Genzyme's Renagel Call Raises Some Eyebrows

Is Genzyme General (GENZ - Cramer's Take - Stockpickr) coming clean about the reasons behind its first-quarter earnings warning?

Genzyme shares are off $5.07, or more than 10%, to $43.72 Wednesday after the biotech firm said first-quarter earnings would fall 10 cents per share below previous guidance due to a reduction in wholesale inventory levels of its kidney dialysis drug, Renagel. The drug's first-quarter sales are now expected to reach $30 million, or half of previous estimates.

The biotech firm says it now expects first-quarter earnings to reach a range of between 21 cents and 23 cents per share, or 10 cents below previous guidance. Analysts were expecting Genzyme to earn 33 cents per share in the first quarter, according to consensus figures compiled by Thomson Financial/First Call.

On a conference call earlier today, Genzyme executives put a positive spin on the warning: The need to reduce Renagel wholesale inventory levels from 12 weeks to 6 weeks was always in the plans, the company said, and actually gives it a lot more flexibility to meet surging patient demand for the drug.

To that end, Genzyme did not touch its previous forecast for 2002 Renagel sales of $260 million to $280 million, and reaffirmed its 25% earnings growth forecast for the year.

But analysts on the call were skeptical, questioning the timing of the company's decision to reduce Renagel inventory levels. Two weeks ago, the company held a conference call to discuss 2001 financial results, but didn't give an indication that this move was coming.

There were also a lot of questions about actual patient demand for Renagel and whether Genzyme had been using high levels of inventory stocking over the past year to artificially boost Renagel sales. No analyst on the conference call accused Genzyme outright of channel stuffing, but the implication was clear.

"Channel stuffing is a harsh term, but it's certainly a legitimate question," says SG Cowen biotech analyst Bill Tanner, who recently downgraded Genzyme to buy from strong buy. Tanner says these concerns will linger until the company -- and investors -- get better visibility into the drug's actual sales to patients. (SG Cowen has a banking relationship with Genzyme.)

Genzyme did tell analysts earlier this month that it planned to reduce wholesale inventory levels from 12 weeks to 4-6 weeks, but most analysts expected this inventory drawdown to occur gradually over the year.

Wednesday, Genzyme executives said the decision to reduce inventory levels in one fell swoop was in the best economic interest of the company, in part because it is gradually shifting manufacturing of Renagel from a contract drug maker to its own in-house facility. Genzyme expects this move to improve the drug's margins from current 65% to more than 80% by the end of 2003.

And addressing the issues of patient demand, Genzyme said end-user sales for the first two months of the year were up 75% over the same period last year. The publication of new scientific studies extolling Renagel's use in kidney dialysis patients are expected in the second half of this year, which will further boost demand for the drug, the company added.

But Genzyme has never had the greatest reputation for crystal-clear communication with Wall Street, so today's earnings warning, and the reasons for it, are not getting a free ride.