BioMarin Pharmaceutical Inc (BMRN) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter BioMarin Pharmaceutical earnings conference call. My name is Katie and I'll be your coordinator for today.

At this time all participants will be in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference.

(OPERATOR INSTRUCTIONS)

I would like to now turn the call over to your host for today, Ms. Eugenia Shen, Senior Manager of Investor Relations. Ma'am, you may proceed.

Thank you. On the call today is J.J. Bienaime, BioMarin's Chief Executive Officer; Jeff Cooper, Chief Financial Officer; Emil Kakkis, Chief Medical Officer; and Steve Aselage, Senior Vice President of Global Commercial Development.

I would like to remind everyone that this non-confidential presentation contains forward-looking statements about the business prospects of BioMarin Pharmaceutical, 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 such as 10-Q, 10-K and 8-K reports.

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

Thank you, Eugenia. And good afternoon and thank you for joining us on today's call.

I have a few introductory comments before Jeff reviews the financial details of our first 2008-quarter. And then Steve will provide more details on the Kuvan launch. And Emil will provide an update on our ongoing R&D programs. Eugenia will then review the list of investor conferences where we'll be presenting in the coming months before we ask the operator to open the call for questions.

So we are very pleased with our first quarter results. Naglazyme, Aldurazyme, and the launch of Kuvan generated strong top-line revenue, which drove the profitability in the first quarter.

First after a full quarter on the market, the commercial launch of Kuvan is off to a great start. And we fight for $8 million of revenue booked in the first quarter.

The interest level from the PKU community is high and we are pleased with the progress we have made today.

A total of 881 patients have been referred to BPPS, so we have a total of 509 patients have initiated commercial therapy as of last Friday, April 25. We anticipate a portion of these patients will discontinue therapy in the future.

The rate of patient referrals to BPPS remains strong. And Steve will elaborate on the details of the Kuvan launch a little later.

So based on the momentum generated to date, the enthusiasm we have seen from patients and physicians, and the efficacy of safety profile for Kuvan, we remain extremely optimistic about the long-term potential of Kuvan in PKU.

At this time it is important to remember that we are still in the beginning stages of the process and say some uncertainty associated with any first-year product launch. However, based on our progress and sales run to date, we are increasing the bottom line, the bottom end of our guidance from $40 million to $45 million.

If we get additional clarity in the coming months to help us narrow the current range of 45 to 70, we will adjust our expectations accordingly.

With respect to Kuvan's regulatory studies outside of the United States, our partners Merck Serono and Asubio are making good progress towards licensure in Europe and in Japan.

In Europe, BioMarin is working closely with Merck Serono on responding to questions from the EMEA as part of the normal review process. And we remain on track for a decision on potential positive opinion and approval in Europe at the end of this year.

In Japan, Asubio has supplemented its own filings to the Ministry of Health, Labor, and Welfare with data from BioMarin's U.S. filing. And we could see approval in Japan in Q2 or Q3 of this year.

As a reminder, BioMarin will receive net single-digit royalties on sales in Europe and in Japan. We will receive substantially higher double-digit royalties that will partially offset royalties paid to Asubio on U.S. sales of Kuvan.

As we think about the long-term vale of Kuvan, we are aggressively pursuing ways to maximize our intellectual property position around the product.

Currently we are evaluating strategies that could significantly extend the exclusivity beyond offering protection of 7.5 years in the U.S. and 10 years in Europe.

Beyond this, we do not have any issued patents, patents specifically related to the use of it in PKU, but we continue to build our patent portfolio with 87 applications in prosecution, which if issued, would expire between 2023 and 2028.

One in particular, which we believe would prove very significant, it's an application for once daily dosing, which is an active prosecution.

If the patent does issue as we expect, it would offer protection for Kuvan until 2024.

To further support our advances in the treatment of PKU and our IT position, we are developing a pro drug with superior bioavailability.

Next, Naglazyme continues to perform well, especially in the international market. And as a result of strong sales strategy in the first quarter, we are raising our expectations for 2008.

We expect ongoing momentum to be driven by continued geographic expansion and the initiation of new patients on commercial therapy.

Countries such as Brazil and Turkey, for example, have been identified as having higher MPS VI patient population than we initially recognized at launch. And we continue to increase the number of patients on therapy.

As for Aldurazyme for MPS I, commercialization continues to go well. And this was the first quarter of the restructure joint venture with Genzyme, which we believe will result in increased clarity in our income statement as well as improve efficiency of operations for both parties. And Jeff will review the details in a moment.

Moving on to PEG-PAL, an enzyme therapy for PKU patients who either do not adequately respond to Kuvan or wish to reduce their blood Phe levels beyond what is possible with Kuvan. The first patient in the Phase I trial is expected to be dosed immediately.

This is a very exciting program. And Emil will review additional details on this in our anti program later.

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

Thanks, J.J.

I will start by reviewing product revenues of Naglazyme, Aldurazyme, and Kuvan for the first quarter ended March 31, 2008. And follow with collaborative agreement revenue for the same period.

I will then review our bottom line for the quarter ended March 31, 2008 and follow with a more in-depth look at our financial results.

Beginning with Naglazyme, net product sales for the first quarter of 2008 were $27.7 million, an increase of 50.5% over product sales of $18.4 million in the first quarter of 2007.

Net sales growth is primarily attributable to geographic expansion internationally and the initiation of therapy by previously identified or newly diagnosed patients.

Net product sales of Aldurazyme by Genzyme were $36.8 million for the first quarter ended March 31, 2008, representing an increase of 37.3% over sales of $26.8 million for the first quarter ended March 31, 2007.

Revenues to BioMarin under the restructured agreement with Genzyme were $24.1 million for the first quarter of 2008.

Beginning January 1, 2008 as a result of the restructuring of the joint venture with Genzyme, BioMarin received a royalty of 39.5% to 50% of worldwide net sales. In addition, BioMarin recognizes product transfer revenue when product is shipped to Genzyme. This amount will eventually be deducted from royalties earned when the product is sold by Genzyme.

The first quarter of 2008 includes a significant amount of incremental product transfer revenue through the transfer of existing Aldurazyme quantities on hand in this first period of the joint venture restructuring.

BioMarin will also record cost of goods sold associated with manufacturing costs of product shipped to Genzyme, a modest amount of operating spending related to certain ongoing U.S. regulatory administrative costs, and finally our share of the remaining R&D activities in the joint venture.

We expect that profitability associated with Aldurazyme will continue to grow during 2008 as a result of growing worldwide product revenue.

As for collaborative agreement revenues associated with our partnership with Merck Serono, BioMarin recorded $2.5 million for the first quarter ended March 31, 2008 compared to $4.1 million for the first quarter ended March 31, 2007.

This reduction of collaborative agreement revenues is due to the lower reimbursable Kuvan development expenses from clinical trial and manufacturing activities.

Net income is $1.7 million or $0.02 per share for the first quarter of 2008 compared to a net loss of $9.3 million or $0.10 per share for the first quarter of 2007.

The net loss during the first quarter of 2008 includes $4.5 million of non-cash stock compensation expense compared to $3.6 million of non-cash stock compensation expense in the first quarter of 2007.

Non-GAAP net income, which excludes stock compensation expense, was $6.2 million or $0.06 per share for the first quarter of 2008 compared to non-GAAP net loss of $5.7 million or loss of $0.06 per share for the first quarter of 2007.

Now I'll review the operating expenses and non-operating interest income in more detail.

Cost of sales increased $13.1 million to $17.2 million in the first quarter of 2008 from $4.1 million in the first quarter of 2007. The increase is primarily due to cost of sales for Aldurazyme, which is now reflected on the income statement along with the related revenues as a result of the restructuring of the JV with Genzyme.

Additionally, increased sales of Naglazyme and the impact of the first full quarter of Kuvan sales contributed to the increase.

Gross margins for Naglazyme were 80% during the first quarter of 2008 compared to 78% during the first quarter of 2007 due to improved yields and the impact of foreign exchange.

Kuvan gross margins during the quarter were 88%, which primarily reflects an 11% royalty on net product sales. Once the inventory that was previously expensed as R&D is used up, we expect U.S. Kuvan margins including the 11% royalty to be in the low 80% range.

Aldurazyme gross margins were 55% due to the mix of royalty income and roughly low margin inventory transfers to Genzyme. Over time we expect annual Aldurazyme gross margins to approach the mid 60% range.

Research and development expenses decreased $500,000 to $17.6 million in the first quarter of 2008 from $18.2 million in the first quarter of 2007. This is attributed primarily to decreased development costs for the Kuvan program, which is offset by increased costs for early stage development programs and non-cash stock based compensation expense.

We expect to increase our R&D spending as 2008 progresses to expand our early stage development programs, support the PEG-PAL clinical studies, and ongoing 6R-BH4 program for cardiovascular and sickle cell indications, and non-cash stock compensation expense.

Selling, general, and administrative expenses increased by $7.4 million to $23.7 million in the first quarter of 2008 from $16.3 million for the first quarter of 2007, this was largely due to increased commercialization activities related to Kuvan, continued international expansion of Naglazyme, and growth in corporate expenses including non-cash stock based compensation expense.

SG&A spending is expected to increase in 2008 as compared to 2007 due to the full-year impact in sales and marketing expenses for Kuvan in the U.S., commercialization of Naglazyme in Europe, Latin America, and other parts of the world, and non-cash stock compensation expense.

Non-operating interest income increased by $1.9 million to $5.6 million in the first quarter of 2008 from $3.7 million in the first quarter of 2007, this was primarily due to the additional cash on hand as a result of the April 2007 financing. During the remainder of 2008 we expect to earn less interest income on our cash balances as compared to 2007, primarily due to the climb in interest rates.

From a cash perspective, we ended the first quarter with $574.8 million of cash, cash equivalents, and short-term investments.

With regard to 2008 guidance, Naglazyme net sales are now expected to be in the range of $115 million to $125 million from a previous range of $105 million to $116 million.

As for Aldurazyme, Genzyme maintains expectations for total net sales for 2008 to be in a range of $135 million to $145 million. However, based on the run rate in the first quarter, we have adjusted our expectations from net revenue to BioMarin to a range of $70 million to $80 million up from a previous range of $68 million to $78 million.

Kuvan net sales are now expected to be in the range of $45 million to $70 million, revised from a range of $40 million to $70 million.

As noted in the press release issued earlier today, interest income is expected to be in a range of $15 million to $18 million result of reduced yields on investments due to declining market interest rates.

As for net income for 2008, we have raised the bottom end of our expectations for an updated range of $28 million to $40 million from a previous range of $20 million to $40 million, which still assumes that the $30 million milestone for EU Kuvan approval will be earned in 2008.

The estimated 2008 net income includes approximately $24 million to $27 million in non-cash stock compensation expense. Non-GAAP net income, excluding the impact of non-cash stock compensation, is estimated to be in the range of $52 million to $67 million from a previous range of $47 million to $67 million.

And now I'd like to turn the call over to Steve, who will provide an update on the Kuvan launch.

Thanks, Jeff.

After a full quarter into the Kuvan launch, we are encouraged by what we see.

As J.J. mentioned, there is strong interest from patients and physicians and in addition to blood Phe level reductions, many patients have noted qualitative benefits, such as better concentration, less depression, and feeling better overall.

There are also some accounts of patients being able to increase the amount of natural protein in their diets while keeping blood Phe levels under control.

Our current observed average dose is still approximately 18 mgs per kg per day. And average weight is approximately 48 kilograms.

We do not have enough information yet to assess compliance. Assuming 80% compliance yields an average price of approximately $70,000 per year before factoring in mandatory government discounts.

As of April 25, a total of 881 patients have been referred to BPPS for treatment initiation. Over 500 patients have had therapy initiated with commercial Kuvan.

Since many of these patients have been on therapy for less than one month, we can't say with certainty how many of those patients will stay on therapy long-term.

At this time, over 75% of responding EAP patients have been transitioned onto commercial therapy. And we are diligently working with the others to establish insurance coverage.

The average number of patients referred to BPPS fluctuates significantly from week to week, but is averaged between nine and 11 per working day each full month since launch.

At the beginning of the quarter, this reflected mostly EAP patients transitioning to commercial therapy. But now it is almost all new patients being referred for treatment.

Overall time from BPPS referral to shipment of drug has recently averaged between two and three weeks. This is largely a function of insurers requiring prior authorization and patients making more use of the financial assistance program offered by the National Organization of Rare Diseases.

Over 100 of the approximately 130 PKU clinics have now referred patients for therapy. And these referring clinics generally represent the larger clinics, which account for the majority of the PKU patient population.

It is important to keep in mind that it does take time for clinics to schedule appointments and complete the necessary paperwork for reimbursement.

Due to scheduling constraints, larger clinics will take more time to cycle through their PKU patients.

It is also worth noting that in Q2 we will roll out the PKU registry. All U.S. PKU clinics have been invited to participate in the program. Please note that these Kuvan launch metrics are given to provide clarity at the beginning of the launch. We do not commit to offering this level of granularity going forward.

Overall the response from payers has been encouraging. To date we have seen very few denials from payers, mostly due to administrative errors, which we have been able to reverse.

We have seen significant improvements in processing timelines already. And expect payer decisions in the overall administrative process to become more streamlined once the product has permanent placement in the formularies and plans gain additional experience with Kuvan.

In summary, we're encouraged by the level of enthusiasm among patients and physicians, the positive response from payers, and the large pipeline of patients being processed through BPPS. We look forward to keeping you updated as the launch progresses.

Now I would like to turn the call over to Emil, who will provide an update on our R&D pipeline.

Thanks, Steve.

Starting with PEG-PAL, the first patients in Phase I trial will be dosed imminently. And we're hopeful that our positive preclinical data showing sustained decreases in blood Phe levels in PKU patients mice will be replicated in humans.

Phase I study will assess the safety and PK of single injections of PEG-PAL in 35 PKU patients, this series of up to seven escalating dose cohorts of five patients each.

The study is expected to conclude by the end of 2008.

The Phase I patients would later be offered continuation into a Phase II study that would evaluate the safety and efficacy of weekly injections for eight weeks, followed by a dose optimization and an extension period.

Based on the FDA's additional regulatory requirements for initiating multi-dose therapy, we now expect to initiate the Phase II in the first quarter of 2009.

Beyond PEG-PAL we've enhanced our early stage development strategy to drive our pipeline growth in the coming two years. Currently we have a number of ongoing pre-clinical programs with potentially interesting drug candidates, one of which is another life store disorder, for which we are targeted to file an IND in the second half of 2009.

We hope to provide additional details on this program at our R&D day in early June.

Regarding the BH4 cardiovascular program, we are performing several Phase II and exploratory studies, including the study of peripheral arterial disease, sickle cell disease, endothelial dysfunction in coronary artery disease, pulmonary arterial hypertension, endothelial dysfunction in isolated hypertension, proteinuria in patients with chronic kidney disease, and the effect of vitamin C on BH4 pharmacokinetics.

We expect to have data from the sponsor study for sickle cell disease by late Q3 to Q4 and for PAD by Q4 or early Q1 2009. The remainder of the study should complete by Q4 2008, up to mid 2009, depending on enrollment in some of the investigator-initiated studies. The collective results will help us determine future of the 6R-BH4 cardiovascular program.

In addition to the programs mentioned, we have several early stage preclinical programs, which should provide BioMarin with additional drug candidates going forward, along with any new late-stage products we might in-license.

We hope to provide additional detail on our pipeline at the R&D day in early June and look forward to keeping you update on our progress.

Now I'd like to turn the call back over to Eugenia for some comments regarding upcoming events.

Thanks, Emil. Before we open up the call for questions, I would like to note that we will be presenting at a few investor conferences in the coming months. On May 1, we will be presenting at the Morgan Stanley Global Healthcare Conference in Key Biscayne, Florida. On May 13 we will be presenting at the Baird Growth Stock Conference in Chicago. And on May 14 we'll be presenting at the Bank of America Healthcare Conference in Las Vegas.

You can access these presentations live through our website at www.bmrn.com. In addition, we are hosting an R&D day on June 5th on New York City. And with that, we would like to open up the call for questions. Katie?

(OPERATOR INSTRUCTIONS)

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

Thanks for taking the question.

I just was wondering, and I know it's very early in the launch here with Kuvan. You note the 509 patients who've initiated therapy. Do you have any kind of read on any confirmed patients who've dropped off therapy and if you could provide that number?

Sure. We've got a relatively small number. But we now have dropped off, I think the last number I saw was 26 or 29. It was in the high 20s.

But what we don't know is patients who have dropped off or will be dropping off because they haven't come due for a refill yet. So please take that number as not meaningful in terms of trying to extrapolate a response rate.

Right, right, okay.

And so when you guys talk about number of patient adds per day, I know you're saying it sort of fluctuates between nine and 11. And again, I understand it's early in the launch here.

But have you thought about how the summer months might impact that number? From one perspective you could say summer months you see a slowdown. But maybe another perspective would be that you'd see more kids getting into their physicians during the summer.

Is that even a logical way of thinking? Or is there some other way we should be thinking about patient adds during the summer months?

We have thought about it a fair amount because we have seen with our enzyme replacement product that certainly the July and August months are tougher months for us to maintain the type of compliance we see through the rest of the year.

How that's going to play out in the Kuvan market I think we're just going to have to wait and see though.

I think both scenarios that you laid out, the positive scenario with particularly children not having school and maybe having more time for parents to get them in. That's the upside.

More patients being on vacation, having their kids away, that's a potential downside.

Emil's flashing me a note here and he's correct. One of the other things that happen during the summer is that there are PKU camps. And that is patients going to PKU camps, some of the non-treated patients may get exposed to treated patients and word of mouth may increase the number of patients asking about therapy.

But I think until we go through a summer and have an actual experience, whatever we think is going to happen is just what we think is going to happen. We aren't going to know until it actually does.

Okay, and then if I could ask just one final question on Aldurazyme. It looks like you had, if I'm doing my math right here, sort of eyeballing what the royalty rate is, about $9 million or so of the inventory transfer revenue.

How should, that's a little higher than we thought for the quarter. And I'm just wondering is this something that we should expect to trail off significantly in coming quarters?

This is Jeff Cooper. I'll answer that.

I think as we look at the remainder of 2008 over the cumulative remaining 9-month period, we still expect that there will be, that Genzyme inventories will continue to build resulting in some incremental transfer revenue over the remainder of the year.

However, there will be some quarterly fluctuations in the timing of shipments that could affect the overall revenue that we recognize from quarter to quarter. So we could potentially see a reduction of royalty revenue during a particular quarter in 2008, if shipments to third party by Genzyme exceed transfers of product by BioMarin to Genzyme, which would result in a temporary reduction in Genzyme's inventory.

But certainly a significant portion of the incremental transfer revenue was recognized from the first quarter. But over the period of the nine months, of the rest of the year, we might see some more coming through.

Let me add though that as I think was stated earlier during the call, the gross margin on this inventory transfer was lower than the gross margin of product that we sell.

So the impact was around $2 million.

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

Great. That's helpful. Thanks.

Your next question comes from the line of Salveen Kochnover from Jefferies & Company. Please proceed.

Hi, thank you for taking my questions.

J.J. or Steve, can you comment on the average response rate of patients on Kuvan?

I think where we have the best at on response rate is from the early access program. Those are the patients have been exposed to Kuvan for the longest and where we've got the best follow-up. We know from that early access program at least that we had a response rate slightly above 50%.

We anticipate that the broader market is going to have a similar type of response rate. But it's going to take a while for us to be able to confirm that.

And then in terms of patients that basically require prior authorization or co-pay assistance, what proportion of patients that are enrolling into the BPPS require, fit into this criteria? And how long does it usually take these patients to receive payer approval?

That's a good question. And I think the whole prior authorization issue is one that makes tracking time from referral into BPPS to actual shipment of drug a very difficult one.

You've got three components of that time period, the processing time at BPPS, the processing time at the specialty pharmacy, and the time the actual insurance company takes making their decision. Two of those three we've been able to improve significantly since the last call.

But the insurance company is one that we have really no control over. I don't have a hard number on the percent of patients that have a prior authorization, but it appears to be a significant number.

When we look at the major plans in the U.S. and we have proactively covered the top 50 plans, it looks like at least 50% of those plans are requiring a prior authorization.

The same with Medicaid programs, it was like a somewhat over 50% of those programs are requiring a prior authorization.

It varies from program to program, but anywhere from two to six weeks would be the range, time it would take for a patient to get their prior authorization cleared.

As far as the patient assistance program, I think it took a while for the PKU community to really understand that that was there for them and a useful support program for them. We saw very little utilization in the first month or two. Now that the program is better understood we're seeing increasing numbers of patients contacting NORD and asking for financial support with co-pays.

At this point we know of over 100 patients that have done that. So that's a significant number of patients. The processing time to get the NORD application, in some cases it can be as short as a couple of days, in other cases it can take several weeks.

Did that answer your question?

Yes. Thanks.

And then in terms of, just based on our discussion with physicians, it seems like they have a certain number of PKU patients they're willing to see at a time. And then they'll enroll them into the BPPS basically then screen them and then treat them and determine whether or not they're responders.

What does this mean for the launch trajectory? Do you think we'll start to see an uptick in the number of patients physician's will see at a time? Or there'll be a certain number that remains constant for each physician?

I think physicians are going to move at their own pace. One of the things we've known from the pre-launch period is that the PKU clinics have limited resources both financial and human. And that they are very much attempting to do small batches of patients, most not all, but most are trying to do small batches of patients just to manage the workload.

So the larger clinics in particular, a clinic has 150, 200, 250 patients, very tough for them to sort through how to get those patients through quickly.

You add to that the fact that this is a new drug. The clinics that were in the early access program or the clinical trials tend to be more aggressive than programs that have not been exposed to the drug before. Many of those people without a prior history want to treat a few patients, go slow, see how it works, get a good feel for the drug before they start bringing in larger numbers of patients.

So I think we'll continue to see relatively steady patient flow. But we won't know that. I can tell you I think that, but I can't tell you I know that.

Okay. And so one last question is there a cutoff date for the EAP patients to transition onto commercial therapy?

We aren't going to cut anybody off therapy completely as long as they are actively working with us to get insurance coverage. We have over 75%. It's probably closer to 80% of those patients on commercial therapy right now.

We have another roughly 7% or 8% of the patients have no insurance and have been transitioned to an indigent patient or compassionate use program.

And there is a relatively small number of patients, between 10% and 15% who have some type of an insurance issue that we're working through in trying to make sure that their coverage is in place before we put them onto commercial therapy.

Okay, great. Thank you.

Your next question comes from the line of Phil Nadeau from Cowen & Company. Please proceed.

Good afternoon. Thanks for taking my questions.

My first is actually on the Kuvan sales number of $5.8 million. Can you tell if there is any inventory change incorporated in that number? So did anybody build inventory that may have inflated that number?

Not to the best of our knowledge. And we are working with a relatively small number of specialty pharmacies.

From as close as we can tell, the inventory that went into those pharmacies and the demand numbers of what was coming out were pretty close match.

Okay. So that brings up my second question.

You folks have been good about updating the Street on the number of patients on commercial therapy through Q1. And based on the numbers that you put out there, $5.8 million does seem quite high. I guess you could see one of two reasons for that if there was no inventory change.

One is the average price per patient, at least initially, seems to be somewhat higher than the $70,000 per patient per year number you're quoting. Or two, there were a number of patients who came on after your most recent update. And those patients get a full month's scrip and that's maybe where some of us made the error and the revenue number was higher than we had calculated.

Can you differentiate between those two possibilities for us? Do you think the average patient number is, or average price per patient is higher than what you've quoted? Or was there just a number of patients added at the end of March?

The price per patient issue is that when we apply. You start with a gross price then you apply the 80% compliance. I think that's where you add up around $70,000 based on the fully run in the too.

The issue is that of course in the first two or three months, the supply is close to 100%. Because you get, it just got started. But in the first quarter you have to use a gross, basically a gross quarterly price instead of a net one. But that doesn't mean that it won't go down over time.

And this, so maybe that helps you a bit understand why the number is high here. And then I'll let Steve continue.

Yes, J.J. is exactly right. There's no compliance factor at all in the first scrip. I mean that's, 100% of the scrip has gone out.

We have had a small number of patients have insurers allow them to get a 90-day supply rather than a 30-day supply with their first scrip too. And that may throw the numbers off a little bit for you.

Okay, that's very helpful.

Then to follow-up on the previous question, you mentioned that you expected to see relatively constant patient flow. And I believe you were talking on a per physician level.

In the past, and I think on the Q1 call you mentioned that you thought the 10 patients per day that was approximately being recommended to BPPS everyday could go up over time as the number of centers prescribing Kuvan increased.

What's your current thinking on the nationwide trends of 10 patients per day? Is that going to be the number for the foreseeable future? Or do you think as the remaining PKU centers come online that 10 patients per day could increase?

We just got started. Again, let's see if it continues to increase. It's anyone's guess right now as to what's going to happen to that number. We are about that level right now.

Now we talked already earlier about the summer. Since this is our first year we don't know what's going to happen in the summer. It's essentially anyone's guess whether it's going to go up or down. There are favorable factors and then there are other factors that could take the number down.

That's why we are not too aggressive. We're still changing our guidance because it's very difficult to know in the first year of launch what's going to happen quarter by quarter.

So in some respects there are some factors pushing the number up, more center have been coming on to prescribing Kuvan.

So eventually as we tapped we get, we penetrate the PKU population more and more, eventually that number's going to have to go down. I mean but we don't know when it's going to start. So I'll let Steve elaborate.

I would echo what J.J. said. We don't know for sure. We're working very hard actually to increase that number. We ran major educational symposia at the GMBI meeting. That's the Genetic Metabolic Dieticians program in Atlanta last week. We think that generated some additional enthusiasm. We hope that translates into patient referrals.

We're rolling out our PKU registry. We'll have an investigator meeting for that in June. Again, we've gotten at least early impressions that there is a lot of enthusiasm related to that. We hope it increases the number of referrals.

We're certainly working hard on education and communication. And we think the more information about Kuvan is out there, the more patients have experience and tell their stories to other patients, the more enthusiasm we're going to generate.

As J.J. said in his initial opening remarks, the product has performed exquisitely. The safety has been great. The efficacy has been better than people expected. And centers, the more experienced they get with it, the happier they seem to be with it.

So we hope to increase. But it's very, very difficult to tell you exactly what's going to happen. We just don't know.

Okay, that's fair enough, two questions for Jeff, if I may, on other parts of the P&L.

Jeff, you mentioned that the transfer revenue you were getting from Genzyme today will be deducted from future royalties on Aldurazyme. And I want to explore that a little bit more.

Does that mean that the $15 million to $18 million that you've gotten for transfer payments this year we'll need to deduct from our future Aldurazyme royalty calculations? Or in the future is there going to be a balance between transfer payments from Genzyme and the deduction?

So the Aldurazyme might equate to what your royalty rates really is?

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

Yes, beyond 2008.

Yes, so the extent that inventory levels at Genzyme remain relatively constant beyond 2008, then basically the impact of the net incremental transfer revenue will be nil. So all the revenue would basically be royalty revenue.

To the extent that their inventory grows over time, there would continue to be some small amount of net incremental transfer revenue. To the extent that inventory levels reduce over time for some reason, you would actually see a reduction against the royalties.

So it's only when the inventory levels go down that you would see this reduction. You could see that on a quarter-to-quarter basis.

As I noted earlier, for the rest of this year we're still expecting to see continued increase in net incremental revenue related to the inventory build. It's certainly not at the level that we saw in Q1.

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

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

$13 million to $18 million, okay.

And then last question is on R&D and SG&A. It seems like the run rate in this quarter for both those lines was quite a bit below what we're projecting for the year. And you mentioned that both were going to grow through the year.

Can you give us some sense of what the R&D and SG&A run rate is going to be for 2008?

Well, for the R&D I mean clearly the spend that we saw in the first quarter was relatively low. It was quite a bit lower the than fourth quarter. We do expect that to grow sizably with the beginning of the Kuvan clinical trials, increased spending for the 6R-BH4 program, as well as a ramp up in our early stage development program.

So we will see definitely a sizeable ramp up in R&D spends as we go through the rest of the year.

For SG&A, the spending there could fluctuate up or down from quarter to quarter. So I wouldn't say necessarily that you would see the same level of ramp up for SG&A. But you could see some fluctuation from quarter to quarter.

That's very helpful, thank you.

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

Hi, thanks for taking my question.

I was wondering if you could update us on your plans to introduce a larger pill size for Kuvan to ease the pill burden? Thanks.

Yes, we have developed a 400-milligram tablet that appears to be stable. And we are working out a development plan to test it for bioavailability by equivalence with the current product later this year.

And based on that discussion with the regulatory variable will determine if we can file that.

It would not be available this year. It would be something potentially sometime next year if we were able to finish this development this year.

So we are working on this tablet to make sure that we maximize long-term compliance. However, I would say at this time and unless Steve gives some more details, the number of tablets has not appears, doesn't appear to be an issue so far. Because patients can dissolve them in apple juice or water or orange juice or they can swallow them. Some of them, although it's not in the label, for convenience purposes and the fact that there is no competition, the pill burden truly has not been a major issue so far.

But Steve you want to say a couple of words about it.

I'm not sure what I can add to that. That has not been a complaint. It would be a nice thing to have a larger tablet, but it is not a necessity at this point.

And I don't see it interfering with the launch trajectory.

But we are developing it anyway, also thinking about potential other indications where the pill burden then could become more of an issue. That's why we're developing it.

So it could be nice to have for PKU although clearly not critical as far as we can tell so far.

Okay, great.

And in terms of PEG-PAL, is there any way to model the immunogenicity of the drug and of potential for there to be antibodies to the antibody. How do you think about this in terms of the need to maybe just overcome that with dose increases over time? Or maybe there could be some other issue with antibodies to an antibody like this.

Is there any way to model that in an assay or animals? Thanks.

We have done some studies using epitope mapping type approaches to look at the protein and to try to analyze its intention. The fundamental fact of the matter is that we covered the whole molecule with PEG. And so the epitopes are all covered and fairly evenly covered.

And so we've certainly done our best to cover the proteinations epitopes.

The thing that could happen in the clinic is that we don't expect the antibodies to inhibit the enzyme or neutralize it. What we expect them is to alter it for clearness from the body, which might alter not so much the dose exactly the perhaps the frequency of administration would be a factor we'd have to consider.

So those are things we could do. I mean we have done the model studies, PK model studies. And we are currently conducting monkey studies. But I don't really think I want to take data from monkeys to decide anything for certain.

The human clinical study is the place where you figure out what our situation is like. There may be some patients that won't tolerate. But we believe that the pegalation is thorough enough on the molecule that we would expect there'd be a natural preservation that would have very good therapeutic effect.

So those are things that we won't know for certain though until we get into a Phase II study.

Thank you.

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

Great, thank you.

Actually I wanted to follow-up on the PEG-PAL program. You said that you, FDA required something else to be done before you can issue these two and therefore its not first quarter '09. Can you just please clarify what additional clinical work that you have to before you initiate Phase II?

Well we had originally had thought that late Q3, Q4 we could get an overlapping stages on it and start the Phase II. That's what we had originally discussed with the Agency.

But for no particular reason, for no data reason, it's just because of ice age guidelines. Their standing now is that they would, they're making basically all products do longer monkey studies regardless whether orphan drug or not.

And so we're ending up having to do, extending some of our toxicology studies before we can file and enable the initiation of the Phase II. So that's the delay.

It doesn't delay the overall program. It just, it won't allow us to overlap Phase I and Phase II, which is what our strategy has been, to try make, to go as quickly as we can in the program.

So it just pushes us back to the beginning of Phase II. But the Phase II could start more succinctly and not necessarily as staged out as it was before.

And this is not a decision that is specific to PEG-PAL. And apparently the FDA now before any potential chronic clinical studies they're going to require this amount of preclinical toxicology package.

Right. So you're current expectations for dosing is still once a week for continuous injections.

Yes. There's no change there.

All right. Thank you.

Your next question comes from the line of Liana Moussatos from Pacific Growth Equities. Please proceed.

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

Let me start with the easy one. We've had 103 different PKU clinics refer Kuvan patients into BPPS that have therapy initiated. And I'll ask Jeff to take the next several.

I think on the gross margins for Aldurazyme we reported 55% in the first quarter. And again, that was due to the significant impact of the incremental transfer revenue, which has a lower margin.

So the net margin overall including the royalties ended up being 55%.

This is the gross margin using the boundary revenue as being not; this is not the overall gross margin for the product, which is initially higher than that.

That's right. That's using the bottom end recorded revenues of $24.1 million off of our cost of goods sold.

The other question with regards to the royalties, the royalties that we pay to our partners as it relates to Kuvan is 11%. And that represents the majority of the cost of goods sold that we're seeing for Kuvan in the first quarter.

I don't know if there was another part to your question?

No, that's it. Thank you.

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

Thanks for taking my question.

Can you just clarify a little bit of how large or small the Naglazyme opportunity is in Japan?

Naglazyme is a relatively small market in Japan. We had no sales in Q1 into Japan. Our first actual shipments were in Q2.

We don't see it as a significant revenue opportunity. But it is an important market. There is a handful of patients there who will go on to commercial therapy quickly. And it is country with several people who have a significant amount of influence within the general MPS community. And we're very happy to be able to be working with them and providing Naglazyme for their patients.

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

Sure. It's a federal mandate that any pharmaceutical product that is paid for by the government is subject to an automatic; I believe it's a 15% discount, 14.9% I believe.

We actually have had a relatively smaller number of Medicaid patients that we expected. In our payer surveys pre-launch we anticipated roughly 30% of the patients would be Medicaid. At this point we're actually averaging under 15% Medicaid. So we're seeing a little bit less on the Medicaid side that we expected.

That may go up over the rest of the year. But at least at the moment it's pretty low.

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

When you say add days to screen more -- have they set up extra clinic data?

Yes.

Yes, we've had a few centers do that but it's really tough. It's been interesting to sort through some of those things. But a lot of them can't get space. They'll share clinic space with other departments. And unless they can get another department willing to give us some time, it's not often just logistically feasible.

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

It's been variable. But I think probably one to two weeks is the shortest period. And we have a number probably the majority take that full 30-day first scrip and follow the patient out through those 30 days before making a decision.

It's pretty rare that somebody would need more than 30 days to make a good decision as to whether or not the patient was a responder.

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

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

Okay, thank you.

(OPERATOR INSTRUCTIONS)

Your next question comes from the line of [Andrew Veno] from Ross Capital. Please proceed.

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

How many people have been on for at least one month? Roughly 400, but that's a ballpark.

Do you have a rough guess to how many of those have a decline in Phe levels of at least 30%?

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

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

No. That is also data we do not see.

Okay, thank you.

Sure.

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

Hi, thanks for taking my question and congrats on the robust quarter.

Just wondering if you could provide some additional insight on Kuvan regarding the percent capture of lost or older patients such as those greater than 20 years old? And also do you see greater than expected compliance in the 15 to 20 year old patients?

And then last question of the 103 clinics, just wondering number represented how many PKU patients do they represent of the total population? Thanks.

Maybe an easy way to take a look at it is we have 19 of the largest 20 in the country that have referred patients. And that top 20 represents the majority of the PKU patients in the country.

So it's a relatively small percentage of PKU patients that are being seen in a center that had not referred anyone yet.

And I'm sorry, could you repeat your previous question?

Sure. Just wondering if you could provide insight on the percent capture of lost or older patients such is, that is those who are greater 20 years old?

And then just wondering if you're seeing a compliance in, you're seeing greater than expected compliance in the 15 to 20 year old patients?

It's too early to comment on the compliance. As far as the capture of patients over the age of 20, I think it's pretty early on that too. Most centers have prioritized their younger patients to bring in. Our average patient age right now is 16.2 years old.

We do have a very large range with the youngest patient under six months and the oldest patient 56 years old was the last spread I saw.

But by and large it is skewed toward the younger patients at this time.

Okay, great. Thanks for your insight.

Sure.

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

Thanks. Just want to follow up on that question. You were talking about the age range for Kuvan. I believe on the last call you talked about percentages over certain ages and under certain ages. Would you have those percentages for this quarter?

You know I don't.

Last time you said 20% were over age 31 and 21% were over 19.

Yes, we broke it out in more detail last time. And I do not have that breakout available to me right now.

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

We can.

So the majority of our sales is about 55%, 53%, 55% were EU sales, about 27% international and 18% U.S.

18% U.S. okay, thanks a lot.

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

Thanks a lot.

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

Thanks for letting me ask a follow up question.

I was just curious when you were answering some previous questions; you mentioned that you had some payers who are authorizing as much as three months of therapy. Can you maybe characterize how many patients is that measurable? Is there some larger number that we should think about?

I think it's a relatively small number at this point. Generally the first scrip is almost always for 30 days. After a patient has been shown to be a responder the physicians made it clear that the patient is going to stay on long-term therapy. It's been possible for a relatively small number of patients to get 90 days.

I can't give you what percentage it is, but I'm sure it would be a single digit percentage of the overall number.

Okay. So that's only after they've been deemed responder, correct?

Right. It wouldn't make much sense for a 90-day supply during the BH4 testing phase.

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

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

Great. Thank you.

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

Thank you. So we feel we're off to a very good start in 2008 with a strong sales of Naglazyme and Aldurazyme and a successful quarter for Kuvan. And that's driving profitability in the first quarter.

We are encouraged by the first full quarter of the Kuvan launch and remain dedicated to the successful execution of this program.

In addition to Kuvan, we will also continue to focus on the geographic expansion of Naglazyme and the advancement of our R&D pipeline. Concerning the effect of our program, we have talked about any number of treatment programs, and possible in-licensing or acquisition opportunities.

We are currently focused on pursuing later stage opportunities to augment our clinical stage pipeline and ensure the continuity of double-digit revenue growth in the coming years.

We look forward to keeping you up to date on our progress and we thank you for your continued support. Thank you for joining us on the call today. Good-bye.

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