United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ______ to _________.
Commission file number: 000-26727
BIOMARIN PHARMACEUTICAL INC.
(Exact name of registrant issuer as specified in its charter)
Delaware 68-0397820
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
371 Bel Marin Keys Blvd., Suite 210, Novato, California 94949
(address of principal executive offices)
(Zip Code)
(415) 884-6700
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No _____
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes ____ No_____
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 42,049,923 shares
common stock, par value $0.001, outstanding as of August 1, 2001.
BIOMARIN PHARMACEUTICAL INC.
TABLE OF CONTENTS
<table>
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Consolidated Balance Sheets..............................................................2
Consolidated Statements of Operations for the three- and six-month
periods ended June 30, 2000 and 2001 and for the period
from March 21, 1997 (inception) through June 30, 2001.................................3
Consolidated Statements of Cash Flows....................................................4
Notes to Consolidated Financial Statements..............................................5
Item 2. Management's Discussion and Analysis.............................................9
Item 3. Quantitative and Qualitative Disclosure about Market Risk.......................18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................19
Item 2. Changes in Securities and Uses of Proceeds.......................................19
Item 3. Defaults upon Senior Securities..................................................19
Item 4. Submission of Matters to a Vote of Security Holders..............................19
Item 5. Other Information................................................................19
Item 6. Exhibits and Reports on Form 8-K.................................................19
SIGNATURE..........................................................................................20
</table>
<table>
Item 1. Financial Statements (Unaudited)
BioMarin Pharmaceutical Inc. and Subsidiaries
(a development-stage company)
Consolidated Balance Sheets as of
December 31, 2000 and June 30, 2001
(In Thousands)
<s> <c> <c>
December 31 June 30
2000 2001
---------------------- -----------------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 16,530 $ 18,967
Short-term investments 23,671 40,918
Accounts receivable, net 1,135 727
Due from BioMarin/Genzyme LLC 1,799 1,504
Inventories 436 480
Prepaid expenses 970 990
---------------------- -----------------------
Total current assets 44,541 63,586
Property, plant and equipment, net 20,715 22,921
Goodwill and other intangibles, net 9,862 8,868
Investment in BioMarin/Genzyme LLC 1,482 1,753
Note receivable from officer - 860
Deposits 333 333
---------------------- -----------------------
Total assets $ 76,933 $ 98,321
====================== =======================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 4,747 $ 3,049
Accrued liabilities 2,109 1,976
Current portion of capital lease obligations - 70
Notes payable - short-term 27 28
---------------------- -----------------------
Total current liabilities 6,883 5,123
Long-term portion of notes payable 56 41
Long-term portion of capital lease obligations - 157
---------------------- -----------------------
Total liabilities 6,939 5,321
---------------------- -----------------------
Stockholders' equity:
Common stock, $0.001 par value: 75,000,000
shares authorized. 36,921,966 and 42,044,764
shares issued and outstanding December 31,
2000 and June 30, 2001, respectively 37 42
Additional paid in capital 153,940 193,107
Common stock warrants - 5,134
Deferred compensation (1,530) (1,112)
Notes from stockholders (1,940) (1,989)
Deficit accumulated during development stage (80,513) (102,182)
---------------------- -----------------------
Total stockholders' equity 69,994 93,000
---------------------- -----------------------
Total liabilities and stockholders' equity $ 76,933 $ 98,321
====================== =======================
The accompanying notes are an integral part of these statements.
</table>
2
<page>
<table>
BioMarin Pharmaceutical Inc. and Subsidiaries
(a development-stage company)
Consolidated Statements of Operations
For the Three-Month Periods Ended June 30, 2000 and 2001
(In Thousands, except per share data, Unaudited)
Three Months Ended June 30,
----------------------------------------
2000 2001
------------------- -----------------
<s> <c> <c>
Revenues:
Revenues - products $ 595 $ 496
Revenues - services 118 157
Revenues from BioMarin/Genzyme LLC 2,370 2,851
Revenues - other - 160
------------------- -----------------
Total revenues 3,083 3,664
------------------- -----------------
Operating Costs and Expenses
Cost of products 144 219
Cost of services 20 89
Research and development 7,917 11,715
Selling, general and administrative 2,190 2,309
Carson Street closure - -
------------------- -----------------
Total operating costs and expenses 10,271 14,332
------------------- -----------------
Loss from operations (7,188) (10,668)
Interest income 802 436
Interest expense (2) (1)
Loss from BioMarin/Genzyme LLC (698) (1,736)
------------------- -----------------
Net loss $ (7,086) $ (11,969)
=================== =================
Net loss per share, basic and diluted $ (0.20) $ (0.30)
=================== =================
Weighted average common shares outstanding
basic and diluted 35,397 39,587
=================== =================
The accompanying notes are an integral part of these statements.
3
</table>
<page>
<table>
BioMarin Pharmaceutical Inc. and Subsidiaries
(a development-stage company)
Consolidated Statements of Operations
For the Six-Month Periods Ended June 30, 2000 and 2001 and for
the Period from March 21, 1997 (Inception) to June 30, 2001
(In Thousands, except per share data, Unaudited)
Period from
March 21, 1997
Six Months Ended June 30, (Inception) to
--------------------------------------
2000 2001 June 30, 2001
------------------ ---------------- -------------------
<s> <c> <c> <c>
Revenues:
Revenues - products $ 1,087 $ 1,188 $ 5,072
Revenues - services 168 174 621
Revenues from BioMarin/Genzyme LLC 5,126 5,542 21,410
Revenues - other - 160 453
------------------ ---------------- -------------------
Total revenues 6,381 7,064 27,556
------------------- --------------- -------------------
Operating Costs and Expenses
Cost of products 292 485 1,531
Cost of services 53 94 339
Research and development 16,580 21,699 97,115
Selling, general and administrative 4,186 4,512 24,577
Carson Street closure 4,423 - 4,423
------------------ ---------------- -------------------
Total operating costs and expenses 25,534 26,790 127,985
------------------- --------------- -------------------
Loss from operations (19,153) (19,726) (100,429)
Interest income 1,590 904 6,465
Interest expense (4) (3) (742)
Loss from BioMarin/Genzyme LLC (1,255) (2,844) (7,476)
------------------ ---------------- -------------------
Net loss $ (18,822) $ (21,669) $ (102,182)
================== ================ ===================
Net loss per share, basic and diluted $ (0.53) $ (0.57) $ (3.84)
================== ================ ===================
Weighted average common shares outstanding 35,206 38,313 26,593
basic and diluted ================== ================ ===================
The accompanying notes are an integral part of these statements.
4
</table>
<page>
<table>
BioMarin Pharmaceutical Inc. and Subsidiaries
(a development-stage company)
Consolidated Statements of Cash Flows
For the Six-Month Periods Ended June 30, 2000 and 2001 and for
the Period from March 21, 1997 (Inception) to June 30, 2001
(In Thousands, Unaudited)
Period from
March 21, 1997
Six Months Ended June 30, (Inception) to
--------------------------------
2000 2001 June 30, 2001
--------------- -------------- ----------------
<s> <c> <c> <c>
Cash flows from operating activities:
Net loss $ (18,822) $ (21,669) $ (102,182)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 2,186 2,444 11,178
Amortization of deferred compensation 639 418 3,330
Amortization of goodwill 606 1,100 4,114
Loss from BioMarin/Genzyme LLC 6,362 8,386 28,041
Compensation in the form of common stock
and common stock options - - 18
Write-off of in-process technology - - 2,625
Carson Street closure 3,791 - 3,791
Changes in operating assets and liabilities:
Accounts receivable, net (355) 408 (726)
Due from BioMarin/Genzyme LLC (196) 295 (1,504)
Note receivable from officer - (860) (860)
Inventories 181 (44) 120
Prepaid expenses (313) (20) (990)
Deposits (182) - (333)
Accounts payable (2,105) (1,698) 3,049
Accrued liabilities (155) (133) 2,033
--------------- -------------- ----------------
Total adjustments 10,459 10,353 53,886
--------------- -------------- ----------------
Net cash used in operating activities (8,363) (11,316) (48,296)
--------------- -------------- ----------------
Cash flows from investing activities:
Purchase of property, plant and equipment (1,275) (4,423) (37,663)
Investment in BioMarin/Genzyme LLC (6,923) (8,657) (29,794)
Sale (purchase) of short-term investments 770 (17,247) (40,918)
Purchase of Biochemical Research Reagent
Division of Oxford GlycoSciences, Plc. - (163) (1,663)
--------------- -------------- ----------------
Net cash used in investing activities (7,428) (30,490) (110,038)
--------------- -------------- ----------------
Cash flows from financing activities:
Proceeds from the sale of common stock and warrants,
net of issuance costs - 43,586 142,495
Proceeds from issuance of convertible notes payable - - 25,615
Proceeds from exercise of common stock options and warrants 3,001 513 7,155
Repayment of note from stockholders - - 804
Issuance of common stock for ESPP - 158 472
Proceeds from notes payable - - 134
Repayment of equipment loan (14) (14) (66)
Other - - 692
--------------- -------------- ----------------
Net cash provided by financing activities 2,987 44,243 177,301
--------------- -------------- ----------------
Net increase (decrease) in cash and cash equivalents (12,804) 2,437 18,967
Cash and cash equivalents, beginning of period 23,413 16,530 -
--------------- -------------- ----------------
Cash and cash equivalents, end of period $ 10,609 $ 18,967 $ 18,967
=============== ============== ================
The accompanying notes are an integral part of these statements.
5
</table>
<page>
BIOMARIN PHARMACEUTICAL INC. AND SUBSIDIARIES
(a development-stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION:
BioMarin Pharmaceutical Inc. (the Company) is a biopharmaceutical company
specializing in the development of enzyme therapies for debilitating
life-threatening chronic genetic diseases and other diseases and conditions.
Since inception, the Company has devoted substantially all of its efforts to
research and development activities, including preclinical studies and clinical
trials, the establishment of laboratory, clinical and commercial scale
manufacturing facilities, clinical manufacturing, and related administrative
activities.
The Company was incorporated on October 25, 1996 in the state of Delaware and
first began business on March 21, 1997 (inception) as a wholly-owned subsidiary
of Glyko Biomedical Ltd. (GBL). Subsequently, the Company has issued stock to
outside investors in a series of transactions, resulting in GBL's ownership of
the Companys outstanding common stock being reduced to 27.0 percent at June 30,
2001.
On October 7, 1998, the Company acquired Glyko, Inc., a wholly-owned subsidiary
of GBL, in a transaction valued at $14.5 million. The transaction was accounted
for as a purchase and resulted in Glyko, Inc. becoming a wholly-owned subsidiary
of the Company. Glyko, Inc. provides products and services that perform
sophisticated carbohydrate analysis for research institutions and commercial
laboratories.
In January 2001, the Company signed an agreement with Acqua Wellington North
American Equities Fund Ltd. (Acqua Wellington) for an equity investment in the
Company. Under the terms of the agreement, the Company will have the option to
request Acqua Wellington to invest through sales of registered common stock at a
small discount to market price. The maximum amount that the Company may request
to be invested in any one month is dependent upon the market price of the stock
(or can be mutually agreed-upon by both parties) and is referred to as the "Draw
Down Amount." Subject to certain conditions, Acqua Wellington is obligated to
purchase this amount if requested to do so by the Company. In addition, the
Company, at its 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
for $1 million ($848,000 net of issuance costs, the majority of which will be
nonrecurring upon future transactions associated with this agreement). Under
this agreement, Acqua Wellington may also purchase stock and receive similar
terms to any other equity financing raised by the Company.
In May 2001, the Company completed two private placements of the Companys
securities, raising total net proceeds of approximately $42.7 million. On May
16, 2001, the Company sold 4,763,712 shares of common stock at $9.45 per share
and, for no additional consideration, issued three-year warrants to purchase
714,554 shares of common stock at $13.10 per share. On May 17, 2001 a fund
managed by Acqua Wellington purchased 105,821 shares of common stock and
received warrants to purchase 15,873 shares of common stock on the same price
and terms as the May 16, 2001 transaction.
Through June 30, 2001, the Company had accumulated losses during its development
stage of approximately $102.2 million. Based on current plans,
management expects to incur further losses at least through 2002. Management
believes that the Companys cash and cash equivalents and short-term investment
balances at June 30, 2001 will be sufficient to meet the Companys obligations
at least through 2002. 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, and collaborative agreements
with corporate partners.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information on substantially the same basis as the annual audited
financial statements. However, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
of normal recurring adjustments, considered necessary for a fair presentation
have been included. Operating results for the three- and six-month periods ended
June 30, 2001 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2001. These consolidated financial statements
should be read in conjunction with the financial statements and footnotes
thereto for the year ended December 31, 2000 included in the Companys Form 10-K
Annual Report.
2. SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the dates of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
estimates made by management include determination of progress to date of
research and development projects in-process, the amortization period of
goodwill and other intangibles, and asset impairment reserves related to certain
leasehold improvements and equipment.
6
Cash and Cash Equivalents
For the consolidated statements of cash flows, the Company treats liquid
investments with original maturities of less than three months when purchased as
cash and cash equivalents.
Short-term Investments
The Company records its investments as held-to-maturity. These investments are
recorded at cost at June 30, 2001, which approximates fair market value. These
securities are comprised mainly of A1/P1 rated commercial paper and Federal
Agency investments, including Federal Home Loans and Federal Farm Credits.
Goodwill and Other Intangibles, net
Pursuant to the purchase agreement between Oxford GlycoSciences, Plc. (OGS) and
Glyko, Inc. dated May 4, 1999, the Company paid OGS $163,000 in June 2001
representing the deferred final installment of the purchase price, based on two
years of sales of OGS products and inventory. This amount was recorded as an
increase to Goodwill and Other Intangibles in the accompanying consolidated
balance sheets.
Investment in BioMarin/Genzyme LLC and Related Revenue
Under the terms of the Companys joint venture agreement with Genzyme, the
Company and Genzyme have each agreed to provide 50 percent of the funding for
the joint venture. All research and development, sales and marketing, and other
activities performed by Genzyme and 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. The percentage of the research and development costs incurred by the
Company and billed to the joint venture that was funded by the Company was
recorded as a credit to the Companys equity in the loss of the joint venture.
Note Receivable from Officer
Pursuant to an employment agreement with an officer of the Company, the Company
loaned the officer $860,000 to purchase a local residential property and issued
a promissory note secured by the property. The note matures on October 31, 2004
(subject to various conditions in the employment agreement) and bears interest
at the Federal mid-term rate.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed using
the straight-line method. Leasehold improvements are amortized over the life of
the asset or the term of the lease, whichever is shorter. Significant additions
and improvements are capitalized, while repairs and maintenance are charged to
expense as incurred.
7
Property and equipment consisted of the following (in thousands):
<table>
December 31, June 30, Estimated
2000 2001 Useful Lives
------------------ ----------------- -------------------------
<s> <c> <c> <c>
Computer hardware and software $ 678 $ 869 3 years
Office furniture and equipment 1,056 1,337 5 years
Manufacturing/laboratory equipment 9,323 10,828 5 years
Leasehold improvements 16,685 19,346 Shorter of life of
asset or lease term
Construction in progress 1,048 1,060
------------------ -----------------
28,790 33,440
------------------ -----------------
Less: Accumulated depreciation (8,075) (10,519)
================== ==================
Total, net $ 20,715 $ 22,921
================== ==================
</table>
Research and Development
Research and development expenses include the expenses associated with contract
research and development provided by third parties, research and development
provided in connection with the BioMarin/Genzyme LLC joint venture including
clinical manufacturing, clinical operations and regulatory, and internal
research and development costs. All research and development expenses discussed
above are expensed as incurred.
Net Income (Loss) per Share
Basic net income (loss) per share is calculated by dividing net income (loss) by
the weighted average common shares outstanding during the period. Diluted net
income per share is calculated by dividing net income by the weighted average of
common stock outstanding and potential common shares during the period.
Potential common shares include dilutive shares issuable upon the exercise of
outstanding common stock options, warrants, and contingent issuances of common
stock. For periods in which the Company has losses, such potential common shares
are excluded from the computation of diluted net loss per share, as their effect
is anti-dilutive.
3. CARSON STREET CLOSURE:
During the first quarter of 2000, the Company decided to close its Carson Street
clinical manufacturing facility. In connection with this decision the Company
recorded a charge of approximately $4.4 million. The charge primarily consisted
of impairment reserves for leasehold improvements and equipment located in the
Carson Street facility.
4. NEW ACCOUNTING PRONOUNCEMENTS:
On June 29, 2001, the Financial Accounting Standards Board (FASB) approved for
issuance Statement of Financial Accounting Standards (SFAS) No. 141. Business
Combinations, and SFAS No. 142, Goodwill and Intangible Assets. Major provisions
of these Statements are as follows: all business combinations initiated after
June 30, 2001 must use the purchase method of accounting; the pooling of
interests method of accounting is prohibited except for transactions initiated
before July 1, 2001; intangible assets acquired in a business combination must
be recorded separately from goodwill if they arise from contractual or other
legal rights or are separable from the acquired entity and can be sold,
transferred, licensed, rented or exchanged, either individually or as part of a
related contract, asset or liability; all acquired goodwill must be assigned to
reporting units for purposes of impairment testing and segment reporting;
effective January 1, 2002, goodwill and intangible assets with indefinite lives
will not be amortized but will be tested for impairment annually using a fair
value approach, except in certain circumstances, and whenever there is an
impairment indicator; other intangible assets will continue to be valued and
amortized over their estimated lives; in-process research and development
acquired in business combinations will continue to be written off immediately;
goodwill arising between June 29, 2001 and December 31, 2001 will not be subject
to amortization. Management is currently assessing the impact of the new
standards. Amortization of goodwill which will cease upon adoption of this
standard totaled $0.5 million and $1 million for the three- and six-month
periods ended June 30, 2001 respectively.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD-LOOKING STATEMENTS
The following "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contains "forward-looking
statements" as defined under securities laws. These statements can
often be identified by the use of terminology such as "believes,"
"expects," "anticipates," "plans," "may," "will," "projects,"
"continues," "estimates," "potential," "opportunity" and so on. These
forward-looking statements may be found in the "Factors that May
Affect Future Results," and other sections of this document. Our
actual results or experience could differ significantly from the
forward-looking statements. Factors that could cause or contribute to
these differences include those discussed in "Factors that May Affect
Future Results," as well as those discussed elsewhere in this
document.
You should not place undue reliance on these statements, which speak
only as of the date that they were made. These cautionary statements
should be considered in connection with any written or oral
forward-looking statements that we may issue in the future. We do not
undertake any obligation to release publicly any revisions to these
forward-looking statements after completion of the filing of this Form
10-Q to reflect later events or circumstances or to reflect the
occurrence of unanticipated events.
Overview
We develop enzyme therapies 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, clinical manufacturing, and the
establishment of laboratory and manufacturing facilities, and administrative
activities.
We have incurred net losses since inception and had an accumulated deficit
through June 30, 2001 of $102.2 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 Topical,
for use in wound debridement in preparation for skin grafting. In June 2001, we
submitted a Clinical Trial Exemption application to the Medicines Control Agency
in the United Kingdom and we expect to begin a clinical trial in the second half
of 2001.
In January 2001, we signed an agreement with Acqua Wellington North American
Equities Fund Ltd. (Acqua Wellington) for an equity investment in us. 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."
Subject to certain conditions, Acqua Wellington is obligated to purchase this
amount if requested to do so by us. In addition, we may, at our discretion,
grant a "Call Option" to Acqua Wellington for an additional investment in an
amount up to the "Draw Down Amount" which Acqua Wellington may or may not choose
to exercise. In the initial transaction under this agreement on February 2,
2001, Acqua Wellington purchased 101,523 shares for $1 million ($848,000 net of
issuance costs, the majority of which will be nonrecurring upon future
transactions associated with this agreement). Under this agreement, Acqua
Wellington may also purchase stock and receive similar terms to any other equity
financing raised by us.
In May 2001, we completed two private placements of its securities, raising
total net proceeds of approximately $42.7 million. On May 16, 2001, we sold
4,763,712 shares of our common stock at $9.45 per share and, for no additional
consideration, issued three-year warrants to purchase 714,554 shares of our
common stock at an exercise price of $13.10 per share. On May 17, 2001, a fund
managed by Acqua Wellington purchased 105,821 shares of our common stock and
received warrants to purchase 15,873 shares of our common stock on the same
price and terms as the May 16, 2001 transaction.
9
Results of Operations
The Quarters Ended June 30, 2001 and 2000
Revenues for the second quarter of 2001 totaled $3.7 million compared to
revenues of $3.1 million in the second quarter of 2000. Second quarter 2001
revenues included $2.9 million for services provided to the joint venture for
Aldurazyme compared to $2.4 million in the same period in 2000. The increase was
primarily the result of clinical testing expenses relating to the Phase III
clinical trial of Aldurazyme and increased regulatory expenses. Second quarter
2001 revenues also included $653,000 generated by Glyko, Inc. compared to
$713,000 for the second quarter of 2000. The decrease in product revenues was
primarily due to reduced enzyme sales.
Cost of products and cost of services related to Glyko, Inc. operations were
$308,000 in the second quarter of 2001 and were $164,000 in the comparable
period of 2000. Glykos total external product and service costs as a percent of
the sales of products and services were 47% in the second quarter of 2001 and
23% in the second quarter of 2000. The change was due primarily to an increase
in labor content in the cost of sales in 2001.
Research and development expenses for the second quarter of 2001 increased by
$3.8 million to $11.7 million from $7.9 million in the second quarter of 2000.
Increased expenses in support of our Aldurazyme, rhASB and Vibriolysin Topical
programs were the major factors in the growth of research and development
expenses.
Selling, general and administrative expenses increased to $2.3 million in the
second quarter of 2001 from $2.2 million in the second quarter 2000. This
increase was primarily due to the acceleration of the amortization of goodwill
resulting from 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.
The Companys equity in the loss of its joint venture with Genzyme was $1.7
million for the second quarter 2001 compared to $0.7 million 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 $436,000 for the second quarter of 2001 compared to $802,000
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 prior to the private placement in
May 2001.
Net loss was $12.0 million ($0.30 per share, basic and diluted) in the second
quarter of 2001 compared to a net loss of $7.1 million ($0.20 per share, basic
and diluted) in the comparable period of 2000.
Six Months Ended June 30, 2001 and 2000
Revenues for the first half of 2001 totaled $7.1 million compared to revenues of
$6.3 million in the first half of 2000. First half of 2001 revenues included
$5.5 million for services provided to the joint venture for Aldurazyme compared
to $5.1 million in the same period in 2000. The increase was due to increased
services provided to the Aldurazyme joint venture. First half of 2001 revenues
also included $1.4 million generated by Glyko, Inc. compared to $1.3 million for
the first half 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
$579,000 in the first half of 2001 and were $345,000 in the comparable period of
2000. Glykos total external product and service costs as a percent of the sales
of products and services were 43% in the first half of 2001 and 27% in the first
half of 2000. The change was due to the same reasons as discussed in the
quarterly results above.
Research and development expenses for the first half of 2001 increased by $5.1
million to $21.7 million from $16.6 million in the first half of 2000. Increased
expenses were due to the same reasons as discussed in the quarterly results
above.
Selling, general and administrative expenses increased to $4.5 million in the
first half of 2001 from $4.2 million in the first half of 2000. This increase
was due to the same reasons as discussed in the above quarterly results above.
In the first half of 2000, the Company recorded a provision of $4.4 million for
the closure of its Carson Street clinical manufacturing facility. The provision
primarily consisted of impairment reserves for leasehold improvements and
equipment located in the Carson Street facility.
The Companys equity in the loss of its joint venture with Genzyme was $2.8
million for the first half of 2001 compared to $1.3 million for the same period
of 2000. The increase was due to the same reasons as discussed in the quarterly
results above.
10
Interest income was $0.9 million for the first half of 2001 compared to $1.6
million for the same period of 2000. The decrease was due to the same reasons as
discussed in the quarterly results above.
Net loss was $21.7 million ($0.57 per share, basic and diluted) in the first
half of 2001 compared to a net loss of $18.8 million ($0.53 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 $177.3 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 by Genzyme as part of our
joint venture with them, an initial public offering including the underwriter's
over-allotment exercise, an investment in our common stock by Genzyme concurrent
with the initial public offering, the sale of common stock under our facility
with 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 $59.9
million at June 30, 2001, an increase of $19.7 million for the first half of
2001. The primary uses of cash during the six months ended June 30, 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 $46
million of common stock in private placements, the sale of $1.0 million of
common stock to Acqua Wellington, the issuance of common stock pursuant to the
exercise of stock options under the 1997 Stock Option Plan and sales of common
stock under our Employee Stock Purchase Plan. For the six months ended June 30,
2001, operations used $11.3 million, we invested $8.7 million in the joint
venture (which was consumed in joint venture operations), we purchased $4.4
million of equipment and leasehold improvements, we paid our final installment
of $163,000 to Oxford GlycoSciences, Plc. for the 1999 purchase of its
biochemical reagent business, we raised net proceeds of approximately $42.7
million from our private placement, we received $0.8 million (net of issuance
costs) from the sale of common stock to Acqua Wellington, $513,000 from the
exercise of stock options and $158,000 from the sale of common stock pursuant to
the Employee Stock Purchase Plan.
From our inception through June 30, 2001, we have purchased approximately $37.7
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.
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 June 30, 2001, we had expended to date approximately $1.2 million on the
analytic projects and $1.3 million on the diagnostic projects. All acquired
in-process research and development of analytic projects have either been
completed or terminated as of June 30, 2001. In order to replace those analytic
projects terminated, new analytic projects have been initiated. We expect to
spend approximately $200,000 to complete the diagnostic projects in phases
within the next 3 months. None of the diagnostic projects have been terminated
to date.
11
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 us. 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."
Subject to certain conditions, Acqua Wellington is obligated to purchase this
amount if requested to do so by us. In addition, we may, at our discretion,
grant a "Call Option" to Acqua Wellington for an additional investment in an
amount up to the "Draw Down Amount" which Acqua Wellington may or may not choose
to exercise. In the initial transaction under this agreement on February 2,
2001, Acqua Wellington purchased 101,523 shares for $1 million ($848,000 net of
issuance costs, the majority of which will be nonrecurring upon future
transactions associated with this agreement). Under this agreement, Acqua
Wellington may also purchase stock and receive similar terms to any other equity
financing raised by us.
In May 2001, we completed two private placements of its securities, raising
total net proceeds of approximately $42.7 million. On May 16, 2001, we sold
4,763,712 shares of our common stock at $9.45 per share and, for no additional
consideration, issued three-year warrants to purchase 714,554 shares of our
common stock at an exercise price of $13.10 per share. On May 17, 2001, a fund
managed by Acqua Wellington purchased 105,821 shares of our common stock and
received warrants to purchase 15,873 shares of our common stock on the same
price and terms as the May 16, 2001 transaction.
The net proceeds from any sales of our common stock in private placements and
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 Topical, 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 Companys supporting infrastructure, and other general corporate
purposes.
We expect our current funds to last at least through the end of 2002. 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
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 cannot assure you that additional financing will be
obtained or, if obtained, will be available on reasonable terms or in a timely
manner.
12
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. 119.
New Accounting Pronouncements
On June 29, 2001, the Financial Accounting Standards Board (FASB) approved for
issuance Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Intangible Assets. Major provisions
of these Statements are as follows: all business combinations initiated after
June 30, 2001 must use the purchase method of accounting; the pooling of
interests method of accounting is prohibited except for transactions initiated
before July 1, 2001; intangible assets acquired in a business combination must
be recorded separately from goodwill if they arise from contractual or other
legal rights or are separable from the acquired entity and can be sold,
transferred, licensed, rented or exchanged, either individually or as part of a
related contract, asset or liability; all acquired goodwill must be assigned to
reporting units for purposes of impairment testing and segment reporting;
effective January 1, 2002, goodwill and intangible assets with indefinite lives
will not be amortized but will be tested for impairment annually using a fair
value approach, except in certain circumstances, and whenever there is an
impairment indicator; other intangible assets will continue to be valued and
amortized over their estimated lives; in-process research and development
acquired in business combinations will continue to be written off immediately;
goodwill arising between June 29, 2001 and December 31, 2001 will not be subject
to amortization. Management is currently assessing the impact of the new
standards. Amortization of goodwill which will cease upon adoption of this
standard totaled $0.5 million and $1.0 million for the three- and six-month
periods ended June 30, 2001, respectively.
FACTORS THAT MAY AFFECT FUTURE RESULTS
An investment in our common stock involves a high degree of risk. We
operate in a dynamic and rapidly changing industry involving numerous risks
and uncertainties. The risks and uncertainties described below are not the
only ones we face. Other risks and uncertainties, including those that we
do not currently consider material, may impair our business. If any of the
risks discussed below actually occur, our business, financial condition,
operating results or cash flows could be materially adversely affected.
This could cause the trading price of our common stock to decline, and you
may lose all or part of your investment. 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.
13
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 June 30, 2001 will be sufficient to
meet our operating and capital requirements at least through the end of 2002.
This estimate is based on assumptions and estimates, which may prove to be
wrong. As a result, we may need to or choose to obtain additional financing
during that time. 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 managements 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 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 FDAs 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.
14
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. 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 two patents that
include claims related to (alpha)-L-iduronidase. Our lead drug product,
Aldurazyme, may infringe on these patents. We believe that these patents are
invalid on a number of grounds. Patents making the same claims were filed in
Europe and have been rejected and cannot be refiled in Europe. Our challenges to
the U.S. patents may be unsuccessful, but the rejection of the European
applications support our strategy to challenge the validity of the U.S. patents.
Even if we are successful, challenging the patents 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 holders have granted exclusive licenses for products relating to
these patents to one of our competitors. If we are unable to successfully
challenge these patents, 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 licenses and even if licenses are
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.
15
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.
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(tm) and
Cerezyme(tm) 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 partys 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 Genzymes 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 related
to the program and reduce the funds available to us for other product programs.
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 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.
16
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 patient populations must be able to afford the
prices of the treatments through insurance or otherwise. 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.
17
Item 3. Quantitative and Qualitative Disclosure about Market Risk.
The Companys exposure to market risk for changes in interest rates relates
primarily to the Companys 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 Companys investment
portfolio. The carrying value approximates fair value at June 30, 2001.
Investment portfolio:
Carrying value
(in $ thousands)
Cash and cash equivalents.............................. $ 18,967*
Short-term investments................................. 40,918**
--------
Total............................................... $ 59,885
========
* 32% invested in A1/P1 rated commercial paper for less than 90-days.
** 83% invested in A1/P1 rated commercial paper and 17% in United States agency
securities.
18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. None.
Item 2. Changes in Securities and Uses of Proceeds.
In May 2001, we completed two related private placements of an aggregate of
4,869,533 shares of our common stock and warrants for the purchase of 752,427
shares our common stock to a select group of institutional investors, each of
whom certified that they are "accredited investors" as defined in Rule 501 of
Regulation D promulgated under the Securities Act of 1933, as amended. In
exchange for the issuance of these securities, we received total gross
consideration of $46.0 million. All of the warrants are for a term of three
years and, with the exception of warrants for the purchase of 22,000 shares,
which have an exercise price of $9.45 per share, all the warrants have an
exercise price of $13.10 per share. The shares were issued pursuant to an
exemption from registration as provided by Rule 506 of Regulation D under the
Securities Act. 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.
At our Annual Meeting, held on May 24, 2001, our stockholders took the following
actions:
(a) The following directors were elected to serve until the next
Annual Meeting:
Director Elected Vote For Withheld
Fredric D. Price 23,165,580 136,184
Grant W. Denison, Jr. 22,454,826 846,918
Ansbert S. Gadicke, M.D., Ph.D. 23,295,392 6,352
Erich Sager 23,268,892 32,852
Gwynn R. Williams 23,269,292 32,452
(b) Arthur Andersen LLP was appointed as our auditors, by a
vote of 23,270,222 shares in favor, 27,800 shares against
and 3,722 shares withheld.
Item 5. Other Information. None.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following documents are filed as part of this report
None.
(b) Reports on Form 8-K.
On May 18, 2001, we filed a Current Report on Form 8-K
regarding the sale of 4,869,533 shares of our common stock
at $9.45 per share and the issuance of warrants to purchase
730,427 shares of our common stock at an exercise price of
$13.10 for a three year term in a private placement. We also
disclosed the issuance of a warrant to purchase 22,000
shares of our common stock at an exercise price of $9.45 per
share to one of our financial advisors for services related
to the placement.
On June 25, 2001, we filed a Current Report on Form 8-K
regarding our filing of a Clinical Trial Exemption
application with the Medicines Control Agency in the United
Kingdom for permission to conduct a human clinical trial of
Vibriolysin Topical in patients with serious burns.
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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: August 13, 2001 By:
- ---------------------- --------------------------------------------
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)
20