United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2004March 31, 2005

Or

For the transition period from                    to                    .

Commission file number: 000-26727

BIOMARIN PHARMACEUTICAL INC.

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx No¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of The Exchange Act). Yesx No¨

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 64,497,63664,636,498 shares common stock, par value $0.001, outstanding as of November 3, 2004.May 2, 2005.

BIOMARIN PHARMACEUTICAL INC.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

BioMarin Pharmaceutical Inc. and SubsidiariesBIOMARIN PHARMACEUTICAL INC. AND SUBSIDIARIES

Consolidated Balance SheetsCONSOLIDATED BALANCE SHEETS

(In thousands, except for share and per share data)

See accompanying notes to consolidated financial statements.

BioMarin Pharmaceutical Inc. and SubsidiariesBIOMARIN PHARMACEUTICAL INC. AND SUBSIDIARIES

Consolidated Statements of OperationsCONSOLIDATED STATEMENTS OF OPERATIONS

For the Three and Nine Months Ended, September 30, 2003March 31, 2004 and 20042005

(In thousands, except for per share data, unaudited)

See accompanying notes to consolidated financial statements.

BioMarin Pharmaceutical Inc. and SubsidiariesBIOMARIN PHARMACEUTICAL INC. AND SUBSIDIARIES

Consolidated Statements of Cash FlowsCONSOLIDATED STATEMENTS OF CASH FLOWS

For the NineThree Months Ended September 30, 2003March 31, 2004, and 20042005

(In thousands, unaudited)

See accompanying notes to consolidated financial statements.

BioMarin Pharmaceutical Inc. and SubsidiariesBIOMARIN PHARMACEUTICAL INC. AND SUBSIDIARIES

Notes To Consolidated Financial StatementsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2004March 31, 2005

(Unaudited)

(1) NATURE OF OPERATIONS AND BUSINESS RISKS

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

Through September 30, 2004,March 31, 2005, the Company had accumulated losses of approximately $406.4$511.3 million. Management expects to incur further losses for the foreseeable future. Management believes that the Company’s cash, cash equivalents, short-term investments, and currently restricted cash and cash balances related to long-term debt at September 30, 2004,March 31, 2005, plus funds contractually committed to the Company, will be sufficient to meet the Company’s obligations into the secondfourth quarter of 2005. Until the Company can generate sufficient levels of cash from its operations, the Company expects to continue to finance future cash needs primarily through proceeds from equity or debt financings, loans and collaborative agreements with corporate partners.

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

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of Presentation

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

Operating results for the ninethree months ended September 30, 2004March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.2005. These consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto for the year ended December 31, 2003,2004, included in the Company’s Annual Report on Form 10-K.

(b) Use of Estimates

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

(c) Cash and Cash Equivalents

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

(d) Short-Term Investments

The Company records its investments as either held-to-maturity or available-for-sale. Held-to-maturity investments are recorded at amortized cost. The available-for-saleAvailable-for-sale investments are recorded at fair market value, with unrealized gains or losses being included in accumulated other comprehensive income (loss). As of September 30, 2004,March 31, 2005, accumulated other comprehensive loss related to recording available-for-sale short-term investments was approximately $0.2 million. Short-term investments are comprised mainly of corporate bonds and federal agency investments and taxable municipal debt securities.investments. As of September 30, 2004,March 31, 2005, the Company had no held-to-maturity investments with net unrealized losses when aggregated by category of investment and the carrying value of the Company’s held-to-maturity investments approximated their fair value.investments.

(e) Inventory

The Company values inventories at the lower of cost or fair value. The Company determines the cost of raw materials using the average cost method and the cost of finished goods using the specific identification cost method. The Company analyzes its inventory levels quarterly and writes down inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable value and inventory in excess of expected requirements. Expired inventory is disposed of and the related costs are written off. As of September 30, 2004,March 31, 2005, inventory consisted of Orapred finished goods of $3.1$2.4 million.

(f) Research and DevelopmentCash Balances Related to Long-term Debt

ResearchCash balances related to long-term debt represent the long-term portion of the amount that the Company is required to keep on deposit with Comerica Bank pursuant to the terms of the equipment and development expenses include expenses associated with contract research and development provided by third parties, product manufacturing prior to regulatory approval, clinical and regulatory costs, and internal research and development costs. We believefacility loan, as amended, that regulatory approval of our product candidates is uncertain, and do not assume that products manufactured prior to regulatory approval will be sold commercially. As a result, inventory costs for product candidates are expensed as research and development until regulatory approval is obtained, at which time inventory is capitalized at the lower of cost or fair value.Company executed in May 2004.

(g) Investment In andin BioMarin/Genzyme LLC, Advances to BioMarin/Genzyme LLC and Equity in the LossLoss/(Income) of BioMarin/Genzyme LLC

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

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

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

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

The Company reviews long-lived assets including goodwill, for impairment annually and whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined that the full carrying amount of an asset is not recoverable, an impairment loss is recorded in the amount by which the carrying amount of the asset exceeds its fair value. See Note 4 for further discussion of the Company’s intangible asset and goodwill impairment analyses.

The Company currently operates in one business segment, the biopharmaceutical development and commercialization segment. When reviewing goodwill for impairment, SFAS No. 142 requires that the Company assess whether goodwill should be allocated to operating levels lower than its single operating segment for which discrete financial information is available and reviewed for decision-making purposes. These lower levels are referred to as reporting units. Currently, the Company has identified two reporting units, the Orapred business and the other biopharmaceutical development and commercialization activities of the Company, which are components of the Company’s single operating segment. The Company performs an annual impairment test in the fourth quarter of each fiscal year by assessing the fair value and recoverability of its goodwill, unless facts and circumstances warrant a review of goodwill for impairment before that time. The Company determines the fair value of its reporting units using a combination of discounted cash flow models, quoted market prices when available and independent appraisals.

The recoverability of the carrying value of leasehold improvements for the Company’s administrative facilities will depend on the successful execution of the Company’s business initiatives and the Company’s ability to earn sufficient returns on its approved products and product candidates. Based on management’s current estimates, the Company expects to recover the carrying value of such assets.

(i) Property and Equipment

Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the related estimated useful lives, except for leasehold improvements, which are depreciated over the shorter of the useful life of the asset or the lease term. Significant additions and improvements are capitalized, while repairs and maintenance are charged to expense as incurred. Property and equipment purchased for specific research and development projects with no alternative uses are expensed as incurred. See Note 7 for further information.

(j) Revenue Recognition

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

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

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

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

Provisions for sales discounts and estimates for chargebacks and product returns are established as a reduction of product sales at the time such revenues are recognized. These revenue reductions are established by the Company’s management as its best estimate at the time of the original sale based on the product’s historical experience adjusted to reflect known changes in the factors that impact such reserves. There were no material revisions to management’s estimates of revenue reductions during the first quarter of 2005. These revenue reductions are generally reflected either as a direct reduction to accounts receivable through an allowance or as an addition to accrued expenses. The Company permits product returns only if the product is damaged or if it is returned near or after expiration.

A reconciliation of the Company’s gross and net product sales for the three months ended March 31, 2005 is as follows (in thousands):

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. As of September 30,December 31, 2004 and March 31, 2005, the Company had no allowance for doubtful accounts.

(k) Research and Development

Milestone revenueResearch and development expenses include expenses associated with contract research and development provided by third parties, product manufacturing prior to regulatory approval, clinical and regulatory costs, and internal research and development costs. The Company believes that regulatory approval of our product candidates is recognized in full whenuncertain, and does not assume that products manufactured prior to regulatory approval will be sold commercially. As a result, inventory costs for product candidates are expensed as research and development until regulatory approval is obtained, at which time inventory is capitalized at the related substantive milestone performance goal is achieved. Milestone revenue is typically not recurring in nature.lower of cost or fair value.

(j)(l) Net Loss Per Share

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

Potentially dilutive securities include (in thousands):

(k)(m) Stock Option Plans

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

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

(l)(n) Income Taxes

The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred taxes are determined based on the difference between the financial statement and tax bases of assets and liabilities using tax rates expected to be in effect in the years in which the differences are expected to reverse. A valuation allowance is recorded to reduce deferred tax assets to the amount that is more likely than not to be realized. There was a full valuation allowance against net deferred tax assets of $241.6 million at December 31, 2004. Future taxable income and ongoing prudent and feasible tax planning strategies have been considered in assessing the need for the valuation allowance. An adjustment to the valuation allowance would increase or decrease income in the period such adjustment was made.

(o) Accumulated Other Comprehensive Loss

Accumulated Other Comprehensive Loss includes unrealized gains and losses on short-term investments and foreign currency translation adjustments.

(p) Recent Accounting Pronouncements

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

In OctoberDecember 2004, the FASB concluded thatFinancial Accounting Standards Board (FASB) issued Statement No. 123R,Share-Based Payment (SFAS 123R), which would require allrequires companies to measure and recognize compensation costexpense for all share-basedstock-based payments (including employee stock options) at fair value, would bevalue. In April 2005, the SEC postponed the effective for public companies for interim or annual periodsdate of SFAS 123R until the fiscal year beginning after June 15, 2005. The Company will adopt StatementSFAS 123R in the thirdfirst quarter of 20052006 and management is currently evaluating the effect that the adoptionimpact of StatementSFAS 123R will have on the Company’sits financial position and results of operations.

In March 2004, See Note 2(m) for information related to the Emerging Issues Task Force reached consensus on EITF Issue No. 03-1,The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. The guidance prescribes a three-step model for determining whether an investment is other-than-temporarily impaired and requires disclosures about unrealized losses on investments. In September 2004, the FASB delayed the accounting provisions of EITF 03-1; however, the disclosure requirements remain effective for annual periods ending after June 15, 2004. The Company will evaluate the impact EITF 03-1 will have on its consolidated financial statements once final guidance is issued. Under the existing guidance, management has determined that there is no impactpro forma effects on the Company’s consolidated financial statements asreported net loss and net loss per common share of September 30, 2004, as there are no investments with impairments that are other-than-temporary.applying the fair value recognition provisions of the previous SFAS 123, to stock-based employee compensation.

(m)(q) Reclassifications

Certain items in the 2003prior years consolidated financial statements have been reclassified to conform to the 20042005 presentation.

(3) ASCENT PEDIATRICS TRANSACTION

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

TotalIn January 2005, the agreements related to the transaction were amended due to a settlement of a dispute with Medicis and the acquisition obligation was reduced. The effect of these amendments totaled $21.0 million and were recorded in the first quarter of 2005 as a reduction of the acquisition obligation and goodwill. Medicis also agreed to pay the Company $6.0 million for Orapred returns, which is payable by Medicis throughout the first six months of 2005. Additionally, Medicis agreed to make available to the Company a convertible note of up to $25.0 million beginning July 1, 2005 based on certain terms and conditions including a change of control provision. Money advanced under the convertible note is convertible into shares of the Company’s common stock at a conversion price equal to the average closing price of the stock for the 20 trading days prior to such advance. The convertible note, once drawn, matures in August 2009, but may be repaid by the Company at any time prior to the maturity date or converted into shares of common stock at Medicis’ option.

The amended transaction agreements provided for total acquisition payments of $190.0$169.0 million will be madepayable to Medicis in specified amounts through 2009, including a payment of $20.0$8.6 million in BioMarin common stock in 2009. The number of shares issuable in 2009 will be based on the per share stock price at that time. The total acquisition cost as amended, including transaction costs totaling approximately $3.5 million, acquired tangible assets and operating liabilities, and the $6.0 million reimbursement for product returns discussed above, was $194.9$168.0 million. The remaining payments to Medicis are payable as follows (in thousands):

Pursuant to the acquisition, the Company was required to deposit $25.0 million of BioMarin common stock and $25.0 million of cash in escrow until the last of the first four quarterly payments to Medicis have been made. The $25.0 million of BioMarin common stock and $25.0was released in 2004, the first $12.5 million of cash arewas released in the first quarter of 2005 and the remaining $12.5 million of cash is scheduled to be fully released in May 2005.

The acquisition has been accounted for as a purchase business combination. Under the purchase method of accounting, the assets acquired and liabilities assumed are recorded at the date of acquisition, at their respective fair values. The Company’s consolidated financial statements for the period subsequent to the acquisition date reflect these values and the results of operations of the Ascent Pediatrics business. The total consideration has been preliminarily allocated based on an estimate of the fair value of assets acquired and liabilities assumed. During March 2005, the Company revised its purchase price allocation based on the settlement of the dispute with Medicis and updated estimates of the fair value of certain acquired liabilities. The final valuationnature of net assets is expectedthe changes includes a revision to be completed uponthe total acquisition cost based on the reduced payments pursuant to the settlement and revised estimates of the acquired return and rebate liabilities based on the Company’s receiving allexperience after the relevant information requiredacquisition. A summary of the material revisions to complete our estimates, but no later than one year from the acquisition date in accordance with GAAP. Components of the purchase price allocation, that are not yet final include the allocation to goodwill, which will be based on the estimated value of the acquired liabilities for product returns and unclaimed rebates. To the extent that our estimates need to be adjusted, we will do so in future quarters.

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

The product technology is the only intangible asset subject to amortization and represents the rights to the proprietary knowledge associated with Orapred. These rights include the right to develop, use, and market Orapred. The product technology is being amortized over Orapred’s estimated economic life of 15 years using the straight-line method of amortization and includes no estimated residual value. The amortization expenseSee Note 4 for the three and nine months ended September 30, 2004 was $1.7 million and $2.5 million, respectively; and accumulated amortization expense as of September 30, 2004 was $2.5 million. The estimated amortization expense associated with the acquisition for the remainder of 2004, and eachfurther discussion of the succeeding five fiscal years is $1.7 million and $6.8 million, respectively.Company’s acquired intangible assets.

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

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

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

The transaction resulted in a purchase price allocation of $32.3$21.3 million to goodwill, representing the financial, strategic and operational value of the transaction to BioMarin. Goodwill is attributed to the premium that the Company was willing to pay to obtain the value of the Orapred business, and the synergies created with the acquisition of the Ascent Pediatrics sales force that will eventually be deployed towards selling future BioMarin products. The entire amount of goodwill is expected to be deductible for tax purposes. The purchase price allocation also included $6.2$2.9 million of estimated liabilities assumed for product returns and unclaimed rebates.

The following unaudited pro forma financial information presents (in thousands) the combined results of operations of BioMarin and the Ascent Pediatrics business for the three and nine months ended September 30, 2003March 31, 2004 and 20042005 as if the acquisition had occurred as of January 1, 2003.2004. The unaudited pro forma financial information is not necessarily indicative of what the Company’s consolidated results of operations actually would have been had the acquisition been completed as of January 1, 2003.2004. In addition, the unaudited pro forma financial information does not attempt to project the future results of operations of the Company combined with the Ascent Pediatrics business.

The historical statements of operations of the Ascent Pediatric business were derived directly from the related trial balances obtained from the seller of the business and include adjustments by the Company to allocate a portion of the seller’s corporate overhead to the Ascent Pediatrics business. Pro forma adjustments include non-cash expenses associated with the acquisition of the Ascent Pediatrics business and certain integration costs incurred during the second quarter of 2004, which are reflected as of January 1, 2003.2004. The non-cash items include an in-process research and development charge, amortization of acquired intangible assets, imputed interest expense and a fair value inventory adjustment. The pro forma net loss for the three and nine months ended September 30, 2003first quarter of 2004 increased as a result of the pro forma adjustments to include the acquisition-related expenses, such as in-process research and development and amortization of the acquired intangible assets.

(4) ACQUIRED INTANGIBLE ASSETS AND GOODWILL

(a) Acquired Intangible Assets

Acquired intangible assets relate to the Ascent Pediatrics transaction completed during May 2004 (Note 3) and consist of the Orapred product technology as of March 31, 2005. The gross and net carrying value of the Orapred product technology as of March 31, 2005 were as follows (in thousands):

In December 2004, the Company recognized an impairment loss totaling approximately $68.3 million, which was recorded as impairment of acquired intangible assets in the consolidated statement of operations for the year ended December 31, 2004. The primary circumstance leading to the impairment was the introduction of a new generic competitor to Orapred during the fourth quarter of 2004, which resulted in a significant decrease in the Orapred market share. As a result of this change in circumstance, the Company tested the recoverability of the related acquired intangible assets by first comparing the assets’ carrying amount to the undiscounted future cash flows that the assets are expected to generate. The Company determined that the carrying value of the assets was not recoverable and an impairment loss was recorded for the amount by which the carrying value of the Orapred product technology exceeded its fair value. The fair value of the Orapred product technology was estimated using the present value of the expected future cash flows from the technology.

The Orapred product technology is being amortized on a straight-line basis over its useful life of 15 years. The estimated amortization expense associated with the revised cost basis of the Orapred product technology for each of the succeeding five years is approximately $1.1 million per year.

(b) Goodwill

Goodwill as of March 31, 2005 relates to the Ascent Pediatrics transaction completed during May 2004 (Note 3). The aggregate amount of goodwill acquired in the transaction was approximately $21.3 million, which reflects the reduction for the settlement of the dispute with Medicis during the first quarter of 2005. Using the reporting unit basis required by SFAS No. 142, Goodwill and Other Intangible Assets, the Company completed its annual impairment test during December 2004, and determined that no impairment of goodwill existed as of December 31, 2004. There were no events or circumstances since the annual impairment test that indicate that goodwill may be impaired. Whether or not goodwill will be impaired in the future is dependent upon the future sales of Orapred and the successful development and sales of the new formulations of Orapred.

(5) JOINT VENTURE

(a) Joint Venture Financial Data

The results of the joint venture’s operations for the three and nine months ended September 30, 2003March 31, 2004 and 20042005, are presented in the table below (in thousands). The joint ventureventure’s results and summarized assets and liabilities as presented below give effect to the difference in inventory cost basis between the Company and the joint venture. The difference in basis primarily represents the difference in inventory capitalization policies between the joint venture and the Company. The Company began capitalizing Aldurazyme inventory

costs in May 2003 after regulatory approval was obtained. The joint venture began capitalizing Aldurazyme inventory costs in January 2002 when inventory production for commercial sale began.

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

At December 31, 20032004 and September 30, 2004,March 31, 2005, the summarized assets and liabilities of the joint venture and the components of the Company’s investment in and advances to the joint venture wereare as follows (in thousands):

(b) Joint Venture Critical Accounting Policies

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

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

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

BioMarin/Genzyme LLC records reserves for rebates payable under Medicaid and third-party payer contracts, such as managed care organizations, as a reduction of revenue at the time product sales are recorded. Certain components of the BioMarin/Genzyme LLC rebate reserves are calculated based on the amount of inventory in the distribution channel, and are impacted by BioMarin/Genzyme LLC’s assessment of distribution channel inventory. BioMarin/Genzyme LLC’s calculation also requires other estimates, including estimates of sales mix, to determine which sales will be subject to rebates and the amount of such rebates. BioMarin/Genzyme LLC updates its estimates and assumptions each period, and records any necessary adjustments to its reserves.

BioMarin/Genzyme LLC records allowances for product returns, if appropriate, as a reduction of revenue at the time product sales are recorded. TheSeveral factors are considered in determining whether an allowance for product returns reserve is estimated based onrequired,

including the joint venture’snature of Aldurazyme and its patient population, the customers’ limited return rights, Genzyme’s experience of returns for Aldurazyme, or for similar products. If the history of product returns changes, the reserve is adjusted appropriately.products and BioMarin/Genzyme LLC’s estimate of distribution channel inventory, is also used to assessbased on sales and inventory level information provided by the reasonableness of itsprimary distributors for Aldurazyme, as described above. Based on these factors, BioMarin/Genzyme LLC has concluded that product returns reserve.

BioMarin/Genzyme LLC maintains allowanceswill be minimal. In the future, if any of these factors and/or the history of product returns changes, an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of its customers were to deteriorate and result in an impairment of their ability to make payments, additional allowancesproduct returns may be required.

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

BioMarin/Genzyme LLC capitalizes inventory produced for commercial sale. Refer to Note 4(a)5(a) above for discussion of the difference in inventory cost basis between the Company and BioMarin/Genzyme LLC.

(5) STOCKHOLDERS’ EQUITY(6) SUPPLEMENTAL BALANCE SHEET INFORMATION

DuringAs of December 31, 2004 certain warrants expired resulting in a reclassification of $5.2 million from warrants to additional paid-in capital.

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

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

(6) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

AccountsMarch 31, 2005, accounts payable and accrued liabilities consisted of the following (in thousands):

As of December 31, 2004 and March 31, 2005, other long-term liabilities consisted of the following (in thousands):

(7) PROPERTY AND EQUIPMENT

Property and equipment at December 31, 2004 and March 31, 2005, consisted of (in thousands):

Depreciation expense for the three months ended March 31, 2004 and 2005 was, $2.0 million and $1.9 million, respectively. In late 2004, the Company changed the estimated useful life of certain leasehold improvements. The effect of the change in estimate on the Company’s net loss for the three months ended March 31, 2005 was a decrease of $0.6 million or $0.01 per share.

(7)(8) CONVERTIBLE DEBT

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

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

Company recognized $0.2 million and $0.6 million of amortization expense during the three and nine months ended September 30, 2004, and $0.2 million of amortization expense during the three and nine months ended September 30, 2003.March 31, 2004 and 2005.

(8)(9) EQUIPMENT AND FACILITY LOANLOANS

The Company entered into several agreements for secured loans totaling $2.6 million during 2002. The loans bear interest at rates ranging from 7.88% to 9.33% and are secured by certain manufacturing and laboratory equipment. Additionally, the agreements have covenants that require the Company to maintain a minimum unrestricted cash balance, including short-term investments, of $35 million. Should the unrestricted cash balance fall below $35 million, the Company can either provide the lender with an irrevocable letter of credit for the amount of the total loans outstanding or repay the loans with prepayment penalties. As of March 31, 2005, $0.3 million was outstanding under these secured loans.

In May 2004, the Company executed a $25$25.0 million credit facility to finance the Company’s equipment purchases and facility improvements. As of September 30, 2004, $8.2March 31, 2005, $23.4 million was outstanding on the facility. Payments of principal and interest of LIBOR plus 1.5% (3.5%(4.6% as of September 30, 2004)March 31, 2005) are due through maturity in 2011. The facility requires an all-asset first priority lien, excluding certain assets such as intellectual property and assets related to the Ascent Pediatrics transaction. The lender requires that wethe Company maintain a total unrestricted cash balance, including short-term investments, of at least $45$45.0 million or a greater amount defined by a calculation provided for in the facility agreement, as amended.previously amended, and that the Company maintain a deposit with the lender equal to the outstanding principal balance. In April 2005, the facility agreement was further amended to reduce the minimum cash and investment balance requirement to $35.0 million or a greater amount defined by a calculation provided for in the facility agreement solely for the month ended April 30, 2005. As of March 31, 2005, $23.4 million of the total minimum unrestricted cash balance is required to be maintained in an account with the lender as an unrestricted compensating balance. The facility also contains additional customary covenants. Principal payments due on all equipment and facility loans range from approximately $12,000 to $119,000 per month and are payable as follows (in thousands):

In February 2005, the $25.0 million credit facility discussed above was amended to provide for an incremental $12.5 million of borrowing capacity to the Company. The incremental loan amount was secured by certain cash and short-term investments and was repaid in March 2005.

(9) SALE OF GLYKO, INC. ASSETS(10) SUPPLEMENTAL CASH FLOW INFORMATION

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

(10)(11) FINANCIAL INSTRUMENTS - INSTRUMENTS—CONCENTRATIONS OF CREDIT RISK

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash, cash equivalents, short-term investments and accounts receivable. AAll cash, cash equivalents, and short-term investments are placed in financial institutions with strong credit ratings, which minimizes the risk of loss due to nonpayment. With respect to accounts receivable, a significant portion of Orapred sales is made to a limited number of financially viable distributors. The Company’s three largest customers accounted for 42%, 31% and 12% of net revenues, respectively, or 85% of the Company’s total net product sales in aggregate for the three months ended March 31, 2005. The Company does not require collateral from its customers, but performs periodic credit evaluations of its customers’ financial condition. Managementcondition and requires immediate payment in certain circumstances. The Company has not experienced any significant losses related to its financial instruments and management does not believe a significant credit risk existed at September 30, 2004.March 31, 2005.

(11) SUPPLEMENTAL CASH FLOW INFORMATION

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

(12) MILESTONE REVENUE

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

(13) LEASE LIABILITY REVERSAL

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

Item 2.

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

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” as defined under securities laws. Many of these statements can be identified by the use of terminology such as “believes,” “expects,” “anticipates,” “plans,” “may,” “will,” “projects,” “continues,” “estimates,” “potential,” “opportunity” and so on.similar expressions. These forward-looking statements may be found in the “Factors“Factors That May Affect Future Results,” and other sections of this Quarterly Report.Form 10-Q. Our actual results or experience could differ significantly from the forward-looking statements. Factors that could cause or contribute to these differences include those discussed in “Factors“Factors That May Affect Future Results,” as well as those discussed elsewhere in this Quarterly Report.Form 10-Q. You should carefully consider that information before you make an investment decision.

You should not place undue reliance on these statements, which speak only as of the date that they were made. These cautionary statements should be considered in connection with any written or oral forward-looking statements that we may issue in the future. We do not undertake any obligation to release publicly any revisions to these forward-looking statements after completion of the filing of this Quarterly ReportForm 10-Q to reflect later events or circumstances or to reflect the occurrence of unanticipated events.

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes thereto appearing elsewhere in this quarterly report. In addition to the other information in this Form 10-Q, investors should carefully consider the following discussion and the information under “Factors That May Affect Future Results” when evaluating us and our business.

Overview

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

The Company’sOur product portfolio is comprised of two approved products and multiple investigational product candidates. Aldurazyme^® (laronidase), has been approved for marketing in the United States by the U.S. Food and Drug Administration (FDA), in the European Union (E.U.) by the European Medicines Evaluation Agency (EMEA) and other countries for the treatment of mucopolysaccharidosis I (MPS I). MPS I is a progressive and debilitating and life-threatening genetic disease that frequently results in death during childhood or early adulthood. It is caused by the deficiency of alpha-L-iduronidase, an enzyme normally required for breaking downthe breakdown of certain complex carbohydrates. MPS I is a progressive disease that afflicts patients from birth and leads to severe disabilities and early death. As the first drug approved for MPS I,carbohydrates known as glycosaminoglycans (GAGs). Aldurazyme has been granted orphan drug status in the U.S. and the E.U., which gives Aldurazyme seven years of market exclusivity in the U.S. and 10 years of market exclusivity in the E.U. for the treatment of MPS I. Aldurazyme has subsequently been approved in additional countries around the world. We have developed Aldurazyme through a joint venture with Genzyme Corporation (Genzyme).Genzyme. Aldurazyme net revenue recorded by our joint venture during the first quarter of 2005 totaled $15.9 million compared to $7.4 million for the first quarter of 2004. There were 312 commercial Aldurazyme patients as of March 31, 2005, compared to 184 as of March 31, 2004.

OnIn May 18, 2004, BioMarin completed the transactionwe obtained rights to acquire the business of Ascent Pediatrics from Medicis Pharmaceutical Corporation. The transaction includesmarket and sell Orapred^® (prednisolone sodium phosphate oral solution), a patent-protected drug primarily used to treat asthma exacerbations in children and other inflammatory conditions,as well as exclusive rights to the Orapred intellectual property, two additional proprietary formulations of Orapred in development, and a U.S.-based sales force. Orapred net product sales during the first quarter of 2005 totaled $5.0 million. In January 2005, the agreements related to the transaction were amended due to a settlement of a dispute with Medicis and payments with respect to the acquisition were reduced. The effect of these amendments totaled $21.0 million and were recorded in the first quarter of 2005 as a reduction of the acquisition obligation and goodwill. Medicis also agreed to pay us $6.0 million for Orapred returns, which is payable by Medicis throughout the first seven months of 2005. Additionally, Medicis will make available to us a convertible note of up to $25.0 million beginning July 1, 2005 based on certain terms and conditions and provided that the Company does not experience a change of control.

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

In June 2004, we announced the positive results of our Phase 3 trial of AryplaserhASB, for the treatment of MPS VI, a progressive and seriously debilitating life-threatening genetic disease for which no drug treatment currently exists. MPS VI is caused by the deficiency of

N-acetylgalactosamine 4-sulfatase (arylsulfatase B), an enzyme normally required for the breakdown of certain complex carbohydrates known as glycosaminoglycans (GAGs).GAGs. The clinical trial demonstrated a statistically significant improvement in endurance in patients receiving AryplaserhASB compared to patients receiving placebo, as measured by the distance walked in 12 minutes, the primary end point of the trial. Additionally, the data demonstrated a statistically significant improvement in reduction of GAGs and a positive trend in a 3-minute stair climb, the secondary end points of the trial. In the fourth quarter of 2004, we expect to fileannounced that we filed for marketing authorization of rhASB in both the U.S. and E.U., where AryplaserhASB has received orphan drug designations for the treatment of MPS VI. In February 2005, we announced that the FDA has accepted for filing and assigned six-month review to the Biologics License Application (BLA) for rhASB. The FDA has indicated that it will take action on the application, under the Prescription Drug User Fee Act (PDUFA), by May 31, 2005.

In April 2005, we announced that we initiated our Phase 3 clinical trial of Phenoptin. The Phase 3, double-blind, placebo-controlled, multi-center trial is designed to evaluate the safety and efficacy of Phenoptin for the treatment of individuals with PKU. We anticipate the trial will enroll patients on an ongoing basis until it is fully enrolled. As a primary efficacy endpoint, the trial will measure the changes in blood Phenylalanine (Phe) level in patients receiving Phenoptin compared to patients receiving placebo. In July 2004, we announced positive results from an investigator sponsored pilot clinical study of 6R-BH₄, the active agent in Phenoptin, in 20 patients with PKU. We also announced that we have received orphan drug designation for Phenoptin for the treatment of PKU in both the U.S. and E.U. In August 2004, we announced that we filed an investigational new drug application (IND) with the FDA for Phenoptin, for the treatment of PKU.

PKU is an inherited metabolic disease that affects at least 50,000 diagnosed patients under the age of 40 in the developed world, an estimated half of whom have a moderate to mild form of the disease. ItPKU is caused by a deficiency of an enzyme, phenylalanine hydroxylase (PAH), which is required for the metabolism of phenylalanine (Phe).Phe. Phe is an amino acid found in most protein-containing foods. Without sufficient quantity or activity of PAH, Phe accumulates to abnormally high levels in the blood resulting in a variety of serious neurological complications. In the U.S. and many developed countries, PKU is diagnosed at birth through a blood test. Phenoptin, our lead product candidate for the treatment of PKU is a proprietary oral form of 6R-BH₄, a small-molecule therapeutic that works in

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

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

In August 2004, we announced that Fredric D. Price resigned as ChairmanOur research and Chief Executive Officer (CEO)development expense during the first quarter of 2005, primarily related to the company. Pierre Lapalme, a memberdevelopment of our Board of Directors who has held numerous senior management positionsrhASB and Phenoptin, totaled $15.0 million compared to $13.7 million in the pharmaceutical industry, has assumedfirst quarter of 2004. Our net loss totaled $22.5 million for the positionfirst quarter of our Chairman2005 compared to $19.9 million in the first quarter of the Board. Louis Drapeau, our Chief Financial Officer since August 2002, has been appointed as our acting Chief Executive Officer until a new CEO is named, and Jeffrey Cooper, Vice President, Controller, has been appointed as our acting Chief Financial Officer. Our Board of Directors has commenced the search for a new CEO.

2004. Our net loss for the thirdfirst quarter of 20042005 includes $2.1 million of Orapred acquisition-related expenses. Our cash burn, a financial measure not determined in accordance with generally accepted accounting principles (GAAP) in the first quarter of 2005 was $29.5$28.2 million as compared to $21.3$15.2 million forin the third quarter of 2003. Net loss for the thirdfirst quarter of 2004, increased primarily as a result of non-cash expenses associated with the Ascent Pediatrics acquisition of $3.8 million, the separation costs associated withand our former CEO of $2.9 million and operating expenses associated with the sales and marketing support of Orapred totaling $4.6 million. These increases were partially offset by a decrease in other operating expenses of $3.1 million, primarily a decrease of $4.0 million in our equity in loss of our joint venture. As of September 30, 2004, our combined cash, cash equivalents, and short-term investments, currently restricted cash and cash balances related to long-term debt totaled $86.6$62.3 million a decreaseas of $119.8March 31, 2005 compared to $90.5 million from $206.4 million atas of December 31, 2003. Additionally, we have $25.2 million of restricted cash at September 30, 2004, primarily associated with the Ascent Pediatrics transaction.2004.

OurSubsequent Events

In April 2005, we entered into an amendment to our existing credit facility with Comerica Bank. Under the facility, Comerica requires that we maintain a certain total unrestricted cash burnbalance. The amendment reduced the minimum cash and investment balance requirement to $35.0 million or a greater amount defined by a calculation provided for in the third quarterfacility solely for the month ended April 30, 2005. For other periods, Comerica Bank requires that we maintain a total unrestricted cash balance of 2004 was $42.2at least $45.0 million as compared to $24.5 millionor a greater amount defined by a calculation provided for in the third quarter of 2003. The $17.7 million increase in cash burn,credit agreement, as previously amended. We maintain a non-GAAP financial measure, is primarily attributabledeposit with Comerica Bank equal to $15.0 million of payments of our Ascent Pediatrics acquisition obligation, a paymentthe outstanding principal balance.

In May 2005, we entered into an agreement with Daiichi Suntory Pharma Co., Ltd. (DSP) to our former CEO and working capital timing differences associatedlicense the exclusive worldwide rights, with the Orapred productexception of Japan, to U.S., European and our other operations. Also contributingforeign patents and patent applications for the use of 6R-BH₄ to treat the vascular complications in diabetes, cardiovascular disease and other indications.This new license extends the exclusive rights to 6R-BH₄ patents and data that we obtained from DSP in December 2004 to all indications. Pursuant to the increase in cash burn areterms of this license, we agreed to pay an upfront payment of approximately $3.4 million, due within 30 days of signing the costs associated with developing our facilities, which were partially offset by drawslicense, milestones on our equipmentdevelopment of products incorporating DSP’s technology and facility loan. See “Non-GAAP Financial Measure” below for discussiona royalty on net sales of “cash burn” as a non-GAAP financial measure and the reconciliation of cash burn to net increase (decrease) in cash.such products.

Non-GAAP Financial Measures

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