The problem with a train wreck isn't the first car that goes off the track, but all the ones farther back that come crashing along behind it.
That seems an apt metaphor for Genzyme (NASDAQ:GENZ). Until recently, everything was going fine for the biotech drug developer. Revenue growth averaged 22% annually from 2003 through 2008. Then the first car slid off the track, as the Food and Drug Administration announced a three-month delay on its decision about allowing larger-scale production of Genzyme's Myozyme.
When the FDA finally made its decision in March, the news wasn't what Genzyme was hoping for. The agency said the company needed to clear up a warning letter about problems the FDA discovered at one of Genzyme's manufacturing plants.
Manufacturing issues continued in June, when Genzyme had to shut down operations at a plant because of contamination. That led to drug shortages, causing Genzyme to show its first decline in quarterly year-over-year sales in a decade.
The plant got cleaned and back up and running, but unfortunately, new issues cropped up last week. On Friday the FDA said that about 1% of the vials coming out of the company contain bits of steel, rubber and fiber. The agency didn't recall the drugs because they treat diseases that don't have any additional treatment options. But it doesn't make the company look good in the eyes of the agency that controls its marketing applications.
It shouldn't have come as a big surprise this week that once again, the FDA failed to approve the large-scale version of Myozyme. Considering the long delay, Genzyme is abandoning that scale, which will be called Lumizyme if it's ever approved. It now plans to try and get the FDA to approve an even larger-scale production used in Europe.
The train cars haven't stopped piling up yet, though. Yesterday, Genzyme announced that it was dropping the development of a follow-on to Renvela, which removes phosphates in patients with chronic kidney disease. The follow-on drug didn't work any better than Renvela.
After this string of bad luck and missteps, is Genzyme a bad-news buy or not? Its shares are down 40% since August of 2008. That year, the company brought in $2.99 per share, excluding one-time issues. If it could get earnings back to 2008 levels -- demand for its product hasn't changed, although there's potential competition from new products from Shire (NASDAQ:SHPGY) and Protalix BioTherapeutics (NYSE:PLX) -- Genzyme would have a P/E of around 16.6.
That's much lower than its previous heights, but after all its missteps, it no longer deserves those lofty past valuations. Genzyme's midsized biotech brethren, Amgen (NASDAQ:AMGN) and Biogen Idec (NASDAQ:BIIB), might be better choices -- at least until Genzyme proves it has the trains back on schedule.
