Genzyme's (Nasdaq: GENZ) investors have clearly set a very low standard for the drugmaker. Yesterday the company announced:
- A likely $175 million disgorgement of past profits in conjunction with the previously disclosed consent decree with the Food and Drug Administration.
- Adjusted earnings that slumped 56% excluding the aforementioned fine.
- A new problem at its manufacturing plant which will keep Genzyme from completely supplying the market for the next two to three months.
What did the stock do? It went up 1.6%. I kid you not.
Part of the apathy may be because the disgorgement of profits could have been worse. The $175 million that Genzyme expects to pay based on the draft consent decree is only about 40% of last year's net income. And the fact that the company has a draft of the consent decree means that the company is making progress toward putting the problems behind it.
But investors are still placing a lot of confidence in management's getting the problems solved. If it isn't able to transfer the fill and finish operations from the Allston plant to its other plant and its contractor Hospira (NYSE: HSP) by a yet-to-be-announced date, the FDA may take an additional 18.5% of revenue on stuff made at Allston. There's also the potential for payments of $15,000 per day per violation if remediation compliance milestones aren't met over the next few years.
The new issue at Genzyme's plant seems to be solved. A power outage seems to have caused problems for the water supply, which hampered production. Instead of ending the quarter with a buildup of inventory, Genzyme will continue to ship just 50% of the supply of Cerezyme for the next two to three months.
Normally a setback like this for an orphan-drug maker would be a one-time loss of revenue, but not much more because drugs to treat orphan indications are rare. But in the case of Gaucher's disease, which Cerezyme treats, Shire (Nasdaq: SHPGY) recently got a drug approved for the disease, and Pfizer (NYSE: PFE) and Protalix BioTherapeutics (NYSE: PLX) are also developing a competing drug. Being first to market is usually a huge benefit, but only if you don't mess up in the face of competition. Only time will tell how much of the market Genzyme will be able to hold on to.
Investors need to be very cautious here. Genzyme could rebound if it can get its act together. But with so many other quality stocks out there, investing in "ifs" seems mighty dangerous even with the bar set low.
