By Ivan Deryugin
Shares of BioMarin Pharmaceuticals (BMRN) have risen roughly 40% in 2012, driven by solid Phase III data for BMRN's lead investigational product GALNS, a treatment for Morquio A Syndrome (MPS) IVA. But with BMRN supported by a market capitalization of just under $6B, shares have room to rise in 2013. The company develops a number of late-stage assets, many of which are due to report pivotal trial data or move into the regulatory process in the next year, both value-driving events that should generate momentum in the stock as they approach and read out. Additionally, BioMarin is positioned financially to support the development of its broad pipeline, with a strong capital position and proportional debt; a number of rumors in 2012 have even suggested that the company was the target of an acquisition, and some analysts continue to see evidence supporting the theory. A solid pipeline targeting several rare diseases, a year chock full of catalysts, and a strong balance sheet will likely lead to gains for BMRN in the new year.
GALNS Data: Preparing for Launch
Much of BMRN's 2012 gains occurred on November 5, when the stock soared 30% on the back of solid Phase III data for GALNS, the company's MPS IVA treatment. MPS IVA, also known as Morquio A Syndrome, is an ultra-rare inherited autosomal storage disease that leads to abnormal heart and skeletal development, dwarfism, heart murmurs, among other symptoms (the incidence rate is 1 in 300,000). GALNS works as an enzyme replacement therapy, and it removes keratin sulfates that build up in a patient's lysosome. BioMarin's Phase III MOR-004 trial for GALNS, which read out in November, met its primary endpoint, measuring six-minute walking distances after 24 weeks, and patients dosed with 2 mg/kg of GALNS each week showed a statistically significant 22.5-meter increase in walking distance compared to patients in the placebo arm (preliminary data from the MOR-005 extension study confirmed that patients continue to improve at 36 and 48 weeks). The MOR-004 trial also met both of its secondary endpoints. The fist was a three-minute stair climb test, with patients in the GALNS arm showing a 1.1 stairs per minute increase over those in the placebo arm. In addition, patients in the GALNS arm showed: "a consistent and robust reduction in urinary KS [keratin sulfates] with a mean difference from baseline as compared to placebo of 40.7 percent (p less than 0.0001). Preliminary analysis of a subset of patients in the extension study (MOR-005) who have reached the 36-week and 48-week in the study showed this level of reduction was maintained." The MOR-004 trial also had solid safety data, with BioMarin reporting that patients saw adverse effects similar to those of other enzyme replacement therapies. Common side effects (defined as those occurring in more than 25% of patients) included vomiting, headache, pyrexia, nausea, and coughing. Serious adverse events occurred in 3.4% of weekly dose patients, and 1.7% of the "every other week group," but no event was serious enough to cause a patient to withdraw from the study.
BioMarin is planning to file for FDA approval of GALNS in the first quarter of 2013 with an approval likely in the 4th quarter, and has indicated that filings in Europe could occur within the first quarter as well. The robust safety and efficacy data for GALNS in the MOR-004 trial, as well as preliminary data from the MOR-005 trial, suggest that approval is likely, especially given that there is a significant unmet medical need for MPS IVA treatments. But with peak sales of GALNS estimated to reach $500 million by 2020, the lead candidate alone is not enough to propel shares of BioMarin higher in 2013. The company's robust pipeline offers further value.
BioMarin's Pipeline: A Catalyst-Rich 2013
BioMarin has six pipeline assets (including GALNS), and 2013 will be a key year for many of BioMarin's clinical programs.
The company has multiple catalysts in 2013, beginning with Phase I/II data for BMN-701, the company's experimental drug for Pompe disease, an autosomal disorder that causes progressive nerve and muscle damage. BMN-701, if approved, will compete with Lumizyme and Myozyme, which are sold by Genzyme and have sales of around $400 million annually. BMN-701 targets Pompe disease in a different way than Genzyme's medicines do, which should give the drug a competitive advantage if and when it is approved. BioMarin states,
The key attribute of BMN-701 is its ability to bind to key cell receptors that direct the enzyme to the cell's lysosome. Instead of trying to engineer cells to make GAA with higher levels of mannose-6 phosphate, which in the case of GAA lowers cell productivity and significantly increases manufacturing costs, BMN-701 takes advantage of the fact that the peptide IGF-2 also binds to the M6P receptor. Every molecule of BMN-701, a fusion of IGF-2 and GAA, can bind the mannose-6 phosphate receptor, be taken up into cells and trafficked to the lysosome where it can degrade the glycogen that causes Pompe disease.
BMN-701 offers patients a new treatment option for Pompe disease, and the market is valued at nearly $1 billion, giving BioMarin ample opportunity to recover its investment in BMN-701. The company has said that it expects to begin a Phase III trial of BMN-701 in Q4 2013 if the clinical data in the Phase I/II trial are positive (the primary endpoint in the trial is defined as superiority to Myozyme).
In the second quarter, BioMarin will begin a Phase III trial of PEG-PAL for the treatment of phenylketonuria (PKU), a metabolic disease caused by enzyme deficiency that leads to a variety of problems, including mental retardation, hyperactivity, and tremors. At BioMarin's recent analyst and R&D day, the company laid out existing clinical data for PEG-PAL. Of the 25 patients in its most recent trial, the average reduction in blood Phe levels (the key marker for PKU) was 68% versus the placebo arm. Safety data for PEG-PAL was also solid, with only one patient in the Phase II trial exiting due to an adverse event. BioMarin already sells Kuvan for the treatment of PKU, but PEG-PAL is being developed for patients that do not respond to treatment with Kuvan. In Q2 2013, BioMarin will also see clinical trial data for a long-term neurocognitive study. High Phe levels can lead to psychological problems, including depression, hypochondria, and anxiety, and BioMarin is conducting studies to determine what kind of neurocognitive benefits patients who take Kuvan can see.
In the second half of 2013, BioMarin will initiate two trials for its remaining pipeline programs, BMN-111 and BMN-763. BMN-111 is an experimental treatment for achonodroplasia, which is the most common form of dwarfism. Achonodroplasia is the result of a mutation in a person's fibroblast growth factor receptor 3 gene. BMN-111 is a version of a C-type natriuretic peptide that regulates bone-growth. BioMarin estimates that there are about 200 new cases of achonodroplasia in the United States each year. Phase I trials of BMN-111 showed that the drug was well tolerated, with some hypotension, but none that was deemed to be clinically significant. In the second half of 2013, BioMarin will also be initiating a Phase III trial for BMN-673, the company's experimental treatment for genetically defined cancers. Earlier clinical data for BMN-673 showed responses in both ovarian and breast cancer, as well as good data relative to peer drugs.
BioMarin's final, and newest pipeline compound is BMN-190, for the treatment of late infantile neuronal ceroid lipofuscinosis type 2 (known as NCL2), an ultra-rare disease (there are estimated to be just 350-1,000 patients worldwide) that causes death by the age of seizures and cognitive declines in patients. Most children with NCL2 become bedridden by age 6, and die by age 20. There are no existing treatment options, and BioMarin expects to file an IND for BMN-190 in early 2013, and for clinical trials to start within the first half of 2013. While it is too early to predict what the clinical trial results for BMN-190 will be, pre-clinical testing done in dogs showed improved motor function in TPP1-null dachshunds after 10.5 months of treatment with BMN-190 (NCL2 is caused by a deficiency in tripeptidyl peptidase-1, also known as TPP1). And given that there are no treatment options for NCL2, it is likely that BioMarin will be able to secure FDA approval for BMN-190, given the severe unmet medical need that exists for an NCL2 treatment.
BioMarin will release clinical data for several of its pipeline assets in 2013 and move the rest through to the next phase of testing. That, alongside an improving financial condition should propel the stock forward.
Financial Overview: Fortifying the Balance Sheet & Takeover Speculation
In addition to a solid pipeline, BioMarin has a solid balance sheet, and its financial position is improving (unless otherwise noted, financial data will be sourced from either BioMarin's Q3 2012 earnings release or its latest 10-Q filing). In Q3 2012, BioMarin posted revenues of $128.117 million, a 12.95% increase from the $113.425 million it posted in Q3 2011. The company's GAAP loss narrowed to 4 cents a share from 16 cents in Q3 2011, and adjusted EBITDA rose from $4.3 million in Q3 2011 to $11.1 million in Q3 2012. BioMarin is still cash flow positive in 2012, despite a 39.23% rise in R&D expenditures, as the company invests aggressively to move its entire pipeline forward. For the first 9 months of 2012, BioMarin posted operating cash flow of $5.623 million, and as the company launches new drugs in the years ahead, its financial position should improve materially. In its latest quarter, BioMarin also improved its gross margin, albeit slightly. Gross margins rose to 80.51%, from 80.12% a year ago. But more importantly, BioMarin's EBITDA margin rose to 8.66%, up from 3.79% a year ago. BioMarin has ample reserves of cash & investments to fund continued pipeline investments, as well as make small-scale acquisitions to further expand its pipeline. The company ended Q3 2012 with $533.196 million in cash & investments, versus debt of $348.301 million, giving the company almost $185 million in net cash and investments. All but $23.44 million of BioMarin's debt is due in the next year, and the majority, which is in the form of senior convertible notes, is due in 2017.
BioMarin has also been the subject of takeover speculation given its diverse pipeline of compounds focused on rare diseases. The latest rumor, from July, is that GlaxoSmithKline (GSK) was preparing a $5 billion bid for the company. However, with BioMarin's market capitalization now above $6 billion, GlaxoSmithKline's offer, if it is indeed true, will need to be raised. But, BioMarin's CEO Jean-Jacques Bienaime has stated that for him to consider selling the company, "It would have to be an exciting premium." BioMarin, if it acquiesces to a deal, would likely demand a sizeable addition, and an offer for the company could easily approach $10 billion, a price tag that eliminates many companies as potential buyers. In my view, the most likely buyer for BioMarin would be Sanofi (SNY). BioMarin already has a joint venture in place with Sanofi's Genzyme unit, which was created in 1998 to sell Aldurazyme, and BioMarin is responsible for manufacturing the drug while Genzyme is responsible for sales & marketing . A similar situation played out earlier in 2012, in which GlaxoSmithKline took control of longtime partner Human Genome Sciences to gain access to the company's pipeline. It is not out of the realm of possibility that Sanofi would want to do the same with BioMarin given that the company has a solid financial condition and a diverse pipeline. And according to RBC analyst Michael Yee, BioMarin is one of the "top mid-cap takeout candidate[s] over the longer-term given its proprietary orphan drug pipeline, global commercial infrastructure and biologics expertise."
2013 will be a catalyst-rich year for BioMarin, and the stock's gains are likely to continue. The company's financial position is solid, and it has a deep pipeline of drugs that target several rare diseases. Existing clinical data for its pipeline assert that these drugs are safe and effective, and if all goes well for BioMarin, it will see both approvals and new regulatory filings in 2013. It's possible that as BioMarin's pipeline moves through development, a larger pharmaceutical company may find itself unable to resist an offer on the company. Either way, shares of BioMarin are likely to see upside in 2013.
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