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United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2004

Or

For the transition period from                      to                      .

Commission file number: 000-26727

BIOMARIN PHARMACEUTICAL INC.

(Exact name of registrant issuer as specified in its charter)

Registrant’s telephone number: (415) 506-6700

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of The Exchange Act). Yes x No ¨

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 64,497,636 shares common stock, par value $0.001, outstanding as of November 3, 2004.

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BIOMARIN PHARMACEUTICAL INC.

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PART I. FINANCIAL INFORMATION

BioMarin Pharmaceutical Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share and per share data)

See accompanying notes to consolidated financial statements.

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BioMarin Pharmaceutical Inc. and Subsidiaries

Consolidated Statements of Operations

For the Three and Nine Months Ended September 30, 2003 and 2004

(In thousands, except per share data, unaudited)

See accompanying notes to consolidated financial statements.

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BioMarin Pharmaceutical Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2003 and 2004

(In thousands, unaudited)

See accompanying notes to consolidated financial statements.

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BioMarin Pharmaceutical Inc. and Subsidiaries

Notes To Consolidated Financial Statements

September 30, 2004

(Unaudited)

(1) NATURE OF OPERATIONS AND BUSINESS RISKS

BioMarin Pharmaceutical Inc. (the Company or BioMarin) develops and commercializes innovative biopharmaceuticals for serious diseases and medical conditions. The Company and its joint venture partner, Genzyme Corporation (Genzyme), received marketing approval for Aldurazyme^® (laronidase) in the United States on April 30, 2003 and in the European Union on June 11, 2003. On May 18, 2004, BioMarin completed the transaction to acquire the Ascent Pediatrics business. The transaction includes: Orapred^® (prednisolone sodium phosphate oral solution), a patent-protected drug to treat asthma in children; two additional proprietary formulations of Orapred in development; and a U.S. sales force. See Note 3 for further discussion of the transaction. The Company is incorporated in the state of Delaware.

Through September 30, 2004, the Company had accumulated losses of approximately $406.4 million. Management expects to incur further losses for the foreseeable future. Management believes that the Company’s cash, cash equivalents, short-term investments and currently restricted cash at September 30, 2004, will be sufficient to meet the Company’s obligations into the second quarter of 2005. Until the Company can generate sufficient levels of cash from its operations, the Company expects to continue to finance future cash needs primarily through proceeds from equity or debt financings, loans and collaborative agreements with corporate partners.

The Company is subject to a number of risks, including: the need for additional financings; the financial performance of Orapred; its joint venture partner’s ability to successfully commercialize Aldurazyme; its ability to successfully commercialize its product candidates, if approved; its ability to successfully integrate acquisitions; the uncertainty of the Company’s research and development efforts resulting in successful commercial products; obtaining regulatory approval for such products; access to adequate insurance coverage; reliance on the proprietary technology of others; dependence on key personnel; uncertain patent protection; significant competition from larger organizations and generic competition with respect to Orapred; dependence on corporate partners and collaborators; and possible restrictions on reimbursement, as well as other changes in the healthcare industry.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of Presentation

These unaudited consolidated financial statements include the accounts of BioMarin and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated. These unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the Securities and Exchange Commission requirements for interim reporting. However, they do not include all of the information and footnotes required by generally accepted accounting principles (GAAP) for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included.

Operating results for the nine months ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. These consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto for the year ended December 31, 2003, included in the Company’s Annual Report on Form 10-K.

(b) Use of Estimates

The preparation of financial statements in conformity with GAAP in the U.S. requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

(c) Cash and Cash Equivalents

The Company treats liquid investments with original maturities of less than three months when purchased as cash and cash equivalents.

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(d) Short-Term Investments

The Company records its investments as either held-to-maturity or available-for-sale. Held-to-maturity investments are recorded at amortized cost. The available-for-sale investments are recorded at fair market value, with unrealized gains or losses being included in accumulated other comprehensive income (loss). As of September 30, 2004, accumulated other comprehensive loss related to recording available-for-sale short-term investments was approximately $0.2 million. Short-term investments are comprised mainly of corporate bonds, federal agency investments and taxable municipal debt securities. As of September 30, 2004, the Company had no held-to-maturity investments with net unrealized losses when aggregated by category of investment and the carrying value of the Company’s held-to-maturity investments approximated their fair value.

(e) Inventory

The Company values inventories at the lower of cost or fair value. The Company determines cost using the average cost method. The Company analyzes its inventory levels quarterly and writes down inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable value and inventory in excess of expected requirements. Expired inventory is disposed of and the related costs are written off. As of September 30, 2004, inventory consisted of Orapred finished goods of $3.1 million.

(f) Research and Development

Research and development expenses include expenses associated with contract research and development provided by third parties, product manufacturing prior to regulatory approval, clinical and regulatory costs, and internal research and development costs. We believe that regulatory approval of our product candidates is uncertain, and do not assume that products manufactured prior to regulatory approval will be sold commercially. As a result, inventory costs for product candidates are expensed as research and development until regulatory approval is obtained, at which time inventory is capitalized at the lower of cost or fair value.

(g) Investment In and Advances to BioMarin/Genzyme LLC and Equity in the Loss of BioMarin/Genzyme LLC

Under the Aldurazyme joint venture agreement with Genzyme, the Company and Genzyme each provide 50% of the funding for the joint venture. All manufacturing, research and development, sales and marketing, and other services performed by Genzyme and the Company on behalf of the joint venture are billed to the joint venture at cost. Any profits or losses of the joint venture are shared equally by the two parties.

The Company accounts for its investment in the joint venture using the equity method. Accordingly, the Company records an increase in its investment for contributions to the joint venture, and a reduction in its investment for its 50% share of the loss of the joint venture. Equity in the loss of BioMarin/Genzyme LLC includes the Company’s 50% share of the joint venture’s loss for the period. The investment in and advances to BioMarin/Genzyme LLC includes the current receivable from the joint venture for the reimbursement related to services provided to the joint venture by the Company during the most recent month and the Company’s share of the net current assets of the joint venture, primarily cash, accounts receivable and inventory.

(h) Goodwill, Acquired Intangible Assets and Impairment of Long-Lived Assets

The Company records goodwill in a business combination when the total consideration exceeds the fair value of the net tangible and identifiable intangible assets acquired. In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, goodwill and intangible assets with indefinite lives are not amortized. Intangible assets with definite lives are amortized over their useful lives.

The Company reviews long-lived assets, including goodwill, for impairment annually and whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable.

(i) Revenue Recognition

The Company recognizes revenue from product sales when persuasive evidence of an arrangement exists, the product has been shipped, title and risk of loss have passed to the customer, the price to the buyer is fixed or determinable and collection from the customer is reasonably assured. Product sales transactions are evidenced by customer purchase orders, invoices and the related shipping documents.

The timing of product shipments can have a significant impact on the amount of revenue from product sales that the Company recognizes in a particular period. Also, the majority of Orapred sales are made to wholesalers, which, in turn, resell the product to retail outlets. Inventory in the distribution channel consists of inventory held by wholesalers, who are the Company’s principal customers, and inventory held by retailers. The Company’s revenue from product sales in a particular period is impacted by

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increases or decreases in wholesaler inventory levels. If wholesaler inventories increased substantially, the Company could experience reduced revenue from sales in subsequent periods, or product returns from the distribution channel due to overstocking, low end-user demand or product expiration.

The Company establishes and maintains reserves for amounts payable to managed care organizations and state Medicaid programs for the reimbursement of a portion of the retail price of prescriptions filled that are covered by the respective plans. The amounts estimated to be paid relating to products sold are recognized as revenue reductions and as additions to accrued expenses at the time of the original sale. The rebate reserves are based on the Company’s best estimate of the expected prescription fill rate to these managed care organizations and state Medicaid patients. The estimates are developed using the product’s rebate history adjusted to reflect known changes in the factors that impact such reserves.

Provisions for sales discounts, and estimates for chargebacks and product returns are established as a reduction of product sales at the time such revenues are recognized. These revenue reductions are established by the Company’s management as its best estimate at the time of the original sale based on the product’s historical experience adjusted to reflect known changes in the factors that impact such reserves. These revenue reductions are generally reflected either as a direct reduction to accounts receivable through an allowance or as an addition to accrued expenses. The Company permits product returns only if the product is damaged or if it is returned near or after expiration.

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. As of September 30, 2004, the Company had no allowance for doubtful accounts.

Milestone revenue is recognized in full when the related substantive milestone performance goal is achieved. Milestone revenue is typically not recurring in nature.

(j) Net Loss Per Share

Net loss per share is calculated by dividing net loss by the weighted average shares of common stock outstanding during the period. Diluted net loss per share is calculated by dividing net loss by the weighted average shares of common stock outstanding and potential shares of common stock during the period. Potential shares of common stock include dilutive stock issuable upon the exercise of outstanding common stock options, warrants, convertible debt and contingent issuances of common stock. For all periods presented, such potential shares of common stock were excluded from the computation of diluted net loss per share, as their effect is antidilutive.

Potentially dilutive securities include (in thousands):

(k) Stock Option Plans

The Company has three stock-based compensation plans. The Company accounts for those plans under APB Opinion No. 25, Accounting for Stock Issued to Employees, whereby generally no stock-based compensation cost is reflected in net loss for options issued to employees and directors with exercise prices at or above the market price on the date of issuance. The following table (in thousands, except per share data) illustrates the effect on net loss and net loss per share as if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), as amended by SFAS No. 148, Accounting for Stock Based Compensation – Transition and Disclosure, to stock-based compensation.

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The Company recognizes as an expense the fair value of options granted to persons who are neither employees nor directors.

(l) Recent Accounting Pronouncements

In September 2004, Emerging Issues Task Force (EITF) reached a consensus on EITF Issue No. 04-08 (EITF 04-08), The Effect of Contingently Convertible Debt on Diluted Earnings per Share. Under current interpretations of FASB No. 128, Earnings per Share, issuers of contingently convertible debt instruments generally exclude the potential common shares underlying the contingently convertible debt instruments from the calculation of diluted earnings per share until the underlying common stock achieves a specified price target, or other contingency is met. EITF 04-08 requires that contingently convertible debt instruments should be included in diluted earnings per share computations, if dilutive, regardless of whether the market price trigger has been met. Management has determined that this pronouncement has no impact on our current and historical financial statements because the effect of such potential shares on our net loss per share would be antidilutive. Potentially dilutive securities, including, the potential shares associated with our convertible debt are disclosed in Note 2(j).

In October 2004, the FASB concluded that Statement 123R, Share-Based Payment, which would require all companies to measure compensation cost for all share-based payments (including employee stock options) at fair value, would be effective for public companies for interim or annual periods beginning after June 15, 2005. The Company will adopt Statement 123R in the third quarter of 2005 and management is currently evaluating the effect that the adoption of Statement 123R will have on the Company’s financial position and results of operations.

In March 2004, the Emerging Issues Task Force reached consensus on EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. The guidance prescribes a three-step model for determining whether an investment is other-than-temporarily impaired and requires disclosures about unrealized losses on investments. In September 2004, the FASB delayed the accounting provisions of EITF 03-1; however, the disclosure requirements remain effective for annual periods ending after June 15, 2004. The Company will evaluate the impact EITF 03-1 will have on its consolidated financial statements once final guidance is issued. Under the existing guidance, management has determined that there is no impact on the Company’s consolidated financial statements as of September 30, 2004, as there are no investments with impairments that are other-than-temporary.

(m) Reclassifications

Certain items in the 2003 consolidated financial statements have been reclassified to conform to the 2004 presentation.

(3) ASCENT PEDIATRICS TRANSACTION

On May 18, 2004, the Company acquired the Ascent Pediatrics business from Medicis Pharmaceutical Corporation (Medicis). The transaction included: Orapred, a patent-protected drug to treat asthma in children; two additional proprietary formulations of Orapred in development; and a U.S.-based sales force. In connection with the transaction, the Company also acquired certain tangible assets, including inventory and equipment.

Total acquisition payments of $190.0 million will be made to Medicis in specified amounts through 2009, including a payment of $20.0 million in BioMarin common stock in 2009. The number of shares issuable in 2009 will be based on the per share stock price at that time. The total acquisition cost, including transaction costs, acquired tangible assets and operating liabilities, was $194.9 million.

Pursuant to the acquisition, the Company was required to deposit $25.0 million of BioMarin common stock and $25.0 million of cash in escrow until the last of the first four quarterly payments to Medicis have been made. The $25.0 million of BioMarin common stock and $25.0 million of cash are scheduled to be fully released in May 2005.

The acquisition has been accounted for as a purchase business combination. Under the purchase method of accounting, the assets acquired and liabilities assumed are recorded at the date of acquisition, at their respective fair values. The Company’s consolidated financial statements for the period subsequent to the acquisition date reflect these values and the results of operations of the Ascent Pediatrics business. The total consideration has been preliminarily allocated based on an estimate of the fair value of assets acquired and liabilities assumed. The final valuation of net assets is expected to be completed upon the Company’s receiving all the relevant information required to complete our estimates, but no later than one year from the acquisition date in accordance with GAAP. Components of the purchase price allocation that are not yet final include the allocation to goodwill, which will be based on the estimated value of the acquired liabilities for product returns and unclaimed rebates. To the extent that our estimates need to be adjusted, we will do so in future quarters.

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The fair value of the transaction was allocated as follows (in thousands):

The product technology is the only intangible asset subject to amortization and represents the rights to the proprietary knowledge associated with Orapred. These rights include the right to develop, use, and market Orapred. The product technology is being amortized over Orapred’s estimated economic life of 15 years using the straight-line method of amortization and includes no estimated residual value. The amortization expense for the three and nine months ended September 30, 2004 was $1.7 million and $2.5 million, respectively; and accumulated amortization expense as of September 30, 2004 was $2.5 million. The estimated amortization expense associated with the acquisition for the remainder of 2004, and each of the succeeding five fiscal years is $1.7 million and $6.8 million, respectively.

In-process research and development represents the fair value of the two additional proprietary formulations of Orapred that are currently under development but not yet completed.

The imputed discount on the purchase obligation represents the gross value of the future cash payments to Medicis, discounted to their present value at a rate of 6.1%. The discount will be amortized and recorded as interest expense over the life of the obligation using the effective interest rate method.

The allocation to inventory at the purchase date includes an adjustment of $0.9 million in addition to the cost basis of the finished inventory to reflect the fair value of the finished inventory less the cost of disposal and a reasonable profit for the selling effort.

The transaction resulted in a purchase price allocation of $32.3 million to goodwill, representing the financial, strategic and operational value of the transaction to BioMarin. Goodwill is attributed to the premium that the Company was willing to pay to obtain the value of the Orapred business, and the synergies created with the acquisition of the Ascent Pediatrics sales force that will eventually be deployed towards selling future BioMarin products. The purchase price allocation also included $6.2 million of estimated liabilities assumed for product returns and unclaimed rebates.

The following unaudited pro forma financial information presents (in thousands) the combined results of operations of BioMarin and the Ascent Pediatrics business for the three and nine months ended September 30, 2003 and 2004 as if the acquisition had occurred as of January 1, 2003. The unaudited pro forma financial information is not necessarily indicative of what the Company’s consolidated results of operations actually would have been had the acquisition been completed as of January 1, 2003. In addition, the unaudited pro forma financial information does not attempt to project the future results of operations of the Company combined with the Ascent Pediatrics business.

The historical statements of operations of the Ascent Pediatric business were derived directly from the related trial balances obtained from the seller of the business and include adjustments by the Company to allocate a portion of the seller’s corporate overhead to the Ascent Pediatrics business. Pro forma adjustments include non-cash expenses associated with the acquisition of the Ascent Pediatrics business and certain integration costs incurred during the second quarter of 2004, which are reflected as of January 1, 2003. The non-cash items include an in-process research and development charge, amortization of acquired intangible assets, imputed interest expense and a fair value inventory adjustment. The pro forma net loss for the three and nine months ended September 30, 2003 increased as a result of the pro forma adjustments to include the acquisition-related expenses, such as in-process research and development and amortization of the acquired intangible assets.

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(4) JOINT VENTURE

(a) Joint Venture Financial Data

The results of the joint venture’s operations for the three and nine months ended September 30, 2003 and 2004 are presented in the table below (in thousands). The joint venture results and summarized assets and liabilities as presented below give effect to the difference in inventory cost basis between the Company and the joint venture. The difference in basis primarily represents the difference in inventory capitalization policies between the joint venture and the Company. The Company began capitalizing Aldurazyme inventory costs in May 2003 after regulatory approval was obtained. The joint venture began capitalizing Aldurazyme inventory costs in January 2002 when inventory production for commercial sale began.

The difference in inventory capitalization policies resulted in greater operating expense recognized by the Company prior to regulatory approval compared to the joint venture. It will result in less cost of goods sold recognized by the Company when the previously expensed product is sold by the joint venture and less operating expenses when this previously expensed product is used in clinical trials. The difference will be eliminated when all of the product produced prior to obtaining regulatory approval has been sold or used in clinical trials.

At December 31, 2003 and September 30, 2004, the summarized assets and liabilities of the joint venture and the components of the Company’s investment in and advances to the joint venture were as follows (in thousands):

(b) Joint Venture Critical Accounting Policies

Revenue recognition—BioMarin/Genzyme LLC recognizes revenue from product sales when persuasive evidence of an arrangement exists, the product has been delivered to the customer, title and risk of loss have passed to the customer, the price to the buyer is fixed or determinable and collection from the customer is reasonably assured. Revenue transactions are evidenced by customer purchase orders, customer contracts in certain instances, invoices and the related shipping documents.

The timing of product deliveries can have a significant impact on the amount of revenue that BioMarin/Genzyme LLC recognizes in a particular period. Also, Aldurazyme is sold at least in part through distributors. Inventory in the distribution channel consists of inventory held by distributors, who are BioMarin/Genzyme LLC’s customers, and inventory held by retailers, such as hospitals. BioMarin/Genzyme LLC’s revenue in a particular period can be impacted by increases or decreases in distributor inventories. If distributor inventories increased to excessive levels, BioMarin/Genzyme LLC could experience reduced purchases in subsequent periods, or product returns from the distribution channel due to overstocking, low end-user demand or product expiration.

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To monitor the amount of Aldurazyme inventory in the joint venture’s U.S. distribution channel, BioMarin/Genzyme LLC receives data on sales and inventory levels directly from its primary distributors for the product.

BioMarin/Genzyme LLC records reserves for rebates payable under Medicaid and payer contracts, such as managed care organizations, as a reduction of revenue at the time product sales are recorded. BioMarin/Genzyme LLC records allowances for product returns as a reduction of revenue at the time product sales are recorded. The product returns reserve is estimated based on the joint venture’s experience of returns for Aldurazyme, or for similar products. If the history of product returns changes, the reserve is adjusted appropriately. BioMarin/Genzyme LLC’s estimate of distribution channel inventory is also used to assess the reasonableness of its product returns reserve.

BioMarin/Genzyme LLC maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of its customers were to deteriorate and result in an impairment of their ability to make payments, additional allowances may be required.

Inventory—BioMarin/Genzyme LLC values inventories at the lower of cost or fair value. BioMarin/Genzyme LLC determines cost using the first-in, first-out method of inventory costing and writes down inventory that has expired, become obsolete, has a cost basis in excess of its expected net realizable value, or is in excess of expected requirements. If actual market conditions are less favorable than those projected by the joint venture, additional inventory write-downs may be required.

BioMarin/Genzyme LLC capitalizes inventory produced for commercial sale. Refer to Note 4(a) above for discussion of the difference in inventory cost basis between the Company and BioMarin/Genzyme LLC.

(5) STOCKHOLDERS’ EQUITY

During 2004, certain warrants expired resulting in a reclassification of $5.2 million from warrants to additional paid-in capital.

The Company had an agreement with Acqua Wellington for an equity investment in the Company. The Company voluntarily terminated its agreement with Acqua Wellington in September 2003. During the first half of 2003, Acqua Wellington purchased 765,816 shares of the Company’s common stock for $8.0 million, net of issuance costs.

In February 2003, the Company completed a public offering of its common stock. In the offering, the Company sold 8,625,000 shares, and the net proceeds were approximately $80.5 million. The offering was pursuant to the Company’s shelf registration statement filed in December 2002, which allows the Company to sell shares of its common stock in one or more offerings, up to a total of $150.0 million.

(6) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consisted of the following (in thousands):

(7) CONVERTIBLE DEBT

In June 2003, the Company sold $125 million of convertible debt due on June 15, 2008. The debt was issued at face value and bears interest at the rate of 3.5% per annum, payable semi-annually in cash. The debt is convertible, at the option of the holder, at any time prior to maturity or redemption, into shares of Company common stock at a conversion price of approximately $14.01 per share, subject to adjustment in certain circumstances. On or after June 20, 2006, the Company may, at its option, redeem the notes, in whole or in part, at predetermined prices, plus any accrued and unpaid interest to the redemption date. The Company also must repay the debt if there is a qualifying change in control or termination of trading of its common stock.

In connection with the placement of the debt, the Company paid approximately $4.1 million in offering costs, which have been deferred and are included in other assets. They are being amortized as interest expense over the life of the debt, and the

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Company recognized $0.2 million and $0.6 million of amortization expense during the three and nine months ended September 30, 2004, and $0.2 million of amortization expense during the three and nine months ended September 30, 2003.

(8) EQUIPMENT AND FACILITY LOAN

In May 2004, the Company executed a $25 million credit facility to finance the Company’s equipment purchases and facility improvements. As of September 30, 2004, $8.2 million was outstanding on the facility. Payments of principal and interest of LIBOR plus 1.5% (3.5% as of September 30, 2004) are due through maturity in 2011. The facility requires an all-asset first priority lien, excluding certain assets such as intellectual property and assets related to the Ascent Pediatrics transaction. The lender requires that we maintain a total unrestricted cash balance, including short-term investments, of at least $45 million or a greater amount defined by a calculation provided for in the facility agreement, as amended. The facility also contains additional customary covenants.

(9) SALE OF GLYKO, INC. ASSETS

In January 2003, the Company sold certain Glyko assets including intellectual property, inventory and customer lists, to a third party for a total sales price of up to $1.5 million. The sales price was comprised of cash totaling $0.2 million, a note receivable payable in installments through 2006 totaling $0.5 million, without interest, and quarterly royalties based upon the future sales of certain Glyko products up to a maximum of $0.8 million. The future royalties are based upon the terms of the related license agreement, which terminates in January 2008. As the net book value of the Glyko assets was reduced to zero as of December 31, 2002, the Company recognized a gain on disposal of discontinued operations totaling $0.6 million in 2003. The gain represents the cash and note receivable received offset by the discount on the note receivable and related transaction fees incurred during 2003.

(10) FINANCIAL INSTRUMENTS - CONCENTRATIONS OF CREDIT RISK

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of accounts receivable. A significant portion of Orapred sales is made to a limited number of financially viable distributors. The Company does not require collateral from its customers, but performs periodic credit evaluations of its customers’ financial condition. Management does not believe a significant credit risk existed at September 30, 2004.

(11) SUPPLEMENTAL CASH FLOW INFORMATION

The following non-cash transaction occurred during the periods presented (in thousands):

(12) MILESTONE REVENUE

During May 2003, the Company received $12.1 million from Genzyme for the one-time milestone payment related to the marketing approval of Aldurazyme. The milestone payment is included as revenue in the accompanying consolidated statements of operations.

(13) LEASE LIABILITY REVERSAL

In September 2003, the Company decided to develop one of its leased facilities that the Company elected to abandon during 2002. In connection with the abandonment of the facility in the fourth quarter of 2002, the Company recorded a liability totaling $2.25 million for the costs to be incurred under the remaining term of the lease. At the time, there was deemed to be no economic benefit to the future lease payments because the Company did not plan to occupy the facility. As a result of the decision to develop the facility for future use, the Company reversed the remaining liability in September 2003 totaling $2.0 million, which is included as a reduction of general and administrative expenses in the 2003 consolidated statements of operations.

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Forward-Looking Statements

This Quarterly Report on Form 10-Q 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,” and other sections of this Quarterly Report. 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 Quarterly Report. 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 Quarterly Report to reflect later events or circumstances or to reflect the occurrence of unanticipated events.

Overview

We develop and commercialize innovative biopharmaceuticals for serious diseases and medical conditions. We select product candidates for diseases and conditions that represent a significant medical need, have well-understood biology and provide an opportunity to be first-to-market.

The Company’s product portfolio is comprised of two approved products and multiple investigational product candidates. Aldurazyme^® (laronidase), has been approved for marketing in the United States by the U.S. Food and Drug Administration (FDA), in the European Union (E.U.) by the European Medicines Evaluation Agency (EMEA) and other countries for the treatment of mucopolysaccharidosis I (MPS I). MPS I is a debilitating and life-threatening genetic disease caused by the deficiency of alpha-L-iduronidase, an enzyme normally required for breaking down certain complex carbohydrates. MPS I is a progressive disease that afflicts patients from birth and leads to severe disabilities and early death. As the first drug approved for MPS I, Aldurazyme has been granted orphan drug status in the U.S. and the E.U., which gives Aldurazyme seven years of market exclusivity in the U.S. and 10 years of market exclusivity in the E.U. for the treatment of MPS I. Aldurazyme has subsequently been approved in additional countries around the world. We have developed Aldurazyme through a joint venture with Genzyme Corporation (Genzyme).

On May 18, 2004, BioMarin completed the transaction to acquire the business of Ascent Pediatrics from Medicis Pharmaceutical Corporation. The transaction includes Orapred^® (prednisolone sodium phosphate oral solution), a patent-protected drug to treat asthma in children and other inflammatory conditions, two additional proprietary formulations of Orapred in development, and a U.S.-based sales force.

We are developing several other product candidates for the treatment of genetic diseases including: Aryplase^™ (galsulfase) for the treatment of mucopolysaccharidosis VI (MPS VI); Phenoptin^™ (6R-BH₄) a proprietary oral form of tetrahydrobiopterin for the treatment of moderate to mild forms of phenylketonuria (PKU); and Phenylase^™ (recombinant phenylalanine ammonia lyase), a preclinical candidate for the treatment of the more severe form of PKU.

In June 2004, we announced the positive results of our Phase 3 trial of Aryplase for the treatment of MPS VI, a progressive and seriously debilitating life-threatening genetic disease for which no drug treatment currently exists. MPS VI is caused by the deficiency of N-acetylgalactosamine 4-sulfatase (arylsulfatase B), an enzyme normally required for the breakdown of certain complex carbohydrates known as glycosaminoglycans (GAGs). The clinical trial demonstrated a statistically significant improvement in endurance in patients receiving Aryplase compared to patients receiving placebo, as measured by the distance walked in 12 minutes, the primary end point of the trial. Additionally, the data demonstrated a statistically significant improvement in reduction of GAGs and a positive trend in a 3-minute stair climb, the secondary end points of the trial. In the fourth quarter of 2004, we expect to file for marketing authorization in both the U.S. and E.U., where Aryplase has received orphan drug designations for the treatment of MPS VI.

In July 2004, we announced positive results from an investigator sponsored pilot clinical study of 6R-BH₄, the active agent in Phenoptin, in 20 patients with PKU. We also announced that we have received orphan drug designation for Phenoptin for the treatment of PKU in both the U.S. and E.U. In August 2004, we announced that we filed an investigational new drug application (IND) with the FDA for Phenoptin, for the treatment of PKU. PKU is an inherited metabolic disease that affects at least 50,000 diagnosed patients under the age of 40 in the developed world, an estimated half of whom have a moderate to mild form of the disease. It is caused by a deficiency of an enzyme, phenylalanine hydroxylase (PAH), which is required for the metabolism of phenylalanine (Phe). Phe is an amino acid found in most protein-containing foods. Without sufficient quantity or activity of PAH, Phe accumulates to abnormally high levels in the blood resulting in a variety of serious neurological complications. Phenoptin, our lead product candidate for the treatment of PKU, is a proprietary oral form of 6R-BH₄, a small-molecule therapeutic that works in

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combination with PAH to metabolize Phe. If approved, it could become the first drug for the treatment of PKU. Phenylase, an enzyme therapy currently in preclinical development, is being developed as a subcutaneous injection and is intended for those who do not respond to Phenoptin, likely those with the more severe form of the disease. We expect to initiate a Phase 2 clinical study of Phenoptin based on our recently filed IND by the end of 2004.

We are evaluating multiple enzyme-based therapies for serious medical conditions including: Vibrilase^™, a topical investigational enzyme therapy for use in the debridement of serious burns; our preclinical candidate Chondroitinase for spinal cord injury; and our preclinical candidate Heparinase III for reperfusion injury. In August 2004, we announced positive data from a Phase 1b clinical trial of Vibrilase. Data from the trial suggest that treatment with Vibrilase is generally safe and well tolerated, and effective in debriding partial-thickness burns. We are pursuing preclinical development of several other enzyme product candidates for genetic and other diseases. Additionally, we are evaluating two platform technologies, NeuroTrans^™ and Immune Tolerance, to overcome limitations associated with existing pharmaceuticals. We have retained all worldwide commercial rights to all of our product candidates.

In August 2004, we announced that Fredric D. Price resigned as Chairman and Chief Executive Officer (CEO) of the company. Pierre Lapalme, a member of our Board of Directors who has held numerous senior management positions in the pharmaceutical industry, has assumed the position of our Chairman of the Board. Louis Drapeau, our Chief Financial Officer since August 2002, has been appointed as our acting Chief Executive Officer until a new CEO is named, and Jeffrey Cooper, Vice President, Controller, has been appointed as our acting Chief Financial Officer. Our Board of Directors has commenced the search for a new CEO.

Our net loss for the third quarter of 2004 was $29.5 million as compared to $21.3 million for the third quarter of 2003. Net loss for the third quarter of 2004 increased primarily as a result of non-cash expenses associated with the Ascent Pediatrics acquisition of $3.8 million, the separation costs associated with our former CEO of $2.9 million and operating expenses associated with the sales and marketing support of Orapred totaling $4.6 million. These increases were partially offset by a decrease in other operating expenses of $3.1 million, primarily a decrease of $4.0 million in our equity in loss of our joint venture. As of September 30, 2004, our combined cash, cash equivalents and short-term investments totaled $86.6 million, a decrease of $119.8 million from $206.4 million at December 31, 2003. Additionally, we have $25.2 million of restricted cash at September 30, 2004, primarily associated with the Ascent Pediatrics transaction.

Our cash burn in the third quarter of 2004 was $42.2 million as compared to $24.5 million in the third quarter of 2003. The $17.7 million increase in cash burn, a non-GAAP financial measure, is primarily attributable to $15.0 million of payments of our Ascent Pediatrics acquisition obligation, a payment to our former CEO and working capital timing differences associated with the Orapred product and our other operations. Also contributing to the increase in cash burn are the costs associated with developing our facilities, which were partially offset by draws on our equipment and facility loan. See “Non-GAAP Financial Measure” below for discussion of “cash burn” as a non-GAAP financial measure and the reconciliation of cash burn to net increase (decrease) in cash.

Non-GAAP Financial Measures

The discussion above includes “cash burn” (a non-GAAP financial measure). We define cash burn as the net increase (or decrease) in cash (as determined in accordance with GAAP) excluding the effect of capital markets financing activities, the purchase and sale of short-term investments (as determined in accordance with GAAP) and the net increase (or decrease) in restricted cash. Cash burn for the periods presented was determined as follows:

We use short-term investments as an investment vehicle for our cash and cash equivalents, and the distinction between cash and cash equivalents is determined based on the duration of the investment. We manage our cash, cash equivalents and short-term investments as a common pool. The effect on net increase (or decrease) in cash because of the purchase and sale of short-term investments is impossible to predict and does not have a material effect on our liquidity or total current assets since short-term investments are usually bonds and notes held to maturity. Therefore, for purposes of determining cash burn, we do not give effect to the purchase and sale of short-term investments and assume that the net effect of the purchase and sale of short-term investments will be zero.

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We believe that cash burn, although a non-GAAP financial measure, provides useful information to investors by showing the net cash expended in most aspects of our activities. We also believe that the presentation of this non-GAAP financial measure is consistent with our past practice, as well as industry practice in general, and will enable investors, analysts and readers of our financial statements to compare current non-GAAP measures with non-GAAP measures presented in prior periods. Any non-GAAP financial measure used by us should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP.

Critical Accounting Policies and Estimates

In preparing our consolidated financial statements, we make assumptions, judgments and estimates that can have a significant impact on our net loss, as well as on the value of certain assets and liabilities on our consolidated balance sheet. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments and estimates and make changes accordingly. Unless otherwise noted below, there have not been any recent changes to our assumptions, judgments or estimates included in our critical accounting policies. We believe that the assumptions, judgments and estimates involved in the accounting for our equity in the loss of BioMarin/Genzyme LLC, impairment of long-lived assets, revenue recognition, income taxes, inventory, research and development, and stock option plans have the greatest potential impact on our consolidated financial statements, so we consider these to be our critical accounting policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results. For further information on our critical and other accounting policies, see Note 2 to the accompanying consolidated financial statements.

Equity in the loss of BioMarin/Genzyme LLC

We account for our joint venture investment using the equity method. Accordingly, we record an increase in our investment for contributions to the joint venture, and a reduction in our investment for our 50% share of the loss of the joint venture.

Equity in the loss of BioMarin/Genzyme LLC includes our 50% share of the joint venture’s loss for the period. The investment in and advances to BioMarin/Genzyme LLC includes our share of the joint venture’s cash, accounts receivable and inventory, and it also includes the current receivable from the joint venture for the reimbursement related to services provided to the joint venture by us.

A critical accounting estimate by management associated with our accounting for the joint venture is the realizability of our investment in the joint venture. The joint venture has incurred significant losses to date. We believe that our investment in the joint venture will be recovered because we project that the joint venture will eventually achieve positive earnings and cash flows. We and our joint venture partner maintain the ability and intent to fund the joint venture’s operations.

Impairment of Long-Lived Assets

We regularly review long-lived assets, including goodwill, for impairment. The recoverability of long-lived assets is measured by comparing the asset’s carrying amount to its fair value, determined by the expected undiscounted future cash flows that the asset is expected to generate. If it is determined that the full carrying amount of an asset is not recoverable, an impairment loss is recorded in the amount by which the carrying amount of the asset exceeds its fair value.

Determining whether an impairment has occurred typically requires various estimates and assumptions, including determining which cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, their amount, and the asset’s residual value, if any. In turn, measurement of an impairment loss requires a determination of fair value, which is based on the best information available. We use internal discounted cash flow estimates, quoted market prices when available and independent appraisals as appropriate to determine fair value. We derive the required cash flow estimates from our historical experience and our internal business plans and apply an appropriate discount rate.

Revenue Recognition

We recognize revenue from product sales when persuasive evidence of an arrangement exists, the product has been shipped, title and risk of loss have passed to the customer, the price to the buyer is fixed or determinable and collection from the customer is reasonably assured. Product sales transactions are evidenced by customer purchase orders, invoices and the related shipping documents.

The timing of product shipments can have a significant impact on the amount of revenue from product sales that we recognize in a particular period. Also, the majority of Orapred sales are made to wholesalers, which, in turn resell the product to retail outlets. Inventory in the distribution channel consists of inventory held by wholesalers, who are our principal customers, and inventory held by retailers. Our revenue from product sales in a particular period is impacted by increases or decreases in

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wholesalers’ inventory levels. From time to time, we offer sales incentives, such as price discounts and extended payment terms, in the ordinary course of business. These incentives may impact the level of inventory held by wholesalers. If wholesaler inventories substantially exceed retail demand, we could experience reduced revenue from sales in subsequent periods, or product returns from the distribution channel due to overstocking, low end-user demand or product expiration.

We establish and maintain reserves for amounts payable to managed care organizations and state Medicaid programs for the reimbursement of a portion of the retail price of prescriptions filled that are covered by the respective plans. The amounts estimated to be paid relating to products sold are recognized as revenue reductions and as additions to accrued expenses at the time of the original sale. The rebate reserves are based on our best estimate of the expected prescription fill rate to these managed care organizations and state Medicaid patients, as well as the rebate rates associated with eligible prescriptions. The estimates are developed using the product’s rebate history adjusted to reflect known changes in the factors that impact such reserves. These factors include changes in the mix of prescriptions that are eligible for rebates and the lag time related to the processing of rebate claims by our customers. The length of time between the period of original sale and the processing of the related rebates has been consistent historically at between three and six months, depending on the nature of the rebate. Neither the rebate rates nor the time to process rebates are extremely sensitive to changes because both the rebate rate structures and the related rebate-processing practices of our customers are well established. To the extent actual rebates differ from management’s estimates, additional reserves may be required.

Provisions for sales discounts, and estimates for chargebacks and product returns are established as a reduction of product sales at the time such revenues are recognized. These revenue reductions are established by our management as our best estimate at the time of the original sale based on the product’s historical experience adjusted to reflect known changes in the factors that impact such reserves. These revenue reductions are generally reflected either as a direct reduction to accounts receivable through an allowance or as an addition to accrued expenses. We do not provide any forms of price protection to customers and permit product returns only if the product is damaged or if it is returned near or after expiration.

Our estimates for future product returns are primarily based on the actual return history for the product. Our estimates for future product returns are also based on the amount of inventory that exists in the distribution channel. Although we are unable to quantify wholesaler inventory levels with any certainty, to the extent necessary based on the expiration date and quantity of product in the distribution channel, we adjust our estimate for future returns as appropriate. We estimate wholesaler inventory levels, to the extent possible, based on limited information obtained from certain of our wholesale customers and through other internal analysis. Our internal analysis utilizes information such as historical sales to wholesalers, product shelf life based on expiration dating, estimates of the length of time product is in the distribution channel and historical prescription data, which is provided by a third party vendor. We also evaluate the current and future commercial market for Orapred and consider factors such as Orapred’s performance compared to its existing competitors and generic competition.

The amount of Orapred returns compared to sales has been reasonably consistent historically. Our experience is that the length of time between the period of original sale and the product return is between one and two years. Because the product has been on the market for less than three years, we are continuing to obtain and analyze the returns history. Our evaluation of such factors has not resulted in material revisions to our estimates of future product returns for current sales. However, to the extent actual chargebacks and product returns differ from management’s estimates, additional reserves may be required. Additionally, in the Ascent Pediatrics transaction we acquired liabilities for certain Orapred product returns and unclaimed rebates for the period prior to our acquisition of the product. We may need to adjust our estimates of these liabilities in the future.

As discussed above, our estimates of revenue dilution items are based primarily on the historical experience for the product, as adjusted to reflect known changes in the factors that impact the revenue dilutions. The nature and amount of our current estimates of the applicable revenue dilution item that are applied to gross sales to derive net sales are described in the table below. There are no additional material revenue dilution items other than those disclosed below and there have been no material revisions to our estimates of our revenue dilution items to date.

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. When estimating the allowance for doubtful accounts, we make judgments about the creditworthiness of customers based on ongoing credit evaluations and the aging profile of customer accounts receivable and assess current economic trends that might impact the level of credit losses in the future. Historically, the Orapred product has not experienced significant

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credit losses and an allowance for doubtful accounts has not been required because a significant portion of Orapred sales is made to a limited number of financially viable distributors and because we offer discounts that encourage the prompt payment of outstanding receivables. However, since we cannot predict changes in the financial stability of our customers, we cannot guarantee that allowances will not be required in the future. If we begin to experience credit losses, our operating expenses would increase.

Income taxes

We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We have recorded a full valuation allowance against our net deferred tax assets, the principal amount of which is the tax effect of net operating loss carryforwards, of approximately $147.8 million at December 31, 2003. Future taxable income and ongoing prudent and feasible tax planning strategies have been considered in assessing the need for the valuation allowance. If we later determine that it is more likely than not that the net deferred tax assets would be realized, the previously provided valuation allowance would be reversed. In order to realize our deferred tax assets we must be able to generate sufficient taxable income in the tax jurisdictions in which the deferred tax assets are located. This critical accounting assumption has been historically accurate, as we have not been able to utilize our net deferred tax assets, and we do not expect changes to this assumption as we expect to incur losses for the foreseeable future.

Inventory

We value inventories at the lower of cost or fair value. We determine cost using the average cost method. We analyze our inventory levels quarterly and write down inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable value and inventory in excess of expected requirements. Expired inventory is disposed of and the related costs are written off. The determination of whether or not inventory costs will be realizable requires estimates by management. A critical estimate in this determination is the estimate of the future expected inventory requirements, whereby we compare our internal sales forecasts to inventory on hand. Actual results may differ from those estimates and inventory write-offs may be required.

Research and Development

Research and development expenses include expenses associated with contract research and development provided by third parties, product manufacturing prior to regulatory approval, clinical and regulatory costs, and internal research and development costs. A critical accounting assumption by management is that we believe that regulatory approval of our product candidates is uncertain, and do not assume that product manufactured prior to regulatory approval will be sold commercially. As a result, inventory costs for product candidates are expensed as research and development expenses until regulatory approval is obtained, at which time inventory is capitalized at the lower of cost or fair value. Historically, there have been no changes to this assumption.

Stock Option Plans

We have three stock-based compensation plans. We account for those plans under APB Opinion No. 25, Accounting for Stock Issued to Employees whereby generally no stock-based compensation cost is reflected in our net loss for options issued to employees and directors with exercise prices at or above the market price on the date of issuance. We recognize as an expense the fair value of options granted to persons who are neither employees nor directors. The fair value of options granted is determined using the Black-Scholes model, which requires various estimates and assumptions by management, including the expected term of the options and the expected future volatility of the value of our stock. The expected term of stock options is determined primarily based on the historical patterns for stock option exercises and cancellations. The expected future volatility is determined based on both the historical volatility as well as current and future circumstances that will affect future volatility. These estimates are sensitive to change based on external factors such as the equity markets in general and the individual circumstances of our employees, which are considered in the determination of our estimates.

Recent Accounting Pronouncements

See Note 2(l) of the accompanying consolidated financial statements for a full description of recent accounting pronouncements. We do not expect that any of the recent pronouncements will have a significant impact on our results of operations and financial condition.

Results of Operations

All of the activities related to the manufacture, distribution and sale of Aldurazyme are reported in the results of the joint venture. Because of this presentation and the significance of the joint venture’s operations compared to our total operations, we have divided our discussion of the Results of Operations into two sections, BioMarin in total and BioMarin/Genzyme LLC. The discussion of the joint venture’s operations includes the total amounts for the joint venture, not just our 50% interest in the operations.

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Quarter Ended September 30, 2004 and 2003

BioMarin

Revenue and Gross Profit

Commencing with our acquisition of the Ascent Pediatrics business on May 18, 2004, our revenues include sales of Orapred, a patent-protected drug to treat asthma in children. During the third quarter, we recognized $0.2 million of net product sales and approximately $0.1 million of gross profit. Net sales of Orapred during the third quarter of 2004 were lower than expected as a result of larger than anticipated levels of Orapred inventory held by distributors prior to our acquisition of the product. Cost of sales excludes the amortization of the developed product technology resulting from the acquisition of the Ascent Pediatrics business.

Net Loss

Our net loss for the third quarter of 2004 was $29.5 million as compared to $21.3 million for the third quarter of 2003. Net loss for the third quarter of 2004 increased primarily as a result of non-cash expenses associated with the Ascent Pediatrics acquisition of $3.8 million, the separation costs associated with our former CEO of $2.9 million and operating expenses associated with the sales and marketing support of Orapred totaling $4.6 million. These increases were partially offset by a decrease in other operating expenses of $3.1 million, primarily a decrease of $4.0 million in our equity in loss of our joint venture.

Research and Development Expense

Our research and development expenses include personnel, facility and external costs associated with the development and commercialization of our product candidates and products. These development costs primarily include preclinical and clinical studies, manufacturing prior to regulatory approval, quality control and assurance and other product development expenses such as regulatory costs.

Research and development expenses in the third quarter of 2004 decreased by $2.4 million to $11.8 million from $14.2 million in the third quarter of 2003. The major factors causing the decrease include the lack of clinical and manufacturing costs related to our discontinued Neutralase program, which totaled $5.7 million during the third quarter of 2003. Offsetting this decrease were increases related to the manufacturing and clinical development of Phenoptin totaling $2.3 million and Orapred-related research and development totaling $1.0 million.

Selling, General and Administrative Expense

Our selling, general and administrative expenses include sales and administrative personnel, facility and external costs required to support our product development programs. These selling, general and administrative costs include facility operating expenses and depreciation, sales operations in support of Orapred and our product candidates, human resources, finance and support personnel expenses and other corporate costs such as insurance, audit and legal expenses.

Selling, general and administrative expenses in the third quarter of 2004 increased to $12.8 million from $2.0 million in the third quarter of 2003. The components of the increase between 2003 and 2004 are as follows (in millions):

Amortization of Acquired Intangible Assets

Amortization of acquired intangible assets includes the current amortization expense of the Orapred product technology acquired in the Ascent Pediatrics transaction. The acquired intangible assets are being amortized over 15 years and we expect that the recurring annual amortization expense associated with the transaction will be $6.7 million.

Acquired In-Process Research and Development

Acquired in-process research and development includes the one-time charge for the portion of the Ascent Pediatrics transaction consideration attributable to the two additional proprietary formulations of Orapred that we acquired that are currently under development.

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Equity in the loss of BioMarin/Genzyme LLC

Equity in the loss of BioMarin/Genzyme LLC includes our 50% share of the joint venture’s loss for the period. Equity in the loss of BioMarin/Genzyme LLC was $0.5 million in the third quarter of 2004 compared to $4.5 million in the third quarter of 2003. The decrease is principally due to the profits derived from $10.3 million of Aldurazyme sales in the third quarter of 2004 compared to $3.4 million during the third quarter of 2003. See the BioMarin/Genzyme LLC section below for further discussion of the joint venture’s results of operations.

Interest Income

We invest our cash and short-term investments in government and other high credit quality securities in order to limit default and market risk. Interest income decreased to $0.6 million in the third quarter of 2004 from $0.8 million in the third quarter of 2003 due to lower average cash and short-term investment balances during the period.

Interest Expense

We incur interest expense on our convertible debt issued in June 2003 and on our equipment loans. Interest expense also includes imputed interest expense on the discounted obligation for the Ascent Pediatrics transaction. Interest expense was $3.4 million and $1.4 million in the third quarter of 2004 and 2003, respectively. The increase in the third quarter of 2004 primarily represents imputed interest expense of $2.1 million.

BioMarin/Genzyme LLC

The discussion below gives effect to the inventory capitalization policy that we use for inventory held by the joint venture, which is different from the joint venture’s inventory capitalization policy. We began capitalizing Aldurazyme inventory production costs in May 2003, after U.S. regulatory approval was obtained. The joint venture began capitalizing Aldurazyme inventory production costs in January 2002 when inventory production for commercial sale began. The difference in inventory capitalization policies results in a greater operating expense realized by us prior to regulatory approval, and lower cost of goods sold with higher gross profit realized by us as the previously expensed product is sold by the joint venture, as well as lower research and development expense when Aldurazyme is used in on-going clinical trials. These differences will be eliminated when all of the product manufactured prior to regulatory approval has been sold or has been used in clinical trials. See Note 4(a) to the accompanying consolidated financial statements for further discussion of the difference in inventory cost basis between us and the joint venture.

Revenue and Gross Profit

We and our joint venture partner, Genzyme, received marketing approval for Aldurazyme in the U.S. on April 30, 2003 and in the E.U. on June 11, 2003. We have subsequently received marketing approval in other countries. Aldurazyme was launched commercially in May 2003 in the U.S. and in June 2003 in the E.U. The joint venture recognized $10.3 million of revenue and $10.1 million of gross profit during the third quarter of 2004, which reflects the effect of previously expensing most of the product sold during the quarter. BioMarin/Genzyme LLC recognized $3.4 million of revenue and $0.4 million of gross profit during the third quarter of 2003. Gross profit for the joint venture for the third quarter of 2003 would have been higher by $2.8 million if not for production costs incurred during the third quarter of 2003 that were not allocated to Aldurazyme inventory.

Operating Expenses

Operating expenses of the joint venture include the costs associated with the development and commercial support of Aldurazyme and totaled $11.1 million for the third quarter of 2004 as compared to $9.4 million for the third quarter of 2003. Operating expenses in the third quarter of 2004 included $5.9 million of sales and marketing expenses associated with the commercial support of Aldurazyme and $3.9 million of research and development costs, primarily clinical trial costs. Operating expenses in the third quarter of 2003 included $4.3 million of sales and marketing expenses associated with the commercial launch of Aldurazyme and $3.4 million of research and development expenses. Sales and marketing expenses increased in the third quarter of 2004 due to increased post-launch commercialization activities.

Nine Months Ended September 30, 2004 and 2003

BioMarin

Revenue and Gross Profit

Commencing with our acquisition of the Ascent Pediatrics business on May 18, 2004, our revenues include sales of Orapred. During the nine months ended September 30, 2004, we recognized $4.7 million of net product sales and approximately $4.1 million of gross profit, representing a gross margin of 87%. Cost of sales for the nine months ended September 30, 2004 includes a $0.3 million

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charge related to the inventory fair market value adjustment associated with the acquisition. Net sales of Orapred from May 18, 2004 to September 30, 2004 were lower than expected as a result of larger than anticipated levels of Orapred inventory held by distributors prior to our acquisition of the product. Gross margin excluding the inventory fair value adjustment was 92%. Cost of sales excludes the amortization of the developed product technology resulting from the acquisition of the Ascent Pediatrics business.

Milestone revenue for the nine months ended September 30, 2003 represents the $12.1 million non-recurring milestone payment received from Genzyme related to the marketing approval of Aldurazyme.

Net Loss

Our net loss for the nine months ended September 30, 2004 was $105.0 million as compared to $50.1 million for the nine months ended September 30, 2003. Net loss for the first nine months of 2004 increased as a result of the following (in millions):

Expenses associated with the Ascent Pediatrics acquisition include acquired in-process research and development of $35.4 million, amortization of acquired intangibles of $2.5 million, imputed interest expense of $3.2 million and the fair value inventory adjustment of $0.3 million.

Research and Development Expense

Our research and development expenses include personnel, facility and external costs associated with the development and commercialization of our product candidates and products. These development costs primarily include preclinical and clinical studies, manufacturing prior to regulatory approval, quality control and assurance and other product development expenses such as regulatory costs.

Research and development expenses increased by $0.9 million to $37.7 million in the first nine months of 2004 from $36.8 million in the first nine months of 2003. The major factors causing the increase include increased Aryplase costs of $11.7 million and increased Phenoptin costs of $4.6 million. These increases were mostly offset by $15.7 million of Neutralase development costs incurred during the first nine months of 2003 that were not incurred during 2004 because the program was discontinued. The increased Aryplase costs include $9.4 million of increased manufacturing and quality costs and $4.9 million of increased clinical costs, primarily related to the Phase 3 clinical trial. The increased Phenoptin costs primarily include $2.4 million of manufacturing costs and $1.6 million of clinical development costs.

Selling, General and Administrative Expense

Our selling, general and administrative expenses include sales and administrative personnel, facility and external costs required to support our product development programs. These selling, general and administrative costs include facility operating expenses and depreciation, sales operations in support of Orapred and our product candidates, human resources, finance and support personnel expenses and other corporate costs such as insurance, audit and legal expenses. Selling, general and administrative expenses increased by $14.9 million to $24.3 million in the first nine months of 2004 from $9.4 million in the first nine months of 2003. The components of the increase between 2003 and 2004 are as follows (in millions):

The increase in corporate overhead and other costs includes increased rent expense, accounting fees, administrative personnel and costs incurred in preparation for the commercial launch of Aryplase.

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Amortization of Acquired Intangible Assets

Amortization of acquired intangible assets includes the current amortization expense of the intangible assets acquired in the Ascent Pediatrics transaction, including the Orapred developed and core technology. The acquired intangible assets are being amortized over 15 years and we expect that the recurring annual amortization expense associated with the transaction will be $6.7 million.

Acquired in-Process Research and Development

Acquired in-process research and development includes the nonrecurring charge for the portion of the Ascent Pediatrics transaction consideration attributable to the two additional proprietary formulations of Orapred that we acquired that are currently under development.

Equity in the loss of BioMarin/Genzyme LLC

Equity in the loss of BioMarin/Genzyme LLC includes our 50% share of the joint venture’s loss for the period. Equity in the loss of BioMarin/Genzyme LLC was $4.0 million in the first nine months of 2004 compared to $16.6 million in the first nine months of 2003. The decrease is principally due to the profits derived from $27.0 million of Aldurazyme sales in the first nine months of 2004 compared to $4.9 million during the first nine months of 2003. See the BioMarin/Genzyme LLC section below for further discussion of the joint venture’s results of operations.

Interest Income

We invest our cash and short-term investments in government and other high credit quality securities in order to limit default and market risk. Interest income increased to $2.0 million in the first nine months of 2004 from $1.8 million in the first nine months of 2003. The increase of $0.2 million is primarily the result of a slightly higher average cash and short-term investment balance for the nine months ended September 30, 2004.

Interest Expense

We incur interest expense on our convertible debt issued in June 2003 and on our equipment loans. Interest expense also includes imputed interest expense on the discounted obligation for the Ascent Pediatrics transaction. Interest expense was $7.2 million and $1.7 million in the first nine months of 2004 and 2003, respectively, representing an increase of $5.5 million. The increase in the first nine months of 2004 primarily represents interest expense related to the convertible debt, which was outstanding during all of 2004, of $2.2 million and imputed interest of $3.2 million.

Discontinued Operations

In December 2001, we decided to close the carbohydrate analytical business portion of our wholly owned subsidiary, Glyko, Inc. (Glyko). As a result, the operations of Glyko are classified as discontinued operations in our consolidated financial statements. Accordingly, we have segregated its operating results in our consolidated statements of operations and have segregated its cash flows in our consolidated statements of cash flows.

In January 2003, we sold certain assets of Glyko to a third party for a total sales price of up to $1.5 million. The sales price was comprised of cash totaling $0.2 million, a note receivable payable in quarterly installments through 2006 totaling $0.5 million and quarterly royalties based upon future sales of certain Glyko products through 2008 up to a maximum of $0.8 million. The proceeds from the sale of the Glyko assets, including the discounted note receivable of $0.4 million, was recorded as a gain from discontinued operations in the first quarter of 2003 totaling $0.6 million, net of transaction costs.

BioMarin/Genzyme LLC

The discussion below gives effect to the inventory capitalization policy that we use for inventory held by the joint venture, which is different from the joint venture’s inventory capitalization policy. We began capitalizing Aldurazyme inventory production costs in May 2003, after U.S. regulatory approval was obtained. The joint venture began capitalizing Aldurazyme inventory production costs in January 2002 when inventory production for commercial sale began. The difference in inventory capitalization policies results in a greater operating expense realized by us prior to regulatory approval, and lower cost of goods sold with higher gross profit realized by us as the previously expensed product is sold by the joint venture, as well as lower research and development expense when Aldurazyme is used in on-going clinical trials. These differences will be eliminated when all of the product manufactured prior to regulatory approval has been sold or has been used in clinical trials. See Note 4(a) to the accompanying consolidated financial statements for further discussion of the difference in inventory cost basis between us and the joint venture.

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Revenue and Gross Profit

We and our joint venture partner, Genzyme, received marketing approval for Aldurazyme in the U.S. on April 30, 2003 and in the E.U. on June 11, 2003. We have subsequently received marketing approval in other countries. Aldurazyme was launched commercially in May 2003 in the U.S. and in June 2003 in the E.U. The joint venture recognized $27.0 million of revenue and $26.5 million of gross profit during the first nine months of 2004, which reflects the effect of previously expensing most of the product sold during the period. BioMarin/Genzyme LLC recognized $4.9 million of revenue and $1.9 million of gross profit during the first nine months of 2003. Gross profit for the nine months ended September 30, 2003 would have been higher by $2.8 million if not for production costs incurred during the third quarter of 2003 that were not allocated to Aldurazyme inventory.

Operating Expenses

Operating expenses of the joint venture include the costs associated with the development and commercialization of Aldurazyme and totaled $34.5 million for first nine months of 2004 as compared to $35.2 million for the first nine months of 2003. Operating expenses for the first nine months of 2004 included $16.3 million of sales and marketing expenses associated with the commercial support of Aldurazyme and $12.0 million of research and development costs, primarily clinical trial costs. Operating expenses for the first nine months of 2003 included $12.3 million of sales and marketing expenses associated with the commercial launch of Aldurazyme and $18.7 million of research and development expenses. Sales and marketing expenses increased in the first nine months of 2004 due to increased post-launch commercialization activities. Research and development of the joint venture for the first nine months of 2003 included $8.2 million for the production of Aldurazyme prior to obtaining regulatory approval and $10.5 million of clinical trial costs and continued research and development efforts. Research and development decreased in the first nine months of 2004 compared to 2003 due to the capitalization of inventory during all of 2004 compared with approximately half of 2003.

Liquidity and Capital Resources

Cash and Cash Flow

We have financed our operations by the issuance of common stock, convertible debt, equipment financing and the related interest income earned on cash, cash equivalents and short-term investments. During the first nine months of 2003, we raised $80.5 million from a public offering of our common stock, $8.0 million from the sale of our common stock to Acqua Wellington and $120.9 million from a convertible debt offering. We voluntarily elected to terminate our equity financing agreement with Acqua Wellington in September 2003.

As of September 30, 2004, our combined cash, cash equivalents and short-term investments totaled $86.6 million, a decrease of $119.8 million from $206.4 million at December 31, 2003. Additionally, we have $25.2 million of restricted cash at September 30, 2004, primarily associated with the Ascent Pediatrics transaction. Cash inflows during the first nine months of 2004 included proceeds from our equipment and facility loan totaling $8.2 million. The primary sources of cash during the first nine months of 2003 were the financing activities described above, a milestone payment from Genzyme of $12.1 million and the issuance of common stock pursuant to the exercise of stock options under our stock compensation plans of approximately $4.3 million.

The primary uses of cash during the first nine months of 2004 were to finance operations, which primarily included the manufacturing and clinical trials of Aryplase and the related supporting functions, and the Ascent Pediatrics transaction. Our cash burn, a non-GAAP financial measure, in the first nine months of 2004 was $94.6 million as compared to $41.5 million in the first nine months of 2003. The $53.1 million increase in cash burn during the first nine months of 2004 is primarily attributable to cash payments associated with the Ascent Pediatrics transaction totaling $29.7 million, an increase in capital expenditures primarily related to the development of our facilities of $13.8 million, the lack of the $12.1 million milestone revenue received in 2003 and increased investments in working capital such as inventory and our investment in BioMarin/Genzyme LLC. These increases in cash burn were partially offset by equipment and facility loan proceeds of $8.2 million. See “Overview—Non-GAAP Financial Measures” above for a discussion of “cash burn” as a non-GAAP financial measure and the reconciliation of cash burn to net increase (decrease) in cash.

We do not expect to generate net positive cash flow from operations for the foreseeable future because we expect to continue to incur operational expenses and continue our research and development activities, including:

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We also expect to incur costs related to increased marketing and manufacturing of Aldurazyme to satisfy the product demands associated with its commercialization.

As a result of the Ascent Pediatrics transaction, we expect to pay Medicis $145.0 million in specified cash payments through 2009, of which $15.0 million is payable in the fourth quarter of 2004.

Funding Commitments

We expect to fund our operations with our cash, cash equivalents, short-term investments and currently restricted cash, supplemented by proceeds from equity or debt financings, loans or collaborative agreements with corporate partners. We expect our current funds will meet our operating and capital requirements into the second quarter of 2005.

Our investment in our product development programs has a major impact on our operating performance. In the nine months ended September 30, 2004, our research and development expenses of $37.7 million represent $24.5 million of Aryplase costs, $5.0 million of Phenoptin costs, $2.0 million of NeuroTrans costs, $1.2 million of Orapred costs, $0.3 million of Vibrilase costs and $4.7 million of research and development costs not allocated to specific major projects.

In the quarter ended September 30, 2004, our research and development expenses of $11.8 million represent $5.7 million of Aryplase costs, $2.6 million of Phenoptin costs, $0.7 million of NeuroTrans costs, $1.0 million of Orapred costs and $1.8 million of research and development costs not allocated to specific major projects.

As of September 30, 2004, our research and development expenses associated with our significant product development programs since inception totaled $68.6 million of Aryplase costs, $5.7 million of Phenoptin costs, $5.0 million of NeuroTrans costs, $8.0 million of Vibrilase costs, $1.2 million of Orapred costs, and $95.7 million of costs not allocated to specific projects and discontinued projects. We cannot estimate the cost to complete any of our product development programs. Additionally, except as disclosed in under “—Overview”, we cannot estimate the time to complete any of our product development programs or when we expect to receive net cash inflows from any of our product development programs. Please see “Factors That May Affect Future Results” for a discussion of the reasons that we are unable to estimate such information, and in particular “—If we fail to obtain or maintain regulatory approval to commercially manufacture or sell our future drug products, or if approval is delayed, we will be unable to generate revenue from the sale of these products, our potential for generating positive cash flow will be diminished, and the capital necessary to fund our operations will be increased;” “–To obtain regulatory approval to market our products, preclinical studies and costly and lengthy clinical trials will be required and the results of the studies and trials are highly uncertain;” “—If we are unable to successfully develop manufacturing processes for our drug products to produce sufficient quantities and at acceptable cost, we may be unable to meet demand for our products and lose potential revenue, have reduced margins or be forced to terminate a program;” “—If we fail to compete successfully with respect to product sales, we may be unable to generate sufficient sales to recover our expenses related to the development of a product program or to justify continued marketing of a product;” and “—If we do not achieve our projected development goals in the time frames we announce and expect, the commercialization of our products may be delayed and the credibility of our management may be adversely affected and, as a result, our stock price may decline.”

We expect that the proceeds from equity or debt financing, loans or collaborative agreements will be used to fund future operating costs, capital expenditures and working capital requirements, which may include costs associated with the commercialization of our products; additional clinical trials and the manufacturing of Orapred, Aryplase and Phenoptin; preclinical studies and clinical trials for our other product candidates; potential licenses and other acquisitions of complementary technologies, products and companies; general corporate purposes including the development of our corporate facilities; payment of the amounts due to the Ascent Pediatrics transaction; and working capital.

Our future capital requirements will depend on many factors, including, but not limited to:

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Borrowings and Contractual Obligations

Our $125 million of 3.5% convertible notes will impact our liquidity due to the semi-annual cash interest payments and the scheduled repayment of the notes in 2008. Should we redeem the notes after June 2006, at our option according to the terms of the notes, we will be subject to premiums upon redemption ranging from 0.7% to 1.4%, dependent upon the time the notes are redeemed. We also must repay the debt if there is a qualifying change in control or termination of trading of our common stock.

We have entered into several agreements for loans, including a $25.0 million credit facility executed in May 2004, to finance our equipment purchases and facility improvements. The aggregate outstanding balance totaled $9.4 million at September 30, 2004. The loans bear interest ranging from 2.83% to 9.33% and are secured by liens on certain assets. Payments of principal and interest are due through maturity of the credit facility in 2011. The lender under our credit facility requires that we maintain a total unrestricted cash balance of at least $45 million or a greater amount defined by a calculation provided for in the credit agreement, as amended. As a result of the Ascent Pediatrics transaction, we expect to pay Medicis $145.0 million in specified cash payments through 2009, of which $15.0 million is payable in the fourth quarter of 2004.

We anticipate a need for additional financing to fund our future operations, including the commercialization of our drug product candidates currently under development. We cannot provide assurance that additional financing will be obtained or, if obtained, will be available on reasonable terms or in a timely manner.

We have contractual and commercial obligations under our debt, operating and capital leases and other obligations related to research and development activities, licenses and sales royalties with annual minimums. Information about these obligations as of September 30, 2004, is presented in the table below (in thousands).