BioMarin Pharmaceutical Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Unaudited consolidated results; financial amounts below are in U.S. dollars. BioMarin develops and sells therapies for rare diseases and reported six approved products.
Financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $334.1M | $279.9M | $955.3M | $816.8M |
| Net product revenue | $298.8M | $278.3M | $916.9M | $812.2M |
| Operating loss | $13.7M | $60.1M | $72.7M | $713.8M |
| Net loss | $12.5M | $37.4M | $65.7M | $539.5M |
| Diluted loss per share | $0.07 | $0.22 | $0.38 | $3.30 |
- Q3 revenue rose about 19% year over year; nine-month revenue rose about 17%. Q3 included $31.5M of net upfront license revenue from Sarepta and $1.4M of Sarepta royalties.
- Q3 product gross margin was 80%, versus 82% a year earlier; nine-month margin was 82% in both periods. Management attributed the quarterly decline mainly to higher Naglazyme and Vimizim manufacturing costs.
- Operating expenses were $347.9M in Q3 and $1.03B for the nine months. Nine-month 2016 expenses included a $599.1M intangible-asset impairment, principally related to terminated development programs; there was no comparable 2017 charge.
- R&D expense fell to $442.1M for nine months from $486.7M, while SG&A rose to $394.1M from $333.6M. Higher spending on pegvaliase and valoctocogene roxaparvovec was partly offset by reduced spending on terminated programs and Brineura after approval.
- Nine-month operating cash use was $23.4M, compared with $227.6M in 2016. Investing cash use was $445.0M, including $159.3M of property and equipment purchases; financing provided $494.0M, including $481.7M net proceeds from convertible notes. Cash and equivalents increased to $431.4M, while cash, equivalents and investments totaled $1.67B.
- At September 30, total convertible debt, net, was $1.17B (principal of approximately $1.25B); stockholders’ equity was $2.81B. The $100M revolving credit facility was undrawn, and the company reported covenant compliance.
Business developments and changes
- Product revenue growth was led by Kuvan ($300.1M for nine months, up $42.3M) and Vimizim ($299.3M, up $39.0M). Naglazyme rose $16.8M for nine months, although Q3 revenue declined $5.7M, mainly due to timing of Latin American government orders. Brineura generated $3.4M in nine-month product revenue following U.S. and EU approvals.
- In August, BioMarin issued $495M of 0.599% convertible notes due 2024, receiving $481.7M net proceeds. Existing convertible notes include $375M due 2018 and $375M due 2020. The 2017 notes matured in April; holders converted $22.5M principal into shares.
- BioMarin granted Sarepta global exclusive rights to its DMD exon-skipping patent estate. The agreement provides for royalties of 5% of U.S. net sales through 2023 and 8% in the EU and certain other countries through September 2024, plus potential milestones. BioMarin retained a right to convert the license to co-exclusive if it resumes DMD exon-skipping development.
- Settlements allow Par and Dr. Reddy’s to market certain generic Kuvan formulations in the U.S. beginning in 2020 or 2021, subject to specified conditions and possible earlier entry.
Outlook, risks and contingencies
- Management expected product gross margin to remain in the low-80% range over the following 12 months. It expected R&D spending to increase in the remainder of 2017 versus 2016 and SG&A to increase with product launches and commercial expansion.
- The filing states the company expects operating losses and net cash outflows for at least the next 12 months. Management expects higher interest income from investment balances, partly offset by planned spending; interest expense is expected to rise due to the 2024 notes.
- Pegvaliase received FDA Priority Review; the stated PDUFA date was February 28, 2018. The company anticipated that its response to an FDA request for additional CMC information would be treated as a major amendment and extend the date by three months. The company also planned an EU marketing application in Q1 2018.
- Management expected to initiate a global Phase 3 program for valoctocogene roxaparvovec in Q4 2017. The FDA had cleared its IND and granted Breakthrough Therapy Designation in October 2017; the filing emphasizes the development, manufacturing, safety, reimbursement and adoption uncertainties of gene therapy.
- Potential milestone payments totaled about $600.2M if specified events occur; $179.4M was recorded as contingent acquisition consideration, including $52.6M expected within 12 months. The filing also lists $41.5M of R&D and purchase commitments for the next five years.
- Key risks include clinical and regulatory uncertainty, manufacturing and supply constraints, reimbursement and pricing pressure, foreign currency and government-customer collection risks, and generic competition to Kuvan. Three customers accounted for 47% of Q3 net product revenue. The company reported effective disclosure controls and no material quarter-end control changes.
Investor verification points
- Verify the drivers and durability of revenue growth, including the Sarepta upfront payment, Brineura launch uptake, and variable Latin American government orders.
- Check subsequent FDA action and timing for pegvaliase, and progress, safety and manufacturing milestones for the gene-therapy and other pipeline programs.
- Assess cash use, planned facility investment, inventory growth, and the company’s ability to meet 2018 and 2020 debt obligations or refinance them.
- Review the timing and commercial impact of Kuvan generic entry under the settlements, and monitor the assumptions underlying contingent milestone liabilities.
- Evaluate whether continued R&D and SG&A growth, pricing and reimbursement pressures, and concentrated customers and markets affect the path to positive cash flow.