# BIOMARIN PHARMACEUTICAL INC (BMRN) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from BIOMARIN PHARMACEUTICAL INC's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1048477/000104847724000016/bmrn-20231231.htm
Accession: 0001048477-24-000016
Filing date: 2024-02-26
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/BMRN/
All MD&A years: /company/BMRN/mda/
Previous year: /company/BMRN/mda/fy2022/ (FY 2022)
Next year: /company/BMRN/mda/fy2024/ (FY 2024)

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

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

Overview

Founded in 1997, we are a global biotechnology company dedicated to transforming lives through genetic discovery. We develop and commercialize targeted therapies that address the root cause of genetic conditions. Our robust research and development capabilities have resulted in multiple innovative commercial therapies for patients with rare genetic disorders. Our distinctive approach to drug discovery has produced a diverse pipeline of commercial, clinical, and pre-clinical candidates that address a significant unmet medical need, have well-understood biology, and provide an opportunity to be first-to-market or offer a substantial benefit over existing treatment options. A summary of our commercial products, as of December 31, 2023, is provided below:

[[GREPCENT_TABLE]]
[["Commercial Products","","Indication"],["Enzyme products:"],["VIMIZIM (elosulfase alpha)","","Mucopolysaccharidosis (MPS) IVA"],["NAGLAZYME (galsulfase)","","MPS VI"],["PALYNZIQ (pegvaliase-pqpz)","","Phenylketonuria (PKU)"],["BRINEURA (cerliponase alfa)","","Neuronal ceroid lipofuscinosis type 2 (CLN2)"],["ALDURAZYME (laronidase)","","MPS I"],["Other products:"],["VOXZOGO (vosoritide)","","Achondroplasia"],["KUVAN (sapropterin dihydrochloride)","","PKU"],["ROCTAVIAN (valoctocogene roxaparvovec)","","Severe Hemophilia A"]]
[[/GREPCENT_TABLE]]

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

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

2023 Financial Highlights

Key components of our results of operations include the following:

[[GREPCENT_TABLE]]
[["","Twelve Months Ended December 31,"],["","2023","","2022","","2021"],["Total revenues","$","2,419.2","","","$","2,096.0","","","$","1,846.3"],["Cost of sales","$","514.9","","","$","483.7","","","$","470.5"],["Research and development (R&D) expense","$","746.8","","","$","649.6","","","$","628.8"],["Selling, general and administrative (SG&A) expense","$","937.3","","","$","854.0","","","$","759.4"],["Gain on sale of nonfinancial assets, net","$","\u2014","","","$","108.0","","","$","\u2014"],["Provision for (benefit from) income taxes","$","20.9","","","$","8.0","","","$","(11.3)"],["Net income (loss)","$","167.6","","","$","141.6","","","$","(64.1)"]]
[[/GREPCENT_TABLE]]

See “Results of Operations” below for discussion of our results for the periods presented.

Uncertainty Relating to Macroeconomic Environment

Conditions in the current macroeconomic environment, such as inflation, changes in interest and foreign currency exchange rates, natural disasters, and supply chain disruptions, could impact our global revenue sources and our overall business operations. The extent and duration of such effects remain uncertain and difficult to predict. We are actively monitoring and managing our response and assessing actual and potential impacts to our operating results and financial condition, as well as developments in our business, which could further impact the developments, trends and expectations described below. See the risk factor, “Our business is affected by macroeconomic conditions.” described in “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K.

Business Developments

We continued to grow our commercial business and advance our product candidate pipeline during 2023. We believe that the combination of our internal research programs and partnerships will allow us to continue to develop and commercialize innovative therapies for people with serious and life-threatening rare diseases and medical conditions.

In 2023, we achieved $2.4 billion in total revenues, including a significant contribution from our ongoing expansion of VOXZOGO, and we continued making important advancements in our product development pipeline. Our key business developments since the beginning of 2023 include U.S. Food and Drug Administration (FDA) approval of VOXZOGO for children with achondroplasia of all ages with open growth plates in the U.S., European Commission approval to expand the indication for VOXZOGO to treat children with achondroplasia aged four months and older with open growth plates in the European Union (EU), and FDA approval of ROCTAVIAN in the U.S. We also continued progress in our earlier stage clinical programs. Please see the disclosures in Part I Item I in this Annual Report on Form 10-K for further discussion of these recent developments.

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

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

Results of Operations

Net Product Revenues

Net Product Revenues consisted of the following:

[[GREPCENT_TABLE]]
[["","","Twelve Months Ended December 31,"],["","","2023","","2022","","2021","","2023 vs. 2022","","2022 vs. 2021"],["Enzyme products:"],["VIMIZIM","","$","701.0","","","$","663.8","","","$","623.1","","","$","37.2","","","$","40.7"],["NAGLAZYME","","420.3","","","443.8","","","380.4","","","(23.5)","","","63.4"],["PALYNZIQ","","303.9","","","255.0","","","237.5","","","48.9","","","17.5"],["BRINEURA","","161.9","","","154.3","","","128.0","","","7.6","","","26.3"],["ALDURAZYME","","131.2","","","128.4","","","122.8","","","2.8","","","5.6"],["Total enzyme product revenues","","$","1,718.3","","","$","1,645.3","","","$","1,491.8","","","$","73.0","","","$","153.5"],["Other products:"],["VOXZOGO","","469.9","","","169.1","","","5.9","","","300.8","","","163.2"],["KUVAN","","180.8","","","227.6","","","285.8","","","(46.8)","","","(58.2)"],["ROCTAVIAN","","3.5","","","\u2014","","","\u2014","","","3.5","","","\u2014"],["Total net product revenues","","$","2,372.5","","","$","2,042.0","","","$","1,783.5","","","$","330.5","","","$","258.5"]]
[[/GREPCENT_TABLE]]

The increase in Net Product Revenues in 2023 as compared to 2022 was primarily attributed to the following:

•VOXZOGO: higher sales volume due to new patients initiating therapy across all regions;

•PALYNZIQ: higher sales volume from new patients initiating therapy, particularly in the U.S.; and

•VIMIZIM: higher sales volume primarily due to new patients initiating therapy, particularly in the U.S. and Europe, timing of orders in countries that place large government orders, particularly in the Middle East and Latin America; partially offset by

•KUVAN: lower sales primarily attributed to increasing generic competition as a result of the loss of exclusivity in the U.S. that occurred in October 2020 and

•NAGLAZYME: lower sales volume primarily due to timing of orders in countries that place large government orders, particularly in the Middle East.

In certain countries, governments place large periodic orders for our products. We expect that the timing of these large government orders will continue to be inconsistent, which has created and may continue to create significant period to period variation in our revenues.

Strong demand for VOXZOGO in certain markets has outpaced our projections in recent quarters, and we expect to face challenges meeting our current estimates of VOXZOGO demand through the first half of 2024. These demand challenges will result in modest reduction of our revenue growth for VOXZOGO during the supply-constrained period. The projected temporary supply constraint could result in postponement of planned entry into additional markets or delayed clinical development activities until VOXZOGO inventory levels increase. When the expected increases in supply become available during 2024, while overall inventory and ability to supply the market will increase, if actual demand continues to exceed our estimates, the supply constraint could be prolonged. We are working to increase fill-finish capacity to meet this increased demand while also implementing actions to manage growth and minimize patient impact. For example, in 2023 we secured increased supply commitments beginning in mid-2024. We do not expect a material impact on our revenues if we successfully execute our manufacturing plans. See "Risk Factors" in Part I, Item 1A of this Annual Report for additional information on risk factors that could impact our business and operations.

See also the risk factor “The sale of generic versions of KUVAN by generic manufacturers has adversely affected and will continue to adversely affect our revenues and may cause a decline in KUVAN revenues faster than expected” in “Risk Factors” included in Part I, Item 1A of this Annual Report for additional information on risks we face.

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

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

We face exposure to movements in foreign currency exchange rates, which we expect to continue in future periods. We use foreign currency exchange forward contracts to hedge a percentage of our foreign currency exposure, primarily the Euro. The following table shows our Net Product Revenues denominated in USD and foreign currencies:

[[GREPCENT_TABLE]]
[["","Twelve Months Ended December 31,"],["","2023","","2022","","2021","","2023 vs. 2022","","2022 vs. 2021"],["Sales denominated in USD","$","1,137.8","","","$","1,008.8","","","$","961.1","","","$","129.0","","","$","47.7"],["Sales denominated in foreign currencies","1,234.7","","","1,033.2","","","822.4","","","201.5","","","210.8"],["Total net product revenues","$","2,372.5","","","$","2,042.0","","","$","1,783.5","","","$","330.5","","","$","258.5"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Twelve Months Ended December 31,"],["","2023","","2022","","2021","","2023 vs. 2022","","2022 vs. 2021"],["Favorable (unfavorable) impact of foreign currency exchange rates on product sales denominated in currencies other than USD","$","(100.0)","","","$","(59.0)","","","$","2.3","","","$","(41.0)","","","$","(61.3)"]]
[[/GREPCENT_TABLE]]

The unfavorable impact of foreign currency exchange rates on USD reported results in 2023 was primarily driven by the Argentine Peso, Euro, Japanese Yen and Russian Ruble.

See “Quantitative and Qualitative Disclosures about Market Risk” in Part II, Item 7A of this Annual Report on Form 10-K and the risk factor “Our international operations pose currency risks, which may adversely affect our operating and net income” in “Risk Factors” included in Part I, Item 1A of this Annual Report for information on currency exchange rate risk related to our Net Product Revenues.

Royalty and Other Revenues

Royalty and Other Revenues include royalties earned on net sales of products sold by third parties, up-front licensing fees, milestones achieved by licensees or sublicensees and rental income associated with the tenants in our facilities.

[[GREPCENT_TABLE]]
[["","","Twelve Months Ended December 31,"],["","","2023","","2022","","2021","","2023 vs. 2022","","2022 vs. 2021"],["Royalty and other revenues","","$","46.7","","","$","54.0","","","$","62.8","","","$","(7.3)","","","$","(8.8)"]]
[[/GREPCENT_TABLE]]

The decrease in Royalty and Other Revenues in 2023 as compared to 2022 was primarily due to lower royalty revenues earned from third parties.

We expect to continue to earn royalties from third parties in the future.

Cost of Sales and Gross Margin

Cost of Sales includes raw materials, personnel, facility and other costs associated with manufacturing our commercial products. These costs include production materials, production costs at our manufacturing facilities, third-party manufacturing

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

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

costs, amortization of technology transfer intangible assets and internal and external final formulation and packaging costs. Cost of Sales also includes royalties payable to third parties based on sales of our products and charges for inventory valuation reserves.

The following table summarizes our Cost of Sales and gross margin:

[[GREPCENT_TABLE]]
[["","Twelve Months Ended December 31,"],["","2023","","2022","","2021","","2023 vs. 2022","","2022 vs. 2021"],["Total revenues","$","2,419.2","","","$","2,096.0","","","$","1,846.3","","","$","323.2","","","$","249.7"],["Cost of sales","$","514.9","","","$","483.7","","","$","470.5","","","$","31.2","","","$","13.2"],["Gross margin","78.7","%","","76.9","%","","74.5","%","","1.8","%","","2.4","%"]]
[[/GREPCENT_TABLE]]

Cost of Sales increased for 2023 compared to 2022 primarily due to higher sales volumes as noted above. Gross margin for 2023 increased compared to 2022 primarily due to higher sales volume of products with higher margins, predominately related to VOXZOGO, and lower per unit manufacturing costs for our enzyme products.

We expect gross margin to increase modestly in future periods as the product mix is expected to shift to reflect an increase of sales volumes for higher margin commercial products.

Research and Development

We group all of our R&D activities and related expense into three categories: (i) research and early pipeline, (ii) later-stage clinical programs and (iii) marketed products as follows:

[[GREPCENT_TABLE]]
[["Category","","Description"],["Research and early pipeline","","R&D expense incurred in activities substantially in support of early research through the completion of phase 2 clinical trials, including drug discovery, toxicology, pharmacokinetics and drug metabolism and process development."],["Later-stage clinical programs","","R&D expense incurred in or related to phase 3 clinical programs intended to result in registration of a new product or a new indication for an existing product primarily in the U.S. or the EU."],["Marketed products","","R&D expense incurred in support of our marketed products that are authorized to be sold primarily in the U.S. or the EU. Includes clinical trials designed to gather information on product safety (certain of which may be required by regulatory authorities) and their product characteristics after regulatory approval has been obtained, as well as the costs of obtaining regulatory approval of a product in a new market after approval in either the U.S. or EU has been obtained."]]
[[/GREPCENT_TABLE]]

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

We continuously evaluate the recoverability of costs associated with pre-launch or pre-qualification manufacturing activities, if any, and capitalize the costs incurred related to those activities if we determine that recoverability is highly likely and therefore future revenues are expected. If the related product candidate's marketing application is rejected by the applicable regulators and the likelihood of future revenues for a product candidate become uncertain, the related manufacturing costs are expensed as R&D expenses.

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

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

R&D expense consisted of the following:

[[GREPCENT_TABLE]]
[["","","Twelve Months Ended December 31,"],["","","2023","","2022","","2021","","2023 vs. 2022","","2022 vs. 2021"],["Research and early pipeline","","$","393.1","","","$","313.9","","","$","275.9","","","$","79.2","","","$","38.0"],["Later-stage clinical programs","","62.6","","","119.0","","","244.4","","","(56.4)","","","(125.4)"],["Marketed Products","","291.1","","","216.7","","","108.5","","","74.4","","","108.2"],["Total R&D expense","","$","746.8","","","$","649.6","","","$","628.8","","","$","97.2","","","$","20.8"]]
[[/GREPCENT_TABLE]]

R&D expense increased for 2023 compared to 2022 primarily due to higher spend in research and early pipeline attributable to increased pre-clinical activities, including studies for planned clinical trial application submissions in the U.S. and EU. Higher spend on R&D activities related to our marketed products was partially offset by the decrease in later-stage clinical program spend due to the marketing approval of ROCTAVIAN in mid-2023.

We expect R&D expense to increase in future periods compared to 2023, primarily due to higher spend on early pipeline and later-stage clinical programs.

Selling, General and Administrative

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

SG&A expenses consisted of the following:

[[GREPCENT_TABLE]]
[["","","Twelve Months Ended December 31,"],["","","2023","","2022","","2021","","2023 vs. 2022","","2022 vs. 2021"],["S&M expense","","$","488.4","","","$","450.3","","","$","405.1","","","$","38.1","","","$","45.2"],["G&A expense","","448.9","","","403.7","","","354.3","","","45.2","","","49.4"],["Total SG&A expense","","$","937.3","","","$","854.0","","","$","759.4","","","$","83.3","","","$","94.6"]]
[[/GREPCENT_TABLE]]

S&M expenses by product were as follows:

[[GREPCENT_TABLE]]
[["","","Twelve Months Ended December 31,"],["","","2023","","2022","","2021","","2023 vs. 2022","","2022 vs. 2021"],["Enzyme Products","","$","225.3","","","$","225.7","","","$","222.1","","","$","(0.4)","","","$","3.6"],["VOXZOGO","","108.9","","","102.3","","","75.1","","","6.6","","","27.2"],["ROCTAVIAN","","104.5","","","73.6","","","54.0","","","30.9","","","19.6"],["Other","","49.7","","","48.7","","","53.9","","","1.0","","","(5.2)"],["Total S&M expense","","$","488.4","","","$","450.3","","","$","405.1","","","$","38.1","","","$","45.2"]]
[[/GREPCENT_TABLE]]

The increase in S&M expense for 2023 compared to 2022 was primarily a result of increased activities in support of the European and U.S. commercial launch of ROCTAVIAN.

The increase in G&A expense was primarily due to increased costs related to costs associated with our enterprise resource planning (ERP) system and other strategic initiatives, an impairment charge recorded in 2023 and unfavorable fluctuations of unhedged currencies. Partially offsetting the increases was a decrease in severance and employee termination benefits related to the 2022 reorganization plan that did not recur in 2023. In 2023, we decided to cease development of the first generation VOXZOGO pen device and impaired the related capitalized tooling and fixed assets that had not been placed in service. See Note 4 to our accompanying Consolidated Financial Statements for additional details.

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

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

We expect SG&A expense to increase in future periods as a result of the continued market expansion of our commercial products and support of our global business as it grows.

Intangible Asset Amortization and Contingent Consideration and Gain on Sale of Nonfinancial Assets

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

[[GREPCENT_TABLE]]
[["","Twelve Months Ended December 31, 2023"],["","2023","","2022","","2021","","2023 vs. 2022","","2022 vs. 2021"],["Amortization of intangible assets","$","62.2","","","$","62.8","","","$","61.9","","","$","(0.6)","","","$","0.9"],["Changes in the fair value of contingent consideration","\u2014","","","4.4","","","8.0","","","(4.4)","","","(3.6)"],["Total intangible asset amortization and contingent consideration","$","62.2","","","$","67.2","","","$","69.9","","","$","(5.0)","","","$","(2.7)"],["Gain on sale of nonfinancial assets","$","\u2014","","","$","108.0","","","$","\u2014","","","$","(108.0)","","","$","108.0"]]
[[/GREPCENT_TABLE]]

Amortization of intangible assets: the expense in 2023 as compared to 2022 was relatively flat.

Changes in the fair value of contingent consideration: the 2023 decrease in expense as compared to 2022 was attributable to the attainment of final commercial milestones in 2022.

Gain on Sale of Nonfinancial Assets: the decrease in 2023 as compared to 2022 was due to the sale in 2022 of a Priority Review Voucher (PRV) with no similar transaction in 2023.

Interest Income

We invest our cash equivalents and investments in U.S. government securities and other high credit quality debt securities in order to limit default and market risk.

[[GREPCENT_TABLE]]
[["","Twelve Months Ended December 31,"],["","2023","","2022","","2021","","2023 vs. 2022","","2022 vs. 2021"],["Interest income","$","58.3","","","$","18.0","","","$","10.5","","","$","40.3","","","$","7.5"]]
[[/GREPCENT_TABLE]]

The increase in Interest Income during 2023 compared to 2022 was primarily due to higher money market and available-for-sale debt securities balances and higher yields on our investment portfolio. We do not expect Interest Income to fluctuate significantly over the next 12 months due to anticipated interest rates and yields on our cash equivalents and investments.

Interest Expense

We incur interest expense primarily on our convertible debt. Interest Expense for the periods presented was as follows:

[[GREPCENT_TABLE]]
[["","Twelve Months Ended December 31,"],["","2023","","2022","","2021","","2023 vs. 2022","","2022 vs. 2021"],["Interest expense","$","17.3","","","$","16.0","","","$","15.3","","","$","1.3","","","$","0.7"]]
[[/GREPCENT_TABLE]]

Interest Expense in 2023 as compared to 2022 was relatively flat. We expect Interest Expense to decrease over the next 12 months due to the settlement of our convertible debt that matures in August 2024. See Note 10 to our accompanying Consolidated Financial Statements for additional information regarding our convertible debt.

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

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

Other Income (Expense), Net

Other Income (Expense), Net for the periods presented was as follows:

[[GREPCENT_TABLE]]
[["","Twelve Months Ended December 31,"],["","2023","","2022","","2021","","2023 vs. 2022","","2022 vs. 2021"],["Other income (expense), net","$","(10.5)","","","$","(2.1)","","","$","11.8","","","$","(8.4)","","","$","(13.9)"]]
[[/GREPCENT_TABLE]]

The change in Other Income (Expense), Net, in 2023 compared to 2022 was primarily due to impairment losses on an equity investment and a convertible note, partially offset by the gain on the fair value of assets held in our nonqualified deferred compensation plan and gains related to refundable tax credits recorded in 2023.

Provision for (Benefit from) Income Taxes

Provision for (Benefit from) Income Taxes for the periods presented was as follows:

[[GREPCENT_TABLE]]
[["","Twelve Months Ended December 31,"],["","2023","","2022","","2021","","2023 vs. 2022","","2022 vs. 2021"],["Provision for (benefit from) income taxes","$","20.9","","","$","8.0","","","$","(11.3)","","","$","12.9","","","$","19.3"]]
[[/GREPCENT_TABLE]]

Provision for income taxes in 2023 increased compared to 2022, primarily due to taxes on higher earnings and foreign-source income taxed in the U.S. partially offset by an additional benefit from an increase in R&D credits and the release of a valuation allowance related to future royalty earnings. Our Provision for income taxes in 2023 and 2022 consisted of state, federal and foreign current tax expense which was offset by tax benefits related to stock option exercises, foreign tax credits, and deferred tax benefits from federal orphan drug credits and federal R&D credits. See Note 15 to our accompanying Consolidated Financial Statements for additional information.

In the third quarter of 2023, we determined that it is more likely than not that the deferred tax assets related to a future royalty stream will be realized. In making this determination, we analyzed both the consistent historical royalty earnings and the forecast of future royalty earnings and reached the conclusion that it was appropriate to release the valuation allowance reserve.

Certain countries in which we have operations, including Ireland, have adopted Pillar Two rules, recently released from the Organisation for Economic Co-operation and Development (OECD), including a minimum tax rate of 15%. It is uncertain whether the United States will enact legislation to adopt the Pillar Two framework. We do not expect the adoption of the Pillar Two framework to have a material impact on our effective tax rate and we plan to continue evaluating additional guidance released by the OECD, along with the pending legislative adoption by additional individual countries.

Results of Operations 2022 Compared to 2021

For a discussion of our results of operations pertaining to 2022 as compared to 2021 see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2022 (filed with the Securities and Exchange Commission (SEC) on February 27, 2023).

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

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

Financial Condition, Liquidity and Capital Resources

Our cash, cash equivalents, and investments were as follows:

[[GREPCENT_TABLE]]
[["","December 31, 2023","","December 31, 2022","","Change"],["Cash and cash equivalents","$","755.1","","","$","724.5","","","$","30.6"],["Short-term investments","318.7","","","567.0","","","(248.3)"],["Long-term investments","611.1","","","333.9","","","277.2"],["Total cash, cash equivalents and investments","$","1,684.9","","","$","1,625.4","","","$","59.5"]]
[[/GREPCENT_TABLE]]

We believe our cash generated from sales of our commercial products, in addition to our cash, cash equivalents and investments, will be sufficient to satisfy our liquidity requirements for at least the next 12 months. We believe we will meet longer-term expected future cash requirements and obligations through a combination of cash flows from operating activities and available cash and investments balances. We will need to raise additional funds from equity or debt securities, loans or collaborative agreements if we are unable to satisfy our liquidity requirements. For example, we may require additional financing to fund the repayment of our convertible debt, future milestone payments and our future operations, including the commercialization of our products and product candidates currently under development, preclinical studies and clinical trials, and potential licenses and acquisitions. The timing and mix of our funding alternatives could change depending on many factors, including how much we elect to spend on our development programs, potential licenses and acquisitions of complementary technologies, products and companies or if we settle our convertible debt in cash.

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

Our cash flows for each of the years ended December 31, 2023 and 2022 were as follows:

[[GREPCENT_TABLE]]
[["","2023","","2022","","2023 vs. 2022"],["Net cash provided by operating activities","$","159.3","","","$","175.9","","","$","(16.6)"],["Net cash used in investing activities","$","(111.2)","","","$","(20.0)","","","$","(91.2)"],["Net cash used in financing activities","$","(18.7)","","","$","(18.7)","","","$","\u2014"]]
[[/GREPCENT_TABLE]]

The decrease in net cash provided by operating activities in 2023 compared to 2022 was primarily attributed to the timing of cash receipts from our customers and increased payments for inventory purchases, income taxes and increased payments related to implementation of our ERP system, partially offset by timing of cash payments to other vendors.

The increase in net cash used in investing activities in 2023 compared to 2022 was primarily attributable to the absence of $110.0 million gross proceeds from the sale of PRV in 2022, partially offset by a decrease in purchases of fixed assets.

Net cash used by financing activities in 2023 compared to 2022 was flat but was driven by higher taxes paid for net settlement of shares under our equity incentive plans offset by a decrease in milestone payments to a third party that had been contingent upon PKU sales milestones achieved in 2022.

Financing and Credit Facilities

Our $1.1 billion (undiscounted) of total convertible debt as of December 31, 2023 will impact our liquidity due to the semi-annual cash interest payments as well as the repayment of the principal amount, if not converted. As of December 31, 2023, our indebtedness consisted of our 1.250% senior subordinated convertible notes due in 2027 (the 2027 Notes) and our 0.599% senior subordinated convertible notes due in 2024 (the 2024 Notes and together with the 2027 Notes, the Notes), which, if not converted, will be required to be repaid in cash at maturity in May 2027 and August 2024, respectively. We have reclassified all of the outstanding principal of the 2024 Notes as a current liability as there are less than twelve months remaining until maturity.

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

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

In October 2018, we entered into an unsecured revolving credit facility of up to $200.0 million that included a letter of credit subfacility and a swingline loan subfacility. The credit facility was intended to finance ongoing working capital needs and for other general corporate purposes. In May 2021, the credit facility was amended to extend the original maturity date from October 19, 2021 to May 28, 2024. The credit facility was terminated on August 4, 2023 and, therefore there were no amounts outstanding under the terminated credit facility as of December 31, 2023.

See Note 10 to our accompanying Consolidated Financial Statements for additional discussion on our convertible debt and credit facility.

Material Cash Requirements

Purchase and Lease Obligations

As of December 31, 2023, we had purchase obligations of approximately $354.1 million, of which $325.9 million is expected to be paid in 2024. Our purchase obligations are primarily related to firm purchase commitments entered into in the normal course of business to procure active pharmaceutical ingredients, certain inventory-related items, certain third-party R&D services, production services and facility construction services. The amount also includes hosting fees and other ERP system implementation costs for which we are committed.

As of December 31, 2023, we had lease payment obligations of $58.7 million, of which $11.4 million is payable in 2024. See Note 9 to our accompanying Consolidated Financial Statements for details on our lease liabilities.

Contingent Obligations

As of December 31, 2023, we were subject to contingent payments considered reasonably possible of $763.3 million, of this amount we may pay up to $30.1 million in 2024 if certain contingencies are met. See Note 18 to our accompanying Consolidated Financial Statements for additional discussion on our contingent obligations.

Unrecognized Tax Benefits

As of December 31, 2023, our liability for unrecognized tax benefits was $277.5 million. Due to their nature, we cannot reasonably estimate the timing of future payments. See Note 15 to our accompanying Consolidated Financial Statements for a full discussion on our income taxes.

Critical Accounting Estimates

In preparing our Consolidated Financial Statements in accordance with 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. On an ongoing basis, we evaluate our estimates and discuss our critical accounting policies and estimates with the Audit Committee of our Board of Directors. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results.

Our significant accounting policies are described in Note 1 to our accompanying Consolidated Financial Statements included in this Annual Report on Form 10-K. We believe the critical accounting estimates below reflect the most critical judgments and estimates used in the preparation of our Consolidated Financial Statements.

Revenue Recognition and Related Allowances

Net Product Revenues – We recognize revenue when the customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. For ALDURAZYME revenues, we receive a payment ranging from 39.5% to 50% on worldwide net ALDURAZYME sales by Sanofi depending on sales volume, which is included in Net Product Revenues in our Consolidated Statements of Operations. We recognize our best estimate of the entire revenue that we expect to receive when the product is released and control is transferred to Sanofi. We record ALDURAZYME net product revenues based on the estimated variable consideration payable when the product is sold through by Sanofi. Differences between the estimated variable consideration to be received and actual payments received are not expected to be material. If actual results vary from our estimates, we will make adjustments, which would affect Net Product Revenues and earnings in the period such variances become known.

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

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

Gross-to-Net Sales Adjustments – We record product sales net of estimated mandatory and supplemental discounts to government payers, discounts to private payers and other related charges. Rebates, cash discounts and distributor fees represent the majority of our gross-to-net deductions and are recorded in the same period the related sales occur. Rebates may include amounts paid to Medicaid or other U.S. or foreign government programs, certain managed care providers, or other payers. Rebates, branded co-pay assistance programs, cash discounts and distributor fees are estimates based on contractual arrangements or statutory obligations, which may vary by product and payer. Estimation requires evaluation of our actual historical experience, customer and payer mix, current contractual and statutory obligations, patient outcomes, specific known market events and trends and industry data. We evaluate our customer and payer mix to estimate which sales will be subject to these revenue dilutive items and consider changes to government program guidelines or contractual obligations that would impact the actual rebates and/or our estimates of which sales qualify for such rebates. Any necessary adjustments to our reserves are made each quarter to reflect current information. We believe the methodologies that we use to estimate allowances are reasonable and appropriate given the facts and circumstances. However, actual results may differ significantly from our estimates.

The following table summarizes the consolidated activities and ending balances of all our gross-to-net sales adjustments:

[[GREPCENT_TABLE]]
[["","","Balance at Beginning of Year","","Provision for Current Period Sales","","Payments","","Balance at End of Year"],["Year ended December 31, 2023","","$","115.0","","","$","370.7","","","$","(333.6)","","","$","152.1"],["Year ended December 31, 2022","","$","85.6","","","$","282.5","","","$","(253.1)","","","$","115.0"],["Year ended December 31, 2021","","$","104.4","","","$","252.9","","","$","(271.7)","","","$","85.6"]]
[[/GREPCENT_TABLE]]

Income Taxes

We calculate and provide for income taxes in each of the tax jurisdictions in which we operate. Our Consolidated Balance Sheets reflect net deferred tax assets and liabilities, which are measured using enacted tax rates. The net deferred tax assets primarily represent the tax benefit of tax credits and timing differences between book and tax recognition of certain revenue and expense items, net of a valuation allowance. When it is more likely than not that all or some portion of deferred tax assets may not be realized, we establish a valuation allowance for the amount that may not be realized. We utilize financial projections to support our net deferred tax assets, which contain significant assumptions and estimates of future operations. If such assumptions were to differ significantly, it may have a material impact on our ability to realize our net deferred tax assets. Changes in our valuation allowance will result in a change to tax expense.

We establish liabilities or reduce assets for certain tax positions when we believe those certain tax positions are not more likely than not to be sustained if challenged. Each quarter, we evaluate these uncertain tax positions and adjust the related tax assets and liabilities in light of changing facts and circumstances.

We are subject to income taxes in the U.S. and various foreign jurisdictions, including Ireland. Due to economic and political conditions, various countries are actively considering changes to existing tax laws. We cannot predict the form or timing of potential legislative changes that could have a material adverse impact on our results of operations. Management is not aware of any potential changes that would have a material effect on our Consolidated Financial Statements. See Note 15 to our accompanying Consolidated Financial Statements for additional discussion.

Impairments of Long-Lived Assets

We assess changes in economic, regulatory and legal conditions and make assumptions regarding estimated future cash flows in evaluating the value of our property, plant and equipment, goodwill and other long-lived assets. We periodically evaluate whether current facts or circumstances indicate that the carrying values of our long-lived assets may not be recoverable. Should there be an indication of impairment, we test for recoverability by comparing the estimated undiscounted future cash flows expected to result from the use of the asset or asset group and its eventual disposition to the carrying amount of the asset or asset group. Any excess of the carrying value of the asset or asset group over its estimated fair value is recognized as an impairment loss.

Recent Accounting Pronouncements

See Note 1 to our accompanying Consolidated Financial Statements for a full description of recent accounting pronouncements and our expectation of their impact on our results of operations and financial condition.

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