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United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
(Mark One)
[X] Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934 For the fiscal year ended December 31, 2001
Or
[ ] 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 small business issuer as specified in its charter)
Delaware 68-0397820
(State of other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
371 Bel Marin Keys Blvd., #210, Novato, California 94949
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (415) 884-6700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)
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
----- ----
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained in this form, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. __
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 15, 2002 was $392,122,171. The number of shares of common
stock, $0.001 par value, outstanding on March 15, 2002 was 52,447,402.
The documents incorporated by reference are as follows:
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held May 29, 2002 are incorporated by reference into Part
III.
BIOMARIN PHARMACEUTICAL INC.
Part I
FORWARD LOOKING STATEMENTS
This Form 10-K contains "forward-looking statements" as defined under securities
laws. Many of these statements can be identified by the use of terminology such
as "believes," "expects," "anticipates," "plans," "may," "will," "projects,"
"continues," "estimates," "potential," "opportunity" and so on. These
forward-looking statements may be found in the " Factors That May Affect Future
Results," "Description of Business," and other sections of this Annual Report on
Form 10-K. 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 Form 10-K. You should carefully
consider that information before you make an investment decision.
You should not place undue reliance on these statements, which speak only as of
the date that they were made. These cautionary statements should be considered
in connection with any written or oral forward-looking statements that we may
issue in the future. We do not undertake any obligation to release publicly any
revisions to these forward-looking statements after completion of the filing of
this Form 10-K to reflect later events or circumstances or to reflect the
occurrence of unanticipated events.
Item 1. Description of Business
Overview
We develop enzyme therapies to treat serious, life-threatening diseases and
conditions. We leverage our expertise in enzyme biology to develop product
candidates for the treatment of genetic diseases, including MPS I, MPS VI and
PKU, as well as other critical care situations such as cardiovascular surgery
and serious burns. Our product candidates address markets for which no products
are currently available or where current products have been associated with
major deficiencies. We focus on conditions with well-defined patient
populations, including genetic diseases, which require chronic therapy.
Our lead product candidate, Aldurazyme(TM), which recently completed a Phase 3
trial, is being developed for the treatment of Mucopolysaccharidosis I (MPS I)
disease. MPS I is a debilitating and life-threatening genetic disease caused by
the deficiency of (alpha)-L-iduronidase, an enzyme responsible for breaking down
certain carbohydrates. MPS I is a progressive disease that afflicts patients
from birth and frequently leads to severe disability and early death. There are
currently no drugs on the market for the treatment of MPS I. Aldurazyme has
received both fast track designation from the United States Food and Drug
Administration (FDA) and orphan drug designation for the treatment of MPS I in
the United States and in the European Union. The impact of these designations is
discussed in the "Government Regulation" section, which begins on page 6. We are
developing Aldurazyme through a joint venture with Genzyme Corporation. In
collaboration with Genzyme, we completed a double-blinded, placebo-controlled
Phase 3 clinical trial of Aldurazyme in August 2001. On November 2, 2001, we
announced positive results from this trial. On April 1, 2002, we announced that
together with our joint venture partner, Genzyme, we have filed with European
regulatory authorities for approval to market Aldurazyme. 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 seperate
approval process. In the United States, we along with Genzyme have been in
discussions with the FDA regarding the filing of a Biologics License Application
(BLA). We plan to initiate the BLA filing as soon as possible.
We are developing our second product candidate, Neutralase(TM), for reversal of
anticoagulation by heparin in patients undergoing Coronary Artery Bypass Graft,
or CABG, surgery and angioplasty. We acquired rights to Neutralase through our
acquisition of the pharmaceutical assets of IBEX Technologies Inc. in the fourth
quarter of 2001. Heparin is a carbohydrate drug commonly used to prevent
coagulation, or blood clotting, during certain types of major surgery.
Neutralase is a carbohydrate-modifying enzyme that cleaves heparin, allowing
coagulation of blood and aiding patient recovery following CABG surgery and
angioplasty. Based on data from previous trials, we plan to initiate a Phase 3
trial in CABG surgery in 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 a Phase 1 trial of AryplaseTM (formerly referred to as rhASB) for
the treatment of MPS VI, another seriously debilitating genetic disease. Based
on data from this previous trial, we plan to initiate a Phase 2 trial of
Aryplase in early 2002. We are also developing VibrilaseTM (formerly referred to
as Vibriolysin Topical), 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 begin a Phase 2 clinical trial in either the
United States or the United Kingdom following the completion of this Phase 1
trial. In addition, we are pursuing preclinical development of other enzyme
product candidates for genetic and other diseases.
1
Recent Developments
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 an MAA to the 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
seperate approval process. In the United States, we along with Genzyme have been
in discussions with the FDA regarding the filing of a BLA. We plan to initiate
the BLA filing as soon as possible.
On March 21, 2002, we acquired Synapse Technologies Inc. Synapse owns the rights
to certain patented and proprietary technology which, based on the results of
preclinical trials, has the potential to deliver therapeutic enzymes and other
drugs across the blood-brain barrier by means of traditional intravenous
injections. Under the terms of the agreement, we purchased 100% of the
outstanding shares of Synapse for approximately $10.2 million payable in 885,242
shares of our common stock. We also may make future contingent payments of up to
approximately $6 million. These payments are payable in cash or stock, at our
option.
On February 25, 2002, we decided to close the analytics product catalog business
of our wholly-owned subsidiary, Glyko, Inc. The majority of the Glyko, Inc.
employees will be incorporated into our pharmaceutical business and such
employees will continue to provide necessary analytic and diagnostic support to
our therapeutic products. Certain operating assets of Glyko, Inc. may be offered
for sale.
On February 7, 2002, we announced that we had reached a definitive agreement to
acquire all of the outstanding capital stock of Glyko Biomedical Ltd. (GBL).
GBL's principal asset is its 22% ownership interest in our common stock. GBL
owns approximately 11.4 million shares of our common stock. Under the terms of
the acquisition agreement, GBL's common shareholders will receive approximately
11.4 million shares of our common stock in exchange for all of GBL's outstanding
common stock. There will be no net effect on the number of shares of our common
stock outstanding, as we plan to retire the existing shares of our common stock
currently held by GBL upon closing.
On December 12, 2001, we completed a public offering of our common stock. In the
offering, we sold 8,050,000 shares, including 1,050,000 shares to cover
underwriters' over-allotments, at a price to the public of $12.00 per share, or
a total offering price of $96.6 million. The net proceeds, after expenses and
underwriting discounts, were approximately $90.4 million. We intend to use the
net proceeds from this sale of shares for:
o the development and commercialization of our lead product candidate,
Aldurazyme;
o additional clinical trials and manufacturing of Neutralase;
o preclinical studies and clinical trials for our other product
candidates;
o potential licenses and other acquisitions of complementary
technologies and products;
o general corporate purposes; and
o working capital.
On November 2, 2001, we along with Genzyme, announced positive results from a
preliminary analysis of data from the Phase 3 clinical trial of Aldurazyme for
the treatment of MPS I. Patients were evaluated at defined intervals to assess
progress in meeting two primary endpoints. The preliminary data analysis showed
a statistically significant increase in pulmonary capacity (p=0.028) and
demonstrated a positive trend in endurance as measured by a six-minute walk test
(p=0.066). Among other endpoints measured in the trial, the main findings of an
earlier open-label study of Aldurazyme were confirmed: a reduction in liver size
and a reduction in excretion of urinary glycosaminoglycans, or GAGs, the
carbohydrate substances that accumulate in patients with MPS I. Based on the
strength of the trial's results, we, along with Genzyme, have met jointly with
U.S. and European regulatory authorities to discuss applications to market
Aldurazyme. Based on these discussions, the MAA has been submitted to the EMEA.
We plan to file the BLA with the FDA as soon as possible.
On October 31, 2001, we acquired the pharmaceutical assets of IBEX Technologies
Inc. and its subsidiaries. The product candidates and technologies that we
gained in this transaction, primarily the Neutralase and Phenylase programs, are
complementary to our existing product portfolio and core competencies. Under the
terms of the agreements, we acquired these assets in exchange for consideration
of $10.4 million, with $8.4 million payable in shares of our common stock and
$2.0 million payable in cash. In addition, we agreed to make contingent cash
payments of up to approximately $9.5 million to IBEX upon FDA approval of
products acquired from IBEX.
2
Aldurazyme
Our lead product candidate, Aldurazyme, is being developed for the treatment of
MPS I. MPS I is a genetic disease caused by the deficiency of
(alpha)-L-iduronidase. Patients with MPS I have multiple debilitating symptoms
resulting from the buildup of carbohydrate residues in all tissues in the body.
These symptoms include delayed physical growth, enlarged livers and spleens,
skeletal and joint deformities, airway obstruction, heart disease, reduced
endurance and pulmonary function impaired hearing and vision, and in some cases,
delayed mental development. Most patients with MPS I will die from complications
associated with the disease as children or teenagers. About 3,400 individuals in
developed countries have MPS I, including about 1,000 in the United States and
Canada.
There are currently no approved drugs for the treatment of MPS I. Bone marrow
transplantation has been used to treat severely affected patients, generally
under the age of two, with limited success. Bone marrow transplantation is
associated with high morbidity and mortality rates as well as with problems
inherent in the procedure itself, including graft vs. host disease, graft
rejection, and donor availability, which severely limit its utility and
application.
Aldurazyme is a specific form of recombinant human (alpha)-L-iduronidase that
replaces a genetic deficiency of (alpha)-L-iduronidase in MPS I patients, thus
reduces or eliminates the build-up of certain carbohydrates in the lysosomes of
cells. By eliminating this carbohydrate build-up, Aldurazyme is able to
significantly reduce the physical symptoms experienced by these patients. The
Phase 1 trial results of this product candidate reported no neutralizing
antibodies, indicating its applicability for chronic administration. In
collaboration with Genzyme, we completed a 45-patient, double-blinded,
placebo-controlled Phase 3 clinical trial of Aldurazyme in August 2001, which
was conducted at five sites in the U.S., Europe and Canada. All patients
completed the trial and elected to receive Aldurazyme in an open label extension
study. On November 2, 2001, we announced positive results from this trial. We
intend to continue the development of this drug and recently filed an MAA with
the EMEA. We plan to file a BLA with the FDA as soon as possible.
Aldurazyme has received fast track designation from the FDA for the treatment of
MPS I. The FDA has granted Aldurazyme orphan drug designation, which will result
in exclusive rights to market Aldurazyme to treat MPS I for seven years from the
date of FDA approval if Aldurazyme is the first product to be approved by the
FDA for the treatment of MPS I. In addition, the European Commission has
designated Aldurazyme for the treatment of MPS I as an orphan medicinal product,
giving the potential for market exclusivity in Europe for 10 years. In September
1998, we formed a 50/50 joint venture with Genzyme for the worldwide development
and commercialization of Aldurazyme. Genzyme is responsible for regulatory
submissions in international markets and marketing, distribution, sales and
obtaining reimbursement for Aldurazyme worldwide. We are responsible for U.S.
regulatory submissions and the development and manufacturing of
(alpha)-L-iduronidase.
Neutralase
We are developing Neutralase for the reversal of anticoagulation by heparin in
patients undergoing Coronary Artery Bypass Graft, or CABG, surgery and
angioplasty. Patients undergoing CABG surgery and angioplasty are treated with
heparin to prevent coagulation during surgery. Once the procedure is completed,
anticoagulant reversal agents are administered to prevent excessive bleeding.
Currently, protamine is the only product commercially available for the reversal
of heparin anticoagulation. In medical studies, protamine has been associated
with adverse side effects, such as abnormal changes in blood pressure,
depression of heart function and acute allergic reactions. There were
approximately 571,000 CABG procedures and 1,069,000 angioplasties in the United
States in 1999 (as published by the American Heart Association in their 2002
Heart and Stroke Statistical Update) that could have potentially benefited from
heparin reversal. We believe that an additional substantial market opportunity
exists in Europe and the rest of the world.
We believe Neutralase has the potential to reverse heparin anticoagulation
without many of the serious side effects associated with protamine. Neutralase
is a carbohydrate-modifying enzyme that breaks down heparin in a manner that
inactivates heparin's anticoagulation effect and restores the normal coagulation
of blood. Neutralase has the potential for use as a reversal agent for heparin
anticoagulation in open-heart surgery such as CABG procedures, interventional
cardiology procedures such as angioplasty, and in other procedures where heparin
or heparin-like anticoagulants are used, such as in hip and knee surgeries.
Data from Phase 1 and Phase 2 clinical trials suggest that Neutralase can
reverse heparin anticoagulation without the adverse changes in blood pressure
associated with protamine usage. Building on the work undertaken so far, we
intend to initiate a Phase 3 trial for CABG in 2002, followed by a Phase 2B
trial for angioplasty.
3
Other Product Development Programs
Aryplase
We are developing recombinant, human N-acetylgalactosamine 4-sulfatase
(Aryplase) for the treatment of MPS VI, a debilitating genetic disease similar
to MPS I. Aryplase has received fast track designation from the FDA as well as
orphan drug designation for the treatment of MPS VI in the United States and in
the European Union. Based on clinical data to date, we plan to initiate a Phase
2 trial of Aryplase early in 2002.
Vibrilase
We are developing Vibrilase for use in removing burned skin in preparation for
skin grafting or other therapy. In the fourth quarter of 2001, we initiated a
Phase 1 clinical trial of this product candidate in the United Kingdom, and
expect to begin a Phase 2 clinical trial in either the United States or the
United Kingdom following the completion of this Phase 1 trial.
Phenylase
We are developing Phenylase as an oral enzyme therapy for patients with
phenylketonuria (PKU) a genetic disease in which the body cannot properly
metabolize the amino acid phenylalanine. If left untreated, elevated levels of
phenylalanine lead to brain damage and severe mental retardation. Phenylase is
currently in preclinical development.
BioMarin's Strategy
Our strategy is to develop therapeutic enzyme products to treat a variety of
diseases and conditions. The principal elements of this strategy are to:
Develop and successfully commercialize our lead product candidates
We are seeking to develop and globally commercialize Aldurazyme for the
treatment of MPS I, Neutralase for the reversal of anticoagulation agents,
Aryplase for MPS VI, and Vibrilase for serious burns, each of which is in human
clinical testing. With regard to Aldurazyme,in concert with our joint venture
partner, Genzyme, we are developing strategies for the effective launch of this
product. We believe we will benefit from Genzyme's marketing organization, which
has extensive worldwide experience marketing drugs to well-defined patient
populations with chronic genetic diseases.
Continue to build a diversified portfolio of product candidates
In addition to the products in human clinical testing noted above, we are
conducting research on other enzyme products, including those intended to treat
phenylketonuria (Phenylase), ischemia (Extravase), and diseases in which it is
necessary to treat the brain (Synapse.)
Target underserved markets
We intend to continue to target market opportunities where there is little or no
competition, such as the markets for MPS I and MPS VI. We also target markets
where we believe that our technology will enable us to become a market leader in
a relatively short time period, such as the market for Neutralase. Our strategy
is to avoid situations where market differentiation is a function of marketing
strength and not technical expertise.
Seek to license or acquire complementary products and technologies
We intend to supplement our internal drug discovery efforts through the
acquisition of products and technologies that complement our general product
development strategy. Two examples of this are our recent acquisition of the
pharmaceutical assets of IBEX Technologies, which added three complementary
product candidates to our portfolio and our acquisition of Synapse Technologies,
Inc., which added technology intended to enable certain drug products to cross
the blood-brain-barrier by means of traditional intravenous injection. We intend
to continue to identify, evaluate and pursue the licensing or acquisition of
other strategically valuable products and organizations.
Leverage our core competencies
We believe that we have significant expertise in enzyme biology and
manipulation, which we have used to establish a strong platform for the
development of enzyme-related pharmaceutical products. We intend to leverage
these competencies to develop high-value products for markets with unmet medical
needs. When strategically advantageous, we may seek partnerships with industry
leaders for the further advancement of our product candidates.
4
Manufacturing
The drug candidates we are currently developing require the manufacture of
recombinant enzymes. For our genetic disease programs, we expect to manufacture
the bulk enzymes. We believe that we will be able to manufacture sufficient
quantities of our genetic disease drug products for clinical trials and
commercial sales in part because relatively low doses are required for treatment
and because the targeted patient populations are small. In general, we expect to
contract with outside service providers for certain manufacturing services,
including final product fill and finish operations and bulk enzyme production
for clinical and early commercial production where the production requirements
exceed our manufacturing capacity.
In the first quarter of 2000, we began production of Aldurazyme for clinical
requirements including the Phase 3 clinical trial and other clinical studies.
The bulk production is being done in our Galli Drive (Novato, California)
manufacturing facility. Following the recently completed expansion, Galli is a
51,800 square foot cGMP production facility including support areas, housing
utilities, laboratories and administrative functions. We expect to support the
commercial launch of Aldurazyme from this facility. Vialing and packaging will
be performed using either our joint venture partner or contract manufacturers.
In 2000, the manufacturing facilities in Novato were inspected and subsequently
licensed by the State of California Food and Drug Branch for the production of
clinical trial material. These facilities will be inspected by the FDA and other
regulatory agencies in connection with the BLA and other marketing applications.
These facilities, and those of any third-party manufacturers, will be subject to
periodic inspections confirming compliance with applicable law. Our facilities
must be cGMP certified before we can manufacture our drugs for commercial sales.
Failure to comply with these requirements could result in the shutdown of our
facilities, fines or other penalties.
Sales and Marketing
We have no experience marketing or selling pharmaceutical products. To
commercially market our products once the necessary regulatory approvals are
obtained, we must either develop our own sales and marketing force or enter into
arrangements with third parties.
We established a joint venture with Genzyme for the worldwide development and
commercialization of Aldurazyme for the treatment of MPS I. Under the joint
venture, Genzyme will be responsible for marketing, distribution, sales and
obtaining reimbursement of Aldurazyme worldwide.
In the future, we may develop the capability to market and sell our drug
products that are targeted at small or concentrated patient populations. In many
cases, we believe that these patient populations are typically well-informed and
well-connected to the medical community. Often family/patient groups suffering
from niche diseases are capable users of the Internet to share experiences and
gather information. We believe that direct marketing to these families or
patients would be effective. We may also market our products through
distributors or other collaborators, particularly for those products targeted at
larger patient populations or for countries where the development of an
infrastructure is not economically attractive.
Patents and Proprietary Rights
Our success depends in part on our ability to:
o Obtain patents
o Protect trade secrets
o Operate without infringing the proprietary rights of others
o Prevent others from infringing on our proprietary rights
We may obtain licenses to patents and patent applications from others.
We have thirteen patent applications presently pending in the United States
Patent and Trademark Office. We have filed six foreign counterpart applications
and expect to file a foreign counterpart to one of the other pending U.S. patent
applications at the proper time.
Glyko, Inc. owns twelve issued U.S. patents. In addition, Glyko, Inc. has
licensed four U.S. patents and their foreign counterparts from AstroMed Ltd. and
its successor Astroscan Ltd. on an exclusive, worldwide, perpetual and
royalty-free basis. Glyko, Inc. has also licensed six U.S. patents from Glycomed
Incorporated on an exclusive, worldwide, perpetual and royalty-free basis. These
patents are all related to Glyko, Inc.'s products and services.
5
Government Regulation
Food and Drug Administration Modernization Act of 1997. The Food and Drug
Administration Modernization Act of 1997 was enacted, in part, to ensure the
availability of safe and effective drugs, biologics and medical devices by
expediting the FDA review process for new products. The Modernization Act
establishes a statutory program for the approval of fast track products,
including biologics. The fast track provisions essentially codify the FDA's
accelerated approval regulations for drugs and biologics. A fast track product
is defined as a new drug or biologic intended for the treatment of a serious or
life-threatening condition that demonstrates the potential to address unmet
medical needs for this condition. Under the fast track program, the sponsor of a
new drug or biologic may request the FDA designate the drug or biologic as a
fast track product at any time during the clinical development of the product.
The Modernization Act specifies that the FDA must determine if the product
qualifies for fast track designation within 60 days of receipt of the sponsor's
request.
Approval of a license application for a fast track product can be based on an
effect on a clinical endpoint or on a surrogate endpoint that is reasonably
likely to predict clinical benefit. Approval of a license application for a fast
track product based on a surrogate endpoint may be subject to:
o Post-approval studies to validate the surrogate endpoint or
confirm the effect on the clinical endpoint
o Prior review of all promotional materials
If a preliminary review of the clinical data suggests that the product is
effective, the FDA may initiate review of sections of a license application for
a fast track product before the application is complete. This rolling review is
available if the applicant provides a schedule for submission of remaining
information and pays applicable user fees. However, the time period specified in
the Prescription Drug User Fees Act, which governs the time period goals the FDA
has committed to reviewing a license application, does not begin until the
complete application is submitted.
In September 1998, the FDA designated Aldurazyme a fast track product for the
more severe forms of MPS I. In June 2000, the FDA designated Aryplase a fast
track product for the treatment of MPS VI. We cannot predict the ultimate
impact, if any, of the fast track process on the timing or likelihood of FDA
approval of Aldurazyme, Aryplase or any of our other potential products.
Orphan Drug Designation. In September 1997, Aldurazyme received orphan drug
designation from the FDA. In February 1999, Aryplase received orphan drug
designation from the FDA. Orphan drug designation is granted by the FDA to drugs
intended to treat a rare disease or condition, which for this program is defined
as having a prevalence less than 200,000 individuals in the United States.
Orphan drug designation must be requested before submitting a biologics license
application. After the FDA grants orphan drug designation, the generic identity
of the therapeutic agent and its potential orphan use are disclosed publicly by
the FDA. A similar system for orphan drug designation exists in the European
Community. Both Aldurazyme and Aryplase received designation as orphan medicinal
products by the European Commission in February 2001.
Orphan drug designation does not shorten the regulatory review and approval
process for an orphan drug, nor does it give that drug any advantage in the
regulatory review and approval process. If an orphan drug later receives
approval for the indication for which it has designation, the relevant
regulatory authority may not approve any other applications to market the same
drug for the same indication, except in very limited circumstances, for seven
years in the U.S. and ten years in Europe. Although obtaining approval to market
a product with orphan drug exclusivity may be advantageous, we cannot be
certain:
o that we will be the first to obtain approval for any drug for
which we obtain orphan drug designation,
o that orphan drug designation will result in any commercial
advantage or reduce competition, nor
o that the limited exceptions to this exclusivity will not be
invoked by the relevant regulatory authority.
Competition
The biopharmaceutical industry is rapidly evolving and highly competitive. The
following is a summary competitive analysis for known competitive threats for
each of our major biopharmaceutical product programs:
Aldurazyme for MPS I. On November 21, 2000 and May 29, 2001, respectively,
Transkaryotic Therapies, Inc. (TKTX) announced that two US patents on
(alpha)-L-iduronidase had been issued and that these patents had been
exclusively licensed to TKTX. We have examined the patents, the patent files,
the prior art and other information. We believe that the patents may not survive
a challenge. However, the processes of patent law are uncertain and any patent
proceeding is subject to multiple unanticipated outcomes. We believe that it is
in the best interests of our joint venture with Genzyme to pursue the
development of Aldurazyme with commercial diligence, concurrent with our
challenge of the patents, in order to gain marketing approvals as rapidly as
possible and to provide MPS I patients with the benefits of Aldurazyme. If
either or both of the patents are deemed (or ruled) to be valid, the joint
venture will need to reach an accommodation with the holder of the license to
the patent.
6
These patents do not affect our ability to market Aldurazyme in Europe or Japan,
both major pharmaceutical markets. A patent making the same claims was rejected
by the European Community and cannot be refiled.
A small private company announced that it has novel enzymatic technology to make
enzymes with proper glycosylation and phosphorylation. Since that announcement,
that company has been acquired by our joint venture partner, Genzyme. Pursuant
to our joint venture agreement with Genzyme, both Genzyme and our Company must
mutually agree on any technological developments relating to Aldurazyme. The
proper carbohydrate and phosphate structural elements of the enzyme are
essential to facilitate uptake of the enzyme by the patient's cells to have
efficient enzyme replacement therapy. Our preclinical analysis indicates that
Aldurazyme is highly efficient in being taken up by cells during enzyme
replacement therapy as a result of the proper mannose-6-phosphate ligands
(glycosylation and phosphorylation) on the enzyme. We do not have any
comparative data to assess directly the relative potential therapeutic qualities
of Aldurazyme and the other enzyme.
Neutralase for anticoagulation reversal. Currently protamine sulfate (US) and
protamine chloride (EU) are the only products used to reverse heparin.
Neutralase, if approved, would have to compete with protamine in the market
place. Protamine is relatively inexpensive; for Neutralase to achieve
significant market share, clinical data will be needed to demonstrate advantages
in safety or efficacy or both for the reversal of heparin. We believe that
Neutralase has superior characteristics but cannot predict that clinical studies
will demonstrate this superiority. Other than protamine, there are no
significant competitive drugs in clinical trials for the reversal of heparin.
An alternative source of competition comes from substitutes for heparin, and
hence reducing the need for Neutralase. The Medicines Company has an approved
drug AngiomaxTM (hirudin) that is a substitute for heparin in angioplasty and
potentially other indications. We cannot predict how much this competitor will
reduce the potential market size of Neutralase for angioplasty or other
indications. One additional source of competition comes from changes in medical
practice that may decrease the use of procedures that require heparin and so
Neutralase. Off-pump coronary artery bypass surgery has increased in frequency
and the amount of heparin used is less, though heparin is still used. Increased
off-pump CABG could reduce the use of heparin to some degree and therefore
decrease the market for Neutralase. Other unpredictable changes in medical
practice or other non-heparin-like anticoagulants could occur or be approved and
potentially reduce the market for Neutralase. At this time, we do not foresee a
large competitive challenge to heparin or the need for heparin reversal.
Aryplase for MPS VI. We know of no active competitive program for enzyme
replacement therapy for MPS VI that has entered clinical trials.
Gene therapy is a potential competitive threat to enzyme replacement therapies
for both MPS I and MPS VI. We know of no competitive program using gene therapy
for the treatment of either MPS I or MPS VI that has entered clinical trials.
Vibrilase for debridement of serious burns. Other enzymatic products exist which
might be possibly used for the debridement of serious second or third degree
burns. Those products in their current form have not captured any meaningful
share of the debridement function in the treatment of burn patients. We know of
no clinical program of a new enzymatic product for the debridement of serious
burns. The primary competition for Vibrilase continues to be surgical
debridement.
See "Factors that May Affect Future Results--If we fail to compete successfully,
our revenues and operating results will be adversely affected."
Employees
As of March 15, 2002, we had 216 full-time employees, 111 of whom are in
operations, 80 of whom are in research and development and 25 of whom are in
administration.
We consider our employee relations to be good. Our employees are not covered by
a collective bargaining agreement. We have not experienced employment related
work stoppages. We cannot assure you that we will be able to continue attracting
qualified personnel in sufficient numbers to meet our needs.
7
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 that involves numerous risks and
uncertainties. The risks and uncertainties described below are not the only ones
we face. Other risks and uncertainties, including those that we do not currently
consider material, may impair our business. If any of the risks discussed below
actually occur, our business, financial condition, operating results or cash
flows could be materially adversely affected. This could cause the trading price
of our common stock to decline, and you may lose all or part of your investment.
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 December 31, 2001, we had an accumulated deficit of
approximately $148.1 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 cannot be certain that any financing will be available when
needed. If we fail to raise additional financing as we need it, we will have to
delay or terminate some or all of our product development programs.
We expect to continue to spend substantial amounts of capital for our operations
for the foreseeable future. The amount of capital we will need depends on many
factors, including:
. the progress, timing and scope of our preclinical studies and clinical
trials;
. the time and cost necessary to obtain regulatory approvals;
. the time and cost necessary to develop commercial manufacturing
processes, including quality systems and to build or acquire
manufacturing capabilities;
. the time and cost necessary to respond to technological and market
developments; and
. 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:
. additional leases for new facilities and capital equipment;
. additional licenses and collaborative agreements;
. additional contracts for consulting, maintenance and administrative
services; and
. additional contracts for product manufacturing.
We believe that our cash, cash equivalents and short term investment securities
balances at December 31, 2001 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 and our operating results will be
adversely affected.
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, the
value of our company and our operating results will be adversely affected.
8
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:
. slow or insufficient patient enrollment;
. slow recruitment of, and completion of necessary institutional
approvals at clinical sites;
. longer treatment time required to demonstrate efficacy;
. lack of sufficient supplies of the product candidate;
. adverse medical events or side effects in treated patients;
. lack of effectiveness of the product candidate being tested; and
. regulatory requests for additional clinical trials.
Typically, if a drug product is intended to treat a chronic disease, as is the
case with most of the product candidates we are developing, safety and efficacy
data must be gathered over an extended period of time, which can range from six
months to three years or more.
In May 2001, we completed a 24-month patient evaluation for the initial clinical
trial of our lead drug product, Aldurazyme, for the treatment of MPS I. Two of
the original ten patients enrolled in this trial died in 2000. One of these
patients received 103 weeks of Aldurazyme treatment and the other received 37
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 31 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.
Although Aldurazyme and Aryplase have obtained fast track designations, we
cannot guarantee a faster review process or faster approval compared to the
normal FDA procedures.
We will not be able to sell our products if we fail to comply with manufacturing
regulations.
Before we can begin commercial manufacture of our products, we must obtain
regulatory approval of our manufacturing facility and process. In addition,
manufacture of our drug products must comply with the FDA's current Good
Manufacturing Practices regulations, commonly known as cGMP. The cGMP
regulations govern quality control and documentation policies and procedures.
Our manufacturing facilities are continuously subject to inspection by the FDA,
the State of California and foreign regulatory authorities, before and after
product approval. Our Galli Drive and our Bel Marin Keys Boulevard manufacturing
facilities have been inspected and licensed by the State of California for
clinical pharmaceutical manufacture. We cannot guarantee that these facilities
will pass federal or international regulatory inspection. We cannot guarantee
that we, or any potential third party manufacturer of our drug products, will be
able to comply with cGMP regulations.
We must pass Federal, state and European regulatory inspections, and we must
manufacture process qualification batches to final specifications under cGMP
controls for each of our drug products before the marketing applications can be
approved. Although we have completed process qualification batches for
Aldurazyme, these batches may be rejected by the regulatory authorities, and we
may be unable to manufacture the process qualification batches for our other
products or pass the inspections in a timely manner, if at all.
9
If we fail to obtain orphan drug exclusivity for some of our products, our
competitors may sell products to treat the same conditions and our revenues will
be reduced.
As part of our business strategy, we intend to develop some drugs that may be
eligible for FDA and European Community orphan drug designation. Under the
Orphan Drug Act, the FDA may designate a product as an orphan drug if it is a
drug intended to treat a rare disease or condition, defined as a patient
population of less than 200,000 in the United States. The company that first
obtains FDA approval for a designated orphan drug for a given rare disease
receives marketing exclusivity for use of that drug for the stated condition for
a period of seven years. However, different drugs can be approved for the same
condition. Similar regulations are available in the European Community with a
ten-year period of market exclusivity.
Because the extent and scope of patent protection for our drug products is
limited, orphan drug designation is particularly important for our products that
are eligible for orphan drug designation. We plan to rely on the exclusivity
period under the orphan drug designation to maintain a competitive position. If
we do not obtain orphan drug exclusivity for our drug products, which do not
have patent protection, our competitors may then sell the same drug to treat the
same condition.
Even though we have obtained orphan drug designation for certain of our product
candidates and even if we obtain orphan drug designation for other products we
develop, we cannot guarantee that we will be the first to obtain marketing
approval for any orphan indication or, if we do, that exclusivity would
effectively protect the product from competition. Orphan drug designation
neither shortens the development time or regulatory review time of a drug nor
gives the drug any advantage in the regulatory review or approval process.
Because the target patient populations for some of our products are small, we
must achieve significant market share and obtain high per patient prices for our
products to achieve profitability.
Two of our lead drug candidates, Aldurazyme and Aryplase, target diseases with
small patient populations. As a result, our per-patient prices must be
relatively high in order to recover our development costs and achieve
profitability. Aldurazyme targets patients with MPS I and Aryplase targets
patients with MPS VI. We estimate that there are approximately 3,400 patients
with MPS I and 1,100 patients with MPS VI in the developed world. We believe
that we will need to market worldwide to achieve significant market share. In
addition, we are developing other drug candidates to treat conditions, such as
other genetic diseases and serious burn wounds, with small patient populations.
We cannot be certain that we will be able to obtain sufficient market share for
our drug products at a price high enough to justify our product development
efforts.
If we fail to obtain an adequate level of reimbursement for our drug products by
third-party payers, there would 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.
Third-party payers, such as government or private health care insurers,
carefully review and increasingly challenge the prices charged for drugs.
Reimbursement rates from private companies vary depending on the third-party
payer, the insurance plan and other factors. Reimbursement systems in
international markets vary significantly by country and by region, and
reimbursement approvals must be obtained on a country-by-country basis. We
cannot be certain that third-party payers will pay for the costs of our drugs.
Even if we are able to obtain reimbursement from third-party payers, we cannot
be certain that reimbursement rates will be enough to allow us to profit from
sales of our drugs or to justify our product development expenses.
We currently have no expertise obtaining reimbursement. We expect to rely on the
expertise of our joint venture partner Genzyme to obtain reimbursement for the
costs of Aldurazyme. We cannot predict what the reimbursement rates will be. In
addition, we will need to develop our own reimbursement expertise for future
drug candidates unless we enter into collaborations with other companies with
the necessary expertise.
We expect that, in the future, reimbursement will be increasingly restricted
both in the United States and internationally. The escalating cost of health
care has led to increased pressure on the health care industry to reduce costs.
Governmental and private third-party payers have proposed health care reforms
and cost reductions. A number of federal and state proposals to control the cost
of health care, including the cost of drug treatments have been made in the
United States. In some foreign markets, the government controls the pricing
which would affect the profitability of drugs. Current government regulations
and possible future legislation regarding health care may affect our future
revenues from sales of our drugs and may adversely affect our business and
prospects.
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.
10
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:
. 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.
. 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.
. 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.
. Receipt of a patent may not provide much practical protection. If we
receive a patent with a narrow scope, then it will be easier for
competitors to design products that do not infringe on our patent.
In addition, competitors also seek patent protection for their technology. There
are many patents in our field of technology, and we cannot guarantee that we do
not infringe on those patents or that we will not infringe on patents granted in
the future. If a patent holder believes our product infringes on their patent,
the patent holder may sue us even if we have received patent protection for our
technology. If someone else claims we infringe on their technology, we would
face a number of issues, including the following:
. Defending a lawsuit takes significant time and can be very expensive.
. If the court decides that our product infringes on the competitor's
patent, we may have to pay substantial damages for past infringement.
. 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.
. Redesigning our product so it does not infringe may not be possible
or could require substantial funds and time.
It is also unclear whether our trade secrets will provide useful protection.
While we use reasonable efforts to protect our trade secrets, our employees or
consultants may unintentionally or willfully disclose our information to
competitors. Enforcing a claim that someone else illegally obtained and is using
our trade secrets, like patent litigation, is expensive and time consuming, and
the outcome is unpredictable. In addition, courts outside the United States are
sometimes less willing to protect trade secrets. Our competitors may
independently develop equivalent knowledge, methods and know-how.
We may also support and collaborate in research conducted by government
organizations or by universities. We cannot guarantee that we will be able to
acquire any exclusive rights to technology or products derived from these
collaborations. If we do not obtain required licenses or rights, we could
encounter delays in product development while we attempt to design around other
patents or even be prohibited from developing, manufacturing or selling products
requiring these licenses. There is also a risk that disputes may arise as to the
rights to technology or products developed in collaboration with other parties.
The United States Patent and Trademark Office recently issued two patents that
relate to (alpha)-L-iduronidase. If we are not able to successfully challenge
these patents, we may be prevented from producing Aldurazyme unless and until we
obtain a license.
The United States Patent and Trademark Office recently issued two patents that
include composition of matter and method of use claims for recombinant
(alpha)-L-iduronidase. Our lead drug product, Aldurazyme, is based on
recombinant (alpha)-L-iduronidase. We believe that these patents are invalid on
a number of grounds. A corresponding patent application was filed in the
European Patent Office claiming composition of matter for recombinant
(alpha)-L-iduronidase, and it was rejected over prior art and withdrawn and
cannot be re-filed. Nonetheless, under U.S. law, issued patents are entitled to
a presumption of validity, and our challenges to the U.S. patents may be
unsuccessful. Even if we are successful, challenging the U.S. patents may be
expensive, require our management to devote significant time to this effort and
may delay commercialization of Aldurazyme in the United States.
11
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.
We cannot guarantee that Genzyme will devote the resources necessary to
successfully market Aldurazyme. In addition, either party may terminate the
joint venture for specified reasons, including if the other party is in material
breach of the agreement or has experienced a change of control or has declared
bankruptcy and also is in breach of the agreement. Either party may also
terminate the agreement upon one-year prior written notice for any reason.
Furthermore, we may terminate the joint venture if Genzyme fails to fulfill its
contractual obligation to pay us $12.1 million in cash upon the approval of the
BLA for Aldurazyme.
If the joint venture is terminated for breach, the non-breaching party would be
granted, exclusively, all of the rights to Aldurazyme and any related
intellectual property and regulatory approvals and would be obligated to buy out
the breaching party's interest in the joint venture. If we are the breaching
party, we would lose our rights to Aldurazyme and the related intellectual
property and regulatory approvals. If the joint venture is terminated without
cause, the non-terminating party would have the option, exercisable for one
year, to buy out the terminating party's interest in the joint venture and
obtain all rights to Aldurazyme exclusively. In the event of termination of the
buy out option without exercise by the non-terminating party as described above,
all right and title to Aldurazyme is to be sold to the highest bidder, with the
proceeds to be split equally between Genzyme and us.
If the joint venture is terminated by either party because the other declared
bankruptcy and is also in breach of the agreement, the terminating party would
be obligated to buy out the other and would obtain all rights to Aldurazyme
exclusively. If the joint venture is terminated by a party because the other
party experienced a change of control, the terminating party shall notify the
other party, the offeree, of its intent to buy out the offeree's interest in the
joint venture for a stated amount set by the terminating party at its
discretion. The offeree must then either accept this offer or agree to buy the
terminating party's interest in the joint venture on those same terms. The party
who buys out the other would then have exclusive rights to Aldurazyme.
If we were obligated, or given the option, to buy out Genzyme's interest in the
joint venture, and gain exclusive rights to Aldurazyme, we may not have
sufficient funds to do so and we may not be able to obtain the financing to do
so. If we fail to buy out Genzyme's interest we may be held in breach of the
agreement and may lose any claim to the rights to Aldurazyme and the related
intellectual property and regulatory approvals. We would then effectively be
prohibited from developing and commercializing the product.
Termination of the joint venture in which we retain the rights to Aldurazyme
could cause us significant delays in product launch in the United States,
difficulties in obtaining third-party reimbursement and delays or failure to
obtain foreign regulatory approval, any of which could hurt our business and
results of operations. Since Genzyme funds 50% of the joint venture's operating
expenses, the termination of the joint venture would double our financial burden
and reduce the funds available to us for other product programs.
If we are unable to manufacture our drug products in sufficient quantities and
at acceptable cost, we may be unable to meet demand for our products and lose
potential revenues or have reduced margins.
Although we have successfully manufactured Aldurazyme at commercial scale within
our cost parameters, we cannot guarantee that we will be able to manufacture any
other drug product successfully with a commercially viable process or at a scale
large enough to support their respective commercial markets or at acceptable
margins.
Our manufacturing processes may not meet initial expectations and we may
encounter problems with any of the following measurements of performance if we
attempt to increase the scale or size or improve the commercial viability of our
manufacturing processes:
. design, construction and qualification of manufacturing facilities
that meet regulatory requirements;
. schedule;
. reproducibility;
. production yields;
. purity;
. costs;
12
. quality control and assurance systems;
. shortages of qualified personnel; and
. compliance with regulatory requirements.
Improvements in manufacturing processes typically are very difficult to achieve
and are often very expensive. We cannot know with certainty how long it might
take to make improvements if it becomes necessary to do so. If we contract for
manufacturing services with an unproven process, our contractor is subject to
the same uncertainties, high standards and regulatory controls.
The availability of suitable contract manufacturing at scheduled or optimum
times is not certain. The cost of contract manufacturing is greater than
internal manufacturing and therefore our manufacturing processes must be of
higher productivity to yield equivalent margins.
The manufacture of Neutralase involves the fermentation of a bacterial species.
We have never used a bacterial production process for the production of any
commercial product. IBEX Technologies Inc., from which we acquired Neutralase,
had contracted with a third party for the manufacture of the Neutralase used in
prior clinical trials.
We have built-out approximately 51,800 square feet at our Novato facilities for
manufacturing capability for Aldurazyme and Aryplase including related quality
control laboratories, materials capabilities, and support areas. We expect to
add additional capabilities in stages over time, which could create additional
operational complexity and challenges. We expect that the manufacturing process
of all of our new drug products, including Aryplase and Neutralase, will require
significant time and resources before we can begin to manufacture them (or have
them manufactured by third parties) in commercial quantity at acceptable cost.
Even if we can establish the necessary capacity, we cannot be certain that
manufacturing costs will be commercially reasonable, especially if contract
manufacturing is employed or if third-party reimbursement is substantially lower
than expected.
In order to achieve our product cost targets, we must develop efficient
manufacturing processes either by:
. improving the product yield from our current cell lines, colonies of
cells which have a common genetic makeup;
. improving the manufacturing processes licensed from others; or
. 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 increase capabilities either by developing our own sales and
marketing organization or by entering into agreements with others, we may be
unable to successfully sell our products. If we are unable to effectively sell
our drug products, our ability to generate revenues will be diminished.
Under our joint venture with Genzyme, Genzyme is responsible for marketing and
distributing Aldurazyme. We cannot guarantee that we will be able to establish
sales and distribution capabilities or that the joint venture, any future
collaborators or we will successfully sell any of our drug products.
With our acquisition of Neutralase from IBEX Technologies Inc., we have an
enzyme product that has a significantly larger potential patient population than
Aldurazyme and Aryplase and will be marketed and sold to different target
audiences with different therapeutic and financial requirements and needs. As a
result, we will be competing with other pharmaceutical companies with
experienced and well-funded sales and marketing operations targeting these
specific physician and institutional audiences. We may not be able to create our
own sales and marketing force or of a size that would allow us to compete with
these other companies. If we elect to enter into third-party marketing and
distribution agreements in order to sell into these markets, we may not be able
to enter into these agreements on acceptable terms, if at all. If we cannot
compete effectively in these specific physician and institutional markets, it
would adversely affect sales of Neutralase.
13
If we fail to compete successfully, our revenues and operating results will be
adversely affected.
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. If our
competitors successfully commercialize a product that treats a given rare
genetic disease before we do, we will effectively be precluded from developing a
product to treat that disease because the patient populations of the rare
genetic diseases are so small. If our competitor gets orphan drug exclusivity,
we could be precluded from marketing our version for seven years in the U.S. and
ten years in the European Union. However, different drugs can be approved for
the same condition. These companies also compete with us to attract qualified
personnel and organizations for acquisitions, joint ventures or other
collaborations. They also compete with us to attract academic research
institutions as partners and to license these institutions' proprietary
technology. 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.
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. We also directly compete with a number of
these organizations to recruit personnel, especially scientists and technicians.
If we do not achieve milestones as expected, our stock price may decline.
For planning purposes, we estimate the timing of the accomplishment of various
scientific, clinical, regulatory and other milestones, such as the commencement
or completion of scientific studies and clinical trials and the submission of
regulatory filings. These estimates, some of which are included in this
prospectus, 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 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. We
cannot guarantee that our staff, financial resources, systems, procedures or
controls will be adequate to support our operations or that our management will
be able to manage successfully future market opportunities or our relationships
with customers and other third parties.
Our future growth and success depend on our ability to recruit, retain, manage
and motivate our employees. The loss of key scientific, technical and managerial
personnel may delay or otherwise harm our product development programs. Any harm
to our research and development programs would harm our business and prospects.
Because of the specialized scientific and managerial nature of our business, we
rely heavily on our ability to attract and retain qualified scientific,
technical and managerial personnel. In particular, the loss of Fredric D. Price,
our Chairman and Chief Executive Officer, or Emil D. Kakkis, M.D., Ph.D., our
Senior Vice President of Scientific Affairs or Christopher M. Starr, Ph.D., our
Senior Vice President for Research and Development, could be detrimental to us
if we cannot recruit suitable replacements in a timely manner. While Mr. Price,
Dr. Kakkis and Dr. Starr are parties to employment agreements with us, we cannot
guarantee that they will remain employed with us in the future. In addition,
these agreements do not restrict their ability to compete with us after their
employment is terminated. The competition for qualified personnel in the
biopharmaceutical field is intense. We cannot be certain that we will continue
to attract and retain qualified personnel necessary for the development of our
business.
If we fail to effectively integrate the recently acquired Neutralase and
Phenylase programs and those acquired from Synapse Technologies, Inc. into our
current operations, the efficient execution of these product programs could be
delayed and our operating and research and development expenditures could
increase beyond anticipated levels.
Our recent acquisition of assets from IBEX Technologies Inc., including the
Neutralase and Phenylase product programs and from Synapse Technologies, Inc.,
will need to be integrated with our current operations. This will include
several technical and administrative challenges, including managing the
information transfer, integrating certain of our former technical staff members
at Ibex and Synapse into our research and development structure and managing
multiple operations in different countries. If we do not accomplish this
integration effectively, our programs could be delayed and our operating and
research and development expenditures could increase beyond anticipated levels.
Additionally, the integration could require a significant time commitment from
our senior management.
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.
14
Examples include the potential use in the future of effective gene therapy for
the treatment of genetic diseases. The use of gene therapy could theoretically
reduce or eliminate the use of enzyme replacement therapy in MPS diseases.
Sometimes, this change in treatment method can be caused by the introduction of
other companies' products or the development of new technologies or surgical
procedures which may not directly compete with ours, but which have the effect
of changing how doctors decide to treat a disease. For example, Neutralase is
being developed for heparin reversal in CABG surgery. It is possible that
alternative non-surgical methods of treating heart disease could be developed.
If so, then the demand for Neutralase would likely decrease.
If product liability lawsuits are successfully brought against us, we may incur
substantial liabilities.
We are exposed to the potential product liability risks inherent in the testing,
manufacturing and marketing of human pharmaceuticals. The BioMarin/Genzyme LLC
maintains product liability insurance for our clinical trials of Aldurazyme. We
have obtained insurance against product liability lawsuits for the clinical
trials for Aryplase and Vibrilase. We may be subject to claims in connection
with our current clinical trials for Aldurazyme, Aryplase and Vibrilase for
which the joint venture's or our insurance coverages are not adequate. We cannot
be certain that if Aldurazyme, Aryplase or Vibrilase receives FDA approval, the
product liability insurance the joint venture or we will need to obtain in
connection with the commercial sales of Aldurazyme, Aryplase or Vibrilase will
be available in meaningful amounts or at a reasonable cost. In addition, we
cannot be certain that we can successfully defend any product liability lawsuit
brought against us. If we are the subject of a successful product liability
claim which exceeds the limits of any insurance coverage we may obtain, we may
incur substantial liabilities which would adversely affect our earnings and
financial condition.
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:
. 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;
. results of clinical trials, announcements of technological innovations
or new products by us or our competitors;
. government regulatory action affecting our drug products or our
competitors' drug products in both the United States and foreign
countries;
. developments or disputes concerning patent or proprietary rights;
. general market conditions and fluctuations for the emerging growth and
biopharmaceutical market sectors;
. economic conditions in the United States or abroad;
. actual or anticipated fluctuations in our operating results;
. broad market fluctuations in the United States or in Europe,
which may cause the market price of our common stock to fluctuate;
and
. 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:
. trading in different time zones;
. different ability to buy or sell our stock;
. different market conditions in different capital markets; and
. 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.
15
If our officers, directors and largest stockholder elect to act together, they
may be able to control our management and operations, acting in their best
interests and not necessarily those of other stockholders.
Our directors and officers control approximately 28% of the outstanding shares
of our common stock. Glyko Biomedical Ltd. owns approximately 22% 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:
. The election of all directors;
. The amendment of charter documents or the approval of a merger, sale
of assets or other major corporate transactions; and
. 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.
16
Item 2. Properties
We are currently leasing a total of seven buildings. Five of our buildings are
located in Novato, California, each within a half-mile radius. The five
buildings, each named for the streets on which they are located, are:
o Bel Marin Keys facility
o Galli Drive facility
o Pimentel Court facility
o 79 Digital Drive facility
o 95 Digital Drive facility
The sixth building is located in Torrance, California and is currently being
subleased until the lease expires in August 2002. The seventh building is
located in Montreal, Ontario, Canada, which we sublease from IBEX Technologies,
Inc. for our research and development efforts relating to Neutralase and
Phenylase. The Montreal sublease expires in October 2002.
The Bel Marin Keys facility houses administrative staff and a clinical
production laboratory. It consists of approximately 13,400 square feet. The
lease expires in May 2004. We have an option to extend the lease for one
additional three-year period.
The Galli Drive facility consists of approximately 69,800 rentable square feet.
It currently houses research and development laboratories, storage and warehouse
functions, administrative offices, and our Aldurazyme manufacturing facility.
The lease expires in August 2010 and has the option to extend for two additional
five-year periods.
The Pimentel Court facility, with approximately 11,500 square feet, houses the
manufacturing, research and administrative operations of Glyko, Inc. The lease
expires in April 2003 and has options for two 2-year extensions.
Our 79 Digital Drive facility leased commencing in late 2001 provides
warehousing support for our entire organization. Its primary focus is to provide
controlled access warehousing and the required segregation and testing of all
cGMP raw materials used in our manufacturing operations. In addition, 79 Digital
serves as the primary shipping, receiving and storage point for all other
materials used throughout our entire organization.
The 95 Digital Drive facility, 34,000 rentable square feet, is planned to house
research and process development functions. The building shell has been
completed. Development of internal laboratory space is on hold until at least
2002. When fully developed, it will consist of approximately 42,000 square feet.
The lease expires in November 2009.
Our administrative office space is expected to be adequate until the end of
2002, at which time we may add additional office space. We may need to
supplement our production facilities' capacity if the market penetration rates
are such that the output from our facilities would be less than the markets'
demands. Based on the timelines for Neutralase and Vibrilase, we will have to
develop, purchase from third parties, or enter into agreements with third
parties for contact manufacturing for these products for production of clinical
materials, beginning in 2002. We plan to use contract manufacturing when
appropriate to provide product for both clinical and commercial requirements
until such time as we believe it prudent to develop in-house manufacturing
capability.
Item 3. Legal Proceedings
We have no material legal proceedings pending.
Item 4. Submission of Matters to a Vote of Security-Holders
No matters were submitted to a vote of our security holders during the quarter
ended December 31, 2001.
17
Part II
Item 5. Market For Common Equity and Related Stockholder Matters
As of July 1999, our common stock has been listed on the Nasdaq National Market
and the Swiss New Market SWX under the symbol "BMRN". The following table sets
forth the high and low sales prices for our common stock for the periods noted,
as reported by Nasdaq National Market.
Prices
Year Period High Low
2000 First Quarter $41.25 $11.00
2000 Second Quarter $30.38 $16.00
2000 Third Quarter $21.86 $15.75
2000 Fourth Quarter $18.50 $15.75
2001 First Quarter $13.25 $6.56
2001 Second Quarter $13.29 $7.50
2001 Third Quarter $13.74 $8.07
2001 Fourth Quarter $14.40 $8.65
On March 15, 2002, the last reported sale price on the Nasdaq National Market
for our common stock was $10.55. We have never paid any cash dividends on our
common stock and we do not anticipate paying cash dividends in the foreseeable
future.
Holders
As of March 15, 2002, there were 80 holders of record of 52,447,402 outstanding
shares of our common stock. Additionally, on such date options to acquire
7,573,124 shares of our common stock and warrants to acquire 752,427 shares of
our common stock were outstanding.
Unregistered Securities
On October 31, 2001, we issued 814,647 shares of common stock to IBEX
Technologies Inc. and its subsidiaries as partial consideration for our purchase
of the intellectual property and other assets associated with the IBEX
therapeutic enzyme drug products (including Neutralase and Phenylase). These
shares were issued pursuant to an exemption from registration under Section
4(2), of the Securities Act of 1933. These shares were appropriately legended to
indicate that the shares may not be resold unless registered under the
Securities Act or an exemption from registration is available. We have since
registered these shares for resale through a registration statement on Form S-3.
18
Item 6. Selected consolidated financial data (in thousands, except per share
data)
The selected consolidated financial data set forth below contain only a portion
of our financial statement information and should be read in conjunction with
the Consolidated Financial Statements of BioMarin Pharmaceutical Inc. and
related Notes and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere herein. All financial data
presented in thousands, except per share data.
We derived the statement of operations data for the interim period from March
21, 1997 through December 31, 1997 and the years ended December 31, 1998, 1999,
2000 and 2001 and balance sheet data as of December 31, 1997, 1998, 1999, 2000
and 2001 from audited financial statements. Historical results are not
necessarily indicative of results that we may expect in the future.
Period from
March 21, 1997
(inception) to
December 31, Year ended December 31,
----------------------------------------------------------------------------
Consolidated statements
of operations data: 1997 1998 1999 2000 2001
- ----------------------------------------------- ----------------------------------------------------------------------------
(in thousands, except for per share data)
Revenues $ -- $ 854 $ 5,300 $ 9,714 $ 11,699
Operating costs and expenses:
Research and development 1,914 10,288 26,341 34,459 45,283
General and administrative 914 3,146 4,757 6,507 6,718
In-process research and development 11,647
Facility closure -- -- -- 4,423
------ ------ ------ ------ -------
Total operating costs and expenses 2,828 13,434 31,098 45,389 63,648
------ ------ ------ ------ -------
Loss from operations (2,828) (12,580) (25,798) (35,675) (51,949)
Interest income 65 685 1,832 2,979 1,871
Interest expense -- -- (732) (7) (17)
Equity in loss of joint venture -- (47) (1,673) (2,912) (7,333)
------ ------ ------ ------ -------
Net loss continuing operations (2,763) (11,942) (26,371) (35,615) (57,428)
Loss from discontinued operations - (372) (1,701) (1,749) (2,266)
Loss from disposal of discontinued operations - - - - (7,912)
------ ------ ------- ------ -------
Net loss $(2,763) $(12,314) $(28,072) $(37,364) $(67,606)
====== ====== ======= ====== =======
Net loss per share, basic and diluted
Loss from continued operations $(0.34) $(0.53) $(0.88) $(0.99) $(1.40)
====== ====== ====== ======= =======
Loss from discontinued operations $ - $(0.02) $(0.06) $(0.05) $ (0.06)
====== ====== ====== ======= =======
Loss on disposal of discontinued operations $ - $ - $ - $ - $ (0.19)
====== ====== ====== ======= =======
Net loss $(0.34) $(0.55) $(0.94) $(1.04) $ (1.65)
====== ====== ====== ======= =======
Weighted average common shares outstanding 8,136 22,488 29,944 35,859 41,083
====== ====== ====== ======= =======
December 31,
-------------------- -----------------------------------------------------
Consolidated 1997 1998 1999 2000 2001
balance sheet data:
- ------------------------------------------------- -------------------- ------------ ------------ ------------ --------------
Cash, cash equivalents and short-term $6,888 $11,389 $62,986 $40,201 $131,097
investments
Total current assets 7,507 12,819 66,422 44,541 136,783
Total assets 7,653 31,510 103,549 76,933 171,811
Long-term liabilities -- 110 85 56 3,961
Total stockholders' equity 7,380 29,394 98,377 69,994 159,548
- ---------------------------
See notes to our consolidated financial statements incorporated by reference in
this prospectus for a description of the number of shares used in the
computation of the net loss per common share.
19
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion of the financial condition and results of operations
should be read in conjunction with our consolidated financial statements and
their notes appearing elsewhere in this document.
Overview
We develop enzyme therapies to treat serious, life-threatening diseases and
conditions. We leverage our expertise in enzyme biology to develop product
candidates for the treatment of genetic diseases, including MPS I, MPS VI and
PKU, as well as other critical care situations such as cardiovascular surgery
and serious burns. Our product candidates address markets for which no products
are currently available or where current products have been associated with
major deficiencies. We focus on conditions with well-defined patient
populations, including genetic diseases, which require chronic therapy.
Our lead product candidate, Aldurazyme, which recently completed a Phase 3
trial, is being developed for the treatment of Mucopolysaccharidosis I (MPS I)
disease. We are developing our second product candidate, Neutralase, for
reversal of anticoagulation by heparin in patients undergoing Coronary Artery
Bypass Graft, or CABG, surgery and angioplasty. In addition to Aldurazyme and
Neutralase, we are developing other enzyme-based therapeutics for the treatment
of a variety of diseases and conditions. These include Aryplase for the
treatment of MPS VI, Vibrilase, a topical enzyme product for use in removing
burned skin tissue in preparation for skin grafting or other therapy, and other
enzyme product candidates, currently in preclinical development for genetic and
other diseases.
Results of Operations
In February 2002, we decided to close the carbohydrate analytical business
portion of our wholly owned subsidiary, Glyko, Inc., which provided all of
Glyko, Inc.'s revenues. The decision to close Glyko, Inc. has resulted in the
operations of Glyko Inc. being classified as discontinued operations in our
consolidated financial statements and, accordingly, we have segregated the
assets and liabilities of the discontinued operations in our consolidated
balance sheets. In addition, we have segregated the operating results in our
consolidated statements of operations and have segregated cash flows from
discontinued operations in our consolidated statements of cash flows.
Years Ended December 31, 2001 and 2000
For the years ended December 31, 2001 and 2000, revenues were $11.7 million and
$9.7 million, respectively. Revenues from our joint venture with Genzyme were
$11.3 million and $9.7 million, and other revenues were $0.4 million and zero
representing grant revenues for the years ended December 31, 2001 and 2000,
respectively. The increase in joint venture revenues in 2001 was primarily the
result of increased manufacturing activities in support of our Phase 3 clinical
trial and our Phase 1 and Phase 3 extension studies, increased regulatory,
clinical and plant and process validation efforts in preparation for a BLA that
will be filed as soon as possible.
Research and development expenses increased to $45.3 million in 2001 from $34.5
million in 2000. The major factors in the growth of research and development
expenses include increased expenses in support of the Aldurazyme joint venture
with Genzyme, especially manufacturing, regulatory and clinical requirements, of
manufacturing and clinical requirements to support our Phase 1 clinical trial of
Aryplase, of the contract manufacturing requirements to support our Phase 1
clinical trial of Vibrilase and the increased manufacturing and research staff,
including the scientific staff we assumed in Montreal, Canada in our purchase of
the therapeutic assets of IBEX Technologies, Inc. and its subsidiaries in
October 2001, to support our product programs. We anticipate research and
development expenditures to increase in the future in order to further develop
our drug product candidates.
General and administrative expenses increased to $6.7 million in 2001 from $6.5
million in 2000. This increase was primarily due to the costs incurred in 2001
in legal and other fees associated with the potential purchase of all of the
outstanding capital stock of Glyko Biomedical Ltd. by us (in exchange for our
common stock) anticipated to close in the second quarter of 2002, increased
staffing in finance, business development, information systems and purchasing,
partially offset by savings due to the elimination of the President position
from our executive team. We anticipate general and administrative expenditures
to increase in the future relating to the increased headcount and facilities to
support the growth of our Company.
In-process research and development represents all of the purchase price of our
acquisition of the IBEX therapeutic assets in October 2001 plus related expenses
totaling $11.7 million. On October 31, 2001, we purchased from IBEX Technologies
Inc. and its subsidiaries the intellectual property and other assets associated
with the IBEX therapeutic enzyme drug products (including Neutralase and
Phenylase) for $10.4 million, consisting of $2 million in cash and $8.4 million
in our common stock at $10.218 per share (814,647 shares). In connection with
the purchase of the IBEX therapeutic assets, we issued options to purchase
43,861 shares of our common stock. These options were valued using the
Black-Scholes option pricing model and the resulting valuation of $291,000 was
included as additional purchase price. The purchase agreement includes up to
approximately $9.5 million in contingency payments upon regulatory approval of
Neutralase and Phenylase, provided that approval occurs prior to October 31,
2006.
20
Facility closure in 2000, represents a charge of $4.4 million for the closure of
our Carson Street clinical manufacturing facility. The charge primarily
consisted of impairment reserves for leasehold improvements and equipment
located in the Carson Street facility.
Interest income decreased by $1.1 million to $1.9 million in 2001 from $3.0
million in 2000 primarily due to the decrease in cash available for investment
through most of the 2001 (as our significant follow-on offering occurred in
December 2001) and the decrease in interest rates available on short-term
investments.
Interest expense for 2001 and 2000 were immaterial. We expect interest expense
to increase in future years due to an equipment loan executed for $5.5 million
in December 2001.
Our equity in the loss of our joint venture with Genzyme was $7.3 million for
2001 compared to $2.9 million for 2000, as the joint venture conducted a
multi-site, placebo-controlled Phase 3 clinical trial of 45 patients which
commenced in December 2000 and continued extension studies of the original Phase
1 clinical trial and the Phase 3 clinical trial of Aldurazyme.
Net loss from continuing operations was $57.4 million ($1.40 per share, basic
and diluted) and $35.6 million ($0.99 per share, basic and diluted) for 2001 and
2000, respectively.
Loss from discontinued operations relating to the Glyko, Inc. analytics business
increased by $0.6 million to $2.3 million in 2001 compared to $1.7 million in
2000 due to the increased sales and production staff in 2001 in an attempt to
grow the core analytics business.
Loss from disposal of discontinued operations represents the Glyko, Inc. closure
expense of $7.9 million in 2001 consisting primarily of an impairment reserve
against the unamortized balance of goodwill and other intangible assets related
to the initial acquisition of Glyko, Inc. The majority of the Glyko, Inc.
employees will be incorporated into our business and such employees will
continue to provide necessary analytic and diagnostic support to the Company's
therapeutic products.
Net loss was $67.6 million ($1.65 per share, basic and diluted) and $37.4
million ($1.04 per share, basic and diluted) for 2001 and 2000, respectively.
Years Ended December 31, 2000 and 1999
For the years ended December 31, 2000 and 1999, revenues were $9.7 million and
$5.3 million, respectively representing revenues from our joint venture with
Genzyme. The increase in joint venture revenues in 2000 was primarily the result
of increased manufacturing activities as we began enzyme production in our new
Galli Drive manufacturing facility in Novato, California.
Research and development expenses increased to $34.5 million in 2000 from $26.3
million in 1999. Increased expenses in support of the Aldurazyme joint venture
with Genzyme, especially manufacturing requirements, and of the Aryplase program
were the major factors in the growth of research and development expenses.
General and administrative expenses increased to $6.5 million in 2000 from $4.8
million in 1999. This increase was partially due to tthe increase in staffing
and facilities in 2000.
In the first quarter of 2000, we recorded a charge of $4.4 million for the
closure of our Carson Street clinical manufacturing facility. The facility was
no longer required for the production of Aldurazyme, the initial purpose of the
plant, after a decision by the BioMarin/Genzyme LLC joint venture to use our
Galli Drive facility for the manufacture of bulk Aldurazyme both for the Phase 3
trial and for the commercial launch of Aldurazyme. This decision was based in
part on FDA guidance to use an improved production process, which was installed
in the Galli facility, for the clinical trial, for the BLA submission and for
the commercial production. The majority of our technical staff at the Carson
Street facility transferred to the Galli Drive facility in Novato, California in
May 2000. The charge primarily consisted of impairment reserves for leasehold
improvements and equipment located in the Carson Street facility.
Interest income increased to $3.0 million in 2000 from $1.8 million in 1999
primarily due to increased cash reserves resulting from our initial public
offering (concurrent with an investment by Genzyme) in July 1999 and funds
received from exercise of stock options and warrants.
21
Interest expense decreased by $0.7 million in 2000 compared to 1999 due to the
interest accrued in 1999 from April through July on our convertible notes
payable which, along with the accrued interest converted into our common stock
issued to note holders concurrent with our initial public offering.
Our equity in the loss of our joint venture with Genzyme was $2.9 million for
2000 compared to $1.7 million for 1999, as the joint venture continued the
original clinical trial of Aldurazyme and began a Phase 3 clinical trial.
Net loss from continuing operations was $35.6 million ($0.99 per share, basic
and diluted) and $26.4 million ($0.88 per share, basic and diluted) for 2000 and
1999, respectively.
Loss from discontinued operations was $1.7 million for 2000 and 1999
representing the Glyko, Inc. analytics business.
The net loss was $37.4 million ($1.04 per share, basic and diluted) and $28.1
million ($.94 per share, basic and diluted) for 2000 and 1999, respectively.
Liquidity and Capital Resources
We have financed our operations since our inception by the issuance of common
stock and convertible notes, equipment financing and the related interest income
earned on cash balances available for short-term investment. Since inception, we
have raised aggregate net proceeds of approximately $286 million. We were
initially funded by an investment from GBL. We have since raised additional
capital from the sale of our common stock in both public and private offerings
and the sale of our other securities, all of which have since converted into
common stock.
Our combined cash, cash equivalents and short-term investments totaled $131.1
million at December 31, 2001 an increase of $90.9 million from $40.2 million at
December 31, 2000. The primary uses of cash during the year ended December 31,
2001 were to finance operations, fund the joint venture, purchase leasehold
improvements and equipment and purchase the therapeutic assets of IBEX. The
primary sources of cash during the year were:
o the issuance of common stock in a follow-on offering in December 2001 netting
us approximately $90.4 million;
o the issuance of common stock in a private placement in May 2001 netting us
approximately $41.6 million;
o the issuance of common stock to Acqua Wellington and its affiliates during
2001 pursuant to our agreement with Acqua Wellington, including their
participation in our private placement, netting us, in the aggregate,
approximately $14.2 million;
o equipment financing of $5.5 million; and
o the issuance of common stock pursuant to the exercise of stock options under
the 1997 Stock Plan and the 1998 Director Plan and pursuant to our Employee
Stock Purchase Plan, the aggregate exercise price of which totaled
approximately $1.6 million.
For the year ended December 31, 2001, operations used $23.1 million, we invested
$18.2 million in the joint venture (which was consumed in joint venture
operations), we purchased $17.8 million of leasehold improvements and equipment
and we purchased the therapeutic assets of IBEX in exchange for our common stock
plus $3 million in cash and out of pocket expenses.
From our inception through December 31, 2001, we have purchased approximately
$51.1 million of leasehold improvements and equipment. We expect that our
investment in leasehold improvements and equipment will increase significantly
during the next two years because we will provide facilities and equipment for a
larger staff and increase manufacturing capacity.
We have made and plan to make substantial commitments to capital projects,
including developing new research and development facilities and expanding our
administrative and support offices.
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.
On May 16, 2001, we sold 4,763,712 shares of our common stock at $9.45 per share
and, for no additional consideration, issued three-year warrants to purchase
714,554 shares of common stock at an exercise price of $13.10 per share and
received net proceeds of approximately $41.6 million. Also, on May 17, 2001, a
fund managed by Acqua Wellington purchased 105,821 shares of common stock and
received warrants to purchase 15,873 shares of common stock on the same price
and terms as the May 16, 2001 transaction; we received net proceeds of
approximately $1 million.
In August 2001, we signed an amended agreement with Acqua Wellington North
American Equities Fund Ltd. (Acqua Wellington) for an equity investment in us.
The agreement allows for the purchase of up to $27.7 million (approximately
2,500,000 shares). 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 the
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. During 2001, Acqua
Wellington purchased 1,344,194 shares for $13.5 million ($13.2 million net of
issuance costs). Under this agreement, Acqua Wellington may also purchase stock
and receive similar terms of any other equity financing by us.
22
On December 13, 2001, we completed a follow-on public offering of our common
stock. In the offering, we sold 8,050,000 shares, including 1,050,000 shares to
cover over-allotments, at a price to the public of $12.00 per share. The net
proceeds to us were approximately $90.4 million.
During December 2001, we entered into three separate agreements with General
Electric Capital Corporation for secured loans totaling $5.5 million. The notes
bear interest (ranging from 9.1% to 9.31%) and are secured by certain
manufacturing and laboratory equipment. Additionally, one of the agreements is
subject to a covenant that requires us to maintain a minimum unrestricted cash
balance of $25 million. Should the unrestricted cash balance fall below $25
million, the note is subject to prepayment, including prepayment penalties
ranging from 1% to 4%.
The net proceeds from any sales of our common stock or equipment financing 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.
We expect our current funds to last through 2003.
We do not expect to generate positive cash flow from operations at least until
2004 because we expect to increase operational expenses and manufacturing
investment for the joint venture and to increase research and development<