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 similar expressions. These forward-looking statements may be found in "Overview," and other sections of this Quarterly Report on 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 "Risk Factors," in our Annual Report on Form 10-K for the year ended December 31, 2008, which was filed with the Securities and Exchange Commission (SEC) on February 27, 2009, as well as those discussed elsewhere in this Quarterly Report on 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 Report on Form 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 notes to those statements included elsewhere in this Quarterly Report on Form 10-Q.

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 unmet medical need, have well-understood biology and provide an opportunity to be first-to-market. Our product portfolio is comprised of three approved products and multiple investigational product candidates. Approved products include Naglazyme, Aldurazyme and Kuvan.

Naglazyme received marketing approval in the U.S. in May 2005, in the E.U. in January 2006, and subsequently in other countries. Naglazyme net product revenues for the second quarter and first six months of 2008 were $35.1 million and $62.8 million, respectively, and increased to $42.9 million and $82.3 million in the second quarter and first six months of 2009, respectively.

Aldurazyme, which was developed in collaboration with Genzyme Corporation (Genzyme), has been approved for marketing in the U.S., E.U., and in other countries. Prior to 2008, we developed and commercialized Aldurazyme through a joint venture with Genzyme. Pursuant to our arrangement with Genzyme, Genzyme sells Aldurazyme to third parties and we recognize royalty revenue on net sales by Genzyme. We recognize a portion of the royalty as product transfer revenue when product is released to Genzyme and all obligations related to the transfer have been fulfilled at that point and title to, and risk of loss for the product is 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 calculated royalties earned when the product is sold by Genzyme. Aldurazyme net product revenues for the second quarter and first six months of 2009 were $21.6 million and $38.7 million, respectively, compared to $13.4 million and $37.5 million, in the second quarter and first six months of 2008, respectively.

Kuvan was granted marketing approval in the U.S. and Europe in December 2007 and December 2008, respectively. Kuvan net product revenues for the second quarter and first six months of 2009 were $16.9 million and $32.5 million, respectively, compared to $12.0 million and $17.8 million in the second quarter and first six months of 2008, respectively.

We are developing PEG-PAL, an experimental enzyme substitution therapy for the treatment of phenylketonuria (PKU), for patients that do not respond well to Kuvan. In May 2008, we initiated a Phase I open label clinical trial of PEG-PAL in PKU patients. In June 2009, we released the results of the Phase I open label clinical trial of PEG-PAL. The primary objective of this study was to assess the safety and tolerability of single subcutaneous injections of PEG-PAL in subjects with PKU. We expect to initiate the Phase II clinical trial in the second half of 2009, pending institutional review board approval from the clinical trial sites. In 2007 and early 2008 we devoted substantial resources to the development of 6R-BH4, the active ingredient in Kuvan, for the treatment of certain cardiovascular indications including peripheral arterial disease and sickle cell disease. We released data from several 6R-BH4 trials in early February 2009. We completed enrollment of an open label Phase I/II clinical trial, an enzyme replacement therapy for the treatment of MPS IVA or Morquio Syndrome Type A in July 2009. We expect the results form this trial in mid 2010. We are conducting preclinical development of several other enzyme product candidates for genetic and other diseases, and a small molecule for the treatment of Duchenne Muscular Dystrophy.

Key components of our results of operations for the three and six months ended June 30, 2008 and 2009 include the following (in millions):

                                                     Three Months Ended         Six Months Ended
                                                          June 30,                  June 30,
                                                     2008          2009          2008        2009
Total net product revenues                        $     60.5    $     81.5    $    118.1    $ 153.4
Collaborative agreement revenues                         2.5           0.9           5.0        1.4
Cost of sales                                            9.6          19.8          26.8       34.2
Research and development expense                        23.8          26.3          41.4       60.7
Selling, general and administrative expense             25.2          30.5          48.9       59.1
Net income (loss)                                        3.8           1.3           5.5      (11.8 )
Stock-based compensation expense                         5.9           9.0          10.4       16.8

See "Results of Operations" for discussion of the detailed components and analysis of the amounts above. Our cash, cash equivalents, short-term investments and long-term investments totaled $485.3 million as of June 30, 2009, compared to $561.4 million as of December 31, 2008, primarily due to the early settlement of our Medicis obligation. See "Liquidity and Capital Resources" below for a further discussion of our liquidity and capital resources.

Critical Accounting Policies and Estimates

In preparing our consolidated financial statements in accordance with accounting principles generally accepted in the U.S. (GAAP) and pursuant to the rules and regulations promulgated by 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. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments and estimates. We also discuss our critical accounting policies and estimates with the Audit Committee of the Board of Directors.

We believe that the assumptions, judgments and estimates involved in the accounting for the impairment of long-lived assets, revenue recognition and related reserves, income taxes, inventory, research and development, and stock-based compensation have the greatest impact on our consolidated financial statements, so we consider these to be our critical accounting policies. Historically, our assumptions, judgments and estimates relative to our critical accounting polices have not differed materially from actual results.

There have been no significant changes in our critical accounting policies and estimates during the three and six months ended June 30, 2009 as compared to the critical accounting policies and estimates disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2008, which was filed with the SEC on February 27, 2009.

Recent Accounting Pronouncements

See Note 2(r) of 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.

Results of Operations

Net Income (Loss)

Our net income for the three months ended June 30, 2009 was $1.3 million and our
net loss for the six months ended June 30, 2009 was $11.8 million, compared to
net income of $3.8 million and $5.5 million for the three and six months ended
June 30, 2008, respectively, with the change primarily due to the following (in
millions):



                                                         Three Months Ended        Six Months Ended
                                                           June 30, 2009            June 30, 2009
Net income for the period ended June 30, 2008           $                3.8      $              5.5
Increased Naglazyme gross profit                                         5.8                    14.9
Increased Kuvan gross profit                                             3.5                    11.6
Increased Aldurazyme gross profit                                        2.0                     1.9
Decreased Kuvan license fee revenues                                    (1.2 )                  (2.6 )
Decreased Kuvan collaborative agreement revenue                         (0.1 )                  (0.6 )
Increased research and development expense                              (2.5 )                 (19.3 )
Increased selling, general and administrative expense                   (5.3 )                 (10.2 )
Impairment loss on equity investments                                     -                     (5.8 )
Gain on the sale of equity investments                                   1.6                     1.6
Increased (decreased) Orapred royalty revenue                           (1.0 )                   0.1
Decreased interest income                                               (3.2 )                  (6.7 )
Increased interest expense                                              (0.4 )                  (0.4 )
Increased amortization of Orapred intangible asset                      (0.7 )                  (0.7 )
Other individually insignificant fluctuations                           (1.0 )                  (1.1 )

Net income (loss) for the period ended June 30, 2009    $                1.3      $            (11.8 )

The increase in Naglazyme gross profit in the second quarter and first six months of 2009 as compared to the same periods in 2008 is primarily a result of additional patients initiating therapy outside the U.S. and the E.U. The increase in Kuvan gross profit during the second quarter and first six months of 2009 compared to the same periods of 2008 is primarily a result of additional patients initiating therapy in the U.S. The increase in Aldurazyme gross profit in the second quarter and first six months of 2009 as compared to the same periods in 2008 is primarily attributed to increased product transfer revenue resulting from increased shipments to Genzyme. The decrease in Kuvan license fee revenues is attributed to our fulfillment of all performance obligations relating to the 2005 up-front license payment of $25.0 million from Merck Serono in December 2008. The increase in selling, general and administrative expense is primarily due to increased facility and employee related costs and the continued commercialization of Kuvan in the U.S. The increase in research and development expense is primarily due to increases in development expense for our GALNS program for the treatment of MPS IVA, the up-front costs associated with a product licensed from La Jolla Pharmaceutical Company, and other early stage programs. See below for additional information related to the primary net income
(loss) fluctuations presented above, including details of our operating expense fluctuations.

Net Product Revenues, Cost of Sales and Gross Profit

The following table shows a comparison of net product revenues for the three and
six months ended June 30, 2008 and 2009 (in thousands):



                                     Three Months Ended                 Six Months Ended
                                          June 30,                          June 30,
                                 2008       2009      Change      2008        2009       Change
  Naglazyme                    $ 35,092   $ 42,929   $  7,837   $  62,826   $  82,281   $ 19,455
  Kuvan                          12,016     16,940      4,924      17,807      32,452     14,645
  Aldurazyme                     13,350     21,603      8,253      37,450      38,653      1,203

  Total Net Product Revenues   $ 60,458   $ 81,472   $ 21,014   $ 118,083   $ 153,386   $ 35,303

Naglazyme net product revenues earned from customers based outside the U.S. during the second quarter and first six months of 2009 were $37.2 million and $71.5 million, respectively. The negative impact of foreign currency exchange rates on Naglazyme sales denominated in currencies other than the U.S. dollar were approximately $1.7 million and $3.7 million in the second quarter and first six months of 2009, respectively. Gross profit from Naglazyme sales in the second quarter and first six months of 2009 were approximately $34.1 million and $65.5 million, respectively, representing gross margins of 79% and 80%, respectively compared to gross profits of $28.3 million and $50.6 million, in the second quarter and first six months of 2008, respectively, representing gross margins of approximately 81% and 80%, respectively. The slight decrease in gross margins during the second quarter of 2009 as compared to the second quarter of 2008 is attributed to the negative foreign currency impact during the second quarter of 2009.

We received marketing approval for Kuvan in the U.S. in December 2007 and began shipping product that same month. Net product revenue for Kuvan during the second quarter and first six months of 2009 was $16.9 million and $32.5 million, respectively, compared to $12.0 million and $17.8 million, respectively, during the second quarter and first six months of 2008. Gross profit from Kuvan in the second quarter and first six months of 2009 was approximately $13.7 million and $26.7 million, respectively, representing gross margins of approximately 81% and 82%, respectively. During the second quarter and first six months of 2008, gross profit from Kuvan was approximately $10.6 million and $15.7 million, respectively, representing gross margins of 88% for each period. All periods reflect royalties paid to third parties of 11%. In accordance with our inventory accounting policy, we began capitalizing Kuvan inventory production costs after U.S. regulatory approval was obtained in December 2007. As a result, the product sold in 2008 had an insignificant cost basis. The cost of sales for Kuvan for the second quarter and first six months of 2008 is primarily comprised of royalties paid to third parties based on Kuvan net sales. We expect U.S. gross margins for Kuvan for the foreseeable future to be in the lower 80% range as the expensed inventory has been mostly depleted.

Pursuant to our relationship with Genzyme, we record a 39.5% to 50% royalty on worldwide net product sales of Aldurazyme. We also recognize product transfer revenue when product is released to Genzyme and all of our obligations have been fulfilled. Genzyme's return rights for Aldurazyme are limited to defective product. 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 calculated royalty rate when the product is sold by Genzyme.

Aldurazyme net product revenue during the second quarter and first six months of 2009 was $21.6 million and $38.7 million, respectively, compared to $13.4 million and $37.5 million in the second quarter and first six months of 2008, respectively. Aldurazyme net product revenues in the second quarter and first six months of 2009 included royalty revenues of $15.5 million and $30.0 million, respectively, compared to the second quarter and first six months of 2008 which included royalty revenue of $13.4 million and $29.8 million, respectively. Royalty revenue from Genzyme is based on 39.5% of net Aldurazyme sales by Genzyme, which totaled $39.2 million and $76.0 million, respectively, in the second quarter and first six months of 2009, respectively, compared to $38.7 million and $75.5 million in the second quarter and first six months of 2008. Incremental net product transfer revenue in the first six months of 2009 and 2008 was $8.6 million and $7.7 million, respectively. Incremental Aldurazyme net product transfer revenue reflects higher net shipments of Aldurazyme to Genzyme than Genzyme shipments to customers during the period to meet future product demand. In January 2008, we transferred existing finished goods on-hand to Genzyme under the restructured terms of the BioMarin/Genzyme LLC agreements, resulting in the recognition of significant incremental product transfer revenue during 2008. In the future, to the extent that Genzyme Aldurazyme inventory quantities on hand remain flat, we expect that our total Aldurazyme revenues will approximate the 39.5% to 50% royalties on net product sales by Genzyme. In the second quarter and first six months of 2009, Aldurazyme gross profit was $13.9 million and $27.0 million, respectively, representing a gross margin of 64% and 70%, respectively, which reflects the profit earned on royalty revenue and net incremental product transfer revenue. For the same periods in 2008, Aldurazyme gross profit was $11.9 million and $25.1 million, respectively, representing gross margins of 89% and 67%, respectively. The change in gross margins is attributed to a shift in revenue mix between royalty revenue and net product transfer revenues. During the second quarter of 2008, Aldurazyme net product revenues consisted entirely of royalty revenues, compared to the second quarter of 2009 when the revenue mix was 72% royalty revenues and 28% net product transfer revenues. In the first six months of 2009, the revenue mix was 78% royalty revenues and 22% net product transfer revenues, respectively, compared to the first six months of 2008, where the revenue mix was 79% royalty revenues and 21% net product transfer revenues, respectively. Aldurazyme gross margins are expected to fluctuate depending on the mix of royalty revenue, from which we earn higher gross profit, and product transfer revenue, from which we earn a lower gross profit.

Total cost of sales during the second quarter and first six months of 2009, was $19.8 million and $34.2 million, respectively, compared to $9.6 million and $26.8 million in the second quarter and first six months of 2008, respectively. The increase in cost of sales in the second quarter of 2009 compared to the second quarter of 2008 is attributed to an increase in product sales and the Aldurazyme product revenue mix. The increase in cost of sales during the fist six months of 2009 compared to the same period in 2008 is proportional to the increase in net product revenues for the same period.

Collaborative Agreement Revenues

Collaborative agreement revenues include both license revenue and contract research revenue under our agreement with Merck Serono, which was executed in May 2005. License revenues are related to amortization of the $25.0 million up-front license payment received from Merck Serono and contract research revenues are related to shared development costs that are incurred by us, of which approximately 50% is reimbursed by Merck Serono. Our performance obligations related to the initial $25.0 million up-front license payment were completed in December 2008. Therefore, periods subsequent to December 31, 2008 will not include amortization amounts related to this payment. As shared development spending increases or decreases, contract research revenues will also change proportionately. Reimbursable revenues are expected to increase if PEG-PAL successfully completes Phase II clinical trials and Merck Serono chooses to co-develop the PEG-PAL or 6R-BH4 program. The related costs are included in research and development expenses.

Collaborative agreement revenues in the second quarter and first six months of 2009 were comprised of reimbursable Kuvan development costs and amounted to $0.9 million and $1.4 million, respectively. During the second quarter and first six months of 2008 collaborative revenues were comprised of $1.5 million and $3.0 million of amortization relating to the $25.0 million up-front license payment received from Merck Serono and reimbursable Kuvan development of $1.0 million and $2.0 million, respectively. Kuvan development costs decreased during the second quarter and first six months of 2009 as compared to the same periods of 2008 due to reductions in Kuvan clinical trial activities.

Royalty and License Revenues

Royalty and license revenues for the second quarter and first six months of 2009 totaled $0.4 million and $2.0 million, respectively, compared to $1.2 million and $1.5 million in the second quarter and first six months of 2008, respectively. Royalty and license revenues for the three and six months ended June 30, 2009 included royalty revenues from Orapred product sold by the sublicensee of $0.2 million and $1.6 million, respectively, and 6R-BH4 royalty revenues for related products sold in Japan of $0.3 million and $0.4 million, respectively. Royalty and license revenues for the three and six months ended June 30, 2008 included royalty revenues from Orapred product sold by the sublicensee of $1.2 million and $1.5 million, respectively.

Research and Development Expense

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

Research and development expenses increased by $2.5 million and $19.3 million to $26.3 million and $60.7 million for the three and six months ended June 30, 2009, respectively, from $23.8 million and $41.4 million for the three and six months ended June 30, 2008, respectively. The change in research and development expenses for the second quarter and first six months of 2009 is primarily a result of the following (in millions):

                                                       Three Months Ended        Six Months Ended
                                                         June 30, 2009            June 30, 2009
Research and development expenses for period ended
June 30, 2008                                         $               23.8      $             41.4
License payment related to collaboration with La
Jolla Pharmaceutical Company                                            -                      8.8
Increased GALNS for Morquio Syndrome Type A
development expense                                                    0.6                     3.4
Increased Kuvan development expenses                                   0.5                     1.2
Increased Prodrug development expenses                                 0.3                     1.1
Increased Duchene Muscular Dystrophy program
development expense                                                    1.1                     1.4
Increased Naglazyme development expenses                               0.5                     0.5
Increased stock-based compensation expense                             0.5                     1.5
Decreased 6R-BH4 development expenses for
indications other than PKU                                            (2.8 )                  (3.6 )
Decreased PEG-PAL development expenses                                (0.6 )                  (0.7 )
Decreased research and development expenses on
early development stage programs                                        -                     (0.3 )
Increase in non-allocated research and development
expenses and other net changes                                         2.4                     6.0

Research and development expenses for the period
ended June 30, 2009                                   $               26.3      $             60.7

During the first quarter of 2009, we paid La Jolla Pharmaceutical Company an up-front license fee for the rights to develop and commercialize their investigational drug, Riquent. In February 2009, the results of the first interim efficacy analysis for the Phase III ASPEN Study were announced, and the Independent Data Monitoring Board determined that the continuation of the trial was futile. Based on the results of this interim efficacy analysis, the Company and La Jolla decided to stop the study and in March 2009, we terminated the license agreement. As such, there will not be any additional development expense for Riquent. The increase in GALNS development expenses is primarily attributed to an increase in pre-clinical studies and manufacturing costs in preparation for the Phase I/II clinical trial that was initiated in April 2009. The decrease in 6R-BH4 development expense for indications other than PKU is primarily due to a decline in pre-clinical studies in 2009. The increase in Kuvan research and development expense is attributed to long-term clinical activities related to post-approval regulatory commitments. We expect to continue incurring significant research and development expense for the foreseeable future due to long-term clinical activities related to Kuvan post-approval regulatory commitments and spending on our GALNS program for the treatment of Morquio Syndrome Type A and PEG-PAL and Prodrug programs. The increase in Duchene Muscular Dystrophy program development expense is primarily attributed to increased pre-clinical activities related to the disease. The increase in stock-based compensation expense is a result of an increased number of options outstanding due to increased number of employees. The increase in non-allocated research and development primarily includes increases in facilities costs, general research costs and research and development personnel.

Selling, General and Administrative Expense

Our selling, general and administrative expense includes commercial and administrative personnel, corporate facility and external costs required to support our commercialized products and product development programs. These selling, general and administrative costs include: corporate facility operating expenses and depreciation; marketing and sales operations; human resources; . . .