ZymoGenetics Leads With Its Chin

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It says a lot about ZymoGenetics' (Nasdaq: ZGEN) quarter that management decided to open the conference call talking about its hepatitis C drug still in trials, rather than the sales results of its blood-clotting agent, Recothrom.

I can see why management might be excited about the hepatitis drug. The phase 1b trial testing of its "IL-29" in hepatitis C patients just came out on Monday. And the stock shot up 17% as a result. But the decision to lead with that probably had more to do with the drug likely joining a market with Schering-Plough's (NYSE: SGP) Pegintron, which brought in $235 million last quarter. Compare that to Recothrom, which brought in just $1.8 million.

$1.8 million? Ouch! That's no way to support a drug pipeline.

Unfortunately, this thrombin is competing against entrenched leader King Pharmaceuticals (NYSE: KG) -- which sold some $65 million worth of its own version in its second quarter -- and Omrix Biopharmaceuticals' (Nasdaq: OMRI) Evithrom, which is sold by powerhouse Johnson & Johnson (NYSE: JNJ). Recothrom has some definite safety advantages over King's product, but the decision-makers at the hospitals just don't seem to be aware of the added safety.

In order to get hospitals to use its Recothrom, ZymoGenetics is dropping its price. The plan seems to be to switch the hospitals to Recothrom with prices competitive with King and Omrix, while emphasizing the safety. Management said that early results seem positive, and they are projecting $3 million in fourth-quarter sales. They'll begin to raise prices once the hospitals are using the product. Good luck with that.

While I think we can write off Recothrom as being the saving grace of the company -- at least for now -- ZymoGenetics shouldn't be left for dead. This quarter it'll get a milestone payment from Bayer, its international partner for Recothrom, and some cash from Bristol-Myers Squibb (NYSE: BMY) for settling a patent dispute. That, along with a licensing deal it's hoping to set up, should get it into 2010. Hopefully by then, ZymoGenetics will be close to receiving royalties from its earlier licensed products, like Factor 13 from Novo Nordisk (NYSE: NVO), and it'll be happy to start its conference call with a report of the quarterly finances.