Down nearly 50% from its peak last summer, BioMarin Pharmaceutical (NASDAQ:BMRN) stock has recently been trading at lower valuations than it's seen in years. This stock might bounce around like a risky early stage biotech, but it has a handful of products that have more than doubled its top line over the past four years to $890 million.
Biomarin has been on the slow road to profit town for over a decade, but it's also had its foot on the R&D pedal. That hasn't done wonders for its bottom line. Instead of profits, shareholders have had to settle for a stable of clinical-stage assets. That didn't bother investors too much until a very expensive Duchenne muscular dystrophy drug failed to impress regulators.
Give me just a few minutes to explain the opportunities and obstacles BioMarin is facing, and you can decide for yourself if the company's valuation is too pessimistic.
Biomarin's first two approved drugs, Aldurazyme and Naglazyme, treat different forms of Mucopolysaccharidosis, a group of rare metabolic disorders considered an "orphan" disease. The two drugs were granted orphan exclusivity in the U.S. and EU, but those periods have expired. Combined, BioMarin recorded $401.1 million in 2015 sales for these two biologics. A lack of bulletproof patent exclusivity for about 45% of the company's total revenue is a little scary, but I wouldn't run for the exits just yet.
As biologics go, these two are relatively short and simple, but manufacturing "generic" versions, or biosimilars, requires drugmakers to jump through a longer set of regulatory hoops than small-molecule drugs. Given the extra expenses involved, biosimilar drugmakers are focused on blockbusters with huge addressable patient populations, meaning these two are probably safe for now.
Another of BioMarin's marketed products, Kuvan, for treatment of some patients with phenylketonuria, is under a more immediate threat. Phenylketonuria, which is characterized by a buildup of phenylalanine in the body, is a very rare disease. However, with annual sales of $239 million last year, Kuvan made up nearly 27% of BioMarin's total revenue. Two generic-drug manufacturers have already submitted applications for generic versions of Kuvan, meaning BioMarin might be facing losses due to generic competition not too far off.
A big downside of this disease is that patients generally need to stay on a protein-restricted diet. With this in mind, BioMarin's follow-up to Kuvan, pegvaliase, showed both good and upsetting results. After eight weeks of treatment with pegvaliase, patients on unrestricted diets had lower levels of phenylalanine than patients on Kuvan after six weeks -- which is great news.
The upsetting part was a failure of pegvaliase to improve patients' cognitive function, a secondary endpoint I honestly felt was doomed from the outset. When phenylketonuria is diagnosed and treated immediately following birth, those individuals generally have normal intelligence throughout their lives, which suggests the damage done at an early age is permanent. Seems to me that pegvaliase's failure to meet its secondary endpoint, while disappointing, was much less meaningful than the drug's superior reduction of phenalynine. So, I'm fairly confident pegvaliase, if approved, will help offset losses from generic Kuvan competition.
Despite revenue streams that are on somewhat shaky ground, BioMarin did something astonishing for several reasons in January 2015: It acquired Prosensa, a Dutch company with Duchenne muscular dystrophy candidate drisapersen, for $751.5 million. That's a big purchase for a company with negative cash flows and such an uncertain revenue stream.
What confounds me further is the amount of uncertainty surrounding drisapersen, now Kyndrisa, ahead of the purchase. After several years of funding drisapersen's clinical development, GlaxoSmithKline terminated its collaboration with Prosensa after the drug failed to outperform a placebo in a 186-patient phase 3 trial.
Biomarin's reasoning behind the enormous purchase was based on positive results from a genetically defined subset of Duchenne muscular dystrophy patients combined in a post hoc analysis. It believed they would be sufficient for an application without another trial. If I can give only one piece of advice to beginning biotech investors, it's this: When you see the words "post hoc analysis," walk away.
Perhaps the most disturbing facet of the Prosensa acquisition was that Kyndrisa's data was arguably less impressive than another candidate for the same subset of patients: eteplirsen from Sarepta.
As many analysts expected, myself included, the FDA sent BioMarin a complete response letter stating there just wasn't enough proof of Kyndrisa's efficacy to warrant approval. Meanwhile the FDA continues its sadistic three-year-long accelerated review of Sarepta's candidate.
Jekyll & Hyde?
I'm truly of two minds when it comes to BioMarin. One part of me sees a smart developer of rare-disease drugs that understands its limitations. It must have been tempting to develop its cancer asset talazoparib, but instead it stayed within its core-competency and sold rights to the compound to Medivation
In the wake of that discipline I'm still baffled by the $751 million Prosensa acquisition. If BioMarin had paid $100 million or maybe even $200 million upfront for drisapersen rights, then back loaded the deal with milestone payments after the FDA agreed its combined post hoc analysis was sufficient, I would be shouting "buy" from the rooftops. Instead, this is a company I'll be keeping at arm's length.