-----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, IcAWjSs5MCYcaTmR/pyLciKTCzVmc07OB1w8uCqcRymm7vz7CzJy2V8LsLSY/rMV Yk2X3OikRCZZCVBKTxIj7A== 0001048477-02-000035.txt : 20020515 0001048477-02-000035.hdr.sgml : 20020515 20020515164501 ACCESSION NUMBER: 0001048477-02-000035 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 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: 1934 Act SEC FILE NUMBER: 000-26727 FILM NUMBER: 02653200 BUSINESS ADDRESS: STREET 1: 371 BEL MARIN KEYS BLVD STREET 2: STE 210 CITY: NOVATO STATE: CA ZIP: 94949 BUSINESS PHONE: 4158846700 MAIL ADDRESS: STREET 1: 371 BEL MARIN KEYS BLVD STREET 2: STE 210 CITY: NOVATO STATE: CA ZIP: 94949 10-Q 1 bmrnform10q033102.txt BIOMARIN PHARMACEUTICAL 10-Q 03/31/02 United States Securities and Exchange Commission Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 [ ] 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: 53,835,325 shares common stock, par value $0.001, outstanding as of May 3, 2002. BIOMARIN PHARMACEUTICAL INC. TABLE OF CONTENTS Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited). Consolidated Balance Sheets.......................................2 Consolidated Statements of Operations for the three-month periods ended March 31, 2001 and 2002 and for the period from March 21, 1997 (inception) through March 31, 2002.........3 Consolidated Statements of Cash Flows.............................5 Notes to Consolidated Financial Statements........................6 Item 2. Management's Discussion and Analysis.......................9 Item 3. Quantitative and Qualitative Disclosure about Market Risk.......................................25 PART II. OTHER INFORMATION Item 1. Legal Proceedings..........................................26 Item 2. Changes in Securities and Uses of Proceeds.................26 Item 3. Defaults upon Senior Securities............................26 Item 4. Submission of Matters to a Vote of Security Holders........26 Item 5. Other Information..........................................26 Item 6. Exhibits and Reports on Form 8-K...........................26 SIGNATURE....................................................................28 Item 1. Financial Statements BioMarin Pharmaceutical Inc. and Subsidiaries (a development-stage company) Consolidated Balance Sheets as of (In thousands, except for shares and per share data) December 31, March 31, 2001 2002 ---------------------- ----------------------- ---------------------- ----------------------- Assets (unaudited) Current assets: Cash and cash equivalents $ 12,528 $ 18,202 Short-term investments 118,569 96,596 Due from BioMarin/Genzyme LLC 3,096 5,888 Current assets of discontinued ops. of Glyko, Inc. 668 852 Other current assets 1,922 1,888 ---------------------- ----------------------- ---------------------- ----------------------- Total current assets 136,783 123,426 Property, plant and equipment, net 32,560 33,059 Other non-current assets 2,468 821 ---------------------- ----------------------- Total assets $ 171,811 $ 157,306 ====================== ======================= Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 4,284 $ 3,188 Accrued liabilities 2,198 4,375 Current liabilities of discontinued ops. of Glyko, Inc. 229 154 Current portion of capital lease obligations 66 193 Short-term portion of notes payable 1,525 1,525 ---------------------- ----------------------- Total current liabilities 8,302 9,435 Long-term portion of notes payable 3,864 3,421 Long-term portion of capital lease obligations 97 82 ---------------------- ----------------------- Total liabilities 12,263 12,938 --------------------- ----------------------- Stockholders' equity: Common stock, $0.001 par value: 75,000,000 shares authorized 52,402,535 and 53,357,642 shares issued and outstanding December 31, 2001 and March 31, 2002, respectively 52 53 Additional paid in capital 305,230 316,469 Common stock warrants 5,134 5,219 Deferred compensation (699) (490) Notes from stockholders (2,037) (2,087) Foreign currency translation adjustment (13) (74) Deficit accumulated during development stage (148,119) (174,722) --------------------- ----------------------- Total stockholders' equity 159,548 144,368 --------------------- ----------------------- Total liabilities and stockholders' equity $ 171,811 $ 157,306 ===================== =======================
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, 2001 and 2002 (In thousands, except per share data, unaudited) Three Months Ended March 31, ------------------------------------------------- 2001 2002 ----------------------- ----------------------- Revenues: Revenues from BioMarin/Genzyme LLC $ 2,690 $ 3,792 ----------------------- ----------------------- ----------------------- ----------------------- Total revenues 2,690 3,792 ----------------------- ----------------------- Operating Costs and Expenses: Research and development 9,657 13,218 General and administrative 1,474 3,926 In-process research and development - 11,223 ----------------------- ----------------------- Total operating costs and expenses 11,131 28,367 ----------------------- ----------------------- Loss from operations (8,441) (24,575) Interest income 468 380 Interest expense (2) (91) Loss from BioMarin/Genzyme LLC (1,108) (2,298) ----------------------- ----------------------- Net loss from continuing operations (9,083) (26,584) Income (loss) from discontinued operations (617) 122 Loss from disposal of discontinued operations - (141) ----------------------- ----------------------- ----------------------- ----------------------- Net loss $ (9,700) (26,603) ======================= ======================= ======================= ======================= Net loss per share, basic and diluted: Net loss from continuing operations $ (0.24) (0.51) Loss from discontinued operations (0.02) (0.00) ----------------------- ----------------------- ----------------------- ----------------------- Net loss $ (0.26) (0.51) ======================= ======================= ======================= ======================= Weighted average common shares outstanding 37,052 52,535 ======================= ======================= ======================= =======================
The accompanying notes are an integral part of these statements. 3 BioMarin Pharmaceutical Inc. and Subsidiaries (a development-stage company) Consolidated Statements of Operations (continued) For the Period from March 21, 1997 (Inception) to March 31, 2002 (In thousands, except per share data, unaudited) Period from March 21, 1997 (Inception) to March 31, 2002 --------------------------------- --------------------------------- Revenues: Revenues from BioMarin/Genzyme LLC $ 30,990 Revenues - other 369 --------------------------------- --------------------------------- Total revenues 31,359 --------------------------------- Operating Costs and Expenses: Research and development 131,501 General and administrative 25,970 In-process research and development 22,870 Facility closure 4,423 --------------------------------- Total operating costs and expenses 184,764 --------------------------------- Loss from operations (153,405) Interest income 7,812 Interest expense (847) Loss from BioMarin/Genzyme LLC (14,263) --------------------------------- Net loss from continuing operations (160,703) Loss from discontinued operations (5,966) Loss from disposal of discontinued operations (8,053) --------------------------------- --------------------------------- Net loss $ (174,722) ================================= ================================= Net loss per share, basic and diluted: Net loss from continuing operations $ (5.44) Loss from discontinued operations (0.20) Loss on disposal of discontinued operations (0.27) --------------------------------- --------------------------------- Net loss $ (5.91) ================================= ================================= Weighted average common shares outstanding 29,539 ================================= The accompanying notes are an integral part of these statements.
4 BioMarin Pharmaceutical Inc. and Subsidiaries (a development-stage company) Consolidated Statements of Cash Flows For the Three-Month Periods Ended March 31, 2001 and 2002, and for the Period from March 21, 1997 (Inception) to March 31, 2002 (In thousands, unaudited) March 21, 1997 (inception) to March 31, March 31, 2001 2002 2002 -------------------- ------------------- --------------------- Cash flows from operating activities: Net loss from continuing operations $ (9,083) $ (26,584) $ (160,703) Adjustments to reconcile net loss to net cash used in operating activities: In-process research and development - 10,286 21,933 Facility closure - - 3,791 Depreciation 1,162 1,852 16,759 Amortization of deferred compensation 209 209 3,970 Loss from BioMarin/Genzyme LLC 3,799 6,160 44,324 Other non-cash compensation - 206 206 Changes in operating assets and liabilities: Due from BioMarin/Genzyme LLC (1,587) (2,815) (5,911) Other current assets (92) 2,078 812 Note receivable from officer - (300) (1,189) Deposits (150) - (434) Accounts payable (3,122) (1,323) 3,060 Accrued liabilities (165) 2,177 4,696 ------------------------------------------------------------------ Net cash used in continuing operations (9,029) (8,054) (68,686) Net cash provided by (used in) discontinued operations (125) (279) 470 ------------------------------------------------------------------ Net cash used in operating activities (9,154) (8,333) (68,216) ------------------------------------------------------------------ Cash flows from investing activities: Purchase of property and equipment (430) (2,245) (53,296) Purchase of Synapse - (1,028) (1,028) Investment in BioMarin/Genzyme LLC (2,100) (4,504) (123,073) Purchase of IBEX therapeutic assets - - (39,309) Purchase (sale) of short-term investments 13,627 21,973 18,941 ------------------------------------------------------------------ Net cash used in continuing operations 11,097 14,196 (197,765) Net cash used in discontinued operations - - (1,663) ------------------------------------------------------------------ Net cash provided by (used in) investing activities 11,097 14,196 (199,428) ------------------------------------------------------------------ Cash flow from financing activities: Net proceeds from sale of common stock, net 848 - 232,823 Proceeds from issuance of convertible notes - - 25,615 Net proceeds from Acqua Wellington agreement - - 13,163 Proceeds from exercise of common stock options and warrants 408 375 8,070 Net proceeds from notes payable - - 5,639 Repayment of notes payable (7) (443) (693) Repayment of capital lease obligations - (15) (58) Receipts from notes receivable from stockholders - (45) 759 Issuance of common stock for ESPP, and other - - 602 ------------------------------------------------------------------ Net cash provided by (used in) financing activities 1,249 (128) 285,920 ------------------------------------------------------------------ Effect of foreign currency translation on cash - (61) (74) ------------------------------------------------------------------ Net increase in cash 3,192 5,674 18,202 Cash and cash equivalents: Beginning of period 16,530 12,528 - ------------------------------------------------------------------ End of period $ 19,722 $ 18,202 $ 18,202 ==================================================================
The accompanying notes are an integral part of these statements. 5 BIOMARIN PHARMACEUTICAL INC. AND SUBSIDIARIES (a development-stage company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION: --------------------- BioMarin Pharmaceutical Inc. (the Company) is a biopharmaceutical company specializing in the development of enzyme therapies for debilitating life-threatening chronic genetic diseases and other diseases and 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, clinical and commercial scale manufacturing facilities, clinical manufacturing, and related administrative activities. The Company was incorporated on October 25, 1996 in the state of Delaware and first began business on March 21, 1997 (inception) as a wholly-owned subsidiary of Glyko Biomedical Ltd. (GBL). Subsequently, the Company has issued stock to outside investors in a series of transactions, resulting in GBL's ownership of the Company's outstanding common stock being reduced to 21.3 percent at March 31, 2002. In February 2002, the Company decided to close the carbohydrate analytical business portion of Glyko, Inc., a wholly-owned subsidiary, which provided all of Glyko, Inc.'s revenues. Accordingly, the Company recorded a Glyko, Inc. closure expense of $7.9 million in the 2001 consolidated statements of operations. This charge consisted primarily of an impairment reserve against the unamortized balance of goodwill and other intangible assets related to the acquisition of Glyko, Inc. The majority of the Glyko, Inc. employees have been incorporated into the BioMarin business to provide necessary analytic and diagnostic support to the Company's therapeutic products. The net loss of Glyko, Inc.'s operations is included in the accompanying consolidated statements of operations as income (loss) from discontinued operations. Glyko, Inc.'s gross revenues for the quarters ended March 31, 2002 and 2001 and for the period from March 21, 1997 (inception) through March 31, 2002 were $0.8 million, $0.7 million and $8.2 million, respectively. On March 21, 2002, the Company purchased all of the outstanding capital stock of Synapse Technologies Inc. (a privately held Canadian company) for approximately $10.2 million in Company common stock plus future contingent milestone payments totaling approximately $6 million payable in either cash or common stock at the Company's discretion. The Company issued 885,240 shares of common stock for the purchase. The acquisition was recorded using the purchase method of accounting. The transaction did not meet the criteria of a business combination as outlined in EITF 98-3 "Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business" as, upon acquisition, Synapse did not have any significant business outputs. Accordingly, all of the purchase price plus related expenses totaling $11.2 million was attributed to in-process research and development and was expensed in the accompanying consolidated statements of operations. Through March 31, 2002, the Company had accumulated losses during its development stage of approximately $174.7 million. Based on current plans, management expects to incur further losses for the foreseeable future. Management believes that the Company's cash and cash equivalents and short-term investment balances at March 31, 2002 will be sufficient to meet the Company's obligations through the end of 2003. Until the company can generate sufficient levels of cash from its operations, the company expects to continue to finance future cash needs through the sale of equity securities, equipment-based financing, and collaborative agreements with corporate partners. 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. However, 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. 6 Operating results for the three-month periods ended March 31, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. These consolidated financial statements should be read in conjunction with the financial statements and footnotes thereto for the year ended December 31, 2001 included in the Company's Form 10-K Annual Report. 2. SIGNIFICANT ACCOUNTING POLICIES: -------------------------------- Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents For the consolidated statements of cash flows, the Company treats liquid investments with original maturities of less than three months when purchased as cash and cash equivalents. Short-term Investments The Company records its investments as held-to-maturity. These investments are recorded at amortized cost at March 31, 2002. These securities are comprised mainly of bond mutual funds, corporate bonds, Federal agency investments, commercial paper and bank certificates of deposit. Investment in BioMarin/Genzyme LLC and Related Revenue Under the terms of the Company's joint venture agreement with Genzyme, the Company and Genzyme have each agreed to provide 50 percent of the funding for the joint venture. All research and development, sales and marketing, administrative, and other activities performed by Genzyme and the Company on behalf of the joint venture are billed to the joint venture at cost. Any profits or losses of the joint venture are shared equally by the two parties. The Company accounts for its investment in the joint venture using the equity method. The Company recognizes 50% of amounts billed to the joint venture as revenue in accordance with its policy to recognize revenue for these billings to the extent that payments for the billings were funded by Genzyme. The 50% of amounts billed to the joint venture that is funded by the Company is recorded as an offset to the Company's equity in the loss of the joint venture. Note Receivable from Officer Pursuant to an employment agreement with an officer of the Company, the Company loaned the officer $860,000 to purchase a local property and received a promissory note secured by the property. The note matures on October 31, 2004 (subject to various conditions in the employment agreement) and bears interest at the Federal mid-term rate. In February 2002, the Company loaned another officer $300,000 to purchase a residence and received a promissory note secured by the officers unencumbered shares of the Company owned by the officer. The note is full-recourse and matures on October 31, 2002 and bears interest at the Federal short-term rate. Property, Plant and Equipment Property, plant 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. 7 Property, plant and equipment consisted of the following (in thousands): December 31, March 31, Estimated 2001 2002 Useful Lives --------------- ------------- ------------------------------------- --------------- ------------- ------------------------------------- Computer hardware and software $ 1,532 $ 1,820 3 years Office furniture and equipment 1,557 1,622 5 years Manufacturing/laboratory equipment 11,769 11,918 5 years Leasehold improvements 30,886 32,735 Shorter of life of asset or lease term Construction in progress 1,064 1,064 --------------- ------------- --------------- ------------- 46,808 49,159 Less: Accumulated depreciation (14,248) (16,100) --------------- ------------- --------------- ------------- Total, net $ 32,560 $ 33,059 =============== =============
Stockholders' Equity The notes from stockholders included in stockholders' equity are currently due. The notes are anticipated to be paid prior to June 30, 2002. The Company does not believe there will be any problems collecting on the notes. Research and Development Research and development expenses include the expenses associated with contract research and development provided by third parties, research and development performed in connection with the BioMarin/Genzyme LLC joint venture (including clinical manufacturing, clinical operations, regulatory activities), and internal research and development activities. All research and development expenses 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. 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations FORWARD-LOOKING STATEMENTS The following "Management's 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 "Factors that May Affect Future Results," 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 "Factors that May Affect Future Results," as well as those discussed elsewhere in this document. You should not place undue reliance on these statements, which speak only as of the date that they were made. These cautionary statements should be considered in connection with any written or oral forward-looking statements that we may issue in the future. We do not undertake any obligation to release publicly any revisions to these forward-looking statements after completion of the filing of this Form 10-Q to reflect later events or circumstances or to reflect the occurrence of unanticipated events. Overview We develop enzyme therapies to treat serious, life-threatening diseases and conditions. We leverage our expertise in enzyme biology to develop product candidates for the treatment of genetic diseases, including MPS I, MPS VI and PKU, as well as other critical care situations such as cardiovascular surgery and serious burns. Our product candidates address markets for which no products are currently available or where current products have been associated with major deficiencies. We focus on conditions with well-defined patient populations, including genetic diseases, which require chronic therapy. Our lead product candidate, Aldurazyme(TM), is being developed for the treatment of Mucopolysaccharidosis I (MPS I) disease. MPS I is a debilitating and life-threatening genetic disease caused by the deficiency of (alpha)-L-iduronidase, an enzyme responsible for breaking down certain carbohydrates. MPS I is a progressive disease that afflicts patients from birth and frequently leads to severe disability and early death. There are currently no drugs on the market for the treatment of MPS I. Aldurazyme has received both fast track designation from the United States Food and Drug Administration (FDA) and orphan drug designation for the treatment of MPS I in the United States and in the European Union. We are developing Aldurazyme through a joint venture with Genzyme Corporation. In collaboration with Genzyme, we completed a double-blinded, placebo-controlled Phase 3 clinical trial of Aldurazyme in August 2001. On November 2, 2001, we announced positive results from this trial. On April 1, 2002, we announced that together with our joint venture partner, Genzyme, we have filed with European regulatory authorities for approval to market Aldurazyme. On April 15, 2002, Genzyme and we announced that the joint venture filed the first portion of a "rolling"' Biologics License Application (BLA) with the FDA for approval to market Aldurazyme in the United States. Genzyme and we anticipate a response from the FDA regarding the application to market Aldurazyme in the United States during the first half of 2003. We are developing our second product candidate, Neutralase(TM), for reversal of anticoagulation by heparin in patients undergoing Coronary Artery Bypass Graft, or CABG, surgery and angioplasty. We acquired rights to Neutralase through our acquisition of the pharmaceutical assets of IBEX Technologies Inc. in the fourth quarter of 2001. Heparin is a carbohydrate drug commonly used to prevent coagulation, or blood clotting, during certain types of major surgery. Neutralase is a carbohydrate-modifying enzyme that cleaves heparin, allowing coagulation of blood and aiding patient recovery following CABG surgery and angioplasty. Based on data from previous trials, we plan to initiate a Phase 3 trial in CABG surgery in the third quarter of 2002. In addition to Aldurazyme and Neutralase, we are developing other enzyme-based therapeutics for the treatment of a variety of diseases and conditions. In 2001, we announced the results of a Phase 1 trial of Aryplase(TM) for the treatment of MPS VI, another seriously debilitating genetic disease. Based on data from the Phase 1 trial, we initiated a Phase 2 trial of Aryplase in the first quarter of 2002. We are also developing VibrilaseTM, a topical enzyme product for use in removing burned skin tissue in preparation for skin grafting or other therapy. We initiated a Phase 1 clinical trial of Vibrilase in the United Kingdom in the fourth quarter of 2001, and expect to analyze the results from this trial in the fourth quarter of 2002. In addition, we are pursuing preclinical development of other enzyme product candidates for genetic and other diseases. 9 Recent Developments On April 22, 2002, we announced that we had begun dosing patients in a Phase 2 clinical trial of Aryplase for the treatment of MPS VI. The primary objective of this open-label, multi-national Phase 2 clinical trial will be to evaluate the efficacy, safety and pharmacokinetics of weekly intravenous infusions of 1.0 mg/kg of Aryplase in 10 MPS VI patients. This dose represents the higher level of two doses administered in the six-patient Phase 1 trial. On April 15, 2002, Genzyme and we announced that the joint venture filed the first portion of a "rolling" Biologics License Application (BLA) with the FDA for approval to market Aldurazyme in the United States. We plan to complete the BLA filing in the third quarter of this year. The BLA will include six months of data from the ongoing open-label Phase 3 extension study in addition to the six-month data from the placebo-controlled portion of the Phase 3 trial. Patients from both the treatment and placebo arms of the Phase 3 trial had received at least six months of weekly Aldurazyme infusions in the open-label extension study as of February 8, 2002. Genzyme and we anticipate a response from the FDA regarding the application to market Aldurazyme in the United States during the first half of 2003. On April 1, 2002, we announced that together with our joint venture partner, Genzyme, we have filed with European regulatory authorities for approval to market Aldurazyme. Our joint venture submitted a Marketing Authorization Application (MAA) to the European Medicines Evaluation Agency (European Union)(or EMEA) on March 1, 2002. The EMEA has accepted our MAA and validated that it is complete and ready for scientific review. Accordingly, the EMEA's Committee for Proprietary Medicinal Products (CPMP) will now evaluate the application to determine whether to approve Aldurazyme for the treatment of MPS I in all 15 member states of the European Union. Norway and Iceland also participate in the CPMP but have a separate approval process. On March 21, 2002, we acquired Synapse Technologies Inc. Synapse owns the rights to certain patented and proprietary technology which, based on the results of preclinical trials, has the potential to deliver therapeutic enzymes and other drugs across the blood-brain barrier by means of traditional intravenous injections. Under the terms of the agreement, we purchased 100% of the outstanding shares of Synapse for approximately $10.2 million payable in 885,240 shares of our common stock. We also may make future contingent payments of up to CDN. $8 million (which equaled approximately U.S. $5.0 million as of May 1, 2002). These payments are payable in either cash or stock, at our option. On February 25, 2002, we decided to close the analytics product catalog business of our wholly-owned subsidiary, Glyko, Inc. The majority of the Glyko, Inc. employees have been incorporated into our pharmaceutical business to provide necessary analytic and diagnostic support to our therapeutic products. Certain operating assets of Glyko, Inc. may be offered for sale. On February 7, 2002, we announced that we had reached a definitive agreement to acquire all of the outstanding capital stock of Glyko Biomedical Ltd. (GBL). GBL is not affiliated with Glyko, Inc. GBL's principal asset is its 21.3% ownership interest in our common stock. GBL owns 11,367,617 shares of our common stock. Under the terms of the acquisition agreement, GBL's common shareholders will receive 11,367,617 shares of our common stock in exchange for all of GBL's outstanding common stock. There will be no net effect on the number of shares of our common stock outstanding, as we plan to retire the existing shares of our common stock currently held by GBL upon closing. Results of Operations In February 2002, we decided to close the carbohydrate analytical business portion of our wholly owned subsidiary, Glyko, Inc., which provided all of Glyko, Inc.'s revenues. The decision to close Glyko, Inc. has resulted in the operations of Glyko, Inc. being classified as discontinued operations in our consolidated financial statements and, accordingly, we have segregated the assets and liabilities of the discontinued operations in our consolidated balance sheets. In addition, we have segregated the operating results in our consolidated statements of operations and have segregated cash flows from discontinued operations in our consolidated statements of cash flows. 10 The Quarters Ended March 31, 2002 and 2001 For the quarters ended March 31, 2002 and 2001, revenues were $3.8 million and $2.7 million, respectively, which came exclusively from our joint venture with Genzyme. The increase in joint venture revenues in the first quarter of 2002 compared to the same period in 2001 was primarily the result of increased manufacturing activities in support of our Phase 1 and Phase 3 extension studies, increased regulatory, clinical and plant and process validation efforts in preparation for the rolling BLA submission that commenced in April 2002. Research and development expenses increased to $13.2 million in the first quarter of 2002 from $9.7 million in comparable period of 2001. The major factors in the growth of research and development expenses include increased expenses for the Aldurazyme joint venture with Genzyme, especially manufacturing, regulatory and clinical requirements, for manufacturing and clinical requirements to support our Phase 2 clinical trial and Phase 1 extension study of Aryplase, for the clinical expenses associated with our Phase 1 clinical trial of Vibrilase and for the increased manufacturing and research staff to support our product programs, including the addition of scientific staff in Montreal, Canada in October 2001 supporting Neutralase and Phenylase and in Vancouver, Canada in March 2002 supporting the technology purchased from Synapse. We anticipate research and development expenditures to continue to increase in the future in order to further develop our drug product candidates. General and administrative expenses increased to $3.9 million in the first quarter of 2002 from $1.5 million in the comparable period of 2001. This increase was primarily due to costs incurred in the first quarter of 2002 for legal and other fees associated with the Synapse acquisition and the potential acquisition of all of the outstanding capital stock of Glyko Biomedical Ltd. by us (in exchange for our common stock), increased staffing in finance, business development, information systems and purchasing, and expenses related to the implementation of an improved financial reporting and budgeting software system. Over the next year, we anticipate that general and administrative expenditures will increase approximately 30%, exclusive of the approximately $1.1 million of extraordinary costs associated with the acquisitions and the implementation of the financial reporting system. This increase will primarily be due to increased headcount and facilities to support the growth of our Company. In-process research and development totaling $11.2 million represents the entire purchase price of our acquisition of all of the outstanding stock of Synapse Technologies, Inc. in March 2002 plus related expenses. On March 21, 2002, we purchased Synapse including its intellectual property and preclinical data on p97, a technology that may allow drugs to cross the blood brain barrier, for $10.2 million in our common stock at a deemed price of $11.50 per share (885,240 shares). In connection with the Synapse purchase, we issued options and warrants to purchase 80,221 and 27,419 shares of our common stock, respectively. These options and warrants were valued using the Black-Scholes option pricing model and the resulting valuations of $561,000 and $85,000, respectively, were included as additional purchase price. The purchase agreement requires us to make up to CDN. $8 million (which equaled approximately U.S. $5.0 million as of May 1, 2002) in contingency payments upon certain regulatory and licensing milestones if they occur before March 21, 2012. Interest income decreased by $88,000 to $380,000 in the first quarter of 2002 from $468,000 in the first quarter of 2001 primarily due to the decrease in interest rates available on short-term investments, offset in part by higher cash balances resulting from our recent financing activities. Interest expense for the first quarter of 2002 was $91,000 and $2,000 in the comparable period of 2001. The increase was due to an equipment loan executed for $5.5 million in December 2001. Our equity in the loss of our joint venture with Genzyme was $2.3 million for the first quarter of 2002 compared to $1.1 million for the first quarter of 2001, as the joint venture continued extension studies of the original Phase 1 clinical trial and the Phase 3 clinical trial of Aldurazyme and filed an MAA in Europe. Net loss from continuing operations was $26.6 million ($0.51 per share, basic and diluted) and $9.1 million ($0.24 per share, basic and diluted) for the first quarter of 2002 and 2001, respectively. Income (loss) from discontinued operations relating to the Glyko, Inc. analytics business was $122,000 in the first quarter of 2002 and $(617,000) in the comparable period of 2001. The increase to income in the first quarter of 2002 was due to an increase in sales to customers in anticipation of a possible sale or discontinuance of the analytics business of Glyko, Inc. 11 Loss from disposal of discontinued operations represents the Glyko, Inc. closure expense of $141,000 in the first quarter of 2002 consisting primarily of accrued severance to personnel who did not become our employees and marketing and investment banking fees incurred in connection with the potential sale of the analytics business of Glyko, Inc. Net loss was $26.6 million ($0.51 per share, basic and diluted) and $9.7 million ($0.26 per share, basic and diluted) for the first quarters of 2002 and 2001, respectively. Liquidity and Capital Resources We have financed our operations since our inception by the issuance of common stock and convertible notes, equipment financing and the related interest income earned on cash balances available for short-term investment. Since inception, we have raised aggregate net proceeds of approximately $286 million. We were initially funded by an investment from GBL. We have since raised additional capital from the sale of our common stock in both public and private offerings and the sale of our other securities, all of which have since converted into common stock. Our combined cash, cash equivalents and short-term investments totaled $114.8 million at March 31, 2002 a decrease of $16.3 million from $131.1 million at December 31, 2001. The primary uses of cash during the quarter ended March 31, 2002 were to finance operations, fund the joint venture, purchase leasehold improvements and equipment and expenses associated with the purchase of Synapse (primarily legal fees). The primary sources of cash during the quarter were the issuance of common stock pursuant to the exercise of stock options under the 1997 Stock Plan, the aggregate exercise price of which totaled approximately $0.4 million. As of March 31, 2002, our total research and development expense to date was $131.5 million which was allocated $65.0 million to Aldurazyme, $0.6 million to Neutralase, $14.9 million to Aryplase, $6.6 million to Vibrilase and $44.4 million to other projects. In the first quarter of 2002, our research and development expense of $13.2 million was allocated $7.7 million to Aldurazyme, $0.3 million to Neutralase, $2.1 million to Aryplase, $0.3 million to Vibrilase and $2.8 million to other projects. Due to the uncertainty of the development of, and the complications of obtaining regulatory approval for the commercialization of pharmaceutical products, it is impossible to estimate the future costs associated with the completion of any of our product programs, the anticipated completion date, or the date by which the project will generate significant revenue from sales, if at all. Please see the section entitled "Factors That May Affect Future Results," and, in particular, the discussions captioned "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"; "To obtain regulatory approval to market our products, preclinical studies and costly and lengthy clinical trials will be required, and the results of the studies and trials are highly uncertain" and "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 or have reduced margins" in that section. From our inception through March 31, 2002, we have purchased approximately $53.3 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 increased manufacturing capacity. We expect to fund our operations with our cash, cash equivalents and short-term investments. We have made and plan to make substantial commitments to capital projects, including developing new research and development facilities and expanding our administrative and support offices. For all of 2002, we expect to expend approximately $60 million for operations and capital expenditures. We expect our current funds to last through 2003. We do not expect to generate positive cash flow from operations at least until 2004 because we expect to increase operational expenses and manufacturing investment for the joint venture and to increase research and development activities, including: o preclinical studies and clinical trials; o process development, including quality systems for product manufacture; o regulatory processes in the United States and international jurisdictions; o clinical and commercial scale manufacturing capabilities; and o expansion of sales and marketing activities Until we can generate sufficient levels of cash from our operations, we expect to continue our operations through the expenditure of our current cash, cash equivalents and short-term investments and supplement our cash, cash equivalents and short-term investments through: the sale of equity securities; equipment-based financing; and collaborative agreements with corporate partners. We expect that the net proceeds from any sales of our common stock, equipment financing or collaborative agreements will be used to fund operating costs, capital expenditures and working capital requirements, which may include costs associated with our lead clinical programs including Aldurazyme for MPS I, Neutralase for heparin reversal, Aryplase for MPS VI and Vibrilase for burn wounds. In addition, net proceeds may also be used for research and development of other pipeline products, building of our supporting infrastructure, and other general corporate purposes. 12 There are three current arrangements that may provide us with additional sources of financing in the future: o In September 1998, we established a joint venture with Genzyme for the worldwide development and commercialization of Aldurazyme for the treatment of MPS I. We share expenses and profits from the joint venture equally with Genzyme. Genzyme has committed to pay us an additional $12.1 million upon approval of the BLA for Aldurazyme. We anticipate a response from the FDA in the first half of 2003 regarding our recently filed "rolling" BLA for Aldurazyme. o In August 2001, we signed an amended agreement with Acqua Wellington North American Equities Fund Ltd. (Acqua Wellington)for an equity investment in us. The agreement allows for the purchase of up to $27.7 million of our common stock. Under the terms of the agreement, we will have the option to request that Acqua Wellington invest in us through sales of registered common stock at a small discount to market price. The maximum amount that we may request to be bought in any one month is dependent upon the market price of our stock (or an amount that can be mutually agreed-upon by both parties) and is referred to as the "Draw Down Amount." Subject to certain conditions, Acqua Wellington is obligated to purchase this amount if requested to do so by us. In addition, we may, at our discretion, grant a "Call Option" to Acqua Wellington for an additional investment in an amount up to the "Draw Down Amount" which Acqua Wellington may or may not choose to exercise. As of March 31, 2002, we may request a maximum additional aggregate investment of $14.2 million. This agreement terminates on October 15, 2002. Under this agreement, Acqua Wellington may also purchase stock and receive similar terms of any other equity financing by us. o During December 2001, we entered into three separate agreements with General Electric Capital Corporation for secured loans totaling $5.5 million. The notes bear interest (ranging from 9.1% to 9.31%) and are secured by certain manufacturing and laboratory equipment. Additionally, one of the agreements is subject to a covenant that requires us to maintain a minimum unrestricted cash balance of $25 million. Should the unrestricted cash balance fall below $25 million, the note is subject to prepayment, including prepayment penalties ranging from 1% to 4%. We expect to enter into additional similar facilities as we acquire additional equipment and expand our facilities. In addition to the foregoing sources, we anticipate a need for additional financing to fund our future operations, including the commercialization of our drug products currently under development. We cannot assure you that additional financing will be obtained or, if obtained, will be available on reasonable terms or in a timely manner. Our future capital requirements will depend on many factors, including, but not limited to: 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 develop commercial manufacturing processes, including quality systems and to build or acquire manufacturing capabilities; o the time and cost necessary to respond to technological and market developments; and o any changes made or new developments in our existing collaborative, licensing and other commercial relationships or any new collaborative, licensing and other commercial relationships that we may establish. We plan to continue our policy of investing available funds in government, investment grade and interest-bearing securities. We do not invest in derivative financial instruments, as defined by Statement of Financial Accounting Standards No. 119. 13 Critical Accounting Policies Investment in BioMarin/Genzyme LLC and Related Revenue--Under the terms of our joint venture agreement with Genzyme, Genzyme and we have each agreed to provide 50 percent of the funding for the joint venture. All research and development, sales and marketing, and other activities performed by Genzyme and us on behalf of the joint venture are billed to the joint venture at cost. Any profits or losses of the joint venture are shared equally by the two parties. We provided $43.9 million in funding to the joint venture from inception through March 31, 2002. We account for our investment in the joint venture using the equity method. Accordingly, we record a reduction in our investment in the joint venture for our 50 percent share of the loss of the joint venture. The percentage of the costs incurred by us and billed to the joint venture that are funded by us (50 percent), is recorded as a credit to our equity in the loss of the joint venture. Impairment of Long-Lived Assets--We regularly review long-lived assets and identifiable intangibles whenever events or circumstances indicate that the carrying amount of such assets may not be fully recoverable. We evaluate the recoverability of long-lived assets by measuring the carrying amount of the assets against the estimated undiscounted future cash flows associated with them. At the time such evaluations indicate that the future undiscounted cash flows of certain long-lived assets are not sufficient to recover the carrying value of such assets, the assets are adjusted to their fair values. Income taxes - We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. For all periods presented, we have recorded a full valuation allowance against our net deferred tax asset, the principal amount of which is the tax effect of net operating loss carryforwards of approximately $61.5 million at December 31, 2001. We have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. An adjustment to the valuation allowance would increase income in the period such adjustment was made. 14 FACTORS THAT MAY AFFECT FUTURE RESULTS An investment in our common stock involves a high degree of risk. We operate in a dynamic and rapidly changing industry involving numerous risks and uncertainties. The risks and uncertainties described below are not the only ones we face. Other risks and uncertainties, including those that we do not currently consider material, may impair our business. If any of the risks discussed below actually occur, our business, financial condition, operating results or cash flows could be materially adversely affected. This could cause the trading price of our common stock to decline, and you may lose all or part of your investment. If we continue to incur operating losses for a period longer than anticipated, we may be unable to continue our operations at planned levels and be forced to reduce or discontinue 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 product candidates. As of March 31, 2002, we had an accumulated deficit of approximately $174.7 million. We expect to continue to operate at a net loss for the foreseeable future. Our future profitability depends on our receiving regulatory approval of our product 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 continuing basis, then we may be unable to continue our operations. 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 some or all of our product development programs. We expect to continue to spend substantial amounts of capital for our operations for the foreseeable future. The amount of capital we will need depends on many factors, including: 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 develop commercial manufacturing processes, including quality systems and to build or acquire manufacturing capabilities; o the time and cost necessary to respond to technological and market developments; and o any changes made or new developments in our existing collaborative, licensing and other commercial relationships or any new collaborative, licensing and other commercial relationships that we may establish. 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; and o additional contracts for product manufacturing. We believe that our cash, cash equivalents and short term investment securities balances at March 31, 2002 will be sufficient to meet our operating and capital requirements through 2003. These estimates are 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. 15 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, our potential for generating positive cash flow will be diminished and the capital necessary to fund our operations will be increased. We must obtain regulatory approval before marketing or selling our drug products in the U.S. and in foreign jurisdictions. In the U.S., 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 drug products. Because of the risks and uncertainties in biopharmaceutical development, our drug products could take a significantly longer time to gain regulatory approval than we expect or may never gain approval. If regulatory approvals are not obtained or are delayed, our management's credibility, and the value of our company and our operating results will be adversely affected. Additionally, we will be unable to generate revenue from the sale of our products and our potential for generating positive cash flow will be diminished and the capital necessary to fund our operations will be increased. To obtain regulatory approval to market our products, preclinical studies and costly and lengthy clinical trials will be required, and the results of the studies and trials are highly uncertain. As part of the regulatory approval process, we must conduct, at our own expense, preclinical studies in the laboratory on animals and clinical trials on humans for each drug product. We expect the number of preclinical studies and clinical trials that the regulatory authorities 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 significantly different. After we have conducted preclinical studies in animals, we must demonstrate that our drug products are safe and efficacious 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 drug products. Additional factors that can cause delay or termination of our clinical trials include: o slow or insufficient patient enrollment; o slow recruitment of, and completion of necessary institutional approvals at clinical sites; o longer treatment time required to demonstrate efficacy; o lack of sufficient supplies of the product candidate; o adverse medical events or side effects in treated patients; o lack of effectiveness of the product candidate being tested; and o regulatory requests for additional clinical trials. Typically, if a drug product is intended to treat a chronic disease, as is the case with most of the product candidates we are developing, safety and efficacy data must be gathered over an extended period of time, which can range from six months to three years or more. In May 2001, we completed a 24-month patient evaluation for the initial clinical trial of our lead drug product, Aldurazyme, for the treatment of MPS I. Two of the original ten patients enrolled in this trial died in 2000. One of these patients received 103 weeks of Aldurazyme treatment and the other received 137 weeks of treatment. One of the original forty-five patients who completed the Phase 3 clinical trial died after 16 weeks of the Phase 3 extension study. One patient treated under a single-patient use protocol died after 131 weeks of Aldurazyme treatment. Based on medical data collected from clinical investigative sites, none of these cases directly implicated treatment with Aldurazyme as the cause of death. If cases of patient complications or death are ultimately attributed to Aldurazyme, our chances of commercializing this drug would be seriously compromised. The fast track designation for our product candidates may not actually lead to a faster review process and a delay in the review process or approval of our products will delay revenue from the sale of the products and will increase the capital necessary to fund these programs. 16 Aldurazyme and Aryplase have obtained fast track designations, which provides certain advantageous procedures and guidelines with respect to the review by the FDA of the BLA for these products and which may result in our receipt of an initial response from the FDA earlier than would be received if these products had not received a fast track designation. However, these procedures and guidelines do not guarantee that the total review process will be shorter than, or that approval will be obtained, if at all, earlier than, would be the case if the products had not received fast track designation. If the review process or approval for either product is delayed, realizing revenue from the sale of the products will be delayed and the capital necessary to fund these programs will be increased. We will not be able to sell our products if we fail to comply with manufacturing regulations. Before we can begin commercial manufacture of 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. Our Galli Drive and our Bel Marin Keys Boulevard manufacturing facilities have been inspected and licensed by the State of California for clinical pharmaceutical manufacture. We cannot guarantee that these facilities will pass federal or international regulatory inspection. We cannot guarantee that we, or any potential third party manufacturer of our drug products, will be able to comply with cGMP regulations. We must pass Federal, state and European regulatory inspections, and we must manufacture process qualification batches to final specifications under cGMP controls for each of our drug products before the marketing applications can be approved. Although we have completed process qualification batches for Aldurazyme, these batches may be rejected by the regulatory authorities, and we may be unable to manufacture the process qualification batches for our other products or pass the inspections in a timely manner, if at all. If we fail to obtain orphan drug exclusivity for some of our products, our competitors may sell products to treat the same conditions and our revenues will be reduced. As part of our business strategy, we intend to develop some drugs that may be eligible for FDA and European Community 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 in the United States. The company that first obtains 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. Similar regulations are available in the European Community with a ten-year period of market exclusivity. 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 our drug products, which do not have patent protection, our competitors may then sell the same drug to treat the same condition. Even though we have obtained orphan drug designation for certain of our product candidates 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, if we do, that exclusivity would effectively protect the product from competition. Orphan drug designation neither shortens the development time or regulatory review time of a drug nor gives the drug any advantage in the regulatory review or approval process. Because the target patient populations for some of our products are small, we must achieve significant market share and obtain high per patient prices for our products to achieve profitability. Two of our lead drug candidates, Aldurazyme and Aryplase, target diseases with small patient populations. As a result, our per-patient prices must be relatively high in order to recover our development costs and achieve profitability. Aldurazyme targets patients with MPS I and Aryplase targets patients with MPS VI. 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 payers, the sales of our drugs would be adversely affected or there may be no commercially viable markets for our products. 17 The course of treatment for patients with MPS I using Aldurazyme and for patients with MPS VI using Aryplase is expected to be expensive. We expect patients to need treatment throughout their lifetimes. We expect that most families of patients will not be capable of paying for this treatment themselves. There will be no commercially viable market for Aldurazyme or Aryplase without reimbursement from third-party payers. Additionally, even if there is a commercially viable market, if the level of reimbursement is below our expectations, our revenue and gross margins will be adversely effected. Third-party payers, such as government or private health care insurers, carefully review and increasingly challenge the prices charged for drugs. Reimbursement rates from private companies vary depending on the third-party payer, 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 payers will pay for the costs of our drugs. Even if we are able to obtain reimbursement from third-party payers, we cannot be certain that reimbursement rates will be enough to allow us to profit from sales of our drugs or to justify our product development expenses. We currently have no expertise obtaining reimbursement. We expect to rely on the expertise of our joint venture partner Genzyme to obtain reimbursement for the costs of Aldurazyme. We will not know what the reimbursement rates will be until we are ready to market the product and we actually negotiate rates. 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 payers 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 adversely affect reimbursement for medical treatment by third party payers, which may render our products commercially un-viable or may adversely affect our future revenues and gross margins. 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. Patent protection may not be available for some of the enzymes we are developing. If we must spend significant time and money protecting our patents, designing around patents held by others or licensing, for large fees, patents or other proprietary rights held by others, our business and financial prospects may be harmed. The patent positions of biotechnology products are 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 have been published and are believed to be in the public domain. The composition and genetic sequences of other MPS enzymes that 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 broad composition-of-matter patents, other forms of patent protection or orphan drug status may provide us with a competitive advantage. As a result of these uncertainties, investors should not rely on patents as a means of protecting our product candidates, including Aldurazyme. We own or license patents and patent applications to certain of our product candidates. However, these patents and patent applications do not ensure the protection of our intellectual property for a number of other reasons, including the following: o We do not know whether our patent applications will result in issued 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, was not novel or was obvious. In litigation, a competitor could claim that our issued patents are not valid for a number of reasons. If a court agrees, we would lose that patent. As a company, we have no meaningful experience with competitors interfering with our patents or patent applications. 18 o Enforcing patents is expensive and may absorb significant time of our management. Management would spend less time and resources on developing products, which could increase our research and development expense and delay product programs. o Receipt of a patent 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. 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 the following: 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 or 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. The United States Patent and Trademark Office recently issued two patents that relate to (alpha)-L-iduronidase. If we are not able to successfully challenge these patents, we may be prevented from producing Aldurazyme unless and until we obtain a license. The United States Patent and Trademark Office recently issued two patents that include composition of matter and method of use claims for recombinant (alpha)-L-iduronidase. Our lead drug product, Aldurazyme, is based on recombinant (alpha)-L-iduronidase. We believe that these patents are invalid on a number of grounds. A corresponding patent application was filed in the European Patent Office claiming composition of matter for recombinant (alpha)-L-iduronidase, and it was rejected over prior art and withdrawn and cannot be re-filed. Nonetheless, under U.S. law, issued patents are entitled to a presumption of validity, and our challenges to the U.S. patents may be unsuccessful. Even if we are successful, challenging the U.S. patents may be expensive, require our management to devote significant time to this effort and may delay commercialization of Aldurazyme in the United States. 19 The patent holder has granted an exclusive license for products relating to these patents to one of our competitors. If we are unable to successfully challenge the patents, we may be unable to produce Aldurazyme in the United States unless we can obtain a sublicense from the current licensee. The current licensee is not required to grant us a license and even if a license is available, we may have to pay substantial license fees, which could materially reduce potential profits from the eventual sale of Aldurazyme. If our joint venture with Genzyme were terminated, we could be barred from commercializing Aldurazyme or our ability to commercialize Aldurazyme would be delayed or diminished. We are relying on Genzyme to apply the expertise it has developed through the launch and sale of other enzyme-based products to the marketing of our initial drug product, Aldurazyme. 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 Aldurazyme. 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. Although we are not currently in breach of the joint venture agreement and we believe that Genzyme is not currently in breach of the joint venture agreement, there is a risk that either Genzyme or we could breach the agreement in the future. Either party may also terminate the agreement upon one-year prior written notice for any reason. Furthermore, we may terminate the joint venture if Genzyme fails to fulfill its contractual obligation to pay us $12.1 million in cash upon the approval of the BLA for Aldurazyme. If the joint venture is terminated for breach, the non-breaching party would be granted, exclusively, all of the rights to Aldurazyme and any related intellectual property and regulatory approvals and would be obligated to buy out the breaching party's interest in the joint venture. If we are the breaching party, we would lose our rights to Aldurazyme and the related intellectual property and regulatory approvals. If the joint venture is terminated without cause, the non-terminating party would have the option, exercisable for one year, to buy out the terminating party's interest in the joint venture and obtain all rights to Aldurazyme exclusively. In the event of termination of the buy out option without exercise by the non-terminating party as described above, all right and title to Aldurazyme 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 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 Aldurazyme 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 Aldurazyme. If we were obligated, or given the option, to buy out Genzyme's interest in the joint venture, and gain exclusive rights to Aldurazyme, we may not have sufficient funds to do so and we may not 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 Aldurazyme and the related intellectual property and regulatory approvals. We would then effectively be prohibited from developing and commercializing the product. Termination of the joint venture in which we retain the rights to Aldurazyme 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 or have reduced margins. Although we have successfully manufactured Aldurazyme at commercial scale within our cost parameters, we cannot guarantee that we will be able to manufacture any other drug product successfully with a commercially viable process or at a scale large enough to support their respective commercial markets or at acceptable margins. Our manufacturing processes may not meet initial expectations and we may encounter problems with any of the following measurements of performance if we attempt to increase the scale or size or improve the commercial viability of our manufacturing processes: 20 o design, construction and qualification of manufacturing facilities that meet regulatory requirements; o schedule; o reproducibility; o production yields; o purity; o costs; o quality control and assurance systems; o shortages of qualified personnel; and o compliance with regulatory requirements. Improvements in manufacturing processes typically are very difficult to achieve and are often very expensive. We cannot know with certainty how long it might take to make improvements if it becomes 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. The availability of suitable contract manufacturing at scheduled or optimum times is not certain. The cost of contract manufacturing is greater than internal manufacturing and therefore our manufacturing processes must be of higher productivity to yield equivalent margins. The manufacture of Neutralase involves the fermentation of a bacterial species. We have never used a bacterial production process for the production of any commercial product. IBEX Technologies Inc., from which we acquired Neutralase, had contracted with a third party for the manufacture of the Neutralase used in prior clinical trials. We have built-out approximately 51,800 square feet at our Novato facilities for manufacturing capability for Aldurazyme and Aryplase including related quality control laboratories, materials capabilities, and support areas. We expect to add additional capabilities in stages over time, which could create additional operational complexity and challenges. We expect that the manufacturing process of all of our new drug products, including Aryplase and Neutralase, will require significant time and resources before we can begin to manufacture them (or have them manufactured by third parties) in commercial quantity at acceptable cost. Even if we can establish the necessary capacity, we cannot be certain that manufacturing costs will be commercially reasonable, especially if contract manufacturing is employed or if third-party 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 product yield from our current cell lines, colonies of cells which have a common genetic makeup; o improving the manufacturing processes licensed from others; or o developing more efficient, lower cost recombinant cell lines and production processes. A recombinant cell line is a cell line with foreign DNA inserted that is used to produce an enzyme or other protein that it would not have otherwise produced. The development of a stable, high production cell line for any given enzyme is difficult, expensive and unpredictable and may not result in adequate yields. In addition, the development of protein purification processes is difficult and may not produce the high purity required with acceptable yield and costs or may not result in adequate shelf-lives of the final products. 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 larger losses in manufacturing start-up phases. 21 If we are unable to create 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 capabilities either by developing our own 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. Under our joint venture with Genzyme, Genzyme is responsible for marketing and distributing Aldurazyme. We cannot guarantee that we will be able to establish sales and distribution capabilities or that the joint venture, any future collaborators or we will successfully sell any of our drug products. With our acquisition of Neutralase from IBEX Technologies Inc., we have an enzyme product that has a significantly larger potential patient population than Aldurazyme and Aryplase and will be marketed and sold to different target audiences with different therapeutic and financial requirements and needs. As a result, we will be competing with other pharmaceutical companies with experienced and well-funded sales and marketing operations targeting these specific physician and institutional audiences. We may not be able to create our own sales and marketing force or of a size that would allow us to compete with these other companies. If we elect to enter into third-party marketing and distribution agreements in order to sell into these markets, we may not be able to enter into these agreements on acceptable terms, if at all. If we cannot compete effectively in these specific physician and institutional markets, it would adversely affect sales of Neutralase. If we fail to compete successfully with respect to product sales, we may be unable to generate sufficient sales to recover our expenses related to the development of a product program or to justify continued marketing of a product. 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 those products with orphan drug designation, or commercialize their products before we do. With respect to Aldurazyme and Aryplase, if our competitors successfully commercialize a product that treats MPSI or MPSIV, respectively, before we do, we may effectively be precluded from developing a product to treat that disease because the patient populations of the diseases are so small. If our competitor gets orphan drug exclusivity, we could be precluded from marketing our version for seven years in the U.S. and ten years in the European Union. If we do not compete successfully, we may be unable to generate sufficient sales to recover our expenses related to the development of a product program or to justify continued marketing of a product. If we fail to compete successfully with respect to acquisitions, joint venture and other collaboration opportunities, we may be limited in our ability to develop new products and to continue to expand our product pipeline. Our competitors compete with us to attract organizations for acquisitions, joint ventures, licensing arrangements or other collaborations. To date, several of our product programs have been acquired through acquisitions, such as the programs acquired from IBEX and Synapse, and several of our product programs have been developed through licensing or collaborative arrangements, such as Aldurazyme and Vibrilase. These collaborations include licensing proprietary technology from, and other relationships with academic research institutions. If our competitors successfully enter into partnering arrangements or licensing 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 or basic research 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. If we are unable to compete successfully with respect to acquisitions, joint venture and other collaboration opportunities, we may be limited in our ability to develop new products and to continue to expand our product pipeline. If we do not achieve our projected development goals in the time frames we announce and expect, the commercialization of our products may be delayed and the credibility of our management may be adversely affected and, as a result, our stock price may decline. For planning purposes, we estimate the timing of the accomplishment of various scientific, clinical, regulatory and other product development goals, which we sometimes refer to as milestones. These milestones may include the commencement or completion of scientific studies or clinical trials and the submission of regulatory filings. From time to time, we publicly announce the expected timing of some of these milestones. All of these milestones are based on a variety of assumptions. The actual timing of these milestones can vary dramatically compared to our estimates, in many cases for reasons beyond our control. If we do not meet these milestones as publicly announced, the commercialization of our products may be delayed and the credibility of our management may be adversely affected and, as a result, our stock price may decline. If we fail to manage our growth or fail to recruit and retain personnel, our product development programs may be delayed. 22 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 and/or foreign government approval to market Aldurazyme, the joint venture will be required to devote additional resources to support the commercialization of Aldurazyme. 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 staff, financial resources, 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. We compete with other biotechnology and pharmaceutical companies, as well as universities and other academic institutions for qualified personnel. Any harm to our research and development programs would harm our business and prospects. Because of the specialized scientific and managerial 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 Fredric D. Price, our Chairman and Chief Executive Officer, or Emil D. Kakkis, M.D., Ph.D., our Senior Vice President of Scientific Affairs or Christopher M. Starr, Ph.D., our Senior Vice President for Research and Development, could be detrimental to us if we cannot recruit suitable replacements in a timely manner. While Mr. Price, Dr. Kakkis and Dr. Starr are parties to employment agreements with us, we cannot guarantee that they will remain employed with us in the future. In addition, these agreements do not restrict their ability to compete with us after their employment is terminated. 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. Changes in methods of treatment of disease could reduce demand for our products. Even if our drug products are approved, doctors must use treatments that require using those products. If doctors elect a different course of treatment from that which includes our drug products, this decision would reduce demand for our drug products. Examples include the potential use in the future of effective gene therapy for the treatment of genetic diseases. The use of gene therapy could theoretically reduce or eliminate the use of enzyme replacement therapy in MPS diseases. Sometimes, this change in treatment method can be caused by the introduction of other companies' products or the development of new technologies or surgical procedures which may not directly compete with ours, but which have the effect of changing how doctors decide to treat a disease. For example, Neutralase is being developed for heparin reversal in CABG surgery. It is possible that alternative non-surgical methods of treating heart disease could be developed. If so, then the demand for Neutralase would likely decrease. 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 Aldurazyme, with aggregate loss limits of $5.0 million. We have obtained insurance against product liability lawsuits for the clinical trials for Aryplase and Vibrilase, with aggregate loss limits of $8.0 million. Pharmaceutical companies must balance the cost of insurance with the level of coverage based on estimates of potential liability. Historically, the potential liability associated with product liability lawsuits for pharmaceutical products has been unpredictable. Although we believe that our current insurance is a reasonable estimate of our potential liability and represents a commercially reasonable balancing of the level of coverage as compared to the cost of the insurance, we may be subject to claims in connection with our current clinical trials for Aldurazyme, Aryplase and Vibrilase for which the joint venture's or our insurance coverages are not adequate. We cannot be certain that if Aldurazyme, Aryplase or Vibrilase receives FDA approval, the product liability insurance the joint venture or we will need to obtain in connection with the commercial sales of Aldurazyme, Aryplase or Vibrilase 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 that exceeds the limits of any insurance coverage we may obtain, we may incur substantial liabilities that would adversely affect our earnings and require the commitment of capital resources that might otherwise be available for the development and commercialization of our product programs. Our stock price may be volatile, and an investment in our stock could suffer a decline in value. 23 Our valuation and stock price since the beginning of trading after our initial public offering have had no meaningful relationship to current or historical earnings, asset values, book value or many other criteria based on conventional measures of stock value. The market price of our common stock will fluctuate due to factors including: o progress of Aldurazyme, Neutralase, Aryplase and our other lead drug products through the regulatory process, especially regulatory actions in the United States related to Aldurazyme; o results of clinical trials, announcements of technological innovations or new products by us or our competitors; o government regulatory action affecting our drug products or our competitors' drug products in both the United States and foreign countries; o developments or disputes concerning patent or proprietary rights; o general market conditions and fluctuations for the emerging growth and biopharmaceutical market sectors; o economic conditions in the United States or abroad; o actual or anticipated fluctuations in our operating results; o broad market fluctuations in the United States or in Europe, which may cause the market price of our common stock to fluctuate; and o changes in company assessments or 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. 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 market conditions in different capital markets; and 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 28% of the outstanding shares of our common stock. Glyko Biomedical Ltd. owns approximately 21.3% of the outstanding shares of our capital stock. The president and chief executive officer of Glyko Biomedical and a significant shareholder of Glyko Biomedical serve as two of our directors. As a result, due to their concentration of stock ownership, directors and officers, if they act together, may be able to 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; and o The defeat of any non-negotiated takeover attempt that might otherwise benefit the public stockholders. 24 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. We are 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 our 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 has 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 our outstanding voting stock. 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. Our 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. Item 3. Quantitative and Qualitative Disclosure about Market Risk. Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. By policy, we place our investments with highly rated credit issuers and limit the amount of credit exposure to any one issuer. As stated in our policy, we seek to improve the safety and likelihood of preservation of our invested funds by limiting default risk and market risk. We have no investments denominated in foreign country currencies and therefore are not subject to foreign exchange risk. We mitigate default risk by investing in high credit quality securities and by positioning our 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. Based on our investment portfolio and interest rates at March 31, 2001, we believe that a 100 basis point increase or decrease in interest rates would result in an increase or decrease or increase of approximately $1.1 million, respectively, in the fair value of the investment portfolio. Changes in interest rates may affect the fair value of the investment portfolio; however, we will not recognize such gains or losses unless the investments are sold. Moreover, such gains or losses have historically been immaterial, because we have generally held the majority of such investments to maturity, a practice we currently intend to continue. The table below presents the carrying value for our investment portfolio. The carrying value approximates fair value at March 31, 2002. Investment portfolio: Carrying value (in $ thousands) Cash and cash equivalents......................... $ 18,202 Short-term investments............................ 96,596* ----------- Total.......................................... $114,798 *33% invested in a bond mutual fund, 4% in corporate bonds, 47% in callable and non-callable Federal agencies, and 16% in money market funds. 25 PART II. OTHER INFORMATION Item 1. Legal Proceedings. None. Item 2. Changes in Securities and Uses of Proceeds. BioMarin issued 885,240 shares of its Common Stock to the former shareholders of Synapse Technologies Inc. in order to acquire the outstanding shares of Synapse Technologies. The shares were issued effective as of March 21, 2002, the closing date of BioMarin's acquisition of Synapse Technologies. These shares were issued without registration in reliance upon an exemption under Section 3(a)(10) of the Securities Act of 1933, as amended, after a fairness hearing by the Supreme Court of British Columbia 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 - -------------- ----------------------------------------------------------------- EXHIBIT DESCRIPTION OF DOCUMENT NUMBER - -------------- ----------------------------------------------------------------- - -------------- ----------------------------------------------------------------- 2.1 Acquisition Agreement for a Plan of Arrangement by and among the Company, BioMarin Acquisition (Nova Scotia) Company, and Glyko Biomedical Ltd., dated February 6, 2002, previously filed with the Commission on April 1, 2002 as Exhibit 2.5 to the Company's Annual Report on Form 10-K, which is incorporated herein by reference. - -------------- ----------------------------------------------------------------- - -------------- ----------------------------------------------------------------- 10.1 Second Amended and Restated Agreement for Plan of Arrangement by and among the Company, BioMarin Delivery Canada Inc. and Synapse Technologies Inc., dated February 4, 2002, previously filed with the Commission on April 1, 2002 as Exhibit 10.26 to the Company's Annual Report on Form 10-K, which is incorporated herein by reference. - -------------- ----------------------------------------------------------------- - -------------- ----------------------------------------------------------------- 10.2 Amendment to BioMarin Pharmaceutical Inc. 1997 Stock Plan, as amended, as adopted March 20, 2002, previously filed with the Commission on March 21, 2002 as Exhibit 99.1 to the Company's Current Repot on Form 8-K, which is incorporated herein by reference. - -------------- ----------------------------------------------------------------- (b) Reports on Form 8-K. On January 7, 2002, we filed a Current Report on Form 8-K regarding the announcement of various changes to our senior management and the appointment of Dr. Phyllis Gardner, MD to our board of directors. On November January 14, 2002, we filed an amended and restated Current Report on Form 8-K/A regarding the completion of our acquisition of the rights to all of the pharmaceutical assets of IBEX Technologies Inc. This Current Report amended and restated a Current Report on Form 8-K that originally filed on November 2, 2001, as subsequently amended and restated on November 14, 2001. On January 15, 2002, we filed a Current Report on Form 8-K regarding the announcement that we reached a definitive agreement to acquire Synapse Technologies Inc. On February 7, 2002, we filed a Current Report on Form 8-K regarding the announcement that we reached a definitive agreement to acquire all of the outstanding shares of Glyko Biomedical Ltd. 26 On February 26, 2002, we filed a Current Report on Form 8-K regarding the announcement our financial results for the fourth quarter and the full year ended December 31, 2001. On March 21, 2002, we filed a Current Report on Form 8-K regarding the announcement of an amendment to our 1997 Stock Plan (as amended on December 22, 1998). 27 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 14, 2002 By: /s/ Fredric D. Price -------------------- -------------------- Fredric D. Price, Chairman and Chief Executive Officer (on behalf of the Registrant Dated: May 14, 2002 By: /s/ Kim R. Tsuchimoto -------------------- --------------------- Vice President, Controller (principal accounting officer) 28 Exhibit Index - -------------- ----------------------------------------------------------------- EXHIBIT DESCRIPTION OF DOCUMENT NUMBER - -------------- ----------------------------------------------------------------- - -------------- ----------------------------------------------------------------- 2.1 Acquisition Agreement for a Plan of Arrangement by and among the Company, BioMarin Acquisition (Nova Scotia) Company, and Glyko Biomedical Ltd., dated February 6, 2002, previously filed with the Commission on April 1, 2002 as Exhibit 2.5 to the Company's Annual Report on Form 10-K, which is incorporated herein by reference. - -------------- ----------------------------------------------------------------- - -------------- ----------------------------------------------------------------- 10.1 Second Amended and Restated Agreement for Plan of Arrangement by and among the Company, BioMarin Delivery Canada Inc. and Synapse Technologies Inc., dated February 4, 2002, previously filed with the Commission on April 1, 2002 as Exhibit 10.26 to the Company's Annual Report on Form 10-K, which is incorporated herein by reference. - -------------- ----------------------------------------------------------------- - -------------- ----------------------------------------------------------------- 10.2 Amendment to BioMarin Pharmaceutical Inc. 1997 Stock Plan, as amended, as adopted March 20, 2002, previously filed with the Commission on March 21, 2002 as Exhibit 99.1 to the Company's Current Repot on Form 8-K, which is incorporated herein by reference. - -------------- ----------------------------------------------------------------- 29 -----END PRIVACY-ENHANCED MESSAGE-----