-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LxgIa9CvkEWcVNNWkyUfDsS8KDLUXjq4Ju8ytdiZALhpLOHUgmCC786JRHxk0Cgm kSmN5A5US9etw82DUVEghg== 0001048477-00-000011.txt : 20000516 0001048477-00-000011.hdr.sgml : 20000516 ACCESSION NUMBER: 0001048477-00-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BIOMARIN PHARMACEUTICAL INC CENTRAL INDEX KEY: 0001048477 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 680397820 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26727 FILM NUMBER: 630712 BUSINESS ADDRESS: STREET 1: 11 PIMENTEL COURT CITY: NOVATO STATE: CA ZIP: 94949 MAIL ADDRESS: STREET 1: 11 PIMENTEL COURT STREET 2: 11 PIMENTEL COURT CITY: NOVATO STATE: CA ZIP: 94949 10-Q 1 BIOMARIN PHARMACEUTICAL INC. FORM 10-Q 3/31/00 United States Securities and Exchange Commission Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to _________. Commission file number: 000-26727 BIOMARIN PHARMACEUTICAL INC. (Exact name of registrant issuer as specified in its charter) Delaware 68-0397820 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 371 Bel Marin Keys Blvd., Suite 210, Novato, California 94949 (Address of principal executive offices) (Zip Code) (415) 884-6700 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the registrant filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ____ No_____ APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 35,354,921shares common stock, par value $0.001, outstanding as of April 30, 2000. BIOMARIN PHARMACEUTICAL INC. TABLE OF CONTENTS Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited). Consolidated Balance Sheets..................................................2 Consolidated Statements of Operations........................................3 Consolidated Statements of Cash Flows........................................4 Notes to Consolidated Financial Statements..................................5 Item 2. Management's Discussion and Analysis...............................7 Item 3. Quantitative and Qualitative Disclosure about Market Risk.........12 PART II. OTHER INFORMATION Item 1. Legal Proceedings..................................................23 Item 2. Changes in Securities and Uses of Proceeds.........................23 Item 3. Defaults upon Senior Securities....................................23 Item 4. Submission of Matters to a Vote of Security Holders................23 Item 5. Other Information..................................................23 Item 6. Exhibits and Reports on Form 8-K...................................24 SIGNATURE...................................................................26 PART 1. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) BioMarin Pharmaceutical Inc. and Subsidiaries (a development-stage company) Consolidated Balance Sheets as of December 31, 1999 and March 31, 2000 ($ Thousands) December 31, March 31, 1999 2000 ------------------- ----------------- (unaudited) Assets Current assets: Cash and cash equivalents $ 23,413 $ 40,675 Short-term investments 39,573 14,999 Accounts receivable, net 1,047 1,109 Due from Glyko Biomedical Ltd. 139 163 Due from BioMarin/Genzyme LLC 1,280 3,734 Inventories 676 647 Prepaid expenses 294 225 ------------------- ----------------- Total current assets 66,422 61,552 Property, plant and equipment, net 25,093 20,743 Goodwill and other intangible assets 11,462 11,159 Investment in BioMarin/Genzyme LLC 421 790 Deposits 151 246 ------------------- ----------------- Total assets $ 103,549 $ 94,490 =================== ================= Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 3,095 $ 1,367 Accrued liabilities 1,966 3,289 Notes payable - short-term 26 26 ------------------- ----------------- Total current liabilities 5,087 4,682 Long-term liabilities: Long-term portion of notes payable 85 77 ------------------- ----------------- Total liabilities 5,172 4,759 ------------------- ----------------- Stockholders' equity: Common stock, $0.001 par value: 75,000,000 Authorized 34,832,578 and 35,305,921 shares issued and outstanding at December 31, 1999 and March 31, 2000, respectively 35 35 Additional paid-in capital 146,592 149,412 Common stock warrants and options 128 128 Deferred compensation (2,591) (2,322) Notes from stockholders (2,638) (2,638) Deficit accumulated during the development stage (43,149) (54,884) ------------------- ----------------- Total stockholders' equity 98,377 89,731 ------------------- ----------------- Total liabilities and stockholders' equity $ 103,549 $ 94,490 =================== =================
The accompanying notes are an integral part of these statements. 2 BioMarin Pharmaceutical Inc. and Subsidiaries (a development-stage company) Consolidated Statements of Operations for the Three-Month Periods Ended March 31, 1999 and 2000 and for the Period from March 21, 1997 (inception) to March 31, 2000 ($ Thousands, except for per share data) For the period March 21, 1997 Three Months Ended March 31, (inception), to -------------------------------------- March 31, 1999 2000 2000 -------------------- ------------------ -------------------- (unaudited) (unaudited) (unaudited) Revenues: Revenues - products $ 202 $ 469 $ 2,008 Revenues - services 47 50 247 Revenues from joint venture 746 2,756 8,893 Revenues - other 109 23 316 -------------------- ------------------ -------------------- Total revenues: 1,104 3,298 11,464 Operating Costs and Expenses: Cost of products 84 148 559 Cost of services 18 33 194 Research and development 3,892 8,663 48,285 Selling, general and administrative 1,693 1,996 13,247 Carson Street closure - 4,423 4,423 -------------------- ------------------ -------------------- Total operating costs and expenses 5,687 15,263 66,708 Loss from operations (4,583) (11,965) (55,244) Interest income 154 788 3,370 Interest expense - (2) (734) Equity in loss of BioMarin/Genzyme LLC (180) (557) (2,277) -------------------- ------------------ -------------------- Net loss (4,609) (11,736) (54,885) ==================== ================== ==================== Net loss per share, basic and diluted $ (0.18) $ (0.34) $(2.46) ==================== ================== ==================== Weighted average common shares outstanding 26,176 35,015 22,302 ==================== ================== ====================
The accompanying notes are an integral part of these statements. 3 BioMarin Pharmaceutical Inc. and Subsidiaries (a development-stage company) Consolidated Statements of Cash Flows For the Three-Month Periods Ended March 31, 1999 and 2000, and for the Period from March 21, 1997 (inception) to March 31, 2000 Period from March 21, 1997 Three Months Ended (inception) to March 31, March 31, 1999 2000 2000 ------------ ------------ ------------ Cash flows from operating activities: Net loss $ (4,609) $ (11,736) $ (54,885) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 420 1,163 5,550 Amortization of deferred compensation 298 268 1,794 Amortization of goodwill 271 303 1,717 Compensation in the form of common stock and common stock options - - 18 Loss from BioMarin/Genzyme LLC 180 3,304 10,324 Write off of in-process technology - - 2,625 Carson Street closure - 4,423 4,423 Changed in operating assets and liabilities: Accounts receivable (36) (62) (1,109) Due from Glyko Biomedical Ltd. (5) (24) (162) Due from BioMarin/Genzyme LLC (210) (2,453) (3,733) Inventories 12 29 (48) Prepaid expenses (30) 69 (224) Deposits (10) (95) (246) Accounts payable (560) (1,728) 1,366 Accrued liabilities 184 696 2,662 ------------ ------------ ------------ Total adjustments 514 5,893 24,957 ------------ ------------ ------------ Net cash used in operating activities (4,095) (5,843) (29,928) Cash flows from investing activities: Purchase of property and equipment (2,781) (608) (30,087) Purchase of Biochemical Research Reagent Division of Oxford Glycosciences - - (1,500) Investment in BioMarin/Genzyme LLC (642) (3,674) (11,115) Sale/(purchase) of short-term investments 1,722 24,574 (14,999) ------------ ------------ ------------ Net cash provided by (used in) investing activities (1,701) 20,292 (57,701) Cash flows from financing activities: Proceeds from note payable - - 134 Bridge loan - - 880 Proceeds from issuance of convertible notes payable - - 25,615 Accrued interest on notes receivable from stockholders (37) - (188) Proceeds from exercise of common stock options - 2,821 2,969 Repayment of equipment loan (6) (8) (32) Proceeds from sale of common stock, net of issuance costs - - 98,926 ------------ ------------ ------------ Net cash provided by (used in) financing activities (43) 2,813 128,304 ------------ ------------ ------------ Net increase (decrease)in cash and cash equivalents (5,839) 17,262 40,675 Cash and cash equivalents, beginning of period 9,414 23,413 - ------------ ------------ ------------ Cash and cash equivalents, end of period $ 3,575 $ 40,675 $ 40,675 ============ ============ ============
The accompanying notes are an integral part of these statements. 4 BIOMARIN PHARMACEUTICAL INC. AND SUBSIDIARIES (a development-stage company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION: ---------------------- BioMarin Pharmaceutical Inc. (BioMarin or Company) is a publicly-traded (Nasdaq National Market and SWX New Market: BMRN) biopharmaceutical company specializing in the development of carbohydrate enzyme therapies for debilitating, life-threatening, chronic genetic disorders and other diseases or conditions. Since inception, the Company has devoted substantially all of its efforts to research and development activities, including preclinical studies and clinical trials, the establishment of laboratory and clinical scale manufacturing facilities, clinical manufacturing, and related administrative activities. BioMarin was incorporated in October 1996 as a wholly-owned subsidiary of Glyko Biomedical Ltd. (GBL). The Company was funded by GBL and began operations on March 21, 1997 (inception). In October 1998, the Company acquired Glyko, Inc., a wholly-owned subsidiary of GBL, in a transaction valued at $14.5 million. The Company completed its Initial Public Offering (IPO) of 4.5 million shares of common stock at $13.00 per share on July 23, 1999, raising net proceeds of approximately $51.9 million. In a private placement concurrent with the IPO, Genzyme invested $10 million at the IPO price of $13 per share (769,230 shares of common stock). In addition, the $26 million of convertible notes sold by the Company on April 13, 1999, plus accrued interest, were converted into 2,672,020 shares of common stock at $10 per share. The underwriters' over-allotment exercise of 675,000 shares in August 1999 raised additional net proceeds of $8.1 million at the IPO price. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information on substantially the same basis as the annual audited financial statements. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2000 are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. These consolidated financial statements should be read in conjunction with the financial statements and footnotes thereto for the year ended December 31, 1999 included in the Company's Form 10-K Annual Report. 2. SIGNIFICANT ACCOUNTING POLICIES: -------------------------------- Use of Estimates The preparation of the Company's financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that effect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents consist of amounts held with banks and short-term investments with original maturities of 90 days or less. Short-term Investments The Company records its investment securities as available-for-sale because the sale of such securities may be required prior to maturity. These securities are recorded at March 31, 2000 at cost, which approximates fair market value. These securities are comprised mainly of Federal Agency investments including Federal National Mortgage and Federal Home Loans and bank certificates of deposit. 5 Property and Equipment Property and equipment are stated at cost. Depreciation is computed using the straight-line method. Leasehold improvements are amortized over the life of the asset or the term of the lease, whichever is shorter. Significant additions and improvements are capitalized, while repairs and maintenance are charged to expense as incurred. Property and equipment consisted of the following ($ thousands): December 31, March 31, Estimated 1999 2000 Useful Lives ------------------ ------------------ ------------------ Computer hardware and software $ 426 $ 429 3 years Office furniture and equipment 1,017 899 5 years Manufacturing/laboratory equipment 8,254 7,309 5 years Leasehold improvements 19,768 16,623 Shorter of life of asset or lease term ------------------ ------------------ 29,465 25,260 Less: Accumulated depreciation (4,372) (4,517) ------------------ ------------------ Total, net $ 25,093 $ 20,743 ================== ==================
Research and Development Research and development expenses include the expenses associated with contract research and development provided by third parties, research and development provided in connection with BioMarin/Genzyme LLC, a joint venture, including clinical and regulatory costs, and internal research and development costs. All research and development costs discussed above are expensed as incurred. Net Income (Loss) per Share Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted average common shares outstanding during the period. Diluted net income per share is calculated by dividing net income by the weighted average of common stock outstanding and potential common shares during the period. Potential common shares include dilutive shares issuable upon the exercise of outstanding common stock options, warrants, and contingent issuances of common stock. For periods in which the Company has losses, such potential common shares are excluded from the computation of diluted net loss per share, as their effect is anti-dilutive. Use of Estimates The preparation of the Company's financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that effect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents consist of amounts held with banks and short-term investments with original maturities of 90 days or less. 3. CARSON STREET CLOSURE: ---------------------- During the first quarter of 2000, the Company decided to close its Carson Street clinical manufacturing facility. In connection with this decision, the Company recorded a charge of approximately $4.4 million for the closure of its Carson Street clinical manufacturing facility. The facility was no longer required for the production of Aldurazyme(TM), the initial purpose of the plant, after a decision by the BioMarin/Genzyme LLC (joint venture) to use the Company's Galli Drive facility for the manufacture of bulk Aldurazyme(TM) both for the confirmatory Phase III trial and for the commercial launch of Aldurazyme(TM). This decision was based in part on U.S. Food and Drug Administration guidance to use an improved production process, which was installed in the Galli facility, for the clinical trial and biologics license application submission and for commercial production. The Carson Street facility is expected to complete its final production lots in May. The Company expects that a majority of its technical staff at the Carson Street facility in Torrance, California will transfer to the Galli Drive facility in Novato, California, which has significantly greater manufacturing capacity. The charge primarily consisted of write-downs of leasehold improvements and equipment located in the Carson Street facility. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations FORWARD-LOOKING STATEMENTS The following discussion and analysis of financial condition and results of operations contains "forward-looking statements" as defined under securities laws. These statements can often be identified by the use of terminology such as "believes," "expects," "anticipates," "plans," "may," "will," "projects," "continues," "estimates," "potential," "opportunity" and so on. These forward-looking statements may be found in the "Risk Factors," and other sections of this document. Our actual results or experience could differ significantly from the forward-looking statements. Factors that could cause or contribute to these differences include those discussed in "Risk Factors," as well as those discussed elsewhere in this document. Overview We are a developer of carbohydrate enzyme therapies for debilitating, life-threatening, chronic genetic disorders and other diseases or conditions. Since our inception on March 21, 1997, we have been engaged in research and development activities, including preclinical studies, clinical trials and clinical manufacturing, the establishment of laboratory and manufacturing facilities, and administrative activities. BioMarin was incorporated in October 1996 as a wholly-owned subsidiary of Glyko Biomedical Ltd. or GBL (TSE: GBL). BioMarin was initially funded by GBL and began operations on March 21, 1997, the date of inception. We have incurred net losses since inception and had an accumulated deficit through March 31, 2000 of $54.9 million. Our losses have resulted primarily from research and development activities and related administrative expenses. We expect to continue to incur operating losses at least through 2001. To date, we have not generated revenues from the sale of our drug candidates. Our lead product is Aldurazyme(TM), alronidase for injection, (recombinant human (alpha)-L-iduronidase), which is undergoing clinical trials for use in enzyme replacement therapy for Mucopolysaccharridosis-I or MPS-I. Our financial results may vary depending on many factors, including: . The progress of Aldurazyme(TM) in the regulatory processes and initial sales activities . The investment in manufacturing process development and in manufacturing capacity for Aldurazyme(TM) and other product candidates . The acceleration of our other pharmaceutical candidates into preclinical studies and clinical trials . The progress of our additional research and development efforts In September 1998, we established a joint venture with Genzyme for the worldwide development and commercialization of Aldurazyme(TM) for the treatment of MPS-I. Under the agreement, our Company and Genzyme are each required to make capital contributions to the joint venture equal to 50% of the expenses associated with the development and commercialization of Aldurazyme(TM). We will share equally in any profits generated from the sales of Aldurazyme(TM). In October 1998, we acquired Glyko, Inc., a wholly-owned subsidiary of GBL in a transaction valued at $14.5 million. Glyko, Inc. provides products and services that perform carbohydrate analysis and medical diagnosis to research institutions and commercial laboratories. In July 1999, we completed our initial public offering or IPO of 4.5 million shares of our common stock at $13 per share raising net proceeds of approximately $51.9 million. In a private placement concurrent with the IPO, Genzyme purchased $10 million of our common stock (769,230 shares) at the IPO price of $13. In addition, the $26 million of convertible notes sold by the Company on April 13, 1999, plus accrued interest, were converted into 2,672,020 shares of common stock at $10 per share. In August 1999, the underwriters exercised their over-allotment option for 675,000 shares at the IPO price of $13 per share, raising additional net proceeds of $8.1 million. 7 Results of Operations The Quarters Ended March 31, 2000 and 1999 Revenues for the first quarter of 2000 totaled $3.3 million compared to revenues of $1.1 million in the first quarter of 1999. First quarter 2000 revenues included $2.8 million for services provided to the joint venture for Aldurazyme(TM) compared to $746,000 in the same period in 1999. The increase was primarily the result of increased services provided to the joint venture for the start-up of manufacturing operations in the Galli Drive facility in preparation for the supply of clinical trial material while also running the Carson Street facility. First quarter 2000 revenues also included $519,000 generated by Glyko, Inc. compared to $249,000 for the first quarter of 1999. Glyko's external revenues for products and services for the first quarter of 2000 were up 108% in comparison to the first quarter of 1999 as a result of product sales from the biochemical reagents business of Oxford GlycoScience Plc. (LSE: OGS), which was acquired in May 1999. Other revenues decreased from $109,000 in the first quarter of 1999 to $23,000 in the first quarter of 2000 due to the reduction in governmental grant revenue for Glyko, Inc. programs. Cost of products and cost of services related to Glyko, Inc. operations were $181,000 in the first quarter of 2000 and were $102,000 in the comparable period of 1999. Glyko's total external product and service costs as a percent of the sales of products and services were 35% in the first quarter of 2000 and 41% in the first quarter of 1999. The improvement was due to a favorable mix, with a greater percentage of higher margin product sales. Research and development expenses for the first quarter of 2000 increased by $4.8 million from $3.9 million in the first quarter of 1999 to $8.7 million in the first quarter of 2000. This increase was due primarily to increased activities in support of the joint venture for Aldurazyme(TM) and in support of the Company's enzyme product candidates for MPS-VI and burn debridement. Selling, general and administrative expenses increased from $1.7 million in the first quarter of 1999 to $2.0 million in the first quarter of 2000 due to increased administrative staff expenses to support expanded operations and expenses associated with its new status as a publicly traded company. During the first quarter of 2000, the Company decided to close its Carson Street clinical manufacturing facility. In connection with this decision, the Company recorded a charge of approximately $4.4 million for the closure of its Carson Street clinical manufacturing facility. The facility was no longer required for the production of Aldurazyme(TM), the initial purpose of the plant, after a decision by the BioMarin/Genzyme LLC (joint venture) to use the Company's Galli Drive facility for the manufacture of bulk Aldurazyme(TM) both for the confirmatory Phase III trial and for the commercial launch of Aldurazyme(TM). This decision was based in part on U.S. Food and Drug Administration guidance to use an improved production process, which was installed in the Galli facility, for the clinical trial and biologics license application submission and for commercial production. The Carson Street facility is expected to complete its final production lots in May. The Company expects that a majority of its technical staff at the Carson Street facility in Torrance, California will transfer to the Galli Drive facility in Novato, California, which has significantly greater manufacturing capacity. The charge primarily consisted of write-downs of leasehold improvements and equipment located in the Carson Street facility. The Company's equity in the loss of its joint venture with Genzyme was $557,000 for the first quarter 2000 compared to $180,000 for the same period of 1999. Interest income increased by $634,000 from $154,000 in the first quarter of 1999 to $788,000 in the first quarter of 2000 due to increased cash reserves resulting from the initial public offering on July 23, 1999, a concurrent investment by Genzyme, and a convertible note financing in April 1999. Net loss of $4.6 million ($0.18 per share) in the first quarter of 1999 increased to $11.7 million ($0.34 per share) in the comparable period of 2000. 8 Liquidity and Capital Resources We have financed our operations since our inception by the issuance of common stock and convertible notes and the related interest income earned on cash balances available for short-term investment. Since inception, we have raised aggregate net proceeds of approximately $124 million after the IPO and concurrent Genzyme investment. We were initially funded by GBL with a $1.5 million investment. We have since raised additional capital from the sale of common stock in private placements, in the sale of promissory notes convertible into common stock, in an investment of $8.0 million by Genzyme as part of our joint venture with them, in an initial public offering including the underwriters' over-allotment exercise and in the concurrent $10 million Genzyme investment in our Company. Our combined cash, cash equivalents and short-term investments totaled $55.7 million at March 31, 2000, a decrease of $7.3 million from December 31, 1999. The primary use of cash during the quarter ended March 31, 2000 was to finance operations, fund to the joint venture and to purchase equipment and leasehold improvements. The primary source of cash was the issuance of common stock pursuant to the exercise of stock options under the 1997 Stock Plan. For the quarter ended March 31, 2000, operations used $5.7 million, we invested $3.7 million in the joint venture (which was consumed in joint venture operations), we purchased $0.7 million of equipment and leasehold improvements and we raised $2.8 million from the exercise of stock options. From our inception through March 31, 2000, we have purchased approximately $30.2 million of leasehold improvements and equipment. We expect that our investment in leasehold improvements and equipment will increase significantly during the next two years because we will provide facilities and equipment for a larger staff and increase manufacturing capacity. As part of the acquisition of Glyko, Inc., we acquired in-process research and development projects, the value of which was expensed as a portion of the purchase price at the time of the acquisition. The 11 projects acquired are each relatively small and can be grouped into two categories, analytic projects and diagnostic projects. The analytic projects are intended to expand the analytic product line by adding new enzymes for reagent sales, new kits for agricultural applications, new instrument capabilities for protein analysis and a major upgrade of software capabilities. At the time of the acquisition of Glyko, Inc., all of the analytic projects had completed feasibility work and the software projects were 75% complete and have since been completed. The development of specialized materials supporting instrument capabilities is deemed to be the most difficult technical hurdle for the completion and commercialization of the analytic projects. The fair value of the analytic projects was $1.7 million at the time of the acquisition. The diagnostic projects are intended to expand a product line based on very precise measurements of the level of complex carbohydrates in blood and urine as indicators of serious disease conditions including heart disease, kidney disease and mucopolysaccharidoses or carbohydrate storage diseases. At the time of the Glyko, Inc. acquisition, preliminary feasibility work had been done for all of the projects and a software project was well advanced as to programming, which has since been completed. The development of new more sensitive carbohydrate chemistry techniques is deemed to be the most difficult technical hurdle for the completion and commercialization of the diagnostic products. The fair value of the diagnostic projects was $924,000 at the time of the acquisition. As of March 31, 2000, we had expended to date approximately $800,000 on the in-process research and development projects and $875,000 on the diagnostic projects. If all acquired in-process research and development projects proceed to completion, we expect to spend approximately $310,000 in incremental direct expense to complete the analytic projects in phases over approximately 12 months. We expect to spend approximately $850,000 to complete the diagnostic projects in phases to be completed within the next 18 months. None of these projects have been terminated to date. Since the acquisition of these in-process research and development projects one year ago, there have been no subsequent developments which indicate that the completion and commercialization of either of the projects are less likely to be completed on the original planned schedule or less likely to be a commercial success. 9 We have made and plan to make substantial commitments to capital projects, including expanding the Aldurazyme(TM) manufacturing facility in Novato and developing new research and development facilities in Novato. In September 1998, we established a joint venture with Genzyme for the worldwide development and commercialization of Aldurazyme(TM) for the treatment of MPS-I. We share expenses and profits from the joint venture equally with Genzyme. Genzyme purchased $8.0 million in common stock upon signing the agreement and $10.0 million of common stock at the IPO price of $13 per share in a private placement concurrent with the IPO. Genzyme has committed to pay us an additional $12.1 million upon approval of the biologics license application for Aldurazyme(TM). On October 7, 1998, we purchased Glyko, Inc. from GBL for an aggregate purchase price of $14.5 million. The purchase price was paid by 2,259,039 shares of our common stock, our assumption of certain stock options held by Glyko, Inc. employees which were exercisable into a maximum of 255,540 shares of our common stock and $500 in cash. On April 13, 1999, we sold a total of $26.0 million of convertible promissory notes. The notes plus accrued interest were converted into 2,672,020 shares of our common stock at a conversion price of $10.00 per share concurrent with the IPO. In May 1999, Glyko, Inc. acquired key assets of the Biochemical Research Reagent Division of Oxford GlycoSciences Plc. The acquisition was made to increase Glyko, Inc.'s product offerings and was valued from $1.5 million to $2.1 million, depending on the future sales of the acquired products. In July 1999, we completed our initial public offering of 4.5 million shares of our common stock at $13 per share raising net proceeds of approximately $51.8 million. In a private placement concurrent with the IPO, Genzyme purchased $10 million of our common stock (769,230 shares) at the IPO price of $13. In August 1999, the underwriters exercised their over-allotment option for 675,000 shares at the IPO price of $13 raising additional net proceeds of $8.1 million. We expect our current funds to last at least through mid-year 2001. Until we can generate sufficient levels of cash from our operations, we expect to continue to finance future cash needs through: . The sale of equity securities . Equipment-based financing . Collaborative agreements with corporate partners We do not expect to generate positive internal cash flow for at least through 2001 because we expect to increase operational expenses and manufacturing investment for the joint venture and to increase research and development activities, including: . Preclinical studies, clinical trials and regulatory review . Commercialization of our drug candidates . Development of manufacturing operations . Process development . Scale-up of manufacturing facilities . Sales and marketing activities 10 We anticipate a need for additional financing to fund the future operations of its business, including the commercialization of our drug candidates currently under development. We cannot assure you that additional financing will be obtained or, if obtained, will be available on reasonable terms. Our future capital requirements will depend on many factors, including, but not limited to: . The progress of our research and development programs . The progress of preclinical studies and clinical trials . The time and cost involved in obtaining regulatory approvals . Scaling up, installing and validating manufacturing capacity . Competing technological and market developments . Changes and developments in collaborative, licensing and other relationships . The development of commercialization activities and arrangements . The leasing and build-out of additional facilities . The purchase of additional capital equipment We plan to continue our policy of investing available funds in government securities and investment grade, interest-bearing securities, primarily with maturities of one year or less. We do not invest in derivative financial instruments, as defined by Statement of Financial Accounting Standards No. 119. 11 RISK FACTORS If we continue to incur operating losses for a period longer than anticipated, we may be unable to continue our operations. We are in an early stage of development and have operated at a net loss since we were formed. Since we began operations in March 1997, we have been engaged primarily in research and development. We have no sales revenues from any of our drug products. As of March 31, 2000, we had an accumulated deficit of approximately $54.9 million. We expect to continue to operate at a net loss at least through 2002. Our future profitability depends on our receiving regulatory approval of our drug candidates and our ability to successfully manufacture and market any approved drugs, either by ourselves or jointly with others. The extent of our future losses and the timing of profitability are highly uncertain. If we fail to become profitable or are unable to sustain profitability on a quarterly or annual basis, then we may be unable to continue our operations. Because of the relative small size and scale of our wholly-owned subsidiary, Glyko, Inc., profits from products and services offered by it will be insufficient to offset the expenses associated with our pharmaceutical business. As a result, we expect that operating losses will continue and increase for the foreseeable future. If we fail to obtain the capital necessary to fund our operations we will be unable to complete our product development programs. In the future, we may need to raise substantial additional capital to fund operations. We cannot be certain that any financing will be available when needed. If we fail to raise additional financing as we need it, we will have to delay or terminate our product development programs. We expect to continue to spend substantial amounts of capital for our operations for the foreseeable future. Activities which will require additional expenditures include: o research and development programs o preclinical studies and clinical trials o regulatory processes o establishment of commercial scale manufacturing capabilities and o expansion of sales and marketing activities. The amount of capital we may need depends on many factors, including: o The progress, timing and scope of our research and development programs o The progress, timing and scope of our preclinical studies and clinical trials o The time and cost necessary to obtain regulatory approvals o The time and cost necessary to build our manufacturing facilities and obtain the necessary regulatory approvals for those facilities o The time and cost necessary to respond to technological and market developments o Any changes made or new developments in our existing collaborative, licensing and other commercial relationships o Any new collaborative, licensing and other commercial relationships that we may establish 12 Moreover, our fixed expenses such as rent, license payments and other contractual commitments are substantial and will increase in the future. These fixed expenses will increase because we may enter into: o additional leases for new facilities and capital equipment o additional licenses and collaborative agreements o additional contracts for consulting, maintenance and administrative services o additional expenses associated with being a public company. We believe that the cash, cash equivalents, short-term investment securities balances at March 31, 2000 will be sufficient to meet our operating and capital requirements through mid-year 2001. This estimate is based on assumptions and estimates, which may prove to be wrong. As a result, we may need or choose to obtain additional financing during that time. If we fail to obtain regulatory approval to commercially manufacture or sell any of our future drug products, or if approval is delayed, we will be unable to generate revenue from the sale of our products. We must obtain regulatory approval to market our products in the U.S. and foreign jurisdictions. We must obtain regulatory approval before marketing or selling our future drug products. In the United States, we must obtain FDA approval for each drug that we intend to commercialize. The FDA approval process is typically lengthy and expensive, and approval is never certain. Products distributed abroad are also subject to foreign government regulation. None of our drug products has received regulatory approval to be commercially marketed and sold. If we fail to obtain regulatory approval we will be unable to market and sell our future drug products. Because of the risks and uncertainties in biopharmaceutical development, our drug candidates could take a significantly longer time to gain regulatory approval than we expect or may never gain approval. If regulatory approval is delayed our management's credibility, the value of our Company and our operating results may be adversely affected. To obtain regulatory approval to market our products, preclinical studies and costly and lengthy clinical trials may be required and the results of the studies and trials are highly uncertain. As part of the FDA approval process, we must conduct, at our own expense, preclinical studies on animals and clinical trials on humans on each drug candidate. We expect the number of preclinical studies and clinical trials that the FDA will require will vary depending on the drug product, the disease or condition the drug is being developed to address and regulations applicable to the particular drug. We may need to perform multiple preclinical studies using various doses and formulations before we can begin clinical trials, which could result in delays in our ability to market any of our drug products. Furthermore, even if we obtain favorable results in preclinical studies on animals, the results in humans may be different. After we have conducted preclinical studies in animals we must demonstrate that our drug products are safe and effective for use on the target human patients in order to receive regulatory approval for commercial sale. Adverse or inconclusive clinical results would stop us from filing for regulatory approval of our products. Additional factors that can cause delay or termination of our clinical trials include: o Slow patient enrollment o Longer treatment time required to demonstrate efficacy o Lack of sufficient supplies of the drug candidate o Adverse medical events or side effects in treated patients o Lack of effectiveness of the drug candidate being tested 13 Typically, if a drug product is intended to treat a chronic disease safety and efficacy data must be gathered over an extended period of time which ranges from six months to three years. In addition, clinical trials on humans are typically conducted in three phases. The FDA generally requires two pivotal clinical trials that demonstrate substantial evidence of safety and efficacy and appropriate dosing in a broad patient population at multiple sites to support an application for regulatory approval. If a drug is intended for the treatment of a serious or life-threatening condition and the drug demonstrates the potential to address unmet medical needs for this condition, a single trial may be sufficient to prove safety and efficacy under the FDA's Modernization Act of 1997. The fast track designation for AldurazymeTM may not actually lead to a faster review process. Although AldurazymeTM has obtained a fast track designation, we cannot guarantee a faster review process or faster approval compared to the normal FDA procedures. We will not be able to sell our products if we fail to comply with manufacturing regulations. Before we can begin commercially manufacturing our products we must obtain regulatory approval of our manufacturing facility and process. In addition, manufacture of our drug products must comply with the FDA's current Good Manufacturing Practices regulations, commonly known as cGMP. The cGMP regulations govern quality control and documentation policies and procedures. Our manufacturing facilities are continuously subject to inspection by the FDA, the State of California and foreign regulatory authorities, before and after product approval. Because we are currently in the process of developing the manufacturing site and process for commercial manufacture of AldurazymeTM, our facility has not yet been inspected by any governmental entity. We cannot guarantee that the Company, or any potential third-party manufacturer of our drug products, will be able to comply with cGMP regulations. Material changes to the manufacturing processes after approvals have been granted are also subject to review and approval by the FDA or other regulatory agencies. We must pass FDA and state inspections and manufacture three process qualification batches to final specifications under cGMP controls before the AldurazymeTM BLA can be approved. We cannot assure you that we will pass the inspections in a timely manner, if at all. If we fail to obtain orphan drug exclusivity for our products, our competitors may sell products to treat the same conditions and our revenues may be reduced. As part of our business strategy, we intend to develop drugs that may be eligible for FDA orphan drug designation. Under the Orphan Drug Act, the FDA may designate a product as an orphan drug if it is a drug intended to treat a rare disease or condition, defined as a patient population of less than 200,000. The company that obtains the first FDA approval for a designated orphan drug for a given rare disease receives marketing exclusivity for use of that drug for the stated condition for a period of seven years. However, different drugs can be approved for the same condition. Because the extent and scope of patent protection for our drug products is limited, orphan drug designation is particularly important for our products that are eligible for orphan drug designation. We plan to rely on the exclusivity period under the orphan drug designation to maintain a competitive position. If we do not obtain orphan drug exclusivity for any one of our drug products, our competitors may then sell the same drug to treat the same condition. We received orphan drug designation from the FDA for AldurazymeTM in September 1997. In February 1999, we received orphan drug designation from the FDA for BM102 for the treatment of MPSVI. Even though we have obtained orphan drug designation for these drugs and even if we obtain orphan drug designation for other products we develop, we cannot guarantee that we will be the first to obtain marketing approval for any orphan indication or that exclusivity would effectively protect the product from competition. Orphan drug designation does not shorten the development or FDA review time of a drug so designated nor give the drug any advantage in the FDA review or approval process. 14 Because the target patient populations for our products are small we must achieve significant market share and obtain high per patient prices for our products to achieve profitability. Our initial drug candidates target disorders with small patient populations. As a result, our prices must be high enough to recover our development costs and achieve profitability. For example, two of our initial drug products in genetic disorders, AldurazymeTM and BM102, target patients with MPS-I and MPS-VI, respectively. We estimate that there are approximately 3,400 patients with MPS-I and 1,100 patients with MPS-VI in the developed world. We believe that we will need to market worldwide to achieve significant market share. In addition, we are developing other drug candidates to treat conditions, such as other genetic diseases and serious burn wounds, with small patient populations. We cannot be certain that we will be able to obtain sufficient market share for our drug products at a price high enough to justify our product development efforts. If we fail to obtain an adequate level of reimbursement for our drug products by third-party payors there would be no commercially viable markets for our products. The course of treatment for patients with MPS-I using AldurazymeTM is expected to be expensive. We expect patients to need treatment throughout their lifetimes. We expect that families of patients will not be capable of paying for this treatment themselves. There will be no commercially viable market for AldurazymeTM without reimbursement from third-party payors. Third-party payors, such as government or private health care insurers, carefully review and increasingly challenge the price charged for drugs. Reimbursement rates from private companies vary depending on the third-party payor, the insurance plan and other factors. Reimbursement systems in international markets vary significantly by country and by region, and reimbursement approvals must be obtained on a country-by-country basis. We cannot be certain that third-party payors will pay for the costs of our drugs and the courses of treatment. Even if we are able to obtain reimbursement from third-party payors, we cannot be certain that reimbursement rates will be enough to allow us to profit from sales of our drugs. We currently have no expertise obtaining reimbursement. We expect to rely on the expertise of our partner Genzyme to obtain reimbursement for AldurazymeTM. We cannot predict what the reimbursement rates will be. In addition, we will need to develop our own reimbursement expertise for future drug candidates unless we enter into collaborations with other companies with the necessary expertise. We expect that in the future reimbursement will be increasingly restricted both in the United States and internationally. The escalating cost of health care has led to increased pressure on the health care industry to reduce costs. Governmental and private third-party payors have proposed health care reforms and cost reductions. A number of federal and state proposals to control the cost of health care, including the cost of drug treatments have been made in the United States. In some foreign markets, the government controls the pricing which would affect the profitability of drugs. Current government regulations and possible future legislation regarding health care may affect our future revenues from sales of our drugs and may adversely affect our business and prospects. If we are unable to protect our proprietary technology we may not be able to compete as effectively. Where appropriate, we seek patent protection for certain aspects of our technology. Meaningful patent protection may not be available for some of the enzymes we are developing, including AldurazymeTM and BM102. If we must spend significant time and money protecting our patents, designing around patents held by others or licensing, for excessively large fees, patents or other proprietary rights held by others, our business and prospects may be harmed. The patent positions of biotechnology companies are extremely complex and uncertain. The scope and extent of patent protection for some of our products are particularly uncertain because key information on some of the enzymes we are developing has existed in the public domain for many years. Other parties have published the structure of the enzymes, the methods for purifying or producing the enzymes or the methods of treatment. The composition and genetic sequences of animal and/or human versions of many of our enzymes, including those for AldurazymeTM and BM102, have been published and are in the public domain. The composition and genetic 15 sequences of other MPS enzymes which we intend to develop as products have also been published. Publication of this information may prevent us from obtaining composition of matter patents, which are generally believed to offer the strongest patent protection. For enzymes with no prospect of composition of matter patents, we will depend on orphan drug status. In addition, our owned and licensed patents and patent applications do not ensure the protection of our intellectual property for a number of other reasons: o We do not know whether our patent applications will result in actual patents. For example, we may not have developed a method for treating a disease before others developed similar methods. o Competitors may interfere with our patent process in a variety of ways. Competitors may claim that they invented the claimed invention prior to us. Competitors may also claim that we are infringing on their patents and therefore cannot practice our technology as claimed under our patent. Competitors may also contest our patents by showing the patent examiner that the invention was not original, novel or was obvious. As a Company, we have no meaningful experience with competitors interfering with our patents or patent applications. o Even if we receive a patent, it may not provide much practical protection. If we receive a patent with a narrow scope, then it will be easier for competitors to design products that do not infringe on our patent. o Enforcing patents is expensive and may absorb significant time by our management. In litigation, a competitor could claim that our issued patents are not valid for a number of reasons. If the court agrees, we would lose that patent. In addition, competitors also seek patent protection for their technology. There are many patents in our field of technology, and we cannot guarantee that we do not infringe on those patents or that we will not infringe on patents granted in the future. If a patent holder believes our product infringes on their patent, the patent holder may sue us even if we have received patent protection for our technology. If someone else claims we infringe on their technology, we would face a number of issues, including: o Defending a lawsuit takes significant time and can be very expensive. o If the court decides that our product infringes on the competitor's patent, we may have to pay substantial damages for past infringement. o The court may prohibit us from selling or licensing the product unless the patent holder licenses the patent to us. The patent holder is not required to grant us a license. If a license is available, we may have to pay substantial royalties or grant cross-licenses to our patents. o Redesigning our product so it does not infringe may not be possible and could require substantial funds and time. It is also unclear whether our trade secrets will provide useful protection. While we use reasonable efforts to protect our trade secrets, our employees or consultants may unintentionally or willfully disclose our information to competitors. Enforcing a claim that someone else illegally obtained and is using our trade secrets, like patent litigation, is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willing to protect trade secrets. Our competitors may independently develop equivalent knowledge, methods and know-how. We may also support and collaborate in research conducted by government organizations or by universities. We cannot guarantee that we will be able to acquire any exclusive rights to technology or products derived from these collaborations. If we do not obtain required licenses or rights, we could encounter delays in product development while we attempt to design around other patents or even be prohibited from developing, manufacturing or selling products requiring these licenses. There is also a risk that disputes may arise as to the rights to technology or products developed in collaboration with other parties. 16 If our joint venture with Genzyme were terminated, we could be barred from commercializing Aldurazyme(TM) or our ability to commercialize Aldurazyme(TM) would be delayed. We are relying on Genzyme to apply the expertise it has developed through the launch and sale of Ceredase(R) and Cerezyme(R) enzymes for Gaucher disease, a rare genetic disorder, to the marketing of our initial drug product, AldurazymeTM. Because it is our initial product, our operations are substantially dependent upon the development of AldurazymeTM. We have no experience selling, marketing or obtaining reimbursement for pharmaceutical products. In addition, without Genzyme we would be required to pursue foreign regulatory approvals. We have no experience in seeking foreign regulatory approvals. We cannot guarantee that Genzyme will devote the resources necessary to successfully market AldurazymeTM. In addition, either party may terminate the joint venture for specified reasons, including if the other party is in material breach of the agreement or has experienced a change of control or has declared bankruptcy and also is in breach of the agreement. Either party may also terminate the agreement upon one year prior written notice for any reason after the earlier of December 31, 2000 or after the joint venture has received the FDA's approval of BLA for AldurazymeTM. Furthermore, we may terminate the joint venture if Genzyme fails to fulfill its contractual obligation to pay us $12.1million in cash upon the approval of the BLA for AldurazymeTM. Upon termination of the joint venture one party must buy out the other party's interest in the joint venture. The party who buys out the other will then also obtain, exclusively, all rights to AldurazymeTM and any related intellectual property and regulatory approvals. If the joint venture is terminated by Genzyme for a breach on our part, Genzyme would be granted, exclusively, all of the rights to AldurazymeTM and any related intellectual property and regulatory approvals and would be obligated to buy out our interest in the joint venture. We would then effectively be unable to develop and commercialize AldurazymeTM. If we terminated the joint venture for a breach by Genzyme, we would be obligated to buy out Genzyme's interest in the joint venture and, we would then be granted all of these rights to AldurazymeTM exclusively. While we could then continue to develop AldurazymeTM, that development would be slowed because we would have to divert substantial capital to buy out Genzyme's interest in the joint venture and would then have to search for a new partner to commercialize the product and to obtain foreign regulatory approvals or to develop these capabilities ourselves. If the joint venture is terminated by us without cause, Genzyme would have the option, exercisable for one year, to immediately buy out our interest in the joint venture and obtain all rights to AldurazymeTM exclusively. If the agreement is terminated by Genzyme without cause, we would have the option, exercisable for one year, to immediately buy out Genzyme's interest in the joint venture and obtain these exclusive rights. In event of termination of the buy out option without exercise by the non-terminating party as described above, all right and title to AldurazymeTM is to be sold to the highest bidder, with the proceeds to be split equally between Genzyme and us. If the joint venture is terminated by us because Genzyme fails to make the $12.1 million payment to us upon FDA approval of the BLA for AldurazymeTM, we would be obligated to buy Genzyme's interest in the joint venture and would obtain all rights to AldurazymeTM exclusively. If the joint venture is terminated by either party because the other declared bankruptcy and is also in breach of the agreement, the terminating party would be obligated to buy out the other and would obtain all rights to AldurazymeTM exclusively. If the joint venture is terminated by a party because the other party experienced a change of control, the terminating party shall notify the other party, the offeree, of its intent to buy out the offeree's interest in the joint venture for a stated amount set by the terminating party at its discretion. The offeree must then either accept this offer or agree to buy the terminating party's interest in the joint venture on those same terms. The party who buys out the other would then have exclusive rights to AldurazymeTM. We cannot assure you that if the joint venture were terminated and if we were obligated, or given the option, to buy out Genzyme's interest in the joint venture, and gain exclusive rights to AldurazymeTM, that we will have sufficient funds to do so or that we will be able to obtain the financing to do so. If we fail to buy out Genzyme's interest we may be held in breach of the agreement and may lose any claim to the rights to AldurazymeTM and the related intellectual property and regulatory approvals. We would then effectively be prohibited from developing and commercializing the product. 17 Termination of the joint venture where we retain the rights to AldurazymeTM could cause us significant delays in product launch in the United States, difficulties in obtaining third-party reimbursement and delays or failure to obtain foreign regulatory approval, any of which could hurt our business and results of operations. Since Genzyme funds 50% of the joint venture's operating expenses, the termination of the joint venture would double our financial burden and reduce the funds available to us for other product programs. If we are unable to manufacture our drug products in sufficient quantities and at acceptable cost, we may be unable to meet demand for our products and lose potential revenues. We have no experience manufacturing drug products in volumes that will be necessary to support commercial sales. Our unproven manufacturing process may not meet initial expectations as to schedule, reproducibility, yields, purity, costs, quality, and other measurements of performance. Improvements in manufacturing processes typically are very difficult to achieve and are often very expensive. We cannot know with any certainty how long it might take to make improvements if it became necessary to do so. If we contract for manufacturing services with an unproven process, our contractor is subject to the same uncertainties, high standards and regulatory controls. If we are unable to establish and maintain commercial scale manufacturing within our planned time and cost parameters, sales of our products and our financial performance will be adversely affected. We may encounter problems with any of the following if we attempt to increase the scale or size of manufacturing: o Design, construction and qualification of manufacturing facilities that meet regulatory requirements o Production yields o Purity o Quality control and assurance o Shortages of qualified personnel o Compliance with FDA regulations We have developed a total of 31,000 square feet at our Novato facility for phase 1 of manufacturing capability for AldurazymeTM. The "shakedown" runs of this facility may take longer than planned. We expect that the manufacturing process of all of our new products, including BM102, will also require lengthy development time before we can begin manufacturing them in commercial quantity. Even if we can establish this capacity, we cannot be certain that manufacturing costs will be commercially reasonable, especially if reimbursement is substantially lower than expected. In order to achieve our product cost targets we must develop efficient manufacturing processes either by o improving the colonies of cells which have a common genetic make-up, or cell lines, o improving the processes licensed from others, or o developing a recombinant cell line and production processes. A recombinant cell line is a cell line with foreign DNA inserted which is used to produce a protein that it would not have otherwise produced. The development of a stable, high production cell line for any given enzyme is risky, expensive and unpredictable and may not yield adequate results. In addition, the development of protein purification processes is difficult and may not produce the high purity required with acceptable yield and costs. If we are not able to develop efficient manufacturing processes, the investment in manufacturing capacity sufficient to satisfy market demand will be much greater and will place heavy financial demands upon us. If we do not achieve our manufacturing cost targets, we will have lower margins and reduced profitability in commercial production and greater losses in manufacturing start-up phases. 18 If we are unable to increase our marketing and distribution capabilities or to enter into agreements with third parties to do so, our ability to generate revenues will be diminished. If we cannot increase our marketing capabilities either by developing our sales and marketing organization or by entering into agreements with others, we may be unable to successfully sell our products. If we are unable to effectively sell our drug products, our ability to generate revenues will be diminished. To increase our distribution and marketing for both our drug candidates and our Glyko, Inc. products, we will have to increase our current sales force and/or enter into third-party marketing and distribution agreements. We cannot guarantee that we will be able to hire in a timely manner, the qualified sales and marketing personnel we need if at all. Nor can we guarantee that we will be able to enter into any marketing or distribution agreements on acceptable terms, if at all. If we cannot increase our marketing capabilities as we intend, either by increasing our sales force or entering into agreements with third parties, sales of our products may be adversely affected. We have entered into a joint venture with Genzyme where Genzyme will be responsible for marketing and distributing Aldurazyme(TM). We cannot guarantee that we will be able to establish sales and distribution capabilities or that the Company, the joint venture or any future collaborators will successfully sell any of our drug candidates. If we fail to compete successfully, our revenues and operating results will be adversely affected. Our competitors may develop, manufacture and market products that are more effective or less expensive than ours. They may also obtain regulatory approvals for their products faster than we can obtain them, including orphan drug designation, or commercialize their products before we do. If our competitors successfully commercialize a product which treats a given rare genetic disease before we do, we will effectively be precluded from developing a product to treat that disease because the patient populations of the rare genetic diseases are so small. These companies also compete with us to attract qualified personnel and parties for acquisitions, joint ventures or other collaborations. They also compete with us to attract academic research institutions as partners and to license these institution's proprietary technology. If our competitors successfully enter into partnering arrangements or license agreements with academic research institutions, we will then be precluded from pursuing those specific opportunities. Since each of these opportunities is unique, we may not be able to find a substitute. Several pharmaceutical and biotechnology companies have already established themselves in the field of enzyme therapeutics, including Genzyme, our joint venture partner. These companies have already begun many drug development programs, some of which may target diseases that we are also targeting, and have already entered into partnering and licensing arrangements with academic research institutions, reducing the pool of available opportunities. Universities and public and private research institutions are also competitors. While these organizations primarily have educational objectives, they may develop proprietary technology and acquire patents that we may need for the development of our drug products. We will attempt to license this proprietary technology, if available. These licenses may not be available to us on acceptable terms, if at all. We also directly compete with a number of these organizations to recruit personnel, especially scientists and technicians. We believe that established technologies provided by other companies, such as laboratory and testing services firms compete with Glyko Inc.'s products and services. For example, Glyko, Inc.'s FACE(R) Imaging System competes with alternative carbohydrate analytical technologies, including capillary electrophoresis, high-pressure liquid chromatography, mass spectrometry and nuclear magnetic resonance spectrometry. These competitive technologies have established customer bases and are more widely used and accepted by scientific and technical personnel because they can be used for non-carbohydrate applications. Companies competing with Glyko, Inc. may have greater financial, manufacturing and marketing resources and experience. If we fail to manage our growth or fail to recruit and retain personnel, our product development programs may be delayed. Our rapid growth has strained our managerial, operational, financial and other resources. We expect this growth to continue. We have entered into a joint venture with Genzyme. If we receive FDA approval to market AldurazymeTM, the joint venture will be required to devote additional resources to support the commercialization of AldurazymeTM. 19 To manage expansion effectively, we need to continue to develop and improve our research and development capabilities, manufacturing and quality capacities, sales and marketing capabilities and financial and administrative systems. We cannot guarantee that our systems, procedures or controls will be adequate to support our operations or that our management will be able to manage successfully future market opportunities or our relationships with customers and other third parties. Our future growth and success depend on our ability to recruit, retain, manage and motivate our employees. The loss of key scientific, technical and managerial personnel may delay or otherwise harm our product development programs. Any harm to our research and development programs would harm our business and prospects. Because of the specialized scientific nature of our business, we rely heavily on our ability to attract and retain qualified scientific, technical and managerial personnel. In particular, the loss of Grant W. Denison, Jr., Chairman and Chief Executive Officer, John C. Klock, M.D., President and Secretary or Christopher M. Starr, Ph.D., Vice President for Research and Development would be detrimental to us if we cannot recruit suitable replacements in a timely manner. While each of these individuals is party to an employment agreement with us, which includes financial incentives for each of them to remain employed with us, these agreements each terminate in June 2000 and we cannot guarantee that any of them will remain employed with us beyond that time. In addition, these agreements do not restrict their ability to compete with us after their employment is terminated. Dr. Klock has notified us that he intends to resign as president and secretary effective July 30, 2000, although he intends to remain as a director if reelected at the annual shareholder's meeting. The competition for qualified personnel in the biopharmaceutical field is intense. We cannot be certain that we will continue to attract and retain qualified personnel necessary for the development of our business. If product liability lawsuits are successfully brought against us, we may incur substantial liabilities. We are exposed to the potential product liability risks inherent in the testing, manufacturing and marketing of human pharmaceuticals. The BioMarin/Genzyme LLC maintains product liability insurance for our clinical trials of AldurazymeTM. Although we intend to obtain insurance against product liability lawsuits shortly before initiating clinical trials for BM102 and for our other products, we cannot be certain that we will be able to obtain adequate insurance coverage at reasonable cost. In addition, we may be subject to claims in connection with our current clinical trials for AldurazymeTM for which the joint venture's insurance coverage is not adequate. We cannot be certain that if AldurazymeTM receives FDA approval, the product liability insurance the joint venture will need to obtain in connection with the commercial sales of AldurazymeTM will be available in meaningful amounts or at a reasonable cost. In addition, we cannot be certain that we can successfully defend any product liability lawsuit brought against us. If we are the subject of a successful product liability claim which exceeds the limits of any insurance coverage we may obtain, we may incur substantial liabilities which would adversely affect our earnings and financial condition. Our stock price may be volatile and an investment in our stock could suffer a decline in value. Our valuation and stock price since the beginning of trading after the IPO have had no meaningful relationship to current or historical earnings, asset values, book value or many other criteria based on historical value. The market price of our common stock will fluctuate due to factors including: o Progress of AldurazymeTM and our other lead drug products through the regulatory process, especially AldurazymeTM regulatory actions in the United States o Results of clinical trials, announcements of technological innovations or new products by us or our competitors o Government regulatory action affecting our drug candidates or our competitors' drug candidates in both the United States and foreign countries o Developments or disputes concerning patent or proprietary rights o General market conditions for emerging growth and biopharmaceutical companies o Economic conditions in the United States or abroad 20 o Actual or anticipated fluctuations in our operating results o Broad market fluctuations may cause the market price of our common stock to fluctuate o Changes in financial estimates by securities analysts In addition, the value of our common stock may fluctuate because it is listed on both the Nasdaq National Market and the Swiss Exchange's SWX New Market. Because we have accumulated relatively limited experience since July 23, 1999, in observing the trading of our stock on the two markets, we cannot be certain what effect, if any, the dual listing will have on the future price of our stock in either market. Listing on both exchanges may increase stock price volatility due to: o trading in different time zones o different ability to buy or sell our stock o different trading volume In the past, following periods of large price declines in the public market price of a company's securities, securities class action litigation has often been initiated against that company. Litigation of this type could result in substantial costs and diversion of management's attention and resources, which would hurt our business. Any adverse determination in litigation could also subject us to significant liabilities. If our officers, directors and largest stockholder elect to act together they may be able to control our management and operations, acting in their best interests and not necessarily those of other stockholders. Our directors and officers control approximately 13.9% of the outstanding shares of our common stock. Glyko Biomedical Ltd. or GBL owns 32.2% of the outstanding shares of capital stock. Three of six GBL directors are officers or directors of the Company. As a result, due to their concentration of stock ownership, directors and officers, together with GBL if they act together, may be able to otherwise control our management and operations, and may be able to prevail on all matters requiring a stockholder vote including: o The election of all directors o The amendment of charter documents or the approval of a merger, sale of assets or other major corporate transactions o The defeat of any non-negotiated takeover attempt that might otherwise benefit the public stockholders Anti-takeover provisions in our charter documents and under Delaware law may make an acquisition of us, which may be beneficial to our stockholders, more difficult. BioMarin is incorporated in Delaware. Certain anti-takeover provisions of Delaware law and our charter documents as currently in effect may make a change in control of the Company more difficult, even if a change in control would be beneficial to the stockholders. Our anti-takeover provisions include provisions in the certificate of incorporation providing that stockholders' meetings may only be called by the Board of Directors and a provision in the bylaws providing that the stockholders may not take action by written consent. Additionally, our Board of Directors have the authority to issue 1,000,000 shares of preferred stock and to determine the terms of those shares of stock without any further action by the stockholders. The rights of holders of our common stock are subject to the rights of the holders of any preferred stock that may be issued. The issuance of preferred stock, could make it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. Delaware law also prohibits corporations from engaging in a business combination with any holders of 15% or more of their capital stock until the holder has held the stock for three years unless, among other possibilities, the Board of Directors approves the transaction. The Board of Directors may use these provisions to prevent changes in the management and control of our company. Also, under applicable Delaware law, our Board of Directors may adopt additional anti-takeover measures in the future. 21 Item 3. Quantitative and Qualitative Disclosure about Market Risk. The Company's exposure to market risk for changes in interest rates relates primarily to the Company's investment portfolio. The Company places its investments with high credit issuers and by policy limits the amount of credit exposure to any one issuer. As stated in its policy, the Company will seek to improve the safety and likelihood of preservation of its invested funds by limiting default risk and market risk. The Company has no investments denominated in foreign country currencies and therefore is not subject to foreign exchange risk. The Company mitigates default risk by investing in high credit quality securities and by positioning its portfolio to respond appropriately to a significant reduction in a credit rating of any investment issuer or guarantor. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity. The table below presents the carrying value for the Company's investment portfolio. The carrying value approximates fair value at March 31, 2000. Investment portfolio: Carrying value (in $ thousands) ---------------- Cash and cash equivalents..............$40,675 Short-term investments.............. 14,734* Certificates of deposit......................265 Total.................$55,674 * 100% in United States agency securities. 22 PART II. OTHER INFORMATION Item 1. Legal Proceedings. None. Item 2. Changes in Securities and Uses of Proceeds. None. Item 3. Defaults upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Other Information. None. Item 6. Exhibits and Reports on Form 8-K. (a) The following documents are filed as part of this report See Exhibit Index attached hereto. (b) Reports on Form 8K No reports were filed on Form 8-K during the three months ended March 31, 2000. 23 EXHIBIT INDEX Exhibit Number Description of Document - -------------- ----------------------- 2.1 Share Exchange Agreement with Glyko Biomedical, Ltd. (1) 3.1A Amended and Restated Certificate of Incorporation of BioMarin Pharmaceutical Inc., a Delaware Corporation, as filed on March 22, 1999. (1) 3.1B Form of Amended and Restated Certificate of Incorporation of BioMarin Pharmaceutical Inc., a Delaware Corporation. (2) 3.2 Amended and Restated Bylaws of BioMarin Pharmaceutical Inc., a Delaware Corporation. (2) 4.1 Form of Amended and Restated Registration Rights Agreement, by and among the Company and the investors named therein. (1) 10.1 Form of Indemnification Agreement for directors and officers 1997 Stock Plan, as amended on December 22, 1998, and forms of agreements. (1) 10.3 1998 Director Option Plan and forms of agreements thereunder. (1) 10.4 1998 Employee Stock Purchase Plan and forms of agreements thereunder. (1) 10.5 Amended and Restated Founder's Stock Purchase Agreement with Dr. John C. Klock dated as of October 1, 1997 with exhibits. (1) 10.6 Amended and Restated Founder's Stock Purchase Agreement with Grant W. Denison, Jr. dated as of October 1, 1997 with exhibits. (1) 10.7 Amended and Restated Founder's Stock Purchase Agreement with Dr. Christopher M. Starr dated as of October 1, 1997 with exhibits. (1) 10.8 Employment Agreement with Dr. John C. Klock dated June 26, 1997, as amended. (3) 10.9 Employment Agreement with Grant W. Denison, Jr. dated June 26, 1997, as amended. (1) 10.10 Employment Agreement with Dr. Christopher M. Starr dated June 26, 1997, as amended. (1) 10.11 Employment Agreement with Raymond W. Anderson dated June 22, 1998, as amended. (1) 10.12 Employment Agreement with Stuart J. Swiedler, M.D., Ph.D., dated May 29, 1998, as amended. (1) 10.13 Employment Agreement with Emil Kakkis, M.D., Ph.D., dated June 30, 1998, as amended. (1) 10.14 Employment Agreement between Brian K. Brandley, Ph.D and Glyko, Inc. dated February 22, 1998, as amended. (1) 10.15 License Agreement with Glyko Biomedical, Ltd. dated June 26, 1997 with exhibits attached. (1) 10.16 Option Agreement with W.R. Grace & Co. dated as of May 1, 1998. (3) (*) 10.17 Grant Terms and Conditions Agreement with Harbor-UCLA Research and Education Institute dated April 1, 1997, as amended. (3) (*) 10.18 License Agreement with Women's and Children's Hospital, Adelaide, Australia dated August 14, 1998. (4) (*) 10.19 Lease Agreement dated May 18, 1998 for 371 Bel Marin Keys Boulevard, as amended. (1) 10.20 Standard NNN Lease dated June 25, 1998 for 46 Galli Drive. (1) 10.21 Standard Industrial Commercial Single-Tenant Lease dated May 29, 1998 for 110 Digital Drive, as amended. (1) 10.22 Sublease dated June 24, 1998 for 1123 West Carson Street. (1) 10.23 Commercial Lease and Deposit Receipt with Glyko, Inc. for 11 Pimentel Court and 13 Pimentel Court, dated December 23, 1996. (1) 10.24 Collaboration Agreement with Genzyme Corporation dated September 4, 1998. (4) 24 EXHIBIT INDEX Exhibit Number Description of Document -------------- ----------------------- 10.25 Purchase Agreement with Genzyme Corporation dated September 4, 1998. (1) 10.26 Subscription Agreement with Genzyme dated September 4, 1998. (1) 10.27 Form of Convertible Note Purchase Agreement dated as of April 12, 1999 with form of convertible promissory note. (1) 10.28 Astro License Agreement dated December 18, 1990 among Glyko, Inc., Astromed, Ltd., and Astroscan, Ltd. (3) 10.29 Glycomed License Agreement dated December 18, 1990 between Glyko, Inc., and Glycomed, Inc. (3) 10.30 Operating Agreement with Genzyme Corporation. (2) 10.31 Lease Agreement dated March 15, 2000 for 11 Pimentel Court. 21.1 List of Subsidiaries. (1) 23.1 Consent of Independent Public Accountants. 27.1 Financial Data Schedule (available in EDGAR format only) (1) Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 333-77701) filed on May 4, 1999. (2) Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 333-77701) filed on July 6, 1999. (3) Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 333-77701) filed on June 14, 1999. (4) Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 333-77701) filed on July 21, 1999. (*) This exhibit has been granted confidential treatment. 25 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. BIOMARIN PHARMACEUTICAL INC. Dated: May 12, 2000 By: /s/ Raymond W. Anderson --------------------------------- --------------------------------- Raymond W. Anderson Chief Financial Officer and V.P. Finance and Administration 26 EX-10 2 LEASE AGREEMENT AMENDMENT TO LEASE AGREEMENT DATED DECEMBER 23, 1996 BY AND BETWEEN DOUGLAS KAYE, LESSOR AND GLYKO, INC., LESSEE DATED MARCH 15, 2000 The above referenced lease agreement shall be amended as follows: RENT Commencing April 1, 2000 section 1, "Rent" of the lease agreement shall be amended as follows: Year 1: $12,100 per month Year 2: $12,700 per month Year 3: $13,300 per month OPTION TO RENEW In the event Lessee has not been in default under any of the terms and conditions of this lease Lessee shall have two (2), two (2) year options to renew upon the following term and conditions: Lessee shall give Lessor written notice of Lessee's intent to exercise its option to renew no earlier than twelve (12) months and no later than six (6) months prior to the lease expiration date, and first option to renew period, if exercised. First Option Period Year 4: $13,850 per month Year 5: $14,500 per month Second Option Period, if exercised Rent for the second option period shall be determined as follows: Rent shall be adjusted to the then fair market value for the Premises (the "Fair Market Value"). Fair Market Value is defined as the rent for Comparable Space (office and R&D), in new leases signed directly with the respective lessors, within the previous six (6) months of the exercise of any given option (the "Comparable Leases"). If there have been no leases signed within such time period, then Fair Market Value shall be defined as the rent quoted for Comparable Space (the "Quoted Rent"). The definition of Fair Market Value shall include annual rent adjustments in the Comparable Leases or Quoted Rent. In no event shall the rent for any option period be less than the rent paid by Lessee during the year immediately preceding such option period. All other terms and conditions of the lease shall remain the same unless as indicated herein. Lessee: Glyko, Inc. Lessor: Douglas Kaye By: /s/ Raymond Anderson By: /s/ Douglas Kaye Title: Vice President Finance and Admin. Title: Date: March 17, 2000 Date: March 22, 2000 EX-27 3 FDS BIOMARIN PHARMACEUTICAL INC.
5 0001048477 BioMarin Pharmaceutical Inc. 1,000 US Dollars 3-Mos DEC-31-2000 JAN-01-2000 MAR-31-2000 1 40,675 14,999 1,179 (70) 647 61,552 25,260 (4,517) 94,490 1,367 0 0 0 35 89,696 94,490 519 3,298 181 181 15,820 0 2 (11,736) (11,736) (11,736) 0 0 0 11,736 (0.34) (0.34)
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