10-Q

United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2005

Or

¨ 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.)
105 Digital Drive, Novato, California	94949
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number: (415) 506-6700

(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 ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of The Exchange Act). Yes x No ¨

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 64,636,498 shares common stock, par value $0.001, outstanding as of May 2, 2005.

1

BIOMARIN PHARMACEUTICAL INC.

TABLE OF CONTENTS

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements (Unaudited)	3
	Consolidated Balance Sheets	3
	Consolidated Statements of Operations	4
	Consolidated Statements of Cash Flows	5
	Notes to Consolidated Financial Statements (Unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosure about Market Risk	43
Item 4.	Controls and Procedures	44
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	45
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 3.	Defaults Upon Senior Securities	45
Item 4.	Submission of Matters to a Vote of Security Holders	45
Item 5.	Other Information	45
Item 6.	Exhibits	45
SIGNATURE		46

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PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

B IOMARIN PHARMACEUTICAL INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except for share and per share data)

	December 31, 2004 (1)			March 31, 2005
				(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	13,081		$	11,246
Short-term investments		35,734			18,513
Restricted cash		25,298			12,930
Accounts receivable, net		4,047			1,831
Advances to BioMarin/Genzyme LLC		2,160			604
Inventory		2,316			2,439
Other current assets		2,641			6,036
Total current assets		85,277			53,599
Cash balances related to long-term debt		16,406			19,603
Investment in BioMarin/Genzyme LLC		23,129			25,217
Property and equipment, net		42,501			41,179
Acquired intangible assets, net		16,451			16,165
Goodwill		45,053			21,262
Other assets		4,149			3,908
Total assets	$	232,966		$	180,933
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable and accrued liabilities	$	27,249		$	25,639
Current portion of acquisition obligation, net of discount		39,122			20,946
Current portion of equipment and facility loans		3,683			4,110
Total current liabilities		70,054			50,695
Convertible debt		125,000			125,000
Equipment and facility loan, net of current portion		16,406			19,603
Long-term portion of acquisition obligation, net of discount		86,632			72,821
Other long-term liabilities		2,852			3,049
Total liabilities		300,944			271,168
Stockholders’ deficit:
Common stock, $0.001 par value: 150,000,000 shares authorized; 64,501,159 and 64,511,159 shares issued and outstanding at December 31, 2004 and March 31, 2005, respectively		65			65
Additional paid-in capital		421,141			421,214
Accumulated other comprehensive loss		(363	)		(235	)
Accumulated deficit		(488,821	)		(511,279	)
Total stockholders’ deficit		(67,978	)		(90,235	)
Total liabilities and stockholders’ deficit	$	232,966		$	180,933

(1) December 31, 2004 balances were derived from the audited consolidated financial statements.

See accompanying notes to consolidated financial statements.

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BIOMARIN PHARMACEUTICAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended, March 31, 2004 and 2005

(In thousands, except for per share data, unaudited)

	Three Months Ended March 31,
	2004			2005
Net product sales	$	—		$	4,989
Operating expenses:
Cost of sales (excludes amortization of developed product technology)		—			660
Research and development		13,695			14,992
Selling, general and administrative		3,881			10,567
Amortization of acquired intangible assets		—			286
Equity in the loss/(income) of BioMarin/Genzyme LLC		1,759			(2,076	)
Total operating expenses		19,335			24,429
Loss from operations		(19,335	)		(19,440	)
Interest income		761			241
Interest expense		(1,371	)		(3,259	)
Net loss	$	(19,945	)	$	(22,458	)
Net loss per share, basic and diluted	$	(0.31	)	$	(0.35	)
Weighted average common shares outstanding, basic and diluted		64,225			64,511

See accompanying notes to consolidated financial statements.

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BIOMARIN PHARMACEUTICAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended March 31, 2004, and 2005

(In thousands, unaudited)

	Three Months Ended March 31,
	2004			2005
Cash flows from operating activities
Net loss	$	(19,945	)	$	(22,458	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		2,191			2,466
Imputed interest on acquisition obligation		—			1,661
Equity in the loss/(income) of BioMarin/Genzyme LLC		1,759			(2,076	)
Changes in operating assets and liabilities:
Accounts receivable		—			2,216
Advances to BioMarin/Genzyme LLC		1,088			1,556
Inventory		—			(123	)
Other current assets		376			605
Other assets		(315	)		21
Accounts payable and accrued liabilities		2,752			(2,479	)
Other liabilities		—			208
Net cash used in operating activities		(12,094	)		(18,403	)
Cash flows from investing activities
Purchase of property and equipment		(1,232	)		(582	)
Decrease in restricted cash		—			12,368
Sale of short-term investments		25,388			17,283
Purchase of short-term investments		(35,436	)		—
Investment in BioMarin/Genzyme LLC		(1,938	)		—
Settlement of dispute with Medicis		—			2,000
Net cash provided by (used in) investing activities		(13,218	)		31,069
Cash flows from financing activities
Proceeds from equipment and facility loans		—			17,148
Proceeds from exercise of stock options		807			73
Increase in cash balances related to long-term debt		—			(3,197	)
Repayment of equipment and facility loans		(715	)		(13,524	)
Repayment of acquisition obligation		—			(15,000	)
Other		12			—
Net cash provided by (used in) financing activities		104			(14,500	)
Effect of foreign currency translation on cash		1			(1	)
Net decrease in cash		(25,207	)		(1,835	)
Cash and cash equivalents:
Beginning of period		121,406			13,081
End of period	$	96,199		$	11,246

See accompanying notes to consolidated financial statements.

5

BIOMARIN PHARMACEUTICAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2005

(Unaudited)

(1) NATURE OF OPERATIONS AND BUSINESS RISKS

BioMarin Pharmaceutical Inc. (the Company or BioMarin) develops and commercializes innovative biopharmaceuticals for serious diseases and medical conditions. The Company and its joint venture partner, Genzyme Corporation (Genzyme), received marketing approval for Aldurazyme^® (laronidase) in the United States in April 2003 and in the European Union in June 2003. In May 2004, BioMarin completed the transaction to acquire the Ascent Pediatrics business. The transaction included: the exclusive marketing and development rights to Orapred^® (prednisolone sodium phosphate oral solution), a drug to treat asthma in children; two additional proprietary formulations of Orapred in development; and a U.S. sales force. See Note 3 for further discussion of the transaction. The Company is incorporated in the state of Delaware.

Through March 31, 2005, the Company had accumulated losses of approximately $511.3 million. Management expects to incur further losses for the foreseeable future. Management believes that the Company’s cash, cash equivalents, short-term investments, currently restricted cash and cash balances related to long-term debt at March 31, 2005, plus funds contractually committed to the Company, will be sufficient to meet the Company’s obligations into the fourth quarter 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 financings, loans and collaborative agreements with corporate partners.

The Company is subject to a number of risks, including: the need for additional financings; the financial performance of Orapred; significant competition from larger organizations and generic competition with respect to Orapred; its joint venture partner’s ability to successfully commercialize Aldurazyme; its ability to successfully commercialize its product candidates, if approved; 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; dependence on key personnel; uncertain patent protection; dependence on corporate partners and collaborators; and possible restrictions on reimbursement, as well as other changes in the health care 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 for interim financial information and the Securities and Exchange Commission (SEC) requirements for interim reporting. However, they do not include all of the information and footnotes required by generally accepted accounting principles (GAAP) 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 months ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. These consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto for the year ended December 31, 2004, included in the Company’s Annual Report on Form 10-K.

(b) Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP 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) Cash and Cash Equivalents

The Company treats liquid investments with original maturities of less than three months when purchased as cash and cash equivalents.

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(d) Short-Term Investments

The Company records its investments as either held-to-maturity or available-for-sale. Held-to-maturity investments are recorded at amortized cost. Available-for-sale investments are recorded at fair market value, with unrealized gains or losses being included in accumulated other comprehensive income (loss). As of March 31, 2005, accumulated other comprehensive loss related to recording available-for-sale short-term investments was approximately $0.2 million. Short-term investments are comprised mainly of corporate bonds and federal agency investments. As of March 31, 2005, the Company had no held-to-maturity investments.

(e) Inventory

The Company values inventories at the lower of cost or fair value. The Company determines the cost of raw materials using the average cost method and the cost of finished goods using the specific identification cost method. The Company analyzes its inventory levels quarterly and writes down inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable value and inventory in excess of expected requirements. Expired inventory is disposed of and the related costs are written off. As of March 31, 2005, inventory consisted of Orapred finished goods of $2.4 million.

(f) Cash Balances Related to Long-term Debt

Cash balances related to long-term debt represent the long-term portion of the amount that the Company is required to keep on deposit with Comerica Bank pursuant to the terms of the equipment and facility loan, as amended, that the Company executed in May 2004.

(g) Investment in BioMarin/Genzyme LLC, Advances to BioMarin/Genzyme LLC and Equity in the Loss/(Income) 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 or increase in its investment for its 50% share of the loss or income, respectively, of the joint venture. Equity in the loss (income) of BioMarin/Genzyme LLC includes the Company’s 50% share of the joint venture’s loss (income) for the period. Advances to BioMarin/Genzyme LLC include 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, and the Investment in BioMarin/Genzyme LLC includes the Company’s share of the net current assets of the joint venture, primarily cash, accounts receivable and inventory.

(h) Goodwill, Acquired Intangible Assets and Impairment of Long-Lived Assets

The Company records goodwill in a business combination when the total consideration exceeds the fair value of the net tangible and identifiable intangible assets acquired. In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, goodwill and intangible assets with indefinite lives are not amortized. Intangible assets with definite lives are amortized over their useful lives on a straight-line basis.

The Company reviews long-lived assets for impairment annually and whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined that the full carrying amount of an asset is not recoverable, an impairment loss is recorded in the amount by which the carrying amount of the asset exceeds its fair value. See Note 4 for further discussion of the Company’s intangible asset and goodwill impairment analyses.

The Company currently operates in one business segment, the biopharmaceutical development and commercialization segment. When reviewing goodwill for impairment, SFAS No. 142 requires that the Company assess whether goodwill should be allocated to operating levels lower than its single operating segment for which discrete financial information is available and reviewed for decision-making purposes. These lower levels are referred to as reporting units. Currently, the Company has identified two reporting units, the Orapred business and the other biopharmaceutical development and commercialization activities of the Company, which are components of the Company’s single operating segment. The Company performs an annual impairment test in the fourth quarter of each fiscal year by assessing the fair value and recoverability of its goodwill, unless facts and circumstances warrant a review of goodwill for impairment before that time. The Company determines the fair value of its reporting units using a combination of discounted cash flow models, quoted market prices when available and independent appraisals.

7

The recoverability of the carrying value of leasehold improvements for the Company’s administrative facilities will depend on the successful execution of the Company’s business initiatives and the Company’s ability to earn sufficient returns on its approved products and product candidates. Based on management’s current estimates, the Company expects to recover the carrying value of such assets.

(i) Property and Equipment

Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the related estimated useful lives, except for leasehold improvements, which are depreciated over the shorter of the useful life of the asset or the lease term. Significant additions and improvements are capitalized, while repairs and maintenance are charged to expense as incurred. Property and equipment purchased for specific research and development projects with no alternative uses are expensed as incurred. See Note 7 for further information.

(j) Revenue Recognition

The Company recognizes revenue from product sales when persuasive evidence of an arrangement exists, the product has been shipped, title and risk of loss have passed to the customer, the price to the buyer is fixed or determinable and collection from the customer is reasonably assured. Product sales transactions are evidenced by customer purchase orders, invoices and the related shipping documents.

The timing of customer purchases and the resulting product shipments has a significant impact on the amount of revenue from product sales that the Company recognizes in a particular period. Also, the majority of Orapred sales are made to wholesalers, which, in turn, resell the product to retail outlets. Inventory in the distribution channel consists of inventory held by wholesalers, who are the Company’s principal customers, and inventory held by retailers. The Company’s revenue from product sales in a particular period is impacted by increases or decreases in wholesaler inventory levels. If wholesaler inventories increased substantially, the Company could experience reduced revenue from sales in subsequent periods, or product returns from the distribution channel due to overstocking, low end-user demand or product expiration.

The Company establishes and maintains reserves for amounts payable to managed care organizations and state Medicaid programs for the reimbursement of a portion of the retail price of prescriptions filled that are covered by the respective plans. The amounts estimated to be paid relating to products sold are recognized as revenue reductions and as additions to accrued expenses at the time of the original sale. The rebate reserves are based on the Company’s best estimate of the expected prescription fill rate to these managed care organizations and state Medicaid patients. The estimates are developed using the product’s rebate history adjusted to reflect known changes in the factors that impact such reserves.

Provisions for sales discounts and estimates for chargebacks and product returns are established as a reduction of product sales at the time such revenues are recognized. These revenue reductions are established by the Company’s management as its best estimate at the time of the original sale based on the product’s historical experience adjusted to reflect known changes in the factors that impact such reserves. There were no material revisions to management’s estimates of revenue reductions during the first quarter of 2005. These revenue reductions are generally reflected either as a direct reduction to accounts receivable through an allowance or as an addition to accrued expenses. The Company permits product returns only if the product is damaged or if it is returned near or after expiration.

A reconciliation of the Company’s gross and net product sales for the three months ended March 31, 2005 is as follows (in thousands):

	Dollars			Percentage
Gross product sales	$	6,153		100	%
Less allowances for:
Returns		(214	)	(3.5	)%
Rebates		(829	)	(13.5	)%
Discounts		(121	)	(2.0	)%
Total allowances		(1,164	)	(19.0	)%
Net product sales	$	4,989		81.0	%

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. As of December 31, 2004 and March 31, 2005, the Company had no allowance for doubtful accounts.

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(k) Research and Development

Research and development expenses include expenses associated with contract research and development provided by third parties, product manufacturing prior to regulatory approval, clinical and regulatory costs, and internal research and development costs. The Company believes that regulatory approval of our product candidates is uncertain, and does not assume that products manufactured prior to regulatory approval will be sold commercially. As a result, inventory costs for product candidates are expensed as research and development until regulatory approval is obtained, at which time inventory is capitalized at the lower of cost or fair value.

(l) 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 income per share is calculated by dividing net income 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 shares issuable upon the exercise of outstanding common stock options, warrants and contingent issuances of common stock related to our convertible debt and acquisition payable. 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):

	March 31,
	2004	2005
Options to purchase common stock	9,377	11,988
Common stock issuable under convertible debt	8,920	8,920
Portion of acquisition payable in common stock	—	1,670
Warrants to purchase common stock	780	—
Total	19,077	22,578

(m) Stock Option Plans

The Company has three stock-based compensation plans. The Company accounts for those plans under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, whereby generally no stock-based compensation cost is reflected in net loss for options issued to employees and directors with exercise prices at or above the market price on the date of issuance. The following table (in thousands, except per share data) 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), as amended by SFAS No. 148, Accounting for Stock Based Compensation—Transition and Disclosure, to stock-based compensation recognized on a straight-line basis.

	Three Months Ended March 31,
	2004			2005
Net loss as reported	$	(19,945	)	$	(22,458	)
Deduct: Total stock-based compensation expense determined under fair value based method for all awards		(3,240	)		(2,967	)
Pro forma net loss	$	(23,185	)	$	(25,425	)
Net loss per common share as reported, basic and diluted	$	(0.31	)	$	(0.35	)
Pro forma net loss per common share, basic and diluted		(0.36	)		(0.39	)

The Company recognizes as an expense the fair value of options granted to persons who are neither employees nor directors.

(n) Income Taxes

The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred taxes are determined based on the difference between the financial statement and tax bases of assets and liabilities using tax rates expected to be in effect in the years in which the differences are expected to reverse. A valuation allowance is recorded to reduce deferred tax assets to the amount that is more likely than not to be realized. There was a full valuation allowance against net deferred tax assets of $241.6 million at December 31, 2004. 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.

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(o) Accumulated Other Comprehensive Loss

Accumulated Other Comprehensive Loss includes unrealized gains and losses on short-term investments and foreign currency translation adjustments.

(p) Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123R, Share-Based Payment (SFAS 123R), which requires companies to measure and recognize compensation expense for all stock-based payments at fair value. In April 2005, the SEC postponed the effective date of SFAS 123R until the fiscal year beginning after June 15, 2005. The Company will adopt SFAS 123R in the first quarter of 2006 and management is currently evaluating the impact of SFAS 123R on its financial position and results of operations. See Note 2(m) for information related to the pro forma effects on the Company’s reported net loss and net loss per common share of applying the fair value recognition provisions of the previous SFAS 123, to stock-based employee compensation.

(q) Reclassifications

Certain items in the prior years consolidated financial statements have been reclassified to conform to the 2005 presentation.

(3) ASCENT PEDIATRICS TRANSACTION

On May 18, 2004, the Company acquired the Ascent Pediatrics business from Medicis Pharmaceutical Corporation (Medicis). The transaction included: the exclusive marketing and development rights to Orapred, a drug to treat asthma in children; two additional proprietary formulations of Orapred in development; and a U.S.-based sales force. In connection with the transaction, the Company also acquired certain tangible assets, including inventory and equipment. The transaction provided the Company with financial and strategic benefits, primarily the addition of a commercial product and a commercial infrastructure.

In January 2005, the agreements related to the transaction were amended due to a settlement of a dispute with Medicis and the acquisition obligation was reduced. The effect of these amendments totaled $21.0 million and were recorded in the first quarter of 2005 as a reduction of the acquisition obligation and goodwill. Medicis also agreed to pay the Company $6.0 million for Orapred returns, which is payable by Medicis throughout the first six months of 2005. Additionally, Medicis agreed to make available to the Company a convertible note of up to $25.0 million beginning July 1, 2005 based on certain terms and conditions including a change of control provision. Money advanced under the convertible note is convertible into shares of the Company’s common stock at a conversion price equal to the average closing price of the stock for the 20 trading days prior to such advance. The convertible note, once drawn, matures in August 2009, but may be repaid by the Company at any time prior to the maturity date or converted into shares of common stock at Medicis’ option.

The amended transaction agreements provided for total acquisition payments of $169.0 million payable to Medicis in specified amounts through 2009, including a payment of $8.6 million in BioMarin common stock in 2009. The number of shares issuable in 2009 will be based on the per share stock price at that time. The total acquisition cost as amended, including transaction costs totaling approximately $3.5 million, acquired tangible assets and operating liabilities, and the $6.0 million reimbursement for product returns discussed above, was $168.0 million. The remaining payments to Medicis are payable as follows (in thousands):

	As of March 31, 2005
2005	$	19,200
2006		7,700
2007		7,000
2008		6,500
2009		73,600
Total	$	114,000

Pursuant to the acquisition, the Company was required to deposit $25.0 million of BioMarin common stock and $25.0 million of cash in escrow until the last of the first four quarterly payments to Medicis have been made. The $25.0 million of BioMarin common stock was released in 2004, the first $12.5 million of cash was released in the first quarter of 2005 and the remaining $12.5 million of cash is scheduled to be released in May 2005.

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The acquisition has been accounted for as a purchase business combination. Under the purchase method of accounting, the assets acquired and liabilities assumed are recorded at the date of acquisition, at their respective fair values. The Company’s consolidated financial statements for the period subsequent to the acquisition date reflect these values and the results of operations of the Ascent Pediatrics business. The total consideration has been allocated based on an estimate of the fair value of assets acquired and liabilities assumed. During March 2005, the Company revised its purchase price allocation based on the settlement of the dispute with Medicis and updated estimates of the fair value of certain acquired liabilities. The nature of the changes includes a revision to the total acquisition cost based on the reduced payments pursuant to the settlement and revised estimates of the acquired return and rebate liabilities based on the Company’s experience after the acquisition. A summary of the material revisions to the purchase price allocation, is as follows (in thousands):

	Preliminary allocation of purchase price		Changes			Revised allocation of purchase price
Acquired returns reserve	$	883	$	465		$	1,348
Acquired rebate liability		1,161		392			1,553
Goodwill		45,053		(23,791	)		21,262
Receivable for reimbursement for returns		—		6,000			6,000

The revised fair value of the transaction was allocated as follows (in thousands):

Product technology	$	88,689
In-process research and development		31,453
Imputed discount on purchase price		27,054
Inventory		2,301
Equipment		131
Goodwill		21,262
Liabilities assumed		(2,901	)
Total	$	167,989

The product technology is the only intangible asset subject to amortization and represents the rights to the proprietary knowledge associated with Orapred. These rights include the right to develop, use, and market Orapred. The product technology is being amortized over Orapred’s estimated economic life of 15 years using the straight-line method of amortization and includes no estimated residual value. See Note 4 for further discussion of the Company’s acquired intangible assets.

In-process research and development represents the fair value of the two additional proprietary formulations of Orapred that are currently under development but not yet completed.

The imputed discount on the purchase obligation represents the gross value of the future cash payments to Medicis, discounted to their present value at a rate of 6.1%. The discount is being amortized and recorded as interest expense over the life of the obligation using the effective interest rate method.

The allocation to inventory at the purchase date includes an adjustment of $0.9 million in addition to the cost basis of the finished inventory to reflect the fair value of the finished inventory less the cost of disposal and a reasonable profit for the selling effort.

The transaction resulted in a purchase price allocation of $21.3 million to goodwill, representing the financial, strategic and operational value of the transaction to BioMarin. Goodwill is attributed to the premium that the Company was willing to pay to obtain the value of the Orapred business, and the synergies created with the acquisition of the Ascent Pediatrics sales force that will eventually be deployed towards selling future BioMarin products. The entire amount of goodwill is expected to be deductible for tax purposes. The purchase price allocation also included $2.9 million of estimated liabilities assumed for product returns and unclaimed rebates.

The following unaudited pro forma financial information presents (in thousands) the combined results of operations of BioMarin and the Ascent Pediatrics business for the three months ended March 31, 2004 and 2005 as if the acquisition had occurred as of January 1, 2004. The unaudited pro forma financial information is not necessarily indicative of what the Company’s consolidated results of operations actually would have been had the acquisition been completed as of January 1, 2004. In addition, the unaudited pro forma financial information does not attempt to project the future results of operations of the Company combined with the Ascent Pediatrics business.

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	Three months ended March 31,
	2004			2005
Total revenue	$	11,453		$	4,989
Net loss		(51,497	)		(22,458	)
Net loss per share, basic and diluted	$	(0.80	)	$	(0.35	)
Weighted average common shares outstanding, basic and diluted		64,225			64,511

The historical statements of operations of the Ascent Pediatric business were derived directly from the related trial balances obtained from the seller of the business and include adjustments by the Company to allocate a portion of the seller’s corporate overhead to the Ascent Pediatrics business. Pro forma adjustments include non-cash expenses associated with the acquisition of the Ascent Pediatrics business and certain integration costs incurred during the second quarter of 2004, which are reflected as of January 1, 2004. The non-cash items include an in-process research and development charge, amortization of acquired intangible assets, imputed interest expense and a fair value inventory adjustment. The pro forma net loss for the first quarter of 2004 increased as a result of the pro forma adjustments to include the acquisition-related expenses, such as in-process research and development and amortization of the acquired intangible assets.

(4) ACQUIRED INTANGIBLE ASSETS AND GOODWILL

(a) Acquired Intangible Assets

Acquired intangible assets relate to the Ascent Pediatrics transaction completed during May 2004 (Note 3) and consist of the Orapred product technology as of March 31, 2005. The gross and net carrying value of the Orapred product technology as of March 31, 2005 were as follows (in thousands):

Gross value	$	20,437
Accumulated amortization		(4,272	)
Net carrying value	$	16,165

In December 2004, the Company recognized an impairment loss totaling approximately $68.3 million, which was recorded as impairment of acquired intangible assets in the consolidated statement of operations for the year ended December 31, 2004. The primary circumstance leading to the impairment was the introduction of a new generic competitor to Orapred during the fourth quarter of 2004, which resulted in a significant decrease in the Orapred market share. As a result of this change in circumstance, the Company tested the recoverability of the related acquired intangible assets by first comparing the assets’ carrying amount to the undiscounted future cash flows that the assets are expected to generate. The Company determined that the carrying value of the assets was not recoverable and an impairment loss was recorded for the amount by which the carrying value of the Orapred product technology exceeded its fair value. The fair value of the Orapred product technology was estimated using the present value of the expected future cash flows from the technology.

The Orapred product technology is being amortized on a straight-line basis over its useful life of 15 years. The estimated amortization expense associated with the revised cost basis of the Orapred product technology for each of the succeeding five years is approximately $1.1 million per year.

(b) Goodwill

Goodwill as of March 31, 2005 relates to the Ascent Pediatrics transaction completed during May 2004 (Note 3). The aggregate amount of goodwill acquired in the transaction was approximately $21.3 million, which reflects the reduction for the settlement of the dispute with Medicis during the first quarter of 2005. Using the reporting unit basis required by SFAS No. 142, Goodwill and Other Intangible Assets, the Company completed its annual impairment test during December 2004, and determined that no impairment of goodwill existed as of December 31, 2004. There were no events or circumstances since the annual impairment test that indicate that goodwill may be impaired. Whether or not goodwill will be impaired in the future is dependent upon the future sales of Orapred and the successful development and sales of the new formulations of Orapred.

(5) JOINT VENTURE

(a) Joint Venture Financial Data

The results of the joint venture’s operations for the three months ended March 31, 2004 and 2005, are presented in the table below (in thousands). The joint venture’s results and summarized assets and liabilities as presented below give effect to the difference in inventory cost basis between the Company and the joint venture. 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

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costs in May 2003 after 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. This results in less cost of goods sold recognized by the Company when the previously expensed product is sold by the joint venture and less operating expenses when this previously expensed product is used in clinical trials. The adjustment will be eliminated when all of the product produced prior to obtaining regulatory approval has been sold or used in clinical trials.

	Three months ended March 31,
	2004			2005
Revenue	$	7,395		$	15,874
Cost of goods sold		623			2,665
Gross profit		6,772			13,209
Operating expenses		10,311			9,117
(Loss) Income from operations		(3,539	)		4,092
Other income		22			60
Net (loss) income	$	(3,517	)	$	4,152
Equity in the (loss)/income of BioMarin/Genzyme LLC	$	(1,759	)	$	2,076

At December 31, 2004 and March 31, 2005, the summarized assets and liabilities of the joint venture and the components of the Company’s investment in the joint venture are as follows (in thousands):

	December 31, 2004			March 31, 2005
Assets	$	58,009		$	55,758
Liabilities		(11,751	)		(5,324	)
Net equity	$	46,258		$	50,434
Investment in BioMarin/Genzyme LLC (50% share of net equity)	$	23,129		$	25,217

(b) Joint Venture Critical Accounting Policies

Revenue recognition—BioMarin/Genzyme LLC recognizes revenue from product sales when persuasive evidence of an arrangement exists, the product has been delivered to the customer, title and risk of loss have passed to the customer, the price to the buyer is fixed or determinable and collection from the customer is reasonably assured. Revenue transactions are evidenced by customer purchase orders, customer contracts in certain instances, invoices and the related shipping documents.

The timing of product shipment and receipts can have a significant impact on the amount of revenue that BioMarin/Genzyme LLC recognizes in a particular period. Also, Aldurazyme is sold in part through distributors. Inventory in the distribution channel consists of inventory held by distributors, who are BioMarin/Genzyme LLC’s customers, and inventory held by retailers, such as pharmacies and hospitals. BioMarin/Genzyme LLC’s revenue in a particular period can be impacted by increases or decreases in distributor inventories. If distributor inventories increased to excessive levels, BioMarin/Genzyme LLC could experience reduced purchases in subsequent periods. To determine the amount of Aldurazyme inventory in the joint venture’s U.S. distribution channel, BioMarin/Genzyme LLC receives data on sales and inventory levels directly from its primary distributors for the product.

BioMarin/Genzyme LLC records reserves for rebates payable under Medicaid and third-party payer contracts, such as managed care organizations, as a reduction of revenue at the time product sales are recorded. Certain components of the BioMarin/Genzyme LLC rebate reserves are calculated based on the amount of inventory in the distribution channel, and are impacted by BioMarin/Genzyme LLC’s assessment of distribution channel inventory. BioMarin/Genzyme LLC’s calculation also requires other estimates, including estimates of sales mix, to determine which sales will be subject to rebates and the amount of such rebates. BioMarin/Genzyme LLC updates its estimates and assumptions each period, and records any necessary adjustments to its reserves.

BioMarin/Genzyme LLC records allowances for product returns, if appropriate, as a reduction of revenue at the time product sales are recorded. Several factors are considered in determining whether an allowance for product returns is required,

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including the nature of Aldurazyme and its patient population, the customers’ limited return rights, Genzyme’s experience of returns for similar products and BioMarin/Genzyme LLC’s estimate of distribution channel inventory, based on sales and inventory level information provided by the primary distributors for Aldurazyme, as described above. Based on these factors, BioMarin/Genzyme LLC has concluded that product returns will be minimal. In the future, if any of these factors and/or the history of product returns changes, an allowance for product returns may be required.

Inventory—BioMarin/Genzyme LLC values inventories at the lower of cost or fair value. BioMarin/Genzyme LLC determines the cost of raw materials and work-in process using the average cost method and the cost of finished goods using the specific identification method. BioMarin/Genzyme LLC analyzes its inventory levels quarterly and writes down to its net realizable value inventory that has expired, become obsolete, has a cost basis in excess of its expected net realizable value, or is in excess of expected requirements. If actual market conditions are less favorable than those projected by the joint venture, additional inventory write-downs may be required.

BioMarin/Genzyme LLC capitalizes inventory produced for commercial sale. Refer to Note 5(a) above for discussion of the difference in inventory cost basis between the Company and BioMarin/Genzyme LLC.

(6) SUPPLEMENTAL BALANCE SHEET INFORMATION

As of December 31, 2004 and March 31, 2005, accounts payable and accrued liabilities consisted of the following (in thousands):

	December 31, 2004		March 31, 2005
Accounts payable	$	946	$	2,470
Accrued accounts payable		13,662		8,366
Accrued vacation		1,357		1,503
Accrued compensation		3,319		2,480
Accrued other		2,484		3,693
Accrued rebates		3,578		4,841
Acquired rebate reserve		1,020		1,133
Acquired returns reserve		726		984
Current portion of deferred rent		157		169
	$	27,249	$	25,639

As of December 31, 2004 and March 31, 2005, other long-term liabilities consisted of the following (in thousands):

	December 31, 2004		March 31, 2005
Long-term portion of returns reserve	$	790	$	1,004
Long-term portion of deferred rent		2,062		2,045
	$	2,852	$	3,049

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(7) PROPERTY AND EQUIPMENT

Property and equipment at December 31, 2004 and March 31, 2005, consisted of (in thousands):

	Property & Equipment						Estimated useful lives
Category	December 31, 2004			March 31, 2005
Leasehold improvements	$	57,481		$	57,338		Shorter of life of asset or lease term
Manufacturing and laboratory equipment		15,086			15,333		5 years
Computer hardware and software		4,512			4,655		3 years
Office furniture and equipment		3,123			3,223		5 years
Construction-in-progress		240			475
		80,442			81,024
Less: Accumulated depreciation		(37,941	)		(39,845	)
Total property and equipment, net	$	42,501		$	41,179

Depreciation expense for the three months ended March 31, 2004 and 2005 was, $2.0 million and $1.9 million, respectively. In late 2004, the Company changed the estimated useful life of certain leasehold improvements. The effect of the change in estimate on the Company’s net loss for the three months ended March 31, 2005 was a decrease of $0.6 million or $0.01 per share.

(8) CONVERTIBLE DEBT

In June 2003, 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. The Company also must repay the debt if there is a qualifying change in control or termination of trading of its common stock.

In connection with the placement of the debt, the Company paid approximately $4.1 million in offering costs, which have been deferred and are included in other assets. They are being amortized as interest expense over the life of the debt, and the Company recognized $0.2 million of amortization expense during the three months ended March 31, 2004 and 2005.

(9) EQUIPMENT AND FACILITY LOANS

The Company entered into several agreements for secured loans totaling $2.6 million during 2002. The loans bear interest at rates ranging from 7.88% to 9.33% and are secured by certain manufacturing and laboratory equipment. Additionally, the agreements have covenants that require the Company to maintain a minimum unrestricted cash balance, including short-term investments, of $35 million. Should the unrestricted cash balance fall below $35 million, the Company can either provide the lender with an irrevocable letter of credit for the amount of the total loans outstanding or repay the loans with prepayment penalties. As of March 31, 2005, $0.3 million was outstanding under these secured loans.

In May 2004, the Company executed a $25.0 million credit facility to finance the Company’s equipment purchases and facility improvements. As of March 31, 2005, $23.4 million was outstanding on the facility. Payments of principal and interest of LIBOR plus 1.5% (4.6% as of March 31, 2005) are due through maturity in 2011. The facility requires an all-asset first priority lien, excluding certain assets such as intellectual property and assets related to the Ascent Pediatrics transaction. The lender requires that the Company maintain a total unrestricted cash balance, including short-term investments, of at least $45.0 million or a greater amount defined by a calculation provided for in the facility agreement, as previously amended, and that the Company maintain a deposit with the lender equal to the outstanding principal balance. In April 2005, the facility agreement was further amended to reduce the minimum cash and investment balance requirement to $35.0 million or a greater amount defined by a calculation provided for in the facility agreement solely for the month ended April 30, 2005. As of March 31, 2005, $23.4 million of the total minimum unrestricted cash balance is required to be maintained in an account with the lender as an unrestricted compensating balance. The facility also contains additional customary covenants. Principal payments due on all equipment and facility loans range from approximately $12,000 to $119,000 per month and are payable as follows (in thousands):

2005	$	3,161
2006		3,794
2007		3,794
2008		3,794
2009 and thereafter		9,170
Total	$	23,713

In February 2005, the $25.0 million credit facility discussed above was amended to provide for an incremental $12.5 million of borrowing capacity to the Company. The incremental loan amount was secured by certain cash and short-term investments and was repaid in March 2005.

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(10) SUPPLEMENTAL CASH FLOW INFORMATION

The following noncash transaction took place in the periods presented (in thousands):

	Three ended March 31,
	2004		2005
Settlement of dispute with Medicis, net of discount	$	—	$	22,648

(11) FINANCIAL INSTRUMENTS—CONCENTRATIONS OF CREDIT RISK

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash, cash equivalents, short-term investments and accounts receivable. All cash, cash equivalents, and short-term investments are placed in financial institutions with strong credit ratings, which minimizes the risk of loss due to nonpayment. With respect to accounts receivable, a significant portion of Orapred sales is made to a limited number of financially viable distributors. The Company’s three largest customers accounted for 42%, 31% and 12% of net revenues, respectively, or 85% of the Company’s total net product sales in aggregate for the three months ended March 31, 2005. The Company does not require collateral from its customers, but performs periodic credit evaluations of its customers’ financial condition and requires immediate payment in certain circumstances. The Company has not experienced any significant losses related to its financial instruments and management does not believe a significant credit risk existed at March 31, 2005.

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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 similar expressions. These forward-looking statements may be found in “Factors That May Affect Future Results,” and other sections of this 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.

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes thereto appearing elsewhere in this quarterly report. In addition to the other information in this Form 10-Q, investors should carefully consider the following discussion and the information under “Factors That May Affect Future Results” when evaluating us and our business.

Overview

We develop and commercialize innovative biopharmaceuticals for serious diseases and medical conditions. We select product candidates for diseases and conditions that represent a significant medical need, have well-understood biology and provide an opportunity to be first-to-market.

Our product portfolio is comprised of two approved products and multiple investigational product candidates. Aldurazyme^® (laronidase), has been approved for marketing in the United States by the U.S. Food and Drug Administration (FDA), in the European Union (E.U.) by the European Medicines Evaluation Agency (EMEA) and other countries for the treatment of mucopolysaccharidosis I (MPS I). MPS I is a progressive and debilitating life-threatening genetic disease that frequently results in death during childhood or early adulthood. It is caused by the deficiency of alpha-L-iduronidase, an enzyme normally required for the breakdown of certain complex carbohydrates known as glycosaminoglycans (GAGs). Aldurazyme has been granted orphan drug status in the U.S. and the E.U., which gives Aldurazyme seven years of market exclusivity in the U.S. and 10 years of market exclusivity in the E.U. for the treatment of MPS I. We have developed Aldurazyme through a joint venture with Genzyme. Aldurazyme net revenue recorded by our joint venture during the first quarter of 2005 totaled $15.9 million compared to $7.4 million for the first quarter of 2004. There were 312 commercial Aldurazyme patients as of March 31, 2005, compared to 184 as of March 31, 2004.

In May 2004, we obtained rights to market and sell Orapred^® (prednisolone sodium phosphate oral solution), a drug primarily used to treat asthma exacerbations in children as well as exclusive rights to the Orapred intellectual property, two additional proprietary formulations of Orapred in development, and a U.S.-based sales force. Orapred net product sales during the first quarter of 2005 totaled $5.0 million. In January 2005, the agreements related to the transaction were amended due to a settlement of a dispute with Medicis and payments with respect to the acquisition were reduced. The effect of these amendments totaled $21.0 million and were recorded in the first quarter of 2005 as a reduction of the acquisition obligation and goodwill. Medicis also agreed to pay us $6.0 million for Orapred returns, which is payable by Medicis throughout the first seven months of 2005. Additionally, Medicis will make available to us a convertible note of up to $25.0 million beginning July 1, 2005 based on certain terms and conditions and provided that the Company does not experience a change of control.

We are developing several other product candidates for the treatment of genetic diseases including: rhASB (galsulfase), which we formerly referred to as Aryplase, for the treatment of mucopolysaccharidosis VI (MPS VI); Phenoptin (sapropterin hydrochloride), a proprietary, synthetic, oral form of tetrahydrobiopterin (6R-BH₄) for the treatment of moderate to mild forms of phenylketonuria (PKU); and Phenylase (recombinant phenylalanine ammonia lyase), a preclinical candidate for the treatment of the more severe form of PKU.

In June 2004, we announced the positive results of our Phase 3 trial of rhASB, for the treatment of MPS VI, a progressive and debilitating life-threatening genetic disease for which no drug treatment currently exists. MPS VI is caused by the deficiency of

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N-acetylgalactosamine 4-sulfatase (arylsulfatase B), an enzyme normally required for the breakdown of GAGs. The clinical trial demonstrated a statistically significant improvement in endurance in patients receiving rhASB compared to patients receiving placebo, as measured by the distance walked in 12 minutes, the primary end point of the trial. Additionally, the data demonstrated a statistically significant improvement in reduction of GAGs and a positive trend in a 3-minute stair climb, the secondary end points of the trial. In the fourth quarter of 2004, we announced that we filed for marketing authorization of rhASB in both the U.S. and E.U., where rhASB has received orphan drug designations for the treatment of MPS VI. In February 2005, we announced that the FDA has accepted for filing and assigned six-month review to the Biologics License Application (BLA) for rhASB. The FDA has indicated that it will take action on the application, under the Prescription Drug User Fee Act (PDUFA), by May 31, 2005.

In April 2005, we announced that we initiated our Phase 3 clinical trial of Phenoptin. The Phase 3, double-blind, placebo-controlled, multi-center trial is designed to evaluate the safety and efficacy of Phenoptin for the treatment of individuals with PKU. We anticipate the trial will enroll patients on an ongoing basis until it is fully enrolled. As a primary efficacy endpoint, the trial will measure the changes in blood Phenylalanine (Phe) level in patients receiving Phenoptin compared to patients receiving placebo. In July 2004, we announced positive results from an investigator sponsored pilot clinical study of 6R-BH₄, in 20 patients with PKU. We also announced that we have received orphan drug designation for Phenoptin for the treatment of PKU in both the U.S. and E.U.

PKU is an inherited metabolic disease that affects at least 50,000 diagnosed patients under the age of 40 in the developed world, an estimated half of whom have a moderate to mild form of the disease. PKU is caused by a deficiency of an enzyme, phenylalanine hydroxylase (PAH), which is required for the metabolism of Phe. Phe is an amino acid found in most protein-containing foods. Without sufficient quantity or activity of PAH, Phe accumulates to abnormally high levels in the blood resulting in a variety of serious neurological complications. In the U.S. and many developed countries, PKU is diagnosed at birth through a blood test. Phenoptin, our lead product candidate for the treatment of PKU could become the first FDA-approved drug for the treatment of PKU, if approved. Phenylase is currently in preclinical development. It is being developed as a subcutaneous injection and is intended for those who suffer from classic PKU, the more severe form of the disease.

We are evaluating other enzyme-based therapies for serious medical conditions including Vibrilase^™ (vibriolysin), a topical investigational enzyme therapy for use in the debridement of serious burns. In August 2004, we announced positive data from a Phase 1b clinical trial of Vibrilase. Data from the trial suggest that treatment with Vibrilase is generally safe and well tolerated. Additionally, we are evaluating preclinical development of several other enzyme product candidates for genetic and other diseases as well as two platform technologies, immune tolerance and NeuroTrans^™, to overcome limitations associated with the delivery of existing pharmaceuticals. We have retained worldwide commercial rights to all of our product candidates.

Our research and development expense during the first quarter of 2005, primarily related to the development of rhASB and Phenoptin, totaled $15.0 million compared to $13.7 million in the first quarter of 2004. Our net loss totaled $22.5 million for the first quarter of 2005 compared to $19.9 million in the first quarter of 2004. Our net loss for the first quarter of 2005 includes $2.1 million of Orapred acquisition-related expenses. Our cash burn, a financial measure not determined in accordance with generally accepted accounting principles (GAAP) in the first quarter of 2005 was $28.2 million as compared to $15.2 million in the first quarter of 2004, and our cash, cash equivalents, short-term investments, currently restricted cash and cash balances related to long-term debt totaled $62.3 million as of March 31, 2005 compared to $90.5 million as of December 31, 2004.

Subsequent Events

In April 2005, we entered into an amendment to our existing credit facility with Comerica Bank. Under the facility, Comerica requires that we maintain a certain total unrestricted cash balance. The amendment reduced the minimum cash and investment balance requirement to $35.0 million or a greater amount defined by a calculation provided for in the facility solely for the month ended April 30, 2005. For other periods, Comerica Bank requires that we maintain a total unrestricted cash balance of at least $45.0 million or a greater amount defined by a calculation provided for in the credit agreement, as previously amended. We maintain a deposit with Comerica Bank equal to the outstanding principal balance.

In May 2005, we entered into an agreement with Daiichi Suntory Pharma Co., Ltd. (DSP) to license the exclusive worldwide rights, with the exception of Japan, to U.S., European and other foreign patents and patent applications for the use of 6R-BH₄ to treat the vascular complications in diabetes, cardiovascular disease and other indications. This new license extends the exclusive rights to 6R-BH₄ patents and data that we obtained from DSP in December 2004 to all indications. Pursuant to the terms of this license, we agreed to pay an upfront payment of approximately $3.4 million, due within 30 days of signing the license, milestones on development of products incorporating DSP’s technology and a royalty on net sales of such products.

Non-GAAP Financial Measures

The discussion above includes “cash burn” (a non-GAAP financial measure). We define cash burn as the net increase (or decrease) in cash and cash equivalents (as determined in accordance with GAAP) excluding the effect of capital markets financing activities, the purchase and sale of short-term investments (as determined in accordance with GAAP), the net increase (or decrease) in restricted cash (as determined in accordance with GAAP) and the net increase (or decrease) in cash balances related to long-term debt (as determined in accordance with GAAP). Cash burn for the periods presented was determined as follows:

	Three months ended March 31,
	2004			2005
Net decrease in cash and cash equivalents	$	25,207		$	1,835
Net (purchases) sales of short-term investments		(10,048	)		17,221
Decrease in restricted cash		—			12,368
Increase in cash balances related to long-term debt		—			(3,197	)
Cash burn	$	15,159		$	28,227

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We use short-term investments as an investment vehicle for our cash and cash equivalents, and the distinction between cash and cash equivalents is determined based on the duration of the investment. We manage our cash, cash equivalents and short-term investments as a common pool. The effect on net increase (or decrease) in cash because of the purchase and sale of short-term investments is impossible to predict and does not have a material effect on our liquidity or total current assets since short-term investments are usually bonds and notes held to maturity. Therefore, for purposes of determining cash burn, we do not give effect to the purchase and sale of short-term investments and assume that the net effect of the purchase and sale of short-term investments will be zero. The net increase (or decrease) in restricted cash and cash balances related to long-term debt represents changes in our cash balances, but not the use of cash in our operations.

We believe that cash burn, although a non-GAAP financial measure, provides useful information to investors by showing the net cash expended in most aspects of our activities. We also believe that the presentation of this non-GAAP financial measure is consistent with our past practice, as well as industry practice in general, and will enable investors, analysts and readers of our financial statements to compare current non-GAAP measures with non-GAAP measures presented in prior periods. Any non-GAAP financial measure used by us should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP.

Government Regulation

Our operations are regulated extensively by numerous national, state and local agencies. The lengthy process of laboratory and clinical testing, data analysis, manufacturing development, and regulatory review necessary for required governmental approvals is extremely costly and can significantly delay product introductions in a given market. Promotion, marketing, manufacturing and distribution of pharmaceutical products are extensively regulated in all major world markets. We are required to conduct extensive post-marketing surveillance of the safety of the products we sell. In addition, our operations are subject to complex federal, state, local and foreign environmental and occupational health and safety laws and regulations. The laws and regulations affecting the manufacture and sale of current products and the introduction of new products will continue to require substantial scientific and technical effort, time and expense and significant capital investment.

Of particular importance is the FDA. Pursuant to the Federal Food, Drug, and Cosmetic Act, the FDA has jurisdiction over virtually all of our product programs and administers requirements covering the testing, safety, effectiveness, manufacturing, quality control, distribution, labeling, marketing, advertising, dissemination of information and post-marketing surveillance of our products and product candidates. Failure to comply with FDA and other governmental regulations can result in fines, unanticipated compliance expenditures, recall or seizure of products, total or partial suspension of production and/or distribution, suspension of the FDA’s review of marketing applications or other enforcement actions including injunctions, fines and criminal prosecution. Under certain circumstances, the FDA also has the authority to revoke previously granted drug approvals.

The FDA extensively regulates all aspects of manufacturing quality under its current Good Manufacturing Practices (cGMP) regulations. These regulations encompass all aspects of the production process from receipt and qualification of raw materials to distributions procedures for finished products. They are evolving standards; thus, we must continue to expend substantial time, money and effort in all production and quality control areas to maintain compliance. The evolving and complex nature of regulatory requirements, the broad authority and discretion of the FDA, and generally high level of regulatory oversight results in the continuing possibility that we may be adversely affected by regulatory actions despite our efforts to maintain compliance with regulatory requirements. In the event we fail to adhere to cGMP requirements, among other things, we could be subject to a product recall or seizure, adverse publicity, interruptions in production, civil and criminal penalties, and delays in new product approvals.

In addition to FDA restrictions on marketing of pharmaceutical products, several other types of state and federal laws have been enacted to restrict certain marketing practices in the pharmaceutical industry in recent years. These laws include antikickback statutes and false claims statutes.

The federal health care program antikickback statute prohibits, among other things, knowingly and willfully offering, paying, soliciting, or receiving remuneration to induce or in return for purchasing, leasing, ordering, or arranging for the purchase, lease or order of any health care item or service reimbursable under Medicare, Medicaid or other federally financed healthcare programs. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on one hand and prescribers, purchasers,

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and formulary managers on the other. Although there are a number statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchases, or recommendations may be subject to scrutiny if they do not qualify for an exemption or safe harbor. Our practices may not in all cases meet all of the criteria for safe harbor protection from antikickback liability.

Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government, or knowingly making, or causing to be made, a false statement to get a false claim paid. Recently, several pharmaceutical and other health care companies have been prosecuted under these laws for allegedly providing free product to customers with the exceptions that the customers would bill federal programs for the product. Other cases have been brought under false claims laws alleging that off-label promotion of pharmaceutical products has resulted in the submission of false claims to government health care programs. The majority of states also have statutes or regulations similar to the federal antikickback law and false claims laws, which apply to items and services reimbursed under Medicaid and other federal and state programs, or, in several states, apply regardless of the payer. Sanctions under these federal and state laws may include civil monetary penalties, exclusion of a manufacturer’s products from reimbursement under government programs, criminal fines, and imprisonment.

Because of the breadth of these laws and narrowness of the safe harbors, it is possible that some of our business activities could be subject to challenge under one or more of such laws. Such a challenge could have a material adverse effect on our business, financial condition and results of operations.

Critical Accounting Policies and Estimates

In preparing our consolidated financial statements, we make assumptions, judgments and estimates that can have a significant impact on our net losses, as well as on the value of certain assets and liabilities on our consolidated balance sheets. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments and estimates and make changes accordingly. Unless otherwise noted below, there have not been any recent changes to our assumptions, judgments or estimates included in our critical accounting policies. We believe that the assumptions, judgments and estimates involved in the accounting for our equity in the loss (income) of BioMarin/Genzyme LLC, impairment of long-lived assets, revenue recognition, income taxes, inventory, research and development, and stock option plans have the greatest potential impact on our consolidated financial statements, so we consider these to be our critical accounting policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results. For further information on our critical and other accounting policies, see Note 2 to the accompanying consolidated financial statements.

Investment in BioMarin/Genzyme LLC, Advances to BioMarin/Genzyme LLC and Equity in the loss/(income) of BioMarin/Genzyme LLC

We account for our joint venture investment using the equity method. Accordingly, we record an increase in our investment for contributions to the joint venture and a reduction or increase in our investment for our 50% share of the loss or income of the joint venture, respectively.

Equity in the loss/(income) of BioMarin/Genzyme LLC includes our 50% share of the joint venture’s loss (income) for the period. Advances to BioMarin/Genzyme LLC include the current receivable from the joint venture for the reimbursement related to our services provided to the joint venture and the investment in BioMarin/Genzyme LLC includes our share of the joint venture’s cash, accounts receivable and inventory.

A critical accounting estimate by management associated with our accounting for the joint venture is the realizability of our investment in the joint venture. The joint venture has incurred significant losses to date. We believe that our investment in the joint venture will be recovered because we project that the joint venture will maintain sustained positive earnings and cash flows in the future. We and our joint venture partner maintain the ability and intent to fund the joint venture’s operations.

Impairment of Long-Lived Assets

We regularly review long-lived assets for impairment. The recoverability of long-lived assets is measured by comparing the asset’s carrying amount to the expected undiscounted future cash flows that the asset is expected to generate. If the carrying amount of the asset is not recoverable, an impairment loss is recorded for the amount that the carrying value of the asset exceeds its fair value.

We currently operate in one business segment, the biopharmaceutical development and commercialization segment. When reviewing goodwill for impairment, SFAS No. 142 requires that we assess whether goodwill should be allocated to operating levels

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lower than our single operating segment for which discrete financial information is available and reviewed for decision-making purposes. These lower levels are referred to as reporting units. Currently, we have identified two reporting units, the Orapred business and our other development and commercialization activities, which are components of our single operating segment. We perform an annual impairment test in the fourth quarter of each fiscal year by assessing the fair value and recoverability of our goodwill, unless facts and circumstances warrant a review of goodwill for impairment before that time.

Determining whether an impairment has occurred typically requires various estimates and assumptions, including determining which cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, their amount, and the asset’s residual value, if any. In turn, measurement of an impairment loss requires a determination of fair value, which is based on the best information available. We use internal discounted cash flow estimates, quoted market prices when available and independent appraisals as appropriate to determine fair value. We derive the required cash flow estimates from our historical experience and our internal business plans and apply an appropriate discount rate.

The recoverability of the carrying value of leasehold improvements for our administrative facilities will depend on the successful execution of our business initiatives and our ability to earn sufficient returns on our approved products and product candidates. Based on management’s current estimates, we expect to recover the carrying value of such assets.

Revenue Recognition

We recognize revenue from product sales when persuasive evidence of an arrangement exists, the product has been shipped, title and risk of loss have passed to the customer, the price to the buyer is fixed or determinable and collection from the customer is reasonably assured. Product sales transactions are evidenced by customer purchase orders, invoices and the related shipping documents.

The timing of customer purchases and the resulting product shipments has a significant impact on the amount of revenue from product sales that we recognize in a particular period. Also, the majority of Orapred sales are made to wholesalers, which, in turn resell the product to retail outlets. Inventory in the distribution channel consists of inventory held by wholesalers, who are our principal customers, and inventory held by retailers. Our revenue from product sales in a particular period is impacted by increases or decreases in wholesalers’ inventory levels. From time to time, we offer sales incentives, such as price discounts and extended payment terms, in the ordinary course of business. These incentives may impact the level of inventory held by wholesalers. Additionally, the buying practices of the wholesalers include occasional speculative purchases of product in excess of the current market demand, at their discretion, in anticipation of future price increases. If wholesaler inventories substantially exceed retail demand, we could experience reduced revenue from sales in subsequent periods, or product returns from the distribution channel due to overstocking, low end-user demand or product expiration.

We establish and maintain reserves for amounts payable to managed care organizations and state Medicaid programs for the reimbursement of a portion of the retail price of prescriptions filled that are covered by the respective plans. The amounts estimated to be paid relating to products sold are recognized as revenue reductions and as additions to accrued expenses at the time of the original sale. The rebate reserves are based on our best estimate of the expected prescription fill rate to these managed care organizations and state Medicaid patients, as well as the rebate rates associated with eligible prescriptions. The estimates are developed using the product’s rebate history adjusted to reflect known changes in the factors that impact such reserves. These factors include changes in the mix of prescriptions that are eligible for rebates, changes in the contract rebate rates and the lag time related to the processing of rebate claims by our customers and managed care organizations. The length of time between the period of prescriptions and the processing of the related rebates has been consistent historically at between three and six months, depending on the nature of the rebate. The length of time between the period of original sale by us and the processing of the related rebate is dependent upon both the length of time that the product is in the distribution channel and the lag time related to rebate processing by third parties. Additionally, we have experienced longer than usual rebate processing lag times as a result of the transition of the product from Medicis after the acquisition. Rebate rates are sensitive to changes resulting from new Medicaid and managed care contracts entered into by us, and rebate rates may increase in the future. To the extent actual rebates differ from our estimates, additional reserves may be required.

Provisions for sales discounts, and estimates for chargebacks and product returns are established as a reduction of product sales at the time such revenues are recognized. These revenue reductions are established by our management as our best estimate at the time of the original sale based on the product’s historical experience adjusted to reflect known changes in the factors that impact such reserves. These revenue reductions are generally reflected either as a direct reduction to accounts receivable through an allowance or as an addition to accrued expenses. We generally permit product returns only if the product is damaged or if it is returned near or after expiration.

Our estimates for future product returns are primarily based on the actual return history for the product. Our estimates for future product returns are also based on the amount of inventory that exists in the distribution channel. Although we are unable to

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quantify wholesaler inventory levels with any certainty, to the extent necessary based on the expiration date and quantity of product in the distribution channel, we adjust our estimate for future returns as appropriate. We estimate wholesaler inventory levels, to the extent possible, based on limited information obtained from certain of our wholesale customers and through other internal analyses. Our internal analyses utilize information such as historical sales to wholesalers, product shelf-life based on expiration dating, estimates of the length of time product is in the distribution channel and historical prescription data, which are provided by a third-party vendor. We also evaluate the current and future commercial market for Orapred and consider factors such as Orapred’s performance compared to its existing competitors.

The amount of Orapred returns compared to sales has been reasonably consistent historically. Our experience is that the length of time between the period of original sale and the product return is between one and two years. Because the product has been on the market for slightly more than three years and the product expiration dating is two to three years, we are continuing to obtain and analyze the returns history. Our evaluation of such factors has not resulted in material revisions to our estimates of future product returns for our current sales. However, to the extent actual chargebacks and product returns differ from management’s estimates, additional reserves may be required. Additionally, in the Ascent Pediatrics transaction we acquired liabilities for certain Orapred product returns and unclaimed rebates for the period prior to our acquisition of the product. We may need to adjust our estimates of these liabilities in the future.

As discussed above, our estimates of revenue dilution items are based primarily on the historical experience for the product, as adjusted to reflect known changes in the factors that impact the revenue dilutions. The nature and amount of our current estimates of the applicable revenue dilution item that are applied to gross sales to derive net sales are described in the table below. The rebate allowance rates disclosed below reflect an increase in late 2004 to our expected future rebates based on increased managed care organization and Medicaid rebate rates being implemented in response to the recently approved generic competitor of Orapred that has the same strength and route of administration of Orapred. Prior to the introduction of the new generic competitor of Orapred, our estimated provision for rebates as a percentage of gross sales was 6-8%. There were no material revisions to management’s estimates of revenue dilution items during the first quarter of 2005, although we expect that our rebate rates will continue to increase in the future. There are no additional material revenue dilution items other than those disclosed below and there have been no material revisions to our estimates of our revenue dilution items to date, except as discussed above.

Revenue Dilution Item	Estimated Rate		Description
Cash Discounts	2	%	Discounts offered to customers for prompt payment of accounts receivable
Sales Returns	3-4	%	Provision for returns of product sales, mostly due to product expiration or damage
Rebates	13-15	%	Rebates offered to managed care organizations and state Medicaid programs
Total	18-21	%

We periodically evaluate the need to maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. When making this evaluation, we make judgments about the creditworthiness of customers based on ongoing credit evaluations and the aging profile of customer accounts receivable and assess current economic trends that might impact the level of credit losses in the future. Historically, the Orapred product has not experienced significant credit losses and an allowance for doubtful accounts has not been required because a significant portion of Orapred sales is made to a limited number of financially viable distributors, because we offer discounts that encourage the prompt payment of outstanding receivables and because we require immediate payment in certain circumstances. However, since we cannot predict changes in the financial stability of our customers, we cannot guarantee that allowances will not be required in the future. If we begin to experience credit losses, our operating expenses would increase.

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 assets, the principal amount of which is the tax effect of net operating loss carryforwards, of approximately $241.6 million at December 31, 2004. Future taxable income and ongoing prudent and feasible tax planning strategies have been considered in assessing the need for the valuation allowance. If we later determine that it is more likely than not that the net deferred tax assets would be realized, the previously provided valuation allowance would be reversed. In order to realize our deferred tax assets we must be able to generate sufficient taxable income in the tax jurisdictions in which the deferred tax assets are located. This critical accounting assumption has been historically accurate, as we have not been able to utilize our net deferred tax assets, and we do not expect changes to this assumption as we expect to incur losses for the foreseeable future.

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Inventory

We value inventories at the lower of cost or fair value. We determine the cost of raw materials using the average cost method and the cost of finished goods using the specific identification cost method. We analyze our inventory levels quarterly and write down inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable value and inventory in excess of expected requirements. Expired inventory is disposed of and the related costs are written off. The determination of whether or not inventory costs will be realizable requires estimates by our management. A critical estimate in this determination is the estimate of the future expected inventory requirements, whereby we compare our internal sales forecasts to inventory on hand. Actual results may differ from those estimates and inventory write-offs may be required.

Research and Development

Research and development expenses include expenses associated with contract research and development provided by third parties, product manufacturing prior to regulatory approval, clinical and regulatory costs, and internal research and development costs. A critical accounting assumption by our management is that we believe that regulatory approval of our product candidates is uncertain, and do not assume that product manufactured prior to regulatory approval will be sold commercially. As a result, inventory costs for product candidates are expensed as research and development expenses until regulatory approval is obtained, at which time inventory is capitalized at the lower of cost or fair value. Historically, there have been no changes to this assumption.

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 and directors 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 persons who are neither employees nor directors. The fair value of options granted is determined using the Black-Scholes model, which requires various estimates and assumptions by management, including the expected term of the options and the expected future volatility of the value of our stock. The expected term of stock options is determined primarily based on the historical patterns for stock option exercises and cancellations. The expected future volatility is determined based on both the historical volatility as well as current and future circumstances that will affect future volatility. These estimates are sensitive to change based on external factors such as the equity markets in general and the individual circumstances of our employees, which are considered in the determination of our estimates.

Recent Accounting Pronouncements

See Note 2(p) of our accompanying consolidated financial statements for a full description of recent accounting pronouncements and our expectation of their impact on our results of operations and financial condition.

Results of Operations

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 presentation and the significance of the joint venture’s operations compared to our total operations, we have divided our discussion of the results of operations into two sections, BioMarin in total and BioMarin/Genzyme LLC. The discussion of the joint venture’s operations includes the total amounts for the joint venture, not just our 50% interest in the operations.

BioMarin Results of Operations

Net Loss

Our net loss in the first quarter of 2005 was $22.5 million as compared to $19.9 million in the first quarter of 2004. Net loss for the first quarter of 2005 increased primarily as a result of the following (in millions):

Net loss for the first quarter of 2004	$	(19.9	)
Increased Phenoptin development		(2.3	)
Expenses related to the Ascent Pediatrics acquisition		(2.1	)
Increased corporate overhead and other		(1.6	)
Increased preparation for rhASB commercial launch		(0.8	)
Orapred new formulation development		(0.7	)
Increase in other expenses, net		(0.7	)
Increased profits from BioMarin/Genzyme LLC		3.8
Decreased rhASB clinical trial costs		1.8
Net loss for the first quarter of 2005	$	(22.5	)

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Expenses related to the Ascent Pediatrics acquisition include amortization of acquired intangible assets of $0.3 million, imputed interest expense of $1.7 million and a fair value inventory adjustment of $0.1 million. The increase in corporate overhead and other costs includes increased facilities expense, audit fees and legal costs.

Net Product Sales and Gross Profit

Commencing with our acquisition of the Ascent Pediatrics business on May 18, 2004, our net product sales include sales of Orapred, a drug primarily used to treat asthma exacerbations in children. During the first quarter of 2005, we recognized $5.0 million of net product sales of Orapred, including its branded and authorized generic products. Gross profit for the first quarter of 2005 was $4.3 million, representing a gross margin of approximately 86%. We expect that the gross margins related to Orapred will decline in the future as our authorized generic product discussed below, which is priced lower than the branded version, becomes a larger portion of total Orapred sales. Cost of sales excludes the amortization of the developed product technology resulting from the acquisition of the Ascent Pediatrics business.

A new generic competitor to Orapred was introduced into the market in the fourth quarter of 2004, which has adversely affected the net product sales of Orapred. Although we are implementing strategies to counter this effect, we expect the adverse impact on net product sales to continue in the future. At the end of the first quarter of 2005, we launched an authorized Orapred generic product and recognized $0.5 million of related net product sales during the quarter, which is included in the $5.0 million of total net product sales during the quarter.

Research and Development Expense

Our research and development expense includes personnel, facility and external costs associated with the development and commercialization of our product candidates and products. These development costs primarily include preclinical and clinical studies, manufacturing prior to regulatory approval, quality control and assurance and other product development expenses such as regulatory costs. Research and development expenses increased by $1.3 million to $15.0 million in the first quarter of 2005 from $13.7 million in the first quarter of 2004. Research and development expenses increased in the first quarter of 2005 primarily as a result of the following (in millions):

Research and development expense for the first quarter of 2004	$	13.7
Increased Phenoptin development		2.3
Orapred new formulation development		0.7
Decreased rhASB clinical trial costs		(1.8	)
Other		0.1
Research and development expense for the first quarter of 2005	$	15.0

The increased Phenoptin development primarily includes manufacturing costs and clinical trial costs.

Selling, General and Administrative Expense

Our selling, general and administrative expense includes sales and administrative personnel, corporate facility and external costs required to support our commercialized products and product development programs. These selling, general and administrative costs include: corporate facility operating expenses and depreciation; sales operations in support of Orapred and our product candidates; human resources; finance and support personnel expenses; and other corporate costs such as insurance, audit and legal expenses. Selling, general and administrative expenses increased by $6.7 million to $10.6 million in the first quarter of 2005 from $3.9 million in the first quarter of 2004. The components of the increase between the first quarter of 2004 and the first quarter of 2005 primarily include the following (in millions):

Selling, general and administrative expense for the first quarter of 2004	$	3.9
Orapred sales and marketing		4.3
Increased preparation for rhASB commercial launch		0.8
Increased corporate facility expenses		1.2
Increased audit fees and legal expenses		0.6
Other		(0.2	)
Selling, general and administrative expense for the first quarter of 2005	$	10.6

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Amortization of Acquired Intangible Assets

Amortization of acquired intangible assets includes the current amortization expense of the intangible assets acquired in the Ascent Pediatrics transaction in May 2004, including the Orapred developed and core technology. The acquired intangible assets are being amortized over 15 years and the amortization expense for the first quarter of 2005 was $0.3 million. We expect that the recurring annual amortization expense associated with the transaction will be approximately $1.1 million.

Equity in the Loss/(Income) of BioMarin/Genzyme LLC

Equity in the loss/(income) of BioMarin/Genzyme LLC includes our 50% share of the joint venture’s loss (income) for the period. Equity in the income of BioMarin/Genzyme LLC was $2.1 million in the first quarter of 2005 compared to a loss of $1.8 million in the first quarter of 2004. The increase in profit from BioMarin/Genzyme LLC in the first quarter of 2005 was principally due to the $8.5 million increase in Aldurazyme net revenue, which totaled $15.9 million in the first quarter of 2005 compared to $7.4 million in the first quarter of 2004. See the “BioMarin/Genzyme LLC” section below for further discussion of the joint venture’s results of operations.

Interest Income

We invest our cash, short-term investments and restricted cash in government and other high credit quality securities in order to limit default and market risk. Interest income decreased to $0.2 million in the first quarter of 2005 from $0.8 million in the first quarter of 2004. The decrease is primarily due to decreased levels of cash and investments during the first quarter of 2005 compared to the first quarter of 2004 and investment losses recognized during the first quarter of 2005.

Interest Expense

We incur interest expense on our convertible debt and on our equipment and facility loans. Interest expense also includes imputed interest expense on the discounted obligation for the Ascent Pediatrics transaction. Interest expense was $3.3 million and $1.4 million in the first quarter of 2005 and the first quarter of 2004, respectively, representing an increase of $1.9 million. The increase in the first quarter of 2005 primarily represents imputed interest related to the Ascent Pediatrics transaction of $1.7 million.

BioMarin/Genzyme LLC Results of Operations

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 production costs in May 2003, after U.S. regulatory approval was obtained. The joint venture began capitalizing Aldurazyme inventory production costs in January 2002, when inventory production for commercial sale began. The difference in inventory capitalization policies results in a greater operating expense realized by us prior to regulatory approval, and lower cost of goods sold with higher gross profit realized by us as the previously expensed product is sold by the joint venture, as well as lower research and development expense when Aldurazyme is used in on-going clinical trials. These differences will be eliminated when all of the product manufactured prior to regulatory approval has been sold or has been used in clinical trials. We estimate that the majority of the differences will be eliminated by the end of 2005. See Note 5(a) to the accompanying consolidated financial statements for further discussion of the difference in inventory cost basis between the joint venture and us.

Revenue and Gross Profit

Our joint venture partner, Genzyme and we received marketing approval for Aldurazyme in the U.S. in April 2003, and in the E.U. in June 2003. We have subsequently received marketing approval in other countries. Aldurazyme was launched commercially in May 2003 in the U.S. and in June 2003 in the E.U. The joint venture recognized $15.9 million and $7.4 million of net revenue in the first quarter of 2005 and the first quarter of 2004, respectively. The increase in net revenue from the first quarter of 2004 to the first quarter of 2005 of $8.5 million is primarily attributable to an increase in the number of patients initiating therapy. There were 312 and 184 commercial patients on therapy at the end of the first quarter of 2005 and the first quarter of 2004, respectively.

Gross profit was $13.2 million and $6.8 million for the first quarter of 2005 and the first quarter of 2004, respectively, representing gross margins of approximately 83% and 92%, respectively. The decrease in gross margin during the first quarter of 2005 compared to the first quarter of 2004 is attributable to the recognition of higher cost of sales in the first quarter of 2005 as the joint venture sells more of the inventory that was produced after obtaining regulatory approval, which has a higher cost basis because the inventory produced prior to obtaining regulatory approval was previously expensed.

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Operating Expenses

Operating expenses of the joint venture include the costs associated with the development and commercial support of Aldurazyme and totaled $9.1 million for the first quarter of 2005 as compared to $10.3 million for the first quarter of 2004. Operating expenses in the first quarter of 2005 included $5.1 million of selling, general and administrative expenses associated with the commercial support of Aldurazyme and $4.0 million of research and development costs, primarily clinical trial costs. Operating expenses in the first quarter of 2004 included $6.3 million of selling, general and administrative expenses associated with the commercial launch of Aldurazyme and $4.0 million of research and development expenses.

Liquidity and Capital Resources

Cash and Cash Flow

We have financed our operations by the issuance of common stock, convertible debt, equipment and other commercial financing and the related interest income earned on cash, cash equivalents and short-term investments. During 2004, we received $20.0 million of proceeds from our equipment and facility loan.

As of March 31, 2005, our combined cash, cash equivalents, short-term investments, restricted cash and cash balances related to long-term debt totaled $62.3 million, a decrease of $28.2 million from $90.5 million at December 31, 2004. The restricted cash of $12.9 million at March 31, 2005, is primarily associated with the Ascent Pediatrics transaction and we expect the restrictions to be released in the second quarter of 2005. Cash balances related to long-term debt represent an amount totaling $19.6 million that we are required to keep on deposit with Comerica Bank pursuant to the terms of the equipment and facility loan that we entered into in May 2004. This amount is equal to the long-term portion of the outstanding balance under this facility. The maintenance of a deposit equal to the outstanding amount under the facility is a covenant of the facility and the failure to satisfy this covenant would constitute a default under the facility. However, we have the ability to access the amount at our discretion and therefore it is not restricted cash.

Cash inflows during the first quarter of 2005 included net proceeds from our equipment and facility loan from Comerica totaling $3.6 million. In February 2005, the Comerica equipment and facility loan was amended to provide for an incremental $12.5 million of borrowing capacity to us. The incremental loan amount was secured by certain cash and short-term investments and was repaid in March 2005. The primary sources of cash during 2004 were loan proceeds totaling $20.0 million.

Pursuant to our settlement of a dispute with Medicis in January 2005, Medicis will make available to us a convertible note of up to $25.0 million beginning July 1, 2005 based on certain terms and conditions and provided that the Company does not experience a change of control. Money advanced under the convertible note is convertible into our common stock, at Medicis’ option, according to the terms of the convertible note. We anticipate drawing funds from this note, as needed, when it becomes available. Medicis also agreed to pay us $6.0 million for Orapred returns; $2.0 million of this amount was received during the first quarter of 2005 and we expect to receive the remaining $4.0 million through July 2005.

The primary uses of cash during the first quarter of 2005 were to finance operations, which primarily included the manufacturing and clinical trials of rhASB and the related supporting functions, payments to Medicis related to the Ascent Pediatrics transaction and the manufacturing and clinical development of Phenoptin. Our cash burn, a non-GAAP financial measure, in the first quarter of 2005 was $28.2 million as compared to $15.2 million in the first quarter of 2004. The $13.0 million increase in cash burn in the first quarter of 2005 is primarily attributable to payments to Medicis related to the Ascent Pediatrics transaction totaling $15.0 million and net cash outflows for working capital requirements and the increased operating expenses described above. These increases in cash burn were partially offset by equipment and facility loan net proceeds of $3.6 million, a decrease in the cash investment in the joint venture and $2.0 million of the reimbursement from Medicis for Orapred returns received during the first quarter of 2005. See “Overview—Non-GAAP Financial Measures” above for a discussion of “cash burn” as a non-GAAP financial measure and the reconciliation of cash burn to net increase (decrease) in cash.

We do not expect to generate net 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 U.S. and international jurisdictions;

• clinical and commercial scale manufacturing capabilities; and

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• expansion of sales and marketing activities, including the support of the Ascent Pediatrics business and the pre-commercial launch activities for rhASB.

We also expect to incur costs through our joint venture related to increased marketing and manufacturing of Aldurazyme to satisfy the product demands associated with its commercialization.

As a result of the Ascent Pediatrics transaction and the January 2005 amendments to the transaction agreements, we expect to pay Medicis $114.0 million in specified cash payments through 2009, of which $19.2 million is payable in the remainder of 2005.

Funding Commitments

We expect to fund our operations with our cash, cash equivalents, short-term investments and currently restricted cash, supplemented by proceeds from equity or debt financings, loans or collaborative agreements with corporate partners. We expect our current cash, short-term investments, currently restricted cash and cash balances related to long-term debt and funds contractually committed to us will meet our operating and capital requirements into the fourth quarter of 2005.

Our investment in our product development programs has a major impact on our operating performance. Our research and development expenses for the first quarter of 2004 and 2005 and for the period since inception (March 1997) represent the following (in millions):

	Three months ended March 31,				Since Program Inception
	2004		2005
rhASB	$	10.6	$	9.0	$	82.9
Phenoptin		0.8		3.2		12.2
Orapred		—		0.7		2.6
Vibrilase		0.1		0.1		8.2
NeuroTrans		0.7		0.3		6.2
Neutralase		—		—		23.1
Not allocated to specific major projects		1.5		1.7		74.3
	$	13.7	$	15.0	$	209.5

We cannot estimate the cost to complete any of our product development programs. Additionally, except as disclosed under “Overview” above, we cannot estimate the time to complete any of our product development programs or when we expect to receive net cash inflows from any of our product development programs. Please see “Factors That May Affect Future Results” for a discussion of the reasons that we are unable to estimate such information, and in particular “—If we fail to obtain or maintain regulatory approval to commercially manufacture or sell our drugs and 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;” “—To obtain regulatory approval to market our products, preclinical studies and costly and lengthy preclinical and clinical trials are required and the results of the studies and trials are highly uncertain;” “—If we are unable to successfully develop manufacturing processes for our drug products to produce sufficient quantities and at acceptable costs, we may be unable to meet demand for our products and lose potential revenue, have reduced margins or be forced to terminate a program;” “—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 and our revenue could be adversely affected;” and “—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.”

We expect that the proceeds from equity or debt financing, loans or collaborative agreements will be used to fund future operating costs, capital expenditures and working capital requirements, which may include: costs associated with the commercialization of our products; additional clinical trials and the manufacturing of Orapred, rhASB and Phenoptin; preclinical studies and clinical trials for our other product candidates; potential licenses and other acquisitions of complementary technologies, products and companies; general corporate purposes; payment of the amounts due with respect to the Ascent Pediatrics transaction; and working capital.

Our future capital requirements will depend on many factors, including, but not limited to:

• our ability to successfully regain market share of Orapred;

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• our joint venture partner’s 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.

Borrowings and Contractual Obligations

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

We have entered into a $25.0 million credit facility with Comerica Bank executed in May 2004, to finance our equipment purchases and facility improvements. The outstanding loan balance totaled $23.4 million at March 31, 2005. The loans bear interest ranging from 3.94% to 4.59% and are secured by liens on certain assets. Payments of principal and interest are due through maturity of the credit facility in 2011. Comerica Bank requires that we maintain a total unrestricted cash balance of at least $45.0 million or a greater amount defined by a calculation provided for in the credit agreement, as previously amended, and that we maintain a deposit with Comerica Bank equal to the outstanding principal balance. In April 2005, the facility agreement was further amended to reduce the minimum cash and investment balance requirement to $35.0 million or a greater amount defined by a calculation provided for in the facility agreement solely for the month ended April 30, 2005. Our unrestricted cash as of March 31, 2005 totaled $49.4 million. Additionally, there is $0.3 million outstanding on other secured loans that the Company entered into during 2002 with a separate lender.

As a result of the Ascent Pediatrics transaction, we expect to pay Medicis $114.0 million in specified cash payments through 2009, of which $19.2 million is payable in the remainder of 2005.

We anticipate a need for additional financing to fund our future operations, including the commercialization of our drug product candidates 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.

We have contractual and commercial obligations under our debt, operating leases and other obligations related to research and development activities, purchase commitments, licenses and sales royalties with annual minimums. Information about these obligations as of March 31, 2005 is presented below (in thousands).

	Payments Due by Period
	Total		Remainder of 2005		2006		2007-2008		2009- 2010		2011 and Thereafter
Medicis obligations	$	94,000	$	19,200	$	7,700	$	13,500	$	53,600	$	—
Convertible debt and related interest		140,398		4,375		4,375		131,648		—		—
Operating leases		25,572		2,646		3,437		6,642		6,525		6,322
Equipment and facility loans		23,713		3,161		3,794		7,588		7,588		1,582
Research and development and purchase commitments		10,294		9,340		926		28		—		—
Total	$	293,977	$	38,722	$	20,232	$	159,406	$	67,713	$	7,904

We have also licensed technology from others, for which we are required to pay royalties upon future sales, subject to certain annual minimums totaling $0.5 million.

We are also subject to contingent payments totaling approximately $27.8 million upon achievement of certain regulatory and licensing milestones if they occur before certain dates in the future. Included in the total amount is $8.6 million of contingent

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payments related to Neutralase, for which we terminated development during 2003 and, accordingly, we do not expect they will ever be payable.

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 approved for commercial sale in the U.S. and the E.U. and has generated approximately $70.0 million in net sales revenue to our joint venture from the product’s launch (May 2003) through March 31, 2005. We acquired exclusive rights to Orapred in May 2004 and reported $23.6 million in Orapred net product sales following the acquisition through March 31, 2005. We have no revenues from sales of our product candidates. As of March 31, 2005, we had an accumulated deficit of $511.3 million. We expect to continue to operate at a net loss for the foreseeable future. Our future profitability depends on our marketing and selling of Orapred, the successful commercialization of Aldurazyme by our joint venture partner, Genzyme, 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 at planned levels and be forced to reduce or discontinue operations.

If we fail to obtain the capital necessary to fund our operations, our financial results and financial condition will be adversely affected and we will have to delay or terminate some or all of our product development programs.

We will require for additional financing to fund our future operations, including the commercialization of our drug product candidates currently under development. 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 market and sell Orapred including our ability to protect our existing market share and regain market share against generic competition;

• our joint venture partner’s 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;

• our ability to maintain compliance with our debt covenants;

• the time and cost necessary to respond to technological and market developments;

• 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; and

• whether our convertible debt is converted to common stock in the future.

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Moreover, our fixed expenses such as rent, license payments, interest expense and other contractual commitments are substantial and will increase in the future. These fixed expenses will increase because we expect to enter into:

• additional licenses and collaborative agreements;

• additional contracts for consulting, maintenance and administrative services;

• additional contracts for product manufacturing; and

• additional financing facilities.

We believe that our cash, cash equivalents, short-term investment securities, restricted cash balances and cash balances related to long-term debt at March 31, 2005 will be sufficient to meet our operating and capital requirements into the fourth quarter of 2005. These estimates are based on assumptions and estimates, including the availability of a $25 million loan from Medicis in July 2005. These assumptions and estimates may prove to be wrong. Additionally, we are required to maintain a total unrestricted cash balance of at least $45.0 million or a greater amount defined by a calculation provided for in the credit facility with Comerica Bank, as previously amended. We amended our credit facility to reduce the total unrestricted cash balance requirement solely for the month ended April 30, 2005. If we are unable to obtain additional liquidity prior to May 31, 2005, we would need to obtain a further waiver of the total unrestricted cash balance requirement or risk being in violation under the credit facility. We may need to sell equity or debt securities to raise additional funds if we are unable to satisfy our liquidity requirements. The sale of additional securities may result in additional dilution to our stockholders. Furthermore, additional financing may not be available in amounts or on terms satisfactory to us or at all. This could result in the delay, reduction or termination of our research which could harm our business.

If we fail to obtain or maintain regulatory approval to commercially manufacture or sell our drugs and 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 U.S. and in foreign jurisdictions. In the U.S., we must obtain FDA approval for each drug that we intend to commercialize. The FDA approval process is typically lengthy and expensive, and approval is never certain. Products distributed abroad are also subject to foreign government regulation. Both Aldurazyme and Orapred have received regulatory approval to be commercially marketed and sold in the U.S., and Aldurazyme has received regulatory approval to be commercially marketed and sold in the E.U. and several other countries. If we fail to obtain regulatory approval for our other product candidates, we will be unable to market and sell those drug products. Because of the risks and uncertainties in pharmaceutical development, our product candidates could take a significantly longer time to gain regulatory approval than we expect or may never gain approval.

From time to time during the regulatory approval process for our products and our product candidates, we maintain discussions with the FDA and foreign regulatory authorities regarding the regulatory requirements of our development programs. To the extent appropriate, we accommodate the requests of the regulatory authorities and, to date, we have generally been able to reach reasonable accommodations and resolutions regarding the underlying issues. However, we are often unable to determine the outcome of such deliberations until they are final. If we are unable to effectively and efficiently resolve and comply with the inquiries and requests of the FDA and foreign regulatory authorities, the approval of our product candidates may be delayed and their value may be reduced.

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 and reporting adverse reactions and other information. If we do not comply with the FDA’s regulations, the range of possible sanctions includes FDA issuance of adverse publicity, product recalls or seizures, fines, total or partial suspensions of production and/or distribution, suspension of FDA’s review of marketing applications, enforcement actions, including injunctions and civil or criminal prosecution. 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 sanctions are applied or 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 preclinical and clinical trials are 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 product candidate. We expect the number of preclinical studies and clinical trials that the regulatory authorities will require will vary depending on the product candidate, 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 product candidates. 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 targeted human patients in order to receive regulatory approval for commercial sale.

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Adverse or inconclusive clinical results would stop us from filing for regulatory approval of our product candidates. 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 our product candidates, 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, if obtained, may not actually lead to a faster review process and a delay in the review process or in the approval of our products will delay revenue from the sale of the products and will increase the capital necessary to fund these programs.

rhASB has obtained fast track designation and has received a six-month review timeframe for the U.S. Our other product candidates may not receive fast track designation or a six-month review timeframe. Even with fast track designation, it is not guaranteed 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 rhASB is delayed, realizing revenue from the sale of rhASB will be delayed and the capital necessary to fund our development program will be increased.

If we fail to comply with manufacturing regulations, our financial results and financial condition will be adversely affected.

Before we can begin commercial manufacture of our products, we must obtain regulatory approval of our manufacturing facilities, processes and quality systems; and the manufacture of our drugs must comply with cGMP regulations. The cGMP regulations govern facility compliance, quality control and documentation policies and procedures. In addition, 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 manufacturing facility in Novato, California (Galli Drive) and cGMP warehouse facilities have been inspected and licensed by the State of California for clinical pharmaceutical manufacture and have been approved by the FDA, the EMEA and Health Canada for the commercial manufacture of Aldurazyme. We have entered into contracts with third-party manufacturers to produce Orapred and Phenoptin.

Due to the complexity of the processes used to manufacture Aldurazyme and our product candidates, we may be unable to continue to pass or initially pass federal or international regulatory inspections in a cost effective manner. For the same reason, any potential third-party manufacturer of Aldurazyme or our product candidates may be unable to comply with cGMP regulations in a cost effective manner. If we, or our third-party manufacturers with whom we contract, are unable to comply with manufacturing regulations, we may be subject to fines, unanticipated compliance expenses, recall or seizure of our products, total or partial suspension of production and/or enforcement actions, including injunctions, and criminal or civil prosecution. These possible sanctions would adversely affect our financial results and financial condition.

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 U.S. 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

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for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the drug. Similar regulations are available in the E.U. with a 10-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 especially 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 and our revenues will be reduced.

Even though we have obtained orphan drug designation for certain of our product candidates and even if we obtain orphan drug designation for our future product candidates, 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. Even a second drug can be approved for the same condition if the FDA concludes that the later drug is safer, more effective or makes a major contribution to patient care. 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.

Aldurazyme and rhASB both 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 rhASB targets patients with MPS VI. We believe that we will need to market worldwide to achieve significant market penetration of each product. In addition, we are developing other drug candidates to treat conditions, such as other genetic diseases, with small patient populations. Due to the expected costs of treatment for Aldurazyme and rhASB, we may be unable to maintain or obtain sufficient market share for Aldurazyme or rhASB at a price high enough to justify our product development efforts.

If we are found in violation of federal or state “fraud and abuse” laws, we may be required to pay a penalty or be suspended from participation in federal or state health care programs, which may adversely affect our business, financial condition and results of operation.

We are subject to various federal and state health care “fraud and abuse” laws, including antikickback laws, false claims laws and laws related to ensuring compliance. The federal health care program antikickback statute makes it illegal for any person, including a pharmaceutical company, to knowingly and willfully offer, solicit, pay or receive any remuneration, directly or indirectly, in exchange for or to induce the referral of business, including the purchase, order or prescription of a particular drug, for which payment may be made under federal health care programs, such as Medicare and Medicaid. Under federal government regulations, certain arrangements (“safe harbors”) are deemed not to violate the federal antikickback statute. We seek to comply with these safe harbors. False claims laws prohibit anyone from knowingly and willfully presenting or causing to be presented for payment to third party payers (including government payers) claims for reimbursed drugs or services that are false or fraudulent, claims for items or services that were not provided as claimed, or claims for medically unnecessary items or services. Other cases have been brought under false claims laws alleging that off-label promotion of pharmaceutical products has resulted in the submission of false claims to government health care programs. Under the Health Insurance Portability and Accountability Act of 1996, we also are prohibited from knowingly and willfully executing a scheme to defraud any health care benefit program, including private payers, or knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for health care benefits, items or services. Violations of fraud and abuse laws may be punishable by criminal and/or civil sanctions, including fines and/or exclusion or suspension from federal and state health care programs such as Medicare and Medicaid.

Many states have adopted laws similar to the federal antikickback statute, some of which apply to referral of patients for health care services reimbursed by any source, not just governmental payers. In addition, California recently passed a law that requires pharmaceutical companies to comply with both the April 2003 Office of Inspector General Compliance Program Guidance for Pharmaceutical Manufacturers and the July 2002 PhRMA Code on Interactions with Healthcare Professionals.

Neither the government nor the courts have provided substantial guidance on the application of these laws to our business. Law enforcement authorities are increasingly focused on enforcing these laws, and it is possible that some of our practices may be challenged under these laws. While we believe we have structured our business arrangements to comply with these laws, it is possible that the government could allege violations of, or convict us of violating, these laws. If we are found in violation of one of these laws, are required to pay a penalty or are suspended or excluded from participation in federal or state health care programs, our business, financial condition and results of operation may be adversely affected.

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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 using Aldurazyme and rhASB is 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 rhASB 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.

Ascent Pediatrics had reimbursement agreements for Orapred with many of the major U.S. third-party payers. We have agreed with these third parties to maintain the existing agreements at this time and have renegotiated certain agreements. In the future, we expect to enter into additional agreements with other third-party payers and we expect to evaluate and renegotiate additional existing agreements. Reimbursement strategy is a complicated process that is based on a number of factors, including competition, patient profile and the condition being treated, among others.

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 limited expertise in obtaining reimbursement. We rely 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 and as necessary to support Orapred. 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 U.S. 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 U.S. 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.

In the U.S., we expect branded pharmaceutical products to be subject to increasing pricing pressures. Implementation of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA), providing a prescription drug benefit under the Medicare program, will take effect January 1, 2006. While it is difficult to predict the business impact of this legislation prior to 2006, there is additional risk associated with increased pricing pressures. While the MMA prohibits the Secretary of Health and Human Services (HHS) from directly negotiating prescription drug prices with manufacturers, we expect continued challenges to that prohibition over the next several years. Also, the MMA retains the authority of the HHS to prohibit the importation of prescription drugs, but we expect Congress to consider several measures that could remove that authority and allow for importation of products into the U.S. regardless of their safety or cost. If adopted, such legislation would likely have a negative effect on our U.S. sales.

As a result of the passage of the MMA, aged and disabled patients jointly eligible for Medicare and Medicaid will receive their prescription drug benefits through Medicare, instead of Medicaid, beginning January 1, 2006. This may relieve some state budget pressures but is unlikely to result in reduced pricing pressures. A majority of states have begun to implement supplemental rebates and restricted formularies in their Medicaid programs, and these programs are expected to continue in the post-MMA environment. Additionally, in the U.S., we are required to provide rebates to state governments on their purchases of certain of our products under state Medicaid programs. Other cost containment measures have been adopted or proposed by federal, state, and local government entities that provide or pay for health care. In most international markets, we operate in an environment of government-mandated cost containment programs, which may include price controls, reference pricing, discounts and rebates, restrictions on physician prescription levels, restrictions on reimbursement, compulsory licenses, health economic assessments, and generic substitution. Several states are also attempting to extend discounted Medicaid prices to non-Medicaid patients. Additionally, notwithstanding the federal law prohibiting pharmaceutical importation, nine states have implemented importation schemes for their citizens, usually involving a website that links patients to selected Canadian pharmacies. One state has such a program for its state employees. In the absence of federal action to curtail state activities, we expect other states to launch importation efforts. As a result, we expect pressures on pharmaceutical pricing to continue.

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International operations are also generally subject to extensive price and market regulations, and there are many proposals for additional cost-containment measures, including proposals that would directly or indirectly impose additional price controls or reduce the value of our intellectual property portfolio.

We cannot predict the extent to which our business may be affected by these or other potential future legislative or regulatory developments. However, we expect that pressures on pharmaceutical pricing will continue in the near term.

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 biopharmaceutical products are complex and uncertain. The scope and extent of patent protection for some of our products and product candidates are particularly uncertain because key information on some of our product candidates 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. 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 or Orapred.

We own or license patents and patent applications related to Aldurazyme, Orapred, 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 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 operating 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.

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• 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 U.S. 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, hospitals, universities or other educational institutions. These research partners 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 our product development efforts 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 (USPTO) 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 U.S. unless and until we obtain a license.

The USPTO 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 U.S. law, issued patents are entitled to a presumption of validity, and our challenges to the U.S. patents may be unsuccessful. Even if we are successful, challenging the U.S. patents may be expensive, require our management to devote significant time to this effort and may adversely impact commercialization of Aldurazyme in the U.S.

The holder of the patents described above has granted an exclusive license for products relating to these patents to one of our competitors, Transkaryotic Therapies Inc (TKT). If we are unable to successfully challenge the patents, we may be unable to produce Aldurazyme in the U.S. (or in Canada or Japan, should patents issue in these countries) unless we can reach an accommodation with the patent holder and licensee. Neither the current licensee nor the patent holder is required to grant us a license or other accommodation and even if a license or other accommodation is available, we may have to pay substantial license fees, which could adversely affect our business and operating results.

On October 8, 2003, Genzyme and TKT announced their collaboration to develop and commercialize an unrelated drug product. In connection with the collaboration agreement, Genzyme and TKT signed a global legal settlement involving an exchange of non-suits between the companies. As part of this exchange, TKT has agreed not to initiate any patent litigation against Genzyme or our joint venture relating to Aldurazyme. If any or all of the TKT-licensed patents are deemed (or ruled) to cover Aldurazyme, our joint venture may be required to reach additional accommodations with the holder of the patents, who is not party to the TKT-Genzyme settlement discussed above.

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 rely 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 orphan pharmaceutical products. In addition, without Genzyme we would be required to pursue foreign regulatory approvals. We have limited 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, 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.

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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 Aldurazyme.

If the joint venture is terminated and we retain the rights to Aldurazyme, we could experience significant difficulties and delays in obtaining third-party reimbursement or we could fail to obtain foreign regulatory approvals, 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 our license agreement with Ascent Pediatrics is terminated or becomes non-exclusive we could be barred from commercializing Orapred or our ability to successfully commercialize Orapred could be diminished and our revenue could decrease significantly.

The license agreement with Ascent Pediatrics is terminable upon specified material breaches by Ascent Pediatrics or us. If the license agreement were terminated, we would no longer have the ability to manufacture, market, sell, or distribute Orapred and our revenue could decrease significantly.

Ascent Pediatrics has the right under the license agreement to cause the license to become non-exclusive in the event of certain specified breaches by us. If the license becomes non-exclusive, Ascent Pediatrics would be able to commercialize Orapred itself or license it to others, which could reduce our competitive advantage and which could reduce our revenue significantly.

If the option under the securities purchase agreement with Medicis to purchase all of the issued and outstanding capital stock of Ascent Pediatrics is accelerated by Medicis, we may not have sufficient funds to exercise the option, which could result in a termination of the license agreement and our revenue could decrease significantly.

We are obligated to exercise the option under our securities purchase agreement with Medicis to purchase all issued and outstanding capital stock of Ascent Pediatrics in approximately four years unless our product sales from the Ascent Pediatrics business for the 12 months ending March 31, 2009 exceed 150% of the Ascent Pediatrics business product sales in the 12 months ended March 31, 2004, in which event we would have the right not to exercise the option. The exercise of the option is subject to acceleration on specified material breaches of our license agreement with Ascent Pediatrics or a bankruptcy or insolvency proceeding involving Medicis or Ascent Pediatrics, and if such acceleration is due to a specified breach of the license by us, then the option exercise price together with an amount equal to all license payments remaining under our license agreement with Ascent Pediatrics will become due on the accelerated closing date for the purchase of shares under the option.

If the option were accelerated, we may not have sufficient funds at that time to exercise the option and/or to make the license payments, and may not be able to obtain the financing to do so, in which case we would not be able to consummate the transaction to acquire such shares and would be in breach of the license agreement and the securities purchase agreement. If we are in breach of the license agreement, Ascent Pediatrics may terminate the license and we would no longer have the ability to manufacture, market, sell, or distribute Orapred and our revenue could decrease significantly.

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If we are unable to successfully develop manufacturing processes for our drug products to produce sufficient quantities and at acceptable costs, we may be unable to meet demand for our products and lose potential revenue, have reduced margins or be forced to terminate a program.

Although we manufacture 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;

• raw material suppliers;

• 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, and may therefore experience difficulty if further process development is necessary.

The availability of suitable contract manufacturing capacity at scheduled or optimum times is not certain. The cost of contract manufacturing is generally greater than internal manufacturing and therefore our manufacturing processes must be of higher productivity to result in equivalent margins.

Although we have entered into contractual relationships with third-party manufacturers to produce Orapred, if those manufacturers are unwilling or unable to fulfill their contractual obligations, we may be unable to meet demand for that product or sell that product at all, and we may lose potential revenue.

We have built-out approximately 54,000 square feet at our Galli Drive facility for manufacturing capability for Aldurazyme and rhASB, 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 developing manufacturing processes for all of our product candidates, including rhASB, 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 populations 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 otherwise produce. The development of a stable, high production cell line for any given enzyme or other protein is difficult,

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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 may be unable to meet demand for our products and lose potential revenue, have reduced margins or be forced to terminate a program.

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.

If our manufacturing processes have a higher than expected failure rate, we may be unable to meet demand for our products and lose potential revenue, have reduced margins, or be forced to terminate a program.

The processes we use to manufacture our product and product candidates are extremely complex. Many of the processes include biological systems, which add significant complexity, as compared to chemical synthesis. We expect that, from time to time, consistent with biotechnology industry expectations, certain production lots will fail to produce product that meets our quality control release acceptance criteria. To date, our historical failure rates for all of our product programs, including Aldurazyme, have been within our expectations, which are based on industry norms.

In order to produce product within our time and cost parameters, we must continue to produce product within expected failure parameters. Because of the complexity of our manufacturing processes, it may be difficult or impossible for us to determine the cause of any particular lot failure and we must effectively and timely take corrective action in response to any failure.

If we are unable to effectively address manufacturing issues, we may be unable to meet demand for our products and lose potential revenue, have reduced margins, or be forced to terminate a program.

Our sole manufacturing facility for Aldurazyme and rhASB 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, or that of our third-party manufacturers or single-source suppliers, which could materially impair our ability to manufacture Aldurazyme and rhASB or our third-party manufacturer’s ability to manufacture Orapred.

Our Galli Drive facility is our only manufacturing facility for Aldurazyme and rhASB. It is located in the San Francisco Bay Area near known earthquake fault zones and is vulnerable to significant damage from earthquakes. We, and the third-party manufacturers with whom we contract and our single-source suppliers of raw materials, 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 and rhASB, or to have Orapred manufactured for us, could be seriously, or potentially completely impaired, we could incur delays in our development of rhASB, and our Aldurazyme and Orapred commercialization efforts and revenue from the sale of Aldurazyme and Orapred could be seriously impaired. The insurance we maintain may not be adequate to cover our losses resulting from disasters or other business interruptions.

Supply interruptions may disrupt our inventory levels and the availability of our products and cause a loss of our market share and reduce our revenues.

Numerous factors could cause interruptions in the supply of our finished products, including:

• timing, scheduling and prioritization of production by our contract manufacturers;

• labor interruptions;

• changes in our sources for manufacturing;

• the timing and delivery of shipments;

• our failure to locate and obtain replacement manufacturers as needed on a timely basis; and

• conditions affecting the cost and availability of raw materials.

We try to maintain inventory levels that are no greater than necessary to meet our current projections. Any interruption in the supply of finished products could hinder our ability to timely distribute finished products. If we are unable to obtain adequate

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product supplies to satisfy our customers’ orders, we may lose those orders and our customers may cancel other orders and stock and sell competing products. This, in turn, could cause a loss of our market share and reduce our revenues.

A majority of our revenue comes from sales of Orapred and decreased sales or increased operational costs related to Orapred could have an adverse affect on our revenues and operating expenses.

A majority of our revenue comes from sales of Orapred, and we anticipate that this will continue in the near term. As such, our operating results are and will be dependent on the sales and performance of Orapred. Decreased sales or increased operational costs related to Orapred, whether due to increased competition, pricing pressure from managed care organizations, increased costs of raw materials or otherwise, could have an adverse affect on our revenues and operating expenses.

In the third quarter of 2004, the FDA approved a generic product that has the same strength and active ingredient as Orapred. Although there are several other products on the market that have the same or similar ingredients, this is the first product that has the exact same drug substance and concentration as Orapred. Furthermore, the generic product has an AA equivalence rating to Orapred and therefore may be substituted at pharmacies without consulting the prescribing physician. This product has caused Orapred to lose significant market share and we expect that our revenue will continue to decrease. While we are implementing strategies to mitigate the loss of market share, at this time we cannot estimate the magnitude of this impact or if the impact will be short-term or permanent. However, we expect that the impact will continue to be significant and that our revenues and operating expenses will be adversely affected.

Additionally, a significant amount of Orapred that was originally sold by Medicis before our acquisition of the product is maintained by our wholesaler customers and either has expired or is near its expiration date. We have replaced and expect to continue to replace the expired product with new product, which will not be recorded as net product sales. As a result, the replacement product will be utilized to supply the retail demand during its shelf life and may result in decreased sales by us in the future.

We depend on a limited number of customers, and if we lose any of them, our business could be harmed.

Our Orapred customers include some of the nation’s leading wholesale pharmaceutical distributors, such as AmerisourceBergen, Cardinal and McKesson. For the three months ended March 31, 2005, product sales to these three customers accounted for 85% of our net product sales. The loss of any of these customers’ accounts or a material reduction in their purchases could harm our business, financial condition or results of operations. In addition, we may face pricing pressure from our customers.

The distribution network for pharmaceutical products has, in recent years, been subject to increasing consolidation. As a result, a few large wholesale distributors control a significant share of the market. In addition, the number of independent drug stores and small chains has decreased as retail consolidation has occurred. Further consolidation among, or any financial difficulties of, distributors or retailers could result in the combination or elimination of warehouses which may result in product returns to our company, cause a reduction in the inventory levels of distributors and retailers, or otherwise result in reductions in purchases of our products, any of which could harm our business, financial condition and results of operations.

Fluctuations in demand for our products create inventory maintenance uncertainties.

We sell our products primarily to major wholesalers and retail pharmacy chains. Consistent with pharmaceutical industry patterns, approximately 75% to 90% of our revenues are derived from three major drug wholesale concerns. While we attempt to estimate inventory levels of our products at our major wholesale customers, using historical prescription information and purchase patterns, this process is inherently imprecise. We rely wholly upon our wholesale and drug chain customers to effect the distribution allocation of our products. There can be no assurance that these customers will adequately manage their local and regional inventories to avoid spot outages.

We cannot control or influence greatly the purchasing patterns of wholesale and retail drug chain customers. These are highly sophisticated customers that purchase our products in a manner consistent with their industry practices and, presumably based upon their projected demand levels. From time to time, we offer sales incentives, such as price discounts and extended payment terms, in the ordinary course of business. These incentives may impact the level of inventory held by wholesalers. Additionally, the buying practices of the wholesalers include occasional speculative purchases of product in excess of the current market demand, at their discretion, in anticipation of future price increases. Purchases by any given customer, during any given period, may be above or below actual prescription volumes of any of our products during the same period, resulting in fluctuations in product inventory in the distribution channel. In addition, if wholesaler inventories substantially exceed retail demand, we could experience reduced revenue from sales in subsequent periods, or product returns from the distribution channel due to overstocking, low end-user demand or product expiration.

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 and our revenue could be adversely affected.

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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 rhASB, 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 U.S. and 10 years in the E.U. 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.

There are a number of competitive products with Orapred that have the same active ingredient. Some of these products are less expensive than Orapred. Additionally, in the third quarter of 2004, the FDA approved a generic product that has the same strength and route of administration as Orapred. When this product was introduced to the market in the fourth quarter of 2004, many pharmacies and managed care organizations, particularly certain government organizations began to substitute the new generic product for Orapred. Our revenue from Orapred has been adversely affected by this generic and will be further adversely affected if we are not able to implement effective defensive strategies, or if our existing defensive strategies are not effective.

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 NeuroTrans, and several of our product programs have been developed through licensing or collaborative arrangements, such as Aldurazyme, rhASB, Orapred, Phenoptin 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 product candidates. 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.

We depend upon our key personnel and our ability to attract, train and retain employees.

In August 2004, our former Chairman and Chief Executive Officer resigned. We are actively searching for a candidate to assume the role of Chief Executive Officer. Until we are able to successfully fill this position, we expect that third parties may perceive that the vacancy creates some uncertainty about our company.

Our future growth and success depend on our ability to recruit, retain, manage and motivate our employees. The loss of the services of any member of our senior management or the inability to hire or retain experienced management personnel could adversely effect our ability to execute our business plan and harm our operating results.

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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 one or more of our senior executive officers could be detrimental to us if we cannot recruit suitable replacements in a timely manner. While certain of our senior executive officers 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 pharmaceutical 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 or to recruit suitable replacement personnel.

Our success depends on our ability to manage our growth.

Our rapid growth has strained our managerial, operational, financial and other resources. We expect this growth to continue. Based on the approval of Aldurazyme in the U.S. and E.U., 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. Additionally, we acquired approximately 70 new employees through the acquisition of the Ascent Pediatrics field sales force. This has required that we expand our managerial organization to cover several new functional areas, such as sales and marketing.

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.

Growth in our business may also contribute to fluctuations in our operating results, which may cause the price of our securities to decline. Our revenue may fluctuate due to many factors, including changes in:

• wholesaler buying patterns;

• reimbursement rates;

• physician prescribing habits; and

• the availability or pricing of competitive products.

We may also experience fluctuations in our quarterly results due to price changes and sales incentives. For example, purchasers of our products, particularly wholesalers, may increase purchase orders in anticipation of a price increase and reduce order levels following a price increase. We occasionally offer sales incentives, such as price discounts and extended payment terms, in the ordinary course of business, that could have a similar impact. In addition, some of our products are subject to seasonal fluctuation in demand.

Changes in methods of treatment of disease could reduce demand for our products and adversely affect revenues.

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 and adversely affect revenues. 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.

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. BioMarin/Genzyme LLC maintains product liability insurance for Aldurazyme with aggregate loss limits of $5.0 million. We have also obtained insurance against product liability lawsuits for commercial sale of our products and for the clinical trials of our product candidates with aggregate loss limits in the U.S. of $15.0 million plus additional clinical liability coverage with lower loss limits in other countries where clinical studies are conducted. 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 the commercial use of Orapred, our clinical trials and commercial use of Aldurazyme, our clinical trials for rhASB, Phenoptin and Vibrilase, or our clinical trials for our terminated program for Neutralase, for which our insurance coverage may not be adequate.

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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.

We will incur increased costs as a result of recently enacted and proposed changes in laws and regulations.

We face burdens relating to the recent trend toward stricter corporate governance and financial reporting standards. New legislation or regulations that follow the trend of imposing stricter corporate governance and financial reporting standards, including compliance with Section 404 of the Sarbanes-Oxley Act of 2002, have led to an increase in our costs of compliance. The new rules could make it more difficult or more costly for us to obtain certain types of insurance, including directors’ and officers’ liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. A failure to comply with these new laws and regulations may impact market perception of our financial condition and could materially harm our business. Additionally, it is unclear what additional laws or regulations may develop, and we cannot predict the ultimate impact of any future changes.

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 and Orapred;

• manufacture, supply or distribution of Aldurazyme or Orapred;

• progress of rhASB and our other product candidates 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 product candidates or our competitors’ drug products in both the U.S. and foreign countries;

• developments or disputes concerning patent or proprietary rights;

• general market conditions and fluctuations for the emerging growth and pharmaceutical market sectors;

• economic conditions in the U.S. or abroad;

• broad market fluctuations in the U.S. or in the E.U.;

• actual or anticipated fluctuations in our operating results; 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 SWX Exchange. 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

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• 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 our certificate of incorporation providing that stockholders’ meetings may only be called by the board of directors and provisions in our bylaws providing that the stockholders may not take action by written consent and requiring that stockholders that desire to nominate any person for election to the board of directors or to make any proposal with respect to business to be conducted at a meeting of our stockholders be submitted in appropriate form to our Secretary within a specified period of time in advance of any such meeting. 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 our 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 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 1/200 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.

The Caduceus Group’s Proposal to Submit Three Candidates for Nomination in Opposition to the Company’s Nominees Could Adversely Affect our Business.

Caduceus Capital Masters Fund Limited and Caduceus Capital (together, the “Caduceus Group”) recently announced their intention to propose a slate of three candidates for election to our Board of Directors in opposition to our Board of Directors nominees. This solicitation may be disruptive and may negatively impact our ability to achieve our business objectives, and could result in litigation. If successful, such a significant and fundamental change to our Board of Directors could result in the diversion of our Board of Directors’ and our management’s time and attention from our operations and materially hinder the effectiveness of our Board of Directors. In addition, such a change in the composition of our Board of Directors could significantly disrupt or delay our CEO search, which urgently needs to be completed, as well as corporate partnering and financing opportunities, and could, under certain circumstances or in combination with other events, result in a change of control under certain of our material agreements, which in turn could result in the termination of such agreements or the acceleration of our obligation thereunder. In any event, the costs of responding to the Caduceus group may be significant.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

Our market risks at March 31, 2005 have not changed significantly from those discussed in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2004, on file with the Securities and Exchange Commission.

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The table below presents the carrying value of our cash and investment portfolio, which approximates fair value at March 31, 2005 (in thousands):

	Carrying Value
Cash and cash equivalents	$	11,246	*
Short-term investments		18,513	**
Total	$	29,759

* 42% of cash and cash equivalents invested in money market funds and 58% of uninvested cash.

** 78% of short-term investments invested in United States agency securities and 22% in corporate bonds.

Our debt obligations consist of our convertible debt and our equipment and facility loans. Our convertible debt carries a fixed interest rate and, as a result, we are not exposed to interest rate market risk on our convertible debt. The interest rates for certain of our equipment and facility loans are based on the London Inter-Bank Offer Rate (LIBOR) and we are therefore exposed to fluctuations in the LIBOR market. The outstanding principal balance on our equipment and facility loans that carry LIBOR-based rates was $23.4 million as of March 31, 2005. The carrying value of our convertible debt and equipment loans approximates their fair value at March 31, 2005.

Item 4. Controls and Procedures

An evaluation was carried out, under the supervision of and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on the evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls are sufficiently effective to ensure that the information required to be disclosed by us in this Form 10-Q was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and instructions for Form 10-Q. There was no change in our internal control over financial reporting that occurred during the period covered by this Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings. None.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. None.

Item 3. Defaults upon Senior Securities. None.

Item 4. Submission of Matters to a Vote of Security Holders. None.

Item 5. Other Information. None.

Item 6. Exhibits.

3.1	Amended and Restated Bylaws of BioMarin Pharmaceutical Inc., previously filed with the Commission on April 5, 2005 as Exhibit 3.1 to the Company’s Current Report on Form 8-K, which is incorporated herein by reference.
3.2	Certificate of Correction to Certificate of Amendment to the Amended and Restated Certificate of Incorporation of BioMarin Pharmaceutical Inc., previously filed with the Commission on April 5, 2005 as Exhibit 3.2 to the Company’s Current Report on Form 8-K, which is incorporated herein by reference.
10.1	License and Supply Agreement between BioMarin Pharmaceutical Inc. and Hi-Tech Pharmacal Co., Inc. dated February 15, 2005. Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed pursuant to the Freedom of Information Act.
31.1	Certification of Chief Executive Officer pursuant to Rules 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2	Certification of Chief Financial Officer pursuant to Rules 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 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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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

	BIOMARIN PHARMACEUTICAL INC.
Dated: May 5, 2005	By:	/s/ JEFFREY H. COOPER
		Jeffrey H. Cooper, Chief Financial Officer
		(On behalf of the registrant and as principal financial officer)

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Exhibit Index

3.1	Amended and Restated Bylaws of BioMarin Pharmaceutical Inc., previously filed with the Commission on April 5, 2005 as Exhibit 3.1 to the Company’s Current Report on Form 8-K, which is incorporated herein by reference.
3.2	Certificate of Correction to Certificate of Amendment to the Amended and Restated Certificate of Incorporation of BioMarin Pharmaceutical Inc., previously filed with the Commission on April 5, 2005 as Exhibit 3.2 to the Company’s Current Report on Form 8-K, which is incorporated herein by reference.
10.1	License and Supply Agreement between BioMarin Pharmaceutical Inc. and Hi-Tech Pharmacal Co., Inc. dated February 15, 2005. Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed pursuant to the Freedom of Information Act.
31.1	Certification of Chief Executive Officer pursuant to Rules 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2	Certification of Chief Financial Officer pursuant to Rules 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 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. 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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EX-10.1

Exhibit 10.1

CONFIDENTIAL TREATMENT REQUESTED

Redacted portions are indicated by [****]

LICENSE AND SUPPLY AGREEMENT

THIS LICENSE AND SUPPLY AGREEMENT is entered into as of February 15, 2005 by and between Hi-Tech Pharmacal Co., Inc., a Delaware corporation (“Hi-Tech”), and BioMarin Pharmaceutical Inc., a Delaware corporation (“BioMarin”); BioMarin and Hi-Tech are each a “Party” and collectively the “Parties”.

WITNESSETH:

WHEREAS, BioMarin has significant, valuable, and proprietary intellectual property related to the branded prescription pharmaceutical product Orapred^® (prednisolone sodium phosphate 15mg (base)/5mL oral solution) (the “Branded Product”) within the United States of America; and

WHEREAS, Hi-Tech develops, manufactures, markets and distributes generic pharmaceutical products, and now desires to market, sell and distribute a generic version of the Branded Product using BioMarin’s proprietary intellectual property with Hi-Tech’s own sales force and contacts;

NOW, THEREFORE, in consideration of the mutual promises, covenants, and agreements set forth herein, and other good and valuable consideration, the sufficiency and receipt of which is hereby acknowledged by each Party, each Party agrees as follows:

1. Definitions.

1.1. “Affiliate” is, with respect to a Party, any entity during the Term that controls, is controlled by, or is under common control with, that Party. For purposes of this definition, an entity shall be deemed to control another entity if that entity owns or controls, directly or indirectly, more than fifty percent (50%) of the voting control of all equity interests of the other entity (or other comparable ownership interest for an entity other than a corporation).

1.2. “Agreement” is this License and Supply Agreement as executed by both Parties, and as may be amended in accordance with the provisions hereof.

1.3. “aNDA” is the Abbreviated New Drug Application #75-117 and/or submissions, amendments, modifications, supplements and updates thereto, approved by the FDA related to the marketing and sale of the Branded Product and the Product.

1.4. “Authorized Wholesaler” is one or more wholesalers, distributors, and/or customers of Hi-Tech for the Territory, including those who have previously

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agreed to provide Hi-Tech with monthly utilization reports at Hi-Tech’s cost, showing their respective aggregate sales of Product in the Territory for each calendar month during the Term. Hi-Tech shall provide BioMarin with an accurate updated list of all Authorized Wholesalers at the start of each Quarter.

1.5. “cGMP” are current Good Manufacturing Practices, as defined by the FDA pursuant to applicable statutes and the regulations adopted from time to time under the authority of the United States Food, Drug and Cosmetics Act.

1.6. “Competitive Product” is any prescription drug that is listed as pharmaceutically equivalent to the Branded Product as listed in the FDA Orange Book, other than the Product sold pursuant to this Agreement.

1.7. “Confidential Information” is all information of a Party as and to the extent described in Article 16.

1.8. “Effective Date” is the date first above written.

1.9. “Executive Committee” is a committee, comprised of two (2) employees or officers from each Party, which shall meet not less than two (2) times per year at mutually agreed upon dates, times, and places to make decisions regarding the matters set forth in Article 3.

1.10.  “FDA” is the United States of America Food and Drug Administration and any successor thereto.

1.11.  “Hi-Tech Expenses” are those costs incurred for Hi-Tech Promotional Efforts or for advertising and marketing of Product and/or multiple items or services.

1.12.  “Hi-Tech Product Materials” are all forms and formats of information produced by or at the request of Hi-Tech regarding or describing, in whole or in part, the Product.

1.13.  “Hi-Tech Promotional Efforts” are all of Hi-Tech’s activities to promote and have the Product sold and used in the Territory pursuant to the provisions of this Agreement.

1.14.  “Hi-Tech Representative” is a Hi-Tech employee and sales person who makes sales presentations for the Product.

1.15.  “Medical Affairs Liaison” of each Party shall be an employee appointed by that Party to facilitate the communications described in Article 10.

1.16.  “Net Sales” is equal to Hi-Tech’s and its Affiliates’ gross receipts, calculated on the accrual basis, using generally accepted accounting principles, from all sales and distribution of all Product in the Territory, less the following to the extent directly related to a Product:

(a) returns and refunds allowance to be determined at the time of sale for expired product and other product to be returned in the ordinary course of business determined in accordance with GAAP; provided that in no event will such allowance exceed [****];

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(b) returns and refunds actually made for defective or recalled Product;

(c) freight and insurance actually incurred by Hi-Tech for the shipment and delivery of Product to Purchasers;

(d) rebates and chargebacks including but not limited to any statutory or contractual rebates and management fees based on Product sales volume and statutory rebates;

(e) off invoice and other allowances and discounts paid or credited by Hi-Tech directly related to the purchase of the Product; provided, however, any discounts granted or earned in connection with prompt payment terms shall not exceed [****];

(f) Amounts paid by Hi-Tech to BioMarin pursuant to Sections 7.2 and 7.3.

1.17.  “Product” is a prednisolone sodium phosphate 15mg (base)/5mL oral solution that is a generic form of the Branded Product to be manufactured and sold pursuant to the aNDA.

1.18.  “Purchasers” are any person or entity purchasing the Product, including but not limited to wholesalers, distributors, and direct purchasers.

1.19.  “Quarter” is a three (3) consecutive calendar month period starting on January 1, April 1, July 1, or October 1 during the Term.

1.20.  “Term” is the period on and after the Effective Date until termination of this Agreement in accordance with Article 13.

1.21.  “Territory” is the United States of America, and all its territories and possessions.

1.22.  “Unit” is a single 237 mL container of Product.

2. Appointment.

2.1. BioMarin hereby appoints Hi-Tech as the authorized and exclusive marketing entity, distributor and seller of all Product in the Territory for the Term.

2.2. BioMarin retains the right to develop, promote, license, sell, and otherwise commercially exploit any and all branded pharmaceutical products (including but not limited to the Branded Product and other strengths of the Branded Product) and other products in the Territory during the Term; BioMarin does not have the right to promote, license, or sell the Product in the Territory during the Term; Hi-Tech

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hereby agrees it shall have no interest of any kind arising out of, or as a result of, this Agreement, in anything other than its marketing, selling and distribution rights to the Product in the Territory.

3. Executive Committee. Within ten (10) days after the Effective Date, Hi-Tech and BioMarin shall each appoint two (2) of their respective employees to meet within thirty (30) calendar days of the Effective Date and at least twice during each calendar year thereafter, to agree upon, establish, and update each of the following by a majority vote of all members of the Executive Committee:

3.1. Rolling, 12-month, targets and/or goals for market share for the Product;

3.2. The gross sales price for the Product charged by Hi-Tech and the minimum Net Sales price;

3.3. All methods and means proposed to conduct all Hi-Tech Promotional Efforts, and the scope thereof; and

3.4. Such other matters as either Party may bring before the Executive Committee pursuant to the terms of this Agreement.

In the event the Executive Committee is unable to agree upon any issue, such as minimum pricing or annual goals, to the extent applicable, the metric as most recently in effect shall continue to apply.

4. Hi-Tech Promotional Efforts.

4.1. Hi-Tech shall use commercially reasonable efforts to promote the Product for sale in the Territory.

4.2. During the Term, Hi-Tech, by and through the Hi-Tech Representatives, shall perform all Hi-Tech Promotional Efforts in accordance with the terms of this Agreement. Hi-Tech shall consult with BioMarin from time to time with respect to the manner in which Hi-Tech promotes the Product.

4.3. Hi-Tech shall perform Hi-Tech Promotional Efforts for the Product in accordance with all applicable Federal, state, and local laws and regulations of the Territory including, but not limited to, all applicable FDA regulations.

4.4. As part of the Hi-Tech Promotional Efforts, Hi-Tech Representatives shall distribute Hi-Tech Product Materials to potential and existing Purchasers and to others to whom the Hi-Tech Representatives make Hi-Tech Promotional Efforts.

4.5. Hi-Tech shall use commercially reasonable efforts to timely produce and distribute the highest quality Hi-Tech Product Materials and make Hi-Tech Promotional Efforts during the Term.

4.6. Hi-Tech will develop and make one or more presentations to each of its customers who may be a Purchaser.

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4.7. Hi-Tech agrees that all sales, contracting, supervision, administration, accounting, and reporting performed by Hi-Tech employees pursuant to this Agreement shall be at Hi-Tech’s sole cost and expense and shall in no event result in a deduction against Net Sales. Hi-Tech shall have exclusive responsibility for training Hi-Tech Representatives in the promotion of the Product.

4.8. During the Term, Hi-Tech shall not market or sell any Competitive Product.

5. Product Distribution.

5.1. Product Requirements.

(a) Hi-Tech agrees to comply with all Federal, state, and local, laws and regulations of the Territory applicable or relating to the purchase, storage, distribution, handling, sale, or dispensing of the Product.

(b) Hi-Tech shall instruct its Authorized Wholesalers in the proper storage of Product, in accordance with BioMarin’s written recommendations and the product label as approved by the FDA.

(c) Hi-Tech agrees to immediately advise BioMarin of any change in, or revocation of, any of Hi-Tech’s or of any Authorized Wholesaler’s governmental, regulatory, manufacturing, professional, wholesaler, distributor, or warehouse registrations or licenses.

(d) Hi-Tech shall accept all Product returns in the Territory during the Term and account for, track, handle, and dispose of all Product returned by Authorized Wholesalers and others in the Territory, in accordance with all laws, ordinances, regulations and rules applicable for the Territory. Other than recalls or returns of defective product, Hi-Tech shall have sole financial responsibility for all Product returns.

5.2. Electronic Database.

(a) Hi-Tech shall use a computerized database to accurately account for all Product orders and to calculate Net Sales.

(b) The database shall contain and be capable of reporting to BioMarin:

(i) gross receipts and Unit sales on a monthly basis;

(ii) Net Sales on a monthly basis; and

(iii) Each item comprising the difference between gross receipts and Net Sales.

(c) Hi-Tech shall take all necessary steps to assure appropriate back-up and information storage for the database, including the ability to retrieve and print a copy of any source document.

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(d) Hi-Tech shall make all information described in this Section 5.2 available to BioMarin electronically at all times during the Term, for calculation of BioMarin’s royalty.

5.3. Hi-Tech Reports for Calculation of BioMarin Royalty.

(a) Hi-Tech Reports. Not later than thirty (30) days after the end of each Quarter during the Term, Hi-Tech shall supply BioMarin with a report summarizing the Hi-Tech Promotional Efforts, Net Sales, and Hi-Tech Expenses during such Quarter. The format, content, and detail of reports required by this Section 5.3 shall be as reasonably requested by BioMarin.

(b) Audit. If BioMarin determines in its reasonable judgment that a review of Hi-Tech’s relevant books and records is necessary to verify the figures reported or to be reported, then upon reasonable prior written notice to Hi-Tech, and not more than once in any twelve (12) month period, Hi-Tech shall allow BioMarin and/or its auditors during normal business hours to review and conduct an audit at BioMarin’s expense of any and all Hi-Tech books, records, and documents regarding gross receipts from the Product, Net Sales, Hi-Tech Expenses, and a review of any and all of Hi-Tech’s other books and records regarding or relating to Product sales, costs, and all activities related thereto in the Territory, during the Term.

(c) Corrective Payments. If BioMarin’s audit reveals that Hi-Tech has under-reported aggregate Net Sales to BioMarin, then:

(i) If the inaccuracy is [****], Hi-Tech shall refund to BioMarin all under-reported royalties upon Net Sales within [****] following completion of the audit; and

(ii) If the inaccuracy is [****], then Hi-Tech shall refund to BioMarin all under-reported royalties upon Net Sales, plus all reasonable costs of BioMarin’s audit, all within [****] following completion of the audit.

6. Regulatory Matters. BioMarin shall be solely responsible for all regulatory matters in the Territory relating to the Product, the Branded Product and the aNDA . Each Party shall fully cooperate with the other with respect to all regulatory matters within the Territory. Hi-Tech shall promptly reimburse BioMarin upon request for all regulatory expenses incurred by BioMarin, including reasonable internal costs, associated with the Product.

7. Product Supplied.

7.1. Exclusive Supply. BioMarin shall arrange for all Product to be manufactured on Hi-Tech’s behalf by Lyne Laboratories Inc. (“Lyne”) under a Supply Agreement attached hereto as Exhibit A (the “Supply Agreement”). Hi-Tech shall be responsible for providing text and copy for Product labels and package inserts, subject to BioMarin’s prior approval, not to be unreasonably withheld or delayed.

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Within [****] after the Effective Date, the Parties will complete a quality agreement to provide for SOPs for the Product delivery, documentation, and complaint reporting, investigation, coordinating and adjudicating.

7.2. Purchase Orders. Hi-Tech will place firm purchase orders for the Product with BioMarin, at least [****] prior to the scheduled delivery date and otherwise consistent with the timing and limitations contained in the Supply Agreement. To the extent that Hi-Tech requires quantities of Product on conditions other the foregoing, Hi-Tech may place purchase orders for such Product and BioMarin shall use commercially reasonable efforts to accommodate such purchase orders; provided that BioMarin shall not be in breach of this Agreement for failing to meet such purchase orders and shall not be required to delay any scheduled production of Branded Product to meet such purchase orders. The invoice price for each Unit will be [****]. Payment is due net [****].

7.3. BioMarin Distribution. At Hi-Tech’s request, BioMarin will arrange for the storage and shipping of the Product to Purchasers. In the event that BioMarin is responsible for such storage and shipping, within [****] after such request, the Parties shall establish mutually acceptable SOPs for order receipt, shipping methods and tracking and related matters. Within [****] after the end of each calendar month, BioMarin shall invoice Hi-Tech for all out of pocket expenses incurred in connection with the storage, transportation and distribution of the Product (whether BioMarin is shipping product to Hi-Tech or to Purchasers). Payment for such invoices shall be due net [****].

7.4. Product Recall. If any Product is recalled due to manufacturing defects, then BioMarin shall be responsible for all reasonable expenses relating to such recall and for all activities to be performed at BioMarin’s request relating to such recall.

7.5. Pricing Strategies. Parties hereto will mutually agree on Hi-Tech’s prices and pricing strategies. In no event will Hi-Tech make any sale of Product where the Net Sales per Unit is less than [****], without BioMarin’s prior written consent, which may be granted or withheld in BioMarin’s sole and absolute discretion.

7.6. Territory. Hi-Tech and Authorized Wholesalers shall purchase, distribute, transfer, and sell Product only for use within the Territory, and shall not, directly or indirectly, permit or allow any Product to be directly or indirectly transferred outside the Territory for any reason.

7.7. Inspection and Reports. BioMarin shall advise Hi-Tech of any FDA or other governmental agency visits any facility where Product is manufactured to perform an inspection or requests or requires information or changes which directly pertain to the Products. BioMarin shall furnish to Hi-Tech copies of all FDA Forms 482 and 483 related to the Product given by the FDA promptly upon receipt. Further, BioMarin shall advise Hi-Tech of any inspections of Lyne performed by BioMarin and shall provide Hi-Tech with the reports created by BioMarin related to such inspections and will discuss with Hi-Tech any material deficiencies identified by BioMarin.

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8. Product Materials.

8.1. Product Labeling. All Product labeling decisions shall be made by Hi-Tech with BioMarin’s approval. Product labels shall not bear BioMarin’s name, logo, trademarks, or any other identifying material.

8.2. Use of Trademarks. All trade names, trademarks, service marks, copyrights, patents, approvals, licenses, and permits are and shall remain the sole and separate property of the owner thereof and, at the end of the Term, all licenses and rights of use in and to the other Party granted by this Agreement shall cease.

9. Royalty Payments.

9.1. In exchange for the rights granted to Hi-Tech, BioMarin shall be entitled to receive [****]. Such amounts shall be payable Quarterly, within [****] of the end of the Quarter in which accrued.

9.2. Upon [****] prior written notice provided by BioMarin to Hi-Tech with regard to any payment due hereunder, past-due balances are subject to interest at the rate of one and [****] per month [****], or the highest amount allowed by law, whichever is lower, plus all reasonable attorneys’ fees and court costs incurred by BioMarin in collecting payment.

10. Medical Inquiries; Notification Of Adverse Drug Experience.

10.1. Communication. Within ten (10) days after the Effective Date, each Party shall appoint a Medical Affairs Liaison to communicate with the other Party’s Medical Affairs Liaison regarding information required pursuant to this Article 10. Either Party may change its Medical Affairs Liaison by notice to the other Party.

10.2. Notification. During the Term, Hi-Tech shall give BioMarin notice of any adverse drug experience associated with any Product as to which Hi-Tech obtains information, as follows:

(a) Any adverse drug experience information required to be reported to the FDA by or on behalf of Hi-Tech or in the Territory shall also be reported to BioMarin’s Medical Affairs Liaison, by telephone or by facsimile, within twenty-four (24) hours after Hi-Tech’s initial receipt of any such information;

(b) Hi-Tech’s reports to BioMarin shall contain the:

(i) date Hi-Tech first received information regarding an adverse drug experience;

(ii) name of the reporter and the reporter’s title;

(iii) address and telephone number of the reporter;

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(iv) description of the adverse drug experience;

(v) indication for treatment;

(vi) outcome of the event;

(vii) dose and duration of treatment; and

(viii) lot number of the Product, if available.

(ix) such other information as may be required to complete the MedWatch reporting.

(c) Hi-Tech shall maintain a record of any adverse drug experience required to be reported to the FDA, including:

(i) a copy of the drug experience report generated by Hi-Tech necessary to allow BioMarin to make appropriate filings with the FDA;

(ii) the date Hi-Tech first received information regarding an adverse drug experience; and

(iii) the date such report was provided to BioMarin.

10.3. Investigation and Regulatory Follow Up. Hi-Tech shall coordinate any investigation of an adverse drug experience with BioMarin’s Medical Affairs Liaison and shall cooperate with any reasonable requests by such Medical Affairs Liaison. The Parties acknowledge that BioMarin has responsibility for making all appropriate notices and reporting to regulatory authorities, including the FDA, related to any adverse drug experience, including, without limitation, information to be included with the annual report related to the aNDA. Accordingly, Hi-Tech shall provide all assistance reasonably requested by BioMarin related to the matters contained in this Article 10.

11. Representations And Warranties.

11.1. Hi-Tech Representations and Warranties. Hi-Tech hereby represents and warrants to BioMarin that during the Term:

(a) No other consents or approvals are necessary for Hi-Tech to enter into this Agreement and perform all of Hi-Tech’s obligations hereunder.

(b) This Agreement does not conflict with any other Hi-Tech contractual obligation, judicial decree or regulatory order.

(c) Hi-Tech shall perform its obligations hereunder in accordance with, and all Hi-Tech Promotional Efforts and Hi-Tech Product Materials shall

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conform to, all applicable Federal, state, and local laws and regulations of the Territory.

11.2. BioMarin Representations and Warranties. BioMarin hereby represents and warrants to Hi-Tech that during the Term:

(a) No consents or approvals that BioMarin has not previously obtained are necessary for BioMarin to enter into this Agreement and perform all of BioMarin’s obligations hereunder.

(b) This Agreement does not conflict with any other BioMarin contractual obligation, judicial decree or regulatory order.

(c) BioMarin shall perform its obligations hereunder in accordance with all applicable Federal, state, and local laws and regulations of the Territory.

(d) As of the Effective Date, to BioMarin’s knowledge, except for those patents licensed to BioMarin for the manufacture and sale of the Branded Product and the Product, there are no patents owned by others that would be infringed upon by the sale of the Product in the Territory.

(e) As of the Effective Date, there are no suits, claims, or proceedings pending against BioMarin or any of its Affiliates in any court or by or before any governmental body or agency with respect to the intellectual property that could limit any Hi-Tech Promotional Efforts or create any liability to Hi-Tech; and to the best of BioMarin’s knowledge, no such actions, suits, or claims have been threatened against BioMarin.

(f) With respect to Product delivered to Hi-Tech under this Agreement, at the time of delivery:

(i) meet the Product Specifications for Products set forth in Exhibit B attached hereto;

(ii) shall be in good, usable and merchantable condition; and

(iii) shall have been manufactured in compliance with cGMP, and all applicable laws, rules and regulations.

12. Independent Contractors. The Parties agree that each is an independent contractor of the other. Neither Party (nor any employee of that Party) is an employee, officer, agent, partner, business or legal representative of, or joint venturer with, the other Party. Neither Party has authority to assume any obligation on behalf of the other Party and shall not hold out to third parties that it has any authority to do so. Neither Party shall take any action that might mislead or confuse third parties in this regard. Unless otherwise provided herein, each Party shall be responsible for its own expenses and shall not incur expenses for the other Party’s account unless expressly authorized in writing to do so by the other Party.

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13. Term And Termination.

13.1. Term. This Agreement shall be and remain in full force and effect on and after the Effective Date until the fifth (5^th) anniversary of the Effective Date (the “Term”), subject to any earlier termination of this Agreement as set forth in Section 13.2.

13.2. Earlier Termination. This Agreement may be terminated prior to the expiration of the Term upon the occurrence of any of the following:

(a) Mutual Agreement. At any time, by mutual written agreement between the Parties.

(b) Material Breach. If notice is sent from one Party to the other Party that the Party receiving notice has committed a material breach of one or more terms of this Agreement and if, at the end of thirty (30) days following such notice the receiving Party has not cured such breach, then the Party giving notice may immediately terminate this Agreement. BioMarin may immediately terminate this Agreement upon notice to Hi-Tech in the event of a breach by Hi-Tech that endangers any patients using the Product or that could reasonably be expected to have a negative consequence to the aNDA.

(c) Failure to Meet Sales Goals. In the event that during [****] of this Agreement, the average monthly scripts for the Product is [****] of all prednisolone sodium phosphate 15mg/5ml oral liquid products, as reported by IMS Health or other generally recognized script data provider, BioMarin may terminate this agreement on ten (10) days notice to Hi-Tech. Termination pursuant to the application of this Section 13.2(c) shall not be deemed termination due to a material breach of this Agreement by either Party.

(d) Force Majeure. If an event of Force Majeure as described in Article 19 continues for more than six (6) months, then either Party may give the other Party notice of termination at least sixty (60) days before the effective date of termination. Termination pursuant to the application of this Section 13.2(d) shall not be deemed termination due to a material breach of this Agreement by either Party.

(e) Bankruptcy. If either Party gives notice to the other of an adjudication of bankruptcy or insolvency, appointment of a receiver by a court of competent jurisdiction, assignment for the benefit of creditors, or institution of liquidation proceedings by or against a Party (the “insolvent Party”), then the non-insolvent Party may give the insolvent Party notice of termination at least sixty (60) days prior to the effective date of termination. Termination pursuant to the application of this Section 13.2(e) shall not be deemed termination due to a material breach of this Agreement by either Party.

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14. Consequences Of Termination.

14.1. Accrued Obligations. Termination of this Agreement shall not relieve the Parties of any liability which accrued hereunder prior to the effective date of such termination nor prejudice either Party’s right to obtain performance of any obligation provided for in this Agreement which expressly survives termination.

14.2. Unsold Inventory. Upon termination or expiration of this Agreement, at BioMarin’s election, (a) Hi-Tech may, for a period of [****] sell all unsold Product inventory or (b) return to BioMarin all Product then in Hi-Tech’s possession or control. In the event that BioMarin authorizes Hi-Tech to sell out unsold product, all such activities shall be subject to the terms and conditions of this Agreement, including the payments to BioMarin required by Section 9.1. In the event that BioMarin requests a return of unsold Product, BioMarin shall reimburse Hi-Tech for the price paid for such Product pursuant to Section 7.2, as well as additional costs incurred with regard to the labeling, storage and distribution of the Product, unless this Agreement is terminated by BioMarin pursuant to Sections 13.2 (b) or (e), in which case the product shall be returned for no additional consideration.

14.3. Remedies. The exercise by either Party of any right of termination it may have under this Agreement shall not prevent such Party from seeking any other remedy it may be entitled to in law or equity; nor shall any provision under this Agreement which provides a remedy to a Party for the other Party’s non-performance be deemed an exclusive remedy. Notwithstanding the above, neither Party shall be liable to the other Party for any compensation, reimbursement, damages for loss of prospective profits on anticipated revenue, or on account of expenses incurred, punitive or consequential damages, investments made, leases, commitments, or any other obligations incurred in connection with this Agreement as a result of any termination of this Agreement by its terms or by reason of non-renewal of the Term.

14.4. Survival. The provisions of Section 5.3 and Article 10 shall survive for a period of one (1) year following termination or expiration of this Agreement. Further, the provisions of Article 14, Article 15, Article 16, Article 17, Article 20, and Article 22 shall survive the termination of this Agreement indefinitely.

15. Indemnification.

15.1. BioMarin Indemnification. Except as may be otherwise provided herein, BioMarin shall defend, indemnify and hold Hi-Tech and its respective officers, directors, employees, and representatives harmless from and against all suits, claims, liabilities, costs, damages, judgments, and other expenses (including, but not limited to, legal expenses) incurred in connection with the Product as a result of:

(a) BioMarin’s breach of this Agreement; or

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(b) Any claim of patent infringement in the Territory that arises from Hi-Tech’s sale of the Product pursuant to the terms of this Agreement; or

(c) Any claim made by a third party relating to or arising out of any failure of the Product to meet the specifications set forth on Exhibit B or other requirements set forth in Section 11.2(f), including, but not limited to, death or personal injury.

15.2. Hi-Tech Indemnification. Except as may be otherwise provided herein, Hi-Tech shall defend, indemnify and hold BioMarin and all of BioMarin’s officers, directors, employees, and representatives harmless from and against all suits, claims, liabilities, costs, damages, penalties, judgments, and other expenses (including but not limited to, legal expenses) incurred in connection with the Product by:

(a) Hi-Tech’s breach of this Agreement; or

(b) Any claim made by a third party relating to or arising out of the promotion, sale or use of the Product, including, but not limited to, death or personal injury; provided that Hi-Tech shall not be required to indemnify BioMarin to the extent of any claim arising out of or resulting from the negligence or willful misconduct of Lyne or BioMarin, any Affiliate or agent of BioMarin, or any of Lyne’s or BioMarin’s representatives in the performance of their obligations hereunder including any breach which gave rise to indemnification by BioMarin under Section 15.1;

15.3. Indemnification Procedure.

(a) Promptly, but in no event later than ten (10) days after the receipt by any Party hereto of notice of (a) any claim or (b) the commencement of any action or proceeding in respect of which such Party intends to seek indemnification hereunder, such Party (the “Indemnified Party”), such Party will give the other Party (the “Indemnifying Party”) notice of such claim and shall to the extent permitted by law permit the Indemnifying Party to assume the defense of any such claim, and, upon such assumption, shall cooperate fully with the Indemnifying Party in the conduct of such defense. If the Indemnified Party is advised in writing by its legal counsel that there is a conflict between the positions of the Indemnifying Party and the Indemnified Party in conducting the defense of such action or that there are legal defenses available to the Indemnified Party different from or in addition to those available to the Indemnifying Party, then counsel for the Indemnified Party, at the Indemnified Party’s expense, shall be entitled to conduct the defense only to the extent necessary to protect the interests of the Indemnified Party. If the Indemnifying Party assumes the defense of any such claim, the obligations of the Indemnifying Party as to such claim shall include all steps necessary in the defense or settlement of such claim and to holding the Indemnified Party harmless from and against any and all losses, caused by or arising

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out of any settlement approved by the Indemnifying Party or any judgment in connection with such claim. The Indemnified Party may participate, at its expense, in the defense of such claim provided that the Indemnifying Party shall direct and control the defense of such claim. Failure to provide timely notice of a claim shall not eliminate the Indemnifying Party’s indemnification obligations to the Indemnified Party unless and only to the extent to which such failure has substantially prejudiced the Indemnifying Party; provided, however, that no such claim shall be settled without the Indemnifying Party’s prior written consent, which consent shall not be unreasonably withheld. The absence of a complete and general release of all claims against the Indemnifying Party shall be reasonable grounds for the Indemnifying Party to refuse to provide written consent to a settlement or compromise. Notwithstanding the foregoing, each party shall obtain the prior written consent of the other party prior to ceasing to defend, settling or otherwise disposing of any claims of patent infringement or other intellectual property rights related to the Product.

(b) If the Indemnifying Party shall not assume the defense of any such claim, the Indemnified Party may defend against such claim in such manner as it may deem appropriate and, unless the Indemnifying Party shall undertake to indemnify the Indemnified Party for the amount demanded in such claim including all reasonable expenses, legal or otherwise, incurred so far, the Indemnified Party may settle such claim on such terms as it may deem appropriate, and the Indemnifying Party shall promptly pay the Indemnified Party for the amount of all reasonable expenses, legal or otherwise, incurred by the Indemnified Party in connection with the defense against or settlement of such claims and shall be bound by the results obtained by the Indemnified Party. If no settlement of such claim is made, the Indemnifying Party shall promptly pay the Indemnified Party for the amount of any judgment rendered with respect to such claim incurred by the Indemnified Party in the defense against such claim.

(c) Each party agrees that it will not, whether in the context of litigation or otherwise related thereto, without the prior written consent of the other party, such consent not to be unreasonably withheld or delayed, enter into any agreement or arrangement with any third party which in any way compromises, relinquishes, waives or otherwise affects, in whole or in part, the rights of the other party under this Agreement in respect of the Product.

(d) EXCEPT AS EXPRESSLY PROVIDED FOR IN SECTIONS 15.1, 15.2 AND 15.3 REGARDING INDEMNIFICATION WITH RESPECT TO THIRD PARTY CLAIMS AND LOSSES, NEITHER BIOMARIN OR HI-TECH (OR ANY OF THEIR RESPECTIVE AFFILIATES) SHALL BE LIABLE TO THE OTHER UNDER ANY PROVISION OF THIS AGREEMENT OR UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY

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FOR ANY INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES OF ANY KIND OR NATURE.

16. Confidentiality.

16.1. “Confidential Information” means trade secrets, know how and other confidential information (including, without limitation, technical and business information, sales information, customer lists, patent information, structures, models, techniques, formula, processes, compositions, compounds, apparatus, specifications, samples, inventions and ideas) of the disclosing Party (the “Disclosing Party”) which relates to the Branded Product, the Product or other aspects of the Disclosing Party’s business disclosed to the other Party (the “Receiving Party”) in the course of this Agreement, whether or not marked as proprietary or confidential, disclosed by Disclosing Party or obtained through observation or examination of Disclosing Party’s information or developments. Information may be disclosed orally, visually or in tangible form (whether by document, electronic media, or other form).

16.2. During the term of this Agreement and for a period of five (5) years thereafter, Receiving Party agrees to hold Disclosing Party’s Confidential Information in strict confidence and to use such Confidential Information only in connection with performing its obligations and exercising its rights under this Agreement. Receiving Party shall not use the Disclosing Party’s Confidential Information for any purpose other than as permitted in the preceding sentence, reproduce Disclosing Party’s Information, or disclose such Confidential Information to any third party, other than Receiving Party’s consultants and Affiliates as described below, without prior written approval of Disclosing Party. Receiving Party agrees to protect Disclosing Party’s Confidential Information with at least the same degree of care as it normally exercises to protect its own proprietary information of a similar nature, but in any case using no less than a reasonable degree of care. Receiving Party shall take all appropriate steps to ensure that all of its employees, consultants or Affiliates receive Disclosing Party’s Confidential Information only on a need to know basis, within the scope of this Agreement, and then, only if such parties are bound by obligations of confidentiality substantially similar to the terms of this Agreement. Receiving Party shall be liable for any disclosure or release of Disclosing Party’s Confidential Information by any of its employees, consultants or Affiliates, as if such disclosure had been made by Receiving Party. Receiving Party shall not use Disclosing Party’s Confidential Information, in whole or in part, to compete with Disclosing Party, to develop blocking technology, or otherwise to damage Disclosing Party or to enable, assist any other person in doing so.

16.3. The restrictions of this Agreement regarding Confidential Information shall not apply to Confidential Information which: (a) was known to Receiving Party prior to receipt hereunder as evidenced by written records; (b) at the time of disclosure by Disclosing Party, was generally available to the public, or which after disclosure hereunder becomes generally available to the public through no fault attributable to Receiving Party; (c) is hereafter made available to Receiving Party

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for use or disclosure by Receiving Party from any third party having a right do so; (d) is independently developed by Receiving Party without the use of the Confidential Information as evidenced by written records; or (e) subject to Receiving Party providing Disclosing Party with reasonable advance notice and the opportunity to challenge such disclosure, is required to be disclosed by process of law.

16.4. Upon termination of this Agreement for any reason, and upon Disclosing Party’s written request, Receiving Party agrees to deliver to Disclosing Party all written materials embodying the Disclosing Party’s Confidential Information, which are in the possession or under the control of Receiving Party.

16.5. Hi-Tech agrees to promptly disclose to BioMarin all formulas, processes, techniques, test data, improvements, and inventions (whether or not patentable) which Hi-Tech makes, conceives, learns, or reduces to practice, either alone or jointly with others, relating to the Product or BioMarin’s Confidential Information,

16.6. Hi-Tech further agrees to assist BioMarin, at BioMarin’s expense, in every proper way (including execution of patent applications and other documents), to obtain and enforce patents, orphan drug, and other protections upon any of BioMarin’s Confidential Information. Hi-Tech agrees that Hi-Tech’s obligation to assist BioMarin under this subsection shall continue beyond the termination of any verbal or written agreement between the Parties. BioMarin agrees that it will compensate Hi-Tech at reasonable rates for any assistance Hi-Tech actually provides at BioMarin’s request after the termination of any verbal or written agreement for services.

16.7. Receiving Party agrees that if Receiving Party violates, or commits a default under, any provision of this Article 16, Disclosing Party may directly pursue any and all legal and equitable rights and remedies available to it, including, without limitation, the right to injunctive relief as well as all other legal rights and remedies provided by applicable law. The Parties hereby waive any and all requirements for the posting of any bond or surety for or during any proceedings in law or equity.

17. Non-Publicity. The Parties agree that the terms and conditions of this Agreement are Confidential Information and, unless otherwise specifically permitted hereby, may not be the subject of any public announcement or press release by either, except as provided in this Article 17. The Parties acknowledge that certain aspects of this Agreement, including the text of this Agreement (other than the commercial terms) may be required to be disclosed by applicable law, including, without limitation, the Securities Exchange Act of 1934, as amended, and to the extent that such disclosure is required, the disclosing Party shall notify the non-disclosing Party of the contents of the proposed disclosure prior to such disclosure. Consistent with applicable law, the non-disclosing Party shall have the right to make reasonable changes to the disclosure or to request that the disclosing party seek appropriate protective action, such as filing a confidential treatment request pursuant to the Freedom of Information Act to limit disclosure to the extent possible.

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18. Trademarks.

18.1. Promotion. Hi-Tech shall promote the Product in the Territory only under such trademarks, trade names, trade dress, and service marks as have been approved by BioMarin and using only Hi-Tech Product Materials approved by BioMarin.

18.2. Compliance with Laws. When referring to the Product trademarks, labels, trade names, trade dress, service marks or devices, Hi-Tech shall comply with all laws pertaining to trademarks, service marks, trade dress or other intellectual property rights at any time in force in the Territory.

18.3. No Assertion of Right. Hi-Tech shall not have, assert, or acquire any right, title, or interest in or to the trademark or any part of any label, trade name, trade dress, service mark, or device owned by BioMarin.

18.4. Notice of Infringement. Hi-Tech shall give BioMarin prompt notice of any infringement or threatened infringement of the trademark, label, trade name, trade dress, service mark, or device used in connection with the Product.

19. Force Majeure. Failure of either Party to perform its obligations under this Agreement shall not subject such Party to any liability to the other if such failure is caused or occasioned by: act of God or the public enemy; fire; explosion; flood; drought; war, whether declared or undeclared; terrorism; riot; sabotage; embargo; strikes or other labor trouble; failure, in whole or in part, of suppliers to timely deliver materials, equipment or machinery; interruption of or delay in transportation; compliance with any order, regulation, or request of any government of competent jurisdiction or any officer, department, agency, or committee thereof, including requisition, allocation, or establishment of priority; or by compliance with a request authorized by such governmental authority of any manufacturer for material to be used by it; or any other event which is beyond the reasonable control of the Party so failing. The Party suffering an event of force majeure shall immediately notify the other Party and shall use all reasonable efforts to minimize the damages suffered by both Parties. Both Parties shall cooperate in good faith in order to minimize such damages and reach an agreement as to how to proceed.

20. Arbitration. Any controversy or dispute by and between the Parties or any of their Affiliates arising out of this Agreement which is not resolved in good faith by the Parties within sixty (60) days of first becoming known to both parties, except as otherwise may be specifically provided herein with respect to resort to remedies of injunction or other court order, shall be submitted to binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association, and judgment upon the award rendered thereby may be entered in any court having jurisdiction thereof. The place for arbitration shall be New York City, New York. In any arbitration pursuant to this Article 20, the award shall be rendered by a majority of the members of a board of arbitration consisting of three members, one being appointed by each Party and the third being appointed by mutual agreement of the two arbitrators appointed by the Parties. Nothing in this Agreement shall be construed or interpreted as granting the arbitrators the power to award punitive or consequential damages as part of any award rendered relating to this

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Agreement or the transactions contemplated hereby. The costs and expenses of such arbitration shall be shared equally by the Parties.

21. Insurance.

21.1. BioMarin Insurance. BioMarin shall provide to Hi-Tech evidence of product liability and contractual liability insurance reasonably satisfactory to Hi-Tech of not less than [****] per occurrence prior to BioMarin delivering initial commercial Product. Such insurance shall name Hi-Tech as an additional insured and shall be maintained in force for the term of this Agreement and any subsequent renewals. BioMarin will instruct BioMarin’s insurance carrier to give written notice to Hi-Tech at least fifteen (15) days prior to cancellation or expiration of policy. Failure to maintain such coverage shall be grounds for immediate termination of this Agreement by Hi-Tech.

21.2. Hi-Tech Insurance. Hi-Tech shall provide to BioMarin evidence of product liability insurance reasonably satisfactory to BioMarin of not less than [****] in the aggregate, [****] per occurrence, prior to BioMarin delivering initial commercial Product. Such insurance shall name BioMarin as an additional insured and shall be maintained in force for the term of this Agreement and any subsequent renewals. Hi-Tech will instruct Hi-Tech’s insurance carrier to give written notice to BioMarin at least fifteen (15) days prior to cancellation or expiration of policy. Failure to maintain such coverage shall be grounds for immediate termination of this Agreement by BioMarin.

22. General.

22.1. Assignment. Neither Party may assign its interest under this Agreement without the prior written consent of the other Party, which may be granted or withheld at such Party’s sole and absolute discretion; provided that either Party may transfer its rights and obligations to any party that acquires substantially its entire business if the transferring Party is Hi-Tech or its entire business related to the Branded Product if the transferring Party is BioMarin.

22.2. Headings. All headings are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement.

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22.3.  Notices.

(a) Methods. All notices or other communications required or permitted to be given shall be in writing, shall be signed by an authorized officer of the relevant Party, and given to the recipient Party by hand delivery, by special courier mail (i.e. FedEx) sent to that Party to the address set forth below, or by facsimile to that Party at the number on the first page of this Agreement, with written proof of receipt. All notices, consents, approvals, orders, acceptances, and requests shall be in writing addressed to the Parties as follows:

If to Hi-Tech:

Hi-Tech Pharmacal Co., Inc.

369 Bayview Avenue

Amityville, New York 11701

Attention: David Seltzer, President and CEO

Fax: (631) 789-8429

With a copy to:

Tashlik, Kreutzer, Goldwyn & Crandell P.C.

40 Cuttermill Road, Suite 200

Great Neck, NY 11021

Attention: Martin Goldwyn, Esq.

Fax (516) 829-6509

If to BioMarin:

BioMarin Pharmaceutical Inc.

105 Digital Drive

Novato, California 94949

Attention: CEO

Fax: (415) 382-7889

With a copy to:

BioMarin Pharmaceutical Inc.

105 Digital Drive

Novato, California 94949

Attention: Corporate Counsel

Fax: (415) 506-6425

(b) Change of Address. A Party may change its address set forth above by giving a notice in writing, at least five (5) business days prior to the effective date, to all other Parties, stating the new address and the effective date of the change.

(c) Deemed Date of Receipt. Documents sent by prepaid mail shall be deemed to have been received by the addressee on the second business day after posting. Facsimile messages shall be deemed to have been received by the addressee on the date of transmission, provided that if the transmission is not on a business day or not before 4:00 p.m. at the location of the recipient’s address set forth in this Agreement, then it shall be deemed to have been received by the addressee on the next succeeding business day after transmission.

22.4. Waiver. No failure on the part of either Party to exercise, and no delay in exercising, any right or remedy shall operate as a waiver of such right or remedy, nor shall any single or partial exercise of any right or remedy preclude any further or other exercise of such right or remedy. All rights and remedies under this Agreement are cumulative and shall not be deemed exclusive of any other rights or remedies provided by law except as otherwise provided herein.

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22.5. Severability. If any Section or portion(s) thereof contained in this Agreement is declared invalid by any court of competent jurisdiction or a government agency having jurisdiction, the remainder of this Agreement, and the application of such provision to persons or circumstances other than those to which it is held invalid by such court, shall not be affected thereby, and the Agreement shall remain in full force and effect. To the extent possible, the Parties shall reform such invalidated Section or portion(s) thereof in a manner that will render such provision valid without impairing the Parties’ original intent.

22.6. Governing Law. The laws of the State of New York shall govern the interpretation, performance and enforcement of this Agreement, without respect to the conflict of laws provisions.

22.7. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original and all of which, taken together, shall constitute the Agreement.

22.8. Entire Agreement. This Agreement contains the entire understanding between the Parties hereto with respect to the subject matter hereof. This Agreement cannot be amended, except by a writing signed by both Parties.

22.9. Authority. Each Party represents and warrants to the other Party that:

(a) it has the full power and authority to enter into and perform this Agreement; and

(b) the person(s) signing this Agreement on its behalf has been properly authorized and empowered to enter into this Agreement.

IN WITNESS WHEREOF, each of the Parties has by its duly authorized representative signed this Agreement as of the day and year first above written.

HI-TECH PHARMACAL CO., INC.		BIOMARIN PHARMACEUTICAL INC.
By:	/s/ David Seltzer	By:	/s/ Louis Drapeau
	David Seltzer		Louis Drapeau
Its:	President and CEO	Its:	CEO

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EX-31.1

Exhibit 31.1

CERTIFICATION

I, Louis Drapeau, Chief Executive Officer, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of BioMarin Pharmaceutical Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 5, 2005

/s/ LOUIS DRAPEAU

Louis Drapeau

Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Jeffrey H. Cooper, Chief Financial Officer, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of BioMarin Pharmaceutical Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 5, 2005

/s/ JEFFREY H. COOPER

Jeffrey H. Cooper

Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of BioMarin Pharmaceutical Inc. (the “Company”) for the quarter ended March 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Louis Drapeau, as Chief Executive Officer of the Company, and Jeffrey H. Cooper, as Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ LOUIS DRAPEAU

Louis Drapeau

Chief Executive Officer

May 5, 2005

/s/ JEFFREY H. COOPER

Jeffrey H. Cooper

Chief Financial Officer

May 5, 2005