How to Destroy Your Company's Wall Street Credibility and Erase $8 Billion in Shareholder Value, All in Six Months
: It could be the title of a primer by
Shares of the troubled biotech firm are off 24% Thursday after company management issued yet another sales and earnings
warning Wednesday night. At its current price, $19.64, Genzyme has now lost 65% of its market value since the beginning of the year. Worse yet, several Wall Street analysts don't even believe the company's revised numbers, and that means investors could be slapped with yet more warnings in the future.
The Amex Biotechnology Index was off 5% Thursday, as investors used Genzyme as another excuse to run quickly from the sector.
How did Genzyme find itself in such a mess? Unfortunately, it was all too easy:
Step 1: Start the year with an extremely
bullish forecast, particularly for your highest-profile drug. Renagel sales: $260 million to $280 million in 2002, or 58% year-over-year growth. Earnings: 25% growth in 2002. When fund managers question the assumptions, insist they're wrong.
Step 2: A few months later, issue a first-quarter
profit warning. Blame lower-than-expected first-quarter Renagel sales, due to reductions in wholesaler inventory levels. Assure investors that full-year targets for Renagel sales and earnings are still on track.
Step 3: Actually report first-quarter results, but
miss reduced Wall Street expectations. Reiterate, again, full-year forecasts.
Step 4, which brings us to the present: Wednesday night, Genzyme issued its second sales and earnings warning, admitting that, yes, its Renagel sales forecasts were wrong. Forget the 58% year-over-year sales growth for drug, now it will be more like 18% growth. Likewise, the expected 25% earnings growth forecast for the year is now cut to 5% growth, at best.
On a conference all Wednesday night, Genzyme executives, including CEO Henri Termeer, were apologetic, blaming the previous guidance on inflated demand forecasts that resulted from a faulty analysis of third-party prescription data. Now, after sitting down with doctors and the company's salespeople, they've come up with a more realistic forecast for Renagel sales growth this year -- between $200 million and $210 million, the company said.
But with reserves in the Genzyme credibility reservoir at dangerously low levels, many analysts weren't ready Thursday to take the company at its word.
Bear Stearns biotech analyst Ronald Renaud lowered his 2002 Renagel forecast to $181 million from $245 million, and earnings to $1.13 per share from $1.32 per share. (Genzyme now says it expects 2002 earnings of $1.18 to $1.23 per share.) Renaud rates Genzyme neutral, and his firm doesn't have a banking relationship with the company.
One of the big question marks remaining is just how well Genzyme is working through its previously announced Renagel inventory reduction plan. After the first quarter, the company said wholesalers had reduced inventory levels from a bloated 12 weeks to a more manageable six weeks. But Wednesday, Genzyme executives admitted that wholesaler inventories were still at nine weeks and wouldn't be reduced to six weeks until the end of the year.
In late May, SG Cowen's Yaron Werber was one of the first biotech analysts to question the accuracy of Genzyme's inventory level guidance. Thursday, he said his independent checks suggest Renagel's inventory level still stands at just under 11 weeks, raising the risk that Genzyme's current forecast is still risky. Werber reduced his Renagel sales estimate to $190 million in 2002 and his earnings estimate to $1.17 per share. He rates the stock buy, and his firm doesn't have a banking relationship with the company.
Lehman Brothers biotech analyst Joe Dougherty also took down his Genzyme estimates on concerns about the company's ability to provide reliable forecasts.
"We believe that there is still some uncertainty surrounding Genzyme's growth rate going forward. Inventory adjustments and underlying demand in the Renagel market are still poorly visible, as is the degree of penetration," he writes. Dougherty has a buy rating on Genzyme, and his firm has a banking relationship with the company.
Genzyme said Wednesday that it expects to post $40 million in Renagel sales in the current quarter. When you add that figure to the $29.5 million in first-quarter sales, Genzyme clearly has some ground to make up if it expects to hit its reduced Renagel sales targets.
Renagel is used by patients undergoing kidney dialysis. Genzyme believes that new medical guidelines for the treatment of these patients, to be released later this summer and published officially early next year, will favor Renagel use and help reaccelerate the drug's growth over the next six months.
SG Cowen's Werber isn't too sure. "We have recently talked with a prominent physician with intimate knowledge of the K/DOQI (kidney dialysis outcome quality initiatives) guidelines who expressed the notion that the guidelines are unlikely to catalyze Renagel growth," he writes. "Our consultant noted that since Genzyme has done a tremendous job marketing Renagel to physicians, the attributes and benefits of Renagel are widely known and have largely been adopted into clinical practice at this point."