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BMRN > SEC Filings for BMRN > Form 10-Q on 2-May-2014All Recent SEC Filings

Show all filings for BIOMARIN PHARMACEUTICAL INC

Form 10-Q for BIOMARIN PHARMACEUTICAL INC


2-May-2014

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 as well as information provided elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year end December 31, 2013. You should carefully consider that information before you make an investment decision.

You should not place undue reliance on these types of forward-looking statements, which speak only as of the date that they were made. These forward-looking 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 as well as other cautionary statements we have made and may make. 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 our 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,
                                                           2014                    2013
Total net product revenues                             $       149.0           $       127.3
Cost of sales                                                   22.8                    20.5
Research and development expense                                86.2                    83.7
Selling, general and administrative expense                     60.1                    51.1
Intangible asset amortization and contingent
consideration expense                                            9.0                     5.6
Net loss                                                       (38.1 )                 (39.8 )
Stock-based compensation expense                                16.3                    11.6

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

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


Table of Contents

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

VIMIZIM, a treatment mucopolysaccharidosis Type IVA or Morquio Syndrome Type A, a lysosomal storage disorder, received marketing approval in the U.S. in February 2014 and in the European Union (the EU) in April 2014. We immediately began marketing VIMIZIM in the U.S. using our existing sales force and commercial organization and completed our first commercial sale in the U.S. in February 2014. VIMIZIM net product revenues for the three months ended March 31, 2014 totaled $0.9 million.

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, 2014 totaled $80.1 million, compared to $69.4 million for the three months ended March 31, 2013.

Kuvan was granted marketing approval for the treatment of phenylketonuria (PKU) in the U.S. in December 2007 and in the EU in December 2008. Kuvan net product revenues for the three months ended March 31, 2014 totaled $45.2 million, compared to $37.6 million for the three months ended March 31, 2013.

Aldurazyme, which was developed in collaboration with Genzyme Corporation (Genzyme), was approved in 2003 for marketing in the U.S. and the EU and subsequently in other countries for patients with mucopolysaccharidosis I (MPS
I). Aldurazyme net product revenues for the three months ended March 31, 2014 totaled $18.1 million, compared to $16.7 million for the three months ended March 31, 2013.

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 the three months ended March 31, 2014 totaled $4.7 million, compared to $3.6 million for the three months ended March 31, 2013.

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

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;

BMN 111, a peptide therapeutic for the treatment of achondroplasia, the leading cause of dwarfism; and

BMN 190 for the treatment of late infantile neuronal ceroid lipofuscinosis (CLN2), lysomal storage disorder primarily affecting the brain.

We are conducting or planning to conduct preclinical development of several other product candidates for genetic and other metabolic diseases and recently announced the selection of two new drug development candidates, BMN 270 and BMN
250. BMN 270 is a Factor VIII gene therapy drug development candidate, an AAV VIII vector, for the treatment of hemophilia A. BMN 250 is a novel fusion of alpha-N-acetyglucosaminidase (NAGLU) with a peptide derived from insulin-like growth factor 2 (IGF2), for the treatment of Sanfilippo B syndrome or Mucopolysaccharidosis type IIIB (MPS IIIB).

Cost of sales includes raw materials, personnel and facility and other costs associated with manufacturing VIMIZIM, 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.


Table of Contents

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

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, research and development facilities 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.

Our cash, cash equivalents, short-term investments and long-term investments totaled $1,138.9 million as of March 31, 2014, compared to $1,052.4 million as of December 31, 2013. We have historically financed our operations primarily through our cash flows from operating activities, 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 Condensed 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 Condensed 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 three months ended March 31, 2014, 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, 2013, which was filed with the SEC on February 26, 2014.

Recent Accounting Pronouncements

See Note 4 to our 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, 2014 was $38.1 million,
compared to a net loss of $39.8 million for the three months ended March 31,
2013. The decrease in net loss was primarily a result of the following (in
millions):



 Net loss for the period ended March 31, 2013                           $  (39.8 )
 Increased gross profit from product sales                                  19.4
 Absence of debt conversion expense                                         10.4
 Increased selling, general and administrative expense                      (9.0 )
 Decreased benefit from income taxes                                        (8.2 )
 Increased interest expense                                                 (7.4 )
 Increased intangible asset amortization and contingent consideration       (3.4 )
 Increased research and development expense                                 (2.4 )
 Other individually insignificant fluctuations                               2.3

 Net loss for the period ended March 31, 2014                           $  (38.1 )

The increase in gross profit from product sales during the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 was primarily a result of additional Naglazyme patients initiating therapy globally 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 PEG PAL program and earlier stage development 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 expenses related to the commercial launch of VIMIZIM.

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,
                                            2014            2013       Change
            VIMIZIM                      $      0.9       $      0     $   0.9
            Naglazyme                          80.1           69.4        10.7
            Kuvan                              45.2           37.6         7.6
            Aldurazyme                         18.1           16.7         1.4
            Firdapse                            4.7            3.6         1.1

            Total net product revenues   $    149.0       $  127.3     $  21.7

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

                                         Three Months Ended March 31,
                                        2014            2013       Change
                VIMIZIM              $      0.8       $      0     $   0.8
                Naglazyme                  69.0           59.7         9.3
                Kuvan                      38.1           31.6         6.5
                Aldurazyme                 14.8           12.7         2.1
                Firdapse                    3.5            2.8         0.7

                Total gross profit   $    126.2       $  106.8     $  19.4


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, 2014 2013 Change Aldurazyme revenue reported by Genzyme $ 55.9 $ 48.4 $ 7.5

                                                                Three Months Ended March 31,
                                                           2014             2013          Change
Royalties earned from Genzyme                            $    21.9        $    19.3     $       2.6
Incremental (previously recognized) Aldurazyme product
transfer revenue                                              (3.8 )           (2.6 )          (1.2 )

Total Aldurazyme net product revenues                    $    18.1        $    16.7     $       1.4

Net product revenues for Naglazyme for the three months ended March 31, 2014 totaled $80.1 million, of which $70.7 million was earned from customers based outside the U.S., compared to $69.4 million for the three months ended March 31, 2013, of which $60.1 million was earned from customers based outside the U.S. The increase in Naglazyme net product revenues was attributed to new patients initiating therapy. The impact of foreign currency exchange rates on Naglazyme sales denominated in currencies other than the U.S. dollar was positive by $0.1 million for the three months ended March 31, 2013. Naglazyme gross margins for each of the three months ended March 31, 2014 and 2013 were 86%. Naglazyme gross margins for the three months ended March 31, 2014 were consistent with expectations and are not expected to fluctuate significantly in the future.

Net product revenue for Kuvan for the three months ended March 31, 2014 totaled $45.2 million, compared to $37.6 million for the three months ended March 31, 2013. The increase in Kuvan net product revenues was attributed to new patients initiating therapy. Kuvan gross margins for each of the three months ended March 31, 2014 and 2013 were 84%. Cost of goods sold for the three months ended March 31, 2014 and 2013 reflect royalties paid to third-parties of approximately 10%. Kuvan gross margins for the three months ended March 31, 2014 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, 2014 were $0.5 million, compared to $0.4 million for the three months ended March 31, 2013.

Aldurazyme gross margins were 82% for the three months ended March 31, 2014, compared to 76% for the three months ended March 31, 2013. Aldurazyme gross margins reflect the profit earned on royalty revenue and net incremental product transfer revenue. 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.

Net product revenue for Firdapse for the three months ended March 31, 2014 totaled $4.7 million, compared to $3.6 million for the three months ended March 31, 2013. Firdapse gross margins for the three months ended March 31, 2014 were 75%, compared to 77% for the three months ended March 31, 2013. Cost of goods sold for the three months ended March 31, 2014 and 2013 reflect royalties paid to third-parties of approximately 8%. Firdapse gross margins for the three months ended March 31, 2014 decreased due to increased manufacturing costs and the depletion of manufactured product that was previously expensed as research and development expense. Firdapse gross margins for the three months ended March 31, 2014 were consistent with expectations and are not expected to fluctuate significantly in the future.

In February 2014, the FDA granted marketing approval for VIMIZIM and we began marketing the product immediately. Net product revenues for VIMIZIM for the three months ended March 31, 2014 totaled $0.9 million and gross margins were 91%.

Total cost of sales for the three months ended March 31, 2014 was $22.8 million, compared to $20.5 million for the three months ended March 31, 2013. The increase in cost of sales was primarily attributed to the increase in product sales.


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 prioritizing 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 $86.2 million for the three months ended March 31, 2014, from $83.7 million for the three months ended March 31, 2013. 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, 2013      $  83.7
Gain on early lease termination                                               6.1
Increased PEG PAL development expenses                                        4.9
Increased development expenses on early development stage programs            3.0
Increased BMN 190 development expenses                                        1.9
Increased stock-based compensation expenses related to research and
development                                                                   1.8
Increased BMN 111 development expenses                                        1.0
Increased BMN 673 development expenses                                        0.3
Decreased VIMIZIM development expenses                                       (4.0 )
Decreased BMN 701 development expenses                                       (2.0 )
Decreased development expenses related to mature commercial products         (1.3 )
Decrease in non-allocated research and development expenses and
other net changes                                                            (9.2 )

Research and development expense for the period ended March 31, 2014      $  86.2

The increase in PEG PAL and BMN 673 development expense was attributed to increased clinical trial activities related to these product candidates. The increase in development expense on early development stage programs was primarily attributed to the pre-clinical activity related to BMN 270, BMN 250 and development costs related to the programs acquired from Zacharon Pharmaceuticals, Inc. (Zacharon). The increase in stock-based compensation is primarily attributed to an increase in the number of options outstanding due to an increased number of employees and an increase in the weighted-average fair value of the equity awards granted during 2013. The increases in BMN 190 and BMN 111 development expense were attributed to increased pre-clinical activities related to these product candidates. The decrease in non-allocated research and development expense is primarily attributed to a decline in research and development personnel costs and facility costs that are not allocated to specific programs. The gain in the three months ended March 31, 2014, resulted from the early termination of our lease and the recognition of the remaining deferred rent and asset retirement liabilities upon acquisition of SRCC where our corporate headquarters are located.

During 2014, we expect our research and development spending to increase over 2013 levels due to our PEG PAL, BMN 673, BMN 701, BMN 111 and BMN 190 programs progressing, including a few of those programs progressing to more advanced phases of clinical studies. Phase 3 clinical trials for PEG PAL and BMN 673 were initiated in the second and fourth quarters of 2013, respectively, and we expect to initiate a Phase 3 trial of BMN 701 in the second quarter of 2014. We also expect increased spending on pre-clinical and clinical activities for our early development stage programs including BMN 270, programs acquired from Zacharon and BMN 250. 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 pre-launch manufacturing activities, and if it is determined that recoverability is highly likely and therefore future revenues are expected, the costs subsequently incurred related to pre-launch 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.

Selling, General and Administrative

Selling, general and administrative expense increased to $60.1 million for the three months ended March 31, 2014, from $51.1 million for the three months ended March 31, 2013. The increase in selling, general and administrative expenses was primarily a result of the following (in millions):


Table of Contents

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



Selling, general and administrative expense for the period ended
March 31, 2013                                                            $  51.1
Gain on early lease termination                                               2.7
Increased VIMIZIM commercial launch expenses                                  7.6
Increased stock-based compensation                                            2.9
Decreased sales and marketing expenses related to mature commercial
products                                                                     (1.5 )
Decreased foreign exchange losses on unhedged transactions                   (0.1 )
Net decrease in corporate support and other administrative expenses          (2.6 )

Selling, general and administrative expense for the period ended
March 31, 2014                                                            $  60.1

The increase in stock-based compensation is attributed to an increase in the number of options outstanding due to an increased number of employees, an increase in the weighted-average fair value of the equity awards granted during 2013. 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. Additionally, transaction costs associated with the SRCC acquisition increased selling, general and administrative expenses by . . .

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