BioMarin Pharmaceutical Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet comparisons are with December 31, 2015. The company develops and commercializes biopharmaceuticals for serious diseases and reported five approved products: Vimizim, Naglazyme, Kuvan, Aldurazyme and Firdapse.
Financial performance and position
Amounts are in U.S. dollars; financial statement figures below are in millions unless otherwise noted.
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Total revenue | $236.7 | $202.9 |
| Net product revenue | $235.4 | $201.3 |
| Cost of sales | $43.1 | $31.0 |
| Research and development | $158.8 | $142.1 |
| Selling, general and administrative | $105.3 | $92.8 |
| Operating loss | $(80.9) | $(65.9) |
| Net loss | $(85.1) | $(67.5) |
| Net loss per diluted share | $(0.53) | $(0.43) |
| Cash used in operating activities | $(171.6) | $(137.8) |
| Cash, cash equivalents and investments | $771.3 at March 31, 2016 | $1,018.3 at December 31, 2015 |
| Working capital | $604.8 at March 31, 2016 | $644.1 at December 31, 2015 |
| Convertible debt, net carrying value | $668.0 at March 31, 2016 | $662.3 at December 31, 2015 |
Margins: Gross margin calculated as net product revenue less cost of sales was approximately 81.7%, compared with 84.6% in Q1 2015. The filing reports product-specific margins of 85% for Vimizim, 85% for Naglazyme, 76% for Kuvan and 81% for Aldurazyme in Q1 2016. Kuvan’s margin was reduced by the fair-value adjustment on acquired inventory.
Cash and investments fell by $247.0 million from year-end. Investing activities provided $77.0 million, including proceeds from investment maturities and sales; capital expenditures were $45.2 million. Financing activities used $37.2 million, including $40.8 million of taxes paid on net share settlement of equity awards. The company reported $779.8 million of convertible debt principal on an undiscounted basis, with notes due in 2017, 2018 and 2020.
Material changes versus the prior comparable period
- Revenue increased 16.7%, while net loss widened by $17.6 million. Higher revenue was more than offset by increases in cost of sales, R&D, SG&A, intangible amortization and contingent consideration expense.
- Product revenue growth was led by Kuvan, up $26.5 million, and Vimizim, up $22.0 million. Naglazyme declined $12.8 million and Aldurazyme declined $1.8 million.
- Comparability of Kuvan revenue is affected by the January 1, 2016 acquisition of global rights, except Japan. Before the acquisition, BioMarin generally earned royalties on Merck Serono’s sales outside its existing territories; it now records product sales for the expanded business.
- Q1 2016 operating cash use increased $33.8 million. Management cited increased payments for R&D and inventory purchases among working-capital drivers.
- Comprehensive loss was $106.1 million versus $51.1 million in Q1 2015, including a $21.0 million other comprehensive loss in Q1 2016, largely reflecting changes in hedge and investment valuations.
Outlook, management commentary and risks
- Outlook: Management expects Kuvan revenue in 2016 to increase over 2015 following the acquisition. It expects R&D spending to rise during the remainder of 2016 as programs advance, and SG&A to increase with commercialization preparation, international expansion and business growth. Significant capital investment in manufacturing and headquarters facilities was also expected. The filing does not provide a clear numerical full-year revenue or earnings guidance value.
- Management said it expects net losses and net cash outflows for at least the next 12 months and expects to rely heavily on product revenue, existing cash and investments; additional financing may be needed depending on spending and business-development decisions. Of $771.3 million in cash and investments, $151.2 million was held in foreign subsidiaries.
- Pipeline and regulatory items: The FDA issued a complete response letter for Kyndrisa in January 2016, finding the effectiveness evidence insufficient. The EU application remained under review, with a CHMP opinion anticipated in Q2 and a possible European Commission decision in the second half of 2016. Subsequent to quarter-end, BioMarin reported preliminary positive pegvaliase Phase 3 results, positive 48-week cerliponase alfa results, and preliminary BMN 270 data from eight patients; these are not Q1 financial results.
- Acquisition obligations: BioMarin acquired the expanded Kuvan and pegvaliase rights for $374.2 million in cash consideration and may owe up to €60.0 million for sales milestones and €125.0 million for pegvaliase development milestones. The filing reports $232.7 million of recognized contingent acquisition consideration, of which $97.4 million was expected to be paid within 12 months. Total potential contingent payments across programs were approximately $880.8 million, subject to milestone achievement and deadlines.
- Legal and commercial risks: Par challenged patents covering Kuvan tablets and powder; litigation triggered approval stays expiring in July 2017 and July 2018, respectively. Generic competition, pricing and reimbursement pressure, delays in government customer payments, foreign exchange movements, manufacturing and supply risks, and clinical or regulatory setbacks could materially affect results.
- Approximately 14% of accounts receivable related to certain European countries identified as exposed to sovereign-credit risk; related Q1 product revenue was 8%. Receivables in Italy, Portugal, Spain and Russia totaled approximately $25.0 million, including $1.2 million more than 90 days past due.
- Vimizim manufacturing qualification inventory of $15.5 million was capitalized; it would be expensed if the manufacturing process were not approved. The filing states that this outcome was considered unlikely.
Important facts for investors to verify
- How much of Kuvan’s reported growth reflects the expanded rights acquisition, and whether the business transition and country marketing-authorization transfers proceed as planned.
- Whether operating cash use, capital spending and milestone payments remain supportable from liquidity, given the expected continued losses and convertible-note obligations.
- Developments in the Par patent litigation and the timing and potential impact of generic Kuvan competition, including the separate settlement with DRL.
- Progress, evidence and regulatory timelines for pegvaliase, Kyndrisa, cerliponase alfa, BMN 270 and other key development programs.
- Trends in Naglazyme sales, government customer collections, foreign exchange exposure, and the Vimizim manufacturing qualification campaign.