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BioMarin Pharmaceutical, Inc. (NASDAQ:BMRN)

Q3 FY08 Earnings Call

October 28, 2008, 05:00 PM ET

Executives

Eugenia Shen - Senior Manager of IR

Jean-Jacques Bienaimé - CEO

Jeffrey H. Cooper - Sr. VP and CFO

Stephen Aselage - Sr. VP, Global Commercial Development

Emil D. Kakkis, M.D., Ph.D. - Sr. VP, Chief Medical Officer

Analysts

Salveen Kochnover - Collins Stewart Llc

Christopher Raymond - Robert W. Baird & Co., Inc.

Brian Abrahams - Oppenheimer & Co.

Joseph Schwartz - Leerink Swann

Philip Nadeau - Cowen & Co.

Thomas Mcgahren - Merrill Lynch

Liana Moussatos - Pacific Growth Equities

Vernon Bernardino - Rodman & Renshaw Llc

Katherine S. Kim - Bank of America Securities

Operator

Good day, ladies and gentlemen and welcome to the Third Quarter 2008 BioMarin Pharmaceutical Incorporated Earnings Conference Call. My name is Stacy and I will be your conference moderator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference. [Operator Instructions]. As a reminder this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call Ms. Eugenia Shen, Senior Manager of Investor Relations. Please proceed.

Eugenia Shen - Senior Manager of Investor Relations

Thank you. On the call today is J.J. Bienaimé, BioMarin's Chief Executive Officer; Jeff Cooper, Chief Financial Officer; Emil Kakkis, Chief Medical Officer; and Steve Aselage, Senior Vice President of Global Commercial Development.

This non-confidential presentation contains forward-looking statements, about the business prospects of BioMarin Pharmaceutical including expectations regarding BioMarin's financial performance, commercial products and potential future products in different areas of therapeutic research and development.

Results may differ materially depending on the progress of BioMarin's product programs, actions of regulatory authorities, availability of capital, future actions in the pharmaceutical market and development by competitors and those factors detailed in BioMarin's filings with the Securities and Exchange Commission such as 10-Q, 10-K and 8-K report.

And now I would like to turn the call over to J.J, BioMarin's CEO.

Jean-Jacques Bienaimé - Chief Executive Officer

Thank you, Eugenia and good afternoon. Thank you for joining us in today's call. I have a few introductory comments, before Jeff reviews the financial details of the third quarter and the nine months of 2008 And then Steve will provide more details of commercial activities and Emil will provide an update on our ongoing R&D efforts.

Eugenia will then review the list of Investor Conferences where we will be presenting in the coming months, before we ask the operator to open the call for questions.

First looking at the big picture, with $563 million in cash at the end of September. Free products from the market and growing to revenues pushing $300 million. We are one of few biotech companies that will have limited exposure towards a protracted unfavorable financing environment.

We do not expect that any of our three commercial products will face any direct competition for the foreseeable future and we have substantial cash reserves. In addition to our three commercial products, we have a robust pipeline of promising products, which keeps us well positioned for continued long-term growth.

We are pleased to report third quarter results, which show an overall increase of 191% in total BioMarin revenue as compared to the third quarter of 2007. The third quarter marks our fourth consecutive profitable quarter. And we are well on our way to achieving our first profitable year.

Naglazyme continues to perform well with a 56% increase in net sales as compared to the third quarter of 2007, while sales were down sequentially from the second quarter, there was an increase in the absolute number of patients on therapy in the third quarter, which represents the largest spike in the last two years. The reduction, in terms of sequential revenue was due to the timing of shipments to some of our customers outside the United States and a slight seasonality impact as the second and fourth quarters traditionally tend to be the strongest.

You may recall that we experienced the same slowdown last year from Q2 to Q3, which was followed by a sequential increase of 20% in Q4 of 2007. Is a very encouraging trend, we are now seeing is the tremendous progress is being made in international markets, then we would continue to aggressively pursue further growth and the initiation of new patients on commercial therapy. We remain confident that Naglazyme represents a $300 million market opportunity for BioMarin, and that it will continue to contribute significantly to top-line growth in the coming years.

Next, net third party sales of Aldurazyme by Genzyme also increased 18% in the third quarter 2008 as compared to the third quarter of 2007. As with Naglazyme, the third quarter is historically weaker for Aldurazyme due to ordering patterns and the slowdown in the summer months. This marks the third quarter following the restructure joint venture with Genzyme, which we believe has resulted in improved efficiencies of operations for both parties.

Finally, Kuvan; net revenue of $13.8 million in the current quarter is in line with our expectations, and reflects the previously reported slowdown at the PKU clinics.

At the beginning of September, we launched the registry we also initiated 45-day free drug program, and a number of patient educational events were held. Approximately 77 centers have expressed interest in participating in the registries and as of October 24th, 208 patients have been referred to the free drug program including patients in the pilot program.

The patient educational events in September were not as well attended as we have hoped. But, of the patients, who attended, the referral rate into BPPS was high. Overall, the rate of referrals in September and October did not rebound significantly after the sum amounts. Going forward however, we have planned a number of direct patient communications and awareness using efforts to better educate the PKU patient population.

Additionally, there a number of investigative sponsor trials that will enable us to enhance the Kuvan data set and help address patient concerns about long-term safety of the drug and other malignancy.

Later, Steve will elaborate on the details of the Kuvan commercialization program, where we recognize that the rate of Kuvan launch is slower than the original sweet expectations, we remain optimistic about the long-term potential of the drive.

The percentage of patients who remain on therapy is higher than we expected at launch, with a very low number of discontinuation seen thus far. Of all patients who have started on commercial Kuvan between launch on June 30th, between 50% and 60% of them are still on Kuvan three months or more after the Aldurazyme drug.

That is net-net of discontinuation and compliance of all these indications bode well for the long-term potential of Kuvan. With respect to the studies of Kuvan outside of the United States, our partner Asubio officially launched bio obtain for PKU at the end of the third quarter in Japan.

In Europe, BioMarin has been working closely with Merck Serono and the EMEA throughout the review process. In late September Merck Serono received a positive opinion from the CHMP for Kuvan which signaled a strong probability of approval in Europe by the end of the year.

Before approval BioMarin will receive $30 million milestone payments from Merck Serono. We will also receive net single-digit royalties on sales in Europe and substantially higher double-digit royalties on sales in Japan, which will partially offset royalties paid to Asubio on U.S. sales of Kuvan.

To maximize our IP position on Kuvan we're evaluating strategies that could significantly extend excessively beyond often protection securing a passive application for once daily dosing if this pattern issues as expected it will offer protection until 2024.

We're also developing a core drive with superior bio availability. Moving on to PEG-PAL we've completed the third phase of patients and this GSNB meeting is scheduled to be held in a few days. Emil will review additional details on this and our overall R&D program a little later.

Now I would like to turn the call over to Jeff Cooper, who will review the financial results for the third quarter of 2008.

Jeffrey H. Cooper - Senior Vice President and Chief Financial Officer

Thanks JJ. I will start on reviewing product revenues of Naglazyme, Aldurazyme and Kuvan for the third quarter and nine months ended September 30, 2008, and follow with collaborative agreement revenue for the same period. I will then review our bottom-line for the quarter ended September 30, 2008 and follow with a more in depth look at our financial results.

Beginning with Naglazyme, net product revenue for the third quarter of 2008 was $33.3 million, an increase of 56.3% over net product revenue of $21.3 million in the third quarter of 2007. Naglazyme net product revenue for the nine months ended September 30, 2008 was $96.2 million compared to net product revenue of $50.6 million for the nine months ended September 30, 2007.

Naglazyme net product revenue growth is attributable to geographic expansion internationally; the initiation of therapy by previously identified or newly diagnosed patients and rate gain in patient's growth. Net sales of Aldurazyme by Genzyme was $38.2 million for the third quarter ended September 30, 2008 representing an increase of 18.3% over net sales of $32.3 million for the third quarter ended September 30, 2007.

Net third party sales of Aldurazyme by Genzyme for the nine months ended September 30, 2008 were $113.7 million compared to net sales of $88.3 million for the nine months ended September 30, 20007. Net product revenue of BioMarin related to Aldurazyme was $20.7 million in the third quarter of 2008.

This reflects an increase in net product revenue from the amount payable to BioMarin by Genzyme due to incremental product transfer revenue resulting from timing of inventory for Genzyme which exceeded the unit shift third party customers. The net impact of which was about $5.6 million for third quarter of 2008.

Net product revenue to BioMarin related Aldurazyme was $58.1 million for the nine months ended September 30, 2008. Net product revenue for Kuvan was $13.8 million for the third quarter and $31.6 million for the nine months ended September 30, 2008. Net product growth is due to patients initiating therapy with Kuvan.

As for collaborative agreement revenues associated with our partnership with Merck Serono, BioMarin recorded $2.4 million for the third quarter of 2008 compared to $3.1 million for the third quarter of 2007. Collaborative agreement revenues for the nine months ended September 30, 2008 were $7.4 million compared to $10.8 million for the nine months ended September 30, 2007. This reduction of collaborative agreement revenues was due to lower reimbursable Kuvan development expenses in the third quarter and first nine months of 2008.

Net income was $800,000 or $0.01 per share for the third quarter of 2008, compared to a net loss of $5.2 million or $0.05 per share for the third quarter of 2007. The net income during the third quarter of 2008 includes $7.4 million of non-cash stock compensation expense compared to $5 million of non-cash stock compensation expense for the third quarter 2007.

Non-GAAP, net income, which excludes stock compensation expense was $8.2 million or $0.08 per share for the third quarter of 2008, compared to non-GAAP net loss of $200,000 or $0.00 per share for the third quarter of 2007.

Net income for the nine months ended September 30, 2008 was $6.3 million or $0.06 per share, compared to a net loss of $18.4 million or $0.19 per share for the nine months ended September 30, 2007. Non-GAAP net income was $24.1 million or $0.24 per share for the nine months ended September 30, 2008 compared to non-GAAP net loss of $5.6 million or $0.06 per share for the nine months ended September 30, 2007.

Basic and diluted GAAP and non-GAAP earnings per share for the three and nine months ended September 30, 2008 were the same except for non-GAAP diluted earnings per share for the nine months ended September 30, 2008 which was $0.23 per share.

Non-cash stock compensation expense for the nine months ended September 30, 2008 and September 30, 2007 was $17.8 million and 12.8 million respectively.

Now, I'll review the operating expenses and non-operating interest income in more detail. Gross margins for Naglazyme were 81% during the third quarter of 2008, compared to 79% during the third quarter of 2007, due to the impact of foreign currency exchange gains and improved manufacturing yields. Aldurazyme's gross margin will continue that will continue to fluctuate from quarter-to-quarter depending upon the timing of product transfers to Genzyme, which is a basis for cost to goods sold recognized by BioMarin.

In the third quarter and first nine months of 2008, Aldurazyme gross margin were 71% and 69% respectively with respect to the royalty and product transfer revenue from Genzyme to BioMarin.

Kuvan gross margins during the third quarter were 87%, which primarily reflects in 11% royalty on net sales. Once the inventory that was previously expenses of R&D is used up in the first half of 2009. We expect U.S. Kuvan margins including the 11% royalty to be in a lower 80% range.

Research and development expenses increased $9 million to $26.2 million in the third quarter of 2008, from $17.2 million in the third quarter of 2007. This is attributed primarily to increased cost for clinical and early stage development program. The license payment for Duchenne muscular dystrophy and non-cash stock-based compensation expense.

We expect to increase our R&D spending in the fourth quarter of 2008 to expand early-stage development programs, support the PEG-PAL clinical studies, GALNS for MPS IVA as well as non-cash stock compensation expense.

Selling, general and administrative expenses increased by $9.5 million to $29 million in the third quarter of 2008, from $19.5 million from the third quarter of 2007. This is largely due to increased commercialization activities related to Kuvan, continued international expansion of Naglazyme and growth in corporate expenses including non-cash stock-based compensation expense.

Non-operating interest income decreased by $4.5 million to $3.4 million in the third quarter of 2008, from $7.9 million in the third quarter of 2007. This is attributed to the decline in market interest rates. From a cash perspective, we ended the third quarter with $563 million of cash, cash equivalents and short-term investments.

With regard to 2008 guidance, Naglazyme net product revenue is still expected to be in the range of $130 million to $140 million and we're tracking to the middle of that range.

As for Aldurazyme, Genzyme maintains expectations for total net sales in the range of $135 million to $145 million. And we are maintaining our expectation for net product revenue to come around in a range of $72 million to $80 million.

Kuvan net product revenue is still expected to be in the range of $45 million to $65 million, and we are tracking towards the lower end of that range. As for net income for 2008, we are maintaining our expectation for a range of $30 million to $42 million, probably tracking towards the middle of that range. This assumes that $30 million milestone for EU Kuvan approval we earned in 2008.

Aldurazyme 2008 net income includes approximately $24 million to $27million in non-cash stock compensation expense. Non-GAAP and income excluding the impact of non-cash stock compensation is estimated to be in the range of $54 million to $65 million.

And now, I would like to turn the call over to Steve who will provide an update on commercial progress.

Stephen Aselage - Senior Vice President, Global Commercial Development

Thanks Jeff. Starting with Naglazyme, we continue to find significant numbers of new patients particularly in regions such as Latin America, the Middle East, and Turkey. We now have more patients on therapy in Brazil than any other country, and we are aware of many stone-treated patients would benefit from therapy.

It is probably worth noting that Latin America transactions including Brazil are done in U.S. dollars or currency fluctuations do not impact revenues from that region. As JJ mentioned despite the sequential decline of revenue from Q2 to Q3, the increase in absolute patient number in the third quarter represented the largest increase in two years. The decline in revenues due to timing of orders from some customers outside the U.S. and some impact from seasonality.

In the U.S. the most of Europe Naglazyme was ordered by individual hospitals and generally in frequent relatively small quantities. As international becomes a larger portion of our revenues trend, a greater percentage of orders come from government entities that tend to buy larger quantities less frequently.

Normally these orders even helped, and in Q3, they did not. This situation is likely to cause some sharpness in quarter-to-quarter changes in the future as well. From our assessment on the market we believe, they remains significant untapped potential particularly in the international region, which is already in the largest contributor to Naglazyme growth.

Australia have funding approved defective for September, but the initial orders were delayed into our October that had a negative impact on Q3, but we'll further increase international contribution going forward. We continued to expect formal approval in Brazil in the first quarter of 2009, expect to enter new markets in Eastern Europe and the Middle-East. We maintained our peek sales estimate for Naglazyme around $300 million, double our initial expectations at the time of watch.

As for Kuvan, nine months into the product launch, we continue to learn more about the dynamics of what is proven to be a very complex market. The rate of patient referrals has not reaccelerated significantly since the slow down that took place during the summer.

We do have however continue to have additional new patients referred to BPPS, and new patients initiate commercial therapy on a regular basis. Because Kuvan was developed and brought to market at such a rapid speed, in just a little over three years from IND filing to approval, there is not yet much in the way of supported data on long-term safety or specific patient groups such as patients under four years of age and maternal PKU patients.

We are quite confident however that we have a safe drug that can benefit a significant portion of all PKU patients and that we will continue to creatively and aggressively pursue ongoing post-marketing activities. We have intensified our sales efforts on a 20 sales representatives that are continuing their work to define the clinical value of Kuvan and result logistical obstacles for clinics.

We are continuing and expanding our direct-to-patient communication efforts through patient meetings, teleconferences, and podcasts in addition to direct mail and online efforts. Online efforts include PKU.com, which has grown dramatically since inception in March of 2006 and serves as a valuable tool for delivering information to roughly 5,000 registered users.

We are supporting a number of investigator trials and we believe will help clarify the benefits of Kuvan to both patients and care givers. There are currently three open studies and nine plan studies all sorts of range of majors including improvement and behavioral symptoms, depression, anxiety, short-term memory, processing speed, executive function and changes in bone density and nutrition.

These trials will evaluate various patient populations including some that we're not included in our Phase II and Phase III trials. These studies along with our registry program will generate additional data to support the use of Kuvan. Overall despite some of our recent challenges, there are many reasons to remain optimistic about the long term potential of Kuvan.

First as JJ mentioned earlier, the percentage of patients being kept on therapy is higher than we anticipated, and there has been a low percentage of discontinuations as long as response has been established. Also in addition to feel over reductions, patients are anecdotally reporting some very notable qualitative benefits such as better concentration, less depression, improved sleep and generally feeling better overall.

These are the type of outcomes we are attempting to capture and qualifying in our support of the investigators sponsored trials that were previously mentioned. And our view clearly establishing these facts of beneficial outcomes will help increase adoption, improve compliance and maintenance on long-term therapy.

Over all the response from payers continues to be encouraging. We do not anticipate reimbursement to be a limiting factor going forward. Our current observe to average dose is now approximately 18.5 milligrams per kilogram today. The average weight is approximately 54 kilograms. While it is still too early to assess overall compliance rates, we continue to work off the assumption at 80% compliance for yielding estimated average price of approximately $78,000 per year before factoring a mandatory government discounts.

Throughout the launch of Kuvan, we have indeed experienced from unexpected challenges, and we remain confident of the long-term effectiveness of our commercialization program. We look forward to keeping you updated as the launch progresses.

And now, I would like to turn you over to Emil, who will provide an update on our R&D pipeline

Emil D. Kakkis, M.D., Ph.D. - Senior Vice President, Chief Medical Officer

Thanks Steve.

Staring with the BH4 cardiovascular program, two weeks ago, we reported positive results from the Phase 2A sickle cell study. Results indicate that overall administration of BH4 resulted in a significant improvement in endothelial function. Patients, who have normal endothelial function that base line shows the vast improvements and the improvement was dose dependent.

Importantly, BH4 was well tolerated in sickle cells of these patients. We will have a pre-IND meeting with the FDA in late November to discuss next step in the program. Handing feedback from the FDA, future plans could include a survey study to assess the relationship between the endothelial function and sickle cell event and the three month doubled line placebo control dose lining study with the primary endpoint of endothelial function.

In addition to the sickle cell indication, we are also performing several Phase 2 exploratory studies of BH4 in other cardiovascular indication. In first quarter of 2009, we expect to have data from the sponsor study and peripheral arterial disease. The magnetic studies BH4 plus vitamin C give effciater sponsor studies in PH and also in potent area [ph]. The remainder of the study should complete by mid-2009 ending on enrollment in some of the investigator initiative studies. The collective results will help us determine the future 6R-BH4 cardiovascular program.

Moving on to PEG-PAL, the third cohort patients has been dozed in the Phase 1 trial, and the DSMB meeting is scheduled to be held in a few days. The purpose of the meeting is assess the interim safety profile in the first three cohorts with outcome to either continue or end the study. Based on available data, we expect that DSMB will allow the ongoing PEG-PAL study to continue.

We expect to communicate this decision, but do not plan and disclosing any efficacy data until the completion of the study. Phase 1 study, which will assets the safety and pharmacokinetics and single injections of PEG-PAL and 35 PQ of patients of up six to seven escalating dose cohorts is expected to conclude in the first half of 2009. The timing will depend on how many cohorts are tested before we reach a safety stuff criterion.

The nine months dose administration phase of the monkey toxicology study was completed in September, and the study is now in the three month recovery phase, which would conclude in December. In the dose administration phase of the study, 54 monkeys were administered PEG-PAL subcutaneously twice weekly doses ranging from 0.0123 milligram per kilo. No immune related anaphylactoid hyper sensitivity or injections type reactions were noted during the study. The monkeys are not human, but safety is encouraging in this pre-clinical study.

Based on the FDA's requirements to complete this nine month monkey toxicity before initiating multi dose therapy, we expect to initiate Phase 2 in late Q1 or early Q2 of 2009. Phase 2 study will evaluate the safety and efficacy of weekly injections for eight weeks, followed by eight weeks of dose optimization and then an extension period. This will be the true proof of concept for the PEG-PAL drugs since the efficacy of the of repeat dosing and the presence of any immune response that is the key question to answer.

The on PEG-PAL or GALNS program for Morquio or MPS IVA is on track to enter the clinic in the first quarter of 2009. This indication fits well with our core development, regulatory, and commercial strength. And we hope to buy the first treatment option for this unmet medical need with our proven track record of expeditiously bringing product to market.

We are finding that there are a number of Morquio patients out there, a large number in the clinic, worldwide, and many are here to be treated. Regarding our program for Duchenne muscular dystrophy, we are working on reform line the molecule to improve buy availability, and we'll communicate our revise time when that is said. Our pre-clinical stage program for Pompe disease is moving along nicely. In our second Pompe mouth study, the glycogen storage measure in the skeletal muscle was further reduced after a longer period of treatment with BMM 103 and glycogen storage reduction was appeared to that seen with myoziminal muscles [ph]. We are considering our options for this program, and we'll keep you updated on our progress.

Now I would like to turn the call over to Eugenia, for some comments regarding upcoming events.

Eugenia Shen - Senior Manager of Investor Relations

Thanks Emil before we open up the call for questions, I would like to note that we will be presenting at a few Investor Conferences in the coming months. On November 12th, we will be presenting at the Credit Suisse Healthcare Conference in Phoenix and on December 2nd we will be presenting at the Piper Jaffray Conference in New York City.

You can access these presentations live at our website at www.bmrn.com. And with that we would now like to open up the call for questions. Stacy?

Question And Answer

Operator

[Operator Instructions]. Your first question comes from the line of Salveen Kochnover with Collins Stewart. Please proceed.

Salveen Kochnover - Collins Stewart Llc

Thanks for taking my questions. Could you let us know if there is any more EAP or open label extension patients that remain to be switched over to commercial patients at this point?

Stephen Aselage - Senior Vice President, Global Commercial Development

EAP, there are no additional patients that we are aware of, as far as the extension study; I believe the last of the extension study patients won't finish their two years until next month. So, there are very few left... there is probably one or two left on the extension study.

Salveen Kochnover - Collins Stewart Llc

I think at the end of prospects although you provided guidance for third quarter Kuvan sales were slight uptick to the second quarter. How should we think about fourth quarter Kuvan sales and then potentially '09 going forward just given the impact of the marketing initiative?

Stephen Aselage - Senior Vice President, Global Commercial Development

Yes, we're not in a position yet we are ready to give any type of guidance for 2009. But, as I said the referral rate has continued to be about the same as it was through the summer. So I think you can anticipate Q4 to have a slight uptick from Q3, just as Q3 was a slight uptick from Q2. JJ, Jeff just mentioned in the call previously, we are plan on finishing within the guidance for 2008 we are tracking towards the low end of that guidance.

Salveen Kochnover - Collins Stewart Llc

And then in terms of Naglazyme ex-U.S. in '09 apart from Brazil, Eastern Europe and Middle East, are there any additional geographic launches into other geographic country is expected?

Stephen Aselage - Senior Vice President, Global Commercial Development

That's most of the world, outside Western Europe and the United States. But we are just initiating commercial therapy with patients this month in Australia, which is a good opportunity for us as we anticipate and can't promise but we anticipate commercial patient starting in South Korea next year.

There are number of smaller markets that any one of which is not a huge tick for Naglazyme but cumulative where we have a significant impact on a Naglazyme business.

Salveen Kochnover - Collins Stewart Llc

Okay and how, can you just maybe describe the hedging strategy in place for Naglazyme foreign sales just from the foreign exchange impact?

Jeffrey H. Cooper - Senior Vice President and Chief Financial Officer

Sure this is Jeff Cooper. I'll be happy to talk about that. Currently about 50% of overall Naglazyme revenues are euro denominated and so what we've been doing is hedging against the euro as it relates to our forward-looking revenues or profits. So our current process is to hedge about 70% of our projected bottom-line P&L exposure for euro denominated activities. We've provided hedges into the third quarter of 2009, we've hedge that at relatively a high rate in 2008, in mid-150s probably in the mid-140s in the first half of 2009 and then a lower level into the third quarter of 2009.

So basically as I know, we take our total projected euro-based revenue and offset that against our total projected euro expenses and then we hedge 70% of that exposure. So that's pretty much what our plan is in terms of our hedging strategy.

Salveen Kochnover - Collins Stewart Llc

Great. And then just one last question. Do you have a need... continued plans to in license products going forward?

Jean-Jacques Bienaimé - Chief Executive Officer

Yes, I mean we are still looking at different opportunities. I would say with the recent dislocation in the financial markets. They're getting cheaper and cheaper so I think we've been wise to wait. But yes, we're in advanced discussions on a couple of opportunities and we're looking at Phase III plus or later stage. And I mean no guarantee of any transaction and we are looking really at product doping licensing opportunities rather than M&A at this time.

Salveen Kochnover - Collins Stewart Llc

Thank you.

Operator

Your next question comes from the line of Chris Raymond with Robert W. Baird & Company. Please proceed.

Christopher Raymond - Robert W. Baird & Co., Inc.

Thanks for taking the question. Now display here but and with regard to Kuvan, if you were to take the absolute lever under your guidance that would imply sequentially down fourth quarter versus the Q3 revenue. Can you just tell us is that something that's within the realm of possibilities I mean are you seeing that much of a lack of referral?

Jeffrey H. Cooper - Senior Vice President and Chief Financial Officer

We're continuing to see increased referrals and increased net numbers of patients on therapy.

Jean-Jacques Bienaimé - Chief Executive Officer

Yes, so I would say it's as likely that Q4 will be lower than Q3 in dollars.

Christopher Raymond - Robert W. Baird & Co., Inc.

Great. And Steve I don't know if you can, maybe talk a little bit more I think you gave a little bit of color but, what are the primary objections the source, is it patients or is it still the dieticians or a combination that are primarily in your view responsible for the lack of referrals?

Stephen Aselage - Senior Vice President, Global Commercial Development

Let me take a set back from that just for a second and say again that we are seeing continued referrals and we said that over the summer was in the four or five patients per day range and those not change. So it's now like referrals of stock coming in. There are a number of issues. It is a complex market and there are issues there are patient specific issues that are specific on issues that are system specific.

At the patient level, I think its important to realize that most of these patients have been told for their whole lives that if they stay on diet and if they maintain their diet appropriately, then everything is going to be perfect for them. As been the leverage that care givers have used with patients and for the patients to come to grips with the fact that maybe everything really isn't perfect after all, it is not an east psychological transition for them.

With a huge amount of missing information in this marketplace, particularly is related to safety and I have seen on a number of the patient boards where communication is unfettered and lead in often inaccurate concerns about long-term safety impact with Kuvan. And we have found that in our own market research that it is a lingering concern to patients that we have little over two years of safety data in our Kuvan group and unbelievably we continue to have Vioxx product as an example of the pharmaceutical product cause damage years after its approved.

So I think demonstrating safety, getting patients comfortable with the fact that this is a natural way of accruing molecule, it's a co-factored not unlike Vitamin C is a educational process it doesn't happen overnight but it's something we are working on and I think we are making some progress on.

At the caregiver a level you have got a couple different issues one of which is simply time, workload and perception with everyone doesn't necessarily see it benefit Kuvan over diet alone. We work prudent record time and we're proven based on a bio-marker and lowered fee levels.

We've not yet had time to generate the data to show this type of improvements but it is going to most meaningful to caregiver's improvements and executive functions. Information process and speed and concentration those type of information pieces database pieces are going to come out over the next couple of years and I think will make caregivers much more convinced to value for Kuvan, value proposition for Kuvan is compelling. So there is no one issue or no one group that slows things down. It's a combination of things that we need to address and are addressing. I hope I answered your question.

Christopher Raymond - Robert W. Baird & Co., Inc.

Yes, you do. And then sorry for inferring that there are newer peripherals, I didn't mean to do that. If I can just ask one more question on PEG-PAL, I think there is a little bit of a slip from the last press release you guys had, last quarterly results in terms of getting the Phase 1 data. I think last time it was Q1 '08... I'm sorry, Q4 '08, Q1 '09. It looks like we're now talking about one quarter lag. Can you explain a little bit what's behind that as given that you just said you've got three cohorts now was driving that.

Unidentified Company Representative

Well, I think the enrollment the cohort set in a very rigid fashion and a staggered rigid fashion with any slot gets met, then the cants can't be refilled, and say you end up losing some time. So, we have lost a little bit of time. We expect to have essentially five cohorts done, but we won't have data that we would put out and, so our expectation is to be talking of that data in Q1, '09. The study... if we finish by cohorts, and that was all we were going to do if we hit the stock criteria, and that could be done this year still, but I don't know what's going to happen as we go up higher and higher the cohorts.

So, maybe that's sort of a clarification of the data still takes a little time even as we finished the cohort actually come out even if we finish treating patients. We don't know if we are going to go to seven cohorts or not, and so that's one of the other variables. We have to see as we move how many cohorts we will end up doing. So there is a little bit of slippage time, but I think partly also we're trying to clarify when we'd actually put out data and when we would have completed. So, there is some flip in time. But I think that things are moving along and we completed three cohorts, we'll have our DSMB meeting and move on to the next cohort levels. And our dictation though overall and timing for Phase 2 really isn't changing. We do need to talk with... get some more feedback from FDA. Of course, we filed our... the monkey toxicology data as well as our clinical program, updated clinical program, so that's another point, where we have to get some feedback. But our expectation is still to be on track and it will depend a little on what the FDA says and also on what... how many cohorts we end up meeting complete for Phase 1.

Christopher Raymond - Robert W. Baird & Co., Inc.

Thanks.

Unidentified Company Representative

Well, actually I'd like to go back to your Kuvan question if I may for a second also for perspective better [ph]. Again, despite the rumors that is floating around and getting you the referral rates hasn't bounced back substantially, but it's not lower than last summer. So, and just for perspective, we stayed at four patients per day, the 20 patients per weak or about 1,040 patients per, year that's running to 1,000 [ph]. But half of them still on the drug as 500 patients at 80,000 dose a year. That's $40 million of additional business annualized acquired over the next 12 months if we see stay that way, which actually is consistent with the survey that Bank of America did recently that showed that in this 20 centers in survey, the were planning on treating, on doubling the number of patients that they would treat in the next 12 months.

Christopher Raymond - Robert W. Baird & Co., Inc.

Thanks.

Operator

Your next question comes from the line of Brian Abrahams with Oppenheimer. Please proceed.

Brian Abrahams - Oppenheimer & Co.

Hi. Thanks for taking my questions. First one on Kuvan; I was wondering if you could talk a little bit more about the treat on program. What's the position on patient receptivity has been to that? When you expect to see some pull through on referrals there and whether or not you are planning to extend that through next year?

Unidentified Company Representative

The receptivity has been very good qualitative feedback from centers is that it make their life easier. They have better knowledge and ability to schedule by knowing exactly when the patient is going to get the product by not having to wait for insurance authorizations to come from. So, it's been uniformly positive in terms of response. We had... I think JJ mentioned a pilot program. We did some pilot patients starting as early as June of this year toward the king side of that program. And we've seen some of those patients role over commercial already. Bulk of the patients and the starter program came on in September, so we hope to see some of those patients starting to go on to commercial therapy in November. One thing it has not done, which surprises us a little bit, we really thought access to that program was substantially bump up the number of referrals. And interestingly, it has not so physicians like it. They are using it, but they are continuing to schedule Kuvan starts the same way they did before, stand on schedule and not altering their routine.

Brian Abrahams - Oppenheimer & Co.

And are you considering extending the program into 2009?

Jean-Jacques Bienaimé - Chief Executive Officer

We are going to evaluate it in mid December. We want to give at some time. This is a little bit like turning up to the heat in the water when you're taking a shower, it takes a while for things to work through the pipe, so it doesn't have immediately. And we want give this enough time to be able to fully evaluate what's good about it, maybe things haven't worked as well as they could and will either kill it, change it or expand it depending on what we evaluate in December.

Brian Abrahams - Oppenheimer & Co.

Great, and then just a few questions on PEG-PAL and I'll hop back in the queue. You talked about expectations that the study, the Phase I will likely continue through the DSMB review in a few days, does this imply that I guess your, A, not seeing any safety issues and B, either you haven't yet seen key levels reaching a controlled level?

Unidentified Company Representative

Well, the criteria, the reason you are meeting primarily look at safety, they are not really looking at fee control at all, that's not their charge. And so our expectation is so far from what we have seen is that there is we don't believe there is safety issues that would suggest that it needs to be stopped, that's why we believe they will continue, but they need to meet and review all the information.

So, that's our view at the moment. But they will meet and tell us, but they are only going to review safety information, not efficacy information, as I said before even if there was indication that efficacy early in the studies, the... as we bring fee down overtime, it will... we need to get down to a very good control level and the studies are first opportunity to do that. So, we want to make sure we've pressed through as many dose levels as possible to allow us to be prepared to mange these stations for the phase II static. And so how many of those of course that will require it's hard to tell. And so that we don't know if we are going '07 or will stop earlier '09.

Brian Abrahams - Oppenheimer & Co.

Thanks very much for the added information.

Operator

Your next question comes in the line of Joseph Schwartz with Leerink Swann. Please proceed.

Joseph Schwartz - Leerink Swann

Hi, guys. Just wondering if you could give us some color on the marketing events that you've hosted for Kuvan such as the Town Hall meetings. How many events were held in person versus telephonically and other methods and what kind of productivity was there versus the events that you held last spring?

Jean-Jacques Bienaimé - Chief Executive Officer

We ran, I believe 11 programs in person live programs, in the month September, we have run a several more in October. The handful of telephone patient telephone conferences, so consider that more of a pilot program. We've got a very good response from patients or parents, who attended those programs, but we did have... we struggled to get as good an attendance at those programs as we have in the spring. And we have continued to work with exactly how we set up the logistics of those programs to make it as easy for both the center and for the patients to participate. So again as the patients are attended reasonable number went into BPPS quickly or immediately, and then there has been a trickle of follow up from patients, who attended the conferences, took information and thought about it, and then have contacted BPPS subsequently.

Joseph Schwartz - Leerink Swann

How did that compare to last spring, I think that you said that between nine and 40 patients per event when...

Jean-Jacques Bienaimé - Chief Executive Officer

We had lower attendance.

Joseph Schwartz - Leerink Swann

So lower attendance and lower pull through accordingly.

Jean-Jacques Bienaimé - Chief Executive Officer

I think the relative pull through was probably similar as far as the percentage of patients attending that are actually went into BPPS. But we had more difficulty in getting attendance at these fall meetings than we did in the spring.

Joseph Schwartz - Leerink Swann

Okay. And I think that there was a significant number of patients in our backlog due to waiting for Investigator's sponsored studies to begin. Have those patients gone onto paying therapy yet or what are the dynamics there?

Jean-Jacques Bienaimé - Chief Executive Officer

There are a number of investigators' sponsored trials that are either in the planning stage and we have a small number of that have been approved and are opened. The approved stays are beginning to accrue although they are occurring relatively slowly. And I would emphasize that the purpose of the investigator's sponsored trials is not to get more patients on drug, but rather to generate data that can be helpful in convincing people on the real value of Kuvan.

Joseph Schwartz - Leerink Swann

Okay. And then lastly, is there any reason to think that inventory transfers to Genzyme for Aldurazyme would not continue into 2009. It seems to me that as long as Aldurazyme sales are growing, you'd have to continue to ship product to their stock. And so at what point should we anticipate that that hits steady state?

Unidentified Company Representative

Well clearly, we'll continue to ship product to Genzyme since we provide the product to meet their needs for their customers. So that will obviously continue on forever. In terms of whether there would be an impact as far as incremental transfer revenue that will be dependant as you note on the inventory levels that they have on hand. To the extent that they modestly increase our inventory levels, it would be some small incremental transfer revenue benefit say in 2009 or beyond, but the reality is since most of the inventory transfer occurred during 2008. The majority of the benefit is being incurred during 2008. So there could be some modest incremental inventory transfer revenue if inventory levels increase. If they stay flat, it would be none.

Joseph Schwartz - Leerink Swann

Okay, that's very helpful, thank you.

Operator

Your next question comes from the line of Phil Nadeau with Cowen & Co. Please proceed.

Philip Nadeau - Cowen & Co.

Good evening, thanks for taking my questions. First is on Naglazyme, you mentioned that you have the largest patient number spike for Naglazyme in the last two years. Can you give us some idea of the magnitude of that patient spike or at least how it compares as to what you've seen in prior quarters?

Jean-Jacques Bienaimé - Chief Executive Officer

In terms of magnitude, it was substantial. I mean, the overall Naglazyme market we know is... we think is roughly 1,000 or 1,100 patient worldwide. So, I can't give you quantities we... from the beginning said we aren't going to give specific patient numbers with an angles on. But it was a little bit surprising actually how bigger increase was relative to what we've seen over the past few quarters.

And it's little bit ironic that we would have our biggest patient increase in two years and a quarter that we have the first sequential revenue decline. So the underlying business we're really excited about we've seen a lot of growth we're going to continue to see growth with mangles on and as JJ mentioned the international component of our business has turned out to be just much bigger than we anticipated it would be we think has got like through sometime to come.

Philip Nadeau - Cowen & Co.

And was there anything in particular where you can point you that right to the spike in patient numbers this quarter or was it just a confluence of events somewhat to one that made to it down quarter in revenue but in the opposite direction?

Stephen Aselage - Senior Vice President, Global Commercial Development

Yes, I don't think there is anyone thing it wasn't just one area that generated all the new patients it wasn't one approval or registration that generated all the new patients. There was a substantial contribution from Latin America and some contribution from the Middle East and Turkey that was significant and we're continuing to add patients although it's a slower rate in both the United States and Western Europe as well.

So it's a cumulative effect. Actually what... again surprisingly what we thought would be the big bump in patient starts in Q2 as the funding approval on Australia excuse me in Q3 was the funding approval on Australia. We anticipated a number of Australian patients starting commercial therapy then a mega push back to October. So we didn't get the biggest chunk that we thought we would get still had a very outstanding quarter.

Philip Nadeau - Cowen & Co.

Okay. And then question on SG&A, it looks like you are tracking towards about $100 million in SG&A for this year and in your prepared remarks you mentioned that you will only have about 20 sales reps. So the kind of next question, where does this all this SG&A go now that the Kuvan is launching somewhat slower than anticipated, is there any opportunity for decreasing the SG&A spend and rationalizing costs?

Jeffrey H. Cooper - Senior Vice President and Chief Financial Officer

Well I think some of the SG&A spend that we saw during the third quarter related partly to general business growth related to, planned headcount increases both through corporate and sales and marketing. They had also included some items such as higher stock compensation expense which reflects the issue is optimized at higher prices previously.

So that's an expense that continues on even though there is not a cash impact per se. So that impacted the spending during the quarter there were also some possibly to the hedges that we put forward above the forward plans and bank lease as well as some cost on any un-hedged balance sheet position. And then finally there were some non-reimbursable VAT cost that we incurred during the third quarter. So we continue to look at our spending and as we go thorough our budget process that's something that we look at very closely, but I think there were some items particularly related to stock compensation during the quarter that increased the spending quite a bit over the previous quarters.

Jean-Jacques Bienaimé - Chief Executive Officer

Let me also and the total sales reps that Steve mentioned are on the U.S. sales reps, so remember we are marketing Naglazyme on a worldwide basis. And we're expanding our commercial presence around the world to support Naglazyme's expansion.

Philip Nadeau - Cowen & Co.

Okay. And I think you mentioned that you expect SG&A to increase in future quarters. Can you give us some idea of the magnitude of that increase?

Jeffrey H. Cooper - Senior Vice President and Chief Financial Officer

I specifically talked about the increase in R&D, didn't specifically talked about SG&A at this point I think we have really much to add beyond what we've reported for the third quarter. But it's possible as we look to next year. There could some increase depending upon the initiatives that we undertake in sale and marketing programs as well as some corporate expenditures but I don't think we have much to add on that be able to talk more when we come to our February call.

Philip Nadeau - Cowen & Co.

Okay, thank you.

Operator

Your next question comes from the line of Thom Mcgahren with Merrill Lynch. Please proceed.

Thomas Mcgahren - Merrill Lynch

Hi, Steve maybe you could comment on the new registry program which is success building there how many patients maybe you have in the program now?

Stephen Aselage - Senior Vice President, Global Commercial Development

Yes, the registry program was rolled out open for enrolment late summer, we've had our first patients now actually enrolled into the registry. And there's been met I think open arms and acknowledgment that long-term tracking of patient outcomes, safely is much needed in this marketplace. The process I should mention requires both our contracting and our IRB review on approvable.

So it takes the centers several months in a minimum to work through the system to be able to open up but out of them roughly 130 PKU centers in the United States. We have over 70 that have expressed interest in our one stage or another have been rolling on the registry. So we anticipate that it's going to be well utilized and certainly from all the feedback we've got it is a very welcome addition to the tools of the PKU community have at their disposal.

Thomas Mcgahren - Merrill Lynch

Okay.

Jean-Jacques Bienaimé - Chief Executive Officer

Let me remind you also that the risk, the free drug program is linked to the registry enrolment and even if some of the centers haven't been able to enroll many patients into the registry proper, yet because of what Steve explained in terms of the time it takes to get IRB approval and contracting done. We have enrolled fairly over 200 patients into the free good program and they are the same centers, and there was in free centers.

Thomas Mcgahren - Merrill Lynch

Okay. And Steve maybe I'm going to ask one more question. You mentioned before that not everyone has been seeing, or received the benefit of Kuvan over diet. Now were you referring more to the dietitians, I suppose to physicians?

Stephen Aselage - Senior Vice President, Global Commercial Development

I don't think I would differentiate it that way. I think with both groups there is a need for us to establish outcomes there that shows very clear unarguable benefit that Kuvan provides above and beyond diet.

I think its fair to say that the dietitians have probably a little less comfortable with Kuvan and the physicians, and generalizing and I am uncomfortable doing that because remember dietitians are very comfortable with Kuvan at this point.

But as a rule dietitians don't use drugs, they use diet. Physicians are a little more used to prescribing so Kuvan is a little less, less of the strange word to the physicians than to the dietitians who have having to lean something that's really new and out of their room of experience.

Thomas Mcgahren - Merrill Lynch

Okay. Thanks a lot.

Stephen Aselage - Senior Vice President, Global Commercial Development

Sure.

Operator

Your next question comes from line of Liana Moussatos with Pacific Growth Equities. Please proceed.

Liana Moussatos - Pacific Growth Equities

Could you breakdown the Naglazyme revenues geographically please?

Jeffrey H. Cooper - Senior Vice President and Chief Financial Officer

Sure, during the third quarter U.S. sales were $5.1 million, European sales were $16.1 and international was $12.1 million.

Liana Moussatos - Pacific Growth Equities

Thank you.

Operator

Your next question comes from the line of Vernon Bernardino with Rodman & Renshaw. Please proceed.

Vernon Bernardino - Rodman & Renshaw Llc

Hi, thanks for taking my call. Just a few questions in the first time of the therapy are patients still going on not Kuvan therapy and do you expect there is a dynamic to continue and have you observed whether the patient is having a positive effect on this?

Stephen Aselage - Senior Vice President, Global Commercial Development

If I understand your question correctly, its are the patients who are initially starting Kuvan, going on, staying on, not having any interruptions in therapy for their first 90 day period and I think it's a really good question. It's a complex question, because it's the first 30, 60, 90 days, where the patient is undergoing real transition in their lifestyle.

They are getting more blood draws than they've ever gone before as the centers try to monitor effectiveness of the dose. They are going back to clinic more often than before. Some of them seem to have been tempted to go off diet more than, this happened before. So the clinics are monitoring compliance and effectiveness of the drug.

And we have seen patients go on therapy, come back to clinic a week later, completely off diet and then they are pulled off drug and back on diet. So you will stabilize and then you are back on Kuvan after that. If you to try to establish effecting this again. So there is a flux with a subgroup of the patients in the initial time period after initiation of therapy.

Once they get out passed at 90 day point, where they are clearly responding and they've adjusted to the Kuvan and whatever diet adjustments the physician may have made with them. Then they seem to be incredibly stable. It's been a very solid population for us. But there is a lot of flux in the initial time period, patient days really haven't had much impact on that, I think patient days have been helpful in explaining information opportunities, conveying what patients want to know about Kuvan, reimbursement side effects, efficacy, what it means to them and we do believe that's helped get more patients on the therapy.

But it really doesn't do a VAT to a change what happens in the first 90 days after working.

Vernon Bernardino - Rodman & Renshaw Llc

Okay. Second question if I may, can you provide an update on how sensors are deciding if a patient is responding to Kuvan or not, you had previously commented that it varies from center to center. How much of clinical changes in behavior for example are playing a factor that leads to the conclusion of patient as a responder?

Stephen Aselage - Senior Vice President, Global Commercial Development

I think most centers take into account the changes in the patient's mental functioning whether its behavior, concentrations, score performance, anxiety, ability to sleep for reasonable period in the evenings. Usually you see that with at least some drop and some only level as well. We do have a few centers that are very restrictive it's a 30% drop and nothing else means anything but for the most part, I think we've got clinicians who take a look at the overall benefits to the patient as well as to the lab values and make a decision based on what's best for the patients? What they feel is best for the patient.

Vernon Bernardino - Rodman & Renshaw Llc

Okay. And so then is the drop 30% in fee necessary? Absolute critical gaining factor for gaining reimbursement?

Stephen Aselage - Senior Vice President, Global Commercial Development

No it's not.

Vernon Bernardino - Rodman & Renshaw Llc

Okay, great. Thank you very much.

Stephen Aselage - Senior Vice President, Global Commercial Development

May be I should tag on to that it is not in 98% of the payer plans in the United States. There are one or two that have used as a criteria that they have been relatively rigid but it's really an exception when we see that.

Vernon Bernardino - Rodman & Renshaw Llc

Thank you very much.

Stephen Aselage - Senior Vice President, Global Commercial Development

Sure.

Operator

Your final question comes from the line of Katherine Kim with Bank of America Securities. Please proceed.

Katherine S. Kim - Bank of America Securities

Yes, hi I have a couple of questions on PEG-PAL first can you just remind us how many patients are on each cohort?

Jean-Jacques Bienaimé - Chief Executive Officer

There's five patients in each cohort, seven cohorts for a total of 35 patients.

Katherine S. Kim - Bank of America Securities

Okay. And if you have to go to the highest cohort. Would you still be able to complete the study in the timeframe?

Jean-Jacques Bienaimé - Chief Executive Officer

Yes, well the seven cohort would be completing in Q1.

Katherine S. Kim - Bank of America Securities

Okay. And then basically you would be able to start the Phase 2 immediately or when does the nine months stock study completes?

Jean-Jacques Bienaimé - Chief Executive Officer

The nine month stock is completed expectation we have filed that data probably by the end of this year. And our expectation of it is that we could overlap to some degrees of Phase 1 dosing with the Phase 2 start at the lower dose levels. So that our expectations that we're expecting to be start of the Phase 2 to be late Q1, could be early Q2, well that depends little or when with the FDA sense of our timing.

Katherine S. Kim - Bank of America Securities

Okay. And then could you let us know on how soon you could have data on the Phase 2 results?

Unidentified Company Representative

Well, the Phase 2 study has an eight week dosing period, where they repeated the same dose they were on in Phase 1, and then they titrate up to a optimal dose to reach the control; that total period of 16 weeks or four months. So, it's likely that you are going to take good part of the year before we would have all the data. We have only really set a precise time. But it's going to be late in '09, we would have some idea we probably give an update what's happened in the first eight weeks when that data is completed. But, we haven't set a specific timeframe, and it's certainly going to be if there is... as I said, there is eight to 16 weeks of in light period, we're starting in Q1. So, it's going to be sometime in Q4 before we would expect to have some data to talk about could be a little earlier, but somewhere in that timeframe

Katherine S. Kim - Bank of America Securities

Okay, thank you very much.

Operator

With no further questions in the queue, I would like to turn the call over to Mr. JJ Bienaime for closing remarks.

Jean-Jacques Bienaimé - Chief Executive Officer

Thank you. So in summary, we bring revenue this quarter from our three commercial products have been driving our fourth consecutive profitable quarter. And we are headed toward our first full year profitability to the international opportunity for Naglazyme in tremendous, and the tool market opportunity is double the size we anticipated at the time of launch.

So, while the growth trajectory of Kuvan is slower than anticipated, we remain confident on the tool market opportunity and we remain dedicated to the successful execution of this program as detailed during the call. And we are also committed to the advancement of our R&D pipeline including possible in-licensing or acquisition opportunities. We have a solid pipeline of products in development. And in 2009 PEG-PAL getting us more towards syndrome and BH-4 for various correlatory indications will all be in the clinic. We have a strong cash position and have expressing to us in a later stage product to supplement our pipeline and contribute to healthy revenue growth in the coming years.

We are looking forward to keep in you up to date on our progress, and we thank you for you continued support. Thank you for joining us on today's call, and good bye.

Operator

Thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect, and have a great day. .

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