BioMarin Pharmaceutical Inc. — Q2 2011 Form 10-Q
Business context and period: BioMarin develops and commercializes therapies for serious diseases. This unaudited filing covers the three and six months ended June 30, 2011, compared with the same 2010 periods; balance-sheet comparisons are with December 31, 2010. Amounts below are in U.S. dollars and millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $110.6 | $92.0 | $220.1 | $176.9 |
| Net product revenue | $109.6 | $90.6 | $218.7 | $174.7 |
| Operating income | $0.8 | $3.0 | $3.1 | $5.8 |
| Net income (loss) | $(5.1) | $(0.5) | $(9.4) | $0.7 |
| Operating cash flow | Not separately stated by quarter | $10.1 | $25.5 |
- Revenue drivers: Q2 net product revenue increased 21% year over year. Naglazyme was $60.3, Kuvan $28.8, Firdapse $3.2, and Aldurazyme $17.3. For the first half, respective revenues were $120.9, $55.5, $6.3, and $36.0.
- Margins and expenses: Q2 cost of sales was $19.3, implying gross profit of approximately $90.4 on total revenue. Research and development rose to $52.9 from $35.6; SG&A rose to $41.0 from $37.3. Product-level gross margins included Naglazyme 83%, Kuvan 85%, Firdapse 84%, and Aldurazyme 75% in Q2.
- Liquidity: Cash, cash equivalents, and investments totaled $412.1 at June 30, versus $402.3 at year-end. Working capital was $432.1; current assets were $514.1 and current liabilities $82.0. Cash and equivalents alone were $113.0.
- Debt: Convertible debt was $377.5. The notes bear 1.875% and 2.5% interest and mature in 2017 and 2013, respectively; the company cannot unilaterally redeem them before maturity. The 2013 notes include conversion rights, and qualifying change-of-control or trading-termination events can require repayment.
- Cash flows: First-half investing activities provided $3.7, reflecting investment maturities and sales net of purchases; financing activities provided $11.1, largely from employee stock-plan proceeds. Cash and equivalents increased $24.9, while total cash and investments were down from $455.4 a year earlier.
Material changes versus comparable periods
- First-half revenue grew 24% year over year, led by Naglazyme (+$25.0), Kuvan (+$9.6), and Firdapse (+$5.1). Aldurazyme increased $4.3 for the half but was slightly lower in Q2.
- Despite revenue growth, first-half results shifted from $0.7 net income to a $9.4 net loss. Higher R&D (+$32.1) and SG&A (+$10.8), plus increased tax expense, more than offset improved gross profit. Q2 net loss widened to $5.1 from $0.5.
- First-half operating cash flow fell to $10.1 from $25.5, principally reflecting a larger receivables build and lower accrued-liability funding, partly offset by noncash expenses.
- Interest expense declined to $4.2 for the half from $5.1, following the November 2010 conversion of $119.6 principal of 2013 notes. Income tax expense rose to $8.7 from $1.7, including tax expense associated with use of federal NOL carryforwards after a 2010 valuation-allowance release.
Outlook, commentary, risks, and unusual items
- Management said existing cash and investments should fund operations and capital needs for the foreseeable future, assuming achievement of its long-term plans. It also noted potential need for additional capital if spending rises or acquisitions and licenses are pursued. Product revenue is expected to remain an important source of operating funding.
- Management expected significant R&D spending to continue, including for GALNS, PEG-PAL, Firdapse, BMN-673, and BMN-701. SG&A was also expected to rise with commercialization and international expansion. No numerical revenue or earnings guidance was provided.
- A $48.5 purchase of a bulk biologics facility in Ireland was agreed in June, with closing expected in Q3 2011 subject to conditions, including transfer of an environmental license. Additional modifications, equipment, and regulatory approvals will be needed.
- $12.6 of Naglazyme inventory from an expanded facility was not yet approved for commercial sale by the FDA or other regulators. The company expected FDA approval in early 2012; delays could affect recovery of these inventory costs.
- Contingent payments of approximately $361.6 may become due if specified development, commercial, regulatory, or licensing milestones are achieved. Recorded contingent acquisition consideration had a fair value of $38.8. A fair-value reduction of $4.1 in Q2 (and $4.6 for the half) benefited reported expense and reflected revised milestone probabilities and timing.
- Product and customer concentration is notable: three largest customers represented 46% of Q2 net product revenue; the two largest accounted for 55% of receivables. Foreign-exchange movements affect revenues, and the company had 115 euro-forward contracts to sell €71.1 million, plus one undesignated contract for €24.9 million.
- Other stated risks include clinical and regulatory uncertainty, manufacturing capacity and approval, competition, reimbursement changes, reliance on collaborators and intellectual property, and possible financing needs. The filing reported no legal proceedings and no material change to previously disclosed risk factors.
Important facts for investors to verify
- Progress and timing of FDA and other regulatory approval for the expanded Naglazyme manufacturing process and the Irish facility, including associated costs and production readiness.
- Whether growth in product sales can offset rising R&D and commercial expenses, and the sustainability of product-specific margins.
- Receivables collection, customer concentration, and the reason for the increased doubtful-account allowance.
- Cash runway under actual development and facility spending, and the timing, terms, and dilution or repayment effects of any financing or convertible-note actions.
- Milestone conditions, timing, and potential cash impact of the $361.6 contingent-payment commitments.
- Clinical, regulatory, and commercialization milestones for the pipeline, particularly GALNS, PEG-PAL, Firdapse, BMN-673, and BMN-701.