Exploding Pipeline Makes BioMarin Attractive Takeover Target
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The Orphan Drug pipeline of BioMarin Pharmaceutical (NASDAQ: BMRN) has been growing so rapidly that the company has been the object of many takeover rumors since 2006 when it was believed that Genzyme was eyeing them for a buyout. No buyout has occurred yet, but rumors persist and since 2006, shares have risen from $3.87 to over $70. Further supporting this potential buyout is that Genzyme has been acquired by Sanofi (NYSE: SNY), and Sanofi has expressed a strong interest in Orphan Drugs and even stated that they are a good pharma model. If Sanofi's Genzyme unit successfully acquires BioMarin, then it will add greatly to Sanofi's pipeline of fast growing Orphan Drugs and help position Sanofi even stronger in this very high growth area.
There are two primary reasons for BioMarin’s spectacular growth, and the first one is that they specialize in Orphan Drugs that have tremendous advantages over traditional drugs. Orphan Drugs are frequently priced very high and generate very large profit margins. The global Orphan Drugs market generated revenue of $84.9 billion in 2009 and is growing exceptionally fast, expected to reach $112.1 billion by 2014. Orphan Drugs may now the biggest growth driver for the pharmaceutical industry as big pharma is faced with the patent cliff of expiring patents for their aging pipelines.
Time for FDA approval can be accelerated or granted “Fast Track” status. Prices can often be reimbursed for over $100,000 per year per patient for treatment. An example is BioMarin’s Naglazyme with an annual per patient cost of $365,000. Clinical trials are far cheaper because there are fewer patients to study, dictating lower numbers of patients in the trials. According to Genetic Engineering News, Phase III trials for the top ten orphan drugs was 592 patients as opposed to 8,614 for their non-orphan counterparts.
The Orphan Drug Act provides federal tax credits of up to 50% of orphan drug research costs and provides seven-year exclusivity on drug sales for the first company to receive FDA marketing approval. The Orphan Drug Act can also provide for waivers for certain FDA fees including drug approval application and annual product fees.
Orphan drugs treat rare conditions and don’t require a large sales force therefore creating a much lower marketing cost. Thomson Reuters Research claims that about one third of orphan drugs make over $1 billion a year in sales. Collectively, these advantages for Orphan Drugs add up to very fast growth and fast-rising share prices.
The second big reason for BioMarin’s strong growth is their underlying plan to acquire smaller companies that can enhance their pipeline cost-effectively. In January 2012, BioMarin CEO, Jean-Jacques Bienaime, said in an interview that BioMarin is seeking to buy smaller companies to expand its pipeline for treatment of rare diseases, but not to be acquired itself. Bienaime further said, the company will follow a similar acquisition strategy to one used for purchases such as Zystor Therapeutics Inc., which BioMarin bought in 2010 for $22 million in upfront cash. That acquisition gained the company a medicine now being tested for Pompe disease, a muscle-disabling disorder.
Sticking with their acquisition plan, BioMarin has purchased a number of strategic companies that have greatly expanded their pipeline and accelerated growth. The company purchased LEAD Therapeutics with their pre-clinical oral oncology drug for genetically defined cancers. In 2009, BioMarin acquired Huxley Pharmaceuticals for approximately $22.5 million and $36 million in royalties from future sales of Firdapse for the treatment of Lambert-Eaton Myasthenic Syndrome, LEMS.
In January 2013, BioMarin acquired Zacharon Pharmaceuticals for $10 million (plus additional undisclosed milestone payments), which gave BioMarin control of Zacharon’s heparan sulfate synthesis inhibition platform, which BioMarin plans on researching in the treatment of MPS III, other MPS disorders, and ganglioside diseases such as Tay-Sachs.
In October 2012, BioMarin may have made the single best investment in their entire history by investing $5,000,000 for a 17% stake in Catalyst Pharmaceutical Partners. At the same time, they out-licensed the North American rights for Firdapse to Catalyst that has already begun the Phase III clinical trials. It is especially important to note that Catalyst also owns CPP115 that is likely very attractive to BioMarin because it appears to be a serious contender for several Orphan Drug indications such as, Epilepsy, Refractory Epilepsy, Tourette Syndrome, Infantile Spasms, Movement Disorders, Post Traumatic Stress Disorders and other indications. CPP115 was designed by the well-known Dr. Richard Silverman, who also designed the blockbusters Lyrica and Neurontin for Pfizer (NYSE: PFE). Pfizer is also seeking opportunities in Orphan Drugs and they know how successful Dr. Silverman has already been for them so it would not be a surprise if Pfizer also becomes interested in BioMarin if CPP115 becomes part of their pipeline.
With BioMarin’s resources, CPP115 would be an extremely valuable addition to their pipeline that could increase their valuations substantially in the next two to three years. CPP115 could almost double the size of BoMarin’s already robust pipeline. Catalyst is therefore another logical but understandably quiet takeover target for BioMarin.
After all the successful takeovers that helped BioMarin grow, now the company finds itself a target as rumors are heating up again suggested in Fierce Biotech where GlaxoSmithKline and Shire, two U.K. drugmakers with existing footholds in rare diseases, have been rumored to be considering bids for BioMarin.
Even in the face of persistent buyout rumors, Bienaime said he didn’t anticipate interest from an acquirer until BioMarin reports later this year on final testing on GALNS, a treatment for the rare genetic bone disease Morquio A syndrome. Analysts predict peak sales for GALNS of $500 million. In April this year, after positive data from a Vimizim Trial (previously known as GALNS), BioMarin Submitted its Vimizim BLA to the U.S. FDA for the Treatment of MPS IVA and now the rumors are flying again, and the stock is just beginning to follow right along with the rumors. Michael Yee, an analyst at RBC Capital Markets in San Francisco, described GALNS as the biggest driver and most important data set of the year for BioMarin.
Given Bienaime’s statement that BioMarin would not be interested in an acquisition even at a 25% to 30% premium, that would set a buyout price in the neighborhood of $90 per share based on the recent high over $70. If BioMarin can lock up Catalyst’s CPP115, soon, that makes them even more attractive and may give them more leverage for a loftier price. Until a formal takeover offer is made, the predicted price is never known for certain, but based on BioMarin’s expected growth, it could easily be north of $100.
BioMarin is one to watch very closely.
colin simpson has no position in any stocks mentioned. The Motley Fool recommends BioMarin Pharmaceutical. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!