UPDATE 5-Genzyme sees drug supply progress, shares up

* Q2 EPS ex-items $0.18 vs Wall Street view $0.51

* Revenue falls to $1.08 billion from $1.23 billion

* Sees progress in increasing drug supply, divesting units

* Shares up over 2 percent (Adds CEO comment; updates shares)

By Toni Clarke

BOSTON, July 21 (Reuters)- Genzyme Corp GENZ.O signaled it is recovering from a manufacturing crisis that has caused shortages of two of its biggest-selling drugs and virtually eliminated profits, lifting its shares over 2 percent.

The maker of drugs for rare and chronic diseases said on Wednesday its second-quarter earnings plunged, and it cut its profit forecast for the year.

But investors took heart after the company said it expects supplies of Cerezyme, its drug to treat Gaucher disease, and Fabrazyme, its drug for Fabry disease, to increase later in the year.

In an additional sign of progress, the company said it is on track to divest some businesses by the end of the year and has a "multiyear" plan in place to make the company more efficient.

"We are the tail-end of this very, very tough year," Chief Executive Henri Termeer said on a conference call with investors. "We are deeply engaged in an effort to understand costs in the organization and streamline operations."

Last year Genzyme was forced to temporarily close its manufacturing plant in Boston because of a viral contamination, leading to shortages of Cerezyme and Fabrazyme.

Genzyme is the world's dominant supplier of drugs to treat Gaucher and Fabry disease, which are rare, inherited disorders in which patients lack, or are deficient in, key enzymes for breaking down fats. The buildup of fatty deposits can cause organ damage and death.

The shortage has provided an unlooked-for opportunity for rival Shire Plc (SHP.L) to gain market share.

The crisis led activist investors Carl Icahn and Ralph Whitworth of Relational Investors LLC to push Genzyme to make changes to its board and to its strategy, including divesting noncore businesses.

It also led to a consent decree with the U.S. government under which it will pay a fine of $175 million for manufacturing violations related to its Allston plant in Boston. As part of the consent decree, Genzyme is required to move its filling and finishing operations for products sold in the United States out of its plant in Boston by Nov. 28.

The company said it has confidence it can meet that deadline, avoiding potentially hefty fines.

"To the extent you believe they will be able to execute on what they say they are going to do, and you believe that there aren't going to be any more manufacturing problems, you can make the argument that Genzyme is a cheap stock with relatively good growth prospects," said William Tanner, an analyst at Lazard Capital Markets.

Net profit in the second quarter fell to $23,000, or nil per share, from $187.6 million, or 68 cents a share, a year earlier. Excluding one-time items, the company earned 18 cents a share, far below the average analyst forecast of 51 cents, according to Thomson Reuters I/B/E/S.

Revenue fell to $1.08 billion from $1.23 billion, missing the average analyst forecast of $1.16 billion.

Genzyme, which is based in Cambridge, Massachusetts, lowered its forecast for the year, saying it expects earnings per share excluding one-time items of $1.90 to $2.00. It previously forecast $2.80 to $3.20.

The company said it expects 2010 revenue of $4.4 billion to $4.5 billion. Previously it forecast $5.23 billion to $5.53 billion.

The new outlook reflects the company's anticipated divestiture of its genetics, diagnostics and pharmaceuticals businesses, as well as the impact of drug supply constraints and healthcare reform and foreign exchange fluctuations.

Genzyme's shares were up 2.2 percent to $53.41 in afternoon trading on Nasdaq after rising as high as $54.80 earlier.

(Reporting by Toni Clarke, editing by Gerald E. McCormick and Tim Dobbyn)