BioMarin Pharmaceutical Inc (BMRN) 2009 Q2 法說會逐字稿

Good day and welcome to the second-quarter 2009 BioMarin Pharmaceutical Inc. earnings conference call. My name is Candace and I will be your coordinator for today. (Operator Instructions). I would now like to turn the presentation over to your host for today's conference, Senior Manager of Investor Relations Ms. Eugenia Shen. You may proceed.

Thank you. On the call today is JJ Bienaime, BioMarin's Chief Executive Officer; Jeff Cooper, Chief Financial Officer; Hank Fuchs, Chief Medical Officer; and Steve Aselage, Chief Business Officer.

I would like to remind everyone that this nonconfidential 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.

And now, I'd like to turn the call back over to JJ, BioMarin's CEO.

Thank you, Eugenia. Good afternoon and thank you for joining us on today's call. So I have a few introductory comments before Jeff reviews the financials of the second quarter of 2009. Steve will then provide more detail on commercial activities and Hank will provide an update on our ongoing R&D efforts before we open the call for questions.

So we are pleased to report our second-quarter 2009 results, with an increase in total BioMarin revenue of 29% and an increase in net product revenues of 35%, as compared to the second quarter of 2008.

The continued growth of our commercial products, along with carefully managed expense, drove profitability for the quarter despite a tough economic environment and foreign currency headwinds as compared to the second quarter of 2008.

Naglazyme continues to be strong with an increase in net sales of 22%, as compared to the second quarter of 2008. We continue to make steady progress in both new and more established international markets, and remain confident that Naglazyme represents a $300 million-plus market opportunity for BioMarin.

Next, net third-party sales of Aldurazyme by Genzyme increased 1% in the second quarter of 2009, as compared to the second quarter of 2008. Although negatively impacted $3.6 million by foreign currency, the number of patients on therapy continues to increase. As for Genzyme, Aldurazyme unit volume in the second quarter of 2009 increased 9.8%, compared to the second quarter of 2008.

Similar to Naglazyme and other enzyme replacement therapies, Aldurazyme benefits from built-in growth drivers, such as weight-based dosing and theoretically extension of life expectancy and an increase in disease prevalence.

We would also like to reiterate that Aldurazyme is not affected by the temporary production interruption at Genzyme's Allston Landing facility. The last [fuel] finish at the Allston facility was in September 2008. We have since been using another provider with an additional expected to be qualified in second half of 2009.

In terms of the changing healthcare environment, we propose the installation and reimbursement concerns. We believe Naglazyme and Aldurazyme would unlikely be significantly affected at least in the near term. Both products treat very small ultra-orphan diseases with limited impact on payors' budgets and minimal risk of [optimal] use.

Additionally, they are very expensive and complex to manufacture. We'll continue to carefully monitor for potential competitive and reimbursement threats. But at this time, we believe that these products are relatively well insulated.

Finally, Kuvan generated revenue of $16.9 million in the second quarter, compared to $15.5 million in the first quarter of 2009 and $12 million in the second quarter of 2008. In the second quarter of 2009, Kuvan revenues were negatively impacted to the tune of $745,000, due to increased and retroactive federal rebates. And Steve will discuss in further detail a little later.

Also as mentioned in the press release issued this afternoon, in the second quarter of 2009 the number of commercial tablets dispensed to patients increased 14.8% over the first quarter of 2009. So we are encouraged to see positive feedback emerging from the PKU community and believe that this, along with results for the numerous [vetigerous] response trial, the registry program, and long-term neural cognitive study, should offer additional support in the future for the use of Kuvan.

Also, as we announced earlier today, we have been issued patents -- two patents covering single-tablet formulation and the once-a-day dosing regimen for Kuvan in PKU. These patents expire in 2025 and 2024, respectively, which offers an additional 10 years of patent protection beyond orphan drug protection that's due to expire in the mid-2015.

This allows significantly more time for Kuvan fully penetrate the PKU market. So we continue to actively build our RFP position for Kuvan.

In addition to the two patents announced today, several additional patents have been filed, are being prosecuted, and we believe that at least one additional patent will issue between now and the end of the year.

I would also like to mention that yesterday we submitted the Kuvan NDS to the health authorities in Canada -- Health Canada, and with priority review status, we anticipate marketing approval in the first half of 2010 in Canada for Kuvan.

Moving on to clinical programs, we announced encouraging results for the Phase I study of PEG-PAL for PKU in early June. The FDA has agreed with the design of the Phase II protocols and we expect to start the study imminently, pending IRB approval from the clinical study sites.

Also, we recently announced the completed enrollment of the Phase I/II trial of GALNS for MPS IVA. Assuming a successful Phase I/II study, we expect to initiate a pivotal Phase III study in the second half of 2010.

So, we have been excited about both these programs, and Hank will review additional details on our overall R&D program.

As we have mentioned previously, in order to support the projected commercial need for Naglazyme, Aldurazyme, GALNS, and PEG-PAL, through at least 2016 we are making significant investments to double our manufacturing capacity. Construction will be completed in the fourth quarter of this year, and the commissioning of the facility will be completed in the second quarter of 2010.

Now I would like to turn the call over to Jeff Cooper, our Chief Financial Officer, who will review the financial results from the second quarter of 2009.

Thanks, JJ. I will start by reviewing product revenues of Naglazyme, Aldurazyme, and Kuvan for the second quarter ended June 30, 2009. I will then follow with a more in-depth look at our operating expenses and financial results, before reviewing our expectations for 2009.

Beginning with Naglazyme, net product revenue for the second quarter of 2009 was $42.9 million, an increase of 22% over net product revenue of $35.1 million in the second quarter of 2008. Net product revenue for the six months ended June 30, 2009, was $82.3 million, compared to $62.8 million for the six months ended June 30, 2008.

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.

Naglazyme sales for the second quarter of 2009 were negatively impacted by foreign exchange rates of approximately $1.7 million, as compared to the second quarter of 2008, which is net of the impact of our revenue-hedging program. However, after factoring in the offsetting natural hedge of expenses denominated in foreign currency, the net negative impact of our foreign exchange on our P&L was about $1 million.

Net sales of Aldurazyme by Genzyme of $39.2 million for the second quarter of 2009 increased 1%, compared to net sales for the second quarter of 2008. Net sales of Aldurazyme by Genzyme for the six months ended June 30, 2009, was $76 million, compared to $75.5 million for the six months ended June 30, 2008.

Foreign-currency exchange rates had a $3.6 million and $7.2 million negative impact on Aldurazyme sales by Genzyme in the three and six months ended June 30, 2009, respectively.

However, in the second quarter of 2009, the Aldurazyme unit volume increased 9.8%, compared to the second quarter of 2008, as the number of patients on therapy worldwide continues to grow.

Net product revenue to BioMarin related to Aldurazyme with $21.6 million for the second quarter of 2009, including $6.1 million of incremental product transfer revenue. This compares to net product transfer -- net product revenue to BioMarin of $13.4 million for the second quarter of 2008.

During the second quarter of 2009, BioMarin recorded net product revenue that was higher than the royalty earned by Genzyme third-party sales, due to the incremental product transfer revenue related to net increases in Genzyme, Aldurazyme inventory levels during the period.

Net product revenue to BioMarin was $38.7 million for the first six months of 2009, compared to $37.5 million for the first six months of 2008.

Net product revenue for Kuvan was $16.9 million for the second quarter of 2009, compared to $15.5 million for the first quarter of 2009 and $12 million for the second quarter of 2008. In the second quarter of 2009, net product revenue for Kuvan was negatively impacted by $745,000, due to increased and retroactive federal rebates.

In the second quarter of 2009, of the $16.9 million in Kuvan net product revenue, $16.3 million was from U.S. sales and the remaining $600,000 was mostly Merck Serono related.

Product revenue for Kuvan for the six months ended June 30, 2009, was $32.5 million, compared to $17.8 million for the six months ended June 30, 2008. Net product growth was primarily due to patients initiating therapy with Kuvan.

Now I will review gross margins, operating expenses, and nonoperating items in more detail. Gross margins for Naglazyme were 79% during the second quarter of 2009, compared to 81% in the second quarter of 2008.

Aldurazyme gross margins will continue to fluctuate from quarter to quarter depending upon the timing of product transfers to Genzyme, which is the basis of cost of goods sold recognized by BioMarin.

In the second quarter of 2009, Aldurazyme gross margins were 64%, which reflects both the royalty and product transfer revenue from Genzyme to BioMarin.

Kuvan gross margins during the second quarter were 81%, which reflects an 11% royalty payable on net sales. Excluding the impact of Merck Serono-related revenue, which reflects product transfers at cost, U.S. Kuvan margins were 85% for the second quarter.

Going forward, we expect U.S. Kuvan margins, including the 11% royalty payable, to be in the lower 80% range as expensed inventory has been largely exhausted.

Research and development expenses increased $2.5 million to $26.3 million in the second quarter of 2009, from $23.8 million in the second quarter of 2008. The increase in R&D expense includes increased costs for early-stage development programs, Morquio clinical costs, post-marketing commitments and regulatory spending for commercial products, and non-cash stock-based compensation expense. This was partially offset by reduced spending for 6R-BH4-related programs and a timing expense for the PEG-PAL program.

Of the total R&D spend of $26.3 million in Q2 2009, $2.6 million was for stock-based compensation expense. Overall, we continue to manage our spending closely, but we do expect research and development spending to increase from current levels as the year progresses, due to advancement of our development programs.

Selling, general, and administrative expenses increased by $5.3 million to $30.5 million in the second quarter of 2009, from $25.2 million in the second quarter of 2008. This was largely due to growth in employee-related expenses, facility costs, stock-based compensation expense, and other corporate costs.

Of the total $30.5 million of SG&A expense in Q2 2009, $5 million was for stock-based compensation expense.

Interest income decreased by $3.2 million to $0.9 million in the second quarter of 2009, from $4.1 million in the second quarter of 2008, due to the decline in market interest rates. Current yields of invested funds are less than 1%, which are driving down interest income on our investment portfolio.

Interest expense was $4.4 million in the second quarter of 2009, compared to $4.1 million in the second quarter of 2008. Interest expense consists primarily of interest on our convertible debt and imputed interest on the Medicis debt.

Now I will review the GAAP and non-GAAP bottom-line results. Our GAAP net income for the second quarter of 2009 was $1.3 million, or $0.01 per diluted share, compared to net income of $3.8 million, or $0.04 per diluted share, for the second quarter of 2008. GAAP net loss for the six months ended June 30, 2009, was $11.8 million, or $0.12 per diluted share, compared to GAAP net income of $5.5 million, or $0.05 per diluted share, for the six months ended June 30, 2008.

Non-GAAP net income for the second quarter of 2009 was $9 million, or $0.09 per diluted share, compared to non-GAAP net income of $9.7 million, or $0.09 per diluted share, for the second quarter of 2008. Non-GAAP net income for the six months ended June 30, 2009, was $18.4 million, or $0.18 per diluted share, compared to non-GAAP net income of $13.8 million, or $0.13 per diluted share, for the six months ended June 30, 2008.

Also during the second quarter of 2009, both GAAP and non-GAAP net income were not high enough to reflect the impact of the convertible debt as their inclusion would be anti-dilutive. The inclusion or exclusion of convertible debt shares in the calculation of diluted earnings per share is driven by the accounting requirements in accordance with generally accepted accounting principles.

From a cash perspective, we ended the second quarter of 2009 with $485 million of cash in short- and long-term investments. During the quarter, we made our final payments to Medicis of $70.6 million. Also during the second quarter of 2009, we generated $18.5 million of cash from operations, which includes $7.9 million of cash that was transferred from restricted cash as a result of the final Medicis payment.

This compares to cash generated from operations of $7.2 million for the second quarter of 2008.

As an aside, I should also note that, with the Medicis debt paid in full and the transfer of the orphaned IP to our partner SIAL, we will no longer incur quarterly operating expenses of $1.1 million for amortization of the Orapred intangible assets. Additionally, we will no longer incur nonoperating imputed interest expense of $1.1 million per quarter. The total reduction of Orapred-related costs will amount to approximately $2.2 million per quarter.

With regard to 2009 guidance, we are narrowing our previously provided ranges on a few items to reflect increased visibility into the year. Naglazyme net product revenue is expected to be in the range of $165 million to $175 million from a previous range of $160 million to $175 million.

Kuvan net product revenue is still expected to be in the range of $70 million to $80 million. This includes up to $2 million in net product revenue related to Kuvan royalties on European sales and product transfer revenue to our partner, Merck Serono.

For Aldurazyme, we still expect net product revenue to [bottom rent] to be in the range of $69 million to $74 million.

Turning to expenses, we continue to expect cost of sales in the range of 19% to 21% as a percent of sales; R&D in the range of $118 million to $128 million, including $8.8 million associated with the upfront payment for the Riquent transaction; and SG&A in the range of $120 million to $130 million.

For the 2009 bottom line, we now expect our GAAP net results to be in a range of a loss of $12 million to a loss of $6 million from a previous range of a loss of $15 million to breakeven. Non-GAAP net income for 2009 is estimated to be in the range of $35.4 million to $41.4 million, from a previous range of $33.7 million to $51.7 million.

Regarding cash flow, we plan to spend over $80 million in capital expenditures to complete expansion of our Novato manufacturing facility and corporate campus. As of June 30, 2009, we have spent $40.6 million for capital expenditures.

Additionally, our total management payments to date in 2009 were $73.6 million, of which $70.6 million related to the final debt payment in June.

Now I would like to turn the call over to Steve, who will provide an update on commercial activities.

Thanks, Jeff. First, as JJ touched upon earlier, we are closely monitoring the impact of the worldwide economic slowdown and proposed healthcare legislation on our business.

We have seen isolated incidences where pricing or reimbursement pressures have impacted sales, but the overall reimbursement environment remains solid. I will provide specifics on the TRICARE changes that affected Q2 Kuvan sales in a moment.

We monitor a number of indicators, and the volume of patient assistance requests, patient compliance, and reimbursement by payors would all suggest solid continued reimbursement for our products.

Turning specifically to Naglazyme, we continue to make significant progress in international markets, particularly in regions such as Latin America and the Middle East. We continue to be very encouraged by progress made in new geographic regions and also by further penetration of existing markets.

We believe there remains a significant potential in international regions, which are the largest contributors to Naglazyme growth, and are encouraged by the fact that we continue to find new patients in markets where we already are well established.

We received approval in Russia recently, which is a significant market in and of itself. But doubly important is it significantly influences other countries in Eastern Europe. Approval of funding in Poland and Bulgaria also represents successful efforts to bring Naglazyme to the commercial market in those countries.

We remain confident with our current peak sales estimate for Naglazyme of around $300 million, which is double our expectation at the time of launch.

It's worth reminding you that we are seeing, and expect to continue to see, some choppiness in ordering patterns due to government entities purchasing less frequently but in larger quantities. This can obviously influence quarter-to-quarter comparisons.

Moving into Kuvan, in the second quarter of 2009 the quantity of commercial tablets dispensed to patients increased 14.8%, as compared to the first quarter of 2009. This is the best measure we have of true end-user demand and was the strongest quarter-over-quarter growth since launch.

Recorded revenues of $16.9 million were negatively impacted by charges taken in Q2 for an increase in retroactive federal rebate liabilities. A recent federal ruling that retail drugs paid for by TRICARE would be considered as sales to the Department of Defense -- that causes those sales to be subject to a 24% rebate. The ruling retroactively includes sales back to January 2008.

Additionally, a lower-than-expected consumer price increase over the last several quarters have caused a slight increase in the level of Medicaid rebate Kuvan is exposed to. The Q2 Medicaid rebate is 18.5%, versus the 15.1% that had been the norm through all of 2008.

The combination of retroactive TRICARE rebates and higher Medicaid rebates had a net negative impact of roughly $745,000 on Q2 Kuvan sales. On a going-forward basis, we anticipate that the combination of TRICARE and Medicaid will continue to have a negative impact of $150,000 to $160,000 per quarter for at least the near term.

It is worth noting that the TRICARE rebate is undergoing legal challenge by industry organizations and may be overturned or reduced, but we have chosen to handle this situation by assuming the worst-case financial impact. Despite this particular issue, we continue to see generally favorable reimbursement environment for both Kuvan and Naglazyme.

In order to continue building the clinical data set for Kuvan, we are supporting a number of investigator trials that will assess a range of measures, including improvement in behavioral symptoms, depression, anxiety, short-term memory, executive function, and changes in bone mineral density and nutrition. These trials will evaluate various measurements and patient populations not previously included in our clinical trials, and, along with the registry and post-marketing studies, should offer a stronger argument for the use of Kuvan.

We are very encouraged that nine different presentations in abstract or poster form will be presented at the upcoming Inborn Errors of Metabolism meeting this September. These will include the first cohort of patients from the trial looking at the impact of Kuvan on executive function.

Also, we hope to have results from a small study on the effect of Kuvan on institutionalized PKU patients in time for the American College of Medical Genetics meeting next spring. As you know, institutionalized patients are currently not factored into our PKU market estimates and could potentially offer upside down the road.

We remain hopeful about the long-term potential of the market and our ability to successfully execute this progress. We look forward to keeping you updated on the progress of Kuvan and Naglazyme.

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

Thanks, Steve. Starting with the GALNS program for MPS IVA, as announced a few weeks ago the enrollment of 20 patients at three clinical sites is complete for the Phase I/II trial.

The speed of enrollment speaks to the impressive collaborative effort in the Morquio community, which is also extremely active, organized, and eager for a treatment option.

This study, together with our MorCAP assessment study, are important studies to support the design of the pivotal Phase III trial and could help define important eligibility criteria or relevant endpoints. Measurements in the Phase I/II study include carotene and sulfate levels, pulmonary function, and walk distances.

Assuming successful Phase I/II trial results in the first half of 2010, we expect to initiate the pivotal Phase III trial in the second half of 2010.

Also, to give you an update on MorCAP, there are currently 85 patients enrolled in the MorCAP assessment study and 14 more patients are scheduled for enrollment.

Moving on to PEG-PAL, as JJ mentioned earlier, we reported encouraging results for the Phase I study. All patients in the fifth dosing cohort had substantial Phe level reductions with a mean reduction of 62%. Importantly, no serious immune reactions, including hives or anaphylactoid reactions, were observed. The FDA has reviewed the Phase II protocol and we expect to start this study in the current quarter, pending IRB approval from clinical trial sites.

The Phase II study will evaluate the safety and efficacy of weekly injections for eight weeks, followed by dosing regimen optimization in an extension period. To put the safety issue in perspective, minor immune reactions with enzyme therapies are not unusual. The question is whether were you able to dose around this.

We would like to iterate that there were no serious adverse events in the Phase I trial, and while we've always been concerned about potential safety issues with PEG-PAL, we are not more concerned now after the completion of the Phase I trial. Given the substantial reduction in blood phenylalanine levels in this Phase I trial, we believe this product has the potential to provide a substantial benefit for patients.

As for the BH4 program, we are reviewing the data to make a decision in the second half of 2009 on whether or not to pursue a program in pulmonary arterial hypertension. This is the only BH4 cardiovascular indication we are considering at this time.

As you may recall, the investigator-sponsored Phase I(b) multicenter open-label dose-escalation study in PAH showed that the drug was well tolerated and improved the six-minute walk distance in patients, compared to their pretreatment baseline levels.

Turning to our product BMN-103 for Pompe disease, we believe our highly phosphorylated enzyme could result in a more efficient uptake in cells and potentially should lead to improved glycogen reduction in key affected muscle groups not addressed with current therapy. We continue to evaluate several partnering options for this program, although we have not excluded the possibility of developing the product ourselves.

In terms of other preclinical programs, BMN-195 is the small molecule inducer of utrophin, a protein that can potentially replace the defective dystrophin protein in patients with Duchenne's muscular dystrophy. After completing formulation work and toxicology studies, we aim to enter this program into the clinic by early next year.

Moving on to the handheld blood Phe monitor, we have successfully completed early proof-of-concept laboratory studies and are proceeding with prototype development. Near-term plans include user studies, as well as engineering scale-up and finalization of commercial product design, with expected product availability in early 2011.

We are also working on several exciting preclinical programs and we expect that at least one new program will be announced by the first quarter of 2010 as we begin IND-enabling work. We will keep you updated on our progress on this and other programs as they advance.

And with that, Operator, we would like to now turn the call open for questions.

(Operator Instructions). Brian Abrahams, Oppenheimer & Co.

Two pipeline questions for Hank. On GALNS, you talked a little bit about the Phase I/II endpoints that you are looking at in that study. Can you talk about the endpoints that you are going to be exploring in the MorCAP registry? And how, mechanically, might you use that data to help you interpret the Phase I/II results and plan for a Phase III study?

Sure, so I think one concept would be to understand the range of abnormalities from the MorCAP patient population. So, for example, what's the relationship between age and impaired pulmonary function, or age and impaired walk distance, to better understand the relationships between carotene levels and impairments in either pulmonary function or walk test. And that might help us hone in eligibility criteria or outcome measures in the Phase III clinical trial.

By looking at both the natural history setting snapshot data, together in the context of what we observe from the early treatment of patients in the Phase I/II study.

Got you. And then, on PEG-PAL, are there going to be any safety updates or any formal or informal interim analyses once patients receive more than one dose? Given the safety questions?

As you know, it's an open-label study so we will be looking at the data from a safety perspective fairly closely. As to what we choose to announce and when we choose to announce it, I think that we haven't settled on that yet.

Brian, it's JJ. Since you are on the phone, because I looked at your recent report on the in-depth analysis of Morquio, and I think there is a misunderstanding in terms of entry criteria. If I'm not mistaken, I think you thought that we -- excluding -- we are excluding in the Phase I/II studies nonambulatory patients.

That is not correct. The study does -- will include nonambulatory patients. And the decision to do so, not to exclude them, is with the expressed desire to assess respiratory function in this other nonambulatory patient population. Because, similar to MPS VI patients, MPS IV patients have substantial respiratory compromise, part of which is due to [flacture] other than the skeleton, probably including storage and storage.

We knew the macro finish studies study is important in the lungs. So as we observe in MPS VI, when we did studies on the Naglazyme, within six weeks we showed improvement [I mean] in pulmonary function when there was zero impact on bone and cartilage at that time.

I appreciate the clarification. Just to follow up on that, how will you be assessing endurance in those patients? And what proportion of the patients are nonambulatory? I mean, is six-minute -- are there going to be enough patients to get a good read on six-minute walk? Thanks.

Well, as JJ indicated, the concept behind this is that we are not -- we want to give ourselves as many chances to succeed here as possible. Success could come from improved breathing or from improved ambulation, or both. Success could be from healthier patients or more advanced patients. And we don't know.

So we wanted to give ourselves the option of exploring the range of that, and I think we need to let the data do the talking as to which way we go next when we see the data.

Joseph Schwartz, Leerink Swann & Company.

Thank you. I was wondering if you have any new initiatives in mind to reinvigorate the growth of Kuvan?

Hi, Joe. We are continuing to do what has worked and continuing to generate additional clinical data. We've seen, I think we said previously, the best growth in end-user demand in Q2 that we've seen since launch, so we feel like our message is getting through to some extent.

We'd certainly like to see it growing faster. And we really see the ability to generate additional data that shows real clinical benefit to the patients beyond just the lowering of the Phe levels as the driver of that over quarters three and four.

ICIM, at the end of August, start of September, will be a significant event for us in terms of the first of that data coming out. We anticipate having significant data, really, over the next two years following that, with the ISTs that have already been started and are enrolling.

And one significant source of growth -- this is JJ. I think Steve mentioned that in March, there is a good chance they will have some IST data on a small number of institutionalized patients, and if we do show some efficacy there, that could significantly impact positively the product growth.

If I can maybe mention one thing, as well, on the Morquio question that came up previously, it is important to have the nonambulatory patients in this trial because we have seen, at least anecdotally, with Naglazyme, patients who were nonambulatory when they went on to enzyme replacement therapy who became ambulatory after going on enzyme replacement therapy.

We think that's the type of outcome that could have a significant impact.

If I could just ask a follow-up. As far as the free drug program for Kuvan goes, what are your plans to either terminate or continue that?

We plan to continue it at least through the end of this year. We'll reevaluate at the end of the year.

Phil Nadeau, Cowen and Company.

My first is on Naglazyme. You mentioned in your prepared remarks a number of different countries that are coming online. Can you give us some sense of which of those are important growth drivers, and maybe how many patients you have found in the territories?

I don't want to get into specific numbers per country, but Russia is potentially a significant market for us. We know of substantial numbers of patients there and we also know that we've only scratched the surface in terms of really understanding the MPS VI population there.

It's going to take some time for us to dig into that and really figure out exactly what the opportunity is there, but I would say it's very significant.

I should also mention that it will take three or four months, in all likelihood, to get import licenses and some of the rest of the paperwork that's necessary to work through that bureaucracy. So it's likely to have an impact late Q4 or Q1 of next year, but we see that as a very significant development for us.

Poland could also be a significant market for us. The impact of Russia on some of the other countries in Eastern Europe -- a little bit harder to get our arms around that. But we know that many of those countries do look at Russia and base their policies off the Russian decisions. So it's a significant opportunity for us.

How does reimbursement work in Russia? Is there a process that you have to go through once you get the import licenses?

There will be, but reimbursement is generally available after approval and it is generally from the federal government. There are some local governments that will step in on rare occasions, but it is primarily federal reimbursement in Russia.

And then, on Kuvan, two questions. Could you maybe qualitatively tell us what you're seeing in BPPS? Is the number of new-patient referrals consistent with what you've seen in the past, or is there a trend either up or down?

And then, second, on the other end of Kuvan patients, time on therapy, are you seeing any significant drop-offs now that patients have been on therapy for quite some amount of time?

We've seen, actually, amazingly steady Kuvan referrals into BPPS really over the last six months. I think we had one month -- there was a bit of an aberration on the positive side. But it's been steady -- really, what it has been since late spring.

On the back end, we do have some patient drop-off. That's also been very steady, really, almost since launch. We lose a small percentage of our existing patients on a every-quarter basis. We have instituted programs to readdress those patients and try to pull them back onto therapy.

I may have mentioned previously we did some market research on discontinued patients and found an amazing number of patients who are off therapy not because they wanted to be off or even because their physician wanted them to be off, but simply because some kind of -- whether there was a change of doctor, a change of insurance, a change of employer, a relocation, some type of a child issue that affected the family. Patients just got off and then didn't know how to start back on again.

So we are continuing to do market research, identify patients who have discontinued on Kuvan, and, where there is interest, help them to go back on Kuvan. And actually, that was one of the things that had a positive impact on us in Q2 was really the first quarter that we saw an impact from those efforts and saw some discontinued patients starting to restart on Kuvan.

If I may, also, on this overall Kuvan long-term growth, I mean, two things. I think you are -- the fact that we were at the two patents issued give us more time to reach peak sales of the product for significantly more time. More than twice as much time as before yesterday.

And second thing is that another thing we are working on, and we are more and more confident that we are going to get a Phe monitor available in early 2011. We believe it's going to potentially make a substantial difference in helping generate additional sales for Kuvan.

All sorts of reasons are in [specific] -- changing the treatment paradigm here and maybe, Steve, you want to say a few words about why is it that important?

Sure. It's important from a number of perspectives. The logistical barriers that are set up in some cases by a patient needing to get their baseline Phe levels taken are a detriment to many families who are considering starting their child.

If the family lives 100 miles away from their center and has to drive to the center to get blood drawn every week for four weeks before the patient starts, and then the physician wants to do another blood draw every week for the four weeks after they go on to Kuvan, you've got eight 200-mile round trips and eight sticks for maybe a 5-year-old child who is screaming through the whole process.

A lot of parents don't want to deal with that. Those of you that have kids and have been through that, I think, can probably empathize a little bit. If we can minimize the travel, the discomfort of being able to get an easy stick, much less blood drawn, much less painful, immediate feedback as to what the Phe level is, it's just going to smooth out that whole process of a patient getting started.

Equally important for compliance, many times patients don't -- adult patients don't see a Phe level more than once a year or every six months. Having a home Phe monitor gives them immediate feedback. It will be relatively inexpensive, which means that they can have Phe levels taken much more often. So they can actually see what the benefits the drug is providing for them.

If a patient can't see the Phe levels, doesn't necessarily feel the impact of the medication, or at least be able to attribute changes to the medication, they are operating blind in being able to give those people immediate feedback as to the benefit of the medication we think will have a significant impact on the number of patients that do drop off therapy after a period of time. So there -- it's really going to help in a variety of ways. Those are just two.

One last question, that's just on the Pompe program. I noticed, Hank, that wasn't in your prepared remarks, and I think we were expecting a go/no-go decision, or sort of development decision on that this quarter. Any update there?

No, actually, we're probably going to need a bit more time. We're doing a portfolio review of all the products we have in development and preclinical, also. So we are seeing that discussion with some potential partners and we want to review the entire portfolio, including some near-term business development opportunities before we make -- know the right decision on this program.

Chris Raymond, Robert W. Baird & Company, Inc..

I've got a question on the guidance, and I'm sorry if you guys covered this in your prepared remarks, but I just -- I didn't catch it. I'm just kind of curious. I look at your revenue guidance. You've raised the midpoint of total revenue by about $2 million with the Naglazyme bringing up the lower end.

But then, looking at your non-GAAP earnings guidance, the midpoints have come down about $4 million or $5 million. I'm just wondering, with no changes in expense, is there something I'm missing, or was there may be an issue with the original planning process that went into the original guidance? Thanks.

This is Jeff Cooper. No, I don't think there was an issue. I think the guidance can be a range of the maximum amount of revenue for all the products and the least amount of revenue, as well as the maximum amount of expense and the least amount of expense. And I think the guidance that we provided at the beginning of the year reflected a wider range.

I think now that we are six months into the year, we've just tightened that guidance up a little bit. So, it certainly wasn't an error in the guidance that we had previously, but it's just really a tightening of the guidance, reflecting that the ranges may not be as broad all the way up and down the line.

And then, maybe one question for Steve, which I'm hoping he will answer. How many patients in Russia have you identified?

We never gave specific patient numbers. But it's a number of identified patients that's on the order of our major countries in Western Europe. So, it's significant.

Great. Thank you.

Maybe I can add one thing to that. And that's -- we know that we don't have an accurate count on MPS VI patients in Russia. We know what we know, but we also know that that's just the surface of what's there.

Lucy Lu, Citigroup.

Just to follow up that question on the guidance, I still don't quite understand, Jeff, your explanation. So you increase the lower end of the revenue guidance and there's no change in expenses. How come, on both a GAAP and non-GAAP, it seems like you could even make less money than before? I'm just not getting -- like on the GAAP number, it shows you could even lose $6 million, which is prior breakeven. Could you just give a little bit more color on that?

Yes. So like I said previously, so theoretically you could have a range that could be $30 million, if you were to take the top end of the revenue and the lower end of the expenses. And conversely, the lower end of the revenue and the higher end of the expenses, and so, now that we are six months in the year, I think we'll just tightened that up a little bit in terms of the -- trying to get more of a midpoint in terms of the guidance range.

So theoretically, you can have a much wider range, but I think now that we are six months into the year, we've decided to tighten that up a bit.

Okay. I guess the other question that I had, just a follow-up, can you also provide an update on Kuvan in Europe in terms of geographical availability and pricing?

Sure. The best information we have from Merck Serono is that they have pricing that has been set in virtually all of the major markets in Europe.

That pricing is in the same range as U.S. pricing for Kuvan. They have some variance from country to country, although it's pretty small. And exactly how it compares to U.S. depends on movement of the Euro against the dollar at any given time.

But they are in the midst of what I would consider an early phase of their launch, but they have pricing established, and the last feedback I got was they felt good about the progress they were making with the launch.

They basically have revenues in Q2 in eight countries, and the biggest ones being Germany, France, and Spain.

Andrew Vaino, Roth Capital Partners.

Just a quick question, if I may, on the PEG-PAL. Do you guys pegylate this yourselves or is that outsourced?

That's done here at BioMarin.

Do you know what the poly-dispersity of the final product is?

I don't, but certainly Robert Baffi, who is the head of our technical operations group, does.

What was the question?

The poly-dispersity of the PEG. We do use a slightly higher molecular weight than some of the more recently included PEGs, with the idea that that's going to be even less immunogenic.

Now, is it hydroxide at the end or is it the (inaudible) group?

I'm sorry?

Is it hydroxylated at the end or does it have a methyl group?

I'm going to have to get back to you on that.

Okay. And lastly, I know that there is no big deal in terms of clinical response to the drug, but have you released how many -- what percentage of patients develop antibodies?

We haven't released that yet.

If I may, all patients, even with Naglazyme and Aldurazyme, the vast majority of patients develop antibodies that they are not neutralizing. (multiple speakers) therapies, you have antibody generation.

Salveen Kochnover, Collins Stewart.

Thanks for taking my questions. Steve, can you just comment on the disconnect between the 14.8% quarter-over-quarter growth in pills dispensed and in Kuvan's sales growth of 9%. Is that mostly just the free -- the patients on free drugs?

No, the free drug patients don't have any impact on either of those numbers.

There were two things that had an impact. One was the fact that we took six quarters of TRICARE rebates in Q2 of this year, and the higher Medicaid rebate also had an impact, if you do comparisons with previous quarters.

The other thing I should probably mention, in the past we made it public when we saw specialty pharmacy inventories go up substantially. We saw specialty pharmacy inventories go down substantially at the end of June. So, there was a little bit of inventory bleed-off in June that probably had some impact on sales versus end-user demand.

Great, thanks. And then, you had mentioned, earlier, programs to kind of bring in patients that had been on therapy and dropped off. What about patients that were never in-clinic patients, so the out-of-clinic patients? Are you targeting them?

In isolated centers, we are working with the center to do outreach programs. We have a spectrum of centers, ranging from very aggressive in trying their patients to very hesitant to try any patients. Obviously, in the very conservative, slow-adapting centers, we're not going to put time or effort into trying to get more patients back into those clinics.

But where there is a center that's interested in outreach and is aggressive with the use of Kuvan, we are helping and we have seen some positive results with those efforts.

And then, just my last question is around the Pompe disease drug. What are the gating factors in place to decide whether or not you are going to partner the drug versus taking it for yourselves?

Again, if you said the analysis of expected expenses and timelines to approval, risk of approval versus other opportunities we deal with in BioMarin.

And the decision will be in the third quarter, you mentioned earlier?

No, it might take a little longer than that. But we still have ongoing discussions with potential partners.

Eun Yang, Jeffries & Company.

Thanks very much. Assuming that PEG-PAL is successful, based on the early data and mechanism of action of the drug, PEG-PAL would provide better and more clear clinical benefit, but potentially at a much higher treatment cost than Kuvan. The question is how would you utilize or position those two products, if you're going to continue to keep Kuvan on the market once PEG-PAL is approved?

I think the generation of the PEG-PAL data will help us determine an approach on that. Until we actually see the outcomes from the trials, it's going to be very difficult to have a differentiation or a segmentation strategy that makes sense.

The one thing I would say that's clear at this point is that a subcutaneous administration with the PEG-PAL may well be a preferred administration for adults. For younger children, it would not surprise me if we saw that keeping patients under the age of 5, or under the age of 12, on an oral formulation if they're doing well, well controlled with diet and Kuvan.

There might be some hesitancy for parents to switch to any subcutaneous injection at that point, but, again, it's going to take some time and some additional data before we can segment those things appropriately.

Thank you. And last question is could you tell us what is the kind of level of exposure to Medicaid and Medicare in patients currently receiving Kuvan?

Yes, the combined Medicare, Medicaid, and now with TRICARE being considered a DOD -- Department of Defense insurer, the cumulative exposure of Medicare, Medicaid, and DOD is between 21% and 22% of our overall sales.

Jeff Elliott, UBS.

Just a couple of questions. Most have been answered. I realize you haven't told us what the antibodies from PEG-PAL, but when might we expect that full data set from the Phase I? Would it be a publication we should be looking for? Or a conference presentation?

Probably imminently, and probably more like a scientific presentation, but I don't think that's been worked out finally.

In terms of the facility expansion that you guys are doing, what's the cost of that? And what gives you confidence that you need to double your manufacturing capacity at this point, given that some of the products that you talk about are relatively early stage in development?

Well, the total cost of the expansion is about $60 million, the majority of that being incurred this year, in 2009. But with growing revenues for our enzyme products, Naglazyme and Aldurazyme, we definitely got to the point where we needed to begin to increase our capacity, long term.

Add on top of that the possibility of adding new products, such as Morquio and PEG-PAL, the existing capacity facility would not have been enough to manufacture all four of those products. So it was incumbent upon us to expand our facility to give ourselves the required capacity, both for our commercial products and our products in development.

And even in Naglazyme alone, we keep saying this is a $300 million-plus product, and we are basically halfway.

And did you consider sourcing from outside, because I know, industrywide, there -- the sort of notion is there is a fair bit of spare capacity right now. Or were you committed to doing it internally?

I think what we're trying to do is -- one of the reasons that we've been able to get our products approved pretty rapidly is being able to control the manufacturing ourselves, and that's one of the reasons that we have seen positive timelines for Naglazyme and Aldurazyme.

So, I think our strategy right now is to try to maximize the use of that ability and get these products to market sooner. Sometimes we've found that when you are totally reliant on a third party, that can delay the timeline in getting products to market.

I think it's probably worth noting, too, that where there is small-molecule manufacturing involved, we do outsource small molecule. For the big complex proteins, I think it's -- it makes sense for us to keep control of them.

And I would -- I just learned how to spell Allston Landing and we don't want to do that again.

Fair enough.

Liana Moussatos, Wedbush Morgan Securities Inc..

What was the geographic breakdown of Naglazyme sales?

Sure. In the second quarter, U.S. sales were $5.7 million, EU sales were $20.1 million, and sales outside of the EU and US, our international sales, were $17.1 million -- in the second quarter.

Carol Werther, Summer Street Research Partners.

Thank you. Are you expecting a summer slowdown with Kuvan again this year? And to the best of your knowledge, are most sites through any kind of screening of their patients or are there still patients coming in?

We have screened a substantial minority of patients that are active in clinics. We know there are large numbers of patients who have not been screened yet.

I think if there's one thing we've learned over the last 1.5 years in the marketplace with Kuvan is to wait and see what comes rather than to have an expectation of higher referrals or lower referrals.

I would say we are encouraged by what we saw in Q2. We feel good about our start in Q3. But trying to predict what's going to happen in August and September, we haven't been particularly successful in the past and I'm hesitant to pull out a crystal ball and try to guess this year.

This concludes the question-and-answer portion of today's conference. I will turn the call back to management for closing remarks.

Thank you. So in summary, as we enter the second half of this year, we are confident in our ability to meet our stated financial objectives for 2009.

We have three growing commercial products. Naglazyme and Aldurazyme are stable, recurring revenue streams, which are well protected from competitive and reimbursement threats. And Kuvan continues to make steady progress.

So we believe we have a solid pipeline of products in development, including PEG-PAL for PKU, GALNS for MPS IVA, as well as several advancing earlier-stage products. In order to support the projected commercial needs for Naglazyme, Aldurazyme, GALNS, and PEG-PAL, as just reported and discussed for 2016, we are making significant investments to double our manufacturing capacity to support these growing revenues.

We continue to carefully evaluate both our internal R&D program, as well as external opportunities to ensure continued double-digit revenue growth in the coming years. So we are continuing -- we also continue to carefully manage expenses so as to provide maximum long-term value to BioMarin and our shareholders.

We look forward to keeping you updated on our progress and thank you for your continued support and for joining us on the call today. Goodbye.

Thank you, sir, and thank you for your participation in today's conference. You may now disconnect. Have a great day.