From Rags to Riches

Very few companies fire on all cylinders all of the time; perfection over prolonged periods is rare. Far more commonly, companies do things well most of the time and have some blunders along the way. But sometimes, if these screwups are severe, a company burns through the patience of investors, most of whom fold their hand and leave the table. The attraction of such companies is their potential to rise from the ashes (and from rock-bottom stock prices) to become successful turnaround stories.

Finding companies in trouble isn't hard, but trying to find the good investments out of that rogues' gallery isn't easy. Turnarounds can make great investments, but you need a reason to believe the company will right itself and not just get run into the ground.

One troubled company in which I have personally taken a stake is BioMarin Pharmaceutical (Nasdaq: BMRN  ) . Over the past two years, BioMarin's share price has been cut in half. That does not happen when all is hunky-dory, so you may expect that a number of things have gone wrong. In light of last week's conference call, I thought I'd lay out some of the company's lingering issues and what I think it needs to do to get back on the right track.

It's time to clean house
When pro sports teams are on the skids, the owners can't fire all of the players, so they dump the managers and coaches. This is what needs to happen at BioMarin. Far and away, the biggest contributor to the company's poor performance over the past year has been upper management. We have seen a classic example of how not to run a drug company.

Under the tenure of former CEO Fred Price, BioMarin was totally hosed on the acquisition of a drug called Orapred from Medicis Pharmaceutical (NYSE: MRX  ) . BioMarin paid out the nose for a drug that essentially has zero value right now, since generic competition is expected to erode 2005 sales to half of 2004 levels. I'd be surprised if anticipated 2005 sales of $15 million to $20 million cover the expense of the nearly 65-person sales force and the drug's cost of goods. Yet BioMarin will continue to have obligations to Medicis on a product that is likely losing money. That would be funny if it wasn't so sad.

Coincidentally, Fred Price was shown the door last August, when it was clear that Orapred was turning sour. In the meantime, Louis Drapeau has been the acting CEO. Despite the change, I'm not really happy with the current situation. I have little tolerance for management that is not straight with investors. During the past few conference calls, management has dodged pointed questions left and right.

That is unacceptable. I understand that Drapeau is in a tough situation, trying to steer the company through the Orapred disaster. And someone has to sit in the captain's chair after Fred Price's exit. That being said, when the institutional investors on the conference call cannot get a straight answer to a simple question -- such as, "What is the company's current operating cash burn?" -- then we still have a problem.

Dancing around questions like this has created a crisis of confidence in current management. You can hear the frustration and anger during the Q&A sessions of BioMarin's conference calls, the last two of which have been among the worst and most uncomfortable I've ever heard.

Drapeau said that the announcement of a new CEO should be coming soon. Landing a CEO with a prior track record of success and a good reputation with the Street would go a long way toward getting BioMarin back in the market's good graces.

Create value
Fortunately, BioMarin is more than just the Orapred money pit. Even more fortunate is that this help could arrive very shortly. BioMarin has a drug called rhASB (formerly Aryplase), which is under FDA review for the treatment of a rare genetic disorder called MPS VI. The drug is an enzyme replacement therapy, and drugs like rhASB have done well for companies like Genzyme (Nasdaq: GENZ  ) and Transkaryotic Therapies (Nasdaq: TKTX  ) .

The phase 3 data released last year was positive. The FDA will probably decide by May 31 on approval. This is a crucial period for BioMarin. If the drug is turned down, BioMarin is going to be in an even worse spot. That being said, I think the drug will be approved and that it will be a catalyst for reversing the company's fortunes.

Approval of this drug is important because the worldwide market for rhASB is worth about $250 million. How much of that amount the company captures will depend upon market penetration, whether or not the drug is partnered outside the U.S., and the terms that such a deal carries. If approved, rhASB will have Orphan Drug protection and will not face competition from other enzyme replacement therapies for seven years in the U.S. and 10 years in Europe. Given the medical need and the monopoly, BioMarin has the potential to attain meaningful revenues for a company of its size.

Create even more value
If one of BioMarin's hole cards is rhASB, then the other is Phenoptin, which is in development for phenylketonuria (PKU). Nearly all children in the developed world are screened for this genetic deficiency because having PKU means the body cannot breakdown the amino acid phenylalanine. That's a problem because phenylalanine is found in many foods, and its buildup causes neurological damage. So those with PKU have strict dietary restrictions.

Phenoptin could potentially address this problem, since it helps the body break down phenylalanine. The drug will start a phase 3 trial in the next few months, with data expected in the second half of this year. If this becomes a viable drug program, it would be a big boost for the company. There are approximately 50,000 people with PKU in the major pharmaceutical markets, making this a market opportunity potentially worth several hundred million dollars.

Final thoughts
BioMarin has yet to turn the corner, but I believe that time is quickly approaching. The looming approval of rhASB and the hiring of a new CEO should mark the beginning of a new era for BioMarin.

Despite the horrible acquisition of Orapred and a management team that I view as subpar, I think there is value in the company's pipeline that will eventually win out, and that is the basis for why I think this company is a good buy right now. This is most likely not a popular opinion. Many people will think I'm wrong -- that is often the case in turnaround stories. But that is the Motley Fool Rule Breakers way: We don't mind being on the opposite side of the fence.

For additional articles on the biotech industry, see:

Motley Fool Rule Breakersbiotech analyst Charly Travers owns shares of BioMarin and Transkaryotic Therapies. The Motley Fool has a disclosure policy.


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