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BMRN > SEC Filings for BMRN > Form 10-Q on 29-Apr-2013All Recent SEC Filings

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Form 10-Q for BIOMARIN PHARMACEUTICAL INC


29-Apr-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains "forward-looking statements" as defined under securities laws. Many of these statements can be identified by the use of terminology such as "believes," "expects," "anticipates," "plans," "may," "will," "projects," "continues," "estimates," "potential," "opportunity" or the negative versions of these terms and other similar expressions. These forward-looking statements may be found in "Overview," of this Item 2 and other sections of this Quarterly Report on Form 10-Q. Our actual results or experience could differ significantly from the forward-looking statements. Factors that could cause or contribute to these differences include those discussed in "Risk Factors," in Part II Item 1A of this Quarterly Report on Form 10-Q. You should carefully consider that information before you make an investment decision.

You should not place undue reliance on these statements, which speak only as of the date that they were made. These cautionary statements are based on the beliefs and assumptions of our management based on information currently available to management and should be considered in connection with any written or oral forward-looking statements that we may issue in the future. We do not undertake any obligation to release publicly any revisions to these forward-looking statements after completion of the filing of this Quarterly Report on Form 10-Q to reflect later events or circumstances or the occurrence of unanticipated events.

The following discussion of our financial condition and results of operations should be read in conjunction with the Condensed Consolidated Financial Statements and the related Notes thereto included elsewhere in this Quarterly Report on Form 10-Q.

Overview

We develop and commercialize innovative biopharmaceuticals for serious diseases and medical conditions. We select product candidates for diseases and conditions that represent a significant unmet medical need, have well-understood biology and provide an opportunity to be first-to-market or offer a significant benefit over existing products.

Key components of our results of operations include the following (in millions):

                                                          Three Months Ended March 31,
                                                         2013                      2012
Total net product revenues                           $       127.3             $       116.2
Cost of sales                                                 20.5                      17.1
Research and development expense                              83.7                      73.8
Selling, general and administrative expense                   51.1                      45.2
Intangible asset amortization and contingent
consideration                                                  5.6                       2.3
Net income (loss)                                            (39.8 )                   (24.0 )
Stock-based compensation expense                              11.6                      11.1

See "Results of Operations" below for a discussion of the detailed components and analysis of the amounts above.

Our product portfolio is comprised of four approved products and multiple investigational product candidates. Our approved products are Naglazyme (galsulfase), Kuvan (sapropterin dihydrochloride), Firdapse (amifampridine phosphate) and Aldurazyme (laronidase).


Table of Contents

Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued)

Naglazyme, a recombinant form of N-acetylgalactosamine 4-sulfatase indicated for patients with mucopolysaccharidosis VI (MPS VI), a debilitating life-threatening genetic disease for which no other drug treatment currently exists and which is caused by the deficiency of arylsufatase B, received marketing approval in the U.S. in May 2005, in the EU in January 2006 and subsequently in other countries. Naglazyme net product revenues for the three months ended March 31, 2013 totaled $69.4 million compared to $68.6 million for the three months ended March 31, 2012.

Kuvan was granted marketing approval for the treatment of phenylketonuria (PKU) in the U.S. and in the EU in December 2007 and December 2008, respectively. Our Kuvan net product revenues for the three months ended March 31, 2013 totaled $37.6 million compared to $32.0 million for the three months ended March 31, 2012.

In December 2009, the European Medicines Agency granted marketing approval for Firdapse, a proprietary form of 3-4-diaminopyridine (amifampridine phosphate), for the treatment of Lambert-Eaton Myasthenic Syndrome (LEMS). We launched this product on a country-by-country basis in the EU beginning in April 2010. Firdapse net product revenues for each of the three months ended March 31, 2013 and 2012 totaled $3.6 million.

Aldurazyme (laronidase), which was developed in collaboration with Genzyme Corporation (Genzyme), was approved in 2003 for marketing in the U.S., the EU and subsequently in other countries for patients with mucopolysaccharidosis I (MPS I). Our Aldurazyme net product revenues for the three months ended March 31, 2013 totaled $16.7 million compared to $12.0 million for the three months ended March 31, 2012.

We are conducting clinical trials on several investigational product candidates for the treatment of various diseases including:

VimizimTM, formerly referred to as GALNS, an enzyme replacement therapy for the treatment of mucopolysaccharidosis Type IV or Morquio Syndrome Type A, a lysosomal storage disorder;

PEG-PAL, an enzyme substitution therapy for the treatment of PKU;

BMN-701, an enzyme replacement therapy for Pompe disease, a glycogen storage disorder;

BMN-673, an orally available poly-ADP ribose polymerase inhibitor for the treatment of patients with certain cancers; and

BMN-111, a peptide therapeutic for the treatment of achondroplasia, the leading cause of dwarfism.

We are conducting or planning to conduct preclinical development of several other enzyme product candidates for genetic and other metabolic diseases, including BMN-190 for the treatment of late infantile neuronal ceroid lipofuscinosis (LINCL), a form of Batten disease.

Cost of sales includes raw materials, personnel and facility and other costs associated with manufacturing Naglazyme and Aldurazyme at our production facility in Novato, California. Cost of sales also includes third-party manufacturing costs for the production of the active ingredient in Kuvan and Firdapse and third-party production costs related to final formulation and packaging services for all products and cost of royalties payable to third-parties for all products.

Research and development includes costs associated with the research and development of product candidates and post-marketing research commitments related to our approved products. These costs primarily include preclinical and clinical studies, personnel and raw materials costs associated with manufacturing product candidates, quality control and assurance and regulatory costs.

Selling, general and administrative expense primarily includes expenses associated with the commercialization of approved products and general and administrative costs to support our operations. These expenses include: product marketing and sales operations personnel; corporate facility operating expenses; information technology expenses and depreciation; and core corporate support functions, including human resources, finance and legal, and other external corporate costs such as insurance, legal fees and other professional services.

Intangible asset amortization and contingent consideration includes amortization expense related to our finite-lived intangible assets associated with marketing rights in the EU for Firdapse, impairment losses (if any) on intangible assets and changes in the fair value of contingent acquisition consideration payable. Changes in fair value can result from changes in estimated probability adjustments, changes in estimated timing of when a milestone may be achieved, changes in assumed discount periods and rates and passage of time.


Table of Contents

Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued)

Our cash, cash equivalents, short-term investments and long-term investments totaled $525.7 million as of March 31, 2013, compared to $566.7 million as of December 31, 2012. We have historically financed our operations primarily through the issuance of common stock and convertible debt and by relying on equipment and other commercial financing. We will be highly dependent on our net product revenue to supplement our current liquidity and fund our operations for the foreseeable future. We may in the future elect to supplement this with further debt or equity offerings or commercial borrowing. Further, depending on market conditions, our financial position and performance and other factors, we may in the future choose to use a portion of our cash or cash equivalents to repurchase our convertible debt or other securities. See "Financial Position, Liquidity and Capital Resources" below for a further discussion of our liquidity and capital resources.

Critical Accounting Policies and Estimates

In preparing our Consolidated Financial Statements in accordance with accounting principles generally accepted in the U.S. and pursuant to the rules and regulations promulgated by the SEC, we make assumptions, judgments and estimates that can have a significant impact on our net income/(loss) and affect the reported amounts of certain assets, liabilities, revenue and expenses, and related disclosures. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments and estimates. We also discuss our critical accounting policies and estimates with the Audit Committee of our Board of Directors.

We believe that the assumptions, judgments and estimates involved in the accounting for business combinations, contingent acquisition consideration payable, income taxes, long-lived assets, revenue recognition and inventory have the greatest impact on our Consolidated Financial Statements, so we consider these to be our critical accounting policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results.

There have been no significant changes to our critical accounting policies and estimates during the three months ended March 31, 2013, as compared to the critical accounting policies and estimates disclosed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year ended December 31, 2012, which was filed with the SEC on February 26, 2013.

Recent Accounting Pronouncements

See Note 4 of the accompanying Condensed Consolidated Financial Statements for a full description of recent accounting pronouncements and our expectation of their impact, if any, on our results of operations and financial condition.


Table of Contents

Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued)

Results of Operations

Net Loss

Our net loss for the three months ended March 31, 2013 was $39.8 million
compared to net loss of $24.0 million for the three months ended March 31, 2012.
The increase in net loss was primarily a result of the following (in millions):



Net loss for the period ended March 31, 2012                               $ (24.0 )
Increased gross profit from product sales                                      7.7
Increased research and development expense                                    (9.9 )
Increased selling, general and administrative expense                         (5.8 )
Increased intangible asset amortization and contingent consideration
expense                                                                      (10.0 )
Absence of impairment loss on intangible assets                                6.7
Increase in benefit from income taxes                                          4.7
Debt conversion expense                                                      (10.4 )
Other individually insignificant fluctuations                                  1.2

Net loss for the period ended March 31, 2013                               $ (39.8 )

The increase in gross profit from product sales during the three months ended March 31, 2013, as compared to three months ended March 31, 2012, was primarily a result of additional Naglazyme patients initiating therapy and additional Kuvan patients initiating therapy in the U.S. The increase in research and development expense was primarily attributed to increased development expenses for our Vimizim, BMN-701, BMN-673 and PEG-PAL programs. The increase in selling, general and administrative expense was primarily due to increased sales and marketing expenses related to our commercial products and increased pre-commercial Vimizim expenses.

See below for additional information related to the primary net loss fluctuations presented above, including details of our operating expense fluctuations.

Net Product Revenues, Cost of Sales and Gross Profit

Net product revenues were as follows (in millions):



                                             Three Months Ended March 31,
                                           2013             2012        Change
           Naglazyme                    $     69.4       $     68.6     $   0.8
           Kuvan                              37.6             32.0         5.6
           Firdapse                            3.6              3.6           0
           Aldurazyme                         16.7             12.0         4.7

           Total net product revenues   $    127.3       $    116.2     $  11.1

Gross profit by product was as follows (in millions):

                                         Three Months Ended March 31,
                                       2013            2012        Change
               Naglazyme            $     59.7       $    58.8     $   0.9
               Kuvan                      31.6            26.2         5.4
               Firdapse                    2.8             3.0        (0.2 )
               Aldurazyme                 12.7            11.1         1.6

               Total gross profit   $    106.8       $    99.1     $   7.7


Table of Contents

   Management's Discussion and Analysis of Financial Condition and Results of
                            Operations - (Continued)



Net product revenues attributed to our collaboration with Genzyme were as
follows (in millions):



                                                          Three Months Ended March 31,
                                                         2013                      2012
Aldurazyme revenue reported by Genzyme              $         48.4            $         45.9

Royalties earned from Genzyme                       $         19.3            $         18.4
Incremental (previously recognized)
Aldurazyme product transfer revenue                           (2.6 )                    (6.4 )

Total Aldurazyme net product revenues               $         16.7            $         12.0

Naglazyme net product revenues for the three months ended March 31, 2013 totaled $69.4 million, of which $60.1 million was earned from customers based outside the U.S. The impact of foreign currency exchange rates on Naglazyme sales denominated in currencies other than the U.S. dollar was negative by $0.4 million for the three months ended March 31, 2013. Naglazyme gross margins for each of the three months ended March 31, 2013 and 2012 were 86%. Naglazyme gross margins for the three months ended March 31, 2013 were consistent with expectations.

Net product revenue for Kuvan for the three months ended March 31, 2013 was $37.6 million compared to $32.0 million for the three months ended March 31, 2012. Kuvan gross margins for the three months ended March 31, 2013 were 84% compared to the three months ended March 31, 2012 when gross margins were 82%. Cost of goods sold for the three months ended March 31, 2013 and 2012 reflect royalties paid to third-parties of approximately 10%. Kuvan gross margins for the three months ended March 31, 2013 were consistent with expectations and are not expected to fluctuate significantly in the future. The 4% royalties earned from Merck Serono's net sales of Kuvan for the three months ended March 31, 2013 were $0.4 million compared to $0.5 million for the three months ended March 31, 2012.

The Hatch Waxman Act permits the FDA to approve abbreviated new drug applications, (ANDA), for generic versions of branded drugs. Pursuant to the Hatch-Waxman Act, other companies were able to file an ANDA for the active ingredient in Kuvan at any time after December 2011. If a generic competitor were to enter the market following the expiration of orphan exclusivity it would have an adverse effect on our sales of Kuvan.

Net product revenue for Firdapse for each of the three months ended March 31, 2013 and 2012 was $3.6 million. Firdapse gross margins for the three months ended March 31, 2013 were 77% compared to the three months ended March 31, 2012 when gross margins were 82%. Cost of goods sold for the three months ended March 31, 2013 and 2012 reflect royalties paid to third-parties of approximately 8%. Firdapse gross margins for the three months ended March 31, 2013 decreased compared to the three months ended March 31, 2012 due to increased manufacturing costs and the depletion of inventory manufactured prior to regulatory approval. Firdapse gross margins for the three months ended March 31, 2013 were consistent with expectations and are not expected to fluctuate significantly in the future.

Aldurazyme gross margins were 76% for the three months ended March 31, 2013 compared to 93% for the three months ended March 31, 2012. Aldurazyme gross margins reflect the profit earned on royalty revenue and net incremental product transfer revenue. The change in margins is attributed to the shift in revenue mix between royalty revenue and net product transfer revenues. Aldurazyme gross margins are expected to fluctuate depending on the mix of royalty revenue, from which we earn higher gross profit, and product transfer revenue, from which we earn lower gross profit.

Total cost of sales for the three months ended March 31, 2013 was $20.5 million compared to $17.1 million for the three months ended March 31, 2012. The increase in cost of sales was primarily attributed to the increase in product sales and the shift in Aldurazyme revenue mix between royalty revenue and net product revenues.


Table of Contents

Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued)

Research and Development

We manage our research and development expense by identifying the research and development activities we anticipate will be performed during a given period and then prioritize efforts based on scientific data, probability of successful development, market potential, available human and capital resources and other similar considerations. We continually review our pipeline and the development status of product candidates, and as necessary, reallocate resources among the research and development portfolio that we believe will best support the future growth of our business.

Research and development expense increased to $83.7 million for the three months ended March 31, 2013, from $73.8 million for the three months ended March 31, 2012. The increase in research and development expense was primarily a result of the following (in millions):

Research and development expense for the period ended March 31, 2012        $ 73.8
Increased BMN-701 development expenses                                         5.9
Increased development expenses on early development stage programs             5.5
Increased BMN-673 development expenses                                         2.3
Increased PEG-PAL development expenses                                         2.3
Increased BMN-190 development expenses                                         2.0
Increased stock-based compensation expense related to research and
development                                                                    0.6
Decreased Vimizim development expenses                                        (2.7 )
Decreased BMN-111 development expenses                                        (0.4 )
Decrease in non-allocated research and development expenses and other
net changes                                                                   (5.6 )

Research and development expense for the period ended March 31, 2013        $ 83.7

The increase in BMN-701 and BMN-673 development expenses were attributed to increased clinical trial activities related to these product candidates. The increase in development expense on early stage programs is primarily attributed to the $2.0 million license fee paid in connection with the Factor VIII gene therapy program for Hemophilia A from University College London and St. Jude's Children's Research Hospital and development costs related to the Zacharon acquired programs. The increase in PEG-PAL development expense was attributed to an increase in clinical trial activity. The increase in BMN-190 development expense was attributed to increased pre-clinical activities related to this product candidate. During the first quarter of 2013, we re-evaluated the facts and circumstances supporting recoverability of prelaunch manufacturing costs related to Vimizim and concluded that recoverability was probable resulting in the capitalization of approximately $5.1 million pre-launch manufacturing costs during the three months ended March 31, 2013. Pre-launch Vimizim manufacturing costs incurred during the first quarter of 2012 were expensed to research and development expense as significant uncertainty existed over the recoverability of the costs. The increase in stock-based compensation expense is a result of an increased number of options outstanding due to an increased number of employees. The decrease in non-allocated research and development expense primarily includes increased research and development personnel and facility costs that are not allocated to specific programs.

For the remainder of 2013, we expect research and development spending to increase over 2012 levels due to our Vimizim, PEG-PAL, BMN-673, BMN-701, BMN-111 and BMN-190 programs progressing to more advanced phases of clinical studies as well as increased spending on pre-clinical and clinical activities for our early development stage programs. Additionally, we expect to continue incurring significant research and development expense for the foreseeable future due to long-term clinical activities related to post-approval regulatory commitments for our approved products. We continuously evaluate the recoverability of costs associated with prelaunch manufacturing activities, and if it is determined that regulatory approval and recoverability are highly likely and therefore future revenues are expected, the costs related to prelaunch manufacturing activities may be capitalized. When regulatory approval and the likelihood of future revenues for a product candidate are less certain, the related manufacturing costs are expensed as research and development expenses.


Table of Contents

Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued)

Selling, General and Administrative

Selling, general and administrative expense increased to $51.1 million for the
three months ended March 31, 2013, from $45.2 million for the three months ended
March 31, 2012. The increase in selling, general and administrative expenses was
primarily a result of the following (in millions):



Selling, general and administrative expense for the period ended
March 31, 2012                                                              $ 45.2
Increased sales and marketing expenses related to commercial products          4.0
Increased Vimizim pre-commercial expenses                                      1.1
Increased foreign exchange losses on unhedged transactions                     1.0
Net decrease in corporate support and other administrative expenses           (0.2 )

Selling, general and administrative expense for the period ended
March 31, 2013                                                              $ 51.1

We continue to incur sales and marketing expense for Naglazyme and Kuvan as a result of continued expansion of our international and U.S. activities, respectively. We expect selling, general and administrative expenses to increase in future periods as a result of the international expansion of Naglazyme, the U.S. commercialization activities for Kuvan and the administrative support of our expanding operations.

Intangible Asset Amortization and Contingent Consideration

Intangible asset amortization and contingent consideration expense is comprised of amortization of the European marketing rights for Firdapse, changes in the fair value of contingent acquisition consideration payable to former stockholders of our acquired businesses and impairment loss (if any) on intangible assets. Changes in the fair value of contingent acquisition consideration payable result from updates to the assumed probability of achievement or timing of milestones and adjustments to the discount periods and rates. Intangible asset amortization and contingent consideration expense consisted of the following (in millions):

                                                           Three Months Ended March 31,
                                                       2013            2012            Change
Amortization of Firdapse European marketing
rights                                               $    0.8        $     0.8         $     0
Impairment loss on intangible assets                        0              6.7            (6.7 )
Changes in the fair value of contingent
acquisition consideration payable                         4.8             (5.2 )          10.0

Total intangible asset amortization and
contingent consideration                             $    5.6        $     2.3         $   3.3

In the first quarter of 2012, we recorded an impairment charge of $6.7 million related to the U.S. Firdapse in-process research and development (IPR&D) assets based on the status of business development efforts at the time and the related discounted cash flows that no longer supported the carrying-value of the IPR&D . . .

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