BioMarin Pharmaceutical Inc (BMRN) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the BioMarin Pharmaceutical's fourth-quarter and year-end earnings conference call. My name is Carlo and I will be your coordinator for today's presentation. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's prepared remarks. (Operator Instructions). I would now like to turn the presentation over to your host for today's call, Mr. Joshua Grass, Director of Business Development and Financial Relations. Please proceed.

Thanks, Carlo. On the call with me today is Lou Drapeau, acting Chief Executive Officer of BioMarin; Jeff Cooper, acting Chief Financial Officer of BioMarin; and Stu Swiedler, Senior Vice President of Clinical Affairs.

At this time, I'd like to remind everybody that this call will contain forward-looking statements about the business prospects of BioMarin, including 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 development by competitors, and those factors detailed in BioMarin's filings with the Securities and Exchange Commission, including reports 10-Q, 10-K and 8-K. With that out of the way, now I'll hand the call over to Lou.

Thanks, Josh, and good morning, everyone. I'd like to begin today's call by providing a few general comments about the Company and then turn the call over to Jeff Cooper, acting CFO, who will summarize the financial results for the fourth quarter and 2004. Next, Stu Swiedler will review the progress in our clinical stage product development programs, including rhASB, formally known as aeroplase (ph) for MPS VI Phenoptin for PKU. I'll then turn it over to Josh for some final comments and then we'll open up the call for questions.

As you've seen from the series of announcements in the last few months, we've made significant progress with our clinical stage development programs, namely rhASB for MPS VI and Phenoptin for PKU. We expect to reach important regulatory and clinical milestones with these products over the next several months.

We have also brought closure to our dispute with Medicis over Orapred inventory and the settlement we reached improves our financial position and reduces the payments due over the remaining four months -- 4.5 years of the agreement. In summary, the agreement provides BioMarin with a total cash benefit of approximately 52 million, 27 million in offset payments and a $25 million convertible loan.

With respect to Orapred performance, we've encountered a new generic competitor to Orapred, which has significantly impacted our market share. This impact is reflected in our 2005 Orapred sales guidance issued a few weeks ago. We believe that Orapred's proprietary taste-masking technology continues to offer an advantage over the non taste-mask products. And we're doing everything possible to address the competitive environment we now face. This includes continued development of Orapred's follow-on formulations, a room-temperature version and an oral disintegrating tablet. We are also currently evaluating other opportunities to leverage our sales force and will continue to operate the Orapred business on a profitable basis.

On a more positive note, in the fourth quarter 2004, we recognized our first profit from the Aldurazyme joint venture with Genzyme. We expect significant top-line growth from Aldurazyme this year and are working closely with Genzyme to bring Aldurazyme to more MPS I patients around the world in an efficient and cost-effective manner. Now, I'd like to turn the call over to Jeff Cooper.

Thanks, Lou. I'm going to begin by reviewing product revenues of Orapred and Aldurazyme for the fourth quarter and year-end 2004. Then I'll review our net loss for these same periods. And finally I will provide a more in-depth look at our financial results. I will then review fourth-quarter and year-end results of the BioMarin/Genzyme LLC.

Net sales of Orapred recorded by BioMarin in the fourth quarter were 13.9 million. In the period beginning May 18th, 2004, the acquisition date, and ending December 31st, 2004, net sales were 18.6 million. Sales of Aldurazyme by the BioMarin/Genzyme LLC for the fourth quarter and the year ended December 31st, 2004 were 15.6 and 42.6 million, respectively, compared to 6.7 million and 11.5 million for the same periods in 2003. BioMarin's 50 percent share of the BioMarin/Genzyme LLC was a $1 million profit for the fourth quarter and a $3 million loss for the twelve months ended December 31st, 2004 compared to losses of 2.1 million and 18.7 million for the same periods in 2003. These changes were principally due to an increase in sales of Aldurazyme.

Our net loss was 82.4 million or $1.28 per share for the fourth quarter of 2004 and 187.4 million or $2.91 per share for the twelve months ended December 31st, 2004. Of the $2.91 per share loss, $1.61 per share represents certain non-cash charges related to the acquisition of Ascent Pediatrics. The largest single component of BioMarin's net loss in the fourth quarter of 2004 was a $68.3 million impairment charge associated with the write-down of the carrying value of Orapred. This was primarily associated with the impact on the liquid oral formulation due to new generic competition.

Non-cash charges associated with the acquisition of the Ascent Pediatrics business for the 12 months ended December 31st, 2004 also included the acquired in-process research and development expense of 31.5 million and amortization of acquired intangible assets of 4 million. The 2004 financial results do not reflect the effect of the January 2005 settlement with Medicis, which will be accounted for during the first quarter of 2005, as a reduction of goodwill and the acquisition liability.

Now, I will review the fourth-quarter financial results in more detail. R&D expenses for the fourth quarter and 12 months ended December 31st, 2004 were 12.1 million and 49.8 million compared to 17.1 and 53.9 million for the same periods in 2003. The decrease in spending related primarily to the discontinuation of the Neutralase program and was offset to some extent by an increase in spending on rhASB, Phenoptin, and new formulations of Orapred. Spending on these programs for the twelve months ended December 31st, 2004, was 29.8 million for rhASB, 8.3 million for Phenoptin, and 1.9 million for Orapred. In the fourth quarter of 2004, we spent approximately 5.3 million in R&D on rhASB and approximately 3.3 million in R&D on Phenoptin. R&D spending on Orapred for the quarter was 0.7 million.

Selling, general and administrative expenses were 13.3 million for the fourth quarter and 37.6 million for the twelve months ended December 31st, 2004 versus 5.9 million and 15.3 million for the same periods in 2003. The increase in the fourth quarter and year to date is largely due to selling and marketing costs for Orapred, which we incurred for the first time this year, given the May 2004 acquisition of the Ascent Pediatrics business.

From a cash perspective, we ended 2004 with 90.5 million in cash, cash equivalents, short-term investments, and restricted cash. Restricted cash primarily represents cash held in escrow as collateral for the first year of acquisition payments in Medicis. This will be fully released after the scheduled payment in May 2005. In the fourth quarter, we paid 15 million in cash to Medicis as part of the consideration for the Ascent Pediatrics business. During 2005, we expect to make net payments to Medicis of 28.2 million, which takes into effect the reduced payment and a $6 million reimbursement for Orapred return as a result of our settlement. These payments are mostly offset by the $25 million convertible loan that we expect to draw from in the second half of 2005.

Now, I'll cover the results for the BioMarin/Genzyme joint venture. Aldurazyme sales were 15.6 million for the quarter and 42.6 million for the twelve months ended December 31st, 2004. BioMarin realized a $1 million profit for the quarter and a $3 million loss for the twelve months ended December 31st, 2004. BioMarin's share of the loss in the joint venture for the same periods in 2003 were losses of 2.1 million and 18.7 million, respectively. The difference is due to increasing sales of Aldurazyme in 2004, year-over-year trend we expect to continue into 2005 as more patients are transitioned from extending clinical studies to commercial therapy.

Now, for the BioMarin 2005 financial guidance. Our product revenue guidance for 2005 remains unchanged from what we previously announced on January 26th, 2005. For Orapred, we forecast 2005 sales to be in the range of 15 to 20 million. This guidance reflects the projected impact from a new generic formulation introduced to the market in October. For Aldurazyme, BioMarin's and Genzyme's sales guidance for 2005 is 60 to 66 million.

As far projected cash balance at the end of 2005, due to a number of factors including discussions with potential partners regarding copromotion agreements and partnerships for ex-U.S. commercialization of rhASB, Phenoptin, Orapred and Vibrilase, we believe it is best not to provide this guidance today. While we cannot guarantee that any of these discussions will result in a signed agreement, should they, it would likely have a positive agreement on our cash position. We will consider providing this guidance at a later date as appropriate.

I will now turn the call over to Stu Swiedler, who will review some of the progress we've made this past quarter in our lead product development program, namely rhASB for MPS VI and Phenoptin for PKU.

Thanks, Jeff. Beginning with our MPS VI program, we filed for marketing authorization for rhASB in both the U.S. and Europe at the close of 2004. And earlier this month, we announced that the FDA accepted the BLA and assigned it a six-month review. This sets the PDUFA date at May 31st, 2005, at which time the agency will take one of three actions. They will either approve the drugs, not approve the application, or request additional information. At this time, we do not know if the FDA will seek input from an advisory committee on our application.

Regarding our European application, we expect the European Medicines Agency to make a determination on rhASB in the second half of the year. Should all go as planned, we hope to bring this therapy to market promptly following approval in the second half of the year.

One last note about rhASB, later this quarter, we expect to present extension data from the Phase III trial of rhASB at the annual meeting of the Society for Inherited Metabolic Disorders taking place from March 6th to 9th in Pacific Grove, California. We believe this data will provide additional insight into the durability of response in patients receiving drug for one year, and the initial response in patients that were receiving placebo moving in the double-blind portion of the study.

Moving on to our PKU program, we have continued to advance clinical development of Phenoptin. Phenoptin is an investigational oral small molecule therapeutic intended for the treatment of individuals with mild to moderate forms of PKU. We are currently enrolling patients into the Phase II trial that we initiated at the close of 2004. This is essentially a screening trial designed to identify individuals to enroll into the Phase III trial, target to be initiated by the end of the first quarter or perhaps early in the second quarter. The Phase III trial will be a six-week multi-center, double-blind placebo-controlled trial, conducted at up to 31 sties. We anticipate announcing data from this trial in the second half of the year. As a reminder, Phenoptin has been granted orphan drug designation for PKU in both the United States and Europe Union, guaranteeing its marketing exclusivity in the United States and EU for seven and 10 year, respectively, if it is the first therapeutic to be approved for PKU. I think that covers it for the clinical program updates for now. Josh?

Thanks, Stu. Before we open up the call for questions, I would just like to remind everyone that we will be presenting at a few health-care conferences in the coming months. On the morning of March first, we'll be presenting at the Wells Fargo Securities Healthcare Conference, and later that day, we're presenting at the Leerink Swann & Company Inaugural Healthcare Conference, both in New York City. On March 16, we'll be presenting at the SG Cowen 25th Annual Healthcare Conference in Boston. You can access these presentations live through our website at www.BioMarin.com.

Operator, we'd now like to open up the call for questions.

Thank you, sir. (Operator Instructions). Gabe Hoffman, Accipiter.

I apologize if I missed this, but when you had discussed not providing year-end 2005 cash balance, my understanding was that was based on the variability of a potential licensing agreement. I was just curious, could you please provide us with the operating cash burn projection for 2005. That way we can get to a year-end 2005 projected guidance if we are conservative and assume no deals.

Gabe, this is Lou Drapeau. The overall cash burn for the company will be significantly less in 2005 than 2004. But because our partnerships that we're discussing could involve significant cost-sharing arrangements, in addition, milestone payments, it is too early for us to give the operating cash burn at this time. We'll try to do it later in the year when we get more clarity on it.

Right, Lou. So assuming if we are conservative and we assume that there are no such deals, could you tell us what the operating cash burn would be assuming no deals?

I'm going to have to leave it, Gabe, it's just we're going to be significantly less than what we were this year.

Okay. Lou, at a recent investment conference, actually it was CIBC November 8th, slide 23 out of 26 talked about some potential reductions and potentially some -- you'd said that you would give detailed financial guidance in January or February. For a biotech company, it seems relevant what the operating cash burn is. That seems to be a critical component of financial guidance. And I guess shareholders including myself are a bit tired of management's ineptitude in not being able to give the sort of financial metrics that other companies are giving.

As I said, Gabe, we'll give it to you as soon as we have some clarity on it. In addition, I will remark that our cost-containment activities did yield very significant results.

(Operator Instructions). Alan Leong with Biotech Monthly.

Hi, everyone. Can you describe again the timeliness for the Orapred products to come. And with it, maybe provide some color about their desirability in the market. For example, do you think the current battle with the generics has dimmed their sales potential?

No, and this is Lou Drapeau again. The -- we're not going to give specific timing on these because of competitive reasons. But the room-temperature version will have primarily a benefit internationally, where we're in discussions with a number of parties to distribute it internationally. The oral dissolving tablet we believe will open Orapred up to a much larger market than the current children under eight years old that we're currently serving. So both of those have significant opportunities to open up Orapred to a much larger audience than is currently being served by the refrigerated liquid product we have today.

Great. You're recruiting patients for potential marketing release of rhASB. I know you can't comment in terms of sales guidance, it's too early. But can you comment on how the recruiting is going? For example, can you provide color on the numbers or proportions intended (ph) patients have made contact with you?

Yes. We have at least 250 patients identified through their physicians in the world right now.

Just one last question. Can you update us on the progress for a CEO? Maybe provide a little bit what you're looking for in a CEO. And are you adverse to seriously considering an in-house candidate?

Alan, the Board of Directors has hired an outside search firm to help them, Spencer Stuart. That search is well underway. In-house candidates as well as outsiders are being considered. And I can't comment any further, but I hope to have an announcement for you here in the not too distant future.

Thank you very much.

(Operator Instructions). Michael Walsh with Kilkenny Capital.

Could you tell me how you came up with the impairment number that you announced today? What was the calculation that went into that?

Right. The impairment number is based upon -- it's basically a onetime adjustment that reflects the adjusted carrying value of Orapred. As I mentioned previously it's primarily associated with the impact on the liquid oral formulation due to generic competition. The adjustment is based upon our current projections of future expected cash flows associated with these formulations. And so you take the future cash flows over a lengthy period of time, you discount that to the present and then that basically calculates what the write-off will be.

So when the product was purchased last year, the threat of generic competition was so opaque you couldn't do that same kind of calculation?

The calculation at that point in time -- (multiple speakers) count our best estimate of the revenues going forward. And with the generic competition onset, clearly the value or the cost associated with the business has changed. And so that's reflected in the write-off that we took in the fourth quarter of 2004.

Okay. Thank you.

Alan Seymour (ph) with Colombia Management.

Yes, can you give me some sense of what the pricing differential is relative to the generic? And give me some sense also in terms of without giving away any proprietary things whether there are any things you're doing in terms of trying to maintain your market share?

Let me deal with the pricing, Alan. For a wholesale price on an 8-oz. bottle, our product, Orapred Liquid, is selling for about $108. And I understand that the Morton Grove product is selling about $92 for the same 9-oz. bottle. What that translates to is that if there was no reimbursement by the managed care, that the average prescription for Orapred would cost a patient somewhere between $25 and $30. And the average prescription for a Morton Grove product would be somewhere between 20 and $25.

And how long does a bottle last for?

A bottle is -- fills about 4.5 prescriptions. Each prescription lasts about a week in this course.

So one month, right?

No -- well, it's not given like that. What happens is --

No, what I'm trying to get at here is if compliance is better with yours, one doctor visit pays for the differential between the --

Oh, absolutely.

And it seems to me that there has to be a way that you can run a small trial with WellPoint or somebody like that and convince them that you may be saving a few dollars on the generic, but actually your outcomes are a lot better.

Yes, you're exactly correct. And we are getting some anecdotal information from the field today that would suggest that's happening. And we are considering all possible alternatives to deal with this. We've employed experts in the field. But obviously for competitive reasons, I can't go into all the details over this phone call.

Okay. Thanks.

(Operator Instructions).

Sam Collin with First Manhattan (ph) Company.

Hello? Thanks for taking my question. Jeff, if you could just go over once again, how did you come up with the impairment charge and how does it relate to the price that was initially paid for the product? It seems that you initially paid 4 to 5 times sales for the product. And now that the sales have been more than cut in half, the write-down was not more than 50 percent of the initial value of the product. And I'm sure that with the sales being cut by more than a half, the profits have been cut even more. So it seems to me there's a disconnect between the valuation on day one when you bought the product versus what value you're placing on these cash flows to the extent that they even exist going forward now that we've arrived at the point we're at today. So can you go through that again, starting with what did we pay for the product? What multiple of sales and what was that? And why does it bear no relation whatsoever to the write-down that you took?

Well, the original purchase price was $190 million. And that included a charge in-process R&D, which relates to the development efforts of the formulations of Orapred in the pipeline. Additionally, because the payment stream was being made over time, the discounted value of the purchase was closer to about $150 million. When you take that into account, that a portion of the purchase price relates to the in-process R&D part of it, that gets you down to less than $120 million or so. So the $68.3 million write-down represents probably over 50 percent -- greater than 50 percent of the residual value of the original purchase price. So that's kind of how you'd get down to $68.3 million compared to the original purchase price.

Yes, so you had made the comment that it was done on a TCF basis. And if your sales declined by 50 percent, obviously, your profits declined by far more than that. So I find it -- I'd be interested in seeing the exercise that gets you to that write-off. It would seem to me that with the sales cut in half that the profits are extraordinarily thin at this point. And if you were doing it on a cash-flow basis or on the basis of the profits that were thrown off, that you would be writing off much more than that. Potentially 100 out of the 120 or 160 or the 190 -- whatever you want to use as your base.

Well, I didn't say specifically what the reduction in sales would be. But it's a fairly complicated accounting calculation. But --

Your guidance does. I mean your guidance was saying 15 to 20 and it used to be 40 to 45.

Right, over time. But it's a fairly complicated calculation. But when you take into account the long-range sales forecast that's been projected, the change in operating spending based upon that sales forecast, and then look at the bottom-line profitability on a discounted basis, you come up with the write-off that we've come up with. And we feel comfortable that the write-off that we've come up with is appropriate.

Let me come at it in a different way. If you were to sell 15 to $20 million of Orapred, how many people would be in your sales force selling that?

It's about the same as we currently have, which is 60 to 65, Sam. Let me (multiple speakers)

I guess what I'm trying to get at is, is that even a -- at 15 to $20 million, is that a profitable product? And if so, it's razor-thin, isn't it, at the operating line?

It is a profitable product, Sam. Let me try to answer it in my way. Prior to taking the impairment, we had about $130 million on the books; that was at December 31st. And we wrote off about half of that in the impairment, which basically reflects more or less what we think the decline in the revenues are going to be over time.

I'm sorry, I missed that. Say that again, Lou.

We had about 130 million at December 31st prior to the impairment charge. And we wrote off about half of that with the impairment charge.

Yes, I understand. That was the source of my question.

Right. And so that reflected in aggregate about half -- a cut in the sales of about half.

If you were to just step back and get away from the financial machinations and just look at it from a business perspective, is it fair to say that far more than half of the economic value of Orapred is been diminished? If you just look at the script trend, it's clear that far more than half the scripts have switched. We could have some optimistic assumptions about what the new formulations might do. But on a conservative man's basis, based on what we know today, it would seem to me that the economic value -- if you define the economic value in terms of profits and cash flow and not in terms of sales -- but the economic value is very small -- is de minimus relative to the day you acquired it.

Well, I think the other thing to keep in mind is that a portion of the future value -- a significant portion of the future value of Orapred lies in our other formulations, which has mostly been reflected in the in-process R&D write-off of a little over $30 million. So there's value -- significant value -- in franchise that's not reflected on the balance sheet.

So that's not a conservative man's basis. That's potentially it happens; we hope it does. But it's on the come, it's not -- at the end of the day, this isn't a new drug. It's been (technical difficulty) it's been around forever and it's just a new formulation. So maybe the new formulation creates the economic value added that you hope and maybe it doesn't. But as we know it today, the profit stream and the cash-flow stream from the existing product has been almost entirely diminished at this point, I would have to assume with 60 salespeople.

Sam, again, Jeff has talked to you about the fact that we have taken this write-down. It has been reviewed by two outside public accounting firms, one of which is our auditors, and they are happy with it at this point.

Okay. Thank you.

Alan Seymour with Columbia Management.

Yes, let's go to the -- how we're looking at the new formulations for a second. Because obviously I think that goes back to the earlier question in terms of where the value is. When you look at -- and there are some examples I think out there, but I don't remember them offhand. But I presume that your marketing folks have looked at it. You know, where you've gone from a generic to a let's say more of a proprietary generic that has a different formulation, do you have some sense as to what the range of switches are to that generic formulation that has better performance characteristics either because it's oral taken once a day or maybe an extended release or those kinds of things. So I think there is some history in terms of the ability to switch people to things that are actually -- and whether you can -- whether the switch goes from 20 to 80 percent of the market. Do you have any sense of that kind of thing going on? (multiple speakers)

Alan, you may or may not recall that Orapred was launched in 2001 into an already existing generic marketplace, where the other products did not have the taste-masking technology. And because of the better compliance they had, they gained approximately a 55 percent market share over three years. The new product from Morton Grove is not taste-masked, but it is flavored, and it's also AA-rated, which allows the pharmacist to switch it out. We believe that the characteristics of the -- particularly the oral dissolving tablet will allow us to recapture a significant portion of the marketplace that we've already lost due to its particular characteristics. And it also makes it more difficult for generic competitors to follow us because it is a product that requires some upfront investment in the form of R&D.

Okay. Thanks.

Sir, we have no further questions at this time.

Okay. In closing, I'd like to acknowledge that while 2004 brought its share of challenges, some of which we're going to be working hard to address in the foreseeable future, we've also accomplished a great deal. We have continued to see Aldurazyme revenues grow year after year. And a trend that we expect to continue is more patients are rolled onto commercial therapy.

We successfully filed for marketing applications simultaneously for rhASB in both the United States and the European union.

We advanced Phenoptin for PKU from a pilot trial into a Phase II trial within less than a year's time and have set the stage to initiate a Phase III trial in this drug.

And finally, with the addition of a U.S.-based sales force, we have transformed the Company into a fully integrated biopharmaceutical organization, positioning us to capture a greater value from products emerging from our pipeline and to generate revenue through co-promotion partnerships.

On a final know, I'd like to acknowledge that this Friday, February 25th, is national MPS awareness day, a day to give pause, and to recognize the MPS community for the work they have accomplished and the work that remains to be done to help find treatments for all MPS diseases.

Thank you for joining us today. If you have any follow-up questions, please call Josh Grass at Investor Relations at BioMarin at 415-506-6777. Thank you again for your participation and good bye.

Ladies and gentlemen, we thank you for your participation in today's conference. A replay of this call will be available for the next three days at the following number. National people may dial 888-286-8010 and use the pass code 35042156. Again, that pass code is 35042156. International dialers may access a replay by dialing 617-801-6888. This concludes your presentation and you may now disconnect.