June 11 - Overview -- U.S. biotechnology company BioMarin Pharmaceutical Inc. completed an equity offering that raised $250 million, more than doubling its cash balance, extending its ability to fund research by about one year. -- We are affirming our 'B' corporate credit and convertible debt ratings on the company. -- We are revising our liquidity descriptor to "adequate," from "less than adequate." -- Our stable outlook on the company reflects our expectation that BioMarin's increased liquidity will better support growing new product investment. Rating Action On June 11, 2012, Standard & Poor's Ratings Services affirmed its 'B' corporate credit and convertible debt ratings on Novato, Calif.-based BioMarin Pharmaceutical Inc. Our rating outlook is stable. The ratings are unsolicited. We revised our liquidity descriptor for BioMarin to "adequate" from "less than adequate" (according to our criteria) after the company completed an equity offering with net proceeds of at least $250 million. Rationale Standard & Poor's unsolicited ratings on BioMarin reflect its "highly leveraged" financial risk profile, featuring rising debt leverage on dwindling EBITDA. However, this otherwise foreboding financial development is offset by improved liquidity from a just-completed stock offering. We believe BioMarin's business risk profile is "weak" because of its relatively small and niche product portfolio, the uncertain success of its research pipeline, and lack of profitability. BioMarin's highly leveraged financial risk profile reflects the biotechnology company's rising adjusted leverage-over 11x at March 31, 2012--and our expectation that adjusted EBITDA will fall to about $8 million in 2012, from $47 million in 2011. This reflects the company's relatively small size, and research and infrastructure spending needed to bring GALNS, an enzyme replacement therapy, to market. We expect R&D in 2012 to rise 20% to about $260 million, and sales, general, and administrative expenses to rise 15%, to about $200 million. Furthermore, rising working capital and capital expenditures to expand its operations influence our base-case expectation that free operating cash outflows in 2012 and 2013 could require the company to draw down more than $125 million of its cash and short-term investments, which totaled $233 million at March 31, 2012. However, an equity offering just raised some $250 million, providing adequate liquidity to pursue this strategy. We expect revenue growth to taper to a low-double-digit rate in 2012 and 2013, as BioMarin's two largest products mature. The reliance on these products for about three-quarters of revenues highlights the company's product concentration, as captured in its weak business risk profile. Our base case recognizes that Naglazyme, which accounts for about half of company revenues, loses its seven-year orphan drug marketing exclusivity in the U.S. in June. We do not forecast early competition, given the limited size of the market, and ongoing orphan drug status in the EU into 2016. This drug is indicated for the treatment of a debilitating life-threatening genetic disease with no other drug treatment. Kuvan, which accounts for about one-quarter of revenues, was launched in December 2007 as an oral treatment for an inherited metabolic disease. While Kuvan loses orphan drug status in mid-2014, patents should provide protection for an additional 10 years. Contributions from the company's remaining commercialized products--Aldurazyme and Firdapse--are likely to remain relatively small, with growth rates we expect will not be significantly better than BioMarin's two more significant products. BioMarin is significantly ramping up its research investment. We anticipate that R&D, which totaled $214 million in 2011, could average $275 million annually in 2012 and 2013. The company recently entered expensive Phase III clinical trials for GALNS. We believe that results from the study could be available by 2012 year-end. Still, the success of GALNS is uncertain, and we consider a meaningful contribution from it before 2014 unlikely in any case. The longer term product pipeline has several candidates. Our base case assumes that increasing costs for GALNS research, production, and development will exceed BioMarin's ability to fund it; we expect sharp declines in EBITDA, to negligible levels in 2012. Liquidity We have revised our liquidity descriptor to adequate, from less than adequate, with a recent equity offering that more than doubled BioMarin's cash. We anticipate that the company will draw more than $125 million of this in conjunction with its new product funding through 2013. The balance provides a bridge for sustaining research beyond that time. Relevant aspects of BioMarin's liquidity profile are: -- We expect liquidity sources to exceed uses by 1.2x over the next 12 to 24 months. -- Sources of liquidity include cash and short-term investments ($233 million at March 31, 2012) that was just expanded with some $250 million in proceeds from an equity offering. -- About $24 million of convertible notes come due in 2013. Another convertible note issue matures in 2017. -- We believe BioMarin might not be able to absorb a high-impact, low-probability event, given its cash needs for operations. -- In our assessment, the company has no particular core bank relationships. Outlook Our rating outlook on BioMarin is stable. We expect the company's increased liquidity to better support growing new product investment. We expect continued, but slower revenue growth in 2012 from its mature main franchises, Naglazyme and Kuvan. GALNS clinical success by year-end could aid prospects for a sharp turnaround in EBITDA and cash generation by the end of 2013. In the near term, however, dwindling EBITDA will sharply raise debt leverage, limiting prospects for a higher rating in the year ahead. At the same time, now that the company's cash balances have been replenished, a downgrade also is unlikely. Even, if GALNS clinical trial results turn out to be unfavorable or delayed, the liquidity improvement should allow the company to sustain its research and other operating needs for at least a couple of years. Related Criteria And Research -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009 -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Ratings Affirmed BioMarin Pharmaceutical Inc. (Unsolicited Ratings) Corporate Credit Rating B/Stable/-- Subordinated B Recovery Rating 4 This unsolicited rating(s) was initiated by Standard & Poor's. It may be based solely on publicly available information and may or may not involve the participation of the issuer. Standard & Poor's has used information from sources believed to be reliable based on standards established in our Credit Ratings Information and Data Policy but does not guarantee the accuracy, adequacy, or completeness of any information used. 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