutorial could be.
In early August, the company revealed 2009 sales of its blockbuster Gaucher disease drug imiglucerase (Cerezyme) would be reduced from $1.25 billion to around $750 million, at the low end of already lowered guidance Genzyme provided on July 22. But some analysts fear sales of the drug, a Genzyme mainstay that generated $1.2 billion in 2008, may not rebound once the manufacturing problems are resolved. That's because the production snafu has created an opening for competing products from Shire PLC and Protalix BioTherapeutics Ltd. to grab market share. "The big question is will Cerezyme ever bounce back?" says Geoffrey Meacham, an analyst with JP Morgan.
In truth, that's just one of many big questions facing Genzyme, which looks increasingly vulnerable after voluntarily closing its Allston facility for six weeks in mid-June for a thorough decontamination process. The company's share price has slid, down from roughly $73 in January to around $56 in late August, as investors and patients wonder how a world-leading biotech could fail to take steps to ensure adequate supply of the only FDA-approved therapy for a rare but life-threatening condition. Analysts remain split over the long-term consequences to the biotech. Goldman Sachs, for instance, is so down on the stock it has placed the company on its conviction-to-sell list, while Leerink Swann and Bernstein Research believe the current concerns are overblown.
But there's no denying the summer's events have created an opportunity that didn't previously exist for both Shire and Protalix. After Genzyme warned the Gaucher disease community of the likelihood of Cerezyme drug shortages, the Food & Drug Administration asked Genzyme's two competitors to submit treatment new drug applications (NDAs) for their experimental therapies, allowing doctors to prescribe these medicines even before formal regulatory approval. It remains to be seen whether either company will be able to take advantage of the situation--and for how long. But both companies have been granted expedited reviews by the FDA and are in the final stages of preparing to submit their NDAs with an eye to launching their products in the second half of 2010.
Even if Cerezyme sales rebound, the recent gaffe calls into question the notion that the biotech's current management team is the one best suited to unlock maximum value from the biotech's business. Because the company initially failed to recognize the patient demand for the various biologics manufactured at the facility--Cerezyme, the Fabry disease treatment agalsidase beta (Fabrazyme), and the Pompe disease therapy alglucosidase alfa (Myozyme)--the company was forced into an unsustainable position; Genzyme didn't have the manufacturing capacity it needed to adequately supply all three medicines, but it also couldn't afford to perform maintenance and facility upgrades that might threaten inventory. Simply put, even before Vesivirus 2117 was detected in one of the Allston's six bioreactors, the facility was stretched to its absolute limits.
As evidence, look no further than the repeated warnings FDA issued Genzyme over the past year. In October 2008, the FDA delivered a so-called 483 form letter, flagging 16 issues related to microbial monitoring, equipment maintenance, and process controls after a routine pre-approval inspection of the plant. Despite assurances by Genzyme management to investors and analysts that regulators' concerns were being met, the FDA handed Genzyme an official warning letter four months later covering all three biologics manufactured at the plant. A further inspection in May revealed that the company had failed to carry out all of the necessary corrective actions, and in late July, the agency sent Genzyme yet another letter, notifying the company that it would reinspect the Allston plant at some future date.
It's clear that the biotech's management is all too aware that capacity constraints have at least partially helped create the current situation. At the teleconference for the Gaucher community, Termeer said "We did not have the supply in inventory to bridge the gap so product could flow again. We are building more capacity... and that will allow us to move one product out of Allston, which will clearly be a relief" on that facility.
According to David Meeker, MD, Genzyme's EVP of Therapeutics, Biosurgery, and Transplant, the company had, in fact, decided "years earlier," to add capacity, retrofitting an existing plant in Belgium to manufacture Myozyme and constructing a new facility in Framingham, MA dedicated to Cerezyme and Fabrazyme production. In retrospect, says Meeker, those plans were implemented "two years too late," relative to the long lead time required to ramp up manufacturing for biologic molecules.
Genzyme hasn't revealed the precise contents of the latest FDA letter. Meeker intimated the reinspection decision involves three ongoing issues unrelated to the vesivirus contamination, and is also motivated by a "desire to get back into the plant after our decontamination efforts." Although Meeker believes the company has addressed the concerns of regulators, he isn't quite willing to predict an "all clear" from FDA. Noting that "anything can happen during an inspection," Meeker considers "the probability is extremely low" that FDA will find something egregious enough to warrant more dire measures, including a plant shutdown.
But investors have heard that before—and recently. Based on verbal comments made by the FDA, Genzyme told investors earlier this spring that all of the issues cited in the original 483 letter had been satisfactorily resolved. But the July FDA letter indicates they weren't. And an inspection by the European Medicines Agency the week of August 17th suggests at least one currently unresolved issue, which that regulatory body highlighted as a "major observation." Indeed, according to JP Morgan's Meacham, Genzyme has a long history of underestimating the concerns of regulators in its presentations to Wall Street. In his opinion, Genzme's FDA issues are "always more negative" than investors are first led to believe. In a July 31 note to investors, Meacham wrote, "management credibility is yet again called into question" the FDA provides a positive response--an event that might not occur until sometime next year.
And that's potentially a huge problem for Genzyme--even though all six of the Allston plant's bioreactors are operational. As the company promised when it first learned of the viral contamination, it is on track to deliver finished lots of Cerezyme in late November or early December. But it seems highly unlikely that it will be able to release those lots if problems are identified during the pending plant reinspection. Indeed, Meacham wouldn't be surprised if further Cerezyme delays occur and predicts "a 30% chance that there are additional problems supplying the market."
Not everyone is quite so bearish. Geoffrey Porges, an analyst with Bernstein Research who acknowledges he takes "every statement made by Genzyme management with a huge grain of salt," also says the ongoing issues in Allston are "manageable." In an August 18 note to investors, he noted, "Genzyme seems to be taking all the right steps to ensure that: 1) production can resume by the end of the year; 2) issues raised in the FDA's 483 letter will be resolved upon the follow-up inspection.…We maintain our outperform rating."
In the meantime, however, the available supply of Cerezyme is already perilously low. Because of the severe shortage, the biotech, working with the Gaucher disease community, has established a strict dose-conservation program to ensure the remaining drug lots reach the patients who need it most, especially children younger than 18 with type 1 Gaucher disease, and patients with types 2 or 3 of the disease. As such, patients and their physicians are now making hard choices about skipping doses or switching to competing therapies—Shire's human-cell-produced velaglucerase (Vela) and Protalix's plant cell-expressed, recombinant glucocerebrosidase (prGCD)--that have been cleared for use through an emergency access program.
Prior to the Cerezyme shortage, analysts were skeptical that either therapy could cannibalize Genzyme's share of the market, given that biotech's entrenched position and long-standing relationship with the tight-knit Gaucher community. But Genzyme's failure to correct its manufacturing problems has provided both Shire and Protalix with a much needed opening to educate patients about their products, and there could be long-lasting implications. Indeed, the shortage has provided patients unable to get Cerezyme with an incentive to switch to rival therapies now available through the emergency access programs. There are also financial incentives—both Protalix's prGCD and Shire's Vela will be provided free-of-charge until the drugs are formally approved in 2010—that may encourage patients to use competitors' products. The risk for Genzyme is that patients, finding their disease well-controlled on competitors' products, may not switch back to Cerezyme when that drug is again available to the entire Gaucher community. According to Meacham's calculations, if even 5% of Gaucher disease patients switch from Cerezyme to Vela or prGCD and remain on the drug, Genzyme stands to lose $75 million in revenue.
Genzyme's Meeker acknowledges that some patients may switch to Shire's and Protalix's medicines but argues that a number of factors could mitigate the erosion to Cerzyme's market share. Among them: Shire's product has, at best, non-inferior efficacy to Cerezyme, while Protalix's prGCD is a different molecule and the clinical data associated with it are scarce. As a result, physicians may be reluctant to experiment with either, especially if a patient's disease is reasonably controlled. Moreover, because the two competing medicines are available only through an emergency access program, there are administrative hurdles that could discourage physicians from switching patients to the new therapies. Finally, Genzyme announced in late August a treatment investigational new drug protocol for its small molecule Gaucher treatment, Genz-112638, which may allow the company to recapture Cerezyme losses.
Meantime, some expect the recent events to spark wholesale changes at the biotech. "Setting aside the utter mismanagement of the Street expectations, Genzyme jeopardized the market competitiveness of Cerezyme and Fabrazyme.… Minimally we might expect the judgment of those who made that decision to be scrutinized," writes William Tanner, an analyst at Lazard Capital Markets, in a recent report to investors.
But as Tanner's comments suggest, the ultimate consequences could be more far-reaching. Should investors start fleeing the stock, the company's share price will plummet, providing potentially interested drug makers with an opportunity to buy Genzyme outright. It's not so far-fetched. MedImmune LLC, Chiron, and Immunex Corp. all suffered significant manufacturing kerfluffles and all three subsequently lost their independence. MedImmune was sold to AstraZeneca PLC in 2007 for $15.6 billion after commercial and pipeline disappointments were compounded by repeated problems at a European plant that manufactured its nasal influenza vaccine FluMist; Chiron became part of Novartis AG's Novartis Vaccines & Diagnostics Inc. in 2005 after problems cropped up in the biotech's British Fluvirin facility. Immunex, meanwhile, suffered because it didn't have the needed capacity to manufacture its blockbuster rheumatoid arthritis treatment etanercept (Enbrel). In 2001, Amgen Inc. bought the company for $17.9 billion.
It's far too early to claim that because of its manufacturing problems, Genzyme will suffer the same fate as Chiron, Immunex, and MedImmune. But it's also true that the biotech's position is precarious and there is little margin for error for any of the company's diversified business units for the foreseeable future. The industry's big drug players now recognize the importance of playing in specialist markets. Hyper-specialist drugs like Genzyme's are of particular interest—indeed, they are a specific target for Mark Fishman, MD, the president of Novartis Institutes for Biomedical Research Inc., the company's head of early-stage R&D. At the right price, companies such as Novartis, Sanofi-Aventis, or GlaxoSmithKline PLC might think seriously about the advantages afforded by a Genzyme acquisition.
At the recent town hall meeting with Gaucher patients, Termeer acknowledged, "this moment--not being able to bring therapy in the right quantities to all patients--is by far the most difficult personal challenge I have experienced." It is also the company's biggest business challenge.
--Ellen Foster Licking
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