Form 10-Q for period ending 06/30/2003

10-Q 1 d10q.htm FORM 10-Q FOR PERIOD ENDING 06/30/2003 Form 10-Q for period ending 06/30/2003

United States
Securities and Exchange Commission
Washington, D.C. 20549

FORM 10-Q

(Mark One)


x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2003
	Or

o	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 of other jurisdiction of Incorporation or organization)		(I.R.S. Employer Identification No.)

371 Bel Marin Keys Blvd., #210, Novato,
California		94949
(Address of principal executive offices)		(Zip Code)


	Registrant’s telephone number: (415) 884-6700

	(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 preceding 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 o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of The Exchange Act).

Yes x No o

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 x No o

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: 63,763,999 shares common stock, par value $0.001, outstanding as of July 31, 2003.

BIOMARIN PHARMACEUTICAL INC.

TABLE OF CONTENTS


	Page
PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (Unaudited)	1

Consolidated Balance Sheets	1
Consolidated Statements of Operations	2
Consolidated Statements of Cash Flows	4
Notes to Consolidated Financial Statements	5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	11

Item 3. Quantitative and Qualitative Disclosure about Market Risk	32

Item 4. Controls and Procedures	32

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	33

Item 2. Changes in Securities and Uses of Proceeds	33

Item 3. Defaults upon Senior Securities	33

Item 4. Submission of Matters to a Vote of Security Holders	33

Item 5. Other Information	34

Item 6. Exhibits and Reports on Form 8-K	34

SIGNATURE	35

Item 1. Consolidated Financial Statements

BioMarin Pharmaceutical Inc. and Subsidiaries

Consolidated Balance Sheets
(In thousands, except share and per share data)


	December 31, 2002 (1)			June 30, 2003
Assets					(unaudited)
Current assets:
Cash and cash equivalents	$	33,638		$	221,772
Short-term investments		40,340			44,588
Investment in and advances to BioMarin/Genzyme LLC		4,955			6,494
Other current assets		2,139			2,198

Total current assets		81,072			275,052
Property and equipment, net		28,206			24,900
Other assets		1,338			6,433

Total assets	$	110,616		$	306,385

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities	$	3,930		$	12,123
Other current liabilities		2,917			3,128

Total current liabilities		6,847			15,251
Convertible debt		—			125,000
Other long-term liabilities		5,226			3,697

Total liabilities		12,073			143,948

Stockholders’ equity:
Common stock, $0.001 par value: 150,000,000 shares authorized, 53,782,426 and 63,754,999 shares issued and outstanding December 31, 2002 and June 30, 2003, respectively		54			64
Additional paid-in capital		319,038			411,605
Warrants		5,219			5,219
Deferred compensation		(47	)		—
Notes receivable from stockholders		(468	)		(332	)
Accumulated other comprehensive income		327			241
Accumulated deficit		(225,580	)		(254,360	)

Total stockholders’ equity		98,543			162,437

Total liabilities and stockholders’ equity	$	110,616		$	306,385

(1) December 31, 2002 balances were obtained from audited financial statements.

See accompanying notes to consolidated financial statements.

BioMarin Pharmaceutical Inc. and Subsidiaries

Consolidated Statements of Operations
For the Three Months Ended June 30, 2002 and 2003
(In thousands, except per share data, unaudited)


	Three Months Ended June 30,
	2002			2003
Milestone revenue	$	—		$	12,100

Operating expenses:
Research and development		6,615			11,731
General and administrative		2,937			4,460
Equity in the loss of BioMarin/Genzyme LLC		5,884			5,386

Total operating expenses		15,436			21,577

Loss from operations		(15,436	)		(9,477	)
Interest income		1,024			593
Interest expense		(161	)		(213	)

Net loss from continuing operations		(14,573	)		(9,097	)
Income from discontinued operations		172			—
Loss on disposal of discontinued operations		(10	)		—

Net loss	$	(14,411	)	$	(9,097	)

Net loss per share, basic and diluted:
Net loss from continuing operations	$	(0.27	)	$	(0.14	)
Income from discontinued operations		—			—
Loss on disposal of discontinued operations		—			—

Net loss	$	(0.27	)	$	(0.14	)

Weighted average common shares outstanding		53,407			63,494

See accompanying notes to consolidated financial statements.

BioMarin Pharmaceutical Inc. and Subsidiaries

Consolidated Statements of Operations
For the Six Months Ended June 30, 2002 and 2003
(In thousands, except per share data, unaudited)


	Six Months Ended June 30,
	2002			2003
Milestone revenue	$	—		$	12,100

Operating expenses:
Research and development		12,368			22,722
General and administrative		6,745			7,259
Equity in the loss of BioMarin/Genzyme LLC		11,973			12,139
In-process research and development		11,223			—

Total operating expenses		42,309			42,120

Loss from operations		(42,309	)		(30,020	)
Interest income		1,404			1,006
Interest expense		(252	)		(343	)

Net loss from continuing operations		(41,157	)		(29,357	)
Income from discontinued operations		294			—
Gain (loss) on disposal of discontinued operations		(151	)		577

Net loss	$	(41,014	)	$	(28,780	)

Net loss per share, basic and diluted:
Net loss from continuing operations	$	(0.78	)	$	(0.49	)
Income from discontinued operations		0.01			—
Gain (loss) on disposal of discontinued operations		—			0.01

Net loss	$	(0.77	)	$	(0.48	)


Weighted average common shares outstanding		52,973			60,247

See accompanying notes to consolidated financial statements.

BioMarin Pharmaceutical Inc. and Subsidiaries

Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2002 and 2003
(In thousands, unaudited)


	Six Months Ended June 30,
	2002			2003
Cash flows from operating activities:
Net loss from continuing operations	$	(41,157	)	$	(29,357	)
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:
In-process research and development		10,286			—
Depreciation and amortization		4,239			4,125
Other		206			77
Changes in operating assets and liabilities:
Investment in and advances to BioMarin/Genzyme LLC		(1,211	)		(1,539	)
Other current assets		2,769			108
Other assets		(350	)		(725	)
Accounts payable and accrued liabilities		(2,498	)		8,193
Other current liabilities		1,150			(195	)

Net cash used in continuing operations		(26,566	)		(19,313	)
Net cash provided by discontinued operations		53			140

Net cash used in operating activities		(26,513	)		(19,173	)

Cash flows from investing activities:
Purchase of property and equipment		(3,858	)		(772	)
Proceeds from sale of equipment		—			28
Purchase of Synapse Technologies, Inc.		(1,028	)		—
Sale of short-term investments		117,934			50,066
Purchase of short-term investments		(80,302	)		(54,447	)

Net cash provided by (used in) investing activities		32,746			(5,125	)

Cash flow from financing activities:
Net proceeds from public offering of common stock		—			80,530
Net proceeds from sale of common stock to Acqua Wellington		—			7,950
Net proceeds from convertible debt offering		—			120,900
Proceeds from exercise of stock options		487			3,661
Proceeds from notes payable		894			—
Repayment of notes payable and capital lease obligations		(899	)		(1,123	)
Issuance of common stock for ESPP, and other		149			467

Net cash provided by financing activities		631			212,385

Effect of foreign currency translation on cash		(29	)		47
Net increase in cash		6,835			188,134
Cash and cash equivalents:
Beginning of period		12,528			33,638

End of period	$	19,363		$	221,772

See accompanying notes to consolidated financial statements.

BioMarin Pharmaceutical Inc. and Subsidiaries

Notes To Consolidated Financial Statements
June 30, 2003
(Unaudited)

(1) NATURE OF OPERATIONS AND BUSINESS RISKS

BioMarin Pharmaceutical Inc. (the Company or BioMarin) is a biopharmaceutical company specializing in the development of enzyme therapies to treat serious life-threatening diseases and conditions. 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 and commercial manufacturing, and related administrative activities. The Company and its joint venture partner, Genzyme Corporation (Genzyme), received marketing approval for Aldurazyme® (laronidase) in the United States on April 30, 2003 and in the European Union on June 11, 2003. Prior to 2003, the Company was considered a development stage company. The Company is incorporated in the state of Delaware.

Through June 30, 2003, the Company had accumulated losses of approximately $254.4 million. Based on current plans, management expects to incur further losses for the foreseeable future. Management believes that the Company’s cash, cash equivalents, and short-term investments at June 30, 2003 will be sufficient to meet the Company’s obligations through the end of 2005. Until the Company can generate sufficient levels of cash from its operations, the Company expects to continue to finance future cash needs primarily through proceeds from equity or debt financing, equipment loans and collaborative agreements with corporate partners.

The Company is subject to a number of risks, including: its ability to successfully commercialize Aldurazyme; the uncertainty of the Company’s research and development efforts resulting in successful commercial products; obtaining regulatory approval for such products; access to adequate insurance coverage; reliance on the proprietary technology of others; the possible need for additional financing; dependence on key personnel; uncertain patent protection; significant competition from larger organizations; dependence on corporate partners and collaborators; and possible restrictions on reimbursement, as well as other changes in the healthcare industry.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



	(a) Basis of Presentation

These unaudited consolidated financial statements include the accounts of BioMarin and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated. These unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the SEC requirements for interim reporting. 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.

Operating results for the three and six months ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. These consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto for the year ended December 31, 2002 included in the Company’s Annual Report on Form 10-K.



	(b) Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America 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.



	(c) Investment In and Advances to BioMarin/Genzyme LLC and Equity in the Loss of BioMarin/Genzyme LLC

Under the Aldurazyme joint venture agreement with Genzyme, the Company and Genzyme each provide 50% of the funding for the joint venture. All manufacturing, research and development, sales and marketing, and other services 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. Accordingly, the Company records an increase in its investment for contributions to the joint venture, and a reduction in its investment for its 50% share of the loss of the joint venture. Equity in the loss of BioMarin/Genzyme LLC includes the Company’s 50% share of the joint venture’s loss for the period. The investment in and advances to BioMarin/Genzyme LLC includes the current receivable from the joint venture for the reimbursement related to services provided to the joint venture by the Company during the most recent month.

See Note 6(b) for discussion of the Company’s change in presentation of the joint venture results of operations.



	(d) Accounts Payable and Accrued Liabilities



	Accounts payable and accrued liabilities consist of the following (in thousands):


	December 31, 2002		June 30, 2003
Accounts payable	$	141	$	4,273
Accrued liabilities		2,701		6,426
Accrued vacation		814		964
Accrued payroll and benefits		274		460

	$	3,930	$	12,123



	(e) Net Loss Per Share

Net loss per share is calculated by dividing net loss by the weighted average shares of common stock outstanding during the period. Diluted net loss per share is calculated by dividing net loss by the weighted average shares of common stock outstanding and potential shares of common stock during the period. Potential shares of common stock include dilutive stock issuable upon the exercise of outstanding common stock options, warrants, convertible debt and contingent issuances of common stock. For all periods presented, such potential shares of common stock were excluded from the computation of diluted net loss per share, as their effect is antidilutive.

Potentially dilutive securities include (in thousands):


	June 30,
	2002	2003
Options to purchase common stock	7,753	7,569
Common stock issuable under convertible debt	—	8,920
Warrants to purchase common stock	780	780

Total	8,533	17,269



	(f) Milestone Revenue

Milestone revenue is recognized in full when the related substantive milestone performance goal is achieved. Milestone revenue is typically not recurring in nature.



	(g) Stock Option Plans

The Company has three stock-based compensation plans. The Company accounts for those plans under APB Opinion No. 25, Accounting for Stock Issued to Employees, whereby no stock-based compensation cost is reflected in net loss for options issued to employees with exercise prices at or above the market price on the date of issuance. The following table illustrates the effect on net loss and net loss per share as if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), to stock-based compensation (in thousands).


	Three Months ended June 30,						Six Months ended June 30,
	2002			2003			2002			2003
Net loss as reported	$	(14,411	)	$	(9,097	)	$	(41,014	)	$	(28,780	)
Deduct: Total stock-based compensation expense determined under fair value based method for all awards		(4,088	)		(3,455	)		(7,310	)		(6,740	)

Pro forma net loss	$	(18,499	)	$	(12,552	)	$	(48,324	)	$	(35,520	)

Net loss per share as reported, basic and diluted	$	(0.27	)	$	(0.14	)	$	(0.77	)	$	(0.48	)
Pro forma net loss per share, basic and diluted		(0.35	)		(0.20	)		(0.91	)		(0.59	)

The Company recognizes as an expense the fair value of options granted to nonemployees and nondirectors.



	(h) Recent Accounting Pronouncements

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (SFAS 149). SFAS 149 has not had an impact on the Company’s consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (SFAS 150). SFAS 150 has not had an impact on the Company’s consolidated financial statements.



	(i) Reclassifications

Certain items in the 2002 consolidated financial statements have been reclassified to conform to the 2003 presentation. See Note 6(b) for discussion of the Company’s joint venture presentation changes.

(3) STOCKHOLDERS’ EQUITY

In 2001, the Company signed an agreement with Acqua Wellington for an equity investment in the Company. Under the terms of the agreement, the Company has the option to request that Acqua Wellington invest in the Company through sales of registered common stock at a small discount to market price, subject to certain conditions. As of June 30, 2003, the Company may request a maximum additional aggregate investment of the lesser of $7.2 million or 389,990 shares, dependent upon the purchase price per share. Under this agreement, Acqua Wellington may also purchase stock and receive similar terms of any other equity financing by the Company. This agreement terminates on October 15, 2003. During the first and second quarters of 2003, Acqua Wellington purchased 500,000 and 265,816 shares for $5.0 and $3.0 million, respectively, net of issuance costs.

In June 2003, the Company amended its articles of incorporation to increase the number of authorized shares of common stock from 75 million shares to 150 million shares.



(4)	CONVERTIBLE DEBT

On June 23, 2003, in a private placement to qualified institutional investors, the Company sold $125 million of convertible debt due on June 15, 2008. The debt was issued at face value and bears interest at the rate of 3.5% per annum, payable semi-annually in cash. The debt is convertible, at the option of the holder, at any time prior to maturity or redemption, into shares of Company common stock at a conversion price of approximately $14.01 per share, subject to adjustment in certain circumstances. On or after June 20, 2006, the Company may, at its option, redeem the notes, in whole or in part, at predetermined prices, plus any accrued and unpaid interest to the redemption date.

In connection with the placement of the debt, the Company paid approximately $4.1 million in issue costs, which have been deferred and are included in other assets. They are being amortized as interest expense over the life of the debt.



(5)	MILESTONE REVENUE

During May 2003, the Company received $12.1 million from Genzyme for the one-time milestone payment related to the marketing approval of Aldurazyme. The milestone payment is included as revenue in the accompanying consolidated statements of operations.



(6)	JOINT VENTURE



	(a)	Joint Venture Financial Data

For the three and six months ended June 30, 2003, the results of the joint venture’s operations were as follows (in thousands):


	Three Months ended June 30,						Six Months ended June 30,
	2002			2003			2002			2003
Revenue	$	—		$	1,117		$	—		$	1,450
Cost of goods sold		—			179			—			179

Gross margin		—			938			—			1,271
Operating expenses		5,574			9,922			11,289			17,616

Loss from operations		(5,574	)		(8,984	)		(11,289	)		(16,345	)
Other income		40			15			70			38

Net loss		(5,534	)		(8,969	)		(11,219	)		(16,307	)

Differences in basis (1):
Decrease in cost of goods sold		—			179			—			179
Increase in operating expenses		(6,234	)		(1,982	)		(12,727	)		(8,150	)

Adjusted basis net loss	$	(11,768	)	$	(10,772	)	$	(23,946	)	$	(24,278	)

Equity in the loss of BioMarin/Genzyme LLC	$	(5,884	)	$	(5,386	)	$	(11,973	)	$	(12,139	)


	(1)	The difference in basis primarily represents the difference in inventory capitalization policies between the joint venture and the Company. The Company began capitalizing Aldurazyme inventory costs in May 2003 after United States regulatory approval was obtained. The joint venture began capitalizing Aldurazyme inventory costs in January 2002 when inventory



	production for commercial sale began. The difference in inventory capitalization policies resulted in greater operating expense recognized by the Company prior to regulatory approval compared to the joint venture and will result in less cost of goods sold recognized by the Company when the previously expensed product is sold by the joint venture. The adjustment will be eliminated when all of the product produced prior to obtaining regulatory approval has been sold.

At December 31, 2002 and June 30, 2003, the summarized assets and liabilities of the joint venture are as follows (in thousands):


	December 31, 2002			June 30, 2003
Assets	$	27,929		$	41,597
Liabilities		(5,007	)		(7,662	)

Net equity		22,922			33,935

Difference in basis (see (1) above)		(17,286	)		(25,259	)

Adjusted basis net equity	$	5,636		$	8,676

50% share of net equity	$	2,818		$	4,338
Due from BioMarin/Genzyme LLC		2,137			2,156

Investment in and advances to BioMarin/Genzyme LLC	$	4,955		$	6,494


	(b)	Change in Joint Venture Presentation on the Consolidated Statements of Operations

With the commercial launch of Aldurazyme during the second quarter of 2003, the Company changed its presentation of the results of operations of the joint venture under the equity method. Previously, the Company recorded revenue to the extent that the services performed by the Company on behalf of the joint venture were funded by Genzyme. Costs incurred by the Company on behalf of the joint venture were recorded as operating expenses in the consolidated statements of operations. Equity in the loss of BioMarin/Genzyme LLC previously represented 50% of the joint venture net loss that related to costs not incurred by the Company on behalf of the joint venture.

In the new presentation on the consolidated statements of operations, the equity in the loss of BioMarin/Genzyme LLC represents the Company’s 50% share of the joint venture’s net loss. Costs incurred by the Company on behalf of the joint venture are included in the financial statements of the joint venture. This change in presentation had no effect on the Company’s loss from operations or net loss for all periods presented. Both the prior presentation and the new presentation are acceptable under the equity method of accounting.

The Company’s consolidated statements of operations for prior periods have been reclassified to conform to the new presentation. The following table shows the previously presented results of operations of the Company and the current presentation for the three and six months ended June 30, 2002 (in thousands):


	Three Months Ended June 30, 2002
	Prior Presentation			Reclassifications			New Presentation
Revenue from BioMarin/Genzyme LLC	$	3,423		$	(3,423	)	$	—
Operating expenses:
Research and development		13,336			(6,721	)		6,615
General and administrative		3,062			(125	)		2,937
Equity in the loss of BioMarin/Genzyme LLC		2,461			3,423			5,884

Total operating expenses		18,859			(3,423	)		15,436

Loss from operations	$	(15,436	)	$	—		$	(15,436	)


	Six Months Ended June 30, 2002
	Prior Presentation			Reclassifications			New Presentation
Revenue from BioMarin/Genzyme LLC	$	7,215		$	(7,215	)	$	—
Operating expenses:
Research and development		26,554			(14,186	)		12,368
General and administrative		6,988			(243	)		6,745
Equity in the loss of BioMarin/Genzyme LLC		4,759			7,214			11,973
In-process research and development		11,223			—			11,223

Total operating expenses		49,524			(7,215	)		42,309

Loss from operations	$	(42,309	)	$	—		$	(42,309	)


	(c)	Discussion of Joint Venture Results of Operations

See Management’s Discussion and Analysis of Financial Condition and Results of Operations for the three and six months ended June 30, 2003 and 2002 for discussion of the results of operations of BioMarin/Genzyme LLC.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Form 10-Q contains “forward-looking statements” as defined under securities laws. Many of these statements can 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 Quarterly Report on Form 10-Q. 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 Form 10-Q. You should carefully consider that information before you make an investment decision.

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, as well as other critical care situations such as cardiovascular surgery and serious burns. Our first commercial product and our product candidates address markets for which no products are currently available or where current products have been associated with major deficiencies.

Our first product, Aldurazyme^® (laronidase), has been approved for marketing in the United States by the United States Food and Drug Administration (FDA), in the European Union by the European Medicines Evaluation Agency (EMEA) and other countries 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. As the first drug ever approved for MPS I, Aldurazyme has been granted orphan drug status in the United States and the European Union, which gives Aldurazyme seven years of market exclusivity in the United States and ten years of market exclusivity in the European Union for (alpha)-L-iduronidase for the treatment of MPS I. We have developed Aldurazyme through a joint venture with Genzyme Corporation (Genzyme).

We are developing our second product candidate, Neutralase™, for reversal of anticoagulation by heparin. Heparin is a carbohydrate drug commonly used as an anticoagulant in a range of surgical procedures such as coronary artery bypass graft (CABG) surgery and angioplasty. Neutralase is a carbohydrate-modifying enzyme that cleaves heparin, allowing coagulation of blood and potentially aiding patient recovery following surgery. We believe that Neutralase has the potential to address a broad market with multiple potential medical indications. Our first target indication for Neutralase is for the reversal of anticoagulation by heparin in CABG surgery. We began enrolling patients in the first of two Phase 3 trials of Neutralase for the reversal of heparin in CABG surgery in February 2003 and we anticipate that this trial will be completed in the first quarter of 2004. If the trial is successful, we expect to initiate the second Phase 3 trial. We also plan to evaluate Neutralase in interventional cardiology procedures such as angioplasty, and in other procedures such as hip and knee surgeries, where heparin or heparin-like anticoagulants such as Lovenox^® (a low molecular weight heparin) or Arixtra^® (a pentasacharride) are used. We have retained all worldwide commercial rights to Neutralase.

In addition to Aldurazyme and Neutralase, we are developing other enzyme-based therapeutics for the treatment of a variety of diseases and conditions. In March 2002, we began a Phase 2 trial of

Aryplase™ for the treatment of mucopolysaccharidosis VI (MPS VI), another seriously debilitating genetic disease for which no drug treatment currently exists. The six-month treatment phase of the Phase 2 trial ended in January 2003, and we announced positive data from this trial in March 2003. Patients from the Phase 2 trial and the previous Phase 1 trial are continuing to receive Aryplase as part of an extension phase of the trials. We began enrolling patients in a Phase 3 clinical trial of Aryplase in July 2003. We have received orphan drug designation for Aryplase in the United States and the European Union. We also are developing Vibrilase™, 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 this product in the United Kingdom in the second quarter of 2002 and we expect to complete this trial in 2003. In addition, we are pursuing preclinical development of several other enzyme product candidates for genetic and other diseases. We have retained all worldwide commercial rights to all of our product candidates.

Results of Operations

With the commercial launch of Aldurazyme during the second quarter of 2003, we changed our presentation of the results of operations of the Aldurazyme joint venture under the equity method of accounting. Previously, we recorded revenue to the extent that the services performed by us on behalf of the joint venture were funded by Genzyme. Costs incurred by us on behalf of the joint venture were recorded as operating expenses in the consolidated statements of operations. Equity in the loss of BioMarin/Genzyme LLC previously represented 50% of the joint venture net loss that related to costs not incurred by the Company on behalf of the joint venture.

In the new presentation of our consolidated statements of operations, the equity in the loss of BioMarin/Genzyme LLC represents our 50% share of the joint venture’s net loss. Costs incurred by us on behalf of the joint venture are included in the financial statements of the joint venture and are not directly reflected in our operating expenses. This change in presentation had no effect on our loss from operations or net loss for all periods presented. Both the prior presentation and the new presentation are acceptable under the equity method of accounting. See Note 6(b) of the accompanying consolidated financial statements for further discussion of this change.

All of the activities related to the manufacture, distribution and sale of Aldurazyme are reported in the results of the joint venture. Because of this change in presentation, we have divided our discussion of the Results of Operations into two sections, BioMarin and BioMarin/Genzyme LLC. The discussion of the joint venture’s operations include the total amounts for the joint venture, not just our 50% interest in the operations.

Quarters Ended June 30, 2003 and 2002

BioMarin

Our net loss for the second quarter of 2003 as compared to the second quarter of 2002 decreased from $14.4 million to $9.1 million. The decrease was the result of a one-time, $12.1 million milestone payment received from Genzyme, partially offset by increased research and development expenses and general and administrative expenses. Milestone revenue in the second quarter of 2003 represents the $12.1 million milestone payment received from Genzyme related to the FDA marketing approval of Aldurazyme.

Research and development expenses in the second quarter of 2003 increased by $5.1 million to $11.7 million from $6.6 million in the second quarter of 2002. The major factors causing the increase include $2.5 million of costs associated with the Neutralase Phase 3 clinical trial, $1.1 million for manufacturing costs of Neutralase, $0.5 million of increased costs associated with the Aryplase clinical trials, and $0.6 million of quality control costs.

General and administrative expenses increased to $4.5 million in the second quarter of 2003 from $2.9 million in the second quarter of 2002. The major factors for the increase include $0.4 million of facility costs, $0.3 million of recruiting and relocation fees, $0.3 million of commercial planning costs and $0.2 million of increased insurance costs.

Equity in the loss of BioMarin/Genzyme LLC was $5.4 million in the second quarter of 2003 compared to $5.9 million in the second quarter of 2002. The decrease in the loss primarily resulted from the margin generated by Aldurazyme sales during the second quarter of 2003 and the capitalization of inventory upon the regulatory approval of Aldurazyme.

Interest income decreased to $0.6 million in the second quarter of 2003 from $1.0 million in the second quarter of 2002 primarily due to the decrease in available interest rates. The convertible debt offering that we completed on June 23, 2003, had little effect on interest income during the second quarter of 2003.

Interest expense was $213,000 and $161,000 in the second quarter of 2003 and the second quarter of 2002, respectively. The increase is due to accrued interest expense from June 23 through June 30, 2003 on the convertible debt. Based on the currently outstanding amount of convertible debt, we expect to incur $1.1 million of interest expense per quarter related to the convertible debt.

Income from discontinued operations in the second quarter of 2002 represents net receipts from the Glyko, Inc. analytics business.

BioMarin/Genzyme LLC

The discussion below gives effect to the inventory capitalization policy that we use for inventory held by the joint venture, which is different from the joint venture’s inventory capitalization policy. We began capitalizing Aldurazyme inventory costs in May 2003 after United States regulatory approval was obtained. The joint venture began capitalizing Aldurazyme inventory costs in January 2002 when inventory production for commercial sale began. The difference in inventory capitalization policies, as presented below, results in a greater operating expense realized by us prior to regulatory approval, and lower cost of goods sold and higher gross margins realized by us as the previously expensed product is sold by the joint venture. This adjustment will be eliminated when all of the product produced prior to regulatory approval has been sold. See Note 6(b) of the accompanying consolidated financial statements for further discussion of the difference in inventory cost basis between us and the joint venture.

We and our joint venture partner, Genzyme, received marketing approval for Aldurazyme in the United States on April 30, 2003, and in the European Union on June 11, 2003. We have subsequently received marketing approval in other countries. Aldurazyme was launched commercially in May 2003 in the United States and in June 2003 in the European Union. The joint venture recognized $1.1 million of revenue during the second quarter of 2003. Gross margin for the second quarter of 2003 was $1.1 million since all product sold was previously expensed. BioMarin/Genzyme LLC recognized no revenue during 2002.

Operating expenses of BioMarin/Genzyme LLC totaled $11.9 million for the second quarter of 2003, including $5.0 million of sales and marketing expenses associated with the commercial launch of Aldurazyme and $5.6 million of research and development costs. Research and development of the joint venture included $2.0 million of Aldurazyme production before regulatory approval was obtained and $3.6 million of costs associated with the ongoing clinical trials and continued research and development efforts.

Operating expenses of the joint venture for the second quarter of 2002 totaled $11.8 million including $1.4 million of sales and marketing expenses related to the commercialization of Aldurazyme and $9.9 million of research and development. Research and development of the joint venture included $6.2 million for the production of Aldurazyme and $3.7 million of clinical trial costs. Research and development decreased in the second quarter of 2003 compared to the second quarter of 2002 due to the capitalization of inventory in May 2003 after regulatory approval was obtained. Sales and marketing expenses increased in the second quarter of 2003 due to increased commercialization activities in preparation for the Aldurazyme commercial launch.

Six Months Ended June 30, 2003 and 2002

BioMarin

Our net loss for the first half of 2003 as compared to the first half of 2002 decreased from $41.0 million to $28.8 million. The decrease was the result of a one-time, $12.1 million milestone payment received from Genzyme, partially offset by increased research and development expenses and general and administrative expenses. Milestone revenue in the first half of 2003 represents the $12.1 million milestone payment received from Genzyme related to the FDA marketing approval of Aldurazyme.

Research and development expenses in the first half of 2003 increased by $10.3 million to $22.7 million from $12.4 million in the first half of 2002. The major factors causing the increase include $5.0 million for manufacturing costs of Neutralase, $2.8 million of costs associated with the Neutralase Phase 3 clinical trial, $0.5 million of increased costs associated with the Aryplase clinical trials, $0.6 million of quality control costs and $0.3 million of costs related to our preclinical programs.

General and administrative expenses increased to $7.3 million in the first half of 2003 from $6.7 million in the first half of 2002. Included in the expenses for the first half of 2002 are reorganization costs associated with the acquisition of Glyko Biomedical Ltd. of $0.8 million and other compensation costs associated with the termination of a former officer of $0.3 million. After adjusting for these one-time charges in 2002, the major factors causing the increase in general and administrative expenses for 2003 include $0.4 million of facility costs, $0.3 million of recruiting and relocation fees, $0.3 million of commercial planning costs, $0.2 million of increased insurance costs and higher overall compensation expense in the first half of 2003.

In-process research and development expense of $11.2 million in the first half of 2002 represents the purchase price of all of the outstanding stock of Synapse Technologies, Inc. (Synapse) in March 2002 plus related expenses.

Equity in the loss of BioMarin/Genzyme LLC was $12.1 million in the first half of 2003 compared to $12.0 million in the first half of 2002. The increase is due principally to sales and marketing expenses incurred by the joint venture for the commercial launch of Aldurazyme offset by the margin generated by Aldurazyme sales in the first half of 2003 and the capitalization of inventory upon the regulatory approval of Aldurazyme.

Interest income decreased to $1.0 million in the first half of 2003 from $1.4 million in the first half of 2002 primarily due to the decrease in available interest rates. The convertible debt offering that we completed on June 23, 2003, had little effect on interest income during the first half of 2003.

Interest expense was $343,000 and $252,000 in the first half of 2003 and 2002, respectively. The increase is due to accrued interest expense from June 23 through June 30, 2003 on the convertible debt. Based on the currently outstanding amount of convertible debt, we expect to incur $1.1 million of interest expense per quarter related to the convertible debt.

Income from discontinued operations in the first half of 2002 represents net receipts from the Glyko, Inc. analytics business subsequent to the decision to discontinue this business.

Gain from disposal of discontinued operations in the first half of 2003 of $0.6 million represents proceeds from the sale of Glyko, Inc. assets. In January 2003, we sold certain assets of Glyko, Inc. to a third party for a total sales price of up to $1.5 million. The sales price was comprised of cash totaling $0.2 million, a note receivable payable in quarterly installments through 2006 totaling $0.5 million and quarterly royalties based upon future sales of certain Glyko, Inc. products through 2008 up to a maximum of $0.8 million. The proceeds from the sale of the Glyko, Inc. assets, including the discounted note receivable of $0.4 million, was recorded as a gain from discontinued operations in the first quarter of 2003, net of transaction costs, and the royalties will be recorded when earned. The loss from disposal of discontinued

operations in the first half of 2002 of $0.2 million represents the Glyko, Inc. closure expense.

BioMarin/Genzyme LLC

We and our joint venture partner, Genzyme, received marketing approval for Aldurazyme in the United States on April 30, 2003, and in the European Union on June 11, 2003. We have subsequently received marketing approval in other countries. Aldurazyme was launched commercially in May 2003 in the United States and in June 2003 in the European Union. The joint venture recognized $1.5 million of revenue during the first half of 2003. Gross margin for the first half of 2003 was $1.5 million since all product sold was previously expensed. BioMarin/Genzyme LLC recognized no revenue during 2002.

Operating expenses of BioMarin/Genzyme LLC totaled $25.8 million for the first half of 2003, including $8.1 million of sales and marketing expenses associated with the commercial launch of Aldurazyme and $15.3 million of research and development costs. Research and development of the joint venture for the first half of 2003 included $8.2 million of costs associated with production of Aldurazyme prior to regulatory approval and $7.1 million of costs associated with the ongoing clinical trials and continued research and development efforts.

Operating expenses of the joint venture for the first half of 2002 totaled $24.0 million including $2.0 million of sales and marketing expenses related to the commercialization of Aldurazyme and $21.2 million of research and development expenses. Research and development of the joint venture for the first half of 2002 included $12.7 million of costs associated with the production of Aldurazyme and $8.5 million of clinical trial costs and research and development activities. Research and development decreased in the first half of 2003 compared to the first half of 2002 due to the capitalization of inventory in May 2003 after regulatory approval was obtained. Sales and marketing expenses increased in the first half of 2003 due to increased commercialization activities in preparation for the Aldurazyme commercial launch.

Liquidity and Capital Resources

We have financed our operations by the issuance of common stock, convertible debt, equipment financing and the related interest income earned on cash balances available for short-term investment. During the first half of 2003, we raised net proceeds of $80.5 million from a public offering of our common stock, $8.0 million from the sale of our common stock to Acqua Wellington in February, March and April and net proceeds of $120.9 million from a convertible debt offering in June.

As of June 30, 2003, our combined cash, cash equivalents and short-term investments totaled $266.4 million, an increase of $192.4 million from $74.0 million at December 31, 2002. The primary uses of cash during the six months ended June 30, 2003 were to finance operations and fund the joint venture with Genzyme. The primary sources of cash during the first half of 2003 were net proceeds from the public stock offering completed in February of $80.5 million, net proceeds from the Acqua Wellington equity financings of $8.0 million in February, March and April, the milestone payment from Genzyme of $12.1 million, net proceeds from the convertible debt offering of $120.9 million in June and the issuance of common stock pursuant to the exercise of stock options under our stock compensation plans of approximately $3.7 million.

For the six months ended June 30, 2003, our research and development expense of $22.7 million was allocated $10.1 million to Neutralase, $7.4 million to Aryplase, $0.4 million to Vibrilase and $4.8 million to research and development costs not allocated to specific major projects.

In the quarter ended June 30, 2003, our research and development expense of $11.7 million was allocated $4.9 million to Neutralase, $4.2 million to Aryplase, $0.2 million to Vibrilase and $2.4 million to research and development costs not allocated to specific major projects.

We expect to fund our operations with our cash, cash equivalents and short-term investments and supplement our cash, cash equivalents and short-term investments through proceeds from equity or debt financing, equipment loans or collaborative agreements with corporate partners. We expect our current funds, including the proceeds from our recently completed public offering, convertible debt offering and the milestone payment from Genzyme, to meet our operating and capital requirements through the end of 2005.

We do not expect to generate positive cash flow from operations for the foreseeable future because we expect to continue to incur operational expenses and continue our research and development activities, including:

•		preclinical studies and clinical trials;
•		process development, including quality systems for product manufacture;
•		regulatory processes in the United States and international jurisdictions;
•		clinical and commercial scale manufacturing capabilities; and
•		expansion of sales and marketing activities.

We also expect to incur costs related to increased marketing and manufacturing of Aldurazyme to satisfy the product demands associated with its commercial launch.

Our $125 million of 3.5% convertible debt will impact our liquidity due to the semi-annual cash interest payments and the repayment of the notes in 2008. Should we redeem the debt after June 2006, at our option according to the debt terms, we will be subject to premiums upon redemption ranging from 0.7% to 1.4%, dependent upon the time the debt is redeemed. We also must repay the debt if there is a qualifying change in control or termination of trading of our common stock, each according to the debt terms.

We expect that the proceeds from equity or debt financing, equipment loans or collaborative agreements will be used to fund operating costs, capital expenditures and working capital requirements, which may include costs associated with the commercialization of Aldurazyme; additional clinical trials and the manufacturing of Aryplase and Neutralase; preclinical studies and clinical trials for our other product candidates; potential licenses and other acquisitions of complementary technologies, products and companies; general corporate purposes; and working capital.

We plan to continue our policy of investing available funds in government and other investment grade, interest-bearing securities. We do not invest in derivative financial instruments. There are two current arrangements that are available to provide us with additional sources of financing in the future:

•

In 2001, we signed an agreement with Acqua Wellington for an equity investment in us. Under this agreement, we have the option to request that Acqua Wellington invest in us through sales of registered common stock at a small discount to market price, subject to certain conditions. This agreement terminates on October 15, 2003. Under this agreement, Acqua Wellington may also purchase stock and receive similar terms of any other equity financing by us. During the first half of 2003, Acqua Wellington purchased a total of $8.0 million of our common stock, net of issuance costs. At June 30, 2003, we may request a maximum additional aggregate investment of the lesser of $7.2 million or 389,990 shares, dependent upon the purchase price per share.

•

We have entered into several agreements for loans secured by certain equipment with an aggregate outstanding balance totaling $4.7 million at June 30, 2003. The notes bear interest ranging from 8.06% to 9.33% and are secured by certain manufacturing and laboratory equipment. Additionally, the agreements have covenants that require us to maintain a minimum unrestricted cash balance of $35 million. Should the unrestricted cash balance fall below $35 million, we can either provide the lender with an irrevocable letter of credit for the amount of the total notes outstanding or repay the notes with prepayment penalties. We expect to enter into similar facilities as we acquire additional equipment and expand our operations.

We anticipate a need for additional financing to fund our future operations, including the commercialization of our drug products currently under development. We cannot provide assurance 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:

•		our ability to successfully commercialize Aldurazyme;
•		the progress, timing and scope of our preclinical studies and clinical trials;
•		the time and cost necessary to obtain regulatory approvals;
•		the time and cost necessary to develop commercial manufacturing processes, including quality systems and to build or acquire manufacturing capabilities;
•		the time and cost necessary to respond to technological and market developments;
•		any changes made to 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; and
•		Whether our convertible debt is converted to common stock in the future.

We have contractual and commercial obligations under our debt, operating and capital leases and other commitments related to research and development activities, licenses and sales royalties with annual minimums. Information about these commitments as of June 30, 2003 is presented in the table below (in thousands).


	Payments Due by Period
	Total		Remainder of 2003		2004		2005-2006		2007-2008		Thereafter
Equipment loans	$	4,702	$	1,344	$	2,704	$	654	$	—		—
Operating leases		30,945		1,570		3,881		7,303		6,991		11,200
Capital leases		68		43		25		—		—		—
Research and development and license commitments		2,928		2,123		805		—		—		—
Convertible debt and related interest		146,790		2,285		4,375		8,750		131,380		—
Annual royalty commitments		1,775		125		330		660		660		—

Total	$	187,208	$	7,490	$	12,120	$	17,367	$	139,031		11,200

We are also subject to contingent payments totaling approximately $14.2 million upon achievement of certain regulatory and licensing milestones if they occur before certain dates in the future.

Critical Accounting Policies

Equity in the loss of BioMarin/Genzyme LLC

We account for our investment in the joint venture using the equity method. Accordingly, we record an increase in our investment for contributions to the joint venture, and a reduction in our investment for our 50% share of the loss of the joint venture. Equity in the loss of BioMarin/Genzyme LLC includes our 50% share of the joint venture’s loss for the period. The investment in and advances to BioMarin/Genzyme LLC also includes the current receivable from the joint venture for the reimbursement related to services provided to the joint venture by us. See Note 6(b) of the accompanying consolidated financial statements for discussion of our change in presentation of the joint venture results of operations.

Impairment of Long-Lived Assets

We regularly review long-lived assets and identifiable intangibles. 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. 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 $108.5 million at December 31, 2002. Future taxable income and ongoing prudent and feasible tax planning strategies have been considered in assessing the need for the valuation allowance. An adjustment to the valuation allowance would increase or decrease income in the period such adjustment was made.

Research and Development

Research and development expenses include: expenses associated with contract research and development provided by third parties; manufacturing, clinical and regulatory costs; and internal research and development costs. All research and development costs are expensed as incurred. Inventory costs for product candidates are expensed until regulatory approval is obtained, at which time inventory is capitalized at the lower of cost or market value.

Stock Option Plans

We have three stock-based compensation plans. We account for those plans under APB Opinion No. 25, Accounting for Stock Issued to Employees whereby generally no stock-based compensation cost is reflected in our net loss for options issued to employees with exercise prices at or above the market price on the date of issuance. We recognize as an expense the fair value of options granted to nonemployees and nondirectors.

FACTORS THAT MAY AFFECT FUTURE RESULTS

An investment in our securities involves a high degree of risk. We operate in a dynamic and rapidly changing industry that involves 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 securities 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.

Since we began operations in March 1997, we have been engaged primarily in research and development and have operated at a net loss for the entire time. Our first product, Aldurazyme, was only recently approved for commercial sale in the United States and the European Union and has only generated nominal sales revenue to date. We have no sales revenues from our product candidates. As of June 30, 2003, we had an accumulated deficit of approximately $254.4 million. We expect to continue to operate at a net loss for the foreseeable future. Our future profitability depends on the successful commercialization of Aldurazyme by our joint venture partner, Genzyme, and 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 may be unable to raise additional financing when needed due to a variety of factors, including our financial condition, the status of our product programs, and the general condition of the financial markets. If we fail to raise additional financing as we need such funds, 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:

•		our ability to successfully commercialize Aldurazyme;
•		the progress, timing and scope of our preclinical studies and clinical trials;
•		the time and cost necessary to obtain regulatory approvals;
•		the time and cost necessary to develop commercial manufacturing processes, including quality systems and to build or acquire manufacturing capabilities;
•		the time and cost necessary to respond to technological and market developments; and
•		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 due to the payment of interest on our convertible debt and because we may enter into:

•		additional leases for new facilities and capital equipment;
•		additional licenses and collaborative agreements;
•		additional contracts for consulting, maintenance and administrative services;
•		additional contracts for product manufacturing; and
•		additional asset-based financing facilities.

We believe that our cash, cash equivalents and short-term investment securities balances at June 30, 2003, will be sufficient to meet our operating and capital requirements through the end of 2005. 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.

If we fail to obtain or maintain regulatory approval to commercially manufacture or sell our future drug products, or if approval is delayed, we will be unable to generate revenue from the sale of these 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 United States and in foreign jurisdictions. In the United States, we must obtain FDA approval for each drug that we intend to commercialize. The FDA approval process is typically lengthy and expensive, and approval is never certain. Products distributed abroad are also subject to foreign government regulation. Only one of our drug products has received regulatory approval to be commercially marketed and sold in the United States and the European Union. If we fail to obtain regulatory approval for our other drugs, we will be unable to market and sell those 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. After any of our products receive regulatory approval, they remain subject to ongoing FDA regulation, including, for example, changes to the product labeling, new or revised regulatory requirements for manufacturing practices, reporting adverse reactions and other information, and product recall. The FDA can withdraw a product’s approval under some circumstances, such as the failure to comply with existing or future regulatory requirements, or unexpected safety issues. If regulatory approval is delayed, or withdrawn, our management’s credibility, 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 these products, 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:

•		slow or insufficient patient enrollment;
•		slow recruitment of, and completion of necessary institutional approvals at, clinical sites;
•		longer treatment time required to demonstrate efficacy;
•		lack of sufficient supplies of the product candidate;
•		adverse medical events or side effects in treated patients;
•		lack of effectiveness of the product candidate being tested; and
•		regulatory requests for additional clinical trials.

Typically, if a drug product is intended to treat a chronic disease, as is the case with some 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.

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.

Aryplase has obtained fast track designation, which provides certain advantageous procedures and guidelines with respect to the review by the FDA of the Common Technical Document (CTD) for this product and which may result in our receipt of an initial response from the FDA earlier than would be received if this product had not received a fast track designation. However, these procedures and guidelines do not guarantee that the total review process will be faster or that approval will be obtained, if at all, earlier than would be the case if the product had not received fast track designation. If the review process or approval for Aryplase is delayed, realizing revenue from the sale of Aryplase will be delayed and the capital necessary to fund this program 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 facilities and processes. 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 facility compliance, 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 and our Galli Drive facility has been approved by the FDA and the EMEA for the commercial manufacture of Aldurazyme.

Due to the complexity of the processes used to manufacture our products, we may be unable to pass federal or international regulatory inspections in a cost effective manner. For the same reason, any potential third party manufacturer of our drug products may be unable to comply with cGMP regulations in a cost effective manner. If we are unable to comply with manufacturing regulations, we will not be able to sell our products.

If we fail to obtain or maintain 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. Orphan drug exclusive marketing rights may be lost if the FDA later determines that the request for designation was materially defective, or if the manufacturer is unable to assure sufficient quantity of the drug. 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 some of our drug products is particularly limited, orphan drug designation is particularly important for our products that are eligible for orphan drug designation. For eligible drugs, 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 that 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, due to the uncertainties associated with developing pharmaceutical products, we may not be the first to obtain marketing approval

for any orphan indication. Further, even if we obtain orphan drug exclusivity for a product, that exclusivity may not effectively protect the product from competition because different drugs can be approved for the same condition. 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 product programs, 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. Due to the expected costs of treatment for Aldurazyme and Aryplase, we may be unable 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.

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 affected.

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 currently have no expertise obtaining reimbursement. We are relying on the expertise of our joint venture partner Genzyme to obtain reimbursement for the costs of Aldurazyme. 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. For our future products, we will not know what the reimbursement rates will be until we are ready to market the product and we actually negotiate the rates. If we are unable to obtain sufficiently high reimbursement rates, our products may not be commercially viable or our future revenues and gross margins may be adversely affected.

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 affect reimbursement for medical treatment by third-party payers, which may render our products not commercially 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 products 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 products we are developing has existed in the public domain for many years. Other parties have published the structure of the enzymes and compounds, the methods for purifying or producing the enzymes and compounds or the methods of treatment. The composition and genetic sequences of animal and/or human versions of Aldurazyme and many of our product candidates 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 or compounds 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 products or product candidates, including Aldurazyme.

We own or license patents and patent applications related to Aldurazyme and 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:




	•	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.




	•	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.




	•	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 expenses and delay product programs.




	•	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. Due to the number of patents in our field of technology, we cannot be certain 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:




	•	Defending a lawsuit takes significant time and can be very expensive.




	•	If the court decides that our product infringes on the competitor’s patent, we may have to pay substantial damages for past infringement.




	•	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.




	•	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 are adequately protected. 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. These government organizations and universities may be unwilling to grant us any exclusive rights to technology or products derived from these collaborations prior to entering into the relationship.

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 has issued three patents to a third party that relate to (alpha)-L-iduronidase. If we are not able to successfully challenge these patents, we may be prevented from producing Aldurazyme in the United States unless and until we obtain a license.

The United States Patent and Trademark Office has issued three patents to a third party that include composition-of-matter, isolated genomic nucleotide sequences, vectors including the sequences, host cells containing the vectors, and method of use claims for human recombinant (alpha)-L-iduronidase. Our lead drug product, Aldurazyme, is based on human recombinant (alpha)-L-iduronidase. We believe that these patents are invalid or not infringed on a number of grounds. A corresponding patent application was filed in the European Patent Office claiming composition-of-matter for human recombinant (alpha)-L-iduronidase, and it was rejected over prior art and withdrawn and cannot be re-filed. However, corresponding applications are still pending in Canada and Japan, and these applications are being prosecuted by the applicants. We do not know whether any of these applications will issue as patents or the scope of the claims that would issue from these applications. In addition, under United States law, issued patents are entitled to a presumption of validity, and our challenges to the United States patents may be unsuccessful. Even if we are successful, challenging the United States patents may be expensive, require our management to devote significant time to this effort and may adversely impact commercialization of Aldurazyme in the United States.

The holder of the patents described above 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 (or in Canada or Japan, should patents issue in these countries) 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 adversely affect our business and operating results.

If our joint venture with Genzyme were terminated, we could be barred from commercializing Aldurazyme or our ability to successfully 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 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.

Either Genzyme or we 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 party could breach the agreement in the future. Either party may also terminate the agreement upon one-year prior written notice for any reason.

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 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 product inventory and 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 and within our cost parameters, due to the complexity of manufacturing our products we may not 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 if we attempt to increase the scale or size or improve the commercial viability of our manufacturing processes:


	•	design, construction and qualification of manufacturing facilities that meet regulatory requirements;


	•	schedule;


	•	reproducibility;


	•	production yields;


	•	purity;


	•	costs;


	•	quality control and assurance systems;


	•	shortages of qualified personnel; and


	•	compliance with regulatory requirements.

Improvements in manufacturing processes typically are very difficult to achieve and are often very expensive and may require extended periods of time to develop. 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 result in 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. We have contracted with a third party for the manufacture of Neutralase. We expect to use a third party for the manufacture of additional quantities of Neutralase.

We have built-out approximately 54,000 square feet at our Novato facilities for manufacturing capability for Aldurazyme 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 an acceptable cost.

In order to achieve our product cost targets, we must develop efficient manufacturing processes either by:


	•	improving the product yield from our current cell lines, which are colonies of cells that have a common genetic makeup;


	•	improving the manufacturing processes licensed from others; or


	•	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.

In addition, our manufacturing processes subject us to a variety of federal, state and local laws and regulations governing the use, generation, manufacture, storage, handling and disposal of hazardous materials and wastes resulting from their use. We may incur significant costs in complying with these laws and regulations.

Our sole manufacturing facility for Aldurazyme is located near known earthquake fault zones, and the occurrence of an earthquake or other catastrophic disaster could cause damage to our facility and equipment, which could materially impair our ability to manufacture Aldurazyme.

Our Novato, California facility is our only manufacturing facility for Aldurazyme. It is located in the San Francisco Bay area near known earthquake fault zones and is vulnerable to significant damage from earthquakes. We are also vulnerable to damage from other types of disasters, including fires, floods, power loss and similar events. If any disaster were to occur, our ability to manufacture Aldurazyme could be seriously, or potentially completely, impaired, we could incur delays in our commercialization efforts and our revenue from the sale of Aldurazyme could be seriously impaired. The insurance we maintain may not be adequate to cover our losses resulting from disasters or other business interruptions.

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 expand our marketing and distribution 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. We believe that developing an internal sales and distribution capability will be expensive and time consuming. Alternatively, we may enter into agreements with third parties to market our products. For example, under our joint venture with Genzyme, Genzyme is responsible for marketing and distributing Aldurazyme. However, these third parties may not be capable of successfully selling any of our drug products.

Neutralase is 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 develop our own sales and marketing force at all, 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 Aryplase, if our competitors successfully commercialize a product that treats MPS VI before we do, we may effectively be precluded from developing a product to treat that disease because the patient population of the disease is so small. If one of our competitors gets orphan drug exclusivity, we could be precluded from marketing our version for seven years in the United States and ten years in the European Union. However, different drugs can be approved for the same condition. 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 Neutralase and NeuroTrans, and several of our product programs have been developed through licensing or collaborative arrangements, such as Aldurazyme, Aryplase 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 license agreements with academic research institutions, we will then be precluded from pursuing those specific opportunities. Since each of these opportunities is unique, we may not be able to find a substitute. Several pharmaceutical and biotechnology companies have already established themselves in the field of enzyme therapeutics, including Genzyme, our joint venture partner. These companies have already begun many drug development programs, some of which may target diseases that we are also targeting, and have already entered into partnering and licensing arrangements with academic research institutions, reducing the pool of available opportunities.

Universities and public and private research institutions also compete with us. 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 and 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.

Our rapid growth has strained our managerial, operational, financial and other resources. We expect this growth to continue. Based on the recent approval of Aldurazyme by the FDA and European Union, and other countries, we expect that our joint venture with Genzyme will be required to devote additional resources in the immediate future 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. Our staff, financial resources, systems, procedures or controls may be inadequate to support our operations and our management may be unable to manage successfully future market opportunities or our relationships with customers and other third parties.

Our future growth and success depend on our ability to recruit, retain, manage and motivate our employees. The loss of key scientific, technical and managerial personnel may delay or otherwise harm our

product development programs. Any harm to our research and development programs would harm our business and prospects.

Because of the specialized scientific 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 Business Operations or Christopher M. Starr, Ph.D., our Senior Vice President of Scientific Operations, 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, these agreements do not 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. Due to this intense competition, we may be unable to 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. For example if in the future gene therapy becomes widely used as a treatment of genetic diseases, the use of enzyme replacement therapy, like Aldurazyme, in MPS diseases could be greatly reduced. Changes 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 clinical liability insurance for Aldurazyme with aggregate loss limits of $5.0 million and has obtained additional coverage in connection with the commercialization of Aldurazyme. We have obtained insurance against product liability lawsuits with aggregate loss limits of $15.0 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, Vibrilase and Neutralase for which our insurance coverage is not adequate.

The product liability insurance we will need to obtain in connection with the commercial sales of our product candidates if and when they receive regulatory approval may be unavailable in meaningful amounts or at a reasonable cost. In addition, while we take, and continue to take what we believe are appropriate precautions, we may be unable to avoid significant liability if any product liability lawsuit is brought against us. If we are the subject of a successful product liability claim that exceeds the limits of any insurance coverage we 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.

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:


	•	product sales and profitability of Aldurazyme;


	•	progress of Neutralase, Aryplase and our other lead drug products through the regulatory process;


	•	results of clinical trials, announcements of technological innovations or new products by us or our competitors;


	•	government regulatory action affecting our drug products or our competitors’ drug products in both the United States and foreign countries;


	•	developments or disputes concerning patent or proprietary rights;


	•	general market conditions and fluctuations for the emerging growth and biopharmaceutical market sectors; economic conditions in the United States or abroad;


	•	actual or anticipated fluctuations in our operating results;


	•	broad market fluctuations in the United States or in Europe, which may cause the market price of our common stock to fluctuate; and


	•	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:


	•	trading in different time zones;


	•	different ability to buy or sell our stock;


	•	different market conditions in different capital markets; and


	•	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.

Anti-takeover provisions in our charter documents, our stockholders’ rights plan 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 an additional 249,886 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.

In September 2002, our board of directors authorized a stockholder rights plan and related dividend of one preferred share purchase right for each share of our common stock outstanding at that time. In connection with an increase in our authorized common stock, our board approved an amendment to this plan in June 2003. As long as these rights are attached to our common stock, we will issue one right with each new share of common stock so that all shares of our common stock will have attached rights. When exercisable, each right will entitle the registered holder to purchase from us one two-hundredth of a share of our Series B Junior Participating Preferred Stock at a price of $35.00 per two-hundredth of a Preferred Share, subject to adjustment.

The rights are designed to assure that all of our stockholders receive fair and equal treatment in the event of any proposed takeover of us and to guard against partial tender offers, open market accumulations and other abusive tactics to gain control of us without paying all stockholders a control premium. The rights will cause substantial dilution to a person or group that acquires 15% or more of our stock on terms not approved by our board of directors. However, the rights may have the effect of making an acquisition of us, which may be beneficial to our stockholders, more difficult, and the existence of such rights may prevent or reduce the likelihood of a third party making an offer for an acquisition of us.

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 June 30, 2003, we believe that a 100 basis point change in interest rates would result in a decrease or increase of approximately $0.4 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.

The table below presents the carrying value of our investment portfolio, which approximates fair value at June 30, 2003 (in thousands):


	Carrying Value
Cash and cash equivalents	$	221,772	*
Short-term investments		44,588	**

Total	$	266,360


	* 30% of cash and cash equivalents invested in money market funds, 54% in taxable municipal debt securities, 15% in A1/P1 rated commercial paper and 1% of uninvested cash.


	** 37% of short-term investments invested in United States agency securities, 17% in taxable municipal debt securities, 7% in A1/P1 rated commercial paper and 39% in corporate bonds.

Our debt obligations consist of our convertible debt, equipment-based loans and capital lease obligations, which carry fixed interest rates and, as a result, we are not exposed to interest rate market risk on our debt. The carrying value of our convertible debt and equipment loans approximates their fair value at June 30, 2003.

Item 4. Controls and Procedures

As of June 30, 2003, our management, including our Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in ensuring timely collection and evaluation of all information potentially subject to disclosure in our periodic filings with the Securities and Exchange Commission. There have been no significant changes in our internal controls or in the factors that could significantly affect our internal controls during the fiscal quarter to which this report relates or subsequent to the date our Chief Executive Officer and Chief Financial Officer completed their evaluation.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings. None.

Item 2. Changes in Securities and Uses of Proceeds.

On June 12, 2003, our stockholders approved an amendment to our Amended and Restated Certificate of Incorporation to increase the number of authorized shares of our common stock from 75,000,000 to 150,000,000. The Amendment to the Certificate of Incorporation was filed with the Delaware Secretary of State on June 12, 2003. Other than the potential dilution associated with the possible future issuance of this additional common stock, this amendment did not affect the rights of the common stockholders.

On June 23, 2003, we issued and sold an aggregate of $125,000,000 of 3.5% convertible subordinated notes due 2008 in a private placement in reliance on an exemption from registration under Section 4(2) of the Securities Act. The initial purchasers of the notes in that offering were UBS Securities LLC and CIBC World Markets Corp. These initial purchasers purchased the convertible notes at an aggregate purchase price equal to 97% of the aggregate principal amount of the convertible notes. The initial purchaser then resold the notes in offering in reliance on an exemption from registration under Rule 144A of the Securities Act. The notes are convertible into 71.3572 shares of our common stock, par value $0.001 per share, per $1,000 principal amount of notes and subject to adjustment in certain circumstances. This results in an initial conversion price of approximately $14.01 per share.

Item 3. Defaults upon Senior Securities. None.

Item 4. Submission of Matters to a Vote of Security Holders.

The annual meeting of our stockholders was held on June 12, 2003, at which the following actions were taken:


	a)	The following directors were elected to serve until the next annual meeting and until their successors are elected:


Director Elected	Vote For	Withheld

Fredric D. Price	39,728,893	1,725,313
Franz L. Cristiani	29,348,249	12,105,957
Elaine J. Heron, Ph.D.	39,735,382	1,718,824
Erich Sager	36,707,140	4,747,066
Vijay B. Samant	36,710,255	4,743,951
Gwynn R. Williams	29,353,623	12,100,583


	b)	The selection of KPMG LLP as independent auditors was ratified by a vote of 40,861,978 shares in favor; 587,371 shares against; and 4,857 shares withheld.


	c)	The amendment of the Company’s Certificate of Incorporation to increase the number of shares of common stock was approved by a vote of 37,783,966 shares in favor; 3,662,295 shares against; and 7,915 shares withheld.


	d)	The amendment of the Company’s Certificate of Incorporation to increase the number of shares of preferred stock was not approved by a vote of 18,368,739 shares against; 9,381,122 shares in favor; and 13,704,345 shares withheld.


	e)	The amendment of the Company’s 1997 Stock Plan was not approved by a vote of 19,575,999 shares against; 8,172,532 shares in favor; and 13,705,675 shares withheld.

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.

	3.1	Amended and Restated Certificate of Incorporation, as amended June 12, 2003, previously filed with the Commission on June 23, 2003 as Exhibit 3.1 to the Company ’s Current Report on Form 8-K, and incorporated herein by reference.
	4.1	Indenture dated June 23, 2003, by and between BioMarin Pharmaceutical Inc. and Wilmington Trust Company.
	4.2	3.50% Convertible Subordinated Note due 2003, in the principal amount of $125,000,000, dated June 23, 2003.
	4.3	Registration Rights Agreement dated June 23, 2003 by and among, UBS Securities LLC and CIBC World Markets Corp., as Initial Purchasers, and BioMarin Pharmaceutical Inc.
	10.1	Amendment No. 2 to 1998 Director Option Plan, as adopted June 12, 2003 and July 21, 2003.
	10.2	Bayview Business Park Standard Lease dated June 16, 2003 by and between BioMarin Pharmaceutical Inc. and Bayview Ignacio, LLC.
	10.3	Note Purchase Agreement dated June 18, 2003 by and among UBS Securities LLC and CIBC World Markets Corp., as Initial Purchasers, and BioMarin Pharmaceutical Inc.
	31.1 *	Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.1	Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32.2	Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	*	This Certification accompanies this report and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed for purposes of §18 of The Securities Exchange Act of 1934, as amended.

	(b)	Reports on Form 8-K.

On April 1, 2003, we filed a Current Report on Form 8-K regarding a press release related to various events, including the status of the regulatory approval of Aldurazyme and the Vibrilase clinical program.

On May 1, 2003 we filed a Current Report on Form 8-K regarding the FDA approval of the marketing application for Aldurazyme in the United States.

On May 6, 2003, we filed a Current Report on Form 8-K regarding our financial results for the quarter ended March 31, 2003.

On May 16, 2003, we filed a Current Report on Form 8-K regarding the announcement of the commercial availability of Aldurazyme in the United States.

On June 12, 2003, we filed a Current Report on Form 8-K regarding the EMEA approval of the marketing application for Aldurazyme in the European Union.

On June 16, 2003, we filed a Current Report on Form 8-K regarding our intention to offer $125 million of convertible notes.

On June 18, 2003, we filed a Current Report on Form 8-K regarding the pricing of the offering of $125 million of convertible notes.

On June 23, 2003, we filed a Current Report on Form 8-K regarding the amendment to our Certificate of Incorporation to increase the number of authorized shares of common stock.

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: August 11, 2003	By:	/s/ LOUIS DRAPEAU

		Louis Drapeau, Chief Financial Officer, Vice President, Finance and Secretary (On behalf of the registrant and as principal financial officer)

Exhibit Index

3.1		Amended and Restated Certificate of Incorporation, as amended June 12, 2003, previously filed with the Commission on June 23, 2003 as Exhibit 3.1 to the Company’s Current Report on Form 8-K, and incorporated herein by reference.
4.1		Indenture dated June 23, 2003, by and between BioMarin Pharmaceutical Inc. and Wilmington Trust Company.
4.2		3.50% Convertible Subordinated Note due 2003, in the principal amount of $125,000,000, dated June 23, 2003.
4.3		Registration Rights Agreement dated June 23, 2003 by and among, UBS Securities LLC and CIBC World Markets Corp., as Initial Purchasers, and BioMarin Pharmaceutical Inc.
10.1		Amendment No. 2 to 1998 Director Option Plan, as adopted June 12, 2003 and July 21, 2003.
10.2		Bayview Business Park Standard Lease dated June 16, 2003 by and between BioMarin Pharmaceutical Inc. and Bayview Ignacio, LLC.
10.3		Note Purchase Agreement dated June 18, 2003 by and among UBS Securities LLC and CIBC World Markets Corp., as Initial Purchasers, and BioMarin Pharmaceutical Inc.
31.1	*	Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	*	This Certification accompanies this report and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed for purposes of §18 of The Securities Exchange Act of 1934, as amended.

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