How Much Further Can Rare Diseases Carry BioMarin?

Mar.29.12 | About: BioMarin Pharmaceutical (BMRN)

Investors have long known that there can be huge money in rare diseases, and over the years they have rewarded stocks like Genzyme (now part of Sanofi (SNY)) and Alexion (ALXN) accordingly. As another player in the rare disease space, BioMarin (BMRN) already sports a nearly $4 billion market cap, but with a lot of key clinical data coming in the next few quarters, it's worth exploring how much more could be left in the tank.

The Businesses In Hand

BioMarin is a somewhat rare biotech in that it already has four drugs approved and on the market.

Aldurazyme is an enzyme replacement therapy for mucopolysaccharidosis I (aka MPS-I or Hurler syndrome), a condition that causes severe mental and physical development problems and often leads to early death by organ failure. BioMarin developed Aldurazyme with Genzyme and gets a quarterly royalty payment of 39.5% to 50% of sales. For 2011, BioMarin recognized about $83 million in Aldurazyme revenue and Sanofi's total revenue from the product suggests that the market in the U.S. and EU is about 25%-50% penetrated (though incidence numbers on rare diseases are notoriously unreliable).

The company also markets Naglazyme as an enzyme replacement for a broadly similar disease - MPS-VI (Maroteaux-Lamy syndrome). While MPS-VI does not feature the mental development problems of MPS-I, it does result in abnormal growth later in childhood (usually after about age 8) and can lead to restricted movement, deafness, heart disease, and significant pain. Sales of Naglazyme reached nearly $250 million in 2011, suggesting roughly 50% market penetration.

BioMarin also markets Kuvan for mild-to-moderate PKU ($117 million in sales for 2011) and Firdapase for LEMS (a rare autoimmune disorder that causes muscle weakness), which brought in $13 million in 2011.

Major Data Coming Soon

BioMarin could credibly drive $600 million in annual revenue with its existing business, but the pipeline could magnify that significantly.

BioMarin should report pivotal Phase 3 data from its study of GALNS as a treatment for MPS-IVa (aka Morquio A syndrome) in the second half of this year. Early results have been encouraging (as it perhaps obvious from the fact that it has been advanced to Phase 3), and there are no other effective treatments for the condition.

Morquio A syndrome is incrementally more common that MPS-1 or MPS-VI, with an estimated 3,500 or more patients in the U.S. and EU. Like other MPS conditions, Morquio A causes significant physical developmental problems in children and those with the most severe form seldom live past their twenties. With an estimated annual cost of $325,000 per year, GALNS could max out at close to $800 million in revenue, though 100% penetration for any disease is exceedingly rare.

BioMarin is also on pace to deliver phase 2 results from its PEG-PAL enzyme replacement therapy for severe PKU (phenylketonuria). By the standards of rare diseases, PKU is relatively common (about 50,000 in the U.S. and Europe) and unusually well-characterized, as PKU is part of routine newborn screening in most countries.

Although the PKU market would seem to be promising, BioMarin longs may do well to be more conservative on their expectations. For starters, the drug appears to have a potentially limiting side effect profile including an immune response that leads to rashes, joint pain, and fever. It's also worth wondering if the drug can get robust reimbursement; PKU can be controlled (albeit not easily or ideally) with a very strict diet and there has been some resistance to reimbursement for Kuvan (which helps less severe cases of PKU).

Last and not least, BioMarin should report top-line Phase 1/2 data of its experimental drug BMN-701 in Pompe disease. Given its phase of development, this drug would likely not enter the market before 2016 and it will face competition from Genzyme's Myozyme/Lumizyme drug, as well as potential competition from experimental treatments including a drug being developed by Amicus Therapeutics (FOLD) and gene therapy. It's also worth noting that although the late-onset Pompe market could be worth close to $800 million, there has already been resistance from insurance companies in the U.S. and national health services in Europe to the cost of Myozyme/Lumizyme.

Behind these drugs, BioMarin does have other pipeline candidates including a drug for cancer, a drug for achondroplasia, and one for Batten disease.

A Quick Note On Reimbursement

While it could arguably merit a separate column of its own, it's worth considering whether or not the generous reimbursement environment for rare diseases can continue and underpin the business models at companies like Genzyme, Alexion, BioMarin, and Amicus or for individual drugs like Vertex's (VRTX) Kalydeco.

A couple of years ago, Matthew Harper of Forbes pointed out that if everyone thought to have a rare disease were treated (30 million) and the cost were "only" $33,000 per year (far less than the cost of Alexion's or BioMarin's drugs, or Kalydeco), the total would come to $1 trillion - or larger than IMS's estimate of the entire global pharmaceutical market ($880 billion). Clearly many of those 30 million reside in developing nations where even $33,000 is unthinkably expensive, and the chances of finding an effective treatment for every disease is virtually zero, but the issue remains - can the health care system afford drugs with six-digit prices?

I don't pretend to have an answer, and it's easy to see some of the rebuttals - billions are spent to treat diseases caused by lifestyle choices like obesity or smoking, so why should potentially productive members of society be refused treatment because it's expensive? All I want to do in bringing up this issue is highlight the fact that not only does BioMarin have to develop effective drugs, but they may also increasingly have to fight to get the reimbursement management wants.

What's It All Worth?

Taking a cue from the old "Choose Your Own Adventure" books, I'm going to lay out a few different scenarios as to what BioMarin shares could be worth today. Bulls can feel free to focus on the aggressive scenarios, while bears can stick to the other side of the equation.

I offer the following scenarios for estimating revenue in 2018. While bulls will argue that BMN-6739 could be on the market by 2018 (for cancer), and perhaps other drugs as well, I would estimate that they'd be in the earlier stages of their ramp and would not change the analysis much.

BioMarin 2018 Revenue Estimates (in $ millions)        
  A B C D
Existing drugs 700 700 700 800
GALNS 200 300 600 750
BMN-701 200 300 400 550
PEG-PAL 0 300 400 500
Total 1,100 1,600 2,100 2,600
Click to enlarge

Using the revenue estimates from the first table, I built the following chart of revenue multiple-derived price targets. This analysis used a weighted discount rate to balance the contributions of marketed drugs (discounted at 10%) with unapproved drugs (discounted at 30%) to the revenue targets. These numbers are based on multiples of 2018 estimate revenue, or 2019 valuation, discounted back seven years.

BioMarin Implied Value Per Share          
  Disc. Rate 6x mult. 8x mult. 10x mult. 12x mult.
A 17.3% $18.78 $25.04 $31.30 $37.57
B 21.3% $21.60 $28.81 $36.01 $43.21
C 23.3% $25.29 $33.72 $42.15 $50.58
D 23.8% $30.44 $40.58 $50.73 $60.87
Click to enlarge

By way of context, Sanofi acquired Genzyme at about 4x trailing revenue (excluding incentive payouts), though Genzyme had serious manufacturing issues at the time. Alexion presently trades at 21 times trailing revenue, while most revenue-generating biotechs fall into the 6-10x range.

Based on the prior charts, today's price of $34-and-change assumes a reasonably modest revenue outlook (between B and C) and reasonable revenue multiples (8x to 10x). I would say that $40 to $45 is probably a reasonable fair value for these shares, but they are risky - not only from a clinical aspect, but from reimbursement as well. Given that I prefer to buy biotechs with 50% or more upside, I'm not inclined to buy today, but I would be in no hurry to sell if I already owned shares.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.