Jun 17, 2009

Genzyme: Buy The Stock & Get The Pipeline Free


Rarely do I advocate biotech equities to any given individual due to the inherent risk and uncertainty in the industry. But as of late, one biotech firm has garnered my attention, due to extremely high margin of safety at their current market value. I have also watched this company grow over the last 4 years, and their successful execution of what has been an increasingly dynamic strategic vision.

Genzyme, who had a very broad range treatment, catering to numerous “niche” markets, is the company I’m making reference to. This strategy was unprecedented until recently as they target those diseases that strike a very small part of the population. This, however, has given them “fast track status” on the majority of their drugs, referred to as “orphan drugs”, consequently resulting in longer patent lives than the industry average. Genzyme began moving drugs onto the market that treated a select few with some type of rare disease, but have gradually brought bigger and bigger drugs in front of the FDA with remarkable success. Over the last 2 years they have successfully brought 3- mini blockbuster drugs on line with several more in the pipeline in addition to some real blockbusters in the oncology arena. Unlike other mega biotech giants like Amgen whose main focus is in a single specialized area (that being oncology for Amgen), Genzyme has a very diverse portfolio in terms of treatments afflicting main medical arenas. Their target market covers 6 main areas including cardiovascular disease, renal disease, Diagnostics, genetic disease, bio-surgery & most recently Oncology (which they have achieved enormous success in the small time spent here). They have built up a strong capital position before entering the world of oncology as the research tends to be expensive relatively speaking. They have done this through exploiting various niche markets as well as making contractual strategic alliances with such companies as Isis (The leader in the development in RNAI technology, which the scientific world believes is the future for cancer treatments).

Their current flagship drug presently (though unlikely to remain so much longer) is Cerezyme for Gauchers disease. 2008 revenue for this drug, came in just above 1.2Billion. Although this accounted for 27% of their revenue, the more or less recent approval and sales growth of such drugs as Myozyme, Mozobil & Fabrazyme alone has the street as well as the company having net income growth of 80% for FY 09’. Myozyme treats a rare disease (Pompe) but is expected to be used off label for a variety of illnesses. Mozobil will be more and more widely adopted for solid organ transplant/ sensitization both in the U.S and around the world. Myozyme is expected to grow from 300million in 2009 to 800m by 2013 and peak at nearly 1 Billion in sales per year. Mozobil also is expected to grow 400-500% by 2012-2013, thus 3 Billion a year by 2012 from their top 3 drugs (barring future approvals) is great considering the entire value of the company is around 15 Billion.

But what caught my eye wasn’t the current wave of recent approvals but the depth and broad scope of their research pipeline, which also has potential blockbusters that should propel Genzyme to the upper echelon of the biotech world. One the best pipelines in the biotech field is even more compelling when looking at Genzyme’s past track record for drug approvals. This illustrates the innovation and excellent management team that has made Genzyme such as success. A much more sound capital position has enabled Genzyme to seek medical approval from regulators from around the world in hopes of marketing their drug wherever possible Just last Friday Genzyme received approval for Renvela (a drug to help control phosphate in the blood of kidney disease patients) in Europe. Not only is Genzyme attractive on a valuation basis solely based on the current products on the market, but the fact that Genzyme’s pipeline could very well be worth more than then entire company, makes them a standout in an industry that has been rather stagnant over the last couple of years.

Their current pipeline has 12 drugs in stage 3 of FDA trials, nearly 22 drugs in stage 2 of FDA trials, 7 in stage 1 and 11 in pre-development. In other words, Genzyme is positioned for an extremely long period of high growth and potential catalysts year after year for the foreseeable future. This is also a unique pipeline with drugs focusing on various cancers, kidney disease, multiple sclerosis, Crohn’s disease & Parkinson’s disease among others. Even if they only live up to half the success of their past track record, the market value of this company is worth well in excess of $80/ Share. This may sound far-fetched but 12 or so months ago, before some major approval, Genzyme was trading more than 50% higher at $79 than the current $52 dollar handle. The market, as inefficient as it tends to be, is giving those a gift who recognize the valuation disconnect, though I doubt it will be long lived.

The average money manager likely dismisses this company for lack of understanding. They currently have operating margins around 20%, which is well below the industry average. But this is because of GAAP accounting. R&D should be a capital expenditure and show up on the statement of cash flows instead of the income statement. Genzyme had to incur these lower margins (which have been expanding) in order to develop their gem pipeline. But those with the wherewithal to recognize this fact or determine operating margins by capitalizing R&D expenditures would see they are right around the industry average. Another overlooked fact, is that Genzyme’s entry into bigger markets via the aforementioned drugs, also have larger margins, thus it is a certainty their operating margins will expand over time.

Like any other equity I look for a large margin of safety in case my assumptions in my valuation models turn out to be wrong, thus limiting my downside. With Genzyme the current Product portfolio alone gives Genzyme and Intrinsic Value of $54-$62/share. In other words their pipeline (which could be worth substantially more than the future cash flows generated from the current portfolio) is basically free at current prices. But realistically, I expect a fair value to be near $100/share. I think it could be worth far more depending on the outcome of the pipeline, but at the current $52 market price, there is no downside.

What To Look For The Next 2 Years

It is worth noting Alemtunuzab (for MS), Prochymal (For Graft Vs Host Disease), Clolor Combo (Adult Myleiod Luekemia), Mipomersen (Cholestorol) , just to name a few, are some potential blockbusters seeking approval over the next 6-24 months. Mipomersen has recently showed great results in clinical trials: After 24 weeks LDL was lowered 26%, which was the lowest dose, with data to support a more rapid decline at higher doses (trials ongoing). Also The recent milestone approvals in Myozyme, Mozibil and Fabrazyme should reach peak growth in 2011-2012 as it is approved Internationally.

No comments:

Post a Comment