BioMarin Pharmaceutical Inc. (BMRN) Earnings Call Transcript & Summary

For those who don't know me, my name is Akash Tewari. I'm one of the therapeutic analysts here at Jefferies, and I have the pleasure of hosting BioMarin. And joining us today, we have Brian Mueller, CFO; and Jeff Ajer, Chief Commercial Officer, 2 of the people I would love to talk to, especially as BioMarin is transitioning from not only just a rare disease company, but what we're hoping for is a real EPS and revenue acceleration story, something that I think really changes the financial profile of the company and really expands the amount of shareholders who are going to be interested in your stock over the next few years. Maybe before I get in with my own specific questions, I'll hand it off to Brian for some opening remarks, and we'll take it from there.

Thank you, Akash. I appreciate it. Really appreciate the opportunity to be with you in London here today. Here we are just a few weeks from the end of 2022, which has been a very transformational year for BioMarin. We're achieving double-digit revenue growth and return the corner to sustained GAAP profitability. This is driven by steady growth in our base enzyme replacement therapy business, rapid uptake of our most recent -- actually, it is not our most recent launch VOXZOGO is, but ROCTAVIAN is. But last year's launch of VOXZOGO for achondroplasia and disciplined expense management. We are pleased -- back to VOXZOGO, we are pleased to have increased VOXZOGO revenue guidance 4x over the course of 2022. We had highest of expectations for the product, but the launch trajectory over the course of 2022 has surpassed even the upper end of our internal expectations. Layering on top of that steady growth in the base business and the rapid VOXZOGO uptake is ROCTAVIAN, which was approved in Europe in Q3, and the launch is underway. Jeff is here, and he can speak to the dynamics. But ROCTAVIAN is the only gene therapy approved in the world for hemophilia. And for those that may not be familiar with the product, this is a single infusion that offers relief from the current standard of care, which is regular Factor VIII infusions that are very costly and still leave an unmet medical need. And in the U.S., our ROCTAVIAN BLA is under review by the FDA. We provided a progress report last week where we announced that the FDA has scheduled their prelicensure expansion -- inspection and has made the formal request for our 3-year Phase III data, which we're expecting in January. We've reported 1 in 2 years of Phase III data for ROCTAVIAN the last couple of January. This was not a surprise nor was the aspect that this is a substantial amount of data and could trigger the FDA to issue a major amendment, which could extend the PDUFA date by 3 months. But again, not a surprise. We've been talking about this over the course of 2022. So back to the beginning, we're executing on our strategy: steady growth in a base business that has achieved GAAP profitability, substantial product growth revenue opportunities from both VOXZOGO, which is approved in Europe, the U.S. and around the world, as well as ROCTAVIAN approved in Europe and achieving profitability while still investing in our early-stage research pipeline. We've got more assets in preclinical development than any other time in the company's history. Maybe we can talk about the pipeline a little more, but we're looking forward to progression of our early-stage pipeline, which should be product launches over the rest of this decade beyond VOXZOGO and ROCTAVIAN. So I know you've got some questions, Akash, I'll hand it over to you. Thanks.

Great. Thanks so much. And I think we'll talk about ROCTAVIAN and the FDA approval in a bit, but I do have the CFO here, and I want to take advantage of that. One of the questions I often get from investors is if you look at how consensus models your company when you think about your operating margin, you have the non-GAAP margin going from something in the single digits to the teens to something that can really accelerate over the next 3 to 5 years where you can have operating margins go above 40%, something that approaches a much more mature biotech company. And I think the question that -- I often have this with the [indiscernible]. It says, "Hey, can you break down what's going to be the contributor of that growth?" And from talking to you previously, too, it doesn't seem like it's just ROCTAVIAN. It's just the VOXZOGO launch. That obviously is probably the lion's share of the margin expansion. But you've also talked about the potential for the 7 on the market, enzyme replacement products to have potential opportunities to improve COGS or improve the operating margin there as well. So before -- if you don't mind, let's talk about the enzyme replacement business and the cost-cutting opportunities that you see over the next 3 to 5 years. And then VOXZOGO and ROCTAVIAN and their overall margin profiles. And is it fair to see when you see consensus modeling a 45% operating margin over a period of time for this company, is that something that you think is going to be attainable with your outlook right now?

Yes. Thanks, Akash. Appreciate it. Great question. Yes, so let's start. Overall, margins at the moment, what's important to note about our current margin profile, which, on a GAAP basis, again, we're transitioning into GAAP profitability for the first time this year. We have earned non-GAAP income growing over the last few years, which is sort of operating margin. But importantly, while we've achieved roughly $2 billion in revenue with this base business and, again, breakeven to profitable, what's important to note is we deliberately invested in this business to grow into large biopharma, several billion in revenue over the course of this decade, not to manage the absolute current business to the maximum profitability. And what that means is investing in capabilities like manufacturing, global sales and marketing, in research and development. So I'll elaborate on that a bit more as part of total margins. But just big picture, that's our margin and P&L strategy. Since you mentioned some of the brands, we recognize that our current gross margin profile today, which hovers around 75% to 77%, is mostly comprised of these enzyme replacement therapies. And the reason why those might be lower than your typical large biopharma margins that these are ultra-rare disease therapies. These are recombinant human enzymes, very costly to manufacture. Therefore, again, cost of goods sold in that low 20% range. We do have a number of long-term COGS reduction plans in place. We've built and enhanced a significant level of global manufacturing capabilities over the years. This includes our Northern California manufacturing site, our Ireland manufacturing site as well as a pretty robust network of global contract manufacturers. So whether it be improving yields or focusing on pure inbound cost or labor efficiency, we do have a plan to improve the gross margins from the base business over time. But what's even the larger contributor to gross margin in our model is the impact of both ROCTAVIAN and VOXZOGO. Not only our ROCTAVIAN and VOXZOGO, the expected larger sources of revenue growth, both ROCTAVIAN and VOXZOGO are expected to have lower cost of goods sold naturally, therefore, higher gross margins. VOXZOGO is a peptide. So it's not as complicated as the enzyme replacement therapy business. So that will have a naturally lower COGS. And ROCTAVIAN, being a gene therapy, is very complicated. It's very expensive. But if we're recognizing the value, which is substantial of ROCTAVIAN upfront at that high price for the single-dose administration against even a high cost of goods sold, that should have higher gross margins. So we model our gross margins over time, settling into the mid-80s versus the high 70s today. So that's a pretty substantial improvement.

Understood. And it's what is maybe problematic about your low gross margin. At the same time, we always get this question, what's the terminal value for some of these assets, right? Who is going -- 60% of your sales are ex U.S. You have a sales force that's finding patients in other parts of the world, not just EU and the United States. And when we look at the competitive market, there are not a lot of companies who are going to be developing biosimilars for a lot of your products. Do you feel like -- the question we always get is what's the base business valuation for the 7 on the market products? I think most of -- The Street has somewhere between $50 to $70. Like, somewhere in that range will often get cited. But there will also be people who say, "Actually, Akash, I think this could be $90." And that's because there's a terminal value that I assigned to these assets that you don't think -- The Street is not necessarily recognizing. What do you think about that? Do you feel like there is a real tail end to your base business and maybe that's not necessarily well appreciated by The Street?

I do. It's a great question. And we model substantial terminal value for the base business and have observed that it's very resilient. As you noted, there's high barriers to entry. I'll speak to a few of those. First is the manufacturing that we mentioned. It requires a significant level of not only financial investment but know-how, and we've been doing this for over 20 years. And while our $2 billion in base business revenues is substantial, just a reminder, that's made up of 6 of these products. So individually, a few hundred million. Again, we've grown up with a basket of these, but if you were a biosimilar competitor to choose just one of those, get over the manufacturing barrier to entry. And then at that point, you're basically looking to take what would be a fraction of an ultra-rare disease market, which we've already fully penetrated, by the way. Therefore, you're competing on price. And if it's not a really high pharma margin business already, the numbers don't work pretty quickly. So we are always monitoring for competition, and we've observed that there's been some small molecule development activity in the MPS area. None of that has advanced very far. Gene therapy, again, with the high cost and risk of gene therapy drug development for these ultra-rare disorders with literally a few hundred patients in the whole world, also seems like a difficult commercial proposition. Then the last piece I'd mentioned would be that our business today is very global. So while we're very pleased with the achievements we've made in our revenue growth, we sell our products in 78 countries. So it's hard to picture a company that's going to go and try to get that type of leverage with a biosimilar competitor for some of these enzyme replacement therapies.

Understood. And let's actually finish the loop here. When we think about the added cost expenditure to, let's say, launch ROCTAVIAN in the United States, or when you look at VOXZOGO, a lot of people don't understand that 20,000 TAM, a lot of that's actually ex Middle East, South America. How much additional sales force expansion is going to be needed to really fully launch some of those drugs? Or do you really have an existing rare disease franchise and sales force right now that's going to be able to kind of scale up and launch those 2 new products without necessarily doubling your cost structure here?

We do. Yes, maybe I'll start because it ties back to your initial question on overall margin expansion and then ask Jeff to offer some details about the ROCTAVIAN sales force. So again, back to my earlier remarks about building our business for sustainable margin expansion over time, we recognize today that our SG&A expense, as a percentage of revenue, trends higher at about 40%. But again, it's because we've built this infrastructure that's going to serve as a leverage point for these larger market opportunities. So when you think about global commercial operations, corporate infrastructure, general administrative support supply chain, it's the same activities that we've built to support this current business that are supporting the VOXZOGO launch already over the last year and will support ROCTAVIAN. I'll give you an indicator in terms of the way I talk about our ROCTAVIAN and VOXZOGO launch fitting within our current P&L profile as we've been launching VOXZOGO for the last year. And you didn't see that spike in SG&A. There's been an increase, about 9% this year. But that's an example of being able to large -- launch what is our largest product opportunity but with a rather modest increase to the SG&A. So that's -- this is the beginning of that leverage journey. Jeff, you want to add anything on ROCTAVIAN?

Maybe just a little color that the organization across 78 countries around the world gives us a unique capability, also a highly leverageable capability. We're going into new call points with both VOXZOGO and ROCTAVIAN, but we don't need to replicate our entire organization. We need to add incrementally mainly sales people to address new call points, but all of the other infrastructure is highly leverageable. And as Brian says, that's why we're able to absorb those numbers with the biggest launch in the company's history, greater than 1 year in.

Understood. You've mentioned the term GAAP profitability so much. I'm just thinking about this. Obviously, in Q3, there is a -- you weren't GAAP profitable that 1 quarter, and everyone's speculating you'll get added to the S&P 500 at some point. On the Board level, at the C-suite level, is that something that BioMarin is circling as important to achieve as we get into next year, getting added to the S&P 500? Is that something you track? Is that a discussion point? Or is that really your focus on carrying out your business, and if it happens, it kind of happens?

Yes. Thanks for the question. We're evaluating it. We're talking about it. Again, our goal is to grow BioMarin to a large sophisticated, profitable biopharma. So operational execution is the priority. And yes, we recognize that there was a modest loss in Q3. We've got a rather dynamic business from a quarter-to-quarter volatility standpoint. On the revenue side, we tend to have larger orders from certain single-payer nations that won't recur quarter-to-quarter, or you could get a few in 1 quarter and less the next. So there tends to be some bolus ordering that affects quarter-to-quarter revenue. And then likewise, on expenses, there's some timing of R&D milestones and other depending on what's happening in the business, little spikes or troughs in R&D. So we point to our full year guidance as the best way to measure the operating performance of the business. That's how we do it. and, again, planning for profitability here in Q4. So it will be important to watch over the next year for sure.

Understood. Understood. Now I was thinking about this with -- I was talking about this with my team when we've had some more data sets that have come out in achondroplasia. I -- this might be a hot take, but I'd love to get your view on this. Would it surprise you, Jeff and Brian, if 5 years down the line, VOXZOGO is actually your biggest product and ROCTAVIAN isn't? And the reason I say that is there's obviously -- there's -- first of all, label expansion opportunities for ROCTAVIAN as you go into inhibitors, existing AAV5 antibodies. And then, of course, the question on moderate hemophilia expansion. But there also seems to be an underappreciated opportunity in Noonan and some of these other growth-type disorders for VOXZOGO. And we have human data that we saw this year. In some instances, you saw 5.5 centimeters of height improvement, and that can 10x your addressable population, right? That's a real competitive moat from the way we kind of see it. So hot take time, but would it be crazy if VOXZOGO might become a multibillion-dollar drug opportunity over time? And as we think about the label expansion opportunity, how much should investors really be thinking about that as we go into next year?

Yes. Thanks, Akash. Maybe I'll ask Jeff to comment on overall market opportunity and VOXZOGO versus ROCTAVIAN. I'll give him a minute to think about it. I know he thinks about it all the time. But to the market expansion opportunity. So first of all, we believe that each VOXZOGO and ROCTAVIAN represent $1 billion revenue market opportunities for the company, hence, the transformative nature for the future of the company. And when we talk about the $1 billion potential for VOXZOGO, just to be clear, that is in achondroplasia alone. So we're very excited about the opportunity to develop VOXZOGO for other indications. We are very excited about Dr. Dauber's investigator study report earlier this year, which was an interim report. It was just through 6 months on a subset of the patients in this study. So first, we'll be looking forward to the full report on 1 year from his -- from a larger group of patients and his investigator study in the first half of next year. And then next is taking that data, taking what we know about VOXZOGO and achondroplasia and coming up with the best development plan for these other indications. This would include both what the indication or basket of indications could be. This would include the clinical trial design and development pathway with global regulators. And then we'd want to talk to those regulators before and get feedback before we actually start pivotal studies. But we're really excited about it. It is a significant patient population out there. And again, early indicators from that investigator study or is that there were improvements in growth in these severe short stature indications. We're equally excited about ROCTAVIAN. Jeff, do you want to comment on that?

Yes. So Akash, I think there's a lot to like in terms of revenue potential for both VOXZOGO and its initial, like, indication for achondroplasia and also ROCTAVIAN for severe hemophilia A. And within those indications, there's a lot of life cycle management expansion that we're working diligently on as we sit here today. So for VOXZOGO, think about getting into younger age segments, and we've got the data to support it. We're actively working on that, opening up additional patients to treatment. For ROCTAVIAN, there's literally a pipeline of expansion indications there from the initial severe hemophilia A patients that are adults working on testing ROCTAVIAN and adolescents in patients with active and prior inhibitors, for example. These are all opportunities to expand the addressable market, and we're super excited about that. Also think about the variability of VOXZOGO being a chronic therapy and a chronic revenue driver and ROCTAVIAN being really exciting as a big onetime revenue driver. We've guided to expectations in Germany, our first market in Europe of approaching EUR 1.5 million per patient treated, and all of that revenue would be recognized upfront. So what I would say, and back to your original question, Akash, is I would expect both VOXZOGO and ROCTAVIAN to be really big in dynamic revenue drivers over the next 5 years, and watch them both. It's going to be exciting.

Understood. Understood. So I think one of the things during the Q3 call that might have been overlooked, and I kind of want to circle back on that, was the comment that there are patients in the channel right now for ROCTAVIAN. And I think a lot of investors are like, you got Germany best price, why -- let's go. Let's see. Let's get a pop going into Q4. But you guys have been diligent in terms of negotiating long-term contracts. So kind of a 2-part question. A, why not just go out there and start dosing these patients? You have Germany best price. Why is it important to have these long-term contracts even if it has, let's say, a 2- to 3-month delay in terms of the revenues. And then B, JJ has made comments previously, we've got IOIs like indication forms that patients are interested in ROCTAVIAN back a few years ago when it looks like there is going to be approval. It does seem like you have maybe coded these patients, identified them. There has been some interest that you've already picked up in the channel. I'd love for you to kind of expand on that. What is the demand that you're seeing out of the gate in Germany and then also broadly in Europe? And how much visibility do you have on that right now?

There's really great signals of demand for ROCTAVIAN, Akash. Germany is our first market as everybody here would appreciate. The European opportunity is gated by reimbursement and pricing approvals. In most markets, that takes 6 to 18 months. In Germany, we have this free pricing period where we can sell right out of the gate, subject to having an agreement with health insurers to pay the very substantial cost of a treatment with ROCTAVIAN. We've done internal market research in Europe and the United States that would indicate 60% of severe hemophilia A patients surveyed are interested in treatment with ROCTAVIAN, and -- sorry, 80% are interested, and 60% are highly likely to want to try ROCTAVIAN. You have to discount those numbers a little bit as market research, but it's a really strong signal of demand. Some of your peers and other banks have done surveys, dot call surveys in Germany and other European markets that have indicated that there's early adopters that are waiting to get access to ROCTAVIAN. I think that's exactly correct. Due to GDPR regulations, we're not able to go out and create waiting list of identified patients, but we certainly tap into all these signals of demand. And we certainly expect there will be kind of the classic early adapters on both the prescriber and the patient level, and we're super excited to help them gain access to therapy. And what we know is, in Germany, the first patients have already been submitted for co-diagnostic testing. So this is AAV5 antibody titers. A reminder that patients that are AAV5-positive are contraindicated for ROCTAVIAN. So it's an important and necessary step to go through to determine patient eligibility. We have a diagnostic program that we set up for Europe. First patients are already through that step. So we're getting really close. The one thing I would say, Akash, to why not just go out and treat patients is recognizing that gene therapy is new. This is cutting-edge technology. It's a onetime treatment. You can undo it, has these eligibility testing, mainly AAV5, also liver health testing and comes with a very substantial price tag. So that very substantial price tag, we believe, is an economically viable proposition for health insurers leaves them in a better position than having chronic therapy over time, but we have to get these things settled. And we're getting close. So we still think -- I still think that there is a possibility of getting first patients treated in Europe this quarter.

Understood. And I know we have 1 second left. Just to clarify, the price in Europe is not EUR 1.25. Any comment on the net price that you are targeting for this agent?

Yes. So we've got a list price in Germany. That so-called list price is probably the price that nobody's ever going to pay. But anyway, it's pegged. It would equate to EUR 1.94 million for an average size adult patient. And what we're doing in the background is negotiating down to an economically viable price for payers, and we've been guiding to approaching EUR 1.5 million per patient.

Understood. Thank you so much. I really appreciate it. This is a great discussion. And if you guys want to catch up with them, please feel free to. Thank you.

Thanks, Akash.

Thanks, Akash. Thanks, everyone.