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United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2004

Or

For the transition period from            to            .

Commission file number: 000-26727

BIOMARIN PHARMACEUTICAL INC.

(Exact name of registrant issuer as specified in its charter)

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

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 64,388,138 shares common stock, par value $0.001, outstanding as of August 5, 2004.

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BIOMARIN PHARMACEUTICAL INC.

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PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

BioMarin Pharmaceutical Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share and per share data)

See accompanying notes to consolidated financial statements.

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BioMarin Pharmaceutical Inc. and Subsidiaries

Consolidated Statements of Operations

For the Three and Six Months Ended June 30, 2003 and 2004

(In thousands, except per share data, unaudited)

See accompanying notes to consolidated financial statements.

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BioMarin Pharmaceutical Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2003 and 2004

(In thousands, unaudited)

See accompanying notes to consolidated financial statements.

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BioMarin Pharmaceutical Inc. and Subsidiaries

Notes To Consolidated Financial Statements

June 30, 2004

(Unaudited)

(1) NATURE OF OPERATIONS AND BUSINESS RISKS

BioMarin Pharmaceutical Inc. (the Company or BioMarin) develops innovative biopharmaceuticals and commercializes therapeutics for serious pediatric diseases. The Company’s core competencies include research and development capabilities, including preclinical studies and clinical trials, laboratory, clinical and commercial scale manufacturing capabilities and related regulatory and administrative capabilities. The Company and its joint venture partner, Genzyme Corporation (Genzyme), received marketing approval for Aldurazyme^® (laronidase) in the United States on April 30, 2003 and in the European Union on June 11, 2003. On May 18, 2004, BioMarin completed the transaction to acquire the Ascent Pediatrics business. The transaction includes: Orapred^®, a patent-protected drug to treat asthma in children; two additional proprietary formulations of Orapred in development; and a U.S. sales force. See Note 3 for further discussion of the transaction. The Company is incorporated in the state of Delaware.

Through June 30, 2004, the Company had accumulated losses of approximately $376.9 million. Management expects to incur further losses for the foreseeable future. Management believes that the Company’s cash, cash equivalents, short-term investments and currently restricted cash at June 30, 2004, will be sufficient to meet the Company’s obligations through the third quarter of 2005. Until the Company can generate sufficient levels of cash from its operations, the Company expects to continue to finance future cash needs primarily through proceeds from equity or debt financings, loans and collaborative agreements with corporate partners.

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

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of Presentation

These unaudited consolidated financial statements include the accounts of BioMarin and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated. These unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the SEC requirements for interim reporting. However, they do not include all of the information and footnotes required by generally accepted accounting principles (GAAP) for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included.

Operating results for the six months ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. These consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto for the year ended December 31, 2003, included in the Company’s Annual Report on Form 10-K.

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(b) Use of Estimates

The preparation of financial statements in conformity with GAAP in the United States. requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

(c) Cash and Cash Equivalents

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

(d) 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. The available-for-sale investments are recorded at fair market value, with unrealized gains or losses being included in accumulated other comprehensive income (loss). At June 30, 2004, accumulated other comprehensive loss related to recording available-for-sale short-term investments was approximately $0.5 million. Short-term investments are comprised mainly of corporate bonds, federal agency investments and taxable municipal debt securities. At June 30, 2004, the Company had no investments with net unrealized losses when aggregated by category of investment and the carrying value of the Company’s investments approximated their fair value.

(e) Inventory

We value inventories at the lower of cost or fair value. We determine cost using the average cost method. We analyze our inventory levels quarterly and write down inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable value and inventory in excess of expected requirements. Expired inventory is disposed of and the related costs are written off. As of June 30, 2004 inventory consisted of finished goods of $2.1 million.

(f) Research and Development

Research and development expenses include expenses associated with contract research and development provided by third parties, product manufacturing prior to regulatory approval, clinical and regulatory costs, and internal research and development costs. We believe that regulatory approval of our product candidates is uncertain, and do not assume that products manufactured prior to regulatory approval will be sold commercially. As a result, inventory costs for product candidates are expensed as research and development until regulatory approval is obtained, at which time inventory is capitalized at the lower of cost or fair value. There have been no changes in estimates with respect to this policy for any of the periods presented.

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

Under the Aldurazyme joint venture agreement with Genzyme, the Company and Genzyme each provide 50% of the funding for the joint venture. All manufacturing, research and development, sales and marketing, and other services performed by Genzyme and the Company on behalf of the joint venture are billed to the joint venture at cost. Any profits or losses of the joint venture are shared equally by the two parties.

The Company accounts for its investment in the joint venture using the equity method. Accordingly, the Company records an increase in its investment for contributions to the joint venture, and a reduction in its investment for its 50% share of the loss of the joint venture. Equity in the loss of BioMarin/Genzyme LLC includes the Company’s 50% share of the joint venture’s loss for the period. The investment in and advances to BioMarin/Genzyme LLC includes the current receivable from the joint venture for the reimbursement related to services provided to the joint venture by the Company during the most recent month and the Company’s share of the net current assets of the joint venture, primarily cash, accounts receivable and inventory.

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

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

The Company reviews long-lived assets, including goodwill, for impairment annually and whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable.

(i) Revenue Recognition

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

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

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

Provisions for sales discounts, and estimates for chargebacks and product returns are established as a reduction of product sales at the time such revenues are recognized. These revenue reductions are established by the Company’s management as its best estimate at the time of the original sale based on the product’s historical experience adjusted to reflect known changes in the factors that impact such reserves. These revenue reductions are generally reflected either as a direct reduction to accounts receivable through an allowance or as an addition to accrued expenses. The Company does not provide any forms of price protection to its customers and permits product returns only if the product is damaged or if it is returned near or after expiration.

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. As of June 30, 2004, the Company had no allowance for doubtful accounts.

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

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(j) Net Loss Per Share

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

Potentially dilutive securities include (in thousands):

(k) Stock Option Plans

The Company has three stock-based compensation plans. The Company accounts for those plans under APB Opinion No. 25, Accounting for Stock Issued to Employees, whereby generally no stock-based compensation cost is reflected in net loss for options issued to employees and directors with exercise prices at or above the market price on the date of issuance. The following table illustrates the effect on net loss and net loss per share as if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), as amended by SFAS No. 148, Accounting for Stock Based Compensation – Transition and Disclosure, to stock-based compensation (in thousands).

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

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(l) Recent Accounting Pronouncements

In November 2003, the Emerging Issues Task Force reached consensus on EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, concerning the meaning of the term “other-than-temporary” as it applies to impairment losses on various types of investments. The EITF reached a consensus that an investor should estimate the fair value of a cost method investment when an impairment indicator is present. Impairment indicators are relevant only for cost method investments for which the investor is not otherwise required to estimate the fair value on an annual basis. The guidance for evaluating whether an investment is other-than-temporarily impaired should be applied in other-than-temporary impairment evaluations made in reporting periods beginning after June 15, 2004. Management has determined that there is no impact on the Company’s consolidated financial statements as of June 30, 2004, as there are no investments with impairments that are other-than-temporary.

(m) Reclassifications

Certain items in the 2003 consolidated financial statements have been reclassified to conform to the 2004 presentation.

(3) ASCENT PEDIATRICS TRANSACTION

On May 18, 2004, the Company acquired the Ascent Pediatrics business from Medicis Pharmaceutical Corporation (Medicis). The transaction included: Orapred, a patent-protected drug to treat asthma in children; two additional proprietary formulations of Orapred in development; and a U.S. sales force. As a result of the transaction, BioMarin is a fully integrated, pediatrics-focused biopharmaceutical company. The transaction provides a commercial infrastructure that enables BioMarin to launch approved, internally-developed pediatric products in the U.S. In connection with the transaction, the Company also acquired certain tangible assets, including inventory and equipment.

Total acquisition payments of $190.0 million will be made to Medicis in specified amounts through 2009, including a payment of $20.0 million in BioMarin common stock in 2009. The number of shares issuable in 2009 will be based on the per share stock price at that time. The total acquisition cost, including transaction costs, acquired tangible assets and operating liabilities, was $195.0 million.

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

The acquisition has been accounted for as a purchase business combination. Under the purchase method of accounting, the assets acquired and liabilities assumed are recorded at the date of acquisition, at their respective fair values. The Company’s consolidated financial statements for the period subsequent to the acquisition date reflect these values and the results of operations of the Ascent Pediatrics business. The total consideration has been preliminarily allocated based on an estimate of the fair value of assets acquired and liabilities assumed. The final valuation of net assets is expected to be completed upon the Company’s receiving all the relevant information required to complete our estimates, but no later than one year from the acquisition date in accordance with GAAP. Components of the purchase price allocation that are not yet final include the allocation to goodwill based on the estimated value of the acquired liabilities for product returns and unclaimed rebates. To the extent that our estimates need to be adjusted, we will do so in future quarters.

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

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The product technology is the only intangible asset subject to amortization and represents the rights to the proprietary knowledge associated with Orapred. These rights include the right to develop, use, and market Orapred. The product is being amortized over 15 years and includes no estimated residual value. The amortization expense and accumulated amortization for the three and six months ended June 30, 2004 was $0.8 million. The estimated amortization expense for the remainder of 2004, and each of the succeeding five fiscal years is $3.4 million and $6.8 million, respectively.

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

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

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

The transaction resulted in a purchase price allocation of $32.3 million to goodwill, representing the financial, strategic and operational value of the transaction to BioMarin. The purchase price allocation also included $6.2 million of estimated liabilities assumed for product returns and unclaimed rebates.

The following unaudited pro forma financial information presents (in thousands) the combined results of operations of BioMarin and the Ascent Pediatrics business as if the acquisition had occurred as of January 1, 2003. The unaudited pro forma financial information is not necessarily indicative of what the Company’s consolidated results of operations actually would have been had the acquisition been completed as of January 1, 2003. In addition, the unaudited pro forma financial information does not attempt to project the future results of operations of the Company combined with the Ascent Pediatrics business.

Pro forma adjustments include non-cash expenses associated with the acquisition of the Ascent Pediatrics business and certain integration costs incurred during the second quarter of 2004, which are reflected as of January 1, 2003. The non-cash items include an in-process research and development charge, amortization of acquired intangible assets, imputed interest expense and a fair value inventory adjustment.

(4) JOINT VENTURE

(a) Joint Venture Financial Data

The results of the joint venture’s operations for the three and six months ended June 30, 2004 are presented in the table below (in thousands). The joint venture results and summarized assets and liabilities as presented below give effect to the difference in inventory cost basis between the Company and the joint venture. The difference in basis primarily represents the difference in inventory capitalization policies between the joint venture and the Company. The Company began capitalizing Aldurazyme inventory costs in May 2003 after regulatory approval was obtained. The joint venture began capitalizing Aldurazyme inventory costs in January 2002 when inventory production for commercial sale began.

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The difference in inventory capitalization policies resulted in greater operating expense recognized by the Company prior to regulatory approval compared to the joint venture. It will result in less cost of goods sold recognized by the Company when the previously expensed product is sold by the joint venture and less operating expenses when this previously expensed product is used in clinical trials. The difference will be eliminated when all of the product produced prior to obtaining regulatory approval has been sold or used in clinical trials.

At December 31, 2003 and June 30, 2004, the summarized assets and liabilities of the joint venture and the components of the Company’s investment in and advances to the joint venture were as follows (in thousands):

(b) Joint Venture Critical Accounting Policies

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

The timing of product deliveries can have a significant impact on the amount of revenue that BioMarin/Genzyme LLC recognizes in a particular period. Also, Aldurazyme is sold at least in part through distributors. Inventory in the distribution channel consists of inventory held by distributors, who are BioMarin/Genzyme LLC’s customers, and inventory held by retailers, such as hospitals. BioMarin/Genzyme LLC’s revenue in a particular period can be impacted by increases or decreases in distributor inventories. If distributor inventories increased to excessive levels, BioMarin/Genzyme LLC could experience reduced purchases in subsequent periods, or product returns from the distribution channel due to overstocking, low end-user demand or product expiration. To monitor the amount of

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Aldurazyme inventory in the BioMarin/Genzyme LLC U.S. distribution channel, BioMarin/Genzyme LLC receives data on sales and inventory levels directly from its primary distributors for the product.

BioMarin/Genzyme LLC records reserves for rebates payable under Medicaid and payer contracts, such as managed care organizations, as a reduction of revenue at the time product sales are recorded. BioMarin/Genzyme LLC records allowances for product returns as a reduction of revenue at the time product sales are recorded. The product returns reserve is estimated based on BioMarin/Genzyme LLC’s experience of returns for Aldurazyme, or for similar products. If the history of product returns changes, the reserve is adjusted appropriately. BioMarin/Genzyme LLC’s estimate of distribution channel inventory is also used to assess the reasonableness of its product returns reserve.

BioMarin/Genzyme LLC maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of its customers were to deteriorate and result in an impairment of their ability to make payments, additional allowances may be required.

Inventory—BioMarin/Genzyme LLC values inventories at the lower of cost or fair value. BioMarin/Genzyme LLC determines cost using the first-in, first-out method of inventory costing and writes down inventory that has expired, become obsolete, has a cost basis in excess of its expected net realizable value, or is in excess of expected requirements. If actual market conditions are less favorable than those projected by the joint venture, additional inventory write-downs may be required.

BioMarin/Genzyme LLC capitalizes inventory produced for commercial sale. Refer to 4(a) for discussion of the difference in inventory cost basis between the Company and BioMarin/Genzyme LLC.

(5) STOCKHOLDERS’ EQUITY

The Company had an agreement with Acqua Wellington for an equity investment in the Company. The Company voluntarily terminated its agreement with Acqua Wellington in September 2003. During the first half of 2003, Acqua Wellington purchased 765,816 shares of the Company’s common stock for $8.0 million, net of issuance costs.

In February 2003, the Company completed a public offering of its common stock. In the offering, the Company sold 8,625,000 shares, and the net proceeds were approximately $80.5 million. The offering was pursuant to the Company’s shelf registration statement filed in December 2002, which allows the Company to sell shares of its common stock in one or more offerings, up to a total of $150.0 million.

During the second quarter of 2004, certain warrants expired resulting in a reclassification of $5.1 million from warrants to additional paid-in capital.

(6) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

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

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(7) CONVERTIBLE DEBT

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

In connection with the placement of the debt, the Company paid approximately $4.1 million in offering costs, which have been deferred and are included in other assets. They are being amortized as interest expense over the life of the debt, and the Company recognized $0.2 million and $0.4 million of amortization expense during the three and six months ended June 30, 2004, respectively.

(8) EQUIPMENT AND FACILITY LOAN

In May 2004, the Company executed a $25 million credit facility to finance the Company’s equipment purchases and facility improvements. As of June 30, 2004, $4.2 million was outstanding on the facility. Payments of principal and interest of LIBOR plus 1.5% (2.83% as of June 30, 2004) are due through maturity in 2011. The facility requires an all-asset first priority lien, excluding certain assets such as intellectual property and assets related to the Ascent Pediatrics transaction. The lender requires that we maintain a total unrestricted cash balance, including short-term investments, of at least $45 million or a greater amount defined by a calculation provided for in the facility agreement. The facility also contains additional customary covenants.

(9) SALE OF GLYKO, INC. ASSETS

In January 2003, the Company sold certain Glyko assets including intellectual property, inventory and customer lists, to a third party for a total sales price of up to $1.5 million. The sales price was comprised of cash totaling $0.2 million, a note receivable payable in installments through 2006 totaling $0.5 million without interest, and quarterly royalties based upon the future sales of certain Glyko products up to a maximum of $0.8 million. The future royalties are based upon the terms of the related license agreement, which terminates in January 2008. As the net book value of the Glyko assets was reduced to zero as of December 31, 2002, the Company recognized a gain on disposal of discontinued operations totaling $0.6 million in 2003. The gain represents the cash and note receivable received offset by the discount on the note receivable and related transaction fees incurred during 2003.

(10) FINANCIAL INSTRUMENTS - CONCENTRATIONS OF CREDIT RISK

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of accounts receivable. A significant portion of Orapred sales is made to a limited number of financially viable distributors. The Company does not require collateral from its customers, but performs periodic credit evaluations of its customers’ financial condition. Management does not believe a significant credit risk existed at June 30, 2004.

(11) SUPPLEMENTAL CASH FLOW INFORMATION

The following non-cash transaction occurred during the periods presented (in thousands):

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(12) MILESTONE REVENUE

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

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

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” as defined under securities laws. Many of these statements can be identified by the use of terminology such as “believes,” “expects,” “anticipates,” “plans,” “may,” “will,” “projects,” “continues,” “estimates,” “potential,” “opportunity” and so on. These forward-looking statements may be found in the “Factors That May Affect Future Results,” and other sections of this Quarterly Report. 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 Quarterly Report. You should carefully consider that information before you make an investment decision.

You should not place undue reliance on these statements, which speak only as of the date that they were made. These cautionary statements should be considered in connection with any written or oral forward-looking statements that we may issue in the future. We do not undertake any obligation to release publicly any revisions to these forward-looking statements after completion of the filing of this Quarterly Report to reflect later events or circumstances or to reflect the occurrence of unanticipated events.

Overview

We develop innovative biopharmaceuticals and commercialize therapeutics for serious pediatric diseases. We select product candidates for diseases and conditions that represent both a significant medical need and also have well-understood biology.

Our first pediatric-focused product, Aldurazyme^® (laronidase), has been approved for marketing in the United States by the U.S. Food and Drug Administration (FDA), in the European Union (E.U.) by the European Medicines Evaluation Agency (EMEA) and other countries for the treatment of mucopolysaccharidosis I (MPS I) disease. MPS I is a debilitating and life-threatening genetic disease caused by the deficiency of alpha-L-iduronidase, an enzyme normally required for breaking down certain complex carbohydrates. MPS I is a progressive disease that afflicts patients from birth and leads to severe disabilities and early death. As the first drug approved for MPS I, Aldurazyme has been granted orphan drug status in the U.S. and the E.U., which gives Aldurazyme seven years of market exclusivity in the U.S. and 10 years of market exclusivity in the E.U. for the treatment of MPS I. We have developed Aldurazyme through a joint venture with Genzyme Corporation (Genzyme).

On May 18, 2004, BioMarin completed the transaction to obtain the business of Ascent Pediatrics from Medicis Pharmaceutical Corporation. The transaction includes Orapred^®, a patent-protected drug to treat asthma in children, two additional proprietary formulations of Orapred in development and a U.S. sales force.

We are developing other pediatric-focused product candidates including Aryplase^™ (recombinant human N-acetylgalactosamine 4-sulfatase) for the treatment of mucopolysaccharidosis VI (MPS VI); Phenoptin^™, a proprietary oral form of tetrahydrobiopterin (6R-BH4), for the treatment of moderate to mild forms of phenylketonuria (PKU); and Phenylase^™ (recombinant phenylalanine ammonia lyase) for those who do not respond to Phenoptin, likely those with the more severe form of PKU.

In June 2004, we announced the positive results of our Phase 3 trial of Aryplase for the treatment of MPS VI, a progressive and seriously debilitating genetic disease for which no drug treatment currently exists. MPS VI is caused by the deficiency of N-acetylgalactosamine 4-sulfatase (arylsulfatase B), an enzyme normally required for the breakdown of

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certain complex carbohydrates. The clinical trial demonstrated a statistically significant improvement in endurance in patients receiving Aryplase compared to patients receiving placebo, as measured by the distance walked in 12 minutes, the primary end point of the trial. Additionally, the data demonstrated a statistically significant improvement in reduction of glycosaminoglycans (GAGs) and a positive trend in a 3-minute stair climb, the secondary end points of the trial. In the fourth quarter of 2004, we expect to file for marketing authorization in both the U.S. and E.U. where Aryplase has received orphan drug designations for the treatment of MPS VI.

In July 2004, we announced positive results from a pilot clinical study of 6R-BH4, the active agent in Phenoptin, in 20 patients with PKU. The company also announced that it has received orphan drug designation for Phenoptin for the treatment of PKU in both the U.S. and E.U. Our PKU program is comprised of two investigational therapies: Phenoptin for mild to moderate PKU and Phenylase for more severe PKU. PKU is an inherited genetic disease that affects at least 50,000 diagnosed patients under the age of 40 in the developed world, an estimated half of whom have a moderate to mild form of the disease. It is caused by a deficiency of an enzyme, phenylalanine hydroxylase (PAH), which is required for the metabolism of phenylalanine (Phe). Phe is an amino acid found in most protein-containing foods. Without sufficient quantity or activity of PAH, Phe accumulates to abnormally high levels in the blood resulting in a variety of serious neurological complications. Phenoptin, our lead product candidate for the treatment of PKU, is a proprietary oral form of 6R-BH4, a small-molecule therapeutic that works in combination with PAH to metabolize Phe. If approved, it could become the first drug for the treatment of PKU. Phenylase, an enzyme therapy currently in preclinical development, is being developed as a subcutaneous injection and is intended for those who do not respond to Phenoptin, likely those with the more severe form of the disease.

Outside of pediatrics, we are evaluating multiple enzyme-based therapies for serious medical conditions: Vibrilase^™, a topical investigational enzyme therapy for use in the debridement of serious burns, and preclinical candidates including Chondroitinase for spinal cord injury and Extravase^™ for reperfusion injuries. We completed a Phase 1 clinical trial of Vibrilase in the United Kingdom and we expect to announce data in the third quarter of 2004. We are pursuing preclinical development of several other enzyme product candidates for genetic and other diseases. We have retained all worldwide commercial rights to all of our product candidates. Additionally, we are evaluating two platform technologies, NeuroTrans^™ and Immune Tolerance, to overcome limitations associated with existing pharmaceuticals. We expect to make a decision on whether to file an Investigational New Drug Application for NeuroTrans in the fourth quarter of 2004.

Our net loss for the second quarter of 2004 was $55.6 million as compared to $9.1 million for the second quarter of 2003. Net loss for the second quarter of 2004 increased primarily as a result of $35.4 million of in-process research and development expense associated with the acquisition of the Ascent Pediatrics business and increased sales and marketing costs of $2.7 million associated with the integration and support of Orapred and the preparation for the commercial launch of Aryplase. Other significant components of the increase in net loss were the lack of the $12.1 million non-recurring milestone revenue received in the second quarter of 2003, increased operating expenses associated with the continued development of our products and product candidates, increased interest expense associated with our convertible debt and imputed interest expense associated with the Ascent Pediatrics transaction. The increases to net loss were partially offset by approximately $4.0 million of gross profit from sales of Orapred and a decrease in the equity in the loss of BioMarin/Genzyme LLC of $3.7 million. Our pro forma adjusted net loss, a non-GAAP financial measure, in the second quarter of 2004 was $18.0 million, which excludes certain non-cash items related to the Ascent Pediatrics transaction. See “Non-GAAP Financial Measures” below for a discussion of “pro forma adjusted net loss” as a non-GAAP financial measure and the reconciliation of pro forma adjusted net loss to GAAP net loss.

As of June 30, 2004, our combined cash, cash equivalents and short-term investments totaled $128.8 million, a decrease of $77.6 million from $206.4 million at December 31, 2003. Additionally, we have $25.1 million of restricted cash at June 30, 2004, primarily associated with the Ascent Pediatrics transaction.

Our cash burn in the second quarter of 2004 was $37.3 million as compared to $6.1 million in the second quarter of 2003. The $31.2 million increase in cash burn, a non-GAAP financial measure, is primarily attributable to increased research and development and selling, general and administrative expenses discussed above. Also contributing to the increase in cash burn is the payments to Medicis related to the Ascent Pediatrics transaction of $11.2 million in May 2004

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and the lack of the $12.1 million milestone payment received from Genzyme in May 2003. See “Non-GAAP Financial Measure” below for discussion of “cash burn” as a non-GAAP financial measure and the reconciliation of cash burn to net increase (decrease) in cash.

Non-GAAP Financial Measures

The discussion above includes “pro forma adjusted net loss” (a non-GAAP financial measure). We define pro forma adjusted net loss as our GAAP net loss excluding the impact of the non-cash amounts related to accounting for the Ascent Pediatrics transaction as a business combination. We believe investors’ understanding of our performance is enhanced by disclosing pro forma adjusted net loss because the adjusted number is more representative of our ongoing operations and the non-cash items excluded will not affect our liquidity. The excluded items include an in-process research and development charge of $35.4 million, amortization of acquired intangible assets of $0.8 million, imputed interest expense of $1.1 million and a fair value inventory adjustment of $0.3 million. Below is a reconciliation of net loss to pro forma adjusted net loss for the quarter ended June 30, 2004.

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

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

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

Critical Accounting Policies and Estimates

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

Equity in the loss of BioMarin/Genzyme LLC

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

Equity in the loss of BioMarin/Genzyme LLC includes our 50% share of the joint venture’s loss for the period. The investment in and advances to BioMarin/Genzyme LLC includes our share of the joint venture’s cash, accounts receivable and inventory, and it also includes the current receivable from the joint venture for the reimbursement related to services provided to the joint venture by us.

Impairment of Long-Lived Assets

We regularly review long-lived assets, including goodwill, for impairment. The recoverability of long-lived assets is measured by comparing the asset’s carrying amount to its fair value, determined by the expected undiscounted future cash flows that the asset is expected to generate. If it is determined that the full carrying amount of an asset is not recoverable, an impairment loss is recorded in the amount by which the carrying amount of the asset exceeds its fair value. The estimation of the undiscounted future cash flows associated with long-lived assets requires judgment and assumptions that could differ materially from the actual results.

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Revenue Recognition

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

The timing of product shipments can have a significant impact on the amount of revenue from product sales that the Company recognizes in a particular period. Also, the majority of Orapred sales are made to wholesalers, which, in turn resell the product to retail outlets. Inventory in the distribution channel consists of inventory held by wholesalers, who are the Company’s principal customers, and inventory held by retailers. The Company’s revenue from product sales in a particular period is impacted by increases or decreases in wholesalers’ inventory levels. From time to time, including during the second quarter of 2004, we offer sales incentives, such as price discounts and extended payment terms, in the ordinary course of business. These incentives may impact the level of inventory held by wholesalers. If wholesaler inventories substantially exceed retail demand, the Company could experience reduced revenue from sales in subsequent periods, or product returns from the distribution channel due to overstocking, low end-user demand or product expiration.

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

Provisions for sales discounts, and estimates for chargebacks and product returns are established as a reduction of product sales at the time such revenues are recognized. These revenue reductions are established by the Company’s management as its best estimate at the time of the original sale based on the product’s historical experience adjusted to reflect known changes in the factors that impact such reserves. These revenue reductions are generally reflected either as a direct reduction to accounts receivable through an allowance or as an addition to accrued expenses. The Company does not provide any forms of price protection to its customers and permits product returns only if the product is damaged or if it is returned near or after expiration. To the extent actual chargebacks and product returns differ from management’s estimates, additional reserves may be required.

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of its customers were to deteriorate and result in an impairment of their ability to make payments, additional allowances may be required.

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

Income taxes

We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We have recorded a full valuation allowance against our net deferred tax assets, the principal amount of which is the tax effect of net operating loss carryforwards, of approximately $147.8 million at December 31, 2003. Future taxable income and ongoing prudent and feasible tax planning strategies have been considered in assessing the need for the valuation allowance. If we later determine that it is more likely than not that the net deferred tax assets would be realized, the previously provided valuation allowance would be reversed. In order to realize our deferred tax assets we must be able to generate sufficient taxable income in the tax jurisdictions in which the deferred tax assets are located.

Inventory

We value inventories at the lower or cost or fair value. We determine cost using the average cost method. We analyze our inventory levels quarterly and write down inventory that has become obsolete, inventory that has a cost basis

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in excess of its expected net realizable value and inventory in excess of expected requirements. Expired inventory is disposed of and the related costs are written off. The determination of whether or not inventory costs will be realizable requires estimates by management. Actual results may differ from those estimates and additional inventory write-offs may be required.

Research and Development

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

Stock Option Plans

We have three stock-based compensation plans. We account for those plans under APB Opinion No. 25, Accounting for Stock Issued to Employees whereby generally no stock-based compensation cost is reflected in our net loss for options issued to employees and directors with exercise prices at or above the market price on the date of issuance. We recognize as an expense the fair value of options granted to persons who are neither employees nor directors. The fair value of options granted is determined using the Black-Scholes model, which requires various estimates and assumptions by management.

Recent Accounting Pronouncements

See Note 2(l) of the accompanying consolidated financial statements for a full description of recent accounting pronouncements. We do not expect that any of the recent pronouncement will have a significant impact on our results of operations and financial condition.

Results of Operations

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

Quarter Ended June 30, 2004 and 2003

BioMarin

Revenue and Gross Profit

Commencing with our acquisition of the Ascent Pediatrics business on May 18, 2004, our revenues include sales of Orapred, a patent-protected drug to treat asthma in children. During the second quarter we recognized $4.6 million of net product sales and approximately $4.0 million of gross profit, representing a gross margin of 87%. Cost of sales for the second quarter ended June 30, 2004, includes a $0.3 million charge related to the inventory fair market value adjustment associated with the acquisition. Gross margin excluding the inventory fair value adjustment was 92%.

Milestone revenue in the second quarter of 2003 represents the $12.1 million non-recurring milestone payment received from Genzyme related to the marketing approval of Aldurazyme.

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Net Loss

Our net loss for the second quarter of 2004 was $55.6 million as compared to $9.1 million for the second quarter of 2003. Net loss for the second quarter of 2004 increased primarily as a result of $35.4 million of in-process research and development expense associated with the acquisition of the Ascent Pediatrics business. Other significant components of the increase in net loss were the lack of the $12.1 million non-recurring milestone revenue received in the second quarter of 2003, increased sales and marketing expenses of $2.7 million, increased operating expenses associated with the continued development of our products and product candidates, increased interest expense associated with our convertible debt and imputed interest expense associated with the Ascent Pediatrics transaction. The increases to net loss were partially offset by approximately $4.0 million of gross profit from sales of Orapred and a decrease in the equity in loss of BioMarin/Genzyme LLC of $3.7 million.

Our pro forma adjusted net loss in the second quarter of 2004 was $18.0 million as compared to $9.1 million in the second quarter of 2003. Pro forma adjusted net loss in the second quarter of 2004 increased primarily as a result of the lack of the $12.1 million non-recurring milestone revenue received in the second quarter of 2003, increased sales and marketing expenses of $2.7 million and interest expense of $1.1 million, partially offset by approximately $4.0 million of gross profit from sales of Orapred and a decrease in the equity in loss of BioMarin/Genzyme LLC of $3.7 million. See “Overview—Non-GAAP Financial Measures” above for a discussion of “pro forma adjusted net loss” as a non-GAAP financial measure and the reconciliation of pro forma adjusted net loss to net loss.

Research and Development Expense

Our research and development expenses include personnel, facility and external costs associated with the development and commercialization of our product candidates. These development costs primarily include preclinical and clinical studies, manufacturing prior to regulatory approval, quality control and assurance and other product development expenses such as regulatory costs.

Research and development expenses in the second quarter of 2004 increased by $0.6 million to $12.3 million from $11.7 million in the second quarter of 2003. The major factors causing the increase include increased Aryplase clinical trial costs of $1.9 million, primarily relating to the Aryplase Phase 3 clinical trial, and increased Aryplase manufacturing, quality and facility costs of $2.1 million. Also contributing to the increase in research and development expenses were clinical and manufacturing activities related to our Phenoptin program during the second quarter of 2004 of $1.5 million that were not incurred in the second quarter of 2003. These increases were offset by the lack of Neutralase manufacturing and clinical trial costs of $5.0 million as a result of the termination of that program in late 2003.

Selling, General and Administrative Expense

Our selling, general and administrative expenses include sales and administrative personnel, facility and external costs required to support our product development programs. These selling, general and administrative costs include facility operating expenses and depreciation, sales operations in support of Orapred and our product candidates, human resources, finance and support personnel expenses and other corporate costs such as insurance, audit and legal expenses.

Selling, general and administrative expenses in the second quarter of 2004 increased to $7.5 million in 2004 from $4.5 million in the second quarter of 2003. The primary factor causing the increase is sales and marketing costs of $2.7 million associated with the support of Orapred and the preparation for the commercial launch of Aryplase.

Amortization of Acquired Intangible Assets

Amortization of acquired intangible assets includes the current amortization expense of the Orapred product technology acquired in the Ascent Pediatrics transaction. The acquired intangible assets are being amortized over 15 years.

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Acquired In-Process Research and Development

Acquired in-process research and development includes the one-time charge for the portion of the Ascent Pediatrics transaction consideration attributable to the two additional proprietary formulations of Orapred that are currently under development.

Equity in the loss of BioMarin/Genzyme LLC

Equity in the loss of BioMarin/Genzyme LLC includes our 50% share of the joint venture’s loss for the period. Equity in the loss of BioMarin/Genzyme LLC was $1.7 million in the second quarter of 2004 compared to $5.4 million in the second quarter of 2003. The decrease is principally due to $9.2 million of Aldurazyme sales in the second quarter of 2004 compared to $1.1 million during the second quarter of 2003.

Interest Income

We invest our cash and short-term investments in government and other high credit quality securities in order to limit default and market risk. Interest income increased to $0.7 million in the second quarter of 2004 from $0.6 million in the second quarter of 2003.

Interest Expense

We incur interest expense on our convertible debt issued in June 2003 and on our equipment loans. Interest expense also includes imputed interest expense on the discounted obligation for the Ascent Pediatrics transaction. Interest expense was $2.4 million and $0.2 million in the second quarter of 2004 and 2003, respectively. The increase in the second quarter of 2004 represents interest expense related to the convertible debt of $1.1 million and imputed interest expense of $1.1 million. .

BioMarin/Genzyme LLC

The discussion below gives effect to the inventory capitalization policy that we use for inventory held by the joint venture, which is different from the joint venture’s inventory capitalization policy. We began capitalizing Aldurazyme inventory production costs in May 2003, after U.S. regulatory approval was obtained. The joint venture began capitalizing Aldurazyme inventory production costs in January 2002 when inventory production for commercial sale began. The difference in inventory capitalization policies results in a greater operating expense realized by us prior to regulatory approval, and lower cost of goods sold with higher gross profit realized by us as the previously expensed product is sold by the joint venture, as well as lower research and development expense when Aldurazyme is used in on-going clinical trials. These differences will be eliminated when all of the product manufactured prior to regulatory approval has been sold or has been used in clinical trials. See Note 4(a) to the accompanying consolidated financial statements for further discussion of the difference in inventory cost basis between us and the joint venture.

Revenue and Gross Profit

We and our joint venture partner, Genzyme, received marketing approval for Aldurazyme in the U.S. on April 30, 2003, and in the E.U. on June 11, 2003. We have subsequently received marketing approval in other countries. Aldurazyme was launched commercially in May 2003 in the U.S. and in June 2003 in the E.U. The joint venture recognized $9.2 million of revenue and $9.1 million of gross profit during the second quarter of 2004. BioMarin/Genzyme LLC recognized $1.1 million of revenue during the second quarter of 2003. Gross profit during the second quarter of 2003 was $1.1 million because all product sold was previously expensed.

Operating Expenses

Operating expenses of the joint venture include the costs associated with the development and commercialization of Aldurazyme and totaled $12.5 million for the second quarter of 2004 as compared to $11.9 million for the second quarter of 2003. Operating expenses in the second quarter of 2004 included $5.9 million of sales and marketing expenses associated with the commercialization of Aldurazyme and $4.1 million of research and development costs, primarily clinical trial costs.

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Operating expenses in the second quarter of 2003 included $5.0 million of sales and marketing expenses associated with the commercial launch of Aldurazyme and $5.6 million of research and development expenses. Sales and marketing expenses increased in the second quarter of 2004 due to increased commercialization activities. Research and development expenses for the second quarter of 2003 included $2.0 million for the production of Aldurazyme prior to obtaining regulatory approval and $3.6 million of clinical trial costs and continued research and development efforts. Research and development decreased in the second quarter of 2004 compared to 2003 due to the capitalization of inventory beginning in May 2003 after regulatory approval was obtained.

Six Months Ended June 30, 2004 and 2003

BioMarin

Revenue and Gross Profit

Commencing with our acquisition of the Ascent Pediatrics business on May 18, 2004, our revenues include sales of Orapred. During the six months ended June 30, 2004, we recognized $4.6 million of net product sales and approximately $4.0 million of gross profit, representing a gross margin of 87%. Cost of sales for the six months ended June 30, 2004, includes a $0.3 million charge related to the inventory fair market value adjustment associated with the acquisition. Gross margin excluding the inventory fair value adjustment was 92%.

Milestone revenue in the second quarter of 2003 represents the $12.1 million non-recurring milestone payment received from Genzyme related to the marketing approval of Aldurazyme.

Net Loss

Our net loss for the six months ended June 30, 2004 was $75.5 million as compared to $28.8 million for the six months ended June 30, 2003. Net loss for the first half of 2004 increased primarily as a result of $35.4 million of in-process research and development expense associated with the acquisition of the Ascent Pediatrics business. Other significant components of the increase in net loss were the lack of the $12.1 million non-recurring milestone revenue received in the second quarter of 2003, increased sales and marketing expenses of $2.7 million, increased operating expenses associated with the continued development of our products and product candidates, increased interest expense associated with our convertible debt and imputed interest expense associated with the Ascent Pediatrics transaction. The increases to net loss were partially offset by approximately $4.0 million of gross profit from sales of Orapred and a decrease in the equity in the loss of BioMarin/Genzyme LLC of $8.7 million.

Our pro forma adjusted net loss in the second half of 2004 was $37.9 million as compared to $28.8 million in the second half of 2003. Pro forma adjusted net loss in the second half of 2004 increased primarily as a result of the lack of the $12.1 million non-recurring milestone revenue received in the second quarter of 2003, increased sales and marketing expenses of $2.7 million, increased research and development expense of $3.5 million and interest expense of $2.4 million, partially offset by product sales of $4.6 million and a decrease in the equity in the loss of BioMarin/Genzyme LLC of $8.7 million. The increase in research and development expenses reflects increased Aryplase clinical and manufacturing costs offset by the lack of Neutralase clinical and manufacturing costs discussed below. See “Overview—Non-GAAP Financial Measures” above for a discussion of “pro forma adjusted net loss” as a non-GAAP financial measure and the reconciliation of pro forma adjusted net loss to net loss.

Research and Development Expense

Our research and development expenses include personnel, facility and external costs associated with the development and commercialization of our product candidates. These development costs primarily include preclinical and clinical studies, manufacturing prior to regulatory approval, quality control and assurance and other product development expenses such as regulatory costs.

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Research and development expenses increased by $3.5 million to $26.2 million in the first half of 2004 from $22.7 million in the first half of 2003. The major factors causing the increase include increased Aryplase clinical trial costs of $4.6 million, primarily relating to the Phase 3 clinical trial, and increased Aryplase manufacturing, quality and facility costs of $7.0 million. Also contributing to the increase in research and development costs were clinical and manufacturing activities related to our Phenoptin program during the second quarter of 2004 of $2.2 million that were not incurred in 2003. These increases were offset by the lack of Neutralase manufacturing and clinical trial costs of $10.4 million as a result of the termination of that program in late 2003.

Selling, General and Administrative Expense

Our selling, general and administrative expenses include sales and administrative personnel, facility and external costs required to support our product development programs. These selling, general and administrative costs include facility operating expenses and depreciation, sales operations in support of Orapred and our product candidates, human resources, finance and support personnel expenses and other corporate costs such as insurance, audit and legal expenses.

Selling, general and administrative expenses increased to $11.2 million in the first half of 2004 from $7.3 million in the first half of 2003. The major factors causing the increase include sales and marketing costs of $2.7 million associated with the support of Orapred product sales and the preparation for the commercial launch of Aryplase, increased administrative and support personnel and increased rent expense.

Amortization of Acquired Intangible Assets

Amortization of acquired intangible assets includes the current amortization expense of the intangible assets acquired in the Ascent Pediatrics transaction, including the Orapred developed and core technology. The acquired intangible assets are being amortized over 15 years.

Acquired in-Process Research and Development

Acquired in-process research and development includes the one-time charge for the portion of the Ascent Pediatrics transaction consideration attributable to the two additional proprietary formulations of Orapred that are currently under development.

Equity in the loss of BioMarin/Genzyme LLC

Equity in the loss of BioMarin/Genzyme LLC includes our 50% share of the joint venture’s loss for the period. Equity in the loss of BioMarin/Genzyme LLC was $3.5 million in the first half of 2004 compared to $12.1 million in the first half of 2003. The decrease is principally due to $16.6 million of Aldurazyme sales in the first half of 2004 compared to $1.5 million during the first half of 2003.

Interest Income

We invest our cash and short-term investments in government and other high credit quality securities in order to limit default and market risk. Interest income increased to $1.4 million in the first half of 2004 from $1.0 million in the first half of 2003. The increase of $0.4 million is primarily the result of a slightly higher average cash and short-term investment balance for the six months ended June 30, 2004.

Interest Expense

We incur interest expense on our convertible debt issued in June 2003 and on our equipment loans. Interest expense also includes imputed interest expense on the discounted obligation for the Ascent Pediatrics transaction. Interest expense was $3.8 million and $0.3 million in the first half of 2004 and 2003, respectively. The increase in the first half of 2004 primarily represents interest expense related to the convertible debt of $2.2 million and imputed interest of $1.1 million.

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Discontinued Operations

In December 2001, we decided to close the carbohydrate analytical business portion of our wholly owned subsidiary, Glyko, Inc. (Glyko). As a result, the operations of Glyko are classified as discontinued operations in our consolidated financial statements. Accordingly, we have segregated its operating results in our consolidated statements of operations and have segregated its cash flows in our consolidated statements of cash flows.

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

BioMarin/Genzyme LLC

The discussion below gives effect to the inventory capitalization policy that we use for inventory held by the joint venture, which is different from the joint venture’s inventory capitalization policy. We began capitalizing Aldurazyme inventory production costs in May 2003, after U.S. regulatory approval was obtained. The joint venture began capitalizing Aldurazyme inventory production costs in January 2002 when inventory production for commercial sale began. The difference in inventory capitalization policies results in a greater operating expense realized by us prior to regulatory approval, and lower cost of goods sold with higher gross profit realized by us as the previously expensed product is sold by the joint venture, as well as lower research and development expense when Aldurazyme is used in on-going clinical trials. These differences will be eliminated when all of the product manufactured prior to regulatory approval has been sold or has been used in clinical trials. See Note 4(a) to the accompanying consolidated financial statements for further discussion of the difference in inventory cost basis between us and the joint venture.

Revenue and Gross Profit

We and our joint venture partner, Genzyme, received marketing approval for Aldurazyme in the U.S. on April 30, 2003, and in the E.U. on June 11, 2003. We have subsequently received marketing approval in other countries. Aldurazyme was launched commercially in May 2003 in the U.S. and in June 2003 in the E.U. The joint venture recognized $16.6 million of revenue and $16.4 million of gross profit during the first half of 2004. BioMarin/Genzyme LLC recognized $1.5 million of revenue during the first half of 2003. Gross profit for the first half of 2003 was $1.5 million because all product sold was previously expensed.

Operating Expenses

Operating expenses of the joint venture include the costs associated with the development and commercialization of Aldurazyme and totaled $23.3 million for first half of 2004 as compared to $25.8 million for the first half of 2003. Operating expenses for the first half of 2004 included $10.4 million of sales and marketing expenses associated with the commercialization of Aldurazyme and $8.1 million of research and development costs, primarily clinical trial costs.

Operating expenses for the first half of 2003 included $8.1 million of sales and marketing expenses associated with the commercial launch of Aldurazyme and $15.3 million of research and development expenses. Sales and marketing expenses increased in the first half of 2004 due to increased post-launch commercialization activities. Research and development of the joint venture for the first half of 2003 included $8.2 million for the production of Aldurazyme prior to obtaining regulatory approval and $7.1 million of clinical trial costs and continued research and development efforts. Research and development decreased in the first half of 2004 compared to 2003 due to the capitalization of inventory beginning in May 2003 after regulatory approval was obtained.

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Liquidity and Capital Resources

Cash and Cash Flow

We have financed our operations by the issuance of common stock, convertible debt, equipment financing and the related interest income earned on cash, cash equivalents and short-term investments. During the first half of 2003, we raised $80.5 million from a public offering of our common stock, $8.0 million from the sale of our common stock to Acqua Wellington and $120.9 million from a convertible debt offering. We voluntarily elected to terminate our equity financing agreement with Acqua Wellington in September 2003.

As of June 30, 2004, our combined cash, cash equivalents and short-term investments totaled $128.8 million, a decrease of $77.6 million from $206.4 million at December 31, 2003. Additionally, we have $25.1 million of restricted cash at June 30, 2004, primarily associated with the Ascent Pediatrics transaction. Cash inflows during the first half of 2004 included proceeds from our equipment and facility loan totaling $4.2 million. The primary sources of cash during the first half of 2003 were the financing activities described above, a milestone payment from Genzyme of $12.1 million and the issuance of common stock pursuant to the exercise of stock options under our stock compensation plans of approximately $3.7 million.

The primary uses of cash during the first half of 2004 were to finance operations, which primarily included the manufacturing and clinical trials of Aryplase and the related supporting functions, and the Ascent Pediatrics transaction. Our cash burn, a non-GAAP financial measure, in the first half of 2004 was $52.5 million as compared to $17.0 million in the first half of 2003. The $35.5 million increase in cash burn during the first half of 2004 is primarily attributable to increased research and development expenses, increased capital expenditures and cash payments of $14.8 million related to the Ascent Pediatrics transaction. See “Overview—Non-GAAP Financial Measures” above for a discussion of “cash burn” as a non-GAAP financial measure and the reconciliation of cash burn to net increase (decrease) in cash.

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

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

As a result of the Ascent Pediatrics transaction, we expect to pay Medicis $160.0 million in specified cash payments through 2009, of which $30.0 million is payable in 2004.

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Funding Commitments

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

Our investment in our product development programs has a major impact on our operating performance. In the six months ended June 30, 2004, our research and development expenses of $26.2 million represent $18.9 million of Aryplase costs, $2.5 million of Phenoptin costs, $1.3 million of NeuroTrans costs, $0.2 million of Orapred costs and $3.3 million of research and development costs not allocated to specific major projects.

In the quarter ended June 30, 2004, our research and development expenses of $12.3 million represent $8.2 million of Aryplase costs, $1.6 million of Phenoptin costs, $0.6 million of NeuroTrans costs, $0.2 million of Orapred costs and $1.7 million of research and development costs not allocated to specific major projects.

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

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

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Borrowings and Contractual Obligations

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

We have entered into several agreements for loans, including a $25.0 million credit facility executed in May 2004, to finance our equipment purchases and facility improvements. The aggregate outstanding balance totaled $6.2 million at June 30, 2004. The loans bear interest ranging from 2.83% to 9.33% and are secured by liens on certain assets. Payments of principal and interest are due through maturity in 2011. The lender under our credit facility requires that we maintain a total unrestricted cash balance of at least $45 million or a greater amount defined by a calculation provided for in the credit agreement.

As a result of the Ascent Pediatrics transaction, we expect to pay Medicis $160.0 million in specified cash payments through 2009, of which $30.0 million is payable in 2004.

We anticipate a need for additional financing to fund our future operations, including the commercialization of our drug product candidates currently under development. We cannot provide assurance that additional financing will be obtained or, if obtained, will be available on reasonable terms or in a timely manner.

We have contractual and commercial obligations under our debt, operating and capital leases and other obligations related to research and development activities, licenses and sales royalties with annual minimums. Information about these obligations as of June 30, 2004, is presented in the table below (in thousands).