Genzyme Corp. Reports Operating Results (10-Q)

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Nov 09, 2010
Genzyme Corp. (GENZ, Financial) filed Quarterly Report for the period ended 2010-09-30.

Genzyme Corp. has a market cap of $18.11 billion; its shares were traded at around $71.06 with a P/E ratio of 79 and P/S ratio of 4. Genzyme Corp. had an annual average earning growth of 17.5% over the past 10 years. GuruFocus rated Genzyme Corp. the business predictability rank of 2.5-star.GENZ is in the portfolios of Carl Icahn of Icahn Capital Management LP, Manning & Napier Advisors, Inc, Edward Owens of Vanguard Health Care Fund, Murray Stahl of Horizon Asset Management, John Buckingham of Al Frank Asset Management, Inc., Michael Price of MFP Investors LLC, Steven Cohen of SAC Capital Advisors, Pioneer Investments, George Soros of Soros Fund Management LLC, Mario Gabelli of GAMCO Investors, Jeremy Grantham of GMO LLC, Jean-Marie Eveillard of First Eagle Investment Management, LLC, Jean-Marie Eveillard of First Eagle Investment Management, LLC, Jean-Marie Eveillard of First Eagle Investment Management, LLC, Jean-Marie Eveillard of First Eagle Investment Management, LLC, Kenneth Fisher of Fisher Asset Management, LLC.

Highlight of Business Operations:

On September 13, 2010, we entered into an agreement with Laboratory Corporation of America Holdings, or Labcorp, to sell our genetic testing business unit to Labcorp for $925.0 million in cash, subject to a working capital adjustment. Completion of the transaction is subject to customary closing conditions, including expiration or termination of an applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and is expected to occur in the fourth quarter of 2010. The sale is part of our plan announced in May 2010 to pursue strategic alternatives for our genetic testing, diagnostic products and pharmaceutical intermediates business units. Transactions for our diagnostic products and pharmaceutical intermediates business units are targeted for the end of 2010. Our financial results exclude our genetic testing and diagnostic products business units, which are reflected as discontinued operations in our consolidated financial statements for all periods presented in this report. Our genetic testing business unit had revenue of approximately $371 million for the year ended December 31, 2009 and approximately $274 million for the nine months ended September 30, 2010. Our diagnostic products business unit had revenue of approximately $167 million for the year ended December 31, 2009 and approximately $112 million for the nine months ended September 30, 2010. Revenue from our pharmaceutical intermediates business unit for the same periods was significantly less in comparison.

As previously disclosed, on July 29, 2010, we received a letter from Sanofi containing an unsolicited, non-binding proposal to acquire all of our outstanding shares of common stock for $69.00 per share in cash. Our board of directors evaluated the proposal and unanimously rejected it on August 11, 2010. On August 24, 2010, our financial advisors met with Sanofis financial advisors and provided certain non-public information relating to our business operations and projected financial results. On August 29, 2010, we received a second letter from Sanofi that contained a proposal identical to the one in its July 29, 2010 letter. This proposal was again evaluated and unanimously rejected by our board of directors. On October 4, 2010, Sanofi commenced an unsolicited tender offer for all of our outstanding shares of common stock for $69.00 per share in cash. Also on October 4, 2010, our board of directors urged shareholders to take no action with respect to the tender offer. Our board announced that it intended to take a formal position within 10 business days of the commencement of the tender offer. On October 7, 2010, our board voted unanimously to reject the unsolicited tender offer and further recommended that our shareholders not tender their shares to Sanofi pursuant to the tender offer. The full basis for our boards recommendation was set forth in a Solicitation/Recommendation Statement on Schedule 14D-9, which was filed with the SEC on October 7, 2010. On October 22, 2010, we announced that our board had authorized our advisors and management to explore and evaluate alternatives for us and our assets. These efforts are intended to assist our board of directors in being fully informed about our value and are not authorization of a process to sell Genzyme or any of our assets.

On November 4, 2010, we implemented the first phase of a workforce reduction plan pursuant to which we expect to eliminate a total of 1,000 positions by the end of 2011. The first phase will eliminate 392 positions, including both filled and unfilled positions, across various functions and locations. Employees whose positions are eliminated in the first phase were notified beginning on November 4, 2010. In the United States, affected employees are being offered severance packages, including severance payments, temporary healthcare coverage assistance and outplacement services. Similar packages will be offered to affected employees outside of the United States in accordance with local laws. In connection with the elimination of filled positions in the first phase of the workforce reduction plan, we estimate incurring total charges of $24 million to $27 million, primarily for one-time severance benefits and facilities-related costs. These charges are expected to occur in the fourth quarter of 2010. The 1,000 positions expected to be eliminated exclude positions within our genetic testing business unit, for which we have entered into an agreement to sell, and positions within our diagnostic products and pharmaceutical intermediates business units, for which similar transactions are targeted by the end of 2010. The workforce reduction plan is being implemented to reduce costs and increase efficiencies as part of a larger plan to increase shareholder value announced in May 2010.

Our consolidated balance sheets include accounts receivable, net of reserves, held by our subsidiary in Greece related to sales to government-owned or supported healthcare facilities in Greece of approximately $65 million as of September 30, 2010 and approximately $57 million as of December 31, 2009. Payment of these accounts is subject to significant delays due to government funding and reimbursement practices. We believe that this is an industry-wide issue for suppliers to these facilities. In May 2010, the government of Greece announced a plan for repayment of its debt to international pharmaceutical companies, which calls for immediate payment of accounts receivable balances that were established in 2005 and 2006. For accounts receivable established between 2007 and 2009, the government of Greece will issue non-interest bearing bonds, expected to be exchange tradable, with maturities ranging from one to three years. We recorded a charge of $7.2 million to bad debt expense, a component of SG&A in our consolidated statements of operations for the second quarter of 2010 to write down the accounts receivable balances held by our subsidiary in Greece to present value using a 10% risk adjusted discount rate.

upon each organizations percentage share of total branded prescription drug sales to U.S. government programs (such as Medicare and Medicaid and VA, DOD and TriCare retail pharmacy discount programs) made during the previous year. Sales of orphan drugs, however, are not included in the fee calculation. The related fees will be recorded as SG&A. The aggregated industry wide fee is expected to total approximately $28 billion through 2019, ranging from $2.5 billion to $4.1 billion annually. Beginning in 2013, a 2.3% excise tax will be imposed on sales of all medical devices except retail purchases by the public intended for individual use.

Presently, uncertainty exists as many of the specific determinations necessary to implement this new legislation have yet to be decided and communicated to industry participants. We have made several estimates with regard to important assumptions relevant to determining the financial impact of this legislation on our business due to the lack of availability of both certain information and complete understanding of how the process of applying the legislation will be implemented. Although we are still assessing the full extent that the U.S. healthcare reform legislation may have on our business, we currently estimate that our revenues in the United States will be adversely impacted by less than approximately $10 million to $12 million in 2010, with approximately 30% occurring in the third quarter of 2010 and the balance expected in the fourth quarter of 2010 and by approximately $35 million to $40 million in 2011.

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