United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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: 53,424,129 shares common
stock, par value $0.001, outstanding as of August 1, 2002.
BIOMARIN PHARMACEUTICAL INC.
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited).
Consolidated Balance Sheets.........................................2
Consolidated Statements of Operations...............................3
Consolidated Statements of Cash Flows...............................5
Notes to Consolidated Financial Statements..........................6
Item 2. Management's Discussion and Analysis.........................9
Item 3. Quantitative and Qualitative Disclosure
about Market Risk...........................................27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...........................................28
Item 2. Changes in Securities and Uses of Proceeds..................28
Item 3. Defaults upon Senior Securities.............................28
Item 4. Submission of Matters to a Vote of Security Holders.........28
Item 5. Other Information...........................................28
Item 6. Exhibits and Reports on Form 8-K............................28
SIGNATURE.....................................................................30
Item 1. Financial Statements
BioMarin Pharmaceutical Inc. and Subsidiaries
(a development-stage company)
Consolidated Balance Sheets
(In thousands, except for share and per share data)
December 31, June 30,
2001 2002
------------------------ ------------------------
------------------------ ------------------------
Assets (unaudited)
Current assets:
Cash and cash equivalents $ 12,528 $ 19,363
Short-term investments 118,569 81,195
Due from BioMarin/Genzyme LLC 3,096 2,135
Current assets of discontinued operations of Glyko, Inc. 668 687
Other current assets 1,922 2,175
----------------------- -----------------------
Total current assets 136,783 105,555
Property and equipment, net 32,560 32,704
Investment in BioMarin/Genzyme LLC 1,145 2,356
Other non-current assets 1,323 1,358
------------------------ ------------------------
Total assets $ 171,811 $ 141,973
======================== ========================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 4,284 $ 2,014
Accrued liabilities 2,198 3,348
Current liabilities of discontinued operations of Glyko, Inc. 229 158
Other current liabilities 1,591 2,211
------------------------ ----------------------
Total current liabilities 8,302 7,731
Long-term liabilities 3,961 3,463
------------------------ -----------------------
Total liabilities 12,263 11,194
------------------------ -----------------------
Stockholders' equity:
Common stock, $0.001 par value: 75,000,000
shares authorized, 52,402,535 and 53,424,129
shares issued and outstanding December 31,
2001 and June 30, 2002, respectively 52 53
Additional paid-in capital 305,230 316,813
Warrants 5,134 5,219
Deferred compensation (699) (281)
Notes receivable from stockholders (2,037) (2,108)
Accumulated other comprehensive income (13) 216
Deficit accumulated during the development stage (148,119) (189,133)
------------------------ -----------------------
Total stockholders' equity 159,548 130,779
Total liabilities and stockholders' equity ------------------------ -----------------------
$ 171,811 $ 141,973
======================== =======================
The accompanying notes are an integral part of these statements.
2
BioMarin Pharmaceutical Inc. and Subsidiaries
(a development-stage company)
Consolidated Statements of Operations
For the Three Months Ended June 30, 2001 and 2002
(In thousands, except per share data, unaudited)
Three Months Ended June 30,
--------------------------------------------------
2001 2002
----------------------- ------------------------
Revenues:
Revenues from BioMarin/Genzyme LLC $ 2,852 $ 3,423
Revenues - other 160 -
----------------------- ------------------------
Total revenues 3,012 3,423
----------------------- ------------------------
Operating Costs and Expenses:
Research and development 11,506 13,336
General and administrative 1,536 3,062
---------------------- -----------------------
Total operating costs and expenses 13,042 16,398
----------------------- ------------------------
Loss from operations (10,030) (12,975)
Interest income 436 1,024
Interest expense (1) (161)
Loss from BioMarin/Genzyme LLC (1,736) (2,461)
----------------------- ------------------------
Net loss from continuing operations (11,331) (14,573)
Income (loss) from discontinued operations (638) 172
Loss from disposal of discontinued operations - (10)
----------------------- ------------------------
Net loss $ (11,969) $ (14,411)
======================= ========================
Net loss per share, basic and diluted:
Loss from continuing operations $ (0.28) $ (0.27)
Loss from discontinued operations (0.02) -
----------------------- ------------------------
Net loss $ (0.30) $ (0.27)
======================= ========================
Weighted average common shares outstanding 39,587 53,407
======================= ========================
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 Six Months Ended June 30, 2001 and 2002 and
for the Period from March 21, 1997 (Inception) to June 30, 2002
(In thousands, except per share data, unaudited)
Period from March 21,
Six Months Ended June 30, 1997 (Inception) to
------------------------------------------ June 30, 2002
2001 2002
-------------------- ------------------ -----------------------
Revenues:
Revenues from BioMarin/Genzyme LLC $ 5,542 $ 7,215 $ 34,413
Revenues - other 160 - 369
-------------------- ------------------ -----------------------
Total revenues 5,702 7,215 34,782
-------------------- ------------------ -----------------------
Operating Costs and Expenses:
Research and development 21,163 26,554 144,837
General and administrative 3,010 6,988 29,032
In-process research and development - 11,223 22,870
Facility closure - - 4,423
-------------------- ------------------ -----------------------
Total operating costs and expenses 24,173 44,765 201,162
-------------------- ------------------ -----------------------
Loss from operations (18,471) (37,550) (166,380)
Interest income 904 1,404 8,836
Interest expense (3) (252) (1,008)
Loss from BioMarin/Genzyme LLC (2,844) (4,759) (16,724)
-------------------- ------------------ -----------------------
Net loss from continuing operations (20,414) (41,157) (175,276)
Income (loss) from discontinued operations (1,255) 294 (5,794)
Loss from disposal of discontinued operations - (151) (8,063)
-------------------- ------------------ -----------------------
Net loss $ (21,669) $ (41,014) $ (189,133)
==================== ================== =======================
Net loss per share, basic and diluted:
Net loss from continuing operations $ (0.54) $ (0.78) $ (5.72)
Loss from discontinued operations (0.03) (0.01) (0.19)
Loss on disposal of discontinued operations - - (0.26)
-------------------- ------------------ -----------------------
Net loss $ (0.57) $ (0.77) $ (6.17)
==================== ================== =======================
Weighted average common shares outstanding 38,313 52,973 30,669
==================== ================== =======================
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 Six Months Ended June 30, 2001 and 2002 and
for the Period from March 21, 1997 (Inception) to June 30, 2002
(In thousands, unaudited)
Period from March 21,
Six Months Ended June 30, 1997 (Inception) to
---------------------------------------- June 30, 2002
2001 2002
------------------ ------------------ -------------------
Cash flows from operating activities:
Net loss from continuing operations $ (20,414) $ (41,157) $ (175,276)
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 2,444 3,821 18,728
Amortization of deferred compensation 418 418 4,179
Loss from BioMarin/Genzyme LLC 8,386 12,057 50,221
Other non-cash compensation - 206 206
Changes in operating assets and liabilities:
Other current assets 862 2,769 (1,593)
Notes receivable from officers (867) (350) (1,239)
Deposits - - (434)
Accounts payable (1,676) (2,498) 1,885
Accrued liabilities 132 1,150 3,669
------------------ ------------------ -------------------
Net cash used in continuing operations (10,715) (13,298) (73,930)
Net cash provided by (used in) discontinued operations (536) 53 802
------------------ ------------------ -------------------
Net cash used in operating activities (11,251) (13,245) (73,128)
------------------ ------------------ -------------------
Cash flows from investing activities:
Purchase of property and equipment (4,650) (3,858) (54,909)
Purchase of Synapse Technologies, Inc. - (1,028) (1,028)
Investment in BioMarin/Genzyme LLC (8,657) (13,268) (52,577)
Purchase of IBEX therapeutic assets - - (3,032)
(Purchase) sale of short-term investments (17,247) 37,632 (80,937)
------------------ ------------------ -------------------
Net cash provided by (used in) continuing operations (30,554) 19,478 (192,483)
Net cash used in discontinued operations - - (1,663)
------------------ ------------------ -------------------
Net cash provided by (used in) investing activities (30,554) 19,478 (194,146)
------------------ ------------------ -------------------
Cash flow from financing activities:
Proceeds from sale of common stock, net 43,586 - 232,823
Proceeds from issuance of convertible notes - - 25,615
Net proceeds from Acqua Wellington agreement - - 13,163
Proceeds from exercise of stock options and warrants 512 487 8,182
Net proceeds from notes payable - 894 6,533
Repayment of notes payable (14) (865) (1,115)
Repayment of capital lease obligations - (34) (77)
Receipts from notes receivable from stockholders - - 804
Issuance of common stock for ESPP and other 158 149 751
------------------ ------------------ -------------------
Net cash provided by financing activities 44,242 631 286,679
------------------ ------------------ -------------------
Effect of foreign currency translation on cash - (29) (42)
Net increase in cash 2,437 6,835 19,363
Cash and cash equivalents:
Beginning of period 16,530 12,528 -
------------------ ------------------ -------------------
End of period $ 18,967 $ 19,363 $ 19,363
================== ================== ===================
The accompanying notes are an integral part of these statements.
5
BIOMARIN PHARMACEUTICAL INC. AND SUBSIDIARIES
(a development-stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION:
BioMarin Pharmaceutical Inc. (the Company) is a biopharmaceutical company
specializing in the development of enzyme therapies to treat serious
life-threatening diseases. 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 in 1996 in the state of Delaware and began business
on March 21, 1997 (inception) as a wholly-owned subsidiary of Glyko Biomedical
Ltd. (GBL). 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% at June 30, 2002.
In December 2001, the Company decided to close the business of Glyko, Inc., a
wholly-owned subsidiary. 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 results of Glyko,
Inc.'s operations are included in the accompanying consolidated statements of
operations as income (loss) from discontinued operations. Glyko, Inc.'s gross
revenues for the six months ended June 30, 2002 and 2001 and for the period from
March 21, 1997 (inception) through June 30, 2002, were $1.8 million, $1.4
million and $9.2 million, respectively.
Through June 30, 2002, the Company had accumulated losses during its development
stage of approximately $189.1 million. Based on current plans, management
expects to incur further losses for the foreseeable future. Management believes
that the Company's cash, cash equivalents and short-term investments at June 30,
2002 will be sufficient to meet the Company's obligations through the end of
2003. Until the Company can generate sufficient levels of cash from its
operations, the Company expects to continue to finance future cash needs through
the sale of equity securities, equipment-based financing, and collaborative
agreements with corporate partners.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information on substantially the same basis as the annual audited
financial statements. However, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
of normal recurring adjustments, considered necessary for a fair presentation
have been included.
Operating results for the six-month period ended June 30, 2002 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002. These consolidated financial statements should be read in
conjunction with the 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.
6
Cash and Cash Equivalents
For the consolidated statements of cash flows, the Company treats liquid
investments with original maturities of less than three months when purchased as
cash and cash equivalents.
Short-Term Investments
The Company records its investments as either held-to-maturity or
available-for-sale. The investments the Company records as held-to-maturity are
recorded at amortized cost at June 30, 2002. The investments the Company records
as available-for-sale are recorded at fair market value at June 30, 2002 with
unrealized gains or losses being included in accumulated other comprehensive
income. Short-term investments are comprised mainly Federal agency investments,
bond mutual funds and corporate bonds.
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.
Other Assets
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), bears interest at
the Federal mid-term rate and is included in other non-current assets in the
accompanying consolidated financial statements.
In February 2002, the Company loaned another officer $300,000 to purchase a
residence and received a promissory note secured by the officer's unencumbered
shares of the Company owned by the officer. The note is full-recourse, matures
on October 31, 2002, bears interest at the Federal short-term rate and is
included in other current assets in the accompanying consolidated financial
statements.
Property and Equipment
Property 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.
Property and equipment consisted of the following (in thousands):
December 31, June 30,
2001 2002
------------------ ----------------
Computer hardware and software $ 1,532 $ 2,156
Office furniture and equipment 1,557 1,672
Manufacturing and laboratory equipment 11,769 12,150
Leasehold improvements 30,886 33,732
Construction in progress 1,064 1,064
------------------ ----------------
46,808 50,774
Less: Accumulated depreciation (14,248) (18,070)
------------------ ----------------
Total, net $ 32,560 $ 32,704
================== ================
7
Stockholders' Equity
The notes from stockholders included in stockholders' equity are currently due.
The Company does not believe there will be any problems collecting on the notes.
Accumulated other comprehensive income as at December 31, 2001 and June 30, 2002
includes foreign currency translation adjustments associated with the Company's
Canadian operations and unrealized gains and losses on short-term investments
classified as available-for-sale.
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 and regulatory activities), and
internal research and development activities. All research and development
expenses are expensed as incurred.
Net Loss per Share
Potentially dilutive securities outstanding at June 30, 2002 and 2001 include
options and warrants for the purchase of 8,533,229 and 6,771,911 shares of
common stock, respectively. These securities were not considered in the
computation of dilutive loss per share because their effect would be
anti-dilutive for the three months and the six months ended June 30, 2002 and
2001.
Recent Accounting Pronouncements
On January 1, 2002, the Company adopted SFAS No. 141 "Business Combinations" and
SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets".
Adoption of these pronouncements did not have a material impact on the Company's
net loss.
On January 1, 2002, the Company also adopted SFAS 142 "Goodwill and Intangible
Assets" (SFAS 142). If the Company adopted SFAS 142 on January 1, 2001, there
would be no change to net loss from continuing operations. The Company's net
loss and net loss per share for the three months and the six months ended June
30, 2001 would have been $11,478,000, $20,688,000, $0.29 and $0.54,
respectively.
3. NOTE PAYABLE:
In May 2002, the Company entered into an agreement with General Electric Capital
Corporation for a secured loan totaling $0.9 million. The note bears interest at
9.33% per annum and is secured by certain manufacturing and laboratory
equipment. Additionally, the agreement requires the Company 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%.
4. DEFINITIVE AGREEMENT WITH GLYKO BIOMEDICAL, LTD. (GBL):
In February 2002, the Company signed a definitive agreement with Glyko
Biomedical Ltd. (GBL) whereby the Company would purchase (subject to shareholder
and regulatory approval) all of GBL's outstanding capital stock in exchange for
approximately 11.4 million shares of freely tradable common stock of BioMarin.
The proposed purchase, including the issuance of the 11.4 million freely
tradable shares, will be voted upon by the Company's stockholders on August 13,
2002. The proposed purchase will be voted upon by GBL shareholders on August 15,
2002. There will be no dilution to common stock as upon closing of the
transaction, the Company plans to retire the 11.4 million restricted shares
currently held by GBL in exchange for BioMarin preferred stock. The Company has
incurred approximately $1.1 million and $0.4 million of costs associated with
this proposed transition in 2002 and 2001, respectively.
5. SUBSEQUENT EVENTS:
In July 2002, the Company signed an agreement with an unrelated third party for
the manufacturing of Neutralase. In 2002 and 2003, total expenditures related to
this agreement are expected to be less than $6.0 million.
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
Mucopolysaccharidosis I (MPS I), Mucopolysaccharidosis VI (MPS VI) and
Phenylketonuria (PKU), as well as other critical care situations such as
cardiovascular surgery and serious burns. Our product candidates address markets
for which no products are currently available or where current products have
been associated with major deficiencies. 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 MPS I disease.
We are developing another product candidate, Neutralase(TM), for reversal of
anticoagulation by heparin in patients undergoing Coronary Artery Bypass Graft,
or CABG, surgery and angioplasty. 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 AryplaseTM 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.
Recent Developments
On July 31, 2002, we announced that the U.S. Patent and Trademark Office has
issued U.S. Patent No. 6,426,208 covering Aldurazyme for the treatment of MPS I.
Aldurazyme is a specific form of purified recombinant human alpha-L-iduronidase
that is being developed as an investigational enzyme replacement therapy for MPS
I, a life-threatening genetic disease for which no specific drug treatments
currently exist. The patent claims unique characteristics of the pharmaceutical
composition of Aldurazyme, including, but not limited to, the purity of
alpha-L-iduronidase in the final formulation. This patent, which protects a
highly purified form of alpha-L-iduronidase, supports the intellectual property
position for using Aldurazyme to treat MPS I.
9
On July 29, 2002, we announced that together with our joint venture partner,
Genzyme, we submitted the final portion of our "rolling" Biologics License
Application (BLA) for Aldurazyme to the U.S. Food and Drug Administration (FDA).
The filing commenced on April 15, 2002, as previously announced. The final
portion of the BLA includes clinical data from the six-month, placebo-controlled
Phase 3 trial of Aldurazyme, six months of data from the ongoing open-label
Phase 3 extension study, and three years of data from the Phase 1 trial and
extension study. As part of the BLA submission, Genzyme and we have formally
requested Priority Review. 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 June 25, 2002, we announced that the principal investigator from the Phase 1
clinical trial of Aryplase for MPS VI presented positive findings from the
trial's extension study that indicate Aryplase continues to be well-tolerated at
both dose levels by the five patients who have received treatment for a total of
48 weeks. In addition, the patients receiving the 1.0 mg/kg dose continued to
produce a greater sustained reduction than the patients receiving the 0.2 mg/kg
dose in the excretion of urinary glycosaminoglycans (GAGs) over 48 weeks. The
reduction in urinary GAGs indicates that Aryplase is breaking down the complex
carbohydrate materials that otherwise accumulate in patients with MPS VI and
lead to the debilitating and life-threatening symptoms of the disease.
On June 14, 2002, we announced that investigators from the Phase 3 clinical
trial of Aldurazyme for MPS I presented detailed results from the double-blind
portion of the trial and preliminary six-month findings from the trial's ongoing
open-label extension study. Data from the extension study indicate patients who
received Aldurazyme for twelve months continued to improve upon the results seen
in the first six months of treatment.
On May 15, 2002, we announced that we commenced preclinical studies of
NeuroTrans and initiated key steps to continue building the technology's
intellectual property position. NeuroTrans is the proprietary brain delivery
technology that we are developing to treat neurological problems associated with
many lysosomal storage disorders.
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 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.
Results of Operations
In December 2001, we decided to close the carbohydrate analytical business of
our wholly owned subsidiary, Glyko, Inc. The decision to close Glyko, Inc. has
resulted in the operations of Glyko, Inc. being classified as discontinued
operations in our consolidated financial statements and, accordingly, we have
segregated the assets and liabilities of the discontinued operations in our
consolidated balance sheets. In addition, we have segregated the operating
results in our consolidated statements of operations and have segregated cash
flows from discontinued operations in our consolidated statements of cash flows.
Glyko operations ceased on July 31, 2002.
Quarters Ended June 30, 2002 and 2001
For the quarters ended June 30, 2002 and 2001, revenues were $3.4 million and
$3.0 million, respectively, which came primarily from our joint venture with
Genzyme. The increase in joint venture revenues in the second quarter of 2002
compared to the same period in 2001 was caused by increased manufacturing
activities for qualification lots used for the new manufacturing process
developed to maximize output of the plant of $0.9 million offset by decreased
clinical efforts of $0.2 million and a reduction in process development
activities of $0.3 million.
10
Research and development expenses increased to $13.3 million in the second
quarter of 2002 from $11.5 million in comparable period of 2001. The major
factors in the growth of research and development expenses include $1.0 million
of increased expenses for the Aldurazyme joint venture with Genzyme, especially
in manufacturing, and $1.4 million 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 NeuroTrans, offset by an $0.8
million decrease for manufacturing and clinical requirements of Aryplase. 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 $3.1 million in the second
quarter of 2002 from $1.5 million in the comparable period of 2001. This
increase was primarily due to $0.3 million of costs incurred for legal and other
fees associated with the potential acquisition of all of the outstanding capital
stock of Glyko Biomedical Ltd. (in exchange for our common stock) , increased
staffing in finance, business development, human resources, and purchasing of
$0.8 million, expenses related to the implementation of an improved financial
reporting and budgeting software system of $0.5 million, and an increase in rent
expense of $0.2 million, partially offset by several small decreases in
administrative costs.
Interest income increased by $0.6 million to $1.0 million in the second quarter
of 2002 from $0.4 million in the second quarter of 2001 primarily due to higher
cash balances resulting from financing activities.
Interest expense for the second quarter of 2002 was $0.2 million and $1,000 in
the comparable period of 2001. The increase was due to equipment loans executed
for $5.5 million in December 2001 and $0.9 million in May 2002.
Our equity in the loss of our joint venture with Genzyme was $2.5 million for
the second quarter of 2002 compared to $1.7 million for the second quarter of
2001, as the joint venture continued extension studies of the Phase 1 and the
Phase 3 clinical trials of Aldurazyme and began filing a BLA with the FDA.
Net loss from continuing operations was $14.6 million ($0.27 per share, basic
and diluted) and $11.3 million ($0.28 per share, basic and diluted) for the
second quarter of 2002 and 2001, respectively.
Income (loss) from discontinued operations was $0.2 million in the second
quarter of 2002 and ($0.6 million) in the comparable period of 2001. The
increase to income in the second quarter of 2002 was due to an increase in sales
to customers in anticipation of the sale or discontinuance of the analytics
business of Glyko, Inc.
Loss from disposal of discontinued operations represents the Glyko, Inc. closure
expense of $10,000 in the second quarter of 2002 consisting primarily of legal
fees incurred in connection with the sale or discontinuance of the analytics
business of Glyko, Inc.
Net loss was $14.4 million ($0.27 per share, basic and diluted) and $12.0
million ($0.30 per share, basic and diluted) for the second quarters of 2002 and
2001, respectively.
Six Months Ended June 30, 2002 and 2001
Revenues for the first half of 2002 totaled $7.2 million compared to revenues of
$5.7 million in the first half of 2001. Revenues came primarily from our joint
venture with Genzyme. The increase in joint venture revenues in the second half
of 2002 compared to the same period in 2001 was primarily caused by increased
manufacturing activities in support of our Phase 1 and Phase 3 extension studies
of $2.1 million, partially offset by decreased clinical efforts of $0.2 million
and a reduction in process development activities of $0.4 million.
Research and development expenses for the first half of 2002 increased by $5.4
million to $26.6 million from $21.2 million in the first half of 2001. The major
factors in the growth of research and development expenses include $3.0 million
of increased expenses for the Aldurazyme joint venture with Genzyme, especially
manufacturing, regulatory and clinical requirements and $1.8 million 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 NeuroTrans. We anticipate research and development expenditures to
continue to increase in the future in order to further develop our drug product
candidates.
11
General and administrative expenses increased to $7.0 million in the first half
of 2002 from $3.0 million in the first half of 2001. The significant factors
causing the increase in general and administrative costs were costs incurred in
2002 for legal and other fees associated with the potential acquisition of all
of the outstanding capital stock of Glyko Biomedical Ltd. by us of $1.1 million
(in exchange for our common stock), increased staffing in finance, business
development, human resources and purchasing of $1.0 million, expenses related to
the implementation of an improved financial reporting and budgeting software
system of $0.7 million, and increase in employer matching of our 401(k) plan of
$0.2 million and an increase in rent expense of $0.2 million.
In-process research and development totaling $11.2 million represents the
majority of the 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 development activities and
preclinical data on NeuroTrans, a technology that may allow drugs to cross the
blood brain barrier, for $10.2 million of 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 includes up to Cdn. $8 million (which equaled approximately U.S. $5.0
million as of August 1, 2002) in contingency payments upon certain regulatory
and licensing milestones if they occur before March 21, 2012.
Interest income was $1.4 million for the first half of 2002 compared to $0.9
million for the same period of 2001. The increase is primarily due to higher
cash balances resulting from financing activities.
Interest expense for the first half of 2002 was $0.3 million and $3,000 in the
comparable period of 2001. The increase was due to equipment loans executed for
$5.5 million in December 2001 and $0.9 million in May 2002.
Our equity in the loss of our joint venture with Genzyme was $4.8 million for
the first half of 2002 compared to $2.8 million for the same period of 2001. The
increase is due to continued extension studies of the Phase 1 and the Phase 3
clinical trials of Aldurazyme, the commencement of the filing of the BLA with
the FDA and the filing of the MAA in Europe.
Net loss from continuing operations was $41.2 million ($0.78 per share, basic
and diluted) and $20.4 million ($0.54 per share, basic and diluted) for the
second half of 2002 and 2001, respectively.
Income (loss) from discontinued operations was $0.3 million in the second
quarter of 2002 and ($1.3 million) in the comparable period of 2001. The
increase to income in the second half of 2002 was due to an increase in sales to
customers in anticipation of the sale or discontinuance of the analytics
business and a decrease in general and administrative expenses as a result of
the closure of Glyko, Inc.
Loss from disposal of discontinued operations represents the Glyko, Inc. closure
expense of $0.2 million in the second half of 2002 consisting primarily of
accrued severance to personnel who did not become our employees and marketing
and legal and investment banking fees incurred in connection with the sale or
discontinuance of the analytics business of Glyko, Inc.
Net loss was $41.0 million ($0.77 per share, basic and diluted) in the first
half of 2002 compared to a net loss of $21.7 million ($0.57 per share, basic and
diluted) in the comparable period of 2001.
Liquidity and Capital Resources
We have financed our operations since our inception by the issuance of common
stock and convertible notes, equipment financing and the related interest income
earned on cash balances available for short-term investment. Since inception, we
have raised aggregate net proceeds of approximately $286.7 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.
12
As of June 30, 2002 our combined cash, cash equivalents and short-term
investments totaled $100.6 million, a decrease of $30.5 million from $131.1
million at December 31, 2001. The primary uses of cash during the six months
ended June 30, 2002 were to finance operations, fund the joint venture with
Genzyme, purchase leasehold improvements and equipment and expenses associated
with the purchase of Synapse and the pending acquisition of Glyko Biomedical
Ltd. (primarily legal fees). The primary sources of cash during the six months
were proceeds from equipment financing, proceeds from the issuance of common
stock pursuant to the exercise of stock options under the 1997 Stock Plan and
proceeds from the Employee Stock Purchase Plan.
From our inception through June 30, 2002, we have purchased approximately $54.9
million of leasehold improvements and equipment.
As of June 30, 2002, our total research and development expenses since inception
were $144.8 million which was allocated $71.7 million to Aldurazyme, $1.5
million to Neutralase, $16.1 million to Aryplase, $6.8 million to Vibrilase and
$48.7 million to research and development costs not allocated to specific
projects or related to projects that have been abandoned.
For the six months ended June 30, 2002, our research and development expense of
$26.6 million was allocated $14.4 million to Aldurazyme, $1.3 million to
Neutralase, $3.3 million to Aryplase, $0.6 million to Vibrilase and $7.0 million
to research and development cost not allocated to specific projects.
For the quarter ended June 30, 2002, our research and development expense of
$13.3 million was allocated $6.7 million to Aldurazyme, $0.9 million to
Neutralase, $1.2 million to Aryplase, $0.2 million to Vibrilase and $4.3 million
to research and development cost not allocated to specific projects.
We expect to fund our operations with our cash, cash equivalents and short-term
investments. For all of 2002, we expect to expend approximately $60 million for
operations and capital expenditures. We expect our current funds to last through
2003.
We do not expect to generate positive cash flow from operations at least until
2004 because we expect to increase operational expenses 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 to fund our operations through the expenditure of our current cash,
cash equivalents and short-term investments and supplement our cash, cash
equivalents and short-term investments through: the sale of equity securities;
equipment-based financing; and collaborative agreements with corporate partners.
We expect that the net proceeds from any sales of our common stock, equipment
financing or collaborative agreements will be used to fund operating costs,
capital expenditures and working capital requirements, which may include costs
associated with our lead clinical programs including Aldurazyme for MPS I,
Neutralase for heparin reversal, Aryplase for MPS VI and Vibrilase for burn
wounds. In addition, net proceeds may also be used for research and development
of other pipeline products, building of our supporting infrastructure, and other
general corporate purposes.
There are three current arrangements that may provide us with additional sources
of financing in the future:
o In September 1998, we established a joint venture with Genzyme for the
worldwide development and commercialization of Aldurazyme for the
treatment of MPS I. We share expenses and profits from the joint
venture equally with Genzyme. Genzyme has committed to pay us an
additional $12.1 million upon approval of the BLA for Aldurazyme. We
anticipate a response from the FDA in the first half of 2003 regarding
our recently filed "rolling" BLA for Aldurazyme.
13
o In August 2001, we signed an agreement with Acqua Wellington North
American Equities Fund Ltd. (Acqua Wellington) for an equity investment
in us. The agreement allows for the purchase of up to $27.7 million of
our common stock. Under the terms of the agreement, we will have the
option to request that Acqua Wellington invest in us through sales of
registered common stock at a small discount to market price. The
maximum amount that we may request to be bought in any one month is
dependent upon the market price of our stock (or an amount that can be
mutually agreed-upon by both parties) and is referred to as the "Draw
Down Amount." Subject to certain conditions, Acqua Wellington is
obligated to purchase this amount if requested to do so by us. In
addition, we may, at our discretion, grant a "Call Option" to Acqua
Wellington for an additional investment in an amount up to the "Draw
Down Amount" which Acqua Wellington may or may not choose to exercise.
As of June 30, 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 Since December 2001, we entered into four separate agreements with
General Electric Capital Corporation for secured loans totaling $6.4
million. The notes bear interest (ranging from 9.1% to 9.33%) and are
secured by certain manufacturing and laboratory equipment.
Additionally, all of the agreements are subject to a covenant that
requires us to maintain a minimum unrestricted cash balance of $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.
We anticipate a need for additional financing to fund our future operations,
including the commercialization of our drug products currently under
development. We cannot assure you that additional financing will be obtained or,
if obtained, will be available on reasonable terms or in a timely manner.
Our future capital requirements will depend on many factors, including, but not
limited to:
o the progress, timing and scope of our preclinical studies and clinical
trials;
o the time and cost necessary to obtain regulatory approvals;
o the time and cost necessary to develop commercial manufacturing
processes, including quality systems and to build or acquire
manufacturing capabilities;
o the time and cost necessary to respond to technological and market
developments; and
o any changes made or new developments in our existing collaborative,
licensing and other commercial relationships or any new collaborative,
licensing and other commercial relationships that we may establish.
We plan to continue our policy of investing available funds in government,
investment grade and interest-bearing securities. We do not invest in derivative
financial instruments.
Critical Accounting Policies
Investment in BioMarin/Genzyme LLC and Related Revenue--Under the terms of our
joint venture agreement with Genzyme, Genzyme and we have each agreed to provide
50 percent of the funding for the joint venture. All research and development,
sales and marketing, and other activities performed by Genzyme and us on behalf
of the joint venture are billed to the joint venture at cost. Any profits or
losses of the joint venture are shared equally by the two parties. We provided
$52.6 million in funding to the joint venture from inception through June 30,
2002.
14
We account for our investment in the joint venture using the equity method.
Accordingly, we record a reduction in our investment in the joint venture for
our 50 percent share of the loss of the joint venture. The percentage of the
costs incurred by us and billed to the joint venture that are funded by us (50
percent), is recorded as a credit to our equity in the loss of the joint
venture. We recognize 50% of the amount billed to the joint venture as revenue
in accordance with our policy to recognize revenue for billings to the extent
that the payments for the billings were funded by Genzyme.
Impairment of Long-Lived Assets--We regularly review long-lived assets and
identifiable intangibles whenever events or circumstances indicate that the
carrying amount of such assets may not be fully recoverable. We evaluate the
recoverability of long-lived assets by measuring the carrying amount of the
assets against the estimated undiscounted future cash flows associated with
them. At the time such evaluations indicate that the future undiscounted cash
flows of certain long-lived assets are not sufficient to recover the carrying
value of such assets, the assets are adjusted to their fair values.
Income taxes - We record a valuation allowance to reduce our deferred tax assets
to the amount that is more likely than not to be realized. We have recorded a
full valuation allowance against our net deferred tax asset, the principal
amount of which is the tax effect of net operating loss carryforwards of
approximately $61.5 million at December 31, 2001. We have considered future
taxable income and ongoing prudent and feasible tax planning strategies in
assessing the need for the valuation allowance. An adjustment to the valuation
allowance would increase or decrease income in the period such adjustment was
made.
15
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 June 30, 2002, we had an accumulated deficit of
approximately $189.1 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 may be unable to raise additional financing when needed due to a
variety of factors, including our financial condition, the status of our product
programs, and the general condition of the financial markets. If we fail to
raise additional financing as we need such funds, we will have to delay or
terminate some or all of our product development programs.
We expect to continue to spend substantial amounts of capital for our operations
for the foreseeable future. The amount of capital we will need depends on many
factors, including:
o the progress, timing and scope of our preclinical studies and clinical
trials;
o the time and cost necessary to obtain regulatory approvals;
o the time and cost necessary to develop commercial manufacturing
processes, including quality systems and to build or acquire
manufacturing capabilities;
o the time and cost necessary to respond to technological and market
developments; and
o any changes made or new developments in our existing collaborative,
licensing and other commercial relationships or any new collaborative,
licensing and other commercial relationships that we may establish.
Moreover, our fixed expenses such as rent, license payments and other
contractual commitments are substantial and will increase in the future. These
fixed expenses will increase because we may enter into:
o additional leases for new facilities and capital equipment;
o additional licenses and collaborative agreements;
o additional contracts for consulting, maintenance and administrative
services; and
o additional contracts for product manufacturing.
16
We believe that our cash, cash equivalents and short term investment securities
balances at June 30, 2002 will be sufficient to meet our operating and capital
requirements through 2003. These estimates are based on assumptions and
estimates, which may prove to be wrong. As a result, we may need or choose to
obtain additional financing during that time.
If we fail to obtain regulatory approval to commercially manufacture or sell any
of our future drug products, or if approval is delayed, we will be unable to
generate revenue from the sale of our products, our potential for generating
positive cash flow will be diminished and the capital necessary to fund our
operations will be increased.
We must obtain regulatory approval before marketing or selling our drug products
in the U.S. and in foreign jurisdictions. In the U.S., we must obtain FDA
approval for each drug that we intend to commercialize. The FDA approval process
is typically lengthy and expensive, and approval is never certain. Products
distributed abroad are also subject to foreign government regulation. None of
our drug products has received regulatory approval to be commercially marketed
and sold. If we fail to obtain regulatory approval, we will be unable to market
and sell our drug products. Because of the risks and uncertainties in
biopharmaceutical development, our drug products could take a significantly
longer time to gain regulatory approval than we expect or may never gain
approval. If regulatory approval is delayed, our management's credibility, and
the value of our company and our operating results will be adversely affected.
Additionally, we will be unable to generate revenue from the sale of our
products, our potential for generating positive cash flow will be diminished and
the capital necessary to fund our operations will be increased.
To obtain regulatory approval to market our products, preclinical studies and
costly and lengthy clinical trials will be required, and the results of the
studies and trials are highly uncertain.
As part of the regulatory approval process, we must conduct, at our own expense,
preclinical studies in the laboratory on animals and clinical trials on humans
for each drug product. We expect the number of preclinical studies and clinical
trials that the regulatory authorities will require will vary depending on the
drug product, the disease or condition the drug is being developed to address
and regulations applicable to the particular drug. We may need to perform
multiple preclinical studies using various doses and formulations before we can
begin clinical trials, which could result in delays in our ability to market any
of our drug products. Furthermore, even if we obtain favorable results in
preclinical studies on animals, the results in humans may be significantly
different.
After we have conducted preclinical studies in animals, we must demonstrate that
our drug products are safe and efficacious for use on the target human patients
in order to receive regulatory approval for commercial sale. Adverse or
inconclusive clinical results would stop us from filing for regulatory approval
of our drug products. Additional factors that can cause delay or termination of
our clinical trials include:
o slow or insufficient patient enrollment;
o slow recruitment of, and completion of necessary institutional
approvals at clinical sites;
o longer treatment time required to demonstrate efficacy;
o lack of sufficient supplies of the product candidate;
o adverse medical events or side effects in treated patients;
o lack of effectiveness of the product candidate being tested; and
o regulatory requests for additional clinical trials.
Typically, if a drug product is intended to treat a chronic disease, as is the
case with 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.
17
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.
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 BioMarin's receipt of
an initial response from the FDA earlier than would be received if these
products had not received a fast track designation. However, these procedures
and guidelines do not guarantee that the total review process will be faster or
that approval will be obtained, if at all, earlier than 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. Due to the complexity of the processes used
to manufacture our products, we may be unable to pass federal or international
regulatory inspections in a cost effective manner. For the same reason, any
potential third party manufacturer of our drug products may be unable to comply
with cGMP regulations in a cost effective manner.
We must pass Federal, state and European regulatory inspections, and we must
manufacture process qualification batches to final specifications under cGMP
controls for each of our drug products before the marketing applications can be
approved. Although we have completed process qualification batches for
Aldurazyme, these batches may be rejected by the regulatory authorities, and we
may be unable to manufacture the process qualification batches for our other
products or pass the inspections in a timely manner, if at all.
If we fail to obtain orphan drug exclusivity for some of our products, our
competitors may sell products to treat the same conditions and our revenues will
be reduced.
As part of our business strategy, we intend to develop some drugs that may be
eligible for FDA and European Community orphan drug designation. Under the
Orphan Drug Act, the FDA may designate a product as an orphan drug if it is a
drug intended to treat a rare disease or condition, defined as a patient
population of less than 200,000 in the United States. The company that first
obtains FDA approval for a designated orphan drug for a given rare disease
receives marketing exclusivity for use of that drug for the stated condition for
a period of seven years. However, different drugs can be approved for the same
condition. Similar regulations are available in the European Community with a
ten-year period of market exclusivity.
Because the extent and scope of patent protection for 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, due to the uncertainties associated with developing pharmaceutical
products, we may not be the first to obtain marketing approval for any orphan
indication or, if we are the first, that exclusivity would effectively protect
the product from competition. Orphan drug designation neither shortens the
development time or regulatory review time of a drug nor gives the drug any
advantage in the regulatory review or approval process.
18
Because the target patient populations for some of our products are small, we
must achieve significant market share and obtain high per patient prices for our
products to achieve profitability.
Two of our lead drug candidates, Aldurazyme and Aryplase, target diseases with
small patient populations. As a result, our per-patient prices must be
relatively high in order to recover our development costs and achieve
profitability. Aldurazyme targets patients with MPS I and Aryplase targets
patients with MPS VI. We estimate that there are approximately 3,400 patients
with MPS I and 1,100 patients with MPS VI in the developed world. We believe
that we will need to market worldwide to achieve significant market share. In
addition, we are developing other drug candidates to treat conditions, such as
other genetic diseases and serious burn wounds, with small patient populations.
Due to the expected costs of treatment for Aldurazyme and Aryplase, we may be
unable to obtain sufficient market share for our drug products at a price high
enough to justify our product development efforts.
If we fail to obtain an adequate level of reimbursement for our drug products by
third-party payers, the sales of our drugs would be adversely affected or there
may be no commercially viable markets for our products.
The course of treatment for patients with MPS I using Aldurazyme and for
patients with MPS VI using Aryplase is expected to be expensive. We expect
patients to need treatment throughout their lifetimes. We expect that most
families of patients will not be capable of paying for this treatment
themselves. There will be no commercially viable market for Aldurazyme or
Aryplase without reimbursement from third-party payers. Additionally, even if
there is a commercially viable market, if the level of reimbursement is below
our expectations, our revenue and gross margins will be adversely effected.
Third-party payers, such as government or private health care insurers,
carefully review and increasingly challenge the prices charged for drugs.
Reimbursement rates from private companies vary depending on the third-party
payer, the insurance plan and other factors. Reimbursement systems in
international markets vary significantly by country and by region, and
reimbursement approvals must be obtained on a country-by-country basis.
We currently have no expertise obtaining reimbursement. We expect to rely on the
expertise of our joint venture partner Genzyme to obtain reimbursement for the
costs of Aldurazyme. In addition, we will need to develop our own reimbursement
expertise for future drug candidates unless we enter into collaborations with
other companies with the necessary expertise. We will not know what the
reimbursement rates will be until we are ready to market the product and we
actually negotiate the rates. If we are unable to obtain sufficiently high
reimbursement rates, our products may not be commercially viable or our future
revenues and gross margins may be adversely affected.
We expect that, in the future, reimbursement will be increasingly restricted
both in the United States and internationally. The escalating cost of health
care has led to increased pressure on the health care industry to reduce costs.
Governmental and private third-party payers have proposed health care reforms
and cost reductions. A number of federal and state proposals to control the cost
of health care, including the cost of drug treatments have been made in the
United States. In some foreign markets, the government controls the pricing
which would affect the profitability of drugs. Current government regulations
and possible future legislation regarding health care may affect reimbursement
for medical treatment by third-party payers, which may render our products not
commercially viable or may adversely affect our future revenues and gross
margins.
If we are unable to protect our proprietary technology, we may not be able to
compete as effectively.
Where appropriate, we seek patent protection for certain aspects of our
technology. Patent protection may not be available for some of the enzymes we
are developing. If we must spend significant time and money protecting our
patents, designing around patents held by others or licensing, for large fees,
patents or other proprietary rights held by others, our business and financial
prospects may be harmed.
The patent positions of biotechnology products are complex and uncertain. The
scope and extent of patent protection for some of our products are particularly
uncertain because key information on some of the enzymes we are developing has
existed in the public domain for many years. Other parties have published the
structure of the enzymes, the methods for purifying or producing the enzymes or
the methods of treatment. The composition and genetic sequences of animal and/or
human versions of many of our enzymes have been published and are believed to be
in the public domain. The composition and genetic sequences of other MPS enzymes
that we intend to develop as products have also been published. Publication of
this information may prevent us from obtaining composition-of-matter patents,
which are generally believed to offer the strongest patent protection. For
enzymes with no prospect of broad composition-of-matter patents, other forms of
patent protection or orphan drug status may provide us with a competitive
advantage. As a result of these uncertainties, investors should not rely on
patents as a means of protecting our product candidates, including Aldurazyme.
19
We own or license patents and patent applications to certain of our product
candidates. However, these patents and patent applications do not ensure the
protection of our intellectual property for a number of other reasons, including
the following:
o We do not know whether our patent applications will result in issued
patents. For example, we may not have developed a method for treating
a disease before others developed similar methods.
o Competitors may interfere with our patent process in a variety of ways.
Competitors may claim that they invented the claimed invention prior to
us. Competitors may also claim that we are infringing on their patents
and therefore cannot practice our technology as claimed under our
patent. Competitors may also contest our patents by showing the patent
examiner that the invention was not original, was not novel or was
obvious. In litigation, a competitor could claim that our issued
patents are not valid for a number of reasons. If a court agrees, we
would lose that patent. As a company, we have no meaningful experience
with competitors interfering with our patents or patent applications.
o Enforcing patents is expensive and may absorb significant time of our
management. Management would spend less time and resources on
developing products, which could increase our research and development
expense and delay product programs.
o Receipt of a patent may not provide much practical protection. If we
receive a patent with a narrow scope, then it will be easier for
competitors to design products that do not infringe on our patent.
In addition, competitors also seek patent protection for their technology. Due
to the number of patents in our field of technology, we cannot be assured that
we do not infringe on those patents or that we will not infringe on patents
granted in the future. If a patent holder believes our product infringes on
their patent, the patent holder may sue us even if we have received patent
protection for our technology. If someone else claims we infringe on their
technology, we would face a number of issues, including the following:
o Defending a lawsuit takes significant time and can be very expensive.
o If the court decides that our product infringes on the competitor's
patent, we may have to pay substantial damages for past infringement.
o The court may prohibit us from selling or licensing the product unless
the patent holder licenses the patent to us. The patent holder is not
required to grant us a license. If a license is available, we may have
to pay substantial royalties or grant crosslicenses 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.
20
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 has 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 has 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.
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 adversely
affect our business and operating results.
If our joint venture with Genzyme were terminated, we could be barred from
commercializing Aldurazyme or our ability to commercialize Aldurazyme would be
delayed or diminished.
We are relying on Genzyme to apply the expertise it has developed through the
launch and sale of other enzyme-based products to the marketing of our initial
drug product, Aldurazyme. We have no experience selling, marketing or obtaining
reimbursement for pharmaceutical products. In addition, without Genzyme we would
be required to pursue foreign regulatory approvals. We have no experience in
seeking foreign regulatory approvals.
Either BioMarin or Genzyme 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 BioMarin is not currently in breach of the
joint venture agreement and we believe that Genzyme is not currently in breach
of the joint venture agreement, there is a risk that either party could breach
the agreement in the future. Either party may also terminate the agreement upon
one-year prior written notice for any reason. Furthermore, we may terminate the
joint venture if Genzyme fails to fulfill its contractual obligation to pay us
$12.1 million in cash upon the approval of the BLA for Aldurazyme.
If the joint venture is terminated for breach, the non-breaching party would be
granted, exclusively, all of the rights to Aldurazyme and any related
intellectual property and regulatory approvals and would be obligated to buy out
the breaching party's interest in the joint venture. If we are the breaching
party, we would lose our rights to Aldurazyme and the related intellectual
property and regulatory approvals. If the joint venture is terminated without
cause, the non-terminating party would have the option, exercisable for one
year, to buy out the terminating party's interest in the joint venture and
obtain all rights to Aldurazyme exclusively. In the event of termination of the
buy out option without exercise by the non-terminating party as described above,
all right and title to Aldurazyme is to be sold to the highest bidder, with the
proceeds to be split equally between Genzyme and us.
If the joint venture is terminated by either party because the other declared
bankruptcy and is also in breach of the agreement, the terminating party would
be obligated to buy out the other and would obtain all rights to Aldurazyme
exclusively. If the joint venture is terminated by a party because the other
party experienced a change of control, the terminating party shall notify the
other party, the offeree, of its intent to buy out the offeree's interest in the
joint venture for a stated amount set by the terminating party at its
discretion. The offeree must then either accept this offer or agree to buy the
terminating party's interest in the joint venture on those same terms. The party
who buys out the other would then have exclusive rights to Aldurazyme.
21
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, due to the complexity of manufacturing our products we may
not be able to manufacture any other drug product successfully with a
commercially viable process or at a scale large enough to support their
respective commercial markets or at acceptable margins.
Our manufacturing processes may not meet initial expectations and we may
encounter problems with any of the following measurements of performance if we
attempt to increase the scale or size or improve the commercial viability of our
manufacturing processes:
o design, construction and qualification of manufacturing facilities that
meet regulatory requirements;
o schedule;
o reproducibility;
o production yields;
o purity;
o costs;
o quality control and assurance systems;
o shortages of qualified personnel; and
o compliance with regulatory requirements.
Improvements in manufacturing processes typically are very difficult to achieve
and are often very expensive and may require extended periods of time to
develop. If we contract for manufacturing services with an unproven process, our
contractor is subject to the same uncertainties, high standards and regulatory
controls.
The availability of suitable contract manufacturing at scheduled or optimum
times is not certain. The cost of contract manufacturing is greater than
internal manufacturing and therefore our manufacturing processes must be of
higher productivity to yield equivalent margins.
The manufacture of Neutralase involves the fermentation of a bacterial species.
We have never used a bacterial production process for the production of any
commercial product. IBEX Technologies Inc., from which we acquired Neutralase,
had contracted with a third party for the manufacture of the Neutralase used in
prior clinical trials. We have also contracted with a third party for the
manufacture of additional quantities of Neutralase.
We have built-out approximately 51,800 square feet at our Novato facilities for
manufacturing capability for Aldurazyme and Aryplase including related quality
control laboratories, materials capabilities, and support areas. We expect to
add additional capabilities in stages over time, which could create additional
operational complexity and challenges. We expect that the manufacturing process
of all of our new drug products, including Aryplase and Neutralase, will require
significant time and resources before we can begin to manufacture them (or have
them manufactured by third parties) in commercial quantity at acceptable cost.
22
In order to achieve our product cost targets, we must develop efficient
manufacturing processes either by:
o improving the product yield from our current cell lines, colonies of
cells which have a common genetic makeup;
o improving the manufacturing processes licensed from others; or
o developing more efficient, lower cost recombinant cell lines and
production processes.
A recombinant cell line is a cell line with foreign DNA inserted that is used to
produce an enzyme or other protein that it would not have otherwise produced.
The development of a stable, high production cell line for any given enzyme is
difficult, expensive and unpredictable and may not result in adequate yields. In
addition, the development of protein purification processes is difficult and may
not produce the high purity required with acceptable yield and costs or may not
result in adequate shelf-lives of the final products. If we are not able to
develop efficient manufacturing processes, the investment in manufacturing
capacity sufficient to satisfy market demand will be much greater and will place
heavy financial demands upon us. If we do not achieve our manufacturing cost
targets, we will have lower margins and reduced profitability in commercial
production and larger losses in manufacturing start-up phases.
If we are unable to create marketing and distribution capabilities or to enter
into agreements with third parties to do so, our ability to generate revenues
will be diminished.
If we cannot expand capabilities either by developing our own sales and
marketing organization or by entering into agreements with others, we may be
unable to successfully sell our products. We believe that developing an internal
sales and distribution capability will be expensive and time consuming.
Alternatively, we may enter into agreements with third parties to market our
products. For example, under our joint venture with Genzyme, Genzyme is
responsible for marketing and distributing Aldurazyme. However, these third
parties may not be capable of successfully selling any of our drug products.
With our acquisition of Neutralase 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 develop
our own sales and marketing force at all, or of a size that would allow us to
compete with these other companies. If we elect to enter into third-party
marketing and distribution agreements in order to sell into these markets, we
may not be able to enter into these agreements on acceptable terms, if at all.
If we cannot compete effectively in these specific physician and institutional
markets, it would adversely affect sales of Neutralase.
If we fail to compete successfully with respect to product sales, we may be
unable to generate sufficient sales to recover our expenses related to the
development of a product program or to justify continued marketing of a product.
Our competitors may develop, manufacture and market products that are more
effective or less expensive than ours. They may also obtain regulatory approvals
for their products faster than we can obtain them (including those products with
orphan drug designation) or commercialize their products before we do. With
respect to Aldurazyme and Aryplase, if our competitors successfully
commercialize a product that treats MPS I or MPS VI, respectively, before we do,
we may effectively be precluded from developing a product to treat that disease
because the patient populations of the diseases are so small. If one of our
competitors gets orphan drug exclusivity, we could be precluded from marketing
our version for seven years in the U.S. and ten years in the European Union.
However, different drugs can be approved for the same condition. If we do not
compete successfully, we may be unable to generate sufficient sales to recover
our expenses related to the development of a product program or to justify
continued marketing of a product.
23
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 license
agreements with academic research institutions, we will then be precluded from
pursuing those specific opportunities. Since each of these opportunities is
unique, we may not be able to find a substitute. Several pharmaceutical and
biotechnology companies have already established themselves in the field of
enzyme therapeutics, including Genzyme, our joint venture partner. These
companies have already begun many drug development programs, some of which may
target diseases that we are also targeting, and have already entered into
partnering and licensing arrangements with academic research institutions,
reducing the pool of available opportunities.
Universities and public and private research institutions are also competitors
with BioMarin. 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 out product pipeline.
If we do not achieve our projected development goals in the time frames we
announce and expect, the commercialization of our products may be delayed and
the credibility of our management may be adversely affected and, as a result,
our stock price may decline.
For planning purposes, we estimate the timing of the accomplishment of various
scientific, clinical, regulatory and other product development goals, which we
sometimes refer to as milestones. These milestones may include the commencement
or completion of scientific studies and clinical trials and the submission of
regulatory filings. From time to time, we publicly announce the expected timing
of some of these milestones. All of these milestones are based on a variety of
assumptions. The actual timing of these milestones can vary dramatically
compared to our estimates, in many cases for reasons beyond our control. If we
do not meet these milestones as publicly announced, the commercialization of our
products may be delayed and the credibility of our management may be adversely
affected and, as a result, our stock price may decline.
If we fail to manage our growth or fail to recruit and retain personnel, our
product development programs may be delayed.
Our rapid growth has strained our managerial, operational, financial and other
resources. We expect this growth to continue. We have entered into a joint
venture with Genzyme. If we receive FDA and/or foreign government approval to
market Aldurazyme, the joint venture will be required to devote additional
resources to support the commercialization of Aldurazyme.
To manage expansion effectively, we need to continue to develop and improve our
research and development capabilities, manufacturing and quality capacities,
sales and marketing capabilities and financial and administrative systems.
BioMarin's staff, financial resources, systems, procedures or controls may be
inadequate to support our operations and our management may be unable to manage
successfully future market opportunities or our relationships with customers and
other third parties.
Our future growth and success depend on our ability to recruit, retain, manage
and motivate our employees. The loss of key scientific, technical and managerial
personnel may delay or otherwise harm our product development programs. Any harm
to our research and development programs would harm our business and prospects.
24
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. Due to this intense competition, we may be
unable to 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 coronary artery bypass graft (CABG)
surgery. It is possible that alternative non-surgical methods of treating heart
disease could be developed. If so, then the demand for Neutralase would likely
decrease.
If product liability lawsuits are successfully brought against us, we may incur
substantial liabilities.
We are exposed to the potential product liability risks inherent in the testing,
manufacturing and marketing of human pharmaceuticals. The BioMarin/Genzyme LLC
maintains product liability insurance for our clinical trials of Aldurazyme with
aggregate loss limits of $5.0 million. We have obtained insurance against
product liability lawsuits for the clinical trials for Aryplase 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.
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 may be
unavailable in meaningful amounts or at a reasonable cost. In addition, while we
take, and continue to take, what we believe are appropriate precautions, we may
be unable to avoid significant liability if any product liability lawsuit is
brought against us. If we are the subject of a successful product liability
claim that exceeds the limits of any insurance coverage we obtain, we may incur
substantial liabilities that would adversely affect our earnings and require the
commitment of capital resources that might otherwise be available for the
development and commercialization of our product programs.
Our stock price may be volatile, and an investment in our stock could suffer a
decline in value.
Our valuation and stock price since the beginning of trading after our initial
public offering have had no meaningful relationship to current or historical
earnings, asset values, book value or many other criteria based on conventional
measures of stock value. The market price of our common stock will fluctuate due
to factors including:
o progress of Aldurazyme, Neutralase, Aryplase and our other lead drug
products through the regulatory process, especially regulatory actions
in the United States related to Aldurazyme;
o results of clinical trials, announcements of technological innovations
or new products by us or our competitors;
o government regulatory action affecting our drug products or our
competitors' drug products in both the United States and foreign
countries;
25
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 and directors 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 (and their respective affiliates, not including Glyko
Biomedical Ltd.) control approximately 3% 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.
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.
26
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 June 30, 2002, we
believe that a 100 basis point increase or decrease in interest rates would
result in an increase or decrease or increase of approximately $0.8 million,
respectively, in the fair value of the investment portfolio. Changes in interest
rates may affect the fair value of the investment portfolio; however, we will
not recognize such gains or losses into income unless the investments are sold.
The table below presents the carrying value for our investment portfolio. The
carrying value approximates fair value at June 30, 2002.
Investment portfolio:
Carrying value
(in $ thousands)
Cash and cash equivalents........................ $ 19,363
Short-term investments........................... 81,195*
-----------
Total......................................... $100,558
* 66% in callable and non-callable Federal agencies, 28% invested in a bond
mutual fund and 6% in corporate bonds.
27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. None.
Item 2. Changes in Securities and Uses of Proceeds.
On June 14, 2002 our board of directors adopted Amended and Restated Bylaws for
the purpose of modifying the number of directors from a fixed number to a range
of between five and nine, with the exact number within the range to be
determined by resolution of the board of directors. The Amended and Restated
Bylaws are filed as Exhibit 3.2 to this Quarterly Report on Form 10-Q.
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
- -------------- -----------------------------------------------------------------
3.2 Amended and Restated Bylaws of BioMarin Pharmaceutical Inc.
- -------------- -----------------------------------------------------------------
10.1 Employment Agreement dated June 14, 2002 between BioMarin
Pharmaceutical Inc. and Louis Drapeau.
- -------------- -----------------------------------------------------------------
10.2** Bioprocessing Services Agreement dated July 15, 2002, by and
between BioMarin Pharmaceutical Inc. and Diosynth RTP Inc.
- -------------- -----------------------------------------------------------------
99.1 Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
- -------------- -----------------------------------------------------------------
** Portions of this document have been redacted pursuant to a Request for
Confidential Treatment filed pursuant to the Freedom of Information Act
(b) Reports on Form 8-K.
On April 16, 2002, we filed a Current Report on Form 8-K regarding the
announcement that Genzyme and we filed the first portion of a "rolling"
Biologics License Application with the U.S. Food and Drug Administration.
On April 24, 2002, we filed a Current Report on Form 8-K regarding the
announcement that we had begun dosing patients in a Phase 2 clinical trial of
Aryplase for the treatment of MPS VI.
On May 7, 2002, we filed a Current Report on Form 8-K regarding the announcement
of our financial results for the quarter ended March 31, 2002.
On May 16, 2002, we filed a Current Report on Form 8-K regarding the
announcement that we commenced preclinical studies of NeuroTrans.
On June 12, 2002, we filed a Current Report on Form 8-K, which was subsequently
amended and restated on June 18, 2002 on form 8-K/A, regarding the dismissal of
Arthur Andersen LLP and appointment of KPMG LLP as our independent auditors.
28
On June 24, 2002, we filed a Current Report on Form 8-K regarding the
announcement of the detailed results from the six-month double-blind Phase 3
clinical trial of our product candidate Aldurazyme and preliminary six-month
findings from the trial's ongoing open-label extension study.
On June 25, 2002, we filed a Current Report on Form 8-K regarding the
announcement of findings from the Phase 1 trial and the preliminary findings of
the related extension study of our product candidate Aryplase.
29
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: _______________________ By: /s/ Fredric D. Price
--------------------
Fredric D. Price, Chairman and Chief
Executive Officer (on behalf of the
Registrant)
Dated: _______________________ By: /s/ Louis Drapeau
-----------------
Louis Drapeau, Chief Financial Officer,
Vice President, Finance and Secretary
30
Exhibit Index
- -------------- -----------------------------------------------------------------
EXHIBIT DESCRIPTION OF DOCUMENT
NUMBER
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3.2 Amended and Restated Bylaws of BioMarin Pharmaceutical Inc..
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10.1 Employment Agreement dated June 14, 2002 between BioMarin
Pharmaceutical Inc. and Louis Drapeau.
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10.2** Bioprocessing Services Agreement dated July 15, 2002, by and
between BioMarin Pharmaceutical Inc. and Diosynth RTP Inc.
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99.1 Certification of CEO and CFO pursuant to 18 U.S.C Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
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** Portions of this document have been redacted pursuant to a Request for
Confidential Treatment filed pursuant to the Freedom of Information Act
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