We are a developer of enzyme therapies for debilitating, life-threatening, chronic genetic diseases and other diseases or conditions. Since our inception on March 21, 1997, we have been engaged in research and development activities, including preclinical studies, clinical trials and clinical manufacturing, the establishment of laboratory and manufacturing facilities, and administrative activities.
We have incurred net losses since inception and had an accumulated deficit through March 31, 2001 of $90.2 million. Our losses have resulted primarily from research and development activities and related administrative expenses. We expect to continue to incur operating losses at least through 2002.
To date, we have not generated revenues from the sale of our drug candidates. Our lead product is Aldurazyme, laronidase for injection, (recombinant human (alpha)-L-iduronidase), which is undergoing clinical trials for use in enzyme replacement therapy for Mucopolysaccharidosis-I or MPS-I. We have initiated a clinical trial of rhASB (recombinant human N-acetylgalactosamine-4 sulfatase), for use in enzyme replacement therapy for the treatment of MPS-VI or Maroteaux-Lamy Syndrome. We have also successfully conducted preclinical studies in pigs and mice of our burn debridement (cleaning) enzyme, Vibriolysin, for use in wound debridement in preparation for skin grafting and expect to submit an application to the U.S. Food and Drug Administration (FDA) or foreign equivalent to begin a clinical trial by mid-2001.
In January 2001, we signed an agreement with Acqua Wellington North American Equities Fund Ltd. (Acqua Wellington) for an equity investment in the our company. Under the terms of the agreement, we will have the option to request Acqua Wellington to invest through sales of our registered common stock at a small discount to market price. The maximum amount that we may request to be invested in any one month is dependent upon the market price of our stock (or can be mutually agreed-upon by both parties) and is referred to as the "Draw Down Amount." Acqua Wellington is obligated to purchase this amount if requested to do so by us. In addition we, at our discretion, may 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. In the initial transaction under this agreement on February 2, 2001, Acqua Wellington purchased 101,523 shares of our common stock for $1 million ($848,000 net of issuance costs, the majority of which will be nonrecurring upon future transactions associated with this agreement). As of May 4, 2001, the potential maximum future amount available to us under the agreement is $49 million.
Revenues for the first quarter of 2001 totaled $3.4 million compared to revenues of $3.3 million in the first quarter of 2000. First quarter 2001 revenues included $2.7 million for services provided to the joint venture for Aldurazyme compared to $2.8 million in the same period in 2000. The decrease was primarily the result of efficiencies gained in the manufacturing of Aldurazyme. First quarter 2001 revenues also included $709,000 generated by Glyko, Inc. compared to $519,000 for the first quarter of 2000 primarily as a result of increased sales in both the United States and European sales offices.
Cost of products and cost of services related to Glyko, Inc. operations were $271,000 in the first quarter of 2001 and were $181,000 in the comparable period of 2000. Glyko’s total external product and service costs as a percent of the sales of products and services were 38% in the first quarter of 2001 and 35% in the first quarter of 2000. The change was due primarily to a less favorable revenue mix, with a greater percentage of lower margin product sales.
Research and development expenses for the first quarter of 2001 increased by $1.3 million to $10.0 million from $8.7 million in the first quarter of 2000. Increased expenses in support of the rhASB and Vibriolysin programs were the major factors in the growth of research and development expenses.
Selling, general and administrative expenses increased to $2.2 million in the first quarter of 2001 from $2.0 million in the first quarter 2000. This increase was primarily due to the acceleration of the amortization of goodwill for the purchase of Glyko, Inc. The estimated life of the goodwill was decreased from ten years to seven years in the third quarter of 2000.
In the first quarter of 2000, we recorded a provision of $4.4 million for the closure of our Carson Street clinical manufacturing facility. The provision primarily consisted of impairment reserves for leasehold improvements and equipment located in the Carson Street facility.
The equity in the loss of our joint venture with Genzyme was $1.1 million for the first quarter 2001 compared to $557,000 for the same period of 2000 as the joint venture continued its original clinical trial and began its Phase III clinical trial of Aldurazyme late in 2000.
Interest income was $468,000 for the first quarter of 2001 compared to $788,000 for the same period of 2000. The decrease was primarily due to decreased interest rates and the reduction of cash, cash equivalents and short-term investment balances available for investment in 2001 .
Net loss was $9.7 million ($0.26 per share, basic and diluted) in the first quarter of 2001 compared to a net loss of $11.7 million ($0.34 per share, basic and diluted) in the comparable period of 2000.
Liquidity and Capital Resources
We have financed our operations since our inception by the issuance of common stock and convertible notes and the related interest income earned on cash balances available for short-term investment. Since inception, we have raised aggregate net proceeds of approximately $134.3 million. We were initially funded by GBL with a $1.5 million investment. We have since raised additional capital from the sale of common stock in private placements, the sale of promissory notes convertible into common stock, an investment of $8.0 million by Genzyme as part of our joint venture with them, an initial public offering including the underwriters’ over-allotment exercise, the concurrent $10.0 million Genzyme investment in our Company, the sale of $1.0 million of common stock to Acqua Wellington, and sales from stock option and warrant exercises and the Employee Stock Purchase Plan.
Our combined cash, cash equivalents and short-term investments totaled $29.8 million at March 31, 2001, a decrease of $10.4 million for the quarter. The primary uses of cash during the three months ended March 31, 2001 were to finance operations, fund the joint venture and purchase equipment and leasehold improvements. The primary source of cash during this period was the sale of $1.0 million of common stock to Acqua Wellington and the issuance of common stock pursuant to the exercise of stock options under the 1997 Stock Option Plan. For the three months ended March 31, 2001, operations used $9.2 million, we invested $2.1 million in the joint venture (which was consumed in joint venture operations), we purchased $430,000 of equipment and leasehold improvements, we raised $408,000 from the exercise of stock options and we received $848,000 (net of issuance costs) from the sale of common stock to Acqua Wellington.
From our inception through March 31, 2001, we have purchased approximately $33.7 million of leasehold improvements and equipment. We expect that our investment in leasehold improvements and equipment will increase significantly during the next two years because we will provide facilities and equipment for a larger staff and increase manufacturing capacity for both commercial and clinical requirements.
As part of the acquisition of Glyko, Inc., we acquired in-process research and development projects, the value of which was expensed as a portion of the purchase price at the time of the acquisition. The 11 projects acquired are each relatively small and can be grouped into two categories, analytic projects and diagnostic projects.
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The analytic projects are intended to expand the analytic product line by adding new enzymes for reagent sales, new kits for agricultural applications, new instrument capabilities for protein analysis and a major upgrade of software capabilities. At the time of the acquisition of Glyko, Inc., all of the analytic projects had completed feasibility work and the software projects were 75% complete and have since been completed. The development of specialized materials supporting instrument capabilities is deemed to be the most difficult technical hurdle for the completion and commercialization of the analytic projects. The fair value of the analytic projects was $1.7 million at the time of the acquisition.
The diagnostic projects are intended to expand a product line based on very precise measurements of the level of complex carbohydrates in blood and urine as indicators of serious disease conditions including heart disease, kidney disease and mucopolysaccharidoses or carbohydrate lysosomal storage diseases. At the time of the Glyko, Inc. acquisition, preliminary feasibility work had been done for all of the projects and a software project was well advanced as to programming, which has since been completed. The development of new more sensitive carbohydrate chemistry techniques is deemed to be the most difficult technical hurdle for the completion and commercialization of the diagnostic products. The fair value of the diagnostic projects was $924,000 at the time of the acquisition.
As of March 31, 2001, we had expended to date approximately $1.1 million on the analytic projects and $1.2 million on the diagnostic projects. If all acquired in-process research and development projects proceed to completion, we expect to spend approximately $100,000 in incremental direct expense to complete the analytic projects in phases over approximately 3 months. We expect to spend approximately $300,000 to complete the diagnostic projects in phases within the next 6 months. None of these projects have been terminated to date.
Since the acquisition of these in-process research and development projects, there have been no subsequent developments which indicate that the completion and commercialization of either of the projects are less likely to be completed on the original planned schedule or less likely to be a commercial success.
We have made and plan to make substantial commitments to capital projects, including expanding the Aldurazyme and rhASB manufacturing facilities, developing new research and development facilities, and expanding our administrative and support offices.
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 purchased $8.0 million in common stock upon signing the agreement and $10.0 million of common stock at the IPO price of $13 per share in a private placement concurrent with the initial public offering. Genzyme has committed to pay us an additional $12.1 million upon approval by the FDA of the biologics license application (BLA) for Aldurazyme as a treatment for MPS-I.
In January 2001, we signed an agreement with Acqua Wellington North American Equities Fund Ltd. (Acqua Wellington) for an equity investment in the our company. Under the terms of the agreement, we will have the option to request Acqua Wellington to invest through sales of our registered common stock at a small discount to market price. The maximum amount that we may request to be invested in any one month is dependent upon the market price of our stock (or can be mutually agreed-upon by both parties) and is referred to as the "Draw Down Amount." Acqua Wellington is obligated to purchase this amount if requested to do so by us. In addition we, at our discretion, may 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. In the initial transaction under this agreement on February 2, 2001, Acqua Wellington purchased 101,523 shares of our common stock for $1 million ($848,000 net of issuance costs, the majority of which will be nonrecurring upon future transactions associated with this agreement). As of May 4, 2001, the potential maximum future amount available to us under the agreement is $49 million.
The net proceeds from any sales of our common stock to Acqua Wellington 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, rhASB for MPS-VI and our program for Vibriolysin, which is being studied for the debridement (cleaning) of severe burns. In addition, net proceeds may also be used for the research and development of other pipeline products, building of the Company’s supporting infrastructure, and other general corporate purposes.
We expect our current funds to last at least through 2001. Until we can generate sufficient levels of cash from our operations, we expect to continue to finance future cash needs through:
. The sale of equity securities
. Equipment-based financing
. Collaborative agreements with corporate partners
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We do not expect to generate positive cash flow from operations at least through 2002 because we expect to increase operational expenses and manufacturing investment for the joint venture and to increase research and development activities, including:
. Preclinical studies, clinical trials and regulatory review
. Development of manufacturing operations
. Process development activities
. Scale-up of manufacturing processes in larger capacity facilities
We anticipate a need for additional financing to fund the future operations of our business, including the commercialization of our drug candidates currently under development. We are actively considering our financing options to support our operations beyond 2001. 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:
. The progress of our research and development programs
. The progress of preclinical studies and clinical trials
. The time and cost involved in obtaining regulatory approvals
. Scaling up, installing and validating manufacturing capacity
. Competing technological and market developments
. Changes and developments in collaborative, licensing and other relationships
. The development of commercialization activities and arrangements
. The leasing and build-out of additional facilities
. The purchase of additional capital equipment
We plan to continue our policy of investing available funds in government securities and investment grade, interest-bearing securities, primarily with maturities of one year or less. We do not invest in derivative financial instruments, as defined by Statement of Financial Accounting Standards No. 133.
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FACTORS THAT MAY AFFECT FUTURE RESULTS
An investment in our common stock involves a high degree of risk. We operate in involves numerous risks and uncertainties. The risks and uncertainties described below are not the only ones we face. Other risks and uncertainties, including those that we do not currently consider material, may impair our business. If any of the risks discussed below actually occur, our business, financial condition, operating results or cash flows could be materially adversely affected. This could cause the trading price of our common stock to decline, and you may lose all or part of your investment. For a more complete discussion of the factors that we currently consider to pose a material risk to our business, please see the section entitled "Factors That May Effect Future Results" in our Annual Report on Form 10-K.
Research and Development/Rapid Growth
A substantial portion of our business plan is based upon the development, production and sale of carbohydrate enzyme therapies for various medical applications. Although we currently have several products at various stages of research and development, none of our enzyme therapies are approved for marketing and sales. All of the products currently in development will require substantial additional research and development including clinical trials prior to distribution and sales.
To be able to effectively address all of the issues associated with developing commercially viable products, 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 systems, procedures and controls may not be adequate to support our operations and our management may not be able to successfully manage future market opportunities or our relationships with customers and other third parties.
Because the development and manufacture of our enzyme therapy products require specialized technical expertise, the loss of key scientific, technical and managerial personnel may delay or otherwise harm our product development programs. We rely heavily on our ability to attract and retain qualified scientific, technical and managerial personnel. The competition for qualified personnel in the biopharmaceutical field is intense. Our location is in the San Francisco Bay Area, which has a rapidly growing concentration of biopharmaceutical companies, exposes us to particularly intense competition for qualified staff at all levels. We may not be able to continue to attract and retain qualified personnel necessary for the development of our business.
Capital Resources
Developing and bringing our carbohydrate enzyme therapy products to market is a particularly time consuming and capital intensive process which requires substantial expenditures. We believe that the cash, cash equivalents, and short-term investment securities balances at March 31, 2001 will be sufficient to meet our operating and capital requirements through 2001. This estimate is based on assumptions and estimates, which may prove to be wrong. As a result, we will need to obtain additional financing. Such financing may not be available when needed. If we fail to raise additional financing as we need it, we will have to delay or terminate our product development programs.
Regulatory Considerations
We must obtain regulatory approval before marketing or selling our drug products. In the United States, we must obtain FDA approval for each drug that we intend to commercialize. The FDA approval process is typically lengthy and expensive, and approval is never certain. Products distributed abroad are also subject to foreign government regulation. 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 candidates 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, the value of our Company, and our operating results will be adversely affected.
As part of the FDA approval process, we must conduct, at our own and one or more partners (if any) expense, preclinical studies in the laboratory and on animals, and clinical trials on humans for each drug candidate. The
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number of preclinical studies and clinical trials that the FDA will require will vary depending on the drug product, the disease or condition the drug is being developed to address, the results of prior studies and trials, and regulations applicable to the particular drug. Even if we obtain favorable results in preclinical studies on animals, the results in humans may be different. Results of initial clinical trials on a small number of patients may not predict results on larger clinical trials on a larger number of patients. Adverse or inconclusive clinical results would stop us from filing for regulatory approval of our products.
Typically, if a drug product, such as Aldurazyme, is intended to treat a chronic disease, safety and efficacy data must be gathered over an extended period of time, which can range from six months to three years or more. In addition, clinical trials on humans are typically conducted in three phases. The FDA generally requires two pivotal clinical trials that demonstrate substantial evidence of safety, efficacy and appropriate dosing in a broad patient population at multiple sites to support an application for regulatory approval. If a drug is intended for the treatment of a serious or life-threatening condition and the drug demonstrates the potential to address unmet medical needs for this condition, fewer trials may be sufficient to prove safety and efficacy under the FDA’s Modernization Act of 1997.
Where appropriate, we intend to seek fast track designation from the FDA for our drug candidates. To date, Aldurazyme and rhASB have received a fast track designation. However, a fast track designation does not guarantee a faster review process or a faster approval compared to the normal FDA procedures.
In addition to the risks associated with obtaining regulatory approval for our products, we must comply with strict regulatory requirements relating to the manufacture of our drug candidates that can be costly and could delay or prevent our production efforts. Our manufacturing facilities must obtain regulatory certification prior to production and upon any material change to the production process, before and after product approval, and are continuously subject to inspection by the FDA, the State of California and foreign regulatory authorities. Our Galli Drive and our Bel Marin Keys Boulevard manufacturing facilities have been inspected and licensed by the State of California for clinical pharmaceutical manufacture. We cannot guarantee that these facilities will pass federal or international regulatory inspection. 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. We cannot guarantee that the Company, or any potential third-party manufacturer of our drug products, will be able to comply with cGMP regulations.
Protection of Intellectual Property
We are dependent on the protection of our intellectual property. We employ several strategies to attempt to prevent our competitors from utilizing our research and technical information. However, these strategies may not be successful.
Where appropriate, we seek patent protection for certain aspects of our technology. Meaningful patent protection may not be available for some of the enzymes we are developing, including Aldurazyme and rhASB. The patent positions of biotechnology companies are extremely 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, including the structure of the enzymes, the methods for purifying or producing the enzymes and the methods of treatment, has existed in the public domain for many years. Publication of this information may prevent us from obtaining composition-of-matter patents, which are generally believed to offer the strongest patent protection.
Even if we seek a patent on an aspect of our technology, obtaining the patent may be difficult or impossible and may require the expenditure of substantial time and money. Competitors may interfere with our patent process in a variety of ways, including claiming that they invented the claimed invention prior to us or that we are infringing on their patents. Competitors may also contest our patents by showing the patent examiner that the invention was obvious or was not original or novel.
Even if we receive a patent, it 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. Also, enforcing patents is expensive and may absorb significant time by our management. In litigation, a competitor could claim that our issued patents are not valid for a number of reasons. If the court agrees, we would lose that patent.
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In addition, competitors also seek patent protection for their technology. There are many patents in our field of technology, and we cannot guarantee that we do not infringe on those patents or that we will not infringe on patents granted in the future. If a patent holder believes our product infringes on their patent, the patent holder may sue us even if we have received patent protection for our technology.
In addition to seeking patent protection for our intellectual property, we attempt to protect our trade secrets from disclosure to our competitors. We accomplish this in a number of ways, including limiting access to information to necessary employees and requiring persons with access to trade secrets to enter into nondisclosure agreements.
It is unclear whether our trade secrets will provide useful protection. While we use reasonable efforts to protect our trade secrets, our employees or consultants may unintentionally or willfully disclose our information to competitors. Enforcing a claim that someone else illegally obtained and is using our trade secrets, like patent litigation, is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willing to protect trade secrets. Also, our competitors may independently develop equivalent knowledge, methods and know-how.
We may also support and collaborate in research conducted by government organizations or by universities. We cannot guarantee that we will be able to acquire any exclusive rights to technology or products derived from these collaborations. If we do not obtain required licenses or rights, we could encounter delays in product development while we attempt to design around other patents or even be prohibited from developing, manufacturing or selling products requiring these licenses. There is also a risk that disputes may arise as to the rights to technology or products developed in collaboration with other parties.
The United States Patent and Trademark Office recently issued a patent that includes claims related to (alpha)-L-iduronidase. Our lead drug product, Aldurazyme, may infringe on this patent. We believe that this patent is invalid on a number of grounds. A patent making the same claims was filed in Europe and has been rejected and cannot be refiled in Europe. Our challenges to the U.S. patent may be unsuccessful, but the rejection of the European application supports our strategy to challenge the validity of the U.S. patent. Even if we are successful, challenging the patent may be expensive, require our management to devote significant time to this effort and may delay commercialization of our product in the United States.
The patent holder has granted an exclusive license for products relating to this patent to one of our competitors. If we are unable to successfully challenge the patent, we may be unable to produce Aldurazyme in the United States unless we can obtain a sub-license from the current licensee. The current licensee is not required to grant us a license and even if a license is available, we may have to pay substantial license fees and royalties, which could adversely affect our business and operating results.
Orphan Drug Status
As part of our business strategy, and as a further means of protecting our intellectual property, we intend to develop certain 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 obtains the first FDA approval for a designated orphan drug for a given rare disease receives marketing exclusivity for use of that drug for the stated condition for a period of seven years. However, different drugs can be approved for the same condition. Similar regulations are available in the European Community with a ten-year period of market exclusivity.
Because the extent and scope of patent protection for our drug products is limited, orphan drug designation is particularly important for our products that are eligible for orphan drug designation. We plan to rely on the exclusivity period under the orphan drug designation to maintain a competitive position. If we do not obtain orphan drug exclusivity for any one of our drug products and we are unable to otherwise protect the product, our competitors may then sell the same drug to treat the same condition, following their own filing with and approval by the FDA.
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We received orphan drug designation from the FDA for Aldurazyme for the treatment of MPS-I in September 1997. In February 1999, we received orphan drug designation from the FDA for rhASB for the treatment of MPS-VI. In February 2001 we received orphan drug designation from the European Community for both products. Even though we have obtained orphan drug designation for these drugs and even if we obtain orphan drug designation for other products we develop, we cannot guarantee that we will be the first to obtain marketing approval for any orphan indication or that exclusivity would effectively protect the product from competition. Orphan drug designation neither shortens the development or regulatory review time of a drug so designated nor gives the drug any advantage in the FDA review or approval process.
Issues Relating to Our Joint Venture
We have entered into a joint venture with Genzyme Corporation to assist us in obtaining international regulatory approval for Aldurazyme as well as marketing and commercializing the product worldwide. We are relying on Genzyme to apply the expertise it has developed through the launch and sale of Ceredase® and Cerezyme® enzymes for Gaucher disease, a rare genetic disease. Because it is our initial product, our financial results and market value are substantially dependent upon the development of Aldurazyme.
Genzyme may not devote the resources necessary to successfully gain regulatory approvals internationally and to market Aldurazyme worldwide. In addition, either party may terminate the joint venture for specified reasons, including if the other party is in material breach of the agreement or has experienced a change of control or has declared bankruptcy and also is in breach of the agreement.
If the joint venture is terminated, one party, as determined by the joint venture agreement, must buy out the other party’s interest in the joint venture and will then own all rights to Aldurazyme. If Genzyme were obligated to buy out our interest in the joint venture, Genzyme would be granted, exclusively, all of the rights to Aldurazyme and any related intellectual property and regulatory approvals. We would then effectively be unable to develop and commercialize Aldurazyme. If we were obligated to buy out Genzyme’s interest in the joint venture, we would then be granted all of these rights to Aldurazyme exclusively. While we could then continue to develop Aldurazyme, that development may be slowed because we would have to divert substantial capital to buy out Genzyme’s interest in the joint venture and would have to search for a new partner to commercialize the product and to obtain foreign regulatory approvals or to develop these capabilities ourselves.
Termination of the joint venture where 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 until such time (if any) that we were to enter into another partnership with a third party.
Complicated Manufacturing Process
Even once we have successfully developed a product and obtained regulatory approval for its sale and use, there are still several factors that could limit or prevent its commercial viability including large scale manufacturing complications, distribution and marketing, and market demand.
We have developed approximately 41,200 square feet at our Novato facilities for the manufacturing of Aldurazyme and rhASB. We expect that the manufacturing process of all of our new products, including rhASB, will require significant time and resources before we can begin to manufacture them in commercial quantity with appropriate cost.
Except for Aldurazyme,we have no experience manufacturing recombinant human enzymes in volumes that will be necessary to support commercial sales. The large scale, consistent production of several of our enzymes is complicated, expensive and unpredictable and may not yield the high quality and high purity required with acceptable quantity and costs. Improvements in manufacturing processes typically are very difficult to achieve and are often very expensive. We cannot know with certainty how long it might take to make improvements if it became necessary to do so. If we contract for manufacturing services with an unproven process, our contractor is subject to the same uncertainties, high standards and regulatory controls.
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If we do not achieve our manufacturing cost targets, we will have greater losses in manufacturing start-up phases and lower margins and reduced profitability in commercial production. Even if we can establish the necessary capacity, we cannot be certain that manufacturing costs will be commercially reasonable, especially if third-party reimbursement is substantially lower than expected.
Marketing and Pricing Issues
Our initial drug candidates target diseases with small patient populations. As a result, our prices must be high enough to recover our development costs and achieve profitability and the payers for the patient populations must be able to reimburse the prices of the treatments. For example, two of our initial drug products in genetic diseases, Aldurazyme and rhASB, target patients with MPS-I and MPS-VI, respectively. 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 burns, with small patient populations. We cannot be certain that we will be able to obtain sufficient market share for our drug products at a price high enough to justify our product development expenses.
The course of treatment for patients with MPS-I using Aldurazyme and MPS-VI using rhASB 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 rhASB without reimbursement from third-party payers.
Third-party payers, such as government or private health care insurers, carefully review and increasingly challenge the price 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. Third-party payers may not be willing to pay for the costs of our drugs and the courses of treatment at reimbursement rates that will be enough to allow us to profit from sales of our drugs.
We currently have no expertise obtaining reimbursement. We expect to rely on the expertise of our partner Genzyme to obtain reimbursement for Aldurazyme. We will need to develop our own reimbursement expertise for future drug candidates unless we enter into collaborations with other companies with the necessary expertise.
We expect that in the future, reimbursement will be increasingly restricted both in the United States and internationally. The escalating cost of health care has led to increased pressure on the health care industry to reduce costs. Governmental and private third-party payers have proposed health care reforms and cost reductions. A number of federal and state proposals to control the cost of health care, including the cost of drug treatments have been made in the United States. In some foreign markets, the government controls the pricing, which affects the profitability of drugs. Current government regulations and possible future legislation regarding health care may affect our future revenues from sales of our drugs and may adversely affect our business and prospects.
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Item 3. Quantitative and Qualitative Disclosure about Market Risk.
The Company’s exposure to market risk for changes in interest rates relates primarily to the Company’s investment portfolio. The Company places its investments with high credit issuers and by policy limits the amount of credit exposure to any one issuer. As stated in its policy, the Company seeks to improve the safety and likelihood of preservation of its invested funds by limiting default risk and market risk. The Company has no investments denominated in foreign country currencies and therefore is not subject to foreign exchange risk.
The Company mitigates default risk by investing in high credit quality securities and by positioning its 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.
The table below presents the carrying value for the Company’s investment portfolio. The carrying value approximates fair value at March 31, 2001.
Investment portfolio:
Carrying value
(in $ thousands)
----------------
Cash and cash equivalents.......................... $ 19,722
Short-term investments............................. 10,044*
--------
Total........................................... $ 29,766
==========
* 100% in United States agency securities.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings. None.
Item 2. Changes in Securities and Uses of Proceeds.
In February 2001, we issued 25,000 shares of common stock to Fredric D. Price,
our Chief Executive Officer and Chairman of the Board, pursuant to his
employment agreement with us. The shares issued were pursuant to an exemption
from registration under Section 4(2) of the Securities Act of 1933, as amended.
The shares are appropriately legended to indicate that the shares may not be
resold unless registered under the Securities Act or an exemption from
registration is available for such sale.
Item 3. Defaults upon Senior Securities. None.
Item 4. Submission of Matters to a Vote of Security Holders. None.
Item 5. Other Information. None.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following documents are filed as part of this report
See Exhibit Index attached hereto.
(b) Reports on Form 8-K.
No reports were filed on Form 8-K during the
three months ended March 31, 2001.
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EXHIBIT INDEX
Exhibit
Number Description of Document
- ------- ------------------------------
3.1 Registrant's Articles of Incorporation and Bylaws
10.1 License Agreement between BioMarin Pharmaceutical Inc. and
W.R. Grace & Co., effective as of January 1, 2001
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
BIOMARIN PHARMACEUTICAL INC.
Dated: May 4, 2001 By:/s/ Raymond W. Anderson
- ------------------ --------------------------------------------
Raymond W. Anderson
Chief Financial Officer, Chief Operating
Officer, Secretary and V.P. Finance and
Administration (on behalf of registrant
and as principal financial officer)
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