Biotech/Drugs: Genzyme: Majestic Bungee Jumping
Analyst: Bob Hirschfeld (10/7/99)
Genzyme (NASDAQ:GENZ - news) shares have bungee-jumped, first falling Tuesday to the low $30s, then rallying back to over $40 per share on Wednesday after a raft of analyst upgrades, most of which urged investors to buy in at temporarily depressed prices.
Concerns had been raised about the development of a potentially competitive Gaucher's disease drug by UK-based Oxford GlycoSciences. Genzyme's biggest-selling drug, Cerezyme, which treats Gaucher's, is expected to produce 1999 sales of $480 million, which comes to 70% of company revenue.
Genzyme, Wednesday morning, countered speculation over the rival product by announcing that 'premature speculation regarding potentially competitive compounds underestimates the risks, costs, and timelines to develop, gain approval and market a safe and effective product to treat Gaucher's disease.'
Oxford GlycoSciences is currently conducting a trial of its Gaucher drug candidate, for which the company expects to report data by the first quarter of 2000. Its drug has received orphan drug status from the FDA, which means it should enjoy market exclusivity for a period if approved.
Gaucher's Cerezyme, which also has orphan drug status that provides it with market exclusivity until 2001, is a drug administered through intravenous infusion. Cerezyme costs about $150,000 per year, which makes it one of the world's most expensive drugs. Its potential competitor is a capsule and will likely be cheaper to manufacture.
PaineWebber analyst Elise Wang dismissed concerns about Oxford's drug and upgraded her opinion of Genzyme shares to Buy from Attractive. The analyst wrote of the Oxford drug, 'it is premature to assume this product is likely to be effective.' Wang added that Genzyme did not pursue a collaboration on the compound, given 'their skepticism about the potential efficacy and safety of the product.'
Wang added that the compound was originally developed by Searle to treat HIV but dropped due to toxicity issues. The analyst thinks the burden on proving comparable efficacy and safety to Cerezyme will be 'robust.'
Meirav Chovav, the Salomon Smith Barney analyst, concurs that the Oxford product is no threat to Genzyme. In a research note, the analyst writes, 'we believe Oxford's product has toxicity issues and is non-specific for Gaucher's and hence is not a serious threat to Genzyme's Cerazyme.'
Wang estimates Genzyme will earn $1.85 per share for 1999 and $2.20 for 2000. Her 12-month price target, which is based on applying a 30 multiple to year 2000 estimates, is $66 per share. (At a recent $40.56, Genzyme stock is trading at 18.4 times year 2000 estimates). Wang writes that Genzyme will report its third quarter on October 21, and she expects the company to 'meet or exceed' her earnings per share (EPS) estimate of $0.44 per share.
Bottom Line:
In the world of pharmaceuticals, the first-out-of-the-gate advantage is highly significant. Genzyme has that advantage in the treatment of Gaucher's disease. The multiple by which Wang sets her target price on shares, that of thirty, does not seem unreasonable, given that Idec Pharmaceutical's (NASDAQ:IDPH - news) multiple is in the mid-fifties and Amgen's (NASDAQ:AMGN - news) is in the mid-forties. That increases our comfort level with Wang's target price. |
