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BioMarin Pharmaceutical, Inc. (NASDAQ:BMRN)

Q2 2012 Earnings Call

August 1, 2012 05:00 pm ET

Executives

J. J. Bienaime – Chief Executive Officer

Dan Spiegelman – Executive Vice President & Chief Financial Officer

Hank Fuchs – Executive Vice President & Chief Medical Officer

Steve Aselage – Executive Vice President & Chief Business Officer

Eugenia Shen – Investor Relations

Analysts

Mike Yee – RBC Capital Markets

Salveen Richter – Canaccord Genuity

Yaron Werber – Citi

Chris Raymond – Robert W. Baird

Matt Lowe – JP Morgan

Joseph Schwartz – Leerink Swann

Phil Nadeau – Cowen & Co.

Alethia Young – Deutsche Bank

Tim Lugo – William Blair & Company

Ian Somaiya – Piper Jaffray

Matthew Harrison – UBS

Liana Moussatos – Wedbush Morgan

Kim Lee – ThinkEquity

Brian Abrams – Wells Fargo Securities

Stephen Willey – Stifel Nicolaus

Operator

Good day, ladies and gentlemen, and welcome to the Q2 2012 BioMarin Conference Call. My name is Chanel and I will be your operator for today. (Operator instructions.) Just as a reminder, today’s call is being recorded. I would now like to turn the call over to Ms. Eugenia Shen, Investor Relations. Please proceed.

Eugenia Shen

Thank you. On the call today is J.J. Bienaime, BioMarin’s CEO; Dan Spiegelman, CFO; Hank Fuchs, Chief Medical Officer; and Steve Aselage, Chief Business Officer.

This non-confidential presentation contains forward-looking statements about the business prospects of BioMarin Pharmaceuticals 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 in its 10(q), 10(k) and 8(k) report. And now I’d like to turn the call over to J.J., BioMarin’s CEO

J.J. Bienaime

Thank you, Eugenia, and good afternoon and thank you for joining us on today’s call. I have a few introductory comments before we welcome the newest member of our senior management team to the core of our call – Chief Financial Officer Dan Spiegelman who will review the financials for Q2 2012. Steve will then provide more detail on our commercial portfolio and Hank will provide an update on our R&D program before we open the call for questions.

We’re very pleased with the progress we’ve made today in both our commercial as well as our clinical programs. Starting with our commercial portfolio we generated almost $425 million in quarterly revenues for BioMarin-marketed products, and this is after a very strong Q1driven by continued growth from Naglazyme and Kuvan. Our core business is strong and continues to grow and support the majority of the development costs of our existing R&D pipeline.

Our cash balance was $524.6 million at the end of Q2 as compared to $288 million at the end of Q1 2012. At the end of May we raised $235 million of net proceeds from a public offering of common stock. The main purpose of this financing was to strengthen our balance sheet after spending $130 million in that year on a new manufacturing facility in Ireland and also for the repurchase of [Naglazyme 1T2]. We also wanted to raise money at an opportunistic time especially considering the uncertainty of the global markets.

As we enter the second half of the year we are nearing several significant clinical inflection points including the Phase III trials for GALNS, the Phase II trials for PEG-PAL, the Phase I/II trials for BMN-673 – our PARP inhibitors for solid tumors – and the Phase I trial in [healthy enroll] tiers for BMN-1 inhibitor or Achondroplasia; and also the Phase I/II trial for BMN-701 for Pompe Disease now anticipated in Q1 of next year.

Positive results for one or more of these patient-based trials could be transformative for the company. In particular, GALNS has the ability to quickly bring BioMarin to the next phase of maturity. There is an estimated worldwide population of approximately 3000 patients or 3x the MPS VI market size and all of which are theoretically eligible for treatment. And I’m happy to report that over 1200 patients have already been identified which is more than the entire MPS VI market served by Naglazyme, and combined with our exceeding worldwide commercial infrastructure that is highly leverage-able, that adds significant revenues and contributes substantially to our bottom line.

We continue to have confidence in the success of this program due to the clinical benefits seen in the Phase II extension study which Hank will elaborate on a little bit later, and the robust design of the Phase III trial. The Phase III trials include the enrollment of 176 patients. Selection criteria are baseline [walk] distance less than 325 meters which is [serious] to the design of the Naglazyme and Aldurazyme clinical trials; and no patients with planned surgical procedures during the 24-week duration of the trial. We’re also seeking the mean of two (inaudible) measurements at each time point which we expect to reduce variability in the primary endpoint based on our experience with Aldurazyme and Naglazyme.

Importantly we have two treatment arms in the study and can achieve statistical significance from AP value of 0.025 in either one of the treatment arms or 0.05 in each of the two treatment arms combined. We are further encouraged by the tremendous amount of support and encouragement from our patients and physicians, the [NTS IV Committee] and by the continuous patient benefit seen in the Phase II extension study including improvement in growth (inaudible).

Of course GALNS is just one of the significant programs we’re developing. In PEG-PAG we are [ramping up] the Phase II program and we are very encouraged by the progress we’ve made. PEG-PAL is an important enzyme substitution therapy that can theoretically treat the entire spectrum of PKU patients including the most severe patients who most likely do not respond to Kuvan today. Patients with (inaudible) levels of dosing have responded well and almost all of them have elected to remain on [pair].

We have had a positive preliminary discussion with the FDA regarding our potential Phase III and have agreed upon Phe lowering at the primary endpoint and [effectively with the success] we can continue to leverage our commercial infrastructures from Kuvan. Our timelines for two of our most advanced programs – GALNS and PEG-PAL – both remain on track. We look forward to sharing PEG-PAL results with you during Q3 and GALNS results in Q4. We’re also making good progress with BMN-701 for Pompe, BMS-673 our PARP inhibitor for genetically [identified] cancer; BMN-111 for Achondroplasia and BMN-190 for Batten Disease.

Hank will go into more details on each of these but I wanted to talk to you about our latest (inaudible) development program – BMN-190 for Batten Disease. Our recent meetings with regulatory authorities have been positive or very positive and indicate that due to the rare, serious and quickly progressing nature of the disease there may be a very abbreviated clinical and regulatory round two. We remain excited about our investment pipeline and the multiple (inaudible) to generate significant value for the company. We are focused on successfully and expeditiously developing our program which has the opportunity to substantially grow both the top and bottom line.

Looking out beyond 012 we believe we are well positioned for long-term growth. We have increasing revenue from our four commercial products that have no visibly competition in the short term and we are funding the majority of our R&D expenses [effectively] with revenues. We have a full pipeline, so many [factoring] capabilities, and basically $1.5 billion worth of protein manufacturing capabilities and a global commercial infrastructure to support future product launches.

GALNS if successful is highly leverage-able and will help drive the company to profitability. Now I would like to turn the call over to Dan Spiegelman who will review the financial results for Q2 of this year.

Dan Spiegelman

Thanks, J.J. I will start by reviewing product revenues for Q2 2012 and then follow with a more in-depth look at our operating expenses and financial results. Total net product revenue was $123 million for Q2 2012, a 12.2% increase over total net product revenue of $109.6 million for Q2 2011. For our lead product, Naglazyme, net product revenue was $62.9 million for Q2 2012, an increase of 4.3% as compared to $60.3 million in Q2 2011.

Changes in foreign currency rates net of hedges had a negative $1 million impact in Q2 2012. We are encouraged by a 90% growth in revenue for the first six months as compared to the same period last year, as well as continued steady growth in the number of patients in therapy and geographic expansion into new regions such as Russia and Asia. Steve will expand on this later in the talk.

Net sales of Aldurazyme by Genzyme were $45.8 million for Q2 2012, an increase compared to net sales of $44.5 million for Q2 2011. Net product revenue to BioMarin related to Aldurazyme was $21.8 million, an increase of 26% compared to net product revenue to BioMarin of $17.3 million for Q2 2011. Net product transfer revenue had a positive $3.4 million impact on net Aldurazyme revenues to BioMarin in Q2 2012 and is expected to be positive in the second half of 2012 as well.

Net product revenue for Kuvan of $34.7 million for Q2 2012 increased 20.5% as compared to $28.8 million in Q2 2011. And finally, net product revenue for Firdapse was $3.6 million in this quarter for 2012 as compared to $3.2 million in the same quarter for 2011. Now I’ll review gross margins, operating expenses and other items in more detail. For the three months ended June 30, 2012, gross margins for Naglazyme were 85%, for Aldurazyme 51%, Kuvan was 86% and Firdapse was 80%.

Research and development expenses increased by $24.9 million to $77.8 million in Q2 2012. The largest component of the increase in the quarter was related to GALNS which totaled $11.8 million of the increase and was primarily driven by clinical and manufacturing activities including expanded enrollment for the ancillary study. We expect our GALNS manufacturing activities will be mostly complete by the end of this month, resulting in lower GALNS manufacturing expense in the second half of the year. This reduction in spend will be partially offset by increased costs associated with ongoing GALNS clinical trials.

Our other clinical trials also contributed to the increased R&D expense for this quarter including the Phase I/II trial for BMN-701, the Kuvan neurocognitive study and the Phase I/II trials for BMN-673. Prior R&D expenses also included pre-clinical development expenses for BMN-190. Selling, general and administrative expenses increased by $10.5 million to $51.5 million in Q2 2012. Major drivers for SG&A increase during Q2 are increased corporate costs associated with infrastructure to support our growing domestic and global expansion in 2012. The increase in SG&A also included $1.2 million related to Naglazyme sales and marketing expenses, and $1.2 million related to pre-commercial GALNS expenses.

Our GAAP net loss for Q2 2012 was $32 million or $0.27 per diluted share compared to a net loss of $5.1 million or $0.05 per diluted share for Q2 2011. Non-GAAP adjusted EBITDA which we believe represents the best measure of our operating results showed a loss of $7.3 million compared to a non-GAAP adjusted EBITDA gain of $13.9 million for Q2 2011. And finally from a cash perspective we ended the quarter with $524.6 million as compared to $288 million at the end of Q1 2012. As J. J. mentioned, during Q2 we raised $235 million of net proceeds from a public offering of common stock.

Turning now to 2012 guidance, we continue to expect total revenues in the range of $475 million to $510 million and are maintaining our revenue guidance for all of our products with the exception of Kuvan where we are increasing our revenue expectations slightly to a range of $130 million to $140 million from a previous range of $126 million to $136 million. As has been previously discussed on these calls, actual quarterly revenues can be heavily impacted by the timing of certain government Naglazyme orders and the recognition of product transfer sales of Aldurazyme, and consequently we encourage you to monitor annual sales as opposed to quarterly sales.

As for expense guidance, we continue to expect cost of sales in the range of 17% to 18% of total revenues and SG&A expense in the range of $195 million to $205 million. We now expect R&D expense to be in the range of $285 million to $295 million for the full year 2012 as we continue to invest heavily in our advancing pipeline programs. Though R&D expense in the first half of 2012 was $151.6 million, our R&D expenses in the second half of 2012 we expect to be in the range of $133.4 million to $143.4 million, a deceleration from the first half. In addition, it’s worth noting a portion of R&D expenses such as stock compensation are non-cash expenses and our cash expenditure guidance is only increasing by $10 million to our current estimate of $40 million to $50 million for the full year.

While we are increasing our expectations for spend we have increased confidence in our key programs and believe that frontend investments to support the development and potential future commercialization of these programs is worthwhile and prudent. So more detail on our R&D: the increased guidance for R&D relates primarily to increased cost estimates for GALNS and to a larger extent our other ongoing clinical programs. There are no new programs included in the numbers and we have not taken on any new R&D expenditures this year.

The increase in GALNS expense reflects patient- and trial-associated costs including patient travel to sites; getting drug into various countries including large, unexpected import Phes for clinical supplies; larger than expected patient enrollment for the ancillary studies. Based on our experience with Naglazyme we believe these ancillary studies will greatly improve discussions with payers worldwide and may speed acceptance and reimbursement of all patient types. In addition, some BMN-701 manufacturing costs were accelerated into this calendar year.

Increased R&D expenses also include some accounting and forecasting adjustments. For example, our increased stock price during the quarter results in greater stock comp expense for the year, most of which is reflected in R&D. In addition, our guidance has increased due in part to the fact that prior estimates had included assumptions that some clinical programs slow down and probability adjustments on the success of our ongoing programs would occur. However, we have continued to make great progress on all our programs and all the data we’ve received this year has resulted in a continued full speed ahead.

With reduced likelihood of potential setbacks or delays in this calendar year we have eliminated the probability adjustments and delay contingencies from our guidance. Continued program successes have resulted in increased R&D costs this year. And finally, please keep in mind that almost 20% of our proposed R&D spend is for clinical drug supply. If GALNS is approved a portion of the current manufacturing campaign in 2012, approximately $7 million that we’ve expensed, will support [named patients] and commercial sales.

For the bottom line, we expect to come very close to breaking even on an operating basis as measured by non-GAAP adjusted EBITDA, which will likely be in a plus or minus $5 million range – around breakeven. On a GAAP basis we expect a net loss in the range of $105 million to $115 million. We continue to fund most of our R&D through operations and commercial sales and as noted, we expect cash usage in the range of $40 million to $50 million. And we expect to end the year with $475 million to $485 million in cash. Now I would like to turn the call over to Steve who will provide an update on our commercial programs.

Steve Aselage

Thanks, Dan. Overall revenues from product sales in Q2 were $123 million. Naglazyme sales were driven by continued progress in geographic expansion and penetration of the existing markets. Newer regions such as Russia and its neighboring countries are starting to generate meaningful revenue, and we are still identifying new patients and seeing revenue growth in more established regions such as Latin America, Turkey, and the Middle East.

While government ordering patterns sometimes result in choppy revenue quarter-to-quarter, growth in the number of patients in therapy continues at a steady rate. As always, we advise you to look at annual revenues and guidance rather than quarter-to-quarter changes to gauge growth of our Naglazyme franchise.

Kuvan sales are showing an improvement with a 21% growth year-over-year. A number of factors have contributed to continued strong growth. Those factors include greater prescriber comfort that comes from positive experience as well as an increasingly experienced and effective commercial team supporting the product.

We have now completed enrollment of the 200 patients in the PKU-016 study which is designed to document the neurocognitive improvements seen with Kuvan. This study has increased awareness of the cognitive and psychological issues faced by PKU patients throughout the metabolic community which has been a positive outcome for the study already. We expect results in Q2 2013 and believe the outcomes of this study will be the key to further accelerating product adoption in the marketplace.

Patient mapping efforts for our Morquio program continue. Patient confidentiality guidelines vary by country so we are not always able to characterize specific patients. But when we have known patient numbers for centers where we don’t have access to details with those specific patients, we do have details for we are now over 1200 patients identified. The international NDS meeting was recently held in The Netherlands. That meeting is unique in that it is attended by both physicians and patients.

Presentations regarding MPS IVA emphasized the disease impacts beyond just bone – morbidity affecting cardiovascular and pulmonary function got particular emphasis – and this increased awareness of the overall impact of the affliction helps everyone’s understanding of how an enzyme replacement therapy to treat the disease can provide meaningful benefits. Patient organization in (inaudible) can reaffirm that the patient community is very eager to have GALNS available as quickly as possible. We continue our efforts in building knowledge and relationships in the area as Hank and his team move the product forward towards registration. To tell you more about that I will now turn the call over to Hank Fuchs.

Hank Fuchs

Thanks, Steve. As J. J. noted earlier the successful execution of our pipeline remains the top priority for the company as we look forward to several key clinical milestones later this year. Starting with the GALNS MPS IVA, the last patient in the Phase III trial is due to complete in Q3 and we are on track to report top line results in Q4 and to potentially file the first market authorization application in Q1 2013. GALNS is our absolute highest priority as a company and we have allotted every necessary resource to the timely analysis of data, release of results and the potential filing of market authorization applications.

As for the ancillary studies, between the pivotal Phase III study and the ancillary studies we will evaluate the entire spectrum of MPS IVA patients and the complete data package should help us achieve reimbursement worldwide. We conducted these types of studies for Naglazyme post-approval but we believe conducting these studies now will expedite the reimbursement process and maximize our launch potential. The trial for patients under five years of age and the cardio/pulmonary study are both enrolling, and the study for patients with limited ambulation is expected to start enrolling imminently.

We have conducted an initial analysis of longitudinal data from our registry called [MORCAT]. 84 patients whose baseline characteristics would have rendered them eligible for inclusion in Phase III have been evaluated nearly one and a half years after their first assessment. Endurance measures such as walking and stair climb declined approximately 5% per year. Similarly, anthropometric measures such as standing height, sitting height and knee height increased at less than 2% for year.

Importantly, these longitudinal anthropometric data confirm earlier observations on the impact of GALNS on growth in Morquio patients and was first reported on the basis of cross-sectional data. We’ve also evaluated data from the extension phase of the Phase I/II study which began in 2009. There are now new safety events in patients who were treated up to three years. Treatment with GALNS for up to three years generally sustains improvements in walking, stair climbing, and respiratory function. Taken together, these data from our natural history study further define the progressive nature of Morquio Syndrome and new data from our ongoing extension study suggests that GALNS can achieve and sustain improvements in clinically important domains of patient function.

Turning to PEG-PAL, we expect to announce results for the Phase II study in the current quarter. We are very encouraged that retention in the studies continues at a high rate, discontinuation due to adverse events remains at a low rate, and virtually all patients who are active in the study and who have reached therapeutic dosing have experienced Phe lowering to the target range of 600 micromoles per liter or lower. We have now enrolled an additional 15 patients in Part D of our Phase II program whose primary purpose is to characterize the tolerability of initiating therapy on a schedule faster than many used in Part A – approximately 26 weeks – and slower than that used in Part C – immediately.

Patients are now being allowed to administer the medication at home as opposed to requiring visits to the clinic or via a home health provider, and will be treated using fixed doses of PEG-PAL instead of dosing a mgs/kilo basis imminently. Additionally, dose escalation is now being determined on the basis of individual patient tolerability such that increases in frequency or dose will occur when there are no (inaudible) fewer worse toxicities.

As J. J. mentioned earlier we have had positive ongoing discussions with the FDA and have agreed on Phe lowering as the primary endpoint for the Phase III study. We look forward to updating you with results of the Phase II program and plans for a Phase II study later this quarter.

As for the Phase I/II trial for BMN-701 for the onset of Pompe Disease, we expect to complete enrollment of 15 patients in the 20 mgs/kilo cohort by early August and report results of the Phase II study in Q1 2013. While our original goal had been to complete enrollment by the end of June, this has been extended to enable the use of material manufactured at the commercial scale – 12,000 liters – not due to difficulty identifying patients. We are pleased to have 13 patients enrolled in the 20 mgs/kilo cohort as of today’s call and have two more scheduled. We are confident in having six months of data on 15 patients at the 20 mgs/kilo dose in Q1 of next year.

In the meantime we continue to monitor three patients who have been treated at 5 mgs/kilo, three patients treated at 10 mgs/kilo, and one patient treated at 20 mgs/kilo who have all completed 24 weeks of therapy. In these patients BMN-701 appears to reduce [urine-a] tetrasaccharides excretes which suggests clearance of the excess storage product that results from GAA deficiency. The majority of these first seven patients have experienced improvements in walk distance and in respiratory function, even at mostly sub-maximal doses.

The data obtained from 15 patients treated for 24 weeks at 20 mgs/kilo will allow us to compare the proportion of patients whose response to 701 was substantial as well as to evaluate the grouping response following treatment with 701 in comparison to treating them with the improved product Lumizyme.

Moving on to BMN-673 in the Phase I/II open label trial for advanced or recurrent tumor patients, patients have been enrolled in the 1100 microgram cohort which is 11x the dose where we first observed toxicity. We are still evaluating patients to determine the maximally tolerated dose which we believe will be at least 9x that of the dose at which we have first observed response.

We continue to have great success recruiting patients with genetically-defined mutations responsive to PARP. In fact, of 12 ovarian cancer patients with deleterious BRCA mutations treated with 900 micrograms per day or lower, our disease control rate is 11 out of 12 patients or 92% and our objective response rate is 8 out of 12 patients or 67%. We continue to recruit patients through the dose escalation phase and continue to expect to report top line results for at least some groups of patients with genetically-defined mutations in Q4 2012.

Based on data from our ongoing dose escalation of study which suggests that BMN-673 is the most compelling low-dose, single agent PARP inhibitor being investigated as we saw activity at two magnitudes lower than any other oral PARP inhibitor. We believe it is likely to end our Phase III trial in the second half of 2013. We are very encouraged by the tremendous amount of interest in the [support PARP] program from the scientific community. In the highly competitive landscape of PARP inhibitors BMN-673 has been singled out by many as the most promising in the field at this time.

As for BMN-111, the CNP for Achondroplasia, we initiated the Phase I trial in healthy volunteers and expect results in the current quarter. If all goes well we expect to start the Phase II study in patients next year.

Finally, we plan to file the IND for BMN-190 for Batten Disease in the first half of 2013. Recent meetings with regulatory authorities have been very encouraging to suggest a possible aggressive clinical and regulatory path to approval. Several authorities we have met with support advancement of the program into clinic early next year with no further requirements.

We have also engaged with key opinion leaders of the three centers who collectively care for over 100 patients and who are very interested in BMN-190. Our preliminary trial design is a dose escalation study with one year of safety and an extension phase. Due to the extremely serious and rapidly advancing nature of this disease, an important advance in this condition could be recognized within a year or so of getting a couple dozen patients treated on maximal dose. Although still early this program could advance quickly in the clinic.

We now have seven programs in the clinic, the most ever in the history of the company. Several key data readouts are expected shortly, most notable results of the Phase III pivotal study and the Phase II PEG-PAL study, both of which could be transformative for the company. In the coming months we will also develop a clear path for registration for GALNS and identify our next Phase III program.

Collectively our pipeline is advancing and creating sustainable value for long-term growth and we look forward to keeping you updated on our progress. And with that, Operator, we would now like to open up the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions.) Please submit one question. Our first question comes from the line of Mike Yee with RBC Capital Markets.

Mike Yee – RBC Capital Markets

Hi, thanks. That was a very strict rule on one question, so my one question is on 673. I think you said a 67% response rate which is impressive when I look at Phase I studies. So in your next study how fast can you look at a regulatory path to that? If you look at the [ELK] drugs they have very high response rates but very fast time to market. Can you run just an open label study, a couple hundred patients and file a response rate on that type of drug?

Hank Fuchs

Hi Mike, thanks for your one good question. This is Hank. It’s a little early to commit what the registration path is going to be but I do take note of recent precedents and examples involving single arm studies with [strong] activity as a primary endpoint for registration. And for certain of the genetically-defined tumors that we’re talking about, outcomes of current therapy are extremely poor; and therefore the opportunity to provide a solution or an opportunity in that way, a therapy for un-ID’d patients, I think has certainly caught our attention and I imagine it would catch the regulators’ attention as well. Right now it’s a little bit early to commit to a specific registration path.

Operator

Our next question comes from the line of Salveen Richter, Canaccord.

Salveen Richter – Canaccord Genuity

Thanks for taking my question. I just wanted to get some feedback. You’ve been having discussions with the FDA and the EMEA regarding the totality of the GALNS data package that you’re filing ahead of the filing, and so what has the feedback been from both bodies? Maybe just framing kind of what you presented to them and their response, and what they would want to see.

Hank Fuchs

Hi Salveen. I think the general take-homes there are we reminded them that the molecular path and physiology of Morquio Syndrome is exceedingly precisely defined, that GALNS is a pharmacological agent that replaces with nearly as identically as we can make it the natural missing human enzyme. They understand and appreciate that it goes where it’s supposed to go, that is into the lysosomal compartment of all tissues that are affected with the disease including bone tissues.

They have indicated in general an acceptance that the program that we are conducting is comprehensive; that is to say there are no stones that are left unturned or no obvious trials that we’ve omitted to do that we should do. They’ve seen our analysis plans; they’ve had an opportunity to provide input into our analysis plans. I think we have everything that we need to be able to conduct the un-blinding and interpret the data.

And I’d say a final key point of discussion that we’ve had was around being sure we understand to limit patients from interpreting a single primary endpoint and a disease setting that affects every cell in your body. And in particular what (inaudible) RAs are very present with is the idea that in these rare diseases that effectiveness can sometimes be interpreted entirely on the basis of changes in a single primary endpoint; but sometimes and more often than not it’s part of looking at the whole ticket and the whole package of data.

That’s why it was so important for them to review our plans for analysis and make sure that we weren’t missing anything that they would find as important or positive in their decision making. They’re quite familiar and satisfied with reviewing drugs, new biological agents in this space; and I’ll remind you that the rule as proved by the rare exception is that these products ultimately do get across the finish line with the support of data from the registration in the [A1] trial. So we’re very encouraged by our interactions with health authorities and I think we’ve got some good feedback from them about how to present the data when the data are available.

Operator

Our next question comes from Yaron Werber, Citi.

Yaron Werber – Citi

Hi, thanks for taking my question. So it’s also a question about GALNS, and give us a little bit of a sense… I mean the new information you just provided which is really useful is from your ongoing natural history study. You said at one year on average patients in cardio- and pulmonary-wise are showing a (-) 5%, essentially a deterioration. Is that also including six-minute walk, and can you give us what’s the baseline you typically see these patients? I’m trying to get a sense as to what’s the magnitude of deterioration so again we can kind of try to back into what kind of magnitude you need to show of benefit in the Phase III to actually hit your 20-meter [power ring] in the Phase III.

And if you don’t mind if I sneak in kind of a second extension: of the 1200 patients identified, what’s the ages in that cohort in GALNS? Thank you.

Hank Fuchs

Hi Yaron, it’s Hank. I’ll take Part A of your one single question, and I’ll turn Part B of your one single question over to-

Yaron Werber – Citi

I think there were five questions in there.

Hank Fuchs

I can only remember two of them. So the baseline value in the [MORCAT] is actually fairly… We previously reported the baseline value. It’s fairly similar to what we observed in the Phase I/II study, in the mid 200’s of meters walked at baseline. And so about 5% of that, the rough number is about 10 meters per year of decline – it’s actually a little bit lower than 10 meters of decline per year. Just to remind you that the Phase III study was designed, [powered] to detect a 40-meter difference between the groups, so that can be either minus 10 meters versus plus 30 meters, or it can be zero meters versus 40 meters – either way that gives you a 40-meter difference. And Steve, I don’t know if you want to answer Part B?

Steve Aselage

Yeah. I can’t give you details on ages. I know we have ranges from infants and one to two years old, then patients in their 30’s and there’s a few outliers that are actually over the age of 40. Most of the patients are teens and 20’s.

J. J. Bienaime

I’d like to further elaborate on Hank’s answer. The study is powered at 40 meters but we can show key value at as little as 24 meters, 25 meters difference.

Operator

Our next question comes from Chris Raymond, Robert W Baird.

Chris Raymond – Robert W. Baird

Thanks. I’m just sort of intrigued by your commentary on one of the reasons for the R&D guidance increase was the increase of the number of patients in your ancillary studies. Can you maybe give us a sense of what that population was maybe when you initiated them and then where the numbers are now; and how that really makes the total package more robust?

Hank Fuchs

The big swinging part of that is what we call the cardio/pulmonary study. And Steve mentioned in his prepared comments that at the International MPS Society Meeting there was an increased focus on the non-bone related aspects of Morquio Syndrome. This by the way is true for all the MPSes. I think it’s taken a number of years for the lens to move away from purely skeletal dysplasia to understand better the internal effects of the mucopolysaccharidosis.

At this year’s MPS meeting there was a lot of talk about cardio-respiratory impairment. When we finished enrollment in the pivotal trial there was an enormous amount of demand from patients and physicians to study more patients, number one; and number two, to get an even more detailed understanding of the cardio-pulmonary effects of GALNS for the reasons that Steve highlighted.

And so a study that we were planning on doing originally in the later part of the year became a study that for reasons of interest and demand of patients got moved up earlier in the year. Now that was the principle moving ancillary study that contributed to the change in the cost profile of the program, and again just to remind you we enrolled 176 patients in the randomized pivotal trial, not 162 patients. We did that not because we were worried about study power or anything like that; we did it because frankly there was just so much demand from clinical trial sites. And you can’t really stop a trial on a dime, precisely, with so many patients whose hopes and wishes are tied up in being able to get into the trial.

So for those couple of reasons we rearranged the schedule of trials and again, I think it’s a reflection of tremendous interest by the patients both in the outcome of the pivotal program but also in the cardio-pulmonary effects of enzyme replacement therapy in their disease.

Operator

Our next question comes from the line of Cory Kasimov, JP Morgan.

Matt Lowe – JP Morgan

Hi there, it’s actually Matt Lowe in for Cory. Just on the Phase III GALNS study, can you speak to the ongoing monitoring in the study and maybe update us on the variability in compliance in the study that you’ve seen so far?

Hank Fuchs

Yeah, hi Matt-for-Cory. Yeah, so I won’t give you anything specific except to reiterate because the trial is very much ongoing and we absolutely have to protect the integrity of the ongoing trial. And there’s actually internally quite a system to prevent any even accidental un-blinding of the clinical trial.

What I can tell you is we set up alert systems around adherence to the protocol which look at things like does every patient have every measure at every time point that they were supposed to have? Did patients get their drug on the time schedule they were supposed to get their drug? Did patients get the dug infusion over the time period that the protocol required? Did the patients get pre-medicated with the appropriate antihistamine-type medications or (inaudible) medications?

And suffice it to say that looking very carefully at all these parameters which pertain to adherence and variability no alarm bells have been rung. We’re working very closely with the study’s Steering Committee who looks at derivations of these data and we’re working very closely with the Data Monitoring Committee who look at derivations of these data and they also verify that there are no alarm bells or actions to be taken as a result of concerns around study conduct. So we’re very, very, very encouraged by the course and progress of the study and look forward to un-blinding later in the year.

Operator

Our next question comes from the line of Joseph Schwartz, Leerink Swann.

Joseph Schwartz – Leerink Swann

Hi, thank you. The data that you provided from you natural history study, was that controlled or did you control in any way for surgeries like you’re doing in the ongoing randomized placebo controlled double-blind study? And the studies that you’re doing for reimbursement discussions, do you have the sense that data from those ancillary studies is required to obtain the type of pricing that you are able to get for drugs like Naglazyme?

Hank Fuchs

Yeah, I’ll start with half of it and then Steve can take over the other half. The [A4] patients on whom I just reported, we didn’t exclude specifically surgical. I don’t know off the top of my head how many patients in that one year or one and a half years had surgeries during that interval so I can’t speak to that. The primary finding I’m reporting here is on the longitudinally progressive nature of Morquio Disease. We have seen this to be a progressive disease based on cohort studies but on actual longitudinal studies, and I think Steve, you might want to comment on the value of that incrementally.

Steve Aselage

Sure. The pricing isn’t dependent on the supportive studies. They’re certainly going to be helpful in terms of creating a value proposition but they’re independent. The real value, the greatest value at least of the supportive studies is to ensure that we can address the entire spectrum of Morquio patients and not just the subset of patients who would qualify for a Phase III trial.

In other words we’ve excluded patients based on walk distance, walking too far; we’ve excluded patients who were not able to get out of their wheelchairs and walk at all and excluded patients under the age of five. Those three supportive studies in total bring us into the situation where we can address all of the similar patient groups hopefully at launch, assuming we get that done by launch rather than piecemeal-ing different sections over a period of time.

Operator

And our next question comes from Phil Nadeau of Cowen & Co.

Phil Nadeau – Cowen & Co.

Yes, thanks for taking my question. It’s on the R&D guidance change. Dan, you mentioned several different factors that led to the change but it’s unclear to me which of those are most important. Can you give us maybe the top two reasons quantitatively why the guidance was changed and then similarly, I for one didn’t realize that the guidance you gave us before was risk-adjusted for the different programs. Where are the sensitivities in the current guidance and if you were to have to take this up in future quarters can you give us some sense of why that would be?

Dan Spiegelman

Sure. So the primary driver of the increase is increased clinical expenses in the GALNS program. That’s the number one driver, to fully represent costs both in the clinic and in the manufacturing expenses for the product. There’s a portion of the expenses that has had maybe the second biggest are the non-cash expenses around stock comp and the like; and in terms of our confidence in the R&D expenses for the remainder of the year we feel pretty good about it. There’s always some risk of some additional expenses in terms of closing out the study that could pop up but we feel pretty good about it.

Operator

Our next question comes from Robyn Karnauskas with Deutsche Bank.

Alethia Young – Deutsche Bank

Hey guys, thanks for taking my question – this is Alethia on behalf of Robin. I’m just wanting to ask about the PARP inhibitor, and can you help us think about other indications that may possibly beyond breasts might make sense? Just if there’s any color around some of the considerations around the opportunity would be great – thanks.

Hank Fuchs

Yeah, hi. So we’ve talked a lot about genetically defined tumors and we talk a lot about BRCA and there’s BRCA ovarian and BRCA breast. We’ve identified two initial targets that we want to go after but we haven’t named what the specific molecular biology and tumor is for competitive reasons. But tumors 3 and 4 on our list if you will, where BRCA ovarian is tumor 1 and BRCA breast is tumor 2, tumors 3 and 4 also have substantially enhanced susceptibility to PARP inhibitors.

The molecular basis of that enhanced susceptibility is not worked out as well as it has for BRCA mutations but it’s pretty well worked out; and both of those tumors you would consider to be relatively rare, relatively high unmet need and relatively opportune from the point of a facile development and registration pathway.

Operator

Our next question comes from Tim Lugo, William Blair.

Tim Lugo – William Blair & Company

Thanks for taking the question. I counted three [areas regarding the comfort] of the GALNS program so I’ll ask a 701 question. Can you just give me some more details on the quarter push for data? And now that you have some experience with the 10 mg dosing, if there were something to arise from the 20 mg/kg is the 10 mg enough to go forward with?

Hank Fuchs

So we’re comfortable about the safety of 10 mg/kg. We’re encouraged by the preliminary efficacy that we’ve seen at 5 mg/kg and 10 mg/kg put together but we really want to push toward 20 mg/kg. I might have missed the very first part of the push for the data for the quarter – I might have missed part of that question.

Tim Lugo – William Blair & Company

Just some detail as to why we’re seeing Q1 for 2013 and not at the R&D day.

Hank Fuchs

Got it. So that as I mentioned in my prepared comments had to do with wanting to use the full scale material for the expanded cohort. So we wanted as many patients as we could in the expanded cohort treated at 20 mg/kg to be treated with an identical material; not to have scale of manufacturers’ switch introduced into the complexity of interpreting those data. And that material came off the finishing line a little bit later than we thought it would which necessitated us, instead of completing enrollment in June we’ll complete enrollment of those patients in early August.

J. J. Bienaime

And for us to [present the data] we do want to have 24 weeks of follow-up so it’s comparable to the last studies from Genzyme. So we’ll see [completion running] in August. There’s no way we’ll have time to analyze and report 24 weeks of data in December.

Operator

Our next question comes from Ian Somaiya, Piper Jaffray.

Ian Somaiya – Piper Jaffray

Thanks. I just wanted to follow up on Phil’s question, and I actually wanted to follow up on the answer you gave to Phil’s question which was you’re comfortable with the R&D spending for the next couple of quarters. I was hoping to maybe move a bit further out, look at 2013, 2014; and maybe if you can speak to it from the standpoint of the right size of the organization. Do you feel you need to expand R&D to support development of the clinical candidates you have? And just supporting the clinical trials themselves, how should we think about the likely incremental costs for these programs? And are there trials that are wrapping up that we should also keep in mind in terms of potentially coming off the book?

Hank Fuchs

Yes, so Ian, I’d love to give you a crisp answer to it but the crispest answer is it depends on the clinical results of all the various different studies that we’re running in terms of what we’ll roll out in terms of expenses in terms of 2013 and 2014. From an infrastructure standpoint we’re in pretty good shape in terms of having the basic capabilities to run these various different studies and we can certainly scale the organization and leverage it to complete the work.

J. J. Bienaime

And again I want to [reassert] something for this year that Dan stated, that actually despite the increase in guidance which is mainly related to stuff we have already spent, the anticipated R&D spend in the second half of the year is anticipated to be lower than the first half of this year. So you see that doesn’t mean that next year will be lower than this year – we doubt it. But again I think to implement the current plan at least in the short term I agree with the sense that we have a pretty good infrastructure there; but the spend in ’13 and ’14 will indeed depend a lot on how many programs keep moving to the next phase. That’s why we don’t want to start giving guidance for ’13 at this time. We can only do that in Q1 of the year.

Operator

Our next question comes from Matthew Harrison, UBS.

Matthew Harrison – UBS

Hi, good afternoon. I thought I’d ask a 701 question. Maybe you can give us a little more detail about what you mean by consistent with other enzyme replacement therapies in terms of the safety profile. Have you seen any anaphylactic-type reactions?

Hank Fuchs

We’ve seen infusion-associated reactions that are rated in severity that’s similar to what we see with GALNS or Naglazyme. And the important thing about infusion-associated reactions to enzyme replacement therapies is that they tend to be transient, lifelong therapies. They cluster in frequency around the 12-week to 36-week time point, and as we’re seeing with GALNS for example, once the patients enter into that longer-term period really nothing new comes up. So we’re earlier in the course of 701’s development than we are for example with GALNS or Naglazyme but we’re seeing a relatively similar pattern; i.e., the nature of them, the frequency of them and the severity of them is relatively similar to that of our other enzyme products.

Operator

Our next question comes from Liana Mousssatos, Wedbush.

Liana Moussatos – Wedbush Morgan

Thank you for taking my question. My question is actually what’s the geographic breakdown of Q2 Naglazyme sales. But I just want to congratulate you on the consistent quarter-over-quarter growth for Kuvan and it’s been going on for a long time. So I’m sure that the impact from the neurocognitive outcome study is going to be huge. But my question is about Naglazyme.

Steve Aselage

Sure, thanks. So Naglazyme, the US sales were $8.4 million; EU sales were $22 million; and the rest of the international sales were $32.5 million.

Operator

Our next question comes from Kim Lee, ThinkEquity.

Kim Lee – ThinkEquity

Good afternoon, thanks for taking the question. From the input that you’ve gotten from the FDA how does the, and this relates to the GALNS program now – how does the FDA’s input in the analysis plan differ from yours?

Hank Fuchs

Well, first of all I’m not sure I’m going to go into very specific details about discussions of an ongoing nature between us and a health authority. And as with any scientific experiment there are always a couple of different ways of looking at things. I would characterize this as to say that the data themselves will ultimately settle any of those differences, and the important comments that I made were that it’s not as if new studies came up or new analyses are coming up.

It’s really more around in the event that the limitation for the six minute walk test in this disease are as six-minute walk test has been in other enzyme replacement therapies, how are we going to look at the data to come to a conclusion about the effectiveness of the drug? And there are a variety of different ways of doing that and one is as valid as another, and it gives us an opportunity to provide a pretty wide-angle lens on the results of our clinical trial. And as I said, ultimately at the end of the day it’s going to be the results of the trial that determine the next step.

Operator

Our next question comes from Brian Abrams, Wells Fargo Securities.

Brian Abrams – Wells Fargo Securities

Hi, thanks very much for taking my question and congratulations on all the pipeline progress. A question on 111: recognizing that you’re still awaiting the full Phase I data, I’m just wondering at this point what’s your level of comfort with the hemodynamic effect? Are you expecting that you’ll be able to move forward with doses analogous to those where you saw long bone improvements in animals? And then I saw that you started a longitudinal study in children with Achondroplasia – I’m just wondering where that potentially fits in with the program. Could that reduce the need for a placebo arm in future studies? Thanks.

Hank Fuchs

Well, the answer to your first question is a little bit hard to answer in the context of a pure healthy volunteer study because all that tells you is whether there were any side effects other than cardiovascular that got in the way. And we haven’t completed the analysis of the Phase I study so it’d be premature to give you the results of the Phase I study, which as I indicated in my prepared comments we expect to complete during this quarter. But I think the short version of it is, also as indicated in my prepared comments, that we continue to believe that we’ll be in a patient study in the first part of next year.

The natural history studies can be phenomenally useful as you see with GALNS – they were helpful for us to be able to design the eligibility for a Phase III trial, they were helpful to understand how to interpret impacts of the drug in some of the ancillary populations: those younger than five or those who are more advanced. So our expectation is that they’ll be similarly useful for the design of the Phase III clinical trial that supports registration for the Achondroplasia program.

To get very precisely to your question, can we imagine that natural history studies in Achondroplasia could serve to obviate the need of a placebo in a Phase III clinical trial – it’s possible and there certainly have been programs where there hasn’t been a placebo controlled Phase III clinical trial to support registration. We’re looking into that. We’re in discussions about that but I think it’s premature to come to a conclusion about the likelihood that the registry studies could support registration without a control arm in a Phase III study.

Operator

Our next question comes from Stephen Willey, Stifel Nicolaus.

Stephen Willey – Stifel Nicolaus

Yeah, thanks for taking the question. With respect to the conversations you’ve had with the FDA regarding Phe reduction as a primary endpoint for PEG-PAL, have there been any discussions around pre-specifying [dyaliprilization] as a secondary endpoint? And then maybe any color you can maybe provide around that variable in patients treated to date in the ongoing Phase II. Thanks.

Hank Fuchs

Yes, there have been discussions. I think the step back to take is that PEG-PAL is an injectable and is being developed initially primarily targeting adult patients with phenylketonuria and patients who are either nonresponsive to or for whom Kuvan is inappropriate therapy.

These patients are largely noncompliant with artificial diets that contain reduced intake of phenylalanine. In fact there are publications that indicate that once you reach late adolescence, early adulthood, fewer than 20% of patients are on any Phe restriction at all and the 20% that are on Phe-restricted diets consume about half of the normal amount of Phe which would amount to maybe a 10% or 20% reduction in their blood Phe levels from those degrees of Phe restriction.

So when we presented those facts to the FDA they said “What’s the point of studying diet liberalization? These people are already taking advanced and liberal amounts of Phe in their diet, and if you show in those patients that you control their blood Phe then the product will be indicated to reduce blood phenylalanine.” And the implication of that was that there would be no reference to a requirement for dietary supplementation to also further control blood Phe.

We have diet records of patients who have been treated in a PhaseI/II trial so far. They mostly collaborate with what I’m indicating to you. The effects of PEG-PAL on blood Phe are quite dramatic, much more than you expect to see in an adult population with tight adherence to diet. And finally diet type and adherence to diet is really not a general matter the rule for adult patients with PKU. So all together we were pretty encouraged by the FDA’s willingness to have us use blood Phe as a primary endpoint, for us to study a population who is largely non-adherent to diet in the first place.

Operator

Our next question comes from Yaron Werber, Citi. Yaron, your line is open if you can unmute it. It looks like Yaron has queued up again; it may be that his line dropped. Yaron, go ahead.

Yaron Werber – Citi

Hey, can you hear me okay? Okay, great. I just wanted to get, it’s for Dan – if you can tell us what was the share count at the end of the quarter? What we have now in the press release is the average share count and it’s not fully reflective of the recent offering. Thank you.

Dan Spiegelman

Hold on, I have that… Share count at the end of the quarter is 123 million.

Yaron Werber – Citi

Okay, great. Thank you.

Operator

And there are no further questions. I would now like to turn the call back over to Mr. Bienaime.

J. J. Bienaime

Thank you. So in summary we are pretty pleased with the performance of our commercial portfolio for the first half of the year. We are very focused on our quickly advancing pipeline and also our revised guidance for R&D spend. We remain as excited as ever with key (inaudible) in the second half of the year including the two newest [firm] opportunities – GALNS and PEG-PAL. Strategically we maintain a high degree of confidence in the GALNS Phase III programs which if successful will be transformative for the company in terms of doubling revenues and bringing us to profitability.

The last patient is due to complete the study in the next few weeks and we look forward to updating you with the results of this important study in Q4. So thank you for your continued support and for joining us on today’s call, and goodbye.

Operator

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.

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