BioMarin Pharmaceutical Inc (BMRN) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the third-quarter 2008 BioMarin Pharmaceuticals Inc. earnings conference call. My name is Stacy and I will be your conference moderator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, as Ms. Eugenia Shen, Senior Manager of Investor Relations.

Thank you. On the call today is JJ 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.

This nonconfidential presentation contains forward-looking statements about the business prospects of BioMarin Pharmaceuticals, including expectations regarding BioMarin's financial performance, commercial products and potential future products in different areas of therapeutic research and development. Results may differ materially depending on the progress of BioMarin's product program, 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.

I now would like to turn the call over to JJ, 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 the third quarter and the nine months of 2008, and then Steve will provide more detail on commercial activities, and Emil will provide an update on our ongoing R&D efforts. Eugenia will then review the list of investor conferences where we will be presenting in the coming months before we ask the operator to open the call for questions.

First, looking at the big picture, we have $563 million in cash at the end of September, three products on the market and growing total revenues approaching $300 million. We are one of the few biotech companies that will have limited exposure to what will be a protracted unfavorable financial environment. We do not expect that any of our three commercial products will face any direct competition for the foreseeable future, and we have substantial cash reserves.

In addition to our three commercial products, we have a robust pipeline of promising products, which keeps us well-positioned for continued long-term growth. We are pleased to report third quarter results which show an overall increase of 191% in total BioMarin revenue as compared to the third quarter of 2007. The third quarter marks our fourth consecutive profitable quarter, and we are well on our way to achieving our first profitable year.

Naglazyme continues to perform well with a 56% increase in net sales as compared to the third quarter of 2007. While sales were down sequentially from the second quarter, there was an increase in the absolute number of patients on therapy in the third quarter, which represents the largest spike in the last two years. The reduction in sequential revenues was due to the timing of shipments to some of our customers outside the United States and a slight seasonality impact as the second and fourth quarters traditionally tend to be the strongest.

You may recall that we experienced the same slowdown last year from Q2 to Q3, which was followed by a sequential increase of 20% in Q4 of 2007. A very encouraging trend we are now seeing is the tremendous progress that is being made in international markets, and we will continue to aggressively pursue further growth and the initiation of new patients on commercial therapy. We remain confident that Naglazyme represents a $300 million market opportunity for BioMarin and that it will continue to contribute significantly to top-line growth in the coming years.

Next, net third party sales of Aldurazyme by Genzyme increased 18% in the third quarter of 2008 as compared to the third quarter of 2007. As with Naglazyme, the third quarter is historically weaker for Aldurazyme, due to ordering patterns and the slowdown in the summer months. This marks the third quarter of following the restructured joint venture with Genzyme, which we believe has resulted in improved efficiencies of operations for both parties.

Finally, Kuvan net revenue of $13.8 million in the third quarter is in line with our expectations and reflects the previously reported slowdown at the PKU clinics. At the beginning of September we launched the registry and the associated 45-day free drug program, and a number of patient educational events were held. Approximately 77 centers have expressed interest in participating in the registry; and, as of October 24th, 208 patients had been referred through the free drug program, including patients in the pilot program.

The patient educational events of September's were not as well attended as we hoped, but of the patients who attended, the referral rate into BPPS was high. Overall, the rate of referrals in September and October did not rebound significantly after the summer months. Going forward, however, we have planned a number of direct patient communications and awareness building efforts to better educate the PKU patient population.

Additionally, there are a number of [investigative response to] trials that will enable us to enhance the equivalent data set and help address patient concerns about long-term safety of the drug and other measures. Later, Steve will elaborate on the details of the Kuvan commercialization program.

While we recognize that the rate of Kuvan launch is slower than original street expectations, we remain optimistic about the long-term potential of the drug. The percentage of patients who remain on therapy is higher than we expected at launch with a very low number of discontinuation seen thus far. Of all patients who have started on commercial Kuvan between launch and June 30th, between 50% and 60% of them are still on Kuvan three months or more after they have tried the drug, and this is net-net of discontinuation and compliance. Of all these indications -- bode well for the long-term potential of Kuvan.

With respect to the studies of Kuvan outside of the United States, our partner Asubio officially launched Biopten for PKU at the end of the third quarter in Japan. In Europe, BioMarin has been working closely with Merck Serono and the EMEA throughout the review process. In late September, Merck Serono received a positive opinion from the CHMP for Kuvan, which signals a strong probability of approval in Europe by the end of the year. Upon approval, BioMarin will receive a $30 million milestone payment from Merck Serono. We will also receive net single-digit royalties on sales in Europe and substantially higher double-digit royalties on sales in Japan, which will partially offset royalties paid to Asubio on US sales of Kuvan.

To maximize our [IT] position around Kuvan, we're evaluating a strategy that could significantly extend exclusivity beyond orphan protection, including a patent application for once-daily dosing. If this patent issues as expected, it will offer protection until 2024. We are also developing a pro-drug with superior bioavailability.

Moving on to PEG-PAL, we have completed the third cohort of patients, and the DSMB meeting is scheduled to be held in a few days. Emil will review additional details on this and our overall R&D program a little later.

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

Thanks, JJ. I will start by reviewing product revenues of Naglazyme, Aldurazyme and Kuvan for the third quarter and nine months ended September 30, 2008, and follow with collaborative agreement revenue for the same periods. I will then review our bottom line for the quarter ended September 30, 2008, followed with a more in-depth look at our financial results.

Beginning with Naglazyme, net product revenue for the third quarter of 2008 was $33.3 million, an increase of 56.3% over net product revenue of $21.3 million in the third quarter of 2007. Naglazyme net product revenue for the nine months ended September 30, 2008, was $96.2 million compared to net product revenue of $60.6 million for the nine months ended September 30, 2007. Naglazyme net product revenue growth is attributable to geographic expansion internationally, the initiation of therapy by previously identified or newly diagnosed patients and weight gain as patients grow.

Net sales of Aldurazyme by Genzyme were $38.2 million for the third quarter ended September 30, 2008, representing an increase of 18.3% over net sales of $32.3 million for the third quarter ended September 30, 2007. Net third-party sales of Aldurazyme by Genzyme for the nine months ended September 30, 2008 were $113.7 million compared to net sales of $88.3 million for the nine months ended September 30, 2007.

Net product revenue of BioMarin-related Aldurazyme was $20.7 million in the third quarter of 2008. This reflects an increase in net product revenue from the amounts payable to BioMarin by Genzyme due to incremental product transfer revenue resulting from the timing of inventory transfer to Genzyme which exceeded the units shipped to third-party customers, the net impact of which was about $5.6 million for the third quarter of 2008.

Net product revenue to BioMarin-related Aldurazyme was $58.1 million for the nine months ended September 30, 2008.

Net product revenue for Kuvan was $13.8 million for the third quarter and $31.6 million for the nine months ended September 30, 2008. Net product growth was due to patients initiating therapy with Kuvan.

As for collaborative agreement revenues associated with our partnership with Merck Serono, BioMarin reported $2.4 million for the third quarter of 2008 compared to $3.1 million for the third quarter 2007. Collaborative agreement revenues for the nine months ended September 30, 2008 were $7.4 million compared to $10.8 million for the nine months ended September 30, 2007. This reduction of collaborative agreement revenue is due to lower reimbursable Kuvan development expenses in the third quarter and first nine months of 2008.

Net income was $800,000 or $0.01 per share for the third quarter of 2008 compared to a net loss of $5.2 million or $0.05 per share for the third quarter of 2007. The net income during the third quarter of 2008 includes $7.4 million of non-cash stock compensation expense compared to $5 million of non-cash stock compensation expense for the third quarter of 2007.

Non-GAAP net income, which includes stock compensation expense, was $8.2 million or $0.08 per share for the third quarter of 2008 compared to non-GAAP net loss of $200,000 or $0.00 per share for the third quarter of 2007.

Net income for the nine months ended September 30, 2008 was $6.3 million or $0.06 per share compared to a net loss of $18.4 million or $0.19 per share for the nine months ended September 30, 2007. Non-GAAP net income was $24.1 million or $0.24 per share for the nine months ended September 30, 2008, compared to non-GAAP net loss of $5.6 million or $0.06 per share for the nine months ended September 30, 2007. Basic and diluted GAAP and non-GAAP earnings per share for the three and nine months ended September 30, 2008 were the same, except for non-GAAP diluted earnings per share for the nine months ended September 30, 2008, which was $0.23 per share.

Non-cash stock compensation expense for the nine months ended September 30, 2008 and September 30, 2007 was $17.8 million and $12.8 million, respectively.

Now I'll review the operating expenses and non-operating interest income in more detail. Gross margins for Naglazyme were 81% during the third quarter of 2008 compared to 79% during the third quarter of 2007, due to the impact of foreign currency exchange gains and improved manufacturing yields. Aldurazyme gross margins will continue to fluctuate from quarter to quarter, depending upon the timing of product transfers to Genzyme, which is the basis for cost of goods sold recognized by BioMarin.

In the third quarter and first nine months of 2008, Aldurazyme gross margins were 71% and 69%, respectively, which reflects both the royalty and product transfer revenue from Genzyme to BioMarin. Kuvan gross margins during the third quarter were 87%, which primarily reflects an 11% royalty on net sales. Once the inventory that was previously expensed as R&D is used up in the first half of 2009, we expect US Kuvan margins, including the 11% royalty, to be in lower 80% range.

Research and development expenses increased $9 million to $26.2 million in the third quarter of 2008 from $17.2 million in the third quarter of 2007. This is attributed primarily to increased costs for clinical and early-stage development programs, the license payment for Duchenne muscular dystrophy and non-cash stock-based compensation expense. We expect to increase our R&D spending in the fourth quarter of 2008 to expand early-stage development programs to support the PEG-PAL clinical studies, GALNS for MPS IVA as well as non-cash stock compensation expense.

Selling, general and administrative expenses increased by $9.5 million to $29 million in the third quarter of 2008 from $19.5 million in the third 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.

Non-operating interest income decreased by $4.5 million to $3.4 million in the third quarter of 2008 from $7.9 million in the third quarter of 2007. This is attributed to the decline in market interest rates. From a cash perspective we ended the third quarter with $563 million of cash, cash equivalents and short-term investments.

With regard to 2008 guidance, Naglazyme net product revenue is still expected to be in the range of $130 million to $140 million, and we are tracking to the middle of that range. As for Aldurazyme, Genzyme maintains expectations of total net sales in the range of $135 million to $145 million, and we are maintaining our expectation for net product revenue to BioMarin in a range of $72 million to $80 million.

Kuvan net product revenue is still expected to be in the range of $45 million to $65 million, and we are tracking towards the lower end of that range. As for net income for 2008, we are maintaining our expectation for a range of $30 million to $42 million, currently tracking towards the middle of that range. This assumes that the $30 million milestone for EU Kuvan approval will be earned in 2008.

The estimate of 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 $54 million to $69 million.

Now I'd like to turn the call over to Steve, who will provide an update on commercial progress.

Thanks, Jeff. Starting with Naglazyme, we continue to find significant numbers of new patients, particularly in regions such as Latin America, the Middle East and Turkey. We now have more patients on therapy in Brazil than in any other country, and we are aware of many still untreated patients who would benefit from therapy. It is probably worth noting that Latin American transactions including Brazil are done in US dollars, so currency fluctuations did not impact revenues from that region.

As JJ mentioned, despite the sequential decline in revenue from Q2 to Q3, the increase in absolute patient number in the third quarter represented the largest increase in two years. The decline in revenue is due to timing of orders from some customers outside the US and some impact from seasonality. In the US and most of Europe, Naglazyme is ordered by individual hospitals in generally infrequent, relatively small quantities. As international becomes a larger portion of our revenue stream, a greater percentage of orders come from government entities that tend to buy larger quantities less frequently. Normally, these orders even out, but in Q3 they did not. This situation is likely to cause some choppiness in quarter-to-quarter changes in the future as well.

From our assessment of the market, we believe there remains significant untapped potential, particularly in the international region, which is already the largest contributor to Naglazyme growth. Australia had funding approved effective for September, but the initial orders were delayed into October and that had a negative impact on Q3 but will further increase international contribution going forward. We continue to expect formal approval in Brazil in the first quarter of 2009 and expect to enter new markets in Eastern Europe and the Middle East.

We maintain our peak sales estimate for Naglazyme of around $300 million, double our initial expectations at the time of launch.

As for Kuvan, nine months into the product launch we continue to learn more about the dynamics of what has proven to be a very complex market. The rate of patient referrals has not re-accelerated significantly since the slowdown that took place during the summer. We do, however, continue to have additional new patients referred to BPPS and new patients initiate commercial therapy on a regular basis. Because Kuvan was developed and brought to market at such a rapid speed, and just a little over three years from IND filing to approval, there's not yet much in the way of supportive data on long-term safety or specific patient groups such as patients under four years of age and maternal PKU patients. We are quite confident, however, that we have a safe drug that can benefit a significant portion of all PKU patients and that we will continue to creatively and aggressively pursue ongoing post-marketing activities.

We have intensified our sales efforts, and our 20 sales representatives are continuing their work to define the clinical value of Kuvan and resolve logistical obstacles for clinics. We are continuing and expanding our direct-to-patient communication efforts through patient meetings, teleconferences and podcasts, in addition to direct mail and online efforts. Online efforts include PKU.com, which has grown dramatically since inception in March of 2006 and serves as a valuable tool for delivering information to roughly 5000 registered users. We're supporting a number of investigator trials that we believe will help clarify the benefits of Kuvan to both patients and caregivers.

There are currently three open studies and nine planned studies that will assess a range of measures, including improvement in behavioral symptoms, depression, anxiety, short-term memory, processing speed, executive function and changes in bone density and nutrition. These trials will evaluate various patient populations, including some that were not included in our Phase II and Phase III trials. These studies, along with our registry program, will generate additional data to support the use of Kuvan.

Overall, despite some of our recent challenges, there are many reasons to remain optimistic about the long-term potential of Kuvan. First, as JJ mentioned earlier, the percentage of patients being kept on therapy is higher than we anticipated and there has been a low percentage of discontinuations once response has been established. Also, in addition to fee level reductions, patients are anecdotally reporting some very notable qualitative benefits, such as better concentration, less depression, improved sleep and generally feeling better overall. These are the type of outcomes we are attempting to capture and quantify in our support of the investigator-sponsored trials that were previously mentioned. In our view, clearly establishing these types of beneficial outcomes will help increase adoption, improve compliance and maintenance on long-term therapy. Overall, the response from payers continues to be encouraging. We do not anticipate reimbursement to be a limiting factor going forward. Our current observed average dose is now approximately 18.5 milligrams per kilogram per day. The average weight is approximately 50 kilograms.

While it is still too early to assess overall compliance rates, we continue to work off the assumption that 80% compliance will yield an estimated average price of approximately $78,000 per year before factoring in mandatory government discounts. Throughout the launch of Kuvan, we have indeed experienced some unexpected challenges, but we remain confident about the long-term effectiveness of our commercialization program, and we look forward to keeping you updated as the launch progresses.

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

Thanks, Steve. Starting with the BH4 cardiovascular program, two weeks ago we reported positive results from the Phase IIa sickle cell study. Results indicated that oral administration of BH4 resulted in a significant improvement in endothelial dysfunction. Patients with abnormal endothelial function at baseline showed the best improvement, and the improvement was dose-dependent.

Importantly, BH4 was well-tolerated in sickle cell diseased patients. We will have a pre-IND meeting with the FDA in late November to discuss the next steps in the program. Pending feedback from the FDA, future plans could include a survey study to assess the relationship between endothelial dysfunction and sickle cell events and a three-month double-blind placebo-controlled dose-finding study with a primary end point of endothelial dysfunction.

In addition to the sickle cell indication, we are also performing several Phase II exploratory studies of BH4 and other cardiovascular indications. In the first quarter of 2009 we expect to have data from the sponsored study in peripheral arterial disease, the mechanistic study of BH4+Vitamin C, the investigator-sponsored studies in pH and also in proteinuria. The remainder of the study should complete by mid 2009, depending on enrollment in some of the investigator-initiated studies. The collective results will help us determine the future of the 6R-BH4 cardiovascular program.

Moving onto PEG-PAL, the third cohort of patients has been dosed in the Phase I trial, and the DSMB meeting is scheduled to be held in a few days. The purpose of the meeting is to assess the interim safety profile in the first three cohorts with an outcome to either continue or end the study. Based on available data, we expect the DSMB will allow the ongoing PEG-PAL study to continue.

We expect to communicate this decision but do not plan on disclosing any efficacy data until the completion of the study. The Phase I study, which will assess the safety and pharmacokinetics of single injections of PEG-PAL in 35 PKU patients of up to [six -- seven] escalating dose cohorts is expected to conclude in the first half of 2009. The timing will depend on how many cohorts are tested before we reach a safety stop criterion.

The nine months dose administration phase of the monkey toxicology study was completed in September, and the study is now in the three-month recovery phase, which will conclude in December. In the dose administration phase of the study, 64 monkeys were administered PEG-PAL subcutaneously, twice weekly at doses ranging from 0.01 to 3 milligrams per kilo. No immune-related anaphylactoid, hypersensitivity or injection site reactions were noted during the study. Monkeys are not human, but the safety is encouraging in this preclinical study.

Based on the FDA's requirement to complete this nine-month monkey tox study before initiating multidose therapy, we expect to initiate Phase II in late Q1 or early Q2 of 2009. The Phase II study will evaluate the safety and efficacy of weekly injection for eight weeks followed by eight weeks of dose optimization and then an extension period. This will be the true proof of concept for the PEG-PAL drug, since it is the efficacy of repeat dosing in the presence of any immune response that is the key question to answer.

Beyond PEG-PAL, our GALNS program for Morquio, or MPS IVA, is on track to enter the clinic in the first quarter of 2009. This indication fits well with our core development, regulatory and commercial strengths, and we hope to provide the first treatment option for this unmet medical need with our proven track record of expeditiously bringing product to market. We're finding that there are a number of Morquio patients out there, a large number in the clinics worldwide, and many are eager to be treated.

Regarding our program for Duchenne muscular dystrophy, we are working on reformulating the molecule to improve bioavailability and will communicate a revised time line when that is set.

Our preclinical stage program for Pompe disease is moving along nicely. In our second Pompe mouse study, the glycogen storage measures in the [cell to] muscles was further reduced after a longer period of treatment with BMN103 and glycogen storage reduction was superior to that [theme] with Myozyme in all muscles. We are considering our options for this program and we'll keep you updated on our progress.

Now I would like to turn the call 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 presented at a few investor conferences in the coming months. On November 12, we will be presenting at the Credit Suisse Healthcare Conference in Phoenix, and on December 2, we will be presenting at the Piper Jaffray Conference in New York City. You can access these presentations live through our website at www.BMRN.com.

With that, we would now like to open up the call for questions.

(OPERATOR INSTRUCTIONS). Salveen Kochnover, Collins Stewart.

Could you let us know if there was any more EAP or open label extension patients that remain to be switched over to commercial patients at this point?

EAP -- there are no additional patients that we are aware of. As far as the extension study, I believe the last of the extension study patients won't finish their two years until next month. So there are very few left, but there are probably one or two left on the extension study.

I think at the end of the second quarter, you provided guidance for third quarter Kuvan sales was a slight uptick to the second quarter. How should we think about fourth-quarter Kuvan sales, and then potentially '09 going forward, just given the impact of the marketing initiative?

We're not at a position yet where we are ready to give any type of guidance for 2009. But as I said, the referral rate has continued to be about the same as it was through the summer. So I think you can anticipate Q4 to have a slight uptick from Q3, just as Q3 was a slight uptick from Q2. JJ or Jeff mentioned in the call previously, we are -- plan on finishing within the guidance for 2008 and we're tracking toward the low end of that guidance.

Then in terms of Naglazyme ex-US in '09, apart from Brazil, Eastern Europe and the Middle East, are there any additional geographic -- launches into other geographic countries expected?

That's most of the world, outside of Western Europe and United States. But we are just initiating commercial therapy with patients this month in Australia, which is a good opportunity for us. We anticipate -- I can't promise, but we anticipate commercial patients starting in South Korea next year. There are a number of smaller markets, that any one of which is not a huge tick for Naglazyme but cumulatively will have a significant impact on our Naglazyme business.

Can you just maybe describe the hedging strategy in place for Naglazyme foreign sales, just from the foreign exchange impact?

Sure, this is Jeff Cooper, I'll be happy to talk about that. Currently about 50% of our worldwide Naglazyme revenues are euro-denominated, and so what we have been doing is hedging against the euro as it relates to our forward-looking revenues or profit. So our current process is to hedge about 70% of our projected bottom-line P&L exposure for euro-denominated activities. We have provided hedges into the third quarter of 2009. We have hedged at a relatively high rate; in 2008 mid 150's, probably in the mid 140's in the first half of 2009, and then a lower level into the third quarter of 2009. So basically, as I note, we take our total projected euro-based revenues and offset that against our total projected euro expenses, and then we hedge 70% of that exposure. So that's pretty much what our plan is, in terms of our hedging strategy.

Given your cash position, do you have any continued plans to in-license products going forward?

We are still looking at different opportunities. I would say, with the recent dislocation in the financial market, they are getting cheaper and cheaper. So I think we have been wise to wait. But yes; we are in advanced discussions on a couple of opportunities, and we are looking at Phase III products or later stage. And no guarantee of any transaction, and we are looking, really, at product or in-licensing opportunities rather than M&A at this time.

Chris Raymond, Robert W. Baird & Co.

Not to split hairs here, but with regard to Kuvan, if you were to take the absolute lower end of your guidance, that would imply a sequentially down fourth quarter versus the Q3 revenue. Can you just tell us -- is that something that's within the realm of possibilities? Are you seeing that much of a lack of referral?

We're continuing to see increased referrals and increased net numbers of patients on therapy.

So I would say, it's unlikely that Q4 would be lower than Q3 in dollars.

Great. And Steve, I don't know if you can maybe talk a little bit more. I think you gave a little bit of color, but what are the primary objections, the source? Is it patients, or is it still the dietitians or a combination that are primarily, in your view, responsible for the lack of referrals?

Let me take a step back from that just for a second and say again that we are seeing continued referrals, and we're seeing continued referrals in -- we said it, over the summer, was in the four to five patients per day range, and that has not changed. So it's not like referrals have stopped coming in.

There are a number of issues. It is a complex market, and there are issues that are patient-specific, issues that are caregiver-specific, and issues that are system-specific. At the patient level, I think it's important to realize, is most of these patients have been told for their whole lives that if they stay on diet and if they maintain their diet appropriately that everything is going to be perfect for them. That has been the leverage that caregivers have used with patients. And, for the patients to come to grips with the fact that maybe everything really isn't perfect after all is not an easy psychological transition for them. There has been a huge amount of misinformation in this marketplace, particularly as related to safety. I've seen on a number of the patient boards where communication is unfettered and often inaccurate concerns about long-term safety impact with Kuvan. And we have found that in our own market research, that it is a lingering concern to patients, that we have a little over two years of safety data in our Kuvan group, and unbelievably we continue to have Vioxx brought up as an example of a pharmaceutical product caused damage years after its approval.

So I think demonstrating safety, getting patients comfortable with the fact that this is a naturally occurring molecule and it's a cofactor not unlike vitamin C is an educational process that doesn't happen overnight, but it's something we are working on. And I think we're making some progress on it.

At the caregiver level, you've got a couple different issues, one of which is simply time and workload, and the perception that everyone doesn't necessarily see a benefit to Kuvan over diet alone. We were approved in record time, and we are approved based on a biomarker, lowered Phe levels. We have not yet had time to generate the data to show the type of improvements that are going to be most meaningful to caregivers -- improvements in executive function, information processing speed and concentration. Those type of information pieces, database pieces, are going to come out over the next couple of years and I think will make caregivers much more convinced that the value for Kuvan and the value proposition for Kuvan is compelling.

So there's no one issue or no one group that slows things down. It's a combination of things that we need to address and are addressing. I hope I answered your question.

Yes, you did. And sorry for inferring that there are no referrals; I didn't mean to do that. If I could just ask one more question, on PEG-PAL. I think there's a little bit of a slip from the last press release you guys had, last quarterly result, in terms of getting the Phase I data. I think last time, it was Q1 '08 -- or, I'm sorry -- Q4 '08/Q1 '09. And it looks like we are now talking about a one-quarter lag.

Can you explain a little bit what's behind that? Given that you just said that you've got three cohorts now, what's driving that?

Well, I think the enrollment in cohorts is set in a very rigid vision, in a staggered rigid fashion. So if any slots get missed, then the (inaudible) [says] you can't be refilled. And so you end up losing some time. So we have lost a little bit of time. We expect to have essentially five cohorts done, but we won't have data that we would put out. So our expectation is to be talking about data in Q1 '09. The study -- if we finish five cohorts, and that was all we were going to do because we hit a stock criterion, that could be done this year, still. But I don't know what's going to happen as we go up higher and higher in the cohorts. So maybe that's sort of a clarification that the data still takes a little time, even after we finish the cohort and actually come out, even if we finish treating patients.

We don't know if we are going to go to seven cohorts or not, and so that's one of the other variables. We have to see as we move ahead how many cohorts we will end up doing.

So there is a little bit of slip in time, but I think partly also we're trying to clarify when we would actually put out data and when we would have completed. So there is some slip of time, but I think that things are moving along and we've completed three cohorts. We'll have our DSMB meeting and move onto the next cohort level. Our expectation, though, overall, on timing for Phase II really isn't changing. We do need to talk with -- get some more feedback from FDA, of course, when we file the monkey toxicology data as well as our critical program, updated critical program. So that's another point where we'll have to get some feedback.

But our expectation is still to be on track for the Phase II, and it would depend a little on what the FDA says, and also on what -- how many cohorts we end up meeting to complete for Phase II.

Actually, I would like to go back to your Kuvan question, if I may, for a second also [for perspective] (inaudible). Again, despite some rumors that have been floating around, clearly the referral rate hasn't bounced back substantially, but it's not lower than this past summer. So -- and just for perspective, we stayed at four patients per day, that's 20 patients per week, or about 1040 patients per year, that's running to 1000. About half of them are still on the drug, that's 500 patients at $80,000 a year. That's $40 million of additional business annualized, [acquired] over the next 12 months if we stay that way, which actually is consistent with the survey that Bank of America did recently that showed that in these 20 centers they surveyed, they were planning on doubling the number of patients that they would treat in the next 12 months.

Brian Abrahams, Oppenheimer.

First one on Kuvan, I was wondering if you could talk a little bit more about the free drug program, what the physician and patient receptivity has been to that, when you expect to see some pull-through on referrals there and whether or not you're planning to extend that through next year.

The receptivity has been very good. The qualitative feedback from centers is that it makes their life easier. They have better knowledge and ability to schedule by knowing exactly when the patient is going to get the product, by not having to wait for insurance authorizations to come through. So it has been uniformly positive in terms of the response. We've had, I think JJ mentioned a pilot program. We did some pilot patients starting as early as June of this year to work the kinks out of that program, and we've seen some of those patients roll over to commercial already. The bulk of patients in the starter program came on in September, so we hope to see some of those patients starting to go into commercial therapy in November.

One thing it has not done, which surprised us a little bit, we really thought that access to that program would substantially bump up the number of referrals, and interestingly, it has not. So physicians like it, they are using it, but they are continuing to schedule Kuvan starts the same way they did before -- stand on schedule and not altering their routine.

And are you considering extending the program into 2009?

We're going to evaluate it in mid-December. We want to give it some time. This is a little bit like turning up the heat in the water when you're taking a shower. It takes awhile for things to work through the pipes; it doesn't happen immediately. We want to give this enough time to be able to fully evaluate what is good about it, what -- maybe things haven't worked as well as they could, and we'll either kill it, change it or extend it, depending on what we evaluate in December.

Great, and then just a quick question on PEG-PAL and I'll hop back in the queue. You talked about expectations that the study, the Phase I will likely continue through the DSMB review in a few days. Does this imply that I guess you're, A, not seeing any safety issues; and, B that you haven't yet seen Phe levels reaching a controlled level?

Well, the criteria -- the DSMB are meeting primarily to look at safety; they are not really looking at Phe control at all. That's not their charge. So, our expectation and so far from what we've seen is that there's -- we don't believe there are safety issues that would suggest the study needs to be stopped, so that's why we believe they will continue it. But they need to meet and review all the information.

So that's our view at the moment, but they will meet and tell us. But they are only going to review safety information, not efficacy information. As I said before, even if there was indications of efficacy early in this study, as we bring Phe down over time, we need to get down to a very good control level, and this study is our first opportunity to do that. So we want to make sure we press through as many dose levels as possible to allow us to be prepared to manage these patients in a Phase II setting. So how many of those cohorts that will require is hard to tell, and so that we won't know if we are going to go all seven or we'll stop earlier or not.

Joseph Schwartz, Leerink Swann.

Just wondering if you could give us some color on the marketing events that you hosted for Kuvan, such as the town hall meetings. How many events were held in person versus telephonically and other methods, and what kind of productivity was there versus the events that you held last spring?

We ran, I believe, 11 programs in person, live programs in the month of September. We've run several more in October. [There] were a handful of telephone -- patient telephone conferences held. I'd consider that more of a pilot program. We got a very good response from patients or parents who attended those programs, but we did have -- we struggled to get as good an attendance at those programs as we had in the spring. And we have continued to work with exactly how we set up the logistics of those programs to make it as easy for both the center and for the patients to participate.

So, again, of the patients that attended, a reasonable number went into BPPS quickly or immediately, and then there has been a trickle of follow-up from patients who attended the conferences, took information home, thought about it, and then have contacted BPPS subsequently.

How did that compare to last spring? I think you said that between nine and 40 patients per event --

We had lower attendance.

So lower attendance and lower pull-through, accordingly?

I think the relative pull-through was probably similar, as far as a percentage of patients attending that actually went into BPPS. But, we had more difficulty in getting attendance at these fall meetings than we did in the spring.

Okay. And I think that there was a significant number of patients in a backlog due to waiting for investigators of sponsored studies to begin. Have those patients gone on to paying therapy yet, or what are the dynamics there?

Well, there are a number of investigator-sponsored trials that are either in the planning stage -- and we have a small number that have been approved and are open. The approved studies are beginning to accrue, although they are accruing relatively slowly. And I would emphasize that the purpose of the investigator-sponsored trials is not to get more patients on drug, but rather to generate data that can be helpful in convincing people in the real value of Kuvan.

And then lastly, is there any reason to think that inventory transfers to Genzyme for Aldurazyme would not continue into 2009? It seems to me that as long as Aldurazyme sales are growing, you would have to continue to ship product for their stock. So at what point should we anticipate that that hits steady-state?

Well, clearly, we will continue to ship product to Genzyme, since we provide the product to meet their needs for their customers. So that will obviously continue on forever. In terms of whether there would be an impact as far as incremental transfer revenue, that would be dependent, as you note, on the inventory levels that they have on hand.

To the extent that they modestly increase their inventory levels, there would be some small incremental transfer revenue benefit, say in 2009 or beyond. But the reality is, since most of the inventory transfer occurred during 2008, the majority of the benefit is being incurred during 2008, so there could be some modest incremental inventory transfer revenue if inventory levels increase. If they stay flat, there would be none.

That's very helpful, thank you.

Phil Nadeau, Cowen & Co.

Thanks for taking my questions; my first is on Naglazyme. You mentioned that you had the largest patient number spike for Naglazyme in the last two years. Can you give us an idea of the magnitude of that patient spike, or at least how it compares to what you have seen in prior quarters?

In terms of magnitude, it was substantial. The overall Naglazyme market, we think, is roughly 1000 or 1100 patients worldwide. So I can't give you quantities. We have, from the beginning, said we aren't going to give specific patient numbers with Naglazyme. But it was a little bit surprising, actually, how big our increase was relative to what we've seen over the past few quarters. And it's a little bit ironic that we would have our biggest patient increase in two years in a quarter that we had the first sequential revenue decline since the launch of the product.

So the underlying business we are really excited about. We've seen a lot of growth. We're going to continue to see growth with Naglazyme. As JJ mentioned, the international component of our business has turned out to be just much bigger than we anticipated it would be, and we think it has got legs for some time to come.

Was there anything in particular that you can point to that led to the spike in patient numbers this quarter, or was it just a confluence of events similar to the one that led to a down quarter in revenue, but in the opposite direction?

I don't think there was any one thing. It wasn't just one area that generated all the new patients. It wasn't one approval or registration that generated all the new patients. There was a substantial contribution from Latin America and some contribution from the Middle East and Turkey that was significant, and we're continuing to add patients, although at a slower rate, in both the United States and Western Europe as well. So it's the cumulative effect.

Actually, again surprisingly, what we thought would be the big bump in patient starts in Q2 was the funding approval in Australia -- or, excuse me -- in Q3 was the funding approval in Australia. We anticipated a number of Australian patients starting commercial therapy then, and that got pushed back to October. So we didn't get the biggest chunk that we thought we would get and still had a very outstanding quarter.

And then, a question on SG&A. It looks like you are tracking towards about $100 million in SG&A for this year. And I know, in your prepared remarks, you mentioned that you only have about 20 sales reps. So that kind of begs the question, where does all this SG&A go? And now that Kuvan is launching, somewhat slower than anticipated, is there any opportunity for decreasing SG&A spend and rationalizing costs?

I think some of the SG&A spend that we saw during the third quarter related partly to general business growth related to planned headcount increases both in corporate and sales and marketing. But it also included some items such as higher stock compensation expense, which reflects the issuance of options at higher prices previously. So that's an expense that continues on even though there's not a cash impact, per se. So that impacted the spending during the quarter. There were also some costs related to the hedges that we put forward, both the forward points in bank fees as well as some costs on any unhedged balance sheet position. And then, finally, there were some nonreimbursable VAT costs that we incurred during the third quarter.

So we continue to look at our spending, and as it goes through our budget process, that's something that we look at very closely. But I think there were some items, particularly related to stock compensation during the quarter, that increased the spending quite a bit over the previous quarters.

Also the 20 sales reps that Steve mentioned are only the US sales reps. Now, remember, we're marketing Naglazyme on a worldwide basis, and we are expanding our commercial presence around the world to support Naglazyme's expansion.

Okay. And I think you mentioned that you expect SG&A to increase in future quarters. Can you give us some idea of the magnitude of that increase?

I specifically talked about the increase in R&D, didn't specifically talk about SG&A. At this point, I don't think we have really much to add beyond what we reported for the third quarter. But it's possible, as we look to next year, there could be some increase, depending upon the initiatives that we undertake in our sales and marketing programs as well as some corporate expenditures. But I don't think we're going to have much to add on that. Be able to talk more when we come to our February call.

Okay, thank you.

Tom McGahren, Merrill Lynch.

Steve, maybe you could comment on the new registry program, how the logistics are going there, how many patients maybe you have in the program now?

The registry program was rolled out, open for enrollment late summer. We've had our first patients now actually enrolled into the registry. It has been met with, I think, open arms and an acknowledgment that long-term tracking of patient outcomes, safety, is much-needed in this marketplace. The process, I should mention, requires both a contracting and IRB review and approval. So it takes the center several months, at a minimum, to work through the system to be able to open up.

But out of the roughly 130 PKU centers in the United States, we have over 70 that have expressed interest and are in one stage or another of enrolling in the registry. So we anticipate that it's going to be well utilized and certainly, from all the feedback we've gotten, it is a very welcome addition to the tools that the PKU community have at their disposal.

And if I may remind you also that the [free good] program, free drug program, is linked to the registry enrollment. And even if some of the centers haven't been able to enroll many patients into the registry proper yet because of what Steve explained in terms of the time it takes to get [RAB] approval and contracting done, they have enrolled (inaudible) over 200 patients into the free good program. And they are the same centers, as the registry centers.

Steve, maybe I can ask you one more question. You mentioned before that not everyone has been seeing or sees the benefit of Kuvan over diet. Now, were you referring more to the dietitians as opposed to physicians?

I don't think I would differentiate it that way. I think, with both groups, there's a need for us to establish outcomes data that shows very clear, unarguable benefit that Kuvan provides above and beyond diet. I think it's fair to say that the dietitians are probably a little less comfortable with Kuvan than the physicians. I'm generalizing, and I'm uncomfortable doing that because there are -- a number of dietitians are very comfortable with Kuvan at this point. But as a rule, dietitians don't use drugs; they use diet. Physicians are a little more used to prescribing, so Kuvan is a little less of a strange bird to the physicians than to the dietitians. So they are having to learn something that's really new and out of their realm of experience.

Okay, thanks a lot.

Liana Moussatos, Pacific Growth Equities.

Could you break down the Naglazyme revenues geographically, please?

Sure. During the third quarter, US sales were $5.1 million, European sales were $16.1 million and international was $12.1 million.

Thank you.

Vernon Bernardino, Rodman & Renshaw.

In the first 90 days of therapy, are patients still going on and off Kuvan therapy? And, do you expect this dynamic to continue? And have you observed whether the patient days are having a positive effect on this?

If I understand your question correctly, it's -- are the patients who are initially starting Kuvan going on, staying on, not having interruptions in therapy for that first 90-day period?

And I think it's a really good question, and it's a complex question because it's the first 30-60-90 days, where the patient is undergoing a real transition in their lifestyle. They are getting more blood draws then they have ever gone before as the centers try to monitor effectiveness of the dose. They are going back to clinic more often than before. Some of them seem to have been tempted to go off-diet more than this happened before. So the clinics are monitoring compliance and effectiveness of the drug, and we have seen patients go on therapy, come back to clinic a week later completely off-diet, and then they are pulled off drug and back on diet until they get stabilized. And then, they go back on Kuvan after that to try to establish effectiveness again.

So there is a flux with a subgroup of the patients in the initial time period after initiation of therapy. Once they get out past that 90-day point where they are clearly a responder and they have adjusted to the Kuvan and whatever diet adjustments the physician may have made with them, then they seem to been incredibly stable. It has been a very solid population for us. But there is a lot of flux in the initial time period.

The patient days really haven't had much impact on that. I think patient days have been helpful in explaining information, opportunities, conveying what patients want to know about Kuvan, reimbursement, side effects, efficacy, what it means to them. And we do believe it has helped get more patients onto therapy, but it really doesn't do a lot to change what happens in the first 90 days afterwards.

Okay, second question if I may. Can you provide an update on how centers are deciding if a patient is responding to Kuvan or not? You had previously commented that it varies from center to center. How much are clinical changes in behavior, for example, playing a factor that leads to the conclusion of patient as a responder?

I think most centers take into account changes in a patient's mental functioning, whether it's behavior, concentration, school performance, anxiety, ability to sleep for a reasonable period in the evenings. Usually, you see that with at least some drop in phenylalanine level as well. We do have a few centers that are very restrictive. It's a 30% drop and nothing else means anything. But for the most part, I think we've got clinicians who take a look at the overall benefit to the patient as well as to the lab values and make a decision based on what is best for the patient, what they feel is best for the patient.

So, then, is the 30% drop you've been seeing necessarily an absolute critical gating factor for gaining reimbursement?

No. No, it's not.

Okay, great, thank you very much.

Maybe I should tack onto that -- it is not in 98% of the payer plans in the United States. There are one or two that have used that as criteria that they have been relatively rigid with, but it's really an exception when we see that.

Okay, thank you very much.

Katherine Kim, Banc of America Securities.

I have a couple of questions on PEG-PAL. First, can you just remind us, how many patients are in each cohort?

There's five patients in each cohort, seven cohorts, for a total of 35 patients.

Okay. And if you had to go to the highest cohort, would you still be able to complete this study in the time frame?

Yes. Well, the seventh cohort would be completing in Q1.

Okay. And then, basically, you be able to start the Phase II immediately? Or, when does the nine-month tox study complete?

The nine-month tox is complete. Our expectation is to be able to file the data probably by the end of this year. And, our expectation with the FDA is that we could overlap to some degree the Phase I dosing with the Phase II start at the lower dose levels. So that's our expectation. So we are expecting the start of the Phase II to be late Q1, it could be early Q2, but that depends a little on what the FDA says about our timing.

And then, could you let us know how soon you could have data on the Phase II results?

Well, the Phase II has an 8-week dosing period where they repeat the same dose they were on in Phase I, and then they titrate up to an optimal dose to reach a good control. That total period is 16 weeks, or four months. So it's likely that you are going to take a good part of the year before we would have all the data. We haven't really set a precise time, but it's going to be late in '09 we would have some idea. We would probably give an update on what has happened in the first eight weeks when that data is completed, but we haven't set a specific time frame. But it's certainly going to be -- as I said, there's eight to 16 weeks of [in-live] period, and we're starting in Q1. So it's going to be sometime in Q4 before we would expect to have some data to talk about. It could be a little earlier, but somewhere in that time frame.

Okay, thank you very much.

With no further questions in the queue, I'd like to turn the call over to Mr. JJ Bienaime for closing remarks.

Thank you. So in summary, we're growing revenues this quarter from our three commercial products, have been driving our fourth consecutive profitable quarter, and we are headed toward our first full year of profitability. For the international opportunity for Naglazyme, it is tremendous, and the total market opportunity is double the size we anticipated at the time of launch. So, while the growth trajectory of Kuvan is slower than anticipated, we remain confident on the total market opportunity and we remain dedicated to the successful execution of this program as detailed during the call.

We're also committed to the advancement of our R&D pipeline, including possible in-licensing or acquisition opportunities. We have a solid pipeline of products in development, and in 2009 PEG-PAL candidates for Morquio Syndrome and BH4 for various cardiovascular indications will all be in the clinic.

We have a strong cash position and have expressed interest in a later-stage product to supplement our pipeline and contribute to healthy revenue growth in the coming years. We're looking forward to keeping you up-to-date on our progress, and we thank you for your continued support. Thank you for joining us on today's call and good bye.

Thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect, and have a great day.