BioMarin: Gains To Continue As Pipeline Progress Is Realized

| About: BioMarin Pharmaceutical (BMRN)
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By Ivan Deryugin

Since our last report on BioMarin Pharmaceutical (NASDAQ:BMRN) in late December, shares of the San Rafael, Calif., based company have solidly outperformed the broader biotechnology sector, rallying over 21% compared to around 13% for the Nasdaq Biotechnology Index. However, further gains are likely as the large-cap drug developer continues to see progress in its pipeline. BMRN has a number of catalysts this year, and according to analysts, should reach sustained profitability in 2015.

For Q4 2012, BioMarin posted revenues of $131.938 million, a 22.34% increase relative to Q4 2011 (full-year revenue growth came in at 13.4%). The company lost 43 cents per share (versus 25 cents a year ago), with the increase driven by a 45.68% surge in R&D expenses tied to multiple pipeline advancements that BioMarin will see in 2013, as well as an increase in expenses related to Vimizim, BioMarin's MPS IVA drug formerly known as GALNS. Revenue growth in 2012 was seen across BioMarin's product portfolio, and was driven by a 22.5% increase in Kuvan revenue, with the company seeing increasing uptake by patients, as well as solid continuation rates. While BioMarin's guidance for 2013 implies 13.56% growth in Kuvan revenue, Jeffery Ajer, BioMarin's CCO, noted on the company's Q4 call that as BioMarin reports data from its Kuvan label-expansion studies, revenue growth is likely to accelerate in 2014, as data from the company's PKU-106 trial will likely support a label expansion. Naglazyme, which generates a majority of BioMarin's revenue (51.32% in 2012), saw sales growth of 14.3% in 2012. While BioMarin warned investors that quarter-to-quarter Naglazyme revenues could be choppy (due to government ordering patterns), the franchise will still see growth in 2013, with guidance implying 7% revenue growth.

For BioMarin as a whole, 2013 guidance calls for $542.5 million in revenue at the midpoint of guidance, implying growth of 8.34%. Admittedly, that is not the kind of revenue growth that biotechnology investors wish to see. However, the BioMarin thesis is not built around the company's 2013 sales. Rather, it is built around the events that are set to occur in 2013, which will position the company for accelerating growth in 2014. This can be seen in the company's R&D guidance, which calls for R&D expenses to rise by over 19% to $360 million at the midpoint of guidance. Despite posting a net loss of over $114 million in 2012, BioMarin still reported positive operating cash flow in 2012 ($17.609 million), and ended the year with over $566 million in cash & investments, giving the company ample financial resources to continue investing in its pipeline.

A Diverse Set of Catalysts

2013 will be a busy year for BioMarin, and the company has already reported several key developments. In early January, the company acquired Zacharon Pharmaceuticals for $10 million (plus additional undisclosed milestone payments), which gave BioMarin control of Zacharon's heparan sulfate synthesis inhibition platform, which BioMarin plans on researching in the treatment of MPS III, other MPS disorders, and ganglioside diseases such as Tay-Sachs. The costs of acquiring Zacharon have already been included in BioMarin's 2013 R&D guidance. However, the Zacharon acquisition is a longer-term story; the company's platform is still in optimization, and BioMarin has forecast that it will take several years for any Zacharon compounds to reach the clinical development stage. But BioMarin is making progress on more immediate programs as well. The company expects to file for FDA approval of Vimizim within the 1st quarter of 2013, meaning that an announcement should be made shortly; an FDA decision is expected in Q4 2013.

But, as we noted in our last report, Vimizim is forecast to generate peak sales of just $500 million by 2020, meaning that the drug cannot drive BioMarin forward on its own. Vimizim highlights both the opportunities and challenges facing an orphan-drug focused company such as BioMarin. While such a focus leads to relatively less competition, it also creates challenges in finding a proper balance between markets free of competition and market size. Even if a biotechnology company such as BioMarin locks down a particular market, it may not matter if that market was small to begin with. Vertex Pharmaceuticals (NASDAQ:VRTX) has demonstrated the pitfalls of this quite well. While its cystic fibrosis drug Kalydeco carriers a price tag of $294,000, making it a very profitable product, its near-term growth is already being challenged due to the fact that virtually every patient in the United States eligible to use it is already doing so. Vertex is depending on geographic and label expansion to fuel long-term growth. BioMarin, on the other hand, is depending on product/franchise expansion to fuel growth. Fortunately, the company's pipeline has an ample supply of assets aside from Vimizim to fuel long-term growth, and the company's pipeline is currently led by BMN-701, BioMarin's experimental treatment for Pompe disease.

The global market for Pompe disease is estimated to be worth around $1 billion and is currently led by Lumizyme and Myozyme, both sold by Genzyme. On March 19, BioMarin announced that it was moving BMN-701 into Phase II/III trials (expected by the end of 2013), due to solid Phase I/II clinical data. Results from BioMarin's POM-001 study exceeded its predefined endpoints for moving forward with development of BMN-701. The study involved 22 patients and 3 dosing levels: 5, 10, and 20 mg/kg. 19% of patients in the study had an improvement in 6-minute walking distance of more than 75 meters, and patients in the study saw a 27% improvement in MIP scores through the 24th week of the study, and a 14% improvement in MEP scores (Maximal Expiratory/Inspiratory Pressure scores are two measures of respiratory function in patients with Pompe disease). Patients in the alglucosidase alfa (the clinical name for Myozyme and Lumizyme) saw only an 8% improvement in MEP scores, and a 12.5% improvement in MIP scores. BMN-701 was well tolerated by patients in the POM-001 study, with side effects similar to enzyme replacement therapies already on the market. The most serious adverse events in the study were reactions to injections, and were experience by 2 patients. One patient temporarily stopped taking BMN-701 and one withdrew from the study. 13 patients in the 20-mg/kg arm experienced hypoglycemia (something that BioMarin expected), but the episodes all occurred during/within one hour of injection, were asymptomatic and were alleviated through dietary changes. These results from POM-001 will allow BioMarin to move BMN-701 into Phase II/III trials by the end of the year.

CMO Henry Fuchs stated that this was due to, "conversations with opinion leaders as well as from the study of the regulatory landscape about the requirements for registration support. And as I think I've mentioned before, what's clear is that a switching study would be required to support the registration of 701. And a switching study is something that we can start relatively readily, we believe." Improvements in BioMarin's manufacturing capabilities related to BMN-701 are also leading to an accelerated clinical trial schedule. BioMarin expects that this next trial of BMN-701 will be a single-arm trial (at the 20 mg/kg dose), with MIP scores serving as the primary endpoint, with MEP scores, 6-minute walking tests, and BMN-701's safety profile serving as secondary endpoints. CEO Jean-Jacques Bienaime noted on BioMarin's Q4 earnings call that BioMarin has had extensive conversations with "opinion leaders" in the Pompe community, and the company is hearing that, "we're above where the key opinion leaders have told us it will induce switching [from Myozyme and Lumizyme] on their part." BMN-701 is shaping up to be a key value driver for BioMarin, and its clinical profile has shown that it is a meaningful competitor to both Myozyme and Lumizyme.

While BMN-701 is BioMarin's key clinical asset, 2013 will feature (and already featured) incremental progress on several other clinical programs. In late February, BioMarin reported clinical data from PKU-016, its study of neuropsychiatric outcomes in patients taking Kuvan. While the 206-patient study showed that Kuvan reduced ADHD-RS scores by 4.1 points more than placebo, it did so at a p-value of 0.085. However, the PKU-016 trial showed a statistically significant (p=0.036) improvement in patient inattentiveness, with Kuvan offering a 6-point improvement in the inattentiveness domain, 3.4 points higher relative to the placebo arm of the trial. BioMarin will utilize this data to help design its PEG-PAL Phase III Kuvan study. BioMarin has a collaboration agreement relating to Kuvan and PEG-PAL with Merck Serono, a subsidiary of Merck KGaA (unrelated to Merck & Co.), and under the terms of the agreement between the 2 companies, Merck Serono has the right to opt-in (for commercialization in Europe) into the development of Kuvan in PEG-PAL. Merck Serono has the right to opt-in until BioMarin begins Phase III trials of Kuvan in PEG-PAL.

If Merck Serono opts in before the start of the study, they are obligated to pay 50% of the development costs. But, if the company opts in once the study already starts, it must pay either 75% (if the Phase III clinical data has not yet been unblinded) or 100% (if the Phase III clinical data has been unblinded) of development costs and a $7 million milestone payment. This decision is important to watch because the agreement between Merck Serono and BioMarin precludes BioMarin from commercializing Kuvan in PEG-PAL in Europe unless Merck Serono opts in due to the fact that there is some patient overlap between PEG-PAL patients and the existing Kuvan patient pool. BioMarin is also forecasting that it will present updated Phase I/II clinical data regarding BMN-673 (the company's PARP inhibitor for genetically defined cancers) at ASCO 2013. Around 8% of breast cancer patients have the mutation targeted by BMN-673, and it is possible that a Phase II/III study will begin by the end of 2013.

Finally, 2013 will also feature incremental progress on BioMarin's 2 earlier-stage pipeline programs, BMN-111 and BMN-190. BMN-111 is a CNP analog designed to treat achonodroplasia (the most common form of dwarfism). As we noted in our previous report, a Phase II trial of BMN-111 is set to begin in mid-2013. Since that report, BioMarin has announced that the trial's primary objective will be the safety and tolerability of daily injections of BMN-111 over the course of 6 months, with changes in growth velocity and absolute growth serving as secondary objectives. And BioMarin also expects to file for approval to begin clinical trials of BMN-190 for the treatment of Batten disease within Q1 2013 (this could potentially be pushed out to Q2 2013).

BioMarin has said that it's meetings with the FDA have been "very encouraging" and offer the potential for a rapid clinical and regulatory approval timeline due to the rapid and debilitating nature of Batten disease. Also known as neuronal ceroid lipofuscinosis (NCL2), Batten disease is an extraordinarily rare (it is estimated that there are just 350-1,000 patients worldwide) and deadly lysosomal storage disease that causes severe neural degeneration, which leads to a progressive loss of motor and mental skills, and death in the majority of patients by the time they turn 20. BioMarin has done preliminary work on designing its clinical trial for BMN-190, and its current plans call for a one-year safety and dose-escalation study, with enrollment expected to begin in mid-2013. While some may believe that it is too early to speculate on the potential for FDA approval of BMN-190, the unique nature of Batten disease could make this situation different. There are no treatment options for Batten disease, and BMN-190 has shown effectiveness in pre-clinical testing. These factors, combined with the severe unmet medical need for a treatment (as we noted in our previous report on BioMarin) will likely lead to a relatively low threshold for FDA approval.

Financials and Takeover Potential

As noted above, BioMarin ended 2012 with over $566 million in cash and investments. The company also ended 2012 with $348.224 million in convertible notes due in 2017. But, earlier this month, BioMarin announced that it had struck a partial redemption of these notes, exchanging $139.2 million in principal for 6.8 million shares of BioMarin. Alongside the exchange, the company made an inducement payment of $7.8 million. However, the reduction in outstanding notes will reduce future interest payments by $11.7 million, leading to net saving of almost $4 million.

For the first time in several years, BioMarin will likely have negative operating cash flow, with CFO Daniel Spiegelman forecasting that the company will end the year with "at least" $420 million in cash and investments. 2013 cash burn will be caused primarily by investments in Vimizim inventory, increased capital expenditures to support an expansion of the company's business, as well as a $40 million alternative minimum tax payment. However, that payment can be applied to future income taxes. While these are meaningful cash outflows, BioMarin will still end 2013 with over $400 million in cash and investments, and its debt burden has been reduced by well over $100 million. (Sustained profitability is forecast for 2015, with consensus forecasts calling for 9 cents in EPS, rising by 611.11% to 64 cents in 2016.)

Positive clinical trial results from BMN-701 also serve to incrementally increase the odds of a takeover of the company. While BioMarin has been the subject of takeover speculation [rumors of a bid from GlaxoSmithKline (NYSE:GSK) surfaced in June 2012, as did rumors of a bid from Shire (NASDAQ:SHPG)], takeover speculation regarding BioMarin has been less frequent than for many of its peers. While the bullish thesis for BioMarin, as outlined in our previous report, assumes that the company will remain independent, a takeover of the company is not outside the realm of possibility. BioMarin's CEO has gone on record to say that an "exciting premium" could lead to a sale of the company. And analysts have also said that potential bidders are likely to wait for positive data regarding Vimizim and BMN-701 before making a bid. With Vimizim approval a possibility before the end of the year and BMN-701 advancing further into development, the confidence that potential bidders have in BioMarin could be increasing.

As we outlined in our last report on the company, we believe that if BioMarin does in fact receive a takeover offer, Sanofi (NYSE:SNY) seems most likely. The two companies have been collaborators since 1998, and Sanofi may want to head off future competition for Myozyme and Lumizyme by taking control of BMN-701 (to say nothing of the rest of BioMarin's pipeline). In addition, BioMarin has the potential to integrate well with Genzyme, which, like BioMarin, specializes in orphan drugs and diseases. But, with a market capitalization of over $7.5 billion, and a CEO that has stated he will not sell without a meaningful premium (earlier this year, he rejected the idea of a 25%-30% premium), the number of bidders with the financial ability to complete such a deal is limited, and investors should base their investment decisions regarding BioMarin on factors other than its takeover potential.

2013 is a catalyst-rich year for BioMarin's entire pipeline, ranging from possible approval of Vimizim to patient enrollment in clinical trials of BMN-190. Combined with a strong balance sheet, as well as continued near-term revenue growth, BioMarin is positioning itself for long-term success, with sustained profitability set for 2015.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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