Genzyme (NASDAQ:GENZ): Upgraded to Outperform at Leerink Swann

My favourite call this morning comes from Leerink Swann.

They are upgrading Genzyme (NASDAQ:GENZ) to Outperform from Market Perform based on: 1) MEDACorp consultants' ("consultants") perspective that Vesivirus is unlikely to recur in Allston; and 2) while Gaucher's experts note an eagerness to switch a majority of their patients to Shire's velaglucerase and a reluctance to switch to PLX's prGCD given immunogenicity concerns, the firm does not believe competitors have sufficient capacity at the current time to absorb more than 20% of the population.

Leerink believes Street concerns on the Allston manufacturing facility have overshot the mark. Based on: 1) consultants’ feedback that the probability of Vesivirus recurrence is <10%; style="font-weight: bold; color: rgb(51, 204, 0);">They expect shares to react favorably to the updates and see recovery to the high $50s, yielding comparable upside to that which they see for other largecap biotech names.

Despite The Bad Luck, GENZ Couldn't Have Been Luckier. While the timing of the Vesivirus infection relative to dwindling inventory levels was self-inflicted bad luck, the fact that Shire's Lexington facility will not come on line until until 2012 and the fact that PLX has its own supply limitations and is yet to present compelling safety/efficacy data to practitioners means that Cerezyme is likely to escape with a flesh wound instead of the decapitation that would have happened if competitors were geared up to claim market share.

Don't Forget The 2010 Catch-up Effect. In 2010, GENZ expects to sell all the Cerezyme it can produce, in part to replenish inventory, which should boost 2010 revenues.

Still Upside Despite Significant Share Loss. Leerink's 2015 Cerezyme estimate of $1B on the backdrop of a $1.2B 2008 market growing at $100M/yr represents share loss of ~40%. We believe current valuation assumes 2015 share loss of ~65%.

Could Lumizyme Approval Come Early? The gating factor on Lumizyme 2KL approval is FDA re-inspection, which, could occur at any time, in Leerink's view. They do not see downside to speculating the approval could come before the mid-November PDUFA.

4KL Should Be Fine. The FDA will use the same ICH guidelines that the EMEA used to get comfort that the 4KL facility is comparable to the 2KL. Firm estimates FDA approval represents a boost of ~$100M/yr in Lumizyme revenue (~270 patients).

Notablecalls: I like this call:

- Leerink Swann is pretty much the best Biotech/Pharma house out there. See how they upgraded Shire Plc (NASDAQ:SHPGY) on July 17 - the stock is up 10 pts since then. Note that Shire's velaglucerase is Cerezyme's main competitor.

- They don't even mention valuation as ONE of the reasons for the upgrade.

- Catalysts ahead (Lumizyme, updates on Cerezyme)

- Estimates are raised even for the outer-years.

- The shorts were in trouble already yesterday. Today's upgrade will add insult to injury. Goldman and several other firms have been touting GENZ as a possible short candidate and will likely have to start rethinking their thesis as catalysts start nearing.

All in all, I see GENZ trading to $54 today and possibly to $54.50 if the shorts step in and start covering.