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 March 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to _________.
Commission file number: 000-26727
BIOMARIN PHARMACEUTICAL INC.
(Exact name of registrant issuer as specified in its charter)
Delaware 68-0397820
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
371 Bel Marin Keys Blvd., Suite 210, Novato, California 94949
(address of principal executive offices)
(Zip Code)
(415) 884-6700
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes ____ No_____
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 53,835,325 shares common stock,
par value $0.001, outstanding as of May 3, 2002.
BIOMARIN PHARMACEUTICAL INC.
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Consolidated Balance Sheets.......................................2
Consolidated Statements of Operations for the three-month
periods ended March 31, 2001 and 2002 and for the period
from March 21, 1997 (inception) through March 31, 2002.........3
Consolidated Statements of Cash Flows.............................5
Notes to Consolidated Financial Statements........................6
Item 2. Management's Discussion and Analysis.......................9
Item 3. Quantitative and Qualitative Disclosure
about Market Risk.......................................25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..........................................26
Item 2. Changes in Securities and Uses of Proceeds.................26
Item 3. Defaults upon Senior Securities............................26
Item 4. Submission of Matters to a Vote of Security Holders........26
Item 5. Other Information..........................................26
Item 6. Exhibits and Reports on Form 8-K...........................26
SIGNATURE....................................................................28
Item 1. Financial Statements
BioMarin Pharmaceutical Inc. and Subsidiaries
(a development-stage company)
Consolidated Balance Sheets as of
(In thousands, except for shares and per share data)
December 31, March 31,
2001 2002
---------------------- -----------------------
---------------------- -----------------------
Assets (unaudited)
Current assets:
Cash and cash equivalents $ 12,528 $ 18,202
Short-term investments 118,569 96,596
Due from BioMarin/Genzyme LLC 3,096 5,888
Current assets of discontinued ops. of Glyko, Inc. 668 852
Other current assets 1,922 1,888
---------------------- -----------------------
---------------------- -----------------------
Total current assets 136,783 123,426
Property, plant and equipment, net 32,560 33,059
Other non-current assets 2,468 821
---------------------- -----------------------
Total assets $ 171,811 $ 157,306
====================== =======================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 4,284 $ 3,188
Accrued liabilities 2,198 4,375
Current liabilities of discontinued ops. of Glyko, Inc. 229 154
Current portion of capital lease obligations 66 193
Short-term portion of notes payable 1,525 1,525
---------------------- -----------------------
Total current liabilities 8,302 9,435
Long-term portion of notes payable 3,864 3,421
Long-term portion of capital lease obligations 97 82
---------------------- -----------------------
Total liabilities 12,263 12,938
--------------------- -----------------------
Stockholders' equity:
Common stock, $0.001 par value: 75,000,000
shares authorized 52,402,535 and 53,357,642
shares issued and outstanding December 31,
2001 and March 31, 2002, respectively 52 53
Additional paid in capital 305,230 316,469
Common stock warrants 5,134 5,219
Deferred compensation (699) (490)
Notes from stockholders (2,037) (2,087)
Foreign currency translation adjustment (13) (74)
Deficit accumulated during development stage (148,119) (174,722)
--------------------- -----------------------
Total stockholders' equity 159,548 144,368
--------------------- -----------------------
Total liabilities and stockholders' equity $ 171,811 $ 157,306
===================== =======================
The accompanying notes are an integral part of these statements.
2
BioMarin Pharmaceutical Inc. and Subsidiaries
(a development-stage company)
Consolidated Statements of Operations
For the Three-Month Periods Ended March 31, 2001 and 2002
(In thousands, except per share data, unaudited)
Three Months Ended March 31,
-------------------------------------------------
2001 2002
----------------------- -----------------------
Revenues:
Revenues from BioMarin/Genzyme LLC $ 2,690 $ 3,792
----------------------- -----------------------
----------------------- -----------------------
Total revenues 2,690 3,792
----------------------- -----------------------
Operating Costs and Expenses:
Research and development 9,657 13,218
General and administrative 1,474 3,926
In-process research and development - 11,223
----------------------- -----------------------
Total operating costs and expenses 11,131 28,367
----------------------- -----------------------
Loss from operations (8,441) (24,575)
Interest income 468 380
Interest expense (2) (91)
Loss from BioMarin/Genzyme LLC (1,108) (2,298)
----------------------- -----------------------
Net loss from continuing operations (9,083) (26,584)
Income (loss) from discontinued operations (617) 122
Loss from disposal of discontinued operations - (141)
----------------------- -----------------------
----------------------- -----------------------
Net loss $ (9,700) (26,603)
======================= =======================
======================= =======================
Net loss per share, basic and diluted:
Net loss from continuing operations $ (0.24) (0.51)
Loss from discontinued operations (0.02) (0.00)
----------------------- -----------------------
----------------------- -----------------------
Net loss $ (0.26) (0.51)
======================= =======================
======================= =======================
Weighted average common shares outstanding 37,052 52,535
======================= =======================
======================= =======================
The accompanying notes are an integral part of these statements.
3
BioMarin Pharmaceutical Inc. and Subsidiaries
(a development-stage company)
Consolidated Statements of Operations (continued)
For the Period from March 21, 1997 (Inception) to March 31, 2002
(In thousands, except per share data, unaudited)
Period from March 21,
1997 (Inception) to
March 31, 2002
---------------------------------
---------------------------------
Revenues:
Revenues from BioMarin/Genzyme LLC $ 30,990
Revenues - other 369
---------------------------------
---------------------------------
Total revenues 31,359
---------------------------------
Operating Costs and Expenses:
Research and development 131,501
General and administrative 25,970
In-process research and development 22,870
Facility closure 4,423
---------------------------------
Total operating costs and expenses 184,764
---------------------------------
Loss from operations (153,405)
Interest income 7,812
Interest expense (847)
Loss from BioMarin/Genzyme LLC (14,263)
---------------------------------
Net loss from continuing operations (160,703)
Loss from discontinued operations (5,966)
Loss from disposal of discontinued operations (8,053)
---------------------------------
---------------------------------
Net loss $ (174,722)
=================================
=================================
Net loss per share, basic and diluted:
Net loss from continuing operations $ (5.44)
Loss from discontinued operations (0.20)
Loss on disposal of discontinued operations (0.27)
---------------------------------
---------------------------------
Net loss $ (5.91)
=================================
=================================
Weighted average common shares outstanding 29,539
=================================
The accompanying notes are an integral part of these statements.
4
BioMarin Pharmaceutical Inc. and Subsidiaries
(a development-stage company)
Consolidated Statements of Cash Flows
For the Three-Month Periods Ended March 31, 2001 and 2002, and for
the Period from March 21, 1997 (Inception) to March 31, 2002
(In thousands, unaudited)
March 21, 1997
(inception) to
March 31, March 31,
2001 2002 2002
-------------------- ------------------- ---------------------
Cash flows from operating activities:
Net loss from continuing operations $ (9,083) $ (26,584) $ (160,703)
Adjustments to reconcile net loss to net cash used in
operating activities:
In-process research and development - 10,286 21,933
Facility closure - - 3,791
Depreciation 1,162 1,852 16,759
Amortization of deferred compensation 209 209 3,970
Loss from BioMarin/Genzyme LLC 3,799 6,160 44,324
Other non-cash compensation - 206 206
Changes in operating assets and liabilities:
Due from BioMarin/Genzyme LLC (1,587) (2,815) (5,911)
Other current assets (92) 2,078 812
Note receivable from officer - (300) (1,189)
Deposits (150) - (434)
Accounts payable (3,122) (1,323) 3,060
Accrued liabilities (165) 2,177 4,696
------------------------------------------------------------------
Net cash used in continuing operations (9,029) (8,054) (68,686)
Net cash provided by (used in) discontinued operations (125) (279) 470
------------------------------------------------------------------
Net cash used in operating activities (9,154) (8,333) (68,216)
------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (430) (2,245) (53,296)
Purchase of Synapse - (1,028) (1,028)
Investment in BioMarin/Genzyme LLC (2,100) (4,504) (123,073)
Purchase of IBEX therapeutic assets - - (39,309)
Purchase (sale) of short-term investments 13,627 21,973 18,941
------------------------------------------------------------------
Net cash used in continuing operations 11,097 14,196 (197,765)
Net cash used in discontinued operations - - (1,663)
------------------------------------------------------------------
Net cash provided by (used in) investing activities 11,097 14,196 (199,428)
------------------------------------------------------------------
Cash flow from financing activities:
Net proceeds from sale of common stock, net 848 - 232,823
Proceeds from issuance of convertible notes - - 25,615
Net proceeds from Acqua Wellington agreement - - 13,163
Proceeds from exercise of common
stock options and warrants 408 375 8,070
Net proceeds from notes payable - - 5,639
Repayment of notes payable (7) (443) (693)
Repayment of capital lease obligations - (15) (58)
Receipts from notes receivable from stockholders - (45) 759
Issuance of common stock for ESPP, and other - - 602
------------------------------------------------------------------
Net cash provided by (used in) financing activities
1,249 (128) 285,920
------------------------------------------------------------------
Effect of foreign currency translation on cash - (61) (74)
------------------------------------------------------------------
Net increase in cash 3,192 5,674 18,202
Cash and cash equivalents:
Beginning of period 16,530 12,528 -
------------------------------------------------------------------
End of period $ 19,722 $ 18,202 $ 18,202
==================================================================
The accompanying notes are an integral part of these statements.
5
BIOMARIN PHARMACEUTICAL INC. AND SUBSIDIARIES
(a development-stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION:
---------------------
BioMarin Pharmaceutical Inc. (the Company) is a biopharmaceutical company
specializing in the development of enzyme therapies 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 Company's outstanding common stock being reduced to 21.3 percent at March
31, 2002.
In February 2002, the Company decided to close the carbohydrate analytical
business portion of Glyko, Inc., a wholly-owned subsidiary, which provided all
of Glyko, Inc.'s revenues. Accordingly, the Company recorded a Glyko, Inc.
closure expense of $7.9 million in the 2001 consolidated statements of
operations. This charge consisted primarily of an impairment reserve against the
unamortized balance of goodwill and other intangible assets related to the
acquisition of Glyko, Inc. The majority of the Glyko, Inc. employees have been
incorporated into the BioMarin business to provide necessary analytic and
diagnostic support to the Company's therapeutic products.
The net loss of Glyko, Inc.'s operations is included in the accompanying
consolidated statements of operations as income (loss) from discontinued
operations. Glyko, Inc.'s gross revenues for the quarters ended March 31, 2002
and 2001 and for the period from March 21, 1997 (inception) through March 31,
2002 were $0.8 million, $0.7 million and $8.2 million, respectively.
On March 21, 2002, the Company purchased all of the outstanding capital stock of
Synapse Technologies Inc. (a privately held Canadian company) for approximately
$10.2 million in Company common stock plus future contingent milestone payments
totaling approximately $6 million payable in either cash or common stock at the
Company's discretion. The Company issued 885,240 shares of common stock for the
purchase. The acquisition was recorded using the purchase method of accounting.
The transaction did not meet the criteria of a business combination as outlined
in EITF 98-3 "Determining Whether a Nonmonetary Transaction Involves Receipt of
Productive Assets or of a Business" as, upon acquisition, Synapse did not have
any significant business outputs. Accordingly, all of the purchase price plus
related expenses totaling $11.2 million was attributed to in-process research
and development and was expensed in the accompanying consolidated statements of
operations.
Through March 31, 2002, the Company had accumulated losses during its
development stage of approximately $174.7 million. Based on current plans,
management expects to incur further losses for the foreseeable future.
Management believes that the Company's cash and cash equivalents and short-term
investment balances at March 31, 2002 will be sufficient to meet the Company's
obligations through the end of 2003. Until the company can generate sufficient
levels of cash from its operations, the company expects to continue to finance
future cash needs through the sale of equity securities, equipment-based
financing, and collaborative agreements with corporate partners.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with 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.
6
Operating results for the three-month periods ended March 31, 2002 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002. These consolidated financial statements should be read in
conjunction with the financial statements and footnotes thereto for the year
ended December 31, 2001 included in the Company's Form 10-K Annual Report.
2. SIGNIFICANT ACCOUNTING POLICIES:
--------------------------------
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the dates of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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 amortized cost at March 31, 2002. These securities are comprised
mainly of bond mutual funds, corporate bonds, Federal agency investments,
commercial paper and bank certificates of deposit.
Investment in BioMarin/Genzyme LLC and Related Revenue
Under the terms of the Company's 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,
administrative, 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 Company recognizes 50% of amounts billed to the joint venture as
revenue in accordance with its policy to recognize revenue for these billings to
the extent that payments for the billings were funded by Genzyme. The 50% of
amounts billed to the joint venture that is funded by the Company is recorded as
an offset to the Company's 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 property and received 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.
In February 2002, the Company loaned another officer $300,000 to purchase a
residence and received a promissory note secured by the officers unencumbered
shares of the Company owned by the officer. The note is full-recourse and
matures on October 31, 2002 and bears interest at the Federal short-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, plant and equipment consisted of the following (in thousands):
December 31, March 31, Estimated
2001 2002 Useful Lives
--------------- ------------- -------------------------------------
--------------- ------------- -------------------------------------
Computer hardware and software $ 1,532 $ 1,820 3 years
Office furniture and equipment 1,557 1,622 5 years
Manufacturing/laboratory equipment 11,769 11,918 5 years
Leasehold improvements 30,886 32,735 Shorter of life of asset or lease term
Construction in progress 1,064 1,064
--------------- -------------
--------------- -------------
46,808 49,159
Less: Accumulated depreciation (14,248) (16,100)
--------------- -------------
--------------- -------------
Total, net $ 32,560 $ 33,059
=============== =============
Stockholders' Equity
The notes from stockholders included in stockholders' equity are currently due.
The notes are anticipated to be paid prior to June 30, 2002. The Company does
not believe there will be any problems collecting on the notes.
Research and Development
Research and development expenses include the expenses associated with contract
research and development provided by third parties, research and development
performed in connection with the BioMarin/Genzyme LLC joint venture (including
clinical manufacturing, clinical operations, regulatory activities), and
internal research and development activities. All research and development
expenses 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.
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 to treat serious, life-threatening diseases and
conditions. We leverage our expertise in enzyme biology to develop product
candidates for the treatment of genetic diseases, including MPS I, MPS VI and
PKU, as well as other critical care situations such as cardiovascular surgery
and serious burns. Our product candidates address markets for which no products
are currently available or where current products have been associated with
major deficiencies. We focus on conditions with well-defined patient
populations, including genetic diseases, which require chronic therapy.
Our lead product candidate, Aldurazyme(TM), is being developed for the treatment
of Mucopolysaccharidosis I (MPS I) disease. MPS I is a debilitating and
life-threatening genetic disease caused by the deficiency of
(alpha)-L-iduronidase, an enzyme responsible for breaking down certain
carbohydrates. MPS I is a progressive disease that afflicts patients from birth
and frequently leads to severe disability and early death. There are currently
no drugs on the market for the treatment of MPS I. Aldurazyme has received both
fast track designation from the United States Food and Drug Administration (FDA)
and orphan drug designation for the treatment of MPS I in the United States and
in the European Union. We are developing Aldurazyme through a joint venture with
Genzyme Corporation. In collaboration with Genzyme, we completed a
double-blinded, placebo-controlled Phase 3 clinical trial of Aldurazyme in
August 2001. On November 2, 2001, we announced positive results from this trial.
On April 1, 2002, we announced that together with our joint venture partner,
Genzyme, we have filed with European regulatory authorities for approval to
market Aldurazyme. On April 15, 2002, Genzyme and we announced that the joint
venture filed the first portion of a "rolling"' Biologics License Application
(BLA) with the FDA for approval to market Aldurazyme in the United States.
Genzyme and we anticipate a response from the FDA regarding the application to
market Aldurazyme in the United States during the first half of 2003.
We are developing our second product candidate, Neutralase(TM), for reversal of
anticoagulation by heparin in patients undergoing Coronary Artery Bypass Graft,
or CABG, surgery and angioplasty. We acquired rights to Neutralase through our
acquisition of the pharmaceutical assets of IBEX Technologies Inc. in the fourth
quarter of 2001. Heparin is a carbohydrate drug commonly used to prevent
coagulation, or blood clotting, during certain types of major surgery.
Neutralase is a carbohydrate-modifying enzyme that cleaves heparin, allowing
coagulation of blood and aiding patient recovery following CABG surgery and
angioplasty. Based on data from previous trials, we plan to initiate a Phase 3
trial in CABG surgery in the third quarter of 2002.
In addition to Aldurazyme and Neutralase, we are developing other enzyme-based
therapeutics for the treatment of a variety of diseases and conditions. In 2001,
we announced the results of a Phase 1 trial of Aryplase(TM) for the treatment of
MPS VI, another seriously debilitating genetic disease. Based on data from the
Phase 1 trial, we initiated a Phase 2 trial of Aryplase in the first quarter of
2002. We are also developing VibrilaseTM, a topical enzyme product for use in
removing burned skin tissue in preparation for skin grafting or other therapy.
We initiated a Phase 1 clinical trial of Vibrilase in the United Kingdom in the
fourth quarter of 2001, and expect to analyze the results from this trial in the
fourth quarter of 2002. In addition, we are pursuing preclinical development of
other enzyme product candidates for genetic and other diseases.
9
Recent Developments
On April 22, 2002, we announced that we had begun dosing patients in a Phase 2
clinical trial of Aryplase for the treatment of MPS VI. The primary objective of
this open-label, multi-national Phase 2 clinical trial will be to evaluate the
efficacy, safety and pharmacokinetics of weekly intravenous infusions of 1.0
mg/kg of Aryplase in 10 MPS VI patients. This dose represents the higher level
of two doses administered in the six-patient Phase 1 trial.
On April 15, 2002, Genzyme and we announced that the joint venture filed the
first portion of a "rolling" Biologics License Application (BLA) with the FDA
for approval to market Aldurazyme in the United States. We plan to complete the
BLA filing in the third quarter of this year. The BLA will include six months of
data from the ongoing open-label Phase 3 extension study in addition to the
six-month data from the placebo-controlled portion of the Phase 3 trial.
Patients from both the treatment and placebo arms of the Phase 3 trial had
received at least six months of weekly Aldurazyme infusions in the open-label
extension study as of February 8, 2002. Genzyme and we anticipate a response
from the FDA regarding the application to market Aldurazyme in the United States
during the first half of 2003.
On April 1, 2002, we announced that together with our joint venture partner,
Genzyme, we have filed with European regulatory authorities for approval to
market Aldurazyme. Our joint venture submitted a Marketing Authorization
Application (MAA) to the European Medicines Evaluation Agency (European
Union)(or EMEA) on March 1, 2002. The EMEA has accepted our MAA and validated
that it is complete and ready for scientific review. Accordingly, the EMEA's
Committee for Proprietary Medicinal Products (CPMP) will now evaluate the
application to determine whether to approve Aldurazyme for the treatment of MPS
I in all 15 member states of the European Union. Norway and Iceland also
participate in the CPMP but have a separate approval process.
On March 21, 2002, we acquired Synapse Technologies Inc. Synapse owns the rights
to certain patented and proprietary technology which, based on the results of
preclinical trials, has the potential to deliver therapeutic enzymes and other
drugs across the blood-brain barrier by means of traditional intravenous
injections. Under the terms of the agreement, we purchased 100% of the
outstanding shares of Synapse for approximately $10.2 million payable in 885,240
shares of our common stock. We also may make future contingent payments of up to
CDN. $8 million (which equaled approximately U.S. $5.0 million as of May 1,
2002). These payments are payable in either cash or stock, at our option.
On February 25, 2002, we decided to close the analytics product catalog business
of our wholly-owned subsidiary, Glyko, Inc. The majority of the Glyko, Inc.
employees have been incorporated into our pharmaceutical business to provide
necessary analytic and diagnostic support to our therapeutic products. Certain
operating assets of Glyko, Inc. may be offered for sale.
On February 7, 2002, we announced that we had reached a definitive agreement to
acquire all of the outstanding capital stock of Glyko Biomedical Ltd. (GBL). GBL
is not affiliated with Glyko, Inc. GBL's principal asset is its 21.3% ownership
interest in our common stock. GBL owns 11,367,617 shares of our common stock.
Under the terms of the acquisition agreement, GBL's common shareholders will
receive 11,367,617 shares of our common stock in exchange for all of GBL's
outstanding common stock. There will be no net effect on the number of shares of
our common stock outstanding, as we plan to retire the existing shares of our
common stock currently held by GBL upon closing.
Results of Operations
In February 2002, we decided to close the carbohydrate analytical business
portion of our wholly owned subsidiary, Glyko, Inc., which provided all of
Glyko, Inc.'s revenues. The decision to close Glyko, Inc. has resulted in the
operations of Glyko, Inc. being classified as discontinued operations in our
consolidated financial statements and, accordingly, we have segregated the
assets and liabilities of the discontinued operations in our consolidated
balance sheets. In addition, we have segregated the operating results in our
consolidated statements of operations and have segregated cash flows from
discontinued operations in our consolidated statements of cash flows.
10
The Quarters Ended March 31, 2002 and 2001
For the quarters ended March 31, 2002 and 2001, revenues were $3.8 million and
$2.7 million, respectively, which came exclusively from our joint venture with
Genzyme. The increase in joint venture revenues in the first quarter of 2002
compared to the same period in 2001 was primarily the result of increased
manufacturing activities in support of our Phase 1 and Phase 3 extension
studies, increased regulatory, clinical and plant and process validation efforts
in preparation for the rolling BLA submission that commenced in April 2002.
Research and development expenses increased to $13.2 million in the first
quarter of 2002 from $9.7 million in comparable period of 2001. The major
factors in the growth of research and development expenses include increased
expenses for the Aldurazyme joint venture with Genzyme, especially
manufacturing, regulatory and clinical requirements, for manufacturing and
clinical requirements to support our Phase 2 clinical trial and Phase 1
extension study of Aryplase, for the clinical expenses associated with our Phase
1 clinical trial of Vibrilase and for the increased manufacturing and research
staff to support our product programs, including the addition of scientific
staff in Montreal, Canada in October 2001 supporting Neutralase and Phenylase
and in Vancouver, Canada in March 2002 supporting the technology purchased from
Synapse. We anticipate research and development expenditures to continue to
increase in the future in order to further develop our drug product candidates.
General and administrative expenses increased to $3.9 million in the first
quarter of 2002 from $1.5 million in the comparable period of 2001. This
increase was primarily due to costs incurred in the first quarter of 2002 for
legal and other fees associated with the Synapse acquisition and the potential
acquisition of all of the outstanding capital stock of Glyko Biomedical Ltd. by
us (in exchange for our common stock), increased staffing in finance, business
development, information systems and purchasing, and expenses related to the
implementation of an improved financial reporting and budgeting software system.
Over the next year, we anticipate that general and administrative expenditures
will increase approximately 30%, exclusive of the approximately $1.1 million of
extraordinary costs associated with the acquisitions and the implementation of
the financial reporting system. This increase will primarily be due to increased
headcount and facilities to support the growth of our Company.
In-process research and development totaling $11.2 million represents the entire
purchase price of our acquisition of all of the outstanding stock of Synapse
Technologies, Inc. in March 2002 plus related expenses. On March 21, 2002, we
purchased Synapse including its intellectual property and preclinical data on
p97, a technology that may allow drugs to cross the blood brain barrier, for
$10.2 million in our common stock at a deemed price of $11.50 per share (885,240
shares). In connection with the Synapse purchase, we issued options and warrants
to purchase 80,221 and 27,419 shares of our common stock, respectively. These
options and warrants were valued using the Black-Scholes option pricing model
and the resulting valuations of $561,000 and $85,000, respectively, were
included as additional purchase price. The purchase agreement requires us to
make up to CDN. $8 million (which equaled approximately U.S. $5.0 million as of
May 1, 2002) in contingency payments upon certain regulatory and licensing
milestones if they occur before March 21, 2012.
Interest income decreased by $88,000 to $380,000 in the first quarter of 2002
from $468,000 in the first quarter of 2001 primarily due to the decrease in
interest rates available on short-term investments, offset in part by higher
cash balances resulting from our recent financing activities.
Interest expense for the first quarter of 2002 was $91,000 and $2,000 in the
comparable period of 2001. The increase was due to an equipment loan executed
for $5.5 million in December 2001.
Our equity in the loss of our joint venture with Genzyme was $2.3 million for
the first quarter of 2002 compared to $1.1 million for the first quarter of
2001, as the joint venture continued extension studies of the original Phase 1
clinical trial and the Phase 3 clinical trial of Aldurazyme and filed an MAA in
Europe.
Net loss from continuing operations was $26.6 million ($0.51 per share, basic
and diluted) and $9.1 million ($0.24 per share, basic and diluted) for the first
quarter of 2002 and 2001, respectively.
Income (loss) from discontinued operations relating to the Glyko, Inc. analytics
business was $122,000 in the first quarter of 2002 and $(617,000) in the
comparable period of 2001. The increase to income in the first quarter of 2002
was due to an increase in sales to customers in anticipation of a possible sale
or discontinuance of the analytics business of Glyko, Inc.
11
Loss from disposal of discontinued operations represents the Glyko, Inc. closure
expense of $141,000 in the first quarter of 2002 consisting primarily of accrued
severance to personnel who did not become our employees and marketing and
investment banking fees incurred in connection with the potential sale of the
analytics business of Glyko, Inc.
Net loss was $26.6 million ($0.51 per share, basic and diluted) and $9.7 million
($0.26 per share, basic and diluted) for the first quarters of 2002 and 2001,
respectively.
Liquidity and Capital Resources
We have financed our operations since our inception by the issuance of common
stock and convertible notes, equipment financing and the related interest income
earned on cash balances available for short-term investment. Since inception, we
have raised aggregate net proceeds of approximately $286 million. We were
initially funded by an investment from GBL. We have since raised additional
capital from the sale of our common stock in both public and private offerings
and the sale of our other securities, all of which have since converted into
common stock.
Our combined cash, cash equivalents and short-term investments totaled $114.8
million at March 31, 2002 a decrease of $16.3 million from $131.1 million at
December 31, 2001. The primary uses of cash during the quarter ended March 31,
2002 were to finance operations, fund the joint venture, purchase leasehold
improvements and equipment and expenses associated with the purchase of Synapse
(primarily legal fees). The primary sources of cash during the quarter were the
issuance of common stock pursuant to the exercise of stock options under the
1997 Stock Plan, the aggregate exercise price of which totaled approximately
$0.4 million.
As of March 31, 2002, our total research and development expense to date was
$131.5 million which was allocated $65.0 million to Aldurazyme, $0.6 million to
Neutralase, $14.9 million to Aryplase, $6.6 million to Vibrilase and $44.4
million to other projects. In the first quarter of 2002, our research and
development expense of $13.2 million was allocated $7.7 million to Aldurazyme,
$0.3 million to Neutralase, $2.1 million to Aryplase, $0.3 million to Vibrilase
and $2.8 million to other projects. Due to the uncertainty of the development
of, and the complications of obtaining regulatory approval for the
commercialization of pharmaceutical products, it is impossible to estimate the
future costs associated with the completion of any of our product programs, the
anticipated completion date, or the date by which the project will generate
significant revenue from sales, if at all. Please see the section entitled
"Factors That May Affect Future Results," and, in particular, the discussions
captioned "If we fail to obtain regulatory approval to commercially manufacture
or sell any of our future drug products, or if approval is delayed, we will be
unable to generate revenue from the sale of our products"; "To obtain regulatory
approval to market our products, preclinical studies and costly and lengthy
clinical trials will be required, and the results of the studies and trials are
highly uncertain" and "If we are unable to manufacture our drug products in
sufficient quantities and at acceptable cost, we may be unable to meet demand
for our products and lose potential revenues or have reduced margins" in that
section.
From our inception through March 31, 2002, we have purchased approximately $53.3
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 increased manufacturing capacity.
We expect to fund our operations with our cash, cash equivalents and short-term
investments. We have made and plan to make substantial commitments to capital
projects, including developing new research and development facilities and
expanding our administrative and support offices. For all of 2002, we expect to
expend approximately $60 million for operations and capital expenditures. We
expect our current funds to last through 2003.
We do not expect to generate positive cash flow from operations at least until
2004 because we expect to increase operational expenses and manufacturing
investment for the joint venture and to increase research and development
activities, including:
o preclinical studies and clinical trials;
o process development, including quality systems for product manufacture;
o regulatory processes in the United States and international
jurisdictions;
o clinical and commercial scale manufacturing capabilities; and
o expansion of sales and marketing activities
Until we can generate sufficient levels of cash from our operations, we expect
to continue our operations through the expenditure of our current cash, cash
equivalents and short-term investments and supplement our cash, cash equivalents
and short-term investments through: the sale of equity securities;
equipment-based financing; and collaborative agreements with corporate partners.
We expect that the net proceeds from any sales of our common stock, equipment
financing or collaborative agreements will be used to fund operating costs,
capital expenditures and working capital requirements, which may include costs
associated with our lead clinical programs including Aldurazyme for MPS I,
Neutralase for heparin reversal, Aryplase for MPS VI and Vibrilase for burn
wounds. In addition, net proceeds may also be used for research and development
of other pipeline products, building of our supporting infrastructure, and other
general corporate purposes.
12
There are three current arrangements that may provide us with additional sources
of financing in the future:
o In September 1998, we established a joint venture with Genzyme for the
worldwide development and commercialization of Aldurazyme for the
treatment of MPS I. We share expenses and profits from the joint
venture equally with Genzyme. Genzyme has committed to pay us an
additional $12.1 million upon approval of the BLA for Aldurazyme. We
anticipate a response from the FDA in the first half of 2003 regarding
our recently filed "rolling" BLA for Aldurazyme.
o In August 2001, we signed an amended agreement with Acqua Wellington
North American Equities Fund Ltd. (Acqua Wellington)for an equity
investment in us. The agreement allows for the purchase of up to $27.7
million of our common stock. Under the terms of the agreement, we will
have the option to request that Acqua Wellington invest in us through
sales of registered common stock at a small discount to market price.
The maximum amount that we may request to be bought in any one month is
dependent upon the market price of our stock (or an amount that can be
mutually agreed-upon by both parties) and is referred to as the "Draw
Down Amount." Subject to certain conditions, Acqua Wellington is
obligated to purchase this amount if requested to do so by us. In
addition, we may, at our discretion, grant a "Call Option" to Acqua
Wellington for an additional investment in an amount up to the "Draw
Down Amount" which Acqua Wellington may or may not choose to exercise.
As of March 31, 2002, we may request a maximum additional aggregate
investment of $14.2 million. This agreement terminates on October 15,
2002. Under this agreement, Acqua Wellington may also purchase stock
and receive similar terms of any other equity financing by us.
o During December 2001, we entered into three separate agreements with
General Electric Capital Corporation for secured loans totaling $5.5
million. The notes bear interest (ranging from 9.1% to 9.31%) and are
secured by certain manufacturing and laboratory equipment.
Additionally, one of the agreements is subject to a covenant that
requires us to maintain a minimum unrestricted cash balance of $25
million. Should the unrestricted cash balance fall below $25 million,
the note is subject to prepayment, including prepayment penalties
ranging from 1% to 4%. We expect to enter into additional similar
facilities as we acquire additional equipment and expand our
facilities.
In addition to the foregoing sources, we anticipate a need for additional
financing to fund our future operations, including the commercialization of our
drug products currently under development. We cannot assure you that additional
financing will be obtained or, if obtained, will be available on reasonable
terms or in a timely manner.
Our future capital requirements will depend on many factors, including, but not
limited to:
o the progress, timing and scope of our preclinical studies and clinical
trials;
o the time and cost necessary to obtain regulatory approvals;
o the time and cost necessary to develop commercial manufacturing
processes, including quality systems and to build or acquire
manufacturing capabilities;
o the time and cost necessary to respond to technological and market
developments; and
o any changes made or new developments in our existing collaborative,
licensing and other commercial relationships or any new collaborative,
licensing and other commercial relationships that we may establish.
We plan to continue our policy of investing available funds in government,
investment grade and interest-bearing securities. We do not invest in derivative
financial instruments, as defined by Statement of Financial Accounting Standards
No. 119.
13
Critical Accounting Policies
Investment in BioMarin/Genzyme LLC and Related Revenue--Under the terms of our
joint venture agreement with Genzyme, Genzyme and we have each agreed to provide
50 percent of the funding for the joint venture. All research and development,
sales and marketing, and other activities performed by Genzyme and us on behalf
of the joint venture are billed to the joint venture at cost. Any profits or
losses of the joint venture are shared equally by the two parties. We provided
$43.9 million in funding to the joint venture from inception through March 31,
2002.
We account for our investment in the joint venture using the equity method.
Accordingly, we record a reduction in our investment in the joint venture for
our 50 percent share of the loss of the joint venture. The percentage of the
costs incurred by us and billed to the joint venture that are funded by us (50
percent), is recorded as a credit to our equity in the loss of the joint
venture.
Impairment of Long-Lived Assets--We regularly review long-lived assets and
identifiable intangibles whenever events or circumstances indicate that the
carrying amount of such assets may not be fully recoverable. We evaluate the
recoverability of long-lived assets by measuring the carrying amount of the
assets against the estimated undiscounted future cash flows associated with
them. At the time such evaluations indicate that the future undiscounted cash
flows of certain long-lived assets are not sufficient to recover the carrying
value of such assets, the assets are adjusted to their fair values.
Income taxes - We record a valuation allowance to reduce our deferred tax assets
to the amount that is more likely than not to be realized. For all periods
presented, we have recorded a full valuation allowance against our net deferred
tax asset, the principal amount of which is the tax effect of net operating loss
carryforwards of approximately $61.5 million at December 31, 2001. We have
considered future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for the valuation allowance. An adjustment to
the valuation allowance would increase income in the period such adjustment was
made.
14
FACTORS THAT MAY AFFECT FUTURE RESULTS
An investment in our common stock involves a high degree of risk. We operate in
a dynamic and rapidly changing industry involving numerous risks and
uncertainties. The risks and uncertainties described below are not the only ones
we face. Other risks and uncertainties, including those that we do not currently
consider material, may impair our business. If any of the risks discussed below
actually occur, our business, financial condition, operating results or cash
flows could be materially adversely affected. This could cause the trading price
of our common stock to decline, and you may lose all or part of your investment.
If we continue to incur operating losses for a period longer than anticipated,
we may be unable to continue our operations at planned levels and be forced to
reduce or discontinue operations.
We are in an early stage of development and have operated at a net loss since we
were formed. Since we began operations in March 1997, we have been engaged
primarily in research and development. We have no sales revenues from any of our
product candidates. As of March 31, 2002, we had an accumulated deficit of
approximately $174.7 million. We expect to continue to operate at a net loss for
the foreseeable future. Our future profitability depends on our receiving
regulatory approval of our product candidates and our ability to successfully
manufacture and market any approved drugs, either by ourselves or jointly with
others. The extent of our future losses and the timing of profitability are
highly uncertain. If we fail to become profitable or are unable to sustain
profitability on a continuing basis, then we may be unable to continue our
operations.
If we fail to obtain the capital necessary to fund our operations, we will be
unable to complete our product development programs.
In the future, we may need to raise substantial additional capital to fund
operations. We cannot be certain that any financing will be available when
needed. If we fail to raise additional financing as we need it, we will have to
delay or terminate some or all of our product development programs.
We expect to continue to spend substantial amounts of capital for our operations
for the foreseeable future. The amount of capital we will need depends on many
factors, including:
o the progress, timing and scope of our preclinical studies and clinical
trials;
o the time and cost necessary to obtain regulatory approvals;
o the time and cost necessary to develop commercial manufacturing
processes, including quality systems and to build or acquire
manufacturing capabilities;
o the time and cost necessary to respond to technological and market
developments; and
o any changes made or new developments in our existing collaborative,
licensing and other commercial relationships or any new collaborative,
licensing and other commercial relationships that we may establish.
Moreover, our fixed expenses such as rent, license payments and other
contractual commitments are substantial and will increase in the future. These
fixed expenses will increase because we may enter into:
o additional leases for new facilities and capital equipment;
o additional licenses and collaborative agreements;
o additional contracts for consulting, maintenance and administrative
services; and
o additional contracts for product manufacturing.
We believe that our cash, cash equivalents and short term investment securities
balances at March 31, 2002 will be sufficient to meet our operating and capital
requirements through 2003. These estimates are based on assumptions and
estimates, which may prove to be wrong. As a result, we may need or choose to
obtain additional financing during that time.
15
If we fail to obtain regulatory approval to commercially manufacture or sell any
of our future drug products, or if approval is delayed, we will be unable to
generate revenue from the sale of our products, our potential for generating
positive cash flow will be diminished and the capital necessary to fund our
operations will be increased.
We must obtain regulatory approval before marketing or selling our drug products
in the U.S. and in foreign jurisdictions. In the U.S., we must obtain FDA
approval for each drug that we intend to commercialize. The FDA approval process
is typically lengthy and expensive, and approval is never certain. Products
distributed abroad are also subject to foreign government regulation. None of
our drug products has received regulatory approval to be commercially marketed
and sold. If we fail to obtain regulatory approval, we will be unable to market
and sell our drug products. Because of the risks and uncertainties in
biopharmaceutical development, our drug products could take a significantly
longer time to gain regulatory approval than we expect or may never gain
approval. If regulatory approvals are not obtained or are delayed, our
management's credibility, and the value of our company and our operating results
will be adversely affected. Additionally, we will be unable to generate revenue
from the sale of our products and our potential for generating positive cash
flow will be diminished and the capital necessary to fund our operations will be
increased.
To obtain regulatory approval to market our products, preclinical studies and
costly and lengthy clinical trials will be required, and the results of the
studies and trials are highly uncertain.
As part of the regulatory approval process, we must conduct, at our own expense,
preclinical studies in the laboratory on animals and clinical trials on humans
for each drug product. We expect the number of preclinical studies and clinical
trials that the regulatory authorities will require will vary depending on the
drug product, the disease or condition the drug is being developed to address
and regulations applicable to the particular drug. We may need to perform
multiple preclinical studies using various doses and formulations before we can
begin clinical trials, which could result in delays in our ability to market any
of our drug products. Furthermore, even if we obtain favorable results in
preclinical studies on animals, the results in humans may be significantly
different.
After we have conducted preclinical studies in animals, we must demonstrate that
our drug products are safe and efficacious for use on the target human patients
in order to receive regulatory approval for commercial sale. Adverse or
inconclusive clinical results would stop us from filing for regulatory approval
of our drug products. Additional factors that can cause delay or termination of
our clinical trials include:
o slow or insufficient patient enrollment;
o slow recruitment of, and completion of necessary institutional
approvals at clinical sites;
o longer treatment time required to demonstrate efficacy;
o lack of sufficient supplies of the product candidate;
o adverse medical events or side effects in treated patients;
o lack of effectiveness of the product candidate being tested; and
o regulatory requests for additional clinical trials.
Typically, if a drug product is intended to treat a chronic disease, as is the
case with most of the product candidates we are developing, safety and efficacy
data must be gathered over an extended period of time, which can range from six
months to three years or more.
In May 2001, we completed a 24-month patient evaluation for the initial clinical
trial of our lead drug product, Aldurazyme, for the treatment of MPS I. Two of
the original ten patients enrolled in this trial died in 2000. One of these
patients received 103 weeks of Aldurazyme treatment and the other received 137
weeks of treatment. One of the original forty-five patients who completed the
Phase 3 clinical trial died after 16 weeks of the Phase 3 extension study. One
patient treated under a single-patient use protocol died after 131 weeks of
Aldurazyme treatment. Based on medical data collected from clinical
investigative sites, none of these cases directly implicated treatment with
Aldurazyme as the cause of death. If cases of patient complications or death are
ultimately attributed to Aldurazyme, our chances of commercializing this drug
would be seriously compromised.
The fast track designation for our product candidates may not actually lead to a
faster review process and a delay in the review process or approval of our
products will delay revenue from the sale of the products and will increase the
capital necessary to fund these programs.
16
Aldurazyme and Aryplase have obtained fast track designations, which provides
certain advantageous procedures and guidelines with respect to the review by the
FDA of the BLA for these products and which may result in our receipt of an
initial response from the FDA earlier than would be received if these products
had not received a fast track designation. However, these procedures and
guidelines do not guarantee that the total review process will be shorter than,
or that approval will be obtained, if at all, earlier than, would be the case if
the products had not received fast track designation. If the review process or
approval for either product is delayed, realizing revenue from the sale of the
products will be delayed and the capital necessary to fund these programs will
be increased.
We will not be able to sell our products if we fail to comply with manufacturing
regulations.
Before we can begin commercial manufacture of our products, we must obtain
regulatory approval of our manufacturing facility and process. In addition,
manufacture of our drug products must comply with the FDA's current Good
Manufacturing Practices regulations, commonly known as cGMP. The cGMP
regulations govern quality control and documentation policies and procedures.
Our manufacturing facilities are continuously subject to inspection by the FDA,
the State of California and foreign regulatory authorities, before and after
product approval. Our Galli Drive and our Bel Marin Keys Boulevard manufacturing
facilities have been inspected and licensed by the State of California for
clinical pharmaceutical manufacture. We cannot guarantee that these facilities
will pass federal or international regulatory inspection. We cannot guarantee
that we, or any potential third party manufacturer of our drug products, will be
able to comply with cGMP regulations.
We must pass Federal, state and European regulatory inspections, and we must
manufacture process qualification batches to final specifications under cGMP
controls for each of our drug products before the marketing applications can be
approved. Although we have completed process qualification batches for
Aldurazyme, these batches may be rejected by the regulatory authorities, and we
may be unable to manufacture the process qualification batches for our other
products or pass the inspections in a timely manner, if at all.
If we fail to obtain orphan drug exclusivity for some of our products, our
competitors may sell products to treat the same conditions and our revenues will
be reduced.
As part of our business strategy, we intend to develop some drugs that may be
eligible for FDA and European Community orphan drug designation. Under the
Orphan Drug Act, the FDA may designate a product as an orphan drug if it is a
drug intended to treat a rare disease or condition, defined as a patient
population of less than 200,000 in the United States. The company that first
obtains FDA approval for a designated orphan drug for a given rare disease
receives marketing exclusivity for use of that drug for the stated condition for
a period of seven years. However, different drugs can be approved for the same
condition. Similar regulations are available in the European Community with a
ten-year period of market exclusivity.
Because the extent and scope of patent protection for 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 our drug products, which do not
have patent protection, our competitors may then sell the same drug to treat the
same condition.
Even though we have obtained orphan drug designation for certain of our product
candidates and even if we obtain orphan drug designation for other products we
develop, we cannot guarantee that we will be the first to obtain marketing
approval for any orphan indication or, if we do, that exclusivity would
effectively protect the product from competition. Orphan drug designation
neither shortens the development time or regulatory review time of a drug nor
gives the drug any advantage in the regulatory review or approval process.
Because the target patient populations for some of our products are small, we
must achieve significant market share and obtain high per patient prices for our
products to achieve profitability.
Two of our lead drug candidates, Aldurazyme and Aryplase, target diseases with
small patient populations. As a result, our per-patient prices must be
relatively high in order to recover our development costs and achieve
profitability. Aldurazyme targets patients with MPS I and Aryplase targets
patients with MPS VI. We estimate that there are approximately 3,400 patients
with MPS I and 1,100 patients with MPS VI in the developed world. We believe
that we will need to market worldwide to achieve significant market share. In
addition, we are developing other drug candidates to treat conditions, such as
other genetic diseases and serious burn wounds, with small patient populations.
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
efforts.
If we fail to obtain an adequate level of reimbursement for our drug products by
third-party payers, the sales of our drugs would be adversely affected or there
may be no commercially viable markets for our products.
17
The course of treatment for patients with MPS I using Aldurazyme and for
patients with MPS VI using Aryplase is expected to be expensive. We expect
patients to need treatment throughout their lifetimes. We expect that most
families of patients will not be capable of paying for this treatment
themselves. There will be no commercially viable market for Aldurazyme or
Aryplase without reimbursement from third-party payers. Additionally, even if
there is a commercially viable market, if the level of reimbursement is below
our expectations, our revenue and gross margins will be adversely effected.
Third-party payers, such as government or private health care insurers,
carefully review and increasingly challenge the prices charged for drugs.
Reimbursement rates from private companies vary depending on the third-party
payer, the insurance plan and other factors. Reimbursement systems in
international markets vary significantly by country and by region, and
reimbursement approvals must be obtained on a country-by-country basis. We
cannot be certain that third-party payers will pay for the costs of our drugs.
Even if we are able to obtain reimbursement from third-party payers, we cannot
be certain that reimbursement rates will be enough to allow us to profit from
sales of our drugs or to justify our product development expenses.
We currently have no expertise obtaining reimbursement. We expect to rely on the
expertise of our joint venture partner Genzyme to obtain reimbursement for the
costs of Aldurazyme. We will not know what the reimbursement rates will be until
we are ready to market the product and we actually negotiate rates. In addition,
we will need to develop our own reimbursement expertise for future drug
candidates unless we enter into collaborations with other companies with the
necessary expertise.
We expect that, in the future, reimbursement will be increasingly restricted
both in the United States and internationally. The escalating cost of health
care has led to increased pressure on the health care industry to reduce costs.
Governmental and private third-party payers have proposed health care reforms
and cost reductions. A number of federal and state proposals to control the cost
of health care, including the cost of drug treatments have been made in the
United States. In some foreign markets, the government controls the pricing
which would affect the profitability of drugs. Current government regulations
and possible future legislation regarding health care may adversely affect
reimbursement for medical treatment by third party payers, which may render our
products commercially un-viable or may adversely affect our future revenues and
gross margins.
If we are unable to protect our proprietary technology, we may not be able to
compete as effectively.
Where appropriate, we seek patent protection for certain aspects of our
technology. Patent protection may not be available for some of the enzymes we
are developing. If we must spend significant time and money protecting our
patents, designing around patents held by others or licensing, for large fees,
patents or other proprietary rights held by others, our business and financial
prospects may be harmed.
The patent positions of biotechnology products are complex and uncertain. The
scope and extent of patent protection for some of our products are particularly
uncertain because key information on some of the enzymes we are developing has
existed in the public domain for many years. Other parties have published the
structure of the enzymes, the methods for purifying or producing the enzymes or
the methods of treatment. The composition and genetic sequences of animal and/or
human versions of many of our enzymes have been published and are believed to be
in the public domain. The composition and genetic sequences of other MPS enzymes
that we intend to develop as products have also been published. Publication of
this information may prevent us from obtaining composition-of-matter patents,
which are generally believed to offer the strongest patent protection. For
enzymes with no prospect of broad composition-of-matter patents, other forms of
patent protection or orphan drug status may provide us with a competitive
advantage. As a result of these uncertainties, investors should not rely on
patents as a means of protecting our product candidates, including Aldurazyme.
We own or license patents and patent applications to certain of our product
candidates. However, these patents and patent applications do not ensure the
protection of our intellectual property for a number of other reasons, including
the following:
o We do not know whether our patent applications will result in issued
patents. For example, we may not have developed a method for treating
a disease before others developed similar methods.
o Competitors may interfere with our patent process in a variety of ways.
Competitors may claim that they invented the claimed invention prior to
us. Competitors may also claim that we are infringing on their patents
and therefore cannot practice our technology as claimed under our
patent. Competitors may also contest our patents by showing the patent
examiner that the invention was not original, was not novel or was
obvious. In litigation, a competitor could claim that our issued
patents are not valid for a number of reasons. If a court agrees, we
would lose that patent. As a company, we have no meaningful experience
with competitors interfering with our patents or patent applications.
18
o Enforcing patents is expensive and may absorb significant time of our
management. Management would spend less time and resources on
developing products, which could increase our research and development
expense and delay product programs.
o Receipt of a patent may not provide much practical protection. If we
receive a patent with a narrow scope, then it will be easier for
competitors to design products that do not infringe on our patent.
In addition, competitors also seek patent protection for their technology. 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. If someone else claims we infringe on their technology, we would
face a number of issues, including the following:
o Defending a lawsuit takes significant time and can be very expensive.
o If the court decides that our product infringes on the competitor's
patent, we may have to pay substantial damages for past infringement.
o The court may prohibit us from selling or licensing the product unless
the patent holder licenses the patent to us. The patent holder is not
required to grant us a license. If a license is available, we may have
to pay substantial royalties or grant cross licenses to our patents.
o Redesigning our product so it does not infringe may not be possible or
could require substantial funds and time.
It is also unclear whether our trade secrets 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. 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
relate to (alpha)-L-iduronidase. If we are not able to successfully challenge
these patents, we may be prevented from producing Aldurazyme unless and until we
obtain a license.
The United States Patent and Trademark Office recently issued two patents that
include composition of matter and method of use claims for recombinant
(alpha)-L-iduronidase. Our lead drug product, Aldurazyme, is based on
recombinant (alpha)-L-iduronidase. We believe that these patents are invalid on
a number of grounds. A corresponding patent application was filed in the
European Patent Office claiming composition of matter for recombinant
(alpha)-L-iduronidase, and it was rejected over prior art and withdrawn and
cannot be re-filed. Nonetheless, under U.S. law, issued patents are entitled to
a presumption of validity, and our challenges to the U.S. patents may be
unsuccessful. Even if we are successful, challenging the U.S. patents may be
expensive, require our management to devote significant time to this effort and
may delay commercialization of Aldurazyme in the United States.
19
The patent holder has granted an exclusive license for products relating to
these patents to one of our competitors. If we are unable to successfully
challenge the patents, we may be unable to produce Aldurazyme in the United
States unless we can obtain a sublicense 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, which could materially
reduce potential profits from the eventual sale of Aldurazyme.
If our joint venture with Genzyme were terminated, we could be barred from
commercializing Aldurazyme or our ability to commercialize Aldurazyme would be
delayed or diminished.
We are relying on Genzyme to apply the expertise it has developed through the
launch and sale of other enzyme-based products to the marketing of our initial
drug product, Aldurazyme. We have no experience selling, marketing or obtaining
reimbursement for pharmaceutical products. In addition, without Genzyme we would
be required to pursue foreign regulatory approvals. We have no experience in
seeking foreign regulatory approvals.
We cannot guarantee that Genzyme will devote the resources necessary to
successfully market Aldurazyme. 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. Although we are not currently
in breach of the joint venture agreement and we believe that Genzyme is not
currently in breach of the joint venture agreement, there is a risk that either
Genzyme or we could breach the agreement in the future. Either party may also
terminate the agreement upon one-year prior written notice for any reason.
Furthermore, we may terminate the joint venture if Genzyme fails to fulfill its
contractual obligation to pay us $12.1 million in cash upon the approval of the
BLA for Aldurazyme.
If the joint venture is terminated for breach, the non-breaching party would be
granted, exclusively, all of the rights to Aldurazyme and any related
intellectual property and regulatory approvals and would be obligated to buy out
the breaching party's interest in the joint venture. If we are the breaching
party, we would lose our rights to Aldurazyme and the related intellectual
property and regulatory approvals. If the joint venture is terminated without
cause, the non-terminating party would have the option, exercisable for one
year, to buy out the terminating party's interest in the joint venture and
obtain all rights to Aldurazyme exclusively. In the event of termination of the
buy out option without exercise by the non-terminating party as described above,
all right and title to Aldurazyme is to be sold to the highest bidder, with the
proceeds to be split equally between Genzyme and us.
If the joint venture is terminated by either party because the other declared
bankruptcy and is also in breach of the agreement, the terminating party would
be obligated to buy out the other and would obtain all rights to Aldurazyme
exclusively. If the joint venture is terminated by a party because the other
party experienced a change of control, the terminating party shall notify the
other party, the offeree, of its intent to buy out the offeree's interest in the
joint venture for a stated amount set by the terminating party at its
discretion. The offeree must then either accept this offer or agree to buy the
terminating party's interest in the joint venture on those same terms. The party
who buys out the other would then have exclusive rights to Aldurazyme.
If we were obligated, or given the option, to buy out Genzyme's interest in the
joint venture, and gain exclusive rights to Aldurazyme, we may not have
sufficient funds to do so and we may not be able to obtain the financing to do
so. If we fail to buy out Genzyme's interest we may be held in breach of the
agreement and may lose any claim to the rights to Aldurazyme and the related
intellectual property and regulatory approvals. We would then effectively be
prohibited from developing and commercializing the product.
Termination of the joint venture in which we retain the rights to Aldurazyme
could cause us significant delays in product launch in the United States,
difficulties in obtaining third-party reimbursement and delays or failure to
obtain foreign regulatory approval, any of which could hurt our business and
results of operations. Since Genzyme funds 50% of the joint venture's operating
expenses, the termination of the joint venture would double our financial burden
and reduce the funds available to us for other product programs.
If we are unable to manufacture our drug products in sufficient quantities and
at acceptable cost, we may be unable to meet demand for our products and lose
potential revenues or have reduced margins.
Although we have successfully manufactured Aldurazyme at commercial scale within
our cost parameters, we cannot guarantee that we will be able to manufacture any
other drug product successfully with a commercially viable process or at a scale
large enough to support their respective commercial markets or at acceptable
margins.
Our manufacturing processes may not meet initial expectations and we may
encounter problems with any of the following measurements of performance if we
attempt to increase the scale or size or improve the commercial viability of our
manufacturing processes:
20
o design, construction and qualification of manufacturing facilities that
meet regulatory requirements;
o schedule;
o reproducibility;
o production yields;
o purity;
o costs;
o quality control and assurance systems;
o shortages of qualified personnel; and
o compliance with regulatory requirements.
Improvements in manufacturing processes typically are very difficult to achieve
and are often very expensive. We cannot know with certainty how long it might
take to make improvements if it becomes 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.
The availability of suitable contract manufacturing at scheduled or optimum
times is not certain. The cost of contract manufacturing is greater than
internal manufacturing and therefore our manufacturing processes must be of
higher productivity to yield equivalent margins.
The manufacture of Neutralase involves the fermentation of a bacterial species.
We have never used a bacterial production process for the production of any
commercial product. IBEX Technologies Inc., from which we acquired Neutralase,
had contracted with a third party for the manufacture of the Neutralase used in
prior clinical trials.
We have built-out approximately 51,800 square feet at our Novato facilities for
manufacturing capability for Aldurazyme and Aryplase including related quality
control laboratories, materials capabilities, and support areas. We expect to
add additional capabilities in stages over time, which could create additional
operational complexity and challenges. We expect that the manufacturing process
of all of our new drug products, including Aryplase and Neutralase, will require
significant time and resources before we can begin to manufacture them (or have
them manufactured by third parties) in commercial quantity at acceptable cost.
Even if we can establish the necessary capacity, we cannot be certain that
manufacturing costs will be commercially reasonable, especially if contract
manufacturing is employed or if third-party reimbursement is substantially lower
than expected.
In order to achieve our product cost targets, we must develop efficient
manufacturing processes either by:
o improving the product yield from our current cell lines, colonies of
cells which have a common genetic makeup;
o improving the manufacturing processes licensed from others; or
o developing more efficient, lower cost recombinant cell lines and
production processes.
A recombinant cell line is a cell line with foreign DNA inserted that is used to
produce an enzyme or other protein that it would not have otherwise produced.
The development of a stable, high production cell line for any given enzyme is
difficult, expensive and unpredictable and may not result in adequate yields. In
addition, the development of protein purification processes is difficult and may
not produce the high purity required with acceptable yield and costs or may not
result in adequate shelf-lives of the final products. If we are not able to
develop efficient manufacturing processes, the investment in manufacturing
capacity sufficient to satisfy market demand will be much greater and will place
heavy financial demands upon us. If we do not achieve our manufacturing cost
targets, we will have lower margins and reduced profitability in commercial
production and larger losses in manufacturing start-up phases.
21
If we are unable to create marketing and distribution capabilities or to enter
into agreements with third parties to do so, our ability to generate revenues
will be diminished.
If we cannot increase capabilities either by developing our own sales and
marketing organization or by entering into agreements with others, we may be
unable to successfully sell our products. If we are unable to effectively sell
our drug products, our ability to generate revenues will be diminished.
Under our joint venture with Genzyme, Genzyme is responsible for marketing and
distributing Aldurazyme. We cannot guarantee that we will be able to establish
sales and distribution capabilities or that the joint venture, any future
collaborators or we will successfully sell any of our drug products.
With our acquisition of Neutralase from IBEX Technologies Inc., we have an
enzyme product that has a significantly larger potential patient population than
Aldurazyme and Aryplase and will be marketed and sold to different target
audiences with different therapeutic and financial requirements and needs. As a
result, we will be competing with other pharmaceutical companies with
experienced and well-funded sales and marketing operations targeting these
specific physician and institutional audiences. We may not be able to create our
own sales and marketing force or of a size that would allow us to compete with
these other companies. If we elect to enter into third-party marketing and
distribution agreements in order to sell into these markets, we may not be able
to enter into these agreements on acceptable terms, if at all. If we cannot
compete effectively in these specific physician and institutional markets, it
would adversely affect sales of Neutralase.
If we fail to compete successfully with respect to product sales, we may be
unable to generate sufficient sales to recover our expenses related to the
development of a product program or to justify continued marketing of a product.
Our competitors may develop, manufacture and market products that are more
effective or less expensive than ours. They may also obtain regulatory approvals
for their products faster than we can obtain them, including those products with
orphan drug designation, or commercialize their products before we do. With
respect to Aldurazyme and Aryplase, if our competitors successfully
commercialize a product that treats MPSI or MPSIV, respectively, before we do,
we may effectively be precluded from developing a product to treat that disease
because the patient populations of the diseases are so small. If our competitor
gets orphan drug exclusivity, we could be precluded from marketing our version
for seven years in the U.S. and ten years in the European Union. If we do not
compete successfully, we may be unable to generate sufficient sales to recover
our expenses related to the development of a product program or to justify
continued marketing of a product.
If we fail to compete successfully with respect to acquisitions, joint venture
and other collaboration opportunities, we may be limited in our ability to
develop new products and to continue to expand our product pipeline.
Our competitors compete with us to attract organizations for acquisitions, joint
ventures, licensing arrangements or other collaborations. To date, several of
our product programs have been acquired through acquisitions, such as the
programs acquired from IBEX and Synapse, and several of our product programs
have been developed through licensing or collaborative arrangements, such as
Aldurazyme and Vibrilase. These collaborations include licensing proprietary
technology from, and other relationships with academic research institutions. If
our competitors successfully enter into partnering arrangements or licensing
agreements with academic research institutions, we will then be precluded from
pursuing those specific opportunities. Since each of these opportunities is
unique, we may not be able to find a substitute. Several pharmaceutical and
biotechnology companies have already established themselves in the field of
enzyme therapeutics, including Genzyme, our joint venture partner. These
companies have already begun many drug development programs, some of which may
target diseases that we are also targeting, and have already entered into
partnering and licensing arrangements with academic research institutions,
reducing the pool of available opportunities.
Universities and public and private research institutions are also competitors.
While these organizations primarily have educational or basic research
objectives, they may develop proprietary technology and acquire patents that we
may need for the development of our drug products. We will attempt to license
this proprietary technology, if available. These licenses may not be available
to us on acceptable terms, if at all. If we are unable to compete successfully
with respect to acquisitions, joint venture and other collaboration
opportunities, we may be limited in our ability to develop new products and to
continue to expand our product pipeline.
If we do not achieve our projected development goals in the time frames we
announce and expect, the commercialization of our products may be delayed and
the credibility of our management may be adversely affected and, as a result,
our stock price may decline.
For planning purposes, we estimate the timing of the accomplishment of various
scientific, clinical, regulatory and other product development goals, which we
sometimes refer to as milestones. These milestones may include the commencement
or completion of scientific studies or clinical trials and the submission of
regulatory filings. From time to time, we publicly announce the expected timing
of some of these milestones. All of these milestones are based on a variety of
assumptions. The actual timing of these milestones can vary dramatically
compared to our estimates, in many cases for reasons beyond our control. If we
do not meet these milestones as publicly announced, the commercialization of our
products may be delayed and the credibility of our management may be adversely
affected and, as a result, our stock price may decline.
If we fail to manage our growth or fail to recruit and retain personnel, our
product development programs may be delayed.
22
Our rapid growth has strained our managerial, operational, financial and other
resources. We expect this growth to continue. We have entered into a joint
venture with Genzyme. If we receive FDA and/or foreign government approval to
market Aldurazyme, the joint venture will be required to devote additional
resources to support the commercialization of Aldurazyme.
To manage expansion effectively, we need to continue to develop and improve our
research and development capabilities, manufacturing and quality capacities,
sales and marketing capabilities and financial and administrative systems. We
cannot guarantee that our staff, financial resources, systems, procedures or
controls will be adequate to support our operations or that our management will
be able to manage successfully future market opportunities or our relationships
with customers and other third parties.
Our future growth and success depend on our ability to recruit, retain, manage
and motivate our employees. The loss of key scientific, technical and managerial
personnel may delay or otherwise harm our product development programs. We
compete with other biotechnology and pharmaceutical companies, as well as
universities and other academic institutions for qualified personnel. Any harm
to our research and development programs would harm our business and prospects.
Because of the specialized scientific and managerial nature of our business, we
rely heavily on our ability to attract and retain qualified scientific,
technical and managerial personnel. In particular, the loss of Fredric D. Price,
our Chairman and Chief Executive Officer, or Emil D. Kakkis, M.D., Ph.D., our
Senior Vice President of Scientific Affairs or Christopher M. Starr, Ph.D., our
Senior Vice President for Research and Development, could be detrimental to us
if we cannot recruit suitable replacements in a timely manner. While Mr. Price,
Dr. Kakkis and Dr. Starr are parties to employment agreements with us, we cannot
guarantee that they will remain employed with us in the future. In addition,
these agreements do not restrict their ability to compete with us after their
employment is terminated. The competition for qualified personnel in the
biopharmaceutical field is intense. We cannot be certain that we will continue
to attract and retain qualified personnel necessary for the development of our
business.
Changes in methods of treatment of disease could reduce demand for our products.
Even if our drug products are approved, doctors must use treatments that require
using those products. If doctors elect a different course of treatment from that
which includes our drug products, this decision would reduce demand for our drug
products.
Examples include the potential use in the future of effective gene therapy for
the treatment of genetic diseases. The use of gene therapy could theoretically
reduce or eliminate the use of enzyme replacement therapy in MPS diseases.
Sometimes, this change in treatment method can be caused by the introduction of
other companies' products or the development of new technologies or surgical
procedures which may not directly compete with ours, but which have the effect
of changing how doctors decide to treat a disease. For example, Neutralase is
being developed for heparin reversal in CABG surgery. It is possible that
alternative non-surgical methods of treating heart disease could be developed.
If so, then the demand for Neutralase would likely decrease.
If product liability lawsuits are successfully brought against us, we may incur
substantial liabilities.
We are exposed to the potential product liability risks inherent in the testing,
manufacturing and marketing of human pharmaceuticals. The BioMarin/Genzyme LLC
maintains product liability insurance for our clinical trials of Aldurazyme,
with aggregate loss limits of $5.0 million. We have obtained insurance against
product liability lawsuits for the clinical trials for Aryplase and Vibrilase,
with aggregate loss limits of $8.0 million. Pharmaceutical companies must
balance the cost of insurance with the level of coverage based on estimates of
potential liability. Historically, the potential liability associated with
product liability lawsuits for pharmaceutical products has been unpredictable.
Although we believe that our current insurance is a reasonable estimate of our
potential liability and represents a commercially reasonable balancing of the
level of coverage as compared to the cost of the insurance, we may be subject to
claims in connection with our current clinical trials for Aldurazyme, Aryplase
and Vibrilase for which the joint venture's or our insurance coverages are not
adequate.
We cannot be certain that if Aldurazyme, Aryplase or Vibrilase receives FDA
approval, the product liability insurance the joint venture or we will need to
obtain in connection with the commercial sales of Aldurazyme, Aryplase or
Vibrilase will be available in meaningful amounts or at a reasonable cost. In
addition, we cannot be certain that we can successfully defend any product
liability lawsuit brought against us. If we are the subject of a successful
product liability claim that exceeds the limits of any insurance coverage we may
obtain, we may incur substantial liabilities that would adversely affect our
earnings and require the commitment of capital resources that might otherwise be
available for the development and commercialization of our product programs.
Our stock price may be volatile, and an investment in our stock could suffer a
decline in value.
23
Our valuation and stock price since the beginning of trading after our initial
public offering have had no meaningful relationship to current or historical
earnings, asset values, book value or many other criteria based on conventional
measures of stock value. The market price of our common stock will fluctuate due
to factors including:
o progress of Aldurazyme, Neutralase, Aryplase and our other lead drug
products through the regulatory process, especially regulatory actions
in the United States related to Aldurazyme;
o results of clinical trials, announcements of technological innovations
or new products by us or our competitors;
o government regulatory action affecting our drug products or our
competitors' drug products in both the United States and foreign
countries;
o developments or disputes concerning patent or proprietary rights;
o general market conditions and fluctuations for the emerging growth and
biopharmaceutical market sectors;
o economic conditions in the United States or abroad;
o actual or anticipated fluctuations in our operating results;
o broad market fluctuations in the United States or in Europe, which may
cause the market price of our common stock to fluctuate; and
o changes in company assessments or financial estimates by securities
analysts
In addition, the value of our common stock may fluctuate because it is listed on
both the Nasdaq National Market and the Swiss Exchange's SWX New Market. Listing
on both exchanges may increase stock price volatility due to:
o trading in different time zones;
o different ability to buy or sell our stock;
o different market conditions in different capital markets; and
o different trading volume.
In the past, following periods of large price declines in the public market
price of a company's securities, securities class action litigation has often
been initiated against that company. Litigation of this type could result in
substantial costs and diversion of management's attention and resources, which
would hurt our business. Any adverse determination in litigation could also
subject us to significant liabilities.
If our officers, directors and largest stockholder elect to act together, they
may be able to control our management and operations, acting in their best
interests and not necessarily those of other stockholders.
Our directors and officers control approximately 28% of the outstanding shares
of our common stock. Glyko Biomedical Ltd. owns approximately 21.3% of the
outstanding shares of our capital stock. The president and chief executive
officer of Glyko Biomedical and a significant shareholder of Glyko Biomedical
serve as two of our directors. As a result, due to their concentration of stock
ownership, directors and officers, if they act together, may be able to control
our management and operations, and may be able to prevail on all matters
requiring a stockholder vote including:
o The election of all directors;
o The amendment of charter documents or the approval of a merger, sale of
assets or other major corporate transactions; and
o The defeat of any non-negotiated takeover attempt that might otherwise
benefit the public stockholders.
24
Anti-takeover provisions in our charter documents and under Delaware law may
make an acquisition of us, which may be beneficial to our stockholders, more
difficult.
We are incorporated in Delaware. Certain anti-takeover provisions of Delaware
law and our charter documents as currently in effect may make a change in
control of our company more difficult, even if a change in control would be
beneficial to the stockholders. Our anti-takeover provisions include provisions
in the certificate of incorporation providing that stockholders' meetings may
only be called by the board of directors and a provision in the bylaws providing
that the stockholders may not take action by written consent. Additionally, our
board of directors has the authority to issue 1,000,000 shares of preferred
stock and to determine the terms of those shares of stock without any further
action by the stockholders. The rights of holders of our common stock are
subject to the rights of the holders of any preferred stock that may be issued.
The issuance of preferred stock could make it more difficult for a third party
to acquire a majority of our outstanding voting stock. Delaware law also
prohibits corporations from engaging in a business combination with any holders
of 15% or more of their capital stock until the holder has held the stock for
three years unless, among other possibilities, the board of directors approves
the transaction. Our board of directors may use these provisions to prevent
changes in the management and control of our company. Also, under applicable
Delaware law, our board of directors may adopt additional anti-takeover measures
in the future.
Item 3. Quantitative and Qualitative Disclosure about Market Risk.
Our exposure to market risk for changes in interest rates relates primarily to
our investment portfolio. By policy, we place our investments with highly rated
credit issuers and limit the amount of credit exposure to any one issuer. As
stated in our policy, we seek to improve the safety and likelihood of
preservation of our invested funds by limiting default risk and market risk. We
have no investments denominated in foreign country currencies and therefore are
not subject to foreign exchange risk.
We mitigate default risk by investing in high credit quality securities and by
positioning our portfolio to respond appropriately to a significant reduction in
a credit rating of any investment issuer or guarantor. The portfolio includes
only marketable securities with active secondary or resale markets to ensure
portfolio liquidity.
Based on our investment portfolio and interest rates at March 31, 2001, we
believe that a 100 basis point increase or decrease in interest rates would
result in an increase or decrease or increase of approximately $1.1 million,
respectively, in the fair value of the investment portfolio. Changes in interest
rates may affect the fair value of the investment portfolio; however, we will
not recognize such gains or losses unless the investments are sold. Moreover,
such gains or losses have historically been immaterial, because we have
generally held the majority of such investments to maturity, a practice we
currently intend to continue.
The table below presents the carrying value for our investment portfolio. The
carrying value approximates fair value at March 31, 2002.
Investment portfolio:
Carrying value
(in $ thousands)
Cash and cash equivalents......................... $ 18,202
Short-term investments............................ 96,596*
-----------
Total.......................................... $114,798
*33% invested in a bond mutual fund, 4% in corporate bonds, 47% in callable and
non-callable Federal agencies, and 16% in money market funds.
25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. None.
Item 2. Changes in Securities and Uses of Proceeds.
BioMarin issued 885,240 shares of its Common Stock to the former shareholders of
Synapse Technologies Inc. in order to acquire the outstanding shares of Synapse
Technologies. The shares were issued effective as of March 21, 2002, the closing
date of BioMarin's acquisition of Synapse Technologies. These shares were issued
without registration in reliance upon an exemption under Section 3(a)(10) of the
Securities Act of 1933, as amended, after a fairness hearing by the Supreme
Court of British Columbia
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
- -------------- -----------------------------------------------------------------
EXHIBIT DESCRIPTION OF DOCUMENT
NUMBER
- -------------- -----------------------------------------------------------------
- -------------- -----------------------------------------------------------------
2.1 Acquisition Agreement for a Plan of Arrangement by and among the
Company, BioMarin Acquisition (Nova Scotia) Company, and Glyko
Biomedical Ltd., dated February 6, 2002, previously filed with
the Commission on April 1, 2002 as Exhibit 2.5 to the Company's
Annual Report on Form 10-K, which is incorporated herein by
reference.
- -------------- -----------------------------------------------------------------
- -------------- -----------------------------------------------------------------
10.1 Second Amended and Restated Agreement for Plan of Arrangement by
and among the Company, BioMarin Delivery Canada Inc. and Synapse
Technologies Inc., dated February 4, 2002, previously filed with
the Commission on April 1, 2002 as Exhibit 10.26 to the Company's
Annual Report on Form 10-K, which is incorporated herein by
reference.
- -------------- -----------------------------------------------------------------
- -------------- -----------------------------------------------------------------
10.2 Amendment to BioMarin Pharmaceutical Inc. 1997 Stock Plan, as
amended, as adopted March 20, 2002, previously filed with the
Commission on March 21, 2002 as Exhibit 99.1 to the Company's
Current Repot on Form 8-K, which is incorporated herein by
reference.
- -------------- -----------------------------------------------------------------
(b) Reports on Form 8-K.
On January 7, 2002, we filed a Current Report on Form 8-K regarding the
announcement of various changes to our senior management and the appointment of
Dr. Phyllis Gardner, MD to our board of directors.
On November January 14, 2002, we filed an amended and restated Current Report on
Form 8-K/A regarding the completion of our acquisition of the rights to all of
the pharmaceutical assets of IBEX Technologies Inc. This Current Report amended
and restated a Current Report on Form 8-K that originally filed on November 2,
2001, as subsequently amended and restated on November 14, 2001.
On January 15, 2002, we filed a Current Report on Form 8-K regarding the
announcement that we reached a definitive agreement to acquire Synapse
Technologies Inc.
On February 7, 2002, we filed a Current Report on Form 8-K regarding the
announcement that we reached a definitive agreement to acquire all of the
outstanding shares of Glyko Biomedical Ltd.
26
On February 26, 2002, we filed a Current Report on Form 8-K regarding the
announcement our financial results for the fourth quarter and the full year
ended December 31, 2001.
On March 21, 2002, we filed a Current Report on Form 8-K regarding the
announcement of an amendment to our 1997 Stock Plan (as amended on December 22,
1998).
27
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 14, 2002 By: /s/ Fredric D. Price
-------------------- --------------------
Fredric D. Price, Chairman and Chief
Executive Officer (on behalf of the
Registrant
Dated: May 14, 2002 By: /s/ Kim R. Tsuchimoto
-------------------- ---------------------
Vice President, Controller (principal
accounting officer)
28
Exhibit Index
- -------------- -----------------------------------------------------------------
EXHIBIT DESCRIPTION OF DOCUMENT
NUMBER
- -------------- -----------------------------------------------------------------
- -------------- -----------------------------------------------------------------
2.1 Acquisition Agreement for a Plan of Arrangement by and among the
Company, BioMarin Acquisition (Nova Scotia) Company, and Glyko
Biomedical Ltd., dated February 6, 2002, previously filed with
the Commission on April 1, 2002 as Exhibit 2.5 to the Company's
Annual Report on Form 10-K, which is incorporated herein by
reference.
- -------------- -----------------------------------------------------------------
- -------------- -----------------------------------------------------------------
10.1 Second Amended and Restated Agreement for Plan of Arrangement by
and among the Company, BioMarin Delivery Canada Inc. and Synapse
Technologies Inc., dated February 4, 2002, previously filed with
the Commission on April 1, 2002 as Exhibit 10.26 to the Company's
Annual Report on Form 10-K, which is incorporated herein by
reference.
- -------------- -----------------------------------------------------------------
- -------------- -----------------------------------------------------------------
10.2 Amendment to BioMarin Pharmaceutical Inc. 1997 Stock Plan, as
amended, as adopted March 20, 2002, previously filed with the
Commission on March 21, 2002 as Exhibit 99.1 to the Company's
Current Repot on Form 8-K, which is incorporated herein by
reference.
- -------------- -----------------------------------------------------------------
29