United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to _________.
Commission file number: 000-26727
BIOMARIN PHARMACEUTICAL INC.
(Exact name of registrant issuer as specified in its charter)
Delaware 68-0397820
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
371 Bel Marin Keys Blvd., Suite 210, Novato, California 94949
(address of principal executive offices)
(Zip Code)
(415) 884-6700
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes ____ No_____
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 53,671,951 shares common
stock, par value $0.001, outstanding as of November 4, 2002.
BIOMARIN PHARMACEUTICAL INC.
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited).
Consolidated Balance Sheets.........................................2
Consolidated Statements of Operations...............................3
Consolidated Statements of Cash Flows...............................5
Notes to Consolidated Financial Statements..........................6
Item 2. Management's Discussion and Analysis........................10
Item 3. Quantitative and Qualitative Disclosure
about Market Risk...........................................28
Item 4. Controls and Procedures.....................................28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...........................................29
Item 2. Changes in Securities and Uses of Proceeds..................29
Item 3. Defaults upon Senior Securities.............................29
Item 4. Submission of Matters to a Vote of Security Holders.........29
Item 5. Other Information...........................................29
Item 6. Exhibits and Reports on Form 8-K............................29
SIGNATURE.....................................................................31
Item 1. Consolidated Financial Statements
BioMarin Pharmaceutical Inc. and Subsidiaries
(a development-stage company)
Consolidated Balance Sheets
(In thousands, except share and per share data)
December 31, September 30,
2001 2002
------------------------ ------------------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 12,528 $ 32,405
Short-term investments 118,569 54,063
Due from BioMarin/Genzyme LLC 3,096 2,332
Current assets of discontinued
operations of Glyko, Inc. 668 -
Other current assets 1,922 2,570
------------------------ ------------------------
Total current assets 136,783 91,370
Property plant, and equipment, net 32,560 30,994
Investment in BioMarin/Genzyme LLC 1,145 3,750
Other non-current assets 1,323 1,355
------------------------ ------------------------
Total assets $ 171,811 $ 127,469
======================== ========================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 4,284 $ 763
Accrued liabilities 2,198 5,332
Current liabilities of discontinued
operations of Glyko, Inc. 229 5
Other current liabilities 1,591 2,247
------------------------ ------------------------
Total current liabilities 8,302 8,347
Long-term liabilities 3,961 2,912
------------------------ ------------------------
Total liabilities 12,263 11,259
------------------------ ------------------------
Stockholders' equity:
Common stock, $0.001 par value: 75,000,000
shares authorized, 52,402,535 and 53,617,129
shares issued and outstanding December 31,
2001 and September 30, 2002, respectively 52 54
Additional paid-in capital 305,230 318,410
Warrants 5,134 5,219
Deferred compensation (699) (138)
Notes receivable from stockholders (2,037) (1,057)
Accumulated other comprehensive loss (13) (28)
Deficit accumulated during the development stage (148,119) (206,250)
------------------------ ------------------------
Total stockholders' equity 159,548 116,210
------------------------ ------------------------
Total liabilities and stockholders' equity $ 171,811 $ 127,469
======================== ========================
The accompanying notes are an integral part of these statements.
2
BioMarin Pharmaceutical Inc. and Subsidiaries
(a development-stage company)
Consolidated Statements of Operations
For the Three Months Ended September 30, 2001 and 2002
(In thousands, except per share data, unaudited)
Three Months Ended September 30,
--------------------------------------------------
2001 2002
----------------------- ------------------------
Revenue:
Revenue from BioMarin/Genzyme LLC $ 3,079 $ 3,569
----------------------- ------------------------
Operating expenses:
Research and development 10,039 14,675
General and administrative 2,340 3,940
----------------------- ------------------------
Total operating expenses 12,379 18,615
----------------------- ------------------------
Loss from operations (9,300) (15,046)
Interest income 530 629
Interest expense (8) (123)
Loss from BioMarin/Genzyme LLC (1,864) (2,350)
----------------------- ------------------------
Net loss from continuing operations (10,642) (16,890)
Loss from discontinued operations (373) (219)
Loss on disposal of discontinued operations - (8)
----------------------- ------------------------
Net loss $ (11,015) $ (17,117)
======================= ========================
Net loss per share, basic and diluted:
Loss from continuing operations $ (0.25) $ (0.32)
Loss from discontinued operations (0.01) -
Loss on disposal of discontinued operations - -
----------------------- ------------------------
Net loss $ (0.26) $ (0.32)
======================= ========================
Weighted average common shares outstanding 42,136 53,446
======================= ========================
The accompanying notes are an integral part of these statements.
3
BioMarin Pharmaceutical Inc. and Subsidiaries
(a development-stage company)
Consolidated Statements of Operations (continued)
For the Nine Months Ended September 30, 2001 and 2002 and
for the Period from March 21, 1997 (Inception) to September 30, 2002
(In thousands, except per share data, unaudited)
Nine Months Ended September 30, Period from March 21,
------------------------------------------ 1997 (Inception) to
2001 2002 September 30, 2002
-------------------- ------------------ -----------------------
Revenue:
Revenue from BioMarin/Genzyme LLC $ 8,621 $ 10,784 $ 37,982
-------------------- ------------------ -----------------------
Operating expenses:
Research and development 31,042 41,229 159,143
General and administrative 5,350 10,928 32,972
In-process research and development - 11,223 22,870
Facility closure - - 4,423
-------------------- ------------------ -----------------------
Total operating expenses 36,392 63,380 219,408
-------------------- ------------------ -----------------------
Loss from operations (27,771) (52,596) (181,426)
Interest income 1,434 2,033 9,465
Interest expense (11) (375) (1,131)
Loss from BioMarin/Genzyme LLC (4,708) (7,109) (19,074)
-------------------- ------------------ -----------------------
Net loss from continuing operations (31,056) (58,047) (192,166)
Income (loss) from discontinued operations (1,628) 75 (6,013)
Loss on disposal of discontinued operations - (159) (8,071)
-------------------- ------------------ -----------------------
Net loss $ (32,684) $ (58,131) $ (206,250)
==================== ================== =======================
Net loss per share, basic and diluted:
Net loss from continuing operations $ (0.79) $ (1.10) $ (6.24)
Loss from discontinued operations (0.04) - (0.19)
Loss on disposal of discontinued operations - - (0.26)
-------------------- ------------------ -----------------------
Net loss $ (0.83) $ (1.10) $ (6.69)
==================== ================== =======================
Weighted average common shares outstanding 39,601 53,011 30,811
==================== ================== =======================
The accompanying notes are an integral part of these statements.
4
BioMarin Pharmaceutical Inc. and Subsidiaries
(a development-stage company)
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2001 and 2002 and
for the Period from March 21, 1997 (Inception) to September 30, 2002
(In thousands, unaudited)
Nine Months Ended September 30, Period from March 21,
---------------------------------------- 1997 (Inception) to
2001 2002 September 30, 2002
------------------ ------------------ ----------------------
Cash flows from operating activities:
Net loss from continuing operations $ (31,056) $ (58,047) $ (192,166)
Adjustments to reconcile net loss from
continuing operations to net cash
used in operating activities:
In-process research and development - 10,286 21,933
Facility closure - - 3,791
Depreciation 3,827 6,059 20,966
Amortization of deferred compensation 627 561 4,322
Loss from BioMarin/Genzyme LLC 13,328 17,965 56,129
Transaction costs related to Glyko
Biomedical Ltd. 286 1,942 2,329
Other non-cash charges - 249 249
Changes in operating assets and liabilities:
Due from BioMarin/Genzyme LLC (2,056) 764 (2,332)
Other current assets (298) 1,378 112
Notes receivable from officers (878) (300) (1,189)
Deposits (75) - (434)
Accounts payable (780) (3,749) 634
Accrued liabilities (3) 3,135 5,654
------------------ ------------------ ----------------------
Net cash used in continuing operations (17,078) (19,757) (80,002)
Net cash provided by (used in) discontinued
operations (201) 361 1,110
------------------ ------------------ ----------------------
Net cash used in operating activities (17,279) (19,396) (78,892)
------------------ ------------------ ----------------------
Cash flows from investing activities:
Purchase of property and equipment (10,901) (4,386) (55,437)
Purchase of Synapse Technologies, Inc. - (1,028) (1,028)
Investment in BioMarin/Genzyme LLC (14,010) (20,570) (59,879)
Purchase of IBEX therapeutic assets - - (3,032)
Purchase of Glyko Biomedical Ltd. (286) (1,258) (1,645)
Sale (purchase) of short-term investments (13,004) 64,548 (54,021)
------------------ ------------------ ----------------------
Net cash provided by (used in) continuing
operations (38,201) 37,306 (175,042)
Net cash used in discontinued operations - - (1,663)
------------------ ------------------ ----------------------
Net cash provided by (used in) investing
activities (38,201) 37,306 (176,705)
------------------ ------------------ ----------------------
Cash flow from financing activities:
Proceeds from sale of common stock, net 45,446 - 232,823
Proceeds from issuance of convertible notes - - 25,615
Proceeds from Acqua Wellington agreement, net - - 13,163
Proceeds from exercise of stock options and
warrants 625 1,254 8,949
Proceeds from notes payable - 894 6,533
Repayment of notes payable (28) (1,351) (1,601)
Repayment of capital lease obligations (21) (63) (106)
Receipts from notes receivable from stockholders - 1,148 1,952
Issuance of common stock for ESPP and other 158 142 744
------------------ ------------------ ----------------------
Net cash provided by financing activities 46,180 2,024 288,072
------------------ ------------------ ----------------------
Effect of foreign currency translation on cash - (57) (70)
Net increase (decrease) in cash (9,300) 19,877 32,405
Cash and cash equivalents:
Beginning of period 16,530 12,528 -
------------------ ------------------ ----------------------
End of period $ 7,230 $ 32,405 $ 32,405
================== ================== ======================
The accompanying notes are an integral part of these statements.
5
BIOMARIN PHARMACEUTICAL INC. AND SUBSIDIARIES
(a development-stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION:
BioMarin Pharmaceutical Inc. (the Company) is a biopharmaceutical company
specializing in the development of enzyme therapies to treat serious
life-threatening diseases and conditions. The Company has devoted substantially
all of its efforts to research and development activities, including preclinical
studies and clinical trials, the establishment of laboratory, clinical and
commercial scale manufacturing facilities, clinical manufacturing, and related
administrative activities.
The Company was incorporated in 1996 in the state of Delaware and began business
on March 21, 1997 (inception) as a wholly owned subsidiary of Glyko Biomedical
Ltd. (GBL). In August 2002, the Company acquired all of the outstanding common
shares of GBL in exchange for 11,367,617 shares of BioMarin common stock. GBL's
principal asset was 11,367,617 shares of the Company's common stock, which were
subsequently retired. GBL is now a wholly owned subsidiary of the Company.
In December 2001, the Company decided to close the business of Glyko, Inc., a
wholly owned subsidiary. The results of Glyko, Inc.'s operations are included in
the accompanying consolidated statements of operations as income (loss) from
discontinued operations. Glyko, Inc.'s operations ceased on July 31, 2002.
Through September 30, 2002, the Company had accumulated losses during its
development stage of approximately $206.3 million. Based on current plans,
management expects to incur further losses for the foreseeable future.
Management believes that the Company's cash, cash equivalents and short-term
investments at September 30, 2002 will be sufficient to meet the Company's
obligations through the end of 2003. Until the Company can generate sufficient
levels of cash from its operations, the Company expects to continue to finance
future cash needs through the sale of equity securities, equipment-based
financing, and collaborative agreements with corporate partners.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
for interim financial information on substantially the same basis as the annual
audited consolidated financial statements. However, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments, consisting of normal recurring adjustments, considered necessary
for a fair presentation have been included.
Operating results for the nine months ended September 30, 2002 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and footnotes thereto for
the year ended December 31, 2001 included in the Company's Form 10-K Annual
Report.
2. SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the dates of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Short-Term Investments
The Company records its investments as either held-to-maturity or
available-for-sale. The held-to-maturity investments are recorded at amortized
cost at September 30, 2002. The available-for-sale investments are recorded at
fair market value at September 30, 2002 with unrealized gains or losses being
included in accumulated other comprehensive loss. Short-term investments are
comprised mainly of federal agency investments, bond mutual funds and corporate
bonds. At September 30, 2002, the effect on other comprehensive loss related to
recording short-term investments as available for sale was $42,000.
6
Other Assets
In February 2002, the Company loaned an officer $300,000 and received a full
recourse promissory note secured by unencumbered shares of the Company owned by
the officer. The note plus accrued interest was paid in October 2002.
Stockholders' Equity
In September 2002, the Company collected approximately $1.1 million of an
outstanding note from a former officer. The remaining note amount of
approximately $600,000 is included in stockholders' equity and is currently due.
This note is collateralized by 1 million shares of the Company's stock.
Net Loss per Share
Potentially dilutive securities outstanding at September 30, 2002 and 2001
include options to acquire 7,866,108 and 6,854,427 shares of common stock,
respectively and warrants to acquire 779,846 and 752,427 shares of common stock,
respectively. These securities were not considered in the computation of
dilutive loss per share because their effect would be anti-dilutive for the
three months and the nine months ended September 30, 2002 and 2001.
Recent Accounting Pronouncements
On January 1, 2002, the Company adopted SFAS No. 141 "Business Combinations" and
SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets".
Adoption of these pronouncements did not have a material impact on the Company's
net loss.
On January 1, 2002, the Company also adopted SFAS 142 "Goodwill and Intangible
Assets" (SFAS 142). If the Company had adopted SFAS 142 on January 1, 2001,
there would have been no change to net loss from continuing operations. The
Company's net loss and net loss per share for the three months and the nine
months ended September 30, 2001 would have been $10,511,000, $31,172,000, $0.25
and $0.79, respectively.
In June 2002, the Financial Accounting Standards Board (FASB) issued SFAS 146
"Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146)
which addresses accounting for restructuring and similar costs. The Company
plans to adopt the provisions of SFAS 146 for restructuring activities initiated
after December 31, 2002. The Company does not believe that SFAS 146 will have a
material effect on its consolidated financial statements.
Reclassifications
Certain prior period amounts have been reclassified to conform with current
period presentation.
3. NOTES PAYABLE:
In May 2002, the Company entered into an agreement with General Electric Capital
Corporation (GE) for a secured loan totaling $0.9 million. The note bears
interest at 9.33% per annum, is repayable over thirty-six months and is secured
by certain manufacturing and laboratory equipment. Additionally, the agreement
requires the Company to maintain a minimum unrestricted cash balance of $35
million. Should the unrestricted cash balance fall below $35 million, the
Company can either provide GE with an irrevocable letter of credit for the
amount of the total notes outstanding or repay the notes.
4. ACQUISITIONS:
In March 2002, the Company purchased all of the outstanding common stock of
Synapse Technologies Inc. (a privately held Canadian company) for approximately
$10.2 million in Company common stock plus future contingent milestone payments
totaling approximately $5.0 million as of September 30, 2002, payable in either
cash or common stock at the Company's discretion. At September 30, 2002, the
7
Company has not accrued any amounts related to this contingency as they are not
estimable. The Company issued 885,242 share of common stock for the purchase.
Synapse's operations consist solely of research and development. Since all of
its activity is related to in-process research and development of technology for
which technological feasibility had not yet been established and for which no
alternative future uses exist, the purchase price of $11.2 million, which
includes $1.0 million in expenses related to transaction costs and the issuance
of options and warrants, were expensed. The options and warrants were valued
using the Black-Scholes Option Pricing Model with the following assumptions:
risk-free interest rate of 5 percent; expected dividend yield of zero percent;
expected lives of 8 years for the options and 3.75 years for the warrants; and
expected volatility of 61 percent. The transaction did not meet the criteria of
a business combination because the assets acquired did not meet the definition
of a business as outlined in EITF 98-3 "Determining Whether a Nonmonetary
Transaction Involves Receipt of Productive Assets or of a Business".
In August 2002, the Company purchased all of GBL's outstanding capital stock in
exchange for 11,367,617 shares of common stock of BioMarin. The Company incurred
and expensed approximately $1.9 million and $0.4 million of costs associated
with this transaction in 2002 and 2001, respectively.
The following unaudited pro forma summary financial information displays the
consolidated results of operations of the Company as if the acquisition had
occurred on January 1, 2001. The pro forma information also assumes that the
Company acquired the IBEX therapeutic assets and Synapse Technologies, Inc.
common stock on January 1, 2001. The pro forma information is not necessarily
indicative of the results that actually would have occurred if the acquisition
had been consummated on January 1, 2001 nor does it purport to represent
operations for future periods (in thousands, except per share data):
Nine Months Ended September 30,
-----------------------------------
2001 2002
--------------- ---------------
Revenue $ 8,621 $ 10,784
Operating expenses (40,058) (50,865)
Loss from continuing operations (34,877) (46,930)
Loss per share from continuing operations, basic and diluted $ (0.84) $ (0.88)
Weighted average common stock outstanding 41,301 53,270
5. CLOSURE OF CANADIAN FACILITIES:
In September 2002, the Company decided to close its facilities in Vancouver,
Canada and downsize its facility in Montreal, Canada. The Company recorded
approximately $0.3 million in severance costs and a write-down for leasehold
improvements and laboratory equipment that will not be used in the future. The
Company plans to exit the Vancouver facility by December 31, 2002 and may record
additional facility related expenses at that time.
6. COMMITMENTS:
In July 2002, the Company signed an agreement with an unrelated third party for
the manufacturing of Neutralase(TM). Through September 30, 2002 the Company has
expensed approximately $1.0 million. In 2002 and 2003, total expenditures
related to this agreement are expected to aggregate approximately $6.0 million.
7. RELATED PARTY TRANSACTIONS:
An officer of the Company holds a position with Harbor-UCLA Research Educational
Institute ("REI"). REI licenses certain intellectual property and provides other
research services to the Company. The Company paid REI approximately $0.3
million and $0.2 million in the three months ended September 30, 2002 and 2001,
respectively, and $0.8 million and $0.7 million in the nine months ended
September 30, 2002 and 2001, respectively.
8
8. SUBSEQUENT EVENTS:
In October 2002, the Company entered into an agreement with GE for a secured
loan totaling approximately $1.3 million. The note bears interest at 8.11% per
annum, is repayable over thirty-six months and is secured by certain
manufacturing and laboratory equipment.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD-LOOKING STATEMENTS
The following "Management's Discussion and Analysis of Financial Condition
and Results of Operations" contains "forward-looking statements" as defined
under securities laws. These statements can often be identified by the use
of terminology such as "believes," "expects," "anticipates," "plans,"
"may," "will," "projects," "continues," "estimates," "potential,"
"opportunity" and so on. These forward-looking statements may also be found
in the "Factors that May Affect Future Results," and other sections of this
document. Our actual results or experience could differ significantly from
the forward-looking statements. Factors that could cause or contribute to
these differences include those discussed in "Factors that May Affect
Future Results," as well as those discussed elsewhere in this document.
You should not place undue reliance on these statements, which speak only
as of the date that they were made. These cautionary statements should be
considered in connection with any written or oral forward-looking
statements that we may issue in the future. We do not undertake any
obligation to release publicly any revisions to these forward-looking
statements after completion of the filing of this Form 10-Q to reflect
later events or circumstances or to reflect the occurrence of unanticipated
events.
Overview
We develop enzyme therapies to treat serious, life-threatening diseases and
conditions. We leverage our expertise in enzyme biology to develop product
candidates for the treatment of genetic diseases, including
Mucopolysaccharidosis I (MPS I), Mucopolysaccharidosis VI (MPS VI) and
Phenylketonuria (PKU), as well as other critical care situations such as
cardiovascular surgery and serious burns. Our product candidates address markets
for which no products are currently available or where current products have
been associated with major deficiencies.
Our lead product candidate, Aldurazyme(TM) is being developed with our joint
venture partner, Genzyme Corporation (Genzyme), for the treatment of MPS I, a
life threatening genetic disease for which no specific drug treatments currently
exist.
We are developing another product candidate, Neutralase, for reversal of
anticoagulation by heparin in patients undergoing Coronary Artery Bypass Graft,
or CABG, surgery. Heparin is a carbohydrate drug commonly used to prevent
coagulation, or blood clotting, during certain types of major surgery.
Neutralase is a carbohydrate-modifying enzyme that cleaves heparin, allowing
coagulation of blood following CABG surgery. We plan to commence the first of
two phase 3 clinical trials of Neutralase in the fourth quarter of 2002.
Neutralase may also be useful as a heparin reversal agent in coronary
angioplasty. Preclinical experiments indicate that Neutralase may also reverse
the newer classes of anticoagulants, such as the low molecular weight heparins
and the pentasaccharide, fondiparinux.
In 2001, we announced the results of a Phase 1 trial of Aryplase(TM) for the
treatment of MPS VI, another seriously debilitating genetic disease. Based on
data from the Phase 1 trial we initiated a Phase 2 trial of Aryplase in the
first quarter of 2002. We are also developing Vibrilase(TM), a topical enzyme
product for use in removing burned skin tissue in the treatment of serious
burns. We initiated a Phase 1 clinical trial of Vibrilase in the United Kingdom
in the fourth quarter of 2001, and expect to analyze the results from this trial
in the fourth quarter of 2002.
In addition, we are in preclinical development with several other enzyme product
candidates for genetic and other diseases and conditions. We are continuing with
the development of our preclinical product, NeuroTrans. Additionally, we are
actively seeking partners for licensing the NeuroTrans technology for use with
non-enzyme based treatments, including for the treatment of brain cancers.
Recent Developments
On October 28, 2002, Genzyme and we announced that the U.S. Food and Drug
Administration (FDA) informed us that the Aldurazyme (laronidase) Biologics
License Application (BLA) had been scheduled for review by the Endocrinologic
and Metabolic Drugs Advisory Committee on January 15, 2003. Genzyme and we
anticipate a response from the FDA regarding the application to market
Aldurazyme in the U.S. by the end of January 2003.
10
On September 30, 2002, we announced that we completed critical steps to begin
patient enrollment for our Phase 3 trial of Neutralase for reversal of heparin
in CABG surgery. Clinical data also suggests that Neutralase may be a valuable
heparin reversal agent in angioplasty and may shorten time to patient
ambulation.
On September 16, 2002, we announced that the FDA accepted the Aldurazyme BLA and
granted the application priority review status. Priority review status specifies
that the FDA will respond to the filing within six months from the date of the
completed BLA filing, which was July 29, 2002.
On September 12, 2002, we announced the adoption of a stockholder rights plan.
The plan was adopted to better protect our stockholders and assure they receive
full value of their investment in the event of any proposed takeover of us. The
plan was not adopted in response to any specific proposal or attempt to gain
control of our company.
On August 22, 2002, we announced the completion of our acquisition of GBL. GBL's
principal asset was an approximate 21% ownership interest in our capital stock.
As a result of the transaction, GBL became a wholly owned subsidiary of us with
the number of outstanding shares of our common stock remaining the same.
On July 31, 2002, we announced that the U.S. Patent and Trademark Office issued
U.S. Patent No. 6,426,208 entitled "Recombinant alpha-L-iduronidase, Methods for
Producing and Purifying the Same and Methods for Treating Diseases Caused by
Deficiencies Thereof". The patent relates to unique characteristics of the
pharmaceutical composition of Aldurazyme, including the highly purified form of
recombinant (alpha)-L-iduronidase used in Aldurazyme and the use of Aldurazyme
for the treatment of MPS I. Harbor-UCLA Research and Education Institute, the
holder of this patent, granted us an exclusive license for the commercial use of
the rights related to this patent. This patent is part of our continuing efforts
to strengthen the intellectual property position for Aldurazyme.
On July 29, 2002, we announced that together with our joint venture partner,
Genzyme, we submitted the final portion of our "rolling" BLA for Aldurazyme to
the FDA. The filing commenced on April 12, 2002, as previously announced. The
final portion of the BLA includes clinical data from the six-month,
placebo-controlled Phase 3 trial of Aldurazyme, six months of data from the
Phase 3 ongoing open-label study, Phase 1 data and three years of data from the
open-label extension study.
Results of Operations
In December 2001, we decided to close the carbohydrate analytical business of
our wholly owned subsidiary, Glyko, Inc. The decision to close Glyko, Inc. has
resulted in the operations of Glyko, Inc. being classified as discontinued
operations in our consolidated financial statements and, accordingly, we have
segregated the assets and liabilities of the discontinued operations in our
consolidated balance sheets. In addition, we have segregated the operating
results in our consolidated statements of operations and have segregated cash
flows from discontinued operations in our consolidated statements of cash flows.
Glyko, Inc. operations ceased on July 31, 2002.
Quarters Ended September 30, 2002 and 2001
For the quarters ended September 30, 2002 and 2001, revenues were $3.6 million
and $3.1 million, respectively, which came from our joint venture with Genzyme.
The increase in joint venture revenue in the third quarter of 2002 compared to
the same period in 2001 was caused by increased manufacturing costs for
technical materials for production runs during the third quarter of 2002 of $0.8
million and increased manufacturing facility costs of $0.6 million offset by
decreased clinical efforts of $0.7 million and a reduction in process
development activities of $0.2 million.
Research and development expenses increased to $14.7 million in the third
quarter of 2002 from $10.0 million in comparable period of 2001. The major
increases include $1.0 million of increased expenses for the Aldurazyme joint
venture with Genzyme, especially in manufacturing, $1.4 million for increased
manufacturing and research staff to support our product programs, $1.0 million
for increased external manufacturing costs for Neutralase, $0.5 million of
increased research and development costs associated with our other product
programs, and $0.3 million for increased patent expenses.
11
General and administrative expenses increased to $3.9 million in the third
quarter of 2002 from $2.3 million in the comparable period of 2001. This
increase was primarily due to $0.8 million of costs incurred for legal and other
fees associated with the acquisition of all of the outstanding capital stock of
GBL and increased staffing in finance, purchasing, business development, and
human resources of $0.5 million, expenses related to an improved financial
reporting and budgeting system of $0.1 million, and an increase in rent expense
of $0.1 million.
Interest income increased by $0.1 million to $0.6 million in the third quarter
of 2002 from $0.5 million in the third quarter of 2001 primarily due to higher
cash balances resulting from financing activities.
Interest expense was $0.1 million and $8,000 for the third quarter of 2002 and
2001, respectively. The increase was due to new, additional equipment loans of
$5.5 million in December 2001 and $0.9 million in May 2002.
Our equity in the loss of our joint venture with Genzyme was $2.4 million for
the third quarter of 2002 compared to $1.9 million for the third quarter of
2001. This increase was due to continued extension studies of the Phase 3
clinical trials of Aldurazyme and the filing of a BLA with the FDA.
Our net loss from continuing operations was $16.9 million ($0.32 per share,
basic and diluted) and $10.6 million ($0.25 per share, basic and diluted) for
the third quarter of 2002 and 2001, respectively.
The loss from discontinued operations was $0.2 million in the third quarter of
2002 and $0.4 million in the comparable period of 2001. The decrease in the
third quarter of 2002 was due to the fact that Glyko, Inc. ceased operations on
July 31, 2002.
The loss on disposal of discontinued operations represents the Glyko, Inc.
closure expense of $8,000 in the third quarter of 2002 consisting primarily of
employee severance incurred in connection with the discontinuance of the
analytics business of Glyko, Inc.
Our net loss was $17.1 million ($0.32 per share, basic and diluted) and $11.0
million ($0.26 per share, basic and diluted) for the third quarters of 2002 and
2001, respectively.
Nine Months Ended September 30, 2002 and 2001
Revenue for the nine months ended September 30, 2002 totaled $10.8 million
compared to revenue of $8.6 million for the nine months ended September 30,
2001. Revenue came from our joint venture with Genzyme. The increase in joint
venture revenue in 2002 compared to the same period in 2001 was primarily caused
by increased manufacturing activities in support of our Phase 1 and Phase 3
extension studies of $2.9 million, partially offset by decreased clinical
efforts of $0.4 million and a reduction in process development activities of
$0.3 million.
Research and development expenses for the nine months ended September 30, 2002
increased by $10.2 million to $41.2 million from $31.0 million for the same
period in 2001. The major factors causing the increase include $4.4 million of
increased expenses for the Aldurazyme joint venture with Genzyme, especially
manufacturing, regulatory and clinical requirements and $3.1 million for the
increased manufacturing and research staff to support our product programs, $1.0
million for increased external manufacturing costs for Neutralase and $0.4
million for increased patent expenses.
General and administrative expenses increased to $10.9 million in the nine
months ended September 30, 2002 from $5.4 million for the same period in 2001.
The significant factors causing the increase were expenses incurred in 2002 for
legal and other fees associated with our acquisition of all of the outstanding
capital stock of GBL by us of $1.9 million, increased staffing in finance,
purchasing, business development and human resources of $1.5 million, expenses
related to the implementation of an improved financial reporting and budgeting
software system of $0.4 million, an increase in employer matching of our 401(k)
plan of $0.2 million and an increase in rent expense of $0.3 million.
12
In-process research and development expense of $11.2 million represents the
majority of the purchase price of all of the outstanding stock of Synapse
Technologies, Inc. (Synapse) in March 2002 plus related expenses. We purchased
Synapse for $10.2 million of our common stock at a deemed price of $11.50 per
share (885,242 shares). In connection with the Synapse purchase, we issued
options and warrants to purchase 80,221 and 27,419 shares of our common stock,
respectively. These options and warrants were valued using the Black-Scholes
option pricing model and the resulting valuations of $561,000 and $85,000,
respectively, were included as additional purchase price. The purchase agreement
includes up to Cdn. $8 million (which equaled approximately U.S. $5.0 million as
of September 30, 2002) in contingency payments upon achievement of certain
regulatory and licensing milestones if they occur before March 21, 2012.
Interest income was $2.0 million for nine months ended September 30, 2002
compared to $1.4 million for the same period of 2001. The increase is primarily
due to higher cash balances resulting from financing activities.
Interest expense was $0.4 million and $11,000 for the nine months ended
September 30, 2002 and 2001, respectively. The increase of $0.4 million was due
to new, additional equipment loans of $5.5 million in December 2001 and $0.9
million in May 2002.
Our equity in the loss of our joint venture with Genzyme was $7.1 million for
the nine months ended September 30, 2002 compared to $4.7 million for the same
period of 2001. The increase is due to continued extension studies of the Phase
3 clinical trials of Aldurazyme, the filing of the BLA with the FDA and the
filing of the Marketing Authorization Application (MAA) in Europe.
Our net loss from continuing operations was $58.0 million ($1.10 per share,
basic and diluted) and $31.1 million ($0.79 per share, basic and diluted) for
the nine months ended September 30, 2002 and 2001, respectively.
Income (loss) from discontinued operations was $0.1 million for the nine months
ended September 30, 2002 and ($1.6 million) in the comparable period of 2001.
The increase to income in 2002 was due to an increase in sales to customers in
anticipation of the sale or discontinuance of the analytics business and a
decrease in general and administrative expenses as a result of the closure of
Glyko, Inc.
Loss on disposal of discontinued operations represents the Glyko, Inc. closure
expense of $0.2 million for the nine months ended September 30, 2002 consisting
primarily of accrued severance and marketing and legal and investment banking
fees incurred in connection with the potential sale or discontinuance of the
analytics business of Glyko, Inc.
Our net loss was $58.1 million ($1.10 per share, basic and diluted) for the nine
months ended September 30, 2002 compared to a net loss of $32.7 million ($0.83
per share, basic and diluted) in the comparable period of 2001.
Liquidity and Capital Resources
We have financed our operations since our inception by the issuance of common
stock and convertible notes, equipment financing and the related interest income
earned on cash balances available for short-term investment. Since inception, we
have raised aggregate net proceeds of approximately $288.1 million. This amount
was raised from the sale of our common stock in both public and private
offerings and the sale of our other securities, all of which have since
converted into common stock.
As of September 30, 2002, our combined cash, cash equivalents and short-term
investments totaled $86.5 million, a decrease of $44.6 million from $131.1
million at December 31, 2001. The primary uses of cash during the nine months
ended September 30, 2002 were to finance operations, fund the joint venture with
Genzyme, purchase leasehold improvements and equipment and expenses associated
with the acquisitions of Synapse and GBL (primarily investment banking and legal
fees). The primary sources of cash during the nine months ended September 30,
2002 were proceeds from the repayment of a stockholder note, proceeds from
equipment financing, proceeds from the issuance of common stock pursuant to the
exercise of stock options under the 1997 Stock Plan and proceeds from the
Employee Stock Purchase Plan.
From our inception through September 30, 2002, we have purchased approximately
$55.4 million of leasehold improvements and equipment.
13
As of September 30, 2002, our total research and development expenses since
inception were $159.1 million which was allocated $78.8 million to Aldurazyme,
$3.4 million to Neutralase, $17.5 million to Aryplase, $7.0 million to Vibrilase
and $52.4 million to research and development costs not allocated to specific
projects or related to projects that have been abandoned.
For the nine months ended September 30, 2002, our research and development
expense of $41.2 million was allocated $21.6 million to Aldurazyme, $3.2 million
to Neutralase, $4.7 million to Aryplase, $0.7 million to Vibrilase and $11.0
million to research and development cost not allocated to specific projects.
For the quarter ended September 30, 2002, our research and development expense
of $14.7 million was allocated $7.1 million to Aldurazyme, $1.9 million to
Neutralase, $1.4 million to Aryplase, $0.2 million to Vibrilase and $4.1 million
to research and development cost not allocated to specific projects.
We expect to fund our operations with our cash, cash equivalents and short-term
investments. For all of 2002, we expect to expend approximately $60 million for
operations and capital expenditures. We expect our current funds to last through
2003.
We do not expect to generate positive cash flow from operations at least until
2004 because we expect to continue to incur operational expenses and research
and development activities, including:
o preclinical studies and clinical trials;
o process development, including quality systems for product manufacture;
o regulatory processes in the United States and international
jurisdictions;
o clinical and commercial scale manufacturing capabilities; and
o expansion of sales and marketing activities.
Until we can generate sufficient levels of cash from our operations, we expect
to continue to fund our operations through the expenditure of our current cash,
cash equivalents and short-term investments and supplement our cash, cash
equivalents and short-term investments through the sale of equity securities,
equipment-based financing, and collaborative agreements with corporate partners.
We expect that the net proceeds from any sales of our common stock, equipment
financing or collaborative agreements will be used to fund operating costs,
capital expenditures and working capital requirements, which may include costs
associated with our lead clinical programs including Aldurazyme for MPS I,
Neutralase for heparin reversal, Aryplase for MPS VI and Vibrilase for burn
wounds. In addition, net proceeds may also be used for research and development
of other pipeline products, building of our supporting infrastructure, and other
general corporate purposes.
There are three current arrangements that may provide us with additional sources
of financing in the future:
o In September 1998, we established a joint venture with Genzyme for the
worldwide development and commercialization of Aldurazyme for the
treatment of MPS I. We share expenses and profits from the joint
venture equally with Genzyme. Genzyme has committed to pay us an
additional $12.1 million upon approval of the BLA for Aldurazyme. We
anticipate a response from the FDA by the end of January 2003 regarding
the "rolling" BLA for Aldurazyme.
o In August 2001, we signed an agreement with Acqua Wellington North
American Equities Fund Ltd. (Acqua Wellington) for an equity investment
in us. The agreement allows for the purchase of up to $27.7 million of
our common stock. Under the terms of the agreement, we will have the
option to request that Acqua Wellington invest in us through sales of
registered common stock at a small discount to market price. The
maximum amount that we may request to be bought in any one month is
dependent upon the market price of our stock (or an amount that can be
mutually agreed-upon by both parties) and is referred to as the "Draw
Down Amount." Subject to certain conditions, Acqua Wellington is
obligated to purchase this amount if requested to do so by us. In
addition, we may, at our discretion, grant a "Call Option" to Acqua
Wellington for an additional investment in an amount up to the "Draw
Down Amount" which Acqua Wellington may or may not choose to exercise.
As of September 30, 2002, we may request a maximum additional aggregate
investment of $15.2 million. Under this agreement, Acqua Wellington
may also purchase stock and receive similar terms of any other equity
financing by us. On September 24, 2002, we entered into an amendment
to this agreement. This amended agreement extends the termination date
of this facility to October 15, 2003.
14
o We have entered into five separate agreements with GE for secured
loans totaling $7.8 million. The notes bear interest (ranging from
8.11 percent to 9.33 percent) and are secured by certain
manufacturing and laboratory equipment. Additionally, all of the
agreements are subject to a covenant that requires us to maintain a
minimum unrestricted cash balance of $35 million. Should the
unrestricted cash balance fall below $35 million, we can either
provide GE with an irrevocable letter of credit for the amount of the
total notes outstanding or repay the notes. We expect to enter into
additional similar facilities as we acquire additional equipment and
expand our facilities.
We anticipate a need for additional financing to fund our future operations,
including the commercialization of our drug products currently under
development. We cannot assure you that additional financing will be obtained or,
if obtained, will be available on reasonable terms or in a timely manner.
Our future capital requirements will depend on many factors, including, but not
limited to:
o the progress, timing and scope of our preclinical studies and clinical
trials;
o the time and cost necessary to obtain regulatory approvals;
o the time and cost necessary to develop commercial manufacturing
processes, including quality systems and to build or acquire
manufacturing capabilities;
o the time and cost necessary to respond to technological and market
developments; and
o any changes made or new developments in our existing collaborative,
licensing and other commercial relationships or any new collaborative,
licensing and other commercial relationships that we may establish.
We plan to continue our policy of investing available funds in government,
investment grade and interest-bearing securities. We do not invest in derivative
financial instruments.
Critical Accounting Policies
Investment in BioMarin/Genzyme LLC and Related Revenue--Under the terms of our
joint venture agreement with Genzyme, Genzyme and we have each agreed to provide
50 percent of the funding for the joint venture. All research and development,
sales and marketing, and other activities performed by Genzyme and us on behalf
of the joint venture are billed to the joint venture at cost. Any profits or
losses of the joint venture are shared equally by the two parties. We provided
$59.9 million in funding to the joint venture from inception through September
30, 2002.
We account for our investment in the joint venture using the equity method.
Accordingly, we record a reduction in our investment in the joint venture for
our 50 percent share of the loss of the joint venture. The percentage of the
costs incurred by us and billed to the joint venture that are funded by us (50
percent), is recorded as a credit to our equity in the loss of the joint
venture. We recognize 50 percent of the amount billed to the joint venture as
revenue in accordance with our policy to recognize revenue for billings to the
extent that the payments for the billings were funded by Genzyme.
Impairment of Long-Lived Assets--We regularly review long-lived assets and
identifiable intangibles whenever events or circumstances indicate that the
carrying amount of such assets may not be fully recoverable. We evaluate the
recoverability of long-lived assets by measuring the carrying amount of the
assets against the estimated undiscounted future cash flows associated with
them. At the time such evaluations indicate that the future undiscounted cash
flows of certain long-lived assets are not sufficient to recover the carrying
value of such assets, the assets are adjusted to their fair values.
15
Income taxes - We record a valuation allowance to reduce our deferred tax assets
to the amount that is more likely than not to be realized. We have recorded a
full valuation allowance against our net deferred tax asset, the principal
amount of which is the tax effect of net operating loss carryforwards of
approximately $61.5 million at December 31, 2001. We have considered future
taxable income and ongoing prudent and feasible tax planning strategies in
assessing the need for the valuation allowance. An adjustment to the valuation
allowance would increase or decrease income in the period such adjustment was
made.
16
FACTORS THAT MAY AFFECT FUTURE RESULTS
An investment in our common stock involves a high degree of risk. We operate in
a dynamic and rapidly changing industry involving numerous risks and
uncertainties. The risks and uncertainties described below are not the only ones
we face. Other risks and uncertainties, including those that we do not currently
consider material, may impair our business. If any of the risks discussed below
actually occur, our business, financial condition, operating results or cash
flows could be materially adversely affected. This could cause the trading price
of our common stock to decline, and you may lose all or part of your investment.
If we continue to incur operating losses for a period longer than anticipated,
we may be unable to continue our operations at planned levels and be forced to
reduce or discontinue operations.
We are in an early stage of development and have operated at a net loss since we
were formed. Since we began operations in March 1997, we have been engaged
primarily in research and development. We have no sales revenues from any of our
product candidates. As of September 30, 2002, we had an accumulated deficit of
approximately $206.3 million. We expect to continue to operate at a net loss for
at least the next few years. Our future profitability depends on our receiving
regulatory approval of our product candidates and our ability to successfully
manufacture and market any approved drugs, either by ourselves or jointly with
others. The extent of our future losses and the timing of profitability are
highly uncertain. If we fail to become profitable or are unable to sustain
profitability on a continuing basis, then we may be unable to continue our
operations.
If we fail to obtain the capital necessary to fund our operations, we will be
unable to complete our product development programs.
In the future, we may need to raise substantial additional capital to fund
operations. We 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:
o the progress, timing and scope of our preclinical studies and clinical
trials;
o the time and cost necessary to obtain regulatory approvals;
o the time and cost necessary to develop commercial manufacturing
processes, including quality systems and to build or acquire
manufacturing capabilities;
o the time and cost necessary to respond to technological and market
developments; and
o any changes made or new developments in our existing collaborative,
licensing and other commercial relationships or any new collaborative,
licensing and other commercial relationships that we may establish.
Moreover, our fixed expenses such as rent, license payments and other
contractual commitments are substantial and will increase in the future. These
fixed expenses will increase because we may enter into:
o additional leases for new facilities and capital equipment;
o additional licenses and collaborative agreements;
o additional contracts for consulting, maintenance and administrative
services; and
o additional contracts for product manufacturing.
We believe that our cash, cash equivalents and short term investment securities
balances at September 30, 2002 will be sufficient to meet our operating and
capital requirements through 2003. These estimates are based on assumptions and
estimates, which may prove to be wrong. As a result, we may need or choose to
obtain additional financing during that time.
17
If we fail to obtain regulatory approval to commercially manufacture or sell any
of our future drug products, or if approval is delayed, we will be unable to
generate revenue from the sale of our products, our potential for generating
positive cash flow will be diminished and the capital necessary to fund our
operations will be increased.
We must obtain regulatory approval before marketing or selling our drug products
in the U.S. and in foreign jurisdictions. In the U.S., we must obtain FDA
approval for each drug that we intend to commercialize. The FDA approval process
is typically lengthy and expensive, and approval is never certain. Products
distributed abroad are also subject to foreign government regulation. None of
our drug products has received regulatory approval to be commercially marketed
and sold. If we fail to obtain regulatory approval, we will be unable to market
and sell our drug products. Because of the risks and uncertainties in
biopharmaceutical development, our drug products could take a significantly
longer time to gain regulatory approval than we expect or may never gain
approval. If regulatory approval is delayed, our management's credibility, and
the value of our company and our operating results will be adversely affected.
Additionally, we will be unable to generate revenue from the sale of our
products, our potential for generating positive cash flow will be diminished and
the capital necessary to fund our operations will be increased.
To obtain regulatory approval to market our products, preclinical studies and
costly and lengthy clinical trials will be required, and the results of the
studies and trials are highly uncertain.
As part of the regulatory approval process, we must conduct, at our own expense,
preclinical studies in the laboratory on animals and clinical trials on humans
for each drug product. We expect the number of preclinical studies and clinical
trials that the regulatory authorities will require will vary depending on the
drug product, the disease or condition the drug is being developed to address
and regulations applicable to the particular drug. We may need to perform
multiple preclinical studies using various doses and formulations before we can
begin clinical trials, which could result in delays in our ability to market any
of our drug products. Furthermore, even if we obtain favorable results in
preclinical studies on animals, the results in humans may be significantly
different.
After we have conducted preclinical studies in animals, we must demonstrate that
our drug products are safe and efficacious for use on the target human patients
in order to receive regulatory approval for commercial sale. Adverse or
inconclusive clinical results would stop us from filing for regulatory approval
of our drug products. Additional factors that can cause delay or termination of
our clinical trials include:
o slow or insufficient patient enrollment;
o slow recruitment of, and completion of necessary institutional
approvals at clinical sites;
o longer treatment time required to demonstrate efficacy;
o lack of sufficient supplies of the product candidate;
o adverse medical events or side effects in treated patients;
o lack of effectiveness of the product candidate being tested; and
o regulatory requests for additional clinical trials.
Typically, if a drug product is intended to treat a chronic disease, as is the
case with some of the product candidates we are developing, safety and efficacy
data must be gathered over an extended period of time, which can range from six
months to three years or more.
We completed a 36-month patient evaluation for the initial clinical trial of our
lead drug product, Aldurazyme, for the treatment of MPS I. Two of the original
ten patients enrolled in this trial died in 2000. One of these patients received
103 weeks of Aldurazyme treatment and the other received 137 weeks of treatment.
One of the original forty-five patients who completed the Phase 3 clinical trial
died after 16 weeks of the Phase 3 extension study. One patient treated under a
single-patient use protocol died after 131 weeks of Aldurazyme treatment. Based
on medical data collected from clinical investigative sites, none of these cases
directly implicated treatment with Aldurazyme as the cause of death. If cases of
patient complications or death are ultimately attributed to Aldurazyme, our
chances of commercializing this drug would be seriously compromised.
18
The fast track designation for our product candidates may not actually lead to a
faster review process and a delay in the review process or approval of our
products will delay revenue from the sale of the products and will increase the
capital necessary to fund these programs.
Aldurazyme and Aryplase have obtained fast track designations, which provides
certain advantageous procedures and guidelines with respect to the review by the
FDA of the BLA for these products and which may result in our receipt of an
initial response from the FDA earlier than would be received if these products
had not received a fast track designation. However, these procedures and
guidelines do not guarantee that the total review process will be faster or that
approval will be obtained, if at all, earlier than would be the case if the
products had not received fast track designation. If the review process or
approval for either product is delayed, realizing revenue from the sale of the
products will be delayed and the capital necessary to fund these programs will
be increased.
We will not be able to sell our products if we fail to comply with manufacturing
regulations.
Before we can begin commercial manufacture of our products, we must obtain
regulatory approval of our manufacturing facilities and processes. In addition,
manufacture of our drug products must comply with the FDA's current Good
Manufacturing Practices regulations, commonly known as cGMP. The cGMP
regulations govern quality control and documentation policies and procedures.
Our manufacturing facilities are continuously subject to inspection by the FDA,
the State of California and foreign regulatory authorities, before and after
product approval. Our Galli Drive and our Bel Marin Keys Boulevard manufacturing
facilities have been inspected and licensed by the State of California for
clinical pharmaceutical manufacture. Due to the complexity of the processes used
to manufacture our products, we may be unable to pass federal or international
regulatory inspections in a cost effective manner. For the same reason, any
potential third party manufacturer of our drug products may be unable to comply
with cGMP regulations in a cost effective manner.
We must pass federal, state and European regulatory inspections, and we must
manufacture process qualification batches to final specifications under cGMP
controls for each of our drug products before the marketing applications can be
approved. Although we have completed process qualification batches for
Aldurazyme, these batches may be rejected by the regulatory authorities, and we
may be unable to manufacture the process qualification batches for our other
products or pass the inspections in a timely manner, if at all.
If we fail to obtain orphan drug exclusivity for some of our products, our
competitors may sell products to treat the same conditions and our revenues will
be reduced.
As part of our business strategy, we intend to develop some drugs that may be
eligible for FDA and European Community orphan drug designation. Under the
Orphan Drug Act, the FDA may designate a product as an orphan drug if it is a
drug intended to treat a rare disease or condition, defined as a patient
population of less than 200,000 in the United States. The company that first
obtains FDA approval for a designated orphan drug for a given rare disease
receives marketing exclusivity for use of that drug for the stated condition for
a period of seven years. However, different drugs can be approved for the same
condition. Similar regulations are available in the European Community with a
ten-year period of market exclusivity.
Because the extent and scope of patent protection for some of our drug products
is particularly limited, orphan drug designation is particularly important for
our products that are eligible for orphan drug designation. For eligible drugs,
we plan to rely on the exclusivity period under the orphan drug designation to
maintain a competitive position. If we do not obtain orphan drug exclusivity for
our drug products, that do not have patent protection, our competitors may then
sell the same drug to treat the same condition.
Even though we have obtained orphan drug designation for certain of our product
candidates and even if we obtain orphan drug designation for other products we
develop, due to the uncertainties associated with developing pharmaceutical
products, we may not be the first to obtain marketing approval for any orphan
indication or, if we are the first, that exclusivity would effectively protect
the product from competition. Orphan drug designation neither shortens the
development time or regulatory review time of a drug nor gives the drug any
advantage in the regulatory review or approval process.
19
Because the target patient populations for some of our products are small, we
must achieve significant market share and obtain high per patient prices for our
products to achieve profitability.
Two of our lead drug candidates, Aldurazyme and Aryplase, target diseases with
small patient populations. As a result, our per-patient prices must be
relatively high in order to recover our development costs and achieve
profitability. Aldurazyme targets patients with MPS I and Aryplase targets
patients with MPS VI. We estimate that there are approximately 3,400 patients
with MPS I and 1,100 patients with MPS VI in the developed world. We believe
that we will need to market worldwide to achieve significant market share. In
addition, we are developing other drug candidates to treat conditions, such as
other genetic diseases and serious burn wounds, with small patient populations.
Due to the expected costs of treatment for Aldurazyme and Aryplase, we may be
unable to obtain sufficient market share for our drug products at a price high
enough to justify our product development efforts.
If we fail to obtain an adequate level of reimbursement for our drug products by
third-party payers, the sales of our drugs would be adversely affected or there
may be no commercially viable markets for our products.
The course of treatment for patients with MPS I using Aldurazyme and for
patients with MPS VI using Aryplase is expected to be expensive. We expect
patients to need treatment throughout their lifetimes. We expect that most
families of patients will not be capable of paying for this treatment
themselves. There will be no commercially viable market for Aldurazyme or
Aryplase without reimbursement from third-party payers. Additionally, even if
there is a commercially viable market, if the level of reimbursement is below
our expectations, our revenue and gross margins will be adversely effected.
Third-party payers, such as government or private health care insurers,
carefully review and increasingly challenge the prices charged for drugs.
Reimbursement rates from private companies vary depending on the third-party
payer, the insurance plan and other factors. Reimbursement systems in
international markets vary significantly by country and by region, and
reimbursement approvals must be obtained on a country-by-country basis.
We currently have no expertise obtaining reimbursement. We expect to rely on the
expertise of our joint venture partner Genzyme to obtain reimbursement for the
costs of Aldurazyme. In addition, we will need to develop our own reimbursement
expertise for future drug candidates unless we enter into collaborations with
other companies with the necessary expertise. We will not know what the
reimbursement rates will be until we are ready to market the product and we
actually negotiate the rates. If we are unable to obtain sufficiently high
reimbursement rates, our products may not be commercially viable or our future
revenues and gross margins may be adversely affected.
We expect that, in the future, reimbursement will be increasingly restricted
both in the United States and internationally. The escalating cost of health
care has led to increased pressure on the health care industry to reduce costs.
Governmental and private third-party payers have proposed health care reforms
and cost reductions. A number of federal and state proposals to control the cost
of health care, including the cost of drug treatments have been made in the
United States. In some foreign markets, the government controls the pricing
which would affect the profitability of drugs. Current government regulations
and possible future legislation regarding health care may affect reimbursement
for medical treatment by third-party payers, which may render our products not
commercially viable or may adversely affect our future revenues and gross
margins.
If we are unable to protect our proprietary technology, we may not be able to
compete as effectively.
Where appropriate, we seek patent protection for certain aspects of our
technology. Patent protection may not be available for some of the enzymes we
are developing. If we must spend significant time and money protecting our
patents, designing around patents held by others or licensing, for large fees,
patents or other proprietary rights held by others, our business and financial
prospects may be harmed.
The patent positions of biotechnology products are complex and uncertain. The
scope and extent of patent protection for some of our products are particularly
uncertain because key information on some of the enzymes we are developing has
existed in the public domain for many years. Other parties have published the
structure of the enzymes, the methods for purifying or producing the enzymes or
the methods of treatment. The composition and genetic sequences of animal and/or
human versions of many of our enzymes have been published and are believed to be
in the public domain. The composition and genetic sequences of other MPS enzymes
that we intend to develop as products have also been published. Publication of
this information may prevent us from obtaining composition-of-matter patents,
which are generally believed to offer the strongest patent protection. For
enzymes with no prospect of broad composition-of-matter patents, other forms of
patent protection or orphan drug status may provide us with a competitive
advantage. As a result of these uncertainties, investors should not rely on
patents as a means of protecting our product candidates, including Aldurazyme.
20
We own or license patents and patent applications to certain of our product
candidates. However, these patents and patent applications do not ensure the
protection of our intellectual property for a number of other reasons, including
the following:
o We do not know whether our patent applications will result in issued
patents. For example, we may not have developed a method for treating a
disease before others developed similar methods.
o Competitors may interfere with our patent process in a variety of ways.
Competitors may claim that they invented the claimed invention prior to
us. Competitors may also claim that we are infringing on their patents
and therefore cannot practice our technology as claimed under our
patent. Competitors may also contest our patents by showing the patent
examiner that the invention was not original, was not novel or was
obvious. In litigation, a competitor could claim that our issued
patents are not valid for a number of reasons. If a court agrees, we
would lose that patent. As a company, we have no meaningful experience
with competitors interfering with our patents or patent applications.
o Enforcing patents is expensive and may absorb significant time of our
management. Management would spend less time and resources on
developing products, which could increase our research and development
expense and delay product programs.
o Receipt of a patent may not provide much practical protection. If we
receive a patent with a narrow scope, then it will be easier for
competitors to design products that do not infringe on our patent.
In addition, competitors also seek patent protection for their technology. Due
to the number of patents in our field of technology, we cannot be assured that
we do not infringe on those patents or that we will not infringe on patents
granted in the future. If a patent holder believes our product infringes on
their patent, the patent holder may sue us even if we have received patent
protection for our technology. If someone else claims we infringe on their
technology, we would face a number of issues, including the following:
o Defending a lawsuit takes significant time and can be very expensive.
o If the court decides that our product infringes on the competitor's
patent, we may have to pay substantial damages for past infringement.
o The court may prohibit us from selling or licensing the product unless
the patent holder licenses the patent to us. The patent holder is not
required to grant us a license. If a license is available, we may have
to pay substantial royalties or grant cross-licenses to our patents.
o Redesigning our product so it does not infringe may not be possible or
could require substantial funds and time.
It is also unclear whether our trade secrets are adequately protected. While we
use reasonable efforts to protect our trade secrets, our employees or
consultants may unintentionally or willfully disclose our information to
competitors. Enforcing a claim that someone else illegally obtained and is using
our trade secrets, like patent litigation, is expensive and time consuming, and
the outcome is unpredictable. In addition, courts outside the United States are
sometimes less willing to protect trade secrets. Our competitors may
independently develop equivalent knowledge, methods and know-how.
We may also support and collaborate in research conducted by government
organizations or by universities. These government organizations and
universities may be unwilling to grant us any exclusive rights to technology or
products derived from these collaborations prior to entering into the
relationship. If we do not obtain required licenses or rights, we could
encounter delays in product development while we attempt to design around other
patents or even be prohibited from developing, manufacturing or selling products
requiring these licenses. There is also a risk that disputes may arise as to the
rights to technology or products developed in collaboration with other parties.
21
The United States Patent and Trademark Office has issued two 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 unless
and until we obtain a license.
The United States Patent and Trademark Office has issued two patents to a third
party that include composition-of-matter and method of use claims for
recombinant (alpha)-L-iduronidase. Our lead drug product, Aldurazyme, is based
on recombinant (alpha)-L-iduronidase. We believe that these patents are invalid
on a number of grounds. A corresponding patent application was filed in the
European Patent Office claiming composition-of-matter for recombinant
(alpha)-L-iduronidase, and it was rejected over prior art and withdrawn and
cannot be re-filed. Nonetheless, under U.S. law, issued patents are entitled to
a presumption of validity, and our challenges to the U.S. patents may be
unsuccessful. Even if we are successful, challenging the U.S. patents may be
expensive, require our management to devote significant time to this effort and
may delay commercialization of Aldurazyme in the United States.
Although the United States Patent and Trademark Office issued U.S. Patent No.
6,426,208 covering Aldurazyme for the treatment of MPS I, which was licensed to
us, this patent does not necessarily invalidate or give us the right to infringe
upon the patents related to the composition-of-matter and method of use claims
for recombinant (alpha)-L-iduronidase previously issued to the unrelated third
party. If we are unable to successfully challenge the third party's patents, we
may be unable to produce Aldurazyme in the United States unless we can obtain a
sublicense from the current licensee.
If our joint venture with Genzyme were terminated, we could be barred from
commercializing Aldurazyme or our ability to commercialize Aldurazyme would be
delayed or diminished.
We are relying on Genzyme to apply the expertise it has developed through the
launch and sale of other enzyme-based products to the marketing of our initial
drug product, Aldurazyme. We have no experience selling, marketing or obtaining
reimbursement for pharmaceutical products. In addition, without Genzyme we would
be required to pursue foreign regulatory approvals. We have no experience in
seeking foreign regulatory approvals.
Either Genzyme or we may terminate the joint venture for specified reasons,
including if the other party is in material breach of the agreement or has
experienced a change of control or has declared bankruptcy and also is in breach
of the agreement. Although we are not currently in breach of the joint venture
agreement and we believe that Genzyme is not currently in breach of the joint
venture agreement, there is a risk that either party could breach the agreement
in the future. Either party may also terminate the agreement upon one-year prior
written notice for any reason. Furthermore, we may terminate the joint venture
if Genzyme fails to fulfill its contractual obligation to pay us $12.1 million
in cash upon the approval of the BLA for Aldurazyme.
If the joint venture is terminated for breach, the non-breaching party would be
granted, exclusively, all of the rights to Aldurazyme and any related
intellectual property and regulatory approvals and would be obligated to buy out
the breaching party's interest in the joint venture. If we are the breaching
party, we would lose our rights to Aldurazyme and the related intellectual
property and regulatory approvals. If the joint venture is terminated without
cause, the non-terminating party would have the option, exercisable for one
year, to buy out the terminating party's interest in the joint venture and
obtain all rights to Aldurazyme exclusively. In the event of termination of the
buy out option without exercise by the non-terminating party as described above,
all right and title to Aldurazyme is to be sold to the highest bidder, with the
proceeds to be split equally between Genzyme and us.
If the joint venture is terminated by either party because the other declared
bankruptcy and is also in breach of the agreement, the terminating party would
be obligated to buy out the other and would obtain all rights to Aldurazyme
exclusively. If the joint venture is terminated by a party because the other
party experienced a change of control, the terminating party shall notify the
other party, the offeree, of its intent to buy out the offeree's interest in the
joint venture for a stated amount set by the terminating party at its
discretion. The offeree must then either accept this offer or agree to buy the
terminating party's interest in the joint venture on those same terms. The party
who buys out the other would then have exclusive rights to Aldurazyme.
22
If we were obligated, or given the option, to buy out Genzyme's interest in the
joint venture, and gain exclusive rights to Aldurazyme, we may not have
sufficient funds to do so and we may not be able to obtain the financing to do
so. If we fail to buy out Genzyme's interest we may be held in breach of the
agreement and may lose any claim to the rights to Aldurazyme and the related
intellectual property and regulatory approvals. We would then effectively be
prohibited from developing and commercializing the product.
Termination of the joint venture in which we retain the rights to Aldurazyme
could cause us significant delays in product launch in the United States,
difficulties in obtaining third-party reimbursement and delays or failure to
obtain foreign regulatory approval, any of which could hurt our business and
results of operations. Since Genzyme funds 50% of the joint venture's operating
expenses, the termination of the joint venture would double our financial burden
and reduce the funds available to us for other product programs.
If we are unable to manufacture our drug products in sufficient quantities and
at acceptable cost, we may be unable to meet demand for our products and lose
potential revenues or have reduced margins.
Although we have successfully manufactured Aldurazyme at commercial scale 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:
o design, construction and qualification of manufacturing facilities that
meet regulatory requirements;
o schedule;
o reproducibility;
o production yields;
o purity;
o costs;
o quality control and assurance systems;
o shortages of qualified personnel; and
o compliance with regulatory requirements.
Improvements in manufacturing processes typically are very difficult to achieve
and are often very expensive and may require extended periods of time to
develop. If we contract for manufacturing services with an unproven process, our
contractor is subject to the same uncertainties, high standards and regulatory
controls.
The availability of suitable contract manufacturing at scheduled or optimum
times is not certain. The cost of contract manufacturing is greater than
internal manufacturing and therefore our manufacturing processes must be of
higher productivity to yield equivalent margins.
The manufacture of Neutralase involves the fermentation of a bacterial species.
We have never used a bacterial production process for the production of any
commercial product. IBEX Technologies Inc., from which we acquired Neutralase,
had contracted with a third party for the manufacture of the Neutralase used in
prior clinical trials. We have also contracted with a third party for the
manufacture of additional quantities of Neutralase.
We have built-out approximately 51,800 square feet at our Novato facilities for
manufacturing capability for Aldurazyme and Aryplase including related quality
control laboratories, materials capabilities, and support areas. We expect to
add additional capabilities in stages over time, which could create additional
operational complexity and challenges. We expect that the manufacturing process
of all of our new drug products, including Aryplase and Neutralase, will require
significant time and resources before we can begin to manufacture them (or have
them manufactured by third parties) in commercial quantity at acceptable cost.
23
In order to achieve our product cost targets, we must develop efficient
manufacturing processes either by:
o improving the product yield from our current cell lines, colonies of
cells which have a common genetic makeup;
o improving the manufacturing processes licensed from others; or
o developing more efficient, lower cost recombinant cell lines and
production processes.
A recombinant cell line is a cell line with foreign DNA inserted that is used to
produce an enzyme or other protein that it would not have otherwise produced.
The development of a stable, high production cell line for any given enzyme is
difficult, expensive and unpredictable and may not result in adequate yields. In
addition, the development of protein purification processes is difficult and may
not produce the high purity required with acceptable yield and costs or may not
result in adequate shelf-lives of the final products. If we are not able to
develop efficient manufacturing processes, the investment in manufacturing
capacity sufficient to satisfy market demand will be much greater and will place
heavy financial demands upon us. If we do not achieve our manufacturing cost
targets, we will have lower margins and reduced profitability in commercial
production and larger losses in manufacturing start-up phases.
If we are unable to create marketing and distribution capabilities or to enter
into agreements with third parties to do so, our ability to generate revenues
will be diminished.
If we cannot expand capabilities either by developing our own sales and
marketing organization or by entering into agreements with others, we may be
unable to successfully sell our products. We believe that developing an internal
sales and distribution capability will be expensive and time consuming.
Alternatively, we may enter into agreements with third parties to market our
products. For example, under our joint venture with Genzyme, Genzyme is
responsible for marketing and distributing Aldurazyme. However, these third
parties may not be capable of successfully selling any of our drug products.
With our acquisition of Neutralase we have an enzyme product that has a
significantly larger potential patient population than Aldurazyme and Aryplase
and will be marketed and sold to different target audiences with different
therapeutic and financial requirements and needs. As a result, we will be
competing with other pharmaceutical companies with experienced and well-funded
sales and marketing operations targeting these specific physician and
institutional audiences. We may not be able to develop our own sales and
marketing force at all, or of a size that would allow us to compete with these
other companies. If we elect to enter into third-party marketing and
distribution agreements in order to sell into these markets, we may not be able
to enter into these agreements on acceptable terms, if at all. If we cannot
compete effectively in these specific physician and institutional markets, it
would adversely affect sales of Neutralase.
If we fail to compete successfully with respect to product sales, we may be
unable to generate sufficient sales to recover our expenses related to the
development of a product program or to justify continued marketing of a product.
Our competitors may develop, manufacture and market products that are more
effective or less expensive than ours. They may also obtain regulatory approvals
for their products faster than we can obtain them (including those products with
orphan drug designation) or commercialize their products before we do. With
respect to Aldurazyme and Aryplase, if our competitors successfully
commercialize a product that treats MPS I or MPS VI, respectively, before we do,
we may effectively be precluded from developing a product to treat that disease
because the patient populations of the diseases are so small. If one of our
competitors gets orphan drug exclusivity, we could be precluded from marketing
our version for seven years in the U.S. and ten years in the European Union.
However, different drugs can be approved for the same condition. If we do not
compete successfully, we may be unable to generate sufficient sales to recover
our expenses related to the development of a product program or to justify
continued marketing of a product.
If we fail to compete successfully with respect to acquisitions, joint venture
and other collaboration opportunities, we may be limited in our ability to
develop new products and to continue to expand our product pipeline.
24
Our competitors compete with us to attract organizations for acquisitions, joint
ventures, licensing arrangements or other collaborations. To date, several of
our product programs have been acquired through acquisitions, such as Neutralase
and NeuroTrans, and several of our product programs have been developed through
licensing or collaborative arrangements, such as Aldurazyme 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 are also competitors
with us. While these organizations primarily have educational or basic research
objectives, they may develop proprietary technology and acquire patents that we
may need for the development of our drug products. We will attempt to license
this proprietary technology, if available. These licenses may not be available
to us on acceptable terms, if at all. If we are unable to compete successfully
with respect to acquisitions, joint venture and other collaboration
opportunities, we may be limited in our ability to develop new products and to
continue to expand our product pipeline.
If we do not achieve our projected development goals in the time frames we
announce and expect, the commercialization of our products may be delayed and
the credibility of our management may be adversely affected and, as a result,
our stock price may decline.
For planning purposes, we estimate the timing of the accomplishment of various
scientific, clinical, regulatory and other product development goals, which we
sometimes refer to as milestones. These milestones may include the commencement
or completion of scientific studies and clinical trials and the submission of
regulatory filings. From time to time, we publicly announce the expected timing
of some of these milestones. All of these milestones are based on a variety of
assumptions. The actual timing of these milestones can vary dramatically
compared to our estimates, in many cases for reasons beyond our control. If we
do not meet these milestones as publicly announced, the commercialization of our
products may be delayed and the credibility of our management may be adversely
affected and, as a result, our stock price may decline.
If we fail to manage our growth or fail to recruit and retain personnel, our
product development programs may be delayed.
Our rapid growth has strained our managerial, operational, financial and other
resources. We expect this growth to continue. We have entered into a joint
venture with Genzyme. If we receive FDA and/or foreign government approval to
market Aldurazyme, the joint venture will be required to devote additional
resources to support the commercialization of Aldurazyme.
To manage expansion effectively, we need to continue to develop and improve our
research and development capabilities, manufacturing and quality capacities,
sales and marketing capabilities and financial and administrative systems. Our
staff, financial resources, systems, procedures or controls may be inadequate to
support our operations and our management may be unable to manage successfully
future market opportunities or our relationships with customers and other third
parties.
Our future growth and success depend on our ability to recruit, retain, manage
and motivate our employees. The loss of key scientific, technical and managerial
personnel may delay or otherwise harm our product development programs. Any harm
to our research and development programs would harm our business and prospects.
Because of the specialized scientific and managerial nature of our business, we
rely heavily on our ability to attract and retain qualified scientific,
technical and managerial personnel. In particular, the loss of Fredric D. Price,
our Chairman and Chief Executive Officer, or Emil D. Kakkis, M.D., Ph.D., our
Senior Vice President of Business Operations or Christopher M. Starr, Ph.D., our
Senior Vice President of Scientific Operations, could be detrimental to us if we
cannot recruit suitable replacements in a timely manner. While Mr. Price, Dr.
Kakkis and Dr. Starr are parties to employment agreements with us, these
agreements do not guarantee that they will remain employed with us in the
future. In addition, these agreements do not restrict their ability to compete
with us after their employment is terminated. The competition for qualified
personnel in the biopharmaceutical field is intense. Due to this intense
competition, we may be unable to continue to attract and retain qualified
personnel necessary for the development of our business.
25
Changes in methods of treatment of disease could reduce demand for our products.
Even if our drug products are approved, doctors must use treatments that require
using those products. If doctors elect a different course of treatment from that
which includes our drug products, this decision would reduce demand for our drug
products.
Examples include the potential use in the future of effective gene therapy for
the treatment of genetic diseases. The use of gene therapy could theoretically
reduce or eliminate the use of enzyme replacement therapy in MPS diseases.
Sometimes, this change in treatment method can be caused by the introduction of
other companies' products or the development of new technologies or surgical
procedures which may not directly compete with ours, but which have the effect
of changing how doctors decide to treat a disease. For example, Neutralase is
being developed for heparin reversal in coronary artery bypass graft (CABG)
surgery. It is possible that alternative non-surgical methods of treating heart
disease could be developed. If so, then the demand for Neutralase would likely
decrease.
If product liability lawsuits are successfully brought against us, we may incur
substantial liabilities.
We are exposed to the potential product liability risks inherent in the testing,
manufacturing and marketing of human pharmaceuticals. The BioMarin/Genzyme LLC
maintains product liability insurance for our clinical trials of Aldurazyme with
aggregate loss limits of $5.0 million. We have obtained insurance against
product liability lawsuits for the clinical trials for Aryplase, Vibrilase and
Neutralase with aggregate loss limits of $8.0 million. Pharmaceutical companies
must balance the cost of insurance with the level of coverage based on estimates
of potential liability. Historically, the potential liability associated with
product liability lawsuits for pharmaceutical products has been unpredictable.
Although we believe that our current insurance is a reasonable estimate of our
potential liability and represents a commercially reasonable balancing of the
level of coverage as compared to the cost of the insurance, we may be subject to
claims in connection with our current clinical trials for Aldurazyme, Aryplase,
Vibrilase and Neutralase for which the joint venture's or our insurance
coverages are not adequate.
If Aldurazyme, Aryplase, Vibrilase or Neutralase receives FDA approval, the
product liability insurance the joint venture or we will need to obtain in
connection with the commercial sales of Aldurazyme, Aryplase, Vibrilase or
Neutralase may be unavailable in meaningful amounts or at a reasonable cost. In
addition, while we take, and continue to take, what we believe are appropriate
precautions, we may be unable to avoid significant liability if any product
liability lawsuit is brought against us. If we are the subject of a successful
product liability claim that exceeds the limits of any insurance coverage we
obtain, we may incur substantial liabilities that would adversely affect our
earnings and require the commitment of capital resources that might otherwise be
available for the development and commercialization of our product programs.
Our stock price may be volatile, and an investment in our stock could suffer a
decline in value.
Our valuation and stock price since the beginning of trading after our initial
public offering have had no meaningful relationship to current or historical
earnings, asset values, book value or many other criteria based on conventional
measures of stock value. The market price of our common stock will fluctuate due
to factors including:
o progress of Aldurazyme, Neutralase, Aryplase and our other lead drug
products through the regulatory process, especially regulatory actions
in the United States related to Aldurazyme;
o results of clinical trials, announcements of technological innovations
or new products by us or our competitors;
o government regulatory action affecting our drug products or our
competitors' drug products in both the United States and foreign
countries;
o developments or disputes concerning patent or proprietary rights;
26
o general market conditions and fluctuations for the emerging growth and
biopharmaceutical market sectors;
o economic conditions in the United States or abroad;
o actual or anticipated fluctuations in our operating results;
o broad market fluctuations in the United States or in Europe, which may
cause the market price of our common stock to fluctuate; and
o changes in company assessments or financial estimates by securities
analysts.
In addition, the value of our common stock may fluctuate because it is listed on
both the Nasdaq National Market and the Swiss Exchange's SWX New Market. Listing
on both exchanges may increase stock price volatility due to:
o trading in different time zones;
o different ability to buy or sell our stock;
o different market conditions in different capital markets; and
o different trading volume.
In the past, following periods of large price declines in the public market
price of a company's securities, securities class action litigation has often
been initiated against that company. Litigation of this type could result in
substantial costs and diversion of management's attention and resources, which
would hurt our business. Any adverse determination in litigation could also
subject us to significant liabilities.
Anti-takeover provisions in our charter documents, our stockholders' rights plan
and under Delaware law may make an acquisition of us, which may be beneficial to
our stockholders, more difficult.
We are incorporated in Delaware. Certain anti-takeover provisions of Delaware
law and our charter documents as currently in effect may make a change in
control of our company more difficult, even if a change in control would be
beneficial to the stockholders. Our anti-takeover provisions include provisions
in the certificate of incorporation providing that stockholders' meetings may
only be called by the board of directors and a provision in the bylaws providing
that the stockholders may not take action by written consent. Additionally, our
board of directors has the authority to issue an additional 249,886 shares of
preferred stock and to determine the terms of those shares of stock without any
further action by the stockholders. The rights of holders of our common stock
are subject to the rights of the holders of any preferred stock that may be
issued. The issuance of preferred stock could make it more difficult for a third
party to acquire a majority of our outstanding voting stock. Delaware law also
prohibits corporations from engaging in a business combination with any holders
of 15% or more of their capital stock until the holder has held the stock for
three years unless, among other possibilities, the board of directors approves
the transaction. Our board of directors may use these provisions to prevent
changes in the management and control of our company. Also, under applicable
Delaware law, our board of directors may adopt additional anti-takeover measures
in the future.
On September 11, 2002, our board of directors authorized a stockholders' rights
plan and related dividend of one preferred share purchase right for each share
of our common stock outstanding at the close of business on September 23, 2002.
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 one-hundredth of a share of our Series
B Junior Participating Preferred Stock at a price of $35.00 per one-hundredth of
a preferred share, subject to adjustment.
The rights are designed to assure that all of our stockholders receive fair and
equal treatment in the event of any proposed takeover of us and to guard against
partial tender offers, open market accumulations and other abusive tactics to
gain control of us without paying all stockholders a control premium. The rights
will cause substantial dilution to a person or group that acquires 15% or more
of our stock on terms not approved by our board of directors. However, the
rights may have the effect of making an acquisition of us, which may be
beneficial to our stockholders, more difficult, and the existence of such rights
my prevent or reduce the likelihood of a third party making an offer for an
acquisition of us.
27
The ability of our stockholders to recover against Arthur Andersen LLP, may be
limited due to recent developments involving Arthur Andersen.
Our audited consolidated financial statements and the audited financial
statements of IBEX Technologies Inc./Technologies IBEX Inc.-- Therapeutic
Enzymes Division and GBL in our Annual Report on Form 10-K and our Proxy
Statement dated July 5, 2002 have been audited by Arthur Andersen LLP. The
ability of Arthur Andersen LLP to satisfy any claims properly brought against it
for any untrue statement of material fact contained in these financial
statements may be limited as a practical matter due to recent developments
involving Arthur Andersen LLP.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Our exposure to market risk for changes in interest rates relates primarily to
our investment portfolio. By policy, we place our investments with highly rated
credit issuers and limit the amount of credit exposure to any one issuer. As
stated in our policy, we seek to improve the safety and likelihood of
preservation of our invested funds by limiting default risk and market risk. We
have no investments denominated in foreign country currencies and therefore are
not subject to foreign exchange risk.
We mitigate default risk by investing in high credit quality securities and by
positioning our portfolio to respond appropriately to a significant reduction in
a credit rating of any investment issuer or guarantor. The portfolio includes
only marketable securities with active secondary or resale markets to ensure
portfolio liquidity.
Based on our investment portfolio and interest rates at September 30, 2002, we
believe that a 100 basis point increase or decrease in interest rates would
result in an increase or decrease of approximately $0.5 million, respectively,
in the fair value of the investment portfolio. Changes in interest rates may
affect the fair value of the investment portfolio; however, we will not
recognize such gains or losses into income unless the investments are sold.
The table below presents the carrying value for our investment portfolio. The
carrying value approximates fair value at September 30, 2002.
Investment portfolio:
Carrying value
(in $ thousands)
Cash and cash equivalents........................ $ 32,405
Short-term investments........................... 54,063*
-----------
Total......................................... $ 86,468
* 68% in callable and non-callable Federal agencies, 23% invested in a bond
mutual fund and 9% in corporate bonds.
Item 4. Controls and Procedures
Within the 90 days prior to the date of this report, our management, including
our Chief Executive Officer and Chief Financial Officer, have conducted an
evaluation of the effectiveness of our disclosure controls and procedures
pursuant to Exchange Act Rule 13a-14. Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective in ensuring timely collection and
evaluation of all information potentially subject to disclosure in our periodic
filings with the Securities and Exchange Commission. There have been no
significant changes in our internal controls or in the factors that could
significantly affect our internal controls, subsequent to the date our Chief
Executive Officer and Chief Financial Officer completed their evaluation.
28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. None.
Item 2. Changes in Securities and Uses of Proceeds.
In August 2002, we issued 11,367,617 shares of our common stock to the
shareholders of GBL in exchange for all of the outstanding shares of GBL. These
shares were issued in reliance upon the exemption from the registration
requirements of the Securities Act 1933 available pursuant to Section 3(a)(10)
of the Securities Act of 1933. The shares were issued after a court hearing
conducted by the Superior Court of Justice (Ontario), to determine the fairness
of the terms and conditions of the transaction.
On September 11, 2002, our board of directors authorized a dividend of one
preferred share purchase right (a "Right") for each share of our common stock
outstanding at the close of business on September 23, 2002. As long as the
Rights are attached to the common stock, we will issue one Right (subject to
adjustment) with each new share of our common stock so that all shares will have
attached Rights. When exercisable, each Right will entitle the registered holder
to purchase from us one one-hundredth of a share of our Series B Junior
Participating Preferred Stock (the "Preferred Shares") at a price of $35.00 per
one-hundredth of a Preferred Share, subject to adjustment. The description and
terms of the Rights are set forth in a Rights Agreement, dated as of September
11, 2002, as the same may be amended from time to time, between the Company and
Mellon Investor Services LLC, a New Jersey limited liability company, as Rights
Agent. The Rights are subject to redemption by us, at our option on the terms
and conditions described in the Rights Agreement.
Item 3. Defaults upon Senior Securities. None.
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of our stockholders was held on August 13, 2002, at which the
following actions were taken:
(a) The following directors were elected to serve until the
next Annual meeting and until their successors are
elected:
Director Elected Vote For Withheld
Fredric D. Price 32,844,339 5,124,904
Franz L. Cristiani 37,873,502 95,741
Phyllis I. Gardner, M.D. 37,876,973 92,270
Erich Sager 37,864,931 104,312
Vijay B. Samant 37,913,892 55,351
Gwynn R. Williams 37,864,913 104,330
(b) The transaction for us to acquire all of the capital stock
of GBL and the issuance of the shares of our common stock
in connection with such transaction, was approved by a
vote of 32,445,214 shares in favor; 35,801 shares against;
and 5,488,227 shares withheld.
Item 5. Other Information. None.
Item 6. Exhibits and Reports on Form 8-K.
29
(a) The following documents are filed as part of this report
- -------------- -----------------------------------------------------------------
EXHIBIT DESCRIPTION OF DOCUMENT
NUMBER
- -------------- -----------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of BioMarin
Pharmaceutical Inc., as amended and supplemented.
- -------------- -----------------------------------------------------------------
4.1 Rights Agreement, dated as of September 11, 2002, between
BioMarin Pharmaceutical Inc. and Mellon Investor Services LLC, as
Rights Agent, previously filed with the Commission on September
13, 2002 as Exhibit 4.1 to the Company's Form 8-A, which is
incorporated herein by reference.
- -------------- -----------------------------------------------------------------
10.1** Exclusive Patent License Agreement between BioMarin
Pharmaceutical Inc. and the Massachusetts Institute of
Technology, effective as of September 5, 2002.
- -------------- -----------------------------------------------------------------
10.2 Amendment No.1 to Common Stock Purchase Agreement between
BioMarin Pharmaceutical Inc. and Acqua Wellington North American
Equities Fund, Ltd dated September 24, 2002.
- -------------- -----------------------------------------------------------------
99.1 Certification of CEO and CFO pursuant to 18 U.S.C Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
- -------------- -----------------------------------------------------------------
** Portions of this document have been redacted pursuant to a Request for
Confidential Treatment filed pursuant to the Freedom of Information Act
(b) Reports on Form 8-K.
On July 9, 2002, we filed a Current Report on Form 8-K regarding the
announcement that we created a scientific advisory board.
On July 15, 2002, we filed a Current Report on Form 8-K regarding the
announcement that we appointed a new Chief Financial Officer and three new
members of our board of directors.
On July 29, 2002, we filed a Current Report on Form 8-K regarding the
announcement that Genzyme and we filed the final portion of a "rolling"
Biologics License Application (BLA) with the U.S. Food and Drug Administration.
On August 1, 2002, we filed a Current Report on Form 8-K regarding the
announcement that the U.S. Patent and Trademark Office issued to us the U.S.
Patent No. 6,426,208 covering Aldurazyme for the treatment of
Mucopolysaccharidosis I (or MPS I).
On August 2, 2002, we filed a Current Report on Form 8-K regarding the
announcement of our financial results for the quarter ended June 30, 2002.
On August 26, 2002, we filed a Current Report on Form 8-K, which was
subsequently amended and restated on October 18, 2002, announcing that we had
completed our acquisition of all of the outstanding shares of GBL.
On September 13, 2002, we filed a Current Report on Form 8-K regarding the
adoption of a stockholder rights plan. The plan was adopted to better protect
our stockholders and assure they receive full value of their investment in the
event of any proposed takeover of our company.
On September 17, 2002, we filed a Current Report on Form 8-K regarding the
announcement that the U.S. Food and Drug Administration has accepted for review
the BLA filing for Aldurazyme, and has granted the application priority review
status.
On September 30, 2002, we filed a Current Report on Form 8-K regarding the
announcement that we plan to commence the first of two phase 3 clinical trials
of Neutralase in the fourth quarter.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
BIOMARIN PHARMACEUTICAL INC.
Dated: November 12, 2002 By: /s/ Fredric D. Price
--------------------
Fredric D. Price, Chairman and Chief
Executive Officer (on behalf of the
Registrant)
Dated: November 12, 2002 By: /s/ Louis Drapeau
-----------------
Louis Drapeau, Chief Financial Officer,
Vice President, Finance and Secretary
31
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, Fredric D. Price, certify that:
1. I have reviewed this quarterly report on Form 10-Q of BioMarin Pharmaceutical
Inc.;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ Fredric D. Price
Fredric D. Price
Chairman and Chief Executive Officer
32
CERTIFICATION
I, Louis Drapeau, certify that:
1. I have reviewed this quarterly report on Form 10-Q of BioMarin Pharmaceutical
Inc.;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ Louis Drapeau
Louis Drapeau
Chief Financial Officer, Vice President, Finance and Secretary
33
Exhibit Index
- -------------- -----------------------------------------------------------------
EXHIBIT DESCRIPTION OF DOCUMENT
NUMBER
- -------------- -----------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of BioMarin
Pharmaceutical Inc., as amended and supplemented.
- -------------- -----------------------------------------------------------------
4.1 Rights Agreement, dated as of September 11, 2002, between
BioMarin Pharmaceutical Inc. and Mellon Investor Services LLC, as
Rights Agent, previously filed with the Commission on September
13, 2002 as Exhibit 4.1 to the Company's Form 8-A, which is
incorporated herein by reference.
- -------------- -----------------------------------------------------------------
10.1** Exclusive Patent License Agreement between BioMarin
Pharmaceutical Inc. and the Massachusetts Institute of
Technology, effective as of September 5, 2002.
- -------------- -----------------------------------------------------------------
10.2 Amendment No.1 to Common Stock Purchase Agreement between
BioMarin Pharmaceutical Inc. and Acqua Wellington North American
Equities Fund, Ltd dated September 24, 2002.
- -------------- -----------------------------------------------------------------
99.1 Certification of CEO and CFO pursuant to 18 U.S.C Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
- -------------- -----------------------------------------------------------------
** Portions of this document have been redacted pursuant to a Request for
Confidential Treatment filed pursuant to the Freedom of Information Act
34