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BioMarin Pharmaceutical, Inc. (NASDAQ:BMRN)

Q1 FY08 Earnings Call

April 29, 2008, 5:00 PM ET

Executives

Eugene Sheen - Senior Manager, IR

Jean-Jacques Bienaimé - CEO

Jeffrey H. Cooper - VP and CFO

Stephen Aselage - Sr. VP, Global Commercial Development

Emil D. Kakkis - Chief Medical Officer

Analysts

Christopher Raymond - Robert W. Baird

Salveen Kochnover - Jeffries and Company

Phil Nadeau - Cowen and Company

Joseph Swartz - Leerink Swann

Lucy Lu - Citigroup

Liana Moussatos - Pacific Growth Equity

Carol Werther - Summer Street Research

Andrew Vaino - Roth Capital

Vernon Bernardino - Rodman & Renshaw

Tom Mcgahren - Merrill Lynch

Chris Raymond - Robert Baird

Operator

Good day ladies and gentlemen, and welcome to the First Quarter BioMarin Pharmaceutical Earnings Conference Call. My name is Katie and I'll be your coordinator for today. At this time all participants will be in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference. [Operator Instructions].

I would like to now turn the call over to your for today Ms. Eugene Sheen, Senior Manager of Investor Relations. Ma'am you mat proceed.

Eugene Sheen - Senior Manager, Investor Relations

Thank you. On the call today is J.J. Bienaimé, BioMarin's Chief Executive Officer, Jeff Cooper our Chief Financial Officer, Emil Kakkis, Chief Medical Officer and Steve Aselage, Senior Vice President of Global Commercial Development. I would like to remind everyone that this non-confidential presentation contains forward-looking statement about the business prospects of BioMarin Pharmaceutical including the expectations regarding BioMarin's financial performance, commercial products and potential feature products in different areas of therapeutic research and development.

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

Now I like to turn the call over to J.J. BioMarin's CEO.

Jean-Jacques Bienaimé - Chief Executive Officer

Thank you Jean and good afternoon and thank you for joining us on today's call. I have a few introductory comments before I just review the financial details of our first 2008 quarter. Steve will provide more details on the Kuvan launch and Emil will provide an update on our ongoing R&D programs. Eugene will then review you 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.

So we are very pleased with our first quarter results Naglazyme, Aldurazyme and then also Kuvan generated strong top line revenue we strolled the profitability in the first quarter.

First up there a full quarter on the markets the commercial launch of Kuvan is off to a great start with $5.8 million of revenue booked in the first quarter. The interest levels from the PDU community is high and we are pleased with the progress we have made today.

A total of 881 patients have been referred to BBPS in a total of 509 patients have initiated commercial therapy as of last Friday April 25.

We are anticipating a portion of these patients will discontinue therapy in the future. The rate operations referred to BBPS remains strong and Steve will elaborate on the details of the Kuvan launch a little later. So based on the momentum we generated today we have three [indiscernible] we are seeing from patients and physicians and the efficacy of safety profile for Kuvan will remain extremely optimistic about the long term potential of Kuvan in PKU. At this time it is important to remember that we are still in the beginning stage of the process and see some uncertainties associated with any fresh product launch.

However based on our progress and sales run to date we are increasing the bottom line, the bottom end of our guidance from $40 million to $45 million. If we get additional clarity in the coming months to help us narrow the current range of 45 to 70 we will adjust our expectations accordingly. The respective Kuvan regulatory status outside of the United States, our partners Merck, Serrano and Essuvio [ph] are making good progress towards license share in Europe and in Japan.

In Europe BioMarin is working closely with Merck, Serrano on responding to the questions from EMEA as part of the normal review process and will remain on track for a decision on potential positive of... opinion and approval in Europe at the end of this year. In Japan, Essuvio [ph] has supplemented its own filing to the minatory of health labor and welfare with data from BioMarin's US filings and we could see approval in Japan in Q2 or Q3 of this year. As a remainder combin... BioMarin will receive net single digit rechis [ph] on sales in New York and in Japan. We will receive substantially higher double digit royalty that will partially offset royalties paid to Essuvio on your US sales of Kuvan.

As we think about the long term value of Kuvan, we are aggressively pursuing ways to maximize our intellectual property position, we are on the product. Tuarsy [ph] evaluating strategy that would, could significantly extend the exclusivity beyond offered projection up set as an in US and 10 years in Europe, beyond this we do not have any issued license patents specifically related to use of the HY PKU but we continue to build our patent portfolio with 87 applications in prosecution which if issued will expire between 2023 and 2028 but in particular, which we believe will prevent significant. It's an application for once daily received in active prosecution.

If the person does issue as we expect, it would co up for protection for Kuvan until 2024. To further support our advances in the treatment of PKU IP position we are developing a product direct while to cheer by availability, next neither continuous to perform well especially in the international market and at he result of strong stel pg [ph] appliance in a first quarter we are rating our exopectutions [ph] were 2008, we expect all growing momentum to be driven by continued geographic expansion and the initiation of new patient on commercial therapy. Countries such as Brazil and Turkey for example have been identified as having higher end BF6 [ph] population but we have initially recognize at last.

And we continue to increase the number patients on that. As for our Aldurazyme for HTM1 commercialization continues to go well and this was the first quarter of the restructured joint venture with Chenzam which we believe will result in increased clarity in our income statement as well as improve efficiency of operations for both parties and Jeff will review the detail in a moment.

Moving onto back Backbile [ph] and as I have said for BTU patients was either did not adequately respond to Kuvan or wished to reduce their blood beyond what is possible with Kuvan. The French patient in the Phase I trial is expected to dilute immediately. This is a very exciting program and maybe will review additional details on this on R&D program there.

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

Jeffrey H. Cooper - Vice President and Chief Financial Officer

I will start our review in product revenues in Negazyme, Aldurazyme and Kuvan for the first quarter ended March 31, 2008 and follow with collaborative agreement revenue for the same period. I will then review our bottom line for the quarter ended March 31, 2008 and follow with the more in depth look at our financial results.

Beginning with Negazyme that products sales in the first quarter of 2008 were $27.7 million, an increase of 50.5% over product sales of 18.4 million in the first quarter of 2007. Net sales were up as primarily attributable to geographic expansion internationally in the initiation of therapy of our previously identified or newly diagnosed patients. Net products sales of Aldurazyme by Genzyme were $36. 8 million for the first quarter ended March 31, 2008 representing an increase of 37.3% over sales of $26.8 million for the first quarter ended March 31, 2007, revenue of BioMarin out of the restructured agreements with Genzyme were 24.1 million for the first quarter of 2008. Beginning January1st 2008 as result of rest ruction in a joint venture with Genzyme BioMarin received the relative 39.5% to 50% of world wide net sales. In additional BioMarin recognizes its products transfer revenue when products is shipped to Genzyme. This amount will eventually be deducted from royalties earned when the products is sold by Genzyme. The first quarter of 2008 includes a significantly amount of incremental products transfer revenue to the transfer of existing Aldurazyme on hand in this first period of the joint venture restructuring.

BioMarin will also report cost of goods sold associated with manufacturing cost of product shipped to Genzyme, a modest amount of operating spending related to certain ongoing US regulatory administrative cost and finally our share the remaining R&D activities in the joint venture. We expect that possibility associated with all Aldurazyme and will continue to grow during 2208 as result of growing of world wide products revenue.

Have could have been a revenue associated with our partnership with Merck Serrano. BioMarin recorded 2.5 million for the first quarter ended March 31 statement 2008 compared to 4.1 million in the first quarter ended March 31, 2007. This reduction of collaborative agreement revenues is due to lower reimbursable Kuvan development expenses from clinical trail and manufacturing activities.

An income was 1.7 million or $0.02 per share for the first quarter of 2008 compared to net loss of 9.3 million or $0.10 per share for the first quarter of 2007. A net loss during the first quarter of 2008 includes 4.5 million of non cash stock compensation expense compared to 3.6 million of non cash stock compensation expense from the first quarter of 2007. Non GAAP net income which excludes stock compensation expense was 6.2 million or $0.06 per share for the first quarter of 2008 compared to non GAAP net loss of 5.7 million or a loss $0.06 per share of are the first quarter of 2007.

Now I'll review the operating earnings and non operating interest income in more detail. Cost of sales increased $13.1 million to $17.2 million in the first quarter 2008 from $4.1 million in the first quarter of 2007. The increase is primarily due to cost of sales for Aldurazyme which is now reflected on income statement along with the related revenues as result of restructuring the JV with Genzyme. Additionally increased sales of Naglazyme and the impact of first full quarter Kuvan sale contributed to the increase. Gross margins for Naglazyme were 80% during the first quarter 2008 compared to 78% during the first quarter of 2007 due to improved yields and the impact of foreign exchange. Kuvan gross margins during the quarter were 88% which primarily reflects an 11% royalty on the net products sales. Once the inventory that was previously expanded on R&D used up we expect U.S crude [ph] margins including the 11% growth to be in the low 80% range. Although [indiscernible] gross margins were 55% due to mix of royalty income and relatively low margin inventory transfers to Genzyme. Overtime we expect annual Aldurazyme growth margins to approach the mid 60% range. Research and development expenses decreased $500,000 to 17.6 million in the first quarter of 2008 from 18.2 million in the first quarter of 2007. This is attributed primarily due to decrease development costs for Cuban [ph] program which is offset by increased costs or early stage development programs and non cash stock based compensation expense.

We expect to increase our R&D spending of 2008 progresses to stand an early stage development programs support the peg top clinical studies and ongoing 6R-BH4 programs [indiscernible] and non cash dot compensation expense. Selling general and administrative expenses increased by $7.4 million to $23.7 million in the first quarter of 2008 from $16.3 million in the first 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. SG&A spending is expected to continue to increase in 2008 as compared to 2007 to the full year impact of sales and marketing expenses for Kuvan in the US merculazation [ph] of Naglazyme in Europe, Latin America and other parts of the world and non cash stock compensation expense.

Non operating interest income increased by $1.9 million to $5.6 million in Q1 FY'08 from $3.7 million in Q1 2007. This is primarily due to the additional cash on hand as a result of the April 2007 financing. During the remainder of 2008 we expect to earn less interest income on our cash balances as compared to 2007, primarily due to decline in interest rates.

From a cash perspective, we ended the first quarter with $574.8 million cash, cash equivalents and short term investments. With regard to 2008 guidance, Naglazyme net sales are now expected to be in the range of $115 million to $125 million from a previous range of $105 million to $116 million. As for Aldurazyme, Genzyme maintains expectations for total net sales for 2008 to be in the range of $135 million to $145 million. However based on the run rate in the first quarter we have adjusted our expectation for net revenue to bottom in to a range of $70 million to $ 80 million, up from the previous range of $68 million to $78 million. Kuvan net sales are now expected to be in the range of $45 million to $70 million revised from a range of $40 million to $70 million. As noted in the press release issued earlier today, interest income is expected to be in the range of $15 million to $18 million, result of reduced yield on investments due to declining market interest rates.

As for net income for 2008, we have raised the bottom end of our expectation for an updated range of $28 million to $40 million from a previous range of $20 million to $40 million. We're still assuming that the $30 million milestone for EU Kuvan approval will be heard in 2008.

The estimate of 2008 net incomes includes approximately $24 million to $27 million in non cash stock compensation expense. Non GAAP net income excluding the impact of non cash stock compensation is estimated to be in the range of $52 million to $67 million from a previous range of $47 million to $67 million. And now I would like to turn the call over to Steve, who will provide an update on the Kuvan launch.

Stephen Aselage - Senior Vice President, Global Commercial Development

Thanks Jeff. After four quarter into the Kuvan launch we're encouraged by what we see. As J.J. mentioned there is strong interest from patients and physicians in an addition to blood feed level reductions many patients have noted qualitative benefits such as better concentration, less depression and feeling better overall. There are also some accounts of patients being able to increase the amount of natural protein in their diets while keeping blood fee levels on under control.

Our current observed to average dose is still approximately 18 mgs/k per day. And average weight is approximately 48 kilograms. We do not have in our confirmation yet to assess compliance assuming 80% compliance yields an average price of approximately $70,000 per year before factoring in mandatory government discounts.

As of April 25 the total of 881 patients have been referred to BPPS for treatment initiation. Over 500 patients have had therapy initiated with commercial Kuvan. Since many of these patients have been on therapy for less than one month we can't say with certainty how many of those patients will stay on therapy long term.

At this time over 75% of responding EAP patients have been transitioned on to commercial therapy and we're diligently working with the others to establish insurance coverage. The average number of patients referred to BPPS fluctuate significantly from week to week that is average between 9 and 11 per working day each, four months since launch. At the beginning of the quarter this reflected mostly EAP patients transitioning to commercial therapy but now it is almost all new patients being referred for treatment. Overall time from BPPS referral to shipment of drug has recently averaged between two and three weeks. This is largely a function of insures requiring prior authorization and patients making more use of the financial assistance program offered by the National Organization of rare diseases. Over 100 of the approximately 130 PKU clinics have now referred patients for therapy and these referring clinics generally represent the larger clients which account for the majority of the PKU patient population. It is important to keep in mind that it does take time for clinics to schedule appointments and complete the necessary paperwork for reimbursement. Due to scheduling constraints larger clinics will take more time to cycle through their PKU patients.

It is also worth nothing that in Q2 we will roll out the PKU registering. All US PKU clinics have been invited to participate in the program. Please note that these Kuvan launch metrics are given to provide clarity at the beginning of the launch. We do not commit our offering this level of granularity going forward. Overall the response from peers has been encouraging. Today we have seen very few denials from peers mostly due to administrative areas which we have been able to reverse. We have seen significant improvements in processing timelines already and expect fair decisions in the overall administrative process to become more stream lined once the product had permanent placement in the familiarities and plans gain additional experience with Kuvan.

In summary we are encouraged by the level of enthusiasm among patients and physicians; the positive response from peers and the large pipeline of patients being processed through BPPS. We look forward to keeping you updated as the launch progresses and now I would like to turn the call over to Emil who will provide an update on our R&D pipeline.

Emil D. Kakkis - Chief Medical Officer

Thanks Steve, starting with [indiscernible] the first patients in Phase I trial will be dosed imminently

And we are hopeful they're positive clinical data showing sustained decrease in blood fee level in TKU patients. Mice will be replicated in humans. Big one study will set the safety and PKF [ph] injection will take effect 35 PKU patients. This series of up to 7 escalating dose cohorts of five patients each. Study is expected to conclude by the end of 2008.

The Phase I patients would later be offered continuation into a Phase II study that will evaluate the safety and efficacy of weekly injections for 8 weeks, all by dose optimization and extension period. Based on the FCA's additional regulatory requirement for initiating multi dose therapy, we now expect to initiate the phase II in the first quarter of 2009. The un- tapped power development strategy to drive our pipeline growth in the coming few years, currently we have a number of on-going pre-clinical program with potentially interesting drug candidates [ph], one if which is another life long story for which we are targeted by our own R&D in the second half of 2009. We help divide additional details in his program [indiscernible] R&D day in early June.

Regarding the DH4 cardiovascular program, we are performing several Phase II and exploratory studies, including a study in global arterial disease tickle cell disease and yield the function in coronary artery disease, Pulmonary arterial hypertension and it heals its function potential, patients with chronic disease and the effective buoyancy [ph] on DH4 pharmaceutical. Inspected DH1 response is getting for to these file AQ3-Q4 and for P80, YQ4 were early Q1 2009 the remainder of the studies will complete by Q4, 2008 up to mid 2009 depending on environment of some of the investigator initiated studies. The collected results will help us in determining future of the safe RBH4 cardiovascular program. In addition to the programs mentioned, we have separate early stage pre-clinical programs which should provide BioMarin additional drug candidates going forward along with any use late stage product we might like. We help provide additional detail on our pipeline at the R&D day in early June and look forward to seeing to keeping you updated on our progress. Now I would like to turn the call over to Jenny as for some comments regarding upcoming events.

Eugene Sheen - Senior Manager, Investor Relations

Thanks Emil. Before we open up the call for questions, I will like to know that we will be presenting at few investor conferences in the coming months. On May 1st will be presenting at the Morgan Stanley Global Healthcare Conference in Key Biscane [ph], Florida. On May 13th we'll be presenting at the Bear Group Stock Conference in Chicago. And on May 14th we'll be presenting at the Banc of America Healthcare Conference in Las Vegas. You can access these presentations live through our website at www.bmrn.com. In addition we are hosting an R&D day on June 5thin New York City. And with that we would now like to open up the call for questions, Katie.

Question And Answer

Operator

[Operator Instructions]. Your first question comes from the line of Chris Raymond from Robert Baird. Please proceed.

Christopher Raymond - Robert W. Baird

Thanks for taking my question. I just was wondering and I know it's very early in the launch with Kuvan but you know that 509 patients you've initiated therapy. Do you have any kind of read on any confirmed patients you dropped off therapy and this you could provide that number?

Unidentified Company Representative

Sure we've got a relatively small number that we know have dropped off I think the last number I saw was 26 or 29 that was in the high 20s but what we don't know is patients who have dropped off or will be dropping off because they haven't come due to for a refill yet. So please take that numbers, it's not meaningful in terms of trying to extrapolate a response rate.

Unidentified Analyst

Right, right okay. So when you guys talk about number of patient adds per day I know you are saying instead of fluctuate between 9 and 11 and again I understand that it is early in the launch here but have you though t about how the summer months might impact that number you know from perspective you could say summer months it slows down but may be another perspective would be that it sees more kids getting into their physicians and during the summer is that even a logical way of thinking or is it some other way we should be thinking about patient adds during the summer months.

Unidentified Company Representative

You know we have thought about it a fair amount because we have seen with Aldurazyme replacement product that certainly the July and the August months are tougher months for us to maintain the type of compliance we see through the rest of the year how that's going to play out in the Kuvan market I think we are just have to wait and see though. I think both scenarios that you laid out a positive scenario with particularly children not having a school and maybe have even more time for parents to gave them in you know that's s upside more patients being on vacation having their kids away that's potential downside. Emil is flashing me a note here and he is correct and one of the other things that happens during the summer is that there are PKU camps and that is the patients go into PKU camps some of the non treated patients may get exposed to treated patients and word of mouth may increase number of patients asking about therapy. But I think until we go through it summer and have an actual experience whatever we think is going to happen just what we think is going to happen and we are note it until it actually it does.

Unidentified Analyst

Okay and if I can ask just one final question on Aldurazyme, it looks like you had, if I am doing my math right here instead of eye balling with the royalty raters about 9 million so of the inventory transfer revenue, how should... that's a little higher then we thought for the quarter and I am just wondering this is... is this something that we should expect to trail off significantly in coming quarters?

Jeffrey H. Cooper - Vice President and Chief Financial Officer

Yes, this is Jeff Cooper I'll answer that. I think as we look at the remainder of 2008 or the cumulative remaining 9 month period we still expect that there will be the Cheng Tai munipals [ph] will continue to build resulting in some incremental transfer revenue over the remainder of the year. However there will be some quarterly fluctuations in he timing of shipments that could effect the overall revenue that was recognized in quarter-to-quarter, but we could potentially see a reduction of overall to revenue doing different quarter in 2008. It softens [ph] the third party by Genzyme exceeds transfer product by Bob Morine [ph] to future in time which would result in temporary reduction in Gen fan cator [ph] surely a significant portion of the trennew comel [ph] revenue was recognized from the first quarter by over the period of 9 months of the rest of the year we might see more coming through.

Christopher Raymond - Robert W. Baird

Okay, so.

Unidentified Company Representative

And the [indiscernible] you know at the thing what they dreamed of earlier during the call at the gross margin on distinguary [ph] transfer was lover then the gross margin of private resale so the impact on the bottom-line whether on productionally

Unidentified Company Representative

Yes, the bottom-line for the first quarter was about $2 million for the full year it could reach around 4 million.

Christopher Raymond - Robert W. Baird

Great, that's helpful, thanks.

Operator

Your next question comes from the line of Salveen Kochnover from Jeffries and Company, please proceed.

Salveen Kochnover - Jeffries and Company

Hi thank you for taking my question, JJ or Steve can you comment on the average response rate of patient on Kuvan?

Stephen Aselage - Senior Vice President, Global Commercial Development

I think where we have the best add on response rate is from the early access program for those of the patients that have been exposed to Kuvan for the longest and where we've got the best follow up. We know from that early access program at least that we had response rate slightly above 50%. We anticipate that adjourned the broader market is going to have a similar type of response rate but it is going to take a while for us to be able to confirm that.

Salveen Kochnover - Jeffries and Company

And then in terms of patients that basically require prior authorization or co pay assistance. What's the portion of patients that are enrolling into BPPS require... have fit into this criterion and how long does they usually take these patients to receive payer approval?

Stephen Aselage - Senior Vice President, Global Commercial Development

That's a good question and I think the whole primary authorization issue is one that... that makes tracking time from referral into the BPPS to actual shipment of drug there are very difficult one. You get three components of that time period. The processing time to BPPS process in time at the specialty pharmacy and the time the actual insurance company takes making their decision. Through those three we've been able to improve significantly since the last call but the insurance company is one that we have really no control over. I don't have a hard number on the percent of patients that have a prior authorization but it appears to be a significant number. When we look at the major plans in the U.S. and we have proactively covered the top 50 plans. It looks like at least 50% of those plans are requiring a prior authorization same with Medicaid programs; looks like somewhat over 50% of those programs are requiring a prior authorization. It varies from program to program but anywhere from two to six weeks would be the range; the time we take per patients to get their prior authorization cleared. As far as the patients' assistance program, I think it took a lot for the PKU community to really understand that, that was there for them and a useful support program for them, we saw very little utilization in the first month or two. Now that the program is better understood and we're seeing increasing numbers of patients contact in [indiscernible] and asking for financial support with co pays. At this point we have we know of over 100 patients would have done that. So that's a significant number of patients and the processing time to get a note application, in some cases it can be assured as a couple of days and other cases it can take several weeks. Does that answer your question?

Salveen Kochnover - Jeffries and Company

Yes thanks and then in terms of just based on our discussion with physicians, it seems like they have a certain number of PKU patients they're willing to see at a time and then they will roll them into the BPPS basically then screen them and then treat them and determine whether or not the responders, what does this mean for the launch rejected do you think we'll start to see an up tick in the number of patients physicians will see at a time or there will be a certain number that remains constant for each physician.

Unidentified Company Representative

I think physicians are going to move it, at their own pace. One of the things we've known from the pre launch period is that the PKU clinics have limited resources both financial and human and that they're very much attempting to do small batches of patients. Most, not all but most are trying to do small batches of patients just to manage the work load. So the larger clinics in particular clinic is a 150, 200, 250 patients very tuff for them to sort through how to get those patients through quickly. You add to that the fact that this is a new drug, been run the early access program are there any clinical trials tend to be more aggressive than programs that have not done exposed to the drug before and many of those people without a prior history want to treat a few patients go slow and see how it works get a good feel for the drug before they start bringing in larger numbers of patients. So I think we will continue to see relatively steady patient flow but we won't know that I can tell I think that but I can tell you I know that.

Salveen Kochnover - Jeffries and Company

Okay and so one last question is there a cut off the for the EAP patients to transition on to commercial therapy.

Stephen Aselage - Senior Vice President, Global Commercial Development

We are going to cut anybody off therapy completely as long as they are actively working with us to get insurance coverage. We have over 75% probably closer to 80% of those patients on commercial therapy right now, we have another roughly 7% or 8 % on the patients that have no insurance and have been transitioned to a negligent patient or compassion at used program. And there is a relatively small number of patients between 10% or 15% who have some type of an insurance issue that we are working through and trying to make sure that their coverage is in place before we put them on the commercial therapy.

Salveen Kochnover - Jeffries and Company

Great thank you.

Operator

The next question comes from the line of Phil Nadeau from Cowen and Company. Please proceed.

Phil Nadeau - Cowen and Company

Good afternoon and thanks for taking my questions. My first is actually on the Kuvan sales number of $5.8 million can you tell just that there was any inventory change incorporated in that number did anyone build inventory that may have inflated that number.

Unidentified Company Representative

Not to the best of our knowledge and we are working with the relatively small numbers of specialty pharmacies. From as close as we can tell the inventory that went into those pharmacies and demand numbers have always coming out were pretty close match

Phil Nadeau - Cowen and Company

Okay. So that brings up my second question. You folks have been good about updating the street on the number of patients on commercial therapy. Through Q1 and based on the numbers that you put out there, $5.8 million number does seem quite high at least you can see one of two reasons for that if there was no inventory change. One is the average price preparation always to me seems to be some more higher than [indiscernible] preparation period that we are including were too there a number of patients who came on after your most recent update, and those patients got a four marks script in that [indiscernible] in the year end. The revenue number was high than we had calculated. Can you differentiate between those two possibilities for us Do you think the average patient number is or average price probation is higher than what you have quoted or was that just a number of [indiscernible] at the end of March.

Emil D. Kakkis - Chief Medical Officer

Price preparation issue is that, when we apply... we start at the gross price that we apply the 80% compliance, I think [ph] that's going [indiscernible] dollars based on the three [indiscernible] equity. But usually that, of course in the first two three months, [indiscernible] they just got dark, in the first quarter, you have to use a gross based quarterly price instead of a network. But that doesn't mean it won't go down over time. And this shows may be that'll help you [indiscernible] you know [indiscernible]. There's no compliance factor in the first quarter [ph] I mean, that's hundred percent of the script is going out. We also had a small number of patients, a lot of them to get 90 days supply rest [ph] or a 30 days supply with their first script too and that made the numbers throw off a little bit for you.

Phil Nadeau - Cowen and Company

Okay, that's very helpful. Then to follow up on the previous question. You mentioned that you expected to see relatively constant patient flow and I believe you are talking on a per physician level. In the past and I think on the Q1 call you mentioned that you saw the 10 patients per day that was approximately being recommended to BPPS everyday could go up overtime as the number of centers prescribed in Kuvan increased. What's your current thinking on the nationwide trends of 10 patient per day? Is that going to be the number for the foreseeable future or do you think as the remaining PKU centers come online, that 10 patients per day could increase?

Jean-Jacques Bienaimé - Chief Executive Officer

I mean... a bit of that... again on that; let's see if you can continue. At least [ph] anyone gets right now as to what's going to happen to that number. We are about that level right now; we talked already all year about the summer, that this is our first year, we don't know what's going to happen this summer if also anyone gets there instead of a record [ph] down there. Same factors and there are other factors that could pick the number down. That's why we are... not to [indiscernible] chasing our guidance, because it's very difficult to know in the city [ph] of motion what's going to happen quarter by quarter. So in some respects there are some factors pushing the number upwards as more centers have been coming on to describing Kuvan. But also eventually as we tap here, we get... we will penetrate the DEO [ph] population more and more, eventually the numbers that ought to go down. I mean we don't know what else I am going to talk. So I am worried that way.

Jeffrey H. Cooper - Vice President and Chief Financial Officer

Yeah, I mean, I would echo what JJ said. We don't know for sure. We're working very hard actually to increase that number. We ran a major educational symposia at the GMDI meeting, that's a Genetic Metabolic Dietitians program at Atlanta last week. We think that generated some additional enthusiasm. We hope that translates into patient referrals. We're rolling out our PKU registry, will have an investigator meeting for that in June again we've gotten at least early impressions that there is a lot of enthusiasm related to them. We hope it increases the number of referrals. We are certainly working hard on education and communication and we think the more information about Kuvan is out there, the more patients have experience and tell their stories to other patients, the more enthusiasm we are going to generate.

As JJ said in his initial opening remarks, the product has performed exclusively. The safety has been great, the efficacy has been better than people expected and centers, the more experience they get with it, the happier they seem to be with it. So we hope to increase but we've... it's very, very difficult to tell you exactly what's going to happen, we just don't know.

Phil Nadeau - Cowen and Company

Okay that's enough. Two questions for Jeff, if I may, and other parts of the P&L. Jeff you mentioned that the transfer pay... the transfer revenue you are getting from Genzyme today will be deducted from future royalties on Aldurazyme and I want to explore that a little bit more; does that mean that the 15 million to 18 million that you have got it for on transfer payments this year would need to deduct from our future Aldurazyme royalty calculations or in the future is there going to be a balance between transfer payments from Genzyme and the deductions so they are doing that and how it will equate to what [indiscernible] is?

Jeffrey H. Cooper - Vice President and Chief Financial Officer

Right. When you say in the future, do you mean beyond 2008?

Phil Nadeau - Cowen and Company

Yeah, beyond 2008.

Jeffrey H. Cooper - Vice President and Chief Financial Officer

So to the extent that inventory levels at Genzyme remain relatively constant beyond 2008, then basically the impact of the... the net incremental transfer revenue would be nil, so almost all revenue base will be royalty revenue. To the extend that their inventories grow over time there would continue to be some small amount of net incremental transfer revenue to the extent that inventory levels reduce overtime for some reasons, you would actually see a reduction against royalty. So it's only one of the inventory level go down that you would see this reduction, you could see that on a quarter-to-quarter basis. If any of that was rolling [ph] for the rest of this year, we still expecting to see continue increase in net incremental revenue related to the inventory build that's only not of the level that we thought in Q1.

Phil Nadeau - Cowen and Company

Okay. And is the 15 million to 18 million in inventory increase that you mention in your guidance on the last call still valid?

Jeffrey H. Cooper - Vice President and Chief Financial Officer

I would say that probably the range is pried a little bit wider, maybe more like 13 million to 18 million, could be a little bit less.

Phil Nadeau - Cowen and Company

13 million to 18 million, okay. And then last question's on R&D and SG&A. It seems like the run rate in this quarter for both those lines was quite a bit below what we are projecting for the year. And you mentioned that both were going to grow through the year. Can you give us some sense of what the R&D and SG&A run-rate is going to be for 2008?

Jeffrey H. Cooper - Vice President and Chief Financial Officer

Well for the R&D, I mean clearly the spend that we saw in the first quarter was relatively low. Was quite a bit lower than the fourth quarter. We do expect that to grow sizably with the beginning of the Kuvan clinical trails increase spending for the 6-hour stage 4 program as well as ramp up in our early stage development programs. So we will see definitely a sizeable ramp-up in R&D expense as we go through the rest of the year. For SG&A, the spending there could fluctuate up or down from quarter-to-quarter. So I wouldn't say in a facility that you would see the same level ramp up for SG&A so you can see some fluctuation from quarter-to-quarter.

Phil Nadeau - Cowen and Company

That's very helpful, thank you.

Operator

Your next question comes from the line of Joseph Swartz from Leerink Swann. Please proceed.

Joseph Swartz - Leerink Swann

Hi, thanks for taking my question. I was wondering if you could update us on your plans to introduce pill size Kuvan to use the PEG-PAL [ph]? Thanks.

Jeffrey H. Cooper - Vice President and Chief Financial Officer

Yes, we have developed a 400 milligram tablet that appears to be the stable and we are working out a subtle plan to test it for buy bill [indiscernible] with the current product ways here. And based on that especially the regulatory derivable showing that we can file that. It would not be available this year. It would be something... potentially sometime next year if we were able to finish this development here.

Jean-Jacques Bienaimé - Chief Executive Officer

So we are working on these standard drugs to make sure that we might turn up on term compliance. However I would see a disarmament [ph] and I will let Steve give some more details. The number of tablet has not... appear, doesn't appear to be an issue so far because fissures can dissolve them, I mean opportunities [ph] are wider or core issues, everybody can swallow, some of them will build...just on the label for convenience purposes and the fact there is no competition, the pill very materially has not been a major issue so far. But Steve you want to talk more on that?

Stephen Aselage - Senior Vice President, Global Commercial Development

No I am not sure what I can add to that. That has not been a... a compliant, it would be a nice thing to have a larger tablet but it is not a necessity at this point. I don't see it interfering with the launch of Trigatrin [ph].

Jean-Jacques Bienaimé - Chief Executive Officer

But we are developing it anyway also thinking about potential other indications where the feel burden end could become more of an issue. That's why we are developing it. So it could be nice to have PKU although clearly not critical as far as you can tell so far.

Joseph Swartz - Leerink Swann

Okay, great. And in terms of PEG-PAL, is there anyway to model the immunogencity of the drug and the potential for there to be antibodies to be antibody and how do you think about this in terms of the need to maybe just overcome that with dose increases overtime or may be there could be some other issues with antibodies to an antibody like this. Is there anyway to model that in an assay or animals? Thanks.

Stephen Aselage - Senior Vice President, Global Commercial Development

We have done some studies using epitope mapping type approaches to look at the protein and to try to analyze it's potential measure at the... but the fundamental fact of the matter is that we cover the whole molecule with PEG and so the epitopes are all covered... and fair evenly covered and so we certainly have done our best to cover the protinations. The concern... the thing that could happen in the clinic is that the... you don't expect the antibodies to inhibit the environment, neutralize the... we expect to offer clearance from the body which might alter not so much the doze exactly but perhaps the frequency of administration would be a factor we have to consider.

So those are thing we could do. I mean we've done the models, the ESPQ models that I think you are currently conducting monkey studies. But I don't really think I want to take data for monkey to decide anything for certain human close stages place where you would figure out what our situation is like. There may be some patients that won't tolerate, but we believe that the PEGylation is through-ing up on the model we would expect there to be a substantial [indiscernible] that will have very good therapeutic effect. So those are the things that we won't know for certain until we get into Phase 2 study.

Joseph Swartz - Leerink Swann

Thank you.

Operator

Your next question comes from the line of Lucy Lu from Citi. Please proceed.

Lucy Lu - Citigroup

Hey, thank you. Actually I wanted to follow up on the PEG-PAL pal program. You said that you actually required something else to be done if we can use the phase 2 and therefore first quarter '09. Can you just please clarify what additional clinical work you have do before you receive phase 2?

Stephen Aselage - Senior Vice President, Global Commercial Development

We originally had thought that like Q3/Q4 we could, in an over-lapping study we could start the phase 2, that's what we had originally discussed at the agency. But for no particular reason, for no date reason, they just... because of ICH guidelines and they are standing now as they would... they are making base crop [ph] to long-guard monkey studies regardless whether orphan drugs or not. And so we are ending up having to do... extending our somewhere toxicology studies before we could file and enable the initiation of the phase 2. So that's the delay... doesn't delay the overall program, it just... it just won't allow us to overlap phase I or phase II which is what our strategy has been to try to make... to go as quickly as we can in the program.

So, it just pushes back the beginning of phase II, but the phase II could start more simply than not necessarily [indiscernible].

Jean-Jacques Bienaimé - Chief Executive Officer

When we see this decision that is... into a specific percentile [ph] and apparently the FDA launched the third quality, potential clinic... clinical studies based on [indiscernible] this amount of pre-clinical toxicology.

Lucy Lu - Citigroup

Right. So your current expectations for dose EA still once a week to continue conjunction, is that right?

Jean-Jacques Bienaimé - Chief Executive Officer

Yes, some chance is there.

Lucy Lu - Citigroup

All right, thank you.

Operator

Our last question comes from the line of Liana Moussatos from Pacific Growth Equity. Please proceed.

Liana Moussatos - Pacific Growth Equity

How many clinics are referring PKU patients for Kuvan, and can you talk again about the royalties ex-US. You mentioned Japan and Merck, Serrano, single digit, double digit royalties and can you repeat the gross margin in Q1 for Aldurazyme?

Stephen Aselage - Senior Vice President, Global Commercial Development

Let me start with the easy one. We have got 103 different PKU clinics referred to Kuvan patients and QPS [ph] drug therapy initiated. And I will ask Jeff to take the next...

Jeffrey H. Cooper - Vice President and Chief Financial Officer

So I think on the gross margins for Aldurazyme, we reported 55% in the first quarter and again that was due to the significant impact of the incremental transfer revenue which had the lower margin. So the net margin overall including the royalty had been at 55%.

Jean-Jacques Bienaimé - Chief Executive Officer

This is the gross margin as of using the BioMarin revenue has been not --

Jeffrey H. Cooper - Vice President and Chief Financial Officer

That's right.

Jean-Jacques Bienaimé - Chief Executive Officer

This is not the overall gross margin for a product which is initially higher than that.

Jeffrey H. Cooper - Vice President and Chief Financial Officer

That's right. That's using BioMarin reported revenue of 24.1 million, half of our cost of goods sold. The other question with regard to the royalties, the royalties that we pay to our partners as it relates to Kuvan is 11% and that represents the majority of the cost of goods sold that we are seeing for Kuvan in the first quarter. I don't know if there's another part to your question.

Liana Moussatos - Pacific Growth Equity

No that's it, thank you.

Jeffrey H. Cooper - Vice President and Chief Financial Officer

Right.

Operator

Your next question comes from the line of Carol Werther from Summer Street Research. Please proceed.

Carol Werther - Summer Street Research

Thanks for taking my question. Can you just clarify a little bit of what... how large or small the Naglazyme opportunity is in Japan.

Stephen Aselage - Senior Vice President, Global Commercial Development

Naglazyme is a relatively small market in Japan. We had no sales in Q1 into Japan our first actual shipments were in Q2. We don't see it as a significant revenue opportunity but it is an important market. There is a handful of patients there who will go on to commercial therapy quickly and it is a country with several people who have a significant amount of influence within general MPS community and we are very happy to be able to be working with them and providing Naglazyme for their patients.

Carol Werther - Summer Street Research

Okay. And can you just describe the discounting of Kuvan, I guess, probably for Medicaid.

Jeffrey H. Cooper - Vice President and Chief Financial Officer

Sure, it's a federal mandate at any pharmaceutical product. It is paid for by the government, it is subject to an automatic leave, it's a 15% discount, 14.9 I believe. We actually have had a relatively smaller number of medicate patients and we expect it in our pair surveys pre-launch, we anticipate roughly 30% invitations with new Medicaid. At this point we are actually averaging under 15% medicate patients. So are seeing a little bit less on the Medicaid side than we expected. That may go up over the rest of the year but at least at the moment it is pretty low.

Carol Werther - Summer Street Research

Okay. And have any of the PKU clinics have... they have been able to add days to screen more patients?

Jeffrey H. Cooper - Vice President and Chief Financial Officer

When you say add days to screen more, have they setup extra clinic days?

Carol Werther - Summer Street Research

Yeah.

Jeffrey H. Cooper - Vice President and Chief Financial Officer

We've had a few centers do that. But it's really tough. It's been interesting to sort through some of those things. But a lot of them can't get spaced... those shared clinic space with other departments and unless they can get another department willing to give up some time, it's not often just logistically feasible.

Carol Werther - Summer Street Research

Okay. And do you have an idea of how long patients are staying Kuvan before doctors decide or the patients decide the benefit isn't enough?

Jeffrey H. Cooper - Vice President and Chief Financial Officer

It's been variable but I think, probably 1 to 2 weeks is the shortest period and we have a number of... probably the majority take that full 30-day first script, and follow the patient out results 30 days before making a decision. It's pretty rare that somebody would need more than 30 days to make a good decision as to whether or not the patient was responder.

Carol Werther - Summer Street Research

Okay, great, and my last question is how many shares do you have outstanding now?

Jeffrey H. Cooper - Vice President and Chief Financial Officer

The total number of shares that we have outstanding as of the first quarter is 98.5 million. For purposes of our net income calculation it was 97.6 which is the average shares outstanding during the quarter.

Carol Werther - Summer Street Research

Okay, thank you.

Operator

[Operator Instructions] Your next question comes from the line of Andrew Vaino of Roth Capital. Please proceed.

Andrew Vaino - Roth Capital

Thanks for taking my question. Just quick question. How many people have been on the drug for at least one month, for Kuvan that is?

Jeffrey H. Cooper - Vice President and Chief Financial Officer

How many people have been on for at least one month?

Andrew Vaino - Roth Capital

Yeah.

Jeffrey H. Cooper - Vice President and Chief Financial Officer

Roughly 400, but I would have to, that's a ballpark.

Andrew Vaino - Roth Capital

Okay, do you have a rough guess of how many of those have a decline in Phe levels of at least 30%.

Jeffrey H. Cooper - Vice President and Chief Financial Officer

I do not. That is not data we can track.

Andrew Vaino - Roth Capital

Okay, and do you have a rough idea as to what the average baseline Phe level was.

Jeffrey H. Cooper - Vice President and Chief Financial Officer

No, that is also data we do not see.

Andrew Vaino - Roth Capital

Okay, thank you.

Jeffrey H. Cooper - Vice President and Chief Financial Officer

Sure.

Operator

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

Vernon Bernardino - Rodman & Renshaw

Hi guys thanks for taking my question and congrats on the robust quarter. Just wondering if could provide some additional insight on Kuvan regarding the percent capture of lost or older patients such as those that are greater than 20 years old. And also do you see greater than expected compliance in the 16 to 20 year old patients. Then last question, of the 103 clinics just wondering what number represent that... how many patients today... new patients today represent the total population, thanks?

Jeffrey H. Cooper - Vice President and Chief Financial Officer

May be an easy way to take a look at is we have 19 of the largest 20 in the country that have referred patients, and that's top 20 represents majority of the PKU patients in the country. So you know it's a relatively percentage of PKU patients that are being seen in a center that has not referred anyone yet. And I am sorry what was... could you repeat your previous questions.

Vernon Bernardino - Rodman & Renshaw

Sure. Just wondering if you could provide insight on the percent capture of loss or older patients such as that is those who are greater than 20 years old? And then just wondering if you are seeing compliance... you are seeing greater than expected compliance in the 15 to 20 year old patients.

Unidentified Company Representative

You know it's too early to comment on the compliance. As far as the capture of patients over the age of 20, I think it's pretty early on that too. Most centers have prioritized their younger patients to bring in. Our average patients age right now is 16.2 years old. We do have a very large range with the youngest patients under 6 months and the oldest patient 56 years old was the last spread I saw. But by and large it is skewed towards the younger patients at this time.

Vernon Bernardino - Rodman & Renshaw

Okay, great. Thanks for your insight, thanks.

Unidentified Company Representative

Sure.

Operator

Your next question comes from the line Tom Mcgahren from Merrill Lynch. Please proceed.

Tom Mcgahren - Merrill Lynch

Hi thanks. Just want a follow up on that question you are talking about the age range for Kuvan. I believe in your last call you talked about percentages over certain ages and under certain ages, would you have those percentages for this quarter?

Unidentified Company Representative

You know I don't.

Tom Mcgahren - Merrill Lynch

Last time you said, let's see 20% over age 31... 21% over 19.

Unidentified Company Representative

Yeah we have broken out in more detail last time and I do not have that breakout available to me right now.

Tom Mcgahren - Merrill Lynch

Okay, and then just second Naglazyme, can you break out the sales as far as percent in the U.S., Europe and rest of the world?

Unidentified Company Representative

We can't. [Indiscernible].

Unidentified Company Representative

Yeah, so majority of our sales, about 55%, 53%, 55%, were EU sales, about 27% international and 18% U.S.

Tom Mcgahren - Merrill Lynch

80% U.S., okay and thanks a lot.

Unidentified Company Representative

It might be worth adding that the international component has been clearly the most rapidly growing piece of our business and we think that it is going to continue to generate proportionally higher and higher percentages of our overall Naglazyme revenue in the future.

Tom Mcgahren - Merrill Lynch

Thanks a lot.

Operator

Your next question comes from the line Chris Raymond from Robert Baird. Please proceed.

Chris Raymond - Robert Baird

Thanks for letting me... it's a follow-up question. I'm just curious when you were answering some previous questions you mentioned that you had some payers who are authorizing as much as three months of therapy. Can you maybe characterize how many patients is that measurable, is there some larger number that we should think about it?

Unidentified Company Representative

I think it's a relatively small number at this point. Generally the first scrip is almost always for 30 days after patients been shown to be a responder the physicians made it clear that the patents going to stay on long term therapy, it has been possible for a relatively small number of patients to get 90 days. I can't give you what percentage it is, but I'm sure it would be a single-digit percentage of the overall number.

Chris Raymond - Robert Baird

Okay, so that's only after they have deemed responders, correct?

Unidentified Company Representative

Right it wouldn't make much sense for 90 days supply during the BH4 testing phase.

Chris Raymond - Robert Baird

Alright, and then not to focus on the negatives, but since you kind of brought it up you mentioned that 19 of the top 20 PKU treating centers are referring patients. Can you maybe describe without getting into too much specifics what the deal is with that one center.

Unidentified Company Representative

That one center has not yet found a patient, that they don't believe diet is working perfectly out. But I believe as they get some additional time they will probably find a few of those patients.

Chris Raymond - Robert Baird

Great, thank you.

Operator

At this time I'm showing you have no further questions. I would like to now turn the call back over to management for closing remark.

Thank you. In summary we are off to a very good start in 2008 with a strong sales for Naglazyme, Aldurazyme and a successful quarter for Kuvan. And that's driving profitability in the first quarter. We are encouraged by the first Q for the Kuvan launch and remain dedicated to the successful execution of this program. In addition to Kuvan we will also continue to focus on the geographic expansion of Naglazyme and the investment of R&D pipeline, including the effect of our program which we've talked about and a number of technical programs and possible in-licensing or acquisition opportunities.

We are currently focused on pursuing later stage opportunities to augment our clinical stage pipeline and ensure the continuation of double-digit revenue growth in the coming years. We look forward to keeping you up-to-date on our progress, and we thank you for your continued support. Thank you for joining us on the call today. Good bye.

Operator

Ladies and gentlemen thank you for your participation in today's conference. This concludes the conference call and you may now disconnect, and have a wonderful day.

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Source: BioMarin Pharmaceutical, Inc. Q1 2008 Earnings Call Transcript
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