The past 12 months should have been good ones for BioMarin Pharmaceuticals ( BMRN). So why have investors bailed on the stock? Last April, the Food and Drug Administration approved BioMarin's first drug, Aldurazyme, as a treatment for a rare genetic disorder. Before the end of the current quarter, the company is expected to release pivotal, phase III study results for a second drug, Aryplase, also to treat a rare genetic disease. If the data is positive, BioMarin will file Aryplase with the FDA in the second half of this year. Just last week, BioMarin purchased a profitable pediatric drug business from Medicis Pharmaceutical ( MRX) that includes an oral asthma medicine, Orapred, which is expected to generate about $42 million in sales this year. BioMarin says the deal is accretive immediately. Yet with all that, BioMarin shares are down 35% since last April, closing Friday at $6.92, just above its 52-week low. In this same time period, the Amex Biotech Index is up nearly 50%, with small-cap stocks similar to BioMarin performing better still. So what gives? Well, the Aldurazyme launch has not lived up to some lofty expectations for reasons that can't all be laid on BioMarin -- even if investors haven't seen it that way. But the Orapred purchase and the pending Aryplase data are positives, and should help BioMarin reach profitability faster. If the company follows through on its promises, the stock could head higher.
Tastes GreatBioMarin said last Tuesday it was paying $155 million in cash and $20 million in stock to Medicis over five years (back-end loaded) to acquire the Orapred business, which includes a sales force and two follow-on formulations of the drug. Orapred is an oral liquid steroid used to treat asthma in kids under five. What makes the drug unique in an otherwise generic market is that Orapred uses a proprietary, patent-protected technology to mask the horrible, bitter taste of the steroid; without it, kids would gag and not get the proper dose of medicine. That is why Orapred enjoys 85% gross margins, said BioMarin CEO Fred Price.
Price says the Orapred deal is a good one for BioMarin because it solidifies the company's focus on pediatric diseases. (Aldurazyme and Alyprase both treat rare genetic diseases diagnosed in children, MPS I and MPS VI, respectively.) BioMarin also picks up an experienced pediatric sales force, which it currently lacked but will need if and when it launches Alyprase and other drugs farther back in its pipeline. (Aldurazyme is sold by partner Genzyme ( GENZ) -- more on that below.) Orapred is protected by patents that cover the taste-masking technology. Still, there's a risk that another company could develop a different technology that tries to get around the Orapred patents, which have driven 50% market share. But Price says BioMarin did its due diligence and doesn't think it will happen, noting there are other taste-masking technologies out there, but they are inferior. Others wonder why Medicis, a smart, well-managed company, would get rid of the Orapred business if it was so successful? Again, Price has an answer: Medicis' fastest-growing business is its dermatology products, including the new wrinkle filler Restylane. Instead of diverting resources to run the noncore Orapred business, Medicis takes guaranteed cash over five years with some upside potential in a $20 million stock payment in year five. BioMarin is also assuming about $15 million in debt. At this point, investors are downright skeptical. BioMarin stock barely budged after Tuesday's announcement, rising just 7 cents in three trading days after the Orapred deal was announced. "Biomarin is getting no credit at all for this deal," said SG Cowen biotech analyst Phil Nadeau. He thinks there is upside in BioMarin's stock price if Orapred turns out to be a high-margin, high-growth product. SG Cowen no longer rates individual stocks, but the firm does have a banking relationship with BioMarin. BioMarin is in "Wall Street's penalty box" because Aldurazyme has not performed up to expectations, said one hedge fund manager. But he's staying long BioMarin out of a belief it's been beaten up unfairly, that Orapred will perform and the phase III Alyprase data will be positive.