Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

BioMarin Pharmaceutical Inc. (NASDAQ:BMRN)

Q2 2009 Earnings Call Transcript

July 30, 2009 5:00 pm ET

Executives

Eugenia Shen – Senior Manager of IR

J.J. Bienaime – CEO

Jeff Cooper – SVP and CFO

Hank Fuchs – SVP and CMO

Steve Aselage – SVP and Chief Business Officer

Robert Baffi – SVP, Technical Operations

Analysts

Brian Abrahams – Oppenheimer & Co.

Joseph Schwartz – Leerink Swann

Phil Nadeau – Cowen & Co.

Chris Raymond – Robert Baird & Co.

Lucy Lu – Citigroup

Andrew Vaino – Roth Capital Partners

Salveen Kochnover – Collins Stewart

Eun Yang – Jefferies

Jeff Elliott – UBS Securities

Liana Moussatos – Wedbush

Carol Werther – Summer Street Research

Operator

Good day and welcome to the second quarter 2009 BioMarin Pharmaceutical Inc. earnings conference call. My name is Candice and I'll be your coordinator for today. At this time all participants are in listen-only mode. We will conduct a question-and-answer session after management’s remarks. (Operator instructions)

I would now like to turn the presentation over to your host for today’s conference, Senior Manager of Investor Relations, Ms. Eugenia Shen. You may proceed.

Eugenia Shen

Thank you. On the call today is J.J. Bienaime, BioMarin’s Chief Executive Officer; Jeff Cooper, Chief Financial Officer; Hank Fuchs, Chief Medical Officer; and Steve Aselage, Chief Business Officer.

I would like to remind everyone that 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 developments 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 reports.

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

J.J. Bienaimé

Thank you, Eugenia. Good afternoon and thank you for joining us on today’s call. So, I have a few introductory comments before Jeff reviews the financials of the second quarter of 2009. Steve will then provide more details on commercial activities, and Hank will provide an update on our ongoing R&D efforts before we open the call for questions.

So we are pleased to report our second quarter 2009 results with the increase in total BioMarin revenue of 29%, and an increase in net product revenues of 35% as compared to the second quarter of 2008. The continued growth of our commercial products along with carefully managed expense drove profitability for the quarter despite a tough economic environment, and foreign currency headwinds as compared to the second quarter of 2008.

Naglazyme continues to be strong with an increase in net sales of 22% as compared to the second quarter of 2008. We continue to make steady progress in both new and more established international markets, and remain confident that Naglazyme represents a $300 million market opportunity for BioMarin.

Next, net third party sales of Aldurazyme by Genzyme increased 1% in the second quarter of 2009 as compared to the second quarter of 2008. Although negatively impacted $3.6 million by foreign currency, the number of patients on therapy continues to increase.

As for Genzyme or Aldurazyme unit volume in the second quarter of 2009 increased 9.8% compared to the second quarter of 2008.

Similar to Naglazyme and other enzyme replacement therapies Aldurazyme benefits from built-in growth drivers such as weight-based dosing and theoretically extension of life expectancy, and an increase in disease prevalence [ph].

We would also like to reiterate that Aldurazyme is not affected by the temporary production interruption at Genzyme’s Allston Landing facility. The last fill finish at the Allston facility was in September of 2008. We have since been using another provider with an additional expected to be qualified in second half of 2009.

In terms of the changing healthcare environment, we proposed legislation and reimbursement concerns, we believe Naglazyme and Aldurazyme would unlikely be significantly affected at least in the near term. Both products treat very small ultra-orphan diseases with limited impact on payor’s budgets and minimum risk of optimal use.

Additionally they are very expensive and complex to manufacture. We will continue to carefully monitor for potential competitive and reimbursement threats, but at this time we believe that these products are relatively well insulated.

Finally Kuvan generated revenue of $16.9 million in the second quarter compared to $15.5 million in the first quarter of 2009 and $12 million in the second quarter of 2008. In the second quarter of 2009, Kuvan revenues were negatively impacted in the tune of $245,000 due to increased and retroactive federal relief, and Steve will discuss in further detail a little later.

Also as mentioned in the press release issued this afternoon, in the second quarter of 2009 the number of commercial tablets dispensed to patients increased 14.8% over the first quarter of 2009. So we are encouraged to see positive feedback emerging from the PKU community, and believe that this along with results for the numerous investigator-sponsored trial and registry program, and long-term neuro-cognitive study should offer additional support in the future for the use of Kuvan.

Also as we announced earlier today, we have been issued patents, two patents, covering stable tablet formulation and the once-daily dosing regimen for Kuvan in PKU. These patents expire in 2025 and 2024 respectively, which offers an additional 10 years of patent protection beyond orphan drug protection that is due to expire in the mid-2015. This allows significantly more time for Kuvan to fully penetrate the PKU market. So we continued to actively build our (inaudible) position for Kuvan.

In addition to the two patents announced today, several additional patents have been filed, are being prosecuted and we believe that at least one additional patent will be issued between now and the end of the year.

I would also like to mention that yesterday, we submitted Kuvan NDS to the health authorities in Canada, Health Canada, and with progressive review status we anticipate marketing approval in the first half of 2010 in Canada for Kuvan.

Moving on to clinical programs, we announced encouraging results from the Phase 1 study of PEG-PAL for PKU in early June. The FDA has agreed with the design of the Phase II protocol, and we expect to start the study immediately, pending IRB approval from the clinical study sites.

Also we recently announced the completed enrolment of the Phase I/II trial of GALNS for MPS IVA. Assuming a successful Phase I/II we expect to initiate a pivotal Phase III study in the second half of 2010. So we remain excited about both these programs and Hank will review additional details on our overall R&D program.

As we had mentioned previously, in order to support the projected commercial need for Naglazyme, Aldurazyme, GALNS and PEG-PAL through at least 2016, we are making significant investments to double our manufacturing capacity. Construction would be completed in the fourth quarter of this year, and the commissioning of the facility will be completed in the second quarter of 2010.

Now I would like to turn the call over to Jeff Cooper, our Chief Financial Officer, who will review the financial results in the second quarter of 2009.

Jeff Cooper

Thanks, J.J. I'll start by reviewing product revenues of Naglazyme, Aldurazyme and Kuvan for the second quarter ended June 30, 2009. I will then follow with a more in depth look at our operating expenses and financial results before reviewing our expectations for 2009.

Beginning with Naglazyme, net product revenue for the second quarter of 2009 was $42.9 million, an increase of 22% over net product revenue of $35.1 million in the second quarter of 2008.

Net product revenue for the six months ended June 30, 2009, was $82.3 million compared to $62.8 million for the six months ended June 30, 2008.

Naglazyme net product revenue growth is attributable to geographic expansion internationally, the initiation of therapy by previously identified or newly diagnosed patients and weight gain as patients grow.

Naglazyme sales in the second quarter of 2009 were negatively impacted by foreign exchange rates of approximately $1.7 million as compared to the second quarter of 2008, which is net of our impact of our revenue hedging program. However, after factoring in the offsetting natural hedge of expenses denominated in foreign currencies and net negative impact of our foreign exchange on our P&L was about $1 million.

Net sales of Aldurazyme by Genzyme was $39.2 million for the second quarter of 2009, increased 1% compared to net sales for the second quarter of 2008. Net sales of Aldurazyme by Genzyme for the six months ended June 30, 2009, was $76 million compared to $75.5 million for the six months ended June 30, 2008. Foreign currency exchange rate had a $3.6 million and $7.2 million negative impact on Aldurazyme sales by Genzyme in the three and six months ended June 30, 2009, respectively. However, in the second quarter of 2009, the Aldurazyme unit volume increased 9.8% compared to the second quarter of 2008 as the number of patients on therapy worldwide continued to grow.

Net product revenue to BioMarin related to Aldurazyme was $21.6 million for the second quarter of 2009, including $6.1 million of incremental product transfer revenue. This compares to net product revenue to BioMarin of $13.4 million for the second quarter of 2008.

During the second quarter of 2009 BioMarin recorded product net revenue that was higher than the royalties earned by Genzyme third-party sales through the incremental product transfer revenue related to net increases in Genzyme Aldurazyme inventory levels during the period.

Net product revenue to BioMarin was $38.7 million for the first six months of 2009 compared to $37.5 million for the first six months of 2008.

Net product revenue for Kuvan was $16.9 million for the second quarter of 2009 compared to $15.5 million for the first quarter of 2009 and $12 million for the second quarter of 2008. In the second quarter of 2009, net product revenue for Kuvan was negatively impacted by 745,000 due to increased and retroactive federal rebates.

In the second quarter of 2009 of the $16.9 million in Kuvan net product revenue, $16.3 million was from US sales and the remaining $600,000 was mostly (inaudible).

Product revenue for Kuvan for the six months ended June 30, 2009, was $32.5 million compared to $17.8 million for the six months ended June 30, 2008.

Net product growth is primarily due to patients initiating therapy with Kuvan. Now, I’ll review gross margins, operating expenses and non-operating items in more detail.

Gross margins for Naglazyme were 79% during the second quarter of 2009 compared to 81% in the second quarter of 2008. Aldurazyme gross margins will continue to fluctuate from quarter-to-quarter depending upon the timing of product transfers to Genzyme, which is the basis for cost of goods sold recognized by BioMarin. In the second quarter of 2009, Aldurazyme gross margins were 64%, which reflects both the royalty and product transfer revenue from Genzyme to BioMarin.

Kuvan gross margins during the second quarter were 81% that primarily reflects an 11% royalty payable in net sales. Excluding the impact of Merck Serono related revenue, which reflects product transfer of costs, US Kuvan margins were 85% for the second quarter.

Going forward, we expect US Kuvan margins, including the 11% royalty payable to be in lower 80% range, as excess inventory has been largely exhausted.

Research and development expenses increased $2.5 million to $26.3 million in the second quarter of 2009 from $23.8 million in the second quarter of 2008. The increase in R&D expense includes increased costs for early stage development programs, (inaudible) clinical costs, post marketing commitments and regulatory spending for commercial products, and non-cash stock-based compensation expense. This was partially offset by reduced spending for 6R-BH4-related programs and the timing and expense for the PEG-PAL program.

Off the total R&D spend of $26.3 million in Q2 2009, $2.6 million was for stock-based compensation expense. Overall, we continue to manage our spending closely, but we do expect research and development spending to increase from current levels as the year progresses due to the advancement of our development program.

Selling, general and administrative expenses increased by $5.3 million to $30.5 million in the second quarter of 2009, from $25.2 million in the second quarter of 2008. This was largely due to growth in employee related expenses, facility costs, stock-based compensation expense, and other corporate costs.

Of the total $30.5 million of SG&A expense in Q2 2009, $5 million was for stock-based compensation expense.

Interest income decreased by $3.2 million to $0.9 million in the second quarter of 2009 from $4.1 million in the second quarter of 2008 due to the decline in market interest rates. Current yields from invested funds were less than 1%, which are driving down interest income on our investment portfolio.

Interest expense was $4.4 million in the second quarter of 2009 compared to $4.1 million in the second quarter of 2008. Interest expense consists primarily of interest on convertible debt and included interest on the Medicis debt.

Now I will review the GAAP and non-GAAP bottom-line results. Our GAAP net income for the second quarter of 2009 was $1.3 million or $0.01 per diluted share compared to net income of $3.8 million or $0.04 per diluted share for the second quarter of 2008.

GAAP net loss for the six months ended June 30, 2009, was $11.8 million or $0.12 per diluted share compared to GAAP net income of $5.5 million or $0.05 per diluted share for the six months ended June 30, 2008.

Non-GAAP net income for the second quarter of 2009 was $9 million or $0.09 per diluted share compared to non-GAAP net income of $9.7 million or $0.09 per diluted share for the second quarter of 2008.

Non-GAAP net income for the six months ended June 30, 2009, was $18.4 million or $0.18 per diluted share compared to non-GAAP net income of $13.8 million or $0.13 per diluted share for the six months ended June 30, 2008.

Also during the second quarter of 2009, both GAAP and non-GAAP net income were not high enough to reflect the impact of the convertible debt as their inclusion will be anti-dilutive. The inclusion of explosion of convertible debt shares in the calculation of diluted earnings per share is driven by the accounting department in accordance with Generally Accepted Accounting Principles.

From a cash perspective, we ended the second quarter of 2009 with $485 million of cash and short and long-term investments. During the quarter, we made our final payment to Medicis of $70.6 million. Also during the second quarter of 2009, we generated $18.5 million of cash from operations, which includes $7.9 million of cash that was transferred from restricted cash as a result of the final Medicis payment. This compares to cash generated from operations of $7.2 million in the second quarter of 2008.

(inaudible), I should also note that with the Medicis debt paid in full and the transfer of the Orapred IP to our partner (inaudible), we will no longer incur quarter operating expenses of $1.1 million for immunization of the Orapred intangible assets.

Additionally we will no longer incur non-operating imputed interest expense of $1.1 million per quarter. The total reduction of Orapred related costs will amount to approximately $2.2 million per quarter.

With regards to 2009 guidance, we're narrowing our previously provided ranges on a few items to reflect increased visibility into the year. Naglazyme net product revenue is expected to be in the range of $155 million to $175 million from a previous range of $160 million to $175 million. Kuvan net product revenue is still expected to be in the range of $70 million to $80 million. This includes up to $2 million in net product revenue related to Kuvan royalties on European sales and product transfer revenue to our partner Merck Serono.

For Aldurazyme, we still expect net product revenue to BioMarin to be in a range of $69 million to $74 million.

Turning to expenses, we continue to expect cost of sales in the range of 19% to 21% as a percent of sales, R&D in the range of $118 million to $128 million including $8.8 million associated with the upfront payment for the Riquent transaction and SG&A in the range of $120 million to $130 million.

For the 2009 bottom-line, we now expect our GAAP net results to be in the range of a loss of $12 million to a loss of $6 million from a previous range of a loss of $15 million to break even.

Non-GAAP net income for 2009 is estimated to be in the range of $35.4 million to $41.4 million from the previous range of $33.7 million to $51.7 million. Regarding cash flows, we plan to spend over $80 million in capital expenditures to complete expansion of our NOVATO manufacturing facility and corporate campus. As of June 30, 2009, we have spent $40.6 million for capital expenditures. Additionally, our total milestone payment to date in 2009 were $73.6 million of which $70.6 million related to the final debt payment in June.

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

Steve Aselage

Thanks, Jeff. First, as JJ touched upon earlier, we are closely monitoring the impact of the worldwide economic slowdown and proposed health care legislation on our business. We have seen isolated instances where pricing of reimbursement pressures have impacted sales, but the overall reimbursement environment remains solid.

I've will provide specifics on the TRICARE changes that affected Q2 Kuvan sales in a moment. We monitor a number of indicators and the volume of patient assistance requests, patient compliance and reimbursement by peers, will all suggest solid reimbursement for our products.

Turning specifically to Naglazyme, we continue to make significant progress in international markets, particularly in regions such as Latin America and the Middle East. We continue to be very encouraged by progress made in new geographic regions and also by further penetration of existing markets. We believe there remains significant potential in international regions, which are the largest contributors to Naglazyme growth, and are encouraged by the fact we continue to find new patients in markets where we already are well-established.

We received approval in Russia recently, which is a significant market in and itself, but doubly important as it significantly influences other countries in Eastern Europe. Approval of funding in Poland and Bulgaria also represent successful efforts to bring Naglazyme to the commercial market in those countries.

We remain confident with our current peak sales estimate for Naglazyme of around $300 million, which is double our expectation at the time of launch. It is worth reminding you that we are seeing and expect to continue to see some choppiness in ordering patterns due to governments’ entities purchasing less frequently, but in larger quantities. This can obviously influence quarter-to-quarter comparisons.

Moving into Kuvan, in the second quarter of 2009, the quantity of commercial tablets dispensed to patients increased 14.8% as compared to the first quarter of 2009. This is the best measure we have of true end-user demand, and was the strongest quarter-over-quarter growth since launch. Recorded revenues of $16.9 million were negatively impacted by charges taken in Q2 for increased and retroactive federal rebate liabilities. The recent federal ruling that retail drugs paid for by TRICARE would be considered as sales to the Department of defense that causes those sales to be subject to a 24% rebate.

The ruling retroactively includes sales back to January of 2008. Additionally a lower than expected consumer price increase over the last several quarters have caused a slight increase in the level of Medicaid rebate Kuvan is exposed to. The Q2 Medicaid rebate is taking 18.5% versus the 15.1% that had been the norm through all of 2008.

The combination of retroactive TRICARE rebates and higher Medicaid rebates had a net negative impact of roughly $745,000 on Q2 Kuvan sales. On a going forward basis, we anticipate with the combination of TRICARE and Medicaid, we will continue to have a negative impact of $150,000 to $160,000 per quarter for at least the near term.

It is worth noting that the TRICARE rebate is undergoing legal challenge by industry organizations, and maybe overturned or reduced, but we have chosen to handle the situation by assuming the worst case financial impact.

Despite this particular issue, we continue to see a generally favorable reimbursement environment for both Kuvan and Naglazyme.

In order to continue building a clinical data set for Kuvan, we are supporting a number of investigator trials that will assess a range of measures, including improvement in behavioral symptoms, depression, anxiety, short-term memory, executive function and changes in bone mineral density and nutrition.

These trials will evaluate various measurements in patient populations not previously included in our clinical trials. And along with the registry and post-marketing studies should offer a stronger argument for the use of Kuvan.

We are very encouraged that nine different presentations in abstract or post-reform will be presented at the upcoming Inborn Errors of Metabolism meeting this September. This will include the first cohort of patients from the trial looking at the impact of Kuvan on executive function. Also we hope to have results from a small study and the effect of Kuvan on institutionalized PKU patients, in time for the American College of Medical Genetics meeting next spring. As you know, institutionalized patients are currently not factored into our PKU market estimates, and could potentially offer upside.

We remain hopeful about the long-term potential in the market and our ability to successfully execute this program. We look forward to keeping you updated on the progress of Kuvan and Naglazyme.

Now I would like to turn the call over to Hank, who will provide an update on our R&D pipeline.

Hank Fuchs

Thanks, Steve. Starting with the GALNS program for MPS IVA as announced a few weeks ago, the enrolment of 20 patients with three clinical sites is complete for the Phase I/II trial. The speed of enrolment speaks to the impressive collaborative effort of the Morquio community, which is also extremely active, organized and eager for a treatment option.

This study together with our MorCAP assessment study are important studies to support the design of a pivotal Phase III trial, and could help to find important eligibility criteria or relevant endpoints. Measurements in the Phase I/II study include keratan sulfate levels, pulmonary function, and walk distances.

Assuming successful Phase I/II trial results in the first half of 2010, we expect to initiate a the pivotal Phase III trial in the second half of 2010. Also to give you an update on MorCAP there are currently 85 patients enrolled in the MorCAP assessment study and 14 more patients are scheduled for enrolment.

Moving on to PEG-PAL, as J.J. mentioned earlier we reported encouraging results for the Phase 1 study. All patients in the fifth dosing cohort had substantial Phe levels reductions with a mean production of 62%. Importantly no serious immune reactions including hives or anaphylactoid reactions were observed. The FDA has reviewed the Phase II protocol and we expect to start this study in the current quarter pending IRB approval from clinical trial sites.

The Phase II study will evaluate the safety and efficacy of weekly injections for eight weeks, followed by dose and regimen optimization in an extension period. To put the safety issue in perspective, minor immune reactions with enzyme therapies are not unusual. The question is whether we are able to dose around this. We would like to reiterate that there was no serious adverse events in the Phase I study trial, and while we have always been concerned about potential safety issues with PEG-PAL, we are not more concerned now after the completion of the Phase I trial.

Given the substantial reductions in blood phenylalanine in this Phase I trial, we believe this product has the potential to provide substantial benefits for patients. As for the BH4 program, we are reviewing the data to make a decision in the second half of 2009 on whether or not to pursue a program in pulmonary arterial hypertension. This is the only BH4 cardiovascular indication we are considering it this time.

As you may recall, the investigator response of Phase I-B multi-center open label dose escalation study in PAH showed that the drug was well tolerated and improved the six minute walk distance in patients compared to their pre-treatment baseline levels.

Turning to our product BMN-103 for Pompe disease, we believe our highly phosphorylated enzyme could result in more efficient up-tick in cells and potentially lead to improved glycogen reductions in key affected muscle groups not addressed with current therapy. We continue to evaluate several partnering options for this program, although we have not excluded the possibility of developing the product ourselves.

In terms of other pre-clinical programs, the BMN-195 is a small molecule inducer of Utrophin, a protein that can potentially replace the defective dystrophin protein in patients with Duchenne Muscular Dystrophy.

After completing formulation work in toxicology studies we aim to enter this program into the clinic by early next year. Moving on to the handheld blood Phe monitor, we have successfully completed proof of concept laboratory studies, and are proceeding with prototype development. Near-term plans include user studies as well as engineering scale up and finalization of commercial product design with expected product availability in early 2011.

We are also working on several exciting preclinical programs and we expect that at least one new program will be announced by the first quarter of 2010 as we begin IND enabling work. We'll keep you updated on our progress on this and other programs as they advance.

And with that operator, we would like to now turn the call open for questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question will come from the line of Brian Abrahams of Oppenheimer & Co.

Brian Abrahams – Oppenheimer & Co.

Hi, thanks very much for taking my question. Two pipeline questions for Hank. On GALNS, you talked a little bit about the Phase I/II endpoints you are looking at in that study. Can you talk about the endpoints that you are going to be exploring in the MorCAP registry, and how mechanically might you use that data to help you interpret the Phase I/II results and plan for a Phase III study?

Hank Fuchs

Sure, so I think one concept would be to understand the range of abnormalities from the MorCAP patient population. So for an example what is the relationship between age and impaired pulmonary function or age and impaired walk distance to better understand the relationships between keratin levels and impairments in either pulmonary function or walk test. And that might help us home in eligibility criteria or outcome measures in the Phase III clinical trial.

By looking at both the natural history setting, snapshot data together in the context of what we observe from the early treatment of patients in the Phase I/II study.

Brian Abrahams – Oppenheimer & Co.

Got you, and then on PEG-PAL, are there going to be any safety updates or any formal or informal interim analyses once patients receive more than one dose, given the safety questions?

Hank Fuchs

Well, as you know it is open label study. So we will be looking at the data from a safety perspective, you know fairly closely as to what we choose to announce and when we choose to announce I think we haven't settled on that yet.

Brian Abrahams – Oppenheimer & Co.

Okay, thanks for the questions.

J.J. Bienaime

Hi, Brian; it is J.J. (inaudible) on the phone, because I just read your recent report on the (inaudible) of Morquio, and I see there is a misunderstanding in terms of criteria, if I am not mistaken. I think that we saw that, we're excluding in the p2 the nonambulatory patients and that is not correct. Actually, the study does and will include nonambulatory patients, and the decision to do so and not to include them is – with intent is to access respiratory function in this older nonambulatory patient population, because MPS-6 patients, MPS-4 patients have substantial respiratory compromise. Part of this is due to fracture other than the skeleton probably including no storage and storage. We think the macrophage study is important in the lungs.

So we observe in MPS-6, we did the study on Naglazyme within 6 weeks, we saw the improvement in pulmonary function when the no impact on bone and cartilage at that time.

Brian Abrahams – Oppenheimer & Co.

I appreciate the clarification, just to follow up on that, how will you be assessing endurance in those patients, and what proportion of the patients are nonambulatory, is six minute walk – are there going to be enough patients to get a good read on six minute walks? Thanks.

Hank Fuchs

Well as J.J. indicated that the concept behind this is that we are not – we want to give ourselves as many chances to succeed here as possible. And success could come from improved breathing or from improved ambulation or both. Success could be from healthier patients or more advanced patients, and we don't know. So we wanted to give ourselves the option of exploring the range of that, and we think we need to let the data do the talking as to which way we go next when we see the data.

Brian Abrahams – Oppenheimer & Co.

Thanks.

Operator

Our next question comes from the line of Joseph Schwartz of Leerink Swann. You may proceed.

Joseph Schwartz – Leerink Swann

Hi, thank you. I was wondering if you have any new initiatives in minded to reinvigorate the growth of Kuvan?

J.J. Bienaime

Hi, Joe. We are continuing to do what has worked and continuing to generate additional clinical data, and we've seen, I think we said previously the best growth in end-user demand in Q2 that we have seen since launch, and we feel like our message is getting through to some extent. We certainly like to see that growing faster, and we really see the ability to generate additional data, which shows real clinical benefit to the patients beyond just lowering of the Phe levels as the driver of that over the quarters 3 and 4.

ICM [ph] at the end of August, start of September would be a significant event for us in terms of the first set of that data coming out. We anticipate having significant data really over the next two years following that with the ISTs [ph] that have already been started enrolling.

Hank Fuchs

And one significant source of growth, J.J. you know, I think that he mentioned that in March that there is a good chance that we will have some IST data on a small number of institutionalized patients, and we do show some efficacy there that could significantly impact positively the product growth.

Steve Aselage

If I can maybe mention one thing as well in the Morquio question that came up previously, it is important to have nonambulatory patients in this trial, because we have seen at least anecdotally with Naglazyme patients who were nonambulatory, when they went on to enzyme replacement therapy, who became ambulatory and after going on enzyme replacement therapy, do you think that is the type of outcome that could have a significant impact.

Joseph Schwartz – Leerink Swann

If I could just ask a follow up, as far as the free drug program for Kuvan goes, what are your plans to either terminate or continue that?

Hank Fuchs

We plan to continue it at least through the end of this year, and we will re evaluate at the end of the year.

Joseph Schwartz – Leerink Swann

All right. Thank you all. I will get back in the queue.

Operator

Our next question will come from the line of Phil Nadeau of Cowen & Co. You may proceed.

Phil Nadeau – Cowen & Co.

Good afternoon. Thanks for taking my questions. My first is on Naglazyme, you mentioned in your prepared remarks a number of different countries that are coming online, can give us some sense of which of those are important growth drivers and maybe how many patients you have found ?

Hank Fuchs

We – I don't want to get into specific numbers for country, but Russia is potentially a significant market for us. We now have substantial number of patients there, and we also know that we have only scratched the surface in terms of really understanding the entry of such population. It is kind of taking time for us to dig into that and really figure out exactly what the opportunity is there. But I would say it is very significant. I should also mention that it will take three or four months in all likelihood to get import licenses in some of the rest of the paperwork that is necessary to work through that bureaucracy. So it is likely to have an impact late Q4, or Q1 of next year. We see that as a very significant development for us. Poland could also be a significant market for us. The impact of Russia on some of the other countries in Eastern Europe, a little bit harder to get our arms around that. But we know that many of those countries do look at Russia and base their policies of the Russian decisions. So it is a significant opportunity for us.

Phil Nadeau – Cowen & Co.

And how does reimbursement work in Russia, is there a process that you have two go through once you get the import licenses?

Hank Fuchs

There will be, but reimbursement is generally available after approval and it is generally from the federal government. There were some local governments that will step in on rare occasions, but it is primarily federal reimbursement in Russia.

Phil Nadeau – Cowen & Co.

Okay, and then on Kuvan two questions, could you may be qualitatively tell us what you are seeing in BPPS, is the number of new patient referrals consistent with what you have seen in the past or is there a trend either up or down, and then second on the other end of Kuvan patients on permanent therapy, are you seeing any significant drop-offs now that patients have been off therapy for quite some amount of time.

Hank Fuchs

We have seen actually amazing steady Kuvan referrals into BPPS really over the last six months, and I agree in one month there was a bit of the aberration on the positive side. But it has been steady, really what it has been since late spring. On the back end, we do have some patient drop-off. That has also been really very steady almost since launch. We lose a small percentage of our existing patients on every quarter basis. We have instituted programs to readdress those patients and try to pull them back on to therapy. I may have mentioned previously we did some market research on discontinued patients and found that an amazing number of patients who were off therapy not because they wanted be off or even because their physician wanted them to be off, but simply because some kind of whether it was a change of doctor or change of insurance or change of employer, relocation, some type of a child issue that affected the family.

The patient just got off and then didn't know how to start back on again. So we're continuing to do market research to identify patients who have discontinued on Kuvan, and where there is interest to help them get back on Kuvan. And actually that was one of the things that had a positive impact on us in Q2 is, it is really the first quarter that we saw an impact from those efforts and saw some discontinued patients starting to restart on Kuvan.

J.J. Bienaime

(inaudible) on this overall Kuvan long-term growth, I mean two things. I think the fact that we had – two patent issues give us more time to reach peak sales with the product, significantly more time more than twice as much time as before yesterday. And the second thing is another thing we are working on and are far more confident that we are going to get the Phe monitor available in early 2011. We believe it is going to potentially make a special difference in helping generate additional sales for Kuvan. All sort of reasons and strategic changing the fit in paradigm here and maybe Steve will say a few words about it, and why it is that important.

Steve Aselage

Sure, it is important from a number of perspectives. The logistical barriers that are set up in some cases by a patient needing to get to a baseline Phe level is taken, a detriment to many families who were considering starting it on their child. For a family who lives 100 miles away from their center, and has to drive to the center to get blood drawn every week for four weeks before the patient starts and then the physician wants to do another blood drawn every week for the four weeks after they go onto Kuvan. You have got eight 200 mile round trips, and 8 and 6 for maybe for a five-year-old child, who is screaming through the whole process. A lot of parents don’t want to do the thing. Those of you that have kids and have been through that I think can probably emphasize a little bit. If we can minimize the travel, the discomfort, and being able to get a easy stick, much less blood drawn, much less painful. Immediate feedback as to what the Phe level is and it is just going to smooth out that whole process of the patient getting started, and equally important for compliance.

Many times adult patients don’t see a Phe level more than once a year, every six months. Having a home Phe monitor gives an immediate feedback, and it will be relatively inexpensive, which means if they can have Phe levels taken much more often. So they can actually see what the benefits the drug is providing for them. For a patient who can't see the Phe levels, it doesn't necessarily feel the impact of the medication or at least be able to attribute changes to the medication. They are operating blind and be unable to give those people immediate feedback as to the benefit of the medication. We think will have a significant impact on the number of patients who did drop off therapy after a period of time.

So it is really going to help in a variety of different ways. Those are just two.

Phil Nadeau – Cowen & Co.

Okay, great. And one last question that is just on the Pompe program, I know Hank that wasn't in your prepared remarks and I think we're expecting a good decision or some sort of development decision on that this quarter, any update there?

Hank Fuchs

No, actually, we are probably going to need a bit more time. We (inaudible) you of all the products we have in development and pre-clinical also. We are seeing discussion with some potential partners and we are going to review the entire portfolio including some near-term business development opportunities, you know, before we make, you know, the right decision on this program.

Phil Nadeau – Cowen & Co.

Okay, thank you.

Operator

Our next question will come from the line of Chris Raymond of Robert Baird & Co.

Chris Raymond – Robert Baird & Co.

Thanks. I got a question on the guidance and I'm sorry if you guys covered this in your prepared remarks, but I just – I didn't catch it. I'm just kind of curious, you know, if I look at your revenue guidance you've raised the midpoint of total revenue by about $2 million you know, with the Naglazyme bringing up toward the lower end, but then looking at your non-GAAP, you know, earnings guidance, the midpoint has come down about $4 million or $5 million. I'm just wondering, you know, with no changes in expense, is there something I'm missing or was there maybe an issue with the original, you know, planning process that went with the original guidance? Thanks.

Jeff Cooper

This is Jeff Cooper, and I don't think there was an issue. I think, you know, the guidance can be a range of the maximum amount of revenue for all the products from the least amount of revenue, as well as the maximum amount of expense and the least amount of expense, and I think the guidance that we provided at the beginning of the year reflected a wider range.

I think now that we are six months into the year, we have just tightened that guidance up a little bit. So it certainly was an error in the guidance that we had previously, but it's just really a tightening of the guidance reflecting that the ranges may not be as broad all the way up and down the line.

Chris Raymond – Robert Baird & Co.

Okay, and then maybe one question for Steve, which I'm hoping he'll answer. How many patients in Russia have you identified?

Steve Aselage

We never give specific patient numbers, but it is a number of identified patients that is on the order of our major countries in Western Europe. So it is significant.

Chris Raymond – Robert Baird & Co.

Great, thank you.

Steve Aselage

And maybe I can add one thing to that is we know that we don't have an accurate counts on MPS expectations in Russia. We know what we know but we also know that that's just the surface of what's there.

Chris Raymond – Robert Baird & Co.

Great, thanks.

Operator

Our next question will come from the line of Lucy Lu of Citi.

Lucy Lu – Citigroup

Great, thank you. Just to follow-up on that question on the guidance, I still don't quite understand with Jeff your explanation. So you increase the lower end of the revenue guidance and there is no changing in expenses. How come are both the GAAP and non-GAAP. It seems like you could even make less money than before. I'm just not getting like – on the GAAP number so if you could even lose $6 million versus prior break even. Can you just give a little bit more color on that?

Jeff Cooper

Yes, like I said previously. So, you know, theoretically you could have a range that could be you know, $30 million if you were to take the top end of the revenue and the lower end of the expenses and conversely the lower end of the revenue and the higher-end of the expenses. So now that we are six months in the year, I think we have just tightened that up a little bit in terms of the, you know, trying to get more of a midpoint in terms of the guidance range. So theoretically you could have a much wider range, but I think now that we are six months into the year, we have decided to tighten that up a bit.

Lucy Lu – Citigroup

Okay, I guess the other question, just a follow-up. Can you also provide an update on Kuvan in Europe in terms of geographical availability and pricing?

J.J. Bienaime

Sure. The best information we have from our Merck Serono is that they have pricing that has been set in virtually all of the major markets in Europe. That pricing is in the same range as US pricing for Kuvan. They have some variance from country to country, although it is pretty small and exactly how it compares to US depends on movement of the euro against the dollar at any given time.

They are in the midst of what I would consider an early phase of their launch with their pricing established, and the last feedback I got was they felt good about the progress that we are making with the launch.

Jeff Cooper

I mean they basically had revenues in Q2 in eight countries, and the biggest ones being Germany, France, and Spain.

Lucy Lu – Citigroup

Okay, thank you.

Operator

Our next question will come from the line of Andrew Vaino of Roth Capital partners.

Andrew Vaino – Roth Capital Partners

Thank you for taking the call. Just a quick question if I may on the PEG-PAL. Do you guys pegalate that yourselves or is that outsourced?

Steve Aselage

That's done here at BioMarin.

Andrew Vaino – Roth Capital Partners

Okay, do you know what the poly dispersity of the final product is?

Steve Aselage

I don't; but certainly Robert Baffi, who is the head of our technical operations group, does.

Robert Baffi

And what was the question?

Andrew Vaino – Roth Capital Partners

It is the poly dispersity of the PEG?

Robert Baffi

We do use a slightly higher molecular weight than some of the more recently included PEGs with the idea that that's going to be even less immunogenic.

Andrew Vaino – Roth Capital Partners

Well, is it hydroxylated at the end or is it (inaudible) methyl group.

Robert Baffi

I'm sorry.

Andrew Vaino – Roth Capital Partners

Is it hydroxylated at the end or does it have a methyl group?

Robert Baffi

I am going to have to get back to you on that.

Andrew Vaino – Roth Capital Partners

Okay, and lastly I know that there is no big deal in terms of clinical response to the drug, but have you released, how many – what percentage of patients develop antibodies.

Robert Baffi

We haven’t released that yet.

Andrew Vaino – Roth Capital Partners

Okay, thank you.

Robert Baffi

And if I may, you know all patients the Naglazyme and Aldurazyme that majority of patients develop antibody that they are not utilizing.

Andrew Vaino – Roth Capital Partners

Okay.

Robert Baffi

You have antibody generation.

Andrew Vaino – Roth Capital Partners

Thank you.

Operator

Our next question will come from the line of Salveen Kochnover of Collins Stewart. You may proceed.

Salveen Kochnover – Collins Stewart

Sure. Thanks for taking my questions. Steve, can you just comment on the disconnect between the 14.8% quarter-over-quarter growth in pills dispensed and in Kuvan's sales growth of 9%. Is that mostly just the free, the patients on free drug?

Steve Aselage

The free drug patients don't have any impact on either of those numbers. There were two things that had an impact. One was the track that we took, six quarters of TRICARE rebates in Q2 of this year, and a higher Medicaid rebate also had an impact if you do comparisons with previous quarters. The other thing I should probably mention in the past, we made it public when we saw specialty pharmacy inventories build up. Substantially we saw specialty pharmacy inventories go down substantially at the end of June. So there was a little bit of inventory bleed off in June that probably had some impact on sales versus end-user demand.

Salveen Kochnover – Collins Stewart

Great, thanks. And then you had mentioned earlier programs to kind of bring in patients that had been on therapy and dropped off. What about patients that were never in-clinic patients, so the out-of-clinic patients are you targeting them?

Steve Aselage

In isolated centers, we are working with the center to do outreach programs. We have a spectrum of centers ranging from very aggressive in trying their patients to very hesitant to try any patient. Obviously in the very conservative slow adapting centers, we are not going to put time or effort, and they are trying to get more patients back into those clinics, but where there is a center that is interested in outreach and is aggressive with the use of Kuvan, we are helping, and we have seen some positive results with those efforts.

Salveen Kochnover – Collins Stewart

And then, this is my last question. It's around the Pompe disease drug. What are the getting factors in place to decide whether or not you're going to partner the drug versus take it for yourself?

J.J. Bienaime

The analysis of expected expenses and timelines through approval, risk of approval versus all other opportunities we have today within BioMarin.

Salveen Kochnover – Collins Stewart

And the decision would be in the third quarter you mentioned earlier?

J.J. Bienaime

No, it might probably – it might take a little longer than that.

Salveen Kochnover – Collins Stewart

Thank you.

J.J. Bienaime

But we still have ongoing discussions with potential partners.

Salveen Kochnover – Collins Stewart

Thank you.

Operator

Our next question will come from the line of Eun Yang of Jefferies. You may proceed.

Eun Yang – Jefferies

Thanks very much. Assuming that PEG-PAL is successful, based on the early data and mechanism of action of the drug, PEG-PAL would provide better and more clear clinical benefit, but potentially at a much higher trim and cost than Kuvan. The question is how would you utilize or position those two products if you are going to continue to keep Kuvan on the market once PEG-PAL is approved?

Jeff Cooper

I think the generation of the PEG-PAL data will help us determine an approach on that until we actually see the outcomes from the trial, it is going to be very difficult to have a differentiation or segmentation strategy that makes sense. But one thing I would say that's clear at this point is that a subcu administration with the PEG-PAL you know, may well be a preferred administration for adults. For younger children, it would not surprise me if we saw keeping patients under the age of 5 or under the age of 12 on an oral formulation if they are doing well, well controlled with diet and Kuvan, and there might be some hesitancy for parents to switch to a subcu injection at that point, but again it is going to take some time and some additional data before we can segment those things appropriately.

Eun Yang – Jefferies

Thank you and last question is, could you tell us what kind of a level of exposure to Medicaid and Medicare in patients who are currently receiving Kuvan?

Steve Aselage

Yes, the combined Medicare, Medicaid and now with TRICARE being asserted a DOD, Department of Defense, ensure the cumulative exposure of Medicare-Medicaid and DOD is between 21% and 22% of our overall sales.

Operator

Our next question will come from the line of Jeff Elliott of UBS Securities.

Jeff Elliott – UBS Securities

Great, thanks. Just a couple of questions. Most have been answered. I realized you haven't told us what the antibodies from PEG-PAL. But when might we expect that full data set from the Phase I, would it be a publication we should be looking for or a conference presentation?

Steve Aselage

Probably eminently and probably more like that of a scientific presentation but I don't think that's been worked out finally.

Jeff Elliott – UBS Securities

Okay, and in terms of the facility expansion that you guys were doing, what's the cost of that and what gives you confidence that you need to double your manufacturing capacity at this point, given some of the products that you talk about are relatively early stage in development?

Jeff Cooper

Well, the total cost of the expansion is about $60 million, the majority of that being incurred this year in 2009, but, you know, with growing revenues for our enzyme products Naglazyme and Aldurazyme, we definitely got to a point where we needed to begin to increase our capacity long-term. Add on top of that the possibility of adding new products such as Morquio and PEG-PAL, the existing capacity facility would not have been enough to manufacture all four of those products. So it is incumbent upon us to expand our facility to give ourselves a required capacity both for our commercial products and our products in development.

J.J. Bienaime

(inaudible) how long we keep saying this is a $300 million worth product and we are basically half way.

Jeff Elliott – UBS Securities

Did you consider sourcing from outside, because I know industry-wide there is a sort of notion as there is a fair bit of spare capacity right now or are you committed to doing it internally?

Steve Aselage

I think what we are trying to do is one of the reasons that we have been able to get our products approved pretty rapidly is being able to control the manufacturing ourselves and that's, you know, one of the reasons that we have seen you know, positive timelines for Naglazyme and Aldurazyme. So, I think you know, our strategy right now is to try to maximize the use of that ability and get these products to market sooner. Sometimes we found that when you are totally relied on a third-party that can delay the timeline in getting products to the market.

Jeff Cooper

It's probably worth noting too that whether a small molecule manufacture involved, we do outsource small molecule. For the big complex proteins, I think it makes sense for us to keep control of that.

J.J. Bienaime

And I would add, we just learn how to spell out the landing, and we don’t want to try that again.

Jeff Elliott – UBS Securities

Fair enough.

J.J. Bienaime

Thank you.

Operator

Our next question will come from the line of Liana Moussatos of Wedbush

Liana Moussatos – Wedbush

Thank you. What was the geographic breakdown of Naglazyme sales?

Jeff Cooper

Sure. In the second quarter, US sales were $5.7 million, EU sales were $20.1 million, and sales outside the EU and US, our international sales, were $.17.1 million in the second quarter.

Operator

Our final question will come from the line of Carol Werther of Summer Street Research. You may proceed.

Carol Werther – Summer Street Research

Are you expecting a summer slowdown with Kuvan again this year, and to the best of your knowledge are most sites through any kind of screening of their patients or are there still patients coming in?

Steve Aselage

We have screened substantial minority of patients that are active in clinics. We know there are large numbers of patients who have not been screened yet. I think if there is one thing we have learned over the last year and a half in the marketplace with Kuvan is to wait and see what comes rather than to have an expectation of higher referrals or lower referrals. We would say we are encouraged by what we saw in Q2. We feel good about our start in Q3, but trying to predict what's going to happen in August and September. You know, we haven't been particularly successful in the past and hesitant to pull our crystal ball and trying to guess this year.

Carol Werther – Summer Street Research

Okay, great. Thanks.

Operator

This concludes the question and answer portion of today's conference. I will turn the call back to management for closing remark.

J.J. Bienaime

Thank you, so in summary as we enter the second half of this year, we are confident in our ability to meet our stated financial objectives for 2009. You know, three growing commercial products Naglazyme and Aldurazyme are stable procuring revenue streams, which are well protected from competitive and reimbursement threat, and Kuvan continues to make steady progress. So we are – we believe we have a solid pipeline to products in development including PEG-PAL for PKU, GALNS for MPS IVA, as well as several advancing early stage products.

In order to support the projected commercial needs for Naglazyme, Aldurazyme, GALNS, and PEG-PAL, we just reported and discussed to 2016. We are making significant investments to double our manufacturing capacity to support these growing revenues. We continue to carefully evaluate both our internal R&D program as well as external opportunities to ensure continued double-digit revenue growth in the coming years. So we will also continue to carefully manage expenses so as to provide maximum long-term value to BioMarin and our shareholders. We look forward to keeping you up-to-date on our progress and thank you for your continued support and for joining us on the call today. Goodbye.

Operator

Thank you, sir, and thank you for your participation in today's conference. You may now disconnect. Have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: BioMarin Pharmaceutical Inc. Q2 2009 Earnings Call Transcript
This Transcript
All Transcripts