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BioMarin: Where Biotech and Rodney Dangerfield Cross Paths


The company with arguably one of the most promising pipelines around gets no respect.

Last week an FDA panel all but guaranteed that Vimizim -- BioMarin Pharmaceutical's (NASDAQ:BMRN) new drug for Morquio IV syndrome -- will be approved without any label restrictions. Considering the level of anxiety reflected in the option prices before the meeting, one would have thought that the Vimizim decision was going to be a classic biotech binary event, with the stock plus or minus 20% depending on the outcome. Alas for the longs, it was not, as the stock reluctantly trudged from $63 to $70. What's wrong with $7 in a few days, you ask? Nothing, of course, unless one considers that such a move doesn't even begin to scratch the surface of how undervalued BioMarin's stock seems to be. As I allude to in my story title, this is a name that can't get no respect.

Without getting too deep in the weeds, within three years Vimizim is likely to generate peak annual revenues of between $500 million to 750 million; even if all of BioMarin's other marketed products stalled at current levels, and no other drugs were approved, Vimizim alone would double BioMarin's revenues to somewhere north of $1.1 billion/year by 2016, and allow BioMarin to be free-cash-flow positive. For such success, BioMarin trades at a paltry $10 billion market cap. "10x sales is paltry?" It is if one uses Amgen's (NASDAQ:AMGN) buyout of two-tricks pony Onyx Pharmaceuticals (NASDAQ:ONXX) for example, which was purchased for 16.5x revenues; or if one compares BioMarin to one-trick pony Alexion Pharmaceuticals (NASDAQ:ALXN) which also trades at 16x revenues; or Seattle Genetics (NASDAQ:SGEN) at 18x sales.

But it's when one considers BioMarin's pipeline potential that its undervaluation becomes a real head-scratcher. BioMarin has four drugs currently in Phase II/III clinical trials. Three of these drugs each have peak-revenue potential of at least $500 million. And the fourth one -- a cancer drug code named BMN-673 -- would be the home-run play that would catapult BioMarin onto the same stage with the Amgens of the world. The current clinical trials for BMN-673 are targeted at a relatively small subsector of breast cancers, a market in the $200-300 million range; but the mechanism behind this drug makes it a very strong candidate against many other tumors. With time and patience, BMN-673 has very real potential to achieve blockbuster status as a $1 billion-plus drug.

Discerning how many of these four drugs will actually make it to market is way above my pay-grade, which is why I rely on people who understand the science and have an aversion to drinking Kool-Aid to gauge the odds of success. These folks peg the chances that two of the three half-billion-dollar candidates make it to market at about two in three. The other two drugs, including BMN-673, look to have a better than 50-50 chance.

So, on a conservative risk-adjusted basis, current odds are that by 2015/2016, when the results of all these trials will be known, BioMarin will be on its way to yet again doubling its sales to some $2 billion per year. Now how much do you think the stock is worth?

I know I sound "cheerleaderish," but in the context of arguably the most volatile and riskiest industry out there, where companies with unproven concepts are afforded multibillion market caps on a wing and a prayer, it is not often that one can point to a company with already enough revenues to be cash-flow positive, and a pipeline that includes, if not the "cure for cancer," at least a very strong candidate for a very effective treatment against cancer. To find such a company trading as cheap as BioMarin… let's just say it doesn't happen every day.

To maintain some balance, I'll leave you with one note of caution -- a concern that actually seems under-reported: BioMarin's current drugs, and two of the four in the ongoing clinical trials, are so-called "orphan drugs," i.e. drugs targeted at very rare but rather horrible diseases, for which there are few if any treatments. Because of the tiny markets (often 5,000-10,000 patients worldwide), these drugs are astoundingly expensive. Vimizim, for example, will be priced at around $400,000/year per patient, and patients will likely be on it as long as they live. A competitor drug to one of its candidates (Myozyme for Pompe disease) costs almost $1 million per year.

Governments and insurance companies are beginning to push back on these prices -- misguidedly so, in my opinion. It makes for a catchy populist argument to slam rapacious drugmakers, especially if one chooses to ignore that it takes 10-15 years to shepherd a new drug from the lab to the pharmacy, the average cost of development for a single new drug is about $1.3 billion, and approximately 90% of clinical trials fail. And the reality is that, but for these companies, most of these patients would be left to die in rather gruesome ways. Nonetheless, in the current social/political environment, the possibility that pricing power will wither away is very real, and in some cases, it may be a bigger risk than those presented by the clinical-development process.

Twitter: @FZucchi
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Position in BMRN
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