Thursday, March 25, 2010

Genzyme (NASDAQ:GENZ): Downgraded to Underweight at J.P. Morgan

Genzyme (NASDAQ:GENZ) is getting some really negative tier-1 commentary this morning following yesterday’s announcement of an impending consent decree for the Allston manufacturing facility:

- J.P. Morgan is downgrading GENZ to Underweight from Neutral and lowering their target to $45 (prev. $55) saying this is a a materially negative development, and we find it highly unlikely that a company with a multi-year history of manufacturing non-compliance (that has resulted in a consent decree) can quickly resolve the issues at hand. On the surface, the fact that the Allston plant remains open and Cerezyme/Fabrazyme supply is not expected to be disrupted is a positive. That said, supply disruption is very often associated with consent decrees, and unconditional resolution of the Allston manufacturing issues could require significant facility changes and limitations on supply. In addition, they think that management changes or actions by activist shareholders would be unlikely to quickly alter the course of the consent decree or add near-term value. As a result of the manufacturing uncertainty, JPM is lowering their revenue forecasts by 2-3%, raising their COGS and SG&A expenses significantly, and lowering 2010-2012 non GAAP EPS by $0.85, $0.45 and $0.30 to $2.00, $3.50 and $4.15 respectively.

Characterization of FDA dialogue has been overly optimistic. On its 4Q09 earnings call, Genzyme was “on track with its commitments to the 483 observations.” Yet, just over one month later, a consent decree is issued. Looking back to the fall of 2009, Genzyme noted that the new manufacturing processes and methods following the vesivirus contamination are “not expected to be a risk” but less than a month later, a 49-item Form 483 emerged with citations that included protocol development for vesivirus contamination. Hence, the firm is cautious that the there is “no expectation” of a supply disruption for Cerezyme and Fabrazyme especially when the 10K cites the following: “If a consent decree were imposed, we would incur substantial additional expenses and may not be able to produce some or all of our products.” Hence, when Genzyme paints a fairly optimistic picture for a very serious problem like a consent decree, JPM thinks skepticism is warranted.

- Morgan Stanley is reiterating their Underweight rating and $48 target price noting that the market is underestimating the financial impact from the impending consent decree.

Genzyme has a significant fixed cost base (~$2.4 bn in op ex plus >$650 mn+ in cap ex), and using Abbot’s previous agreement as a guide, they believe a reasonable base case is that FDA asks for 15-25% of gross profits from the Allston plant until the consent decree is resolved (could be higher). While some investors may cheer that the company’s hobbled balanced sheet and cash flows likely prevent additional product or company acquisitions, Street estimates need to come down significantly and MSCO now believes EPS will be <$2.00 in 2010; <$3.00 in 2011, and <$4.00 in 2012 (versus consensus of $3.08, $4.23, and $5.11,respectively). The stock is not yet out of the woods, and they see ongoing risk of underperformance. - Goldman Sachs maintains their Sell rating on the name as they believe the news could result in a substantial one-time fee, and create more uncertainty over profits for 2010-11.

1) One-time payment could exceed $300 mn. Assuming the FDA bases the profit disgorgement on US sales in 2009, we estimate $325 mn in profits could be at risk, with downside risk if FDA seeks profits on earlier years (unlikely, in GSCO's view).

2) Future profit disgorgement may reduce 2010/11 EPS by $0.70 (25%) and $0.81 (20%), resp. GSCO assumes that only profits on sales of Cerezyme and Fabrazyme in the US would be at risk, with downside risk if the FDA
seeks profits on worldwide sales (unlikely, in their view).

3) Downside risk on higher costs. Remediation steps could lower margins; for every 1% fall in operating margin, they estimate costs would increase by $50 mn and EPS would fall by $0.14.

4) Little impact on Lumizyme approval, continue to expect delays. As Lumizyme is not produced at Allston and Genzyme did not intend to produce product at the 2,000L scale in Allston, GSCO believes the consent decree may have little impact on the timing of Lumizyme approval. However, they continue to expect delayed approval to 2011 on more data requirements.

5) Cut 2010 EPS. GSCO says they have eliminated Thyrogen sales for 2Q2010 (but no profit disgorgement or other fees), resulting in a reduction in their 2010E EPS (ex-ESO) to $2.73 from $2.83. There is no change to their 2011-12E EPS (ex-ESO) of $4.07 and $4.67, respectively.

Notablecalls: It surely looks like GENZ is going to see another wave of selling today as J.P. Morgan throws in the towel & other tier-1 firms reiterate their negative stances on the name.

There is no short interest to speak of (sub 3%) which kind of means the general market has been neutral-to-positive on the name. This is probably due to the fact people don't want to bet against Carl Icahn, the activist shareholder in GENZ.

I think some investors have lost their faith & patience in the name and will look to dump the stock before it goes back to it's December lows.

I would not be surprised to see GENZ trade down to $53.50 level today and possibly even lower.

PS: Actor Shia LaBeouf appears to be taking his role as Gordon Gekko's protégé in the upcoming "Wall Street" movie a little too seriously. - NYT


1 comment:

bl said...

Nice puts Wed, news already out? WBB Sec downgraded MELA to "short sell". Never seen that type of downdrade. Honest brokerage, or short squeeze set up?