UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________
Form 10-K

____________
(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2017

2019

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 registrant as specified in its charter)

____________

Delaware

68-0397820

Delaware

68-0397820
(State ofor other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

770 Lindaro Street

San Rafael California

California

94901

(Address of principal executive offices)

(Zip Code)

(415) 506-6700
(Registrant’s telephone number, including area code: (415) 506-6700

code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

each class

Trading Symbol(s)

Name of Each Exchangeeach exchange on Which Registered

which registered

Common Stock, $.001 par value

$.001

BMRN

The Nasdaq Global Select Market

Securities registered under Section 12(g) of the Act:

None

____________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes      No  

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      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, 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.    

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging"emerging growth company”company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

Emerging Growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.)    Yes      No  

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of June 30, 20172019 was $8.5$8.1 billion, based on the closing price reported for such date on the Nasdaq Global Select Market.

As of February 13, 2018,12, 2020, the registrant had 176,072,261 179,925,602shares of common stock, par value $0.001, outstanding.  

The documents incorporated by reference are as follows: portions of the Registrant’s Proxy Statement for its 20182020 annual meeting of stockholders are incorporated by reference into Part III.


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BIOMARIN PHARMACEUTICAL INC.

2017

2019 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

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53

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76

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78

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79

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79

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86

87


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Unless the context suggests otherwise, references in this Annual Report on Form 10-K to “BioMarin,” the “Company,” “we,” “us,” and “our” refer to BioMarin Pharmaceutical Inc. and, where appropriate, its wholly owned subsidiaries.

BioMarin®, Brineura®, Firdapse®, Kuvan®, Naglazyme®, Palynziq® and Vimizim® are our registered trademarks. KyndrisaTM is our trademark. Aldurazyme® is a registered trademark of BioMarin/Genzyme LLC. All other brand names and service marks, trademarks and other trade names appearing in this report are the property of their respective owners.

Forward-Looking Statements

This Annual Report on 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,” “intends,” “anticipates,” “plans,” “may,” “will,” “could,” would,“would,” “projects,” “continues,” “estimates,” “potential,” “opportunity” or the negative versions of these terms and other similar expressions. You should not place undue reliance on these types of forward-looking statements, which speak only as of the date that they were made. These forward-looking statements are based on the beliefs and assumptions of our management based on information currently available to management and should be considered in connection with any written or oral forward-looking statements that we may issue in the future as well as other cautionary statements we have made and may make. 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 the section titled Risk Factors“Risk Factors” in Part II, Item 1A of this Annual Report on Form 10-K as well as information provided elsewhere in this Annual Report on Form 10-K. You should carefully consider that information before you make an investment decision. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Annual Report on Form 10-K may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

Except as required by law, we do not undertake any obligation to release publicly any revisions to these forward-looking statements after completion of the filing of this Annual Report on Form 10-K to reflect later events or circumstances or the occurrence of unanticipated events.

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3

Table of ContentsPart
Part I

Item 1. Business

Overview

BioMarin Pharmaceutical Inc. (BioMarin, we, us or our) is a global biotechnology company that develops and commercializes innovative therapies for people with serious and life-threatening rare diseases and medical conditions. We select product candidates for diseases and conditions that represent a significant unmet medical need, have well-understood biology and provide an opportunity to be first-to-market or offer a significant benefit over existing products.

Our therapy portfolio consists of sixseveral commercial products and multiple clinical and pre-clinicalpreclinical product candidates. Our commercial products are Aldurazyme (laronidase) for Mucopolysaccharidosis I (MPS I), Brineura (cerliponase alfa)candidates for the treatment of late infantile neuronal ceroid lipofuscinosis type 2 (CLN2), Firdapse (amifampridine phosphate) for Lambert Eaton Myasthenic Syndrome (LEMS), Kuvan (sapropterin dihydrochloride) for phenylketonuria (PKU), Naglazyme (galsulfase) for Mucopolysaccharidosis VI (MPS VI) and Vimizim (elosulfase alpha) for Mucopolysaccharidosis IV Type A (MPS IV A).  

various diseases. We continue to invest in our clinical and pre-clinicalpreclinical product pipeline by committing significant resources to research and development programs and business development opportunities within our areas of scientific, manufacturing and technical expertise. We are conducting clinical trials

A summary of our major commercial products is provided below:
Major Commercial ProductsIndication
United States
Orphan
Drug
Exclusivity
Expiration (1)
United
States
Biologic
Exclusivity
Expiration (2)
European
Union
Orphan Drug
Exclusivity
Expiration (1)
Aldurazyme (laronidase)
MPS I (3)
ExpiredExpiredExpired
Brineura (cerliponase alfa)
CLN2 (4)
202420292027
Kuvan (sapropterin dihydrochloride)
PKU (5)
ExpiredNot Applicable
2020 (6)
Naglazyme (galsulfase)
MPS VI (7)
ExpiredExpiredExpired
Palynziq (pegvaliase-pqpz)
PKU (8)
202520302029
Vimizim (elosulfase alpha)
MPS IVA (9)
202120262024
(1) See “Government Regulation—Orphan Drug Designation” in this Annual Report on several product candidatesForm 10-K for further discussion
(2) See “Government Regulation—Healthcare Reform” in this Annual Report on Form 10-K for further discussion
(3) For the treatment of various diseases. Our major product candidates in development include pegvaliase, an enzyme substitution therapy forMucopolysaccharidosis I (MPS I)
(4) For the treatment of late infantile neuronal ceroid lipofuscinosis type 2 (CLN2)
(5) For the treatment of phenylketonuria (PKU); vosoritide,
(6) Kuvan, a peptide therapeutic forsmall molecule therapy, has been granted orphan drug status in the European Union (EU), which together with pediatric exclusivity, confers 12 years of market exclusivity in the EU that expires in December 2020
(7) For the treatment of achondroplasia, the most common form of disproportionate short stature in humans; valoctocogene roxaparvovec (formerly referred to as BMN 270), an AAV5 vector and factor VIII gene therapy drug development candidate, forMucopolysaccharidosis VI (MPS VI)
(8) For adult patients with PKU
(9) For the treatment of severe hemophilia A; Mucopolysaccharidosis IV Type A (MPS IVA)
A summary of our ongoing major development programs, including key metrics, is provided below:
Major Product Candidates
in Development
Target
Indication
U.S. Orphan
Designation
EU Orphan
Designation
Stage
Valoctocogene roxaparvovecSevere Hemophilia AYesYesClinical Phase 3
VosoritideAchondroplasiaYesYesClinical Phase 3
BMN 307PKUYesYes
Clinical Phase 1/2 (1)
(1) We expect to start dosing patients in a Phase 1/2 study in the first quarter of 2020. See “Major Product Candidates—BMN 250, an investigational enzyme replacement therapy using a novel fusion307” in this Annual Report on Form 10-K for further discussion.
See “Patents and Proprietary Rights” in this Annual Report on Form 10-K for additional information on our market protection.
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Table of recombinant human alpha-N-acetyglucosaminidase (NAGLU) with a peptide derived from insulin-like growth factor 2 (IGF2), for the treatment of Sanfilippo Syndrome Type B, or mucopolysaccharidosis type IIIB (MPS IIIB); and BMN 290, a selective chromatin modulation therapy, for the treatment of Friedreich's ataxia. We are conducting or planning to conduct preclinical development of several other product candidates for genetic and other metabolic diseases.

Contents

Recent Developments

FDA

Regulatory Review of Pegvaliase

Valoctocogene Roxaparvovec for the Treatment of Severe Hemophilia A

On December 22, 2017,February 20, 2020, we announced that the United StatesU.S. Food and Drug Administration (FDA) will require additional time to complete itsaccepted for priority review of our Biologics License Application (BLA) for pegvaliase, a PEGylated recombinant phenylalanine ammonialyase enzyme product to reduce blood phenylalanine (Phe) levels in adult patientsvaloctocogene roxaparvovec for the treatment of adults with PKU who have uncontrolled blood Phe levels on existing management.severe hemophilia A. The Prescription Drug User Fee Act (PDUFA) target action date for pegvaliasethe BLA has been extendedset for August 21, 2020. On December 23, 2019, we announced that the European Medicines Agency (EMA) validated our Marketing Authorisation Application (MAA) for valoctocogene roxaparvovec, which has been in review under accelerated assessment since January 2020. The submissions are based on our Phase 3 interim analysis and the three-year Phase 1/2 data of patients treated with valoctocogene roxaparvovec. Both submissions represent the first time a gene therapy product for any type of hemophilia indication is under review for marketing authorization by three months to May 28, 2018, which was changed to May 25, 2018 due to the Memorial Day holiday.

health authorities. See “Major Product Candidates in Development — Valoctocogene Roxaparvovec” in this Annual Report on Form 10-K for more information regarding valoctocogene roxaparvovec.

Gene Therapy Product Candidate Valoctocogene RoxaparvovecBMN 307 for the Treatment of Hemophilia A

PKU

BMN 307 is a gene therapy product candidate that is designed to normalize blood phenylalanine (Phe) concentration levels in patients with PKU. On December 19, 2017,January 13, 2020, we announced that we had dosedboth the first patientFDA and Medicines and Healthcare Products Regulatory Agency (MHRA) in the global GENEr8-1 Phase 3 study with the 6e13 vg/kg doseUnited Kingdom (U.K.) granted Investigational New Drug (IND) status and approved our Clinical Trial Application (CTA), respectively, for valoctocogene roxaparvovec, an investigational gene therapy for the treatment ofBMN 307. We expect to start dosing patients with severe hemophilia A. This is the first of two Phase 3 studies in the global Phase 3 program to dosePHEARLESS, a patient. The global Phase 3 program includes two studies with valoctocogene roxaparvovec, one with the 6e13 vg/kg dose (GENEr8-1) and one with the 4e13 vg/kg dose (GENEr8-2). Both Phase 3 GENEr8 studies will be open-label single-arm studies to evaluate the efficacy and safety of valoctocogene roxaparvovec. We plan to enroll the first patient in GENEr8-2 in early 2018. The primary endpoint in both studies will be based on the factor VIII activity level achieved following treatment with valoctocogene roxaparvovec, and the secondary endpoints will measure annualized factor VIII replacement therapy use rate and annualized bleed rate. We also plan to conduct a Phase 1/2 Study with the 6e13kg/vg dose and with approximately 10 patients who are AAV5 positive. The first patient is expected to enroll in the first half of 2018.

On December 9, 2017, we announced an update to our previously reported results of an open-label Phase 1/2 study of valoctocogene roxaparvovec. The updated results were presented during an oral presentation at the

3


59th American Society of Hematology (ASH) Annual Meeting and Exposition by John Pasi, M.B. Ch.B., Ph.D. from Barts and The London School of Medicine and Dentistry and primary investigator for the Phase 1/2 study and included the presentation of data, which included sustained normal or near-normal factor VIII levels in severe hemophilia A for most patients with a maximum follow-up of 19 months. The data presented at ASH had a cut off of November 16, 2017 and included 78 weeks of data for the 6e13 vg/kg dose and 48 weeks of data for the 4e13 vg/kg dose.

In October 2017 we announced that valoctocogene roxaparvovec had been granted Breakthrough Therapy Designation from the FDA. The designation is intended to expedite the development and review of medicines to treat a serious disease and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies. EarlierBMN 307, in the year, the European Medicines Agency (EMA) granted access to its Priority Medicines (PRIME) regulatory initiative for valoctocogene roxaparvovec. To be accepted for PRIME, an investigationalfirst quarter of 2020 using product made at commercial scale from our gene therapy has to show its potential to benefit patients with unmet medical needs based on early clinical data.

Sale of Priority Review Voucher

In December 2017, we sold a Rare Pediatric Disease Priority Review Voucher to Novartis Pharma AG for a lump sum payment of $125.0 million. We received the voucher under an FDA program intended to encourage the development of treatments for rare pediatric diseases. We were awarded the voucher in April 2017 when we received approval from the FDA of Brineura for the treatment of CLN2.

Selection of BMN 290 for Friedreich’s Ataxia

In October 2017 we announced that we had selected BMN 290, a selective chromatin modulation therapy intended for treatment of Friedreich's ataxia, a rare autosomal recessive disorder that results in disabling neurologic and cardiac progressive decline. We expect to submit to the FDA an Investigational New Drug (IND) application in the second half of 2018.

manufacturing facility.

Product Candidate Vosoritide for the Treatment of Achondroplasia

In October 2017,

On November 14, 2019, we provided an update on the open-label Phase 2 studyour development of vosoritide an analogfor the treatment of C-type Natriuretic Peptide (CNP), in children with achondroplasia, the most common form of disproportionate short stature in humans. Vosoritide for achondroplasia has demonstrated sustained increaseWe announced that children in average growth velocitya cohort of our open-label Phase 2 study of vosoritide over 3054 months achieved a statistically significant cumulative additional mean height gain of treatment in 10 children, who completed 30 months of daily dosing at 15 µg/kg/day. Over this period of time, patients have experienced mean absolute growth increase of approximately 49.0 cm over what their baseline growth velocity would have predicted. The sustained increase in annualized growth velocity was accompanied by sustained improvements over time in height compared to age-children, matched for age and gender-matched unaffected children as measured by z-scores. In addition, treatment with vosoritide shows continued improvement over timegender, in proportionality as measured by a ratio of the upper and lower body measurements, or U/L ratio.

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Ournatural history achondroplasia dataset. On December 16, 2019, we announced positive results from our completed global Phase 3 randomized, double-blind, placebo-controlled study of vosoritide in approximately 110121 children with achondroplasia ages 5-14 for 52 weeks also continuedweeks. The placebo-adjusted increased change from baseline in 2017. The study will be followed by a subsequent open-label extension. Childrengrowth velocity after one year of treatment with vosoritide, the primary endpoint, was 1.6 cm/yr. Based on these results, we plan to meet with health authorities in the first half of 2020 to discuss plans for submitting marketing applications in 2020. See “Major Product Candidates in Development — Vosoritide” in this study will have completed a minimum six-month baseline study to determine their respective baseline growth velocity prior to enteringAnnual Report on Form 10-K for more information regarding vosoritide.

Gene Therapy Product Candidate BMN 331 for the Phase 3 study. Vosoritide is being tested in children in the age range where their growth plates are still open. This is approximately 25%Treatment of people with achondroplasia.Hereditary Angioedema
On November 14, 2019, we announced our third gene therapy product candidate, BMN 331, for hereditary angioedema. We expect to complete enrollment of the Phase 3 studybegin IND-enabling studies for BMN 331 in mid-2018 and provide top-line data in the second half of 2019.

early to mid-2020.

Summary of Commercial Products and Development Programs

A summary of

Major Commercial Products
Net Product Revenues related to our major commercial products and major development programs, including key metrics asconsisted of December 31, 2017,the following (in millions):
Years Ended December 31,
Major Commercial Products201920182017
Aldurazyme$97.8$135.1$90.0
Brineura$72.0$39.9$8.6
Kuvan$463.4$433.6$407.5
Naglazyme$374.3$345.9$332.2
Palynziq$86.9$12.2—  
Vimizim$544.3$482.0$413.3

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Table of Contents
Aldurazyme
Aldurazyme is provided below:

 

 

 

 

United States

 

United

 

European

 

2017

 

 

2017

 

 

 

 

 

Orphan

 

States

 

Union

 

Total Net

 

 

Research &

 

 

 

 

 

Drug

 

Biologic

 

Orphan Drug

 

Product

 

 

Development

 

 

 

 

 

Exclusivity

 

Exclusivity

 

Exclusivity

 

Revenues

 

 

Expense

 

Commercial Products

 

Indication

 

Expiration (1)

 

Expiration (2)

 

Expiration (1)

 

(in millions)

 

 

(in millions)

 

Aldurazyme

 

MPS I

 

Expired

 

Expired

 

Expired

 

$

90.0

 

(3)

$

3.6

 

Brineura

 

CLN2

 

2024

 

2029

 

2027

 

$

8.6

 

 

$

52.0

 

Firdapse

 

LEMS

 

NA (4)

 

NA (4)

 

2019

 

$

18.8

 

 

$

2.8

 

Kuvan

 

PKU

 

Expired

 

NA

 

2020 (5)

 

$

407.5

 

 

$

28.4

 

Naglazyme

 

MPS VI

 

Expired

 

Expired

 

Expired

 

$

332.2

 

 

$

12.5

 

Vimizim

 

MPS IV A

 

2021

 

2026

 

2024

 

$

413.3

 

 

$

24.8

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

 

 

 

United

 

European

 

 

 

Research &

 

 

 

 

 

States

 

Union

 

 

 

Development

 

Major Product Candidates

 

Target

 

Orphan

 

Orphan

 

 

 

Expense

 

in Development

 

Indication

 

Designation

 

Designation

 

Stage

 

(in millions)

 

Pegvaliase

 

PKU

 

Yes

 

Yes

 

U.S. marketing authorization

regulatory review (6)

 

$

122.1

 

Valoctocogene

  roxaparvovec

 

Hemophilia A

 

Yes

 

Yes

 

Clinical Phase 3

 

$

118.2

 

Vosoritide

 

Achondroplasia

 

Yes

 

Yes

 

Clinical Phase 3

 

$

55.1

 

BMN 250

 

MPS IIIB

 

Yes

 

Yes

 

Clinical Phase 1/2

 

$

56.0

 

BMN 290

 

Friedreich's Ataxia

 

NA

 

NA

 

Preclinical (7)

 

$

2.8

 

(1)

See “Government Regulation—Orphan Drug Designation” below for further discussion.

(2)

See “Government Regulation— Healthcare Reform” below for further discussion.

(3)

The Aldurazyme total net product revenues noted above are the total net product revenues recognized by us in accordance with the terms of our agreement with Genzyme Corporation (Genzyme)a highly purified protein that is designed to be identical to a naturally occurring form of the human enzyme alpha-L-iduronidase, a lysosomal enzyme normally required for the breakdown of glycosaminoglycans (GAGs). See “Major Commercial Products—Aldurazyme” below for further discussion.

(4)

Firdapse has not received marketing approval in the United States. We have licensed the North American rights to develop and market Firdapse to a third party.

(5)

Kuvan has been granted orphan drug status in the European Union (EU), which together with pediatric exclusivity, confers 12 years of market exclusivity in the EU that expires in 2020.

(6)

We plan to submit a Marketing Authorization Application (MAA) to the EMA in the first quarter of 2018.

(7)

We plan to submit an IND for BMN 290 in the second half of 2018.

See “Patents and Proprietary Rights” below for additional information on our market protection.

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Major Commercial Products

Aldurazyme

Aldurazyme is approved for marketing in the United States (U.S.)U.S., the EU and other international markets for patients with MPS I. MPS I is a progressive and debilitating life-threatening genetic disease, for which no other drug treatment currently exists, that is caused by the deficiency of alpha-L-iduronidase, a lysosomal enzyme normally required for the breakdown of glycosaminoglycans (GAGs).alpha-L-iduronidase. Patients with MPS I typically become progressively worse and experience multiple severe and debilitating symptoms resulting from the build-up of carbohydrate residues in all tissues in the body. These symptoms include: inhibited growth, delayed and regressed mental development (in the severe form of the disease), enlarged liver and spleen, joint deformities and reduced range of motion, impaired cardiovascular function, upper airway obstruction, reduced pulmonary function, frequent ear and lung infections, impaired hearing and vision, sleep apnea, malaise and reduced endurance.

We developed Aldurazyme through collaboration with Genzyme Corporation (Genzyme), now a wholly-ownedwholly owned subsidiary of Sanofi. Under our collaboration agreement with Genzyme, we are responsible for manufacturing Aldurazyme and supplying it to Genzyme. We receive payments ranging from 39.5% to 50% on worldwide net Aldurazyme sales by Genzyme depending on sales volume. We recognize a portion of this amount as product transfer revenue when the product is shipped and released to Genzyme because all of our performance obligations are fulfilled at that point and title to, and risk of loss for, the product has transferred to Genzyme. The product transfer revenue represents the fixed amount per unit of Aldurazyme that Genzyme is required to pay us if the product is unsold by Genzyme. The amount of product transfer revenue will eventually be deducted from the revenues earned by us calculated based on Genzyme’s net sales recognized when the product is sold by Genzyme. Additionally, Genzyme and we are members of BioMarin/Genzyme LLC, a 50/50 limited liability company (the BioMarin/Genzyme LLC) that: (1) holds the intellectual property relating to Aldurazyme and other collaboration products and licenses all such intellectual property on a royalty-free basis to us and Genzyme to allow us to exercise our rights and perform our obligations under the agreements related to the BioMarin/Genzyme LLC, and (2) engages in research and development activities that are mutually selected and funded by Genzyme and us

Aldurazyme net product revenues for the years ended December 31, 2017, 2016 and 2015 totaled $90.0 million, $93.8 million and $98.0 million, respectively. On January 1, 2018, we will adopt Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, as amended (commonly referred to as ASC Topic 606). ASC Topic 606 supersedes nearly all existing revenue recognition guidance under generally accepted accounting principles in the U.S. After adopting ASC Topic 606, we will recognize Aldurazyme revenues when the product is shipped to Genzyme and all required quality control certificates are complete, because all of our performance obligations are fulfilled at that point in time. We will record Aldurazyme net product revenues based on the estimated tiered payment that will be in effect when the product is sold through by Genzyme. We believe that any differences between estimated revenues from Genzyme and the actual payments will be insignificant. See Note 4 to our accompanying Consolidated Financial Statements for additional discussion.

us.

Brineura

Brineura is a recombinant human tripeptidyl peptidase 1 (TPP1) and is approved for the treatment of patients with CLN2, a form of Batten disease.disease, in the U.S., the EU and other international markets. CLN2 is an incurable, rapidly progressive disease that ends in patient death by 10-12 years of age. Patients are initially healthy but begin to decline at approximately the age of three. We estimate that up to 1,200 to 1,600 cases exist worldwide. On April 27, 2017, Brineura was approved in the U.S. to slow the progression of loss of ambulation in symptomatic pediatric patients three years of age and older with CLN2. Brineura is the first treatment approved to slow the progression of loss of ambulation in children with CLN2 disease. We began shipping the product in the U.S. in June 2017.

On June 1, 2017, we announced that the European Commission (EC)EC granted marketing authorization for Brineura in the EU to treat children with CLN2 disease.CLN2. Brineura is the first treatment approved in the EU for the treatment of CLN2, disease, and the marketing authorization for Brineura includes all 28 countries of the EU, Norway, Iceland and Liechtenstein. On April 21, 2017, the Committee for Medicinal Products for Human Use (CHMP),CHMP, the scientific committee of the EMA adopted a positive opinion for our MAA for Brineura following an accelerated review procedure, reserved for medicinal products expected to be a major public health interest. Brineura iswas one of the first therapies to go through this process. We began shipping the product in the EU in July 2017.  

Brineura is administered via intracerebroventricular (ICV) infusion and intended to be used in combination with a delivery device, such as an injector or other delivery system. Please see Government“Government Regulation – Combination Products” belowProducts” in this Annual Report on Form 10-K for additional information on combination products.

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Brineura net product revenues for the year ended December 31, 2017 were $8.6 million.

Kuvan

Kuvan is a proprietary synthetic oral form of 6R-BH4, a naturally occurring enzyme co-factor for phenylalanine hydroxylase (PAH), indicated for patients with PKU. Kuvan is the first drug for the treatment of PKU, which is an inherited metabolic disease that affects at least 50,000 diagnosed patients under the age of 40 in the developed world. We believe that approximately 30% to 50% of those with PKU could benefit from treatment with Kuvan. PKU is caused by a deficiency of activity of an enzyme, PAH, which is required for the metabolism of Phe. Phe is an essential amino acid found in all 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, including severe mental retardation and brain damage, mental illness, seizures and other cognitive problems. As a result of newborn screening efforts implemented in the 1960s and early 1970s, virtually all PKU patients under the age of 40 in developed countries have been diagnosed at birth. Currently, PKU can be managed by a Phe-restricted diet, which is supplemented by nutritional replacement products, like formulas and specially manufactured foods; however, it is difficult for most patients to adhere to the strict diet to the extent needed for achieving adequate control of blood Phe levels.

Kuvan tablets were granted marketing approval for the treatment of PKU in the U.S. in December 2007 and in the EU in December 2008. In December 2013, the FDA approved the use of Kuvan powder for oral solution that is provided in a dose sachet packet allowing faster dissolution of powder in solution compared to the current tablet form. We commenced the commercial launch of this new form of Kuvan in February 2014. We market Kuvan in the U.S., the EU and other international markets (excluding Japan). In certain international markets, Kuvan is also approved for, or is only approved for, the treatment of primary BH4 deficiency, a different disorder than PKU. Kuvan net product revenues for the years ended December 31, 2017, 2016 and 2015 totaled $407.5 million, $348.0 million and $239.3 million, respectively.

In the fourth quarter

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Table of 2015, we entered into the Termination and Transition Agreement with Ares Trading S.A. (Merck Serono), as amended and restated on December 23, 2015 (the A&R Kuvan Agreement) to terminate the Development, License and Commercialization Agreement, dated May 13, 2005, as amended (the License Agreement), including the license to Kuvan granted in the License Agreement from us to Merck Serono. Also in the fourth quarter of 2015, we and Merck Serono entered into a Termination Agreement (the Pegvaliase Agreement) to terminate the license to pegvaliase granted in the License Agreement from us to Merck Serono.

On January 1, 2016, pursuant to the A&R Kuvan Agreement and the Pegvaliase Agreement, we completed the acquisition from Merck Serono and its affiliates of certain rights and other assets, and the assumption from Merck Serono and its affiliates of certain liabilities, in each case with respect to Kuvan and pegvaliase. As a result, we acquired all global rights to Kuvan and pegvaliase from Merck Serono, with the exception of Kuvan in Japan. Previously, we had exclusive rights to Kuvan in the U.S. and Canada and pegvaliase in the U.S. and Japan.

Pursuant to the A&R Kuvan Agreement, we paid Merck Serono $374.5 million, in cash, and are obligated to pay Merck Serono up to a maximum of €60.0 million, in cash, if future sales milestones are met. Pursuant to the Pegvaliase Agreement, we are obligated to pay Merck Serono up to a maximum of €125.0 million, in cash, if future development milestones are met.

Contents

Two companies previously filed paragraph IV certifications and submitted abbreviated new drug applications (ANDAs) to produce sapropterin dihydrochloride tablets and powder. Wepowder and we subsequently entered into settlement agreements regarding Kuvan with both companies. We expect generic versions of Kuvan to first become available in the U.S. in the fourth quarter of 2020. Please see Government Regulation – Hatch-Waxman Act” below and “Legal Proceedings” in Part I, Item 3 of this Annual Report on Form 10-K for additional information. Please see “Risk Factors“Risk Factors” included in Part I, Item 1A of this Annual Report on Form 10-K for more information regarding the settlement agreements and for a discussion of the risks posed by generic versions of Kuvan.

Please see “Government Regulation – The Hatch-Waxman Act” in this Annual Report on Form 10-K for additional information regarding ANDAs.

Naglazyme

Naglazyme is a recombinant form of N-acetylgalactosamine 4-sulfatase (arylsulfatase B) indicated for patients with MPS VI. MPS VI is a debilitating life-threatening genetic disease for which no other drug treatment currently exists and is caused by the deficiency of arylsulfatase B, an enzyme normally required for the breakdown of certain complex carbohydrates known as GAGs. Patients with MPS VI typically become progressively worse and experience multiple severe and debilitating symptoms resulting from the build-up of carbohydrate residues in tissues in the body. These symptoms include: inhibited growth, spinal cord

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compression, enlarged liver and spleen, joint deformities and reduced range of motion, skeletal deformities, impaired cardiovascular function, upper airway obstruction, reduced pulmonary function, frequent ear and lung infections, impaired hearing and vision, sleep apnea, malaise and reduced endurance.

Naglazyme is approved for marketing in the U.S., the EU and other international markets. Naglazyme net product revenues
Palynziq
Palynziq is a PEGylated recombinant phenylalanine ammonia lyase enzyme, which is delivered through subcutaneous injection to reduce blood Phe concentrations. On May 24, 2018, the FDA approved the use of Palynziq in adult patients with PKU who have uncontrolled blood Phe concentrations greater than 600 micromol/L (10mg/dL) on existing management. Palynziq is our second approved treatment for PKU. Palynziq is only available in the years ended December 31, 2017, 2016U.S. through the Palynziq Risk Evaluation and 2015 were $332.2 million, $296.5 millionMitigation Strategy (REMS) program, which is required by the FDA to mitigate the risk of anaphylaxis while using the product. Notable requirements of our REMS program include the following:
prescribers must be certified by enrolling in the REMS program and $303.1 million, respectively.

completing training;

prescribers must prescribe auto-injectable epinephrine with Palynziq;
pharmacies must be certified with the REMS program and must dispense Palynziq only to patients who are authorized to receive it;
patients must enroll in the REMS program and be educated about the risk of anaphylaxis by a certified prescriber to ensure they understand the risks and benefits of treatment with Palynziq; and
patients must have auto-injectable epinephrine available at all times while taking Palynziq.
Please see “Risk Factors” included in Part I, Item 1A of this Annual Report on Form 10-K for a discussion of the risks posed by the REMS program.
On May 6, 2019, we announced that the European Commission (EC) granted marketing authorization for Palynziq in the EU, at doses of up to 60 mg once daily, to reduce Phe concentrations in patients with PKU aged 16 and older who have inadequate blood Phe control (blood Phe levels greater than 600 micromol/L) despite prior management with available treatment options.
Vimizim

Vimizim is an enzyme replacement therapy for the treatment of MPS IV A,IVA, a lysosomal storage disorder. MPS IV AIVA is a disease characterized by deficient activity of N-acetylgalactosamine-6-sulfatase (GALNS) causing excessive lysosomal storage of glycosaminoglycans such as keratan sulfate and chondroitin sulfate. This excessive storage causes a systemic skeletal dysplasia, short stature, and joint abnormalities, which limit mobility and endurance. Malformation of the chest impairs respiratory function, and looseness of joints in the neck cause spinal instability and potentially spinal cord compression. Other symptoms may include hearing loss, corneal clouding, and heart disease. Initial symptoms often become evident in the first five years of life. The disease substantially limits both the quality and length of life of those affected. We have identified over 2,000 patients worldwide suffering from MPS IV AIVA and estimate that the total number of patients suffering from MPS IV A worldwide could be as many as 3,000.

Vimizim was grantedis approved for marketing approval in the U.S. and, the EU in February 2014 and April 2014, respectively, and subsequently in several other international markets. Vimizim net product revenues for the years ended December 31, 2017, 2016 and 2015 were $413.3 million, $354.1 million and $228.1 million, respectively.

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Table of Contents
Major Product Candidates in Development

Pegvaliase

Pegvaliase is an investigational enzyme substitution therapy that we are developing as a subcutaneous injection for the treatment of PKU. In March 2016, we announced that our pivotal Phase 3 PRISM-2 study for pegvaliase met the primary endpoint of change in blood Phe compared with placebo (p<0.0001). This ongoing Phase 3 clinical trial includes an open-label study to evaluate safety and blood Phe levels in naïve patients and a randomized controlled study of the Phase 2 extension study patients and patients from the open-label trial to evaluate blood Phe levels and neurocognitive endpoints. Although we met the primary endpoint of the Phase 3 PRISM-2 study, we did not demonstrate a statistically significant improvement in inattention or mood scores, a key secondary clinical neurocognitive endpoint. The FDA has indicated that lowering Phe blood levels in adults could form the basis for an accelerated approval; however, a favorable outcome on prospectively-specified analyses of inattention in patients with baseline problems with attention may be required for full approval. Although the FDA accepted for Priority Review our BLA for pegvaliase in August 2017, there is no assurance that a reduction in blood Phe alone will be sufficient to support the FDA’s full regulatory approval of pegvaliase. On September 14, 2017, we announced that the FDA provided us with the "Day-74" filing communication for our BLA for pegvaliase. In the letter, the FDA advised that it was not currently planning to hold an advisory committee meeting to discuss the application. When the FDA accepted our BLA and granted priority review status, we announced that the FDA had requested additional information on Chemistry, Manufacturing and Controls (CMC), which was likely to be classified as a major amendment to the BLA and result in a three month extension of the PDUFA date. As expected, the FDA designated the receipt of this additional information as a major amendment to the application thus extending the PDUFA target action date by three months to May 28, 2018, which was changed to May 25, 2018 due to the Memorial Day holiday. If we receive approval from the FDA for pegvaliase on the PDUFA target action date, we could potentially launch the sale of pegvaliase in the U.S. in the second half of 2018. We plan to submit a MAA to the EMA in the first quarter of 2018. 

Valoctocogene Roxaparvovec

Valoctocogene roxaparvovec is an AAV5adeno associated virus (AAV5) vector drug development candidate designed to restore factor VIII plasma concentrations in patients with severe hemophilia A. Hemophilia A, also called factor VIII deficiency or classic hemophilia, is a genetic disorder caused by missing or defective factor VIII, a clotting protein. According to the World Federation of Hemophilia rankings of severity of hemophilia A, the normal range of factor VIII activity levels is between 50% and 150%, expressed as a percentage of normal factor activity in blood, the mild hemophilia A range of factor VIII activity levels is between 5% and 40%, the moderate hemophilia A range

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of factor VIII activity levels is between 1% and 5%, and the severe hemophilia range of factor VIII activity levels is less than 1%. People living with hemophilia A are not able to form blood clots efficiently and are at risk for excessive bleeding from modest injuries, potentially endangering their lives. People with severe hemophilia often bleed spontaneously into their muscles or joints.

In July 2016,

On February 20, 2020, we announced positive proof-of-conceptthat the FDA accepted for priority review our BLA for valoctocogene roxaparvovec for the treatment of adults with severe hemophilia A. The PDUFA target action date for the BLA has been set for August 21, 2020. On December 23, 2019, we announced that the EMA validated our MAA for valoctocogene roxaparvovec, which has been in review under accelerated assessment since January 2020. The submissions are based on our Phase 3 interim analysis and the three-year Phase 1/2 data of patients treated with valoctocogene roxaparvovec, described below. Both submissions represent the first time a gene therapy product for any type of hemophilia indication is under review for marketing authorization by health authorities.
On May 28, 2019, we announced a three-year update to our previously reported results from athe Phase 1/2 dose-escalation study for valoctocogene roxaparvovec in patients with severe hemophilia A, and we subsequently provided positive updates to our interim results in January and July 2017. In December 2017, further updates on valoctocogene roxaparvovec were presented during an oral presentation at the 59th ASH Annual Meeting and Exposition by John Pasi, M.B., Ch.B., Ph.D., from Barts and The London School of Medicine and Dentistry and primary investigator for this Phase 1/2 study. The data presented at ASH had a cut off of November 16, 2017 and included the following updates: For the 4e13 vg/kg dose, the three patients with the longest follow-up (at week 48) had factor VIII activity levelswhich demonstrated that were in or near the normal range with both median and mean values of 49%. Median annualized bleed and factor VIII use rates for the 4e13 vg/kg cohort were zero after week 4 and when their factor VIII activity rose above 5%. Mean annualized bleed and factor VIII use rates for the 4e13vg/kg cohort were 0.6 and 2.0, respectively. For the 6e13 vg/kg dose, at 78 weeks post infusion, the median and mean factor VIII levels for patients were 90 and 89%, respectively. Median annualized bleed and factor VIII use rates for the 6e13 vg/kg cohort were zero after week 4. Mean annualized bleed and factor VIII use rates for the 6e13 vg/kg cohort were 0.5 and 6.1, respectively. Patients in the Phase 1/2 study will be monitored for safety for five years.

On December 19, 2017, we announced that we had dosed the first patient in the global GENEr8-1 Phase 3 studyrate control with the 6e13 vg/kg dose was maintained for valoctocogene roxaparvovec. This is the firsta third year with a median Annualized Bleed Rate (ABR) of two Phase 3 studies0 and mean ABR of 0.7 in that year. In addition, factor VIII levels in the global6e13 vg/kg dose appeared to be approaching a plateau in year three. Factor VIII levels measured with the chromogenic substrate (CS) assay at the end of year three were mean and median of 32.7 international units per deciliter (IU/dL) and 19.9 IU/dl, respectively, compared with mean and median of 36.4 IU/dL and 26.2 IU/dL, respectively, at the end of year two. In January 2020, the New England Journal of Medicine (NEJM) published results from the three-year update from the Phase 3 program to dose a first patient. 1/2 study.

The global Phase 3 study program with valoctocogene roxaparvovec includes two studies, with valoctocogene roxaparvovec, one with the 6e13 vg/kg dose (GENEr8-1) and one with the 4e13 vg/kg dose (GENEr8-2). Both Phase 3 GENEr8 studies willIn July 2019, we announced the discontinuation of the GENEr8-2 study given the overwhelming preference by patients to be treated with the 6e13 vg/kg dose. The GENEr8-1 study is an open-label single-arm studiesstudy to evaluate the efficacy and safety of valoctocogene roxaparvovec. We planroxaparvovec as well as evaluate superiority of the product candidate compared to enroll the first patient in GENEr8-2 in early 2018.standard of care. The primary endpoint in both studies will beis based on the factor VIII activity level achieved following treatment with valoctocogene roxaparvovec, and the secondary endpoints will measureendpoint measures annualized factor VIII replacement therapy use rate and ABR. We announced on May 28, 2019 that data from a 20-patient cohort of the Phase 3 GENEr8-1 study achieved pre-specified clinical criteria for regulatory review in the U.S. and Europe. As of May 28, 2019, eight patients in the cohort achieved factor VIII levels of 40 or more IU/dL using the CS assay at 23 to 26 weeks, meeting the pre-specified criteria for factor VIII activity levels. As of the April 30, 2019 data cutoff, between weeks 23 to 26, seven of 16 study participants in the cohort reached or exceeded the pre-specified factor VIII levels of 40 IU/dL using the CS assay. Subsequent to the April 30, 2019 cutoff, one additional participant met that criteria, bringing the total to eight participants. For the 16 patients who had reached week 26 since administration of valoctocogene roxaparvovec by the April 30, 2019 cutoff, the estimated median ABR was zero and the estimated mean ABR was 1.5, representing a reduction of 85% from baseline levels where all patients were on standard of care. In addition, there was a 98% reduction in median annualized bleed rate. Additionally,factor VIII usage and a 94% reduction in mean factor VIII usage annualized between weeks 5 and 26. Between weeks 23 and 26, the mean factor VIII level using the CS assay was 36 IU/dL and the median was 33 IU/dl. We have dosed 134 study participants in the full GENEr8-1 study and the 52-week results are anticipated in the first quarter of 2021.
In addition to the global Phase 3 GENEr8-1 study, we plan to begin anotherare also conducting a Phase 1/2 Studystudy with the 6e13kg/6E13kg/vg dose withof valoctocogene roxaparvovec in approximately 10 patients who areparticipants with pre-existing AAV5 positive. Theantibodies. In May 2018, we announced that we dosed the first patient is expected to enroll in the first halfPhase 1/2 study (BMN 270-203) evaluating our investigational gene therapy, valoctocogene roxaparvovec, in severe hemophilia A patients with pre-existing AAV5 antibodies. An additional and separate study to evaluate seroprevalence in people with severe hemophilia A is ongoing around the world.
Overall, valoctocogene roxaparvovec continues to have a favorable safety profile and has been generally well tolerated by participants across all doses in the Phase 1/2 and Phase 3 studies. No participants have developed inhibitors to factor VIII or withdrawn from a study, and all participants have remained off factor VIII prophylaxis. Corticosteroid use has been transient with no long-lasting clinical results, and no participants have developed thrombotic events. The most common adverse events associated with valoctocogene roxaparvovec across studies include transient infusion associated reactions and transient, asymptomatic, and mild to moderate raised levels of 2018.

As further described above under “Recent Developments,”certain proteins and enzymes measured in liver function tests.

Valoctocogene roxaparvovec has Orphan Drug designation from the FDA and the EMA. Valoctocogene roxaparvovec has also been accepted for Priority Medicines (PRIME) scheme from the EMA. Additionally, the FDA has granted valoctocogene roxaparvovec Breakthrough Therapy Designation, and the EMA granted access to its PRIME regulatory initiative for valoctocogene roxaparvovec.

designation.

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Vosoritide

Vosoritide is a peptide therapeutican investigational, once daily injection analog of C-type Natriuretic Peptide (CNP) in development for the treatment of achondroplasia, the most common form of disproportionate short stature in humans. In April 2016, we reported 12-month data for the patientsVosoritide has been and is being tested only in children in the 15 µg/kg/day cohortage range when their growth plates are still open, which is approximately 25% of people with achondroplasia. In June 2019, the NEJM published results from our Phase 2 open-label, sequential cohort, dose-escalationdose-finding and extension study offor vosoritide in children who are 5-14aged 5 to 14 years old,with achondroplasia receiving a continuous dose of 15 µg/kg/day. Annualized growth velocity increased from baseline in all cohorts during each 12-month interval by 1.10 to 2.34 cm/year through 42 months. In cohort 3, which showed a durable and consistent increase inreceived 15 μg/kg continuous dosing from baseline, the mean annualized growth velocity derived between 30 and 42 months was 5.51 cm/year, representing a 1.46 cm/year change from baseline. On November 14, 2019, we announced that children in cohort 3 over 54 months achieved a statistically significant cumulative additional mean height gain of 46%-65% from baseline9.0 cm compared to children, matched for age and gender, in a natural history achondroplasia dataset. In the group. Vosoritide continued to be well tolerated with no treatment-related serious adverse events or adverse events leading to discontinuation. In October 2017, we provided an update on theglobal Phase 2 study of vosoritide, which demonstrated sustained increase in average growth velocity over 30children with achondroplasia ages 0-5, enrollment of the first cohort of 24-60 months of treatment in 10 children thatis complete and the second and third cohorts (six- to 24 months and 0- to six-months, respectively) are actively enrolling.
On December 16, 2019, we announced positive results from our completed 30 months of daily dosing at 15 µg/kg/day. Over this period of time, patients experienced mean absolute growth increase of approximately 4 cm over what their baseline growth velocity would have predicted. The sustained increase in annualized growth velocity was accompanied by sustained improvements over time in height compared to age- and gender-matched unaffected children as measured by z-scores. In addition, treatment with vosoritide showed continued improvement over time in proportionality as measured by the U/L ratio.  

Our global Phase 3 randomized, double-blind, placebo-controlled study of vosoritide in approximately 110121 children with achondroplasia ages 5-14 for 52 weeks also continuedweeks. The placebo-adjusted increased change from baseline in 2017. The studygrowth velocity after one year of treatment with vosoritide, the primary endpoint, was 1.6 cm/yr. Based on these results, we plan to meet with health authorities in the first half of 2020 to discuss plans for submitting marketing applications in 2020.

Overall, vosoritide continues to have a favorable safety profile and has been generally well tolerated by participants across the Phase 2 and Phase 3 studies with no clinically significant blood pressure changes and a mild side effect profile.
Vosoritide has Orphan Drug designation from the FDA and the EMA.
Additionally, on November 14, 2019, we announced that vosoritide will be followed bystudied in broader genetic statural abnormalities, starting with dominantly inherited short stature (DISS), as part of a subsequent open-label extension. Childrenresearch collaboration with Children’s National Hospital. We expect the trial with vosoritide for DISS to begin mid-2020.
BMN 307
BMN 307 is an AAV5 mediated gene therapy that is designed to normalize blood Phe concentration levels in this study will have completedpatients with PKU. We tested a minimum six-month baseline studybroad range of vector constructs and combinations to determine their respective baseline growth velocity prior to enteringoptimize the Phase 3 study. Vosoritide is being testedvector and increase potency, resulting in childrena 10-fold increase in potency for the selected vector. Treatment of mice in a validated PKU mouse model with BMN 307 showed a lifetime normalization of Phe and normalized neurotransmitter levels. On January 13, 2020, we announced that both the FDA and MHRA in the age range where their growth plates are still open. This is approximately 25% of people with achondroplasia.U.K. granted IND status and approved its CTA, respectively, for BMN 307. We expect to complete enrollmentstart dosing patients in PHEARLESS, a Phase 1/2 study of the Phase 3 study in mid-2018 and provide top-line dataBMN 307, in the second halffirst quarter of 2019. Additionally, we intend to begin an infant/toddler study in 2018 in children with achondroplasia ages 0-5. We have undertaken a natural history program to augment2020 using product made at commercial scale from our clinical understanding of outcomes of untreated patients for comparison to patients treated with vosoritide.

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gene therapy manufacturing facility.

BMN 250

BMN 250 is an investigational enzyme replacement therapy using a novel fusion NAGLU with a peptide derived from IGF2 for the treatment of MPS IIIB. MPS IIIB is a rapidly progressive pediatric brain disease caused by NAGLU enzyme deficiency resulting in accumulation of heparan sulfate (HS) in the brain. The accumulation of HS leads to progressive cognitive decline, loss of developmental milestones, severe hyperactivity, sleep disorders, loss of mobility, and early death. BMN 250 is delivered directly into the central nervous system via an ICV access device into the cerebrospinal fluid, which allows for the drug to bypass the blood brain barrier and distribute directly within the brain. In January 2017, we announced positive, preliminary results from a multicenter, international Phase 1/2 clinical trial for BMN 250, which began enrolling patients in April 2016. The study demonstrated that BMN 250 reduced HS levels to normal range in cerebral spinal fluid of MPS IIIB patients. A complementary observational study was also initiated to study the progression of MPS IIIB over time.

In February 2018, we presented interim data307 has Orphan Drug designation from the Phase 1/2 trial for BMN 250 at WORLDSymposium 2018. In the completed dose escalation portion of the study (Part 1), which was designed to determine safety and pharmacodynamics activity of BMN 250, three patients received escalating weekly doses (30mg, 100mg, 300mg) of BMN 250 over nine to twelve months. In Part 2 of the study, patients roll over from Part 1 and from the 250-901 observational study; dosing is 300 mg weekly. This interim data cut included the three patients from the dose escalation study and three patients from Part 2. Eligible patients from the concurrently-running 250-901 observational study are expected to roll over into Part 2 on an ongoing basis. MPS IIIB patients are missing one of four enzymes required for HS degradation, resulting in HS elevations. Cerebrospinal fluid HS levels, which were markedly elevated at baseline, were reduced to the non-affected or normal range in all six patients at the time of the data cut. All patients in the 250-901 observational study have enlarged livers as assessed by abdominal MRI scans. All three BMN 250-treated Part 1 patients experienced decreases in liver size into the normal range for age; data for the first three rollover patients is pending. Untreated MPS IIIB patients in the 250-901 observational study show progressive declines over time in developmental quotient (DQ), a measure of cognitive function normalized to age. In contrast, preliminary data in all three Part 1 patients suggest DQ stabilization. Further data in these patients and in patients who roll into the treatment study is necessary to confirm this early observation. Interim trial data indicates that ICV-administered BMN 250 is well-tolerated by MPS IIIB patients, and that the adverse event profile for BMN 250 is generally consistent with that seen with other enzyme replacement therapiesFDA and the ICV mode of administration.

BMN 290

BMN 290 is a selective chromatin modulation therapy for the treatment of Friedreich's ataxia. Friedreich's ataxia is a rare autosomal recessive disorder, which results in disabling neurologic and cardiac progressive decline. Currently there are no approved disease modifying therapies for Friedreich's ataxia. In preclinical models, BMN 290 increases frataxin expression in affected tissues more than two-fold. BMN 290 is a second-generation compound derived from a compound we acquired from Repligen Corporation (Repligen) that had human clinical data demonstrating increases in frataxin in Friedreich’s ataxia patients. We selected BMN 290 for its favorable penetration into the central nervous system and cardiac target tissues and its preservation of the selectivity of the original Repligen compound. We plan to submit an IND in the second half of 2018.

EMA.

Manufacturing

We manufacture the active pharmaceutical ingredients (API) for Aldurazyme, Brineura, Naglazyme, Palynziq, Vimizim pegvaliase, and vosoritide in our production facilities located in Novato, California. We currently also manufacture the API for Brineura and Vimizim in our manufacturing facility in Shanbally, Cork, Ireland. These facilities have demonstrated compliance with current Good Manufacturing Practices (cGMPs) to the satisfaction of the FDA, the EC and health agencies in other countries for the commercial production of Aldurazyme, Naglazyme, Brineura, and Vimizim.these products. Vialing and most packaging are performed by contract manufacturers. We believe that we have ample manufacturing capacity to support commercial demand for both Aldurazyme and Naglazyme for at least the next five years.

We currently manufacture the API for Brineura, Vimizim and BMN 250 inwith our manufacturing facility in Shanbally, Cork, Ireland. This facility has been approved by the FDA, Health Product Regulatory Authorities, EMA, EC, and health agencies in other countries for the testing, packaging, labeling, and release of Vimizim. In June 2017, the FDA approved the Shanbally facility as a bulk biologics manufacturing plant for Vimizim production, which enhances our business continuity and increases our operating capacity to support the anticipated commercial demand of Vimizim. In November and December 2017, the FDA and the EMA, respectively, approved the Shanbally facility as a formulated bulk drug substance manufacturing and quality control facility for Brineura, which further increases our operating capacity and supports the anticipated commercial demand for Brineura. Vialing and most packaging of Brineura, Vimizim and BMN 250 are performed

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by contract manufacturers. We believe that with the ShanballyNovato, California facility and our Novato, CaliforniaShanbally facility, we have ample manufacturing capacity to support anticipated commercial demand for Aldurazyme, Brineura, Naglazyme, Palynziq and Vimizim for at least the next five years.

Firdapse and

Kuvan tablets and powder sachets and Palynziq are currently manufactured on a contract basis by third parties. In general, we expect to continue to contract with outside service providers for certain manufacturing services, including drug substance, API, final product vialing, tableting and sachet production and packaging operations for our products. All of our facilities and those of any third-party manufacturers will be subject to periodic inspections confirming compliance with applicable law and must pass inspection before we can manufacture our drugs for commercial sales. Third-party manufacturers’ facilities are subject to periodic inspections to confirm compliance with applicable law and must be cGMPscGMP certified. We believe that our current agreements with third-party manufacturers and suppliers provide for ample operating capacity to support the anticipated clinical and commercial demand for these products. In certain instances, there is only one approved contract manufacturer for certain aspects of the manufacturing process. In such cases, we attempt to prevent disruption of supplies through supply agreements, maintaining safety stock and other appropriate strategies. Although we have never experienced a disruption in supply from our contract manufacturers, we cannot provide assurance that we will not experience a disruption in the future.

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Table of Contents
In July 2017, we commissioned our commercialcommercial-scale gene therapy manufacturing facility, located in Novato, California, and beganwhere we conduct cGMP production of valoctocogene roxaparvovec and BMN 307 to support clinical development activities and anticipated commercial demand. This facility is capablehas the potential to manufacture 10,000 gene therapy doses annually, depending on dose and production mix of supporting the manufacturing of product for approximately 2,000 patients per year,valoctocogene roxaparvovec and theBMN 307. The facility’s production process was developed in accordance with International Conference on Harmonisation Technical Requirements for Registration of Pharmaceuticals for Human Use facilitating worldwide registration with health authorities.

Raw Materials

Raw materials and supplies required for the production of our products and product candidates are available in some instances from one supplier and in other instances from multiple suppliers. In those cases where raw materials are only available through one supplier, such supplier may be either a sole source (the only recognized supply source available to us) or a single source (the only approved supply source for us among other sources). We have adopted policies to attempt, to the extent feasible, to minimize our raw material supply risks, including maintenance of greater levels of raw materials inventory and implementation of multiple raw materials sourcing strategies, especially for critical raw materials. Although to date we have not experienced any significant delays in obtaining any raw materials from our suppliers, we cannot provide assurance that we will not face shortages from one or more of them in the future.

Sales and Marketing

We have established a commercial organization, including a sales force, to support our product lines directly in the U.S., Europe, South America and certain other significant markets. For other selected markets, we have signed agreements with other companies to act as distributors of Brineura, Kuvan, Naglazyme and Vimizim. Most of these agreements generally grant the distributor the right to market the product in the territory and the obligation to secure all necessary regulatory approvals for commercial or named patient sales. Additional markets are being assessed at this time and additional agreements may be signed in the future.

Genzyme has the exclusive right to distribute, market and sell Aldurazyme globally and is required to purchase its requirements exclusively from us.

In the U.S., our products (other than Aldurazyme) are marketed through our commercial teams, including sales representatives and supporting staff members, who promote our products, directly to physicians in specialties appropriate for each product. Outside of the U.S., our sales representatives and supporting staff members market our products (other than Aldurazyme). We believe that with moderate changes in 2018,2020, the size of our sales force will be appropriate to effectively reach our target audiencecustomers in markets where our products are directly marketed. The launch of any future products, including pegvaliase,if approved, will likely require expansion of our commercial organization, including our sales force, in the U.S. and abroad, and we would need to commit significant additional funds, management’s attention and other resources to such expansion.

abroad.

We utilize third-party logistics companies to store and distribute our products. Moreover, we use third-party vendors, such as advertising agencies, market research firms and suppliers of marketing and other sales support-related services, to assist with our commercial activities.

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Customers

Our Brineura, Firdapse, Kuvan, Naglazyme, and Vimizim customers include a limited number of specialty pharmacies and end-users, such as hospitals and foreign government agencies. We also sell Brineura, Kuvan, Naglazyme and Vimizim to our authorized distributors and to certain larger pharmaceutical wholesalers globally, which act as intermediaries between us and end-users and generally do not stock significant quantities of our products. However, in certain countries, such as those in Latin America, governments place large periodic orders for Naglazyme and Vimizim. The timing of these orders can be inconsistent and can create significant quarter to quarter variation in our revenue. Palynziq is currently distributed in the U.S. pursuant to the REMS program through a limited number of certified specialty pharmacies. During 2017, 45%2019, 43% of our net Brineura, Firdapse, Kuvan, Naglazyme, and Vimizim product revenues, wereexcluding Aldurazyme, was generated by three customers. Genzyme is our sole customer for Aldurazyme and is responsible for marketing and selling Aldurazyme to third parties.

Competition

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The biopharmaceutical industry is rapidly evolving and highly competitive. Within the industry, there are many public and private companies, including pharmaceutical companies and biotechnology companies that have or may soon initiate programs for the same indications that our candidate drugsproducts and commercial drugsproduct candidates are intended to treat. Furthermore, universities and non-profit research organizations may have research programs, both early-stage and clinical, in the same disease areas. Our competitors may have advantages over us due to greater financial or scientific resources, lower labor and other costs, or due to higher headcount and more robust organizational structures. Our competitors have considerable experience in drug manufacturing, preclinical and clinical research, regulatory affairs, marketing, sales, and distribution. They pursue broad patent portfolios and other intellectual property to protect the products they are developing. Their products may outcompete ours due to one or more factors, including faster progress through preclinical and clinical development, lower manufacturing costs, superior safety and efficacy, lower pricing, stronger patent protection, and better marketing, sales, and distribution capabilities. In this event, our products evenand product candidates, if approved, could fail to gain significant market share, and as a result, our business, financial condition and results of operations could be adversely affected.

Our products and product candidates have no direct approved competition currently on the market in the U.S. or the EU, however, other companies are in the development phase with new and generic products. Our products and product candidates have potential competition from products under development either using similar technology to our programs or different treatment strategies. The following is a summary of some of the primary possible future competitors for our products and product candidates, but the information below may not include all potential competition.

Products
Aldurazyme, Naglazyme, and Vimizim

In the mucopolysaccharidosis field, several companies are researching treatments using small molecules, gene therapy, and other novel technologies. Aldurazyme, for the treatment of MPS I, has potential competition from clinical stage product candidates from SangamoArmaGen, Inc., JCR Pharmaceuticals Co., Ltd., Orchard Therapeutics Plc, RegenxBio Inc. and ArmaGen, Inc., and earlier stage product candidates, including a product candidatescandidate from RegenxBio Inc., Immusoft Corporation, and Eloxx Pharmaceuticals Ltd.Corporation. Naglazyme, for the treatment of MPS VI, has potential competition from a clinical stage product candidate from Inventiva S.A. and other potential candidates in earlier stages. These companies, however, are likelyVimizim, for the treatment of MPS IVA, has potential competition from a year or more awaypreclinical stage product candidate from commercial therapies. 

Esteve Pharmaceuticals, S.A. and other potential candidates in earlier stages.

Brineura
Brineura, for the treatment of CLN2, has potential competition from preclinical product candidates from RegenxBio Inc. and Spark Therapeutics, Inc.
Kuvan and Pegvaliase

Palynziq

There are currently no other approved drugs on the market in the U.S. or the EU for the treatment of PKU. However, two companies previously filed paragraph IV certifications and submitted ANDAs to produce sapropterin dihydrochloride tablets and powder. We entered into settlement agreements regarding Kuvan with both companies, which will allow these companies to market generic versions of sapropterin dihydrochloride. We expect generic versions of Kuvan to first become available in the U.S. in the fourth quarter of 2020. Please see Government Regulation – Hatch-Waxman Act” below and “Legal Proceedings“Risk Factors” included in Part I, Item 31A of this Annual Report on Form 10-K for more information regarding the settlement agreements and for a discussion of the risks posed by generic versions of Kuvan in the U.S. and abroad. Please see “Government Regulation – The Hatch-Waxman Act” in this Annual Report on Form 10-K for additional information.

Brineura

Brineura, for the treatment of CLN2, hasinformation regarding ANDAs. Kuvan and Palynziq also have potential competition from clinical stage product candidates from Censa Pharmaceuticals, Inc., Homology Medicines, Inc., Nestle Health Science, S.A., Rubius Therapeutics, Inc., Synlogic, Inc. and earlier stage products,product candidates, including product candidates from Generation Bio Co., LogicBio Therapeutics, Inc., Moderna Therapeutics, Inc. and Sangamo Therapeutics, Inc. BMN 307 is our preclinical gene therapy program for PKU, and other companies are also developing gene therapy product candidates for PKU, as described in “Competition—Product Candidates—BMN 307” in this Annual Report on Form 10-K.

Product Candidates
Valoctocogene roxaparvovec
Valoctocogene roxaparvovec, a preclinical gene therapy product candidate under development by Spark Therapeutics, Inc.

Product Candidates

Our product candidates have potential competition from product candidates either using similar technology to our programs or different treatment strategies. Valoctocogene roxaparvovec, for the treatment ofsevere hemophilia A, could have competition from marketed recombinant factor VIII replacement therapies, a novel bispecific antibody marketed

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by Roche Holding Ltd, earlierand clinical stage programs, including agene therapy product candidates under development by SparkBayer AG, Pfizer, Inc., Roche Holding Ltd, Sangamo Therapeutics, Inc., Sangamo Therapeutics, Inc, and Shire Plc,Takeda Pharmaceutical Company Ltd. and preclinical product candidates from other companies.companies, including Freeline Therapeutics Ltd. and Uniqure N.V. In addition, Alnylam Pharmaceuticals,Novo Nordisk A/S, Pfizer, Inc. isand Sanofi S.A. are developing a

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novel non-factor replacement product candidatecandidates in the clinic for the treatment of hemophilia A.
Vosoritide
Vosoritide, for the treatment of achondroplasia, could have competition from earlyclinical stage products under development by Ascendis Pharma A/S and Therachon AG. Pfizer, Inc., and preclinical product candidates from other companies, including QED Therapeutics, Inc.
BMN 250,307
BMN 307, a gene therapy product candidate for the treatment of MPS IIIB, has potential competition from a clinical stage gene therapy program from Abeona Therapeutics Inc., preclinical gene therapy programs from Laboratorios del Dr. Esteve, S.A.U. and Orchard Therapeutics, Ltd. and other earlier stage product candidates, including a recombinant protein product candidate from ArmaGen. Inc. BMN 290, for the treatment of Friedreich's ataxia,PKU, has potential competition from clinical stage product candidates from ReataCensa Pharmaceuticals, Inc. and Takeda Pharmaceutical Company, Homology Medicines, Inc., Nestle Health Science, S.A., Rubius Therapeutics, Inc., Synlogic, Inc. and earlier stage product candidates, including product candidates from Agilis Biotherapeutics, Inc.Generation Bio Co., VoyagerLogicBio Therapeutics, Inc., PfizerModerna Therapeutics, Inc. and ChondrialSangamo Therapeutics, Inc.

Patents and Proprietary Rights

Our success depends on an intellectual property portfolio that supports our future revenue streams and also erects barriers to our competitors. We are maintaining and building our patent portfolio through: filing new patent applications; prosecuting existing applications; and licensing and acquiring new patents and patent applications. Furthermore we seek to protect our ownership of know-how, trade secrets and trademarks through an active program of legal mechanisms including registrations, assignments, confidentiality agreements, material transfer agreements, research collaborations and licenses.

As of January 19, 2018,23, 2020, the number of our worldwide issued patents now stands at 1,481,1,680, including 111134 patents issued by the U.S. Patent and Trademark Office (the USPTO). Furthermore, our portfolio of pending patent applications totals 478463 applications, including 7971 pending U.S. applications.

With respect to Naglazyme,Aldurazyme, we have 53rights to 31 issued patents, including threefour U.S. patents. ClaimsThese patents cover our ultrapure N -acetylgalactosamine-4-sulfatase compositionsultra-pure alpha-L-iduronidase composition of Naglazyme,Aldurazyme, methods of treating deficiencies of N -acetylgalactosamine-4-sulfatase, including MPS VI, methods alpha-L-iduronidase by administering pharmaceutical compositions comprising such ultra-pure alpha-L-iduronidase, a method of producing and purifying such ultrapure N -acetylgalactosamine-4-sulfataseultra-pure alpha-L-iduronidase and the use of compositions of ultra-pure biologically active fragments of alpha-L-iduronidase. The last-to-expire Aldurazyme patent will expire in November 2020.
With respect to Brineura, we own or have licensed a number of patents and pending patent applications that relate generally to CLN2/TPP1 protein, use of CLN2/TPP1 protein and methods of detecting.treating late infantile neuronal ceroid lipofuscinosis, pharmaceutical compositions and liquid formulations of TPP1 formulations and intrathecal administration of TPP1. We have 7 issued patents, including five issued U.S. patents and eight foreign patents, and 20 pending applications including two U.S. and 18 foreign applications. These patents will expire between 2021 and 2028.

2036.

With respect to Palynziq, we own or have licensed a number of patents and pending patent applications that relate generally to pegylated and variant forms of Anabaena variabilis phenylalanine ammonia lyase (AvPAL), use of pegylated and variant forms of AvPAL in treating diseases caused all or in part by a deficiency in PAH, including PKU, methods of production and purification, and methods of detecting pegylated AvPAL and AvPAL-specific antibodies. We have 159 issued patents, including six issued U.S. patents and 153 foreign patents, and 17 pending applications including four U.S. and 13 foreign applications. These patents will expire between 2026 and 2031.
With respect to Kuvan, we own, co-own or have licensed a number of patents and pending patent applications that relate generally to formulations and forms of our drug substance, methods of use for various indications under development and dosing regimens. We have rights to 151118 issued patents including 1617 issued U.S. patents with claims to a stable tablet and oral solution formulation of 6R-BH4, methods of treating PKU using a once daily dosing regimen, methods of administration of Kuvan with food, crystalline forms of 6R-BH4, and methods of producing 6R-BH4. These patents will expire between 2024 and 2032.

2032 (dry blend formulation in the U.S.). We have rightsgranted licenses to 33certain of these patents to two companies, as further described in “Major Commercial Products—Kuvan” in this Annual Report on Form 10-K .

With respect to Naglazyme, we have 54 issued patents, including sixthree U.S. patents, related to Aldurazyme. These patentspatents. Claims cover our ultra-pure alpha-L-iduronidase compositionultrapure N -acetylgalactosamine-4-sulfatase compositions of Aldurazyme,Naglazyme, methods of treating deficiencies of alpha-L-iduronidase by administering pharmaceutical compositions comprising such ultra-pure alpha-L-iduronidase, a methodN -acetylgalactosamine-4-sulfatase, including MPS VI, methods of producing and purifying such ultra-pure alpha-L-iduronidaseultrapure N -acetylgalactosamine-4-sulfatase compositions and the usemethods of compositions of ultra-pure biologically active fragments of alpha-L-iduronidase.detecting. These patents will expire in 2019between 2021 and 2020. There are U.S. patents on alpha-L-iduronidase owned and controlled by a third party. We have examined such issued U.S. patents, the related U.S. and foreign applications and their file histories, the prior art and other information. Corresponding foreign applications were filed in Canada, Europe and Japan. The European application was rejected and abandoned and cannot be re-filed. The Japanese application has also lapsed and cannot be re-filed. Claims in the related Canadian application issued in 2007. We believe that such patents may not survive a challenge to patent validity but that it is unlikely that a court in any country would order us to stop marketing the only life-saving drug that is currently approved for this disease. However, the processes2028.
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Table of patent law are uncertain and any patent proceeding is subject to multiple unanticipated outcomes. We believe that it is in the best interest of our joint venture with Genzyme to market Aldurazyme with commercial diligence, in order to provide MPS I patients with the benefits of Aldurazyme. We believe that these patents and patent applications do not affect our ability to market Aldurazyme in Europe.

We have patent protection in the European Patent Organization countries for Firdapse for the treatment of LEMS. These patents will expire in 2022.

Contents

With respect to Vimizim, we own or have licensed a number of patents and pending patent applications that relate generally to compositions of matter, methods of use and methods of production. We have rights to

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204 202 issued patents including 1713 issued U.S. patents with claims to compositions of purified recombinant N-acetylgalactosamine-6-sulfate sulfatase (Vimizim) methods of treating Morquio Syndrome and sulfatase-modifying factor I (SUMF1) polypeptides and nucleic acids used in the manufacture of Vimizim. Issued U.S. patents cover SUMF1 compositions (set to expire in 2019), purified recombinant Vimizim compositions (set to expire in 2029) and methods of treating Morquio Syndrome (set to expire in 2029). We also have issued U.S. and European patents that cover methods of production (set to expire in 2024) and formulations (set to expire in 2031).

With respect to our clinical product candidates, we believe we have the necessary intellectual property rights to allowing us to undertake the development of these candidates. Certain of our product candidates are in therapeutic areas that have been the subject of many years of extensive research and development by academic organizations and third parties who may control patents or other intellectual property that they might assert against us, should one or more of our product candidates in these therapeutic areas succeed in obtaining regulatory approval and thereafter be commercialized. We continually evaluate the intellectual property rights of others in these areas in order to determine whether a claim of infringement may be made by others against us. Should we determine that a third party has intellectual property rights that could impact our ability to freely market a compound we consider a number of factors in determining how best to prepare for the commercialization of any such product candidate. In making this determination we consider, among other things, the stage of development of our product candidate and whether we and our outside counsel believe the intellectual property rights of others are valid, whether we infringe the intellectual property rights of others, whether a license is available upon commercially reasonable terms, whether we will seek to challenge the intellectual property rights of others, and the likelihood of and liability resulting from an adverse outcome should we be found to infringe the intellectual property rights of others.

Government Regulation

Regulation by governmental authorities in the U.S. and other countries is a significant factor in the development, manufacture, commercialization, pricing and reimbursement of our products. Our industry is subject to significant federal, state, local and foreign regulation. Our present and future business has been, and will continue to be, subject to a variety of laws in the U.S. and other jurisdictions. In the U.S., failure to comply with applicable U.S. requirements may subject a company to a variety of administrative or judicial sanctions, such as FDA refusal to approve pending new drug applications (NDAs) or NDAs,BLAs, warning or untitled letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, civil penalties, and criminal prosecution.

Our products require approval from the FDA, the EMA and corresponding agencies in other countries before they can be marketed.

Approval Process in the U.S. and EU

Pharmaceutical product development in the U.S. and the EU typically involves preclinical laboratory and animal tests, the submission to the applicable regulatory agency of an application (e.g., an IND or a clinical trial application (CTA))CTA), which must become effective before clinical testing may commence, and adequate and well-controlled human clinical trials to establish the safety and effectiveness of the drug for each indication for which marketing approval is sought. Currently, European clinical trial authorization applications must be submitted to the competent authority in each EU Member State in which the trial will be conducted. Under the new European Regulation on Clinical Trials, which is expected to take effect in 2020, there will be a centralized application procedure where one national authority takes the lead in reviewing the application and the other national authorities have only a limited involvement. Satisfaction of FDA and EMAEuropean pre-market approval requirements typically takes many years and the actual time required may vary substantially based upon the type, complexity and novelty of the product or disease.

Preclinical tests include laboratory evaluation, as well as animal studies, to assess the characteristics and potential pharmacology, pharmacokinetics and toxicity of the product. The conduct of the preclinical tests must comply with FDA and/or EMA regulations and requirements, including good laboratory practices. The results of preclinical testing, along with other information, including information about product chemistry, manufacturing and controls and a proposed clinical trial protocol are submitted to the applicable regulatory agency as part of an IND or CTA. Long termLong-term preclinical tests, such as animal tests of reproductive toxicity and carcinogenicity, may continue after the IND or CTA is submitted. Until the CTA or IND is approved, or deemed approvedbecomes effective following a waiting period, we may not start the clinical trial in the relevant jurisdiction.

Clinical trials involve the administration of the investigational new drug to healthy volunteers or patients under the supervision of a qualified investigator. Clinical trials must be conducted in compliance with applicable regulations, good clinical practices (GCP), as well as under protocols detailing the objectives of the trial and the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated. Each protocol involving

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testing on patients and subsequent protocol amendments must be submitted to the FDA as part of the IND and to the relevant regulatory agency in the EU as part of a new CTA.

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The regulatory agencies may order the temporary halt or permanent discontinuation of a clinical trial at any time or impose other sanctions if they believe that the clinical trial is not being conducted in accordance with applicable requirements or presents an unacceptable risk to the clinical trial patients. The study protocol and informed consent information for patients in clinical trials must also be submitted to an institutional review board (IRB) or ethics committee, for approval. An IRB/ethics committee may also require the clinical trial at the site to be halted, either temporarily or permanently, for failure to comply with the IRB/ethics committee’s requirements, or may impose other conditions.

Clinical trials to support NDAs, BLAs or MAAs for marketing approval are typically conducted in three sequential phases, but the phases may overlap or be combined. In Phase 1, the initial introduction of the drug into healthy human subjects or patients, the drug is tested to assess metabolism, pharmacokinetics, pharmacological actions, side effects associated with increasing doses and, if possible, early evidence on effectiveness. Phase 2 usually involves trials in a limited patient population, to determine the effectiveness of the drug for a particular indication or indications, dosage tolerance and optimum dosage, and to identify common adverse effects and safety risks. If a compound demonstrates evidence of effectiveness and an acceptable safety profile in Phase 2 evaluations, Phase 3 trials are undertaken to obtain the additional information about clinical efficacy and safety in a larger number of patients, typically at geographically dispersed clinical trial sites. After completion of the required clinical testing, an NDA or BLAapplication is prepared and submitted to the FDA and an MAA is prepared and submitted to the EMA. FDA approvalregulatory agency. Approval of the NDA or BLAapplication by the applicable regulatory agency is required before marketing of the product may begin inbegin. In Europe, an MAA is prepared and, for all orphan designated products, is submitted to the U.S. andEMA under the centralized application procedure. EC approval of the MAA byunder the ECcentralized application procedure results in a single marketing authorization that is required before marketing ofvalid across the product may begin inEuropean Economic Area (i.e., the EU.EU as well as Iceland, Liechtenstein and Norway). The NDA, BLA or MAA must include the results of all preclinical, clinical and other testing, a compilation of data relating to the product’s pharmacology, chemistry, manufacture and controls and proposed labeling, among other things. In the U.S., each NDA or BLA is subject to a significant user fee at the time of submission, unless a waiver is granted by the FDA.

The FDA and the EMA initially review the applications for a threshold determination that it is sufficiently complete to permit substantive review, typically within 30-60 days. The FDA or the EMAregulatory agency may request additional information rather than accepting an NDA/BLA or MAA, respectively,application for filing or validation. Once the submission is accepted, the applicable agency begins an in-depth review. For the FDA, the review period for standard review applications is typically an additional ten months and, for priority review of drugs, that is, drugs that the FDA determines address a significant unmet need and represent a significant improvement over existing therapy, the review period is typically an additional six months in duration. The review process may be extended by the FDA for three additional months to consider new information submitted during the review or clarification regarding information already provided in the submission. The FDA may also refer applications for novel products or products that present difficult questions of safety or efficacy to an advisory committee, typically a panel that includes clinicians and other experts, for review, evaluation and a recommendation as to whether the application should be approved. The FDA is not bound by the recommendation of an advisory committee, but it generally follows such recommendations. After the FDA evaluates the information provided in the NDA/BLA, it issues an approval letter, or a complete response letter. A complete response letter outlines the deficiencies in the submission and may require substantial additional testing or information in order for the FDA to reconsider the application. If and when those deficiencies have been addressed and the NDA/BLA has been resubmitted, the FDA will re-initiate review. If it is satisfied that the deficiencies have been addressed, the FDA will issue an approval letter. The FDA has committed to reviewing such resubmissions
Under the centralized procedure in two or six months depending on the type of information included. It is not unusual, however,EU, the maximum timeframe for the FDA to issue a complete response letter because it believes that the drug is not safe enough or effective enough or because it does not believe that the data submitted are reliable or conclusive.

Forevaluation of an MAA by the EMA an application designated as standard review typically lasts approximately eleven months depending on the length of time sponsors take to address EMA questions. The accelerated assessment procedure is applicable to marketing authorization applications for medicinal products that are expected210 days. This excludes so-called clock stops, during which additional written or oral information is to be of major public health interest. For applications that receive accelerated assessment designation and are ableprovided by the applicant in response to remain on this timelinequestions asked by the review typically lasts approximately seven months depending on the length of time sponsors take to address EMA questions. It is not unusual, however, for applications that receive accelerated assessment designation to revert to standard review, typically because the EMA has determined that the significance of the questions that the company needs to address would be more appropriate under the standard review timelines.CHMP. At the end of the review period, EMA will issuethe CHMP provides an opinion either in support ofto the EC. If the opinion is favorable, the EC may then adopt a decision to grant marketing authorization (positive opinion) or recommending refusal of a marketing authorization (negative opinion).authorization. In the event of a negative opinion, the company may request a re-examination of the application. Withinapplication within 15 days of receipt of the negative opinion. The company then has 60 days the company mustto provide the EMACHMP with detailed grounds for requesting the re-examination. Within 60 days of providing this

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information, the EMA will issue an opinion either in support of marketing authorization (positive opinion) or recommending refusal of a marketing authorization (negative opinion). In the event of a positive opinion, the EC will then grant marketing authorization in approximately 67 days.CHMP shall re-examine its opinion. The EC follows the recommendation of the EMACHMP in almost all cases.

In exceptional cases, the CHMP might perform an accelerated review of an MAA in no more than 150 days. This is usually when the product is of major interest from the point of view of public health and, in particular, from the viewpoint of therapeutic innovation.

During the review period, the FDA and/or the EMA will typically inspect one or more clinical sites and/or the sponsor to assure compliance with GCP regulations and will inspect the facility or the facilities at which the drug is manufactured to ensure compliance with cGMPs regulations. Neither the FDA nor the EMA will approve the product unless compliance is satisfactory and the application contains data that provide substantial evidence that the drug is safe and effective in the indication studied.

A marketing approval authorizes commercial marketing of the drug with specific prescribing information for specific indications. As a condition of NDA or BLA approval, the FDA may require a risk mitigation and evaluation and mitigation strategy, (REMS), to help ensure that the benefits of the drug outweigh the potential risks. REMSRisk mitigation and evaluation strategies can include medication guides, communication plans for healthcare professionals, and elements to assure safe use, (ETASU). ETASU can include, but are not limited to,such as special training or certification for prescribing or dispensing, dispensing only under certain circumstances, special monitoring and the use of patient registries. The requirement for REMS can materially affect the potential market and profitability of the drug. Moreover, product approval may require substantial post-approval testing and surveillance to monitor the drug’s safety or efficacy. Once granted, product approvals may be withdrawn if compliance with regulatory standards is not maintained or problems are identified following initial marketing.

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Combination Products

A combination product is a product comprising (i) two or more regulated components, i.e., drug/device, biologic/device, drug/biologic, or drug/device/biologic, that are physically, chemically, or otherwise combined or mixed and produced as a single entity; (ii) two or more separate products packaged together in a single package or as a unit and comprising drug and device products, device and biological products, or biological and drug products; (iii) a drug, device, or biological product packaged separately that according to its investigational plan or proposed labeling is intended for use only with an approved individually specified drug, device, or biological product where both are required to achieve the intended use, indication, or effect and where upon approval of the proposed product the labeling of the approved product would need to be changed, e.g., to reflect a change in intended use, dosage form, strength, route of administration, or significant change in dose; or (iv) any investigational drug, device, or biological product packaged separately that according to its proposed labeling is for use only with another individually specified investigational drug, device, or biological product where both are required to achieve the intended use, indication, or effect.

The FDA is divided into various branches, or Centers, by product type. Different Centers typically review drug, biologic, or device applications. In order to review an application for a combination product, the FDA must decide which Center should be responsible for the review. FDA regulations require that the FDA determine the combination product’s primary mode of action, or PMOA, which is the single mode of a combination product that provides the most important therapeutic action of the combination product. The Center that regulates that portion of the product that generates the PMOA becomes the lead evaluator. If there are two independent modes of action, neither of which is subordinate to the other, the FDA makes a determination as to which Center to assign the product based on consistency with other combination products raising similar types of safety and effectiveness questions or to the Center with the most expertise in evaluating the most significant safety and effectiveness questions raised by the combination product. When evaluating an application, a lead Center may consult other Centers but still retain complete reviewing authority, or it may collaborate with another Center, by which the Center assigns review of a specific section of the application to another Center, delegating its review authority for that section. Typically, the FDA requires a single marketing application submitted to the Center selected to be the lead evaluator, although the agency has the discretion to require separate applications to more than one Center. One reason to submit multiple evaluations is if the applicant wishes to receive some benefit that accrues only from approval under a particular type of application, like new drug product exclusivity. If multiple applications are submitted, each may be evaluated by a different lead Center.

The 21st Century Cures Act was signed into law on December 13, 2016. In Section 3038, the FDA is instructed that if a combination product has an approved constituent (e.g., an investigational drug delivered with devices already 510(k) cleared by the FDA), the FDA may only require the sponsor to submit data or information necessary to meet the standard for clearance or approval, taking into consideration incremental risks and benefits posed by the combination product, using a risk-based approach and taking into account any prior finding of safety and effectiveness or substantial equivalence for the approved constituent. It appears that the primary

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purpose of this provision is to reduce the burden of proving the safety and effectiveness of the approved constituent by leveraging the FDA’s prior clearance or approval. The FDA is instructed to focus on the new constituent plus the incremental risk created by a new use of the approved constituent. It is too soon to understand how the FDA will implement this provision.

Disclosure of Clinical Trial Information

Sponsors of clinical trials of FDA-regulated products, including drugs and biologics, are required to register and disclose certain clinical trial information. Information related to the product, patient population, phase of investigation, study sites and investigators, and other aspects of the clinical trial are then made public as part of the registration. Sponsors are also obligated to discuss the results of their clinical trials after completion. In certain circumstances, disclosure of the results of these trials can be delayed for up to two years after the date of completion of the trial. Competitors may use this publicly-available information to gain knowledge regarding the progress of development programs. Moreover, there is an increasing trend in the EU requiring public disclosure of development data, in particular clinical trial data. These data were traditionally regarded as confidential commercial information; however, under policies recently adopted in the EU, clinical study data submitted to the EMA in MAAs, including pre-clinicalpreclinical data, and patient level data, may be subject to public disclosure.

The Hatch-Waxman Act

Upon approval of a drug through an NDA, applicants are required to submit to the FDA each patent that covers the applicant’s product or FDA approved method of using this product. Those patents are then published in the FDA’s Orange Book. Drugs listed in the Orange Book can, in turn, be cited by potential competitors in support of approval of an ANDA. Generally, an ANDA provides for marketing of a drug product that has the same active ingredients in the same strength(s), route of administration, and dosage form as the listed drug and has been shown through bioequivalence testing to be therapeutically equivalent to the listed drug. ANDA applicants are not required to conduct or submit results of pre-clinicalpreclinical or clinical tests to prove the safety or effectiveness of their drug product, other than the requirement for bioequivalence testing. Drugs approved in this way are commonly referred to as “generic equivalents” to the listed drug, and can often be substituted by pharmacists under prescriptions written for the original listed drug.

The ANDA applicant is required to certify to the FDA concerning any patents listed for the approved product in the Orange Book. Specifically, the applicant must certify that: (i) the required patent information has not been filed; (ii) the listed patent has expired; (iii) the listed patent has not expired, but will expire on a particular date and approval is sought after patent expiration; or (iv) the listed patent is invalid or will not be infringed by the new product. A certification that the new product will not infringe the already approved product’s listed patents or that such patents are invalid is called a paragraph IV certification. If the applicant does not challenge the listed patents, the ANDA application will not be approved until all the listed patents claiming the referenced product have expired. Alternatively, for a patent covering an approved method of use, an ANDA applicant may submit a statement to the FDA that the company is not seeking approval for the covered use.

If the ANDA applicant has submitted a paragraph IV certification to the FDA, the applicant must also send notice of the paragraph IV certification to the NDA and patent holders once the ANDA has been accepted for filing by the FDA. The NDA and patent holders may then initiate a patent infringement lawsuit in response to the notice of the paragraph IV certification. The filing of a patent infringement lawsuit within 45 days of the receipt of a paragraph IV certification automatically prevents the FDA from approving the ANDA until the earlier of 30 months, expiration of the patent, settlement of the lawsuit or a decision in the infringement case that is favorable to the ANDA applicant.

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The ANDA application also will not be approved until any non-patent exclusivity, such as exclusivity for obtaining approval of a new chemical entity, listed in the Orange Book for the referenced product has expired. Federal law provides a period of five years following approval of a drug containing no previously approved active moiety, during which ANDAs for generic versions of those drugs cannot be submitted unless the submission contains a paragraph IV challenge to a listed patent, in which case the submission may be made four years following the original product approval. Federal law provides for a period of three years of exclusivity following approval of a listed drug that contains previously approved active ingredients but is approved in a new dosage form, route of administration or combination, or for a new condition of use, the approval of which was required to be supported by new clinical trials conducted by or for the sponsor, during which the FDA cannot grant effective approval of an ANDA based on that listed drug. Both of the five-year and three-year exclusivity periods, as well as any unexpired patents listed in the Orange Book for the listed drug, can be extended by six months if the FDA

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grants the NDA sponsor a period of pediatric exclusivity based on studies submitted by the sponsor in response to a written request.

Orphan Drug Designation

Orphan drug designation is granted by the FDA and EMA to drugs intended to treat a rare disease or condition, which in the U.S. is defined as having a prevalence of less than 200,000 individuals in the U.S. and in the EU is defined as no more than five in 10,000 people in the EU, which is equivalent to around 250,000 people or less. Orphan drug designation must be requested before submitting a marketing application.

Orphan drug designation does not shorten the regulatory review and approval process, nor does it provide any advantage in the regulatory review and approval process. However, if an orphan drug later receives approval

Exclusivity 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 the EU. Among the other benefits of orphan drug designation are tax credits for certain research and a waiver of the NDA/BLA application user fee. Although obtaining approval to market a product with orphan drug exclusivity may be advantageous, we cannot be certain:

that we will be the first to obtain approval for any drug for which we obtain orphan drug designation;

Biologics

that orphan drug designation will result in any commercial advantage or reduce competition; or

that the limited exceptions to this exclusivity will not be invoked by the relevant regulatory authority.

Orphan drug exclusive marketing rights may be lost under certain conditions, such as if the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the drug.

Breakthrough Therapy Designation

The FDA is also required to expedite the development and review of the application for approval of drugs that are intended to treat a serious or life-threatening disease or condition where preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints. Under the breakthrough therapy program, the sponsor of a new drug candidate may request that the FDA designate the drug candidate for a specific indication as a breakthrough therapy concurrent with, or after, the filing of the IND for the drug candidate. The FDA must determine if the drug candidate qualifies for breakthrough therapy designation within 60 days of receipt of the sponsor’s request.

PRIME Designation

The EMA launched its PRIME regulatory initiative to enhance support for the development of therapies that target an unmet medical need. The initiative focuses on drugs that may offer a major therapeutic advantage over existing treatments, or benefit patients with no treatment options. These therapies are considered priority medicines within the EU. Through PRIME, the EMA offers early, proactive and enhanced support to drug developers to optimize the generation of robust data on a therapy’s benefits and risks and enable accelerated assessment of drug applications.

Pediatric Information

Under the Pediatric Research Equity Act of 2007 (PREA), NDAs or BLAs or supplements to NDAs or BLAs must contain data to assess the safety and effectiveness of the drug for the claimed indication(s) in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation for which the drug is safe and effective. The FDA may grant deferrals for submission of data or full or partial waivers. Unless otherwise required by regulation, PREA does not apply to any drug for an indication for which orphan drug designation has been granted. The Best Pharmaceuticals for Children Act (BPCA) provides sponsors of NDAs with an additional six-month period of market exclusivity for all unexpired patent or non-patent exclusivity on all forms of the drug containing the active moiety if the sponsor submits results of pediatric studies specifically requested by the FDA under BPCA within required timeframes. The Biologics Price Competition and Innovation Act of 2009 (BPCIA) provides sponsors, which was enacted as part of BLAs an additional six-month extension for all unexpired non-patent market exclusivity on all forms of the biological containing the active moiety pursuant to the BPCA if the conditions under the BPCA are met.

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Fast Track Designation

The FDA is required to facilitate the development and expedite the review of drugs that are intended for the treatment of a serious or life-threatening condition for which there is no effective treatment and that demonstrate the potential to address unmet medical needs for the condition. Under the FDA’s fast track program, the sponsor of a new drug candidate may request that the FDA designate the drug candidate for a specific indication as a fast track drug concurrent with or after the filing of the IND for the drug candidate. The FDA must determine if the drug candidate qualifies for fast track designation within 60 days of receipt of the sponsor’s request.

In addition to other benefits, such as the ability to use surrogate endpoints and have greater interactions with the FDA, the FDA may initiate review of sections of a fast track drug’s NDA or BLA before the application is complete. This rolling review is available if the applicant provides and the FDA approves a schedule for the submission of the remaining information and the applicant pays applicable user fees. However, the FDA’s time period goal for reviewing an application does not begin until the last section of the NDA or BLA is submitted. Additionally, the fast track designation may be withdrawn by the FDA if the FDA believes that the designation is no longer supported by data emerging in the clinical trial process.

Post-Approval Regulatory Requirements

Following approval, the FDA and the EMA will impose certain post-approval requirements related to a product. For instance, the FDA closely regulates the post-approval marketing and promotion of approved products, including standards and regulations for direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational activities and promotional activities involving the Internet.

Approved products may be marketed only for the approved indications and in accordance with the provisions of the approved labeling. Changes to some of the conditions established in an approved application, including changes in indications, labeling, or manufacturing processes or facilities, may require a submission to and approval by the FDA or the EMA, as applicable, before the change can be implemented. An NDA/BLA or MAA supplement for a new indication typically requires clinical data similar to that in the original application, and similar procedures and actions in reviewing NDA/ BLA or MAA supplements as in reviewing NDAs/BLAs and MAAs.

Adverse event reporting and submission of periodic reports is required following marketing approval. Either the FDA or EMA may also require post-marketing testing, known as Phase 4 testing, REMS, and surveillance to monitor the effects of an approved product or place conditions on an approval that could restrict the distribution or use of the product. In addition, quality control as well as the manufacture, packaging, and labeling procedures must continue to conform to cGMPs after approval. Drug and biological product manufacturers and certain of their subcontractors are subject to periodic unannounced inspections by the FDA or the EMA during which the agency inspects manufacturing facilities to access compliance with cGMPs. Accordingly, manufacturers must continue to expend time, money and effort in the areas of production and quality control to maintain compliance with cGMPs. Regulatory authorities may withdraw product approvals or request product recalls if a company fails to comply with regulatory standards, if it encounters problems following initial marketing, or if previously unrecognized problems are subsequently discovered. In addition, prescription drug manufacturers in the U.S. must comply with applicable provisions of the Drug Supply Chain Security Act and provide and receive product tracing information, maintain appropriate licenses, ensure they only work with other properly licensed entities and have procedures in place to identify and properly handle suspect and illegitimate products.

Good Manufacturing Practices

The FDA, the EMA and other regulatory agencies regulate and inspect equipment, facilities and processes used in the manufacture of pharmaceutical and biologic products prior to approving a product. If, after receiving approval from regulatory agencies, a company makes a material change in manufacturing equipment, location or process, additional regulatory review and approval may be required. All facilities and manufacturing techniques used for the manufacture of our products must comply with applicable regulations governing the production of pharmaceutical products known as cGMPs.

The FDA, the EMA and other regulatory agencies also conduct regular, periodic visits to re-inspect equipment, facilities and processes following initial approval of a product. If, as a result of these inspections, it is determined that our equipment, facilities or processes do not comply with applicable regulations and conditions

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of product approval, regulatory agencies may require product recall, issue warning or similar letters or may seek civil, criminal, or administrative sanctions against us.

Healthcare Reform

The U.S. and some foreign jurisdictions are considering or have enacted a number of legislative and regulatory proposals to change the healthcare system in ways that could affect our ability to sell our products profitably. For example, in the U.S., the Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act of 2010 (as amended, the PPACA), is a sweeping measure intended to improve quality of care, constrain healthcare spending, and expand healthcare coverage within the U.S., primarily through the imposition of health insurance mandates on employers and individuals and expansion of the Medicaid program.

The BPCIA, which was enacted as part of the PPACA, created an abbreviated approval pathway for biological products that are demonstrated to be “biosimilar” or “interchangeable” with an FDA-licensed reference biological product. Biosimilarity sufficient to reference a prior FDA-licensed product requires that there be no differences in conditions of use, route of administration, dosage form, and strength, and no clinically meaningful differences between the biological product and the reference product in terms of safety, purity, and potency. Biosimilarity must be shown through analytical studies, animal studies, and at least one clinical study, absent a waiver from the Secretary of the U.S. Department of Health and Human Services. In order to meet the higher hurdle of interchangeability, a sponsor must demonstrate that the biosimilar product can be expected to produce the same clinical result as the reference product, and for a product that is administered more than once, that the risk of switching between the reference product and biosimilar product is not greater than the risk of maintaining the patient on the reference product. The first biosimilar product was approved under the BPCIA in 2015, though no interchangeable products have been approved to date. Complexities associated with the larger, and often more complex, structures of biological products, as well as the process by which such products are manufactured, pose significant hurdles to implementation that are still being evaluated by the FDA. A reference biologic is granted 12 years of exclusivity from the time of first licensure of the reference product and no application for a biosimilar can be submitted for four years from the date of licensure of the reference product. The first biologic product submitted under the abbreviated approval pathway that is determined to be interchangeable with the reference product has exclusivity against a finding of interchangeability for other biologics for the same condition of use for the lesser of (i) one year after first commercial marketing of the first interchangeable biosimilar, (ii) eighteen months after the first interchangeable biosimilar is approved if there is not patent challenge, (iii) eighteen months after resolution of a lawsuit over the patents of the reference biologic in favor of the first interchangeable biosimilar applicant, or (iv) 42 months after the first interchangeable biosimilar’s application has been approved if a patent lawsuit is ongoing within the 42-month period.

Orphan Drug Designation
Orphan drug designation is granted by the FDA and EMA to drugs intended to treat a rare disease or condition, which in the U.S. is defined as having a prevalence of less than 200,000 individuals in the U.S. In the EU, orphan drug designation is available if a sponsor can establish: that the medicine is intended for the diagnosis, prevention or treatment of (1) a life-threatening or chronically debilitating condition affecting no more than five in 10,000 people in the EU, which is equivalent to around 250,000 people or fewer, or (2) a life-threatening, seriously debilitating or serious and chronic condition in the EU and that without incentives it is unlikely that the marketing of the medicinal product in the EU would generate sufficient return to justify the necessary investment. For either of these criteria, the applicant must demonstrate that there exists no satisfactory method of diagnosis, prevention or treatment of the condition in question that has been authorized in the EU or, if such method exists, the medicinal product will be of significant benefit to those affected by that condition. Orphan drug designation must be requested before
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submitting a marketing application.
Orphan drug designation does not shorten the regulatory review and approval process. However, 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 the EU (extendable to twelve years for medicines that have complied with an agreed pediatric investigation plan pursuant to Regulation 1901/2006) and, in addition, a range of other benefits during the development and regulatory review process are available in the EU, including scientific assistance for study protocols, authorization through the centralized marketing authorization procedure covering all member countries and a reduction or elimination of registration and marketing authorization fees. Among the benefits of orphan drug designation in the U.S. are tax credits for certain research and a waiver of the NDA/BLA application user fee. Orphan drug exclusive marketing rights may be lost under certain conditions, such as if the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the drug. In the EU, marketing authorization may be granted to a similar medicinal product with the same orphan indication during the regulatory exclusivity period with the consent of the marketing authorization holder for the original orphan medicinal product or if the manufacturer of the original orphan medicinal product is unable to supply sufficient quantities. Marketing authorization may also be granted to a similar medicinal product with the same orphan indication if this medicinal product is safer, more effective or otherwise clinically superior to the original orphan medicinal product. The period of market exclusivity may, in addition, be reduced to six years if, at the end of the fifth year, it can be demonstrated on the basis of available evidence that the criteria for its designation as an orphan medicine are no longer satisfied, for example if the original orphan medicinal product has become sufficiently profitable not to justify maintenance of market exclusivity.
Breakthrough Therapy Designation
The FDA is also required to expedite the development and review of the application for approval of drugs that are intended to treat a serious or life-threatening disease or condition where preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints. Under the breakthrough therapy program, the sponsor of a new drug candidate may request that the FDA designate the drug candidate for a specific indication as a breakthrough therapy concurrent with, or after, the filing of the IND for the drug candidate. The FDA must determine if the drug candidate qualifies for breakthrough therapy designation within 60 days of receipt of the sponsor’s request.
PRIME Designation
The EMA launched its PRIME regulatory initiative to enhance support for the development of therapies that target an unmet medical need. The initiative focuses on drugs that may offer a major therapeutic advantage over existing treatments, or benefit patients with no treatment options. These therapies are considered priority medicines within the EU. Through PRIME, the EMA offers early, proactive and enhanced support to drug developers to optimize the generation of robust data on a therapy’s benefits and risks and enable accelerated assessment of drug applications.
Pediatric Information
Under the Pediatric Research Equity Act of 2007 (PREA), NDAs or BLAs or supplements to NDAs or BLAs must contain data to assess the safety and effectiveness of the drug for the claimed indication(s) in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation for which the drug is safe and effective. The FDA may grant deferrals for submission of data or full or partial waivers. Unless otherwise required by statute or regulation, PREA does not apply to any drug for an indication for which orphan drug designation has been granted. The Best Pharmaceuticals for Children Act (BPCA) provides sponsors of NDAs with an additional six-month period of market exclusivity for all unexpired patent or non-patent exclusivity on all forms of the drug containing the active moiety if the sponsor submits results of pediatric studies specifically requested by the FDA under BPCA within required timeframes. The BPCIA provides sponsors of BLAs an additional six-month extension for all unexpired non-patent market exclusivity on all forms of the biological containing the active moiety pursuant to the BPCA if the conditions under the BPCA are met.
In the EU, companies developing a new medicinal product must agree to a Paediatric Investigation Plan (PIP) with the EMA and must conduct pediatric clinical trials in accordance with that PIP, unless a deferral or waiver applies, (e.g., because the relevant disease or condition occurs only in adults). The MAA for the product must include the results of pediatric clinical trials conducted in accordance with the PIP, unless a waiver applies, or a deferral has been granted, in which case the pediatric clinical trials must be completed at a later date. Products that are granted a marketing authorization on the basis of the pediatric clinical trials conducted in accordance with the PIP are eligible for a six month extension of the protection under a supplementary protection certificate (if any is in effect at the time of approval) or, in the case of orphan medicinal products, a two year extension of the orphan market exclusivity. This pediatric reward is subject to specific conditions and is not automatically available when data in compliance with the PIP are developed and submitted.
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Fast Track Designation and Accelerated Approval
The FDA is required to facilitate the development and expedite the review of drugs that are intended for the treatment of a serious or life-threatening condition for which there is no effective treatment and that demonstrate the potential to address unmet medical needs for the condition. Under the FDA’s fast track program, the sponsor of a new drug candidate may request that the FDA designate the drug candidate for a specific indication as a fast track drug concurrent with or after the filing of the IND for the drug candidate. The FDA must determine if the drug candidate qualifies for fast track designation within 60 days of receipt of the sponsor’s request.
In addition to other benefits, such as the ability to use surrogate endpoints and have greater interactions with the FDA, the FDA may initiate review of sections of a fast track drug’s NDA or BLA before the application is complete. This rolling review is available if the applicant provides and the FDA approves a schedule for the submission of the remaining information and the applicant pays applicable user fees. However, the FDA’s time period goal for reviewing an application does not begin until the last section of the NDA or BLA is submitted. Additionally, the fast track designation may be withdrawn by the FDA if the FDA believes that the designation is no longer supported by data emerging in the clinical trial process.
Under the fast track program and the FDA’s accelerated approval regulations, the FDA may approve a drug for a serious or life-threatening illness that provides meaningful therapeutic benefit to patients over existing treatments based upon a surrogate endpoint that is reasonably likely to predict clinical benefit, or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, that is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit, taking into account the severity, rarity, or prevalence of the condition and the availability or lack of alternative treatments. In clinical trials, a surrogate endpoint is a measurement of laboratory or clinical signs of a disease or condition that substitutes for a direct measurement of how a patient feels, functions, or survives. Surrogate endpoints can often be measured more easily or more rapidly than clinical endpoints. A drug candidate approved on this basis is subject to rigorous post-marketing compliance requirements, including the completion of a Phase 4 or post-approval clinical trial to confirm the effect on the clinical endpoint. Failure to conduct a required post-approval study or confirm a clinical benefit through a post-marketing study will allow the FDA to withdraw the drug from the market on an expedited basis. All promotional materials for drug candidates approved under accelerated regulations are subject to prior review by the FDA.
Post-Approval Regulatory Requirements
Following approval, the FDA and the EMA will impose certain post-approval requirements related to a product. For instance, the FDA closely regulates the post-approval marketing and promotion of approved products, including standards and regulations for direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational activities and promotional activities involving the Internet. Moreover, if a company obtains original FDA approval for a product via the accelerated approval pathway, the company may be required to conduct a post-marketing confirmatory trial to verify and describe the clinical benefit in support of full approval. An unsuccessful post-marketing study or failure to complete such a study could result in the withdrawal of the FDA’s marketing approval for a product.
Approved products may be marketed only for the approved indications and in accordance with the provisions of the approved labeling. Changes to some of the conditions established in an approved application, including changes in indications, labeling, or manufacturing processes or facilities, may require a submission to and approval by the FDA or the EMA, as applicable, before the change can be implemented. An NDA/BLA or MAA supplement for a new indication typically requires clinical data similar to that in the original application, and similar procedures and actions in reviewing NDA/ BLA or MAA supplements as in reviewing NDAs/BLAs and MAAs.
Adverse event reporting and submission of periodic reports is required following marketing approval. Either the FDA or EMA may also require post-marketing testing, known as Phase 4 testing, a risk evaluation and mitigation strategy, and surveillance to monitor the effects of an approved product or place conditions on an approval that could restrict the distribution or use of the product. In addition, quality control as well as the manufacture, packaging, and labeling procedures must continue to conform to cGMPs after approval. Drug and biological product manufacturers and certain of their subcontractors are subject to periodic unannounced inspections by the FDA or the EMA during which the agency inspects manufacturing facilities to assess compliance with cGMPs. Accordingly, manufacturers must continue to expend time, money and effort in the areas of production and quality control to maintain compliance with cGMPs. Regulatory authorities may withdraw product approvals or request product recalls if a company fails to comply with regulatory standards, if it encounters problems following initial marketing, or if previously unrecognized problems are subsequently discovered. In addition, prescription drug manufacturers in the U.S. must comply with applicable provisions of the Drug Supply Chain Security Act and provide and receive product tracing information, maintain appropriate licenses, ensure they only work with other properly licensed entities and have procedures in place to identify and properly handle suspect and illegitimate products.
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Healthcare Reform
The U.S. and some foreign jurisdictions are considering or have enacted a number of legislative and regulatory proposals to change the healthcare system in ways that could affect our ability to sell our products profitably. For example, in the U.S., the PPACA is a sweeping measure intended to improve quality of care, constrain healthcare spending, and expand healthcare coverage within the U.S., primarily through the imposition of health insurance mandates on employers and individuals and expansion of the Medicaid program.
The PPACA also imposed a fee on certain manufacturers and importers of branded prescription drugs (excluding orphan drugs under certain conditions). The annual fee is apportioned among the participating companies based on each company’s sales of qualifying products to, or use by, certain U.S. government programs during the preceding year. Other provisions of the law have also affected us and have increased certain of our costs. For example, the Medicaid rebate rate was increased and the volume of rebated drugs has been expanded to include beneficiaries in Medicaid managed care organizations. Among other things, the PPACA also expanded the 340B drug discount program (excluding orphan drugs), including the creation of new penalties for non-compliance, and includednow includes a 50%70% discount on brand name drugs for Medicare Part D participants in the coverage gap, or “donut hole.” The law also revised the definition of “average manufacturer price” for reporting purposes. Substantial new provisions affecting compliance also have been added, which may require us to modify our business practices with healthcare practitioners. In addition, drug manufacturers are required to collect and report annually information on payments or transfers of value to physicians and teaching hospitals, as well as investment interests held by physicians and their immediate family members during the preceding calendar year. Effective January 1, 2022, drug manufacturers will also be required to report on payments or transfers of value to physician assistants, nurse practitioners or clinical nurse specialists, certified registered nurse anesthetists, and certified nurse-midwives. The reported data are posted in searchable form on a public web site. Failure to submit required information may result in civil monetary penalties. It is still unclear the full impact that the PPACA will have on our business. There have been judicial and Congressionalcongressional challenges to certain aspects of the PPACA, and we expect that there will be additional challenges and amendments in the future, especially with the recent change incurrent Presidential administration.

Since January 2017, the U.S. President has signed two Executive Orders designed to delay the implementation of any certain provisions of the PPACA or otherwise circumvent some of the requirements for health insurance mandated by the PPACA. Concurrently, Congress has considered legislation that would repeal or repeal and replace all or part of the PPACA. While Congress has not passed legislation repealing the PPACA in its entirety, two bills affectingit has enacted laws that modify certain provisions of the PPACA such as removing penalties for not complying with the PPACA’s individual mandate to carry health insurance, delaying the implementation of certain taxes underACA-mandated fees, and increasing the point-of-sale discount that is owed by pharmaceutical manufacturers who participate in Medicare Part D. Additionally, on December 14, 2018, a Texas U.S. District Court Judge ruled that the PPACA have been signed into law.

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Theis unconstitutional in its entirety because the individual mandate was repealed by Congress as part of the Tax Cuts and Jobs ActAct. While the Texas U.S. District Court Judge, as well as the U.S. Presidential administration and the Centers for Medicare and Medicaid Services (CMS), have stated that the ruling will have no immediate effect pending appeal of 2017 includes a provision repealing the “individual mandate,” the tax-based shared responsibility payment imposed bydecision, it is unclear how this decision, subsequent appeals, and other efforts to repeal and replace the PPACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year, effective January 1, 2019.Additionally, on January 23, 2018,will impact the U.S. President signed a continuing resolution on appropriations for fiscal year 2018 that delayed the implementation of certain PPACA-mandated fees, including the so-called “Cadillac” tax on certain high cost employer-sponsored insurance plans, the annual fee imposed on certain health insurance providers based on market share, and the medical device excise tax on non-exempt medical devices. Congress also could consider subsequent legislation to repeal or replace elements of the PPACA.

Other legislative changes have been proposed and adopted since the PPACA was enacted. These changes included the Budget Control Act of 2011, which caused aggregate reductions to Medicare payments to providers of up to 2% per fiscal year effective April 1, 2013 which, following passage of the Bipartisan Budget Act of 2015, will stay in effect through 20252029 unless additional Congressionalcongressional action is taken. Further, the American Taxpayer Relief Act of 2012, among other things, further reduced Medicare payments to several types of providers.
Additionally, there has been increasing legislative and enforcement interest in the U.S. with respect to specialty drug pricing practices. Specifically, at the federal level, there have been several recent U.S. Congressionalcongressional inquiries and proposed billsand enacted state and federal legislation designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drugs. Further,For example, at the federal level, the U.S. Presidential administration’s budget proposal for the fiscal year 2021 includes a $135.0 billion allowance to support legislative proposals seeking to reduce drug prices, increase competition, lower out-of-pocket drug costs for patients, and increase patient access to lower-cost generic and biosimilar drugs. Moreover, the U.S. Presidential administration previously released a “Blueprint” to lower drug prices and reduce out of pocket costs of drugs that contained proposals to increase manufacturer competition, increase the negotiating power of certain federal healthcare programs, incentivize manufacturers to lower the list price of their products and reduce the out of pocket costs of drug products paid by consumers. Although a number of these and other measures may require additional authorization to become effective, Congress and the U.S. AdministrationPresidential administration have each indicated that it will continue to seek new legislative and/or administrative measures to control drug costs. At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, to encourage importation from other countries and bulk purchasing.

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Brexit and the Regulatory Framework in the U.K.
In June 2016, a majority of the eligible members of the electorate in the U.K. voted to withdraw from the EU in a national referendum (Brexit). On March 29, 2017, the U.K.’s Prime Minister formally delivered the notice of withdrawal. After significant negotiation between the U.K. and the EU, the withdrawal of the U.K. from the EU took effect on January 31, 2020. There is now a transition period while the U.K. and EU negotiate additional arrangements, including their future trading terms. The U.K. has stated that it wants the transition period to expire, and the future trading terms to be agreed, by December 31, 2020.
Since the regulatory framework for pharmaceutical products in the U.K covering quality, safety and efficacy of pharmaceutical products, clinical trials, marketing authorization, commercial sales and distribution of pharmaceutical products is derived from EU directives and regulations, immediately following Brexit, it is expected that the U.K.'s regulatory regime will remain aligned with EU regulations. It remains to be seen how, if at all, Brexit will impact regulatory requirements for product candidates and products in the U.K. In the longer term, Brexit could materially impact the future regulatory regime which applies to products and the approval of product candidates in the U.K.
Other U.S. Regulatory Requirements

In addition to FDA restrictions on marketing of pharmaceutical products, several other types of state and federal laws have been applied to restrict certain business and marketing practices in the pharmaceutical industry in recent years. These laws include anti-kickback, false claims, patient data privacy and security, and transparency statutes and regulations.

The federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service reimbursable under Medicare, Medicaid or other federally financed healthcare programs. The PPACA amended the intent requirement of the federal Anti-Kickback and certain other criminal healthcare fraud statutes such that a person or entity no longer needs to have actual knowledge of these statutes or specific intent to violate them in order to commit a violation. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers and formulary managers on the other. Although there are a number of statutory exemptionsexceptions and regulatory safe harbors protecting certain common activities from prosecution or other regulatory sanctions, the exemptionsexceptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exemptionexception or safe harbor.

Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government, or knowingly making, or causing to be made, a false statement to have a false claim paid. The PPACA amended the statute so that the government may assert that a claim including items or services resulting from a violation of the federal anti-kickback statuteAnti-Kickback Statute constitutes a false or fraudulent claim for purposes of the false claims laws. Recently, several pharmaceutical and other healthcare companies have been prosecuted under these laws for allegedly inflating drug prices they report to pricing services, which in turn are used by the government to set Medicare and Medicaid reimbursement rates, and for allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product. In addition, certain marketing practices, including off-label promotion, may also violate false claims laws.

The federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, imposes criminal and civil liability for, among other things, executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters.

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HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act and itstheir implementing regulations, also imposes obligations, including mandatory contractual terms, on certain types of individuals and entities, with respect to safeguarding the privacy, security and transmission of individually identifiable health information.

The federal Physician Payments Sunshine Act requires certain manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program, with specific exceptions, to report annually to the Centers for Medicare & Medicaid Services (CMS)CMS information related to payments or other transfers of value made to physicians and teaching hospitals, and applicable manufacturers and applicable group purchasing organizations to report annually to CMS ownership and investment interests held by the physicians and their immediate family members.

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The majority of states also have statutes or regulations similar to the federal Anti-Kickback Statute and false claims laws, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payer. Sanctions under these federal and state laws may include civil monetary penalties, damages, monetary fines, disgorgement, exclusion of a company’s productscompany from reimbursement under federal healthcare programs, integrity oversight and reporting obligations, criminal fines, contractual damages, reputational harm, diminished profits and future earnings, curtailment of operations and imprisonment. Several states now require pharmaceutical companies to report expenses relating to the marketing and promotion of pharmaceutical products and to report gifts and payments to individual physicians in these states. Otherstates while other states prohibit providing various other marketing-related activities. Other states require submission or disclosure of certain pricing information. Still other states require the posting of information relating to clinical studies and their outcomes. In addition, states including California, Connecticut, Nevada and Massachusetts require pharmaceutical companies to implement compliance programs or marketing codes. Currently, several additional states are considering similar proposals. Compliance with these laws is difficult and time consuming, and companies that do not comply with these state laws face civil penalties.

Approval Outside of the U.S./EU

For marketing outside the U.S. and the EU, we are subject to foreign regulatory requirements governing human clinical testing and marketing approval for our products. These requirements vary by jurisdiction, can differ from those in the U.S. and the EU and may require us to perform additional pre-clinicalpreclinical or clinical testing. The amount of time required to obtain necessary approvals may be longer or shorter than that required for FDA or EMA approval. In many countries outside of the U.S., approvals for pricing, coverage and reimbursement offered by third-party payers, including government payers and private insurance plans, are also required.

Anti-Corruption Legislation

The U.S. Foreign Corrupt Practices Act (FCPA), to which we are subject, prohibits corporations and individuals from engaging in certain activities to obtain or retain business or to influence a person working in an official capacity. It is illegal to pay, offer to pay or authorize the payment of anything of value to any foreign government official, government staff member, political party or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in an official capacity. Similar laws exist in other countries, such as the United Kingdom,U.K., that restrict improper payments to public and private parties. Many countries have laws prohibiting these types of payments within the respective country. Historically, pharmaceutical companies have been the target of FCPA and other anti-corruption investigations and penalties.

Pricing and Reimbursement

Because the course of treatment for patients using our products is expensive, sales of our products depend, in significant part, on the availability and extent of coverage and reimbursement offered by third-party payers, including government payers and private insurance plans. Governments may regulate access to, prices of or reimbursement levels for our products to control costs or to affect levels of use of our products, and private insurers may be influenced by government reimbursement methodologies.

Third-party payers such as government or private healthcare insurers, carefully review and increasingly challenge the prices charged for drugs, examine their medical necessity, and review their cost effectiveness. Reimbursement rates from private companies vary depending on the third-party payer, the insurance plan and other factors. One payer’s determination to provide coverage for a product does not assure that other payers will also provide coverage for the product. Moreover, the process for determining whether a third-party payer will provide coverage for a product may be separate from the process for setting the price of a product or for establishing the reimbursement rate that such a payer will pay for the product. Obtaining coverage and adequate reimbursement for our products may be particularly difficult because of the higher prices often associated with drugs administered under the supervision of a physician. A payer’s decision to provide

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coverage for a product does not imply that an adequate reimbursement rate will be approved. Adequate third-party reimbursement may not be available to enable us to maintain high enough price levels sufficient to realize an appropriate return onsufficient revenues from our investment in product development. In addition, emphasis on managed care in the U.S. has increased and we expect will continue to increase the pressure on pharmaceutical pricing. Coverage policies and third-party reimbursement rates may change at any time. Even if favorable coverage and reimbursement status is attained for one or more products for which we or our collaborators receive regulatory approval, less favorable coverage policies and reimbursement rates may be implemented in the future.

Outside of the U.S. our products are paid for by a variety of payers, with governments being the primary source of payment. Reimbursement in the EU and many other territories must be negotiated on a country-by-country basis and in many countries the product cannot be commercially launched until reimbursement is approved. In many countries the government closely regulates drug pricing and reimbursement and often has a significant discretion in determining whether a product will be reimbursed at all and, if it is, how much will be paid. Negotiating prices with governmental authorities can delay patient access to and commercialization of our products. Payers in many countries use a variety of cost-containment measures that can include referencing prices in other countries and using those reference prices to set their own price, mandatory price cuts and rebates. This international patchwork of price regulation has led to different prices across countries and some cross-border trade in our products from markets with lower prices. Even after a price is negotiated, countries frequently request or require adjustments to the price and other concessions over time.

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Government Programs for Marketed Drugs in the U.S.

U.S.

Medicaid, the 340B Drug Pricing Program, and Medicare

Federal law requires that a pharmaceutical manufacturer, as a condition of having its products receive federal reimbursement under Medicaid and Medicare Part B, must pay rebates to state Medicaid programs for all units of its covered outpatient drugs dispensed to Medicaid beneficiaries and paid for by a state Medicaid program under either a fee-for-service arrangement or through a managed care organization. This federal requirement is effectuated through a Medicaid drug rebate agreement between the manufacturer and the Secretary of Health and Human Services. CMS administers the Medicaid drug rebate agreements, which provide, among other things, that the drug manufacturer will pay rebates to each state Medicaid agency on a quarterly basis and report certain price information on a monthly and quarterly basis. The rebates are based on prices reported to CMS by manufacturers for their covered outpatient drugs. For non-innovator products, generally generic drugs marketed under ANDAs, the rebate amount is 13% of the average manufacturer price (AMP) for the quarter. The AMP is the weighted average of prices paid to the manufacturer (1) directly by retail community pharmacies and (2) by wholesalers for drugs distributed to retail community pharmacies. For innovator products (i.e., drugs that are marketed under NDAs or BLAs), the rebate amount is the greater of 23.1% of the AMP for the quarter or the difference between such AMP and the best price for that same quarter. The best price is essentially the lowest price available to non-governmental entities. Innovator products may also be subject to an additional rebate that is based on the amount, if any, by which the product’s AMP for a given quarter exceeds the inflation-adjusted baseline AMP, which for most drugs is the AMP for the first full quarter after launch. Beginning inSince 2017, non-innovator products are also subject to an additional rebate.

The statutory definition of AMP was amended in 2010. CMS has released the final rule pertaining to AMP and other aspects of the Medicaid drug rebate program, which was effective as of April 1, 2016.

The terms of participation in the Medicaid drug rebate program impose an obligation to correct the prices reported in previous quarters, as may be necessary. Any such corrections could result in additional or lesser rebate liability, depending on the direction of the correction. In addition to retroactive rebates, if a manufacturer were found to have knowingly submitted false information to the government, federal law provides for civil monetary penalties for failing to provide required information, late submission of required information, and false information.

A manufacturer must also participate in a federal program known as the 340B drug pricing program in order for federal funds to be available to pay for the manufacturer’s drugs under Medicaid and Medicare Part B. Under this program, the participating manufacturer agrees to charge certain safety net healthcare providers no more than an established discounted price for its covered outpatient drugs. The formula for determining the discounted price is defined by statute and is based on the AMP and the unit rebate amount as calculated under the Medicaid drug rebate program, discussed above.

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Manufacturers are required to report pricing information to the Health Resources and Services Administration (HRSA) on a quarterly basis. HRSA has also issued regulations relating to the calculation of the ceiling price as well as imposition of civil monetary penalties for each instance of knowingly and intentionally overcharging a 340B covered entity.

Federal law also requires that manufacturers report data on a quarterly basis to CMS regarding the pricing of drugs that are separately reimbursable under Medicare Part B. These are generally drugs, such as injectable products, that are administered “incident to” a physician service and are not generally self-administered. The pricing information submitted by manufacturers is the basis for reimbursement to physicians and suppliers for drugs covered under Medicare Part B. As with the Medicaid drug rebate program, federal law provides for civil monetary penalties for failing to provide required information, late submission of required information, and false information.

Medicare Part D provides prescription drug benefits for seniors and people with disabilities. Medicare Part D beneficiaries have a gap in their coverage (between the initial coverage limit and the point at which catastrophic coverage begins) where Medicare does not cover their prescription drug costs, known as the coverage gap. However, by 2020 Medicare Part D beneficiaries will pay 25% of drug costs after they reach the initial coverage limit - the same percentage they were responsible for before they reached that limit - thereby closing the coverage gap. The cost of closing the coverage gap is being borne by innovator companies and the government through subsidies. Beginning in 2011, eachEach manufacturer of drugs approved under NDAs or BLAs wasis required to enter into a Medicare Part D coverage gap discount agreement and provide a 50%70% discount on those drugs dispensed to Medicare beneficiaries in the coverage gap, in order for its drugs to be reimbursed by Medicare Part D.

Federal Contracting/Pricing Requirements

Manufacturers are also required to make their covered drugs, which are generally drugs approved under NDAs or BLAs, available to authorized users of the Federal Supply Schedule (FSS) of the General Services Administration. The law also requires manufacturers to offer deeply discounted FSS contract pricing for purchases of their covered drugs by the Department of Veterans Affairs, the Department of Defense, the Coast Guard, and the Public Health Service (including the Indian Health Service) in order for federal funding to be available for reimbursement or purchase of the manufacturer’s drugs under certain federal programs. FSS pricing to those four federal agencies for covered drugs must be no more than the Federal Ceiling Price (FCP), which is at least 24% below the Non-Federal Average Manufacturer Price (Non-FAMP) for the prior year. The Non-FAMP is the average price for
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covered drugs sold to wholesalers or other middlemen, net of any price reductions.

The accuracy of a manufacturer’s reported Non-FAMPs, FCPs, or FSS contract prices may be audited by the government. Among the remedies available to the government for inaccuracies is recoupment of any overcharges to the four specified federal agencies based on those inaccuracies. If a manufacturer were found to have knowingly reported false prices, in addition to other penalties available to the government, the law provides for significant civil monetary penalties of $100,000 per incorrect item. Finally, manufacturers are required to disclose in FSS contract proposals all commercial pricing that is equal to or less than the proposed FSS pricing, and subsequent to award of an FSS contract, manufacturers are required to monitor certain commercial price reductions and extend commensurate price reductions to the government, under the terms of the FSS contract Price Reductions Clause. Among the remedies available to the government for any failure to properly disclose commercial pricing and/or to extend FSS contract price reductions is recoupment of any FSS overcharges that may result from such omissions.

Employees

As of February 13, 2018,2020, we had 2,5813,001 full-time employees, 1,1331,358 of whom were in operations, 654653 of whom were in research and development, 378508 of whom were in sales and marketing and 416482 of whom were 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.

Research and Development

For information regarding research and development expenses incurred during 2017, 2016 and 2015, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations—Research and Development.

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Segment and Geographic Area Financial Information

Our chief operating decision maker (i.e., our chief executive officer) reviews financial information on a consolidated basis, for the purposes of allocating resources and evaluating financial performance. Accordingly, we consider ourselves to have a single reporting segment and operating unit structure.

Net product revenues by geography are based on patients’ locations for our commercial products, which are sold directly by us, and global sales of Aldurazyme, which is marketed by Genzyme. Genzyme is our sole customer for Aldurazyme and is responsible for marketing and selling Aldurazyme to third parties. Although Genzyme sells Aldurazyme worldwide, the revenues earned by us on Genzyme’s net sales are not broken out by geographic region as the underlying revenue transactions are with Genzyme, whose headquarters are located in the U.S.

The table below summarizes consolidated net product revenue based on patient location for Brineura, Firdapse, Kuvan, Naglazyme, and Vimizim, which are sold directly by us, and global sales of Aldurazyme, which is marketed by Genzyme (in millions):

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Net product revenues:

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

495.7

 

 

$

411.9

 

 

$

343.4

 

Europe

 

 

266.2

 

 

 

252.6

 

 

 

171.2

 

Latin America

 

 

182.4

 

 

 

147.5

 

 

 

142.3

 

Rest of the world

 

 

236.1

 

 

 

204.6

 

 

 

129.6

 

Total net product revenues marketed by BioMarin

 

 

1,180.4

 

 

 

1,016.6

 

 

 

786.5

 

Aldurazyme net product revenues marketed by

   Genzyme

 

 

90.0

 

 

 

93.8

 

 

 

98.0

 

Total net product revenue

 

$

1,270.4

 

 

 

1,110.4

 

 

$

884.5

 

Total revenues generated outside the U.S. was $725.4 million, $609.3 million and $445.8 million, in the years ended December 31, 2017, 2016 and 2015, respectively.

The following table outlines non-monetary long-lived assets by geographic area (in millions):

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Non-monetary long-lived assets:

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

1,183.8

 

 

$

1,183.9

 

 

$

940.5

 

Europe

 

 

823.7

 

 

 

812.8

 

 

 

865.2

 

Rest of World

 

 

2.7

 

 

 

2.6

 

 

 

2.3

 

Total long-lived assets

 

$

2,010.2

 

 

$

1,999.3

 

 

$

1,808.0

 

The increase in non-monetary long-lived assets in 2017 compared to 2016 was primarily attributable to increased costs related to our in-process projects at our manufacturing facilities in the U.S. and Europe, partially offset by a net decrease in intangible assets due to normal amortization of the definite lived intangible assets. The increase in non-monetary long-lived assets in 2016 compared to 2015 was primarily attributable to increased costs related to our in-process projects at our manufacturing facilities, partially offset by a net decrease in intangible assets resulting from the impairment of in-process research and development intangible assets due to program terminations in 2016.

See “Risk Factors” included in Part I, Item 1A of this Annual Report on Form 10-K for additional information regarding the risks we face related to our foreign operations.

Other Information

We were incorporated in Delaware in October 1996. Our principal executive offices are located at 770 Lindaro Street, San Rafael, California 94901 and our telephone number is (415) 506-6700. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, proxy statements, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as

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amended (the Exchange Act) are available free of charge at www.bmrn.com as soon as reasonably practicable after electronically filing such reports with the Security and Exchange Commission (the SEC). Such reports and other information may be obtained by visiting the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549 or by calling the SEC at 1-800-SEC-0330. Additionally, these reports are available ataccessed through the SEC’s website at http://www.sec.gov. Information contained in our website is not part of this or any other report that we file with or furnish to the SEC.

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Item 1A. Risk Factors

An investment in our securities 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 value of our securities to decline, and you may lose all or part of your investment.

Risks Related to Our Business

If we fail to obtain and maintain regulatory approval to commercially market and sell our product candidates, or if approval of our product candidates is delayed, we will be unable to generate revenue from the sale of these product candidates, our potential for generating positive cash flow will be diminished, and the capital necessary to fund our operations will increase.

We must obtain and maintain regulatory approval to market and sell our product candidates. For example, in the U.S.United States (U.S.), we must obtain Food and Drug Administration (FDA) approval for each product candidate that we intend to commercialize, and in Europe we must obtain approval from the European Medicines Agency (EMA). The FDA and EMA approval processes are typically lengthy and expensive, and approval is never certain. Accordingly, there are no assurances that we will obtain regulatory approval for any of our product candidates, including pegvaliase, in any jurisdiction. For example, even though the pivotal Phase 3 PRISM-2 study of pegvaliase met the primary endpoint of change in blood Phe compared with placebo (p<0.0001), we did not demonstrate a statistically significant improvement in inattention or mood scores, a key secondary clinical neurocognitive endpoint. In August 2017, the FDA accepted for Priority Review our Biologics License Application (BLA) for pegvaliase, butcandidates. Furthermore, there iscan be no assurance that a reduction in blood Phe alone will be sufficient to support the FDA’s full regulatory approval of pegvaliase.

Althoughone of our product candidates by one regulatory agency will mean that other agencies will also approve the same product candidate. Similarly, regulatory authorities may approve a product candidate for fewer or more limited indications than requested or may grant approval subject to the performance of post-marketing studies. In addition, regulatory authorities may not approve the labeling claims that are necessary or desirable for the successful commercialization of our product candidates.

We have had fewer interactions with regulatory authorities outside the U.S. and the European Union (EU) as compared to our interactions with the FDA and EMA. The approval procedures vary among countries and can involve additional clinical testing, and the time required to obtain approval may differ from that required to obtain FDA or EMA have programs to facilitate accelerated approval processes, the timelines agreed under legislative goals or mandatedapproval. Moreover, clinical trials conducted in one country may not be accepted by regulations are subject to the possibility of substantial delays. In addition,regulatory authorities in other countries. Approval by the FDA theor EMA and other internationaldoes not ensure approval by regulatory authorities in other countries, and approval by one or more foreign regulatory authorities does not ensure approval by regulatory authorities in other foreign countries or by the FDA or EMA. However, a failure or delay in obtaining regulatory approval in one country may have substantial discretion overa negative effect on the regulatory process in others. The foreign regulatory approval process for pharmaceutical products. These regulatory agenciesmay include all of the risks associated with obtaining FDA or EMA approval. We may not agree thatobtain foreign regulatory approvals on a timely basis, if at all. We may not be able to file for regulatory approvals and even if we have demonstrated the requisite level of product safety and efficacyfile we may not receive necessary approvals to grant approval and may require additional data. If we fail to obtain regulatory approval forcommercialize our product candidates we will be unable to market and sell those product candidates. in any market.
Because of the risks and uncertainties in pharmaceutical development, our product candidates could take a significantly longer time to gain regulatory approval than we expect or may never gain approval. We also rely on independent third-party contract research organizations (CROs) to file some of our foreign marketing applications and important aspects of the services performed for us by the CROs are out of our direct control. If we fail to adequately manage our CROs, if the CRO elects to prioritize work on our projects below other projects or if there is any dispute or disruption in our relationship with our CROs, the filing of our applications may be delayed.

Although the FDA and the EMA have programs to facilitate expedited development and accelerated approval processes, the timelines agreed under legislative goals or mandated by regulations are subject to the possibility of substantial delays. In addition, the FDA, the EMA and other international regulatory authorities have substantial discretion over the approval process for pharmaceutical products. These regulatory agencies may not agree that we have demonstrated the requisite level of product safety and efficacy to grant approval and may require additional data. Moreover, if original FDA approval for one of our product candidates is granted via the accelerated approval pathway, we may be required to conduct a post-marketing confirmatory trial to verify and describe the clinical benefit in support of full approval. An unsuccessful post-marketing study or failure to complete such a study with due diligence could result in the withdrawal of the FDA’s marketing approval for a product candidate. If we fail to obtain and maintain regulatory approval for our product candidates, we will be unable to market and sell those product candidates, which would have a negative effect on our business and financial condition.
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With respect to valoctocogene roxaparvovec, we may experience challenges specific to gene therapy that cause significant delays or unanticipated costs, or that cannot be solved. Although numerous companies are currently advancing gene therapy product candidates through clinical trials, the FDA has only approved a very small number of vector-based gene therapy products thus far. Moreover, there are very few approved gene therapy products outside the U.S. As a result, it is difficult to determine how long it will take or how much it will cost to obtain regulatory approvals for valoctocogene roxaparvovec in any jurisdiction. Regulatory requirements governing gene and cell therapy products are still evolving and may continue to change in the future. Regulatory review agencies and the new requirements and guidelines they promulgate may lengthen the regulatory review process, require us to perform additional or larger studies, increase our development costs, lead to changes in regulatory positions and interpretations, delay or prevent approval and commercialization of our treatment candidate or lead to significant post-approval studies, limitations or restrictions. Delay or failure to obtain, or unexpected costs in obtaining, the regulatory approval necessary to bring valoctocogene roxaparvovec to market could have a negative effect on our business and financial condition. Even if we do obtain regulatory approval, ethical, social and legal concerns about gene therapy arising in the future could result in additional regulations restricting or prohibiting sale of our product.
In addition, some of our product candidates are intended to be used in combination with a delivery device, such as an injector or other delivery system. Medical products containing a combination of new drugs, biological products or medical devices may be regulated as “combination products” in the U.S. A combination product generally is defined as a product consisting of components from two or more regulatory categories (e.g., drug/device, device/biologic, drug/biologic). Each component of a combination product is subject to the requirements established by the FDA for that type of component, whether a new drug, biologic or device. In order to facilitate pre-market review of combination products, the FDA designates one of its centers to have primary jurisdiction for the pre-market review and regulation of the overall product based upon a determination by the FDA of the primary mode of action of the combination product. The determination whether a product is a combination product or two separately regulated products is made by the FDA on a case-by-case basis. Our product candidates intended for use with such devices, or expanded indications that we may seek for our products used with such devices, may not be approved or may be substantially delayed in receiving approval if

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the devices do not gain and/or maintain their own regulatory approvals or clearances. Where approval of the drug or biologic product and device is sought under a single application, the increased complexity of the review process may delay approval. The FDA review process and criteria isare not a well-established area,areas, which could also lead to delays in the approval process. In addition, because these delivery devices are provided by unaffiliated third-party companies, we are dependent on the sustained cooperation and effort of those third-party companies both to obtain regulatory approval and to maintain their own regulatory compliance. Failure of third-party companies to assist in the approval process or to maintain their own regulatory compliance could delay or prevent approval of our product candidates, or limit our ability to sell a product once it is approved.

From time to time during the development and regulatory approval process for our products and product candidates, we engage in discussions with the FDA and comparable international regulatory authorities regarding our development programs, including discussions about the regulatory requirements for approval. As part of these discussions, we sometimes seek advice in the design of our clinical programs from various regulatory agencies globally, but we do not always follow such guidance. This increases the chance of adverse regulatory actions, but we try to always provide appropriate scientific evidence to support approval. For example, although we designed our Phase 3 study of vosoritide in a manner that we believe can demonstrate efficacy and safety of the product candidate for the target patient population, the FDA may ultimately disagree. On January 23, 2018, the FDA announced the following: “On Thursday, March 22, 2018, the Pediatric Advisory Committee (PAC) and the Endocrinologic and Metabolic Drugs Advisory Committee (EMDAC) will meet to discuss the major objectives of a phase 3 drug development program indicated for the treatment of children with achondroplasia (ACH) submitted by BioMarin Pharmaceutical Inc. The following elements of a phase 3 program should be considered for discussion: evidence required to establish dose-response, study design, e.g., placebo control, study duration, intended population, e.g., infants and toddlers and/or older children and adolescents, and endpoints that have a clinically meaningful impact on the patient’s functional or psychological well-being.” We cannot predict the outcome of this meeting, how the FDA will incorporate the advice from the meeting or whether or not the meeting will have any impact on our development of vosoritide. Moreover, sometimes different regulatory agencies provide different or conflicting advice. While we attempt to harmonize the advice we receive from multiple regulatory authorities, it is not always practical to do so. Also, we may choose not to harmonize conflicting advice when harmonization would significantly delay clinical trial data or is otherwise inappropriate. If we are unable to effectively and efficiently resolve and comply with the inquiries and requests of the FDA and other non-U.S. regulatory authorities, the approval of our product candidates may be delayed and their value may be reduced.

Any product for which we have obtained regulatory approval, or for which we obtain approval in the future, is subject to, or will be subject to, extensive ongoing regulatory requirements by the FDA, the EMA and other comparable international regulatory authorities, and if we fail to comply with regulatory requirements or if we experience unanticipated problems with our products, we may be subject to penalties, we will be unable to generate revenue from the sale of such products, our potential for generating positive cash flow will be diminished, and the capital necessary to fund our operations will be increased.

Aldurazyme, Brineura, Kuvan, Naglazyme and Vimizim have received regulatory approval to be commercially marketed and sold in the U.S., the EU and certain other countries, and FirdapsePalynziq has received regulatory approval to be commercially marketed in the U.S. and the EU. Any product for which we have obtained regulatory approval, or for which we obtain regulatory approval in the future, along with the manufacturing processes and practices, post-approval clinical research, product labeling, advertising and promotional activities for such product, are subject to continual requirements of, and review by, the FDA, the EMA and other comparable international regulatory authorities. These requirements include submissions of safety and other post-marketing information and reports, registration and listing requirements, current good manufacturing practices (cGMP) requirements relating to manufacturing, quality control, quality assurance and corresponding maintenance of records and documents, requirements regarding the distribution of samples to physicians, import and export requirements and recordkeeping.

Promotionalrecord keeping.

An example of the ongoing regulatory requirements our products are subject to is the Palynziq Risk Evaluation and Mitigation Strategy (REMS) program. In the U.S., Palynziq is only available through the REMS program, which is required by the FDA to mitigate the risk of anaphylaxis while using the product. Notable requirements of our REMS program include the following:
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prescribers must be certified by enrolling in the REMS program and completing training;
prescribers must prescribe auto-injectable epinephrine with Palynziq;
pharmacies must be certified with the REMS program and must dispense Palynziq only to patients who are authorized to receive it;
patients must enroll in the REMS program and be educated about the risk of anaphylaxis by a certified prescriber to ensure they understand the risks and benefits of treatment with Palynziq; and
patients must have auto-injectable epinephrine available at all times while taking Palynziq.
Failure of prescribers, pharmacies or patients to enroll in our REMS program or to successfully complete and comply with its requirements may result in regulatory action from the FDA or decreased sales of Palynziq. The restrictions and requirements under our REMS program, as well as potential changes to these restrictions and requirements in the future, subject us to increased risks and uncertainties, any of which could harm our business. The requirement for a REMS program can materially affect the potential market for and profitability of a drug. We cannot predict whether the FDA will request, seek to require or ultimately require modifications to, or impose additional requirements on, the Palynziq REMS program, or whether the FDA will permit modifications to the Palynziq REMS program that we consider warranted. Any modifications required or rejected by the FDA could make it more difficult or expensive for us to distribute Palynziq in the U.S., impair the safety profile of Palynziq, disrupt continuity of care for Palynziq patients and/or negatively affect sales of Palynziq.
Moreover, promotional communications with respect to prescription drugs, including biologics, are subject to a variety of legal and regulatory restrictions and must be consistent with the information in the product's approved labeling. In particular, a product may not be promoted for uses that are not approved by the FDA as reflected in the product’s approved labeling. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant civil, criminal and administrative penalties. Thus, we will not be able to promote any products we develop for indications or uses for which they are not approved.

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In addition, the FDA often requires post-marketing testing and surveillance to monitor the effects of products. The FDA, the EMA and other comparable international regulatory agencies may condition approval of our product candidates on the completion of such post-marketing clinical studies. These post-marketing studies may suggest that a product causes undesirable side effects or may present a risk to the patient.

Discovery after approval of previously unknown problems with any of our products, manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in actions such as:

restrictions on our ability to conduct clinical trials, including full or partial clinical holds on ongoing or planned trials;

restrictions on product manufacturing processes;

restrictions on the marketing of a product;

restrictions on product distribution;

requirements to conduct post-marketing clinical trials;

untitled or warning letters or other adverse publicity;

withdrawal of the products from the market;

refusal to approve pending applications or supplements to approved applications that we submit;

recall of products;

refusal to permit the import or export of our products;

product seizure;

fines, restitution or disgorgement of profits or revenue;

injunctions; or

imposition of civil or criminal penalties.

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If such regulatory actions are taken, theour value of our company and our operating results will be adversely affected. Additionally, if the FDA, the EMA or any other comparable international regulatory agency withdraws its approval of a product, we will be unable to generate revenue from the sale of that product in the relevant jurisdiction, our potential for generating positive cash flow will be diminished and the capital necessary to fund our operations will be increased. Accordingly, we continue to expend significant time, money and effort in all areas of regulatory compliance, including manufacturing, production, product surveillance, post-marketing studies and quality control.

If we fail to obtain or maintain orphan drug exclusivity for some of our products, our competitors may obtain approval to sell the same drugs to treat the same conditions and our revenues will be reduced.

As part of our business strategy, we have developed and may in the future develop some drugs that may be eligible for FDA and EU orphan drug designation. Under the Orphan Drug Act, the FDA may designate a product as an orphan drug if it is intended to treat a rare disease or condition, defined as a patient population of fewer than 200,000 in the U.S. In the EU, orphan drug designation is granted to drugsavailable if a sponsor can establish: that the medicine is intended to treatfor the diagnosis, prevention or treatment of (1) a rare diseaselife-threatening or chronically debilitating condition defined as having a prevalence ofaffecting no more than five in 10,000 people in the EU, which is equivalent to around 250,000 people or fewer.fewer or (2) a life-threatening, seriously debilitating or serious and chronic condition in the EU and that without incentives it is unlikely that the marketing of the medicinal product in the EU would generate sufficient return to justify the necessary investment. For either of these conditions, the applicant must demonstrate that there exists no satisfactory method of diagnosis, prevention or treatment of the condition in question that has been authorized in the EU or, if such method exists, the medicinal product will be of significant benefit to those affected by that condition. 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. Orphan drug exclusive marketing rights may be lost if the FDA later determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the drug. Similar regulations are available inIn addition, the FDA may approve another drug during a period of orphan drug exclusivity if the second drug is found to be clinically superior to the first drug. In the EU, with a ten-year period of market exclusivity (extendable to twelve years for medicines that have complied with an agreed pediatric investigation plan pursuant to Regulation 1901/2006) is available. Orphan drug marketing exclusivity may be lost in the EU if a manufacturer is unable to supply sufficient quantities and marketing authorization may also be granted to a similar medicinal product with the same orphan indication if this medicinal product is safer, more effective or otherwise clinically superior to the original orphan medicinal product. The period of market exclusivity may, in addition, be reduced to six years if, at the end of the fifth year, it can be demonstrated on the basis of available evidence that the criteria for its designation as an orphan medicine are no longer satisfied, for example if the original orphan medicinal product has become sufficiently profitable not to justify maintenance of market exclusivity.

Because the extent and scope of patent protection for some of our products is limited, orphan drug designation is especially important for our products that are eligible for orphan drug designation. For eligible products, we plan to rely on the exclusivity period under the Orphan Drug Act to maintain a competitive position. If we do not obtain orphan drug exclusivity for our products that do not have broad patent protection, our competitors may then sell the same drug to treat the same condition and our revenues will be reduced.

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Even though we have obtained orphan drug designation for certain of our product candidates and even if we obtain orphan drug designation for our future product candidates, due to the uncertainties associated with developing biopharmaceutical products, we may not be the first to obtain marketing approval for any particular orphan indication, which means that we may not obtain orphan drug exclusivity and could also potentially be blocked from approval of certain product candidates until the competitor product’s orphan drug exclusivity period expires. Moreover, with respect to certain biologics and gene therapies, it is uncertain how similarity between product candidates designed to treat the same rare disease or condition may affect such product candidates’ orphan drug exclusivities. Further, even if we obtain orphan drug exclusivity for a product, that exclusivity may not effectively protect the product from competition because different drugs can be approved for the same condition and the same drug can be approved for different conditions and potentially used off-label in the orphan indication. Even after an orphan drug is approved and granted orphan drug exclusivity, the FDA can subsequently approve the same drug for the same condition if the FDA concludes that the later drug is safer or more effective or makes a major contribution to patient care. 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.

We may face competition from biosimilars approved through an abbreviated regulatory pathway.

Our Aldurazyme, Brineura, Naglazyme, Palynziq and Vimizim products are regulated by the FDA as biologics under the Federal Food, Drug, and Cosmetic Act (the FDC Act) and the Public Health Service Act (the PHS Act). Biologics require the submission of a BLABiologics License Application (BLA) and approval by the FDA prior to being marketed in the U.S. Historically, a biologic product approved under a BLA was not subject to the generic drug review and approval provisions of the FDC Act. However, theThe Biologics Price Competition and Innovation Act of 2009 (BPCIA) created a regulatory pathway under the PHS Act for the abbreviated approval of biological products that are demonstrated to be “biosimilar” or “interchangeable” with an FDA-approved biological product. A similar abridged marketing authorization process is available to biosimilar products in the EU. In order to meet the standard of interchangeability, a sponsor must demonstrate that the biosimilar product can be expected to produce the same clinical result as the reference product, and for a product that is administered more than once, that the risk of switching between the reference product and biosimilar product is not greater than the risk of maintaining the patient on the reference product. Such biosimilars would reference biological products approved in the U.S. The BPCIA establishes a period of 12 years of exclusivity for reference products. Aldurazyme’sIn Europe, a medicinal product containing a new active substance benefits from eight years of data exclusivity, underduring which biosimilar applications referring to the BPCIA expired in 2015, Brineura’sdata of that product may not be accepted by the regulatory authorities, and a further two years of market exclusivity, underduring which such biosimilar products may not be placed on the BPCIA expires in 2029, Naglazyme’s exclusivity undermarket. The two-year period may be extended to three years if during the BPCIA expired in June 2017, and Vimizim’s exclusivity under the BPCIA expires in 2026.first eight years a new therapeutic indication with significant clinical benefit over existing therapies is approved. Our products approved under
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Table of Contents
BLAs in the U.S. or Marketing Authorisation Applications (MAAs) in Europe, as well as products in development that may be approved under BLAsthose regimes in the future, could be reference products for biosimilar marketing applications.

To obtain regulatory approval to market our products, preclinical studies and costly and lengthy clinical trials are required and the results of the studies and trials are highly uncertain.

Likewise, preliminary, initial or interim data from clinical trials should be considered carefully and with caution since the final data may be materially different from the preliminary, initial or interim data, particularly as more patient data become available.

As part of the drug development process we must conduct, at our own expense, preclinical studies in the laboratory, including studies in animals, and clinical trials on humans for each product candidate. We expect theThe number of preclinical studies and clinical trials that the regulatory authorities will require will varyvaries depending on the product candidate, the disease or condition the drug is being developed to address and regulations applicable to the particular drug. Generally, new drugs for diseases or conditions that affect larger patient populations, are less severe, or are treatable by alternative strategies must be validated through additional preclinical and clinical trials and/or clinical trials with higher enrollments. With respect to our early stage product candidates, we may need to perform multiple preclinical studies using various doses and formulations before we can begin clinical trials, which could result in delays to our development timeline. Furthermore, even if we obtain favorable results in preclinical studies, the results in humans may be significantly different. After we have conducted preclinical studies, we must demonstrate that our product candidates are safe and efficacious for use in the targeted human patients in order to receive regulatory approval for commercial sale. Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical trial process. The results of preclinical studies and early clinical trials of our product candidates may not be predictive of the results of later-stage clinical trials, and favorable data from interim analyses do not ensure the final results of a trial will be favorable. From time to time, we have and may in the future publish or report preliminary, initial or interim data from our clinical trials, such as the data we have announced from the GENEr-8-1 study for valoctocogene roxaparvovec. Preliminary, initial or interim data from our clinical trials may not be indicative of the final results of the trial and are subject to the risk that one or more of the clinical outcomes may materially change as patient enrollment continues and/or more patient data become available. In this regard, such data may show initial evidence of clinical benefit, but as patients continue to be followed and more patient data become available, there is a risk that any therapeutic effects will not be durable in patients and/or will decrease over time or cease entirely. Preliminary, initial or interim data also remain subject to audit and verification procedures that may result in the final data being materially different from such preliminary, initial or interim data. As a result, preliminary, initial or interim data should be considered carefully and with caution until the final data are available.
Product candidates may fail to show the desired safety and efficacy traits despite having progressed through preclinical studies and initial clinical trials, or despite having favorable data in connection with an interim analysis. A number of companies in the biopharmaceutical industry including us with respect to Kyndrisa, have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier trials. Also, as noted above, we do not always follow the advice of regulatory authorities or comply with all of their requests regarding the design of our clinical programs. In those cases, we may choose a development program that is inconsistent with the advice of regulatory authorities, which may limit the jurisdictions where we conduct clinical trials and/or adversely affect our ability to obtain approval in those jurisdictions where we do not follow the regulatory advice.

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Adverse or inconclusive clinical results could stop us from obtaining regulatory approval of our product candidates. 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;

budgetary constraints or prohibitively high clinical trial costs;

longer treatment time required to demonstrate efficacy;

lack of sufficient supplies of the product candidate;

adverse medical events or side effects in treated patients, including immune reactions;

lack of effectiveness of the product candidate being tested;

availability of competitive therapies to treat the same indication as our product candidates;

regulatory requests for additional clinical trials or pre-clinicalpreclinical studies;

deviations in standards for Good Clinical Practice (GCP); and

disputes with or disruptions in our relationships with clinical trial partners, including CROs, clinical laboratories, clinical sites, and principal investigators

investigators.
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Moreover, principal investigators for our clinical trials may serve as scientific advisors or consultants to us from time to time and receive compensation in connection with such services reportable to the FDA or other regulatory authority. If the FDA or other regulatory authority concludes that a financial relationship between us and a principal investigator has created a conflict of interest, the FDA or other regulatory authority may question the integrity of the data generated at the applicable clinical trial site and the utility of the clinical trial itself may be jeopardized.

Our valoctocogene roxaparvovec (formerly referred to as BMN 270) program is based on a gene therapy approach, which, as a novel technology, presents additional treatment, regulatory, manufacturing,development and commercialtreatment risks in relation to our other, more traditional drug development programs.

In addition to the risks set forth in this Risk Factors section associated with developing and commercializing more traditional pharmaceutical drugs, there are additional, unique development and treatment risks associated with gene therapy products like our product candidate valoctocogene roxaparvovec. The goal of gene therapy is to be able to correct an inborn genetic defect through one-time administration of therapeutic genetic material containing non-defective gene copies. The gene copies are designed to reside permanently in a patient, allowing the patient to produce an essential protein or ribonucleic acid (RNA) molecule that a healthy person would normally produce. There is a risk, however, that the new gene copies will produce too muchlittle or too littlemuch of the desired protein or RNA. ThereAlthough a one-time administration of a gene therapy product like our product candidate valoctocogene roxaparvovec is alsointended to correct an inborn genetic defect for the entire lifetime of a patient, there is a risk that the therapeutic effect will not be durable and production of the desired protein or RNA will increase or decrease over time.time or cease entirely. Because the treatment is irreversible, there may be challenges in managing side effects, particularly those caused by overproduction.potential overproduction of the desired protein. Adverse effects would not be able to be reversed or relieved by stopping dosing, and we may have to develop additional clinical safety procedures. Furthermore, because the new gene copies are designed to reside permanently in a patient, there is a risk that they will disrupt other normal biological molecules and processes, including other healthy genes, and we may not learn the nature and magnitude of these side effects until long after clinical trials have been completed.

We may experience development problems related

As compared to our other, more traditional products, our gene therapy program that cause significant delays or unanticipated costs, or that cannot be solved. Although numerous companies are currently advancing gene therapy product candidates through clinical trialscandidate valoctocogene roxaparvovec, if approved, may present additional problems with respect to the pricing, coverage, and reimbursement and acceptance of the FDA has approved several cell-based gene therapy treatmentsproduct candidate.
In addition to date, the FDA has only approved one vector-based gene therapy product thus far. Moreover,risks set forth in this Risk Factors section associated with commercializing more traditional pharmaceutical drugs, there are very few approvedadditional, unique commercial risks associated with gene therapy products outside the U.S. As a result, it is difficult to determine how long it will take or how much it will cost to obtain regulatory approvals forlike our product candidate in any jurisdiction. Regulatory requirements governing gene and cell therapy products are still evolving and may continue to change in the future. Regulatory review agencies and the new requirements and guidelines they promulgate may lengthen the regulatory review process, require us to perform additional or larger studies, increase our development costs, lead to changes in regulatory positions and interpretations, delay or prevent approval and commercialization of our treatment candidate or lead to significant post-approval studies, limitations or restrictions. Delay or failure to obtain, or unexpected costs in obtaining, the regulatory approval necessary to

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bring valoctocogene roxaparvovec to market could have a negative effect on our business and financial condition. Even if we do obtain regulatory approval, ethical, social and legal concerns about gene therapy arising in the future could result in additional regulations restricting or prohibiting sale of our product.

Even if we obtain regulatory approval for valoctocogene roxaparvovec, we may experience delays, and increased costs, in developing a sustainable, reproducible and large-scale manufacturing process. Gene therapy products are novel, complex and difficult to manufacture, and have only in limited cases been manufactured at scales sufficient for pivotal trials and commercialization. Few pharmaceutical contract manufacturers specialize in gene therapy products and those that do are still developing appropriate processes and facilities for large-scale production. Whether we produce valoctocogene roxaparvovec at a contract manufacturer or at our own gene therapy manufacturing facility, we will likely face technical and scientific challenges, considerable capital costs, and potential difficulty in recruiting and hiring experienced, qualified personnel. As a result, we could experience manufacturing delays that prevent us from completing our clinical studies or commercializing valoctocogene roxaparvovec in a timely, or on a profitable, basis, if at all.

roxaparvovec. Due to the relative novelty of gene therapy and the potential to provide extended duration therapeutic treatment with a one-time administration, we also face uncertainty with respect to the pricing, coverage and reimbursement of valoctocogene roxaparvovec,, if approved. In order to recover our research and development costs and commercialize this one-time treatment on a profitable basis, we expect the cost of a single administration of valoctocogene roxaparvovec to be substantial. Therefore, we expect that coverage and reimbursement by governments and other third-party payers will be essential for the vast majority of patients to be able to afford valoctocogene roxaparvovec.roxaparvovec. Accordingly, sales of valoctocogene roxaparvovec,, if approved, will depend substantially, both domestically and internationally, on the extent to which its cost will be paid by third-party payers. Even if coverage is provided, the reimbursement amounts approved by third-party payers may not be high enough to allow us to realize a sufficient return onrevenues from our investment.

investment in the development of valoctocogene roxaparvovec.

We also face uncertainty as to whether gene therapy will gain the acceptance of the public or the medical community. Even if we obtain regulatory approval for valoctocogene roxaparvovec,, the commercial success of valoctocogene roxaparvovec will depend, in part, on the acceptance of physicians, patients and healthcarethird-party payers of gene therapy products in general, and our product candidate in particular, as medically necessary, cost-effective and safe. In particular, our success will depend upon physicians prescribing our product candidate in lieu of existing treatments they are already familiar with and for which greater clinical data may be available. Even if valoctocogene roxaparvovec displays a favorable efficacyMoreover, physicians and safety profile in clinical trials and is ultimately approved, marketpatients may delay acceptance of valoctocogene roxaparvovec will not be fully known until after it is launched.the product candidate has been on the market for a certain amount of time. Negative public opinion or more restrictive government regulations or could have a negative effect on our business and financial condition and may delay or impair the development andsuccessful commercialization of, and demand for, valoctocogene roxaparvovec.
We have implemented a data access plan for valoctocogene roxaparvovec,.

which restricts our management’s review of emerging data from these trials. Without access to ongoing data, management does not have the ability to adjust the trials based on such emerging data, which could adversely impact the ultimate outcome of these trials.

In order to preserve the scientific integrity of the valoctocogene roxaparvovec trials and to allow us to only report on data at intervals that we believe will be meaningful to investors, we have implemented a data access plan related to the ongoing open label trials, which is designed to significantly mirror blinded trials. Pursuant to this plan, the ongoing emerging data are generally not collected by us, with the exception that certain specific data points are collected and reviewed by a small group of medical personnel monitoring and managing the trial, and then, only to the extent necessary to allow them to perform their monitoring responsibilities. As we disclose and publicly discuss prior data from these trials, such discussions do not incorporate any of the currently emerging data that are being collected and reviewed by personnel monitoring the trial and, accordingly, this prior data may differ significantly from more recent data that are only available to such personnel. Further, since our management does not have access to any of the ongoing data and does not have the ability to adjust the trials based on such emerging data, the data access plan could adversely impact the ultimate outcome of the trials.
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If we continue to incur operating losses and experience netor are unable to sustain positive cash outflowsflows for a period longer than anticipated, we may be unable to continue our operations at planned levels and be forced to reduce our operations.

Since we began operations in March 1997, we have been engaged in substantial research and development and capital investments, and we have operated at a net loss for each year since our inception, with the exception of 2008 and 2010. Based upon our current plan for investments in research and development for existing and new programs, as well as capital investments in our facilities and working capital needs, such as for inventory, we expect to operate at a net loss and experience net cash outflows for at least the next 12 months. Our future profitability and cash flows depend on our marketing and selling of our products, the receipt of regulatory approval of our product candidates, our ability to successfully manufacture and market any products, either by ourselves or jointly with others, our spending on our development programs, the impact of any possible future business development transactions and other risks set forth in this Risk Factors section. The extent of our future losses and the timing of profitability and positive cash flows are highly uncertain. If we fail to become profitable and cash flow positive or are unable to sustain profitability and positive cash flows on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce our operations.

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If we fail to obtain the capital necessary to fund our operations, our financial results and financial condition will be adversely affected and we will have to delay or terminate some or all of our product development programs.

As of December 31, 2017,2019, we had cash, cash equivalents and investments totaling $1.8$1.2 billion and long-termconvertible debt obligations of $1.2 billion$870.0 million (undiscounted). , which consisted of our 1.50% senior subordinated convertible notes due in 2020 (the 2020 Notes) and our 0.599% senior subordinated convertible notes due in 2024 (the 2024 Notes and, together with the 2020 Notes, the Notes), which, if not converted, will be required to be repaid in cash at maturity in October 2020 and August 2024, respectively. We will need cash not only to pay the ongoing interest due on the Notes during their term, but also to repay the principal amount of the Notes if not converted.
In January 2016, we terminated our License and Commercialization Agreement with Ares Trading, S.A. (Merck Serono)(Merck Serono). Pursuant to the Termination and Transition Agreement related to Kuvan and the Termination Agreement related to pegvaliase,Palynziq, we made cashare obligated to make certain payments on this transaction totaling $374.5 million,to Merck Serono if sales and development milestones are achieved. The remaining milestone payments that may pay Merck Seronobecome payable include up to a maximum of €60 million, in cash, if future sales milestones are met with respect to Kuvan and up to a maximum of €125 million, in cash, if future development milestones are met with respect to pegvaliase. In October 2013, we completed an offering of senior subordinated convertible notes and received net proceeds of approximately $696.4 million, after deducting commissions, estimated offering expenses payable by us and the purchase of the related capped calls. In August 2017, we completed an offering of senior subordinated convertible notes and received net proceeds of approximately $481.7 million, after deducting commissions and estimated offering expenses payable by us, a majority of which we intend to use to repay, repurchase or settle in cash some or all of our 0.75% senior subordinated convertible notes due in 2018 (the 2018 Notes). We will need cash to not only repay the principal amount of the 2018 Notes, our 1.50% senior subordinated convertible notes due in 2020 (the 2020 Notes), and our 0.599% senior subordinated convertible notes due in 2024, (the 2024 Notes, and together with the 2018 Notes and the 2020 Notes, the Notes) but also the ongoing interest due on the Notes during their term.          

Palynziq.

We may require additional financing to fund the repayment of ourthe Notes, future milestone payments and our future operations, including the commercialization of our products and product candidates currently under development, preclinical studies and clinical trials, and potential licenses and acquisitions. We may be unable to raise additional financing due to a variety of factors, including our financial condition, the status of our product programs, and the general condition of the financial markets. If we fail to raise any necessary additional financing we may have to delay or terminate some or all of our product development programs and our financial condition and operating results will be adversely affected.

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:

our ability to successfully market and sell our products;

the time and cost necessary to develop commercial manufacturing processes, including quality systems, and to build or acquire manufacturing capabilities;

capabilities the progress and success of our preclinical studies and clinical trials (including studies and the manufacture of materials);

the timing, number, size and scope of our preclinical studies and clinical trials;

the time and cost necessary to obtain regulatory approvals and the costs of post-marketing studies which may be required by regulatory authorities;

the progress of research programs carried out by us;

our possible achievement of development and commercial milestones under agreements with third parties, such as the Kuvan and Palynziq milestones under the termination agreements with Merck Serono related to Kuvan and pegvaliase milestones;

Serono;

any changes made to, 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;

Sanofi Genzyme’s (Genzyme) ability to continue to successfully commercialize Aldurazyme; and

whether our convertible debt is converted to common stock in the future.

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Moreover, our fixed expenses such as rent, license payments, interest expense and other contractual commitments are substantial and may increase in the future. These fixed expenses may increase because we may enter into:

additional licenses and collaborative agreements;

additional contracts for product manufacturing; and

additional financing facilities or arrangements.

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We will need to raise additional funds from equity or debt securities, loans or collaborative agreements if we are unable to satisfy our liquidity requirements. The sale of additional securities will result in additional dilution to our stockholders. Furthermore, additional financing may not be available in amounts or on terms satisfactory to us or at all. This could result in the delay, reduction or termination of our research, which could harm our business.

We have incurred substantial indebtedness that may decrease our business flexibility, access to capital, and/or increase our borrowing costs, which may adversely affect our operations and financial results.

As of December 31, 2017,2019, we had $1.2 billion$870.0 million (undiscounted) principal amount of indebtedness, including $375.0 million (undiscounted) principal amount of indebtedness under the 2018 Notes, $375.0 million (undiscounted) principal amount of indebtedness under the 2020 Notes and $495.0 million (undiscounted) principal amount of indebtedness under the 2024 Notes. In November 2016,October 2018, we also entered into aan unsecured credit agreement (the 2018 Credit Agreement)Facility) with Bank of America, N.A., as the administrative agent, swing lineswingline lender and a lender, Citibank N.A. as letter of credit issuer and each of Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citibank, N.A. and Wells Fargo Securities, LLC as joint lead arrangers and joint bookrunners, providing for up to $100.0$200.0 million in revolving loans.loan commitments. Our indebtedness may:

limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions or other general business purposes;

limit our ability to use our cash flow or obtain additional financing for future working capital, capital expenditures, acquisitions or other general business purposes;

require us to use a substantial portion of our cash flow from operations to make debt service payments;

limit our flexibility to plan for, or react to, changes in our business and industry;

place us at a competitive disadvantage compared to our less leveraged competitors; and

increase our vulnerability to the impact of adverse economic and industry conditions.

In addition, the 2018 Credit Agreement does,Facility contains, and any future indebtedness that we may incur may contain, financial and other restrictive covenants that limit our ability to operate our business, raise capital or make payments under our other indebtedness. If we fail to comply with these covenants or to make payments under our indebtedness when due, then we would be in default under that indebtedness, which could, in turn, result in that and our other indebtedness becoming immediately payable in full. If we default under the 2018 Credit Agreement,Facility, the outstanding borrowings thereunder could become immediately due and payable, the 2018 Credit AgreementFacility lenders could refuse to permit additional borrowings under the facility, or it could lead to defaults under agreements governing our current or future indebtedness, including the indentures governing ourthe Notes. If we default under any of the Notes, such Notes could become immediately due and payable and it could lead to defaults under the other Notes and/or the 2018 Credit Agreement.

Facility.

In addition, our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time.

Our outstanding indebtedness consists primarily of the 2018 Notes, 2020 Notes and 2024 Notes, which, if not converted, will be required to be repaid in cash at maturity in 2018,October 2020 and August 2024, respectively. In addition, in the event the conditional conversion feature of the 2018 Notes or 2020 Notes is triggered, holders of suchthe 2020 Notes will be entitled to convert the 2018 Notes or 2020 Notes at any time during specified periods at their option. In addition, the 2018 Notes will be freely convertible on or after July 15, 2018option, and the 2020 Notes will be freely convertible on or after July 15, 2020. We intend to use a majority of the net proceeds we received from the issuance of the 2024 Notes to repay, repurchase or settle in cash some or all of the 2018 Notes. We may also elect to settle conversions of the 2020 Notes in cash, in whole or in part, which could further affect our liquidity. While we could seek

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to obtain additional third-party financing to pay for any amounts due in cash upon such events, we cannot be sure that such third-party financing will be available on commercially reasonable terms, if at all.

The 2018 Notes mature in October 2018, and therefore we have reclassified the outstanding principal of such Notes as a current liability.

We could also bewere required under applicable accounting rules to reclassify all or a portion of the outstanding principal of such the 2020 Notes as a current rather than long-term liability (for example, if(because there are 12 months or less remaining until maturity), which would resultresulted in a material reduction of our net working capital. While we could seek to obtain third-party financing to pay for any amounts due in cash upon such events, we cannot be sure that such third-party financing will be available on commercially reasonable terms, if at all. Furthermore, if we are required to share settle any conversions of Notes, due to lack of requisite liquidity or otherwise, we may cease to be eligible to account for the Notes using the treasury stock method, which may adversely impact our diluted earnings per share.
In addition, although we had no outstanding balance under the Credit Agreement as of December 31, 2017, we also may borrow up to $100.0$200.0 million in revolving loans under the 2018 Credit Agreement,Facility, which would be required to be repaid in cash at maturity in November 2018.

on October 19, 2021, except that if at least $100.0 million aggregate principal amount of the 2020 Notes remains outstanding on August 1, 2020 and certain other conditions have not been met, we may be required to repay all amounts borrowed under the 2018 Credit Facility on August 1, 2020.

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If we fail to comply with manufacturing regulations, our financial results and financial condition will be adversely affected.

Before we can begin commercial manufacture of our products, regulatory authorities must approve marketing applications that identify manufacturing facilities operated by us or our contract manufacturers that have passed regulatory inspection and manufacturing processes that are acceptable to the regulatory authorities. In addition, our pharmaceutical manufacturing facilities are continuously subject to scheduled and unannounced inspection by the FDA and international regulatory authorities, before and after product approval, to monitor and ensure compliance with cGMP and other regulations. Our manufacturing facility in the U.S. has been approved by the FDA for the EC,manufacture of Palynziq, and it has been approved by the FDA, the European Commission (EC), and health agencies in other countries for the manufacture of Aldurazyme, Brineura, Naglazyme and Vimizim. Our manufacturing facility in Shanbally, Cork, Ireland has been approved by the FDA, the EC, and health agencies in other countries for the manufacture of Vimizim, and it has been approved by the FDA and the EMA as a formulated bulk drug substance manufacturing and quality control facility for Brineura. In addition, our third-party manufacturers’ facilities involved with the manufacture of our products have also been inspected and approved by various regulatory authorities. Although we are not involved in the day-to-day operations of our contract manufacturers, we are ultimately responsible for ensuring that our products are manufactured in accordance with cGMP regulations.

Due to the complexity of the processes used to manufacture our products and product candidates, we may be unable to continue to pass or initially pass federal or international regulatory inspections in a cost-effective manner. For the same reason, any potential third-party manufacturer of our products or our product candidates may be unable to comply with cGMP regulations in a cost-effective manner and may be unable to initially or continue to pass a federal or international regulatory inspection.

If we, or third-party manufacturers with whom we contract, are unable to comply with manufacturing regulations, we may be subject to delay of approval of our product candidates, warning or untitled letters, fines, unanticipated compliance expenses, recall or seizure of our products, total or partial suspension of production and/or enforcement actions, including injunctions, and criminal or civil prosecution. These possible sanctions would adversely affect our financial results and financial condition.

If we are unable to successfully develop and maintain manufacturing processes for our productsproduct candidates to produce sufficient quantities at acceptable costs, we may be unable to meet demand forsupport a clinical trial or be forced to terminate a program, or if we are unable to produce sufficient quantities of our products andat acceptable costs, we may be unable to meet commercial demand, lose potential revenue, have reduced margins or be forced to terminate a program.

Due to the complexity of manufacturing our product candidates and products, we may not be able to manufacture sufficient quantities. Our inability to produce enough of our product candidate at acceptable costs may result in the delay or termination of development programs. With respect to our commercial portfolio, we may not be able to manufacture our products successfully with a commercially viable process or at a scale large enough to support their respective commercial markets or at acceptable margins.

The development of commercially viable manufacturing processes typically is very difficult to achieve and is often very expensive and may require extended periods of time. Changes in manufacturing processes (including manufacturing cell lines), equipment or facilities (including moving manufacturing from one of our facilities to another one of our facilities or a third-party facility, or from a third-party facility to one of our facilities) may require us to complete clinical trials to receive regulatory approval of any manufacturing modifications.

With respect to valoctocogene roxaparvovec, gene therapy products are relatively novel and complex and have only in limited cases been manufactured at scales sufficient for pivotal trials and commercialization. Few pharmaceutical contract manufacturers specialize in gene therapy products and those that do are still developing appropriate processes and facilities for large-scale production. We invested a considerable amount of capital building our own commercial gene therapy manufacturing facility, which may be subject to significant impairment if our gene therapy programs are unsuccessful. As we develop, seek to optimize and operate the valoctocogene roxaparvovec manufacturing process, we will likely face technical and scientific challenges, considerable capital costs, and potential difficulty in recruiting and hiring experienced, qualified personnel. There may also be unexpected technical or operational issues during clinical or commercial manufacturing campaigns. As a result, we could experience manufacturing delays that prevent us from completing our clinical studies in a timely manner, if at all, or commercializing valoctocogene roxaparvovec on a profitable basis, if at all.
Also, we may be required to demonstrate product comparability between a biological product made after a manufacturing change and the product made before implementation of the change through additional types of

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analytical and functional testing or may have to complete additional clinical studies. If we contract for manufacturing services with an unproven process, our contractor is subject to the same uncertainties, high standards and regulatory controls, and may therefore experience difficulty if further process development is necessary.

Even a developed manufacturing process can encounter difficulties. Problems may arise during manufacturing for a variety of reasons, including human error, mechanical breakdowns, problems with raw materials and cell banks, malfunctions of internal information technology systems, and other events that cannot always be prevented or anticipated. Many of the processes
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include biological systems, which add significant complexity, as compared to chemical synthesis. We expect that, from time to time, consistent with biotechnology industry expectations, certain production lots will fail to produce product that meets our quality control release acceptance criteria. To date, our historical failure rates for all of our product programs, including Aldurazyme, Brineura, Naglazyme, Palynziq and Vimizim, have been within our expectations, which are based on industry norms. If the failure rate increased substantially, we could experience increased costs, lost revenue, damage to customer relations, time and expense investigating the cause and, depending upon the cause, similar losses with respect to other lots or products. If problems are not discovered before the product is released to the market, recall and product liability costs may also be incurred.

In order to produce product within our time and cost parameters, we must continue to produce product within our expected success rate and yield expectations. Because of the complexity of our manufacturing processes, it may be difficult or impossible for us to determine the cause of any particular lot failure and we must effectively take corrective action in response to any failure in a timely manner.

Although we

We have entered into contractual relationships with third-party manufacturers to produce the active ingredientingredients in FirdapseKuvan and Kuvan, ifPalynziq. If those manufacturers are unwilling or unable to fulfill their contractual obligations, we may be unable to meet demand for FirdapseKuvan and KuvanPalynziq, or sell these products at all, we may lose potential revenue, and we may be forced to terminate a program. We have contracts for the production of final product for FirdapseKuvan and Kuvan.Palynziq. We also currently rely on third parties for portions of the manufacture of Aldurazyme, Brineura, Naglazyme, Palynziq and Vimizim. If those manufacturers are unwilling or unable to fulfill their contractual obligations or satisfy demand outside of or in excess of the contractual obligations, we may be unable to meet demand for these products or sell these products at all and we may lose potential revenue. Further, the availability of suitable contract manufacturing capacity at scheduled or optimum times is not certain.

In addition, our manufacturing processes subject us to a variety of federal, state and local laws and regulations governing the use, generation, manufacture, storage, handling and disposal of hazardous materials and wastes resulting from their use. We incur significant costs in complying with these laws and regulations.

Supply interruptions may disrupt our inventory levels and the availability of our products and product candidates and cause delays in obtaining regulatory approval for our product candidates, or harm our business by reducing our revenues.

We depend on single-source suppliers for critical raw materials and a limited number of manufacturing facilities to manufacture our finished products and product candidates. Numerous factors could cause interruptions in the supply or manufacture of our products and product candidates, including:

timing, scheduling and prioritization of production by our contract manufacturers or a breach of our agreements by our contract manufacturers;

labor interruptions;

changes in our sources for manufacturing;

the timing and delivery of shipments;

our failure to locate and obtain replacement suppliers and manufacturers as needed on a timely basis; and

conditions affecting the cost and availability of raw materials.

If one of our suppliers or manufacturers fails or refuses to supply us with necessary raw materials or finished products or product candidates on a timely basis or at all, it would take a significant amount of time and expense to qualify a new supplier or manufacturer. We may not be able to obtain active ingredients or finished products from new suppliers or manufacturers on acceptable terms and at reasonable prices, or at all.

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Any interruption in the supply of finished products could hinder our ability to distribute finished products to meet commercial demand.

demand and adversely affect our financial results and financial condition.

With respect to our product candidates, production of product is necessary to perform clinical trials and successful registration batches are necessary to file for approval to commercially market and sell product candidates. Delays in obtaining clinical material or registration batches could adversely impact our clinical trials and delay regulatory approval for our product candidates.

Because the target patient populations for our products are small, we must achieve significant market share and maintain high per-patient prices for our products to achieve profitability.

All of our products target diseases with small patient populations. As a result, our per-patient prices must be relatively high
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in order to recover our development and manufacturing costs and achieve profitability. For Brineura, Naglazyme and Vimizim in particular, we must market worldwide to achieve significant market penetration of the product. In addition, because the number of potential patients in each disease population is small, it is not only important to find patients who begin therapy to achieve significant market penetration of the product, but we also need to be able to maintain these patients on therapy for an extended period of time. Due to the expected costs of treatment for our products, we may be unable to maintain or obtain sufficient market share at a price high enough to justify our product development efforts and manufacturing expenses.

If we fail to obtain an adequate level of coverage and reimbursement for our products by third-party payers, the sales of our products would be adversely affected or there may be no commercially viable markets for our products.

The course of treatment for patients using our products is expensive. We expect patients to need treatment for extended periods, and for some products throughout the lifetimes of the patients. 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 our products without coverage and reimbursement from third-party payers. Additionally, even if there is a commercially viable market, if the level of reimbursement is below our expectations, our revenue and gross margins will be adversely affected.

Third-party payers, such as government or private healthcare 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. Obtaining coverage and adequate reimbursement for our products may be particularly difficult because of the higher prices often associated with drugs administered under the supervision of a physician. Reimbursement systems in international markets vary significantly by country and by region, and reimbursement approvals must be obtained on a country-by-country basis.

Government authorities and other third-party payers are developing increasingly sophisticated methods of controlling healthcare costs, such as by limiting coverage and the amount of reimbursement for particular medications. Increasingly, third-party payers are requiring that drug companies provide them with predetermined discounts from list prices as a condition of coverage, are using restrictive formularies and preferred drug lists to leverage greater discounts in competitive classes, and are challenging the prices charged for medical products. Further, no uniform policy requirement for coverage and reimbursement for drug products exists among third-party payers in the U.S. Therefore, coverage and reimbursement for drug products can differ significantly from payer to payer. As a result, the coverage determination process is often a time-consuming and costly process that will require us to provide scientific and clinical support for the use of our products to each payer separately, with no assurance that coverage and adequate reimbursement will be applied consistently or obtained in the first instance.

We cannot be sure that coverage and reimbursement will be available for any product that we commercialize or will continue to be available for any product that we have commercialized and, if reimbursement is available, what the level of reimbursement will be. Coverage and reimbursement may impact the demand for, or the price of, any product candidate for which we obtain marketing approval. If coverage and reimbursement are not available or reimbursement is available only to limited levels, we may not successfully commercialize any product candidate for which we obtain marketing approval or continue to market any product that has already been commercialized.

Reimbursement in the EU and many other territories must be negotiated on a country-by-country basis and in many countries the product cannot be commercially launched until reimbursement is approved. The timing to complete the negotiation process in each country is highly uncertain, and in some countries we expect that it will

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exceed 12 months. Even after a price is negotiated, countries frequently request or require reductions to the price and other concessions over time.

For our future products, we will not know what the reimbursement rates will be until we are ready to market the product and we actually negotiate the rates. If we are unable to obtain sufficiently high reimbursement rates for our products, they may not be commercially viable or our future revenues and gross margins may be adversely affected.

A significant portion of our international sales are made based on special access programs, and changes to these programs could adversely affect our product sales and revenue in these countries.

We make a significant portion of our international sales of Naglazyme and Vimizim through special access or “named patient” programs, which do not require full product approval, and we expect a significant portion of our international sales of Brineura will also be through such programs. The specifics of the programs vary from country to country. Generally, special approval must be obtained for each patient. The approval normally requires an application or a lawsuit accompanied by evidence of medical need. Generally, the approvals for each patient must be renewed from time to time.

These programs are not well defined in some countries and are subject to changes in requirements and funding levels. Any change to these programs could adversely affect our ability to sell our products in those countries and delay sales. If the programs are not funded by the respective government, there could be insufficient funds to pay for all patients. Further, governments have in the past undertaken and may in the futurecontinue to undertake unofficial measures to limit purchases of our products, including initially denying coverage for purchasers, delaying orders and denying or taking excessively long to approve customs clearance. Any such actions could materially delay or reduce our revenues from such countries.

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Without the special access programs, we would need to seek full product approval to commercially market and sell our products in certain jurisdictions. This can be an expensive and time-consuming process and may subject our products to additional price controls. Because the number of patients is so small in some countries, it may not be economically feasible to seek and maintain a full product approval, and therefore the sales in such country would be permanently reduced or eliminated. For all of these reasons, if the special access programs that we are currently using are eliminated or restricted, our revenues could be adversely affected.

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 our revenue could 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, which may prevent us from marketing our product entirely) or commercialize their products before we do. With respect to valoctocogene roxaparvovec, if the product candidate is approved, we will face a highly developed and competitive market for hemophilia A treatments. As we commercialize valoctocogene roxaparvovec, if approved, we may face intense competition from large pharmaceutical companies with extensive resources and established relationships in the hemophilia A community. If we do not compete successfully, our revenue would be adversely affected, and 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.

Government price controls or other changes in pricing regulation could restrict the amount that we are able to charge for our current and future products, which would adversely affect our revenue and results of operations.

We expect that coverage and reimbursement may be increasingly restricted both in all the U.S. and internationally.markets in which we sell our products. The escalating cost of healthcare has led to increased pressure on the healthcare industry to reduce costs. In particular, drug pricing by pharmaceutical companies has recently come under increased scrutiny and continues to be subject to intense political and public debate in the U.S. and abroad. Governmental and private third-party payers have proposed healthcare reforms and cost reductions. A number of federal and state proposals to control the cost of healthcare, including the cost of drug treatments, have been made in the U.S. Specifically, there have been several recent U.S. Congressionalcongressional inquiries and proposed bills and enacted legislation designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drugs. Further, Congress and the executive branch have each indicated that they will continue to seek new legislative and/or administrative measures to control drug costs. In some international markets, the government controls the pricing, which can affect the profitability of drugs. Current government regulations and possible future legislation regarding healthcare may affect coverage and reimbursement for medical treatment by third-party payers, which may render our products not commercially viable or may adversely affect our future revenues and gross margins.

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International operations are also generally subject to extensive price and market regulations, and there are many proposals for additional cost-containment measures, including proposals that would directly or indirectly impose additional price controls or mandatory price cuts or reduce the value of our intellectual property portfolio. As part of these cost containment measures, some countries have imposed or threatenedand continue to imposepropose revenue caps limiting the annual volume of sales of our products. To the extent thatSome of these caps are significantly below the actual demand in certain countries, and if the trend regarding revenue caps continues, our future revenues and gross margins may be adversely affected.

We cannot predict the extent to which our business may be affected by these or other potential future legislative or regulatory developments. However, future price controls or other changes in pricing regulation or negative publicity related to our product pricing or the pricing of pharmaceutical drugs generally could restrict the amount that we are able to charge for our current and future products or our sales volume, which would adversely affect our revenue and results of operations.

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Government healthcare reform could increase our costs and adversely affect our revenue and results of operations.

Our industry is highly regulated and changes in law may adversely impact our business, operations or financial results. TheIn the U.S., the Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act of 2010 (the PPACA) is a sweeping measure intended to, among other things, expand healthcare coverage within the U.S., primarily through the imposition of health insurance mandates on employers and individuals and expansion of the Medicaid program. Several provisions of the law have affected us and increased certain of our costs.

Since its enactment, there have been judicial and Congressionalcongressional challenges to certain aspects of the PPACA, as well as recent efforts by the U.S. Presidential administration to repeal or replace certain aspects of the PPACA, and we expect there will be additional challenges and amendments to the PPACA in the future. Since January 2017, the U.S. President has signed two Executive Orders and other directives designed to delay, circumvent, or loosen certain requirements mandated by the PPACA. Concurrently, Congress has considered legislation that would repeal or repeal and replace all or part of the PPACA. While Congress has not passed legislation repealing the PPACA in its entirety, the Tax Cuts and Jobs Actit has enacted laws that modify certain provisions of 2017 includes a provision repealing the “individual mandate,” the tax-based shared responsibility payment imposed by the PPACA on certain individuals who failsuch as removing penalties for not complying with the PPACA’s individual mandate to maintain qualifyingcarry health coverage for all or part of a year, effective January 1, 2019. Additionally, on January 23, 2018, the U.S. President signed a continuing resolution on appropriations for fiscal year 2018 that delayedinsurance, delaying the implementation of certain PPACA-mandatedACA-mandated fees, includingand increasing the so-called “Cadillac” taxpoint-of-sale discount that is owed by pharmaceutical manufacturers who participate in Medicare Part D. Additionally, on certain high cost employer-sponsored insurance plans,December 14, 2018, a Texas U.S. District Court Judge ruled that the annual fee imposed on certain health insurance providers based on market share,PPACA is unconstitutional in its entirety because the individual mandate was repealed by Congress as part of the Tax Cuts & Jobs Act. While the Texas U.S. District Court Judge, as well as the current U.S. Presidential administration and the medical device excise tax on non-exempt medical devices. Congress may considerCenters for Medicare and Medicaid Services (CMS), have stated that the ruling will have no immediate effect pending appeal of the decision, it is unclear how this decision, subsequent appeals, and other legislationefforts to repeal orand replace elements of the PPACA. It is uncertainPPACA will impact the extent to which any such changes may impactPPACA and our business or financial condition.business. In addition, other legislative changes have been adopted since the PPACA was enacted. Some of these changes have resulted in additional reductions in Medicare and other healthcare funding, which could have a material adverse effect on our customers and, accordingly, our financial operations.

We anticipate that the PPACA, as well as other healthcare reform measures that may be adopted in the future in the U.S. or abroad, may result in more rigorous coverage criteria and an additional downward pressure on the reimbursement our customers may receive for our products. Recently there has been heightened governmental scrutiny in countries worldwide over the manner in which manufacturers set prices for their marketed products. For example,
In the U.S., there have been several recent U.S. Congressionalcongressional inquiries and proposed billsand enacted federal and state legislation designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, reduce the cost of drugs under Medicare, and reform government program reimbursement methodologies for drug products. For example, at the federal level, the U.S. Presidential administration’s budget proposal for the fiscal year 2021 includes a $135.0 billion allowance to support legislative proposals seeking to reduce drug prices, increase competition, lower out-of-pocket drug costs for patients, and increase patient access to lower-cost generic and biosimilar drugs. Moreover, the U.S. Presidential administration previously released a “Blueprint” to lower drug prices and reduce out of pocket costs of drugs that contains additional proposals to increase manufacturer competition, increase the negotiating power of certain federal healthcare programs, incentivize manufacturers to lower the list price of their products and reduce the out of pocket costs of drug products paid by consumers. Although a number of these and other measures may require additional authorization to become effective, Congress and the U.S. Presidential administration have each indicated that it will continue to seek new legislative and/or administrative measures to control drug costs. Any reduction in reimbursement from Medicare and other government programs may result in a similar reduction in payments from private payers. In addition, individual states in the United States have also become increasingly active in passingpassed legislation and implementingimplemented regulations designed to control pharmaceutical product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. Legally mandated price controls on payment amounts by third-party payers or other restrictions could harm our business, results of operations, financial condition and prospects. In addition,Moreover, regional healthcare authorities and individual hospitals are increasingly using bidding procedures to determine what pharmaceutical products and which suppliers will be included in their prescription drug and other healthcare programs.
Likewise, in many EU countries, legislators and other policymakers continue to propose and implement healthcare cost-containing measures in response to the increased attention being paid to healthcare costs in the EU. Certain of these changes could impose limitations on the prices we will be able to charge for our products and any approved product candidates or the amounts of reimbursement available for these products from governmental and private third-party payers, may increase the tax obligations on pharmaceutical companies or may facilitate the introduction of generic competition with respect to our products. Further, an increasing number of EU countries and other foreign countries use prices for medicinal products established in other countries as “reference prices” to help determine the price of the product in their own territory. Consequently, a downward trend in prices of medicinal products in some countries could contribute to similar downward trends elsewhere. Moreover, in order to obtain reimbursement for our products in some countries, we may be required to conduct clinical trials that compare the cost-effectiveness of our products to other available therapies.
Legally mandated price controls on payment amounts by governmental and private third-party payers or other restrictions could harm our business, results of operations, financial condition and prospects. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability or commercialize our products.
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For more information regarding government healthcare reform, see Government“Government Regulation - Health ReformReform” in Part I, Item 1 of this Annual Report on Form 10-K.

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10-K for the year ended December 31, 2019.

We face credit risks from government-owned or sponsored customers outside of the U.S. that may adversely affect our results of operations.

Our product sales to government-owned or supported customers in various countries outside of the U.S. are subject to significant payment delays due to government funding and reimbursement practices. This has resulted and may continue to result in an increase in days sales outstanding due to the average length of time that we have accounts receivable outstanding. If significant changes were to occur in the reimbursement practices of these governments or if government funding becomes unavailable, we may not be able to collect on amounts due to us from these customers and our results of operations would be adversely affected.

If we are found in violation of federalhealthcare laws or state healthcareprivacy and data protection laws, we may be required to pay a penaltypenalties, be subjected to scrutiny by regulators or governmental entities, or be suspended from participation in federal or stategovernment healthcare programs, which may adversely affect our business, financial condition and results of operations.

We are subject to various federal and state healthcare laws and regulations in the U.S. and internationally, including anti-kickback laws, false claims laws, data privacy and security laws, and laws related to ensuring compliance. TheIn the U.S., the federal Anti-Kickback Statute makes it illegal for any person or entity, including a pharmaceutical company, to knowingly and willfully offer, solicit, pay or receive any remuneration, directly or indirectly, in exchange for or to induce the referral of business, including the purchase, order or prescription of a particular drug, for which payment may be made under federal healthcare programs, such as Medicare and Medicaid. Under the federal governmentAnti-Kickback Statute and related regulations, certain arrangements or safe harbors, are deemed not to violate the federal Anti-Kickback Statute.Statute if they fit within a statutory exception or regulatory safe harbor. However, the exemptionsexceptions and safe harbors are drawn narrowly, and practices that involve remuneration not intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exemptionexception or safe harbor. Our practices may not in all cases meet all of the criteria for safe harbor protection from Anti-Kickback liability, although we seek to comply with these safe harbors. Many states have adopted laws similar to the federal Anti-Kickback Statute, some of which apply to referral of patients for healthcare services reimbursed by any source, not just governmental payers.

Federal and state false claims laws, including the civil False Claims Act, prohibit any person or entity from knowingly presenting, or causing to be presented, a false claim for payment to the federal government, or knowingly making, or causing to be made, a false statement to have a false claim paid, or knowingly making, using, or causing to be made or used, a false record or statement to avoid, decrease or conceal an obligation to pay money to the federal government. In addition, certain marketing practices, including off-label promotion, may also violate false claims laws. Under the Health Insurance Portability and Accountability Act of 1996 (HIPAA), we also are prohibited from knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private payers, or knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services.

HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act and its implementing regulations, also imposes obligations, including mandatory contractual terms, on certain types of individuals and entities, with respect to safeguarding the privacy, security and transmission of individually identifiable health information. Many state and foreign laws also govern the privacy and security of health information. They often differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.

Substantial new provisions affecting compliance have also been adopted, which may require us to modify our business practices with healthcare practitioners. The PPACA, through the Physician Payments Sunshine Act, requires drug manufacturers to collect and report to CMS information on payments or transfers of value to physicians and teaching hospitals, as well as investment and ownership interests held by physicians and their immediate family members during the preceding calendar year. Failure to submit required information may result in civil monetary penalties.

In addition, there has been a recent trend of increased state regulation of payments made to physicians. Certain states mandate implementation of compliance programs, compliance with the Office of Inspector General Compliance Program Guidance for Pharmaceutical Manufacturers and the Pharmaceutical Research and Manufacturers of America (PhRMA) Code on Interactions with Healthcare Professionals, and/or the tracking and reporting of gifts, compensation and other remuneration to physicians. The shifting compliance environment and the need to implement systems to comply with multiple jurisdictions with different compliance and/or reporting requirements increases the possibility that a pharmaceutical manufacturer may violate one or more of the requirements.

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Due to the breadth of these laws, the narrowness of available statutory and regulatory exceptions and the increased focus by law enforcement agencies in enforcing such laws, our business activities could be subject to challenge under one or more of such laws.

In addition, recent healthcare reform legislation has strengthened these laws.laws in the U.S. For example, the PPACA, among other things, amends the intent requirement of the federal Anti-Kickback Statute and criminal healthcare fraud statutes. A person or entity no longer needs to have actual knowledge of these statutes or specific intent to violate them in order to commit a violation. Moreover, the PPACA provides that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the civil False Claims Act.
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act and its implementing regulations, also imposes obligations, including mandatory contractual terms, on certain types of individuals and entities, with respect to safeguarding the privacy, integrity, availability, security and transmission of individually identifiable health information. Many state and foreign laws also govern the privacy and security of health information. They often differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts. The global data protection landscape is rapidly evolving, and implementation standards and enforcement practices are likely to remain uncertain for the foreseeable future. In the United States, California recently enacted the California Consumer Privacy Act (CCPA), which took effect on January 1, 2020. The CCPA gives California residents expanded rights to access and delete their personal information, opt out of certain personal information sharing, and receive detailed information about how their personal information is used. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. The CCPA has increased our compliance costs and may increase our potential liability. Some observers have noted that the CCPA could mark the beginning of a trend toward more stringent privacy legislation in the U.S., which could increase our potential liability and adversely affect our business.
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The European Regulation 2016/679, known as the General Data Protection Regulation (GDPR), as well as EU Member State implementing legislations, apply to the collection and processing of personal data, including health-related information, by companies located in the EU, or in certain circumstances, by companies located outside of the EU and processing personal information of individuals located in the EU. These laws impose strict obligations on the ability to process personal data, including health-related information, in particular in relation to their collection, use, disclosure and transfer. These include several requirements relating to (i) obtaining, in some situations, the consent of the individuals to whom the personal data relates, (ii) the information provided to the individuals about how their personal information is used, (iii) ensuring the security and confidentiality of the personal data, (iv) the obligation to notify regulatory authorities and affected individuals of personal data breaches, (v) extensive internal privacy governance obligations, and (vi) obligations to honor rights of individuals in relation to their personal data (for example, the right to access, correct and delete their data). The GDPR prohibits the transfer of personal data to countries outside of the European Economic Area (EEA), such as the United States, which are not considered by the European Commission to provide an adequate level of data protection. Switzerland has adopted similar restrictions. Although there are legal mechanisms to allow for the transfer of personal data from the EEA and Switzerland to the United States, they are subject to legal challenges and uncertainty about compliance with EU data protection laws remains.
Potential pecuniary fines for noncompliant companies may be up to the greater of €20 million or 4% of annual global revenue. The GDPR has increased our responsibility and liability in relation to personal data that we process, and we may be required to put in place additional potential mechanisms to ensure compliance with the new EU data protection rules.
Substantial new laws and regulations affecting compliance have also been adopted in the U.S. and certain foreign countries, which may require us to modify our business practices with healthcare practitioners. For example, in the U.S., the PPACA, through the Physician Payments Sunshine Act, requires certain drug, biologicals and medical supply manufacturers to collect and report to CMS information on payments or transfers of value to physicians and teaching hospitals, as well as investment and ownership interests held by physicians and their immediate family members during the preceding calendar year. Effective January 1, 2022, manufacturers will also be required to report on payments or transfers of value to physician assistants, nurse practitioners or clinical nurse specialists, certified registered nurse anesthetists, and certified nurse-midwives. In addition, there has been a recent trend of increased state regulation of payments made to physicians. Certain states and/or local jurisdictions mandate implementation of compliance programs, compliance with the Office of Inspector General Compliance Program Guidance for Pharmaceutical Manufacturers and the Pharmaceutical Research and Manufacturers of America (PhRMA) Code on Interactions with Healthcare Professionals, the registration of pharmaceutical sales representatives and/or the tracking and reporting of gifts, compensation and other remuneration to physicians, marketing expenditures, and drug pricing. Likewise, in many foreign countries there is an increasing focus on the relationship between drug companies and healthcare practitioners. Recently enacted foreign legislation creates reporting obligations on payments, gifts and benefits made to these professionals; however, implementing regulations enacting such laws are still pending and subject to varying interpretations by courts and government agencies. The shifting regulatory environment and the need to implement systems to comply with multiple jurisdictions with different compliance and/or reporting requirements increases the costs of maintaining compliance and the possibility that we may violate one or more of the requirements and be subject to fines or sanctions.
Due to the breadth of the healthcare and privacy and data protection laws described above, the narrowness of available statutory and regulatory exceptions and safe harbors and the increased focus by law enforcement agencies in enforcing such laws, our business activities could be subject to challenge under one or more of such laws. If we are found in violation of one of these laws, we may be subject to significant criminal, civil or administrative sanctions, including damages, fines, disgorgement, imprisonment, contractual damages, reputational harm, diminished profits and future earnings, additional reporting requirements and oversight if we become subject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance with these laws, curtailment of our operations, and debarment, suspension or exclusion from participation in federal or stategovernment healthcare programs, any of which could adversely affect our business, financial condition and results of operations.

We conduct a significant amount of our sales and operations outside of the U.S., which subjects us to additional business risks that could adversely affect our revenue and results of operations.

A significant portion of the sales of Aldurazyme, Brineura, Kuvan, Naglazyme and Vimizim and all of the sales of Firdapse are generated from countries other than the U.S. Similarly, we expect a significant portion of the sales of BrineuraPalynziq to be generated from countries other than the U.S. We have operations in Canada and in several European, Middle Eastern, Asian, and Latin American countries. We expect that we will continue to expand our international operations in the future. International operations inherently subject us to a number of risks and uncertainties, including:

the increased complexity and costs inherent in managing international operations;

diverse regulatory and compliance requirements, and changes in those requirements that could restrict our ability to manufacture, market and sell our products;

political and economic instability;

diminished protection of intellectual property in some countries outside of the U.S.;

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trade protection measures and import or export licensing requirements;

difficulty in staffing and managing international operations;

differing labor regulations and business practices;

potentially negative consequences from changes in or interpretations of tax laws;

changes in international medical reimbursement policies and programs;

financial risks such as longer payment cycles, difficulty collecting accounts receivable, exposure to fluctuations in foreign currency exchange rates and potential currency controls imposed by foreign governments;

regulatory and compliance risks that relate to maintaining accurate information and control over sales and distributors’ and service providers’ activities that may fall within the purview of the Foreign Corrupt Practices Act (the FCPA); and

rapidly evolving global laws and regulations relating to data securityprotection and the unauthorized useprivacy and security of or access to, commercial and personal information.

Any of these factors may, individually or as a group, have a material adverse effect on our business and results of operations.

As we continue to expand our existing international operations, we may encounter new risks. For example, as we focus on building our international sales and distribution networks in new geographic regions, we must continue to develop relationships with qualified local distributors and trading companies. If we are not successful in developing and maintaining these relationships, we may not be able to grow sales in these geographic regions. These or other similar risks could adversely affect our revenue and profitability.

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The U.K.’s withdrawal from the EU may have a negative effect on global economic conditions, financial markets and our business, which could adversely affect our revenue and results of operations.
In June 2016, a majority of the eligible members of the electorate in the United Kingdom (U.K.) voted to withdraw from the EU in a national referendum (Brexit). On March 29, 2017, the U.K.’s Prime Minister formally delivered the notice of withdrawal. After significant negotiation between the U.K. and the EU, the withdrawal of the U.K. from the EU took effect on January 31, 2020. There is now a transition period while the U.K. and EU negotiate additional arrangements, including their future trading terms. The U.K. has stated that it wants the transition period to expire, and the future trading terms to be agreed, by December 31, 2020.
The uncertainties regarding the U.K.’s future relationship with the EU, have had and may continue to have an adverse effect on global economic conditions and the stability of global financial markets. In particular, depending on what terms are agreed between the U.K. and the EU, if any, it could lead to a period of considerable uncertainty in relation to global financial and banking markets, as well as on regulatory processes in Europe and the EEA. Lack of clarity about future U.K. laws and regulations as the U.K. determines which EU rules and regulations to replace or replicate, including financial laws and regulations, tax and free trade agreements, intellectual property rights, supply chain logistics, environmental, health and safety laws and regulations, immigration laws and employment laws, could decrease foreign direct investment in all markets, increase costs, depress economic activity and restrict access to capital.
If the U.K. and the EU are unable to negotiate acceptable future trading terms or if other EU countries pursue withdrawal, barrier-free access between the U.K. and other EU or EEA countries could be diminished or eliminated, which could make our doing business in the EU more difficult. As a result of Brexit, we failmay face disruptions in our supply chain, inventory management, manufacturing process and product distribution network, which could adversely affect our business and results of operations. Moreover, Brexit may also lead to comply with new regulatory costs and challenges that could have a material adverse effect on our operations. The EMA has issued guidance to marketing authorization holders of centrally authorized medicinal products regarding certain requirements that need to be considered as part of Brexit, such as the requirement for the marketing authorization holder of a product centrally approved by the EC to be established in the EU, and the requirement for some activities relating to centrally approved products, such as batch release and pharmacovigilance, be performed in the EU. Furthermore, there are few indications of the effect Brexit will have on the pathway to obtaining marketing approval for any of our product candidates in the U.K.
U.S. export control and economic sanctions may adversely affect our business, financial condition and operating resultsresults. Moreover, compliance with such regulatory requirements may be adversely affected.

We rely on a general licenseincrease our costs and negatively impact our ability to sell our products and collect cash from customers.

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Our products are subject to U.S. export control laws and regulations, including the U.S. Export Administration Regulations and various economic and trade sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC). Exports of our products and solutions must be made in compliance with these laws and regulations. Changes to these laws and regulations, or to the countries, governments, persons or activities targeted by such laws, could result in decreased use of our products, or hinder our ability to export or sell our products to existing or potential customers, which would likely adversely affect our results of operations, financial condition or strategic objectives. If we fail to comply with these laws and regulations, we could be subject to substantial civil or criminal penalties, including the possible loss of export or import privileges and fines.
We rely on a general license from OFAC to sell our medicines for eventual use by hospital and clinic end-users in Iran. The use of this OFAC general license requires us to observe strict conditions with respect to products sold, end-user limitations and payment requirements. Although we believe we have maintained compliance with the general license requirements, there can be no assurance that the general license will not be revoked, be renewed in the future or that we will remain in compliance. Moreover, aA violation of the OFAC general license could result in substantial fines, sanctions, civil or criminal penalties, competitive or reputational harm, litigation or regulatory action and other consequences that might adversely affect our results of operations, financial condition or strategic objectives.

Moreover, U.S. export control and economic sanctions may make operating in certain countries more difficult and expensive. For example, we may be unable to find distributors or financial institutions willing to facilitate the sale of our products and collection of cash from such sales in a cost-effective manner, if at all.
Failure to comply with applicable anti-corruption legislation could result in fines, criminal penalties and materially adversely affect our business, financial condition and results of operations.

We are required to comply with anti-corruption and anti-bribery laws in the jurisdictions in which we operate, including the FCPA in the United States, the UKU.K. Bribery Act and other similar laws in other countries in which we do business. We operate in a number of countries that are recognized to have a reputation for corruption and pose an increased risk of corrupt practices. We also regularly interact with government regulators in many countries, including those that are considered higher risk for corruption, in order to secure regulatory approval to manufacture and distribute our products. The anti-corruption and anti-bribery laws to which we are subject generally prohibit companies and their intermediaries from making improper payments to foreign officials or other persons for the purposes of influencing official decisions or obtaining or retaining business and/or other benefits. These laws also require us to make and keep books and records that accurately and fairly reflect our transactions and to devise and maintain an adequate system of internal accounting controls. As part of our business, we deal with state-owned business enterprises, the employees and representatives of which may be considered foreign officials for purposes of applicable anti-corruption laws.

Although we have adopted policies and procedures designed to ensure that we, our employees and third-party agents will comply with such laws, there can be no assurance that such policies or procedures will work effectively at all times or protect us against liability under these or other laws for actions taken by our employees, partners and other third parties with respect to our business. If we are not in compliance with anti-corruption laws and other laws governing the conduct of business with government entities and/or officials (including local laws), we may be subject to criminal and civil penalties and other remedial measures, which could harm our business, financial condition, results of operations, cash flows and prospects. Investigations of any actual or alleged violations of such laws or policies related to us could harm our business, financial condition, results of operations, cash flows and prospects.

Moreover, there has been enhanced scrutiny of company-sponsored patient assistance programs, including insurance premium and co-pay assistance programs and donations to third-party charities that provide such assistance. There has also been enhanced scrutiny by governments on reimbursement support offerings, clinical education programs and promotional speaker programs. If we, our third-party agents or donation recipients are deemed to have failed to comply with laws, regulations or government guidance in any of these areas, we could be subject to criminal or civil sanctions. Any similar violations by our competitors could also negatively impact our industry reputation and increase scrutiny over our business and our products
Changes in funding for the FDA, the EMA and other government agencies or government shutdowns could hinder the ability of such agencies to hire and retain key leadership and other personnel or otherwise prevent those agencies from performing normal functions on which the operation of our business may rely, which could negatively impact our business.
Changes in funding levels of government agencies can affect their ability to hire and retain key personnel and carry out their normal functions that support our business. For example, the ability of the FDA to timely review and approve INDs or marketing authorizations for our product candidates may be hindered by a lack of resources and qualified personnel. In addition, funding of other government agencies on which our operations rely, including those that fund research and development activities, is subject to the political budget process, which is inherently fluid and unpredictable.
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Government shutdowns could also impact the ability of government agencies to function normally and support our operations. For example, the U.S. federal government has shut down repeatedly since 1980, including for a period of 35 days beginning on December 22, 2018. During a shutdown, certain regulatory agencies, such as the FDA, have had to furlough key personnel and stop critical activities. If a prolonged government shutdown occurs, it could significantly impact the ability of the FDA to timely review and process our regulatory submissions, which could have a material adverse effect on our business.
Our international operations pose currency risks, which may adversely affect our operating results and net income.

A significant and growing portion of our revenues and earnings, as well as our substantial international net assets, are exposed to changes in foreign exchange rates. As we operate in multiple foreign currencies, including the euro,Euro, the Brazilian real,Real, the U.K. pound,Great British Pound, the Canadian dollar, the Swiss franc, the Japanese yenDollar and several other currencies, changes in those currencies relative to the U.S. dollarDollar (USD) will impact our revenues and expenses. If the U.S. dollarUSD were to weaken against another currency, assuming all other variables remained constant, our revenues would increase, having a positive impact on earnings, and our overall expenses would increase, having a negative impact on earnings. Conversely, if the U.S. dollarUSD were to strengthen against another currency, assuming all other variables remained constant, our revenues would decrease, having a negative impact on earnings, and our overall expenses would decrease, having a positive impact on earnings. In addition, because our financial statements are reported in U.S. dollars,USD, changes in currency exchange rates between the U.S. dollarUSD and other currencies have had, and will continue to have, an impact on our results of operations. Therefore, significant changes in foreign exchange rates can impact our results and our financial guidance.

We implement currency hedges intended to reduce our exposure to changes in certain foreign currency exchange rates. However, our hedging strategies may not be successful, and any of our unhedged foreign exchange exposures will continue to be subject to market fluctuations. These risks could cause a material adverse effect on our business, financial position and results of operations and could cause the market value of our common stock to decline.

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If we are unable to protect our intellectual property, we may not be able to compete effectively.

Where appropriate, we seek patent protection for certain aspects of our technology. Patent protection may not be available for some of the products we are developing. If we must spend significant time and money protecting or enforcing our patents, designing around patents held by others or licensing, potentially for large fees, patents or other proprietary rights held by others, our business and financial prospects may be harmed.

The patent positions of biopharmaceutical products are complex and uncertain. The scope and extent of patent protection for some of our products and product candidates are particularly uncertain because key information on some of our product candidates has existed in the public domain for many years. The composition and genetic sequences of animal and/or human versions of Aldurazyme, Naglazyme and many of our product candidates have been published and are believed to be in the public domain. The chemical structure of 6R-BH4 (the active ingredient in Kuvan) and 3,4-DAP (the active ingredient in Firdapse) havehas also been published. Publication of this information may prevent us from obtaining or enforcing patents relating to our products and product candidates, including without limitation composition-of-matter patents, which are generally believed to offer the strongest patent protection.

We own or have licensed patents and patent applications related to our products. However, these patents and patent applications do not ensure the protection of our intellectual property for a number of reasons, including without limitation the following:

With respect to pending patent applications, unless and until actually issued, the protective value of these applications is impossible to determine. We do not know whether our patent applications will result in issued patents.

Patents have limited duration and expire. For example, certain of our patents related to Aldurazyme expired in November 2019 and the other patents related to Aldurazyme expire in 2020.

Competitors may interfere with our patent process in a variety of ways. Competitors may claim that they invented the claimed invention prior to us or that they filed their application for a patent on a claimed invention before we did. Competitors may also claim that we are infringing on their patents and therefore we cannot practice our technology. Competitors may also contest our patents by showing the patent examiner or a court that the invention was not original, was not novel or was obvious, for example. In litigation, a competitor could claim that our issued patents are not valid or are unenforceable for a number of reasons. If a court agrees, we would not be able to enforce that patent. We have limited experience with competitors interfering with or challenging the validity or enforceability of our patents or patent applications.

Generic manufacturers may use litigation and regulatory means to obtain approval for generic versions of our products notwithstanding our filed 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 operating expenses and delay product programs.

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Receipt of a patent may not provide much, if any, practical protection. For example, 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.

The Leahy-Smith America Invents Act of 2011, which reformed certain patent laws in the U.S., may create additional uncertainty. Among the significant changes are switching from a first-to-invent“first-to-invent” system to a first-to-file“first-to-file” system, and the implementation of new procedures that permit competitors to challenge our patents in the U.S. Patent and Trademark Office after grant.

It is also unclear whether our trade secrets are adequately protected. Our current and former employees, consultants or contractors may unintentionally or willfully disclose trade secrets to competitors. Enforcing a claim that someone else illegally obtained and is using our trade secrets, as with patent litigation, is expensive and time consuming, requires significant resources and has an unpredictable outcome. In addition, courts outside of the U.S. are sometimes less willing to protect trade secrets. Furthermore, our competitors may independently develop equivalent knowledge, methods and know-how, in which case we would not be able to enforce our trade secret rights against such competitors.

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Under policies recently adopted in the EU, clinical trial data submitted to the EMA in MAAs that were traditionally regarded as confidential commercial information are now subject to public disclosure. Subject to BioMarin’sour ability to review and redact a narrow sub-set of confidential commercial information, the new EU policies will result in the EMA’s public disclosure of certain of our clinical study reports, clinical trial data summaries and clinical overviews for recently completed and future MAA submissions. The move toward public disclosure of development data could adversely affect our business in many ways, including, for example, resulting in the disclosure of our confidential methodologies for development of our products, preventing us from obtaining intellectual property right protection for innovations, requiring us to allocate significant resources to prevent other companies from violating our intellectual property rights, adding even more complexity to processing health data from clinical trials consistent with applicable data privacy regulations, and enabling competitors to use our data to gain approvals for their own products.

If we are unable to protect our intellectual property, third parties could develop competing products, which could adversely affect our revenue and financial results generally.

Competitors and other third parties may have developed intellectual property that could limit our ability to market and commercialize our products and product candidates, if approved.

Similar to us, competitors continually seek intellectual property protection for their technology. Several of our development programs, such as valoctocogene roxaparvovec,, focus on therapeutic areas that have been the subject of extensive research and development by third parties for many years. Due to the amount of intellectual property in our field of technology, we cannot be certain that we do not infringe intellectual property rights of competitors or that we will not infringe intellectual property rights of competitors granted or created in the future. For example, if a patent holder believes our product infringes its patent, the patent holder may sue us even if we have received patent protection for our technology. If someone else claims we infringe its intellectual property, we would face a number of issues, including the following:

Defending a lawsuit takes significant executive resources and can be very expensive.

If a court decides that our product infringes a competitorscompetitor’s intellectual property, we may have to pay substantial damages.

With respect to patents, in addition to requiring us to pay substantial damages, a court may prohibit us from making, selling, offering to sell, importing or using our 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, it may not be available on commercially reasonable terms. For example, we may have to pay substantial royalties or grant cross licenses to our patents and patent applications.

We may need to redesign our product so it does not infringe the intellectual property rights of others.

Redesigning our product so it does not infringe the intellectual property rights of competitors may not be possible or could require substantial funds and time.

We may also support and collaborate in research conducted by government organizations, hospitals, universities or other educational institutions. These research partners may be unwilling to grant us 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 our product development efforts while we attempt to design around other patents or may be prohibited from making, using, importing, offering to sell or selling products requiring these licenses or rights. There is also a risk that disputes may arise as to the rights to technology or products developed in collaboration with other parties. If we are not able to resolve such disputes and obtain the licenses or rights we need, we may not be able to develop or market our products.

If our Manufacturing, Marketing and Sales Agreement with Genzyme were terminated, we could be prevented
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from continuing to commercialize Aldurazyme or our ability to successfully commercialize Aldurazyme would be delayed or diminished.

Either party may terminate the Manufacturing, Marketing and Sales Agreement (the MMS Agreement) between Genzyme and us related to Aldurazyme for specified reasons, including if the other party is in material breach of the MMS Agreement, has experienced a change of control, as such term is defined in the MMS Agreement, or has declared bankruptcy and also is in breach of the MMS Agreement. Although we are not currently in breach of the MMS Agreement, there is a risk that either party could breach the MMS Agreement in

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the future. Either party may also terminate the MMS Agreement upon one yearone-year prior written notice for any reason.

If the MMS Agreement is terminated for breach, the breaching party will transfer its interest in the BioMarin/Genzyme LLC to the non-breaching party, and the non-breaching party will pay a specified buyout amount for the breaching party’s interest in Aldurazyme and in the BioMarin/Genzyme LLC. If we are the breaching party, we would lose our rights to Aldurazyme and the related intellectual property and regulatory approvals. If the MMS Agreement 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 Aldurazyme and in the BioMarin/Genzyme LLC at a specified buyout amount. If such option is not exercised, all rights to Aldurazyme will be sold and the BioMarin/Genzyme LLC will be dissolved. In the event of termination of the buyout 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 between Genzyme and us in accordance with our percentage interest in the BioMarin/Genzyme LLC.

If the MMS Agreement is terminated by either party because the other party declared bankruptcy, the terminating party would be obligated to buy out the other party and would obtain all rights to Aldurazyme exclusively. If the MMS Agreement 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 Aldurazyme and the BioMarin/Genzyme LLC 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 Aldurazyme and the BioMarin/Genzyme LLC on those same terms. The party who buys out the other party would then have exclusive worldwide rights to Aldurazyme. The Amended and Restated Collaboration Agreement between us and Genzyme will automatically terminate upon the effective date of the termination of the MMS Agreement and may not be terminated independently from the MMS Agreement.

If we were obligated or given the option to buy out Genzyme’s interest in Aldurazyme and the BioMarin/Genzyme LLC, and thereby 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 Aldurazyme. If this happened, not only would our product revenues decrease, but our share price would also decline.

If we fail to develop new products and product candidates or compete successfully with respect to acquisitions, joint ventures, licenses or other collaboration opportunities, our ability to continue to expand our product pipeline and our growth and development would be impaired.

Our future growth and development dependsdepend in part on our ability to successfully develop new products from our research and development activities. The development of biopharmaceutical products is very expensive and time intensive and involves a great degree of risk. The outcomes of research and development programs, especially for innovative biopharmaceuticals, are inherently uncertain and may not result in the commercialization of any products.

Our competitors compete with us to attract organizations for acquisitions, joint ventures, licensing arrangements or other collaborations. To date, several of our former and current product programs have been acquired through acquisitions and several of our former and current product programs have been developed through licensing or collaborative arrangements, such as Aldurazyme, Firdapse, Kuvan and Naglazyme. These collaborations include licensing proprietary technology from, and other relationships with, academic research institutions. Our future success will depend, in part, on our ability to identify additional opportunities and to successfully enter into partnering or acquisition agreements for those opportunities. 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. Because 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 genetic diseases. 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.

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Universities and public and private research institutions also compete with us. 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 product candidates. We will attempt to license this proprietary technology, if available. These licenses may not be available to us on acceptable terms, if at all. If we are unable to compete successfully with respect to acquisitions, joint venture and other collaboration opportunities, we may be limited in our ability to develop new products and to continue to expand our product pipeline.

If generic manufacturers are successful in their use

The sale of litigation or regulatory means to obtain approval for generic versions of Kuvan by generic manufacturers may adversely affect our revenue and results of operations would be adversely affected.

operations.

The Drug Price Competition and Patent Term Restoration Act of 1984, known as the Hatch-Waxman Act, permits the FDA to approve ANDAsabbreviated new drug applications (ANDAs) for generic versions of branded drugs. We refer to this process as the ANDA process. The ANDA process permits competitor companies to obtain marketing approval for a drug with the same active ingredient as a branded drug, but does not generally require the conduct and submission of clinical efficacy studies for the generic product. In place of such clinical studies, an ANDA applicant usually needs only to submit data demonstrating that its product is bioequivalent to the branded product.

Pursuant to the Hatch-Waxman Act, companies were permitted to file ANDA applications for proposed generic versions of Kuvan at any time after December 2011. We own several patents that cover Kuvan, and we have listed those patents in conjunction with that product in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations (the Orange Book). The Hatch-Waxman Act requires an ANDA applicant seeking FDA approval of its proposed generic product prior to the expiration of our Orange Book-listed patents to certify that the applicant believes that our patents are invalid or will not be infringed by the manufacture, use or sale of the drug for which the application has been submitted (a paragraph IV certification) and notify us of such certification (a paragraph IV notice). Upon receipt of a paragraph IV notice, the Hatch-Waxman Act allows us, with proper basis, to bring an action for patent infringement against the ANDA filer, asking that the proposed generic product not be approved until after our patents expire. If we commence a lawsuit within 45 days from receipt of the paragraph IV notice, the Hatch-Waxman Act provides a 30-month stay, during which time the FDA cannot finally approve the generic’s application. If the litigation is resolved in favor of the ANDA applicant during the 30-month stay period, the stay is lifted and the FDA may approve the ANDA if it is otherwise ready for approval. The discovery, trial and appeals process in such a lawsuit is costly, time consuming, and may result in generic competition if the ANDA applicant prevails.

We

Between 2014 and 2016 we received a paragraph IV notice letter, dated December 23, 2016,letters from Dr. Reddy’s Laboratories, Inc. and Dr. Reddy’s Laboratories, Ltd. (collectively, DRL),two pharmaceutical companies notifying us that DRLeach had filed an abbreviated new drug application (ANDA)ANDAs seeking approval of a proposed generic versionversions of Kuvan (sapropterin dihydrochloride) 100 mg oral powder prior to the expiration of our patents listed in the FDA's Approved Drug Products with Therapeutic Equivalence Evaluations (the Orange Book).Kuvan. We filed a lawsuitlawsuits alleging patent infringement against DRL. In Augusteach company, and between 2015 and 2017 we entered into a settlement agreementagreements with DRL (the DRL Powder Settlement Agreement)the companies that resolved the patent litigation with DRL in the U.S. related to Kuvan 100 mg oral powder. UnderThe settlement agreements granted the terms of the DRL Powder Settlement Agreement, we granted DRL acompanies non-exclusive licenselicenses to our Kuvan-related patents to allow DRLthem to market a generic versionversions of sapropterin dihydrochloride in oral powder form in 100 mg and 500 mg packet formulations in the U.S. for the indications approved for Kuvan beginning on October 1, 2020, or earlier under certain circumstances.

We also received two separate paragraph IV notice letters, dated January 14, 2016 and January 22, 2015, from Par notifying us that Par had filed an ANDA seeking approval of proposedexpect generic versions of Kuvan 100 mg oral powder and Kuvan 100 mg oral tablets, respectively, prior to the expiration of our patents listed in the FDA’s Orange Book. We filed two lawsuits alleging patent infringement against Par (the lawsuit against Par pertaining to the proposed generic version of Kuvan 100 mg oral tablets was filed together with Merck & Cie), and the two Par cases were consolidated. In April 2017, we and Merck & Cie entered into a settlement agreement with Par (the Par Settlement Agreement) that resolved both cases against Par. Under the Par Settlement Agreement, we granted Par a non-exclusive license to our Kuvan-related patents to allow Par to market a generic version of sapropterin dihydrochloride in 100 mg oral tablets and oral powder in 100 mg and 500 mg packet formulationsfirst become available in the U.S. for the indications approved for Kuvan beginning on: April 1, 2021 if Par is not entitled to the statutory 180-day first filer exclusivity period; October 1, 2020 if Par is entitled to the statutory 180-day first filer exclusivity period; or earlier under certain circumstances.

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We also received a paragraph IV notice letter, dated October 3, 2014, from DRL notifying us that DRL had filed an ANDA seeking approval of a proposed generic version of Kuvan 100 mg oral tablets prior to the expiration of our patents listed in the FDA’s Orange Book. We, together with Merck & Cie, filed a lawsuit alleging patent infringement against DRL. In September 2015, we and Merck & Cie entered into a settlement agreement with DRL (the DRL Tablet Settlement Agreement) that resolved the patent litigation with DRL in the U.S. related to Kuvan 100 mg oral tablets. Under the termsfourth quarter of the DRL Tablet Settlement Agreement, we granted DRL a non-exclusive license to our Kuvan-related patents to allow DRL to market a generic version of sapropterin dihydrochloride 100 mg oral tablets in the U.S. for the indications approved for Kuvan beginning on October 1, 2020, or earlier under certain circumstances.  

For more information regarding these matters, see “Legal Proceedings” in Part I, Item 3 of this Annual Report on Form 10-K.

The DRL Powder Settlement Agreement, the Par Settlement Agreement, and the DRL Tablet Settlement Agreement, as well as any2020.

Any future ANDA or related legal proceeding could have an adverse impact on our stock price, and litigation to enforce our patents has, and is likely to continue to, cost a substantial amount and require significant management attention. If the patents covering Kuvan and its use are not upheld in litigation, or if DRLany ANDA filer we bring suit against is found to not infringe our asserted patents, the resulting generic competition following the expiration of regulatory exclusivity would have a material adverse effect on our revenue and results of operations. Moreover, generic competition from DRL and Par following the settlements described above could have a material adverse effect on our revenue and results of operations.

We also face potential generic competition for Kuvan in certain foreign countries, and ourthere is a process equivalent to the ANDA process under Article 10 of Directive 2001/83/EC in the EU. Our ability to successfully market and sell Kuvan in many countries in which we operate is based upon patent rights or certain regulatory forms of exclusivity, or both. The scope of our patent rights and regulatory exclusivity for Kuvan vary from country to country and are dependent on the availability of meaningful legal remedies in each country. If our patent rights and regulatory exclusivity for Kuvan are successfully challenged, expire, or otherwise terminate in a particular country, the resulting generic competition could have a material adverse effect on our revenue and results of operations.

If we do not achieve our projected development goals in the timeframes we announce and expect, the commercialization of our product candidates may be delayed and the credibility of our management may be adversely affected and, as a result, our stock price may decline.

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For planning purposes, we estimate the timing of the accomplishment of various scientific, clinical, regulatory and other product development goals, which we sometimes refer to as milestones. These milestones may include the commencement or completion of scientific studies and clinical trials and the submission of regulatory filings. From time to time, we publicly announce the expected timing of some of these milestones. All of these milestones are based on a variety of assumptions. The actual timing of these milestones can vary dramatically compared to our estimates, in many cases for reasons beyond our control. If we do not meet these milestones as publicly announced, the commercialization of our products may be delayed and the credibility of our management may be adversely affected and, as a result, our stock price may decline.

We depend upon our key personnel and our ability to attract and retain employees.

Our future growth and success will depend in large part on our continued ability to attract, retain, manage and motivate our employees. The loss of the services of any member of our senior management or the inability to hire or retain experienced management personnel could adversely affect our ability to execute our business plan and harm our operating results.

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 one or more of our senior executive officers could be detrimental to us if we do not have an adequate succession plan or if we cannot recruit suitable replacements in a timely manner. While our senior executive officers are parties to employment agreements with us, these agreements do not guarantee that they will remain employed with us in the future. In addition, in many cases, these agreements do not restrict our senior executive officers’ ability to compete with us after their employment is terminated. The competition for qualified personnel in the pharmaceutical field is intense, and there is a limited pool of qualified potential employees to recruit. Due to this intense competition, we may be unable to continue to attract and retain qualified personnel necessary for the development of our business or to recruit suitable replacement personnel. If we are unsuccessful in our recruitment and retention efforts, our business may be harmed.

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Our success depends on our ability to manage our growth.

Product candidates that we are currently developing or may license or acquire in the future may be intended for patient populations that are significantly larger than any of the patient populations we currently target. In order to continue development and marketing of these products, if approved, we will need to significantly expand our operations. 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, financial and administrative systems and standard processes for global operations. Our staff, financial resources, systems, procedures or controls may be inadequate to support our operations and may increase our exposure to regulatory and corruption risks and our management may be unable to manage successfully future market opportunities or our relationships with customers and other third parties.

Changes in methods of treatment of disease could reduce demand for our products and adversely affect revenues.

Even if our product candidates are approved, if doctors elect a course of treatment which does not include our products, this decision would reduce demand for our products and adversely affect revenues. For example, if gene therapy becomes widely used as a treatment of genetic diseases, the use of enzyme replacement therapy, such as Aldurazyme, Naglazyme, and Vimizim in MPS diseases, could be greatly reduced. Moreover, if we obtain regulatory approval for valoctocogene roxaparvovec,, the commercial success of valoctocogene roxaparvovec will still depend, in part, on the acceptance of physicians, patients and healthcare payers of gene therapy products in general, and our product candidate in particular, as medically necessary, cost-effectivecost effective and safe. Changes 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.

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. We currently maintain insurance against product liability lawsuits for the commercial sale of our products and for the clinical trials of our product candidates. Pharmaceutical companies must balance the cost of insurance with the level of coverage based on estimates of potential liability. Historically, the potential liability associated with product liability lawsuits for pharmaceutical products has been unpredictable. Although we believe that our current insurance is a reasonable estimate of our potential liability and represents a commercially reasonable balancing of the level of coverage as compared to the cost of the insurance, we may be subject to claims in connection with our clinical trials and commercial use of our products and product candidates for which our insurance coverage may not be adequate and we may be unable to avoid significant liability if any product liability lawsuit is brought against us. If we are the subject of a successful product liability claim that exceeds the limits of any insurance coverage we obtain, we may incur substantial charges that would adversely affect our earnings and require the commitment of capital resources that might otherwise be available for the development and commercialization of our product programs.

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We rely significantly on information technology systems and any failure, inadequacy, interruption or security lapse of that technology, including any cybersecurity incidents, could harm our ability to operate our business effectively.

effectively and have a material adverse effect on our business, reputation, financial condition, and results of operations.

We rely significantly on our information technology and manufacturing infrastructuresystems to effectively manage and maintain our operations, inventory and internal reports, to manufacture and ship products to customers and to timely invoice them. Any failure, inadequacy or interruption of that infrastructure or security lapse of that technology, including cybersecurity incidents or attacks, could harm our ability to operate our business effectively. Our ability to manage and maintain our operations, inventory and internal reports, to manufacture and ship our products to customers and timely invoice them depends significantly on our enterprise resource planning, production management and other information systems. Cybersecurity attacks in particular are evolving and include, but are not limited to, malicious software, attempts to gain unauthorized access to data and other electronic security breaches that could lead to disruptions in systems, misappropriation of our confidential or otherwise protected information and corruption of data. Cybersecurity incidents resulting in the failure of our enterprise resource planning system, production management or other systems to operate effectively or to integrate with other systems, or a breach in security or other unauthorized access of these systems, may affect our ability to manage and maintain our operations, inventory and internal reports, and result in delays in product fulfillment and reduced efficiency of our operations. A breach
As part of our business, we collect, store and transmit large amounts of confidential information, proprietary data, intellectual property and personal data. The information and data processed and stored in security,our technology systems, and those of our research collaborators, CROs, contract manufacturers, suppliers, distributors, or other third parties for which we depend to operate our business, may be vulnerable to loss, damage, denial-of-service, unauthorized access resulting in misappropriation, theft, or sabotage with respectmisappropriation. Such cybersecurity breaches may be the result of unauthorized activity by our employees or contractors or malware, hacking, business email compromise, phishing or other cyberattacks directed by third parties. While we have implemented measures to protect our information and data, our efforts may not be successful.
We have experienced and may continue to experience cybersecurity incidents. Although to our knowledge we have not experienced any material incident or interruption to date, if such an event were to occur it could result in a material disruption of our development programs and commercial operations, including due to a loss, corruption or unauthorized disclosure of our trade secrets, personal data or other proprietary or sensitive information. Moreover, the costs to us to investigate and confidential information, including research ormitigate cybersecurity incidents could be significant. For example, the loss of clinical trial data could result in delays in our product development or regulatory approval efforts and significantly increase our costs to recover or reproduce the data. Any security breach that results in the unauthorized access, use or disclosure of personal data may require significant capital investmentsus to remediatenotify individuals, governmental authorities, credit reporting agencies, or other parties pursuant to privacy and security laws and regulations or other obligations. Such a security compromise could harm our reputation, erode confidence in our information security measures, and lead to regulatory scrutiny. To the extent that any disruption or security breach resulted in a loss of, or damage to, our data or systems, or inappropriate disclosure of confidential, proprietary or personal information, we could be exposed to a risk of loss, enforcement measures, penalties, fines, indemnification claims, litigation and potential civil or criminal liability, which could materially adversely affect our business, financial condition and results of operations.

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If a natural disaster, or terrorist or criminal activity or other unforeseen event caused significant damage to our facilities or the facilitiesthose of our third-party manufacturers and suppliers or significantly disrupted our operations or those of our third-party manufacturers and suppliers, we may be unable to meet demand for our products and lose potential revenue, have reduced margins, or be forced to terminate a program.

We manufacture Aldurazyme, Brineura, Naglazyme and a portion of Vimizim in a manufacturing facility located near known earthquake fault zones, and the

The occurrence of an earthquake or other catastrophic disaster could cause damage to our facility and equipment, or that of our third-party manufacturers or single-source suppliers, which could materially impair ourthe ability to manufacture Aldurazyme, Brineura, Naglazyme and Vimizimfor us or our third-party manufacturers’ abilitymanufacturers to manufacture Firdapse or Kuvan.

our products and product candidates. Our Galli Drive facility, located in Novato, California, is currently our only manufacturing facility for Aldurazyme, Naglazyme and NaglazymePalynziq and is one of two manufacturing facilities for Brineura and Vimizim. ItOur gene therapy manufacturing facility is also located in Novato, California, and it is currently our only manufacturing facility to support valoctocogene roxaparvovec clinical development activities and the anticipated commercial demand for valoctocogene roxaparvovec, if approved. These facilities are located in the San Francisco Bay Area near known earthquake fault zones and isare vulnerable to significant damage from earthquakes. We, the third-party manufacturers with whom we contract and our single-source suppliers of raw materials, which include many of our critical raw materials, are also vulnerable to damage from other types of disasters, including fires, explosions, floods, power loss and similar events. If any disaster were to occur, or any terrorist or criminal activity caused significant damage to our facilities or the facilities of our third-party manufacturers and suppliers, our ability to manufacture Aldurazyme, Brineura, Naglazyme and Vimizim,our products, or to have Firdapse or Kuvanour products manufactured, could be seriously, or potentially completely, impaired, and our commercialization efforts and revenue could be seriously impaired.

Moreover, other unforeseen events, such as power outages, could significantly disrupt our operations or those of our third-party manufacturers and suppliers, which could result in significant delays in the manufacture of our products and adversely impact our commercial operations and revenues. Pacific Gas and Electric Company, the electric utility in the San Francisco Bay Area where many of our facilities are located, commenced widespread blackouts during the fall of 2019 to avoid and contain wildfires sparked during strong wind events by downed power lines or equipment failures. While we have not experienced damage to our facilities or material disruption to our operations as a result of these power outages, ongoing blackouts, particularly if prolonged or frequent, could impact our business going forward. The insurance that we carry, the inventory that we maintain and our risk mitigation plans may not be adequate to cover our losses resulting from disasters or other business interruptions.

The impact

46

Changes in tax reform bill onlaws or regulations that are applied adversely to us is uncertain and couldor our customers may have a material adverse effect on our business and financial condition.

On

Legislation enacted on December 22, 2017, the U.S. President signed into lawknown as the Tax Cuts & Jobs Act new legislation thator TCJA, significantly revises the Internal Revenue Code of 1986, as amended. The newly enacted federal income tax law,TCJA, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, creation of a base erosion and anti-abuse tax and modification or repeal of many business deductions and credits (including reduction of tax credits under the Orphan Drug Act). Many aspects of the new federal tax lawTCJA are unclear and may not be clarified for some time. We have estimatedFuture guidance from the impactInternal Revenue Service and other tax authorities with respect to the TCJA may affect us, and certain aspects of the Tax Cuts & Jobs Act by incorporating assumptions made based upon our current interpretation and analysis to date of the law. The actual impact of the Tax Cuts & Jobs Act may differ from our estimates due to, among other things, further refinement of our calculations, changesTCJA could be repealed or modified in interpretations and assumptions we have made, guidance that may be issued and actions we may take as a result of the newfuture legislation. Notwithstanding the reduction in the corporate income tax rate, it is possible that the Tax Cuts & Jobs Act,TCJA, or regulations or interpretations under it, or any other future changes in tax laws, could adversely affect our business and financial condition, and such effect could be material.
Moreover, changes in the tax laws of foreign jurisdictions could arise as a result of the base erosion and profit shifting (BEPS) project that was undertaken by the Organization for Economic Co-operation and Development (OECD). The OECD, which represents a coalition of member countries, recommended changes to numerous long-standing tax principles related to transfer pricing. These changes, as adopted by countries, may increase tax uncertainty and may adversely affect our provision for income taxes, results of operations and cash flows. It is not uncommon for taxing authorities in different countries to have conflicting views, for instance, with respect to, among other things, the manner in which the arm's length standard is applied for transfer pricing purposes, or with respect to the valuation of intellectual property. If tax authorities successfully challenge our transfer prices as not reflecting arm's length transactions, they could require us to adjust our transfer prices and thereby reallocate our income to reflect these revised transfer prices, resulting in a higher tax liability. In addition, if a country from which income is reallocated does not agree with the reallocation, both that country and the other country to which the income was allocated could tax the same income, potentially resulting in double taxation. If tax authorities were to allocate income to a higher tax jurisdiction, subject our income to double taxation or assess interest and penalties, it is uncertain ifwould increase our consolidated tax liability, which could adversely affect our business, financial condition, results of operations and to what extent various U.S. states will conform to the newly enacted federal tax law.  

cash flows.

Our business is affected by macroeconomic conditions.

Various macroeconomic factors could adversely affect our business and the results of our operations and financial condition, including changes in inflation, interest rates and foreign currency exchange rates and overall economic conditions and uncertainties, including those resulting from the current and future conditions in the global financial markets. For instance, if inflation or other factors were to significantly increase our business costs, it may not be feasible to pass price increases on to our customers due to the process by which healthcare providers are reimbursed for our products by the government. Interest rates, the liquidity of the credit markets and the volatility of the capital markets could also affect the value of our investments and our ability to liquidate our investments in order to fund our operations. We purchase or enter into a variety of financial instruments and transactions, including investments in commercial paper, the extension of credit to corporations, institutions and governments and hedging contracts. If any of the issuers or counter parties to these instruments were to default on their obligations, it could materially reduce the value of the transaction and adversely affect our cash flows.

48


We sell our products in countries that face economic volatility and weakness. Although we have historically collected receivables from customers in those countries, sustained weakness or further deterioration of the local economies and currencies may cause customers in those countries to be unable to pay for our products. Additionally, if one or more of these countries were unable to purchase our products, our revenue would be adversely affected.

Interest rates and the ability to access credit markets could also adversely affect the ability of our customers/distributors to purchase, pay for and effectively distribute our products. Similarly, these macroeconomic factors could affect the ability of our contract manufacturers, sole-source or single-source suppliers to remain in business or otherwise manufacture or supply product. Failure by any of them to remain a going concern could affect our ability to manufacture products.

products.

Risks Related to Ownership of Our Securities

Our stock price may be volatile, and an investment in our stock could suffer a decline in value.

Our valuation and stock price have 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:

product sales and profitability of our products;

manufacturing, supply or distribution of our product candidates and commercial products;

47

progress of our product candidates through the regulatory process and our ability to successfully commercialize any such products that receive regulatory approval;

results of clinical trials, announcements of technological innovations or new products by us or our competitors;

generic competition to Kuvan tablets and powder relating to our settlements with DRL and Parthe two pharmaceutical companies described above in this Risk Factors section or potential generic competition from future competitors;

government regulatory action affecting our product candidates, our products or our competitors'competitors’ product candidates and products in both the U.S. and non-U.S. countries;

developments or disputes concerning patent or proprietary rights;

general market conditions and fluctuations for the emerging growth and pharmaceutical market sectors;

economic conditions in the U.S. or abroad;

negative publicity about us or the pharmaceutical industry;

changes in the structure of healthcare payment systems;

cybersecurity incidents experienced by us or others in our industry;

broad market fluctuations in the U.S., the EU or in other parts of the world;

actual or anticipated fluctuations in our operating results, including due to timing of large orderorders for our products, in particular in Latin America, where governments place large periodic orders for Naglazyme and Vimizim;

changes in company assessments of us or financial estimates by securities analysts;

acquisitions of products, businesses, or other assets; and

sales of our shares of stock by us, our significant stockholders, or members of our management or Board of Directors.

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. In addition, our stock price can be materially adversely affected by factors beyond our control, such as disruptions in global financial markets or negative trends in the biotechnology sector of the economy, even if our business is operating well.

49


Conversion of the Notes will dilute the ownership interest of existing stockholders, including holders who had previously converted their Notes, or may otherwise depress the price of our common stock.

The conversion of some or all of the Notes will dilute the ownership interests of existing stockholders to the extent we deliver shares upon conversion of any of the Notes. The Notes may become in the future become convertible at the option of their holders prior to their scheduled terms under certain circumstances. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the Notes may encourage short selling by market participants because the conversion of the Notes could be used to satisfy short positions, or anticipated conversion of the Notes into shares of our common stock could depress the price of our common stock.

The capped call transactions may affect the value of the Notes and our common stock.

In connection with the issuance of the 2018 Notes and 2020 Notes, we entered into capped call transactions with respect to 50% of the principal amount of the 2018 Notes and 50% of the principal amount of the 2020 Notes with certain hedge counterparties. The capped call transactions will cover, subject to customary anti-dilution adjustments, the aggregate number of shares of common stock underlying 50% of the principal amount of the relevant2020 Notes and are expected generally to reduce potential dilution to the common stock upon conversion of the relevant2020 Notes in excess of the principal amount of such converted 2020 Notes. In connection with establishing their initial hedges of the capped call transactions, the hedge counterparties (or their affiliates) entered into various derivative transactions with respect to the common stock concurrently with, and/or purchased the common stock shortly after, the pricing of the relevant notes.2020 Notes. The hedge counterparties (or their affiliates) are likely to modify their hedge positions by entering into or unwinding various derivative transactions with respect to the common stock and/or by purchasing or selling the common stock or other securities of ours in secondary market transactions prior to the maturity of the relevant2020 Notes (and are likely to do so during the settlement averaging period under the relevant capped call transactions, which precedes the maturity date of the relevant2020 Notes, and on or around any earlier conversion date related to a conversion of the relevant2020 Notes).

48

The effect, if any, of any of these transactions and activities on the market price of our common stock or the 2020 Notes will depend in part on market conditions and cannot be ascertained at this time, but any of these activities could adversely affect the value of our common stock, which could affect the value of the 2020 Notes and the value of our common stock, if any, that 2020 Note holders receive upon any conversion of the 2020 Notes.

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 us more difficult, even if a change in control would be beneficial to the stockholders. Our anti-takeover provisions include provisions in our restated certificate of incorporation and amended and restated bylaws as amended, providing that stockholders’ meetings may only be called by our Chairman, the lead independent director or the majority of our Board of Directors and that the stockholders may not take action by written consent and requiring that stockholders that desire to nominate any person for election to our Board of Directors or to make any proposal with respect to business to be conducted at a meeting of our stockholders be submitted in appropriate form to our Secretary within a specified period of time in advance of any such meeting. Additionally, our Board of Directors has the authority to issue shares of preferred stock and to determine the terms of those shares of stock without any further action by our 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, our Board of Directors approves the transaction. Our Board of Directors may use these provisions to prevent changes in the management and control of us. Also, under applicable Delaware law, our Board of Directors may adopt additional anti-takeover measures in the future.

The fundamental change repurchase feature of the Notes may delay or prevent an otherwise beneficial attempt to take us over.

The terms of the Notes require us to repurchase the Notes in the event of a fundamental change. A takeover of us would trigger options by the respective holders of the applicable Notes to require us to repurchase such Notes. This may have the effect of delaying or preventing a takeover of us that would otherwise be beneficial to our stockholders or investors in the Notes.

50


Our amended and restated bylaws as amended, provide that the Court of Chancery of the State of Delaware will be the exclusive forum for the adjudication of certain disputes, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.

Our amended and restated bylaws as amended, provide that the Court of Chancery of the State of Delaware is the sole and exclusive forum for:

any derivative action or proceeding brought on our behalf;

any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of BioMarin to us or our stockholders;

any action asserting a claim against us or any of our directors, officers or other employees arising pursuant to any provision of the General Corporation Law of the State of Delaware, our restated certificate of incorporation or our amended and restated bylaws, as amended;bylaws; and

any action asserting a claim against us or any of our directors, officers or other employees that is governed by the internal affairs doctrine.

This exclusive-forum provision would not apply to suits brought to enforce a duty or liability created by the Securities Act of 1933, as amended, the Exchange Act or any other claim for which the U.S. federal courts have exclusive jurisdiction, and further provides that any person or entity that acquires any interest in shares of our capital stock will be deemed to have notice of and consented to the provisions of such provision, including consent to the personal jurisdiction of the Court of Chancery of the State of Delaware related to any action covered by such provision.

This exclusive-forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers, and other employees. If a court were to find this exclusive-forum provision to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving the dispute in other jurisdictions, which could seriously harm our business.

business.

Item 1B. Unresolved Staff Comments

None.

49


Item 2. Properties

The following table contains information about our current significant owned and leased properties as of December 31, 2017:

2019:

 

 

Approximate

 

 

 

 

Lease

Location

 

Square Feet

 

 

Use

 

Expiration Date

San Rafael facility, San Rafael, California

 

 

391,700

 

 

Corporate headquarters, laboratory and office

 

NA: owned

property

Several leased locations in Novato, California

 

 

225,000

 

 

Office, laboratory and warehouse

 

2018-2021

Shanbally facility, Cork, Ireland

 

 

183,200

 

 

Manufacturing, laboratory and office

 

NA: owned

property

Galli Drive facility, Novato, California

 

 

98,200

 

 

Clinical and commercial manufacturing and laboratory

 

NA: owned

property

Bel Marin Keys facility, Novato, California

 

 

83,000

 

 

Office and laboratory

 

NA: owned

property

Digital Drive facility, Novato, California

 

 

47,000

 

 

Office and laboratory

 

NA: owned

property

Leveroni Drive facility, Novato, California

 

 

38,300

 

 

Manufacturing

 

NA: owned

property

Leiden, The Netherlands

 

 

22,900

 

 

Office and laboratory

 

2018

London, England

 

 

22,600

 

 

Office

 

2025

Dublin, Ireland

 

 

17,500

 

 

Office

 

2024

Location
Approximate
Square Feet
Use
Lease
Expiration
Date
San Rafael facility, San Rafael, California407,300 Corporate headquarters, laboratory and officeOwned 
property
Several facilities in Novato, California293,300 Clinical and commercial manufacturing, laboratory and officeOwned 
property
Several leased facilities in Novato, California203,700 Office and warehouse2023-2026
Shanbally facility, Cork, Ireland203,500 Manufacturing, laboratory and officeOwned 
property

In addition to the above, we also maintain small offices in a variety of locations around the world.

We expect that these properties, together with our other smaller leased office facilities toin various countries, will be adequate for our operations for the foreseeable future. We believe that, to the extent required, we will be able to lease or buy additional facilities at commercially reasonable rates. We plan to use

51


contract manufacturing when appropriate to provide product for both clinical and commercial requirements until such time as we believe it prudent to develop additional in-house clinical and/or commercial manufacturing capacity.

Item 3. Legal Proceedings

Paragraph IV Notices

We received a paragraph IV notice letter, dated December 23, 2016, from Dr. Reddy’s Laboratories, Inc. and Dr. Reddy’s Laboratories, Ltd. (collectively, DRL), notifying us that DRL had filed an abbreviated new drug application (ANDA) seeking approval of a proposed generic version of Kuvan (sapropterin dihydrochloride) 100 mg oral powder prior to the expiration of our patents listed in the FDA's Approved Drug Products with Therapeutic Equivalence Evaluations (the Orange Book). We filed a lawsuit alleging patent infringement against DRL. In August 2017, we entered into a settlement agreement with DRL (the DRL Powder Settlement Agreement) that resolved the patent litigation with DRL in the U.S. related to Kuvan 100 mg oral powder. Under the terms of the DRL Powder Settlement Agreement, we granted DRL a non-exclusive license to our Kuvan-related patents to allow DRL to market a generic version of sapropterin dihydrochloride in oral powder form in 100 mg and 500 mg packet formulations in the U.S. for the indications approved for Kuvan beginning on October 1, 2020, or earlier under certain circumstances.

We also received two separate paragraph IV notice letters, dated January 14, 2016 and January 22, 2015, from Par Pharmaceutical, Inc. (Par), notifying us that Par had filed an ANDA seeking approval of proposed generic versions of Kuvan 100 mg oral powder and Kuvan 100 mg oral tablets, respectively, prior to the expiration of our patents listed in the FDA’s Orange Book. We filed two lawsuits alleging patent infringement against Par (the lawsuit against Par pertaining to the proposed generic version of Kuvan 100 mg oral tablets was filed together with Merck & Cie), and the two Par cases were consolidated. In April 2017, we and Merck & Cie entered into a settlement agreement with Par (the Par Settlement Agreement) that resolved both cases against Par. Under the Par Settlement Agreement, we granted Par a non-exclusive license to our Kuvan-related patents to allow Par to market a generic version of sapropterin dihydrochloride in 100 mg oral tablets and oral powder in 100 mg and 500 mg packet formulations in the U.S. for the indications approved for Kuvan beginning on: April 1, 2021 if Par is not entitled to the statutory 180-day first filer exclusivity period; October 1, 2020 if Par is entitled to the statutory 180-day first filer exclusivity period; or earlier under certain circumstances.

We also received a paragraph IV notice letter, dated October 3, 2014, from DRL notifying us that DRL had filed an ANDA seeking approval of a proposed generic version of Kuvan 100 mg oral tablets prior to the expiration of our patents listed in the FDA’s Orange Book. We, together with Merck & Cie, filed a lawsuit alleging patent infringement against DRL. In September 2015, we and Merck & Cie entered into a settlement agreement with DRL (the DRL Tablet Settlement Agreement) that resolved the patent litigation with DRL in the U.S. related to Kuvan 100 mg oral tablets. Under the terms of the DRL Tablet Settlement Agreement, we granted DRL a non-exclusive license to our Kuvan-related patents to allow DRL to market a generic version of sapropterin dihydrochloride 100 mg oral tablets in the U.S. for the indications approved for Kuvan beginning on October 1, 2020, or earlier under certain circumstances.

None.
Item 4. Mine Safety Disclosures

Not applicable.

52

50

Part II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is listed under the symbol “BMRN” on the Nasdaq Global Select Market. The following table sets forth the range of high and low quarterly sales prices for our common stock for the periods noted, as reported by Nasdaq.

 

 

 

 

Prices

 

Year

 

Period

 

High

 

 

Low

 

2017

 

Fourth Quarter

 

$

96.05

 

 

$

80.10

 

 

 

Third Quarter

 

$

95.45

 

 

$

80.29

 

 

 

Second Quarter

 

$

100.51

 

 

$

85.45

 

 

 

First Quarter

 

$

95.79

 

 

$

82.57

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

Fourth Quarter

 

$

98.34

 

 

$

78.42

 

 

 

Third Quarter

 

$

102.49

 

 

$

77.04

 

 

 

Second Quarter

 

$

94.08

 

 

$

73.45

 

 

 

First Quarter

 

$

105.61

 

 

$

62.12

 

On February 13, 2018, the last reported sale price on the Nasdaq Global Select Market for our common stock was $81.57. We have never paid any cash dividends on our common stock and we do not anticipate paying cash dividends in the foreseeable future.

Recent Sales of Unregistered Securities

We did not sell any unregistered securities during the three yearsyear ended December 31, 2017.

2019.

Issuer Purchases of Equity Securities

We did not make any purchases of our common stock during the year ended December 31, 2017.

2019.

Holders

As of February 13, 2018,12, 2020, there were 4644 holders of record of 176,072,261179,925,602 outstanding shares of our common stock.

53

51

Performance Graph

The following is not deemed “filed” with the Securities and Exchange Commission and is not to be incorporated by reference into any filing we make under the Securities Act of 1933, as amended, whether made before or after the date hereof and irrespective of any general incorporation by reference language in such filing.

The following graph shows the value of an investment in BioMarin common stock, the Nasdaq Composite Index (U.S.) and the Nasdaq Biotechnology Index, assuming the investment of $100$100.00 at the beginning of the period and the reinvestment of dividends, if any. Our common stock is traded on the Nasdaq Global Select Market and is a component of both the Nasdaq Composite Index and the Nasdaq Biotechnology Index. The comparisons shown in the graph are based upon historical data and we caution that the stock price performance shown in the graph is not indicative of, nor intended to forecast, the potential future performance of our stock.

bmrn-20191231_g1.jpg
*$100 $100 invested on December 31, 20122014 in stock or index, including reinvestment of dividends.

 

Fiscal Year Ending December 31,

 

Fiscal Year Ending December 31,

 

2012

 

 

2013

 

 

2014

 

 

2015

 

 

2016

 

 

2017

 

201420152016201720182019

BioMarin Pharmaceutical Inc.

 

$

100.00

 

 

$

142.99

 

 

$

183.74

 

 

$

212.93

 

 

$

168.37

 

 

$

181.24

 

BioMarin Pharmaceutical Inc.$100.00  $115.88  $91.64  $98.64  $94.19  $93.53  

Nasdaq Composite

 

 

100.00

 

 

 

141.63

 

 

 

162.09

 

 

 

173.33

 

 

 

187.19

 

 

 

242.29

 

Nasdaq Composite$100.00  $106.96  $116.45  $150.96  $146.67  $200.49  

Nasdaq Biotechnology

 

 

100.00

 

 

 

174.05

 

 

 

230.33

 

 

 

244.29

 

 

 

194.95

 

 

 

228.29

 

Nasdaq Biotechnology$100.00  $111.77  $87.91  $106.92  $97.45  $121.92  

54


52

Item 6. Selected Consolidated Financial Data

We derived the selected consolidated statements of operations data for the years ended December 31, 2017, 20162019, 2018 and 20152017 and the selected consolidated balance sheet data as of December 31, 20172019 and 20162018 from the audited Consolidated Financial Statements appearing elsewhere in this Annual Report on Form 10-K. We derived the selected consolidated statements of operations data for the years ended December 31, 20142016 and 20132015 and the selected consolidated balance sheet data as of December 31, 2015, 20142017, 2016 and 20132015 from audited Consolidated Financial Statements not included in this Annual Report on Form 10-K. The information set forth below is not necessarily indicative of results of future operations, and should be read in conjunction with Part II, Item 7, Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the Consolidated Financial Statements and related notes thereto included in Item 15 of this Annual Report on Form 10-K to fully understand factors that may affect the comparability of the information presented below:

 

 

Years Ended December 31,

 

 

 

(In millions, except for per share data)

 

 

 

2017 (1)

 

 

2016 (2)

 

 

2015

 

 

2014

 

 

2013

 

Consolidated Statements of Operations data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues (3)

 

$

1,313.6

 

 

$

1,116.9

 

 

$

889.9

 

 

$

749.3

 

 

$

548.5

 

Total costs and expenses (3)

 

$

1,328.3

 

 

$

1,920.3

 

 

$

1,000.6

 

 

$

842.2

 

 

$

704.5

 

Loss from operations

 

$

(14.7

)

 

$

(803.4

)

 

$

(110.7

)

 

$

(92.9

)

 

$

(156.0

)

Provision for (benefit from) income

  taxes

 

$

81.2

 

 

$

(200.8

)

 

$

17.1

 

 

$

9.1

 

 

$

(0.2

)

Net loss

 

$

(117.0

)

 

$

(630.2

)

 

$

(171.8

)

 

$

(134.0

)

 

$

(176.4

)

Net loss per share, basic

 

$

(0.67

)

 

$

(3.80

)

 

$

(1.07

)

 

$

(0.92

)

 

$

(1.28

)

Net loss per share, diluted

 

$

(0.67

)

 

$

(3.81

)

 

$

(1.07

)

 

$

(0.92

)

 

$

(1.28

)

Weighted average common shares

  outstanding, basic

 

 

174.4

 

 

 

166.0

 

 

 

160.0

 

 

 

146.3

 

 

 

137.8

 

Weighted average common shares

  outstanding, diluted

 

 

174.4

 

 

 

166.2

 

 

 

160.0

 

 

 

146.3

 

 

 

137.8

 

 

 

December 31,

 

 

 

(In millions)

 

 

 

2017

 

 

2016 (4)

 

 

2015

 

 

2014

 

 

2013

 

Consolidated Balance Sheets data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents and investments (5) (6)

 

$

1,781.7

 

 

$

1,362.4

 

 

$

1,018.3

 

 

$

1,043.0

 

 

$

1,052.4

 

Total assets (1)

 

$

4,633.1

 

 

$

4,023.7

 

 

$

3,729.4

 

 

$

2,475.4

 

 

$

2,225.5

 

Other long-term obligations

 

$

194.4

 

 

$

157.3

 

 

$

220.8

 

 

$

68.8

 

 

$

64.2

 

Long-term convertible senior notes, net (6)

 

$

813.5

 

 

$

660.8

 

 

$

662.3

 

 

$

642.9

 

 

$

637.0

 

Total stockholders' equity

 

$

2,808.7

 

 

$

2,766.3

 

 

$

2,400.8

 

 

$

1,527.9

 

 

$

1,341.0

 

(1)

Certain Consolidated Statement of Operations and Consolidated Balance Sheet data for the year ended December 31, 2017 included an incremental income tax expense of $42.3 million driven by to the Tax Cuts and Jobs Act (the 2017 Tax Act), enacted in December 2017. See Note 15 to our accompanying Consolidated Financial Statements for additional information.

(2)

In January 2016, we adopted Accounting Standards Update No. 2016-09, Compensation-Stock Compensation (Topic 718) “Improvement to Employee Share-based Payment Accounting” (ASU 2016-09), which required us to record, among other items, excess tax benefits as a reduction of the provision for income taxes in the income statements. We were required to reflect any adoption adjustments as of January 1, 2016, the beginning of the annual period that includes the interim period of adoption. As such, certain Consolidated Statements of Operations data for the year ended December 31, 2016 included the impact of the ASU 2016-09 adoption.


(3)

See “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this Annual Report on Form 10-K for a description of our results of operations for 2017.

Years Ended December 31,
(In millions, except for per share data)
2019 (1)2018 (1)2017 (1)20162015
Consolidated Statements of Operations data:
Total revenues (2)
$1,704.0  $1,491.2  $1,313.6  $1,116.9  $889.9  
Total costs and expenses$1,804.5  $1,614.7  $1,328.3  $1,920.3  $1,000.6  
Loss from operations$(100.5) $(123.5) $(14.7) $(803.4) $(110.7) 
Provision for (benefit from) income
taxes
$(71.0) $(65.5) $81.2  $(200.8) $17.1  
Net loss$(23.8) $(77.2) $(117.0) $(630.2) $(171.8) 
Net loss per share, basic$(0.13) $(0.44) $(0.67) $(3.80) $(1.07) 
Net loss per share, diluted$(0.13) $(0.44) $(0.67) $(3.81) $(1.07) 
Weighted average common shares
outstanding, basic
179.0  177.1  174.4  166.0  160.0  
Weighted average common shares
outstanding, diluted
179.0  177.3  174.4  166.2  160.0  

(4)

Certain Consolidated Balance Sheets data as of December 31, 2016 include the impact of ASU 2016-09, which we early adopted in 2016. For instance, the net cumulative-effect adjustment of $131.3 million decrease to Accumulated Deficit, which was recorded as of January 1, 2016, mostly related to the recognition of the previously unrecognized excess tax benefits using the modified retrospective method.


(5)

See “Management's Discussion and Analysis of Financial Condition and Results of Operations— Financial Position, Liquidity and Capital Resources” in Part II, Item 7 of this Annual Report on Form 10-K for additional discussion.

December 31,
(In millions)
2019 (1)2018 (1)201720162015
Consolidated Balance Sheets data:
Cash, cash equivalents and investments$1,165.8  $1,320.2  $1,781.7  $1,362.4  $1,018.3  
Total assets (2)
$4,690.0  $4,427.1  $4,633.1  $4,023.7  $3,729.4  
Convertible senior notes, net$848.1  $830.4  $1,174.5  $683.2  $662.3  
Other long-term obligations (2)
$148.9  $105.5  $194.4  $157.3  $220.8  
Total stockholders' equity$3,122.4  $2,967.9  $2,808.7  $2,766.3  $2,400.8  

55

(1)Refer to “Management's Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations” in Part II, Item 7 of this Annual Report on Form 10-K for additional discussion of our operating results and changes in our financial position.
(2)Refer to the Consolidated Financial Statements and related notes thereto included in Item 15 of this Annual Report on Form 10-K for additional discussion of the impact of adoption of new accounting pronouncements.


53

(6)

During 2017 and 2013, we issued convertible senior notes in registered offerings with principal amounts of $495.0 million and $750.0 million, respectively.

Table of Contents

Quarterly Financial Data (unaudited)
You should read the following tables presenting our unaudited quarterly results of operations in conjunction with the Consolidated Financial Statements and related notes contained elsewhere in this Annual Report on Form 10-K. We have prepared this unaudited information on the same basis as our audited Consolidated Financial Statements. Our quarterly operating results have fluctuated in the past and may continue to do so in the future as a result of a number of factors, including, but not limited to, the timing and nature of research and development activities.

 

 

Three Months Ended

 

 

 

(In millions, except per share data, unaudited)

 

 

 

March 31,

 

 

June 30,

 

 

September 30,

 

 

December 31,

 

2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

303.7

 

 

$

317.4

 

 

$

334.1

 

 

$

358.3

 

Net loss (1)

 

$

(16.3

)

 

$

(36.8

)

 

$

(12.5

)

 

$

(51.4

)

Net loss per share, basic (1)

 

$

(0.09

)

 

$

(0.21

)

 

$

(0.07

)

 

$

(0.29

)

Net loss per share, diluted (1)

 

$

(0.09

)

 

$

(0.21

)

 

$

(0.07

)

 

$

(0.30

)

2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

236.7

 

 

$

300.1

 

 

$

279.9

 

 

$

300.1

 

Net loss (2)

 

$

(83.1

)

 

$

(419.0

)

 

$

(37.4

)

 

$

(90.7

)

Net loss per share, basic and diluted (2)

 

$

(0.51

)

 

$

(2.58

)

 

$

(0.22

)

 

$

(0.53

)

(1)

The fourth quarter of 2017 included an incremental income tax expense of $42.3 million related to the 2017 Tax Act. See Note 15 to our accompanying Consolidated Financial Statements for additional information.

(2)

In the second quarter of 2016, we recorded an impairment charge of $599.1 million related to the Kyndrisa and other exon and reveglucosidase alfa in-process research and development (IPR&D) assets based on the termination of the internal development of the respective programs. See “Management's Discussion and Analysis of Financial Condition and Results of Operations— Financial Position, Liquidity and Capital Resources” in Part II, Item 7 of this Annual Report on Form 10-K for additional discussion.

Three Months Ended
(In millions, except per share data, unaudited)
March 31,June 30,September 30,December 31,
2019:
Total revenues$400.7  $387.8  $461.1  $454.4  
Net income (loss)$(56.5) $(37.4) $55.0  $15.0  
Net income (loss) per share, basic$(0.32) $(0.21) $0.31  $0.08  
Net income (loss) per share, diluted$(0.32) $(0.21) $0.30  $0.08  
2018:
Total revenues$373.4  $372.8  $391.7  $353.2  
Net loss$(44.1) $(16.8) $(12.6) $(3.7) 
Net loss per share, basic$(0.25) $(0.09) $(0.07) $(0.02) 
Net loss per share, diluted$(0.26) $(0.09) $(0.07) $(0.03) 

56

Refer to “Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations” in Part II, Item 7 of this Annual Report on Form 10-K for discussion of our operating results.
54


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand our results of operations and financial condition. MD&A is provided as a supplement to, and should be read in conjunction with, our audited Consolidated Financial Statements and the accompanying notes to the Consolidated Financial Statements and other disclosures included in this Annual Report on Form 10-K, including the disclosures under Risk Factors“Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K. These risks and uncertainties could cause actual results to differ significantly from those projected in forward-looking statements contained in this report or implied by past results and trends. Forward-looking statements are statements that attempt to forecast or anticipate future developments in our business, financial condition or results of operations. See the section titled Forward-Looking Statements“Forward-Looking Statements” that appears at the beginning of this Annual Report on Form 10-K. These statements, like all statements in this report, speak only as of the date of this Annual Report on Form 10-K (unless another date is indicated), and, except as required by law, we undertake no obligation to update or revise these statements in light of future developments. Our Consolidated Financial Statements have been prepared in accordance with United States (U.S.) generally accepted accounting principles (GAAP) and are presented in U.S. dollarsDollars (USD).

Overview

We are a global biotechnology company that develops and commercializes innovative therapies for people with serious and life-threatening rare diseases and medical conditions. We select product candidates for diseases and conditions that represent a significant unmet medical need, have well-understood biology and provide an opportunity to be first-to-market or offer a significant benefit over existing products.

Our therapy portfolio consists of sixseveral commercial productstherapies and multiple clinical and pre-clinicalpreclinical product candidates. OurA summary of our major commercial products, are Aldurazyme (laronidase)including key metrics, as of December 31, 2019, is provided below:
Major Commercial ProductsIndication
United States
Orphan
Drug
Exclusivity
Expiration (1)
United
States
Biologic
Exclusivity
Expiration (2)
European
Union
Orphan Drug
Exclusivity
Expiration (1)
Aldurazyme (laronidase)
MPS I (3)
ExpiredExpiredExpired
Brineura (cerliponase alfa)
CLN2 (4)
202420292027
Kuvan (sapropterin dihydrochloride)
PKU (5)
ExpiredNot Applicable
2020 (6)
Naglazyme (galsulfase)
MPS VI (7)
ExpiredExpiredExpired
Palynziq (pegvaliase-pqpz)
PKU (8)
202520302029
Vimizim (elosulfase alpha)
MPS IVA (9)
202120262024
(1)See “Government Regulation—Orphan Drug Designation” in Part I, Item 1 of this Annual Report on form 10-K for further discussion
(2)See “Government Regulation— Healthcare Reform” in Part I, Item 1 of this Annual Report on form 10-K for further discussion
(3)For the treatment of Mucopolysaccharidosis I (MPS I), Brineura (cerliponase alfa) for
(4)For the treatment of late infantile neuronal ceroid lipofuscinosis type 2 (CLN2), Firdapse (amifampridine phosphate) for Lambert Eaton Myasthenic Syndrome (LEMS), Kuvan (sapropterin dihydrochloride) for
(5)For the treatment of phenylketonuria (PKU)
(6)Kuvan, a small molecule therapy, has been granted orphan drug status in the European Union (EU), Naglazyme (galsulfase) forwhich together with pediatric exclusivity, confers 12 years of market exclusivity in the EU that expires in December 2020
(7)For the treatment of Mucopolysaccharidosis VI (MPS VI) and Vimizim (elosulfase alpha) for
(8)For adult patients with PKU
(9)For the treatment of Mucopolysaccharidosis IV Type A (MPS IV A).

IVA)

A summary of our on-going major development programs, including key metrics as of December 31, 2019, is provided below:
Major Product Candidates
in Development
Target
Indication
U.S. Orphan
Designation
EU Orphan
Designation
Stage
Valoctocogene roxaparvovecSevere Hemophilia A Yes Yes Clinical Phase 3
Vosoritide Achondroplasia Yes Yes Clinical Phase 3
BMN 307PKUYesYes
Clinical Phase 1/2 (1)
(1)We expect to start dosing patients in a Phase 1/2 study in the first quarter of 2020. See "Major Product Candidates - BMN 307" in Part I, Item 1 of this Annual Report on form 10-K for further discussion.
55


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
(In millions of U.S. Dollars, except as otherwise disclosed)
Business Developments

We continued to grow our commercial business and advance our product candidate pipeline during 2017.2019. We believe that the combination of our internal research programs, acquisitions and partnerships will allow us to continue to develop and commercialize innovative therapies for people with serious and life-threatening rare diseases and medical conditions. Below is a summary of key business developments from 2019:
Product Approval
Palynziq - In May 2019, the European Commission granted marketing authorization for Palynziq at doses of up to 60 mg once daily, to reduce blood Phe concentrations in 2017:

Product Approvals

Brineura was approved to treat childrenpatients with CLN2 disease byPKU aged 16 and older, who have inadequate blood Phe control (blood Phe levels greater than 600 micromol/L) despite prior management with available treatment options. EU commercial sales commenced in the third quarter of 2019 and we anticipate meaningful revenue contributions from this region in 2020.

Continued Emphasis on Research and Development
Valoctocogene roxaparvovec – In February 2020, we announced that the U.S. Food and Drug Administration (FDA) in April 2017 and byaccepted for priority review our Biologics License Application (BLA) for valoctocogene roxaparvovec for the treatment of adults with severe hemophilia A. The Prescription Drug User Fee Act (PDUFA) target action date for the BLA has been set for August 21, 2020. In December 2019, the European Commission (EC)Medicines Agency (EMA) validated the Marketing Authorization Application (MAA) for valoctocogene roxaparvovec, which has been in June 2017.review under accelerated assessment since January 2020. These submissions are based on our Phase 3 interim analysis and the updated three-year Phase 1/2 data of patients treated with valoctocogene roxaparvovec. Both submissions represent the first time a gene therapy product for any type of hemophilia indication is under review for marketing authorization by health authorities.
In August 2019 we announced the discontinuation of the valoctocogene roxaparvovec study with the 4e13 vg/kg dose given the overwhelming preference by patients to be treated with the 6e13 vg/kg dose. We began marketing Brineurahave dosed 134 study participants in the U.S.full GENEr8-1 Phase 3 open-label study and EU following approvalthe 52-week results are anticipated in eachthe first quarter of these markets.

Continued Emphasis on Research2021. Although the trial is open-label, we have instituted a data access plan designed to substantially mirror a blinded trial, such that only a very limited group of medical personnel who are assisting with monitoring and Development

The FDA completed its reviewmanaging the trial have access to any portion of the ongoing results, and then only to the extent necessary to perform their monitoring responsibilities.

BMN 307 - In January 2020, both the U.S. FDA and the Medicines and Healthcare Products Regulatory Agency in the United Kingdom granted us Investigational New Drug (IND) applicationstatus and approved our Clinical Trial Application (CTA), respectively, for valoctocogene roxaparvovec (formerly referredBMN 307. We expect to asstart dosing patients in PHEARLESS, a Phase 1/2 study of BMN 270), an investigational307, in the first quarter of 2020 with product made at commercial scale from our gene therapy treatment for severe hemophilia A, concluded thatmanufacturing facility. Both the FDA and EMA have granted BMN 307 Orphan status.
Vosoritide – In December 2019, we could proceed with its clinical development, and granted valoctocogene roxaparvovec Breakthrough Therapy Designation in October 2017. The European Medicines Agency (EMA) has granted its Priority Medicines (PRIME) designation to valoctocogene roxaparvovec. We initiatedreported positive final results from the first of two globalrandomized, double-blind, placebo-controlled, Phase 3 programstudy evaluating the efficacy and safety of vosoritide. The study enrolled 121 children aged 5 to 14 with achondroplasia, the most common form of disproportionate short stature. The placebo-adjusted increased change from baseline in growth velocity after one year of treatment with vosoritide, the fourth quarter of 2017. In early 2018,primary endpoint, was 1.6cm/yr (p<0.0001). The results were consistent across the broad patient population studied. Vosoritide was generally well tolerated with no clinically significant blood pressure changes. Based on these results, we plan to enrollmeet with the health authorities in the first patienthalf of 2020 to discuss plans for submitting marketing applications in 2020.
In November 2019, we announced that vosoritide will be studied in broader genetic statural abnormalities, starting with dominantly inherited short stature (DISS), as part of a research collaboration with Children's National Hospital. We expect the second global Phase 3 program and will begin another Phase 1/2 Studytrial with the 6e13kg/vg dose.

vosoritide for DISS to being mid-2020.

We selectedBMN 331 - In November 2019, we announced our nextthird gene therapy product development candidate, BMN 290, a selective chromatin modulation therapy intended331, for the treatment of Friedreich's ataxia, a rare autosomal recessive disorder that results in disabling neurologic and cardiac progressive decline.hereditary angioedema. We expect to submit IND applicationbegin IND-enabling studies for BMN 331 in the second halfearly to mid-2020.

56

The FDA accepted for Priority Review the Biologics License Application (BLA) for pegvaliase, a PEGylated phenylanine-metabolizing enzyme product, to reduce blood phenylalanine (Phe) levels in adult patients with PKU who have uncontrolled blood Phe levels on existing management. The Prescription Drug User Fee Act (PDUFA) target action date has been extended by three months to


57


Management’s Discussion and Analysis of Financial Condition and Results of Operations – (Continued)

May 28, 2018, which was changed to May 25, 2018 due to the Memorial Day holiday. We intend to submit a Marketing Authorization Application (MAA) to the EMA in the first quarter of 2018.

(continued)

We continued our ongoing trials for vosoritide for the treatment(In millions of children with achondroplasia, including a randomized, placebo-controlled Phase 3 study of vosoritide in approximately 110 children with achondroplasia 52 weeks and a long-term open-label Phase 2 study of approximately 23 children. In 2018, we expect to initiate an infant/toddler study and continue the natural history program to augment existing studies.

U.S. Dollars, except as otherwise disclosed)

We announced positive, preliminary results from a multicenter, international Phase 1/2 clinical trial for BMN 250 which began enrolling patients in April 2016. The study demonstrated that BMN 250 reduced heparan sulfate levels to normal range in cerebral spinal fluid of MPS IIIB patients and indicated that ICV-administered BMN 250 is well-tolerated by MPS IIIB patients. A complementary observational study was also initiated to study the progression of MPS IIIB over time.

Other 2017 Developments

We executed a license agreement and a settlement agreement (the Sarepta Agreements) with Sarepta Therapeutics (Sarepta) that provide Sarepta with global exclusive rights to our Duchenne muscular dystrophy (DMD) patent estate for EXONDYS 51 and all future exon-skipping products. The Sarepta Agreements resolved the ongoing worldwide patent proceedings related to the use of EXONDYS 51 and all future exon-skipping products for the treatment of DMD. See Note 21 to our accompanying Consolidated Financial Statements for additional information.

We commissioned our commercial gene therapy manufacturing facility, located in Novato, California, and began current Good Manufacturing Practices (GMP) production of valoctocogene roxaparvovec to support clinical development activities and anticipated commercial demand.

We- In October 2019, we entered into a settlementlicensing agreement with Dr. Reddy's Laboratories, Inc. and Dr. Reddy's Laboratories, Ltd. (collectively, DRL) that resolves the patent litigation with DRLa third party for tralesinidase alfa (BMN 250) an investigational Enzyme Replacement Therapy (ERT) for MPS IIIB or Sanfilippo Syndrome Type B. We received a minority stake in the U.S. relatedthird party and we are entitled to Kuvan 100 mg oral powder. Please see “Legal Proceedings” included in Part I, Item 3receive milestone payments if certain development, regulatory and sales milestones are met and royalties on net sales of this Annual Report on Form 10-K, for additional information.

BMN 250. Upon closing, the third party assumed all financial obligations associated with the continued development and commercialization of BMN 250.

We entered into a settlement agreement with Par Pharmaceutical (Par)Brineura - In February 2019, we announced that resolves patent litigationtwenty-three patients in the U.S.ongoing open-label extension study treated with Par relatedBrineura continued to our Kuvan (sapropterin dihydrochloride) 100 mg oral tablets and oral powder in 100 mg and 500 mg packet formulations. Please see “Legal Proceedings” included in Part I, Item 3show a reduced rate of this Annual Report on Form 10-K,decline compared to a natural history cohort of CLN2 disease for additional information.

three years as measured by the CLN2 Clinical Rating Scale.

We issued $495.0 million in aggregate principal of 0.599% senior subordinated convertible notes due in 2024 (the 2024 Notes), which resulted in net proceeds of $481.7 million.

Outlook 2018

2020

In 2018,2020, we will continue to focus on our key operating objectives which include continued progression of our product pipeline and continued uptake of our commercial products. From a research and development (R&D) perspective, we expect to continue to invest in our various ongoing clinical studies, which support both our commercial products and pipeline of new product candidates. We expect to move forward on a number of late-stage clinical studies for new product candidates and plan to file marketing applications for various therapeutic areas.

From a commercial perspective, we expect to continue to build-out our commercial organization to support the commercialization of Brineura and VimizimPalynziq and incur pre-commercialization expenses related to valoctocogene roxaparvovec. Additionally, in January 2020, we completed the international expansionsale of Kuvan.

worldwide rights to Firdapse, our commercial product for the treatment of Lambert-Eaton myasthenic syndrome, to a third party in exchange for a one-time payment of $67.0 million. Under the terms of the agreement, we agreed to provide certain services to the third-party purchaser, such as customer sales and support, for up to 12 months after the closing of the transaction.

We continue to monitor conditions in the macroeconomic environment that could affect our ability to achieve our goals, such as changes in the reimbursement and payer landscape, a worsening of economic conditions in certain key markets, particularly in Europe and Latin America, patent expirationsexpiration of competitive products and the launch of generic competitors, such as generic versions of Kuvan, which we expect to first become available in the U.S. in the fourth quarter of 2020, government pricing pressures internationally and the potential volatility in foreign currency exchange rates. We will adjust our business processes, as appropriate, to attempt to mitigate these risks to our business.

We expect that our product pipeline investments and expanding commercial infrastructure will enable us to execute on our 20182020 operating objectives.

58

2019 Financial Highlights
Key components of our results of operations include the following:
Years Ended December 31,
201920182017
Net product revenues (1)
$1,661.0  $1,470.4  $1,270.4  
Cost of sales$359.5  $315.3  $241.8  
R&D expense$715.0  $696.3  $610.8  
Selling, general and administrative (SG&A) expense$680.9  $604.4  $554.3  
Provision for (benefit from) income taxes$(71.0) $(65.5) $81.2  
Net loss$(23.8) $(77.2) $(117.0) 
(1)  On January 1, 2018 we adopted Accounting Standard Codification (ASC) 606, Revenue from Contracts with Customers (ASC Topic 606) using the modified retrospective method. Results for 2019 and 2018 are presented under ASC Topic 606, while 2017 amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC Topic 605, Revenue Recognition.
The decrease in Net Loss for the year ended December 31, 2019 as compared to 2018 was primarily attributed to:
increased gross profits driven by higher sales volume for products marketed by us; and
increased benefit from income taxes; partially offset by
57


Management’s Discussion and Analysis of Financial Condition and Results of Operations – (Continued)

2017 Financial Highlights

Key components(continued)

(In millions of our resultsU.S. Dollars, except as otherwise disclosed)
increased SG&A expense primarily in support of operations include the following (in millions):

EU commercial launch and continued U.S expansion of Palynziq and market preparation related to valoctocogene roxaparvovec; and

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Net product revenues

 

$

1,270.4

 

 

$

1,110.4

 

 

$

884.5

 

Cost of sales

 

$

241.8

 

 

$

209.6

 

 

$

152.0

 

R&D expense

 

$

610.8

 

 

$

661.9

 

 

$

634.8

 

Selling, general and administrative (SG&A) expense

 

$

554.3

 

 

$

476.6

 

 

$

402.3

 

Intangible asset amortization and

   contingent consideration expense

 

$

46.5

 

 

$

(27.0

)

 

$

(17.7

)

Impairment of intangible assets

 

$

 

 

$

599.1

 

 

$

198.7

 

Net loss

 

$

(117.0

)

 

$

(630.2

)

 

$

(171.8

)

increased R&D expense primarily attributed to preclinical and manufacturing activities related to PKU gene therapy development program and clinical activities related to valoctocogene roxaparvovec.

See Results“Results of OperationsOperations” below for a discussion ofadditional information related to the detailed components and analysis of the amounts notedNet Loss fluctuations presented above.

Total Revenues include net product revenues and royalty and other revenues. Net Product Revenues include revenues generated from our approved products. In the U.S., our commercial products are generally sold to specialty pharmacies or end-users, such as hospitals, which act as retailers. Outside the U.S., our commercial products are sold to our authorized distributors or directly to government purchasers or hospitals, which act as the end-users. Royalty and Other Revenues include royalties on net sales of products to licensees or sublicensees, collaborative agreement revenues and rental income associated with the tenants in our San Rafael, California facility.

Our cash, cash equivalents and investments totaled $1.8$1.2 billion as of December 31, 2017,2019, compared to $1.4$1.3 billion as of December 31, 2016.2018. We have historically financed our operations primarily through our cash flows from operating activities and the issuance of common stock and convertible debt. We will be highly dependent on our net product revenues to supplement our current liquidity and fund our operations for the foreseeable future. We may in the future elect to supplement this with further debt or equity offerings or commercial borrowing. Further, depending on market conditions, our financial position and performance and other factors, we may in the future choose to use a portion of our cash, cash equivalents or investments to repurchase our convertible debt or other securities. See “Financial Position, Liquidity and Capital Resources”Resources below for a further discussion of our liquidity and capital resources.

Critical Accounting Policies, Estimates and Judgments

In preparing our Consolidated Financial Statements in accordance with U.S. GAAP in the U.S. and pursuant to the rules and regulations promulgated by the Securities and Exchange Commission (the SEC), we make assumptions, judgments and estimates that can have a significant impact on our net income/loss and affect the reported amounts of certain assets, liabilities, revenue and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and discuss our critical accounting policies and estimates with the Audit Committee of our Board of Directors. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions.

While our significant accounting policies are more fully described in Note 3 to our accompanying Consolidated Financial Statements included in this Annual Report on Form 10-K, we believe the following critical accounting policies below reflect the more significant judgments and estimates used in the preparation of our Consolidated Financial Statements:

Statements.

Revenue Recognition and Related Allowances;

Allowances

Inventory;

Inventory Produced Prior to Regulatory Approval

Valuation of Goodwill and Acquired Intangible Assets;

Assets

Valuation of Contingent Acquisition Consideration Payable; and  

Income Taxes.

59


Management’s Discussion and Analysis of Financial Condition and Results of Operations – (Continued)

Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results.

Revenue Recognition and Related Allowances

Net Product Revenues— WeFollowing the adoption of ASC Topic 606, we recognize revenue when persuasive evidencethe customer obtains control of promised goods or services, in an arrangement exists, delivery has occurred,amount that reflects the priceconsideration which we expect to receive in exchange for those goods or services.For Aldurazyme revenues, we receive a payment ranging from 39.5% to 50% on worldwide net Aldurazyme sales by Sanofi Genzyme (Genzyme) depending on sales volume, which is included in Net Product Revenues in our Consolidated Statements of Operations. Under ASC Topic 606, we recognize our best estimate of the buyerentire revenue that we expect to receive when the product is released and control is transferred to Genzyme. We record Aldurazyme net product revenues based on the estimated variable consideration payable when the product is sold through by Genzyme. Actual amounts of consideration ultimately received may differ from our estimates. Differences between the estimated variable consideration to be received from Genzyme and actual payments received are not expected to be material. If actual results vary from our estimates, we will make adjustments, which would affect Net Product Revenues and earnings in the period such variances become known.
Prior to adoption of ASC Topic 606, for Aldurazyme revenues, we only recognized a portion of the tiered payment as product transfer revenue when the product was released to Genzyme because all of our performance obligations were fulfilled at that point, the prices were substantially fixed or determinable and collectiontitle to, and risk of loss for, the product had transferred to Genzyme. The product transfer revenue only represented the fixed amount per unit of Aldurazyme that Genzyme was required to pay us if the product was unsold by Genzyme. The amount of product transfer revenue was eventually deducted from the customer is reasonably assured. calculated royalty recognized when the product was subsequently sold by Genzyme. We recorded the Aldurazyme revenues based on net sales information provided by Genzyme and recorded product transfer revenues based on the fulfillment of Genzyme purchase orders in accordance with the terms of the related agreements with Genzyme.
58


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
(In millions of U.S. Dollars, except as otherwise disclosed)
Gross-to-Net Sales Adjustments We record product sales net of estimated mandatory and supplemental discounts to government payers, in addition to discounts to private payers, and other related charges. These are generally referred to as gross to netRebates, cash discounts and distributor fees represent the majority of our gross-to-net deductions and are recorded in the same period the related sales occur. Rebates, distributor fees and cash discounts represent the majority of our gross to net deduction and require complete and significant judgment by management. Estimates are assessed each period and updated to reflect current information.

Revenue Related Allowances – Our revenue related allowances include rebates, distributor fees and cash discounts. Rebates include amounts paid to Medicaid, other government programs, certain managed care providers, as well as foreign government rebates. Rebates, cash discounts and distributor fees and cash discounts are estimates based on contractual arrangements or statutory requirementsobligations, which may vary by product and payer.

Our allowance for governmentEstimation requiresevaluation of our historical experience,customer mix,current contractual and other rebates is estimated based on products sold, customer mix,statutory obligations, specific known market events and program requirements. trends and industry data.We evaluate our customer mix to estimate which sales will be subject to rebatesthese revenue dilutive items and consider changes to government program guidelines that would impact the actual rebates and/or our estimates of which sales qualify for such rebates.

We update our estimates and assumptions each quarter based on actual historical experience, current contractual and statutory requirements, specific known market events and trends and forecasted customer buying and payment patters and record any necessary adjustments to our reserves. We record fees paidreserves to distributors and cash discounts as a reduction of revenue based on contractual terms and product sold.

reflect current information. We believe the methodologies that we use to estimate allowances are reasonable and appropriate given the facts and circumstances. However, actual results may differ significantly from our estimates.

The following table summarizes the consolidated activities and ending balances inof all our revenue related allowances (in millions):

gross-to-net sales adjustments:

Accrued rebates, cash discounts and

   distributor fees

 

Balance at Beginning of Year

 

 

Decrease/(Increase) to Product Sales

 

 

Payments

 

 

Balance at End of Year

 

Year ended December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Activity related to 2017 sales

 

$

 

 

$

112.3

 

 

$

(73.0

)

 

$

39.3

 

Activity related to sales prior to 2017

 

 

43.4

 

 

 

(3.8

)

 

 

(27.1

)

 

 

12.5

 

Total

 

 

43.4

 

 

 

108.5

 

 

 

(100.1

)

 

 

51.8

 

Year ended December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Activity related to 2016 sales

 

 

 

 

 

86.6

 

 

 

(58.4

)

 

 

28.2

 

Activity related to sales prior to 2016

 

 

39.2

 

 

 

(5.4

)

 

 

(18.6

)

 

 

15.2

 

Total

 

$

39.2

 

 

$

81.2

 

 

$

(77.0

)

 

$

43.4

 


Balance at Beginning of Year
Provision for Current Period
Sales
PaymentsBalance at End of Year
Year ended December 31, 2019$80.7  $198.1  $(164.4) $114.4  
Year ended December 31, 201863.3  151.6  (134.2) 80.7  
Year ended December 31, 2017$48.8  $121.0  $(106.5) $63.3  
Inventory

Produced Prior to Regulatory Approval

When future commercialization for a product candidate is probable and management expects to realize economic benefit in the future, we capitalize pre-launch inventory costs prior to regulatory approval. For inventories that are capitalized in preparation of product launch, management considers a number of factors, including the product candidate’s current status in the regulatory approval process, results from the related pivotal clinical trial, results from meetings with relevant regulatory agencies prior to the filing of regulatory applications, historical experience, as well as potential impediments to the approval process such as product safety or efficacy, commercialization and market trends.

60


Management’s Discussion and Analysis of Financial Condition and Results of Operations – (Continued)

In applying the lower of cost or net realizable value to pre-launch inventory, we estimate a range of likely commercial prices based on our comparable commercial products and consider the product candidate’s stability data for all of the pre-approval production to date to determine whether there is adequate expected shelf life for the capitalized pre-launch production costs.

If the criteria for capitalizing inventory produced prior to regulatory approval are not met, we recognize such costs as R&D expense in the period incurred. As of December 31, 2019, there were $29.2 million of valoctocogene roxaparvovec pre-launch inventory costs on our Consolidated Balance Sheet.

Valuation of Goodwill and Acquired Intangible Assets

We have recorded goodwill and acquired intangible assets primarily related to in-process research and development (IPR&D) projects through acquisitions accounted for as business combinations. When identifiable intangible assets, including IPR&D, are acquired, we determine the fair value of these assets as of the acquisition date. Discounted cash flow models are typically used in these valuations if quoted market prices are not available, and the models require significant estimates and assumptions including but not limited to:

estimating future cash flows from product sales;

estimating the time and resources needed to complete the development and approval of product candidate;

estimating future cash flows from product sales;

developing appropriate probability of success rates for unapproved product candidates considering their stages of development;

projecting timing of regulatory approval; and

risks related to the viabilityviability of and potential alternative treatments in any future target markets.

59



Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
(In millions of U.S. Dollars, except as otherwise disclosed)
Goodwill represents the excess of purchase price over fair value of net assets acquired in a business combination accounted for by the acquisition method of accounting and is not amortized, but subject to impairment testing. We review our goodwill and indefinite lived intangible assets for impairment annually in the fourth quarter, or more frequently if warranted by events or changes in circumstances indicate that the carrying aboutamount may not be recoverable.
We performassess goodwill impairment by comparing the fair value of our single reporting unit with its carrying amount. If the carrying value of the reporting unit exceeds its fair value, an impairment loss equal to the difference will be recorded.
We assess impairment of indefinite-lived intangible assets first by performing a qualitative assessment. If the qualitative assessment of goodwill and indefinite lived assets to determine ifindicates that it is more likely than not that the fair value of our single reporting unit or other indefinite liveindefinite-lived intangible assets is less than its carrying value. If it is determined that the fair value is more likely than not less than its carrying value,amount, then we will perform a quantitative assessment and record an impairment loss. We assess definite-lived intangible assets for recoverability when there is an indication of impairment by comparing the two step impairment test. Inestimated undiscounted future cash flows expected to result from the first stepuse of the impairment review, we compareasset or asset group and its eventual disposition to the carrying valueamount of our single reporting unit or applicablethe asset to its fair value, which management estimates using a discounted cash flow analysis. If the carrying value of our single reporting unit or asset exceeds its fair value, we perform the second step, and determine the impairment loss, if any, as thegroup. Any excess of the carrying value of the goodwillasset or indefinite lived intangible asset group over its estimated fair value.  

value is recognized as an impairment loss.

Valuation of Contingent Acquisition Consideration Payable

Significant estimates and judgementsjudgments are required in determining the acquisition fair value of any contingent obligations incurred in connection with an acquisition. WeWe estimate the fair value of contingent acquisition consideration payments utilizing a probability-based income approach inclusive of an estimated discount rate. Each period we reassess the fair value of the contingent acquisition consideration payable associated with certain acquisitions and record increases in the fair value as contingent consideration expense and record decreases in the fair value as a reduction of contingent consideration expense. Changes in the fair value of the contingent acquisition consideration payable can result from changes to one or multiple inputs including the estimated probability with respect to regulatory approval, changes in the assumed timing of when milestones are likely to be achieved and changes in assumed discount periods and rates. Accordingly, subsequent changes in the underlying facts and circumstances could result in changes to our estimates and assumptions, which could have a material impact on the estimated future fair values of contingent acquisition consideration payable.

consideration.

We believe the fair value used to record contingent acquisition consideration payable incurred in connection with a business combinations is based on reasonable estimates and assumptions given the facts and circumstances as of the related valuation date.

Income Taxes

We calculate and provide for income taxes in each of the tax jurisdictions in which we operate. Our Consolidated Balance Sheets reflect net deferred tax assets and liabilities, which are measured using enacted tax

61


Management’s Discussion and Analysis of Financial Condition and Results of Operations – (Continued)

rates. The net deferred tax assets primarily represent the tax benefit of tax credits and timing differences between book and tax recognition of certain revenue and expense items, net of a valuation allowance. When it is more likely than not that all or some portion of deferred tax assets may not be realized, we establish a valuation allowance for the amount that may not be realized. We establish liabilities or reduce assets for certain tax position when we believe certain tax position are not more likely than not to be sustained if challenged. Each quarter, we evaluate these uncertain tax position and adjust the related tax assets and liabilities in light of changing facts and circumstances.

We utilize financial projections to support our net deferred tax assets, which contain significant assumptions and estimates of future operations. If such assumptions were to differ significantly, it may have a material impact on our ability to realize our deferred tax assets. We assess our ability to realize our deferred tax benefits at the end of each period, If we determine it is more likely than not that we will not realize the deferred tax benefits, valuation allowance may need to be established against all or a portion of our deferred tax assets. Changes in our valuation allowance will result in a change to tax expense.

We establish liabilities or reduce assets for certain tax positions when we believe those certain tax positions are not more likely than not to be sustained if challenged. Each quarter, we evaluate these uncertain tax positions and adjust the related tax assets and liabilities in light of changing facts and circumstances.
We are subject to income taxes in the United StatesU.S. and various foreign jurisdictions, including Ireland. Due to economic and political conditions, various countries are actively considering changes to existing tax laws. We cannot predict the form or timing of potential legislative changes that could have a material adverse impact on our results of operations. In addition, significant judgment is required in determining our worldwide provision for income taxes. Management is not aware of any potential changes that would have a material effect on our Consolidated Financial Statements, except for the Tax Cuts and Jobs Act (the 2017 Tax Act), which was enacted in December 2017. We have estimated the impact of the 2017 Tax Act by incorporating assumptions made based upon our current interpretation and analysis to date of the law. The actual impact of the 2017 Tax Act may differ from our estimates due to, among other things, further refinement of our calculations, changes in interpretations and assumptions we have made, guidance that may be issued and actions we may take as a result of the new legislation.

Statements.

Recent Accounting Pronouncements

See Note 4 to our accompanying Consolidated Financial Statements for a full description of recent accounting pronouncements and our expectation of their impact, if any, on our results of operations and financial condition.

60


Management’s Discussion and Analysis of Financial Condition and Results of Operations

(continued)

(In millions of U.S. Dollars, except as otherwise disclosed)
Results of Operations
Net Loss

Net Loss consisted of the following:

Years Ended December 31,
2019201820172019 vs. 20182018 vs. 2017
Total revenues$1,704.0  $1,491.2  $1,313.6  $212.8  $177.6  
Cost of sales359.5  315.3  241.8  44.2  73.5  
R&D expense715.0  696.3  610.8  18.7  85.5  
SG&A expense680.9  604.4  554.3  76.5  50.1  
Intangible asset amortization and contingent consideration74.1  48.8  46.5  25.3  2.3  
Gain on sale of intangible asset(25.0) (50.0) (125.0) 25.0  75.0  
Other, net5.7  (19.1) (21.0) 24.8  1.9  
Provision for (benefit from) income taxes(71.0) (65.5) 81.2  (5.5) (146.7) 
Net loss$(23.8) $(77.2) $(117.0) $53.4  $39.8  

Our net loss for the year ended December 31, 20172019 was $117.0$23.8 million, compared to a net losslosses of $630.2$77.2 million and $171.8$117.0 million for the years ended December 31, 20162018 and 2015,2017, respectively. The changes in Net Loss were primarily a result of the following (in millions):

following:

 

 

Years Ended December 31,

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

2016

 

 

2015

 

 

2017 vs. 2016

 

 

2016 vs. 2015

 

Total revenues

 

$

1,313.6

 

 

$

1,116.9

 

 

$

889.9

 

 

$

196.7

 

 

$

227.0

 

Cost of sales

 

 

241.8

 

 

 

209.6

 

 

 

152.0

 

 

 

32.2

 

 

 

57.6

 

R&D expense

 

 

610.8

 

 

 

661.9

 

 

 

634.8

 

 

 

(51.1

)

 

 

27.1

 

SG&A expense

 

 

554.3

 

 

 

476.6

 

 

 

402.3

 

 

 

77.7

 

 

 

74.3

 

Intangible asset amortization and

    contingent consideration

 

 

46.5

 

 

 

(27.0

)

 

 

(17.7

)

 

 

73.5

 

 

 

(9.3

)

Impairment of intangible assets

 

 

 

 

 

599.1

 

 

 

198.7

 

 

 

(599.1

)

 

 

400.4

 

Gain on sale of intangible asset

 

 

(125.0

)

 

 

 

 

 

(369.5

)

 

 

(125.0

)

 

 

369.5

 

Other, net

 

 

(21.0

)

 

 

(27.7

)

 

 

(44.0

)

 

 

6.7

 

 

 

16.3

 

Provision for (benefit from)

   income taxes

 

 

81.2

 

 

 

(200.8

)

 

 

17.1

 

 

 

282.0

 

 

 

(217.9

)

Net loss

 

$

(117.0

)

 

$

(630.2

)

 

$

(171.8

)

 

$

513.2

 

 

$

(458.4

)

Net Product Revenues

Net Product Revenues consisted of the following:

Years Ended December 31,
2019201820172019 vs. 20182018 vs. 2017
Aldurazyme$97.8  $135.1  $90.0  $(37.3) $45.1  
Brineura72.0  39.9  8.6  32.1  31.3  
Firdapse22.3  21.7  18.8  0.6  2.9  
Kuvan463.4  433.6  407.5  29.8  26.1  
Naglazyme374.3  345.9  332.2  28.4  13.7  
Palynziq86.9  12.2  —  74.7  12.2  
Vimizim544.3  482.0  413.3  62.3  68.7  
Total net product revenues$1,661.0  $1,470.4  $1,270.4  $190.6  $200.0  
  2019 compared to 2018
The decreaseincrease in Net LossProduct Revenues for the year ended December 31, 20172019 as compared to 2018 was primarily attributed to the following:

anPalynziq: the increase in Total Revenues driven bywas attributed to a combination of revenue from more patients achieving maintenance dosing and new patients initiating therapy in the U.S. as the product launched in the third quarter of 2018;

Vimizim: the increase was primarily attributed to increased sales volume due to patient growth in the U.S and orders from Latin America;
Brineura: the $31.5 million net upfront license payment from Sarepta pursuantincrease was primarily attributed to growth in the Sarepta Agreements;

number of patients in all regions;
61

62



Management’s Discussion and Analysis of Financial Condition and Results of Operations – (Continued)

the $125.0 million gain on the sale of the Rare Pediatric Disease Priority Review Voucher (the PRV) that we received in connection with the approval from the FDA of Brineura for the treatment of CLN2; and

(continued)
(In millions of U.S. Dollars, except as otherwise disclosed)

Kuvan: the absence ofincrease was primarily attributed to increased sales volume due to patient growth in North America and in European markets;

Naglazyme: the $599.1 million intangible asset impairment charge recorded in 2016 when the Kyndrisa and reveglucosidase alfa programs were terminated;increase was primarily attributed to increased sales volume driven by orders from Brazil; partially offset by

Aldurazyme: the decrease was primarily attributed to decreased sales volume to Genzyme.

2018 compared to 2017

The increase in Net Product Revenues for the year ended December 31, 2018 as compared to 2017 was primarily attributed to the following:
Vimizim: the increase was primarily attributable to new patients initiating therapy and government ordering patterns;
Aldurazyme: the increase was primarily attributable to an increase in sales volume and the adoption of ASC Topic 606 on January 1, 2018, which contributed $20.2 million to the increase;
Brineura: the increase was primarily attributable to new patients initiating therapy as the product was commercially launched in mid-2017;
Kuvan: the increase was primarily attributable to an increase in patients initiating therapy in North America;
Naglazyme: the increase was primarily attributable to new patients initiating therapy in Turkey and North America and government ordering patterns in the provision for income taxes andMiddle East, partially offset by a $5.8 million IPR&D asset impairment chargedecrease due to the terminationimpact of related development programs.  

orders from certain Latin American countries; and

See below for additional information related

Palynziq: the increase was primarily attributable to the Net Loss fluctuations presented above, including detailsconversion of our operating expense fluctuations andclinical patients to commercial Palynziq in the aforementioned impairment charge.

Net Product Revenues

A summaryU.S. in 2018 following the commercial launch of our various commercial products, including key metrics as of December 31, 2017, is provided below:

Commercial Products

 

Indication

 

U.S. Orphan Drug Exclusivity

Expiration

 

U.S. Biologic

Exclusivity

Expiration

 

EU Orphan Drug Exclusivity

Expiration

Aldurazyme

 

MPS I

 

Expired

 

Expired

 

Expired

Brineura

 

CLN2

 

2024

 

2029

 

2027

Firdapse

 

LEMS

 

NA (1)

 

NA (1)

 

2019

Kuvan

 

PKU

 

Expired

 

NA

 

2020 (2)

Naglazyme

 

MPS VI

 

Expired

 

Expired

 

Expired

Vimizim

 

MPS IVA

 

2021

 

2026

 

2024

Palynziq in July 2018.

(1)

Firdapse has not received marketing approval in the U.S. We have licensed the North American rights to develop and market Firdapse to a third party.

(2)

Kuvan has been granted orphan drug status in the EU, which together with pediatric exclusivity, confers 12 years of market exclusivity in the EU that expires in 2020. Furthermore, Ares Trading S.A. (Merck Serono) marketed Kuvan in the EU until January 1, 2016. See Note 5 to our accompanying Consolidated Financial Statements for further discussion.

Net Product Revenues consisted of the following (in millions):  

 

 

Years Ended December 31,

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

2016

 

 

2015

 

 

2017 vs. 2016

 

 

2016 vs. 2015

 

Aldurazyme

 

$

90.0

 

 

$

93.8

 

 

$

98.0

 

 

$

(3.8

)

 

$

(4.2

)

Brineura

 

 

8.6

 

 

 

 

 

 

 

 

 

8.6

 

 

 

 

Firdapse

 

 

18.8

 

 

 

18.0

 

 

 

16.0

 

 

 

0.8

 

 

 

2.0

 

Kuvan

 

 

407.5

 

 

 

348.0

 

 

 

239.3

 

 

 

59.5

 

 

 

108.7

 

Naglazyme

 

 

332.2

 

 

 

296.5

 

 

 

303.1

 

 

 

35.7

 

 

 

(6.6

)

Vimizim

 

 

413.3

 

 

 

354.1

 

 

 

228.1

 

 

 

59.2

 

 

 

126.0

 

Total net product revenues

 

$

1,270.4

 

 

$

1,110.4

 

 

$

884.5

 

 

$

160.0

 

 

$

225.9

 

63


Management’s Discussion and Analysis of Financial Condition and Results of Operations – (Continued)

Our Brineura, Firdapse, Kuvan, Naglazyme and Vimizim customers include a limited number of specialty pharmacies and end-users, such as hospitals and foreign government agencies. We also sell Brineura, Kuvan, Naglazyme and Vimizim to our authorized distributors and to certain larger pharmaceutical wholesalers globally, which act as intermediaries between us and end-users and generally do not stock significant quantities of our products. However, inIn certain countries, such as in Latin America, governments place large periodic orders for Naglazyme and Vimizim. The timingordering patterns of these large government orders can be inconsistent and can create significant quarterperiod to quarterperiod variation in our revenues. Genzyme Corporation (Genzyme) is our sole customer for Aldurazyme and is responsible for marketing and selling Aldurazyme to third parties.

The following is additional discussion of our revenues by product:

Aldurazyme: The decrease in 2017 compared to 2016 and the decrease in 2016 compared to 2015 were primarily attributable to the decreases in shipments to Genzyme, offset in part by the increase in Aldurazyme revenue reported by Genzyme. Aldurazyme revenues reported by Genzyme totaled $233.8 million, $223.3 million and $217.8 million in 2017, 2016 and 2015, respectively. Although Genzyme sells Aldurazyme worldwide, the net product revenues earned by us on Genzyme’s net sales are denominated in USD. We will adopt Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, as amended, (commonly referred to as ASC Topic 606) on January 1, 2018. After adopting ASC Topic 606, we will recognize Aldurazyme revenues when the product is shipped to Genzyme and all required quality control certificates are complete, because our performance obligations are fulfilled at that point in time. We will record Aldurazyme net product revenues based on the estimated tiered payment that will be in effect when the product is sold through by Genzyme. We believe any differences between the estimated revenue from Genzyme and actual payments will be insignificant. See Note 4 to our accompanying Consolidated Financial Statements for additional information on the impact of ASC Topic 606 on the first quarter of 2018.

Brineura: The FDA and EC granted marketing approval for Brineura in April 2017 and June 2017, respectively. We began marking the product following approval in each of these markets with the first commercial shipments in the U.S. and EU occurring in June 2017 and July 2017, respectively.

Kuvan: The increase in 2017 compared to 2016 was primarily attributable to an increase in patients on Kuvan therapy in the U.S. and the completion of the transition of the ex-North American territories acquired in 2016. The increase in 2016 compared to 2015 was primarily attributable to the addition of international Kuvan product sales through the acquisition of certain rights and other assets with respect to Kuvan and pegvaliase from Merck Serono and its affiliates (the Merck PKU Business) in January 2016 and new patients initiating therapy in the U.S. Prior to our acquisition of the Merck PKU Business, we earned royalties of 4% on Merck Serono’s net sales of Kuvan.

Two companies previously filed paragraph IV certifications and submitted abbreviated new drug applications (ANDAs) to produce sapropterin dihydrochloride tablets and powder. We entered into settlement agreements regarding Kuvan with both companies. Please see “Government Regulation – Hatch-Waxman Act” below and “Legal Proceedings” in Part I, Item 3 of this Annual Report on Form 10-K for additional information. Please see “Risk Factors” included in Part I, Item 1A of this Annual Report on Form 10-K for a discussion of the risks posed by generic versions of Kuvan.  

Naglazyme: The increase in 2017 compared to 2016 was primarily attributable to new patients initiating therapy, the positive impact of foreign currency exchange rates and the timing of central government orders from Latin America and Europe. The decrease in Naglazyme net product revenues for 2016 compared to 2015 was primarily attributable to the timing of central government orders from Latin America and the negative impact of foreign currency exchange rates, partially offset by new patients initiating therapy in Europe and the Middle East.

Vimizim: The increase in 2017 compared to 2016 and in 2016 compared to 2015 was primarily attributable to new patients initiating therapy.

We face exposure to movements in foreign currency exchange rates, primarily the Euro. We use foreign currency exchange contracts to hedge a percentage of our foreign currency exposure. The following table shows our Net Product Revenues denominated in USD and foreign currencies (in millions):

currencies:

64


Management’s Discussion and Analysis of Financial Condition and Results of Operations – (Continued)

 

Years Ended December 31,

 

Years Ended December 31,

 

2017

 

 

2016

 

 

2015

 

2019201820172019 vs. 20182018 vs. 2017

Sales denominated in USD

 

$

748.5

 

 

$

643.2

 

 

$

580.7

 

Sales denominated in USD$932.6  $891.7  $748.5  $40.9  $143.2  

Sales denominated in foreign currencies

 

 

521.9

 

 

 

467.2

 

 

 

303.8

 

Sales denominated in foreign currencies728.4  578.7  521.9  149.7  56.8  

Total net product revenues

 

$

1,270.4

 

 

$

1,110.4

 

 

$

884.5

 

Total net product revenues$1,661.0  $1,470.4  $1,270.4  $190.6  $200.0  


The net impact of foreign currency exchange rates on product sales denominated in currencies other than USD during 2019 was unfavorable by $24.8 million, which was primarily driven by weakening relative to the USD of currencies in emerging markets such as Brazil, Colombia and Argentina from 2018 to 2019. The net impact of foreign currency exchange rates on product sales denominated in currencies other than USD during 2018 was unfavorable by $0.7 million, due primarily to minimal movements in foreign currency exchange rates from 2017 to 2018 in the underlying currencies in which our non-USD revenues were denominated. During 2017, the net impact of foreign currency exchange rates was positivefavorable by $5.5 million, compared to a negative impact of $3.6 million during 2016which was primarily driven by the Brazilian Real and a negative impact of $37.3 million during 2015.the Euro. See Quantitative“Quantitative and Qualitative Disclosures about Market RiskRisk” in Part II, Item 7A of this Annual Report on Form 10-K for information on currency exchange rate risk related to our revenues.

62


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
(In millions of U.S. Dollars, except as otherwise disclosed)
Royalty and Other Revenues

Royalty and Other Revenues were $43.2 million forinclude royalties earned on net sales of products sold and milestones achieved by licensees or sublicensees and rental income associated with the year ended December 31, 2017,tenants in our San Rafael, California facility.
Years Ended December 31,
2019201820172019 vs. 20182018 vs. 2017
Royalty and other revenues$43.0  $20.9  $43.2  $22.1  $(22.3) 
The 2019 increase in Royalty and Other Revenues compared to $6.5 million and $5.4 million for the years ended December 31, 2016 and 2015, respectively. The increase in 2017 as compared to 2016 and 2015 was2018 is primarily due to a one time license payment from a third party due to their achievement of a regulatory milestone and royalty revenues earned from Catalyst on net product sales of Firdapse in North America, which was approved for sale in November 2018. See Note 20 to our accompanying Consolidated Financial Statements for additional information regarding our license and collaboration agreements.
The 2018 decrease in Royalty and Other Revenues compared to 2017 is primarily attributable to the recognition of the $31.5 million net upfront license revenue from Sarepta and $3.8 milliona third party in royalty revenue earned on Sarepta net sales during 2017.
We expect to continue to earn royalties from Sarepta’s net sales underthird parties in the terms of the Sarepta Agreements in future quarters.

future.

Cost of Sales and Product Gross Margin

Cost of Sales includes raw materials, personnel and facility and other costs associated primarily with manufacturing Aldurazyme, Brineura, Naglazyme and Vimizimour commercial products. These costs include production materials, production costs at our production facilities.manufacturing facilities, third-party manufacturing costs, and internal and external final formulation and packaging costs. Cost of Sales also includes third-party manufacturing costs for the production of the active ingredient in Kuvan and Firdapse and third-party production costs related to final formulation and packaging services for all products and cost of royalties payable to third parties for all products

based on sales of our products.

The following table summarizes our cost of goods soldsales and product gross margin (in millions, except percentages):

margin:

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Total net product revenues

 

$

1,270.4

 

 

$

1,110.4

 

 

$

884.5

 

Cost of sales

 

 

241.8

 

 

 

209.6

 

 

 

152.0

 

Product gross margin

 

 

81

%

 

 

81

%

 

 

83

%


Our product gross margin for the year ended December 31, 2017 remained flat

Years Ended December 31,
2019201820172019 vs. 20182018 vs. 2017
Total net product revenues$1,661.0  $1,470.4  $1,270.4  $190.6  $200.0  
Cost of sales$359.5  $315.3  $241.8  $44.2  $73.5  
Product gross margin78.4 %78.6 %81.0 %(0.2)%(2.4)%
The 2019 increase in Cost of Sales compared to 2016, which2018 was primarily attributable to increased sales volumes. Product gross margins were relatively flat in 2019 compared to 2018.
The 2018 increase in Cost of Sales compared to 2017 was primarily attributable to increased Vimizim manufacturing costs and increased sales volume for Aldurazyme. Gross margins decreased from 2015in 2018 compared to 2017 primarily due to the impact on Aldurazyme net product revenues of adopting ASC Topic 606 and increased NaglazymeVimizim and VimizimNaglazyme manufacturing costs. Under ASC Topic 606, which we adopted on January 1, 2018, we recognize the full amount of expected Aldurazyme revenue in the same period as related cost of sales. Prior to adoption, Aldurazyme gross margins fluctuated depending on the mix of product transfer revenue and variable consideration recognized in the period.
We expect total product gross margin to remain near 80 percent80% over the next twelve months.

Research and Development

R&D Expenseexpense includes costs associated with the research and development of product candidates and post-marketing research commitments related to our approved products. R&D Expenseexpense primarily includes preclinical and clinical studies, personnel and raw materials costs associated with manufacturing clinical product, candidates, quality control and assurance, research and development,other R&D activities, facilities and regulatory costs

A summarycosts.

63

Major Product Candidates

Target

U.S. Orphan

EU Orphan

in Development

Indication

Designation

Designation

Stage

Pegvaliase

PKU

Yes

Yes

U.S. marketing authorization

regulatory review

Valoctocogene roxaparvovec

Hemophilia A (1)

Yes

Yes

Clinical Phase 3

Vosoritide

Achondroplasia

Yes

Yes

Clinical Phase 3

BMN 250

MPS IIIB (2)

Yes

Yes

Clinical Phase 1/2

BMN 290

Friedreich's Ataxia

Not applicable

Not applicable

Preclinical


65


Management’s Discussion and Analysis of Financial Condition and Results of Operations – (Continued)

(1)

Hemophilia A is also called factor VIII deficiency or classic hemophilia.

(continued)

(2)

Sanfilippo Syndrome Type B, or mucopolysaccharidosis type IIIB (MPS IIIB).

(In millions of U.S. Dollars, except as otherwise disclosed)

We manage our R&D expense by identifying the R&D activities we anticipate will be performed during a given period and then prioritizing efforts based on scientific data, probability of successful development, market potential, available human and capital resources and other similar considerations. We continually review our product pipeline and the development status of product candidates and, as necessary, reallocate resources among the research and development portfolio that we believe will best support the future growth of our business.

R&D expense decreased to $610.8 million for the year ended December 31, 2017, compared to $661.9 million and $634.8 million for the years ended December 31, 2016 and 2015, respectively. R&D expense consisted of the following (in millions):  

 

 

Years Ended December 31,

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

2016

 

 

2015

 

 

2017 vs. 2016

 

 

2016 vs. 2015

 

Pegvaliase

 

$

122.1

 

 

$

88.6

 

 

$

74.0

 

 

$

33.5

 

 

$

14.6

 

Valoctocogene roxaparvovec

 

 

118.2

 

 

 

58.9

 

 

 

32.7

 

 

 

59.3

 

 

 

26.2

 

Vosoritide

 

 

55.1

 

 

 

55.8

 

 

 

49.4

 

 

 

(0.7

)

 

 

6.4

 

BMN 250

 

 

56.0

 

 

 

46.1

 

 

 

33.6

 

 

 

9.9

 

 

 

12.5

 

BMN 290

 

 

2.8

 

 

 

2.1

 

 

 

2.9

 

 

 

0.7

 

 

 

(0.8

)

Brineura

 

 

52.0

 

 

 

77.2

 

 

 

39.9

 

 

 

(25.2

)

 

 

37.3

 

Other approved products

 

 

72.1

 

 

 

65.0

 

 

 

82.0

 

 

 

7.1

 

 

 

(17.0

)

Early stage programs

 

 

65.4

 

 

 

55.9

 

 

 

39.0

 

 

 

9.5

 

 

 

16.9

 

Other and non-allocated

 

 

67.1

 

 

 

212.3

 

 

 

281.3

 

 

 

(145.2

)

 

 

(69.0

)

Total

 

$

610.8

 

 

$

661.9

 

 

$

634.8

 

 

$

(51.1

)

 

$

27.1

 

2017 compared to 2016

The decrease in R&D expense primarily comprised the following:

a decrease in R&D expense for other and non-allocated programs primarily related to R&D spending in 2016 on the Kyndrisa, other exon-skipping, and reveglucosidase alfa development programs, all of which were terminated in 2016; and

a decrease in R&D expense related to Brineura, which was approved for marketing in the U.S. and EU in June 2017 and July 2017, respectively. During the second quarter of 2016, we evaluated the facts and circumstances supporting recoverability of pre-launch manufacturing costs related to Brineura and concluded that recoverability was probable, resulting in the decrease in R&D costs as pre-launch manufacturing costs began to be capitalized during 2016. Prior to the second quarter of 2016, Brineura pre-launch manufacturing costs incurred were expensed to R&D expense as significant uncertainty existed over the recoverability of the costs at the time; partially offset by

an increase in clinical trial activities related to BMN 250, pegvaliase and valoctocogene roxaparvovec product candidates; and

an increase in pre-clinical activity for our early stage programs.  

During 2018, we expect our R&D spending to increase over 2017 levels due to our BMN 250, BMN 290, pegvaliase, valoctocogene roxaparvovec, and vosoritide programs progressing in their development. We also expect increased spending on pre-clinical activities for our early development stage programs. Additionally, we expect to continue incurring R&D expense for the foreseeable future due to long-term clinical activities related to post-approval regulatory commitments for our approved products. We continuously evaluate the recoverability of costs associated with pre-launch or pre-qualification manufacturing activities, and capitalize the costs incurred related to those activities if it is determined that recoverability is highly likely and therefore future revenues are expected, the costs subsequently incurred related to pre-launch or pre-qualification manufacturing activities for purposes of commercial sales will likely be capitalized.expected. When regulatory approval and the likelihood of future revenues for a product candidate are less certain, the related manufacturing costs are expensed as R&D expenses.

66

We capitalized $29.2 million of manufacturing related costs for the commercial production of valoctocogene roxaparvovec from the second quarter of 2019 through December 31, 2019 as we believe those costs are likely to be recoverable. See Note 8 to our accompanying Consolidated Financial Statements for additional information regarding our inventory.
R&D expense increased to $715.0 million for the year ended December 31, 2019, compared to $696.3 million and $610.8 million for the years ended December 31, 2018 and 2017 respectively. R&D expense consisted of the following:  
Years Ended December 31,
2019201820172019 vs. 20182018 vs. 2017
Valoctocogene roxaparvovec$192.8  $161.7  $118.2  $31.1  $43.5  
Vosoritide120.9  89.3  55.1  31.6  34.2  
BMN 30789.2  18.1  —  71.1  18.1  
Palynziq71.7  94.8  122.1  (23.1) (27.3) 
Brineura39.4  46.9  52.0  (7.5) (5.1) 
Tralesinidase alfa27.4  82.2  56.0  (54.8) 26.2  
Other approved products64.7  70.6  72.1  (5.9) (1.5) 
Early stage programs75.0  68.2  65.4  6.8  2.8  
Other33.9  64.5  69.9  (30.6) (5.4) 
Total$715.0  $696.3  $610.8  $18.7  $85.5  
2019 compared to 2018
The increase in R&D expense primarily comprised the following:
an increase in preclinical and manufacturing activities related to our BMN 307 development program, including clinical manufacturing costs; and
an increase in clinical activity related to our late-stage product candidates valoctocogene roxaparvovec and vosoritide; partially offset by
a decrease in tralesinidase alfa clinical manufacturing costs; and
a decrease in costs related to Palynziq, for which capitalization of manufacturing costs began in the second quarter of 2018 following FDA approval.
During 2020, we expect our R&D spending to be generally flat compared to 2019, primarily due to lower development costs on Palynziq and valoctocogene roxaparvovec, along with the out-licensing of tralesinidase alfa; offset by increased spending on preclinical activities for our early stage development programs.
2018 compared to 2017
The increase in R&D expense primarily comprised the following:
an increase in costs for clinical studies related to our valoctocogene roxaparvovec and vosoritide product candidates;
an increase in costs of the manufacturing of our tralesinidase alfa clinical product; and
an increase in costs related to other R&D expenses primarily related to activity for our preclinical programs; partially offset by
a decrease in costs related to Palynziq, for which capitalization of manufacturing costs began in the second quarter of 2018 following FDA approval; and
64


Management’s Discussion and Analysis of Financial Condition and Results of Operations – (Continued)

2016 compared to 2015

The increase in R&D expense primarily comprised the following:

(continued)

an increase in R&D expense related to Brineura, pegvaliase, and vosoritide due to increased clinical trial activities related to these product candidates(In millions of U.S. Dollars, except as they advanced to later stages of development;

otherwise disclosed)

an increase in R&D expense related to BMN 250 and valoctocogene roxaparvovec due to increased pre-clinical and clinical activities related to these product candidates; and

an increase in R&D expense related to vosoritide and valoctocogene roxaparvovec due to payments totaling $12.0 million related to achievement of certain development milestones; partially offset by

a decrease in R&D expense for other and non-allocated programs primarilyclinical manufacturing costs related to talazoparib due to the completion of the sale of the assets to Medivation, Inc. in the fourth quarter of 2015.  

Brineura.

Selling, General and Administrative

Sales and Marketing (S&M) expense primarily consisted of employee-related expenses for our sales group, brand marketing, patient support groups and pre-commercialization expenses related to our product candidates. General and administrative (G&A) expense primarily consisted of corporate support and other administrative expenses, including employee-related expenses.

SG&A expense increased to $554.3$680.9 million for the year ended December 31, 2017,2019, compared to $476.6$604.4 million and $402.3$554.3 million for the years ended December 31, 20162018 and 2015,2017, respectively. SG&A expenses consisted of the following (in millions):

following:

Years Ended December 31,

 

 

 

 

 

 

 

 

 

Years Ended December 31,

2017

 

 

2016

 

 

2015

 

 

2017 vs. 2016

 

 

2016 vs. 2015

 

2019201820172019 vs. 20182018 vs. 2017

S&M expense

$

291.5

 

 

$

252.9

 

 

$

202.9

 

 

$

38.6

 

 

$

50.0

 

S&M expense$382.2  $324.2  $291.5  $58.0  $32.7  

G&A expense

 

262.8

 

 

 

223.7

 

 

 

199.4

 

 

 

39.1

 

 

 

24.3

 

G&A expense298.7  280.2  262.8  18.5  17.4  

Total SG&A expense

$

554.3

 

 

$

476.6

 

 

$

402.3

 

 

$

77.7

 

 

$

74.3

 

Total SG&A expense$680.9  $604.4  $554.3  $76.5  $50.1  

 

Years Ended December 31,

 

 

 

 

S&M expense by product:

2017

 

 

2016

 

 

2015

 

 

2017 vs. 2016

 

 

2016 vs. 2015

 

Brineura

$

31.6

 

 

$

15.4

 

 

$

 

 

$

16.2

 

 

$

15.4

 

Kuvan

 

87.7

 

 

 

65.2

 

 

 

40.7

 

 

 

22.5

 

 

 

24.5

 

Naglazyme

 

51.3

 

 

 

50.9

 

 

 

46.8

 

 

 

0.4

 

 

 

4.1

 

Vimizim

 

77.4

 

 

 

66.7

 

 

 

56.4

 

 

 

10.7

 

 

 

10.3

 

Other and non-allocated

 

43.5

 

 

 

54.7

 

 

 

59.0

 

 

 

(11.2

)

 

 

(4.3

)

Total S&M expense

$

291.5

 

 

$

252.9

 

 

$

202.9

 

 

$

38.6

 

 

$

50.0

 


2017

Components of S&M expense were as follows:

Years Ended December 31,
S&M expense by product:2019201820172019 vs. 20182018 vs. 2017
PKU Products$137.2  $118.6  $99.1  $18.6  $19.5  
MPS Products119.2  115.8  129.2  3.4  (13.4) 
Brineura45.4  44.2  31.6  1.2  12.6  
Valoctocogene roxaparvovec50.3  17.0  7.7  33.3  9.3  
Other30.1  28.6  23.9  1.5  4.7  
Total S&M expense$382.2  $324.2  $291.5  $58.0  $32.7  
2019 compared to 2016

2018

The increase in S&M expense was primarily comprised the following:

a result of an increase in Kuvanpre-commercialization activities related to valoctocogene roxaparvovec and Vimizimcommercialization activities in support of the continued U.S. expansion and EU commercial launches of Palynziq.

The increase in G&A expense was primarily due to consulting fees and higher employee related expenses to support our growth.
We expect SG&A expense to increase in future periods as a result of pre-commercialization efforts related to valoctocogene roxaparvovec and the continued commercial launch of Palynziq.
2018 compared to 2017
The increase in S&M expense due towas primarily a result of the following:
the Palynziq U.S. commercial launch and European pre-commercialization activities;
the continued worldwide expansion of commercial activities; and

an increase in Brineura S&M expense primarily due to marketing expenseactivities related to the commercial launch of Brineura in 2017;Brineura; and

pre-commercialization activities related to our valoctocogene roxaparvovec product candidate; partially offset by

a decrease in other and not allocated S&M expense primarily due to the decrease in S&M expensesmarketing activities related to Kyndrisa and other terminated programs.

our mature products as resources were shifted toward activities noted above.

The increase in G&A expense was primarily due to increased personnel-related costs mainly due to increased headcount.

We expect SG&A expenseheadcount to increase in future periods as a resultsupport our growth and other administrative-related costs.

65


Management’s Discussion and Analysis of Financial Condition and Results of Operations – (Continued)

2016 compared to 2015

The increase in S&M expense primarily comprised the following:

(continued)

an increase in Kuvan S&M expense due to expansion(In millions of worldwide commercial activitiesU.S. Dollars, except as a result of acquiring the worldwide rights to Kuvan, except for Japan, from Merck Serono on January 1, 2016;

otherwise disclosed)

an increase in Naglazyme and Vimizim S&M expense due to continued expansion of our worldwide commercial activities; and

an increase in Brineura S&M expense due to an increase in pre-commercialization marketing expense for Brineura.

G&A expense increased in 2016 as compared to 2015, primarily due to increased headcount, partially offset by the impact of foreign currency fluctuations.

Intangible Asset Amortization and Contingent Consideration

and Gain on Sale of Intangible Assets

Changes during the periods presented for Intangible Asset Amortization and Contingent Consideration and Gain on Sale of Intangible Assets were as follows:

Years Ended December 31,
2019201820172019 vs. 20182018 vs. 2017
Increases in the fair value of contingent consideration$20.6  $18.5  $10.3  $2.1  $8.2  
Amortization of intangible assets53.5  30.3  36.2  23.2  (5.9) 
Total intangible asset amortization and contingent consideration$74.1  $48.8  $46.5  $25.3  $2.3  
Gain on sale of intangible assets$25.0  $50.0  $125.0  $(25.0) $(75.0) 
2019 compared to 2018
Fair value of contingent consideration: the increase in the fair value of the contingent acquisition consideration payable result from updatesin 2019 was primarily attributable to changes in the estimated probability of achieving development milestones, related to our Palynziq program which received EU marketing approval in May 2019.
Amortization of intangible assets: the increase in 2019 was due to the Palynziq IPR&D assets that were placed into service following EU marketing approval in May 2019.
Gain on Sale of Intangible Assets: we recognized a gain of $25.0 million in 2019 due to the achievement or assumed timing of milestones during the second and adjustmentsfourth quarter of 2019 by third parties, related to previously sold intangible assets. See Note 6 to the discount periods and rates. Intangible asset amortization and contingent consideration expense consisted of the following (in millions):

accompanying Consolidated Financial Statements for additional information.

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Increases (decreases) in the fair value of contingent acquisition

   consideration payable

 

$

10.3

 

 

$

(57.2

)

 

$

(28.5

)

Amortization of intangible assets

 

 

36.2

 

 

 

30.2

 

 

 

10.8

 

Total intangible asset amortization and

   contingent consideration

 

$

46.5

 

 

$

(27.0

)

 

$

(17.7

)

20172018 compared to 2016

The2017

Fair value of contingent consideration: the changes in the fair value of the contingent acquisition consideration payablein 2018 were primarily attributable to changes in the estimated probability of achieving development milestones based on the current status of the related development programs, as well as the passage of time. The majority of the changes in fair value of contingent acquisition consideration payable for each period presentedwhich was attributedprimarily related to the following:

the continued progress of the PKU developmentalPalynziq program for pegvaliase;to support the filing and

the progress toward approval of the talazoparib program currently being developed by Pfizer, Inc.; partially offset by

European MAA.

Amortization of intangible assets: the reversal of the fair value of the Firdapse FDA approval milestonedecrease in 2018 was due to the reduction of the estimated probability of achieving the Firdapse FDA approval milestone prior to its expiration date; and

the termination of the Kyndrisa and reveglucosidase alfa development programs in 2016 resulted in the reversal of the fair value of the remaining contingent consideration payable to the former Prosensa Holding N.V. and Zystor Therapeutics, Inc. shareholders, respectively.  

The increase in amortization of intangible assets duringa 2017 was primarily attributable to the impairment of IPR&D assets that we had acquired from Zacharon Pharmaceuticals, Inc. (Zacharon), as the related development programs wereprogram was terminated. It is our policy to report impairment charges that are not material as a component of Intangible Asset Amortization and Contingent Consideration on our Consolidated Statements of Operations.

2016 compared to 2015

The majority

Gain on Sale of the changesIntangible Assets: we recognized a gain of $50.0 million in fair value of contingent acquisition consideration payable for the year ended December 31, 2016 compared2018 due to the year ended December 31, 2015 was attributed to the discontinuancea third party’s achievement of the Kyndrisadevelopment and reveglucosidase alfa development programs, which resulted in the reversal of the fair value of the

68


Management’s Discussion and Analysis of Financial Condition and Results of Operations – (Continued)

remaining contingent consideration payable to the former Prosensa and ZyStor Therapeutics, Inc. shareholders, respectively, because the related salesregulatory approval milestones were no longer expected to be attained.

The increase in amortization of intangible assets during 2016 was primarily attributable to the amortization of the Kuvan intangible assets acquired from Merck Serono in January 2016.

Impairment of Intangible Asset

No material impairment charges were recorded in 2017. In 2016, we recorded an impairment charge of $599.1 million related to the Kyndrisa and other exon and reveglucosidase alfa IPR&D assets based on the termination of the internal development of the respective programs. In 2015, we recorded an impairment charge of $198.7 million relateda previously sold intangible asset. See Note 6 to the Kyndrisa IPR&D assets based on the then current status of our U.S. development efforts and the related discounted cash flows that no longer supported the full carrying-value of the Kyndrisa IPR&D assets. See Note 7 to our accompanying Consolidated Financial Statements for additional information regarding our Intangible Assets.

Gain on Sale of Intangible Asset

In December 2017, we sold the PRV that we received in connection with the FDA approval of Brineura for the treatment of CLN2. In exchange for the PRV, we received lump sum payment of $125.0 million from Novartis Pharma AG. The proceeds from the sale of PRV were recognized as a gain on the sale of intangible asset. In 2015, we recognized a net gain of $369.5 million for the sale of talazoparib to Medivation, Inc.

information.

Interest Income

We invest our cash short-termequivalents and long-term investments in U.S. government securities and other high credit quality debt securities in order to limit default and market risk. Interest income was $14.9 million forcomprised of the year ended December 31, 2017,following:
Years Ended December 31,
2019201820172019 vs. 20182018 vs. 2017
Interest income$22.7  $22.8  $14.9  $(0.1) $7.9  
Interest income during 2019 was flat compared to $7.5 million and $4.5 million for2018 as higher average interest rates offset the years ended December 31, 2016 and 2015, respectively.impact of lower investment balances. The increase in interest income during 20172018 compared to 20162017 was primarily due to a higher investment balances, which increased due tobalance during the investment of the net proceeds of $481.7 million from our August 2017 issuance of the 2024 Notesperiod and higher average interest rate on investments. Due to higher investment balances offset in part by planned spend, during 2018 we
66


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
(In millions of U.S. Dollars, except as otherwise disclosed)
We expect an increase in interest income from present levels.

to remain relatively flat over the next 12 months.

Interest Expense

We incur interest expense primarily on our convertible debt. Interest expense consisted of the following (in millions):

following:

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Coupon interest

 

$

10.4

 

 

$

9.6

 

 

$

9.8

 

Amortization of debt issuance costs

 

 

3.7

 

 

 

3.4

 

 

 

3.3

 

Accretion of discount on convertible notes

 

 

28.6

 

 

 

26.5

 

 

 

25.1

 

Total interest expense

 

$

42.7

 

 

$

39.5

 

 

$

38.2

 

Years Ended December 31,
2019201820172019 vs. 20182018 vs. 2017
Total interest expense$23.5  $43.7  $42.7  $(20.2) $1.0  

The increaseddecrease in interest expense in 20172019 compared to 20162018 was primarily due to the August 2017 issuancematurity of the 2024 Notes. The increased interest expense in 2016 compared to 2015 was attributable to an increase in the accretion of the discount on our 0.75% senior subordinated convertible notes, due inwhich matured on October 15, 2018 (the 2018 Notes) and.
The increase in interest expense in 2018 compared to 2017 was primarily due to the issuance of our 1.50%0.599% senior subordinated convertible notes due in 20202024 (the 2020 Notes and, together with2024 Notes) in August 2017, partially offset by the maturity of the 2018 Notes and the 2024 Notes, the Notes) which were issued in October 2013, using the effective interest rate method. 2018.
We expect interest expense to increaseremain relatively flat over the next 12 months due to the coupon interest and amortization of issuance costs related to the 2024 Notes.months. See Note 13 to our accompanying Consolidated Financial Statements for additional information regarding our debt.

Other Expense

During the second quarter of 2015, we recorded write-offs of $12.8 million for investments and advances related to a supplier of one of our multi-sourced materials due to a deterioration in its financial condition.

69


Management’s Discussion and Analysis of Financial Condition and Results of Operations – (Continued)


Provision for (Benefit from) Income Taxes

On December 22, 2017, the 2017 Tax Cuts and Jobs Act (2017 Tax Act) was signed into law. The new law2017 Tax Act has resulted in significant changes to the U.S. corporate income tax system. These changes include a federal statutory rate reduction from 35% to 21% and the elimination or reduction of certain domestic deductions and credits, including a 50% reduction in the orphan drug credit benefit.credit. The 2017 Tax Act changed U.S. international taxation from a worldwide basis to a modified territorial system that includes base erosion prevention measures on foreign earnings. This will resultresulted in our foreign subsidiaries being subject to U.S. taxation in the future. These changes are effective in 2018.

We recognized an income tax provision of $81.2 million, an income tax benefit of $200.8 million and an income tax provision of $17.1 million in the years ended December 31, 2017, 2016 and 2015, respectively.current year. Changes to tax laws and tax rates are required to be accounted for in the period of the enactment, therefore our 2017 tax provision included the impact of the 2017 Tax Act.

We recognized an income tax benefit of $71.0 million and $65.5 million in 2019 and 2018, respectively, and income tax expense of $81.2 million in 2017. Provision for (benefit from) income taxes for 2017, 20162019, 2018 and 20152017 consisted of state, federal and foreign current tax expense which was offset by tax benefits related to stock option exercises and deferred tax benefits from federal orphan drug credits, federal R&D credits and California R&D credits. The provision for (benefit from) income taxes for the years ended December 31, 2017, 20162019 and 20152017 were further impacted by the following items:

2019 included a tax benefit of $29.6 million for the release of the valuation allowance against the net deferred tax asset of our Dutch subsidiary. In the second quarter of 2019, we determined that it is more likely than not that the deferred tax assets, including net operating losses and tax credit carryforwards of our Dutch subsidiary, will be realized. In making this determination, we analyzed our recent history of earnings, forecasts of future earnings and cumulative earnings for the last three years of our Dutch subsidiary and we reached the conclusion that it was appropriate to release the valuation allowance reserve.

2017 included a provisional expense of $42.3 million related to the 2017 Tax Act primarily consisting of $33.1 million for the re-measurement of the net deferred tax assets at the lower enacted corporate tax rate and $9.2 million related to the new limitations on tax deductible compensation. Our deferred tax assets and liabilities are measured at the enacted tax rate expected to apply when these temporary differences are expected to be realized or settled. Additionally, we established a $41.4 million valuation allowance on state tax credits as management assessed the impact of the 2017 Tax Act on our financial projections and concluded that it is more likely than not that these state tax credits will not be utilized in the foreseeable future because these credits do not expire and we project that we will be generating more credits than we will utilize on an annual basis. The 2017 Tax Act also includes a one-time mandatory deemed repatriation toll tax on accumulated earnings of our foreign subsidiaries that did not impact us due to a net deficit in these foreign subsidiaries;

subsidiaries.

2016 included a deferred tax benefit of $143.5 million associated withIn December 2017, the GAAP impairmentSecurities and Exchange Commission staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Kyndrisa IPR&D;Tax Cuts and

2015 included Jobs Act (SAB 118), which allowed us to record provisional amounts during a deferred tax benefit of $49.7 million associated with the GAAP impairmentmeasurement period not to extend beyond one year of the Kyndrisa IPR&D, which was partially offset byenactment date. As a $29.7 million increase in the valuation allowance related to future contingent consideration on the sale of talazoparib that is reasonably uncertain of receipt.

The 2017result, we previously provided a provisional charge is an estimate and the measurement of deferred tax assets is subject to further analysis and potential correlative adjustments as developing interpretations and guidance from the U.S. Treasury Department, the IRS, and other standard setting bodies provide additional clarifications of the provisionseffect of the 2017 Tax Act. Updated guidanceAct in our financial statements. In the fourth quarter of 2018, we completed our analysis to determine the effect of the 2017 Tax Act and regulations could result in changes to this estimate during 2018 when the analysis is complete.recorded immaterial adjustments as of December 31, 2018. We have not yet elected an accounting method regarding whether to record deferred tax assets and liabilitiesaccount for expected amounts of Global Intangible Low-TaxedLow-taxed Income (GILTI) inclusions or whether to treat such amounts as a current period cost.  

The consolidated GAAP net loss includes allexpense when incurred.

67


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
(In accordance with Accounting Standards Codification Topic 740, “Income Taxes,” we calculate our provision for (benefit from) income taxes on an entity-by-entity and jurisdiction-by-jurisdiction basismillions of U.S. Dollars, except as adjusted for differences between book-basis income and tax-basis income, which results in certain foreign entities being profitable and incurring foreign current income tax expense. Certain foreign entities incur significant amounts of R&D expense that results in significant losses that more than offset the income reported by the profitable foreign entities on a consolidated basis. The majority of these material R&D losses are in foreign jurisdictions that do not have net operating loss carryforward provisions that result in deferred tax assets, which results in an effective tax rate of 0% on approximately $53.5 million of foreign net losses during 2017. For the year ended December 31, 2017, our Dutch operations had GAAP income of $20.7 million. For the year ended December 31, 2017, other foreign operations generated GAAP income of approximately $16.3 million with an effective tax rate of approximately 22%.

otherwise disclosed)

Financial Position, Liquidity and Capital Resources

As of December 31, 2017,2019, we had $1.8$1.2 billion in cash, cash equivalents, and short-term and long-term investments. We expect to fund our operations with our net product revenues from our commercial products, cash, cash equivalents and investments, potentially supplemented as may become necessary by proceeds from equity or debt financings and loans, or collaborative agreements with corporate partners. We may require additional financing to fund the repayment of our convertible debt, future milestone payments and our future operations,

70


Management’s Discussion and Analysis of Financial Condition and Results of Operations – (Continued)

including the commercialization of our products and product candidates currently under development, preclinical studies and clinical trials, and potential licenses and acquisitions. We will need to raise additional funds from equity or debt securities, loans or collaborative agreements if we are unable to satisfy our liquidity requirements. The timing and mix of our funding options could change depending on many factors, including how much we elect to spend on our development programs, potential licenses and acquisitions of complementary technologies, products and companies or if we elect to settle all or a portion of our convertible debt in cash.

In managing our liquidity needs in the U.S., we do not rely on unrepatriated earnings as a source of funds and we have not provided for U.S. federal or state income taxes on these undistributed foreign earnings. We do not record U.S. tax expense on the undistributed earnings of our controlled foreign subsidiaries as these earnings are intended to be indefinitely reinvested offshore. As of December 31, 2017, the cumulative amount of these earnings was approximately $10.7 million. 

As of December 31, 2017, $187.92019, $162.7 million of our $1.8$1.2 billion balance of cash, cash equivalents and investments was held in foreign subsidiaries, a significant portion of which is required to fund the liquidity needs of these foreign subsidiaries.subsidiaries See Note 1518 to our accompanying Consolidated Financial Statements for additional discussion.

discussion regarding income taxes.

We are mindful that conditions in the current macroeconomic environment could affect our ability to achieve our goals. We sell our products in countries that face economic volatility and weakness. Although we have historically collected receivables from customers in such countries, sustained weakness or further deterioration of the local economies and currencies may cause customers in those countries to be unable to pay for our products. We will continue to monitor these conditions and will attempt to adjust our business processes, as appropriate, to mitigate macroeconomic risks to our business.

Our liquidity and capital resources as of December 31 were as follows (in millions):

follows:

 

 

2017

 

 

2016

 

 

2015

 

 

2017 vs. 2016

 

 

2016 vs. 2015

 

Cash and cash equivalents

 

$

598.0

 

 

$

408.3

 

 

$

397.0

 

 

$

189.7

 

 

$

11.3

 

Short-term investments

 

 

797.9

 

 

 

381.3

 

 

 

195.6

 

 

 

416.6

 

 

 

185.7

 

Long-term investments

 

 

385.8

 

 

 

572.8

 

 

 

425.7

 

 

 

(187.0

)

 

 

147.1

 

Cash, cash equivalents and investments

 

$

1,781.7

 

 

$

1,362.4

 

 

$

1,018.3

 

 

$

419.3

 

 

$

344.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible debt, net

 

$

1,174.5

 

 

$

683.2

 

 

$

662.3

 

 

$

491.3

 

 

$

20.9

 


2019201820172019 vs. 20182018 vs. 2017
Cash and cash equivalents$437.4  $494.0  $598.0  $(56.6) $(104.0) 
Short-term investments316.4  590.3  797.9  (273.9) (207.6) 
Long-term investments412.0  235.9  385.8  176.1  (149.9) 
Cash, cash equivalents and investments$1,165.8  $1,320.2  $1,781.7  $(154.4) $(461.5) 
Convertible debt, net$848.1  $830.4  $1,174.5  $17.7  $(344.1) 
68


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
(In millions of U.S. Dollars, except as otherwise disclosed)
Our cash flows for each of the years ended December 31 are summarized as follows (in millions):

follows:

 

 

2017

 

 

2016

 

 

2015

 

 

2017 vs. 2016

 

 

2016 vs. 2015

 

Cash & cash equivalents at the beginning of

   the period

 

$

408.3

 

 

$

397.0

 

 

$

875.5

 

 

$

11.3

 

 

$

(478.5

)

Net cash used in operating activities

 

 

(8.8

)

 

 

(227.8

)

 

 

(219.5

)

 

 

219.0

 

 

 

(8.3

)

Net cash used in investing activities

 

 

(305.5

)

 

 

(484.0

)

 

 

(1,179.6

)

 

 

178.5

 

 

 

695.6

 

Net cash provided by financing activities

 

 

507.1

 

 

 

727.1

 

 

 

925.7

 

 

 

(220.0

)

 

 

(198.6

)

Foreign exchange impact

 

 

(3.1

)

 

 

(4.0

)

 

 

(5.1

)

 

 

0.9

 

 

 

1.1

 

Cash & cash equivalents at the end

   of the period

 

$

598.0

 

 

$

408.3

 

 

$

397.0

 

 

$

189.7

 

 

$

11.3

 

Short-term and long-term investments

 

 

1,183.7

 

 

 

954.1

 

 

 

621.3

 

 

 

229.6

 

 

 

332.8

 

Cash, cash equivalents and investments

 

$

1,781.7

 

 

$

1,362.4

 

 

$

1,018.3

 

 

$

419.3

 

 

$

344.1

 


2019201820172019 vs. 20182018 vs. 2017
Cash & cash equivalents at the beginning of the period$494.0  $598.0  $408.3  $(104.0) $189.7  
Net cash provided by (used in) operating activities48.3  20.2  (8.8) 28.1  29.0  
Net cash provided by (used in) investing activities(31.0) 264.4  (305.5) (295.4) 569.9  
Net cash provided by (used in) financing activities(74.7) (388.0) 507.1  313.3  (895.1) 
Foreign exchange impact0.8  (0.6) (3.1) 1.4  2.5  
Cash & cash equivalents at the end of the period$437.4  $494.0  $598.0  $(56.6) $(104.0) 
Short-term and long-term investments728.4  826.2  1,183.7  (97.8) (357.5) 
Cash, cash equivalents and investments$1,165.8  $1,320.2  $1,781.7  $(154.4) $(461.5) 
Cash Used inProvided by (Used in) Operating Activities

Cash used in

Net cash provided by operating activities forduring 2019 was $48.3 million, compared to cash provided by operating activities of $20.2 million during 2018. Cash provided by operating activities was primarily attributed to the year ended December 31, 2017timing of payments to vendors and cash receipts from customers partially offset by higher inventory levels.
Net cash provided by operating activities during 2018 was $8.8$20.2 million, compared to cash used in operating activities of $227.8$8.8 million for the year ended December 31, 2016.during 2017. Cash used inprovided by operating activities was primarily consistedattributed to the timing of net loss of $117.0 million, adjusted for non-cash items such as $140.3 million for stock-based compensation expenses, $87.9 million for depreciationcash receipts from customers and amortization expense, $44.5 million for a change in deferred income taxes and $32.3 million of non-cash interest expense,payments to vendors, partially offset by a $125.0 million gain on the sale of an intangible asset. Changeshigher inventory levels. The increase in operating assets and liabilities resulted in a net

71


Management’s Discussion and Analysis of Financial Condition and Results of Operations – (Continued)

cash outflow of $94.0 million that consistedaccounts receivable is primarily of increased cash outflow for increased inventory spending for all commercial products to meet anticipated future sales demand.

Cash used in operating activities for the year ended December 31, 2016 was $227.8 million, compared to cash used in operating activities of $219.5 million for the year ended December 31, 2015. Cash used in operating activities primarily consisted of net loss of $630.2 million, adjusted for non-cash items such as $599.1 million of asset impairment charges, $134.6 million for stock-based compensation expenses, $96.9 million for depreciation and amortization expense, and $29.9 million of non-cash interest expense, partially offset by $228.1 million change in deferred income taxes and $57.2 million relateddue to the decreaseincrease in Genzyme unbilled receivables due to the fair valueadoption of contingent acquisition consideration payable. Changes in operating assets and liabilities resulted in a net cash outflow of $160.3 million that consisted primarily of increased cash outflow for R&D expenses and increased inventory spending to meet anticipated future sales demand.

ASC Topic 606.

Cash Used inProvided by (Used in) Investing Activities

Net cash used in investing activities for the year ended December 31, 2017during 2019 was $305.5$31.0 million, compared to net cash provided by investing activities of $264.4 million during 2018. Net cash used in investing activities in 2019 was primarily attributable to $145.0 million in purchases of property, plant and equipment, partially offset by $108.2 million in net maturities of available-for-sale debt securities and $25.0 million in milestone payment receipts related to previously sold intangible assets.
Net cash provided by investing activities during 2018 was $264.4 million, compared to net cash used in investing activities of $484.0$305.5 million for the year ended December 31, 2016. The decrease in netduring 2017. Net cash used inprovided by investing activities for the year ended December 31, 2017 compared to the prior yearin 2018 was primarily attributable to the $125.0 million in proceeds from the sale of the PRV and an increase of $102.7$359.0 million in net purchasesmaturities of available-for-sale debt securities and $50.0 million in milestone payment receipts related to a previously sold intangible asset, partially offset by a $50.8$144.6 million increase in the purchases of property, plant and equipment.
We expect to continue to make significant capital investments in our manufacturing facilities and our corporate headquarters to accommodate anticipated headcount growth.

Cash Provided by (Used in) Financing Activities
Net cash used in investingfinancing activities for the year ended December 31, 2016during 2019 was $484.0$74.7 million, compared to net cash used in investingfinancing activities of $1.2 billion for the year ended December 31, 2015. The decrease in net$388.0 million during 2018. Net cash used in investingfinancing activities for the year ended December 31, 2016 compared to the prior yearin 2019 was primarily attributableattributed to the absence of 2015$58.5 million in payments of $538.4 millioncontingent consideration and cash paid for taxes related to acquire Prosensa and $371.8 million deposit for the PKU rights from Merck Serono, a $79.3 million decrease in the purchasesnet settlement of property, plant and equipment, and a decrease of $116.3 million in net purchases of available-for-sale securities.

Cash Provided by Financing Activities

equity awards.

Net cash provided byused in financing activities for the year ended December 31, 2017during 2018 was $507.1$388.0 million, compared to net cash provided by financing activities of $727.1$507.1 million for the year ended December 31, 2016. The decreaseduring 2017. Net cash used in net cash provided by financing activities for the year ended December 31, 2017 comparedin 2018 was primarily related to the prior year was primarily attributable a $712.9$375.0 million decreasesettlement of the 2018 Notes, which matured in net proceeds from public offerings of common stock,October 2018, partially offset by $481.7$31.6 million of net proceeds from the issuanceissuances under our equity
69

incentive plans.
Other Information

Our $1.2 billion$870.0 million (undiscounted) of total convertible debt as of December 31, 20172019 will impact our liquidity due to the semi-annual cash interest payments. OurAs of December 31, 2019, our indebtedness consists primarilyconsisted of the 2020 Notes and the 2024 Notes (together with the 2020 Notes, the Notes), which, if not converted, will be required to be repaid in cash at maturity in 2018,October 2020 and August 2024, respectively. Our senior subordinated convertible notesWe will need cash not only to pay the ongoing interest due in 2017 matured on April 23, 2017, with conversionthe Notes during their term, but also to repay the principle amount of all principal amounts except for a final cash settlement of $26,000.the Notes if not converted. See Note 13 to our accompanying Consolidated Financial Statements for additional discussion.

In the event the conditional conversion feature of the 2018 Notes or 2020 Notes is triggered, holders of suchthe 2020 Notes will be entitled to convert the 2018 Notes or 2020 Notes at any time during specified periods at their option. In addition, the 2018 Notes will be freely convertible on or after July 15, 2018 and the 2020 Notes will be freely convertible on or after July 15, 2020.2020. We intend tomay use a majoritythe remaining balance of the net proceeds we received from the issuance of the 2024 Notes to repay, repurchase or settle in cash some or all of the 20182020 Notes. We may also elect to settle conversions of the 2020 Notes in cash, in whole or in part, which could further affect our liquidity. While we could seek to obtain additional third-party financing to pay for any amounts due in cash upon such events, we cannot be sure that such third-party financing will be available on commercially reasonable terms, if at all. The $375.0 million principal amount of the 2018 Notes mature in October 2018 and therefore weall. We have reclassified the net outstanding principal of the 2018 Notes as a current liability. Even if holders of the 2020 Notes do not elect to convert their 2020 Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of suchthe 2020 Notes as a current liability rather than long-term liability (for example, whenas there are 12less than twelve months or less remaining until maturity), which would resultmaturity.
Our 2018 Notes matured in October 2018 and were settled with a material reductioncombination of our net working capital.

In August 2017, we completed an offering of $495.0 million in aggregate principal amount of the 2024 Notes, which resulted in net proceeds of $481.7 million, after deducting commissionscash and offering expenses.

In August 2016, we sold 7.5 million shares of our common stock, at aconsisting of approximately $375.0 million in cash and 190,220 in shares. The shares issued represented the value of the 2018 Notes in excess of the conversion price of $96.00 per share in an underwritten public offering$94.15, as measured over a 25-day averaging period. The cash payment was comprised of the principal, the value of fractional shares and the value of unconverted 2018 Notes. In October 2018, pursuant to an effective registration statement previously fileda capped call transaction, which was entered into concurrently with the SEC. Weissuance of the 2018 Notes, we received net proceedsfrom the capped call counterparties 95,127 shares of approximately $712.9 million from this public offering after accountingour common stock, which was accounted for as treasury shares and subsequently retired. No gain or loss was incurred upon the underwriting discount and offering costs.  

extinguishment of the 2018 Notes.

In November 2016October 2018, we entered into aan unsecured revolving credit agreement (the Credit Agreement) providing forfacility of up to $100.0$200.0 million in revolving loans (the Revolving2018 Credit Facility). We expect to use the proceedsThe 2018 Credit Facility includes a letter of the Revolving Credit Facilitycredit subfacility and a swingline loan subfacility and is also intended to finance ongoing working capital needs (including timing differences resulting from the strategic management of short-term investments) and for other general corporate purposes. Borrowings under the 2018 Credit Facility bear interest, at our option, at a rate equal to either (a) the LIBOR rate, or LIBOR successor rate, plus an applicable margin ranging from 1.00% to 1.95% per annum, based upon our net leverage ratio and EBITDA for each of the two most recently ended four-quarter measurement periods, or (b) the Base Rate, generally the prime lending rate, plus an applicable margin ranging from 0.00% to 0.95%, based upon our net leverage ratio and EBITDA for each of the two most recently ended four-quarter measurement periods. Our obligations under the Credit Facility are guaranteed by our direct subsidiary, California Corporate Center Acquisition LLC, and such obligations may in the future be guaranteed from time to time by certain other material domestic subsidiaries. Commitment fees payable on the undrawn amount range from 0.15% to 0.35% per annum based upon our net leverage ratio and EBITDA for each of the two most recently ended four-quarter measurement periods. The 2018 Credit Facility matures on October 19, 2021 at which time all outstanding amounts become due and payable, except that if at least $100.0 million aggregate principal amount of the 2020 Notes remain outstanding on August 1, 2020 and certain other conditions have not been met, we may be required to repay all amounts borrowed under the 2018 Credit Facility on August 1, 2020. The 2018 Credit Facility contains financial covenants requiring us to maintain a minimum interest coverage ratio and a minimum liquidity requirement. As of December 31, 2017, we had not drawn on the Revolving Credit Facility. Although quarterly interest payments will be2019, there were no outstanding amounts due on nor any outstanding balance due, we anticipate any balance due to be short-term in nature.usage of the 2018 Credit Facility. See Note 13 to our accompanying Consolidated Financial Statements for additional discussion.

Funding Commitments

We cannot estimate with certainty the cost to complete any of our product development programs. Additionally, except as disclosed under Overview“Overview” above, we cannot precisely 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 Risk Factors“Risk Factors” included in Part I, Item 1A of this Annual Report on Form 10-K, for a discussion of the reasons we are unable to estimate such information, and in particular the following risk factors:

If we fail to obtain regulatory approval to commercially market and sell our product candidates, or if approval of our product candidates is delayed, we will be unable to generate revenue from the sale of these product candidates, our potential for generating positive cash flow will be diminished, and the capital necessary to fund our operations will increase;

If we are unable to successfully develop and maintain manufacturing processes for our products to produce sufficient quantities at acceptable costs, 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 our revenue could be adversely affected.

• If we fail to obtain regulatory approval to commercially market and sell our product candidates, or if approval of our product candidates is delayed, we will be unable to generate revenue from the sale of these product candidates, our potential for generating positive cash flow will be diminished, and the capital necessary to fund our operations will

73

70


Management’s Discussion and Analysis of Financial Condition and Results of Operations – (Continued)

(continued)

If we do not achieve our projected development goals in the timeframes we announce and expect, the commercialization of our product candidates may be delayed and the credibility of our management

may be adversely affected and, as a result, our stock price may decline.

(In millions of U.S. Dollars, except as otherwise disclosed)

increase;
• If we are unable to successfully develop and maintain manufacturing processes for our product candidates to produce sufficient quantities at acceptable costs, we may be unable to support a clinical trial or be forced to terminate a program, or if we are unable to produce sufficient quantities of our products at acceptable costs, we may be unable to meet commercial demand, 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 our revenue could be adversely affected.
• If we do not achieve our projected development goals in the timeframes we announce and expect, the commercialization of our product candidates may be delayed and the credibility of our management may be adversely affected and, as a result, our stock price may decline.
Our investment in our product development programs and continued development of our existing commercial products has a major impact on our operating performance.performance. Our R&D expenses infor the period since inception as of December 31, 2019 for certain of our key programs were as follows (in millions):

follows:

 

 

Since Program

 

 

 

Inception

 

Brineura

 

$

240.2

 

Pegvaliase

 

 

522.9

 

Valoctocogene roxaparvovec

 

 

239.3

 

Vosoritide

 

 

229.7

 

BMN 250

 

 

154.6

 

BMN 290

 

 

7.8

 

Other approved products

 

 

979.8

 

Other and non-allocated

 

Not meaningful

 

Since Program
Inception
Palynziq$689.4 
Valoctocogene roxaparvovec593.8 
Vosoritide439.9 
Brineura326.5 
BMN 307107.3 
Other approved products1,115.1 


We may need or elect to increase our spending above our current long-term plans and consequently we mayto be unableable to achieve our long-term goals. This may increase our capital requirements, including: costs associated with the commercialization of our products;products; additional clinical trials; investments in the manufacturing of our commercial products; pre-clinicalproducts; preclinical studies and clinical trials for our other product candidates;candidates; potential licenses and other acquisitions of complementary technologies, products and companies;companies; and general corporate purposes.

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

product sales and profitability of our products;

manufacturing, supply or distribution of our product candidates and commercial products;

progress of our product candidates through the regulatory process and our ability to successfully commercialize any such products that receive regulatory approval;

market and sell our products;
the time and cost necessary to develop commercial manufacturing processes, including quality systems, and to build or acquire manufacturing capabilities;

resultsthe progress and success of our preclinical studies and clinical trials announcements(including the manufacture of technological innovations or new productsmaterials for use in such studies and trials);

the timing, number, size and scope of our preclinical studies and clinical trials;
the time and cost necessary to obtain regulatory approvals and the costs of post-marketing studies which may be required by us or our competitors;

regulatory authorities; and

generic competition to Kuvan relating to our settlements with DRL and Par or potential generic competition from future competitors;

the progress of research programs carried out by us.

government regulatory action affecting our product candidates, our products or our competitors’ product candidates and products in both the U.S. and non-U.S. countries; and

developments or disputes concerning patent or proprietary rights.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that are currently material or reasonably likely to be material to our consolidated financial position or results of operations.

74

71


Management’s Discussion and Analysis of Financial Condition and Results of Operations – (Continued)

(continued)

(In millions of U.S. Dollars, except as otherwise disclosed)
Contractual and Commercial Obligations

We have contractual and commercial obligations under our convertible debt, operating leases and other obligations related to R&D activities, purchase commitments, licenses and sales royalties with annual minimums. Our contractual obligations as of December 31, 20172019 are presented in the table below (in millions).

below.

 

Payments Due within

 

 

 

 

 

 

 

 

 

 

 

 

 

 

More

 

 

 

 

 

Payments Due within

 

1 Year

 

 

>1 -3

 

 

> 3 - 5

 

 

Than 5

 

 

 

 

 

1 Year
or Less
>1 -3
Years
> 3 - 5
Years
More
Than 5
Years
Total

 

or Less

 

 

Years

 

 

Years

 

 

Years

 

 

Total

 

2018 Notes and related interest

 

$

377.8

 

 

$

 

 

$

 

 

$

 

 

$

377.8

 

2020 Notes and related interest

 

 

5.6

 

 

 

386.2

 

 

 

 

 

 

 

 

 

391.8

 

2020 Notes and related interest$380.6  $—  $—  $—  $380.6  

2024 Notes and related interest

 

 

3.0

 

 

 

5.9

 

 

 

5.9

 

 

 

500.9

 

 

 

515.7

 

2024 Notes and related interest3.0  5.9  500.9  —  509.8  

Operating leases

 

 

9.7

 

 

 

13.6

 

 

 

8.9

 

 

 

5.9

 

 

 

38.1

 

LeasesLeases13.7  23.3  20.4  17.0  74.4  

R&D and purchase commitments

 

 

52.1

 

 

 

0.7

 

 

 

 

 

 

 

 

 

52.8

 

R&D and purchase commitments105.2  1.0  —  —  106.2  

Total

 

$

448.2

 

 

$

406.4

 

 

$

14.8

 

 

$

506.8

 

 

$

1,376.2

 

Total$502.5  $30.2  $521.3  $17.0  $1,071.0  

We are

As of December 31, 2019, we were also subject to contingent payments related to totaling approximately $361.3 million upon achievement of certain development and regulatory activities and commercial sales and licensing milestones totaling approximately $604.6 million as of December 31, 2017, which are due upon achievement of certain development and commercial milestones, and if they occur before certain dates in the future.future. Of this amount, $222.0$67.3 million (USD equivalent of 185 million translated at 1.20 USD per Euro as of December 31, 2017) relatesrelated to the acquisition of certain rights and other assets with respect to Kuvan and Palynziq from Merck PKU Business acquisitionSerono and $53.4$243.8 million relatesrelated to programs that are no longer being developed.

As of December 31, 2017,2019, we have recorded $189.0$50.8 million of contingent acquisition consideration payable on itsour Consolidated Balance Sheets, in Short-term and Long-term Contingent Acquisition Consideration Payable,all of which $53.6 million is expected to be paid by us in the next twelve months.

was long-term.

Any outstanding amounts due under the Revolving2018 Credit Facility will be due in full in November 2018October 2021 with related interest, if any, due on a quarterly basis.basis, except that if at least $100.0 million aggregate principal amount of the 2020 Notes remain outstanding on August 1, 2020 and certain other conditions have not been met, we may be required to repay all amounts borrowed under the 2018 Credit Facility on August 1, 2020. As of December 31, 2017,2019, there was no outstanding balance.

75


72

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

We are exposed to market risks that may result from changes in foreign currency exchange rates, interest rates and credit risks. To reduce certain of these risks, we enter into foreign currency derivative hedging transactions, follow investment guidelines and monitor outstanding trade receivables as part of our risk management program.

Foreign Currency Exchange Rate Risk

Our operations include manufacturing and sales activities in the U.S. as well as sales activities in regions outside the U.S, including Europe, Latin America and Asia Pacific. As a result, our financial results may be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which we sell our products. Our operating results are exposed to changes in foreign currency exchange rates between the U.S. dollarDollar (USD) and various foreign currencies, primarily the Euro. When the U.S. dollarUSD strengthens against these currencies, the relative value of the sales made in the respective foreign currency decreases. Conversely, when the U.S. dollarUSD weakens against these currencies, the relative value of such sales increases. Overall, we are a net receiver of foreign currencies and, therefore, benefit from a weaker U.S. dollarUSD and are adversely affected by a stronger U.S. dollarUSD relative to those foreign currencies in which we transact significant business.

During 2017,2019, approximately 41%44% of our net product sales were denominated in foreign currencies and 22%19% of our operating expenses were denominated in foreign currencies. To partially mitigate the impact of changes in currency exchange rates on net cash flows from our foreign currency denominated sales and operating expenses, we may enter into forward foreign currency exchange contracts.contracts (forward contracts). We also hedge certain monetary assets and liabilities, primarily those denominated in Euros, using forward foreign currency exchange contracts, which reduces but does not eliminate our exposure to currency fluctuations between the date the transaction is recorded and the date the cash is collected or paid. Generally, the market risks of these contracts are offset by the corresponding gains and losses on the transactions being hedged.

We do not use derivative financial instruments for speculative trading purposes, nor do we hedge foreign currency exchange rate exposure in a manner that entirely offsets the effects of changes in foreign currency exchange rates. The counterparties to these forward foreign currency exchange contracts are creditworthy multinational commercial banks, which minimizes the risk of counterparty nonperformance. We regularly review our hedging program and may, as part of this review, make changes to the program.

As of December 31, 2017 and 2016,2019, we had open forward foreign currency exchange contracts with net notional amounts of $276.1 million and $223.5 million, respectively.$654.7 million. A hypothetical 10% strengtheningadverse movement in foreign currency exchange rates compared with the U.S. dollarUSD relative to exchange rates at December 31, 20172019 would have resulted in a reduction in the value received over the remaining life of these contracts ofby approximately $29.7$68.1 million on this date and, if realized, would negatively affect earnings during the remaining life of the contracts. The same hypothetical movement in foreign currency exchange rates withestimated fair value change was determined by measuring the U.S. dollar relative to exchange rates at December 31, 2016, would have resulted in a reductionimpact of the value received over the remaining life of the contracts by approximately $21.0 millionhypothetical exchange rate movement on this date and, if realized, would have negatively affect earnings during the remaining life of theseoutstanding forward contracts. This analysis does not consider the impact of the hypothetical changes in foreign currency rates would have on the forecasted transactions that these foreign currency sensitive instruments were designated to offset.

Our use of this methodology to quantify the market risk of such instruments is subject to assumptions and actual impact could be significantly different.

Based on our overall foreign currency exchange ratedenominated exposures at December 31, 2017,2019, we believe that a near-term 10% fluctuation of the U.S. dollarUSD exchange rate could result in a potential change in the fair value of our net foreign currency sensitivedenominated assets and liabilities, excluding our investments and open forward foreign currency exchange contracts, by approximately $4.7$5.1 million. We expect to continue to enter into transactions based in foreign currencies that could be impacted by changes in exchange rates.

Interest Rate Market Risk

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio.portfolio, which includes our cash equivalents and marketable debt securities. By policy, we place our investments with highly rated credit issuers and limit the amount of credit exposure to any one issuer. As stated in our investment policy, we seek to improve the safety and likelihood of preservation of our invested funds by limiting default risk and market risk.


We mitigate default risk by investing in high credit quality securities and by positioning our portfolio to respond appropriately to a significant reduction in a credit rating of any investment issuer or guarantor. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity.

We have outstanding $375.0 million of the 2018 Notes, $375.0 million(undiscounted) of the 2020 Notes and $495.0 million (undiscounted) of the 2024 Notes. The interest rates on these notes are fixed and therefore they do not expose us to risk related to rising interest rates. As of December 31, 2017,2019, the fair value of our convertible debt was $1.3 billion.

$927.5 million.

73

In connection with the October 2013 offering of the 2018 Notes, which matured in October 2018, and the 2020 Notes, we paid $29.8 million to purchase a capped call covering 3,982,988 shares of our common stock.stock with 50% related to the 2018 Notes and 50% related to the 2020 Notes. If the per share price of our common stock remains below $94.15, thesethe capped call transactionstransaction would be not applicable and, therefore, would provide us no benefit in offsetting potential dilution from the 2018 Notes and the 2020 Notes. If the per share price of our common stock exceeds $121.05, then, to the extent of the excess, thesethe capped call transactionstransaction would result in additional dilution from conversion of the 2018 Notes and the 2020 Notes.

As of December 31, 2017,2019, our investment portfolio did not include any investments with significant exposure to countries that face economic volatility and weakness. Although not predictive in nature, we believe a hypothetical 100 basis point threshold reflects a reasonably possible near-term change in interest rates. Based on our investment portfolio and interest rates at December 31, 2017,2019, we believe that a 100 basis point increase in interest rates could result in a potential loss in fair value of our investment portfolio of approximately $9.6$7.6 million. Changes in interest rates may affect the fair value of our investment portfolio. However, we will not recognize such gains or losses in our Consolidated Statements of Operations unless the investments are sold or we determine that the decline in the investment’s value is other-than-temporary.

other than temporary.

The table below summarizes the expected maturities and average interest rates of our interest-generating investments at December 31, 20172019 (in millions):

 

Expected Maturity

 

 

 

 

 

Expected Maturity

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

2022

 

 

Thereafter

 

 

Total

 

20202021202220232024ThereafterTotal

Available-for-sale

debt securities

 

$

840.3

 

 

$

353.4

 

 

$

32.2

 

 

$

 

 

$

 

 

$

0.2

 

 

$

1,226.1

 

Available-for-sale debt securities$321.4  $321.6  $90.2  $—  $—  $0.1  $733.3  

Average interest rate

 

 

1.7

%

 

 

2.1

%

 

 

2.1

%

 

 

 

 

 

 

 

 

5.1

%

 

 

1.8

%

Average interest rate1.9 %1.8 %1.8 %—  —  5.4 %1.8 %

Counterparty credit risks

Our financial instruments, including derivatives, are subject to counterparty credit risk that we consider as part of the overall fair value measurement. Our financial risk management policy limits derivative transactions by requiring transactions to be with institutions with minimum credit ratings of A or equivalent by Standards & Poor’s, Moody's or Fitch. In addition, we have an investment policy that limits investments to certain types of debt and money market instruments issued by institutions primarily with investment grade credit ratings and places restriction on maturities and concentrations by asset class and issuer.

Item 8. Financial Statements and Supplementary Data

The information required to be filed in this item appears under Exhibits,“Exhibits, Financial Statement SchedulesSchedules” in Part IV, Item 15 of this Annual Report on Form 10-K and is set forth on pages F-1 to F-44.

beginning on page 77.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An evaluation was carried out, under the supervision of and with the participation of our management, including our Chief Executive Officer and our Acting Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on the evaluation, our Chief Executive Officer and our Acting Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of December 31, 2017.

2019.

Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting. Under the supervision of and with the participation of our management, including our Chief Executive Officer and our Acting Chief Financial Officer, our management has assessed the effectiveness of our internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act as of December 31, 2017.2019. Our management’s assessment was based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), Internal Control-Integrated Framework (2013).

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Table of Contents
Based on the COSO criteria, our management has concluded that our internal control over financial reporting as of December 31, 20172019 was effective.

Our independent registered public accounting firm, KPMG LLP, has audited the financial statements included in this Annual Report on Form 10-K and has issued a report on the effectiveness of our internal control over financial reporting. The report of KPMG LLP is incorporated by reference to Item 8 of this Annual Report on Form 10-K.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during our most recently completed quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act.

Effective January, 1, 2018, we adopted Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, as amended (commonly referred to as ASC Topic 606). During the year ended 2017, we implemented internal controls to ensure that we have adequately evaluated our contracts and properly assessed the impact of ASC Topic 606 on our financial statements to facilitate the adoption on January 1, 2018. We do not expect significant changes to our internal control over financial reporting due to the adoption of ASC Topic 606.

Scope of the Effectiveness of Controls

Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Our internal control over financial reporting includes those policies and procedures that:

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets;

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and our board of directors; and

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

Item 9B. Other Information

None.
75

As previously reported, on November 21, 2017, we and our wholly owned subsidiary, BioMarin Commercial Ltd., entered into a definitive agreement to sell a Rare Pediatric Disease Priority Review Voucher (PRV) for a lump sum paymentTable of $125.0 million. The PRV was sold to Novartis Pharma AG pursuant to an Asset Purchase Agreement, which contains customary representations, warranties and covenants. We received the PRV under a U.S. Food and Drug Administration (FDA) program intended to encourage the development of treatments for rare pediatric diseases. We were awarded the PRV in April 2017 when we received approval from the FDA of Brineura for the treatment of CLN2.

The transactions contemplated by the Asset Purchase Agreement closed on December 15, 2017.

Contents

Part III

Part III

Item 10. Directors, Executive Officers and Corporate Governance

The information required by this Item regarding our directors, executive officers and corporate governance is incorporated into this section by reference to the sections captioned Election“Election of DirectorsDirectors” and Executive Officers“Executive Officers” in the proxy statement for our 20182020 annual meeting of stockholders.

Item 11. Executive Compensation

The information required by this Item regarding executive compensation is incorporated into this section by reference to the section captioned Executive Compensation“Executive Compensation” in the proxy statement for our 20182020 annual meeting of stockholders.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this Item regarding security ownership of our beneficial owners, management and related stockholder matters is incorporated into this section by reference to the section captioned Security“Security Ownership of Certain Beneficial Owners and ManagementManagement” in the proxy statement for our 20182020 annual meeting of stockholders.

The information required by this Item regarding the securities authorized for issuance under our equity compensation plans is incorporated into this section by reference to the section captioned Equity“Equity Compensation Plan InformationInformation” in the proxy statement for our 20182020 annual meeting of stockholders.

Item 13. Certain Relationships and Related Transactions and Director Independence

The information required by this Item regarding certain relationships, related transactions and director independence is incorporated into this section by reference to the sections captioned Transactions“Transactions with Related Persons, Promoters and Certain Control Persons,,Review,“Review, Approval and Ratification of Transactions with Related PartiesParties” and Director Independence“Director Independence” in the proxy statement for our 20182020 annual meeting of stockholders.

Item 14. Principal Accounting Fees and Services

The information required by this Item regarding our principal accountant fees and services is incorporated into this section by reference to the section captioned Independent“Independent Registered Public Accounting FirmFirm” in the proxy statement for our 20182020 annual meeting of stockholders.


76

Table of ContentsPart
Part IV

Item 15. Exhibits, Financial Statement Schedules

Page

Page

Financial Statements

81

Financial Statements

F-2

Consolidated Financial Statements as of December 31, 20172019 and 20162018, and for the three years ended December 31, 2017:

2019:

F-4

F-5

F-6

F-7

F-8

F-9



77

Table of Contents
Exhibit Index

2.1

Purchase Agreement, dated as of November 23, 2014, among BioMarin Falcons B.V., BioMarin Pharmaceutical Inc. and Prosensa Holding N.V., previously filed with the SEC on November 26, 2014 as Exhibit 2.01 to the Company’s Current Report on Form 8-K (File No. 000-26727), which is incorporated herein by reference.

Exhibit Number

Description

2.2

2.1 

2.3

2.2 

Termination Agreement, dated as of October 1, 2015, between BioMarin Pharmaceutical Inc. and Ares Trading S.A., previously filed with the SEC on January 7, 2016 as Exhibit 2.2 to the Company’s Current Report on Form 8-K (File No. 000-26727), which is incorporated herein by reference. Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment. Omitted portions have been filed separately with the SEC.

2.4

2.5

2.3 

2.6

2.4 

3.1

2.5 

3.1 

3.2

4.1

Indenture dated as of March 29, 2006, between BioMarin Pharmaceutical Inc. and Wilmington Trust Company, previously filed with the SEC on March 29, 2006 as Exhibit 4.13.1 to the Company’s Current Report on Form 8-K (File No. 000-26727), which is incorporated herein by reference.

4.2

4.1

Second Supplemental Indenture, dated as of April 23, 2007, between BioMarin Pharmaceutical Inc. and Wilmington Trust Company, previously filed with the SEC on April 23, 2007 as Exhibit 4.1 to the Company’s Current Report on Form 8-K (File No. 000-26727), which is incorporated herein by reference.

4.3

Form of 1.875% Senior Subordinated Convertible Notes due 2017, previously filed with the SEC on April 23, 2007 as Exhibit 4.2 to the Company’s Current Report on Form 8-K (File No. 000-26727), which is incorporated herein by reference.


4.4

Indenture, dated as of October 15, 2013, between BioMarin Pharmaceutical Inc. and Wilmington Trust, National Association, previously filed with the SEC on October 15, 2013 as Exhibit 4.1 to the Company’s Current Report on Form 8-K (File No. 000-26727), which is incorporated herein by reference.

4.5

4.2

4.6

4.3

4.7

4.4

4.8

4.5

10.1†

4.6*

10.1†

78

Table of Contents

10.2†

10.3†

10.4†

10.5†

10.6†

10.7†

Summary of Bonus Plan, previously filed with the SEC on February 27, 2009 as Exhibit 10.33 to the Company’s Annual Report on Form 10-K (File No. 000-26727), which is incorporated herein by reference.


10.8†

Amended and Restated Employment Agreement with Jean-Jacques Bienaimé effective December 13, 2016 previously filed with the SEC on December 19, 2016 as Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 000-26727), which is incorporated herein by reference.

10.9

10.8

10.10

10.9

10.11

10.10

10.12

10.11

10.13

10.12

10.14

10.13

10.15†

10.14†

10.16†

10.15†

10.17†

10.16†

10.18†

10.17

Form of Agreement Regarding Restricted Stock Units for the BioMarin Pharmaceutical Inc. 2012 Inducement Plan, previously filed with the SEC on August 2, 2012 as Exhibit 10.14 to the Company’s Quarterly Report on Form 10-Q (File No. 000-26727), which is incorporated herein by reference.


10.19

Capped Call Confirmation for the 2018 Notes, dated October 8, 2013, between BioMarin Pharmaceutical Inc. and Bank of America, N.A., previously filed with the SEC on October 11, 2013 as Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 000-26727), which is incorporated herein by reference.

10.20

Capped Call Confirmation for the 2020 Notes, dated October 8, 2013, between BioMarin Pharmaceutical Inc. and Bank of America, N.A., previously filed with the SEC on October 11, 2013 as Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 000-26727), which is incorporated herein by reference.

79

Table of Contents

10.21

10.18

Capped Call Confirmation for the 2018 Notes, dated October 8, 2013, between BioMarin Pharmaceutical Inc. and Morgan Stanley & Co. LLC, previously filed with the SEC on October 11, 2013 as Exhibit 10.3 to the Company’s Current Report on Form 8-K (File No. 000-26727), which is incorporated herein by reference.

10.22

10.23

10.19

Capped Call Confirmation for the 2018 Notes, dated October 8, 2013, between BioMarin Pharmaceutical Inc. and Barclays Bank PLC, previously filed with the SEC on October 11, 2013 as Exhibit 10.5 to the Company’s Current Report on Form 8-K (File No. 000-26727), which is incorporated herein by reference.

10.24

10.25

10.20

Additional Capped Call Confirmation for the 2018 Notes, dated October 9, 2013, between BioMarin Pharmaceutical Inc. and Bank of America, N.A., previously filed with the SEC on October 11, 2013 as Exhibit 10.7 to the Company’s Current Report on Form 8-K (File No. 000-26727), which is incorporated herein by reference.

10.26

10.27

10.21

Additional Capped Call Confirmation for the 2018 Notes, dated October 9, 2013, between BioMarin Pharmaceutical Inc. and Morgan Stanley & Co. LLC, previously filed with the SEC on October 11, 2013 as Exhibit 10.9 to the Company’s Current Report on Form 8-K (File No. 000-26727), which is incorporated herein by reference.

10.28

10.29

10.22

Additional Capped Call Confirmation for the 2018 Notes, dated October 9, 2013, between BioMarin Pharmaceutical Inc. and Barclays Bank PLC, previously filed with the SEC on October 11, 2013 as Exhibit 10.11 to the Company’s Current Report on Form 8-K (File No. 000-26727), which is incorporated herein by reference.

10.30

10.23


10.31

Contract of Purchase and Sale and Joint Escrow Instructions, dated December 17, 2013, for the San Rafael Corporate Center, by and among BioMarin Pharmaceutical Inc., through its wholly-owned subsidiary, California Corporate Center Acquisition, LLC, SR Corporate Center Phase One, LLC, and SR Corporate Center Phase Two, previously filed with the SEC on February 26, 2014 as Exhibit 10.68 to the Company’s Annual Report on Form 10-K (File No. 000-26727), which is incorporated herein by reference.

10.32

10.24†

Convertible Promissory Note, dated as of November 26, 2014, between Prosensa Holding N.V. and BioMarin Falcons B.V., previously filed with the SEC on November 26, 2014 as Exhibit 10.3 to the Company’s Current Report on Form 8-K (File No. 000-26727), which is incorporated herein by reference.

10.33†

10.34

10.25†

Form of Contingent Value Rights Agreement, dated as of January 14, 2015, by and between BioMarin Pharmaceutical Inc., BioMarin Falcons B.V. and American Stock Transfer & Trust Company, LLC, previously filed with the SEC on January 16, 2015 as Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 000-26727), which is incorporated herein by reference.

10.35†

10.36†

10.26†

10.37†

10.27†

10.38

10.28

10.39

10.29

Credit Agreement by and among BioMarin Pharmaceutical Inc., as the Borrower, Bank of America, N.A., as Administrative Agent, Swing Line Lender, L/C Issuer and a Lender, and the Lenders party thereto, dated as of November 29, 2016, previously filed with the SEC on February 27, 2017 as Exhibit 10.49 to the Company’s Annual Report on Form 10-K (File No. 000-26727), which is incorporated herein by reference.

10.40†

Form of Agreement Regarding Performance Compensation Award in the Form of Restricted Stock Units for the BioMarin Pharmaceutical Inc. 2006 Share Incentive Plan, previously filed with the SEC on February 27, 2017 as Exhibit 10.50 to the Company’s Annual Report on Form 10-K (File No. 000-26727), which is incorporated by reference herein.

10.41


10.42†

10.30†

10.43†

10.31†

10.32†

10.44†

10.33†

80

Table of Contents

10.45†

10.34†

10.46†

10.35†

10.36†
10.37
10.38

10.47*

21.1*

Asset Purchase Agreement by and between Novartis Pharma AG, BioMarin Pharmaceutical Inc. and BioMarin Commercial Ltd., dated as of November 21, 2017.

21.1*

23.1*

24.1*

31.1*

31.2*

32.1*

101.INS

XBRL Instance Document

- the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Document

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase

101.LAB

Inline XBRL Taxonomy Extension Labels Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Link Document

*

Filed herewith

104XBRL tags for the cover page from the Company’s Quarterly Report on Form 10-K for the year ended December 31, 2019, are embedded within the Inline XBRL document.

Management contract or compensatory plan or arrangement

* Filed herewith

† Management contract or compensatory plan or arrangement

Attached as Exhibit 101 to this report are documents formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets as of December 31, 2019 and December 31, 2018, (ii) Consolidated Statements of Operations for the years ended December 31, 2019, 2018 and 2017, (iii) Consolidated Statement of Comprehensive Loss for the years ended December 31, 2019, 2018 and 2017, (iv) Consolidated Statement of Stockholders’ Equity for the years ended December 31, 2019, 2018 and 2017, (v) Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017, and (vi) Notes to Consolidated Financial Statements.

Item 16. Form 10-K Summary

None.


81

Table of ContentsSIGNATURES

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

BIOMARIN PHARMACEUTICAL INC.

Dated: February 26, 2018

27, 2020

By:

/S/ DANIEL SPIEGELMAN

BRIAN R. MUELLER

Daniel Spiegelman

ExecutiveBrian R. Mueller
Senior
 Vice President, Finance and 
Acting
Chief Financial Officer



82

Table of Contents
Exhibit 24.1
POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jean-Jacques Bienaimé and Daniel Spiegelman,Brian R. Mueller, his or her attorney-in-fact, with the power of substitution, for him or her in any and all capacities, to sign any amendments to the Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:

Signature

Title

Date

Signature

Title

Date

/S/ JEAN-JACQUES BIENAIMÉ

Chairman and Chief Executive Officer

(Principal Executive Officer)

February 26, 2018

27, 2020

Jean-Jacques Bienaimé

/S/ DANIEL SPIEGELMAN

BRIAN R. MUELLER

ExecutiveSenior Vice President, Finance and

 Acting Chief Financial Officer (Principal Financial and Accounting Officer)

February 26, 2018

27, 2020

Daniel Spiegelman

/S/ BRIAN R. MUELLER

Senior Vice President, Finance and Chief Accounting Officer (Principal Accounting Officer)

February 26, 2018

Brian R. Mueller

/S/ ELIZABETH MCKEE ANDERSON

DirectorFebruary 27, 2020
Elizabeth McKee Anderson
/S/ WILLARD H. DERE, M.D.

Director

February 26, 2018

27, 2020

Willard H. Dere, M.D.

/S/ MICHAEL G. GREY

Director

February 26, 2018

27, 2020

Michael G. Grey

/S/ ELAINE J. HERON

Director

February 26, 2018

27, 2020

Elaine J. Heron

/S/ ROBERT J. HOMBACH

Director

February 26, 2018

27, 2020

Robert J. Hombach

/S/ V. BRYAN LAWLIS

Director

February 26, 2018

27, 2020

V. Bryan Lawlis

/S/ ALAN J. LEWIS

Director

February 26, 2018

27, 2020

Alan J. Lewis

/S/ RICHARD A. MEIER

Lead Independent Director

February 26, 2018

27, 2020

Richard A. Meier

/S/ DAVID PYOTT

Director

February 26, 2018

27, 2020

David Pyott

/S/ DENNIS J. SLAMON

Director

February 26, 2018

27, 2020

Dennis J. Slamon



83

Table of Contents
BIOMARIN PHARMACEUTICALPHARMACEUTICAL INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

PAGE

PAGE

Consolidated Financial Statements as of December 31, 20172019 and 20162018, and for the three years ended December 31, 2017:

2019:




84

Table of Contents
Report of Independent Registered Public Accounting Firm

To the stockholdersStockholders and the Board of Directors

BioMarin Pharmaceutical Inc.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of BioMarin Pharmaceutical Inc. and subsidiaries (the Company) as of December 31, 20172019 and 2016,2018, the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the years in the three‑yearthree-year period ended December 31, 2017,2019 and the related notes (collectively, the “consolidatedconsolidated financial statements”)statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20172019 and 2016,2018, and the results of its operations and its cash flows for each of the years in the three‑yearthree-year period ended December 31, 2017,2019, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 26, 201827, 2020 expressedan unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Change in Accounting Principle
As discussed in Note 4 to the consolidated financial statements, the Company has changed its method of accounting for Leases as of January 1, 2019, due to the adoption of Accounting Standards Codification 842 (ASC 842), Leases.
As discussed in Note 3 to the consolidated financial statements, the Company has changed its method of accounting for Revenue as of January 1, 2018, due to the adoption of Accounting Standards Codification 606 (ASC 606), Revenue from Contracts with Customers.
Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Evaluation of variable consideration relating to Aldurazyme net product revenue
As described in Notes 3 and 15 to the consolidated financial statements, during the year ended December 31, 2019 the Company recognized $98 million in Aldurazyme net product revenue. Under its arrangement with Genzyme Corporation (Genzyme), a wholly owned subsidiary of Sanofi, the Company receives payments ranging from 39.5% to 50% on worldwide net Aldurazyme sales by Genzyme, depending on Genzyme’s sales volume. The Company estimates this variable consideration based on the amount that it expects to be entitled to from Genzyme’s sales of Aldurazyme. The Company recognizes this revenue upon satisfying the product
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performance obligation, which is when the product is shipped to Genzyme and all required quality control certificates are complete.
We identified the evaluation of variable consideration relating to Aldurazyme net product revenue, including the evaluation of the need for constraint on variable consideration, as a critical audit matter. Evaluating the key assumptions of forecasted Genzyme’s sales volume and average price per vial involved a high degree of subjective auditor judgment due to the nature of available supporting evidence being limited to historical sales and price data related to these assumptions. Changes in these key assumptions could have a significant impact on Aldurazyme net product revenue.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s process for recognizing Aldurazyme net product revenue. This included testing controls over forecasting Genzyme’s sales volume and average price per vial used to estimate variable consideration and evaluate the need for constraint on variable consideration. We evaluated the Company’s ability to estimate the variable consideration by comparing historical estimates of sales volume and price per vial to actual sales volume and price per vial of product sold by Genzyme. We also compared the Company’s current-period forecasts of future Genzyme sales volume and average price per vial to Genzyme’s historical sales volume and price per vial. We performed a sensitivity analysis to assess the impact of changes in these key assumptions on the Company’s estimate of variable consideration.
/s/ KPMG LLP

We have served as the Company’s auditor since 2002.

San Francisco, California
February 26, 2018

27, 2020



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Report of Independent Registered Public Accounting Firm

The


To the Stockholders and Board of Directors and Stockholders

BioMarin Pharmaceutical Inc.:

Opinion on Internal Control Over Financial Reporting

We have audited BioMarin Pharmaceutical Inc.’s and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 20172019 and 2016,2018, the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2017,2019, and the related notes (collectively, the “consolidatedconsolidated financial statements”)statements), and our report dated February 26, 201827, 2020 expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting in Item 9a.9A. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ KPMG LLP

San Francisco, California
February 26, 2018

27, 2020


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BIOMARIN PHARMACEUTICAL INC.

CONSOLIDATED BALANCE SHEETS

December 31, 20172019 and 2016

2018

(In thousands of U.S. Dollars, except share and per share amounts)

 

 

December 31,

 

 

December 31,

 

 

 

2017

 

 

2016

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

598,028

 

 

$

408,330

 

Short-term investments

 

 

797,940

 

 

 

381,347

 

Accounts receivable, net

 

 

261,365

 

 

 

215,280

 

Inventory

 

 

475,775

 

 

 

355,126

 

Other current assets

 

 

74,036

 

 

 

61,708

 

Total current assets

 

 

2,207,144

 

 

 

1,421,791

 

Noncurrent assets:

 

 

 

 

 

 

 

 

Long-term investments

 

 

385,785

 

 

 

572,711

 

Property, plant and equipment, net

 

 

896,700

 

 

 

798,768

 

Intangible assets, net

 

 

517,510

 

 

 

553,780

 

Goodwill

 

 

197,039

 

 

 

197,039

 

Deferred tax assets

 

 

399,095

 

 

 

446,786

 

Other assets

 

 

29,852

 

 

 

32,815

 

Total assets

 

$

4,633,125

 

 

$

4,023,690

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

401,921

 

 

$

370,505

 

Short-term convertible debt, net

 

 

360,949

 

 

 

22,478

 

Short-term contingent acquisition consideration payable

 

 

53,648

 

 

 

46,327

 

Total current liabilities

 

 

816,518

 

 

 

439,310

 

Noncurrent liabilities:

 

 

 

 

 

 

 

 

Long-term convertible debt, net

 

 

813,521

 

 

 

660,761

 

Long-term contingent acquisition consideration payable

 

 

135,318

 

 

 

115,310

 

Other long-term liabilities

 

 

59,105

 

 

 

42,034

 

Total liabilities

 

 

1,824,462

 

 

 

1,257,415

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.001 par value: 500,000,000 and 250,000,000

shares authorized, respectively; 175,843,749 and 172,647,588                      shares issued and outstanding, respectively.

 

 

176

 

 

 

173

 

Additional paid-in capital

 

 

4,483,220

 

 

 

4,288,113

 

Company common stock held by Nonqualified Deferred Compensation

   Plan (the NQDC)

 

 

(14,224

)

 

 

(14,321

)

Accumulated other comprehensive income (loss)

 

 

(22,961

)

 

 

12,816

 

Accumulated deficit

 

 

(1,637,548

)

 

 

(1,520,506

)

Total stockholders’ equity

 

 

2,808,663

 

 

 

2,766,275

 

Total liabilities and stockholders’ equity

 

$

4,633,125

 

 

$

4,023,690

 


December 31,
2019
December 31,
2018
ASSETS
Current assets:
Cash and cash equivalents$437,446  $493,982  
Short-term investments316,361  590,326  
Accounts receivable, net377,404  342,633  
Inventory680,275  530,871  
Other current assets130,657  98,403  
Total current assets1,942,143  2,056,215  
Noncurrent assets:
Long-term investments411,978  235,864  
Property, plant and equipment, net1,010,868  948,682  
Intangible assets, net456,580  491,808  
Goodwill197,039  197,039  
Deferred tax assets549,422  460,952  
Other assets122,009  36,568  
Total assets$4,690,039  $4,427,128  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities$570,621  $437,290  
Short-term convertible debt, net361,882  —  
Short-term contingent consideration—  85,951  
Total current liabilities932,503  523,241  
Noncurrent liabilities:
Long-term convertible debt, net486,238  830,417  
Long-term contingent consideration50,793  46,883  
Other long-term liabilities98,124  58,647  
Total liabilities1,567,658  1,459,188  
Stockholders’ equity:
Common stock, $0.001 par value: 500,000,000 shares authorized;
   179,838,114 and 178,252,954 shares issued and outstanding, respectively.
180  178  
Additional paid-in capital4,832,707  4,669,926  
Company common stock held by Nonqualified Deferred Compensation Plan (the NQDC)(9,961) (13,301) 
Accumulated other comprehensive income20,164  5,271  
Accumulated deficit(1,720,709) (1,694,134) 
Total stockholders’ equity3,122,381  2,967,940  
Total liabilities and stockholders’ equity$4,690,039  $4,427,128  
The accompanying notes are an integral part of these Consolidated Financial Statements.


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BIOMARIN PHARMACEUTICAL INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 2017, 20162019, 2018 and 2015

2017

(In thousands of U.S. Dollars, except per share amounts)

 

 

2017

 

 

2016

 

 

2015

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

Net product revenues

 

$

1,270,445

 

 

$

1,110,381

 

 

$

884,522

 

Royalty and other revenues

 

 

43,201

 

 

 

6,473

 

 

 

5,373

 

Total revenues

 

 

1,313,646

 

 

 

1,116,854

 

 

 

889,895

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

241,786

 

 

 

209,620

 

 

 

152,008

 

Research and development

 

 

610,753

 

 

 

661,905

 

 

 

634,806

 

Selling, general and administrative

 

 

554,336

 

 

 

476,593

 

 

 

402,271

 

Intangible asset amortization and contingent consideration

 

 

46,471

 

 

 

(26,953

)

 

 

(17,690

)

Impairment of intangible assets

 

 

 

 

 

599,118

 

 

 

198,700

 

Gain on sale of intangible asset

 

 

(125,000

)

 

 

 

 

 

(369,498

)

Total operating expenses

 

 

1,328,346

 

 

 

1,920,283

 

 

 

1,000,597

 

LOSS FROM OPERATIONS

 

 

(14,700

)

 

 

(803,429

)

 

 

(110,702

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity in the loss of BioMarin/Genzyme LLC

 

 

(1,291

)

 

 

(538

)

 

 

(817

)

Interest income

 

 

14,853

 

 

 

7,487

 

 

 

4,501

 

Interest expense

 

 

(42,707

)

 

 

(39,499

)

 

 

(38,244

)

Other income (expense)

 

 

7,970

 

 

 

4,929

 

 

 

(9,462

)

LOSS BEFORE INCOME TAXES

 

 

(35,875

)

 

 

(831,050

)

 

 

(154,724

)

Provision for (benefit from) income taxes

 

 

81,167

 

 

 

(200,840

)

 

 

17,075

 

NET LOSS

 

$

(117,042

)

 

$

(630,210

)

 

$

(171,799

)

NET LOSS PER SHARE, BASIC

 

$

(0.67

)

 

$

(3.80

)

 

$

(1.07

)

NET LOSS PER SHARE, DILUTED

 

$

(0.67

)

 

$

(3.81

)

 

$

(1.07

)

Weighted average common shares outstanding, basic

 

 

174,427

 

 

 

165,985

 

 

 

160,025

 

Weighted average common shares outstanding, diluted

 

 

174,427

 

 

 

166,219

 

 

 

160,025

 


201920182017
REVENUES:
Net product revenues$1,661,043  $1,470,356  $1,270,445  
Royalty and other revenues43,005  20,856  43,201  
Total revenues1,704,048  1,491,212  1,313,646  
OPERATING EXPENSES:
Cost of sales359,466  315,264  241,786  
Research and development715,007  696,328  610,753  
Selling, general and administrative680,924  604,353  554,336  
Intangible asset amortization and contingent consideration74,108  48,791  46,471  
Gain on sale of intangible assets(25,000) (50,000) (125,000) 
Total operating expenses1,804,505  1,614,736  1,328,346  
LOSS FROM OPERATIONS(100,457) (123,524) (14,700) 
Equity in the loss of BioMarin/Genzyme LLC(587) (553) (1,291) 
Interest income22,748  22,831  14,853  
Interest expense(23,460) (43,664) (42,707) 
Other income, net6,945  2,205  7,970  
LOSS BEFORE INCOME TAXES(94,811) (142,705) (35,875) 
Provision for (benefit from) income taxes(70,963) (65,494) 81,167  
NET LOSS$(23,848) $(77,211) $(117,042) 
NET LOSS PER SHARE, BASIC$(0.13) $(0.44) $(0.67) 
NET LOSS PER SHARE, DILUTED$(0.13) $(0.44) $(0.67) 
Weighted average common shares outstanding, basic179,039  177,061  174,427  
Weighted average common shares outstanding, diluted179,039  177,268  174,427  
The accompanying notes are an integral part of these Consolidated Financial Statements.


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BIOMARIN PHARMACEUTICAL INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

Years Ended December 31, 2017, 20162019, 2018 and 2015

2017

(In thousands)

thousands of U.S. Dollars)

 

 

2017

 

 

2016

 

 

2015

 

NET LOSS

 

$

(117,042

)

 

$

(630,210

)

 

$

(171,799

)

OTHER COMPREHENSIVE INCOME (LOSS):

 

 

 

 

 

 

 

 

 

 

 

 

Net foreign currency gain (loss)

 

 

5

 

 

 

(2

)

 

 

(59

)

Available-for-sale debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding loss arising during the period, net

   of tax impact of $272, $4,412 and $1,581, respectively.

 

 

(483

)

 

 

(7,692

)

 

 

(2,878

)

Less: reclassifications to net loss, net of tax impact of

   $(1,191), $42 and $(681), respectively.

 

 

2,061

 

 

 

(73

)

 

 

1,192

 

Net change in unrealized holding loss, net of tax

 

 

(2,544

)

 

 

(7,619

)

 

 

(4,070

)

Cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gain (loss) arising during the

   period, net of tax impact of $0.

 

 

(38,351

)

 

 

9,677

 

 

 

17,300

 

Less: reclassifications to net loss, net of tax impact of $0.

 

 

(5,113

)

 

 

10,273

 

 

 

19,604

 

Net change in unrealized holding loss, net of tax

 

 

(33,238

)

 

 

(596

)

 

 

(2,304

)

OTHER COMPREHENSIVE LOSS, NET OF TAX

 

 

(35,777

)

 

 

(8,217

)

 

 

(6,433

)

COMPREHENSIVE LOSS

 

$

(152,819

)

 

$

(638,427

)

 

$

(178,232

)


201920182017
NET LOSS$(23,848) $(77,211) $(117,042) 
OTHER COMPREHENSIVE INCOME (LOSS):
Available-for-sale debt securities:
Unrealized holding gain (loss) arising during the period, net
   of tax impact of $(1,640), $(413) and $272, respectively.
5,482  1,391  (483) 
Less: reclassifications to net loss, net of tax impact of
   $0, $0 and $(1,191), respectively.
—  —  2,061  
Net change in unrealized holding gain (loss), net of tax5,482  1,391  (2,544) 
Cash flow hedges:
Unrealized holding gain (loss) arising during the period, net of tax impact of $0 for all periods presented.25,266  25,386  (38,351) 
Less: reclassifications to net loss, net of tax impact of $0 for all
periods presented.
15,853  (2,047) (5,113) 
Net change in unrealized holding gain (loss), net of tax9,413  27,433  (33,238) 
Other(2) (6)  
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX14,893  28,818  (35,777) 
COMPREHENSIVE LOSS$(8,955) $(48,393) $(152,819) 
The accompanying notes are an integral part of these Consolidated Financial Statements.




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BIOMARIN PHARMACEUTICAL INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Years Ended December 31, 2017, 20162019, 2018 and 2015

2017

(In thousands of U.S. dollarsDollars and share amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Stock

 

 

Other

 

 

 

 

 

 

Total

 

 

 

Common stock

 

 

Paid-in

 

 

Held by

 

 

Comprehensive

 

 

Accumulated

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

NQDC

 

 

Income (Loss)

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2014

 

 

149,094

 

 

$

149

 

 

$

2,359,744

 

 

$

(9,695

)

 

$

27,466

 

 

$

(849,770

)

 

$

1,527,894

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(171,799

)

 

 

(171,799

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,433

)

 

 

 

 

 

 

(6,433

)

Issuance of common stock, net

  of offering costs

 

 

9,775

 

 

 

10

 

 

 

888,247

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

888,257

 

Issuances under equity

  incentive plans, net of tax

 

 

2,208

 

 

 

2

 

 

 

40,054

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

40,056

 

Conversion of convertible

  notes, net

 

 

449

 

 

 

1

 

 

 

9,111

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9,112

 

Company stock held by NQDC

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,921

)

 

 

 

 

 

 

 

 

 

 

(3,921

)

Excess tax benefit from stock

  option exercises

 

 

 

 

 

 

 

 

 

 

2,190

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,190

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

115,491

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

115,491

 

Balance at December 31, 2015

 

 

161,526

 

 

$

162

 

 

$

3,414,837

 

 

$

(13,616

)

 

$

21,033

 

 

$

(1,021,569

)

 

$

2,400,847

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(630,210

)

 

 

(630,210

)

Cumulative-effect adjustment

  of new share-based

  compensation guidance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

131,273

 

 

 

131,273

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,217

)

 

 

 

 

 

 

(8,217

)

Issuance of common stock, net

  of offering costs

 

 

7,500

 

 

 

8

 

 

 

712,930

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

712,938

 

Issuances under equity

  incentive plans, net of tax

 

 

3,184

 

 

 

3

 

 

 

14,755

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14,758

 

Conversion of convertible

  notes, net

 

 

438

 

 

 

 

 

 

 

8,928

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,928

 

Company stock held by NQDC

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(705

)

 

 

 

 

 

 

 

 

 

 

(705

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

136,663

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

136,663

 

Balance at December 31, 2016

 

 

172,648

 

 

$

173

 

 

$

4,288,113

 

 

$

(14,321

)

 

$

12,816

 

 

$

(1,520,506

)

 

$

2,766,275

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(117,042

)

 

 

(117,042

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(35,777

)

 

 

 

 

 

 

(35,777

)

Issuances under equity

  incentive plans, net of tax

 

 

2,092

 

 

 

2

 

 

 

27,350

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27,352

 

Conversion of convertible

  notes, net

 

 

1,104

 

 

 

1

 

 

 

22,476

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

22,477

 

Company stock held by NQDC

 

 

 

 

 

 

 

 

 

 

 

 

 

 

97

 

 

 

 

 

 

 

 

 

 

 

97

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

145,281

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

145,281

 

Balance at December 31, 2017

 

 

175,844

 

 

$

176

 

 

$

4,483,220

 

 

$

(14,224

)

 

$

(22,961

)

 

$

(1,637,548

)

 

$

2,808,663

 


201920182017
Shares of Common Stock, beginning balances178,253  175,844  172,648  
Issuances under equity incentive plans1,585  2,314  2,092  
Conversion of convertible notes, net—  95  1,104  
Shares of Common Stock, ending balances179,838  178,253  175,844  
Total stockholders' equity, beginning balances$2,967,940  $2,808,663  $2,766,275  
Common stock:
Beginning balances178  176  173  
Issuances under equity incentive plans, net of tax   
Conversion of convertible notes, net—  —   
Ending balances180  178  176  
Additional paid-in capital:
Beginning balances4,669,926  4,483,220  4,288,113  
Issuances under equity incentive plans, net of tax(11,071) 31,583  27,350  
Stock-based compensation163,891  155,139  145,281  
Conversion of convertible notes, net—  (16) 22,476  
Common stock held by the NQDC(692) —  —  
Accounting impact of NQDC Plan change (See Note 17)10,653  —  —  
Ending balances4,832,707  4,669,926  4,483,220  
Company common stock held by the NQDC:
Beginning balances(13,301) (14,224) (14,321) 
Common stock held by the NQDC692  923  97  
Accounting impact of NQDC Plan change (See Note 17)2,648  —  —  
Ending balances(9,961) (13,301) (14,224) 
Accumulated other comprehensive income (loss):
Beginning balances5,271  (22,961) 12,816  
Impact of change in accounting principle—  (586) —  
Other comprehensive income (loss)14,893  28,818  (35,777) 
Ending balances20,164  5,271  (22,961) 
Accumulated Deficit:
Beginning balances(1,694,134) (1,637,548) (1,520,506) 
Impact of changes in accounting principles(2,727) 20,625  —  
Net loss(23,848) (77,211) (117,042) 
Ending balances(1,720,709) (1,694,134) (1,637,548) 
Total stockholders' equity, ending balances$3,122,381  $2,967,940  $2,808,663  
The accompanying notes are an integral part of these Consolidated Financial Statements.


91

Table of Contents
BIOMARIN PHARMACEUTICAL INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2017, 20162019, 2018 and 2015

2017

(In thousands of U.S. dollars)

 

2017

 

 

2016

 

 

2015

 

201920182017

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss

 

$

(117,042

)

 

$

(630,210

)

 

$

(171,799

)

Net loss$(23,848) $(77,211) $(117,042) 

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization expense

 

 

87,861

 

 

 

96,912

 

 

 

47,187

 

Depreciation and amortizationDepreciation and amortization105,300  95,671  87,861  

Non-cash interest expense

 

 

32,300

 

 

 

29,930

 

 

 

28,493

 

Non-cash interest expense13,960  31,186  32,300  

Accretion of discount on investments

 

 

3,077

 

 

 

1,300

 

 

 

2,177

 

Amortization of premium on investments (accretion of discount)Amortization of premium on investments (accretion of discount)(2,000) 358  3,077  

Stock-based compensation expense

 

 

140,263

 

 

 

134,641

 

 

 

111,525

 

Stock-based compensation expense159,865  148,819  140,263  

Gain on sale of intangible asset

 

 

(125,000

)

 

 

 

 

 

(369,498

)

(Gain) loss on sale of equity investment

 

 

(3,252

)

 

 

108

 

 

 

(3,022

)

Impairment of assets

 

 

 

 

 

599,118

 

 

 

211,502

 

Gain on sale of intangible assetsGain on sale of intangible assets(25,000) (50,000) (125,000) 
Gain on sale of equity investmentGain on sale of equity investment(714) —  (3,252) 

Deferred income taxes

 

 

44,464

 

 

 

(228,054

)

 

 

(76,827

)

Deferred income taxes(82,760) (68,378) 44,464  

Unrealized foreign exchange loss (gain)

 

 

6,258

 

 

 

(14,481

)

 

 

(19,575

)

Unrealized foreign exchange loss (gain)1,025  (17,766) 6,258  

Non-cash changes in the fair value of contingent acquisition

consideration payable

 

 

10,342

 

 

 

(57,161

)

 

 

(28,457

)

Non-cash changes in the fair value of contingent considerationNon-cash changes in the fair value of contingent consideration5,205  9,296  10,342  

Other

 

 

5,935

 

 

 

336

 

 

 

2,463

 

Other(1,679) (2,347) 5,935  

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Changes in operating assets and liabilities:

Accounts receivable, net

 

 

(25,256

)

 

 

(51,483

)

 

 

(16,367

)

Accounts receivable, net(37,852) (54,274) (25,256) 

Inventory

 

 

(96,890

)

 

 

(64,512

)

 

 

(50,989

)

Inventory(107,554) (23,747) (96,890) 

Other current assets

 

 

(20,687

)

 

 

19,316

 

 

 

25,800

 

Other current assets(27,008) (17,767) (20,687) 

Other assets

 

 

(2,439

)

 

 

(4,979

)

 

 

(3,157

)

Other assets(8,895) (935) (2,439) 

Accounts payable and accrued liabilities

 

 

45,517

 

 

 

(53,205

)

 

 

90,298

 

Accounts payable and accrued liabilities77,089  38,389  45,517  

Other long-term liabilities

 

 

5,792

 

 

 

(5,413

)

 

 

747

 

Other long-term liabilities3,128  8,914  5,792  

Net cash used in operating activities

 

 

(8,757

)

 

 

(227,837

)

 

 

(219,499

)

Net cash provided by (used in) operating activitiesNet cash provided by (used in) operating activities48,262  20,208  (8,757) 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchases of property, plant and equipment

 

 

(199,219

)

 

 

(148,380

)

 

 

(227,653

)

Purchases of property, plant and equipment(145,026) (144,620) (199,219) 

Deposit on purchase of PKU rights

 

 

 

 

 

 

 

 

(371,756

)

Maturities and sales of investments

 

 

425,960

 

 

 

367,569

 

 

 

424,713

 

Maturities and sales of investments740,211  993,734  425,960  

Purchase of available-for-sale debt securities

 

 

(655,447

)

 

 

(699,749

)

 

 

(873,184

)

Purchase of available-for-sale debt securities(632,023) (634,753) (655,447) 

Proceeds from sale of intangible asset

 

 

125,000

 

 

 

 

 

 

410,000

 

Proceeds from sale of intangible asset25,000  50,000  125,000  

Business acquisitions, net of cash acquired

 

 

 

 

 

(2,789

)

 

 

(538,392

)

Purchase of intangible assetsPurchase of intangible assets(18,380) —  —  

Other

 

 

(1,753

)

 

 

(698

)

 

 

(3,326

)

Other(808) (10) (1,753) 

Net cash used in investing activities

 

 

(305,459

)

 

 

(484,047

)

 

 

(1,179,598

)

Net cash provided by (used in) investing activitiesNet cash provided by (used in) investing activities(31,026) 264,351  (305,459) 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from exercises of awards under equity incentive plans

 

 

60,859

 

 

 

74,227

 

 

 

63,045

 

Proceeds from exercises of awards under equity incentive plans31,611  67,488  60,859  

Taxes paid related to net share settlement of equity awards

 

 

(33,507

)

 

 

(59,469

)

 

 

(22,989

)

Taxes paid related to net share settlement of equity awards(42,680) (35,919) (33,507) 

Proceeds from public offering of common stock, net

 

 

 

 

 

712,938

 

 

 

888,257

 

Proceeds from convertible senior subordinated note offering, net

 

 

481,713

 

 

 

 

 

 

 

Proceeds from convertible senior subordinated note offering, net—  —  481,713  

Payment of contingent acquisition consideration payable

 

 

(1,894

)

 

 

 

 

 

 

Other

 

 

(26

)

 

 

(588

)

 

 

(2,590

)

Net cash provided by financing activities

 

 

507,145

 

 

 

727,108

 

 

 

925,723

 

Repayments of convertible debtRepayments of convertible debt—  (374,953) (26) 
Payment of contingent considerationPayment of contingent consideration(58,518) (44,623) (1,894) 
Principal repayments of financing leasesPrincipal repayments of financing leases(5,087) —  —  
Net cash provided by (used in) financing activitiesNet cash provided by (used in) financing activities(74,674) (388,007) 507,145  

Effect of exchange rate changes on cash

 

 

(3,231

)

 

 

(3,934

)

 

 

(5,072

)

Effect of exchange rate changes on cash902  (598) (3,231) 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

189,698

 

 

 

11,290

 

 

 

(478,446

)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS(56,536) (104,046) 189,698  

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents:

Beginning of period

 

 

408,330

 

 

 

397,040

 

 

 

875,486

 

Beginning of period493,982  598,028  408,330  

End of period

 

$

598,028

 

 

$

408,330

 

 

$

397,040

 

End of period$437,446  $493,982  $598,028  

SUPPLEMENTAL CASH FLOW DISCLOSURES:

 

 

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW DISCLOSURES:

Cash paid for interest, net of interest capitalized into fixed assets

 

$

8,544

 

 

$

8,643

 

 

$

9,307

 

Cash paid for interest, net of interest capitalized into fixed assets$8,552  $11,623  $8,544  

Cash paid for income taxes

 

$

23,895

 

 

$

95,857

 

 

$

16,084

 

Cash paid for income taxes$9,726  $16,676  $23,895  

Stock-based compensation capitalized into inventory

 

$

16,052

 

 

$

11,449

 

 

$

11,140

 

Depreciation capitalized into inventory

 

$

24,076

 

 

$

17,375

 

 

$

14,627

 

SUPPLEMENTAL CASH FLOW DISCLOSURES FOR NON-CASH

INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW DISCLOSURES FOR NON-CASH INVESTING AND FINANCING ACTIVITIES:

Increase (decrease) in accounts payable and accrued liabilities related to

fixed assets

 

$

(25,786

)

 

$

20,158

 

 

$

(4,651

)

Increase (decrease) in accounts payable and accrued liabilities related to fixed assets$7,589  $(1,206) $(25,786) 

Conversion of convertible debt, net

 

$

22,477

 

 

$

8,928

 

 

$

9,112

 

Conversion of convertible debt, net$—  $—  $22,477  

The accompanying notes are an integral part of these Consolidated Financial Statements.



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Table of Content
BIOMARIN PHARMACEUTICAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands of U.S. dollars,Dollars, except per share amounts or as otherwise disclosed)


(1) NATURE OF OPERATIONS AND BUSINESS RISKS

BioMarin Pharmaceutical Inc. (the Company or BioMarin) is a global biotechnology company that develops and commercializes innovative therapies for people with serious and life-threatening rare diseases and medical conditions. The Company selects product candidates for diseases and conditions that represent a significant unmet medical need, have well-understood biology and provide an opportunity to be first-to-market or offer a significant benefit over existing products. The Company’s therapy portfolio consists of sixseveral commercial products and multiple clinical and pre-clinicalpreclinical product candidates.

The Company expects to continue to finance future cash needs that exceed its operating activities primarily through its current cash, cash equivalents and investments and through proceeds from debt or equity offerings, commercial borrowing, or through collaborative agreements with corporate partners. If the Company elects to increase its spending on development programs significantly above current long-term plans or enters into potential licenses and other acquisitions of complementary technologies, products or companies, the Company may need additional capital.

The Company is subject to a number of risks, including: the financial performance of its commercial products; the potential need for additional financings;financing; the Company’s ability to successfully commercialize its approved products; the uncertainty of the Company’s research and development (R&D) efforts resulting in future successful commercial products; the Company’s ability to successfully obtain regulatory approval for new products; significant competition from larger organizations; reliance on the proprietary technology of others; dependence on key personnel; uncertain patent protection; dependence on corporate partners and collaborators; and possible restrictions on reimbursement from governmental agencies and healthcare organizations, as well as other changes in the healthcare industry. Please see “Risk Factors” included in Part I, Item 1A of this Annual Report on Form 10-K for a more detailed discussion of these risks.

(2) BASIS OF PRESENTATION

Basis of Presentation

These Consolidated Financial Statements have been prepared pursuant to United States generally accepted accounting principles (U.S. GAAP) and the rules and regulations of the Securities and Exchange Commission (the SEC) for Annual Reports on Form 10-K and include the accounts of BioMarin and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated. Certain amounts in these notes to the Company’s Consolidated Financial Statements have been reclassified to conform to the current period presentation. Management performed an evaluation of the Company’s activities through the date of filing of this Annual Report on Form 10-K, and has concluded that, other than the event discussed in Note 22 to these Consolidated Financial Statements, there arewere no subsequent events or transactions that occurred subsequent to the balance sheet date and prior to the filing this Annual Report on Form 10-K that would require recognition or disclosure in the Consolidated Financial Statements.

Effective January 1, 2019, the Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 842, Leases (ASC Topic 842) using the modified retrospective method for all lease arrangements at the beginning of the period of adoption. Amounts reported for 2019 were presented under ASC Topic 842, whereas prior period amounts were not adjusted and continue to be presented in accordance with the Company’s historical accounting under ASC Topic 840, Leases. See Notes 4 and 12 to these Consolidated Financial Statements for additional discussion of the adoption of ASC Topic 842 and required disclosures.
On January 1, 2019, the Company adopted Accounting Standards Update (ASU) No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12), using the modified retrospective method as discussed in Note 3 - Significant Accounting Policies. This ASU provides new guidance about income statement classification and eliminates the requirement to separately measure and report hedge ineffectiveness. Results for 2019 were presented under ASU 2017-12, whereas prior period amounts were not adjusted and continue to be presented in accordance with the Company’s historical accounting. See Note 4 for additional discussion of the adoption and Note 11 to these Consolidated Financial Statements for additional disclosures required by ASU 2017-12.
Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make judgments, 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. Although these estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future, actual results may be different from those estimates.

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Table of Content
BIOMARIN PHARMACEUTICAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands of U.S. Dollars, except per share amounts or as otherwise disclosed)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents and Investments

The Company treats highly liquid investments, readily convertible to cash, with original maturities of three months or less when purchasedon the purchase date as cash equivalents.
Marketable and cash equivalents. Cash and cash equivalents primarily consist of cash on deposit with banks, investments in money market funds and debt securities with original maturities of three months or less when purchased.

F-9


BIOMARIN PHARMACEUTICAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(In thousands of U.S. dollars, except per share amounts or as otherwise disclosed)

Non-Marketable Securities

Marketable Securities
The Company determines the appropriate classification of its investments in debt and equity securities at the time of purchase and reevaluates such designations at each balance sheet date.reporting period. The Company classifies its debt and equity securities with original maturities greater than three months when purchased as either short-term or long-term investments based on each instrument’s underlying contractual maturity date and its availability for use in current operations. Available-for-sale debt securities are recorded at fair market value with unrealized gains and losses included in Accumulated Other Comprehensive Income (Loss)(AOCI) on the Company’s Consolidated Balance Sheets, with the exception of unrealized losses believed to be other-than-temporary, which, if any, which are reported in Other Income, (Expense)Net in the current period. Available-for-sale debtImpairment assessments are made at the individual security level each reporting period. When the fair value of an investment is less than its cost at the balance sheet date, a determination is made as to whether the impairment is other-than-temporary and, if it is other-than-temporary, an impairment loss is recognized in earnings equal to the difference between the investment’s amortized cost and fair value at such date.
Non-Marketable Equity Securities
The Company records investments in equity securities, primarily consistother than equity method investments, at fair market value, if fair value is readily determinable. Equity securities with no readily determinable fair values are recorded using the measurement alternative of corporatecost adjusted for observable price changes in orderly transactions for identical or similar investments of the same issuer less impairment, if any. Investments in equity securities commercial paper, U.S. federal government agencyare recorded in Other Assets on the Company's Consolidated Balance Sheets. Unrealized gains and losses are reported in Other Income, Net. The Company regularly reviews its non-marketable equity securities and certificatesfor indicators of deposit.

impairment.

Inventory

The Company values inventory at the lower of cost and net realizable value and determines the cost of inventory using the average-cost method. The Company analyzes its inventory levels quarterly and adjusts inventory to its net realizable value, if required, for obsolete, or hasobsolescence, for a cost basis in excess of its expected net realizable value or for quantities in excess of expected requirements. TheseIf the Company determines cost exceeds its net realizable value, the resulting adjustments are recognized as Cost of Sales in the Company’s Consolidated Statements of Operations.

When future commercialization is considered probable and the future economic benefit is expected to be realized, based on management’s judgment, the Company capitalizes pre-launch inventoryor pre-qualification manufacturing costs prior to regulatory approval. A number of factors are taken into consideration, including the current status in the regulatory approval process, pivotal clinical trial results for the underlying product candidate, results from meetings with the relevant regulatory authorities prior to the filing of regulatory applications, historical experience, as well as potential impediments to the approval process such as product safety or efficacy, commercialization and marketplace trends. As of December 31, 2017, the amount of pre-launch inventory on the Company’s Consolidated Balance Sheets was not significant.

Property, Plant and Equipment

Property, plant and equipment are stated at historical cost net of accumulated depreciation. Depreciation is computed using the straight-line method over the related estimated useful lives, as presented in the table below. Significant additions and improvements are capitalized, whilewhereas repairs and maintenance are charged to expenseexpensed as incurred. Depreciation of property, plant and equipment are included in Cost of Sales, Research and Development (R&D) and Selling, General and Administrative and Research and Development,(SG&A), as appropriate, in the Consolidated Statements of Operations. Property and equipment purchased for specific R&D projects with no alternative future uses are expensed as incurred and recorded to Research and DevelopmentR&D in the Consolidated Statements of Operations.


94

Table of Content
BIOMARIN PHARMACEUTICAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands of U.S. Dollars, except per share amounts or as otherwise disclosed)

Leasehold improvements

Shorter of life of asset or lease term

Building and improvements

1520 to 50 years

Manufacturing and laboratory equipment

5 to 1815 years

Computer hardware and software

3 to 105 years

Office furniture and equipment

5 to 10 years

Vehicles

Vehicles

5 years

Land improvements

5 to 10 years

Land

Land

Not applicable

Construction-in-progress

Construction-in-progress

Not applicable

F-10


BIOMARIN PHARMACEUTICAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(In thousands of U.S. dollars, except per share amounts or as otherwise disclosed)

Leases

Certain

The Company determines if an arrangement is a lease at contract inception. For leases where the Company is the lessee, right-of-use (ROU) assets represent the Company’s right to use the underlying asset for the term of the Company’s operating lease agreements include scheduled rent escalationsand the lease liabilities represent the lease payment obligation. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of the future lease payments over the lease term. The Company uses its incremental borrowing rate based on the information available at the commencement date of the underlying lease arrangement to determine the present value of lease payments. The ROU asset also includes any prepaid lease payments and any lease incentives received. The lease term as well as tenant improvement allowances. Scheduled increases in rentto calculate the ROU asset and related lease liability includes options to extend or terminate the lease when it is reasonably certain that the Company will exercise the option. The Company’s lease agreements generally do not contain any material variable lease payments, residual value guarantees or restrictive covenants.
Lease expense arefor operating leases is recognized on a straight-line basis over the lease term. The difference between rentterm as an operating expense while expense for financing leases is recognized as depreciation expense and rent paidinterest expense using the accelerated interest method of recognition. When an arrangement requires payments for lease and non-lease components, the Company has elected to account for lease and non-lease components separately. Lease expense for leases with a term of twelve months or less is recorded as deferred rent and included in Other Liabilities in the Consolidated Balance Sheets. The tenant improvement allowances and free rent periods are recognized as a reduction of rent expense over the lease term on a straight-line basis. Rent expense is recorded to Cost of Sales, Researchbasis and Development and/or Selling, General and Administrative, as appropriate,are not included in the Consolidated Statements of Operations.

recognized ROU assets and lease liabilities.

Goodwill and Intangible 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. Intangible assets with indefinite useful lives are related to purchased in-process research and development (IPR&D) projects and are measured at their respective fair values as of the acquisition date. The Company does not amortize goodwill and intangible assets with indefinite useful lives. Intangible assets related to IPR&D projects are considered to be indefinite livedindefinite-lived until the completion or abandonment of the associated R&D efforts. If and when development is complete, which generally occurs if and when regulatory approval to market a product is obtained, the associated assets are considered finite-lived and are amortized using the straight-line method based on their respective estimated useful lives at that point in time. The amortization of these intangible assets is included in Intangible Asset Amortization and Contingent Consideration in the Consolidated Statements of Operations.

Impairment

The Company reviewsassesses its goodwill and indefinite livedindefinite-lived intangible assets for impairment annually in the fourth quarter, or more frequently as warranted by events or changes in circumstances whichthat indicate that the carrying amount may not be recoverable. The Company qualitatively assesses goodwill and indefinite lived
Goodwill is assessed for impairment by comparing the fair value of the Company’s reporting unit with its carrying amount. If the carrying value of the reporting unit exceeds its fair value, an impairment loss equal to the difference would be recorded. NaN impairment charges were recorded in the periods presented.
Indefinite-lived intangible assets to determine whetherare assessed for impairment first by performing a qualitative assessment. If the qualitative assessment indicates that it is more likely than not that the fair value of the Company’s single reporting unit or other indefinite livedan indefinite-lived intangible asset is less than its carrying amount. If it is determined that the fair value is more likely than not less than its carrying value, a two-step impairment test will be performed.

In the first step of the impairment test,amount, then the Company compares the carrying value of its single reporting unit or applicable asset to its fair value, which the Company estimates usingwill perform a discounted cash flow analysis. If the carrying amount of its single reporting unit or asset exceeds its estimated fair value, the Company performs the second step,quantitative assessment and determines therecord an impairment loss, if any, as the excess of the carrying value of the goodwill or intangible asset over its fair value.loss. Impairment charges that are not material are recorded to Intangible Asset Amortization and Contingent Consideration in the Consolidated Statements of Operations. See Note 7 to these Consolidated Financial Statements forNo impairment charges were recorded in the resultsperiods presented.

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Long-lived Asset Impairment
The Company’s 2017 qualitative assessment.

Long-livedlong-lived assets includingconsist of property, plant and equipment and finite-lived intangible assets are reviewed for impairment whenever facts or circumstances whether internally or externally may suggest that the carrying value of an asset or asset group may not be recoverable.assets. Should there be an indication of impairment, the Company tests for recoverability by comparing the estimated undiscounted future cash flows expected to result from the use of the asset or asset group and its eventual disposition to the carrying amount of the asset or asset group. Any excess of the carrying value of the asset or asset group over its estimated fair value is recognized as an impairment loss.

Impairment charges related to property, plant or equipment that are not material are recorded to depreciation expense and presented in SG&A in the Consolidated Statements of Operations. Impairment charges related to finite-lived intangible assets that are not material are recorded to Intangible Asset Amortization and Contingent Consideration in the Consolidated Statements of Operations.

Revenue Recognition

Effective January 1, 2018, the Company adopted the provisions of ASC 606, Revenue from Contracts with Customers (ASC Topic 606) using the modified retrospective method for all contracts not completed as of the date of adoption. The reported results for 2019 and 2018 reflect the application of ASC Topic 606 guidance, while the reported results for 2017 were prepared under the guidance of ASC 605, Revenue Recognition.
The Company recognizes revenue when persuasive evidenceits customer obtains control of promised goods or services, in an arrangement exists, delivery has occurred,amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that are within the scope of ASC Topic 606, the Company performs the following five steps:
(i)identification of the promised goods or services in the contract;
(ii)determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract;
(iii)measurement of the transaction price, including the constraint on variable consideration;
(iv)allocation of the transaction price to the buyerperformance obligations based on estimated selling prices; and
(v)recognition of revenue when (or as) the Company satisfies each performance obligation. A performance obligation is fixeda promise in a contract to transfer a distinct good or determinable and collection from the customer is reasonably assured.

Net Product Revenues—The Company recognizes revenues from product sales when title and risk of loss have passedservice to the customer which typically occurs upon delivery.and is the unit of account.

Net Product sales transactions are evidenced by customer purchase orders, customer contracts, invoices and/or the related shipping documents. Amounts collected from customers and remitted to governmental authorities, which primarily consists of value-added taxes related to product sales in foreign jurisdictions, are presented on a net basis in the Consolidated Statements of Operations, in that taxes billed to customers are not included as a component of net product revenues.

Revenues

In the U.S., the Company’s commercial products, except for Palynziq and Aldurazyme, are generally sold to specialty pharmacies or end-users, such as hospitals, which act as retailers. Through December 31, 2015, the Company also sold Kuvan to Ares Trading S.A. (Merck Serono) at a price near its manufacturing cost, and Merck Serono resold the product to end users outside the U.S., Canada and Japan. The royalty earned from Kuvan product sold by Merck Serono in the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(In thousands of U.S. dollars, except per share amounts or as otherwise disclosed)

EU was included as a component of Net Product RevenuesPalynziq is distributed in the period earned.U.S. through certain certified specialty pharmacies under the Palynziq Risk Evaluation and Mitigation Strategy (REMS) and Aldurazyme is marketed world-wide by Sanofi Genzyme (Genzyme). Outside the U.S., the Company’s commercial products are sold to its authorized distributors or directly to government purchasers or hospitals, which act as the end-users.

The Revenues from product sales are recognized when the customer obtains control of the Company’s product, which occurs at a point in time, typically upon shipment to the customer. Amounts collected from customers and remitted to governmental authorities, which primarily consist of value-added taxes related to product sales in foreign jurisdictions, are presented on a net basis on the Company’s Consolidated Statements of Operations, in that taxes billed to customers are not included as a component of Net Product Revenues.

For Aldurazyme revenues, the Company receives a payment ranging from 39.5% to 50% on worldwide net Aldurazyme sales by Genzyme Corporation (Genzyme) depending on sales volume, which is included in Net Product Revenues inon the Company’s Consolidated Statements of Operations. The Company recognizes a portionits best estimate of this amount as product transferthe revenue it expects to earn when the product is shippedreleased and released to Genzyme because all of the Company’s performance obligations are fulfilled at that point and title to, and risk of loss for, the product hascontrol is transferred to Genzyme. The Company records Aldurazyme net product transfer revenue represents the fixed amount per unit of Aldurazyme that Genzyme is required to pay the Company if the product is unsold by Genzyme. The amount of product transfer revenue will eventually be deducted from the revenues earned by the Company calculated based on Genzyme’s net sales recognizedthe estimated variable consideration payable when the product is sold through by Genzyme. TheActual amounts of consideration ultimately received may differ from the Company’s estimates. Differences between the estimated variable consideration to be received from Genzyme and actual payments received are not expected to be material. If actual results vary from the Company’s estimates, the Company recordswill make adjustments, which would affect Net Product Revenues and earnings in the Aldurazyme revenues based onperiod such variances become known.
Revenue Reserves
Revenues from product sales are recorded at the net sales information provided by Genzymeprice (transaction price), which includes estimates of variable consideration for which reserves are established and record product transfer revenuewhich result from government rebates, sales returns, and other incentives that are offered within contracts between the Company and its customers, such as specialty pharmacies, hospitals, authorized distributors and government purchasers. These reserves are based on the fulfillmentamounts earned or to be claimed on the related sales and are classified as reductions of Genzyme purchase orders in accordance withaccounts receivable (if the amount is payable to the customer) or a current liability (if the amount
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is payable to a party other than a customer). Where appropriate, these estimates take into consideration a range of possible outcomes that are probability-weighted for relevant factors such as the Company’s historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the related agreements with Genzyme and when the title and riskcontract. The amount of loss for the productvariable consideration that is transferred to Genzyme. Although described as royaltiesincluded in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from the Company’s agreements with Genzyme, the revenues thatestimates, however the Company receives for Aldurazyme and, fordoes not expect any such difference to be material. If actual results in the periods through 2015, for Kuvan, are similar to direct product sales becausefuture vary from the Company’s estimates, the Company manufactures thewill adjust its estimates, which would affect net product revenue and the revenue is highly dependent on substantial operational activities performed by the Company, including responsibility for global regulatory compliance. These responsibilities, and the operational risk that could reduce or eliminate the Company’s receipt of these percentage of net sales amounts, are similar to many of the responsibilities and risks associated with the Company’s direct sales of other commercial products. Due to the significant role the Company playsearnings in the operations of Aldurazyme as well as the rights and responsibilities to deliver the products to Genzyme, the Company includes Aldurazyme revenues as a component of Net Product Revenues in the Company’s Consolidated Statements of Operations. See Note 4 to these Consolidated Financial Statements for further discussion on the Company’s adoption of Accounting Standards Update (ASU) No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers, as amended (commonly referred to as ASC Topic 606) on January 1, 2018.

period such variances become known.

Government Rebates: The Company records an allowancereserves for governmentrebates payable under Medicaid and other rebates is estimated based on products sold, customer mix, and program requirements.government programs as a reduction of revenue at the time product revenues are recorded. The Company evaluates itsCompany’s reserve calculations require estimates, including estimates of customer mix, to estimatedetermine which sales will be subject to rebates and consider changes to government program guidelines that would impact the actual rebates and/or estimatesamount of which sales qualify for such rebates. The Company updates its estimates and assumptions on a quarterly basis based on actual historical experience and records any necessary adjustments to its reserves. The Company records fees paid to distributors and cash discounts as a reduction of revenue.

Sales Returns: The Company records allowances for product returns, if appropriate, as a reduction of revenue at the time product sales are recorded. The Company relies on historical return rates to estimate returns. Several factors are considered in determining whether an allowance for product returns is required, including market exclusivity of the products based on their orphan drug status, the patient population, the customers’ limited return rights and the Company’s historical experience with returns. Because of the pricing of the Company’s commercial products, the limited number of patients and the customers’ limited return rights, most customers and retailers carry a limited inventory. Certain international customers, usually government entities, tendThe Company relies on historical return rates to purchase larger quantities of product less frequently. Although such buying patterns may result in revenue fluctuations from quarter to quarter, the Company has not experienced any increased product returns or risk of product returns related to such buying patterns. Genzyme’s contractual return rightsestimate a reserve for Aldurazyme are limited to defective product.returns. Based on these factors and the fact that the Company has not experienced significant product returns to date, management has concluded thatreturn allowances are not material.
Other Incentives: Other incentives include fees paid to the Company’s distributors and discounts for prompt payment. The Company also offers a branded co-pay assistance program for eligible patients with commercial insurance in the U.S. who are on Brineura, Kuvan or Palynziq therapy. The branded co-pay assistance programs assist commercially insured patients who have coverage for an eligible BioMarin product returns will be minimal. Inand are intended to reduce each participating patient’s portion of the future, if anyfinancial responsibility of these factors and/or the historypurchase price up to a specified dollar amount of product returns change, an allowanceassistance. The Company records fees paid to distributors, cash discounts and amounts paid under the brand specific co-pay assistance program for product returns may be required.

each patient as a reduction of revenue.

Royalty and Other Revenues—includesRevenues
Royalties: For arrangements that include the receipt of sales-based royalties, including milestone payments based on netthe level of sales of products withwhen the license is deemed to be the predominant item to which the royalties relate, the Company has no direct involvement, collaborative agreement revenues and rental income.  

Royaltyrecognizes revenue is recognized as earned in accordance with the contract terms at the timelater of (a) when the related sales occur, or (b) when the performance obligation to which some or all of the royalty amounthas been allocated has been satisfied (or partially satisfied).

Licenses of intellectual property:If the license to the Company’s intellectual property is fixed or determinable based on information receiveddetermined to be distinct from the licensees and sublicensees and atother performance obligations identified in the time collectibility is reasonably assured.

Revenuearrangement, the Company recognizes revenues from non-refundable, up-front fees allocated to the license fees,when the license is transferred to the customer and the customer is able to use and benefit from the license. For licenses that are bundled with other promises, the Company uses judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-front fees. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.

Milestone payments: At the inception of each arrangement that includes developmental, regulatory or commercial milestone payments, the Company evaluates whether achieving the milestones is considered probable and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the value of the associated milestone (such as a regulatory submission by the Company) is included in the transaction price. Milestone payments that are not within the control of the Company, such as under an obligation to supply product,approvals from regulators or where attainment of the specified event is dependent on the development activities of a third party, are not considered probable of being achieved until those approvals are received or the specified event occurs. Revenue is recognized asfrom the satisfaction of performance occurs and the Company’s obligations are completed or recognized up-front upon agreement execution if there are no continuing involvement performance obligations. Revenue associated with substantive at-risk milestones is recognized based upon the achievement of the milestones set forth in the respective agreements. Advance payments received in excess of amounts earned are classified as deferred revenue onamount billable to the Company’s Consolidated Balance Sheets.

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(In thousands of U.S. dollars, except per share amounts or as otherwise disclosed)

customer.

Research and Development

R&D costs are generally expensed as incurred. These expenses include contract R&D services provided by third parties, mostpreclinical and clinical studies, raw materials costs associated with manufacturing clinical product, manufacturing prior to regulatory approval, materialsquality control and supplies, clinicalassurance,
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other R&D activities, facilities and regulatory costs and R&D-related personnel costs including salaries, benefits and stock-based compensation. In instances where the Company enters into agreements withUpfront and milestone payments made to third parties for R&D activities, costsin connection with licensed intellectual property used in the Company’s development programs are expensed uponas incurred up to the earlierpoint of when non-refundable amounts are due or as services are performed unless there is an alternative future use of the funds in other R&D projects. Amounts due under such arrangements may be either fixed fee or fee for service and may include upfront payments, monthly payments and payments upon the completion of milestones or receipt of deliverables.

regulatory approval.

Convertible Debt

For non-conventional convertible debt that may be settled entirely or partially in cash, the Company separately accounts for the liability and equity components by allocating the proceeds from issuance between the liability component and the embedded conversion option, or equity component. The value of the equity component is calculated by first measuring the fair value of the liability component, using the interest rate of a similar liability that does not have a conversion feature, as of the issuance date. The difference between the proceeds from the convertible debt issuance and the amount measured as the liability component is recorded as the equity component with a corresponding discount recorded on the debt. The liability component is presented net of any discounts and issuance costs. For conventional convertible debt that may only be settled with common shares, the Company accounts for thereports debt, net of any discounts or issuance costs, on the Consolidated Balance Sheet.

Sheets.

The Company recognizes discount accretion and debt issuance cost amortization using the effective interest method as part ofand is reported in Interest Expense inon the Consolidated Statements of Operations.

Net Loss Per Common Share

Basic net loss per share is calculated by dividing net lossNet Loss by the weighted average shares of common stock outstanding during the period. Diluted net loss per share reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock; however, potential common equivalent shares are excluded if their effect is anti-dilutive. See Note 14 to these Consolidated Financial Statements for further details.

Stock-Based Compensation

The Company has stock-based compensationequity incentive plans including an Employee Stock Purchase Plan (ESPP), under which various types of equity-based awards aremay be granted or available to employees, including restricted stock units (RSUs) with both performance and service-based vesting conditions and stock options.employees. Stock-based compensation expense is recognized on a straight-line basis over the requisite service period, for each awardwhich is generally the vesting period required to obtain full vesting, and is classified as Cost of Sales, Research and DevelopmentR&D or Selling, General and Administrative,SG&A, as appropriate, in the Consolidated Statements of Operations. The Company accounts for forfeitures as they occur.

Restricted Stock Units
The fair value of restricted stock units (RSUs) with service-based vesting conditions and RSUs with performance conditions is determined to be the fair market value of the Company’s underlying common stock on the date of grant. The stock-based compensation expense for RSUs with service-based vesting is recognized over the period during which the vesting restrictions lapse. Stock-based compensation expense for RSUs with performance conditions is recognized beginning in the period the Company determines it is probable that the performance condition will be achieved. Management expectations related to the achievement of performance goals associated with RSUs with performance conditions are assessed regularly to determine whether such grants are expected to vest. The fair value for RSUs with market conditions is estimated using the Monte Carlo valuation model and related stock-based compensation is recognized on a straight-line basis, unless the required service is not performed, beginning on the grant date.
Stock Options and Purchase Rights
The fair value of each stock option award and purchase rights under the Company’s ESPP awardsEmployee Stock Purchase Plan (ESPP) are estimated on the date of grant using the Black-Scholes valuation model and the following assumptions: expected life of a stock option,term, expected volatility, risk-free interest rate and expected dividend yield. The dividend yield reflects that the Company has not paid any cash dividends since inception and does not intend to pay any cash dividends in the foreseeable future. The expected lifeterm of stock options is based on observed historical exercise patterns. GroupsIn estimating the life of employees that have similar historical exercise patterns were considered separately for valuation purposes. Thestock options, the Company has identified two employee groups executive and non-executive employees, with distinctly different historical exercise patterns.patterns: executive and non-executive. The executive employee group has a history of holding stock options for longer periods than non-executive employees.

The expected term of purchase rights for ESPP is based on each tranche of an offering period, which is four tranches in a twenty-four-month period.

The determination of the fair value of stock-based payment awards using an option-pricing model is affected by the Company’s stock price and may use assumptions regarding a number of complex and subjective variables.

The fair value of RSUs with service-based vesting conditions and RSUs with performance conditions is determined to be the fair market value of the Company’s underlying common stock on the date of grant. The stock-based compensation for RSUs with service-based vesting is recognized ratably over the period during which the vesting restrictions lapse. Stock-based compensation for RSUs with performance conditions is recognized ratably over the service period beginning in the period the Company determines it is probable that the performance condition will be achieved.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(In thousands of U.S. dollars, except per share amounts or as otherwise disclosed)

See Note 17 to these Consolidated Financial Statements for further information.

Income Taxes

The Company calculates and provides for income taxes in each of the tax jurisdictions in which it operates. Deferred tax
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assets and liabilities, measured using enacted tax rates, are recognized for the future tax consequences of temporary differences between the tax and financial statement basis of assets and liabilities. A valuation allowance reduces the deferred tax assets to the amount that is more likely than not to be realized. The Company establishes liabilities or reduces assets for uncertain tax positions when the Company believes certain tax positions are not more likely than not of being sustained if challenged. Each quarter, the Company evaluates these uncertain tax positions and adjusts the related tax assets and liabilities in light of changing facts and circumstances.

The Company uses financial projections to support its net deferred tax assets, which contain significant assumptions and estimates of future operations. If such assumptions were to differ significantly, it may have a material impact on the Company’s ability to realize its deferred tax assets. At the end of each period, the Company will reassess the ability to realize its deferred tax benefits. If it is more likely than not that the Company would not realize the deferred tax benefits, a valuation allowance may need to be established against all or a portion of the deferred tax assets, which will result in a charge to tax expense.

Foreign Currency

For the Company and its subsidiaries, the functional currency has been determined to be the U.S. dollar.Dollar (USD). Assets and liabilities denominated in foreign currency are remeasured at period-end exchange rates for monetary assets. Non-monetary assets and liabilities denominated in foreign currencies are remeasured at historical rates. Foreign currency transaction gains and losses resulting from remeasurement are recognized in Selling, General and AdministrativeSG&A in the Consolidated Statements of Operations.

Derivatives and Hedging Activities

The Company accounts for its derivativeuses forward foreign currency exchange contracts (forward contracts) to hedge certain operational exposures resulting from potential changes in foreign currency exchange rates. Such exposures result from portions of the Company’s forecasted revenues and operating expenses being denominated in currencies other than the USD, primarily the Euro. The Company designates certain of these forward contracts as hedging instruments as either assets or liabilities on the balance sheet and measures them at fair value. Derivativesalso enters into forward contracts that are considered to be economic hedges that are not designated as hedging instruments are adjusted to fairinstruments. Whether designated or undesignated, these forward contracts protect against the reduction in value through earnings in Selling, General and Administrative in the Consolidated Statements of Operations.

For derivative instruments that hedge the exposure to variability in expected futureforecasted foreign currency cash flows that areresulting from product revenues, royalty revenues, operating expenses and asset or liability positions designated as cash flow hedges,in currencies other than the effective portion of the gain or loss is reported as a component of Accumulated Other Comprehensive Income (Loss) in shareholders’ equity and reclassified to earnings in the same period or periods during which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative instrument, if any, is recognized in earnings in the current period.USD. To receive hedge accounting treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash flows on hedged transactions. The Company does not hold or issue derivative instruments for trading or speculative purposes.

See Note 11

The Company accounts for its derivative instruments as either assets or liabilities on the balance sheet and measures them at fair value, which is estimated using current exchange rates and interest rates and takes into consideration the current creditworthiness of the counterparties or the Company, as applicable. For derivatives designated as hedging instruments, the entire change in the fair value of qualifying derivative instruments is recorded in AOCI and amounts deferred in AOCI are reclassified to theseearnings in the same line item in which the earnings effect of the hedged item is reported. Derivatives not designated as hedging instruments are adjusted to fair value through earnings in SG&A in the Consolidated Financial Statements for further information.

of Operations.

Fair Value of Financial Instruments

The Company applies fair value accounting for all financial assets and liabilities and non-financialsnon-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities that are required to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company would transact and the market-based risk measurements or assumptions that that market participants would use to price the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risk. When estimating fair value, depending on the nature and complexity of the asset or liability, the Company may use the following techniques:

Income approach, which is based on the present value of a future stream of net cash flows

Market approach, which is based on market prices and other information from market transactions involving identical or comparable assets or liabilities.

The Company’s fair value methodologies depend on the following types of inputs:

Quoted prices for identical assets or liabilities in active markets (Level 1 inputs)

Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities that are not active, or inputs other than quoted process that are directly or indirectly observable, or inputs that are derived principally from, or corroborated by, observable market data by correlation or other means (Level 2 inputs)
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(In thousands of U.S. dollars,Dollars, except per share amounts or as otherwise disclosed)

Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities that are not active, or inputs other than quoted process that are directly or indirectly observable, or inputs that are derived principally from, or corroborated by, observable market data by correlation or other means (Level 2 inputs)

Unobservable inputs that reflect estimates and assumptions (Level 3 inputs)

The Company’s Level 2 instruments are valued using third-party pricing sources. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities, issuer credit spreads, benchmark securities, prepayment/default projections based on historical data and other observable inputs. The Company validates the prices provided by its third-party pricing services by understanding the models used, obtaining market values from other pricing sources, analyzing pricing data in certain instances and confirming those securities traded in active markets.

The Company’s Level 3 financial assets and liabilities include acquired intangible assets and contingent consideration resulting from business acquisitions. The estimated fair value of long-lived and indefinite-lived intangible assets and contingent consideration are measured by applying a probability-based income approach utilizing an appropriate discount rate as of the acquisition date. Key assumptions used by management to estimate the fair value of contingent consideration include estimated probabilities, the estimated timing of when a milestone may be attained and assumed discount periods and rates. Changes in the fair value of the contingent consideration can result from changes to one or more inputs, including the estimated probability with respect to regulatory approval, changes in the assumed timing of when milestones are likely to be achieved and changes in assumed discount periods and rates. Contingent consideration is remeasured on a recurring basis and resulting changes in the fair value, due to the revision of key assumptions, are recorded in Intangible Asset Amortization and Contingent Consideration on the Company’s Consolidated Statements of Operations.
The Company’s Level 3 instruments also include assets and liabilities not considered material to the Company that are measured at their respective estimated fair value, when estimable, on a non-recurring basis.
See Note 12Notes 5, 10, 11, 13, 19 and 20 to these Consolidated Financial Statements for further information.

information on the nature of these financial instruments.

Segment Information

The Company currently operates in one business1 segment focused on the development and commercialization of innovative therapies for people with serious and life threateninglife-threatening rare diseases and medical conditions. A single management team reports to the chief operating decision maker who comprehensively manages the entire business. All products are included in one1 operating segment because the majority of the Company’s products have similar economic and other characteristics, including the nature of the products and production processes, type of customers, distribution methods and regulatory environment. The Company is not organized by market and is managed and operated as one business. The Company does not operate any separate lines of business or separate business entities with respect to its products. Accordingly, the Company does not accumulate discrete financial information with respect to separate products, other than revenues, cost of sales and does not have separately reportable segments.

Acquisitions

Acquisitions of businesses are accounted for using the acquisition method of accounting. The Company allocates the purchase price of acquired businesses to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values on the acquisition date. The purchase price allocation process requires management to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets and IPR&D. In connection with the purchase price allocations for acquisitions, the Company estimates the fair value of contingent acquisition consideration payments utilizing a probability-based income approach inclusive of an estimated discount rate. Each reporting period thereafter, the Company revalues these obligations and records increases or decreases in their fair value as adjustments to Intangible Asset Amortization and Contingent Consideration in the Consolidated Statements of Operations. Changes in the fair value of the contingent acquisition consideration payable can result from changes to one or multiple inputs including the estimated probability with respect to regulatory approval, changes in the assumed timing of when milestones are likely to be achieved and changes in assumed discount periods and rates.

certain other operating expenses.

(4) RECENT ACCOUNTING PRONOUNCEMENTS

Accounting Pronouncements Not Yet Adopted

Effective January 1, 2018,2020, the Company will adopt Accounting Standards Codification, Topic 606, Revenue from Contracts with Customers ASU No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments (ASC Topic 606)ASU 2016-13), which provides principles for recognizing revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The Company expects to adopt ASC Topic 606 onas amended, using a modified retrospective basisapproach. The standard amends the guidance for measuring and recording credit losses on financial assets measured at amortized cost by replacing the incurred-loss model with an expected-loss model. This new standard also requires that credit losses related to available-for-sale debt securities be recorded as an allowance through a cumulative adjustment to equity.

Asnet income rather than by reducing the Company completes its analysis of the accounting for the Company’s customer contractscarrying amount under the new revenue standard, management is assessing the required changescurrent, other-than-temporary impairment model. The Company anticipates no material impact on its Consolidated Financial Statements due to the Company’s accounting policies, systems and internal control over financial reporting. Based on management’s preliminary assessmentnature of the Company’s material contracts with customers, management does not anticipate thatfinancial instruments.

Accounting Pronouncements Adopted
Effective January 1, 2019, the Company adopted ASC Topic 606 will have a material impact on the timing of revenue recognition for the products that are marketed by the Company. Based on management’s preliminary assessment of the Company’s contract with Genzyme, the Company expects to recognize Aldurazyme revenues when the product is shipped to Genzyme and all the required quality control certifications are complete, because all of the Company’s performance obligations are fulfilled at that point in time. The Company expects to record Aldurazyme net product revenues based on the estimated tiered payment that will be in effect when the product is sold through by Genzyme. Management believes any differences between estimated revenues from Genzyme and actual payments will be insignificant.

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(In thousands of U.S. dollars, except per share amounts or as otherwise disclosed)

In the first quarter of 2018, the management expects the impact of adopting ASC Topic 606 to result in a $20.0 million reduction in Accumulated Deficit, the cumulative effect adjustment under the modified retrospective approach, a $26.0 million increase in Accounts Receivable and a $6.0 million decrease in Deferred Tax Assets.

In February 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-02, Leases (ASU 2016-02).842. The amended guidance requiresrequired balance sheet recognition of lease right-of-use (ROU)ROU assets and liabilities by lessees for leases classified as operating leases, with an option to not recognize lease ROU assets and lease liabilities for leases with a term of 12 months or less. The amendments also requirerequired new disclosures providing additional qualitative and quantitative information about the amounts recorded in the financial statements. Lessor accounting is largely unchanged. ASU 2016-02 isThe Company adopted ASC Topic 842 using the modified retrospective method for all lease arrangements at the beginning of the period of adoption through a cumulative adjustment to Accumulated Deficit. The Company elected to use the practical expedient allowing the use-of-hindsight and reassessed the lease term for all unexpired leases that commenced before the effective fordate of ASC Topic 842. For leases that commenced and expired before the Company’s fiscal year beginning January 1, 2019. Early adoption is permitted, buteffective date of ASC Topic 842, the Company haselected not madeto reassess the electionexpired leases. The Company also elected not to do so. ASU 2016-02 will be effective for the Company’s fiscal year beginning January 1, 2019. The amendments require a modified retrospective approachinclude leases with optional practical expedients.

Asinitial

100

Table of December 31, 2017, the Company’s task force formed in connection with the adoptionContent
BIOMARIN PHARMACEUTICAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands of ASU 2016-02 wasU.S. Dollars, except per share amounts or as otherwise disclosed)
terms of twelve months or less in the process of analyzing the Company’srecognized ROU assets and lease contracts and the potential impact the standard may have on its Consolidated Financial Statements and related disclosures. After completing the analysisliabilities.
As a result of the accounting for the Company’s lease contracts under the standard, management will assess the required changes to the Company’s accounting policies, systems and internal control over financial reporting. Based on management’s preliminary analysis,cumulative impact of adopting ASC Topic 842, the Company anticipates the standard may have a material impact on the Company’s Consolidated Balance Sheets due to the requirement to recognizerecorded lease ROU assets of $55.9 million and correspondinglease liabilities of $59.0 million as of January 1, 2019, primarily related to leasesreal estate and equipment, based on the Company’s Consolidated Balance Sheets, but it is not anticipated to have a material impactpresent value of future lease payments on the Company’s other Consolidated Financial Statements.date of adoption. The difference between the ROU assets and lease liabilities was recorded as an adjustment to Accumulated Deficit. See Note 2312 to these Consolidated Financial Statements for additional information regarding the Company’s lease obligations as of December 31, 2017.

In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business (ASU 2017-01), which is intended to clarify the definition of a business. ASU 2017-01 is effective for the Company’s fiscal year beginningdisclosures required under ASC Topic 842.

Effective January 1, 2018. The new guidance is required to be applied on a prospective basis. The2019, the Company anticipates that the adoption of ASU 2017-01 will result in more acquisitions being accounted for as asset acquisitions.

In August 2017, the FASB issuedadopted ASU No. 2017-12 Derivativesusing the modified retrospective method. This ASU provides new guidance about income statement classification and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12). The standard changes the recognition and presentation requirements of hedge accounting, including eliminatingeliminates the requirement to separately measure and report hedge ineffectiveness and presenting all items that affect earnings in the same income statement line as the hedged item. ASU 2017-12 is effective for the Company’s fiscal year beginning January 1, 2019 and early adoption is permitted. Although the Company is currently evaluating the impact that the standard will have on its Consolidated Financial Statements,ineffectiveness. The adoption of the standard is not expected to have a material impact due to the nature of the Company’s hedging activity. As of December 31, 2017, the Company has not elected to early adoptthis ASU 2017-12.

Accounting Pronouncements Adopted

In January 2017, the FASB issued ASU No. 2017-04, Goodwill and Other - Simplifying the Test for Goodwill Impairment (ASU 2017-04), which eliminated the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. Under the amendments, goodwill impairment testing shall be performed by comparing the fair value of the reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The new standard should be applied on a prospective basis. Early adoption was permitted for annual or interim goodwill impairment testing performed after January 1, 2017. The Company elected to early adopt ASU 2017-04 in the first quarter of 2017, which had no effect on the Company’s Consolidated Financial Statements as no goodwill impairments were identified in fiscal year 2017.

In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting (ASU 2017-09). The amendment provided clarification about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. As early adoption was permitted, the Company elected to early adopt ASU 2017-09 in the second quarter of 2017, which did not have a material impact on the Company’s Consolidated Financial Statements. See Note 11 to these Consolidated Financial Statements becausefor additional disclosures required by ASU 2017-12.

(5) FINANCIAL INSTRUMENTS
The following tables show the Company’s policies had already been in compliance.

F-16

cash, cash equivalents and available-for-sale securities by significant investment category as of December 31, 2019 and 2018, respectively:
December 31, 2019
Amortized CostGross
Unrealized
Gains
Gross
Unrealized
Losses
Aggregate Fair
Value
Cash and Cash Equivalents
Short-term
Marketable Securities (1)
Long-term
Marketable Securities (2)
Level 1:
Cash$259,347  $—  $—  $259,347  $259,347  $—  $—  
Level 2:
Money market instruments173,100  —  —  173,100  173,100  —  —  
Corporate debt securities518,523  3,575  (12) 522,086  —  233,294  288,792  
U.S. government agency securities209,633  993  (67) 210,559  4,999  83,067  122,493  
Foreign and other549  145  (1) 693  —  —  693  
Subtotal901,805  4,713  (80) 906,438  178,099  316,361  411,978  
Total$1,161,152  $4,713  $(80) $1,165,785  $437,446  $316,361  $411,978  


December 31, 2018
Amortized CostGross
Unrealized
Gains
Gross
Unrealized
Losses
Aggregate Fair
Value
Cash and Cash Equivalents
Short-term
Marketable Securities (1)
Long-term
Marketable Securities (2)
Level 1:
Cash$228,809  $—  $—  $228,809  $228,809  $—  $—  
Level 2:
Money market instruments205,736  —  —  205,736  205,736  —  —  
Corporate debt securities564,852  214  (2,288) 562,778  2,000  376,545  184,233  
Commercial paper77,702  —  —  77,702  21,964  55,738  —  
U.S. government agency securities240,436  144  (697) 239,883  31,474  156,967  51,442  
Foreign and other5,126  139  (1) 5,264  3,999  1,076  189  
Subtotal1,093,852  497  (2,986) 1,091,363  265,173  590,326  235,864  
Total$1,322,661  $497  $(2,986) $1,320,172  $493,982  $590,326  $235,864  
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BIOMARIN PHARMACEUTICAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands of U.S. dollars,Dollars, except per share amounts or as otherwise disclosed)

In January 2016, the FASB issued ASU No. 2016-01, Recognition

(1)The Company’s short-term marketable securities mature in one year or less.
(2)The Company’s long-term marketable securities mature between one and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01). ASU 2016-01 changed accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. In addition, the update clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The guidance shall be adopted using a modified retrospective approach, with certain exceptions. As early adoption was permitted for certain provisions, the Company elected to early adopt ASU 2016-01 in 2017, which did not have a material impact on the Company’s Consolidated Financial Statements because the Company’s policies had already been in compliance.

(5) ACQUISITIONS

The Merck PKU Business

On October 1, 2015, the Company entered into a Termination and Transition Agreement with Ares Trading S.A. (Merck Serono), as amended and restated on December 23, 2015 (the A&R Kuvan Agreement), to terminate the Development, License and Commercialization Agreement, dated May 13, 2005, as amended (the License Agreement), between the Company and Merck Serono, including the license to Kuvan the Company had granted to Merck Serono under the License Agreement. Also on October 1, 2015, the Company and Merck Serono entered into a Termination Agreement (the Pegvaliase Agreement) to terminate the license to pegvaliase the Company had granted to Merck Serono under the License Agreement. On January 1, 2016, pursuant to the A&R Kuvan Agreement and the Pegvaliase Agreement, the Company completed the acquisition from Merck Serono and its affiliates of certain rights and other assets with respect to Kuvan and pegvaliase (the Merck PKU Business). As a result, the Company acquired all global rights to Kuvan and pegvaliase from Merck Serono, with the exception of Kuvan in Japan. Previously, the Company had exclusive rights to Kuvan in the U.S. and Canada and pegvaliase in the U.S. and Japan. In connection with the acquisition of the Merck PKU Business, the Company recognized transaction costs of $0.6 million, of which $0.3 million was recognized in each of the years ended December 31, 2016 and 2015.

Pursuant to the A&R Kuvan Agreement, the Company paid Merck Serono $374.5 million in cash and is obligated to pay Merck Serono up to a maximum of €60.0 million, in cash, if future sales milestones are met. Pursuant to the Pegvaliase Agreement, the Company is obligated to pay Merck Serono up to a maximum of €125.0 million, in cash, if future development milestones are met. Merck Serono transferred certain inventory, regulatory materials and approvals, and intellectual property rights to the Company and performed certain transition services for the Company. five years.

As of December 31, 2016, the inventory acquired from Merck Serono has been sold through to customers. The Company and Merck Serono have no further rights or obligations under the License Agreement with respect to Kuvan or pegvaliase.

Kuvan is a commercialized product for the treatment of patients with phenylketonuria (PKU) and/or for primary BH4 deficiency in certain countries. At the time of the acquisition, pegvaliase was in pivotal studies as a potential therapeutic option for adult patients with PKU. In March 2016, the Company announced that its pivotal Phase 3 PRISM-2 study of pegvaliase met the primary endpoint of change in blood Phe compared with placebo (p<0.0001). The Company submitted a marketing application for pegvaliase in the U.S. in June 2017. The Company plans to submit a Marketing Authorization Application for pegvaliase to the European Medicines Agency (EMA) in the first quarter of 2018. In a notice received from the U.S. Food and Drug Administration (FDA), the Prescription Drug User Fee Act (PDUFA) target action date for pegvaliase has been extended by three months to May 28, 2018, which was changed to May 25, 2018 due to the Memorial Day holiday. Kuvan has Orphan Drug exclusivity in the EU until 2020, and pegvaliase has Orphan Drug designation in the U.S. and the EU.

The acquisition date fair value of the contingent acquisition consideration payments, Kuvan global marketing rights, with the exception of Japan, and pegvaliase IPR&D acquired was estimated by applying a probability-based income approach utilizing an appropriate discount rate. See Note 12 to these Consolidated Financial Statements for additional discussion regarding fair value measurements of the contingent acquisition consideration payable included on the Company’s Consolidated Balance Sheet.

F-17


BIOMARIN PHARMACEUTICAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(In thousands of U.S. dollars, except per share amounts or as otherwise disclosed)

The following table presents the final allocation of the purchase consideration for the Merck PKU Business acquisition, including the contingent acquisition consideration payable based on the acquisition date fair value. The allocation of the purchase price below reflects an inventory adjustment in the second quarter of 2016.

Cash payments

 

$

374,545

 

Estimated fair value of contingent acquisition consideration payable

 

 

138,974

 

Total consideration

 

$

513,519

 

Kuvan intangible assets

 

$

172,961

 

Pegvaliase IPR&D

 

 

326,359

 

Inventory

 

 

14,199

 

Total identifiable assets acquired

 

$

513,519

 

The amount allocated to the Kuvan intangible assets is considered to be finite-lived and is being amortized on a straight-line basis over its estimated useful life through 2024.

The amount allocated to pegvaliase acquired IPR&D is considered to be indefinite-lived as R&D efforts are ongoing and, as such, is not subject to amortization. See Note 7 to these Consolidated Financial Statements for further discussion of indefinite-lived intangible assets.

(6) INVESTMENTS

The amortized cost, gross unrealized holding gains or losses, and fair value of the Company’s available-for-sale debt securities by major security type at December 31, 2017 and 2016 are summarized in the tables below:

 

 

Amortized Cost

 

 

Gross

Unrealized

Holding Gains

 

 

Gross

Unrealized

Holding Losses

 

 

Aggregate Fair

Value at December 31, 2017

 

Corporate debt securities

 

$

707,652

 

 

$

150

 

 

$

(2,553

)

 

$

705,249

 

Commercial paper

 

 

24,566

 

 

 

 

 

 

 

 

 

24,566

 

U.S. government agency securities

 

 

472,593

 

 

 

 

 

 

(1,975

)

 

 

470,618

 

Foreign and other

 

 

25,540

 

 

 

150

 

 

 

(64

)

 

 

25,626

 

Total

 

$

1,230,351

 

 

$

300

 

 

$

(4,592

)

 

$

1,226,059

 

 

 

Amortized Cost

 

 

Gross

Unrealized

Holding Gains

 

 

Gross

Unrealized

Holding Losses

 

 

Aggregate Fair

Value at December 31, 2016

 

Certificates of deposit

 

$

2,800

 

 

$

 

 

$

 

 

$

2,800

 

Corporate debt securities

 

 

641,670

 

 

 

329

 

 

 

(2,282

)

 

 

639,717

 

Commercial paper

 

 

16,075

 

 

 

 

 

 

 

 

 

16,075

 

U.S. government agency securities

 

 

310,635

 

 

 

37

 

 

 

(747

)

 

 

309,925

 

Foreign and other

 

 

48

 

 

 

86

 

 

 

 

 

 

134

 

Total

 

$

971,228

 

 

$

452

 

 

$

(3,029

)

 

$

968,651

 

The fair values of available-for-sale securities by contractual maturity were as follows:

 

 

December 31,

 

 

 

2017

 

 

2016

 

Maturing in one year or less

 

$

840,274

 

 

$

395,940

 

Maturing after one year through five years

 

 

385,785

 

 

 

572,711

 

Total

 

$

1,226,059

 

 

$

968,651

 

F-18


BIOMARIN PHARMACEUTICAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(In thousands of U.S. dollars, except per share amounts or as otherwise disclosed)

Impairment assessments are made at the individual security level each reporting period. When the fair value of an investment is less than its cost at the balance sheet date, a determination is made as to whether the impairment is other-than-temporary and, if it is other-than-temporary, an impairment loss is recognized in earnings equal to the difference between the investment’s amortized cost and fair value at such date. As of December 31, 2017,2019, some of the Company’s investments were in an unrealized loss position. However, the Company has the ability and intent to hold all investments that have been in a continuous loss position until maturity or recovery, thus no0 other-than-temporary impairment was deemed to have occurred.

See Note 123 to these Consolidated Financial Statements for additional discussion regarding the Company’s fair value of the Company’s available-for-sale securities.

(7)measurements.

(6) INTANGIBLE ASSETS

Intangible assetsAssets, Net consisted of the following:

 

December 31,

 

December 31,

 

2017

 

 

2016

 

20192018

Intangible assets:

 

 

 

 

 

 

 

 

Intangible assets:

Finite-lived intangible assets

 

$

303,298

 

 

$

305,122

 

Finite-lived intangible assets$652,734  $307,995  

Indefinite-lived intangible assets

 

 

326,359

 

 

 

332,199

 

Indefinite-lived intangible assets—  326,359  

Gross intangible assets:

 

 

629,657

 

 

 

637,321

 

Gross intangible assets:652,734  634,354  

Less: Accumulated amortization

 

 

(112,147

)

 

 

(83,541

)

Less: Accumulated amortization(196,154) (142,546) 

Net carrying value

 

$

517,510

 

 

$

553,780

 

Net carrying value$456,580  $491,808  

Finite-Lived Intangible Assets

The following table summarizes the net-book-valuecarrying value and estimated remaining life of the Company’s finite-lived intangible assets as of December 31, 2017:

2019:

 

 

Net Balance at December 31, 2017

 

 

Average Remaining Life

Repurchased royalty rights

 

$

39,938

 

 

5.9 years

Acquired intellectual property

 

 

149,229

 

 

7.2 years

License payments for marketing approvals

 

 

1,357

 

 

4.4 years

In-place and above market tenant leases

 

 

627

 

 

0.7 - 5.6 years

Total

 

$

191,151

 

 

 

Net BalanceAverage Remaining Life
Acquired intellectual property$406,058 7.8 years
Repurchased royalty rights26,438 3.9 years
Technology transfer23,078 Not applicable (1)
Other1,006 1.2 - 4.6 years
Total$456,580 

(1)The technology transfer intangible asset has not yet been placed into service.
As of December 31, 2017,2019, the estimated future amortization expense associated with the Company’s finite-lived intangible assets, for eachexclusive of the five succeeding fiscal yearstechnology transfer asset that has not been placed into service, was as follows:

Fiscal Year

 

Amount

 

Fiscal YearAmount

2018

 

$

30,400

 

2019

 

 

30,086

 

2020

 

 

27,605

 

2020$62,887  

2021

 

 

26,681

 

202161,963  

2022

 

 

26,657

 

202261,939  
2023202361,311  
2024202455,036  

Thereafter

 

 

49,722

 

Thereafter130,366  

 

$

191,151

 

$433,502  

F-19

Indefinite-Lived Intangible Assets
The Company’s indefinite-lived intangible assets were $326.4 million as of December 31, 2018 and consisted of IPR&D related to the Palynziq rights in Europe. During the second quarter of 2019, these indefinite-lived intangible assets were reclassified
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Table of Content
BIOMARIN PHARMACEUTICAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands of U.S. dollars,Dollars, except per share amounts or as otherwise disclosed)

Indefinite-Lived Intangible Assets

Indefinite-lived intangible assets consisted

to definite-lived as the underlying IPR&D was placed into service upon receiving European regulatory approval for Palynziq. The Company will straight-line the amortization expense for the underlying IPR&D over its estimated useful life of nine years.
In 2019 and 2018, the following:

 

 

December 31,

 

 

 

2017

 

 

2016

 

In-Process Research and Development:

 

 

 

 

 

 

 

 

Pegvaliase

 

$

326,359

 

 

$

326,359

 

Other acquired pre-clinical compounds

 

 

 

 

 

5,840

 

Net carrying value

 

$

326,359

 

 

$

332,199

 

Intangible assetsCompany received $25.0 million and $50.0 million, respectively, due to the achievement by a third party of development and regulatory milestones and commercial sales milestones related to IPR&Da previously sold intangible asset, which the Company recorded as a gain on the sale of intangible assets are considered to be indefinite-lived until the completion or abandonment of the associated R&D efforts.

The Company recognized an impairment charge of $5.8 million related to acquired IPR&D assets during the fourth quarter of 2017, which was included in Intangible Asset Amortization and Contingent Consideration in the Consolidated Statements of Operations.

In 2016 and 2015, the Company recorded impairment charges of $574.1 million and $198.7 million, respectively, related to the Kyndrisa and other exon IPR&D assets based on the status of development efforts. These impairments reduced the remaining book value to zero due to the termination of the programs. In 2016, the Company also recognized an impairment charge of $25.0 million related to the reveglucosidase alfa IPR&D assets due to the decision to terminate that development program.

In December 2017, the Company sold the Rare Pediatric Disease Priority Review Voucher (PRV) it received from the FDAFood and Drug Administration in connection with the U.S. approval of Brineura. In exchange for the voucher, the Company received $125.0 million from Novartis Pharma AG. Thein proceeds from the sale of the PRV, werewhich was recognized as a gain on the sale of intangible asset as the PRV did not have a carrying value on the Company’s Consolidated Balance Sheet at the time of sale.

(8)

In the fourth quarter of 2017, the Company recognized an impairment charge of $5.8 million related to other acquired IPR&D assets recorded in Intangible Asset Amortization and Contingent Consideration on the Company's Consolidated Statements of Operations.
(7) PROPERTY, PLANT AND EQUIPMENT

Property, plantPlant and equipment, net,Equipment, Net, consisted of the following:

 

December 31,

 

December 31,

 

2017

 

 

2016

 

20192018

Building and improvements

 

$

663,347

 

 

$

510,805

 

Building and improvements$725,906  $694,447  

Manufacturing and laboratory equipment

 

 

294,521

 

 

 

242,899

 

Manufacturing and laboratory equipment366,951  345,947  

Computer hardware and software

 

 

144,268

 

 

 

129,506

 

Computer hardware and software167,554  157,787  

Leasehold improvements

 

 

42,572

 

 

 

44,184

 

Leasehold improvements51,324  41,188  

Furniture and equipment

 

 

31,515

 

 

 

27,229

 

Furniture and equipment38,569  33,234  

Land improvements

 

 

5,331

 

 

 

4,881

 

Land improvements7,349  6,551  

Land

 

 

62,369

 

 

 

55,412

 

Land90,418  77,993  

Construction-in-progress

 

 

59,511

 

 

 

126,446

 

Construction-in-progress111,897  64,170  

 

 

1,303,434

 

 

 

1,141,362

 

1,559,968  1,421,317  

Less: Accumulated depreciation

 

$

(406,734

)

 

 

(342,594

)

Accumulated depreciationAccumulated depreciation(549,100) (472,635) 

Total property, plant and equipment, net

 

$

896,700

 

 

$

798,768

 

Total property, plant and equipment, net$1,010,868  $948,682  

The construction-in-process balance primarily includes costs related to the Company’s significant in-process projects at its facilities in Marin County, California, and in Shanbally, Cork, Ireland.

Depreciation for the years ended December 31, 2019, 2018 and 2017 2016 and 2015 was $75.8$89.3 million, $73.2$90.4 million and $50.1$75.8 million, respectively, of which $24.1$37.5 million, $17.4$25.2 million and $14.6$24.1 million was capitalized into inventory, respectively. Capitalized interest related to the Company’s property, plant and equipment purchases for each of the three years ended December 31, 2017 was insignificant.

F-20


BIOMARIN PHARMACEUTICAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(In thousands of U.S. dollars, except per share amounts or as otherwise disclosed)

(9)

(8) INVENTORY

Inventory consisted of the following:

 

December 31,

 

December 31,

 

2017

 

 

2016

 

20192018

Raw materials

 

$

49,877

 

 

$

51,250

 

Raw materials$74,442  $74,616  

Work-in-process

 

 

234,674

 

 

 

167,788

 

Work-in-process349,978  231,064  

Finished goods

 

 

191,224

 

 

 

136,088

 

Finished goods255,855  225,191  

Total inventory

 

$

475,775

 

 

$

355,126

 

Total inventory$680,275  $530,871  

(10)


103


Inventory as of December 31, 2019, included manufacturing-related costs for the commercial production of valoctocogene roxaparvovec inventory totaling $29.2 million. Valoctocogene roxaparvovec is an investigational gene therapy product candidate for the treatment of severe hemophilia A. The Company must receive marketing approval from the applicable regulators before the valoctocogene roxaparvovec inventory can be sold commercially. The Company believes that all material uncertainties related to the ultimate regulatory approval of valoctocogene roxaparvovec for commercial sale have been significantly reduced. A number of factors were taken into consideration, including the current status in the drug development process, pivotal clinical trial results for the underlying product candidate, results from meetings with the relevant regulatory authorities prior to the filing of regulatory applications, historical experience, as well as potential impediments to the approval process such as product safety or efficacy, as well as commercialization and marketplace trends. If regulatory approval is not obtained, the manufacturing-related costs for the commercial production of valoctocogene roxaparvovec will be expensed to R&D.
(9) SUPPLEMENTAL BALANCE SHEET INFORMATION

Accounts payablePayable and accrued liabilitiesAccrued Liabilities consisted of the following:

 

December 31,

 

December 31,

 

2017

 

 

2016

 

20192018

Accounts payable and accrued operating expenses

 

$

166,616

 

 

$

191,353

 

Accounts payable and accrued operating expenses$240,981  $207,620  

Accrued compensation expense

 

 

140,781

 

 

 

109,038

 

Accrued compensation expense192,467  149,937  

Accrued rebates payable

 

 

36,472

 

 

 

34,737

 

Accrued rebates payable57,163  43,116  

Accrued royalties payable

 

 

18,820

 

 

 

15,151

 

Accrued royalties payable30,797  19,977  
Deferred revenueDeferred revenue13,037  1,467  

Value added taxes payable

 

 

9,740

 

 

 

7,848

 

Value added taxes payable8,395  7,785  

Forward foreign currency exchange contracts

 

 

14,464

 

 

 

5,201

 

Forward foreign currency exchange contracts10,448  4,178  

Accrued income taxes

 

 

5,528

 

 

 

 

Lease liabilityLease liability10,700  —  

Other

 

 

9,500

 

 

 

7,177

 

Other6,633  3,210  

Total accounts payable and accrued liabilities

 

$

401,921

 

 

$

370,505

 

Total accounts payable and accrued liabilities$570,621  $437,290  

The roll forward of significant estimated accrued rebates and reserve for cash discounts for the years ended December 31, 2017, 20162019, 2018 and 20152017, were as follows:

Balance at
Beginning
of Period
Provision for Current Period SalesPayments
Balance at
End of
Period
Year ended December 31, 2019:Year ended December 31, 2019:
Accrued rebatesAccrued rebates$43,116  $91,748  $(77,701) $57,163  
Reserve for cash discountsReserve for cash discounts$1,197  $15,335  $(14,643) $1,889  
Year ended December 31, 2018:Year ended December 31, 2018:
Accrued rebatesAccrued rebates$36,472  $67,843  $(61,199) $43,116  
Reserve for cash discountsReserve for cash discounts$1,055  $12,474  $(12,332) $1,197  

 

Balance at

Beginning

of Period

 

 

Provision

for Current

Period Sales

 

 

Provision/

(Reversals)

for Prior

Period Sales

 

 

Actual Charges

Related to

Current

Period Sales

 

 

Actual Charges

Related to

Prior Period

Sales

 

 

Balance at

End of

Period

 

Year ended December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2017:

Accrued rebates

 

$

34,737

 

 

$

56,282

 

 

$

(3,686

)

 

$

(31,714

)

 

$

(19,147

)

 

$

36,472

 

Accrued rebates$34,737  $52,596  $(50,861) $36,472  

Reserve for cash discounts

 

 

888

 

 

 

10,730

 

 

 

(58

)

 

 

(9,601

)

 

 

(904

)

 

 

1,055

 

Reserve for cash discounts$888  $10,672  $(10,505) $1,055  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accrued rebates

 

$

32,553

 

 

$

44,347

 

 

$

(5,205

)

 

$

(23,879

)

 

$

(13,079

)

 

$

34,737

 

Reserve for cash discounts

 

 

831

 

 

 

8,889

 

 

 

(22

)

 

 

(8,160

)

 

 

(650

)

 

 

888

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accrued rebates

 

$

14,859

 

 

$

45,356

 

 

$

(1,245

)

 

$

(18,421

)

 

$

(7,996

)

 

$

32,553

 

Reserve for cash discounts

 

 

688

 

 

 

7,402

 

 

 

 

 

 

(6,722

)

 

 

(537

)

 

 

831

 

(11) DERIVATIVE INSTRUMENTS AND HEDGING STRATEGIES

Foreign Currency Exchange Rate Exposure


(10) FAIR VALUE MEASUREMENTS
The Company uses forward foreign currency exchange contractsmeasures certain financial assets and liabilities at fair value in accordance with its policy in Note 3 – Significant Accounting Policies to hedge certain operational exposures resulting from potential changes in foreign currency exchange rates. Such exposures result from portionsthese Consolidated Financial Statements. The following tables present the classification within
104

Table of the Company’s forecasted revenues and operating expenses being denominated in currencies other than the U.S. dollar, primarily the Euro.

F-21


Content

BIOMARIN PHARMACEUTICAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands of U.S. dollars,Dollars, except per share amounts or as otherwise disclosed)

The Company designates certain

fair value hierarchy of these forward foreign currency exchange contracts as hedging instrumentsfinancial assets and enters into some forward foreign currency exchange contractsliabilities not disclosed elsewhere that are consideredremeasured on a recurring basis.
Fair Value Measurements at December 31, 2019
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Assets:
Other Current Assets:
NQDC Plan assets$1,177  $—  $1,177  
Other Assets:
NQDC Plan assets16,288  —  16,288  
Restricted investments (1)
3,168  —  3,168  
Total other assets19,456  —  19,456  
Total assets$20,633  $—  $20,633  
Liabilities:
Current Liabilities:
NQDC Plan liability (2)
$1,177  $—  $1,177  
Other long-term liabilities:
NQDC Plan liability (2)
16,288  —  16,288  
Contingent consideration—  50,793  50,793  
Total other long-term liabilities16,288  50,793  67,081  
Total liabilities$17,465  $50,793  $68,258  

105

Table of Content
BIOMARIN PHARMACEUTICAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands of U.S. Dollars, except per share amounts or as otherwise disclosed)
Fair Value Measurements at December 31, 2018
Quoted Price in
Active Markets
For Identical
Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Assets:
Other Current Assets:
NQDC Plan assets$—  $370  $—  $370  
Restricted investments (1)
—  9,581  —  9,581  
Total other current assets—  9,951  —  9,951  
Other Assets:
NQDC Plan assets—  12,828  —  12,828  
Restricted investments (1)
—  2,450  —  2,450  
Strategic investment (3)
942  —  —  942  
Total other assets942  15,278  —  16,220  
Total assets$942  $25,229  $—  $26,171  
Liabilities:
Current Liabilities:
NQDC Plan liability$55  $370  $—  $425  
Contingent consideration—  —  85,951  85,951  
Total current liabilities55  370  85,951  86,376  
Other long-term liabilities:
NQDC Plan liability17,598  12,828  —  30,426  
Contingent consideration—  —  46,883  46,883  
Total other long-term liabilities17,598  12,828  46,883  77,309  
Total liabilities$17,653  $13,198  $132,834  $163,685  
(1)The restricted investments as of December 31, 2019 and 2018 secure the Company’s irrevocable standby letters of credit obtained in connection with certain commercial agreements.
(2)The Company’s NQDC was amended during the second quarter of 2019, which resulted in a change to be economic hedgesthe classification of the obligation associated with the Company's common stock held in the NQDC. The obligation that are not designatedwas previously classified as hedging instruments. Whether designated or undesignated, these forward foreign currency exchange contracts protect againsta liability and recorded at fair value, was reclassified into equity and recorded at the reduction in value of forecasted foreign currency cash flows resulting from product revenues, royalty revenues, operating expenses and asset or liability positions designated in currencies other than the U.S. dollar. Theshares' respective grant date fair values at June 30, 2019. The amendment prohibits the diversification of forward foreign currency exchange contracts are estimated using current exchange rates and interest rates, and takeCompany stock contributed to the plan into consideration the current creditworthinessother types of investments. The NQDC liabilities classified as Level 2 represent investments held in plan assets excluding shares of the counterparties or the Company, as applicable. Information regarding the specific instruments used by the Company to hedge its exposure to foreign currency exchange rate fluctuations is provided below.Company's common stock. See Note 1217 to these Consolidated Financial Statements for additional discussion regardingdetails on the fair value of forward foreign currency exchange contracts.

NQDC.

(3)The Company enters into forward foreign currency exchange contractshad investments in order to protect againstmarketable equity securities measured using quoted prices in an active market that were considered strategic investments and were included in Other Assets on the fluctuations in revenue and operating expenses associated with foreign currency-denominated cash flows. The Company has formally designated these forward foreign currency exchange contracts as cash flow hedges and expects them to be highly effective in offsetting fluctuations in operating expenses denominated in Euros and revenues denominated in currencies other thanCompany's Consolidated Balance Sheets. During the U.S. dollar related to changes in foreign currency exchange rates.

The following table summarizes the Companys designated forward foreign currency exchange contracts outstanding assecond quarter of December 31, 2017 (notional amounts in millions):

 

 

 

 

 

 

Aggregate Notional

 

 

 

 

 

Number of

 

 

Amount in

 

 

 

Foreign Exchange Contracts

 

Contracts

 

 

Foreign Currency

 

 

Maturity

Brazilian Reais – Sell

 

 

6

 

 

 

160.0

 

 

May 2018

Canadian Dollars – Sell

 

 

24

 

 

 

27.2

 

 

Jan. 2018 - Dec. 2018

Colombian Pesos – Sell

 

 

12

 

 

 

93,000.0

 

 

Jan. 2018 - Dec. 2018

Euros – Purchase

 

 

80

 

 

 

122.2

 

 

Jan. 2018 - Dec. 2020

Euros – Sell

 

 

289

 

 

 

373.5

 

 

Jan. 2018 - Dec. 2020

Total

 

 

411

 

 

 

 

 

 

 

The maximum length of time over which2019, the Company is hedging its exposure torealized an immaterial gain upon the reductionsale of the shares of the marketable equity securities reported in valueOther Income, Net.

There were no transfers between levels during the periods presented.
106

Table of forecasted foreign currency revenues through forward foreign currency exchange contracts is through December 2020. Over the next twelve months, the Company expects to reclassify $12.1 million from Accumulated Other Comprehensive Income (Loss) to earnings as the forecasted revenue and operating expense transactions occur.

The following table summarizes the Companys non-designated forward foreign currency exchange contracts outstanding as of December 31, 2017 (notional amounts in millions):

Content

 

 

 

 

 

 

Aggregate Notional

 

 

 

 

 

Number of

 

 

Amount in

 

 

 

Foreign Exchange Contracts

 

Contracts

 

 

Foreign Currency

 

 

Maturity

British Pounds – Sell

 

 

1

 

 

 

5.0

 

 

January 2018

Euros – Purchase

 

 

4

 

 

 

93.5

 

 

January 2018

Total

 

 

5

 

 

 

 

 

 

 

F-22


BIOMARIN PHARMACEUTICAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands of U.S. dollars,Dollars, except per share amounts or as otherwise disclosed)

Liabilities measured at fair value using Level 3 inputs primarily consisted of contingent consideration. The following tables represent a roll-forward of contingent consideration.
Contingent consideration as of December 31, 2018$132,834 
Milestone payments to Ares Trading S.A. (Merck Serono)(83,472)
Milestone payments to former LEAD Therapeutics, Inc. shareholders(15,987)
Changes in the fair value of contingent consideration20,612 
Realized foreign exchange gain on settlement of contingent consideration(1,928)
Foreign exchange remeasurement of Euro denominated contingent
  acquisition consideration
(1,266)
Contingent consideration as of December 31, 2019$50,793 

(11) DERIVATIVE INSTRUMENTS AND HEDGING STRATEGIES
The following table summarizes the Company’s derivatives designated as hedging instruments outstanding as of December 31, 2019 (notional amounts in millions):
Foreign Exchange ContractsNumber of
Contracts
Aggregate Notional
Amount in
Foreign Currency
Maturity
Australian Dollars – Sell3613.8  Jan. 2020 - Dec. 2020
Canadian Dollars – Sell5642.5  Jan. 2020 - Dec. 2020
Colombian Pesos – Sell2499,850.0  Jan. 2020 - Dec. 2020
Euros – Purchase146175.4  Jan. 2020 - Dec. 2022
Euros – Sell385617.0  Jan. 2020 - Dec. 2022
Norwegian Krone – Sell3690.8  Jan. 2020 - Dec. 2020
Total683
107

Table of Content
BIOMARIN PHARMACEUTICAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands of U.S. Dollars, except per share amounts or as otherwise disclosed)
The following table summarizes the Company’s derivatives not designated as hedging instruments outstanding as of December 31, 2019 (notional amounts in millions):
Foreign Exchange Contracts
Number of
Contracts
Aggregate Notional
Amount in
Foreign Currency
Maturity
Brazilian Reais – Purchase155.1  February 2020
Colombian Pesos – Purchase428,320.0  Jan. 2020 - Feb. 2020
Colombian Pesos – Sell2173,000.0  Jan. 2020 - Feb. 2020
Euros – Purchase18.0  February 2020
Euros – Sell15.0  February 2020
Great British Pounds – Purchase221.0  Jan. 2020 - Feb. 2020
Rubles – Purchase120.0  February 2020
Rubles – Sell21,360.0  Jan. 2020 - Feb. 2020
Total14
The fair value carrying amounts of the Company’s derivative instruments were as follows:

 

Asset Derivatives

 

 

Liability Derivatives

 

 

 

December 31, 2017

 

 

December 31, 2017

 

 

 

Balance Sheet

Location

 

Fair Value

 

 

Balance Sheet

Location

 

Fair Value

 

Derivatives designated as hedging

   instruments:

 

 

 

 

 

 

 

 

 

 

 

 

Forward foreign currency exchange

   contracts

 

Other current assets

 

$

4,015

 

 

Accounts payable &

accrued liabilities

 

$

14,420

 

Forward foreign currency exchange

   contracts

 

Other assets

 

 

4,973

 

 

Other long- term liabilities

 

 

12,686

 

Total

 

 

 

$

8,988

 

 

 

 

$

27,106

 

Derivatives not designated as

   hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

Forward foreign currency exchange

   contracts

 

Other current assets

 

$

675

 

 

Accounts payable &

accrued liabilities

 

$

44

 

Total

 

 

 

 

675

 

 

 

 

 

44

 

Total value of derivative contracts

 

 

 

$

9,663

 

 

 

 

$

27,150

 

Balance Sheet LocationDecember 31, 2019December 31, 2018
Derivatives designated as hedging instruments:
Asset Derivatives - Level 2 (1)
Other current assets$19,584  $12,686  
Other assets13,539  10,324  
Subtotal$33,123  $23,010  
Liability Derivatives - Level 2 (1)
Accounts payable and accrued liabilities$8,184  $4,036  
Other long-term liabilities5,493  3,653  
Subtotal$13,677  $7,689  
Derivatives not designated as hedging instruments:
Asset Derivatives - Level 2 (1)
Other current assets$469  $168  
Liability Derivatives - Level 2 (1)
Accounts payable and accrued liabilities$2,264  $142  
Total Derivatives Assets$33,592  $23,178  
Total Derivatives Liabilities$15,941  $7,831  

 

Asset Derivatives

 

 

Liability Derivatives

 

 

 

December 31, 2016

 

 

December 31, 2016

 

 

 

Balance Sheet

Location

 

Fair Value

 

 

Balance Sheet

Location

 

Fair Value

 

Derivatives designated as hedging

   instruments:

 

 

 

 

 

 

 

 

 

 

 

 

Forward foreign currency exchange

   contracts

 

Other current assets

 

$

13,048

 

 

Accounts payable &

accrued liabilities

 

$

5,176

 

Forward foreign currency exchange

   contracts

 

Other assets

 

 

8,194

 

 

Other long- term liabilities

 

 

2,342

 

Total

 

 

 

$

21,242

 

 

 

 

$

7,518

 

Derivatives not designated as

   hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

Forward foreign currency exchange

   contracts

 

Other current assets

 

$

964

 

 

Accounts payable &

accrued liabilities

 

$

25

 

Total

 

 

 

 

964

 

 

 

 

 

25

 

Total value of derivative contracts

 

 

 

$

22,206

 

 

 

 

$

7,543

 

The effect of(1) See Note 3 to these Consolidated Financial Statements for additional information related to the Company’s derivative instrumentsfair value measurements.

The following tables summarize the impact of gains and losses from the Company's derivatives on theits Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015 was as follows:

period presented.

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Derivatives Designated as Hedging Instruments:

 

 

 

 

 

 

 

 

 

 

 

 

Net gain (loss) recognized in accumulated other

  comprehensive loss (1)

 

$

(38,351

)

 

$

9,677

 

 

$

17,300

 

Net gain (loss) reclassified from accumulated

  other comprehensive income (loss) into earnings (2)

 

 

(5,113

)

 

 

6,529

 

 

 

19,604

 

Net gain (loss) recognized in net loss (3)

 

 

2,576

 

 

 

5,070

 

 

 

(727

)

Derivatives Not Designated as Hedging Instruments:

 

 

 

 

 

 

 

 

 

 

 

 

Net gain (loss) recognized in net loss(4)

 

$

8,255

 

 

$

(8,687

)

 

$

4,493

 

Derivatives Designated as Cash Flow Hedging InstrumentsDecember 31, 2019
Amount of Gain (Loss) Recognized in Other Comprehensive Income$25,266 

(1)  Net change in the fair value


108

Table of the effective portion classified as accumulated other comprehensive income (loss).

(2)  Effective portion classified as Net Product Revenues and SG&A expense.

(3)  Ineffective portion and amount excluded from effectiveness testing classified as SG&A expense.

(4)  Classified as SG&A expense.

F-23


Content

BIOMARIN PHARMACEUTICAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands of U.S. dollars,Dollars, except per share amounts or as otherwise disclosed)

December 31, 2019
Derivatives Designated as Cash Flow Hedging InstrumentsCash Flow Hedge Gains (Losses)
Reclassified into Earnings
Net product revenues as reported$1,661,043  $17,672  
Operating expenses as reported$1,804,505  $(3,453) 
Derivatives Not Designated as Hedging InstrumentsGains (Losses) Recognized in Earnings
Operating Expenses$(5,259) 
As of December 31, 2019, the Company expects to reclassify unrealized losses of $9.4 million from AOCI to earnings as the forecasted revenue and operating expense transactions occur over the next twelve months.
The Company is exposed to counterparty credit risk on all of its derivative financial instruments. The Company has established and maintains strict counterparty credit guidelines and enters into hedges only with financial institutions that are investment grade or better to minimize the Company’s exposure to potential defaults. The Company does not require collateral to be pledged under these agreements.

(12) FAIR VALUE MEASUREMENTS

LEASES

The Company measures certain financialfollowing table presents the Company’s ROU assets and lease liabilities at fair value on a recurring basis, including available-for-sale fixed income securities and foreign currency derivatives.

The tables below present the fair valueas of these financial assets and liabilities determined using the following input levels.

 

 

Fair Value Measurements at December 31, 2017

 

 

 

Quoted Price in

Active Markets

For Identical

Assets

(Level 1)

 

 

Significant Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents (including available-for-sale debt securities):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market instruments

 

 

 

 

 

215,441

 

 

 

 

 

 

215,441

 

Corporate debt securities

 

 

 

 

 

3,096

 

 

 

 

 

 

3,096

 

Commercial paper

 

 

 

 

 

2,751

 

 

 

 

 

 

2,751

 

U.S. government agency securities

 

 

 

 

 

35,497

 

 

 

 

 

 

35,497

 

Foreign and other

 

 

 

 

 

990

 

 

 

 

 

 

990

 

Total cash and cash equivalents

 

 

 

 

 

257,775

 

 

 

 

 

 

257,775

 

Available-for-sale debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

 

 

 

 

406,188

 

 

 

 

 

 

406,188

 

Commercial paper

 

 

 

 

 

21,815

 

 

 

 

 

 

21,815

 

U.S. government agency securities

 

 

 

 

 

345,501

 

 

 

 

 

 

345,501

 

Foreign and other

 

 

 

 

 

24,436

 

 

 

 

 

 

24,436

 

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

 

 

 

 

295,965

 

 

 

 

 

 

295,965

 

U.S. government agency securities

 

 

 

 

 

89,620

 

 

 

 

 

 

89,620

 

Foreign and other

 

 

 

 

 

200

 

 

 

 

 

 

200

 

Total available-for-sale debt securities

 

 

 

 

 

1,183,725

 

 

 

 

 

 

1,183,725

 

Other Current Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NQDC Plan assets

 

 

 

 

 

967

 

 

 

 

 

 

967

 

Forward foreign currency exchange contract (1)

 

 

 

 

 

4,690

 

 

 

 

 

 

4,690

 

Restricted investments (2)

 

 

 

 

 

15,647

 

 

 

 

 

 

15,647

 

Total other current assets

 

 

 

 

 

21,304

 

 

 

 

 

 

21,304

 

Other Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NQDC Plan assets

 

 

 

 

 

11,859

 

 

 

 

 

 

11,859

 

Forward foreign currency exchange contract (1)

 

 

 

 

 

4,973

 

 

 

 

 

 

4,973

 

Total other assets

 

 

 

 

 

16,832

 

 

 

 

 

 

16,832

 

Total assets

 

$

 

 

$

1,479,636

 

 

$

 

 

$

1,479,636

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NQDC Plan liability

 

$

1,356

 

 

$

967

 

 

$

 

 

$

2,323

 

Forward foreign currency exchange contract (1)

 

 

 

 

 

14,464

 

 

 

 

 

 

14,464

 

Contingent acquisition consideration payable

 

 

 

 

 

 

 

 

53,648

 

 

 

53,648

 

Total current liabilities

 

 

1,356

 

 

 

15,431

 

 

 

53,648

 

 

 

70,435

 

Other long-term liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NQDC Plan liability

 

 

18,272

 

 

 

11,859

 

 

 

 

 

 

30,131

 

Forward foreign currency exchange contract (1)

 

 

 

 

 

12,686

 

 

 

 

 

 

12,686

 

Contingent acquisition consideration payable

 

 

 

 

 

 

 

 

135,318

 

 

 

135,318

 

Total other long-term liabilities

 

 

18,272

 

 

 

24,545

 

 

 

135,318

 

 

 

178,135

 

Total liabilities

 

$

19,628

 

 

$

39,976

 

 

$

188,966

 

 

$

248,570

 

December 31, 2019:

Lease ClassificationClassificationDecember 31, 2019
Assets:
OperatingOther Assets$49,045 
FinancingOther Assets10,389 
Total ROU assets$59,434 
Liabilities:
Current:
OperatingAccounts payable and accrued liabilities$7,451 
FinancingAccounts payable and accrued liabilities3,249 
Noncurrent:
OperatingOther long-term liabilities44,092 
FinancingOther long-term liabilities6,708 
Total lease liabilities$61,500 

F-24

109

Table of Content
BIOMARIN PHARMACEUTICAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands of U.S. dollars,Dollars, except per share amounts or as otherwise disclosed)

 

 

Fair Value Measurements at December 31, 2016

 

 

 

Quoted Price in

Active Markets

For Identical

Assets

(Level 1)

 

 

Significant Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents (including available-for-sale debt securities):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market instruments

 

 

 

 

 

235,571

 

 

 

 

 

 

235,571

 

Corporate debt securities

 

 

 

 

 

8,593

 

 

 

 

 

 

8,593

 

U.S. government agency securities

 

 

 

 

 

6,000

 

 

 

 

 

 

6,000

 

Total cash and cash equivalents

 

 

 

 

 

250,164

 

 

 

 

 

 

250,164

 

Available-for-sale debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

 

 

 

2,800

 

 

 

 

 

 

2,800

 

Corporate debt securities

 

 

 

 

 

193,974

 

 

 

 

 

 

193,974

 

Commercial paper

 

 

 

 

 

16,075

 

 

 

 

 

 

16,075

 

U.S. government agency securities

 

 

 

 

 

168,498

 

 

 

 

 

 

168,498

 

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

 

 

 

 

437,150

 

 

 

 

 

 

437,150

 

U.S. government agency securities

 

 

 

 

 

135,427

 

 

 

 

 

 

135,427

 

Foreign and other

 

 

 

 

 

134

 

 

 

 

 

 

134

 

Total available-for-sale debt securities

 

 

 

 

 

954,058

 

 

 

 

 

 

954,058

 

Other Current Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonqualified Deferred Compensation Plan assets

 

 

 

 

 

163

 

 

 

 

 

 

163

 

Forward foreign currency exchange contract (1)

 

 

 

 

 

14,012

 

 

 

 

 

 

14,012

 

Restricted investments (2)

 

 

 

 

 

3,754

 

 

 

 

 

 

3,754

 

Total other current assets

 

 

 

 

 

17,929

 

 

 

 

 

 

17,929

 

Other Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonqualified Deferred Compensation Plan assets

 

 

 

 

 

9,121

 

 

 

 

 

 

9,121

 

Forward foreign currency exchange contract (1)

 

 

 

 

 

8,194

 

 

 

 

 

 

8,194

 

Strategic investment (3)

 

 

4,064

 

 

 

 

 

 

 

 

 

4,064

 

Total other assets

 

 

4,064

 

 

 

17,315

 

 

 

 

 

 

21,379

 

Total assets

 

$

4,064

 

 

$

1,239,466

 

 

$

 

 

$

1,243,530

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonqualified Deferred Compensation Plan

   liability

 

$

2,073

 

 

$

163

 

 

$

 

 

$

2,236

 

Forward foreign currency exchange contract (1)

 

 

 

 

 

5,201

 

 

 

 

 

 

5,201

 

Contingent acquisition consideration payable

 

 

 

 

 

 

 

 

46,327

 

 

 

46,327

 

Total current liabilities

 

 

2,073

 

 

 

5,364

 

 

 

46,327

 

 

 

53,764

 

Other long-term liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonqualified Deferred Compensation Plan

   liability

 

 

17,303

 

 

 

9,121

 

 

 

 

 

 

26,424

 

Forward foreign currency exchange contract (1)

 

 

 

 

 

2,342

 

 

 

 

 

 

2,342

 

Contingent acquisition consideration payable

 

 

 

 

 

 

 

 

115,310

 

 

 

115,310

 

Total other long-term liabilities

 

 

17,303

 

 

 

11,463

 

 

 

115,310

 

 

 

144,076

 

Total liabilities

 

$

19,376

 

 

$

16,827

 

 

$

161,637

 

 

$

197,840

 

Maturities of lease liabilities as of December 31, 2019 by fiscal year were as follows: 

Maturity of Lease LiabilitiesOperatingFinancingTotal
2020$10,019  $3,705  $13,724  
20219,081  3,090  12,171  
20228,699  2,346  11,045  
20237,748  1,748  9,496  
20245,916  —  5,916  
Thereafter22,027  —  22,027  
Total lease payments63,490  10,889  74,379  
Less: Interest(11,947) (932) (12,879) 
Present value of lease liabilities$51,543  $9,957  $61,500  

(1)

See Note 11 to these Consolidated Financial Statements for further information regarding the derivative instruments.

Lease CostClassificationDecember 31, 2019
Operating (1)Operating Expenses$13,026 
Financing:
AmortizationOperating Expenses2,615 
Interest expenseOperating Expenses606 
Total lease costs$16,247 

(2)

The restricted investments as of December 31, 2017 and 2016 secure the Company’s irrevocable standby letter of credit obtained in connection with certain commercial agreements.

(3)

The Company had investments in marketable equity securities measured using quoted prices in an active market that are considered strategic investments and included in Other Assets on the Company’s Balance Sheets. As of December 31, 2017, all holdings in the Company’s strategic investments have been liquidated.

There(1) Includes short-term leases and variable lease costs, both of which were no transfers between levels duringnot material. Rent expense under operating leases for the yearyears ended December 31, 2017.

F-25

2018 and 2017 was $12.2 million and $11.4 million, respectively.
Minimum lease payments for future years as of December 31, 2018 were as follows: 
2019$12,976  
202012,549  
202111,198  
202210,574  
20239,993  
Thereafter27,701  
Total$84,991  
Deferred rent accruals at December 31, 2018 totaled $2.1 million, of which $0.5 million was current.


Other InformationDecember 31, 2019
Weighted average remaining lease term (in years):
Operating leases7.9
Financing leases3.3
Weighted average discount rate:
Operating leases5.2 %
Financing leases5.4 %
110

Table of Content
BIOMARIN PHARMACEUTICAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands of U.S. dollars,Dollars, except per share amounts or as otherwise disclosed)

As of December 31, 2019, no operating leases were expected to commence that create significant rights and obligations for the Company.
Supplemental Cash Flow InformationDecember 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Cash used in operating activities:
Operating leases$8,183 
Financing leases$628 
Cash used in financing activities:
Financing leases$5,087 
ROU assets obtained in exchange for lease obligations:
Operating leases$9,772 
Financing leases$3,267 

(13) DEBT
As of December 31, 2019, the Company had outstanding fixed-rate notes with varying maturities for an undiscounted aggregate principal amount of $870.0 million (collectively the Notes). The Notes are senior subordinated convertible obligations, summarized as of December 31, as follows:
20192018
1.50% senior subordinated convertible notes due in October 2020 (the 2020 Notes)$374,993  $374,993  
Unamortized discount(12,078) (26,581) 
Unamortized deferred offering costs(1,033) (2,334) 
Convertible Notes due 2020, net (1)
361,882  346,078  
0.599% senior subordinated convertible notes due in August 2024 (the 2024 Notes)495,000  495,000  
Unamortized discount(6,533) (7,946) 
Unamortized deferred offering costs(2,229) (2,715) 
Convertible Notes due in 2024, net486,238  484,339  
Total convertible debt, net$848,120  $830,417  
Fair value of fixed rate convertible debt
Convertible Notes due in 2020 (2)
$405,679  $419,722  
Convertible Notes due in 2024 (2)
521,839  491,626  
Total$927,518  $911,348  
(1)As the 2020 Notes mature in October 2020, the outstanding principal of the 2020 Notes is classified as a current liability as of December 31, 2019.
(2)The fair value of the Company’s Level 2 securities are valued using third-party pricing sources. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities, issuer credit spreads, benchmark securities, prepayment/default projectionsfixed-rate convertible debt is based on historical dataopen market trades and other observable inputs.

The Company validatesis classified as Level 1 in the prices provided by its third-party pricing services by understanding the models used, obtaining market values from other pricing sources, analyzing pricing data in certain instances and confirming those securities traded in active markets.fair value hierarchy. See Note 63 to these Consolidated Financial Statements for furtheradditional information regardingrelated to the Company’s financial instruments.

Liabilities measured at fair value using Level 3 inputsmeasurements.

Interest expense on the Company’s debt consisted of contingent acquisition consideration payable and asset retirement obligations.

The Company’s contingent acquisition consideration payable is estimated using a probability-based income approach utilizing an appropriate discount rate. Key assumptions used by management to estimate the fair valuefollowing:

111

Table of contingent acquisition consideration payable include estimated probabilities, the estimated timingContent
BIOMARIN PHARMACEUTICAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands of when a milestone may be attained and assumed discount periods and rates. Subsequent changes in the fair value of the contingent acquisition consideration payable, resulting from management’s revision of key assumptions, will be recorded in Intangible Asset Amortization and Contingent Consideration in the Company’s Consolidated Statements of Comprehensive Loss. The probability-based income approach used by management to estimate the fair value of the contingent acquisition consideration is most sensitive to changes in the estimated probabilities.

Contingent acquisition consideration payable at December 31, 2016

 

$

161,637

 

Milestone payments to former Huxley Pharmaceuticals, Inc. shareholders

 

 

(3,500

)

Reversal of contingent liability related to revised estimate of Firdapse FDA

  acceptance and approval milestones

 

 

(4,245

)

Changes in the fair value of other contingent acquisition consideration payable

 

 

14,587

 

Foreign exchange remeasurement of Euro denominated contingent

  acquisition consideration payable

 

 

20,487

 

Contingent acquisition consideration payable at December 31, 2017

 

$

188,966

 

Under certain of the Company’s lease agreements, the Company is contractually obligated to return leased space to its original condition upon termination of the lease agreement. The Company records an asset retirement obligation liability and a corresponding capital asset in an amount equal to the estimated fair value of the obligation, when estimable. In subsequent periods, for each such lease, the Company records interest expense to accrete the asset retirement obligation liability to full value and depreciates each capitalized asset retirement obligation asset, both over the term of the associated lease agreement. As of December 31, 2017, the balance of the asset retirement obligation liability was $4.2 million.

The Company acquired intangible assetsU.S. Dollars, except per share amounts or as a result of various business acquisitions. The estimated fair value of these long-lived assets was measured using Level 3 inputs as of the acquisition date.

(13) DEBT

otherwise disclosed)

Years Ended December 31,
201920182017
Coupon interest$4,907  $12,452  $10,407  
Amortization of debt issuance costs2,031  3,610  3,725  
Accretion of discount on convertible notes15,917  27,602  28,575  
Total interest expense on convertible debt$22,855  $43,664  $42,707  
2024 Convertible Notes

In August 2017, the Company issued $495.0 million in aggregate principal amount of senior subordinated convertible notes with a maturity date of August 1, 2024 (the 2024 Notes).2024. The 2024 Notes were issued to the public at 98% of face value and bear interest at the rate of 0.599% per annum. The effective interest rate on the 2024 Notes the year ended December 31, 2017 was 1.1%. Interest is payable semi-annually in cash in arrears on February 1 and August 1 of each year, beginning February 1, 2018. The 2024 Notes are convertible, at the option of the holder into shares of the Company’s common stock. The initial conversion rate for the 2024 Notes is 8.0212 shares per $1,000 principal amount of the 2024 Notes, which represents a conversion price of approximately $124.67 per share, subject to adjustment under certain conditions. Following certain corporate transactions, the Company will, in certain circumstances, increase the conversion rate for a holder that elects to convert its 2024 Notes in connection with such corporate transactions by a number of additional shares of the Company’s common stock. A holder may convert fewer than all of such holder’s 2024 Notes so long as the amount of the 2024 Notes converted is an integral multiple of $1,000 principal amount. Net proceeds from the offering were $481.7 million.

F-26


BIOMARIN PHARMACEUTICAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(In thousands of U.S. dollars, except per share amounts or as otherwise disclosed)

The 2024 Notes are senior subordinated, unsecured obligations, and rank (i) subordinated in right of payment to the prior payment in full of any of the Company’s existing and future senior debt, (ii) equal in right of payment to any of the Company’s existing and future senior subordinated debt, (iii) senior in right of payment to any of the Company’s existing and future indebtedness that is expressly subordinated in right of payment to the 2024 Notes, and (iv) effectively subordinated to any of the Company’s existing and future secured indebtedness, to the extent of the value of the collateral securing that indebtedness and structurally subordinated to all existing and future indebtedness and other liabilities, including trade payables, and (to the extent the Company is not a holder thereof) preferred equity, if any, of the Company’s subsidiaries. Upon the occurrence of a “fundamental change,” as defined in the indenture governing the 2024 Notes, the holders may require the Company to repurchase all or a portion of such holder’s 2024 Notes for cash at 100% of the principal amount of the 2024 Notes being purchased, plus any accrued and unpaid interest.

In connection with the issuance of the 2024 Notes, the Company recorded a discount on the 2024 Notes of $9.9 million, which will be accreted and recorded as additional interest expense over the life of the 2024 Notes. In connection with the issuance of the 2024 Notes, the Company incurred $3.4 million of issuance costs. These costs were deferred and are being amortized over the life of the 2024 Notes and recorded as additional interest expense.

2018/2020 Convertible Notes

On

In October 15, 2013, the Company issued $750.0 million in aggregate principal amount of senior subordinated convertible notes consisting of $375.0 million in aggregate principal amount of 0.75% senior subordinated convertible notes withthat had a maturity date of October 15, 2018 (the 2018 Notes) and $375.0 million in aggregate principal amount of 1.50% senior subordinated convertible notes with a maturity date of October 15, 2020 (the 2020 Notes).2020. Net proceeds from the offering were $726.2 million.

The 2018 Notes and Interest on the 2020 Notes bear interest at a rate of 0.75% and 1.50% per year, respectively, which is payable semiannually in arrears on April 15 and October 15 of each year.

The effective interest rateCompany’s 2018 Notes matured on October 15, 2018. Substantially all holders of the 2018 Notes converted at maturity and 2020 Notes the year ended December 31, 2017 was 6.0% and 7.5%, respectively.

The 2018 Notes were settled with a combination of cash and shares of the Company’s common stock, consisting of approximately $375.0 million in cash and 190,220 in shares. The shares issued represented the value of the 2018 Notes in excess of the conversion price of $94.15, as measured over a 25-day averaging period. The cash payment comprised the principal, the value of fractional shares and the value of unconverted 2018 Notes.

The 2020 Notes are senior unsecured obligations, and rank (i) subordinated to any of the Company’s existing and future unsecured senior debt, (ii) equally to any of the Company’s existing and future senior subordinated debt, (iii) senior to any of the Company’s future indebtedness that is expressly subordinated to the 2018 Notes and the 2020 Notes, and (iv) effectively junior to any secured indebtedness to the extent of the value of the assets securing such indebtedness. Upon the occurrence of a “fundamental change”, as defined in the indenture, the holders may require the Company to repurchase all or a portion of the 2018 Notes and the 2020 Notes for cash at 100% of the principal amount of the Notes being purchased, plus any accrued and unpaid interest.

The initial conversion rate for the 2018 Notes is 10.6213 shares per $1,000 principal amount

112

Table of the 2018 Notes, which represents a conversion priceContent
BIOMARIN PHARMACEUTICAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands of approximately $94.15U.S. Dollars, except per share and theamounts or as otherwise disclosed)
The initial conversion rate for the 2020 Notes is 10.6213 shares per $1,000 principal amount of the 2020 Notes, which represents a conversion price of approximately $94.15 per share,share. Such conversion rates are subject to adjustment under certain conditions. Holders may convert their 2018 Notes or 2020 Notes at their option at any time prior to July 15, 2018, in the case of the 2018 Notes, and July 15, 2020 in the case of the 2020 Notes, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on March 31, 2014, (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the applicable conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the measurement period) in which the trading price per $1,000 principal amount of the relevant notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the applicable conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. On or after July 15, 2018, in the case of the 2018 Notes, or July 15, 2020, in the case of the 2020 Notes, until the close of business on the second scheduled trading day immediately preceding the applicable maturity date, holders may convert their notes at any time, regardless of the foregoing circumstances. Upon conversion of the 2018 Notes and the 2020 Notes, the Company may pay cash, shares of the Company’s common stock or a combination of cash and stock, as determined by the Company in its discretion.

The Company has separately accounted for the liability and equity components of the 2018 Notes and the 2020 Notes by allocating the proceeds from issuance of the 2018 Notes and the 2020 Notes between the liability component and the embedded conversion option, or equity component. This allocation was done by first

F-27


BIOMARIN PHARMACEUTICAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(In thousands of U.S. dollars, except per share amounts or as otherwise disclosed)

estimating an interest rate at the time of issuance for similar notes that do not include the embedded conversion option. The Company allocated $156.2 million to the equity component, net of offering costs of $5.1 million. The Company recorded a discount on the notes2018 Notes and 2020 Notes of $161.3 million, which will bewas accreted and recorded as additional interest expense over the lifelives of the 2018 Notes and the 2020 Notes. Additionally, in connection with the issuance of the 2018 Notes and the 2020 Notes, the Company incurred $23.8 million of issuance costs, which are beingwere deferred and amortized over the lives of the 2018 Notes and 2020 Notes and recorded as additional interest expense over the life of the Notes.  

expense.

To minimize the impact of potential dilution upon conversion of the 2018 Notes and the 2020 Notes, the Company entered into capped call transactions separate from the issuance of the Notes with certain counterparties covering 3,982,988 shares of the Company’s common stock, subject to adjustment.adjustment, which applies 50% to the 2018 Notes and 50% to the 2020 Notes. The capped calls have a strike price of $94.15 and a cap price of $121.05 and are exercisable when and if the Notes are converted. If upon conversion of the Notes, the price of the Company’s common stock is above the strike price of the capped calls, the counterparties will deliver shares of the Company’s common stock and/or cash with an aggregate value equal to the difference between the price of the Company’s common stock at the conversion date and the strike price, multiplied by the number of shares of the Company’s common stock related to the capped calls being exercised. The Company paid $29.8 million for these capped calls transactions, which was recorded as additional paid-in capital.

2017 Convertible

Upon maturity of the 2018 Notes,

In April 2007, the Company sold $324.9 million in aggregate principal amount of senior subordinated convertible notes due in April 2017 (the 2017 Notes). The 2017 Notes were issued at face value and bore interest atreceived from the rate of 1.875% per annum, payable semi-annually in cash. The 2017 Notes were convertible, at the option of the holder, at any time prior to maturity or repurchase, intocapped call counterparties 95,127 shares of the Company’s common stock, at a conversion rate of 49.1171which were accounted for as treasury shares per $1,000 principal amountand subsequently retired. The Company incurred no gain or loss upon the extinguishment of the 2017 Notes, which is equal to a conversion price of approximately $20.36 per share, subject to adjustment in certain circumstances. The 2017 Notes did not include a call provision and the Company was unable to unilaterally redeem the 2017 Notes prior to maturity on April 23, 2017. During the twelve months ended December 31, 2017, 2016 and 2015, certain existing holders of the 2017 Notes elected to convert $22.5 million, $8.9 million and $8.1 million in aggregate principal amount of the 2017 Notes into 1,103,998, 438,462 and 399,469 shares, respectively, of the Companys common stock. The 2017 Notes matured on April 23, 2017 with conversion of all principal amounts except for a final cash settlement of $26,000.

F-28


BIOMARIN PHARMACEUTICAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(In thousands of U.S. dollars, except per share amounts or as otherwise disclosed)

The following table summarizes information regarding the Company’s convertible debt at December 31:

2018 Notes.

 

 

2017

 

 

2016

 

Convertible Notes due 2017

 

$

 

 

$

22,503

 

Unamortized deferred offering costs

 

 

 

 

 

(25

)

Convertible Notes due 2017, net

 

 

 

 

 

22,478

 

 

 

 

 

 

 

 

 

 

Convertible Notes due 2018

 

 

374,980

 

 

 

374,980

 

Unamortized discount

 

 

(12,488

)

 

 

(27,566

)

Unamortized deferred offering costs

 

 

(1,543

)

 

 

(3,484

)

Convertible Notes due 2018, net

 

 

360,949

 

 

 

343,930

 

 

 

 

 

 

 

 

 

 

Convertible Notes due 2020

 

 

374,993

 

 

 

374,993

 

Unamortized discount

 

 

(40,287

)

 

 

(53,239

)

Unamortized deferred offering costs

 

 

(3,631

)

 

 

(4,923

)

Convertible Notes due 2020, net

 

 

331,075

 

 

 

316,831

 

 

 

 

 

 

 

 

 

 

Convertible Notes due in 2024

 

 

495,000

 

 

 

 

Unamortized discount

 

 

(9,355

)

 

 

 

Unamortized deferred offering costs

 

 

(3,199

)

 

 

 

Convertible Notes due in 2024, net

 

 

482,446

 

 

 

 

 

 

 

 

 

 

 

 

 

Total convertible debt, net

 

$

1,174,470

 

 

$

683,239

 

Fair value of fixed rate convertible debt

 

 

 

 

 

 

 

 

Convertible Notes due in 2017 (1)

 

$

 

 

$

90,977

 

Convertible Notes due in 2018 (1)

 

 

403,955

 

 

 

423,202

 

Convertible Notes due in 2020 (1)

 

 

446,470

 

 

 

442,754

 

Convertible Notes due in 2024 (1)

 

 

493,894

 

 

 

 

Total

 

$

1,344,319

 

 

$

956,933

 

(1)

The fair value of the Company’s fixed rate convertible debt is based on open market trades and is classified as Level 1 in the fair value hierarchy.

See Note 1419 to these Consolidated Financial Statements for further discussion of the effect of conversion on net loss per common share.

Revolving Credit Facility

In November 2016,October 2018, the Company entered into aan unsecured revolving credit agreement (Credit Agreement) providing forfacility of up to $100.0$200.0 million (Revolving(the 2018 Credit Facility),. The 2018 Credit Facility includes a $10.0 million letter of credit subfacility and a $15.0 million swing lineswingline loan subfacility. The maturity datesubfacility and is intended to finance ongoing working capital needs and for other general corporate purposes. Borrowings under the 2018 Credit Facility bear interest, at the Company’s option, at a rate equal to either (a) the LIBOR rate (except that if LIBOR is less than 0 it shall be deemed to be 0 for purposes of the Revolving2018 Credit Facility), or LIBOR successor rate, plus an applicable margin ranging from 1.00% to 1.95% per annum, based upon the Company’s net leverage ratio and EBITDA for each of the two most recently ended four-quarter measurement periods, or (b) the Base Rate, generally the prime lending rate, plus an applicable margin ranging from 0.00% to 0.95%, based upon the Company’s net leverage ratio and EBITDA for each of the two most recently ended four-quarter measurement periods. Commitment fees payable on the undrawn amount range from 0.15% to 0.35% per annum based upon the Company’s net leverage ratio and EBITDA for each of the two most recently ended four-quarter measurement periods. The Company’s obligations under the 2018 Credit Facility will occurare guaranteed by its direct subsidiary, California Corporate Center Acquisition LLC, and such obligations may in the future be guaranteed from time to time by certain other material domestic subsidiaries. The 2018 Credit Facility matures on November 29, 2018. Interest on anyOctober 19, 2021 at which time all outstanding balanceamounts become due and payable, except that if at least $100.0 million aggregate principal amount of the Revolving2020 Notes remain outstanding on August 1, 2020 and certain other conditions have not been met, the Company may be required to repay all amounts borrowed under the 2018 Credit Facility is payable quarterlyon August 1, 2020. The 2018 Credit Facility contains financial covenants requiring the Company to maintain a
113

Table of Content
BIOMARIN PHARMACEUTICAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands of U.S. Dollars, except per share amounts or as otherwise disclosed)
minimum interest coverage ratio and draws may be voluntary prepaid at any time without penalty. In connection with entering into the Credit Agreement, $0.6a minimum liquidity requirement.
The Company incurred approximately $1.0 million in financingof issuance costs, was incurred andwhich will be amortized asto Interest Expense over the term of the 2018 Credit Agreement.Facility. As of December 31, 2017,2019, there were no0 outstanding amounts due under the Revolving Credit Facility.

F-29


BIOMARIN PHARMACEUTICAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(In thousands of U.S. dollars, except per share amounts or as otherwise disclosed)

In connection with the Revolving2018 Credit Facility the Company and certain of its subsidiaries are required to comply with covenants, including, among other things, restrictions on the Company’s and such subsidiaries’ ability to incur additional indebtedness, dispose of its assets, incur liens, make investments, and pay dividends or other distributions, in each case subject to specified exceptions. The Credit Agreement also contains customary indemnification obligations and customary events of default. If the Company’s Global Liquidity, which is defined as the sum of the market value of unrestricted cash, marketable securities and other assets to the extent constituting “cash and cash equivalents,” “short-term investments” or “long-term investments” as reflected in the Company’s Consolidated Balance Sheet, in each case, held by the Company or certain of the Company’s subsidiaries at such time, regardless of where such assets are domiciled, falls below $225.0 million at the end of any month or at the time of any borrowing or issuance of a letter of credit under the Revolving Credit Facility, then the Company’s obligations under the Credit Agreement will also be secured by the assets held by the Company in the custody account, which was established in the first quarter of 2017. As of December 31, 2017, the Company and certain of its subsidiaries that serve as guarantors arewere in compliance with all covenants.

Interest expense on the Company’s debt consisted of the following:

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Coupon interest

 

$

10,407

 

 

$

9,555

 

 

$

9,750

 

Amortization of debt issuance costs

 

 

3,725

 

 

 

3,367

 

 

 

3,294

 

Accretion of discount on convertible notes

 

 

28,575

 

 

 

26,577

 

 

 

25,200

 

Total interest expense on convertible debt

 

$

42,707

 

 

$

39,499

 

 

$

38,244

 

(14) NET LOSS PER COMMON SHARE

Potentially issuable shares of common stock include shares issuable upon the exercise of outstanding employee stock option awards, common stock issuable under the Company’s ESPP, unvested restricted stock units (RSUs), common stock held by the NQDC and contingent issuances of common stock related to convertible debt.

The following table sets forth the computation of basic and diluted earnings per common share (in thousands of common shares):

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net loss, basic

 

$

(117,042

)

 

$

(630,210

)

 

$

(171,799

)

Less: gain on common stock held by the NQDC

 

 

 

 

 

(3,184

)

 

 

 

Net loss, diluted

 

 

(117,042

)

 

 

(633,394

)

 

 

(171,799

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding, basic

 

 

174,427

 

 

 

165,985

 

 

 

160,025

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

Common stock held by the NQDC

 

 

 

 

 

234

 

 

 

 

Weighted-average common shares outstanding, diluted

 

 

174,427

 

 

 

166,219

 

 

 

160,025

 

Net loss per common share, basic

 

$

(0.67

)

 

$

(3.80

)

 

$

(1.07

)

Net loss per common share, diluted

 

$

(0.67

)

 

$

(3.81

)

 

$

(1.07

)

F-30


BIOMARIN PHARMACEUTICAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(In thousands of U.S. dollars, except per share amounts or as otherwise disclosed)

The table below presents potential shares of common stock that were excluded from the computation of basic and diluted earnings per common share as they were anti-dilutive using the if-converted or treasury stock method (in thousands):  

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Options to purchase common stock

 

 

8,108

 

 

 

8,856

 

 

 

10,323

 

Common stock issuable under the 2017 Notes

 

 

 

 

 

1,105

 

 

 

1,544

 

Common stock issuable under the 2018 Notes

 

 

3,983

 

 

 

3,983

 

 

 

3,983

 

Common stock issuable under the 2020 Notes

 

 

3,983

 

 

 

3,983

 

 

 

3,983

 

Common stock issuable under the 2024 Notes

 

 

3,970

 

 

 

 

 

 

 

Unvested restricted stock units

 

 

2,911

 

 

 

2,618

 

 

 

1,743

 

Common stock potentially issuable for ESPP purchases

 

 

436

 

 

 

404

 

 

 

312

 

Common stock held by the NQDC

 

 

220

 

 

 

 

 

 

243

 

Total number of potentially issuable shares

 

 

23,611

 

 

 

20,949

 

 

 

22,131

 

The potential effect of the capped call transactions with respect to the 2018 Notes and the 2020 Notes was excluded from the diluted net income/loss per share as the Company’s closing stock price on December 31, 2017 and 2016 did not exceed the conversion price of $94.15 per share for the 2018 Notes and the 2020 Notes. Although the Company’s stock price exceeded the conversion price $94.15 at December 31, 2015, the potential shares issuable under the 2018 Notes and the 2020 Notes were excluded from the calculation of diluted loss per share as they were anti-dilutive using the if-converted method. There is no similar capped call transaction associated with the 2024 Notes. See Note 13 to these Consolidated Financial Statements for information on the Company’s debt.

(15) INCOME TAXES

The provision for (benefit from) income taxes is based on loss before income taxes as follows:

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

U.S. Source

 

$

(19,461

)

 

$

10,696

 

 

$

182,215

 

Non-U.S. Source

 

 

(16,414

)

 

 

(841,746

)

 

 

(336,939

)

Loss before income taxes

 

$

(35,875

)

 

$

(831,050

)

 

$

(154,724

)

The U.S. and foreign components of the provision for (benefit from) income taxes are as follows:

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Provision for current income tax expense:

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

$

29,848

 

 

$

22,239

 

 

$

84,743

 

State and local

 

 

2,880

 

 

 

1,418

 

 

 

5,323

 

Foreign

 

 

3,975

 

 

 

3,557

 

 

 

3,836

 

 

 

 

36,703

 

 

 

27,214

 

 

 

93,902

 

Provision for (benefit from) deferred income tax

   expense:

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

 

12,446

 

 

 

(78,428

)

 

 

(17,741

)

State and local

 

 

32,336

 

 

 

(6,012

)

 

 

(8,770

)

Foreign

 

 

(318

)

 

 

(143,614

)

 

 

(50,316

)

 

 

 

44,464

 

 

 

(228,054

)

 

 

(76,827

)

Provision for (benefit from) income taxes

 

$

81,167

 

 

$

(200,840

)

 

$

17,075

 

On December 22, 2017, the bill known as the Tax Cuts and Jobs Act (the 2017 Tax Act) was signed into law. The new law has resulted in significant changes to the U.S. corporate income tax system. These changes include a federal statutory rate reduction from 35% to 21% and the elimination or reduction of certain domestic deductions and credits, including a 50% reduction in the orphan drug credit benefit. The 2017 Tax Act changed U.S. international taxation from a worldwide basis to a modified territorial system that includes base erosion

F-31


BIOMARIN PHARMACEUTICAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(In thousands of U.S. dollars, except per share amounts or as otherwise disclosed)

prevention measures on foreign earnings. This will result in the Company’s foreign subsidiaries being subject to U.S. taxation in the future. These changes are effective in 2018. Changes to tax laws and tax rates are required to be accounted for in the period of the enactment, therefore the Company’s tax expense for the year ended December, 31, 2017 included the impact of the 2017 Tax Act. The Company’s deferred tax assets and liabilities are measured at the enacted tax rate expected to apply when these temporary differences are expected to be realized or settled. The Company recorded a provisional expense of $42.3 million related to the 2017 Tax Act, which included $33.1 million for the re-measurement of the net deferred tax assets at the lower enacted corporate tax rate and $9.2 million related to the increased limitations on executive compensation. The Company also assessed the impact of the 2017 Tax Act on its financial projections and concluded that is more likely than not that certain of its state tax credits will not be utilized in the foreseeable future, and recognized $41.4 million of income tax expense during the fourth quarter of 2017 to establish a valuation allowance against those state tax credits. These credits do not expire, however, the Company projects that it will be generating more credits than it will utilize on an annual basis. The 2017 Tax Act also includes a one-time mandatory deemed repatriation toll tax on accumulated earnings of our foreign subsidiaries that did not impact the Company due to a net deficit in these foreign subsidiaries.

The incremental net income tax expense recognized as a result of the 2017 Tax Act was an estimate and the measurement of deferred tax assets is subject to further analysis and potential correlative adjustments as developing interpretations and guidance from the U.S. Treasury Department, the IRS, and other standard setting bodies provide additional clarifications of the provisions of the 2017 Tax Act. Updated guidance and regulations could result in changes to this estimate during 2018 when the analysis is complete. The Company has not yet elected an accounting method regarding whether to record deferred tax assets and liabilities for expected amounts of Global Intangible Low-Taxed Income (GILTI) inclusions or whether to treat such amounts as a period cost.

For the year ended December 31, 2016, the Company’s Dutch operations had a book net loss of $539.2 million, which included the impairment of the Kyndrisa IPR&D assets and a resulting deferred tax benefit of $143.5 million associated with the reversal of the deferred tax liability of such IPR&D assets.

The following is a reconciliation of the statutory federal income tax rate to the Company’s effective income tax rate expressed as a percentage of loss before income taxes:

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Federal statutory income tax rate

 

 

35.0

%

 

 

35.0

%

 

 

35.0

%

State and local taxes

 

 

(20.3

)%

 

 

0.4

%

 

 

(2.2

)%

Orphan Drug & General Business Credit

 

 

93.9

%

 

 

7.5

%

 

 

34.8

%

Stock compensation expense

 

 

19.1

%

 

 

4.6

%

 

 

(2.8

)%

Changes in the fair value of contingent acquisition consideration payable

 

 

(3.1

)%

 

 

0.9

%

 

 

0.2

%

Subpart F income

 

 

(84.1

)%

 

 

%

 

 

(8.4

)%

Foreign tax rate differential

 

 

(26.2

)%

 

 

(18.6

)%

 

 

(46.2

)%

Section 162(m) limitation

 

 

(26.5

)%

 

 

(5.4

)%

 

 

(1.3

)%

Tax Cuts and Jobs Act of 2017

 

 

(118.0

)%

 

 

%

 

 

%

Other

 

 

1.9

%

 

 

0.3

%

 

 

(1.6

)%

Valuation allowance/deferred benefit

 

 

(97.9

)%

 

 

(0.5

)%

 

 

(18.5

)%

Effective income tax rate

 

 

(226.2

)%

 

 

24.2

%

 

 

(11.0

)%

F-32


BIOMARIN PHARMACEUTICAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(In thousands of U.S. dollars, except per share amounts or as otherwise disclosed)

The significant components of the Company’s net deferred tax assets are as follows:

 

 

December 31,

 

 

 

2017

 

 

2016

 

Net deferred tax assets:

 

 

 

 

 

 

 

 

Net operating loss carryforwards

 

$

48,374

 

 

$

49,787

 

Tax credit carryforwards

 

 

384,381

 

 

 

352,535

 

Accrued expenses, reserves, and prepaids

 

 

54,565

 

 

 

77,904

 

Intangible assets

 

 

17,556

 

 

 

26,751

 

Stock-based compensation

 

 

31,371

 

 

 

47,713

 

Inventory

 

 

13,206

 

 

 

15,581

 

Impairment

 

 

2,609

 

 

 

5,017

 

Other

 

 

2,358

 

 

 

1,519

 

Valuation allowance

 

 

(111,001

)

 

 

(73,037

)

Total deferred tax assets

 

 

443,419

 

 

 

503,770

 

 

 

 

 

 

 

 

 

 

Joint venture basis difference

 

 

(1,229

)

 

 

(1,714

)

Acquired intangibles

 

 

(3,332

)

 

 

(8,773

)

Convertible notes discount

 

 

(10,100

)

 

 

(24,394

)

Property, plant and equipment

 

 

(29,663

)

 

 

(22,103

)

Total deferred tax liabilities

 

 

(44,324

)

 

 

(56,984

)

Net deferred tax assets

 

$

399,095

 

 

$

446,786

 

In 2017, the increase in the valuation allowance was primarily due to the state tax credits discussed above. The incremental expense was partially offset by a reduction in the valuation allowance related to fully valued assets that expired in 2017.

As of December 31, 2017, the Company had the following net operating loss and tax credit carryforwards, which if not utilized, will expire as follows (dollars in thousands):

Type

 

Amount

 

 

Year

Federal net operating loss carryforwards

 

$

15,554

 

 

2028 – 2033

Federal R&D and orphan drug credit carryforwards

 

$

403,828

 

 

2030 – 2037

State net operating loss carryforwards

 

$

108,133

 

 

2019 – 2036

Dutch net operating loss carryforwards

 

$

145,150

 

 

2020 – 2025

The $9.5 million of Irish net operating losses and $83.7 million of state research credit carryovers will carry forward indefinitely.

The Company’s net operating losses and credits could be subject to annual limitations due to ownership change limitations provided by IRC Section 382 and similar state provisions. An annual limitation could result in the expiration of net operating losses and tax credit carryforward before utilization. There are limitations on the tax attributes of acquired entities however, the Company does not believe the limitations will have a material impact on the utilization of the net operating losses or tax credits.

F-33


BIOMARIN PHARMACEUTICAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(In thousands of U.S. dollars, except per share amounts or as otherwise disclosed)

The financial statement recognition of the benefit for a tax position is dependent upon the benefit being more likely than not to be sustainable upon audit by the applicable taxing authority. If this threshold is met, the tax benefit is then measured and recognized at the largest amount that is greater than 50% likely of being realized upon ultimate settlement. A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2017 and 2016 is as follows:

 

 

December 31,

 

 

 

2017

 

 

2016

 

Balance at beginning of period

 

$

103,210

 

 

$

86,731

 

Additions based on tax positions related to the

   current year

 

 

11,042

 

 

 

15,982

 

(Deletions) Additions for tax positions of prior years

 

 

(766

)

 

497

 

Balance at end of period

 

$

113,486

 

 

$

103,210

 

Included in the balance of unrecognized tax benefits at December 31, 2017 are potential benefits of $113.5 million that, if recognized, would affect the effective tax rate. The Company’s policy for classifying interest and penalties associated with unrecognized income tax benefits is to include such items in the income tax expense. The total amount of accrued interest and penalties was not significant as of December 31, 2017.

The Company files income tax returns in the U.S. and various foreign jurisdictions. The U.S. and foreign jurisdictions have statute of limitations ranging from three to five years. However, carryforward tax attributes that were generated in 2014 and earlier may still be adjusted upon examination by tax authorities. Currently, the Company is under audit by the Internal Revenue Service for the year 2014.  

U.S. income and foreign withholding taxes have not been recognized on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that are essentially permanent in duration. This excess totaled approximately $10.7 million as of December 31, 2017, which will be indefinitely reinvested; deferred income taxes have not been provided on such foreign earnings.

(16) EQUITY COMPENSATION PLANS

Share Incentive Plan

The Company’s stock-based compensation plans include the 2017 Equity Incentive Plan and the ESPP. The 2017 Equity Incentive Plan, which was approved by the Company’s stockholders on June 6, 2017 and became effective that same date, and is the successor to and continuation of the Company’s Amended and Restated 2006 Share Incentive Plan (the 2006 Share Incentive Plan), provides for awards of RSUs and stock options as well as other forms of equity compensation. No additional awards will be granted under the 2006 Share Incentive Plan; however, there are vested and unvested awards outstanding under the 2006 Share Incentive Plan. Stock option awards granted to employees generally vest over a four-year period on a cliff basis twelve months after the grant date and then monthly thereafter. The contractual term of stock option awards is generally ten years from the grant date. RSUs granted to employees generally vest annually over a straight-line four-year period after the grant date. RSUs granted to directors generally vest in full one year after the grant date.

Shares formerly reserved for future issuance under the 2006 Share Incentive Plan were transferred to the 2017 Equity Incentive Plan, from which future shares shall be issued. The Company’s stock-based compensation plans are administered by the Company’s Board of Directors, or designated Committee thereof, which selects persons to receive awards and determines the number of shares subject to each award and the terms, conditions, performance measures and other provisions of the awards. As of December 31, 2017, options to purchase approximately 8.1 million shares were outstanding under the Company’s stock option plans. As of December 31, 2017, approximately 10.9 million shares were authorized for future issuance under the 2017 Equity Incentive Plan.

Employee Stock Purchase Plan

Under BioMarin’s ESPP, which was initially approved in June 2006, replacing the Company’s previous plan, and was further amended on March 5, 2014, employees meeting specific employment qualifications are eligible to participate and can purchase shares on established dates (each purchase date) semi-annually through

F-34


BIOMARIN PHARMACEUTICAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(In thousands of U.S. dollars, except per share amounts or as otherwise disclosed)

payroll deductions at the lower of 85% of the fair market value of the stock at the commencement of the offering period or each purchase date of the offering period. Each offering period will span up to two years. The ESPP permits eligible employees to purchase common stock through payroll deductions for up to 10% of qualified compensation, up to an annual limit of $25,000. The ESPP is intended to qualify as an “employee stock purchase plan” under Section 423 of the IRC. During the year ended December 31, 2017, the Company issued 0.2 million shares under the ESPP.

As of December 31, 2017, there were approximately 3.5 million shares were authorized and 0.6 million shares reserved for future issuance under the ESPP.

Board of Director Grants

On September 28, 2017, the Board of Directors (the Board) approved revised compensation for the Independent Directors of the Company as follows. On the date of the Company’s annual meeting of stockholders for a given year, each re-elected Independent Director receives an RSU grant valued at $375,000, with the number of RSUs to be granted calculated based on the three month trailing average closing price of our common stock on the Nasdaq Global Select Market. The RSUs subject to the annual award vest in full on the one-year anniversary of the grant date, subject to each respective director providing service to the Company through such vesting date. Upon election or appointment, a new Independent Director will receive an RSU grant on the same terms as the annual award, pro-rated for amount and vesting to the nearest quarter for the time such new Independent Director will serve prior to the Company’s next annual meeting of stockholders.

Prior to September 28, 2017, each Independent Director was automatically granted an initial equity grant valued at $550,000, with the number of equity awards to be granted calculated based on the three month trailing average closing price of our common stock on the Nasdaq Global Select Market. The initial value was allocated 40% to RSUs and 60% to options to purchase shares of the Company’s common stock (stock options) on the date that such person first becomes an Independent Director. The stock options subject to the initial grant vest quarterly over three years and the initial RSU grant vest annually over three years. On the date of the Company’s annual meeting of stockholders, each re-elected Independent Director was granted an additional equity grant valued at $375,000 with such valuation allocated 50% to RSUs and 50% to stock options. The stock options subject to the annual grant vest quarterly over one year and the additional annual RSUs vest in full on the one-year anniversary of the grant date. The additional stock option grant or RSU grant for a director that served for less than a year was prorated to the nearest quarter. These stock options and RSUs continue to vest only while the Independent Director serves on the Board. The exercise price per share of each of these stock options is 100% of the fair market value of a share of the Company’s common stock on the date of the grant. These stock options have a contractual term of 10 years from grant date.

See Note 3 to these Consolidated Financial Statements for discussion regarding the valuation of equity awards.

Shares Available Under Equity Compensation Plans

At December 31, 2017, an aggregate of approximately 30.0 million unissued shares was authorized for future issuance under the Company’s stock plans, which includes shares issuable under the 2017 Equity Incentive Plan, the ESPP and the Company’s expired plans. Under the 2017 Equity Incentive Plan, shares issued under the 2006 Share Incentive Plan and the 2017 Equity Incentive Plan that expire or are forfeited generally become available for future issuance under the 2017 Equity Incentive Plan.

F-35


BIOMARIN PHARMACEUTICAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(In thousands of U.S. dollars, except per share amounts or as otherwise disclosed)

(17) STOCK-BASED COMPENSATION

Stock Options

The following table summarizes activity under the Company’s stock option plans, including the 2012 and 2014 Inducement Plans and those suspended upon the adoption of the 2017 Share Incentive Plan, for the year ended December 31, 2017. All option grants presented in the table had exercise prices not less than the fair value of the underlying common stock on the grant date:

 

 

Shares

 

 

Weighted

Average

Exercise

Price

 

 

Weighted

Average

Remaining

Years

 

Aggregate

Intrinsic

Value (1)

 

Options outstanding as of

   December 31, 2016

 

 

8,856,208

 

 

$

51.13

 

 

5.4

 

$

304,356

 

Granted

 

 

801,170

 

 

$

87.74

 

 

 

 

 

 

 

Exercised

 

 

(1,367,307

)

 

$

34.96

 

 

 

 

 

 

 

Expired and forfeited

 

 

(182,090

)

 

$

92.98

 

 

 

 

 

 

 

Options outstanding as of

   December 31, 2017

 

 

8,107,981

 

 

$

56.53

 

 

5.1

 

$

281,141

 

Options unvested at

   December 31, 2017

 

 

1,462,941

 

 

$

88.19

 

 

8.5

 

$

6,313

 

Exercisable at December 31, 2017

 

 

6,645,032

 

 

$

49.56

 

 

4.3

 

$

274,828

 

(1)

The aggregate intrinsic value for outstanding options is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company’s common stock on the Nasdaq Global Select Market as of the last trading day for the respective year. The aggregate intrinsic value of options outstanding and exercisable includes options with an exercise price below $89.17, the closing price of the Company’s common stock on the Nasdaq Global Select Market on December 29, 2017, the last trading day of the year.

The weighted-average fair value per option granted in the years ended December 31, 2017, 2016 and 2015 were $36.07, $40.70 and $56.76, respectively. The total intrinsic value of options exercised during the years ended December 31, 2017, 2016 and 2015 was $77.0 million, $127.4 million and $146.6 million, respectively. The aggregate intrinsic value of options exercised was determined as of the date of option exercise. Upon the exercise of the options, the Company issues new common stock from its authorized shares. There were 7.4 million options that were in-the-money at December 31, 2017.

The assumptions used to estimate the per share fair value of stock options granted during the periods presented were as follows:

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Expected volatility

 

38 – 40%

 

 

36 – 44%

 

 

36 – 45%

 

Dividend yield

 

0.00%

 

 

0.00%

 

 

0.00%

 

Expected life

 

4.9 – 6.6 years

 

 

5.0 – 8.1 years

 

 

6.4 – 8.0 years

 

Risk-free interest rate

 

1.8 – 2.2%

 

 

1.1 – 2.3%

 

 

1.5 – 2.2%

 

The Company recorded $36.7 million, $45.5 million and $41.5 million of compensation costs related to current period vesting of stock options for the years ended December 31, 2017, 2016 and 2015, respectively. As of December 31, 2017, the total unrecognized compensation cost related to unvested stock options was $49.2 million. These costs are expected to be recognized over a weighted average period of 2.4 years. The net tax benefit from stock options exercised during the year ended December 31, 2017 was $7.8 million.

F-36


BIOMARIN PHARMACEUTICAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(In thousands of U.S. dollars, except per share amounts or as otherwise disclosed)

The assumptions used to estimate the per share fair value of stock purchase rights granted under the ESPP were as follows:

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Expected volatility

 

28 – 42%

 

 

42 – 50%

 

 

36 – 38%

 

Dividend yield

 

0.00%

 

 

0.00%

 

 

0.00%

 

Expected life

 

6 – 24 months

 

 

6 – 24 months

 

 

6 – 24 months

 

Risk-free interest rate

 

1.0 – 1.6%

 

 

0.4 – 0.8%

 

 

0.1 – 0.8%

 

The Company recorded $11.7 million, $10.1 million and $7.1 million of compensation costs related to shares granted under the ESPP for the years ended December 31, 2017, 2016 and 2015, respectively. As of December 31, 2017, there was $12.9 million of total unrecognized compensation cost related to unvested stock options issuable under the ESPP. These costs are expected to be recognized over a weighted average period of 1.4 years.

Restricted Stock Unit Awards with Service-Based Vesting Conditions

RSUs are generally subject to forfeiture if employment terminates prior to the release of vesting restrictions.

Below is a summary of RSU activity under the plan for the year ended December 31, 2017:

 

 

Shares

 

 

Weighted

Average

Grant Date

Fair Value

 

 

Weighted

Average

Remaining

Years

 

 

Aggregate

Intrinsic

Value

 

Non-vested units as of December 31, 2016

 

 

2,444,966

 

 

$

92.70

 

 

 

1.4

 

 

$

202,541

 

Granted

 

 

1,382,900

 

 

$

87.88

 

 

 

 

 

 

 

 

 

Vested

 

 

(837,926

)

 

$

92.00

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(310,406

)

 

$

96.02

 

 

 

 

 

 

 

 

 

Non-vested units as of December 31, 2017

 

 

2,679,534

 

 

$

90.04

 

 

 

1.4

 

 

$

238,934

 

The weighted-average grant date fair value per share of RSUs granted during the years ended December 31, 2017, 2016 and 2015, was $87.88, $84.18 and $119.86, respectively. The total intrinsic value of restricted stock that vested and was released in the years ended December 31, 2017, 2016 and 2015 was $76.5 million, $63.5 million and $59.5 million, respectively.

The Company recorded $86.5 million, $74.7 million and $47.9 million of compensation costs related to RSUs with service-based vesting conditions for the years ended December 31, 2017, 2016 and 2015, respectively. As of December 31, 2017, there was $173.7 million of total unrecognized compensation cost related to unvested RSUs with service-based vesting conditions. These costs are expected to be recognized over a weighted average period of 1.3 years.

Restricted Stock Unit Awards with Performance Conditions

The Compensation Committee of the Board (with respect to awards to certain executive officers other than the Chief Executive Officer) and the Board (with respect to awards to the Chief Executive Officer) may grant RSUs with performance-based vesting conditions to certain executive officers. In March 2017, the Compensation Committee and Board approved the grant of 133,250 RSUs (base RSUs) with performance-based vesting conditions. This award is contingent upon the achievement of a 2017 revenue target and the number of shares that may be earned range between 50% and 200% of the base RSUs, dependent on the percentage of 2017 “managed revenues” (defined as the Company’s net product revenues, excluding net revenues attributable to Aldurazyme, and determined using fixed foreign currency exchange rates) achieved against the target managed revenues, with a threshold achievement level of 75% of target and a ceiling achievement level of 125% of target. RSUs with performance-based vesting conditions with similar performance conditions were granted in 2016 and 2015.

F-37


BIOMARIN PHARMACEUTICAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(In thousands of U.S. dollars, except per share amounts or as otherwise disclosed)

The following table details the base RSUs granted, RSUs earned and expected to vest and the performance multiplier achieved and compensation expense recognized for the RSUs with performance-based vesting conditions for the years ended December 31, 2017, 2016 and 2015, respectively (dollars in thousands, except per RSU amounts):

 

 

 

 

 

 

Grant Date

 

 

 

 

 

 

 

 

 

 

Compensation Expense for the Years Ended December 31,

 

Date of Grant

 

Base RSUs Granted

 

 

Fair Value

per RSU

 

 

Multiplier Achieved

 

 

RSUs Earned

 

 

2017

 

 

2016

 

 

2015

 

March 2017 (1)

 

 

133,250

 

 

$

87.42

 

 

 

103

%

 

 

131,651

 

 

$

4,141

 

 

$

 

 

$

 

March 2016 (2)

 

 

130,310

 

 

$

83.43

 

 

 

103

%

 

 

134,219

 

 

$

3,928

 

 

$

2,956

 

 

$

 

March 2015 (2)

 

 

58,300

 

 

$

108.36

 

 

 

111

%

 

 

64,713

 

 

$

2,291

 

 

$

2,342

 

 

$

1,805

 

(1)

Based on the Company’s performance against the 2017 revenue target, the Company expects its Compensation Committee to approve a multiplier of 103% and the participating executive officers to earn 131,651 RSUs, which will continue to vest ratably over a three-year service period.

(2)

The RSUs with performance-based vesting conditions granted in 2016 and 2015 were earned on the one year anniversary upon achievement of the respective performance target and vest ratably over a three-year service period.

As of December 31, 2017, total unrecognized compensation expense of $12.4 million related to RSU awards with performance-vesting conditions is expected to be recognized over a weighted average period of 1.8 years.

Compensation expense included in the Company’s Consolidated Statements of Operations for all stock-based compensation arrangements was as follows:

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Cost of sales

 

$

10,636

 

 

$

9,121

 

 

$

6,836

 

Research and development

 

 

53,112

 

 

 

58,279

 

 

 

49,399

 

Selling, general and administrative

 

 

76,515

 

 

 

67,241

 

 

 

55,290

 

Total stock-based compensation expense

 

$

140,263

 

 

$

134,641

 

 

$

111,525

 

Stock-based compensation of $16.1 million, $11.4 million and $11.1 million was capitalized into inventory, for the years ended December 31, 2017, 2016 and 2015, respectively. Capitalized stock-based compensation is recognized as cost of sales when the related product is sold.

F-38


BIOMARIN PHARMACEUTICAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(In thousands of U.S. dollars, except per share amounts or as otherwise disclosed)

(18)ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table summarizes amounts reclassified out of Accumulated Other Comprehensive Income (AOCI)AOCI and their effect on the Company’s Consolidated Statements of Operations for the years ended December 31, 20172019, 2018 and 2016.

2017.

 

 

Amount Reclassified from AOCI (Gain) Loss

 

 

 

 

 

Years Ended December 31,

 

 

Consolidated Statement of

Details about AOCI Components

 

2017

 

 

2016

 

 

Operations Classification

Gains (losses) on cash flow hedges:

 

 

 

 

 

 

 

 

 

 

Forward foreign currency exchange

   contracts

 

$

(5,377

)

 

$

6,112

 

 

Net product revenues

Forward foreign currency exchange

   contracts

 

 

264

 

 

 

4,161

 

 

Selling, general and administrative

Total gain (loss) on cash flow

   hedges

 

 

(5,113

)

 

 

10,273

 

 

 

Gain (loss) on sale of available-for-sale

   debt securities

 

 

3,252

 

 

 

(115

)

 

Other income (expense)

Less income tax effect of the above

 

 

1,191

 

 

 

42

 

 

Provision for (benefit from) income taxes

 

 

$

(3,052

)

 

$

10,116

 

 

Net loss


Years Ended December 31,
Details about AOCI Components201920182017
Consolidated Statement of
Operations Classification
Gains (losses) on cash flow hedges:
Forward contracts$17,672  $(6,005) $(5,377) Net product revenues
Forward contracts(1,819) 3,958  264  Operating expenses
Total gain (loss) on cash flow hedges15,853  (2,047) (5,113) 
Gain on sale of available-for-sale debt securities—  —  3,252  Other income, net
Income tax effect of the above—  —  (1,191) Provision for (benefit from) income taxes
Total gain on available-for-sale debt securities—  —  2,061  
$15,853  $(2,047) $(3,052) Net loss

The following table summarizes changes in the accumulated balances for each component of other comprehensive loss,AOCI, including current period other comprehensive income (loss) and reclassifications out of AOCI, and other amounts of current-period other comprehensive income, for the years ended December 31, 2017 and 2016.

periods presented.

 

Year Ended Balance at December 31, 2017

 

 

Gains and Losses on Cash Flow Hedges

 

 

Unrealized Gains on Available-for-Sale Debt Securities

 

 

Foreign Currency Items

 

 

Total

 

Unrealized Gains (Losses) on Cash Flow HedgesUnrealized Gains (Losses) on Available-for-Sale Debt SecuritiesOtherTotal

AOCI balance at December 31, 2016

 

 

13,006

 

 

 

(178

)

 

 

(12

)

 

 

12,816

 

AOCI balance at December 31, 2017AOCI balance at December 31, 2017$(20,232) $(2,722) $(7) $(22,961) 
Impact of change in accounting principle (1)
Impact of change in accounting principle (1)
—  (586) —  (586) 
AOCI balance at January 1, 2018AOCI balance at January 1, 2018(20,232) (3,308) (7) (23,547) 

Other comprehensive income (loss) before

reclassifications

 

 

(38,351

)

 

 

(755

)

 

 

5

 

 

 

(39,101

)

Other comprehensive income (loss) before
reclassifications
25,386  1,804  (6) 27,184  

Less: gain (loss) reclassified from AOCI

 

 

(5,113

)

 

 

3,252

 

 

 

 

 

 

 

(1,861

)

Less: gain (loss) reclassified from AOCI(2,047) —  —  (2,047) 

Tax effect

 

 

 

 

 

1,463

 

 

 

 

 

 

1,463

 

Tax effect—  (413) —  (413) 

Net current-period other comprehensive income (loss)

 

 

(33,238

)

 

 

(2,544

)

 

 

5

 

 

 

(35,777

)

Net current-period other comprehensive income (loss)27,433  1,391  (6) 28,818  

AOCI balance at December 31, 2017

 

$

(20,232

)

 

$

(2,722

)

 

$

(7

)

 

$

(22,961

)

AOCI balance at December 31, 2018AOCI balance at December 31, 20187,201  (1,917) (13) 5,271  
Other comprehensive income (loss) before
reclassifications
Other comprehensive income (loss) before
reclassifications
25,266  7,122  (2) 32,386  
Less: gain (loss) reclassified from AOCILess: gain (loss) reclassified from AOCI15,853  —  —  15,853  
Tax effectTax effect—  (1,640) —  (1,640) 
Net current-period other comprehensive income (loss)Net current-period other comprehensive income (loss)9,413  5,482  (2) 14,893  
AOCI balance at December 31, 2019AOCI balance at December 31, 2019$16,614  $3,565  $(15) $20,164  

 

 

Year Ended Balance at December 31, 2016

 

 

 

Gains and Losses on Cash Flow Hedges

 

 

Unrealized Gains on Available-for-Sale Debt Securities

 

 

Foreign Currency Items

 

 

Total

 

AOCI balance at December 31, 2015

 

 

13,602

 

 

 

7,441

 

 

 

(10

)

 

 

21,033

 

Other comprehensive income (loss) before

  reclassifications

 

 

9,677

 

 

 

(12,104

)

 

 

(2

)

 

 

(2,429

)

Less: net gain (loss) reclassified from AOCI

 

 

10,273

 

 

 

(115

)

 

 

 

 

 

 

10,158

 

Tax effect

 

 

 

 

 

4,370

 

 

 

 

 

 

4,370

 

Net current-period other comprehensive loss

 

 

(596

)

 

 

(7,619

)

 

 

(2

)

 

 

(8,217

)

AOCI balance at December 31, 2016

 

 

13,006

 

 

 

(178

)

 

 

(12

)

 

 

12,816

 

114

F-39


Table of Content
BIOMARIN PHARMACEUTICAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands of U.S. dollars,Dollars, except per share amounts or as otherwise disclosed)

(19)

(1)The amount represents the reclassification from AOCI to Accumulated Deficit due to the adoption of ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02) in the first quarter of 2018.
(15) REVENUE, AND CREDIT CONCENTRATIONS

Net Product Revenue - AND GEOGRAPHIC INFORMATION

The Company operates in 1 business segment, which primarily focuses on the development and commercialization of innovative therapies for people with serious and life-threatening rare diseases and medical conditions. The Company considers there to be revenue concentration risks for regions where net product revenue exceedsrevenues exceed 10% of consolidated net product revenue.revenues. The concentration of the Company’s net product revenueNet Product Revenues within the regions below may have a material adverse effect on the Company’s revenuerevenues and results of operations if sales in the respective regions experience difficulties.

difficulties.

The following table below summarizes consolidated net product revenue concentrationsdisaggregates Total Revenues from external customers and collaborative partners by geographic region.
Years Ended December 31,
201920182017
Total revenues by geographic region:
United States$778,440  $696,793  $588,243  
Europe509,188  436,434  398,814  
Latin America218,792  185,046  181,970  
Rest of world197,628  172,939  144,619  
Total revenues$1,704,048  $1,491,212  $1,313,646  
The following table disaggregates total Net Product Revenues by product.
Years Ended December 31,
201920182017
Net product revenues by product:
Aldurazyme$97,809  $135,097  $89,959  
Brineura71,997  39,889  8,595  
Firdapse22,348  21,787  18,890  
Kuvan463,353  433,582  407,542  
Naglazyme374,334  345,851  332,208  
Palynziq86,857  12,173  —  
Vimizim544,345  481,977  413,251  
Total net product revenues$1,661,043  $1,470,356  $1,270,445  
115

Table of Content
BIOMARIN PHARMACEUTICAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands of U.S. Dollars, except per share amounts or as otherwise disclosed)
Net Product Revenues by geographic region are based on patient location for Brineura, Firdapse, Kuvan, Naglazyme,the Company’s commercial products, except for Aldurazyme. Although Genzyme sells Aldurazyme worldwide, the revenues earned by the Company based on Genzyme’s net sales are included in the U.S. region, as the transactions are with Genzyme, whose headquarters is located in the U.S. Genzyme is the Company’s sole customer for Aldurazyme and Vimizim, which areis responsible for marketing and selling Aldurazyme to third parties. The table below disaggregates total Net Product Revenues based on patient location for products sold directly by the Company, and global sales of Aldurazyme, which is marketed by Genzyme. Genzyme is the Companys sole customer for Aldurazyme and is responsible for marketing and selling Aldurazyme to third parties.

 

Years Ended December 31,

 

Years Ended December 31,

 

2017

 

 

2016

 

 

2015

 

201920182017

Region:

 

 

 

 

 

 

 

 

 

 

 

 

Region:

United States

 

 

39

%

 

 

37

%

 

 

39

%

United States$669,171  $560,030  $495,741  

Europe

 

 

21

%

 

 

23

%

 

 

19

%

Europe485,596  424,357  363,538  

Latin America

 

 

14

%

 

 

13

%

 

 

16

%

Latin America218,792  184,984  181,963  

Rest of world

 

 

19

%

 

 

19

%

 

 

15

%

Rest of world189,675  165,888  139,244  

Total net product revenues marketed by the

Company

 

 

93

%

 

 

92

%

 

 

89

%

Total net product revenues marketed by the Company1,563,234  1,335,259  1,180,486  

Aldurazyme net product revenues marketed by

Genzyme

 

 

7

%

 

 

8

%

 

 

11

%

Aldurazyme net product revenues marketed by Genzyme97,809  135,097  89,959  

Total net product revenue

 

 

100

%

 

 

100

%

 

 

100

%

Total net product revenue$1,661,043  $1,470,356  $1,270,445  

The following table illustrates the percentage of the Company’s consolidated net product revenuestotal Net Product Revenues attributed to the Company’s largest customers.

 

For the Years Ended December 31,

 

Years Ended December 31,

 

2017

 

 

2016

 

 

2015

 

201920182017

Customer A

 

 

18

%

 

 

19

%

 

 

15

%

Customer A17 %18 %18 %

Customer B

 

 

14

%

 

 

13

%

 

 

13

%

Customer B13 %12 %14 %

Customer C

 

 

10

%

 

 

10

%

 

 

 

Customer C11 %10 %10 %

Customer D

 

 

7

%

 

 

8

%

 

 

11

%

Customer E

 

 

7

%

 

 

6

%

 

 

10

%

Total

 

 

56

%

 

 

56

%

 

 

49

%

Total41 %40 %42 %

On a consolidated basis, the Company’s two largest2 customers accounted for 21%24% and 18%16% of the Company’s December 31, 20172019 accounts receivable balance, respectively, compared to December 31, 20162018 when the two largest2 customers accounted for 26%30% and 20%16% of the accounts receivable balance, respectively. As of December 31, 20172019 and 2016,2018, the accounts receivable balance for Genzyme included $18.1$60.2 million and $30.7$73.9 million, respectively, of unbilled accounts receivable, relatedwhich become payable to net incremental Aldurazymethe Company when the product transfers tois sold through by Genzyme. The Company does not require collateral from its customers, but does perform periodic credit evaluations of its customers’ financial condition and requires immediate payment in certain circumstances.

The Company sells its products in countries that face economic volatility and weakness. Although the Company has historically collected receivables from customers in such countries, sustained weakness or further deterioration of the local economies and currencies may cause customers in those countries to be unable to pay for the Company’s products. The Company has not historically experienced a significant level of uncollected receivables and has received continued payments from its more aged accounts in these countries. The Company believes that the allowances for doubtful accounts related to these countries, if any, iswas adequate based on its analysis of the specific business circumstances and expectations of collection for each of the underlying accounts in these countries.

F-40


BIOMARIN PHARMACEUTICAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(In thousands of U.S. dollars, except per share amounts or as otherwise disclosed)

(20) SEGMENT AND GEOGRAPHIC INFORMATION

The Company operates in one business segment, which primarily focuses on the development and commercialization of innovative therapies for people with serious and life threatening rare diseases and medical conditions.

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Net product revenues by product:

 

 

 

 

 

 

 

 

 

 

 

 

Aldurazyme

 

$

89,959

 

 

$

93,749

 

 

$

97,912

 

Brineura

 

 

8,595

 

 

 

 

 

 

 

Firdapse

 

 

18,890

 

 

 

18,028

 

 

 

16,037

 

Kuvan

 

 

407,542

 

 

 

348,009

 

 

 

239,336

 

Naglazyme

 

 

332,208

 

 

 

296,537

 

 

 

303,090

 

Vimizim

 

 

413,251

 

 

 

354,058

 

 

 

228,147

 

Total net product revenues

 

$

1,270,445

 

 

$

1,110,381

 

 

$

884,522

 

The following table summarizes total revenues from external customers and collaborative partners by geographic region. Net product revenues by geographic region are based on patient location for the Company’s commercial products, except for Aldurazyme, which is based on the location of Genzyme’s headquarters. Although Genzyme sells Aldurazyme worldwide, the revenues earned by the Company based on Genzyme’s net sales are included in the U.S. region as the transactions are with Genzyme whose headquarters are located in the U.S.

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Total revenues by geographic region:

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

588,243

 

 

$

507,539

 

 

$

444,075

 

Europe

 

 

301,487

 

 

 

252,633

 

 

 

171,216

 

Latin America

 

 

182,438

 

 

 

147,471

 

 

 

142,305

 

Rest of world

 

 

241,478

 

 

 

209,211

 

 

 

132,299

 

Total revenues

 

$

1,313,646

 

 

$

1,116,854

 

 

$

889,895

 

The following table summarizes non-monetaryNon-monetary long-lived assets, by geographic region. Non-monetary long-lived assetswhich primarily consist of property, plant and equipment, intangible assets, ROU assets, deferred tax assets and goodwill. 

goodwill, are summarized by geographic region in the following table.

 

December 31,

 

December 31,

 

2017

 

 

2016

 

20192018

Long-lived assets by geography:

 

 

 

 

 

 

 

 

Long-lived assets by geography:

United States

 

$

1,183,791

 

 

$

1,183,938

 

United States$1,789,044  $1,719,733  

Europe

 

 

823,657

 

 

 

812,833

 

IrelandIreland292,957  220,878  

Rest of world

 

 

2,694

 

 

 

2,568

 

Rest of world188,505  158,583  

Total long-lived assets

 

$

2,010,142

 

 

$

1,999,339

 

Total long-lived assets$2,270,506  $2,099,194  

(21)


116

Table of Content
BIOMARIN PHARMACEUTICAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. Dollars, except per share amounts or as otherwise disclosed)

(16) EQUITY COMPENSATION PLANS AND STOCK-BASED COMPENSATION
Equity Compensation Plans
Shares Available Under Equity Compensation Plans
As of December 31, 2019, an aggregate of approximately 39.7 million unissued shares was authorized for future issuance under the Company’s stock plans, which primarily includes shares issuable under the 2017 Equity Incentive Plan and the ESPP. Under the 2017 Equity Incentive Plan, shares issued under the Amended and Restated 2006 Share Incentive Plan (the 2006 Share Incentive Plan) and the 2017 Equity Incentive Plan that expire or are forfeited generally become available for future issuance under the 2017 Equity Incentive Plan. Shares formerly reserved for future issuance under the 2006 Share Incentive Plan were transferred to the 2017 Equity Incentive Plan and became available for issuance thereunder upon the effectiveness of the 2017 Equity Incentive Plan. The Company’s stock-based compensation plans are administered by the Company’s Board of Directors (the Board), or designated Committee thereof, which selects persons to receive awards and determines the number of shares subject to each award and the terms, conditions, performance measures and other provisions of the awards. See Note 3 to these Consolidated Financial Statements for discussion regarding the valuation of equity awards.
2017 Equity Incentive Plan
The 2017 Equity Incentive Plan, approved by the Company’s stockholders on June 6, 2017 and effective as of that same date, is the successor to and continuation of the 2006 Share Incentive Plan and provides for awards of RSUs and stock options as well as other forms of equity compensation. No additional awards will be granted under the 2006 Share Incentive Plan; however, there are vested and unvested awards outstanding under the 2006 Share Incentive Plan. Stock option awards granted to employees generally vest over a four-year period on a cliff basis twelve months after the grant date and then monthly thereafter. The contractual term of stock option awards is generally ten years from the grant date. RSUs granted to employees generally vest annually over a straight-line four-year period after the grant date.
As of December 31, 2019, approximately 21.5 million shares were authorized and reserved for future issuance under the 2017 Equity Incentive Plan.
Employee Stock Purchase Plan
The ESPP was initially approved in June 2006, replacing the Company’s previous plan, and was most recently amended in June 2019. Under BioMarin’s ESPP, employees meeting specific employment qualifications are eligible to participate and can purchase shares on established dates (each purchase date) semi-annually through payroll deductions at the lower of 85% of the fair market value of the stock at the commencement of the offering period or each purchase date of the offering period. Each offering period will span up to two years. The ESPP permits eligible employees to purchase common stock through payroll deductions for up to 10% of qualified compensation, up to an annual limit of $25,000. The ESPP is intended to qualify as an “employee stock purchase plan” under Section 423 of the IRC. During the year ended December 31, 2019, the Company issued 0.2 million shares under the ESPP.
As of December 31, 2019, approximately 7.0 million shares were authorized and 3.6 million shares reserved for future issuance under the ESPP.
Board of Director Grants
September 19, 2019, the Board of BioMarin approved revised compensation for the Independent Directors of the Company. On the date of the Company’s annual meeting of stockholders for a given year, each re-elected Independent Director receives an RSU grant valued at $400,000 ($375,000 prior to September 19, 2019), with the number of RSUs to be granted calculated based on the three-month trailing average closing price of the Company’s common stock on the Nasdaq Global Select Market. The RSUs subject to the annual award vest in full on the one-year anniversary of the grant date, subject to each respective Director providing service to the Company through such vesting date. Upon election or appointment, a new Independent Director will receive an RSU grant on the same terms as the annual award, pro-rated for amount and vesting to the nearest quarter for the time such new Independent Director will serve prior to the Company’s next annual meeting of stockholders.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. Dollars, except per share amounts or as otherwise disclosed)

Stock-based Compensation
Stock-based compensation expense included on the Company’s Consolidated Statements of Operations for all stock-based compensation arrangements was as follows:
Years Ended December 31,
201920182017
Cost of sales$16,146  $13,558  $10,636  
Research and development56,649  57,557  53,112  
Selling, general and administrative87,070  77,704  76,515  
Total stock-based compensation expense$159,865  $148,819  $140,263  
Stock-based compensation of $20.3 million, $20.0 million and $16.1 million was capitalized into inventory for the years ended December 31, 2019, 2018 and 2017, respectively. Capitalized stock-based compensation is recognized in Cost of Sales when the related product is sold.
Restricted Stock Units
Restricted Stock Unit Awards with Service-Based Vesting Conditions
Below is a summary of RSU activity under the plan for the year ended December 31, 2019:
Shares
Weighted
Average
Grant Date
Fair Value
Weighted
Average
Remaining
Years
Aggregate
Intrinsic
Value
Non-vested units as of December 31, 20183,147,523  $87.42  2.6$268,012  
Granted1,937,858  $91.28  
Vested(1,136,627) $91.20  
Forfeited(363,370) $89.39  
Non-vested units as of December 31, 20193,585,384  $88.54  2.6$303,144  
The weighted-average grant date fair value per share of RSUs granted during the years ended December 31, 2019, 2018 and 2017, was $91.28, $84.63 and $87.88, respectively. The total intrinsic value of restricted stock that vested and was released in the years ended December 31, 2019, 2018 and 2017, was $101.0 million, $84.5 million and $76.5 million, respectively.
As of December 31, 2019, total unrecognized compensation cost related to unvested RSUs with service-based vesting conditions of $225.5 million was expected to be recognized over a weighted average period of 2.6 years.
Restricted Stock Unit Awards with Performance Conditions
The Compensation Committee of the Board (with respect to awards to certain executive officers other than the Chief Executive Officer) and the Board (with respect to awards to the Chief Executive Officer) may grant RSUs with performance-based vesting conditions to certain executive officers. In March 2019, the Compensation Committee and Board approved a grant of RSUs with performance-based vesting conditions. This award is contingent upon the achievement of a 2019 revenue target and the earned RSUs, if any, vest over a three-year service period. The number of shares that may be earned range between 50% and 200% of the base RSUs, depending on the percentage of 2019 “managed revenues” (defined as the Company’s net product revenues, excluding net revenues attributable to Aldurazyme, and determined using fixed foreign currency exchange rates) achieved against the target managed revenues, with a threshold achievement level of 75% of target and a ceiling achievement level of 125% of target.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. Dollars, except per share amounts or as otherwise disclosed)

Below is a summary of activity related to RSUs with revenue-based performance conditions under the plan for the year ended December 31, 2019:
Shares
Weighted
Average
Grant Date
Fair Value
Non-vested units as of December 31, 2018256,418  $84.85  
Granted99,010  $94.53  
Vested(125,687) $84.85  
Forfeited(2,857) $83.57  
Non-vested units as of December 31, 2019226,884  $89.09  
The weighted-average grant date fair value of RSUs with performance conditions was $83.57 and $87.42 for the years ended December 31, 2018 and 2017, respectively. As of December 31, 2019, total unrecognized compensation expense of $10.5 million related to RSUs with performance-based vesting conditions was expected to be recognized over a weighted average period of 1.7 years.
In August 2019, the Compensation Committee of the Board approved the grant of 44,260 RSUs with performance-based vesting conditions and a grant date fair value of $81.00 per RSU. These awards are contingent upon obtaining regulatory approval for valoctocogene roxaparvovec by January 2022 and the awarded RSUs, if any, will vest from the time regulatory approval is obtained through January 2022. The Company evaluated the current timeline and the status of regulatory applications and determined that for accounting purposes attainment of the performance measure was not probable as of December 31, 2019 as the regulatory approval is outside of the Company's control. Therefore, the Company did not record any expense associated with these awards, as such the full value of $3.6 million remains unrecognized and the Company does not have an estimate of the expected weighted average period over which expense is to be recognized.
Restricted Stock Unit Awards with Market Conditions
In March 2019, the Compensation Committee and Board approved the grant of 99,010 RSUs with market-based vesting conditions (base TSR-RSUs) to certain executives. These base TSR-RSUs vest, if at all, in full following a three-year service period only if certain total shareholder return (TSR) results relative to the Nasdaq Biotechnology Index comparative companies are achieved. The number of shares that may be earned range between 0 percent and 200% of the base TSR-RSUs with a ceiling achievement level of 100% of the base TSR-RSUs in the event the Company’s TSR is above the 50th percentile but negative on an absolute basis. The Company utilized a Monte Carlo simulation model to determine the grant date fair value of $143.92 per base TSR-RSU using the following assumptions: an expected term of 2.8 years, discount rate of 2.4% dividend yield of 0.0% and expected volatility rate derived from historical volatilities for the Company and the members of the referenced peer group. Compensation expense for awards with market conditions is not reversed if the market condition is not met.
As of December 31, 2019, total unrecognized compensation expense of $9.4 million related to base TSR-RSUs was expected to be recognized over a weighted average period of 2.2 years.
Stock Options and Purchase Rights
Stock Options
The following table summarizes activity under the Company’s stock option plans for the year ended December 31, 2019. All stock option grants presented in the table had exercise prices not less than the fair value of the underlying common stock on the
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(In thousands of U.S. Dollars, except per share amounts or as otherwise disclosed)

grant date:
Shares
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Years
Aggregate
Intrinsic
Value (1)
Options outstanding as of December 31, 20187,363,609  $63.06  5.1$183,091  
Granted610,250  $94.45  
Exercised(567,672) $28.95  
Expired and forfeited(141,952) $82.24  
Options outstanding as of December 31, 20197,264,235  $67.99  4.7$146,700  
Options unvested as of December 31, 20191,258,052  $89.49  8.5$447  
Exercisable at December 31, 20196,006,183  $63.48  3.9$146,253  
(1)The aggregate intrinsic value for outstanding options is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company’s common stock on the Nasdaq Global Select Market as of the last trading day for the respective year. The aggregate intrinsic value of options outstanding and exercisable includes options with an exercise price below $84.55, the closing price of the Company’s common stock on the Nasdaq Global Select Market on December 31, 2019.
The weighted-average fair value per stock option granted in the years ended December 31, 2019, 2018 and 2017, were $36.84, $33.40 and $36.07, respectively. The total intrinsic value of options exercised during the years ended December 31, 2019, 2018 and 2017, was $32.5 million, $79.9 million and $77.0 million, respectively. The aggregate intrinsic value of options exercised was determined as of the date of option exercise. Upon the exercise of the options, the Company issues new common stock from its authorized shares.
The assumptions used to estimate the per share fair value of stock options granted during the periods presented were as follows:
Years Ended December 31,
201920182017
Expected volatility37.1 – 37.4%  36.8 – 38.4%  37.6 – 39.7%  
Dividend yield0.00%  0.00%  0.00%  
Expected term4.6 – 5.8 years  4.6 – 5.7 years  4.9 – 6.6 years  
Risk-free interest rate2.2 – 3.0%  2.3 – 2.8%  1.8 – 2.2%  
As of December 31, 2019, total unrecognized compensation cost related to unvested stock options of $36.5 million was expected to be recognized over a weighted average period of 2.4 years.The net tax benefit from stock options exercised during the year ended December 31, 2019 was $1.2 million.
The assumptions used to estimate the per share fair value of stock purchase rights granted under the ESPP were as follows:
Years Ended December 31,
201920182017
Expected volatility27.7 – 35.0%  29.7 – 35.0%  27.7 – 42.3%  
Dividend yield0.00%  0.00%  0.00%  
Expected term6 – 24 months  6 – 24 months  6 – 24 months  
Risk-free interest rate1.2 – 2.8%  1.2 – 2.8%  1.0 – 1.6%  
As of December 31, 2019, total unrecognized compensation cost related to unvested stock options issuable under the ESPP of $14.3 million was expected to be recognized over a weighted average period of 1.4 years.
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(In thousands of U.S. Dollars, except per share amounts or as otherwise disclosed)
(17) OTHER EMPLOYEE BENEFITS
Employment Agreements
The Company has entered into employment agreements with certain officers. Generally, these agreements can be terminated without cause by the Company upon prior written notice and payment of specified severance, or by the officer upon four weeks’ prior written notice to the Company.
401(k) Plan
The Company sponsors the BioMarin Retirement Savings Plan (the 401(k) Plan). Most employees are eligible to participate following the start of their employment, at the beginning of each calendar month. Employees may contribute to the 401(k) Plan up to the lesser of 100% of their current compensation or an amount up to a statutorily prescribed annual limit. The Company pays the direct expenses of the 401(k) Plan and matches 100% of each participating employee’s eligible contributions, up to a maximum of the lesser of 6% of the employee’s annual compensation or $19,000 per year ($19,500 per year effective January 1, 2020). The Company’s matching contribution vests immediately and was approximately $28.5 million, $23.0 million and $19.8 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Deferred Compensation Plan
The Company amended the NQDC in the second quarter of 2019 to prohibit the diversification of deferrals of Company stock, which resulted in a change to the classification of the obligation associated with the Company's common stock held in the NQDC. Company stock issued and held by the NQDC is accounted for similarly to treasury stock in that the fair value of the employer stock was determined on the grant date and the shares are issued into the NQDC when the restricted stock vests. The corresponding deferred compensation obligation is classified as equity and changes in the fair value of Company stock held in the NQDC are no longer recognized in earnings. Other contributions held in the NQDC are classified as trading securities and recorded at fair value with the corresponding deferred compensation obligation classified as a liability. Changes in the fair value of non-BioMarin investments are recognized in earnings in the period they occur.
See Note 10 to these Consolidated Financial Statements for additional discussion on the fair value and presentation of the NQDC assets and liabilities.
(18) INCOME TAXES
The provision for (benefit from) income taxes was based on loss before income taxes as follows:
Years Ended December 31
201920182017
U.S. Source$(182,112) $(128,700) $(19,461) 
Non-U.S. Source87,301  (14,005) (16,414) 
Loss before income taxes$(94,811) $(142,705) $(35,875) 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands of U.S. Dollars, except per share amounts or as otherwise disclosed)
The U.S. and foreign components of the provision for (benefit from) income taxes were as follows:

Years Ended December 31,
201920182017
Provision for (benefit from) current income tax expense:
Federal$5,127  $(2,660) $29,848  
State and local1,331  588  2,880  
Foreign5,339  4,956  3,975  
11,797  2,884  36,703  
Provision for (benefit from) deferred income taxes:
Federal(58,311) (72,074) 12,446  
State and local(5,394) (994) 32,336  
Foreign(19,055) 4,690  (318) 
(82,760) (68,378) 44,464  
Provision for (benefit from) income taxes$(70,963) $(65,494) $81,167  
On December 22, 2017, the Tax Cuts and Jobs Act (the 2017 Tax Act) was signed into law and resulted in significant changes to the U.S. corporate income tax system. These changes included a federal statutory rate reduction from 35% to 21% and the elimination or reduction of certain domestic deductions and credits, including a 50% reduction in the orphan drug credit benefit. The 2017 Tax Act changed U.S. international taxation from a worldwide basis to a modified territorial system that includes base erosion prevention measures on foreign earnings. This has resulted in the Company’s foreign subsidiaries being subject to U.S. taxation in the current year. Changes to tax laws and tax rates are required to be accounted for in the period of the enactment, therefore the Company’s tax expense for the year ended December 31, 2017 included the impact of the 2017 Tax Act.
In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allowed companies to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. As a result, the Company previously provided a provisional estimate of the effect of the 2017 Tax Act in its 2017 financial statements. In the fourth quarter of 2018, the Company completed its analysis to determine the effect of the 2017 Tax Act and recorded immaterial adjustments as of December 31, 2018. The Company has elected to account for Global Intangible Low-taxed Income (GILTI) as a current period expense when incurred.
The following is a reconciliation of the statutory federal income tax (benefit) expense to the Company’s effective tax rate:
December 31,
201920182017
Federal statutory income tax benefit$(19,911) $(29,968) $(12,556) 
State and local taxes(2,784) (276) 7,282  
Orphan Drug & General Business Credit(43,124) (66,451) (33,683) 
Stock compensation expense239  (5,647) (6,843) 
Changes in the fair value of contingent consideration(1,804) (2,361) 1,099  
Foreign Source Income Subject to US Tax(52) 6,543  30,181  
Foreign tax rate differential (1)
(30,639) 12,583  9,403  
Section 162(m) limitation8,294  7,440  9,492  
Tax Cuts and Jobs Act of 2017—  —  42,338  
Tax Reserves12,123  8,545  2,262  
Other(1,132) (423) (2,940) 
Valuation allowance/deferred benefit7,827  4,521  35,132  
Effective income tax (benefit) expense$(70,963) $(65,494) $81,167  
(1)  For the year ended December 31, 2019, the foreign rate differential included foreign local tax expense which was at an effective rate lower than the U.S. statutory rate and was offset by the benefit of the valuation allowance release against the deferred tax assets of the Company’s Dutch subsidiary of $29.6 million.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands of U.S. Dollars, except per share amounts or as otherwise disclosed)
The significant components of the Company’s net deferred tax assets were as follows:
December 31,
20192018
Net deferred tax assets:
Net operating loss carryforwards$32,181  $42,007  
Tax credit carryforwards508,560  466,066  
Accrued expenses, reserves, and prepaids61,807  55,041  
Intangible assets29,413  18,734  
Stock-based compensation42,873  35,966  
Lease liabilities11,470  —  
Inventory6,290  12,859  
Other575  278  
Valuation allowance(86,197) (107,928) 
Total deferred tax assets606,972  523,023  
Joint venture basis difference(993) (1,010) 
Acquired intangibles(1,647) (6,508) 
Deferred revenue(3,003) (4,480) 
Convertible notes discount(2,364) (5,157) 
ROU assets(10,258) —  
Property, plant and equipment(46,642) (44,916) 
Total deferred tax liabilities(64,907) (62,071) 
Net deferred tax assets$542,065  $460,952  
In the second quarter of 2019, the Company determined that it is more likely than not that the deferred tax assets, including net operating losses and tax credit carryforwards of its Dutch subsidiary, will be realized. In making this determination, the Company analyzed the recent history of earnings, forecasts of future earnings and cumulative earnings for the last three years of the Dutch subsidiary. As a result, the Company recorded a $29.6 million reversal of its deferred tax asset valuation allowance in the second quarter of 2019.
As of December 31, 2019, the Company had the following net operating loss and tax credit carryforwards, which if not utilized, will expire as follows:
TypeAmountYear
Federal net operating loss carryforwards$144,566 2028 – 2037
Federal R&D and orphan drug credit carryforwards$507,292 2030 – 2038
State net operating loss carryforwards$161,341 2020 – 2039
Dutch net operating loss carryforwards$89,064 2021 – 2025
Included in the above table are $132.4 million of federal net operating loss carryforwards that will carry forward indefinitely. Not included in the table above are $112.1 million of state research credit carryovers that will carry forward indefinitely.
The Company’s net operating losses and credits could be subject to annual limitations due to ownership change limitations provided by IRC Section 382 and similar state provisions. An annual limitation could result in the expiration of net operating losses and tax credit carryforward before utilization. There are limitations on the tax attributes of acquired entities however, the Company does not believe the limitations will have a material impact on the utilization of the net operating losses or tax credits.
The financial statement recognition of the benefit for a tax position is dependent upon the benefit being more likely than not to be sustainable upon audit by the applicable taxing authority. If this threshold is met, the tax benefit is then measured and recognized at the largest amount that is greater than 50% likely of being realized upon ultimate settlement.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands of U.S. Dollars, except per share amounts or as otherwise disclosed)
A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2019 and 2018, is as follows:
December 31,
20192018
Balance at beginning of period$147,445  $113,486  
Additions based on tax positions related to the current year19,287  30,811  
(Deletions) Additions for tax positions of prior years2,016  3,148  
Balance at end of period$168,748  $147,445  
Included in the balance of unrecognized tax benefits at December 31, 2019 were potential benefits of $167.2 million that, if recognized, would affect the effective tax rate. The Company’s policy for classifying interest and penalties associated with unrecognized income tax benefits is to include such items in the income tax expense. The total amount of accrued interest and penalties was not significant as of December 31, 2019.
The Company files income tax returns in the U.S. and various foreign jurisdictions. The U.S. and foreign jurisdictions have statute of limitations ranging from three to five years. However, carryforward tax attributes that were generated in 2014 and earlier may still be adjusted upon examination by tax authorities.
U.S. income and foreign withholding taxes have not been recognized on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that are essentially permanent in duration. This excess totaled approximately $31.2 million as of December 31, 2019, which will be indefinitely reinvested; deferred income taxes have not been provided on such foreign earnings.
(19) NET LOSS PER COMMON SHARE
Potentially issuable shares of common stock include shares issuable upon the exercise of outstanding employee stock option awards, common stock issuable under the Company’s ESPP, unvested RSUs, common stock held by the NQDC and contingent issuances of common stock related to convertible debt.
The following table sets forth the computation of basic and diluted loss per common share (common shares in thousands):
Years Ended December 31,
201920182017
Numerator:
Net loss, basic$(23,848) $(77,211) $(117,042) 
Less: gain on common stock held by the NQDC—  (710) —  
Net loss, diluted$(23,848) $(77,921) $(117,042) 
Denominator:
Weighted-average common shares outstanding, basic179,039  177,061  174,427  
Effect of dilutive securities:
Common stock held by the NQDC—  207  —  
Weighted-average common shares outstanding, diluted179,039  177,268  174,427  
Net loss per common share, basic$(0.13) $(0.44) $(0.67) 
Net loss per common share, diluted$(0.13) $(0.44) $(0.67) 
The table below presents potential shares of common stock that were excluded from the computation of basic and diluted
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands of U.S. Dollars, except per share amounts or as otherwise disclosed)
loss per common share as they were anti-dilutive (in thousands):
Years Ended December 31,
201920182017
Options to purchase common stock7,264  7,364  8,108  
Common stock issuable under the 2018 Notes—  —  3,983  
Common stock issuable under the 2020 Notes3,983  3,983  3,983  
Common stock issuable under the 2024 Notes3,970  3,970  3,970  
Unvested restricted stock units3,956  3,404  2,911  
Common stock potentially issuable for ESPP purchases587  435  436  
Common stock held by the NQDC205  —  220  
Total number of potentially issuable shares19,965  19,156  23,611  
The potential effect of the capped call transactions with respect to the 2020 Notes was excluded from the diluted net income/loss per share as the Company’s closing stock price on December 31, 2019, 2018 and 2017 did not exceed the conversion price of $94.15 per share for the 2020 Notes. The potential effect of the capped call transactions with respect to the 2018 Notes was excluded from the diluted net income/loss per share as the Company’s closing stock price on December 31, 2017 did not exceed the conversion price of $94.15 per share for the 2018 Notes. There is no similar capped call transaction associated with the 2024 Notes. See Note 13 to these Consolidated Financial Statements for information on the Company’s debt.
(20) LICENSE AND COLLABORATION AND LICENSE AGREEMENTS

In October 2019, the Company entered into a worldwide, exclusive licensing agreement with a third party for tralesinidase alfa (formerly referred to as BMN 250), an investigational enzyme replacement therapy to treat Sanfilippo Syndrome Type B. In consideration, the Company received an upfront payment of $3.0 million and a minority equity investment in the licensee of $5.0 million, and is entitled to receive royalties on net sales of tralesinidase alfa and milestone payments if certain development, regulatory and sales milestones are met by the licensee. The Company has also committed to providing the licensee with certain amounts of product supply and specified transition services, as well as to performing certain continued manufacturing activities.
The Company evaluated the design and purpose of the third-party licensee and determined that it is a variable interest entity (VIE), as the equity-at-risk is insufficient to support the licensee’s operations. The Company has concluded that it is not the primary beneficiary of the VIE as the Company does not have the power to direct the activities of the VIE that most significantly impact its performance. The Company is accounting for the minority equity investment at cost, less impairment, if any, adjusted for observable price changes, as it does not exercise significant influence over the operations of the licensee.
Other than providing the licensee with certain amounts of product supply, specified transition services and continued manufacturing activities, the Company has no other involvement with the operations of the VIE. As a result, the exposure to loss is limited to the value of the equity investment of $5.0 million. As of December 31, 2019, the Company has a contract liability of $8.8 million related to product supply that will be delivered in 2020, which is included in Accounts Payable and Accrued Liabilities on the Company’s Consolidated Balance Sheets. The carrying value of the Company's investment in the licensee was $5.0 million on December 31, 2019 and was included in Other Assets on the Company’s Consolidated Balance Sheets.
In July 2017, the Company executed a license agreement and a settlement agreement (the Sarepta Agreements) with Sarepta Therapeutics (Sarepta) that provide Sarepta with global exclusive rights to the Company’s Duchenne muscular dystrophy (DMD) patent estate for EXONDYS 51 and all future exon-skipping products. The Sarepta Agreements resolved the ongoing worldwide patent proceedings related to the use of EXONDYS 51 and all future exon-skipping products for the treatment of DMD. Pursuant to the Sarepta Agreements, in 2017 Sarepta paid the Company a net one-time upfront fee of $35.0$31.5 million, which was recognized as license revenue. Under the Sarepta Agreements, Sarepta may pay certain additional regulatory and commercial milestone fees for exons 51, 45, 53 and possibly on future exon-skipping products to the Company if certain development and sales milestones are achieved. Additionally, Sarepta will pay the Company receives from Sarepta royalties based on 5% of net sales in the U.S. through the end of 2023 and 8% of net sales in the EU and in other countries, where

F-41


BIOMARIN PHARMACEUTICAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(In thousands of U.S. dollars, except per share amounts or as otherwise disclosed)

certain of the Company’s patents exist, through September 30, 2024. The Company retained the right to convert the license to a co-exclusive right in the event it decides to proceed with an exon-skipping therapy for DMD.

The

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(In thousands of U.S. Dollars, except per share amounts or as otherwise disclosed)
On October 1, 2015, the Company is engaged in R&D collaborationsentered into a Termination and Transition Agreement with various other entities. These provide for sponsorship of R&D byAres Trading S.A. (Merck Serono), as amended and restated on December 23, 2015 (the A&R Kuvan Agreement), to terminate the Development, License and Commercialization Agreement, dated May 13, 2005, as amended (the License Agreement), between the Company and may also provide for exclusive royalty-bearing intellectual property licenses or rights of first negotiation regarding licensesMerck Serono, including the license to intellectual property developmentKuvan the Company had granted to Merck Serono under the collaborations. Typically, these agreements can be terminated for cause by either party upon 90 days written notice.

License Agreement. The Company and Merck Serono have no further rights or obligations under the License Agreement with respect to Kuvan or Palynziq. Also, on October 1, 2015, the Company and Merck Serono entered into a Termination Agreement (the Pegvaliase Agreement) to terminate the license to pegvaliase the Company had granted to Merck Serono under the License Agreement. On January 1, 2016, pursuant to the A&R Kuvan Agreement and the Pegvaliase Agreement, the Company completed the acquisition from Merck Serono and its affiliates of certain rights and other assets with respect to Kuvan and Palynziq. As a result, the Company acquired all global rights to Kuvan and Palynziq from Merck Serono, with the exception of Kuvan in Japan. Previously, the Company had exclusive rights to Kuvan in the U.S. and Canada and Palynziq in the U.S. and Japan. Pursuant to the A&R Kuvan Agreement, the Company paid Merck Serono $374.5 million in cash and, if future sales milestones are met, is obligated to pay Merck Serono up to a maximum of €60.0 million, in cash, which was an estimated fair value of $67.3 million as of December 31, 2019. Pursuant to the Pegvaliase Agreement, the Company paid Merck Serono €125.0 million in cash when the Palynziq development milestones were achieved.

On October 6, 2015, the Company completed the sale of talazoparib to Medivation Inc. (Medivation) pursuant to an asset purchase agreement (the Medivation Asset Purchase Agreement). Pursuant to the Medivation Asset Purchase Agreement, Medivation paid the Company an upfront payment of $410.0 million upon the closing of the transaction. In addition, contingent upon the successful development and commercialization of talazoparib, In September 2016, Pfizer Inc. acquired Medivation, therefore obligations under the Medivation Asset Purchase Agreement (Medivation Agreement) transferred to Pfizer. In accordance with the Medivation Asset Purchase Agreement, Pfizer will pay the Company milestone payments of up to $160.0 million and mid-single digit percentage royalties on net sales of talazoparib. During the fourth quarter of 2015, the Company recognized a net gain of $369.5 million related to the sale of the talazoparib intangible assets.

In accordance with the Medivation Agreement, Pfizer shall pay the Company milestone payments of up to $160.0 million, of which $25.0 million and $50.0 million was paid in 2019 and 2018, respectively, pursuant to achievement of development and regulatory approval milestones and commercial sales milestones. Commencing in 2018, pursuant to the Medivation Agreement, the Company receives mid-single digit percentage royalties on net sales of talazoparib.

In October 2012, the Company licensed to Catalyst Pharmaceutical Partners, Inc., (Catalyst) the North American rights to develop and market Firdapse. In consideration of this licensing arrangement, the Company received from Catalyst a $5.0 million convertible promissory note. Under the terms of the note agreement, the Company received 6.7 million shares of Catalyst common stock upon the automatic conversion of the convertible promissory note on December 10, 2012. In exchange for the North American rights to Firdapse, the Company maywill receive royalties of 7% to 10% on net product sales of Firdapse in North America.America, which commenced in the first quarter of 2019. As of December 31, 2017, there were no amounts due from Catalyst for reimbursable development costs2019 and 2018, the Company no longer held 0 shares of Catalyst common stock.

In September 2007, the Company licensed to Asubio Pharma Co., Ltd. (a subsidiary of Daiichi Sankyo) exclusive rights to data and intellectual property contained in the Kuvan new drug application. The Company receives royalties on net sales of the product in Japan.

(22) COMPENSATION AGREEMENTS AND PLANS

Employment Agreements

The Company has entered into employment agreementsis engaged in R&D collaborations with certain officers. Generally,various other entities. These provide for sponsorship of R&D by the Company and may also provide for exclusive royalty-bearing intellectual property licenses or rights of first negotiation regarding licenses to intellectual property development under the collaborations. Typically, these agreements can be terminated withoutfor cause by the Companyeither party upon prior90 days written notice and payment of specified severance, or by the officer upon four weeks’ prior written notice to the Company.

401(k) Plan

The Company sponsors the BioMarin Retirement Savings Plan (the 401(k) Plan). Most employees (Participants) are eligible to participate following the start of their employment, at the beginning of each calendar month. Participants may contribute to the 401(k) Plan up to the lesser of 100% of their current compensation or an amount up to a statutorily prescribed annual limit. The Company pays the direct expenses of the 401(k) Plan and matched 100% of each Participant’s contributions, up to a maximum of the lesser of 6% of the employee’s annual compensation or $14,000 per year ($16,000 per year effective January 1, 2018). The Company’s matching contribution vests over four years from employment commencement and was approximately $19.8 million, $16.0 million and $15.1 million for the years ended December 31, 2017, 2016 and 2015, respectively. Employer contributions not vested upon employee termination are forfeited.

Deferred Compensation Plan

In December 2005, the Company adopted the Deferred Compensation Plan. All of the investments held in the NQDC Plan are classified as trading securities and recorded at fair value with changes in the investments’ fair values recognized as earnings in the period they occur. Company stock issued and held by the NQDC Plan is accounted for similarly to treasury stock in that the value of the employer stock is determined on the date the restricted stock vests and the shares are issued into the NQDC Plan. The restricted stock issued into the NQDC Plan is recorded as stockholders’ equity and changes in the fair value of the corresponding liability are recognized in earnings as incurred. The corresponding liabilities for the NQDC Plan are included in Accounts Payable and Accrued Liabilities and Other Long-Term Liabilities in the Company’s Consolidated Balance Sheets. The corresponding assets for the NQDC Plan are included in Other Current Assets and Other Assets in the Company’s Consolidated Balance Sheets.

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BIOMARIN PHARMACEUTICAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(In thousands of U.S. dollars, except per share amounts or as otherwise disclosed)

As of December 31, 2017 and 2016, the fair value of Company stock held by the Deferred Compensation Plan, was $19.6 million and $19.4 million, respectively, which is included in current and non-current liabilities. The change in market value amounted to a loss of $1.4 million, a gain of $5.0 million and a gain of $2.5 million in the years 2017, 2016 and 2015, respectively. See Note 12 to these Consolidated Financial Statements for additional discussion regarding the fair value of the Deferred Compensation Plan assets and liabilities.

(23)notice.

(21) COMMITMENTS AND CONTINGENCIES

Lease Commitments

The Company leases office space and research, testing and manufacturing laboratory space in various facilities under operating agreements expiring at various dates through 2026. Certain of the leases provide for options by the Company to extend the lease for multiple five-year renewal periods and also provide for annual minimum increases in rent, usually based on a consumer price index or annual minimum increases. Minimum lease payments for future years are as follows:

2018

 

$

9,697

 

2019

 

 

7,671

 

2020

 

 

5,996

 

2021

 

 

4,948

 

2022

 

 

3,961

 

Thereafter

 

 

5,851

 

Total

 

$

38,124

 

Rent expense for the years ended December 31, 2017, 2016 and 2015 was $11.4 million, $11.6 million and $9.3 million, respectively. Deferred rent accruals at December 31, 2017 totaled $2.3 million, of which $2.0 million was current. Deferred rent accruals at December 31, 2016 totaled $2.4 million, of which $2.0 million was current.   

Research and Development Funding and Technology Licenses

The Company uses experts and laboratories at universities and other institutions to perform certain R&D activities. These amounts are included as R&D expense as services are provided. The Company has also licensed technology, for which it is required to pay royalties upon future sales, subject to certain annual minimums.

Other Commitments

In the normal course of business, the Company enters into various firm purchase commitments primarily related to active pharmaceutical ingredients, and certain inventory related items.items and certain third-party R&D services. As of December 31, 2017,2019, these commitments for the next five years were approximately $52.8$106.2 million. The
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Table of Content
BIOMARIN PHARMACEUTICAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands of U.S. Dollars, except per share amounts primarily related to active pharmaceutical ingredients represent minimum purchase requirements and post marketing commitments related toor as otherwise disclosed)
Under certain of the Company’s approved products.

lease agreements, the Company is contractually obligated to return leased space to its original condition upon termination of the applicable lease agreement. The Company records interest expense to accrete the asset retirement obligation liability to full value and depreciates each retirement obligation asset, both over the term of the associated lease agreement. As of December 31, 2019 and 2018, the balance of the asset retirement obligation liability was $3.0 million and $4.9 million, respectively. See Note 3 to these Consolidated Financial Statements for further information on the Company's fair value measurements.

Contingencies

From time to time the Company is involved in legal actions arising in the normal course of its business. The most significant of these actions are described below.

The process of resolving matters through litigation or other means is inherently uncertain and it is possible that an unfavorable resolution of these matters could adversely affect the Company, its results of operations, financial condition and cash flows. The Company’s general practice is to expense legal fees as services are rendered in connection with legal matters, and to accrue for liabilities when losses are probable and reasonably estimable.

Paragraph IV Notices

The Company received a paragraph IV notice letter, dated December 23, 2016, from Dr. Reddy’s Laboratories, Inc. and Dr. Reddy’s Laboratories, Ltd. (collectively, DRL), notifying the Company that DRL had

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BIOMARIN PHARMACEUTICAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(In thousands of U.S. dollars, except per share amounts or as otherwise disclosed)

filed an abbreviated new drug application (ANDA) seeking approval of a proposed generic version of Kuvan (sapropterin dihydrochloride) 100 mg oral powder prior to the expiration of the Company’s patents listed in the FDA's Approved Drug Products with Therapeutic Equivalence Evaluations (the Orange Book). The Company filed a lawsuit alleging patent infringement against DRL. In August 2017, the Company entered into a settlement agreement with DRL (the DRL Powder Settlement Agreement) that resolved the patent litigation with DRL in the U.S. related to Kuvan 100 mg oral powder. Under the terms of the DRL Powder Settlement Agreement, the Company granted DRL a non-exclusive license to its Kuvan-related patents to allow DRL to market a generic version of sapropterin dihydrochloride in oral powder form in 100 mg and 500 mg packet formulations in the U.S. for the indications approved for Kuvan beginning on October 1, 2020, or earlier under certain circumstances.

The Company also received two separate paragraph IV notice letters, dated January 14, 2016 and January 22, 2015, from Par Pharmaceutical, Inc. (Par), notifying the Company that Par had filed an ANDA seeking approval of proposed generic versions of Kuvan 100 mg oral powder and Kuvan 100 mg oral tablets, respectively, prior to the expiration of the Company’s patents listed in the FDA’s Orange Book. The Company filed two lawsuits alleging patent infringement against Par (the lawsuit against Par pertaining to the proposed generic version of Kuvan 100 mg oral tablets was filed together with Merck & Cie), and the two Par cases were consolidated. In April 2017, the Company and Merck & Cie entered into a settlement agreement with Par (the Par Settlement Agreement) that resolved both cases against Par. Under the Par Settlement Agreement, the Company granted Par a non-exclusive license to its Kuvan-related patents to allow Par to market a generic version of sapropterin dihydrochloride in 100 mg oral tablets and oral powder in 100 mg and 500 mg packet formulations in the U.S. for the indications approved for Kuvan beginning on: April 1, 2021 if Par is not entitled to the statutory 180-day first filer exclusivity period; October 1, 2020 if Par is entitled to the statutory 180-day first filer exclusivity period; or earlier under certain circumstances.

The Company also received a paragraph IV notice letter, dated October 3, 2014, from DRL notifying the Company that DRL had filed an ANDA seeking approval of a proposed generic version of Kuvan 100 mg oral tablets prior to the expiration of the Company’s patents listed in the FDA’s Orange Book. The Company, together with Merck & Cie, filed a lawsuit alleging patent infringement against DRL. In September 2015, the Company and Merck & Cie entered into a settlement agreement with DRL (the DRL Tablet Settlement Agreement) that resolved the patent litigation with DRL in the U.S. related to Kuvan 100 mg oral tablets. Under the terms of the DRL Tablet Settlement Agreement, the Company granted DRL a non-exclusive license to its Kuvan-related patents to allow DRL to market a generic version of sapropterin dihydrochloride 100 mg oral tablets in the U.S. for the indications approved for Kuvan beginning on October 1, 2020, or earlier under certain circumstances.

Contingent Payments

As of December 31, 2017,2019, the Company iswas also subject to contingent payments totaling approximately $604.6$361.3 million upon achievement of certain development and regulatory activities and commercial sales and licensing milestones if they occur before certain dates in the future. Of this amount, $222.0$67.3 million (or 185 million based on the exchange rate of 1.20 USD per Euro in effect on December 31, 2017) relatesrelated to the acquisition of certain rights and other assets with respect to Kuvan and Palynziq from Merck PKU Business acquisitionSerono and $53.4$243.8 million relatesrelated to programs that are no longer being developed.

As of December 31, 2017,2019, the Company has recorded $189.0$50.8 million of contingent acquisition consideration payable on its Consolidated Balance Sheets, in Short-term and Long-term Contingent Acquisition Consideration Payable,all of which $53.6 million is expectedwas long-term.
(22) SUBSEQUENT EVENT
In January 2020, the Company completed the sale of worldwide rights to be paidFirdapse, the Company's commercial product for the treatment of Lambert-Eaton myasthenic syndrome, to a third party in exchange for a one-time payment of $67.0 million. Under the next twelve months.

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terms of the agreement, the Company agreed to provide certain services to the third-party purchaser, such as customer sales and support, for up to 12 months after the closing of the transaction.
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