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Genzyme expects lingering drug shortage, $175m fine

By Todd Wallack
Globe Staff / April 22, 2010

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Genzyme Corp. said yesterday that patients will continue to experience shortages of two drugs it makes to treat rare genetic disorders and that the company expects to face a federal fine of at least $175 million as a result of quality-control problems at its Allston plant.

The fine would be the first in Genzyme’s 29-year history and indicates the Food and Drug Administration believes the company compromised patients’ safety by violating stringent manufacturing rules. While some other drug makers have been hit with hefty fines in the past, such penalties are rarely imposed.

Genzyme, the state’s largest biotechnology company, said the latest production glitch involved an electrical outage that affected a system used to supply the plant with ultrapure water.

The resulting delay will probably extend for several months the existing shortages of Cerezyme and Fabrazyme, drugs that are needed by a few thousand patients around the world suffering from Gaucher and Fabry diseases. Those disorders cause fatty substances to build up in the lungs, liver, and other parts of the body.

The company has been struggling since last summer to make enough of the treatments, after earlier contamination by a virus temporarily halted production.

In addition to increased scrutiny from regulators as a result of production woes, Genzyme is under pressure from activist shareholders — including billionaire Carl Icahn — who are displeased with how the company is run.

Genzyme had warned investors it was facing an enforcement action from the FDA, including a probable fine, but until yesterday it had not specified a dollar figure. The company said it received a proposed settlement, called a consent order, from the FDA that calls for it to surrender $175 million in past profits from drugs made in Allston. Genzyme could be hit with other fines if it doesn’t meet certain deadlines to revamp its operations.

The FDA declined to comment on the discussions — or to explain what prompted the fine — but a Genzyme spokeswoman confirmed that the company is likely to be fined for failing to comply with federal safety rules for manufacturing drugs. Genzyme said it hopes to finalize an agreement with the agency by the end of June.

Problems at the Allston plant date back to at least February 2009, when regulators sent the company a warning letter citing deficiencies that the company has not specified and the agency did not disclose.

In June, a viral infection forced Genzyme to temporarily stop making Cerezyme and Fabrazyme, and undertake a decontamination effort.

Late last year, there were more troubles: Inspectors found bits of steel, rubber, and fiber in some drugs made or processed at the plant.

The plant is now back online, but because of the recent water system difficulties, Genzyme said, it will only be able to supply half the orders for Cerezyme over the next two or three months, and just 30 percent of doses for Fabrazyme through the third quarter. The company has been working with doctors to provide more of the drugs to the most seriously ill patients.

Representatives of a patients advocacy group, the National Gaucher Foundation, could not be reached for comment.

Cerezyme is Genzyme’s biggest product and costs up to $300,000 a year per patient, generating $1.2 billion in sales in 2008. In 2009, revenue dropped 36 percent to $793 million because of the production gaps. The firm also processes other drugs in Allston, such as Myozyme, a treatment for a genetic disorder called Pompe disease.

Chief executive Henri Termeer told analysts in a conference call yesterday that the company is focusing on making sure the Allston plant remains online and provides a steady flow of drugs to patients who need them.

“It is very clear that we are making progress,’’ Termeer said. “But it is something that has to stay focused.’’

The proposed settlement with the FDA, he said, removes some uncertainty surrounding Genzyme.

Regardless, the looming fine, along with the production problems, helped push the company into the red in the first quarter. It reported a $114.9 million loss, including the cost of paying the anticipated $175 million penalty, compared with a $195.5 million profit during the same period a year ago. Revenue fell 7 percent to $1.07 billion.

In the long term, analysts warned, the setbacks could create opportunities for competitors, including Shire Human Genetic Therapies in Lexington, that are developing competing drugs.

Genzyme also must contend with Icahn, who controls about 2 percent of its stock. He has said he will nominate himself and three others to the board. If successful, he could push for Genzyme to be broken up.

To help minimize shareholder unrest, the company earlier struck a deal with another activist investor, Ralph Whitworth, principal and cofounder of Relational Investors. The company agreed to put Whitworth on its board and give him the opportunity to help select another director, in return for his promise to support Genzyme’s proposals at the June shareholder meeting.

Many investors reacted positively to yesterday’s news. Genzyme shares closed at $54.45, up 87 cents.

JP Morgan analyst Geoffrey Meacham told clients that while the impending fine is problematic, the apparent agreement with the FDA is “perhaps better than the disaster some had feared.’’

Todd Wallack can be reached at twallack@globe.com.