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Genzyme Earnings: Not a Game Changer

Genzyme reports quarterly earnings, but the critical events for the drug maker's outlook won't occur until the second half of 2010.



) -- Earnings reports can often be much ado about the past, while offering very little in the way of visibility about a stock's future -- and that was the case with



earnings on Wednesday.

Genzyme shares, not surprisingly, were up a little under 0.5% on Wednesday afternoon -- after having been down to a similar degree in the morning -- while trading in Genzyme shares was more than one million shares above the drug maker's average daily trading volume.

More activity than usual in Genzyme shares on Wednesday, in other words, but little in the way of a consensus call by the market on Genzyme after the Wednesday morning earnings.

The lack of a call on Genzyme, one way or the other, is probably the most reasonable response from investors, according to Matt Duffy, analyst at institutional research firm BRD Research. For one, Genzyme had pre-announced revenues in the fourth quarter, so there was no surprise there.

What's more, the problems in manufacturing some of Genzyme's best-selling drugs was also mid-2009 news, and with the earnings today, it was really only a matter of the extent to which -- and the pace at which -- Genzyme was recovering from those manufacturing problems.

Indeed, investors shouldn't expect a major trigger event for Genzyme until later in 2010; it was wait-and-see on Genzyme before the earnings, and it's the same story post-earnings.

"You can throw away the numbers from the fourth quarter, and for the first quarter 2010," BRD Research's Duffy said. "Genzyme has essentially guided down for the first half of 2010, and the question is, when does the ramp-up occur in revenue and earnings?" Duffy asked.

Indeed, let's throw away the numbers and focus on what will move Genzyme shares in 2010.

BRD Research had downgraded Genzyme to a short-term hold -- though it maintains a long-term buy on the stock -- in early October, when chronic plant manufacturing problems at its Allston, Mass.-based facility became more than a short-term concern. The Allston facility produces two of Genzyme's best-selling therapies: Cerezyme and Fabrazyme.

"It seems like Genzyme is making reasonable progress on the manufacturing issues, but as we feared, unknowns come into play, and they are not bouncing back as quickly as they needed to and it could potentially take longer, allowing their competition to take advantage," BRD Research's Duffy said.

Duffy added that one risk that will continue as long as Genzyme is not at full capacity is for



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to outcompete it in similar drug categories. "Shire will grab as many patients as they can; this is a high stakes game," Duffy said.

As far as when investors will be able to get a good read on Genzyme, BRD Research's Duffy listed other key events to watch for in 2010.

For one, after Genzyme hit a low in December 2009, activist shareholder Carl Icahn (view

Icahn's portfolio

) revealed that he had taken a 1% stake at the beginning of 2010, and the shares have moved up from a 52-week low around $47-$48 as a result of Icahn's buying. On Wednesday, Genzyme shares closed at $55.78. On Tuesday, it was revealed that Icahn has already since tripled his stake in Genzyme in the fourth quarter.

BRD Research's Duffy said that he believes the minor recovery of Genzyme from its 52-week low -- Genzyme's 52-week high was achieved in the first half of 20009, at $72.35, before the plant problems surfaced -- would not have occurred without the Icahn news. Further buying from Icahn in 2010 and the prospect of a proxy battle for control of the company is an unknown that could influence the outlook for Genzyme shares in the short-term.

Specific to the Genzyme business strategy, BRD Research's Duffy said that it is really the May-June period, when two important government reviews of Genzyme drugs are due, that will delay any visibility on the Genzyme outlook through the first half of 2010.

The FDA is expected to make a decision on approving Lumizyme by June; while an FDA review of a new cell line to increase the manufacturing productivity for Fabrazyme is expected in the May-June period also.

The BRD Research analyst says investors should not expect Genzyme to rally until there is more clarity on Lumizyme and Fabrazyme. "Until then, you're treading water, unless we see more activity from Icahn, or unexpected compounding of problems on the manufacturing front," Duffy added.

What's more, even if FDA approvals come through in the May-June period, any sales success resulting from these decisions won't really be reflected in the numbers, and as a sign of Genzyme executing on getting back to normal earnings, until the October 2010 quarterly reporting period.

The BRD Research analyst explained that previous to 2009, Genzyme has been in the habit of meeting or beating expectations, and the sell side has been favorably inclined toward Genzyme management for that successful track record, but over the last six months, Genzyme is being held on a much shorter-leash.

Wednesday's wait-and-see earnings report from Genzyme did little to change that short leash approach towards the drug maker. "Longer-term, I think Genzyme is a well run company and will do pretty well, but there could be so much volatility in the near term, the rating has to be a short term hold," the BRD Research analyst said.

-- Reported by Eric Rosenbaum in New York.

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