Why BioMarin Is Unfazed by Price-Gouging Proposals

Growing fear that U.S. drug prices may be slashed against the will of companies that market them has battered the biotech industry. Rare-disease specialistBioMarin relies on several very expensive therapies for the majority of its top line. Amid outcry over drug pricing, it seems a company with some of the world's most expensive drugs should be shaking in its boots.

BioMarin shares have lost over 17% of their value since a scathingNew York Times article incited anger over drug pricing practices that Hillary Clinton described as "price gouging." Rather than tremble in fear, BioMarin is boldly expanding its reach within a rare disease, phenylketonuria, or PKU. The company recently announced that it will repurchase rights to Kuvan and pegvaliase from Merck KGaA for about $389 million upfront and up to about $211 million in future milestone payments. This ends 10 years of Merck ownership of ex-U.S. and ex-Japan rights to Kuvan.

Source: BioMarin

At a time when leading presidential candidates are threatening to curb runaway drug prices, it seems crazy for a company that is not yet profitable to spend so much on a drug like Kuvan that can cost patients more than $200,000 per year.And yet BioMarin didn't become a leading rare-disease drugmaker by making poor decisions -- so why is it unfazed?

To answer this, we need to look at two companies that have become "price gouging" whipping posts. Biotech's recent slide began when Clinton responded to a New York Times article that outlined Turing Pharmaceuticals' purchase and subsequent 5,000% price hike of a drug called Daraprim. More recently, Valeant Pharmaceuticals entered the Congressional crosshairs over its tendency to aggressively raise prices of acquired drugs.

Innovation expensesWhat separates these two from the likes of BioMarin is a differing emphasis on innovation. Turing is a privately-held company that doesn't need to disclose its financial details to the public, but its R&D costs can't be very large. A quick search of the NIH's clinical-trials database suggests it hasn't sponsored a single one. To be fair the company did submit anInvestigational New Drug Application to the FDA-- required to begin clinical testing -- for an epilepsy therapy the day following Hillary Clinton's "price gouging" tweet.

Meanwhile, we know publicly-traded Valeant's R&D spending reached $255 million over the past 12 months. While this is far and away the most it has ever spent on R&D, it's less than 3% of revenue recorded during the same period.

One of Clinton's proposals would require drugmakers to invest a "sufficient" amount of revenue in R&D. While it's highly unlikely legislation of this sort will ever see the light of day through a Republican-controlled Congress, BioMarin has little to fear even in a Democratic-controlled Congress. In stark contrast to Valeant, BioMarin spends so much on R&D that it hasn't produced a profit in years.

Not that there isn't any justification for acquiring drugs versus developing them in-house. In this instance, BioMarin is repurchasing ex-U.S. and ex-Japan rights to Kuvan and to pegvaliase, which it sold to Merck KGaA years ago. BioMarin retained rights to U.S. and Canadian sales of Kuvan and will begin booking revenue from global sales excluding Japan in January. Management expects its share of Kuvan sales to reach about $335 million next year, or about $115 million more than it's on pace to earn from U.S. and Canadian sales of Kuvan this year.

PKU affects an estimated 50,000 people worldwide. Reaching their physicians isn't easy, but BioMarin is well positioned to leverage inroads it has made in Kuvan's niche market. In the years following the sale of ex-U.S. rights to Kuvan, BioMarin has developed relationships with doctors worldwide who specialize in rare maladies such as PKU in the course of marketing the rest of its specialized portfolio.

When BioMarin entered the Kuvan agreement with Merck KGaA in 2005, it simply didn't have the means to effectively market the drug around the globe. Fast-forwarding to the first half of this year, the company's ex-U.S. sales have already reached $255.1 million and are now responsible a majority of the company's revenue.

Lumped inAs an investor, the important thing to bear in mind is that the market as a whole tends to sell first then ask questions later. Lumping BioMarin in with the likes of Turing and Valeant makes little sense, but both stock prices fell hard following Clinton's tweet.

BioMarin's drugs are expensive, but its commitment to innovation hardly resembles "price gouging." That's not to say well-intended legislation couldn't spill over in the future, but for now I'm optimistic about BioMarin's decision to cement its place in the global PKU market.

The article Why BioMarin Is Unfazed by Price-Gouging Proposals originally appeared on Fool.com.

Cory Renauer has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Valeant Pharmaceuticals. 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.