BioMarin: More Growth Is Coming

Background

In my last article, I noted the undervaluation of BMRN's (NASDAQ:BMRN) shares. Since that article, BMRN's shares grew to $117 per share at the beginning of this year. However, by now the price of the company shares has returned to the level where it was at the time of publication of my previous BMRN's article. Nevertheless, the company's business has improved significantly over that period. It is worth noting that the fall in BMRN's share price seems largely due to the rotation of investors from defensive sectors to more aggressive ones.

So, BioMarin shares lost 10% against the S&P500 index in the last 30 days. In the last 3 months, the dynamic of BMRN's shares was 19% worse than the dynamic of the S&P500 index. Besides sector rotation, an additional possible reason for the bad performance of BMRN's share was the FTC's desire to block the Amgen/Horizon M&A deal. That possible block can put a pause in M&A activity in the biotechnology sector for a while. I previously singled out BioMarin as a lucrative takeover target. Given the possible slowdown in M&A activity, the likelihood of BMRN's takeover has decreased. Nevertheless, this does not significantly change the company's investment case. BMRN's business, with approvals for its two potential blockbuster drugs, Voxzogo and Roctavian, remains one of the most attractive in the sector. I'll take a look at the main growth drivers for BioMarin's shares. However, before that, let's review the previous quarter's financial results.

1Q23 financial results

The company's 1Q23 revenue was $596 million (+23% YoY), 5% better than the consensus expected. BMRN's adjusted EBITDA was at $139 million (+61% YoY), 19% better than the consensus expectations were. EPS was at $0.27 (-56%), 59% better than the consensus expected. Free cash flow loss was close to $98 million (-16% margin), while a year earlier, it was positive, at $88 million (25% margin). Separately, I note that the drop in free cash flow was associated with one-time changes in working capital.

We will not dwell on the results of the company's traditional business in detail. I will only note that the revenue from the MPS treatment drug business increased by 3% YoY, while the revenue from the sale of drugs for the treatment of phenylketonuria decreased by 1% YoY. Let's dive in BMRN's growth drivers.

Opportunity #1: Voxzogo

Voxzogo was approved in the US in November 2021 and in Europe in August 2021. The start of Voxzogo's sales was very successful. Let's take a look at what the company managed to achieve by the end of 1Q23. In 1Q23, about 1,500 patients in 35 countries were already being treated with Voxzogo versus 1,260 in the quarter ago (+19% QoQ). Voxzogo's 1Q23 revenue was $87.8 million, 16% better than the consensus expected. According to the management, the current penetration of the drug is approximately 9% of the target market. The management includes only current approved indications in its estimate of Voxzogo's addressable market - children over 2 years old in Europe and over 5 years old in the USA, and without age restrictions in Japan. Japan, by the way, was the main driver of Voxzogo's sales growth in 1Q23.

If the drug is approved in the US (October 21) and Europe (2H23) for the younger children group (up to 5 years in the US, up to 2 years in Europe), the addressable number of patients could increase by 1,000. Based on 1Q23 results, management raised Voxzogo's 2023 sales forecast by $50 million to $380-430 million, which could account for about 16% of the company's annual revenue. In addition, approval of the drug for other diseases (hypochondroplasia) may become a long-term revenue growth driver for the drug, but this requires positive data from the clinical trials. The company plans to share more about possible related indications for Voxzogo on R&D Day, which will be held on September 12.

The only headwind to the dominance of Voxzogo in the achondroplasia treatment market in the next 5 years may be infigratinib (BridgeBio Pharma (BBIO)), which showed preliminary effectiveness, according to the Phase 2 data published in March 2023. However, BioMarin has the first-mover advantage in the achondroplasia treatment market, as well as an already proven positive long-term effect. Given the difference in the mechanism of action, it is far from certain that BBIO's drug will show efficacy in the long term as well as that of Voxzogo.

Opportunity # 2: Roctavian

The company received Roctavian's approval last week in the US. Let me remind you that in Europe, approval was received back in August 2022. However, sales in Europe have not yet started due to difficulties in obtaining reimbursement for the drug, especially in Germany. Negotiations with regulators in Germany should be completed in September when the final price for the drug will be announced. At the moment, potential patients in Germany are already undergoing the necessary tests to confirm their suitability for Roctavian treatment. In the United States, the drug will be available in a few weeks. However, it will take several months to complete all the necessary tests to ensure that the patients meet the criteria for the Roctavian treatment.

In the US, the company has chosen a non-standard sales scheme for the drug. The company will refund 100% of Roctavian's price (gross price $2.9 million) if it does not show effectiveness immediately after the injection. Also, the company plans to refund the proportional cost of the drug if its effectiveness decreases in the first 4 years from the treatment beginning. Investors took a not-so-positive view, which was reflected in the company's share price decline. However, I do not see any critical issue in this sales scheme, as the results of Roctavian's clinical trials indicate that the number of patients for whom the drug was not effective is not so much. However, this scheme can help to get reimbursement for the drug quickly enough. By the end of the year, the company also plans to receive insurance compensation in Italy and France. According to management estimates, this year the drug could bring the company $50-150 million in revenue.

Multiple valuation and consensus forecast

The current multiple valuation of the company is very attractive in my view. BioMarin's Forward EV/S multiple is 5.8x, which is 26% below the company's 5-year average multiple and 23% below the median. This and other multiples, EV/EBITDA and P/E, are at their lowest levels in 5 years. Assuming the EV/S multiple remains at current levels, the stock could rise by around 18% YoY on revenue growth alone (consensus forecast). The consensus forecast itself seems also very optimistic - the consensus target price assumes the growth of shares by 38% in the next 12 months. Over the past year, the consensus forecast has revised its BMRN's revenue forecast up 14%, its EBITDA forecast up 60%, and its EPS forecast up 15%. However, I rather focus on my calculations of the fair value of the company shares, which is based on the DCF valuation. My target price for the company stock is $118, that is about $1 above the consensus estimate. The main assumptions in my DCF model are:

• Revenue CAGR 23-27 is 17%.
• Terminal adjusted EBITDA is 50%.
• WACC is 9.6%.
• Terminal growth rate is 3%.

Additional drivers

Another long-term growth opportunity for the company stock is its possible inclusion in the S&P500 index. The company is likely to show four quarters of positive EPS this year and will be included in the S&P on the index rebalance in 2024. What does this mean? The market capitalization of the S&P 500 index is $37.1 trillion. That means that the share of BMRN in the index will be approximately 0.04%, if it is added to the index. The total AUM of the S&P500 tracking index funds is approximately $7.1 trillion (estimates vary widely based on the source). That means $2.8 billion of index fund cash could flow into BMRN stocks once they are included in the index. With an average daily trading volumes of BMRN shares of $102 million, this is about 27 daily trading volume, which can give a strong increase in the price of the shares.

Final thoughts and risks

The company 2Q23 earnings report is scheduled for July 31. Revenue for 2Q23, according to the consensus, is expected at $600 million, which implies a growth rate of 12% YoY, which, in my opinion, is quite achievable. As a result, I maintain my bullish view of the company shares and believe that the fair value of BMRN's shares, without taking into account the possibility of its acquisition, is near the level of $118 per share. To achieve this price target, the company needs to show strong sales of Voxzogo, as well as obtain reimbursement for Roctavian. Both goals are quite achievable. However, like any investment, investing in BioMarin's shares assumes a number of risks.

I highlight some of them:

• Failure to get Roctavian reimbursement.
• Weak sales of Roctavian.
• Increase of competition in the achondroplasia treatment market.
• Failure of pipeline drug clinical trial.

I recommend you review other risks in the company's latest report (10-K).