BioMarin Pharmaceutical Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise noted. BioMarin develops and commercializes biopharmaceuticals for serious diseases and reported five approved products: VIMIZIM, Naglazyme, Kuvan, Aldurazyme and Firdapse.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Total revenue | $191.8 | $136.8 | $343.3 | $264.7 |
| Net product revenue | $188.2 | $132.4 | $337.2 | $259.7 |
| Gross profit on product sales | $157.0 | $109.8 | $283.2 | $216.6 |
| Gross margin on product sales | 83.4% | 82.9% | 84.0% | 83.4% |
| Operating loss | $(18.9) | $(20.1) | $(45.3) | $(53.0) |
| Net loss | $(33.5) | $(21.5) | $(71.6) | $(61.3) |
| Basic loss per share | $(0.23) | $(0.15) | $(0.49) | $(0.46) |
- Revenue drivers: Q2 net product revenue rose 42%; first-half revenue rose 30%. Q2 product revenue included Naglazyme $98.3 million, Kuvan $46.9 million, Aldurazyme $24.1 million, newly launched VIMIZIM $14.3 million and Firdapse $4.6 million. Growth reflected VIMIZIM’s launch, increased Naglazyme sales and patient starts, and higher Kuvan and Aldurazyme revenue.
- Expenses and earnings: Q2 R&D was $107.7 million and SG&A $68.1 million, up from $85.7 million and $50.7 million, respectively. First-half R&D was $193.9 million and SG&A $128.2 million. Higher gross profit and lower operating loss were outweighed below operating income by higher interest expense and taxes; net loss widened in both comparable periods. First-half interest expense increased to $18.3 million from $2.3 million, primarily reflecting the October 2013 convertible-note offering.
- Cash flow: First-half operating cash use was $38.4 million, versus $38.8 million in 2013. Investing cash use was $79.5 million, including $64.7 million of property, plant and equipment purchases. Financing provided $133.8 million, including $117.5 million net proceeds from a March share offering. Cash and cash equivalents ended the period at $584.7 million.
- Liquidity and debt: Cash, cash equivalents and investments totaled $1.081 billion; working capital was $1.054 billion. Convertible debt was $650.9 million net of discounts on the balance sheet; the filing also reports $795.6 million of undiscounted debt obligations. Total liabilities were $883.7 million. The company had accumulated losses of approximately $787.4 million.
Changes versus the prior comparable period
- Revenue and product gross profit increased substantially, while operating losses narrowed; net losses nevertheless increased to $33.5 million in Q2 and $71.6 million in the first half.
- VIMIZIM received U.S. approval in February 2014 and EU approval in April 2014. It generated $15.2 million in first-half product revenue; reported first-half gross margin was 90%, which management expected to decline toward Naglazyme’s margin as previously expensed product was depleted.
- R&D investment increased, notably for BMN 673, BMN 190, PEG PAL and early-stage programs. SG&A rose with VIMIZIM launch and commercial support costs.
- Cash and investments increased by $28.4 million from year-end 2013. The company completed a $117.5 million net equity offering and acquired the San Rafael Corporate Center for $116.5 million in cash; the acquisition contributed to higher property, plant and equipment.
- Inventory increased $30.9 million from year-end, primarily due to buildup of Naglazyme and Aldurazyme inventories. First-half capital expenditures were higher than in 2013.
Outlook, risks and unusual items
- Management expected R&D spending for the remainder of 2014 to exceed 2013 levels as clinical programs advanced, and expected SG&A to increase with product commercialization and expanding operations. The filing states the company expected operating losses for at least the next 12 months; it does not provide a specific earnings or revenue forecast.
- Management said significant further capital investment was expected at the Shanbally, Ireland manufacturing facility and at company headquarters. The Ireland facility had not yet received FDA or EMA approval; approval and manufacturing capacity remain important risks.
- Key risks include clinical and regulatory uncertainty, manufacturing and supply constraints, reimbursement and pricing pressure, dependence on product revenue and collaborators, foreign-exchange exposure, customer concentration and collection delays in certain countries, competition, and patent protection. The four largest customers represented 56% of Q2 product revenue; one customer, Genzyme, is the sole customer for Aldurazyme.
- Potential milestone and licensing payments totaled approximately $545.0 million, including $59.3 million relating to programs no longer being developed. Non-cancelable purchase commitments for R&D and inventory were approximately $40.9 million. Contractual obligations shown totaled $907.9 million, including debt and interest.
- Unusual items included an $8.8 million gain in the first half from early lease termination related to the San Rafael property acquisition; $0.7 million debt-conversion expense associated with conversion of $16.5 million principal of 2017 Notes; and $10.8 million of first-half expense from changes in fair value of contingent acquisition consideration.
- Subsequent event: In July 2014, BioMarin sold its VIMIZIM-related Rare Pediatric Disease Priority Review Voucher for $67.5 million. This occurred after quarter-end and is not included in June 30 cash balances.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing reported no legal proceedings.
Important facts for investors to verify
- Product-level sales growth, particularly the durability of Naglazyme growth and the commercial ramp of VIMIZIM, alongside VIMIZIM’s expected margin decline.
- Clinical, regulatory and manufacturing milestones for pipeline programs and the status and required investment for the Shanbally facility.
- Cash burn, planned capital expenditures, debt cash-interest and repayment obligations, and whether additional financing may be needed.
- Customer concentration, government-related receivable aging and collection exposure, and the effect of reimbursement, pricing and foreign-exchange changes.
- Assumptions underlying the $545.0 million contingent-payment exposure and the timing and likelihood of milestone payments.