A growth stock in the current gloom and doom environment sounds like a leap of faith. Yet economies do recover and more often than not new industries are the bellwethers of their future. Biotechnology industry looks like the industry that will drive future growth. BioMarin Pharmaceuticals with its proven products, earning high margins, large cash reserves and a promising pipeline has the classic characteristics of a growth stock.
BioMarin finds cures for inherited genetic diseases with lifelong enzyme replacement at an annual cost in the ballpark of a quarter of a million dollars for each patient. A disease is inherited when defective or recessive genes of both parents are received by their baby. The human body has millions of cells which generate waste when they perform their functions. Healthy individuals have cells that use enzymes to break down the waste and recycle it. When a human body does not have the enzymes to break down the material, the waste remains in the body and increasingly has toxic effects. The outcome is a disability, such as strained breathing, that prevents the patient from living a normal life, deformed organs or pre-mature death. BioMarin produces enzymes that sap the toxic residue in the body and restores the normal recycling of waste material within the body.
The margins on these BioMarin drugs are protected by the Orphan Drugs Act 1983 which grants a monopoly over biotechnology products for genetic diseases for a period of seven years in the USA and ten years in Europe. These rights have been mandated to ensure that biotechnology companies have the incentives to develop drugs for tiny population groups of a few thousands. Market size in any one country is small as only a fraction of the population (one in over two hundred thousand) is affected by such diseases.
Success in such an environment depends on worldwide marketing to reach the desired scale of production. The costs of commercial development, marketing, regulatory compliance, patient servicing and manufacturing costs have to be spread over relatively small size of the domestic markets. BioMarin has entered into an array of partnerships for marketing, regulatory compliance and patient care to diversify its risks and lower costs. Typically, it enters into marketing agreements with overseas partners, such as Merck Serono and Genezyme to share the costs of research and development and marketing promotion overseas. Conversely, BioMarin invests in therapies developed by other companies such as Summit, which is developing drugs for muscle atrophy, and brings its skills in regulatory compliance to accelerate market launch of new drugs.
Currently, BioMarin has three revenue generating products in the market which have met their expectations. Two of these drugs are meant to restore enzymes required to break down a variety of sugar molecules called GAGs. Patients can develop a variety of disabilities depending on their specific enzyme deficiency. MPS I or Hurler syndrome is one type of disability which causes organ deformities such as large heads, short nose or flat face. Milder forms of this condition can cause learning disabilities or psychiatric problems. MPS IV causes skeletal deformations such as dwarfism, curved spine, flat fleet or outsized chest bone. BioMarin sells a drug Naglazyme for MPS VI and Aldurazyme for MPS I. FDA granted approval for Naglazyme in May 2005 and in European Union in January 2006. Aldurazyme was granted approval in the USA in April 2003 and therapies were offered in May 2003. Europe granted approval in June 2003 and Japan in November 2006.
The potential for growth in overseas markets is till largely untapped. The share of USA in the total sales was 58% at the end of the third quarter of 2008 and 56% for the first nine months of 2008. The share of Europe, Asia and Middle-East is expected to increase with market promotion and expansion of new product sales. BioMarin has found encouraging feedback from Brazil and the Middle East among other countries.
Naglazyme’s product revenue for the nine months ending September 30, 2008 was $96.2 million, an increase of 58.7 percent from $60.6 million for the nine months ending September 30, 2007. Margins realized on these revenues are as high as 81%. The expected peak level of worldwide revenue for Naglazyme is $300 million.
Revenue from Aldurazyme, sold by Genzyme, was $113.7 million for the nine months ended September 30, 2008, an increase of 28.8 percent compared to $88.3 million for the nine months ended September 30, 2007. BioMarin’s own share from the sales was $58.1 million and margins earned were a sizeable 71%.
The future growth of BioMarin will be driven by new products and extending the application of established products for a wider range of conditions. Another class of inherited diseases called PKU (abbreviation of the biological name) is the new target for commercialization at BioMarin. The afflicted patients suffer mental retardation or neurological problems. Kuvan was approved by the US FDA in December 2007 and by the European Commission in December 2008. The commercial launch of Kuvan began in the USA in December 2007 and is expected to begin in Europe in the first half of 2009. BioMarin will receive a milestone payment of $30 million for Kuvan from its partner Merck Serono and single digit royalty payment on commercial sales. In Japan, Kuvan’s active ingredient has been embodied in another product, Biopten, manufactured by Asubio Pharma Co, and was marketing approval for the drug was granted by the Japanese Ministry of Health in July 2008. BioMarin received $1.5 as milestone payment and will receive over 20 percent royalty on commercial sales.
Kuvan is reported to have had mixed success on its launch in the USA. In the first nine months of 2008, the sales of Kuvan were $31.6 million. This is in contrast to the wildly optimistic sales projections of analyst firm, Datamonitor, at $180 million for 2008 and $403 million in 2011. According to BioMarin’s own numbers, 50 to 60% of the patients are responding to the drug and the management admits to challenges in the process of commercialization. Other scientists such as Dr. Richard Kronmal and Dr Larry Sasich question FDAs decision to grant the marketing approval to Kuvan. They feel that the Kuvan is ineffective for patients with elevated toxicity from the enzyme deficiency and can have side effects which cause several different types of infections. While Kuvan is the only available therapy available for this condition, the PKU diet plan has proved to be effective for those who follow a strict regime.
All, however, is not lost from Kuvan. The active ingredient in Kuvan has the potential for treatment of cardiovascular conditions including peripheral arterial disease and BioMarin is conducting clinical studies to confirm this. In addition BioMarin is conducting clinical studies for a related drug PEG-PAL for patients who are not responding to Kuvan. The results for both are expected by the middle of 2009.
BioMarin has adequately established a core competency in enzyme replacement therapies and has a proven business model. The extension of this core competence to an extended list of conditions has risks but these are buffered by growing revenues from Naglazyme and Aldurazyme. With its current price hovering at $17 down from the peak of $40, the downside risk is minimal considering that the stock bottomed at $14. Investors looking to repair their battered portfolios have BioMarin to help them out.
