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Morningstar | Maintaining Our BioMarin FVE Following Steady 2Q and Palynziq Approval

We’re maintaining our $118 fair value estimate for BioMarin following second-quarter earnings that were in line with our expectations. Pivotal data for achondroplasia drug vosoritide and hemophilia A gene therapy val-rox aren't expected until the second half of 2019, which might be preventing short-term investors from considering the name, although we’re confident in BioMarin's long-term prospects. We still view the firm’s orphan drug focus and productive pipeline as warranting a narrow moat rating.

In the long run, BioMarin is still guiding to a top-line growth rate around 15% through 2020 and expenses shrinking as a percentage of sales, with products like vosoritide and val-rox driving stronger growth beyond 2020. Our model projects midteens growth in 2018 and 2019, with an increase in growth likely in 2020 as vosoritide and val-rox could launch. Beyond the currently launching CLN2 disorder drug Brineura (we assume $300 million in peak sales), we see $1 billion peak sales potential each for phenylketonuria drug Palynziq and for vosoritide and val-rox, making these programs more important to BioMarin’s long-term growth trajectory.

BioMarin’s revenue grew 17% in the second quarter, in line with the 16% revenue growth we model for the full year. Demand remains strong for all of BioMarin’s key products--PKU drug Kuvan, Morquio A syndrome drug Vimizim, and Naglazyme--as the number of patients treated continues to climb. BioMarin’s GAAP net losses decreased year over year (largely due to a one-time $20 million payment from Pfizer following regulatory advancements for PARP inhibitor talazoparib), but non-GAAP net income declined. Research and development expenses for vosoritide, val-rox, and Friedreich’s ataxia drug tralesinidase alfa (BMN-250) increased, and BioMarin boosted selling, general, and administrative expenses related to the recent launches of Brineura and Palynziq.

For more information on BioMarin's gene therapy program and the potential impact on the company's profitability, see our Healthcare Observer, "Drug Industry Gross Profits in a Tough Pricing Environment: Manufacturing Improvements Support Undervalued Drug Stocks." Last quarter, BioMarin announced that it plans to enter a PKU gene therapy into development in 2019, which we think could be a promising follow-up to the firm’s established presence with oral PKU drug Kuvan and ongoing U.S. launch for the more potent injectable PKU therapy Palynziq. We think the firm’s gene therapy manufacturing is already off to a good start (hemophilia gene therapy patients in val-rox phase 3 trials are receiving product from BioMarin’s own commercial facility), and we expect the firm has several preclinical gene therapy candidates under consideration.