Back to GetFilings.com




QuickLinks -- Click here to rapidly navigate through this document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q


ý

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

For the quarterly period ended June 30, 2002

or

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

For the transition period from                              to                             

Commission file number 0-14680


GENZYME CORPORATION
(Exact name of registrant as specified in its charter)

Massachusetts
(State or other jurisdiction of
incorporation or organization)
  06-1047163
(I.R.S. Employer Identification No.)

One Kendall Square,
Cambridge, Massachusetts

(Address of principal executive offices)

 

02139
(zip code)

(617) 252-7500
(Registrant's telephone number, including area code)

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

        The number of shares outstanding of each of the issuer's series of common stock as of July 31, 2002:

Genzyme General Division Common Stock   214,279,307
Genzyme Biosurgery Division Common Stock   40,376,346
Genzyme Molecular Oncology Division Common Stock   16,851,498



NOTE REGARDING FORWARD-LOOKING STATEMENTS

        This Form 10-Q contains forward-looking statements, including statements regarding our:

        These statements are subject to risks and uncertainties, and our actual results may differ significantly from those that are described in this report. These risks and uncertainties include:


        For a further description of these risks and other uncertainties, we encourage you to carefully read Exhibit 99.2, "Factors Affecting Future Operating Results," to our Annual Report on Form 10-K for the fiscal year ended December 31, 2001, as amended (our "2001 Form 10-K"). We caution investors not to place undue reliance on the forward-looking statements contained in this report. These statements, like all statements in this report, speak only as of the date of this report (unless another date is indicated) and we undertake no obligation to update or revise the statements.

NOTE REGARDING REFERENCES TO GENZYME DIVISIONS

        Throughout this Form 10-Q, the words "we," "us," "our" and "Genzyme" refer to Genzyme Corporation and all of its operating divisions taken as a whole, and "our board of directors" refers to the board of directors of Genzyme Corporation. In addition, we refer to our three operating divisions as follows:

NOTE REGARDING INCORPORATION BY REFERENCE

        The Securities and Exchange Commission allows us to disclose important information to you by referring you to other documents we have filed with the SEC. The information that we refer you to is "incorporated by reference" into this Form 10-Q. Please read that information.

NOTE REGARDING TRADEMARKS

        Genzyme®, Cerezyme®, Ceredase®, Thyrogen®, Fabrazyme®, Seprafilm®, Carticel®, Epicel® and Snowden-Pencer® are registered trademarks of Genzyme. SAGE™, LongSAGE™ and Sepra™ are trademarks of Genzyme. Renagel® is a registered trademark of GelTex Pharmaceuticals, Inc. Synvisc® and Hylaform® are registered trademarks of Genzyme Biosurgery Corporation. Focal® and FocalSeal® are registered trademarks of Focal, Inc. Aldurazyme™ is a trademark of BioMarin/Genzyme LLC. WelChol™ is a trademark of Sankyo Pharma, Inc. Neurocell™ is a trademark of Diacrin, Inc. Zavesca™ is a trademark of Oxford GlycoSciences plc. All rights reserved.



GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, JUNE 30, 2002
TABLE OF CONTENTS

 
  PAGE NO.
PART I.    FINANCIAL INFORMATION   1

ITEM 1.    Financial Statements

 

1

GENZYME CORPORATION AND SUBSIDIARIES

 

 
  Unaudited, Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2002 and 2001   1
  Consolidated Balance Sheets as of June 30, 2002 (unaudited) and December 31, 2001   3
  Unaudited, Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001   4
  Notes to Unaudited, Consolidated Financial Statements   5

GENZYME GENERAL

 

 
  Unaudited, Combined Statements of Operations for the Three and Six Months Ended June 30, 2002 and 2001   23
  Combined Balance Sheets as of June 30, 2002 (unaudited) and December 31, 2001   24
  Unaudited, Combined Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001   25
  Notes to Unaudited, Combined Financial Statements   26

GENZYME BIOSURGERY

 

 
  Unaudited, Combined Statements of Operations for the Three and Six Months Ended June 30, 2002 and 2001   35
  Combined Balance Sheets as of June 30, 2002 (unaudited) and December 31, 2001   36
  Unaudited, Combined Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001   37
  Notes to Unaudited, Combined Financial Statements   38

GENZYME MOLECULAR ONCOLOGY

 

 
  Unaudited, Combined Statements of Operations for the Three and Six Months Ended June 30, 2002 and 2001   44
  Combined Balance Sheets as of June 30, 2002 (unaudited) and December 31, 2001   45
  Unaudited, Combined Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001   46
  Notes to Unaudited, Combined Financial Statements   47

ITEM 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

 

48

ITEM 3.    Quantitative and Qualitative Disclosures About Market Risk

 

107

PART II.    OTHER INFORMATION

 

 

ITEM 4.    Submission of Matters to a Vote of Security Holders

 

108

ITEM 6.    Exhibits and Reports on Form 8-K

 

110

Signatures

 

111

i


PART 1.    Financial Information

ITEM 1. Financial Statements


GENZYME CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited, amounts in thousands)

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
 
  2002
  2001
  2002
  2001
 
Revenues:                          
  Net product sales   $ 299,980   $ 273,473   $ 566,606   $ 524,303  
  Net service sales     28,024     24,235     54,707     47,995  
  Revenues from research and development contracts:                          
    Related parties     784     1,313     1,396     1,632  
    Other     3,404     1,620     7,423     4,972  
   
 
 
 
 
      Total revenues     332,192     300,641     630,132     578,902  
   
 
 
 
 
Operating costs and expenses:                          
  Cost of products sold     76,522     79,600     148,676     156,132  
  Cost of services sold     16,439     13,428     31,457     26,849  
  Selling, general and administrative     110,882     103,666     213,840     194,780  
  Research and development (including research and development related to contracts)     75,934     62,414     158,075     119,524  
  Amortization of intangibles     17,586     30,174     35,183     59,165  
  Purchase of in-process research and development         8,768         8,768  
   
 
 
 
 
      Total operating costs and expenses     297,363     298,050     587,231     565,218  
   
 
 
 
 
Operating income     34,829     2,591     42,901     13,684  
   
 
 
 
 
Other income (expenses):                          
  Equity in net loss of unconsolidated affiliates     (3,948 )   (11,796 )   (8,042 )   (20,811 )
  Gain (loss) on investments in equity securities     343     (1,532 )   509     (1,532 )
  Minority interest in net loss of subsidiary         725         1,999  
  Other     1,827     (133 )   963     (3,843 )
  Investment income     12,624     12,493     26,061     22,641  
  Interest expense     (7,059 )   (10,766 )   (13,865 )   (22,136 )
   
 
 
 
 
      Total other income (expenses)     3,787     (11,009 )   5,626     (23,682 )
   
 
 
 
 
Income (loss) before income taxes     38,616     (8,418 )   48,527     (9,998 )
(Provision for) benefit from income taxes     (10,293 )   2,064     (13,431 )   2,734  
   
 
 
 
 
Net income (loss) before cumulative effect of change in accounting for goodwill and derivative financial instruments     28,323     (6,354 )   35,096     (7,264 )
Cumulative effect of change in accounting for goodwill             (98,270 )    
Cumulative effect of change in accounting for derivative financial instruments, net of tax                 4,167  
   
 
 
 
 
Net income (loss)   $ 28,323   $ (6,354 ) $ (63,174 ) $ (3,097 )
   
 
 
 
 
Comprehensive income (loss), net of tax:                          
  Net income (loss)   $ 28,323   $ (6,354 ) $ (63,174 ) $ (3,097 )
   
 
 
 
 
  Other comprehensive income (loss), net of tax:                          
    Foreign currency translation adjustments     47,999     (3,723 )   38,799     (17,844 )
    Unrealized gains (losses) on interest rate swap contracts, net of tax     (541 )   218     (163 )   (289 )
    Unrealized gains (losses) on securities:                          
      Unrealized gains (losses) arising during the period     (2,752 )   21,654     (26,709 )   (987 )
      Reclassification adjustment for losses included in net income (loss)     81     973     81     973  
   
 
 
 
 
    Unrealized gains (losses) on securities, net     (2,671 )   22,627     (26,628 )   (14 )
   
 
 
 
 
  Other comprehensive income (loss)     44,787     19,122     12,008     (18,147 )
   
 
 
 
 
Comprehensive income (loss)   $ 73,110   $ 12,768   $ (51,166 ) $ (21,244 )
   
 
 
 
 

The accompanying notes are an integral part of these unaudited, consolidated financial statements.

1



GENZYME CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations (Continued)

(Unaudited, amounts in thousands, except per share amounts)

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
 
  2002
  2001
  2002
  2001
 
Net income (loss) per share:                          
  Allocated to Genzyme General Stock:                          
    Genzyme General net income before cumulative effect of change in accounting for derivative financial instruments   $ 44,411   $ 21,718   $ 68,720   $ 46,863  
    Cumulative effect of change in accounting for derivative financial instruments, net of tax                 4,167  
   
 
 
 
 
    Genzyme General division net income     44,411     21,718     68,720     51,030  
    Tax benefit allocated from Genzyme Biosurgery     2,994     9,627     7,293     17,743  
    Tax benefit allocated from Genzyme Molecular Oncology     2,235     3,854     4,365     6,680  
   
 
 
 
 
    Net income allocated to Genzyme General Stock   $ 49,640   $ 35,199   $ 80,378   $ 75,453  
   
 
 
 
 
Net income per share of Genzyme General Stock:                          
  Basic:                          
    Net income per share before cumulative effect of change in accounting for derivative financial instruments   $ 0.23   $ 0.18   $ 0.38   $ 0.37  
    Per share cumulative effect of change in accounting for derivative financial instruments, net of tax                 0.02  
   
 
 
 
 
    Net income per share allocated to Genzyme General Stock   $ 0.23   $ 0.18   $ 0.38   $ 0.39  
   
 
 
 
 
  Diluted:                          
    Net income per share before cumulative effect of change in accounting for derivative financial instruments   $ 0.23   $ 0.17   $ 0.36   $ 0.35  
    Per share cumulative effect of change in accounting for derivative financial instruments, net of tax                 0.02  
   
 
 
 
 
    Net income per share allocated to Genzyme General Stock   $ 0.23   $ 0.17   $ 0.36   $ 0.37  
   
 
 
 
 
Weighted average shares outstanding:                          
  Basic     213,917     196,423     213,624     194,086  
   
 
 
 
 
  Diluted     219,634     205,685     220,349     203,290  
   
 
 
 
 
Allocated to Biosurgery Stock:                          
  Genzyme Biosurgery net loss before cumulative effect of change in accounting for goodwill   $ (17,522 ) $ (37,608 ) $ (37,904 ) $ (72,935 )
  Cumulative effect of change in accounting for goodwill             (98,270 )    
   
 
 
 
 
  Genzyme Biosurgery division net loss     (17,522 )   (37,608 )   (136,174 )   (72,935 )
  Allocated tax benefit     2,442     4,386     4,890     8,990  
   
 
 
 
 
  Net loss allocated to Biosurgery Stock   $ (15,080 ) $ (33,222 ) $ (131,284 ) $ (63,945 )
   
 
 
 
 
  Net loss per share of Biosurgery Stock—basic and diluted:                          
    Net loss per share before cumulative effect of change in accounting for goodwill   $ (0.38 ) $ (0.91 ) $ (0.83 ) $ (1.75 )
    Per share cumulative effect of change in accounting for
goodwill
            (2.48 )    
   
 
 
 
 
  Net loss per share of Biosurgery Stock—basic and diluted   $ (0.38 ) $ (0.91 ) $ (3.31 ) $ (1.75 )
   
 
 
 
 
  Weighted average shares outstanding     39,637     36,659     39,600     36,531  
   
 
 
 
 
Allocated to Molecular Oncology Stock:                          
  Net loss allocated to Molecular Oncology Stock   $ (6,237 ) $ (8,331 ) $ (12,268 ) $ (14,605 )
   
 
 
 
 
  Net loss per share of Molecular Oncology Stock—basic and diluted   $ (0.37 ) $ (0.52 ) $ (0.73 ) $ (0.91 )
   
 
 
 
 
  Weighted average shares outstanding     16,801     16,088     16,782     15,998  
   
 
 
 
 

The accompanying notes are an integral part of these unaudited, consolidated financial statements.

2



GENZYME CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

(Amounts in thousands)

 
  June 30,
2002

  December 31,
2001

 
 
  (Unaudited)

   
 
ASSETS              
Current assets:              
  Cash and cash equivalents   $ 289,003   $ 247,011  
  Short-term investments     80,104     66,481  
  Accounts receivable, net     295,997     259,283  
  Inventories     191,351     171,409  
  Prepaid expenses and other current assets     43,901     35,408  
  Deferred tax assets—current     70,277     70,196  
   
 
 
    Total current assets     970,633     849,788  
Property, plant and equipment, net     715,622     635,314  
Long-term investments     763,870     807,766  
Notes receivable—related parties     8,818      
Goodwill, net     605,104     697,422  
Other intangible assets, net     768,971     809,224  
Investments in equity securities     53,127     88,686  
Other noncurrent assets     25,714     47,545  
   
 
 
    Total assets   $ 3,911,859   $ 3,935,745  
   
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY              
Current liabilities:              
  Accounts payable   $ 35,649   $ 47,860  
  Accrued expenses     146,799     144,740  
  Income taxes payable     93,338     75,944  
  Deferred revenue     8,630     6,700  
  Current portion of long-term debt and capital lease obligations     16,898     7,746  
   
 
 
    Total current liabilities     301,314     282,990  
Long-term debt and capital lease obligations     294,381     259,809  
Convertible notes and debentures     575,000     585,000  
Deferred tax liabilities     135,475     173,126  
Other noncurrent liabilities     21,123     25,631  
   
 
 
    Total liabilities     1,327,293     1,326,556  
   
 
 
Stockholders' equity:              
  Preferred stock, $0.01 par value          
  Common stock:              
    Genzyme General Stock, $0.01 par value     2,141     2,132  
    Biosurgery Stock, $0.01 par value     397     395  
    Molecular Oncology Stock, $0.01 par value     168     168  
  Treasury Stock—Genzyme General—at cost     (901 )   (901 )
  Additional paid-in capital—Genzyme General Stock     1,804,054     1,749,097  
  Additional paid-in capital—Biosurgery Stock     814,024     843,544  
  Additional paid-in capital—Molecular Oncology Stock     148,667     148,481  
  Deferred compensation     (1,456 )   (2,377 )
  Notes receivable from stockholders     (13,257 )   (13,245 )
  Accumulated deficit     (181,068 )   (117,894 )
  Accumulated other comprehensive income (loss)     11,797     (211 )
   
 
 
    Total stockholders' equity     2,584,566     2,609,189  
   
 
 
    Total liabilities and stockholders' equity   $ 3,911,859   $ 3,935,745  
   
 
 

The accompanying notes are an integral part of these unaudited, consolidated financial statements.

3



GENZYME CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited, amounts in thousands)

 
  Six Months Ended
June 30,

 
 
  2002
  2001
 
Cash Flows from Operating Activities:              
  Net loss   $ (63,174 ) $ (3,097 )
  Reconciliation of net loss to net cash provided by operating activities:              
    Depreciation and amortization     64,326     78,025  
    Non-cash compensation expense     751     4,972  
    Provision for bad debts     3,795     1,825  
    Charges for in-process research and development         8,768  
    Equity in net loss of unconsolidated affiliates     8,042     20,811  
    (Gain) loss on investments in equity securities     (509 )   1,532  
    Minority interest in net loss of subsidiary         (1,999 )
    Deferred income tax benefit     (7,488 )   (14,811 )
    Other     3,128     3,000  
    Cumulative effect of change in accounting for goodwill     98,270      
    Cumulative effect of change in accounting for derivative financial instruments         (4,167 )
    Increase (decrease) in cash from working capital changes:              
      Accounts receivable     (28,034 )   (39,734 )
      Inventories     (5,015 )   11,252  
      Prepaid expenses and other current assets     (5,648 )   1,321  
      Accounts payable, accrued expenses and deferred revenue     (30,086 )   (40,230 )
      Income taxes payable and tax benefits from stock options     24,993     35,261  
   
 
 
        Net cash provided by operating activities     63,351     62,729  
   
 
 
Cash Flows from Investing Activities:              
  Purchases of investments     (260,802 )   (359,534 )
  Sales and maturities of investments     290,391     210,764  
  Purchases of equity securities     (2,210 )   (8,318 )
  Proceeds from sales of equity securities     4,773     36  
  Purchases of property, plant and equipment     (96,199 )   (72,067 )
  Acquisitions, net of acquired cash         (83,420 )
  Investments in unconsolidated affiliates     (14,113 )   (22,744 )
  Note received from a collaborator     (4,045 )    
  Other     1,261     749  
   
 
 
        Net cash used in investing activities     (80,944 )   (334,534 )
   
 
 
Cash Flows from Financing Activities:              
  Proceeds from issuance of common stock     21,417     59,079  
  Proceeds from draw on credit facility     35,000      
  Proceeds from issuance of debt         562,062  
  Payments of debt and capital lease obligations     (1,258 )   (151,303 )
  Bank overdraft     4,157     2,007  
  Payments received for notes receivable from stockholders     181     3,204  
  Other     (1,479 )   2,403  
   
 
 
        Net cash provided by financing activities     58,018     477,452  
   
 
 
Effect of exchange rate changes on cash     1,567     (2,556 )
   
 
 
Increase in cash and cash equivalents     41,992     203,091  
Cash and cash equivalents at beginning of period     247,011     236,213  
   
 
 
Cash and cash equivalents at end of period   $ 289,003   $ 439,304  
   
 
 

The accompanying notes are an integral part of these unaudited, consolidated financial statements.

4



GENZYME CORPORATION AND SUBSIDIARIES

Notes To Unaudited, Consolidated Financial Statements

1.    Basis of Presentation

        Our unaudited, consolidated financial statements for each period include the statements of operations, balance sheets and statements of cash flows of each of our divisions and corporate operations taken as a whole. We eliminate all significant interdivisional and intercompany items and transactions in consolidation. We prepared our unaudited, consolidated financial statements following the requirements of the SEC for interim reporting. As permitted under these rules, we condense or omit certain footnotes and other financial information that are normally required by generally accepted accounting principles. We have reclassified certain 2001 data to conform to our 2002 presentation.

        These financial statements include all normal and recurring adjustments that we consider necessary for the fair presentation of our financial position and operating results. Since these are interim financial statements, you should also read the financial statements and notes included in our 2001 Form 10-K. Revenues, expenses, assets and liabilities can vary from quarter to quarter. Therefore, the results and trends in these interim financial statements may not be indicative of results for future periods.

2.    New Accounting Pronouncements

        In August 2001, the Financial Accounting Standards Board, commonly referred to as the FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. SFAS No. 143 will be effective for our fiscal year ending December 31, 2003. We are in the process of assessing the effect of adopting SFAS No. 143 on our consolidated and combined financial statements.

        In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and amends Accounting Principles Board Opinion No. 30 (APB No. 30), "Reporting Results of Operations—Reporting the Effects of Disposal of a Segment of a Business." SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001, and was adopted by us, as required, on January 1, 2002. The adoption of SFAS No. 144 did not have a material impact on our financial position or results of operations.

        In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force, or EITF, Issue 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF Issue 94-3, a liability for an exit cost as defined in EITF Issue 94-3 was recognized at the date of an entity's commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. We will adopt the provisions of SFAS No. 146 for exit or disposal activities that are initiated after December 31, 2002 as required by the standard.

3.    Acquisitions

        In September 2001, we acquired Novazyme, a privately-held developer of biotherapies for the treatment of lysosomal storage disorders, or LSDs, and in June 2001, we acquired Wyntek Diagnostics, Inc., a privately-held provider of high quality point of care rapid diagnostic tests for

5



pregnancy and infectious diseases. We accounted for the acquisitions as purchases and allocated both to Genzyme General. Also, in June 2001, we acquired the remaining 78% of the outstanding shares of Focal, Inc. common stock not previously acquired. We accounted for the acquisition as a purchase and allocated it to Genzyme Biosurgery.

        The following unaudited pro forma financial summary is presented as if the acquisitions of Novazyme, Focal and Wyntek were completed as of January 1, 2001. The unaudited pro forma combined results are not necessarily indicative of the actual results that would have occurred had the acquisitions been consummated on those dates, or of the future operations of the combined entities. Material nonrecurring charges related to these acquisitions, such as acquired in-process research and development, or IPR&D, charges of $86.8 million resulting from the acquisition of Novazyme and $8.8 million resulting from the acquisition of Wyntek, are not reflected in the following pro forma financial summary.

6



 
  Three Months Ended
June 30, 2001

  Six Months Ended
June 30, 2001

 
 
  (Amounts in thousands)

 
Total revenues   $ 303,204   $ 587,461  
   
 
 
Loss before extraordinary items and cumulative effect of change in accounting for derivative financial instruments   $ (14,446 ) $ (22,215 )
Cumulative effect of change in accounting for derivative financial instruments, net of tax         4,167  
   
 
 
Net loss   $ (14,446 ) $ (18,048 )
   
 
 
Net income allocated to Genzyme General Stock:              
  Net income allocated to Genzyme General Stock before cumulative effect of change in accounting for derivative financial instruments   $ 32,644   $ 66,919  
  Cumulative effect of change in accounting for derivative financial instruments, net of tax         4,167  
   
 
 
  Net income allocated to Genzyme General Stock   $ 32,644   $ 71,086  
   
 
 
Net income per share allocated to Genzyme General Stock:              
  Basic:              
    Net income per share before cumulative effect of change in accounting for derivative financial instruments   $ 0.16   $ 0.34  
    Per share cumulative effect of change in accounting for derivative financial instruments, net of tax         0.02  
   
 
 
    Net income per share allocated to Genzyme General Stock   $ 0.16   $ 0.36  
   
 
 
  Diluted:              
    Net income per share before cumulative effect of change in accounting for derivative financial instruments   $ 0.16   $ 0.32  
    Per share cumulative effect of change in accounting for derivative financial instruments, net of tax         0.02  
   
 
 
    Net income per share allocated to Genzyme General Stock   $ 0.16   $ 0.34  
   
 
 

Weighted average shares outstanding:

 

 

 

 

 

 

 
  Basic     198,985     196,648  
   
 
 
 
Diluted

 

 

219,730

 

 

206,103

 
   
 
 

Net loss allocated to Biosurgery Stock

 

$

(38,759

)

$

(74,529

)
   
 
 
Net loss per share allocated to Biosurgery Stock—basic and Diluted   $ (1.00 ) $ (1.93 )
   
 
 

Weighted average shares outstanding—basic and diluted

 

 

38,746

 

 

38,618

 
   
 
 

7


        The staff of the U.S. Federal Trade Commission, which is known as the FTC, is investigating our acquisition of Novazyme. The FTC is one of the agencies responsible for enforcing federal antitrust laws, and, in this investigation, it is evaluating whether there are anti-competitive aspects of the Novazyme transaction that the government should seek to negate. While we do not believe that the acquisition should be deemed to contravene antitrust laws, we have been cooperating in the FTC investigation. At this stage, we cannot predict with precision the likely outcome of the investigation or how that outcome will impact our business. As with any litigation or investigation, there will be costs associated with responding to the investigation, both in terms of management time and out-of-pocket expenses.

4.    Inventories (amounts in thousands)

 
  June 30,
2002

  December 31,
2001

 
  (Unaudited)

   
Raw materials   $ 42,767   $ 52,586
Work-in-process     84,312     64,925
Finished products     64,272     53,898
   
 
  Total   $ 191,351   $ 171,409
   
 

5.    Goodwill and Other Intangible Assets

        In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires that ratable amortization of goodwill and certain intangible assets be replaced with periodic tests of the goodwill's impairment and that other intangible assets be amortized over their useful lives unless these lives are determined to be indefinite. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001, and thus has been adopted by us effective at the beginning of fiscal year 2002.

        Effective January 1, 2002, in accordance with the provisions of SFAS No. 142, we ceased amortizing goodwill. At January 1, 2002, our gross goodwill totaled $799.5 million, including $4.3 million of acquired workforce intangible assets previously classified as other intangible assets, net of related deferred tax liabilities, of which $1.6 million was allocated to our Therapeutics segment, $0.8 million was allocated to our Diagnostic Products segment and $1.8 million was allocated to Genzyme Biosurgery.

        In November 2001, we sold our Snowden-Pencer® line of surgical instruments, a component of our Biosurgical Specialties segment, and recorded a loss of $25.0 million, which we allocated to Genzyme Biosurgery. Our subsequent test of the remaining long-lived assets related to the remaining products of our surgical instruments and medical devices business line, which make up the majority of our cardiothoracic reporting unit, under SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of," did not indicate an impairment based on the undiscounted cash flows of the business. However, the impairment analysis indicated that the goodwill allocated to the cardiothoracic reporting unit would be impaired if the analysis was done using

8



discounted cash flows, as required by SFAS No. 142. Therefore, in the three months ended March 31, 2002, upon adoption of SFAS No. 142, we tested the goodwill of our cardiothoracic reporting unit in accordance with the transitional provisions of that standard, using the present value of expected future cash flows to estimate the fair value of this reporting unit. We recorded an impairment charge of $98.3 million, which we reflected as a cumulative effect of a change in accounting for goodwill in our unaudited, consolidated statements of operations and the unaudited, combined statements of operations for Genzyme Biosurgery for the three months ended March 31, 2002.

        We have completed the transitional impairment test for the $605.1 million of net goodwill related to our other reporting units in the six months ended June 30, 2002, as provided by SFAS No. 142, and determined that no additional impairment charges were required. We are required to perform impairment tests under SFAS No. 142 annually and whenever events or changes in circumstance suggest that the carrying value of an asset may not be recoverable.

        The following table contains the changes in our net goodwill during the six months ended June 30, 2002 (amounts in thousands):

 
   
  (Unaudited)
 
 
  As of
December 31,
2001

  Adjustments
  Impairment
  As of
June 30,
2002

 
Goodwill, net:                          
  Genzyme General:                          
    Therapeutics (1)   $ 469,721   $ 4,373   $   $ 474,094  
    Diagnostic Products (2)     32,427     786         33,213  
    Other     56,462     103         56,565  
   
 
 
 
 
      Total     558,610     5,262         563,872  
  Genzyme Biosurgery (3,4)     236,621     1,841     (113,859 )   124,603  
  Genzyme Molecular Oncology                  
   
 
 
 
 
      Total     795,231     7,103     (113,859 )   688,475  
Accumulated amortization     (97,809 )   (1,151 )   15,589     (83,371 )
   
 
 
 
 
Goodwill, net   $ 697,422   $ 5,952   $ (98,270 ) $ 605,104  
   
 
 
 
 

(1)
Adjustments for Genzyme General's Therapeutics segment include:

$1.6 million of workforce intangible assets previously classified as other intangible assets, net of related deferred tax benefits, resulting from our acquisition of GelTex Pharmaceuticals, Inc. as required by SFAS No. 142;

$1.9 million to adjust goodwill resulting from a reclassification related to our acquisition of GelTex; and

$0.8 million to adjust goodwill resulting from increased integration and exit activity costs related to our acquisition of Novazyme.
(2)
Adjustments for Genzyme General's Diagnostic Products segment represent workforce intangible assets previously classified as other intangible assets, net of related deferred tax benefits, resulting from our acquisition of Wyntek as required by SFAS No. 142.

9


(3)
Adjustments for Genzyme Biosurgery represent workforce intangible assets previously classified as other intangible assets, net of related deferred tax benefits, resulting from our acquisitions of Focal and Biomatrix, Inc. as required by SFAS No. 142.

(4)
Impairment for Genzyme Biosurgery represents the impairment charge we recorded in the three months ended March 31, 2002 in accordance with the transitional provisions of SFAS No. 142, related to the goodwill allocated to our cardiothoracic reporting unit.

        The following table contains information on our other intangible assets for the periods presented (amounts in thousands):

 
  As of June 30, 2002
(Unaudited)

  As of December 31, 2001
 
  Gross
Other
Intangible
Assets

  Accumulated
Amortization

  Net
Other
Intangible
Assets

  Gross
Other
Intangible
Assets

  Accumulated
Amortization

  Net
Other
Intangible
Assets

Technology   $ 551,773   $ (66,236 ) $ 485,537   $ 551,743   $ (44,253 ) $ 507,490
Patents     196,971     (29,430 )   167,541     196,968     (21,804 )   175,164
Trademarks     91,754     (12,952 )   78,802     91,754     (9,960 )   81,794
License fees     25,715     (6,242 )   19,473     25,460     (5,371 )   20,089
Distribution agreements     13,950     (2,679 )   11,271     13,950     (1,807 )   12,143
Customer lists     8,324     (3,615 )   4,709     8,324     (3,199 )   5,125
Other     12,242     (10,604 )   1,638     18,123     (10,704 )   7,419
   
 
 
 
 
 
  Total   $ 900,729   $ (131,758 ) $ 768,971   $ 906,322   $ (97,098 ) $ 809,224
   
 
 
 
 
 

        All of our other intangible assets are amortized over their estimated useful lives. Total amortization expense for our other intangible assets was:

Amortization expense for each quarter presented includes $0.3 million related to the amortization of a non-compete agreement which is charged to cost of products sold. Amortization expense for both the three and six months ended June 30, 2001 excludes the expense related to the amortization of goodwill.

        The estimated future amortization expense for other intangible assets as of June 30, 2002 for the remainder of fiscal year 2002 and the five succeeding fiscal years is as follows (unaudited, amounts in thousands):

Year ended December 31,

  Estimated
Amortization
Expense

2002 (remaining six months)   $ 35,579
2003     69,948
2004     69,554
2005     69,230
2006     66,809
2007     66,751

10


        The following table presents the impact SFAS No. 142 would have had on our amortization of intangibles expense, net income (loss) and net income (loss) per share had the standard been in effect for the three and six months ended June 30, 2001 (unaudited, amounts in thousands, except per share amounts):

 
  Three Months Ended June 30, 2001
  Six Months Ended June 30, 2001
 
 
  As
Reported

  Goodwill
Amortization
Adjustment

  As
Adjusted

  As
Reported

  Goodwill
Amortization
Adjustment

  As
Adjusted

 
Amortization of intangibles   $ 30,174   $ (12,892 ) $ 17,282   $ 59,165   $ (25,868 ) $ 33,297  
   
 
 
 
 
 
 

Net income (loss) before extraordinary items and cumulative effect of change in accounting for derivative financial instruments

 

$

(6,354

)

$

12,892

 

$

6,538

 

$

(7,264

)

$

25,868

 

$

18,604

 
Cumulative effect of change in accounting for derivative financial instruments, net of tax                 4,167         4,167  
   
 
 
 
 
 
 
Net income (loss)   $ (6,354 ) $ 12,892   $ 6,538   $ (3,097 ) $ 25,868   $ 22,771  
   
 
 
 
 
 
 

Net income allocated to Genzyme General Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Net income allocated to Genzyme General Stock before cumulative effect of change in accounting for derivative financial instruments   $ 35,199   $ 9,103   $ 44,302   $ 71,286   $ 18,012   $ 89,298  
  Cumulative effect of change in accounting for derivative financial instruments, net of tax                 4,167         4,167  
   
 
 
 
 
 
 
  Net income allocated to Genzyme General Stock   $ 35,199   $ 9,103   $ 44,302   $ 75,453   $ 18,012   $ 93,465  
   
 
 
 
 
 
 
  Net income per share allocated to Genzyme General Stock                                      
    Basic:                                      
      Net income per share before cumulative effect of change in accounting for derivative financial instruments   $ 0.18   $ 0.05   $ 0.23   $ 0.37   $ 0.09   $ 0.46  
      Per share cumulative effect of change in accounting for derivative financial instruments, net of tax                 0.02         0.02  
   
 
 
 
 
 
 
      Net income per share allocated to Genzyme General Stock   $ 0.18   $ 0.05   $ 0.23   $ 0.39   $ 0.09   $ 0.48  
   
 
 
 
 
 
 

11


    Diluted:                                      
      Net income per share before cumulative effect of change in accounting for derivative financial instruments   $ 0.17   $ 0.05   $ 0.22   $ 0.35   $ 0.09   $ 0.44  
      Per share cumulative effect of change in accounting for derivative financial instruments, net of tax                 0.02         0.02  
   
 
 
 
 
 
 
      Net income per share allocated to Genzyme General Stock   $ 0.17   $ 0.05   $ 0.22   $ 0.37   $ 0.09   $ 0.46  
   
 
 
 
 
 
 
Net income (loss) allocated to Biosurgery Stock   $ (33,222 ) $ 3,789   $ (29,433 ) $ (63,945 ) $ 7,856   $ (56,089 )
   
 
 
 
 
 
 
Net income (loss) per share allocated to Biosurgery Stock—basic and diluted   $ (0.91 ) $ 0.11   $ (0.80 ) $ (1.75 ) $ 0.21   $ (1.54 )
   
 
 
 
 
 
 

6.    Note Receivable from Dyax Corporation

      In May 2002, we restructured our collaboration agreement with Dyax for the development of the kallikrein inhibitor DX-88. As a result, our option to acquire a 50% interest in DX-88 for hereditary angioedema, or HAE, and other potential indications will now be exercisable following the completion of the ongoing phase 2 clinical trial of DX-88 for the treatment of HAE, or the expenditure by Dyax of at least $8.0 million in development and commercialization costs. As of June 30, 2002, Dyax has incurred $8.3 million of development costs under the collaboration agreement. The restructured agreement also provides Dyax with an option to acquire our interest in the potential application of DX-88 for the reduction of blood loss and other effects of systemic inflammatory responses in surgery. This option expires in March 2003.

        Under the revised collaboration agreement, the line of credit we extended to Dyax was increased from $3.0 million to $7.0 million. In connection with the increase, Dyax issued a senior secured promissory note in the principal amount of $7.0 million to us under which it can request periodic advances of not less than $250,000 in principal, subject to certain conditions. Advances under this note bear interest at the prime rate plus 2% and are due, together with any accrued but unpaid interest, in May 2005. In June 2002, Dyax drew $4.0 million under the note, which we recorded as a note receivable-related party in our unaudited, consolidated balance sheet and the unaudited, combined balance sheet of Genzyme General. Dyax is considered a related party because the chairman and chief executive officer of Dyax is a member of our board of directors. Pursuant to the terms of the note, we are not obligated to make advances in excess of $1.5 million during any subsequent calendar quarter.

12


7.    Sale of GTC Common Stock

        On April 4, 2002, GTC Biotherapeutics, Inc., formerly known as Genzyme Transgenics Corporation and which we refer to as GTC, purchased approximately 2.8 million shares of GTC common stock held by us and allocated to Genzyme General for an aggregate consideration of approximately $9.6 million. We received approximately $4.8 million in cash and a promissory note for the remaining amount of approximately $4.8 million. The shares of GTC common stock were valued at $3.385 per share in this transaction, using the simple average of the high and low transaction prices quoted on the Nasdaq National Market on April 1, 2002. We have committed to a 24-month lock-up provision on the remaining 4.9 million shares of GTC common stock held by us and allocated to Genzyme General, which is approximately 18% of the shares of GTC common stock outstanding as of June 30, 2002. We accounted for our investment in GTC under the equity method of accounting until May 2002, at which point we ceased to have significant influence over GTC. We began accounting for our investment in GTC under the cost method of accounting in June 2002.

        Because of the 24-month lock-up provision, the remaining 4.9 million shares of GTC common stock held by us do not qualify as marketable securities under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." As a result, we carry the investment on our consolidated balance sheet and the combined balance sheet of Genzyme General at cost, subject to review for impairment. Based on the market price of GTC common stock at June 30, 2002, our remaining investment would have an unrealized loss of $8.3 million. Because we have assessed the decline in the market price of GTC common stock to be temporary, we have not recorded an associated impairment charge.

8.    Derivative Financial Instruments

        On January 1, 2001, we adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that we recognize all derivative instruments as either assets or liabilities in our consolidated balance sheet and measure those instruments at fair value. Subsequent changes in fair value are reflected in current earnings or other comprehensive income, depending on whether a derivative instrument is designated as part of a hedge relationship and, if it is, the type of hedge relationship.

        In accordance with the transition provisions of SFAS No. 133, we recorded a cumulative effect adjustment of $4.2 million, net of tax, in our unaudited, consolidated statements of operations and in the unaudited, combined statements of operations of Genzyme General for the three months ended March 31, 2001, to recognize the fair value of warrants to purchase shares of GTC common stock held on January 1, 2001 and allocated to Genzyme General. Transition adjustments pertaining to interest rate swaps designated as cash-flow hedges and foreign currency forward contracts allocated to Genzyme General were not significant. For the three months ended June 30, 2002, we recorded a charge of $0.9 million in other expense in our unaudited, consolidated statements of operations and in the unaudited, combined statements of operations of Genzyme General to reflect the change in value of our warrants to purchase shares of GTC common stock from April 1, 2002 to June 30, 2002 as compared to $0.2 million for the same period of 2001. For the six months ended June 30, 2002, we recorded a charge of $2.1 million in other expense in our unaudited, consolidated statements of operations and in the unaudited, combined statements of operations of Genzyme General to reflect the change in value of our warrants to purchase shares of GTC common stock from January 1, 2002 to June 30, 2002 as compared to $3.8 million for the same period a year ago. We also recorded a charge

13



of $1.1 million, ($1.7 million pre-tax) in other comprehensive income (loss) in stockholders' equity in our unaudited, consolidated balance sheets and the division equity in the unaudited, combined balance sheets of Genzyme General to reflect the change in value of our interest rate swaps during the six month period ended June 30, 2002. At June 30, 2002, our interest rate swaps had a fair market value of $(3.1) million.

9.    Revolving Credit Facility

        We have access to a $350.0 million revolving credit facility, all of which matures in December 2003. During the first quarter of 2002, we drew down $35.0 million from this facility and allocated the borrowings to Genzyme Biosurgery. At June 30, 2002, $269.0 million had been drawn down and remained outstanding under the $350.0 million facility, all of which was allocated to Genzyme Biosurgery. Borrowings under this facility bear interest at LIBOR plus an applicable margin. The terms of the revolving credit facility include various covenants, including financial covenants, which require us to meet minimum liquidity and interest coverage ratios and to meet maximum leverage ratios. We currently are in compliance with these covenants and do not anticipate falling out of compliance.

10.    Tax (Provision) Benefit

 
  Three Months Ended
June 30,

   
  Six Months Ended
June 30,

   
 
 
  Increase/
(Decrease)
% Change

  Increase/
(Decrease)
% Change

 
 
  2002
  2001
  2002
  2001
 
 
  (Unaudited, amounts in thousands, except percentage data)

 
(Provision for) benefit from income
taxes
  $ (10,293 ) $ 2,064   (599 )% $ (13,431 ) $ 2,734   (591 )%
Effective tax rate     27 %   25 %       28 %   27 %    

        Our tax rates for all periods vary from the U.S. statutory tax rate as a result of our:

        Our effective tax rate for both the three and six months ended June 30, 2001 also varied from the U.S. statutory rate due to nondeductible goodwill amortization expense. We stopped recording nondeductible goodwill amortization expense upon the adoption of SFAS No. 142 in fiscal year 2002.

11.    Net Income (Loss) Per Share

        We calculate earnings per share for each series of stock using the two-class method. To calculate basic earnings per share for each series of stock, we divide the earnings allocated to each series of stock by the weighted average number of outstanding shares of that series of stock during the applicable period. When we calculate diluted earnings per share, we also include in the denominator all potentially dilutive securities outstanding during the applicable period. We allocate our earnings to each series of our common stock based on the earnings attributable to that series of stock. The earnings attributable to Genzyme General Stock, as defined in our charter, is equal to the net income or loss of Genzyme General determined in accordance with generally accepted accounting principles and as adjusted for tax benefits allocated to or from Genzyme General in accordance with our management

14



and accounting policies. Earnings attributable to Biosurgery Stock and Molecular Oncology Stock are defined similarly and, as such, are based on the net income or loss of the corresponding division as adjusted for the allocation of tax benefits.

        We calculate the income tax provision of each division as if such division were a separate taxpayer, which includes assessing realizability of deferred tax assets at the division level. Our management and accounting policies provide that if, as of the end of any fiscal quarter, a division cannot use any projected annual tax benefit attributable to it to offset or reduce its current or deferred income tax expense, we may allocate the tax benefit to other divisions in proportion to their taxable income without compensating payment or allocation to the division generating the benefit. The tax benefits allocated to Genzyme General, which are included in earnings attributable to Genzyme General Stock, were:

 
  Three Months Ended June 30,
  Six Months Ended June 30,
 
  2002
  2001
  2002
  2001
 
  (Unaudited, amounts in thousands)

Tax benefits allocated from:                        
  Genzyme Biosurgery   $ 2,994   $ 9,627   $ 7,293   $ 17,743
  Genzyme Molecular Oncology     2,235     3,854     4,365     6,680
   
 
 
 
    Total   $ 5,229   $ 13,481   $ 11,658   $ 24,423
   
 
 
 

        In future periods, Genzyme Biosurgery and Genzyme Molecular Oncology may recognize deferred tax assets in the calculation of their respective tax provisions determined on a separate division basis in accordance with generally accepted accounting principles. However, to the extent the benefit of those deferred tax assets has been previously allocated to Genzyme General in accordance with our management and accounting policies, the benefit will be reflected as a reduction of net income in determining net income (loss) attributable to Biosurgery Stock or Molecular Oncology Stock. As of June 30, 2002, the total tax benefits previously allocated to Genzyme General from Genzyme Biosurgery and Genzyme Molecular Oncology were (unaudited, amounts in thousands):

Genzyme Biosurgery   $ 200,605
Genzyme Molecular Oncology     40,793

15


        The following table sets forth our computation of basic and diluted net income per share allocated to Genzyme General Stock:

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
  2002
  2001
  2002
  2001
 
  (Unaudited, amounts in thousands,
except per share amounts)

Genzyme General net income before cumulative effect of change in accounting for derivative financial
instruments
  $ 44,411   $ 21,718   $ 68,720   $ 46,863
Cumulative effect of change in accounting for derivative financial instruments, net of tax                 4,167
   
 
 
 
Genzyme General division net income     44,411     21,718     68,720     51,030
Tax benefit allocated from Genzyme Biosurgery     2,994     9,627     7,293     17,743
Tax benefit allocated from Genzyme Molecular Oncology     2,235     3,854     4,365     6,680
   
 
 
 
Net income allocated to Genzyme General
Stock—basic and diluted
  $ 49,640   $ 35,199   $ 80,378   $ 75,453
   
 
 
 
Shares used in computing net income per common share—basic     213,917     196,423     213,624     194,086
  Effect of dilutive securities:                        
    Stock options (1)     5,708     9,195     6,710     9,123
    Warrants and stock purchase rights     9     67     15     81
   
 
 
 
      Dilutive potential common shares     5,717     9,262     6,725     9,204
   
 
 
 
Shares used in computing net income per share—diluted (1,2)     219,634     205,685     220,349     203,290
   
 
 
 

16


Genzyme General Stock (Continued):

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
  2002
  2001
  2002
  2001
 
  (Unaudited, amounts in thousands, except per share amounts)

Net income per share of Genzyme General Stock:                        
  Basic:                        
    Net income per share before cumulative effect of change in accounting for derivative financial instruments   $ 0.23   $ 0.18   $ 0.38   $ 0.37
    Per share cumulative effect of change in accounting for derivative financial instruments, net of tax (3)                 0.02
   
 
 
 
    Net income per share allocated to Genzyme General Stock   $ 0.23   $ 0.18   $ 0.38   $ 0.39
   
 
 
 
  Diluted (1,2):                        
    Net income per share before cumulative effect of change in accounting for derivative financial instruments   $ 0.23   $ 0.17   $ 0.36   $ 0.35
    Per share cumulative effect of change in accounting for derivative financial instruments, net of tax (3)                 0.02
   
 
 
 
    Net income per share allocated to Genzyme General Stock   $ 0.23   $ 0.17   $ 0.36   $ 0.37
   
 
 
 

(1)
We did not include the securities described in the following table in the computation of Genzyme General's diluted earnings per share for each period because these securities had an exercise price greater than the average market price of Genzyme General Stock:

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
  2002
  2001
  2002
  2001
 
  (Unaudited, amounts in thousands)

Shares of Genzyme General Stock issuable for options   8,062   1,726   7,579   1,091
   
 
 
 
(2)
We did not include the potentially dilutive effect of the assumed conversion of the $575.0 million in principal of 3% convertible subordinated debentures allocated to Genzyme General in the computation of Genzyme General's dilutive earnings per share for the three and six months ended June 30, 2002, because the conditions for conversion had not been met. The debentures are contingently convertible into approximately 8.2 million shares of Genzyme General Stock at an initial conversion price of $70.30 per share.

(3)
On January 1, 2001, we adopted SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138. In accordance with the transition provisions of SFAS No. 133, we recorded a cumulative effect adjustment of $4.2 million, net of tax, in our unaudited, consolidated statements of operations and in the unaudited, combined statements of operations of Genzyme General for the three months ended March 31, 2001, to record the fair value of warrants to purchase shares of GTC common stock held on January 1, 2001.

17


        For all periods presented, basic and diluted net loss per share of Biosurgery Stock are the same. We did not include the securities described in the following table in the computation of Biosurgery Stock diluted net loss per share for each period because these securities would have an anti-dilutive effect due to the net loss allocated to Biosurgery Stock:

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
  2002
  2001
  2002
  2001
 
  (Unaudited, amounts in thousands)

Shares of Biosurgery Stock issuable for options   6,798   6,852   6,746   5,644
Warrants to purchase shares of Biosurgery Stock   8   3   8   3
Shares issuable upon conversion of 6.9% convertible subordinated notes allocated to Genzyme Biosurgery   358   358   358   358
Biosurgery designated shares (1)   3,115   1,200   3,115   1,200
Biosurgery designated shares reserved for options (1)   80   97   80   97
   
 
 
 
Total shares excluded from the calculation of diluted net loss per share of Biosurgery Stock   10,359   8,510   10,307   7,302
   
 
 
 

(1)
Biosurgery designated shares are shares of Biosurgery Stock that are not issued and outstanding, but which our board of directors may issue, sell or distribute without allocating the proceeds to Genzyme Biosurgery. As of June 30, 2002, there were approximately 3.2 million Biosurgery designated shares.

        For all periods presented, basic and diluted net loss per share of Molecular Oncology Stock are the same. We did not include the securities described in the following table in the computation of Molecular Oncology Stock diluted net loss per share for each period because these securities would have an anti-dilutive effect due to the net loss allocated to Molecular Oncology Stock:

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
  2002
  2001
  2002
  2001
 
  (Unaudited, amounts in thousands)

Shares of Molecular Oncology Stock issuable for options   2,804   1,294   2,169   1,139
Molecular Oncology designated shares (1)   1,651   1,318   1,651   1,318
   
 
 
 
Total shares excluded from the calculation of diluted net loss per share of Molecular Oncology Stock   4,455   2,612   3,820   2,457
   
 
 
 

(1)
Molecular Oncology designated shares are shares of Molecular Oncology Stock that are not issued and outstanding, but which our board of directors may issue, sell, or distribute without allocating the proceeds to Genzyme Molecular Oncology. As of June 30, 2002, there were approximately 1.7 million Molecular Oncology designated shares.

18


12.    Segment Information

        In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," we present segment information in a manner consistent with the method we use to report this information to our management. Applying SFAS No. 131, we have four reportable segments:

19


        We have provided information concerning the operations of these reportable segments in the following table:

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
 
  2002
  2001
  2002
  2001
 
 
  (Unaudited, amounts in thousands)

 
Revenues:                          
  Genzyme General:                          
    Therapeutics (1)   $ 213,476   $ 188,543   $ 404,315   $ 365,330  
    Diagnostic Products (2)     20,530     17,790     40,368     34,214  
    Other (3)     32,303     31,352     63,091     60,464  
    Eliminations/Adjustments (4)     859     1,313     1,541     1,683  
   
 
 
 
 
      Total Genzyme General     267,168     238,998     509,315     461,691  
  Genzyme Biosurgery (5)     62,863     60,364     116,234     114,520  
  Genzyme Molecular Oncology     2,346     1,279     4,768     2,691  
  Eliminations/Adjustments (6)     (185 )       (185 )    
   
 
 
 
 
      Total   $ 332,192   $ 300,641   $ 630,132   $ 578,902  
   
 
 
 
 
Net income (loss):                          
  Genzyme General:                          
    Therapeutics (1)   $ 38,846   $ 37,692   $ 65,561   $ 72,031  
    Diagnostic Products (2)     681     (4,877 )   (764 )   (4,095 )
    Other (3)     1,024     2,888     3,215     4,872  
    Eliminations/Adjustments (4)     3,860     (13,985 )   708     (25,945 )
   
 
 
 
 
      Net income for Genzyme General before cumulative effect of change in accounting for derivative financial instruments     44,411     21,718     68,720     46,863  
      Cumulative effect of change in accounting for derivative financial instruments, net of tax (7)                 4,167  
   
 
 
 
 
    Net income for Genzyme General     44,411     21,718     68,720     51,030  
  Genzyme Biosurgery (5):                          
    Net loss for Genzyme Biosurgery before cumulative effect of change in accounting for goodwill     (17,522 )   (37,608 )   (37,904 )   (72,935 )
    Cumulative effect of change in accounting for goodwill (8)             (98,270 )    
   
 
 
 
 
    Net loss for Genzyme Biosurgery     (17,522 )   (37,608 )   (136,174 )   (72,935 )
  Genzyme Molecular Oncology     (6,237 )   (8,331 )   (12,268 )   (14,605 )
  Eliminations/Adjustments (9)     7,671     17,867     16,548     33,413  
   
 
 
 
 
      Total   $ 28,323   $ (6,354 ) $ (63,174 ) $ (3,097 )
   
 
 
 
 

(1)
In September 2001, we acquired Novazyme and allocated the acquisition to Genzyme General. The results of operations of Novazyme are included in our Therapeutics reporting segment beginning on September 26, 2001, the date of acquisition.

20


(2)
In June 2001, we acquired Wyntek and allocated the acquisition to Genzyme General. The results of operations of Wyntek are included in our Diagnostic Products reporting segment beginning on June 1, 2001, the date of acquisition.

(3)
Other includes amounts attributable to our genetic testing and pharmaceutical businesses, both of which operate within Genzyme General.

(4)
Eliminations/Adjustments consists primarily of amounts related to Genzyme General's research and development and administrative activities, including investment income and interest expense that we do not specifically allocate to a particular segment of Genzyme General.

(5)
In June 2001, we acquired Focal and allocated the acquisition to Genzyme Biosurgery. The results of operations of Focal are included in the results of Genzyme Biosurgery beginning on June 30, 2001, the date of acquisition.

(6)
Represents the elimination of interdivisional revenue.

(7)
In connection with the adoption of SFAS No. 133 on January 1, 2001, we recorded a cumulative effect adjustment of $4.2 million, net of tax, in our unaudited, consolidated statements of operations and the unaudited, combined statements of operations of Genzyme General for the three months ended March 31, 2001, to recognize the fair value of warrants to purchase shares of GTC common stock held on January 1, 2001 and allocated to Genzyme General.

(8)
In connection with the adoption of SFAS No. 142 on January 1, 2002, we tested the goodwill of our cardiothoracic reporting unit for impairment and, as a result, reduced goodwill by recording a cumulative effect impairment charge of $98.3 million in our unaudited, consolidated statements of operations and the unaudited, combined statements of operations of Genzyme Biosurgery for the three months ended March 31, 2002.

(9)
Includes income tax benefits that have not been recognized in the tax provisions of the divisions.

21


        We provide information concerning the assets of our reportable segments in the following table (amounts in thousands):

 
  June 30,
2002

  December 31,
2001

 
 
  (Unaudited)

   
 
Segment Assets:              
  Genzyme General (1):              
    Therapeutics   $ 1,605,879   $ 1,484,387  
    Diagnostic Products     104,476     105,354  
    Other (2)     99,054     89,526  
    Eliminations/Adjustments (3)     1,539,447     1,545,987  
   
 
 
      Total Genzyme General     3,348,856     3,225,254  
  Genzyme Biosurgery (4)     574,206     704,671  
  Genzyme Molecular Oncology     26,157     42,419  
  Eliminations/Adjustments (5)     (37,360 )   (36,599 )
   
 
 
      Total   $ 3,911,859   $ 3,935,745  
   
 
 

(1)
Segment assets for Genzyme General include primarily cash and investments, accounts receivable, inventory and certain fixed and intangible assets.

(2)
Other includes amounts attributable to our genetic testing and pharmaceutical businesses, both of which operate within Genzyme General.

(3)
Eliminations/Adjustments for Genzyme General consists primarily of cash, cash equivalents, short-and long-term investments, equity investments, net property, plant and equipment and deferred tax assets.

(4)
In connection with the adoption of SFAS No. 142 on January 1, 2002, we tested the goodwill of our cardiothoracic reporting unit for impairment and, as a result, reduced goodwill by recording a cumulative-effect impairment charge of $98.3 million in our unaudited, consolidated statements of operations and the unaudited, combined statements of operations of Genzyme Biosurgery for the three months ended March 31, 2002.

(5)
Eliminations/Adjustments represents the elimination of interdivisional balances.

13.    Subsequent Event

        In July 2002, together with BioMarin, we submitted the final portion of the "rolling" BLA for Aldurazyme enzyme to the FDA. As part of the BLA submission, we have formally requested Priority Review, which is an FDA procedure generally reserved for products that address an unmet medical need. We expect a decision regarding the FDA's acceptance of the Aldurazyme BLA and its Priority Review status by the end of September 2002. Pursuant to the terms of our joint venture agreement with BioMarin for the development and commercialization of Aldurazyme, we are obligated to pay BioMarin a $12.1 million milestone payment upon receipt of FDA approval of the Aldurazyme BLA. If the FDA accepts the BLA and grants Priority Review, we anticipate receiving a response from the FDA regarding the application to market Aldurazyme in the United States six months from the submission date of the completed application.

22



GENZYME GENERAL

A Division of Genzyme Corporation

Combined Statements of Operations

(Unaudited, amounts in thousands)

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
 
  2002
  2001
  2002
  2001
 
Revenues:                          
  Net product sales   $ 242,756   $ 219,040   $ 461,219   $ 421,246  
  Net service sales     22,420     18,305     43,595     36,537  
  Revenues from research and development contracts:                          
    Related parties     784     1,313     1,396     1,632  
    Other     1,208     340     3,105     2,276  
   
 
 
 
 
        Total revenues     267,168     238,998     509,315     461,691  
   
 
 
 
 
Operating costs and expenses:                          
  Cost of products sold     50,765     47,469     98,364     95,363  
  Cost of services sold     12,854     10,617     24,720     20,901  
  Selling, general and administrative     80,519     66,558     156,909     125,089  
  Research and development (including research and development related to contracts)     56,477     42,405     120,313     82,591  
  Amortization of intangibles     9,723     18,182     19,441     35,852  
  Purchase of in-process research and development         8,768         8,768  
   
 
 
 
 
        Total operating costs and expenses     210,338     193,999     419,747     368,564  
   
 
 
 
 
Operating income     56,830     44,999     89,568     93,127  
   
 
 
 
 
Other income (expenses):                          
  Equity in net loss of unconsolidated affiliates     (3,948 )   (11,016 )   (8,042 )   (19,495 )
  Gain (loss) on investments in equity securities     343     (1,532 )   509     (1,532 )
  Minority interest in net loss of subsidiary         725         1,999  
  Other     1,749     (171 )   852     (3,888 )
  Investment income     12,079     11,798     25,031     21,011  
  Interest expense     (4,678 )   (7,282 )   (9,219 )   (13,680 )
   
 
 
 
 
        Total other income (expenses)     5,545     (7,478 )   9,131     (15,585 )
   
 
 
 
 
Income before income taxes     62,375     37,521     98,699     77,542  
Provision for income taxes     (17,964 )   (15,803 )   (29,979 )   (30,679 )
   
 
 
 
 
Division net income before cumulative effect of change in accounting for derivative financial instruments     44,411     21,718     68,720     46,863  
Cumulative effect of change in accounting for derivative financial instruments, net of tax                 4,167  
   
 
 
 
 
Division net income   $ 44,411   $ 21,718   $ 68,720   $ 51,030  
   
 
 
 
 
Comprehensive income (loss), net of tax:                          
  Division net income   $ 44,411   $ 21,718   $ 68,720   $ 51,030  
   
 
 
 
 
  Other comprehensive income (loss), net of tax:                          
    Foreign currency translation adjustments     47,503     (4,227 )   42,140     (17,647 )
    Unrealized gain (loss) on interest rate swap contracts, net of tax     (541 )   218     (163 )   (289 )
    Unrealized gains (losses) on securities:                          
      Unrealized gains (losses) arising during the period     (2,923 )   21,654     (26,788 )   (1,084 )
      Reclassification adjustment for losses included in division net income     81     973     81     973  
   
 
 
 
 
    Unrealized gains (losses) on securities, net     (2,842 )   22,627     (26,707 )   (111 )
   
 
 
 
 
  Other comprehensive income (loss)     44,120     18,618     15,270     (18,047 )
   
 
 
 
 
Comprehensive income   $ 88,531   $ 40,336   $ 83,990   $ 32,983  
   
 
 
 
 

The accompanying notes are an integral part of these unaudited, combined financial statements.

23



GENZYME GENERAL

A Division of Genzyme Corporation

Combined Balance Sheets

(Amounts in thousands)

 
  June 30,
2002

  December 31,
2001

 
  (Unaudited)

   
ASSETS            
Current assets:            
  Cash and cash equivalents   $ 256,432   $ 167,253
  Short-term investments     75,883     66,481
  Accounts receivable, net     258,975     220,527
  Inventories     149,369     127,864
  Prepaid expenses and other current assets     40,676     31,972
  Due from Genzyme Biosurgery     31,460     29,513
  Due from Genzyme Molecular Oncology     5,900     7,086
  Deferred tax assets—current     70,277     70,196
   
 
    Total current assets     888,972     720,892
Property, plant and equipment, net     663,220     581,401
Long-term investments     748,017     807,766
Notes receivable—related parties     8,818    
Goodwill, net     492,396     487,826
Other intangible assets, net     470,852     493,642
Investments in equity securities     53,127     88,686
Other noncurrent assets     23,454     45,041
   
 
    Total assets   $ 3,348,856   $ 3,225,254
   
 

LIABILITIES AND DIVISION EQUITY

 

 

 

 

 

 
Current liabilities:            
  Accounts payable   $ 26,927   $ 40,025
  Accrued expenses     121,648     119,511
  Income taxes payable     90,970     74,631
  Deferred revenue     5,056     1,693
  Current portion of long-term debt and capital lease obligations     6,088     6,841
   
 
    Total current liabilities     250,689     242,701
Long-term debt and capital lease obligations     25,044     25,085
Convertible notes and debentures     575,000     575,000
Deferred tax liabilities     48,523     80,696
Other noncurrent liabilities     17,748     21,420
   
 
    Total liabilities     917,004     944,902
   
 
Division equity     2,431,852     2,280,352
   
 
    Total liabilities and division equity   $ 3,348,856   $ 3,225,254
   
 

The accompanying notes are an integral part of these unaudited, combined financial statements.

24



GENZYME GENERAL

A Division of Genzyme Corporation

Combined Statements of Cash Flows

(Unaudited, amounts in thousands)

 
  Six Months Ended
June 30,

 
 
  2002
  2001
 
Cash Flows from Operating Activities:              
  Division net income   $ 68,720   $ 51,030  
  Reconciliation of division net income to net cash provided by operating activities:              
    Depreciation and amortization     45,205     50,794  
    Non-cash compensation expense     751     4,972  
    Provision for bad debts     3,424     1,597  
    Charge for in-process research and development         8,768  
    Equity in net loss of unconsolidated affiliates     8,042     19,495  
    (Gain) loss on investments in equity securities     (509 )   1,532  
    Minority interest in net loss of subsidiary         (1,999 )
    Deferred income tax benefit     (7,488 )   (14,811 )
    Other     3,305     2,924  
    Cumulative effect of change in accounting for derivative financial instruments         (4,167 )
    Increase (decrease) in cash from working capital changes:              
      Accounts receivable     (30,303 )   (31,613 )
      Inventories     (7,335 )   1,820  
      Prepaid expenses and other current assets     (5,919 )   1,174  
      Due from Genzyme Biosurgery     (1,947 )   (20,035 )
      Due from Genzyme Molecular Oncology     1,186     (1,995 )
      Accounts payable, accrued expenses and deferred revenue     (6,642 )   (1,293 )
      Income taxes payable and tax benefits from stock options     26,880     35,261  
   
 
 
        Net cash provided by operating activities     97,370     103,454  
   
 
 
Cash Flows from Investing Activities:              
  Purchases of investments     (239,358 )   (359,534 )
  Sales and maturities of investments     288,872     202,972  
  Purchases of equity securities     (2,210 )   (3,318 )
  Proceeds from sales of equity securities     4,773     36  
  Purchase of property, plant and equipment     (94,268 )   (69,584 )
  Acquisitions, net of cash acquired         (60,026 )
  Investments in unconsolidated affiliates     (14,113 )   (22,744 )
  Note received from a collaborator     (4,045 )    
  Other     1,263     1,408  
   
 
 
        Net cash used in investing activities     (59,086 )   (310,790 )
   
 
 
Cash Flows from Financing Activities:              
  Allocated proceeds from issuance of Genzyme General Stock     20,801     57,934  
  Allocated proceeds from issuance of debt         562,062  
  Payments of debt and capital lease obligations     (775 )   (151,083 )
  Receipt of NeuroCell refund from Genzyme Biosurgery     27,063      
  Net cash allocated from Genzyme Biosurgery         7  
  Bank overdraft     4,469     2,660  
  Other     (3,791 )   2,617  
   
 
 
        Net cash provided by financing activities     47,767     474,197  
   
 
 
Effect of exchange rate changes on cash     3,128     (2,560 )
   
 
 
Increase in cash and cash equivalents     89,179     264,301  
Cash and cash equivalents at beginning of period     167,253     135,841  
   
 
 
Cash and cash equivalents at end of period   $ 256,432   $ 400,142  
   
 
 

The accompanying notes are an integral part of these unaudited, combined financial statements.

25



GENZYME GENERAL

A Division of Genzyme Corporation

Notes To Unaudited, Combined Financial Statements

1.    Basis of Presentation

        The unaudited, combined financial statements of Genzyme General for each period include the statements of operations, balance sheets and statements of cash flows of the businesses we allocate to Genzyme General. We also allocate a portion of our corporate operations to Genzyme General using methods described in our allocation policy included in Note A., "Summary of Significant Accounting Policies—Allocation Policy," to Genzyme General's combined financial statements included in Exhibit 13.2 to our 2001 Form 10-K. These unaudited, combined financial statements are prepared using amounts included in our unaudited, consolidated financial statements included in this Form 10-Q. We prepared these unaudited, combined financial statements for Genzyme General following the requirements of the SEC for interim reporting. As permitted under these rules, we condense or omit certain footnotes and other financial information that are normally required by generally accepted accounting principles. We have reclassified certain 2001 data to conform to our 2002 presentation.

        These financial statements include all normal and recurring adjustments that we consider necessary for the fair presentation of Genzyme General's financial position and operating results. Since these are interim financial statements, you should also read the financial statements and notes for Genzyme General included in our 2001 Form 10-K. Revenues, expenses, assets and liabilities can vary from quarter to quarter. Therefore, the results and trends in these interim financial statements may not be indicative of results for future periods.

2.    New Accounting Pronouncements

        We have included the impact that recently issued accounting standards will have on our financial statements in Note 2, "New Accounting Pronouncements," to our unaudited, consolidated financial statements, which we incorporate by reference into this note.

3.    Acquisitions

        In September 2001, we acquired Novazyme, a privately-held developer of biotherapies for the treatment of LSDs, and in June 2001, we acquired Wyntek, a privately-held provider of high quality point of care rapid diagnostic tests for pregnancy and infectious disease. We accounted for the acquisitions as purchases and allocated both to Genzyme General.

        The following unaudited pro forma financial summary is presented as if the acquisitions of Novazyme and Wyntek were completed as of January 1, 2001. The unaudited pro forma combined results are not necessarily indicative of the actual results that would have occurred had the acquisitions been consummated on those dates, or of the future operations of the combined entities. Material nonrecurring charges related to these acquisitions, such as acquired IPR&D charges of $86.8 million resulting from the acquisition of Novazyme and $8.8 million resulting from the acquisition of Wyntek, are not reflected in the following pro forma financial summary.

26



 
  Three Months Ended
June 30, 2001

  Six Months Ended
June 30, 2001

 
  (Amounts in thousands)

Total revenues   $ 241,555   $ 470,103
Income before extraordinary items and cumulative effect of change in accounting for derivative financial instruments     17,125     38,601
Division net income     17,125     42,768

        The staff of the FTC is investigating our acquisition of Novazyme. The FTC is one of the agencies responsible for enforcing federal antitrust laws, and, in this investigation, it is evaluating whether there are anti-competitive aspects of the Novazyme transaction that the government should seek to negate. While we do not believe that the acquisition should be deemed to contravene antitrust laws, we have been cooperating in the FTC investigation. At this stage, we cannot predict with precision the likely outcome of the investigation or how that outcome will impact our business. As with any litigation or investigation, there will be costs associated with responding to the investigation, both in terms of management time and out-of-pocket expenses.

4.    Inventories (amounts in thousands)

 
  June 30,
2002

  December 31,
2001

 
  (Unaudited)

   
Raw materials   $ 30,726   $ 39,285
Work-in-process     73,100     53,408
Finished products     45,543     35,171
   
 
  Total   $ 149,369   $ 127,864
   
 

5.    Goodwill and Other Intangible Assets

        In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires that ratable amortization of goodwill and certain intangible assets be replaced with periodic tests of the goodwill's impairment and that other intangible assets be amortized over their useful lives unless these lives are determined to be indefinite. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001, and thus has been adopted by Genzyme General effective at the beginning of fiscal year 2002.

        Effective January 1, 2002, in accordance with the provisions of SFAS No. 142, Genzyme General ceased amortizing goodwill. At January 1, 2002, gross goodwill allocated to Genzyme General totaled $561.0 million, including $2.4 million of acquired workforce intangible assets previously classified as other intangible assets, net of related deferred tax liabilities, of which $1.6 million was allocated to

27


Genzyme General's Therapeutics segment and $0.8 million was allocated to its Diagnostic Products segment.

        We have completed the transitional impairment test for the $492.4 million of net goodwill related to Genzyme General's reporting units in the six months ended June 30, 2002, as provided by SFAS No. 142, and determined that no impairment charges were required. We are required to perform impairment tests under SFAS No. 142 annually and whenever events or changes in circumstances suggest that the carrying value of an asset may not be recoverable.

        The following table contains the changes in net goodwill attributable to Genzyme General's segments during the six months ended June 30, 2002 (amounts in thousands):

 
   
  (Unaudited)
 
 
  As of
December 31,
2001

  Adjustments
  As of
June 30,
2002

 
Goodwill, net:                    
  Therapeutics (1)   $ 469,721   $ 4,373   $ 474,094  
  Diagnostic Products (2)     32,427     786     33,213  
  Other     56,462     103     56,565  
   
 
 
 
    Total     558,610     5,262     563,872  
Accumulated amortization     (70,784 )   (692 )   (71,476 )
   
 
 
 
Goodwill, net   $ 487,826   $ 4,570   $ 492,396  
   
 
 
 

(1)
Adjustments for the Therapeutics segment include:

$1.6 million of workforce intangible assets previously classified as other intangible assets, net of related deferred tax benefits, resulting from our acquisition of GelTex as required by SFAS No. 142;

$1.9 million to adjust goodwill resulting from a reclassification related to our acquisition of GelTex; and

$0.8 million to adjust goodwill resulting from increased integration and exit activity costs related to our acquisition of Novazyme.
(2)
Adjustments for the Diagnostic Products segment represent workforce intangible assets previously classified as other intangible assets, net of related deferred tax benefits, resulting from our acquisition of Wyntek as required by SFAS No. 142.

28


        The following table contains information on other intangible assets allocated to Genzyme General for the periods presented (amounts in thousands):

 
  As of June 30, 2002
(Unaudited)

  As of December 31, 2001
 
  Gross
Other
Intangible
Assets

  Accumulated
Amortization

  Net
Other
Intangible
Assets

  Gross
Other
Intangible
Assets

  Accumulated
Amortization

  Net
Other
Intangible
Assets

Technology   $ 378,394   $ (42,211 ) $ 336,183   $ 378,364   $ (28,130 ) $ 350,234
Patents     117,548     (12,951 )   104,597     117,545     (9,035 )   108,510
Trademarks     6,526     (673 )   5,853     6,526     (456 )   6,070
License fees     25,075     (6,165 )   18,910     25,075     (5,326 )   19,749
Customer lists     8,324     (3,615 )   4,709     8,324     (3,199 )   5,125
Other     10,045     (9,445 )   600     13,497     (9,543 )   3,954
   
 
 
 
 
 
  Total   $ 545,912   $ (75,060 ) $ 470,852   $ 549,331   $ (55,689 ) $ 493,642
   
 
 
 
 
 

        All of Genzyme General's other intangible assets are amortized over their estimated useful lives. Total amortization expense for Genzyme General's other intangible assets was:

Amortization expense for each quarter presented includes $0.3 million related to the amortization of a non-compete agreement which is charged to cost of products sold. Amortization expense for both the three and six months ended June 30, 2001 excludes the expense related to the amortization of goodwill.

        The estimated future amortization expense for other intangible assets allocated to Genzyme General as of June 30, 2002 for the remainder of fiscal year 2002 and the five succeeding fiscal years is as follows (unaudited, amounts in thousands):

Year ended December 31,

  Estimated
Amortization
Expense

2002 (remaining six months)   $ 20,036
2003     38,862
2004     38,816
2005     38,751
2006     36,387
2007     36,387

29


        The following table presents the impact SFAS No. 142 would have had on Genzyme General's amortization of intangibles expense and division net income had the standard been in effect for the three and six months ended June 30, 2001 (unaudited, amounts in thousands):

 
  Three Months Ended June 30, 2001
  Six Months Ended June 30, 2001
 
  As
Reported

  Goodwill
Amortization
Adjustment

  As
Adjusted

  As
Reported

  Goodwill
Amortization
Adjustment

  As
Adjusted

Amortization of intangibles   $ 18,182   $ (9,103 ) $ 9,079   $ 35,852   $ (18,012 ) $ 17,840
Genzyme General's net income before cumulative effect of change in accounting for derivative financial instruments, net of tax     21,718     9,103     30,821     46,863     18,012     64,875
Division net income     21,718     9,103     30,821     51,030     18,012     69,042

6.    Note Receivable from Dyax Corporation

        In May 2002, we restructured our collaboration agreement with Dyax for the development of the kallikrein inhibitor DX-88. As a result, our option to acquire a 50% interest in DX-88 for hereditary angioedema, or HAE, and other potential indications will now be exercisable following the completion of the ongoing phase 2 clinical trial of DX-88 for the treatment of HAE, or the expenditure by Dyax of at least $8.0 million in development and commercialization costs. As of June 30, 2002, Dyax has incurred $8.3 million of development costs under the collaboration agreement. The restructured agreement also provides Dyax with an option to acquire our interest in the potential application of DX-88 for the reduction of blood loss and other effects of systemic inflammatory responses in surgery. This option expires in March 2003.

        Under the revised collaboration agreement, the line of credit we extended to Dyax was increased from $3.0 million to $7.0 million. In connection with the increase, Dyax issued a senior secured promissory note in the principal amount of $7.0 million to us under which it can request periodic advances of not less than $250,000 in principal, subject to certain conditions. Advances under this note bear interest at the prime rate plus 2% and are due, together with any accrued but unpaid interest, in May 2005. In June 2002, Dyax drew $4.0 million under the note, which we recorded as a note receivable-related party in our unaudited, consolidated balance sheet and the unaudited, combined balance sheet of Genzyme General. Dyax is considered a related party because the chairman and chief executive officer of Dyax is a member of our board of directors. Pursuant to the terms of the note, we are not obligated to make advances in excess of $1.5 million during any subsequent calendar quarter.

7.    Sale of GTC Common Stock

        On April 4, 2002, GTC purchased approximately 2.8 million shares of GTC common stock held by us and allocated to Genzyme General for an aggregate consideration of approximately $9.6 million. We received approximately $4.8 million in cash and a promissory note for the remaining amount of approximately $4.8 million. The shares of GTC common stock were valued at $3.385 per share in this

30



transaction, using the simple average of the high and low transaction prices quoted on the Nasdaq National Market on April 1, 2002. We have committed to a 24-month lock-up provision on the remaining 4.9 million shares of GTC common stock held by us and allocated to Genzyme General, which is approximately 18% of the shares of GTC common stock outstanding as of June 30, 2002. We accounted for our investment in GTC under the equity method of accounting until May 2002, at which point we ceased to have significant influence over GTC. We began accounting for our investment in GTC under the cost method of accounting in June 2002.

        Because of the 24-month lock-up provision, the remaining 4.9 million shares of GTC common stock held by us do not qualify as marketable securities under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." As a result, Genzyme General carries the investment on its combined balance sheet at cost, subject to review for impairment. Based on the market price of GTC common stock at June 30, 2002, our remaining investment would have an unrealized loss of $8.3 million. Because we have assessed the decline in the market price of GTC common stock to be temporary, we have not recorded an associated impairment charge.

8.    NeuroCell Joint Venture Refund

        In February 2002, Genzyme Biosurgery paid $27.1 million to Genzyme General, representing $20.0 million of the $25.0 million Genzyme Biosurgery received from Genzyme General in connection with the transfer to Genzyme General of Genzyme Biosurgery's interest in Diacrin/Genzyme LLC, plus accrued interest of 13.5% per annum. The refund arose because Diacrin/Genzyme LLC, our joint venture with Diacrin, Inc., failed to initiate a phase 3 trial of NeuroCell-PD for Parkinson's disease by June 30, 2001.

9.    Derivative Financial Instruments

        On January 1, 2001, we adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that we recognize all derivative instruments as either assets or liabilities in our combined balance sheet and measure those instruments at fair value. Subsequent changes in fair value are reflected in current earnings or other comprehensive income, depending on whether a derivative instrument is designated as part of a hedge relationship and, if it is, the type of hedge relationship.

        In accordance with the transition provisions of SFAS No. 133, Genzyme General recorded a cumulative effect adjustment of $4.2 million, net of tax, in its unaudited, combined statement of operations for the three months ended March 31, 2001 to recognize the fair value of warrants to purchase shares of GTC common stock held on January 1, 2001 and allocated to Genzyme General. Transition adjustments pertaining to interest rate swaps designated as cash-flow hedges and foreign currency forward contracts allocated to Genzyme General were not significant. For the three months ended June 30, 2002, Genzyme General recorded a charge of $0.9 million in other expense in its unaudited, combined statements of operations to reflect the change in value of its warrants to purchase shares of GTC common stock from April 1, 2002 to June 30, 2002 as compared to $0.2 million for the same period of 2001. For the six months ended June 30, 2002, Genzyme General recorded a charge of

31



$2.1 million in other expense in its unaudited, combined statements of operations to reflect the change in value of its warrants to purchase shares of GTC common stock from January 1, 2002 to June 30, 2002 as compared to $3.8 million for the same period a year ago. Genzyme General also recorded a charge of $1.1 million, ($1.7 million pre-tax) in division equity in its unaudited, combined balance sheets to reflect the change in value of its interest rate swaps during the six month period ended June 30, 2002. At June 30, 2002, Genzyme General's interest rate swaps had a fair market value of $(3.1) million.

10.    Tax Provision

 
  Three Months Ended
June 30,

   
  Six Months Ended
June 30,

   
 
 
  Increase/
(Decrease)
% Change

  Increase/
(Decrease)
% Change

 
 
  2002
  2001
  2002
  2001
 
 
  (Unaudited, amounts in thousands, except percentage data)

 
Provision for income taxes   $ (17,964 ) $ (15,803 ) 14 % $ (29,979 ) $ (30,679 ) (2 )%
Effective tax rate     29 %   42 %       30 %   40 %    

        Genzyme General's tax rates for all periods vary from the U.S. statutory tax rate as a result of its:

        Genzyme General's effective tax rate for both the three and six months ended June 30, 2001 also varied from the U.S. statutory rate due to nondeductible goodwill amortization expense. Genzyme General stopped recording nondeductible goodwill amortization expense upon the adoption of SFAS No. 142 in fiscal year 2002.

11.    Segment Information

        In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," we present segment information for Genzyme General in a manner consistent with the method we use to report this information to our management. Applying SFAS No. 131, Genzyme General has two reportable segments:

32


        We have provided information concerning the operations in these reportable segments in the following table:

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
 
  2002
  2001
  2002
  2001
 
 
  (Unaudited, amounts in thousands)

 
Revenues:                          
  Therapeutics (1)   $ 213,476   $ 188,543   $ 404,315   $ 365,330  
  Diagnostic Products (2)     20,530     17,790     40,368     34,214  
  Other (3)     32,303     31,352     63,091     60,464  
  Eliminations/Adjustments (4)     859     1,313     1,541     1,683  
   
 
 
 
 
    Total   $ 267,168   $ 238,998   $ 509,315   $ 461,691  
   
 
 
 
 
Division net income:                          
  Therapeutics (1)   $ 38,846   $ 37,692   $ 65,561   $ 72,031  
  Diagnostic Products (2)     681     (4,877 )   (764 )   (4,095 )
  Other (3)     1,024     2,888     3,215     4,872  
  Eliminations/Adjustments (4)     3,860     (13,985 )   708     (25,945 )
   
 
 
 
 
  Division net income before cumulative effect of change in accounting for derivative financial instruments     44,411     21,718     68,720     46,863  
  Cumulative effect of change in accounting for derivative financial instruments, net of tax (5)                 4,167  
   
 
 
 
 
    Division net income   $ 44,411   $ 21,718   $ 68,720   $ 51,030  
   
 
 
 
 

(1)
In September 2001, we acquired Novazyme and allocated the acquisition to Genzyme General. The results of operations of Novazyme are included in our Therapeutics reporting segment beginning on September 26, 2001, the date of acquisition.

(2)
In June 2001, we acquired Wyntek and allocated the acquisition to Genzyme General. The results of operations of Wyntek are included in our Diagnostic Products reporting segment beginning on June 1, 2001, the date of acquisition.

(3)
Other includes amounts attributable to our genetic testing and pharmaceutical businesses, both of which operate within Genzyme General.

(4)
Eliminations/Adjustments consists primarily of amounts related to Genzyme General's research and development and administrative activities, including investment income and interest expense, that we do not specifically allocate to a particular segment of Genzyme General.

(5)
In connection with the adoption of SFAS No. 133, on January 1, 2001, Genzyme General recorded a cumulative effect adjustment of $4.2 million, net of tax, in its unaudited, combined statement of operations for the three months ended March 31, 2001, to recognize the fair value of warrants to purchase shares of GTC common stock held on January 1, 2001 and allocated to Genzyme General.

33


        We provide information concerning the assets of Genzyme General's reportable segments in the following table (amounts in thousands):

 
  June 30,
2002

  December 31,
2001

 
  (Unaudited)

   
Segment Assets (1)            
  Therapeutics   $ 1,605,879   $ 1,484,387
  Diagnostic Products     104,476     105,354
  Other (2)     99,054     89,526
  Eliminations/Adjustments (3)     1,539,447     1,545,987
   
 
    Total   $ 3,348,856   $ 3,225,254
   
 

(1)
Segment assets for Genzyme General include primarily cash and investments, accounts receivable, inventory and certain fixed and intangible assets.

(2)
Other includes amounts attributable to our genetic testing and pharmaceutical businesses, both of which operate within Genzyme General.

(3)
Eliminations/Adjustments consists primarily of cash, cash equivalents, short- and long-term investments, equity investments, net property, plant and equipment and deferred tax assets.

12.    Subsequent Event

        In July 2002, together with BioMarin, we submitted the final portion of the "rolling" BLA for Aldurazyme enzyme to the FDA. As part of the BLA submission, we have formally requested Priority Review, which is an FDA procedure generally reserved for products that address an unmet medical need. We expect a decision regarding the FDA's acceptance of the Aldurazyme BLA and its Priority Review status by the end of September 2002. Pursuant to the terms of our joint venture agreement with BioMarin for the development and commercialization of Aldurazyme, we are obligated to pay BioMarin a $12.1 million milestone payment upon receipt of FDA approval of the Aldurazyme BLA. If the FDA accepts the BLA and grants Priority Review, we anticipate receiving a response from the FDA regarding the application to market Aldurazyme in the United States six months from the submission date of the completed application.

34



GENZYME BIOSURGERY

A Division of Genzyme Corporation

Combined Statements of Operations

(Unaudited, amounts in thousands)

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
 
  2002
  2001
  2002
  2001
 
Revenues:                          
  Net product sales   $ 57,224   $ 54,433   $ 105,387   $ 103,057  
  Net service sales     5,604     5,930     10,812     11,458  
  Revenues from research and development contracts     35     1     35     5  
   
 
 
 
 
      Total revenues     62,863     60,364     116,234     114,520  
   
 
 
 
 
Operating costs and expenses:                          
  Cost of products sold     25,757     32,131     50,312     60,769  
  Cost of services sold     3,585     2,811     6,618     5,948  
  Selling, general and administrative     28,239     35,297     52,738     65,989  
  Research and development     12,984     11,956     24,856     22,675  
  Amortization of intangibles     7,863     11,992     15,742     23,313  
   
 
 
 
 
      Total operating costs and expenses     78,428     94,187     150,266     178,694  
   
 
 
 
 
Operating loss     (15,565 )   (33,823 )   (34,032 )   (64,174 )
   
 
 
 
 
Other income (expenses):                          
  Equity in net loss of unconsolidated affiliate         (780 )       (1,316 )
  Other     78     38     111     45  
  Investment income     326     427     623     939  
  Interest expense     (2,361 )   (3,470 )   (4,606 )   (8,429 )
   
 
 
 
 
      Total other income (expenses)     (1,957 )   (3,785 )   (3,872 )   (8,761 )
   
 
 
 
 
Division net loss before cumulative effect of change in accounting for goodwill     (17,522 )   (37,608 )   (37,904 )   (72,935 )
Cumulative effect of change in accounting for goodwill             (98,270 )    
   
 
 
 
 
Division net loss   $ (17,522 ) $ (37,608 ) $ (136,174 ) $ (72,935 )
   
 
 
 
 
Comprehensive income (loss), net of tax:                          
  Division net loss   $ (17,522 ) $ (37,608 ) $ (136,174 ) $ (72,935 )
  Other comprehensive income (loss), net of tax:                          
    Foreign currency translation adjustments     498     504     (3,340 )   (197 )
    Unrealized gains on securities, net                 97  
   
 
 
 
 
  Other comprehensive income (loss)     498     504     (3,340 )   (100 )
   
 
 
 
 
Comprehensive loss   $ (17,024 ) $ (37,104 ) $ (139,514 ) $ (73,035 )
   
 
 
 
 

The accompanying notes are an integral part of these unaudited, combined financial statements.

35



GENZYME BIOSURGERY

A Division of Genzyme Corporation

Combined Balance Sheets

(Amounts in thousands)

 
  June 30,
2002

  December 31,
2001

 
  (Unaudited)

   
ASSETS            

Current assets:

 

 

 

 

 

 
  Cash and cash equivalents   $ 27,168   $ 38,623
  Accounts receivable, net     36,997     38,293
  Inventories     41,982     43,545
  Prepaid expenses and other current assets     2,629     2,734
   
 
    Total current assets     108,776     123,195
Property, plant and equipment, net     52,343     53,794
Goodwill, net     112,708     209,596
Other intangible assets, net     298,119     315,582
Other noncurrent assets     2,260     2,504
   
 
    Total assets   $ 574,206   $ 704,671
   
 

LIABILITIES AND DIVISION EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 
  Accounts payable   $ 8,722   $ 7,835
  Accrued expenses     26,477     25,142
  Due to Genzyme General     31,460     29,513
  Current portion of long-term debt and capital lease obligations     10,810     905
   
 
    Total current liabilities     77,469     63,395
Long-term debt and capital lease obligations     269,337     234,724
Convertible notes         10,000
Other noncurrent liabilities     2,543     2,098
   
 
    Total liabilities     349,349     310,217
   
 
Division equity     224,857     394,454
   
 
    Total liabilities and division equity   $ 574,206   $ 704,671
   
 

The accompanying notes are an integral part of these unaudited, combined financial statements.

36



GENZYME BIOSURGERY

A Division of Genzyme Corporation

Combined Statements of Cash Flows

(Unaudited, amounts in thousands)

 
  Six Months Ended
June 30,

 
 
  2002
  2001
 
Cash Flows from Operating Activities:              
  Division net loss   $ (136,174 ) $ (72,935 )
  Reconciliation of division net loss to net cash used in operating activities:              
    Depreciation and amortization     19,061     27,169  
    Provision for bad debts     371     228  
    Equity in net loss of unconsolidated affiliate         1,316  
    Other     (109 )   (76 )
    Cumulative effect of change in accounting for goodwill     98,270      
    Increase (decrease) in cash from working capital changes:              
      Accounts receivable     1,831     (8,029 )
      Inventories     2,320     9,432  
      Prepaid expenses and other current assets     165     261  
      Accounts payable and accrued expenses     (5,711 )   (3,909 )
      Due to Genzyme General     1,947     20,035  
   
 
 
        Net cash used in operating activities     (18,029 )   (26,508 )
   
 
 
Cash Flows from Investing Activities:              
  Purchase of equity securities         (5,000 )
  Purchases of property, plant and equipment     (1,931 )   (2,483 )
  Purchase of technology rights     (255 )    
  Acquisitions, net of acquired cash         (23,394 )
  Other     253     (659 )
   
 
 
        Net cash used in investing activities     (1,933 )   (31,536 )
   
 
 
Cash Flows from Financing Activities:              
  Allocated proceeds from issuance of Biosurgery Stock     432     756  
  Proceeds from draw on credit facility     35,000      
  Payments of debt and capital lease obligations     (483 )   (220 )
  Payment of NeuroCell refund to Genzyme General     (27,063 )    
  Net cash allocated to Genzyme General         (7 )
  Bank overdraft     (312 )   (653 )
  Payments received for notes receivable from stockholders     181     3,204  
  Other     2,312     (214 )
   
 
 
        Net cash provided by financing activities     10,067     2,866  
   
 
 
Effect of exchange rate changes on cash     (1,560 )   4  
   
 
 
Decrease in cash and cash equivalents     (11,455 )   (55,174 )
Cash and cash equivalents at beginning of period     38,623     78,163  
   
 
 
Cash and cash equivalents at end of period   $ 27,168   $ 22,989  
   
 
 

The accompanying notes are an integral part of these unaudited, combined financial statements.

37



GENZYME BIOSURGERY

A Division of Genzyme Corporation

Notes to Unaudited, Combined Financial Statements

1.    Basis of Presentation

        The unaudited, combined financial statements of Genzyme Biosurgery for each period include the statements of operations, balance sheets and statements of cash flows of the businesses we allocate to Genzyme Biosurgery. We also allocate a portion of our corporate operations to Genzyme Biosurgery using methods described in our allocation policy included in Note A., "Summary of Significant Accounting Policies—Allocation Policy," to Genzyme Biosurgery's combined financial statements included in Exhibit 13.3 to our 2001 Form 10-K. These unaudited, combined financial statements are prepared using amounts included in our unaudited, consolidated financial statements included in this Form 10-Q. We prepared these unaudited, combined financial statements for Genzyme Biosurgery following the requirements of the SEC for interim reporting. As permitted under these rules, we condense or omit certain footnotes and other financial information that are normally required by generally accepted accounting principles.

        These financial statements include all normal and recurring adjustments that we consider necessary for the fair presentation of Genzyme Biosurgery's financial position and operating results. Since these are interim financial statements, you should also read the financial statements and notes for Genzyme Biosurgery included in our 2001 Form 10-K. Revenues, expenses, assets and liabilities can vary from quarter to quarter. Therefore, the results and trends in these interim financial statements may not be indicative of results for future periods.

2.    New Accounting Pronouncements

        We have included the impact that recently issued accounting standards will have on our financial statements in Note 2, "New Accounting Pronouncements," to our unaudited, consolidated financial statements, which we incorporate by reference into this note.

3.    Acquisitions

        On June 30, 2001, we acquired the remaining 78% of the outstanding shares of Focal common stock not previously acquired. We accounted for the acquisition as a purchase and allocated it to Genzyme Biosurgery.

        The following unaudited pro forma financial summary is presented as if the acquisition of Focal was completed as of January 1, 2001. The unaudited pro forma combined results are not necessarily indicative of the actual results that would have occurred had the acquisition been consummated on that date, or of the future operations of the combined entities.

 
  Three Months Ended
June 30, 2001

  Six Months Ended
June 30, 2001

 
 
  (Amounts in thousands)

 
Total revenues   $ 60,370   $ 114,667  
Division net loss     (43,145 )   (83,519 )

38


4.    Inventories (amounts in thousands)

 
  June 30,
2002

  December 31,
2001

 
  (Unaudited)

   
Raw materials   $ 12,041   $ 13,301
Work-in-process     11,212     11,517
Finished products     18,729     18,727
   
 
  Total   $ 41,982   $ 43,545
   
 

5.    Goodwill and Other Intangible Assets

        In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires that ratable amortization of goodwill and certain intangible assets be replaced with periodic tests of the goodwill's impairment and that other intangible assets be amortized over their useful lives unless these lives are determined to be indefinite. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001, and thus has been adopted by us effective at the beginning of fiscal year 2002.

        Effective January 1, 2002, in accordance with the provisions of SFAS No. 142, Genzyme Biosurgery ceased amortizing goodwill. At January 1, 2002, gross goodwill allocated to Genzyme Biosurgery totaled $238.5 million, including $1.8 million of acquired workforce intangible assets previously classified as purchased intangible assets, net of related deferred tax liabilities.

        In November 2001, we sold the Snowden-Pencer line of surgical instruments, a component of Genzyme Biosurgery's Biosurgical Specialties segment, and recorded a loss of $25.0 million, which we allocated to Genzyme Biosurgery. Our subsequent test of the remaining long-lived assets related to the remaining products of our surgical instruments and medical devices business line, which make up the majority of our cardiothoracic reporting unit, under SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of," did not indicate an impairment based on the undiscounted cash flows of the business. However, the impairment analysis indicated that the goodwill allocated to the cardiothoracic reporting unit would be impaired if the analysis was done using discounted cash flows, as required by SFAS No. 142. Therefore, in the three months ended March 31, 2002, upon adoption of SFAS No. 142, we tested the goodwill of our cardiothoracic reporting unit in accordance with the transitional provisions of that standard, using the present value of expected future cash flows to estimate the fair value of this reporting unit. We recorded an impairment charge of $98.3 million, which we reflected as a cumulative effect of a change in accounting for goodwill in our unaudited, consolidated statements of operations and the unaudited, combined statements of operations for Genzyme Biosurgery for the three months ended March 31, 2002.

        We have completed the transitional impairment test for the $112.7 million of net goodwill related to Genzyme Biosurgery's other reporting units in the six months ended June 30, 2002, as provided by SFAS No. 142, and determined that no additional impairment charges were required. We are required

39



to perform impairment tests under SFAS No. 142 annually and whenever events or changes in circumstance suggest that the carrying value of an asset may not be recoverable.

        The following table contains the changes in the net goodwill attributable to Genzyme Biosurgery's segments during the six months ended June 30, 2002 (amounts in thousands):

 
   
  (Unaudited)
 
 
  As of
December 31,
2001

  Adjustments
  Impairments
  As of
June 30,
2002

 
Goodwill, net:                          
  Cardiothoracic (1,2)   $ 113,447   $ 412   $ (113,859 ) $  
  Orthopaedics (1)     114,760     1,429         116,189  
  Biosurgical Specialties     8,414             8,414  
   
 
 
 
 
    Total     236,621     1,841     (113,859 )   124,603  
Accumulated Amortization     (27,025 )   (459 )   15,589     (11,895 )
   
 
 
 
 
Goodwill, net   $ 209,596   $ 1,382   $ (98,270 ) $ 112,708  
   
 
 
 
 

(1)
Adjustments for the Cardiothoracic and Orthopaedics segments represent workforce intangible assets previously classified as other intangible assets, net of related deferred tax benefits, resulting from our acquisitions of Focal and Biomatrix as required by SFAS No. 142.

(2)
Impairment for the Cardiothoracic segment represents the impairment charge recorded by Genzyme Biosurgery in the three months ended March 31, 2002 in accordance with the transitional provisions of SFAS No. 142, related to the goodwill allocated to its cardiothoracic reporting unit.

        The following table contains information on other intangible assets allocated to Genzyme Biosurgery for the periods presented (amounts in thousands):

 
  As of June 30, 2002
(Unaudited)

  As of December 31, 2001
 
  Gross
Other
Intangible
Assets

  Accumulated
Amortization

  Net
Other
Intangible
Assets

  Gross
Other
Intangible
Assets

  Accumulated
Amortization

  Net
Other
Intangible
Assets

Technology   $ 173,379   $ (24,025 ) $ 149,354   $ 173,379   $ (16,123 ) $ 157,256
Patents     79,423     (16,479 )   62,944     79,423     (12,769 )   66,654
Trademarks     85,228     (12,279 )   72,949     85,228     (9,504 )   75,724
License fees     640     (77 )   563     385     (45 )   340
Distribution agreements     13,950     (2,679 )   11,271     13,950     (1,807 )   12,143
Other     2,197     (1,159 )   1,038     4,626     (1,161 )   3,465
   
 
 
 
 
 
  Total   $ 354,817   $ (56,698 ) $ 298,119   $ 356,991   $ (41,409 ) $ 315,582
   
 
 
 
 
 

40


        All of Genzyme Biosurgery's other intangible assets are amortized over their estimated useful lives. Total amortization expense for Genzyme Biosurgery's other intangible assets was:

        The estimated future amortization expense for other intangible assets allocated to Genzyme Biosurgery as of June 30, 2002 for the remainder of fiscal year 2002 and the five succeeding fiscal years is as follows (unaudited, amounts in thousands):

Year ended December 31,

  Estimated
Amortization
Expense

2002 (remaining six months)   $ 15,543
2003     31,086
2004     30,738
2005     30,479
2006     30,422
2007     30,364

        The following table presents the impact SFAS No. 142 would have had on Genzyme Biosurgery's amortization of intangibles expense and division net loss had the standard been in effect for the three and six months ended June 30, 2001 (unaudited, amounts in thousands):

 
  Three Months Ended June 30, 2001
  Six Months Ended June 30, 2001
 
 
  As
Reported

  Goodwill
Amortization
Adjustment

  As
Adjusted

  As
Reported

  Goodwill
Amortization
Adjustment

  As
Adjusted

 
Amortization of intangibles   $ 11,992   $ (3,789 ) $ 8,203   $ 23,313   $ (7,856 ) $ 15,457  

Division net income (loss)

 

 

(37,608

)

 

3,789

 

 

(33,819

)

 

(72,935

)

 

7,856

 

 

(65,079

)

6.    NeuroCell Joint Venture Refund

        In February 2002, Genzyme Biosurgery paid $27.1 million to Genzyme General, representing $20.0 million of the $25.0 million Genzyme Biosurgery received from Genzyme General in connection with the transfer to Genzyme General of Genzyme Biosurgery's interest in Diacrin/Genzyme LLC, plus accrued interest of 13.5% per annum. The refund arose because Diacrin/Genzyme LLC, our joint venture with Diacrin, Inc., failed to initiate a Phase 3 trial of NeuroCell-PD for Parkinson's disease by June 30, 2001.

41



7.    Revolving Credit Facility

        Genzyme Biosurgery, together with our other operating divisions, has access to a $350.0 million revolving credit facility, all of which matures in December 2003. During the first quarter of 2002, we drew down $35.0 million from this facility and allocated the borrowings to Genzyme Biosurgery. At June 30, 2002, $269.0 million had been drawn down and remained outstanding under the $350.0 million facility, all of which was allocated to Genzyme Biosurgery. Borrowings under this facility bear interest at LIBOR plus an applicable margin.

8.    Segment Information

        In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," we present segment information for Genzyme Biosurgery in a manner consistent with the method we use to report this information to our management. Applying SFAS No. 131, Genzyme Biosurgery has three reportable segments:

42


        We have provided information concerning the operations of these reportable segments in the following table:

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
  2002
  2001
  2002
  2001
 
  (Unaudited, amounts in thousands)

Revenues:                        
  Cardiothoracic (1)   $ 17,532   $ 17,367   $ 34,053   $ 35,656
  Orthopaedics     30,495     26,488     54,670     46,905
  Biosurgical Specialties     14,801     16,508     27,476     31,954
  Other (2)     35     1     35     5
   
 
 
 
    Total   $ 62,863   $ 60,364   $ 116,234   $ 114,520
   
 
 
 
Gross Profit:                        
  Cardiothoracic (1)   $ 5,283   $ 5,291   $ 10,046   $ 12,455
  Orthopaedics     21,744     19,417     36,994     32,946
  Biosurgical Specialties     6,459     714     12,229     2,398
  Other (2)     35         35     4
   
 
 
 
    Total   $ 33,521   $ 25,422   $ 59,304   $ 47,803
   
 
 
 

(1)
In June 2001, we acquired Focal and allocated the acquisition to Genzyme Biosurgery's Cardiothoracic reporting segment. The results of operations of Focal are included in the results of Genzyme Biosurgery beginning June 30, 2001, the date of acquisition.

(2)
The Other category includes revenue from Genzyme Biosurgery's research and development contracts which we do not allocate to a particular reporting segment of Genzyme Biosurgery.

        Except for intangible assets, we do not allocate assets within Genzyme Biosurgery for purposes of reporting segment information.

        In connection with the adoption of SFAS No. 142 on January 1, 2002, we tested the goodwill of Genzyme Biosurgery's cardiothoracic reporting unit for impairment and, as a result, reduced goodwill by recording a cumulative effect impairment charge of $98.3 million in our unaudited, consolidated statements of operations and the unaudited, combined statements of operations of Genzyme Biosurgery for the three months ended March 31, 2002.

43



GENZYME MOLECULAR ONCOLOGY

A Division of Genzyme Corporation

Combined Statements of Operations

(Unaudited, amounts in thousands)

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
 
  2002
  2001
  2002
  2001
 
Revenues:                          
  Service revenue   $ 185   $   $ 485   $  
  Revenue from research and development contracts     1,469     703     2,938     1,406  
  Licensing revenue     673     548     1,326     1,212  
  Royalty revenue     19     28     19     73  
   
 
 
 
 
      Total revenues     2,346     1,279     4,768     2,691  
   
 
 
 
 
Operating costs and expenses:                          
  Cost of services sold     168         287      
  Cost of revenue from research and development contracts and licensing revenue     1,167     485     2,302     1,029  
  Selling, general and administrative     2,124     1,811     4,193     3,702  
  Research and development     5,323     7,568     10,621     13,229  
   
 
 
 
 
      Total operating costs and expenses     8,782     9,864     17,403     17,960  
   
 
 
 
 
Operating loss     (6,436 )   (8,585 )   (12,635 )   (15,269 )
   
 
 
 
 
Other income (expenses):                          
  Interest income     219     268     407     691  
  Interest expense     (20 )   (14 )   (40 )   (27 )
   
 
 
 
 
      Total other income (expenses)     199     254     367     664  
   
 
 
 
 
Division net loss   $ (6,237 ) $ (8,331 ) $ (12,268 ) $ (14,605 )
   
 
 
 
 
Comprehensive income (loss), net of tax:                          
  Division net loss   $ (6,237 ) $ (8,331 ) $ (12,268 ) $ (14,605 )
  Other comprehensive income (loss), net of tax:                          
    Foreign currency translation adjustments     (2 )       (1 )    
    Unrealized losses on securities, net     171         79      
   
 
 
 
 
  Other comprehensive income     169         78      
   
 
 
 
 
Comprehensive loss   $ (6,068 ) $ (8,331 ) $ (12,190 ) $ (14,605 )
   
 
 
 
 

The accompanying notes are an integral part of these unaudited, combined financial statements.

44



GENZYME MOLECULAR ONCOLOGY

A Division of Genzyme Corporation

Combined Balance Sheets

(Amounts in thousands)

 
  June 30,
2002

  December 31,
2001

 
  (Unaudited)

   
ASSETS            

Current assets:

 

 

 

 

 

 
  Cash and cash equivalents   $ 5,403   $ 41,135
  Short-term investments     4,221    
  Accounts receivable, net     25     463
  Prepaid expenses and other current assets     596     702
   
 
    Total current assets     10,245     42,300
Equipment, net     59     119
Long-term investments     15,853    
   
 
    Total assets   $ 26,157   $ 42,419
   
 

LIABILITIES AND DIVISION EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 
  Accrued expenses   $ 1,042   $ 1,400
  Due to Genzyme General     5,900     7,086
  Deferred revenue—current portion     3,574     5,007
   
 
    Total current liabilities     10,516     13,493
Deferred revenue—long term portion     832     2,113
   
 
    Total liabilities     11,348     15,606
   
 
Division equity     14,809     26,813
   
 
    Total liabilities and division equity   $ 26,157   $ 42,419
   
 

The accompanying notes are an integral part of these unaudited, combined financial statements.

45



GENZYME MOLECULAR ONCOLOGY

A Division of Genzyme Corporation

Combined Statements of Cash Flows

(Unaudited, amounts in thousands)

 
  Six Months Ended
June 30,

 
 
  2002
  2001
 
Cash Flows from Operating Activities:              
  Division net loss   $ (12,268 ) $ (14,605 )
  Reconciliation of division net loss to net cash used in operating activities:              
    Depreciation     60     62  
    Other     (68 )   152  
    Increase (decrease) in cash from working capital changes:              
      Accounts receivable     438     (92 )
      Prepaid expenses and other current assets     106     (114 )
      Accrued expenses and deferred revenue     (3,072 )   (1,615 )
      Due to Genzyme General     (1,186 )   1,995  
   
 
 
        Net cash used in operating activities     (15,990 )   (14,217 )
   
 
 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 
  Purchases of investments     (21,444 )    
  Sales and maturities of investments     1,519     7,792  
   
 
 
       
Net cash provided by (used in) investing activities

 

 

(19,925

)

 

7,792

 
   
 
 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 
  Allocated proceeds from issuance of Molecular Oncology Stock     184     389  
   
 
 
        Net cash provided by financing activities     184     389  
   
 
 

Effect of exchange rate changes on cash

 

 

(1

)

 


 
   
 
 
Decrease in cash and cash equivalents     (35,732 )   (6,036 )
Cash and cash equivalents at beginning of period     41,135     22,209  
   
 
 
Cash and cash equivalents at end of period   $ 5,403   $ 16,173  
   
 
 

The accompanying notes are an integral part of these unaudited, combined financial statements.

46



GENZYME MOLECULAR ONCOLOGY

A Division of Genzyme Corporation

Notes To Unaudited, Combined Financial Statements

1.    Basis of Presentation

        The unaudited, combined financial statements of Genzyme Molecular Oncology for each period include the statements of operations, balance sheets and statements of cash flows of the businesses we allocate to Genzyme Molecular Oncology. We also allocate a portion of our corporate operations to Genzyme Molecular Oncology using methods described in our allocation policy included in Note A., "Summary of Significant Accounting Policies—Allocation Policy," to Genzyme Molecular Oncology's combined financial statements included in Exhibit 13.4 to our 2001 Form 10-K. These unaudited, combined financial statements are prepared using amounts included in our unaudited, consolidated financial statements included in this Form 10-Q. We prepared these unaudited, combined financial statements for Genzyme Molecular Oncology following the requirements of the SEC for interim reporting. As permitted under these rules, we condense or omit certain footnotes and other financial information that are normally required by generally accepted accounting principles.

        These financial statements include all normal and recurring adjustments that we consider necessary for the fair presentation of Genzyme Molecular Oncology's financial position and operating results. Since these are interim financial statements, you should also read the financial statements and notes for Genzyme Molecular Oncology included in our 2001 Form 10-K. Revenues, expenses, assets and liabilities can vary from quarter to quarter. Therefore, the results and trends in these interim financial statements may not be indicative of results for future periods.

2.    New Accounting Pronouncements

        We have included the impact that recently issued accounting standards will have on our financial statements in Note 2, "New Accounting Pronouncements," to our unaudited, consolidated financial statements, which we incorporate by reference into this note.

3.    Goodwill and Other Intangible Assets

        In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires that ratable amortization of goodwill and certain intangible assets be replaced with periodic tests of the goodwill's impairment and that other intangible assets be amortized over their useful lives unless these lives are determined to be indefinite. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001, and thus has been adopted by Genzyme Molecular Oncology effective at the beginning of fiscal year 2002. As of January 1, 2002, Genzyme Molecular Oncology had no goodwill or other intangible assets, therefore, adoption of the standard had no effect on Genzyme Molecular Oncology's unaudited, combined financial statements for the three and six months ended June 30, 2002.

47



ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that characterize our business. In particular, we encourage you to review the risks and uncertainties described under "Note Regarding Forward-Looking Statements" and in Exhibit 99.2 to our 2001 Form 10-K. These risks and uncertainties could cause our actual results to differ materially from those forecast in forward-looking statements or implied by past results and trends. Forward-looking statements are statements that attempt to project or anticipate future developments in our business; we encourage you to review the examples of forward-looking statements under "Note Regarding Forward-Looking Statements." These statements, like all statements in this report, speak only as of the date of this report (unless another date is indicated), and we undertake no obligation to update or revise the statements in light of future developments.

INTRODUCTION

        We are a biotechnology company that develops innovative products and services for significant unmet medical needs. We have three operating divisions:

        We have three series of common stock—Genzyme General Division common stock, which we refer to as "Genzyme General Stock," Genzyme Biosurgery Division common stock, which we refer to as "Biosurgery Stock," and Genzyme Molecular Oncology Division common stock, which we refer to as "Molecular Oncology Stock." We also refer to our series of stock as "tracking stock." Unlike typical common stock, each of our tracking stocks is designed to track the financial performance of a specific subset of our business operations and its allocated assets, rather than the operations and assets of our entire company. The chief mechanisms intended to cause each tracking stock to "track" the financial performance of each division are provisions in our charter governing dividends and distributions. Under these provisions, our charter:

48


        Shares of Biosurgery Stock and Molecular Oncology Stock are subject to certain exchange and redemption provisions as set forth in our charter. One of the exchange provisions allows our board of directors to exchange, at any time, shares of Biosurgery Stock and/or Molecular Oncology Stock for cash, shares of Genzyme General Stock, or a combination of both, valued at a 30% premium to the fair market value (as defined in our charter) of the series of stock being exchanged. We encourage you to read our charter for a more complete discussion of the mandatory and optional exchange and redemption provisions of our common stock.

        To determine earnings per share, we allocate our earnings to each series of our common stock based on the earnings attributable to that series of stock. The earnings attributable to each series of stock is defined in our charter as the net income or loss of the corresponding division determined in accordance with generally accepted accounting principles and as adjusted for tax benefits allocated to or from that division in accordance with our management and accounting policies. Our charter also requires that all of our income and expenses be allocated among our divisions in a reasonable and consistent manner. Our board of directors, however, retains considerable discretion in interpreting and changing the methods of allocating earnings to each series of common stock without shareholder approval. As market or competitive conditions warrant, we may create a new series of tracking stock or change our earnings allocation methodology. However, at the present time, we have no plans to do so. Because the earnings allocated to each series of stock are based on the income or losses attributable to each corresponding division, we provide financial statements and management's discussion and analysis for the corporation and each of our divisions to aid investors in evaluating our performance and the performance of each of our divisions.

        While each tracking stock is designed to reflect a division's performance, it is common stock of Genzyme Corporation and not of a division. Our divisions are not separate companies or legal entities, and therefore do not and cannot issue stock. Holders of tracking stock have no specific rights to assets allocated to the corresponding division. We continue to hold title to all of the assets allocated to the corresponding division and are responsible for all of its liabilities, regardless of what we deem for financial statement presentation purposes as allocated to any division. Holders of each tracking stock, as common stockholders are, therefore, subject to the risks of investing in the businesses, assets and liabilities of Genzyme as a whole. For instance, the assets allocated to each division are subject to company-wide claims of creditors, product liability plaintiffs and stockholder litigation. Also, in the event of a Genzyme liquidation, insolvency or similar event, holders of each tracking stock would only have the rights of common stockholders in the combined assets of Genzyme.

DISPOSITION

        In November 2001, we sold our Snowden-Pencer line of surgical instruments, consisting of reusable surgical instruments for open and endoscopic surgery, including general, plastic, gynecological and open cardiovascular surgery, for $15.9 million in net cash. The purchaser acquired all of the assets directly associated with the Snowden-Pencer products, and is subleasing from us a manufacturing facility that we lease in Tucker, Georgia. The assets sold had a net carrying value of approximately $41.0 million at the time of the sale. We recorded a loss of $25.0 million in our consolidated financial statements and in the combined financial statements of Genzyme Biosurgery in connection with this sale. We also recorded a related tax benefit of $4.7 million in our consolidated financial statements.

ACQUISITIONS

        In September 2001, we acquired all of the outstanding capital stock of Novazyme Pharmaceuticals, Inc., a privately-held developer of biotherapies for the treatment of LSDs, for an initial payment of approximately 2.6 million shares of Genzyme General Stock, valued at $110.6 million. Novazyme shareholders received 0.5714 of a share of Genzyme General Stock for each share of Novazyme common stock they held. We will be obligated to make two additional payments

49



totaling $87.5 million, payable in shares of Genzyme General Stock, if we receive U.S. marketing approval for two products for the treatment of LSDs that employ certain of Novazyme's technologies. In connection with the merger, we also assumed all of the outstanding options, warrants and rights to purchase Novazyme common stock on an as-converted basis. We allocated the acquisition to Genzyme General and accounted for the acquisition as a purchase. Accordingly, the results of operations of Novazyme are included in our consolidated financial statements and the combined financial statements of Genzyme General from September 26, 2001, the date of acquisition.

        The staff of the U.S. Federal Trade Commission, which is known as the FTC, is investigating our acquisition of Novazyme. The FTC is one of the agencies responsible for enforcing federal antitrust laws, and, in this investigation, it is evaluating whether there are anti-competitive aspects of the Novazyme transaction that the government should seek to negate. While we do not believe that the acquisition should be deemed to contravene antitrust laws, we have been cooperating in the FTC investigation. At this stage, we cannot predict with precision the likely outcome of the investigation or how that outcome will impact our business. As with any litigation or investigation, there will be costs associated with responding to the investigation, both in terms of management time and out-of-pocket expenses.

        In January 2001, Focal, Inc. exercised its option to require us to purchase $5.0 million in Focal common stock. After that purchase we held approximately 22% of the outstanding shares of Focal common stock and began accounting for our investment under the equity method of accounting. In June 2001, we acquired the remaining 78% of the outstanding shares of Focal common stock that we had not previously acquired. Focal shareholders received 0.1545 of a share of Biosurgery Stock for each share of Focal common stock they held. We issued approximately 2.1 million shares of Biosurgery Stock as consideration, valued at approximately $9.5 million. We also assumed all of the outstanding options to purchase Focal common stock and exchanged them for options to purchase Biosurgery Stock on an as-converted basis. We accounted for the acquisition as a purchase and allocated it to Genzyme Biosurgery. Accordingly, the results of operations of Focal are included in our consolidated financial statements and in the combined financial statements of Genzyme Biosurgery from June 30, 2001, the date of acquisition.

        In June 2001, we acquired all of the outstanding capital stock of privately-held Wyntek Diagnostics, Inc. for $65.0 million in cash. Wyntek is a provider of high quality point of care rapid diagnostic tests for pregnancy and infectious diseases. We allocated the acquisition to Genzyme General and accounted for the acquisition as a purchase. Accordingly, the results of operations of Wyntek are included in our consolidated financial statements and in the combined financial statements of Genzyme General from June 1, 2001, the date of acquisition.

        In January 2001, we acquired the outstanding Class A limited partnership interests in Genzyme Development Partners, L.P., which we refer to as GDP, a limited partnership engaged in developing, producing and commercializing Sepra products, for an aggregate of $25.7 million in cash plus royalties on sales of certain Sepra products for ten years. In August 2001, we purchased the remaining outstanding GDP limited partnership interests, consisting of two Class B interests, for an aggregate of $180,000 plus additional royalties on sales of certain Sepra products for ten years. We accounted for the acquisitions as purchases and allocated them to Genzyme Biosurgery. Accordingly, the results of operations of GDP are included in our consolidated financial statements and the combined financial statements of Genzyme Biosurgery from January 9, 2001, the date of acquisition of the Class A interests.

CRITICAL ACCOUNTING POLICIES

        Our critical accounting policies are set forth under the heading "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations—

50



Critical Accounting Policies" in Exhibit 13.1 to our 2001 Form 10-K. Except for our policy regarding asset impairments, as described below, there have been no changes to these policies since December 31, 2001.

Asset Impairments

        In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and amends APB No. 30, "Reporting Results of Operations—Reporting the Effects of Disposal of a Segment of a Business." SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001, and was adopted by us, as required, on January 1, 2002.

        We periodically evaluate long-lived assets for potential impairment under SFAS No. 144. We perform these evaluations whenever events or changes in circumstances suggest that the carrying value of an asset or group of assets is not recoverable. Indicators of potential impairment include:

        If we believe an indicator of potential impairment exists, we test to determine whether the impairment recognition criterion in SFAS No. 144 has been met. In evaluating long-lived assets for potential impairment, we make several significant estimates and judgments, including:

Use of different estimates and judgments could yield significantly different results in this analysis and could result in materially different asset impairment charges.

        Effective January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets," which requires that ratable amortization of goodwill and certain intangible assets be replaced with periodic tests of goodwill's impairment and that other intangible assets be amortized over their useful lives unless these lives are determined to be indefinite. Unlike SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of," goodwill impairment tests performed under SFAS No. 142 do not involve an initial test comparing the projected undiscounted cash flows to the carrying amount of goodwill. Instead, SFAS No. 142 requires that goodwill be tested using a two-step process. The first step compares the fair value of the reporting unit with the unit's carrying value, including goodwill. When the carrying value of the reporting unit is greater than fair value, the unit's goodwill may be impaired, and the second step must be completed to measure the amount of the goodwill impairment charge, if any. In the second step, the implied fair value of the reporting unit's goodwill is compared with the carrying amount of the unit's goodwill. If the carrying amount is greater than the implied fair value, the carrying value of the goodwill must be written down to its implied fair value. Effective January 1, 2002, we reclassified $4.3 million of acquired workforce intangible assets, previously classified as other intangible assets, net of related deferred tax liabilities, to goodwill as required by SFAS No. 142.

51



        In November 2001, we sold our Snowden-Pencer line of surgical instruments, a component of our Biosurgical Specialties segment, and recorded a loss of $25.0 million, which we allocated to Genzyme Biosurgery. Our subsequent test of the remaining long-lived assets related to the remaining products of our surgical instruments and medical devices business line, which make up the majority of our cardiothoracic reporting unit, under SFAS No. 121, did not indicate an impairment based on the undiscounted cash flows of the business. However, the impairment analysis indicated that the goodwill allocated to the cardiothoracic reporting unit would be impaired if the analysis was done using discounted cash flows, as required by SFAS No. 142. Therefore, in the three months ended March 31, 2002, upon adoption of SFAS No. 142, we tested the goodwill of our cardiothoracic reporting unit in accordance with the transitional provisions of that standard, using the present value of expected future cash flows to estimate the fair value of this reporting unit. We recorded an impairment charge of $98.3 million, which we reflected as a cumulative effect of a change in accounting for goodwill in our unaudited, consolidated statements of operations and the unaudited, combined statements of operations for Genzyme Biosurgery for the three months ended March 31, 2002.

        We have completed the transitional impairment test for the $605.1 million of net goodwill related to our other reporting units in the six months ended June 30, 2002, as provided by SFAS No. 142 and determined that no additional impairment charges were required. We are required to perform impairment tests under SFAS No. 142 annually and whenever events or changes in circumstances suggest that the carrying value of an asset may not be recoverable. For all of our acquisitions, various analyses, assumptions and estimates were made at the time of each acquisition specifically regarding product development, market conditions and cash flows that were used to determine the valuation of goodwill and intangibles. The possibility exists that those estimates could prove to be inaccurate, which could result in an impairment of goodwill.

A.    RESULTS OF OPERATIONS

        The following discussion summarizes the key factors our management believes are necessary for an understanding of our consolidated financial statements.

GENZYME CORPORATION

REVENUES

        The components of our total revenues are described in the following table:

 
  Three Months Ended
June 30,

   
  Six Months Ended
June 30,

   
 
 
  Increase/
(Decrease)
% Change

  Increase/
(Decrease)
% Change

 
 
  2002
  2001
  2002
  2001
 
 
  (Unaudited, amounts in thousands, except percentage data)

 
Product revenue   $ 299,980   $ 273,473   10 % $ 566,606   $ 524,303   8 %
Service revenue     28,024     24,235   16 %   54,707     47,995   14 %
   
 
     
 
     
  Total product and service revenue     328,004     297,708   10 %   621,313     572,298   9 %
Research and development revenue     4,188     2,933   43 %   8,819     6,604   34 %
   
 
     
 
     
  Total revenues   $ 332,192   $ 300,641   10 % $ 630,132   $ 578,902   9 %
   
 
     
 
     

Product Revenue

        We derive product revenue from sales by Genzyme General of therapeutic products, including Cerezyme enzyme and Renagel phosphate binder, diagnostic products and other products, and sales by Genzyme Biosurgery of cardiothoracic products, including fluid management (chest drainage) systems, orthopaedic products, including Synvisc viscosupplementation product, and biosurgical specialties products, including Seprafilm™ bioresorbable membrane.

52



        The following table sets forth our product revenue on a segment basis:

 
  Three Months Ended
June 30,

   
  Six Months Ended
June 30,

   
 
 
  Increase/
(Decrease)
% Change

  Increase/
(Decrease)
% Change

 
 
  2002
  2001
  2002
  2001
 
 
  (Unaudited, amounts in thousands, except percentage data)

 
Genzyme General:                                  
  Therapeutics:                                  
    Cerezyme/Ceredase enzymes   $ 154,717   $ 141,312   9 % $ 302,783   $ 280,943   8 %
    Renagel phosphate binder     39,543     40,408   (2 )%   69,075     69,003    
    Other therapeutic products     18,083     6,503   178 %   29,528     13,179   124 %
   
 
     
 
     
      Total Therapeutics     212,343     188,223   13 %   401,386     363,125   11 %
  Diagnostic Products     20,530     17,790   15 %   40,368     34,214   18 %
  Other     9,883     13,027   (24 )%   19,465     23,907   (19 )%
   
 
     
 
     
      Total product revenue—Genzyme General     242,756     219,040   11 %   461,219     421,246   9 %
   
 
     
 
     
Genzyme Biosurgery:                                  
  Cardiothoracic     17,532     17,367   1 %   34,053     35,656   (4 )%
  Orthopaedics     25,767     21,709   19 %   45,765     37,777   21 %
  Biosurgical specialties     13,925     15,357   (9 )%   25,569     29,624   (14 )%
   
 
     
 
     
      Total product revenue—Genzyme Biosurgery     57,224     54,433   5 %   105,387     103,057   2 %
   
 
     
 
     
      Total product revenues   $ 299,980   $ 273,473   10 % $ 566,606   $ 524,303   8 %
   
 
     
 
     

Genzyme General—Therapeutics

        The increase in Therapeutics product revenue for both the three and six months ended June 30, 2002 as compared to the same periods a year ago, was primarily due to continued growth in sales of Cerezyme enzyme for the treatment of Type 1 Gaucher disease and increased sales of other therapeutic products. Other therapeutic products revenue consists primarily of sales of Thyrogen® hormone, which is an adjunctive diagnostic tool for well-differentiated thyroid cancer and sales of Fabrazyme® enzyme, a recombinant form of the human enzyme alpha-galactosidase used for the treatment of Fabry disease.

        The growth in sales of Cerezyme enzyme in both the three and six months ended June 30, 2002 was attributable to our continued identification of new Gaucher disease patients worldwide resulting from significant investment in our global sales and marketing infrastructure. Additionally, we continue to sell Ceredase enzyme for the treatment of Gaucher disease, although we have successfully converted virtually all Gaucher disease patients that were using Ceredase enzyme to a treatment regimen using Cerezyme enzyme.

        Our results of operations are highly dependent on sales of Cerezyme enzyme and a reduction in revenue from sales of this product would adversely affect our results of operations. Revenue from Cerezyme enzyme would be impacted negatively if competitors developed alternative treatments for Gaucher disease and the alternative products gained commercial acceptance. Although orphan drug status for Cerezyme enzyme, which provided us with exclusive marketing rights for Cerezyme enzyme in the United States, expired in May 2001, we continue to have patents protecting our method of manufacturing Cerezyme enzyme until 2010 and the composition of Cerezyme enzyme as made by that process until 2013. The expiration of market exclusivity and orphan drug status will likely subject Cerezyme enzyme to increased competition, which may decrease the amount of revenue we receive from this product or the growth of that revenue.

53



        Genzyme General is aware of companies that have initiated efforts to develop competitive products. Oxford Glycosciences plc, for example, is developing Zavesca™ (OGT 918), a small molecule drug candidate for the treatment of Type 1 Gaucher disease. OGT 918 has been granted orphan drug status in the United States for treatment of Type 1 Gaucher and Fabry diseases, and has been designated as an orphan medicinal product in the European Union for the treatment of Type 1 Gaucher disease. In 2001, Oxford Glycosciences submitted a Marketing Authorisation Application (MAA) to the European Agency for the Evaluation of Medicinal Products (EMEA), as well as a New Drug Application (NDA) to the FDA for OGT 918 for the oral treatment of Type 1 Gaucher disease. In June 2002, the FDA issued a complete response letter on the NDA for OGT 918. In the letter the FDA stated that, in its opinion, the product is not approvable due to OGS' failure to provide sufficient support for the safety and efficacy of OGT 918. In July 2002, the Committee for Proprietary Medicinal Products (CPMP), of the EMEA issued a positive opinion recommending marketing approval of OGT 918 for the treatment of Type 1 Gaucher disease. The CPMP's decision states that the product is indicated only for mild-to-moderate forms of Type 1 Gaucher disease, and may be used only if the treatment of patients for whom enzyme replacement therapy is unsuitable. The CPMP requested OGS provide follow-up safety data. To date, virtually all Gaucher disease patients who have received enzyme replacement therapy have experienced strong clinical benefit with few side effects.

        The following table provides information regarding the change in sales of our Gaucher disease therapies during the periods presented:

 
  Three Months Ended
June 30,

   
  Six Months Ended
June 30,

   
 
 
  Increase/
(Decrease)
% Change

  Increase/
(Decrease)
% Change

 
 
  2002
  2001
  2002
  2001
 
 
  (Unaudited, amounts in thousands, except percentage data)

 
Sales of Cerezyme/Ceredase enzymes   $ 154,717   $ 141,312   9 % $ 302,783   $ 280,943   8 %
% of total product revenue     52 %   52 %       53 %   54 %    

        Although sales of our Gaucher disease therapies continue to increase, we expect them to decline as a percentage of total product revenue in the future. We expect sales of Renagel phosphate binder to increase, driven primarily by the continued adoption of the product by nephrologists worldwide. The increase in sales of Renagel phosphate binder will be dependent on several factors, including:

        The following table provides information regarding the change in sales of Renagel phosphate binder during the periods presented:

 
  Three Months Ended
June 30,

   
  Six Months Ended
June 30,

   
 
  Increase/
(Decrease)
% Change

  Increase/
(Decrease)
% Change

 
  2002
  2001
  2002
  2001
 
  (Unaudited, amounts in thousands, except percentage data)

Sales of Renagel phosphate binder   $ 39,543   $ 40,408   (2 )% $ 69,075   $ 69,003  
% of total product revenue     13 %   15 %       12 %   13 %  

54


Sales for the three and six months ended June 30, 2002, reflect the impact of a reduction in average domestic wholesaler inventory levels.

        Other therapeutics revenue consists primarily of sales of Thyrogen hormone, Fabrazyme enzyme and royalties earned on sales of WelChol™ compound. The increase in other therapeutics revenue for the three months ended June 30, 2002 as compared to the same period a year ago is attributable to:

        The increase in other therapeutics revenue for the six months ended June 30, 2002 as compared to the same period a year ago is attributable to:

Genzyme General—Diagnostic Products

        Diagnostic Products revenue increased $2.7 million, or 15%, to $20.5 million for the three month period ended June 30, 2002 as compared to the same period a year ago. The increase was primarily attributable to:


        Diagnostic Products revenue increased $6.2 million, or 18%, for the six month period ended June 30, 2002 as compared to the same period a year ago. The increase was primarily attributable to:

55


Genzyme General—Other Product Revenue

        The 24% decrease in other product revenue for the three months ended June 30, 2002 as compared to the same period a year ago is primarily due to a 23% decrease in sales of pharmaceutical materials such as lipids, synthetic peptides and liquid crystals for drug delivery to $6.8 million. The 19% decrease in other product revenue for the six months ended June 30, 2002 as compared to the same period a year ago is primarily due to a 19% decrease in sales of pharmaceutical materials, such as lipids, synthetic peptides and liquid crystals for drug delivery, to $13.5 million.

Genzyme Biosurgery—Cardiothoracic

        Cardiothoracic products include fluid management (chest drainage) systems, surgical closures, biomaterials and instruments for conventional, minimally invasive and off-pump cardiac surgery.

        Cardiothoracic product revenue increased 1% for the three months ended June 30, 2002, as compared to the same period a year ago, primarily due to a 28% increase in the combined sales of FocalSeal®-L surgical sealant and instruments for minimally-invasive and off-pump cardiac surgery to $4.6 million. The increase was partially offset by a 3% decline in revenue from sales of surgical closures to $4.6 million due to our withdrawal of certain commodity suture lines in Europe and an 8% decline in the combined revenues from sales of fluid management systems and instruments for cardiac surgery to $8.3 million.

        Cardiothoracic product revenue decreased 4% for the six months ended June 30, 2002, as compared to the same period a year ago, primarily due to a 13% decline in revenue from sales of surgical closures to $8.7 million resulting from our withdrawal of certain commodity suture lines in Europe and a 10% decline in the combined revenues from sales of fluid management systems and instruments for cardiac surgery to $16.6 million. These decreases were partially offset by a 22% increase in the combined sales of FocalSeal-L surgical sealant and instruments for minimally-invasive and off-pump cardiac surgery to $8.7 million.

Genzyme Biosurgery—Orthopaedics

        Orthopaedics product revenue increased $4.1 million, or 19%, for the three months and $8.0 million, or 21%, for the six months ended June 30, 2002, as compared to the same periods a year ago, primarily due to increased sales of Synvisc viscosupplementation product.

56


Genzyme Biosurgery—Biosurgical Specialties

        Biosurgical Specialties product revenue decreased $1.4 million, or 9%, in the three months ended June 30, 2002, as compared to the same period a year ago. The decrease is due to a $4.8 million, or 97%, decrease in sales of surgical instruments due to the sale of our Snowden-Pencer line of surgical instruments during the fourth quarter of 2001, partially offset by a $1.8 million, or 25%, increase in sales of Sepra products and a $1.4 million, or 331%, increase in the sale of Hylaform® products.

        Biosurgical Specialties product revenue decreased $4.1 million, or 14%, for the six months ended June 30, 2002, as compared to the same period a year ago. The decrease is due to a $9.1 million, or 94%, decrease in sales of surgical instruments due to the sale of our Snowden-Pencer line of surgical instruments during the fourth quarter of 2001, partially offset by a $3.8 million, or 27%, increase in sales of Sepra products and a $1.7 million, or 155%, increase in the sale of Hylaform products.

Service Revenue

        We derive service revenues from four principal sources:

        The following table sets forth our service revenues on a segment basis:

 
  Three Months Ended
June 30,

   
  Six Months Ended
June 30,

   
 
  Increase/
(Decrease)
% Change

  Increase/
(Decrease)
% Change

 
  2002
  2001
  2002
  2001
 
  (Unaudited, amounts in thousands, except percentage data)

Genzyme General—Other   $ 22,420   $ 18,305   22%   $ 43,595   $ 36,537   19%
Genzyme Biosurgery:                                
  Orthopaedics     4,728     4,779   (1)%     8,905     9,128   (2)%
  Biosurgical Specialties     876     1,151   (24)%     1,907     2,330   (18)%
   
 
     
 
   
    Total service revenue—Genzyme Biosurgery     5,604     5,930   (5)%     10,812     11,458   (6)%
   
 
     
 
   
Genzyme Molecular Oncology     185       N/A     485       N/A
Eliminations/Adjustments (1)     (185 )     N/A     (185 )     N/A
   
 
     
 
   
    Total service revenue   $ 28,024   $ 24,235   16%   $ 54,707   $ 47,995   14%
   
 
     
 
   

(1)
Represents the elimination of interdivisional revenue.

        The 22% increase in Genzyme General's other service revenue for the three months ended June 30, 2002 as compared to the same period a year ago is primarily due to increased sales of genetic testing services to $22.4 million. The 19% increase in other service revenue for the six months ended June 30, 2002 as compared to the same period a year ago is primarily due to increased sales of genetic testing services to $43.6 million. The increases for both periods were primarily attributable to expanded presence in the prenatal market and a broader test menu in oncology.

        Orthopaedics service revenue did not change significantly during the three and six months ended June 30, 2002 when compared to the same periods a year ago. Increased sales of Carticel chondrocyte services in the U.S. for both the three and six months ended June 30, 2002 were offset by decreased

57



European sales of the service in each period. We have not been actively seeking new partners or marketing Carticel chondrocytes in Europe since the second quarter of 2001. The decrease in Biosurgical Specialties service revenue for both the three and six months ended June 30, 2002, as compared to the same periods a year ago, is attributable to decreased sales of Epicel skin grafts services in each period.

        Genzyme Molecular Oncology's service revenue for the six months ended June 30, 2002 includes $0.3 million received under an agreement with a pharmaceutical company related to LongSAGE. This was Genzyme Molecular Oncology's first agreement related to this technology, so no such revenues were recorded for the three and six months ended June 30, 2001.

Research and Development Revenue

        We derive research and development revenue primarily from:

        The following table sets forth our research and development revenues on a segment basis:

 
  Three Months Ended
June 30,

   
  Six Months Ended
June 30,

   
 
 
  Increase/
(Decrease)
% Change

  Increase/
(Decrease)
% Change

 
 
  2002
  2001
  2002
  2001
 
 
  (Unaudited, amounts in thousands, except percentage data)

 
Genzyme General:                                  
  Therapeutics   $ 1,133   $ 320   254 % $ 2,929   $ 2,205   33 %
  Other         20   (100 )%   31     20   55 %
  Eliminations/Adjustments     859     1,313   (35 )%   1,541     1,683   (8 )%
   
 
     
 
     
    Total research and development revenue—Genzyme General     1,992     1,653   21 %   4,501     3,908   15 %
Genzyme Biosurgery—Other     35     1   3,400 %   35     5   600 %
Genzyme Molecular Oncology     2,161     1,279   69 %   4,283     2,691   59 %
   
 
     
 
     
    Total research and development revenue   $ 4,188   $ 2,933   43 % $ 8,819   $ 6,604   34 %
   
 
     
 
     

        Research and development revenue allocated to Genzyme General is related primarily to research initiatives for its Therapeutics business segment. Eliminations/Adjustments includes research and development efforts we conducted on behalf of GTC and amounts related to Genzyme General's research and development activities that we do not specifically allocate to a particular segment of Genzyme General.

        Research and development revenue allocated to Genzyme Molecular Oncology is derived from the following sources:

        The increase in research and development revenue allocated to Genzyme Molecular Oncology for the three and six months ended June 30, 2002 is the result of the initiation of the collaboration

58



agreement with Kirin in November 2001 and a planned increase in the amount of research performed on behalf of Purdue, offset in part by a reduction in revenues associated with the cancer diagnostic assets. As a result of the transfer of the cancer diagnostic assets to Genzyme General, Genzyme Molecular Oncology will no longer be allocated revenue arising from the licensing of rights to those assets.

International Product and Service Revenue

        A substantial portion of our revenue was generated outside of the United States. Most of our international revenue is attributable to sales of Cerezyme enzyme. The following table provides information regarding the change in international product and service revenue during the periods presented:

 
  Three Months Ended
June 30,

   
  Six Months Ended
June 30,

   
 
 
  Increase/
(Decrease)
% Change

  Increase/
(Decrease)
% Change

 
 
  2002
  2001
  2002
  2001
 
 
  (Unaudited, amounts in thousands, except percentage data)

 
International product and service revenue   $ 123,563   $ 100,915   22 % $ 238,888   $ 209,819   14 %
% of total product and service revenue     38 %   34 %       38 %   37 %    

        International sales of Cerezyme enzyme increased 13% to $81.1 million for the three months ended June 30, 2002 as compared to $71.4 in the same period a year ago. International sales of Cerezyme enzyme increased 6% to $158.9 million for the six months ended June 30, 2002 as compared to $149.2 in the same period a year ago.

        The increase for the three months ended June 30, 2002 as compared to the same period a year ago is primarily due to:

        The increase for the six months ended June 30, 2002 as compared to the same period a year ago is primarily due to a 7% increase in international unit sales of Cerezyme enzyme.

        International sales of Renagel phosphate binder increased 157% to $10.5 million for the three months ended June 30, 2002 as compared to $4.1 million for the same period a year ago. International sales of Renagel phosphate binder increased 150% to $18.8 million for the six months ended June 30, 2002 as compared to $7.6 million for the same period a year ago.

        The increases for the three and six months ended June 30, 2002 as compared to the same periods a year ago are primarily due to:

59


MARGINS

 
  Three Months Ended
June 30,

   
  Six Months Ended
June 30,

   
 
  Increase/
(Decrease)
% Change

  Increase/
(Decrease)
% Change

 
  2002
  2001
  2002
  2001
 
  (Unaudited, amounts in thousands, except percentage data)

Product margin:                                
  Genzyme General   $ 191,991   $ 171,571   12%   $ 362,855   $ 325,883   11%
  Genzyme Biosurgery     31,467     22,302   41%     55,075     42,288   30%
   
 
     
 
   
    Total product margin   $ 223,458   $ 193,873   15%   $ 417,930   $ 368,171   14%
   
 
     
 
   
Service margin:                                
  Genzyme General   $ 9,566   $ 7,688   24%   $ 18,875   $ 15,636   21%
  Genzyme Biosurgery     2,019     3,119   (35)%     4,194     5,510   (24)%
  Genzyme Molecular Oncology     17       N/A     198       N/A
  Elimination     (17 )     N/A     (17 )     N/A
   
 
     
 
   
    Total service margin   $ 11,585   $ 10,807   7%   $ 23,250   $ 21,146   10%
   
 
     
 
   
Total gross margin:                                
  Genzyme General   $ 201,557   $ 179,259   12%   $ 381,730   $ 341,519   12%
  Genzyme Biosurgery     33,486     25,421   32%     59,269     47,798   24%
  Genzyme Molecular Oncology     17       N/A     198       N/A
  Elimination     (17 )     N/A     (17 )     N/A
   
 
     
 
   
    Total gross margin   $ 235,043   $ 204,680   15%   $ 441,180   $ 389,317   13%
   
 
     
 
   

        We provide a broad range of healthcare products and services. As a result, our gross margin may vary significantly based on the category of product or service. Sales of therapeutic products, including Cerezyme enzyme, result in higher margins than from sales of surgical or diagnostic products.

Product Margin

        Our total product margin increased 15% for the three months ended June 30, 2002 as compared to the same period a year ago, primarily due to a 10% increase in total product revenue coupled with a favorable 4% decrease in the total cost of products sold. Product margin increased 14% for the six months ended June 30, 2002 as compared to the same period a year ago, primarily due to an 8% increase in total product revenue coupled with a favorable 5% decrease in the total cost of products sold.

        The 12% increase in product margin for products allocated to Genzyme General and the increase in product margin as a percentage of product revenue for the three months ended June 30, 2002 as compared to the same period a year ago was primarily attributable to an 11% increase in product revenue offset by a 7% increase in the cost of products sold. The 11% increase in product margin for products allocated to Genzyme General and the increase in product margin as a percentage of product revenue for the six months ended June 30, 2002 as compared to the same period a year ago was primarily attributable to a 9% increase in product revenue offset by a 3% increase in the cost of products sold. The improved margins for both periods were primarily the result of an increase in sales of higher margin Therapeutics products. Sales of Therapeutics products such as Cerezyme enzyme, Thyrogen hormone and Fabrazyme enzyme increased for both periods as compared to the same periods a year ago, while cost of Therapeutics products sold decreased for both periods as compared to the same periods a year ago. The decrease in cost of Therapeutics products sold was primarily attributable to a volume discount on the production costs for Renagel phosphate binder in both periods in accordance with certain third party manufacturing agreements and greater manufacturing efficiencies gained across a number of product areas. Contributing to the decrease in cost of Therapeutics products

60



sold for both periods, as compared to the same periods a year ago, were charges of $4.7 million for the three months ended June 30, 2001 and $8.2 million for the six months ended June 30, 2001 relating to the increased basis of the inventory obtained in connection with our acquisition of GelTex in December 2000, for which there were no comparable amounts in the same periods of 2002. Also impacting product margins slightly were margins attributable to lower margin Diagnostic Products. Although sales of Diagnostic Products, such as point of care rapid diagnostic tests for pregnancy and infectious diseases, increased for both periods as compared to the same periods a year ago, cost of Diagnostic Products sold also increased for both periods as compared to a the same periods a year ago. The increase in cost of Diagnostic Products sold was partially attributable to a charge of $2.8 million recorded in the three months ended March 31, 2002 for the planned closure of a Diagnostic Products manufacturing facility in San Carlos, CA. We expect that in the future Genzyme General's product margin as a percentage of product revenue will trend slightly lower, primarily due to the lower margins normally attributable to Renagel phosphate binder and a product mix shift as sales of Diagnostic Products continue to increase.

        For products allocated to Genzyme Biosurgery, the 41% increase in product margin and the increase in product margin as a percentage of product revenue for the three months ended June 30, 2002 as compared to the same period a year ago was primarily attributable to a modest increase in revenue and a favorable 20% decrease in cost of products sold. The decrease in the cost of products sold was primarily related to our December 2000 acquisition of Biomatrix, Inc., which was allocated to Genzyme Biosurgery. As part of the acquisition, we adjusted the acquired inventory to fair value, resulting in an increase of $11.3 million. This amount was fully amortized to cost of products sold as the acquired inventory was sold in 2001. For the three months ended June 30, 2001, $5.3 million was charged to cost of products sold. Excluding this adjustment, Genzyme Biosurgery's product margin for the three months ended June 30, 2001 would have been 51%.

        The 30% increase in product margin for products allocated to Genzyme Biosurgery and the increase in product margin as a percentage of product revenue for the six months ended June 30, 2002 as compared to the same period as year ago was primarily attributable to a modest increase in revenue and a favorable 17% decrease in cost of products sold as discussed above. For the six months ended June 30, 2001, $11.3 million related to the Biomatrix acquisition was charged to cost of products sold. Excluding this adjustment, Genzyme Biosurgery's product margin for the six months ended June 30, 2001 would have been 52%.

        Excluding the adjustments described above, product margin for products allocated to Genzyme Biosurgery increased in the three and six months ended June 30, 2002 as compared to the same periods in 2001, primarily as a result of an increase in sales of Synvisc viscosupplementation product, a higher margin product.

Service Margin

        Our total service margin increased 7% for the three months ended June 30, 2002 as compared to the same period a year ago primarily due to a 16% increase in total service revenue, which was partially offset by a 22% increase in total cost of services sold. Service margin increased 10% for the six months ended June 30, 2002 as compared to the same period a year ago primarily due to a 14% increase in service revenue, which was partially offset by a 17% increase in total cost of services sold.

        Service margin for services allocated to Genzyme General increased for the three and six months ended June 30, 2002 as compared to the same period a year ago primarily due to increased sales of genetic testing services attributable to our expanded presence in the prenatal market and a broader test menu in oncology.

61



        Service margin for services allocated to Genzyme Biosurgery decreased for the three and six months ended June 30, 2002 as compared to the same period a year ago primarily due to decreased sales of both Carticel chondrocytes and Epicel skin grafts.

OPERATING EXPENSES

Selling, General and Administrative Expenses

        Selling, general and administrative expenses increased 7% for the three month period ended June 30, 2002 and 10% for the six month period ended June 30, 2002 as compared to same periods a year ago as a result of:

        In addition, the three and six months ended June 30, 2001 include $5.5 million of costs associated with the consolidation of Genzyme Biosurgery's European operations, for which there were no comparable amounts in the same periods of 2002.

Research and Development Expenses

        Research and development expenses increased 22% for the three month period ended June 30, 2002 and 32% for the six month period ended June 30, 2002 as compared to the same periods a year ago as a result of:

        Included in research and development expenses for the six month period ended June 30, 2002 are expenses associated with a comparison study of our enzyme programs for treatment of Pompe disease that we concluded during the first quarter of 2002. The enzyme programs included:

62


        The analysis of the data from that study indicated that our internally developed CHO product offers the clearest and most efficient pathway to commercialization based on both clinical and manufacturing considerations. As a result of this analysis we:

        Research and development expenses for the six months ended June 30, 2002 include a charge of $2.0 million we recorded in the first quarter of 2002 representing the restructuring of Genzyme General's facilities in New Jersey and Oklahoma that were acquired in connection with our acquisition of Novazyme.

Amortization of Intangibles

        Amortization of intangibles expense decreased 42% to $17.6 million for the three months ended June 30, 2002 and 41% to $35.2 million for the six months ended June 30, 2002 as compared to the same periods in 2001 due to our adoption of SFAS No. 142 in January 2002. SFAS No. 142 requires that ratable amortization of goodwill and certain intangible assets be replaced with periodic tests of the goodwill's impairment and that other intangible assets be amortized over their useful lives unless these lives are determined to be indefinite. In accordance with the provisions of SFAS No. 142, we ceased amortizing goodwill as of January 1, 2002. Had SFAS No. 142 been in effect on January 1, 2001, our amortization of intangibles expense would have been as follows:

 
  Three Months Ended June 30, 2001
  Six Months Ended June 30, 2001
 
  As
Reported

  Goodwill
Amortization
Adjustment

  As
Adjusted

  As
Reported

  Goodwill
Amortization
Adjustment

  As
Adjusted

 
  (Unaudited, amounts in thousands)

Amortization of intangibles   $ 30,174   $ (12,892 ) $ 17,282   $ 59,165   $ (25,868 ) $ 33,297

Purchase of In-Process Research and Development

Novazyme

        In September 2001, in connection with our acquisition of Novazyme, we acquired a technology platform that we believe can be leveraged in the development of treatments for various LSDs. As of the acquisition date, the technology platform had not achieved technological feasibility and would require significant further development to complete. Accordingly, we allocated to IPR&D and charged to expense $86.8 million, representing the portion of the purchase price attributable to the technology platform. We recorded this amount as a charge to expense in our unaudited, consolidated statements of operations and in Genzyme General's unaudited, combined statements of operations for the quarter ended September 30, 2001.

        The platform technology is specific to LSDs and there is currently no alternative use for the technology in the event that it fails as a platform for enzyme replacement therapy for the treatment of

63



LSDs. As of June 30, 2002, we estimate that it will take approximately four to six years and an investment of approximately $75 million to $100 million to complete the development of, obtain approval for and commercialize the first product based on this technology platform.

Wyntek

        In June 2001, in connection with our acquisition of Wyntek, we allocated approximately $8.8 million of the purchase price to IPR&D. We recorded this amount as a charge to expense in our unaudited, consolidated statements of operations and in Genzyme General's unaudited, combined statements of operations for the quarter ended June 30, 2001.

        Wyntek currently is developing a cardiovascular product to rapidly measure the quantitative levels of cardiac marker proteins. These are the leading markers for the diagnosis of acute myocardial infarction. The product consists of a mobile, stand-alone, quantitative diagnostic device and a reaction strip that detects disease specific marker proteins. The intended use of the device is to read reaction strips at the patient's bedside or in an emergency room setting. We expect to complete the regulatory review process, file an application for marketing approval and begin selling the product during 2002.

GelTex

        In December 2000, in connection with the acquisition of GelTex, we allocated approximately $118.0 million of the purchase price to IPR&D, which we recorded as a charge to expense in our consolidated statement of operations and in Genzyme General's combined statements of operations for the year ended December 31, 2000. As of June 30, 2002, the technological feasibility of the projects had not yet been reached and no significant departures from the assumptions included in the valuation analysis had occurred.

64



        Below is a brief description of the GelTex IPR&D projects, including an estimation of when our management believes Genzyme General may realize revenues from the sales of these products in the respective application:

Program

  Program Description
or Indication

  Development Status
at June 30, 2002

  Value at
Acquisition
Date

  Estimated
Cost to
Complete at
June 30,
2002

  Year of
Expected
Product
Launch

 
   
   
   
  (Amounts in millions)

   
Renagel
phosphate
binder
  Next stage non-absorbed polymer phosphate binder for the treatment of hyperphospatemia  




  Clinical studies scheduled for completion in 2002, 2003 and 2004
Phase 4 trials ongoing in the U.S.
Phase 3 trials ongoing in Japan
  $ 19.7   $ 5.1   (1)

GT160-246

 

C. difficile colitis

 


 

Phase 2 trial ongoing

 

 

37.4

 

 

31.1

 

2006

GT56-252
Oral Iron
Chelator

 

Iron overload disease

 



 

Filed an IND in Q4 2001
Approval to commence Phase 1 trials in Europe obtained 2001

 

 

15.7

 

 

23.5

 

2007

GT316-235
Fat absorption
inhibitor

 

Anti-obesity

 


 

Expected to file an IND in the first half of 2003

 

 

17.8

 

 

38.2

 

2010

Polymer

 

Oral Mucositis

 


 

IND expected to be filed in the second quarter of 2003

 

 

17.8

 

 

29.1

 

2008

DENSPM

 

Psoriasis

 


 

Program cancelled during 2001; no further development planned

 

 

3.4

 

 

N/A

 

N/A

GT102-279

 

Second generation lipid-lowering compound

 


 

Program cancelled during 2001; no further development planned

 

 

6.2

 

 

N/A

 

N/A

 

 

 

 

 

 

 

 



 



 

 

 

 

 

 

 

 

 

 

$

118.0

 

$

127.0

 

 

 

 

 

 

 

 

 

 



 



 

 

(1)
Year of launch not estimable due to early stage of the program.

Biomatrix

        In connection with our acquisition of Biomatrix, we allocated approximately $82.1 million to IPR&D, which we recorded as a charge to expense in our consolidated statements of operations and in Genzyme Biosurgery's combined statement of operations for the year ended December 31, 2000. As of June 30, 2002, the technological feasibility of the Biomatrix IPR&D projects had not yet been reached and no significant departures from the assumptions included in the valuation analysis had occurred.

65



        Below is a brief description of the Biomatrix IPR&D projects, including an estimation of when management believes we may realize revenues from the sales of these products in the respective application:

Program

  Program Description
or Indication

  Development Status
at June 30, 2002

  Value at
Acquisition
Date

  Estimated
Cost to
Complete at
June 30,
2002

  Year of
Expected
Product
Launch

 
   
   
   
  (Amounts in millions)

   
Visco-supplementation   Use of elastoviscous solutions and viscoelastic gels in disease conditions to supplement tissues and body fluids, alleviating pain and restoring normal function.  





  Prelaunch for hip indication in Europe
Preclinical for hip indication in U.S.
Preclinical for knee indication
Preclinical for other joints
  $ 33.8   (1)   2002 to 2008

Visco-augmentation and Visco-separation
(Adhesion prevention)

 

Use of viscoelastic gels to provide scaffolding for tissue regeneration and to separate tissues and decrease formation of adhesions and excessive scars after surgery.

 




 

Preclinical—gynecological and pelvic indications
Phase 2—spine indications

 

 

48.3

 

(1)

 

2003 to 2006

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

$

82.1

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

(1)
Costs to complete are not estimable due to the early stage of these programs.

        Substantial additional research and development will be required prior to any of our acquired IPR&D programs and technology platforms reaching technological feasibility. In addition, once developed each product will need to complete a series of clinical trials and receive FDA or other regulatory approvals prior to commercialization. Our current estimates of the time and investment required to develop these products and technologies may change depending on the different applications that we may choose to pursue. We cannot give assurances that these programs will ever reach feasibility or develop into products that can be marketed profitably. In addition, we cannot guarantee that we will be able to develop and commercialize products before our competitors develop and commercialize products for the same indications. If products based on our acquired IPR&D programs and technology platforms do not become commercially viable, our results of operations could be materially affected.

66



OTHER INCOME AND EXPENSES

 
  Three Months Ended
June 30,

   
  Six Months Ended
June 30,

   
 
 
  Increase/
(Decrease)
% Change

  Increase/
(Decrease)
% Change

 
 
  2002
  2001
  2002
  2001
 
 
  (Unaudited, amounts in thousands, except percentage data)

 
Equity in net loss of unconsolidated affiliates   $ (3,948 ) $ (11,796 ) (67 )% $ (8,042 ) $ (20,811 ) (61 )%
Gain (loss) on investments in equity securities     343     (1,532 ) (122 )%   509     (1,532 ) (133 )%
Minority interest in net loss of subsidiary         725   (100 )%       1,999   (100 )%
Other     1,827     (133 ) (1,474 )%   963     (3,843 ) (125 )%
Investment income     12,624     12,493   1 %   26,061     22,641   15 %
Interest expense     (7,059 )   (10,766 ) (34 )%   (13,865 )   (22,136 ) (37 )%
   
 
     
 
     
  Total other income (expenses)   $ 3,787   $ (11,009 ) (134 )% $ 5,626   $ (23,682 ) (124 )%
   
 
     
 
     

Equity in Net Loss of Unconsolidated Affiliates

        We record the results of the following joint ventures in equity in net loss of unconsolidated affiliates:

Joint Venture

  Partner
  Effective Date
  Product/Indication
  Genzyme Division

BioMarin/
Genzyme LLC

 

BioMarin Pharmaceutical Inc.

 

September 1998

 

Aldurazyme™ enzyme for the treatment of mucopolysaccharidosis-I

 

Genzyme General

Pharming/
Genzyme LLC(1)

 

Pharming Group, N.V.(2)

 

October 1998

 

Human alpha-glucosidase for the treatment of Pompe disease (transgenic product)

 

Genzyme General

Genzyme/Pharming Alliance LLC(3)

 

Pharming Group, N.V.(2)

 

June 2000

 

Human alpha-glucosidase for the treatment of Pompe disease (produced using CHO cells)

 

Genzyme General

Diacrin/
Genzyme LLC

 

Diacrin, Inc.

 

October 1996

 

Products using porcine fetal cells for the treatment of Parkinson's and Huntington's diseases

 

Genzyme Biosurgery (until May 1999); Genzyme General
(after May 1999)

(1)
Beginning in August 2001, we became responsible for funding all of the operations of Pharming/Genzyme LLC, which in turn is legally obligated to supply transgenically-derived human alpha-glucosidase enzyme until the patients currently enrolled in the clinical trial of this product can be transitioned to a CHO-cell product.

(2)
Since August 2001, Pharming Group N.V. has been operating under court-supervised receivership.

(3)
In August 2001, we terminated our strategic alliance with Pharming Group N.V. and certain of its subsidiaries for the development of a CHO-cell product for Pompe disease and assumed full operational and financial responsibility for the development of the CHO-cell product.

        Through May 31, 2002, our equity in net loss of unconsolidated affiliates included our portion of the losses of GTC. Our equity in net loss of unconsolidated affiliates decreased for both the three and six months ended June 30, 2002, as compared to the same periods a year ago, primarily as the result of the August 2001 termination of our strategic alliance with Pharming Group, N.V. for the development

67



of a CHO-cell derived product for the treatment of Pompe disease. In addition, in August 2001, we became responsible for funding the costs to produce transgenically-derived alpha-glucosidase and related clinical trial costs for Pharming/Genzyme LLC until the patients currently enrolled in the clinical trial of the product can be transitioned to a CHO-cell product. Our share of losses for both joint ventures was $4.1 million for the three months ended June 30, 2001 and $6.8 million for the six months ended June 30, 2002.

        The decreases in our equity in net loss of unconsolidated affiliates for the three and six months ended June 30, 2002 as compared to the same periods a year ago were also attributable to decreased losses from our joint ventures with BioMarin and Diacrin, which were offset in part by a slight increase in losses in our equity position in GTC.

        On April 4, 2002, GTC purchased approximately 2.8 million shares of GTC common stock held by us and allocated to Genzyme General for an aggregate consideration of approximately $9.6 million. We received approximately $4.8 million in cash and a promissory note for the remaining amount of approximately $4.8 million. The shares of GTC common stock were valued at $3.385 per share in this transaction, using the simple average of the high and low transaction prices quoted on the Nasdaq National Market on April 1, 2002. We have committed to a 24-month lock-up provision on the remaining 4.9 million shares of GTC common stock held by us and allocated to Genzyme General, which is approximately 18% of the shares of GTC common stock outstanding as of June 30, 2002. We accounted for our investment in GTC under the equity method of accounting until May 2002, at which point we ceased to have significant influence over GTC. We began accounting for our investment in GTC under the cost method of accounting in June 2002.

        Because of the 24-month lock-up provision, the remaining 4.9 million shares of GTC common stock held by us do not qualify as marketable securities under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities". As a result, we carry the investment on our consolidated balance sheet and the combined balance sheet of Genzyme General at cost, subject to review for impairment. Based on the market price of GTC common stock at June 30, 2002, our remaining investment would have an unrealized loss of $8.3 million. Because we have assessed the decline in the market price of GTC common stock to be temporary, we have not recorded an associated impairment charge.

        On June 30, 2001, we acquired the remaining 78% of the outstanding shares of Focal common stock that we did not already hold and began consolidating the operations of Focal. Prior to this transaction we recorded in equity in net loss of unconsolidated affiliates our portion of the results of Focal, which were $0.8 million during the three months ended June 30, 2001 and $1.3 million during the six months ended June 30, 2001.

Gain (Loss) on Investment in Equity Securities

        For the three and six months ended June 30, 2001, we recorded a $1.2 million realized loss to reflect the fair market value of our investment in Aronex Pharmaceuticals resulting from Antigenics Inc.'s April 2001 announcement that it had entered into a definitive merger agreement with Aronex. The merger was completed in July 2001. Under the terms of the merger agreement, we received 0.0594 of a share of Antigenics common stock for each of our shares of Aronex common stock.

Minority Interest in Net Loss of Subsidiary

        As a result of our combined direct (until July 2001) and indirect interest in ATIII LLC, Genzyme General had consolidated the results of ATIII LLC, recording GTC's portion of the losses of that joint venture as minority interest. ATIII LLC was a joint venture we formed with GTC for the development and commercialization of transgenically-derived antithrombin III. In July 2001, we transferred our 50% ownership interest in ATIII LLC to GTC and stopped recording minority interest.

68



Investment Income

        Our investment income increased 1% for the three months ended June 30, 2002 and increased 15% for the six months ended June 30, 2002 as compared to the same periods a year ago primarily due to higher average cash balances. The higher cash balances resulted primarily from our May 2001 private placement of $575.0 million in principal of 3% convertible subordinated debentures due May 2021. Net proceeds from the offering were approximately $562.1 million. We allocated the principal balance of the debentures and the net proceeds from the offering to Genzyme General.

Interest Expense

        Our interest expense decreased 34% for the three months ended June 30, 2002 and 37% for the six months ended June 30, 2002 as compared to the same periods a year ago primarily due to the June 2001 redemption of our $250.0 million in principal of 51/4% convertible subordinated notes due 2005, which was partially offset by the May 2001 private placement of $575.0 million in principal of 3% convertible subordinated debentures due May 2021. Also in May 2001, Genzyme General used a portion of the $562.1 million in net proceeds from the private placement of the 3% convertible subordinated debentures due May 2021 to repay the $150.0 million we had drawn under our revolving credit facility in December 2000.

Tax (Provision) Benefit

 
  Three Months Ended
June 30,

   
  Six Months Ended
June 30,

   
 
 
  Increase/
(Decrease)
% Change

  Increase/
(Decrease)
% Change

 
 
  2002
  2001
  2002
  2001
 
 
  (Unaudited, amounts in thousands, except percentage data)

 
(Provision for) benefit from income taxes   $ (10,293 ) $ 2,064   (599 )% $ (13,431 ) $ 2,734   (591 )%
Effective tax rate     27 %   25 %       28 %   27 %    

        Our tax rates for all periods vary from the U.S. statutory tax rate as a result of our:

        Our effective tax rate for both the three and six months ended June 30, 2001 also varied from the U.S. statutory rate due to nondeductible goodwill amortization expense. We stopped recording nondeductible goodwill amortization expense upon the adoption of SFAS No. 142 in fiscal year 2002.

Cumulative Effects of Changes in Accounting for Goodwill and Derivative Financial Instruments

        On January 1, 2002, we adopted SFAS No. 142, which requires that ratable amortization of goodwill be replaced with periodic impairment testing of goodwill. Accordingly, we ceased amortizing goodwill effective January 1, 2002.

        In accordance with the transitional provisions of SFAS No. 142, we tested the impairment of the goodwill for our cardiothoracic reporting unit and recorded an impairment charge of $98.3 million in our unaudited, consolidated statements of operations and in the unaudited, combined statements of operations of Genzyme Biosurgery for the three months ended March 31, 2002, which we recorded as the cumulative effect of a change in accounting for goodwill.

        On January 1, 2001, we adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133 establishes

69



accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that we recognize all derivative instruments as either assets or liabilities in our unaudited, consolidated balance sheet and measure those instruments at fair value. Subsequent changes in fair value are reflected in income, unless the derivative is part of a qualified hedging relationship.

        In accordance with the transition provisions of SFAS No. 133, we recorded a cumulative effect adjustment of $4.2 million, net of tax, in our unaudited, consolidated statement of operations and in the unaudited, combined statement of operations of Genzyme General for the three months ended March 31, 2001, to recognize the fair value of warrants to purchase shares of GTC common stock held on January 1, 2001 and allocated to Genzyme General. Transition adjustments pertaining to interest rate swaps designated as cash-flow hedges and foreign currency forward contracts allocated to Genzyme General were not significant. For the three months ended June 30, 2002, we recorded a charge of $0.9 million in other expense in our unaudited, consolidated statements of operations and in the unaudited, combined statement of operations of Genzyme General to reflect the change in value of our warrants to purchase shares of GTC common stock from April 1, 2002 to June 30, 2002 as compared to $0.2 million for the same period of 2001. For the six months ended June 30, 2002, we recorded a charge of $2.1 million in other expense to reflect the change in fair value of our warrants to purchase shares of GTC common stock from January 1, 2002 to June 30, 2002 as compared to $3.8 million for the same period a year ago. We also recorded a charge of $1.1 million, ($1.7 million pre-tax) in other comprehensive income (loss), in our stockholders' equity in our unaudited, consolidated balance sheets and in division equity in the unaudited, combined balance sheet of Genzyme General to reflect the change in value of our interest rate swaps during the six month period ended June 30, 2002. At June 30, 2002, our interest swaps had a fair market value of $(3.1) million.

70


GENZYME GENERAL
A Division of Genzyme Corporation

        The following discussion summarizes the key factors our management believes necessary for an understanding of Genzyme General's financial statements.

ACQUISITIONS

        In September 2001, we acquired all of the outstanding capital stock of Novazyme for an initial payment of approximately 2.6 million shares of Genzyme General Stock valued at $110.6 million. Novazyme shareholders received 0.5714 of a share of Genzyme General Stock for each share of Novazyme common stock they held. We will be obligated to make two additional payments totaling $87.5 million, payable in shares of Genzyme General Stock, if we receive U.S. marketing approval for two products for the treatment of LSDs that employ certain of Novazyme's technologies. In connection with the merger, we also assumed all of the outstanding options, warrants and rights to purchase Novazyme common stock on an as-converted basis. We allocated the acquisition to Genzyme General and accounted for the acquisition as a purchase. Accordingly, the results of operations of Novazyme are included in our consolidated financial statements and the combined financial statements of Genzyme General from September 26, 2001, the date of acquisition.

        The staff of the FTC is investigating our acquisition of Novazyme. The FTC is one of the agencies responsible for enforcing federal antitrust laws, and, in this investigation, it is evaluating whether there are anti-competitive aspects of the Novazyme transaction that the government should seek to negate. While we do not believe that the acquisition should be deemed to contravene antitrust laws, we have been cooperating in the FTC investigation. At this stage, we cannot predict with precision the likely outcome of the investigation or how that outcome will impact our business. As with any litigation or investigation, there will be costs associated with responding to the investigation, both in terms of management time and out-of-pocket expenses.

        In June 2001, we acquired all of the outstanding capital stock of privately-held Wyntek for $65.0 million in cash. Wyntek is a provider of high quality point of care rapid diagnostic tests for pregnancy and infectious diseases. We allocated the acquisition to Genzyme General and accounted for the acquisition as a purchase. Accordingly, the results of operations of Wyntek are included in our consolidated financial statements and in the combined financial statements of Genzyme General from June 1, 2001, the date of acquisition.

CRITICAL ACCOUNTING POLICIES

        The critical accounting policies for Genzyme General are set forth under the heading "Management's Discussion and Analysis of Genzyme General's Financial Condition and Results of Operations—Critical Accounting Policies" in Exhibit 13.2 to our 2001 Form 10-K. Except for Genzyme General's policy regarding asset impairments, as described below, there have been no changes to these policies since December 31, 2001.

Asset Impairments

        In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and amends APB No. 30, "Reporting Results of Operations—Reporting the Effects of Disposal of a Segment of a Business." SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001, and was adopted by Genzyme General, as required, on January 1, 2002.

71



        Genzyme General periodically evaluates long-lived assets for potential impairment under SFAS No. 144. Genzyme General performs these evaluations whenever events or changes in circumstances suggest that the carrying value of an asset or group of assets is not recoverable. Indicators of potential impairment include:

        If Genzyme General believes an indicator of potential impairment exists, it tests to determine whether the impairment recognition criterion in SFAS No. 144 has been met. In evaluating long-lived assets for potential impairment, Genzyme General makes several significant estimates and judgments, including:

Use of different estimates and judgments could yield significantly different results in this analysis and could result in materially different asset impairment charges.

        Effective January 1, 2002, Genzyme General adopted SFAS No. 142, "Goodwill and Other Intangible Assets," which requires that ratable amortization of goodwill and certain intangible assets be replaced with periodic tests of goodwill's impairment and that other intangible assets be amortized over their useful lives unless these lives are determined to be indefinite. Unlike SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of," goodwill impairment tests performed under SFAS No. 142 do not involve an initial test comparing the projected undiscounted cash flows to the carrying amount of goodwill. Instead, SFAS No. 142 requires that goodwill be tested using a two-step process. The first step compares the fair value of the reporting unit with the unit's carrying value, including goodwill. When the carrying value of the reporting unit is greater than fair value, the unit's goodwill may be impaired, and the second step must be completed to measure the amount of the goodwill impairment charge, if any. In the second step, the implied fair value of the reporting unit's goodwill is compared with the carrying amount of the unit's goodwill. If the carrying amount is greater than the implied fair value, the carrying value of the goodwill must be written down to its implied fair value.

        Effective January 1, 2002, Genzyme General reclassified $2.4 million of workforce intangible assets previously classified as other intangible assets, net of related deferred tax liabilities, to goodwill as required by SFAS No. 142.

        We have completed transitional impairment tests for the $492.4 million of net goodwill related to Genzyme General's reporting units in the three months ended March 31, 2002, as provided by SFAS No. 142 and determined that no impairment charges were required. We are required to perform impairment tests under SFAS No. 142 annually and whenever events or changes in circumstances suggest that the carrying value of an asset may not be recoverable. For all of our acquisitions, various analyses, assumptions and estimates were made at the time of each acquisition specifically regarding product development, market conditions and cash flows that were used to determine the valuation of goodwill and intangibles. The possibility exists that those estimates could prove to be inaccurate, which could result in an impairment of goodwill.

72



REVENUES

        The components of Genzyme General's total revenues are described in the following table:

 
  Three Months Ended
June 30,

   
  Six Months Ended
June 30,

   
 
 
  Increase/
(Decrease)
% Change

  Increase/
(Decrease)
% Change

 
 
  2002
  2001
  2002
  2001
 
 
  (Unaudited, amounts in thousands, except percentage data)

 
Product revenue   $ 242,756   $ 219,040   11 % $ 461,219   $ 421,246   9 %
Service revenue     22,420     18,305   22 %   43,595     36,537   19 %
   
 
     
 
     
  Total product and service revenue     265,176     237,345   12 %   504,814     457,783   10 %
Research and development revenue     1,992     1,653   21 %   4,501     3,908   15 %
   
 
     
 
     
  Total revenues   $ 267,168   $ 238,998   12 % $ 509,315   $ 461,691   10 %
   
 
     
 
     

Product and Service Revenue

        The following table sets forth Genzyme General's product and service revenues on a segment basis:

 
  Three Months Ended
June 30,

   
  Six Months Ended
June 30,

   
 
 
  Increase/
(Decrease)
% Change

  Increase/
(Decrease)
% Change

 
 
  2002
  2001
  2002
  2001
 
 
  (Unaudited, amounts in thousands, except percentage data)

 
Product Revenue:                                  
  Therapeutics:                                  
    Cerezyme/Ceredase enzymes   $ 154,717   $ 141,312   9 % $ 302,783   $ 280,943   8 %
    Renagel phosphate binder     39,543     40,408   (2 )%   69,075     69,003    
    Other therapeutic products     18,083     6,503   178 %   29,528     13,179   124 %
   
 
     
 
     
      Total Therapeutics     212,343     188,223   13 %   401,386     363,125   11 %
  Diagnostic Products     20,530     17,790   15 %   40,368     34,214   18 %
  Other     9,883     13,027   (24 )%   19,465     23,907   (19 )%
   
 
     
 
     
      Total product revenue     242,756     219,040   11 %   461,219     421,246   9 %
Service Revenue:                                  
  Other     22,420     18,305   22 %   43,595     36,537   19 %
   
 
     
 
     
      Total product and service revenue   $ 265,176   $ 237,345   12 % $ 504,814   $ 457,783   10 %
   
 
     
 
     

Therapeutics

        Genzyme General's increase in Therapeutics product revenue for both the three and six months ended June 30, 2002 as compared to the same period a year ago, was primarily due to continued growth in sales of Cerezyme enzyme for the treatment of Type 1 Gaucher disease and increased sales of other therapeutic products. Other therapeutic products revenue consists primarily of sales of Thyrogen hormone, which is an adjunctive diagnostic tool for well-differentiated thyroid cancer and sales of Fabrazyme enzyme, a recombinant form of the human enzyme alpha-galactosidase used for the treatment of Fabry disease.

        The growth in sales of Cerezyme enzyme in both the three and six months ended June 30, 2002 was attributable to Genzyme General's continued identification of new Gaucher disease patients worldwide resulting from significant investment in our global sales and marketing infrastructure. Additionally, Genzyme General continues to sell Ceredase enzyme for the treatment of Gaucher

73



disease, although we have successfully converted virtually all Gaucher disease patients that were using Ceredase enzyme to a treatment regimen using Cerezyme enzyme.

        Genzyme General's results of operations are highly dependent on sales of Cerezyme enzyme and a reduction in revenue from sales of this product would adversely affect its results of operations. Revenue from Cerezyme enzyme would be impacted negatively if competitors developed alternative treatments for Gaucher disease and the alternative products gained commercial acceptance. Although orphan drug status for Cerezyme enzyme, which provided us with exclusive marketing rights for Cerezyme enzyme in the United States, expired in May 2001, we continue to have patents protecting our method of manufacturing Cerezyme enzyme until 2010 and the composition of Cerezyme enzyme as made by that process until 2013. The expiration of market exclusivity and orphan drug status will likely subject Cerezyme enzyme to increased competition, which may decrease the amount of revenue we receive from this product or the growth of that revenue.

        Genzyme General is aware of companies that have initiated efforts to develop competitive products. Oxford Glycosciences plc, for example, is developing Zavesca (OGT 918), a small molecule drug candidate for the treatment of Type 1 Gaucher disease. OGT 918 has been granted orphan drug status in the United States for treatment of Type 1 Gaucher and Fabry diseases, and has been designated as an orphan medicinal product in the European Union for the treatment of Type 1 Gaucher disease. In 2001, Oxford Glycosciences submitted an MAA to the EMEA, as well as an NDA to the FDA for OGT 918 for the oral treatment of Type 1 Gaucher disease. In June 2002, the FDA issued a complete response letter on the NDA for OGT 918. In the letter the FDA stated that, in its opinion, the product is not approvable due to OGS' failure to provide sufficient support for the safety and efficacy of OGT 918. In July 2002, the CPMP of the EMEA issued a positive opinion recommending marketing approval of OGT 918 for the treatment of Type 1 Gaucher disease. The CPMP's decision states that the product is indicated only for mild-to-moderate forms of Type 1 Gaucher disease, and may be used only if the treatment of patients for whom enzyme replacement therapy is unsuitable. The CPMP requested OGS provide follow-up safety data. To date, virtually all Gaucher disease patients who have received enzyme replacement therapy have experienced strong clinical benefit with few side effects.

        The following table provides information regarding the change in sales of Genzyme General's Gaucher disease therapies as a percentage of total product revenue during the periods presented:

 
  Three Months Ended
June 30,

   
  Six Months Ended
June 30,

   
 
 
  Increase/
(Decrease)
% Change

  Increase/
(Decrease)
% Change

 
 
  2002
  2001
  2002
  2001
 
 
  (Unaudited, amounts in thousands, except percentage data)

 
Sales of Cerezyme/Ceredase enzymes   $ 154,717   $ 141,312   9 % $ 302,783   $ 280,943   8 %
% of total product revenue     64 %   65 %       66 %   67 %    

        Although sales of Genzyme General's Gaucher disease therapies continue to increase, we expect them to decline as a percentage of total product revenue in the future. Genzyme General expects sales of Renagel phosphate binder to increase, driven primarily by the continued adoption of the product by nephrologists worldwide. The increase in sales of Renagel phosphate binder will be dependent on several factors, including:

74


        The following table provides information regarding the change in sales of Renagel phosphate binder during the periods presented:

 
  Three Months Ended
June 30,

   
  Six Months Ended
June 30,

   
 
  Increase/
(Decrease)
% Change

  Increase/
(Decrease)
% Change

 
  2002
  2001
  2002
  2001
 
  (Unaudited, amounts in thousands, except percentage data)

Sales of Renagel phosphate binder   $ 39,543   $ 40,408   (2 )% $ 69,075   $ 69,003  
% of total product revenue     16 %   18 %       15 %   16 %  

Sales for the three and six months ended June 30, 2002, reflect the impact of a reduction in average domestic wholesaler inventory levels.

        Other therapeutics revenue consists primarily of sales of Thyrogen hormone, Fabrazyme enzyme and royalties earned on sales of WelChol compound. The increase in other therapeutics revenue for the three months ended June 30, 2002 as compared to the same period a year ago is attributable to:

        The increase in other therapeutics revenue for the six months ended June 30, 2002 as compared to the same period a year ago is attributable to:

Diagnostic Products

        Diagnostic Products revenue increased $2.7 million, or 15%, to $20.5 million for the three month period ended June 30, 2002 as compared to the same period a year ago. The increase was primarily attributable to:

75


        Diagnostic Products revenue increased $6.2 million or 18% for the six month period ended June 30, 2002 as compared to the same period a year ago. The increase was primarily attributable to:

Other Product and Service Revenue

        The 24% decrease in other product revenue for the three months ended June 30, 2002 as compared to the same period a year ago is primarily due to a 23% decrease in sales of pharmaceutical materials, such as lipids, synthetic peptides and liquid crystals for drug delivery, to $6.8 million. The 22% increase in other service revenue for the three months ended June 30, 2002 as compared to the same period a year ago is primarily due to increased sales of genetic testing services to $22.4 million. This increase was primarily attributable to expanded presence in the prenatal market and a broader test menu in oncology.

        The 19% decrease in other product revenue for the six months ended June 30, 2002 as compared to the same period a year ago is primarily due to a 19% decrease in sales of pharmaceutical materials, such as lipids, synthetic peptides and liquid crystals for drug delivery, to $13.5 million. The 19% increase in other service revenue for the six months ended June 30, 2002 as compared to the same period a year ago is primarily due to increased sales of genetic testing services to $43.6 million. This increase was primarily attributable to expanded presence in the prenatal market and a broader test menu in oncology.

Research and Development Revenue

        The following table sets forth Genzyme General's research and development revenue on a segment basis:

 
  Three Months Ended
June 30,

   
  Six Months Ended
June 30,

   
 
 
  Increase/
(Decrease)
% Change

  Increase/
(Decrease)
% Change

 
 
  2002
  2001
  2002
  2001
 
 
  (Unaudited, amounts in thousands, except percentage data)

 
Research and development revenue:                                  
  Therapeutics   $ 1,133   $ 320   254 % $ 2,929   $ 2,205   33 %
  Other         20   (100 )%   31     20   55 %
  Eliminations/Adjustments     859     1,313   (35 )%   1,541     1,683   (8 )%
   
 
     
 
     
      Total research and development revenue   $ 1,992   $ 1,653   21 % $ 4,501   $ 3,908   15 %
   
 
     
 
     

        Research and development revenue allocated to Genzyme General is related primarily to research initiatives for its Therapeutics business segment. Eliminations/Adjustments includes research and development efforts Genzyme General performs on behalf of GTC and amounts related to Genzyme General's research and development activities that we do not specifically allocate to a particular segment of Genzyme General.

76



International Product and Service Revenue

        A substantial portion of Genzyme General's revenue was generated outside of the United States. Most of the international revenue was attributable to sales of Cerezyme enzyme. The following table provides information regarding the change in international product and service sales revenue during the periods presented:

 
  Three Months Ended
June 30,

   
  Six Months Ended
June 30,

   
 
 
  Increase/
(Decrease)
% Change

  Increase/
(Decrease)
% Change

 
 
  2002
  2001
  2002
  2001
 
 
  (Unaudited, amounts in thousands, except percentage data)

 
International product and service revenue   $ 111,393   $ 88,349   26 % $ 214,907   $ 185,467   16 %
% of total product and service revenue     42 %   37 %       43 %   41 %    

        International sales of Cerezyme enzyme increased 13% to $81.1 million for the three months ended June 30, 2002 as compared to $71.4 in the same period a year ago. International sales of Cerezyme enzyme increased 6% to $158.9 million for the six months ended June 30, 2002 as compared to $149.2 in the same period a year ago.

        The increase for the three months ended June 30, 2002 as compared to the same period a year ago is primarily due to:

        The increase for the six months ended June 30, 2002 as compared to the same period a year ago is primarily due to a 7% increase in international unit sales of Cerezyme enzyme.

        International sales of Renagel phosphate binder increased 157% to $10.5 million for the three months ended June 30, 2002 as compared to $4.1 million for the same period a year ago. International sales of Renagel phosphate binder increased 150% to $18.8 million for the six months ended June 30, 2002 as compared to $7.6 million for the same period a year ago.

        The increase for the three and six months ended June 30, 2002 as compared to the same periods a year ago is primarily due to:

77


MARGINS

 
  Three Months Ended
June 30,

   
  Six Months Ended
June 30,

   
 
  Increase/
(Decrease)
% Change

  Increase/
(Decrease)
% Change

 
  2002
  2001
  2002
  2001
 
  (Unaudited, amounts in thousands, except percentage data)

Product margin   $ 191,991   $ 171,571   12%   $ 362,855   $ 325,883   11%
% of product revenue     79%     78%         79%     77%    

Service margin

 

 

9,566

 

 

7,688

 

24%

 

 

18,875

 

 

15,636

 

21%
% of service revenue     43%     42%         43%     43%    

Total gross margin

 

$

201,557

 

$

179,259

 

12%

 

$

381,730

 

$

341,519

 

12%
% of total product and service revenue     76%     76%         76%     75%    

        Genzyme General provides a broad range of healthcare products and services. As a result, Genzyme General's gross margin may vary significantly based on the category of product or service. Sales of therapeutic products, including Cerezyme enzyme, result in higher margins than sales of diagnostic products.

Product Margin

        The 12% increase in product margin and the increase in product margin as a percentage of product revenue for the three months ended June 30, 2002 as compared to the same period a year ago was primarily attributable to an 11% increase in product revenue offset by a 7% increase in the cost of products sold. The 11% increase in product margin and the increase in product margin as a percentage of product revenue for the six months ended June 30, 2002 as compared to the same period a year ago was primarily attributable to a 9% increase in product revenue offset by a 3% increase in the cost of products sold. The improved margins for both periods were primarily the result of an increase in sales of higher margin Therapeutics products. Sales of Therapeutics products such as Cerezyme enzyme, Thyrogen hormone and Fabrazyme enzyme increased for both periods as compared to the same periods a year ago, while cost of Therapeutics products sold decreased for both periods as compared to the same periods a year ago. The decrease in cost of Therapeutics products sold was primarily attributable to a volume discount on the production costs for Renagel phosphate binder in both periods in accordance with certain third party manufacturing agreements and greater manufacturing efficiencies gained across a number of product areas. Contributing to the decrease in cost of Therapeutics products sold for both periods, as compared to the same periods a year ago, were charges of $4.7 million for the three months ended June 30, 2001 and $8.2 million for the six months ended June 30, 2001 relating to the increased basis of the inventory obtained in connection with our acquisition of GelTex in December 2000, for which there were no comparable amounts in the same periods of 2002. Also impacting product margins slightly were margins attributable to lower margin Diagnostic Products. Although sales of Diagnostic Products, such as point of care rapid diagnostic tests for pregnancy and infectious diseases, increased for both periods as compared to the same periods a year ago, cost of Diagnostic Products sold also increased for both periods as compared to the same periods a year ago. The increase in cost of Diagnostic Products sold was partially attributable to a charge of $2.8 million recorded in the three months ended March 31, 2002 for the planned closure of a Diagnostic Products manufacturing facility in San Carlos, CA. We expect that in the future Genzyme General's product margin as a percentage of product revenue will trend slightly lower, primarily due to the lower margins normally attributable to Renagel phosphate binder and a product mix shift as sales of Diagnostic Products continue to increase.

78



Service Margin

        Service margin increased for the three and six months ended June 30, 2002 as compared to the same periods a year ago primarily due to increased sales of genetic testing services attributable to our expanded presence in the prenatal market and a broader test menu in oncology.

OPERATING EXPENSES

Selling, General and Administrative Expenses

        Selling, general and administrative expenses increased 21% for the three month period ended June 30, 2002 and 25% for the six month period ended June 30, 2002 as compared to same periods a year ago as a result of:


Research and Development Expenses

        Research and development expenses increased 33% for the three month period ended June 30, 2002 and 46% for the six month period ended June 30, 2002 as compared to the same period a year ago as a result of:

        Included in research and development expenses for the six month period ended June 30, 2002 are expenses associated with a comparison study of our enzyme programs for treatment of Pompe disease that we concluded during the first quarter of 2002. The enzyme programs included:

        The analysis of the data from that study indicated that our internally developed CHO product offers the clearest and most efficient pathway to commercialization based on both clinical and manufacturing considerations. As a result of this analysis we:

79


        Research and development expenses for the six months ended June 30, 2002 include a charge of $2.0 million we recorded in the first quarter of 2002 representing the restructuring of Genzyme General's facilities in New Jersey and Oklahoma that were acquired in connection with our acquisition of Novazyme.

Amortization of Intangibles

        Amortization of intangibles expense decreased 47% to $9.7 million for the three months ended June 30, 2002 and 46% to $19.4 million for the six months ended June 30, 2002 as compared to the same periods in 2001 primarily due to Genzyme General's adoption of SFAS No. 142 in January 2002. SFAS No. 142 requires that ratable amortization of goodwill and certain intangible assets be replaced with periodic tests of the goodwill's impairment and that other intangible assets be amortized over their useful lives unless these lives are determined to be indefinite. In accordance with the provisions of SFAS No. 142, Genzyme General ceased amortizing goodwill as of January 1, 2002. Had SFAS No. 142 been in effect on January 1, 2001, Genzyme General's amortization of intangibles expense would have been as follows:

 
  Three Months Ended June 30, 2001
  Six Months Ended June 30, 2001
 
  As
Reported

  Goodwill
Amortization
Adjustment

  As
Adjusted

  As
Reported

  Goodwill
Amortization
Adjustment

  As
Adjusted

 
  (Unaudited, amounts in thousands)

Amortization of intangibles   $ 18,182   $ (9,103 ) $ 9,079   $ 35,852   $ (18,012 ) $ 17,840

Purchase of In-Process Research and Development

Novazyme

        In September 2001, in connection with our acquisition of Novazyme, we acquired a technology platform that we believe can be leveraged in the development of treatments for various LSDs. As of the acquisition date, the technology platform had not achieved technological feasibility and would require significant further development to complete. Accordingly, we allocated to IPR&D and charged to expense $86.8 million, representing the portion of the purchase price attributable to the technology platform. Genzyme General recorded this amount as a charge to expense in its unaudited, combined statements of operations for the quarter ended September 30, 2001.

        The platform technology is specific to LSDs and there is currently no alternative use for the technology in the event that it fails as a platform for enzyme replacement therapy for the treatment of LSDs. As of June 30, 2002, we estimate that it will take approximately four to six years and an investment of approximately $75 million to $100 million to complete the development of, obtain approval for, and commercialize the first product based on this technology platform.

Wyntek

        In June 2001, in connection with our acquisition of Wyntek, we allocated approximately $8.8 million of the purchase price to IPR&D. Genzyme General recorded this amount as a charge to expense in its unaudited, combined statement of operations for the quarter ended June 30, 2001.

80



        Wyntek currently is developing a cardiovascular product to rapidly measure the quantitative levels of cardiac marker proteins. These are the leading markers for the diagnosis of acute myocardial infarction. The product consists of a mobile, stand-alone, quantitative diagnostic device and a reaction strip that detects disease specific marker proteins. The intended use of the device is to read reaction strips at the patient's bedside or in an emergency room setting. We expect to complete the regulatory review process, file an application for marketing approval and begin selling the product during 2002.

GelTex

        In December 2000, in connection with the acquisition of GelTex, we allocated approximately $118.0 million of the purchase price to IPR&D, which Genzyme General recorded as a charge to expense in its unaudited, combined statements of operations for the year ended December 31, 2000. As of June 30, 2002, the technological feasibility of the projects had not yet been reached and no significant departures from the assumptions included in the valuation analysis had occurred.

        Below is a brief description of the GelTex IPR&D projects, including an estimation of when our management believes Genzyme General may realize revenues from the sales of these products in the respective application:

Program

  Program Description or
Indication

   
  Development Status
at June 30, 2002

  Value at
Acquisition
Date

  Estimated
Cost to
Complete
at June 30,
2002

  Year of
Expected
Product
Launch

 
 
   
   
   
  (Amounts in millions)

   
 
Renagel phosphate binder   Next stage non-absorbed polymer phosphate binder for the treatment of hyperphospatemia  




  Clinical studies scheduled for completion in 2002, 2003 and 2004
Phase 4 trials ongoing in the U.S.
Phase 3 trials ongoing in Japan
  $ 19.7   $ 5.1   (1 )

GT160-246

 

C. difficile colitis

 


 

Phase 2 trial ongoing

 

 

37.4

 

 

31.1

 

2006

 

GT56-252 Oral Iron Chelator

 

Iron overload disease

 



 

Filed an IND in Q4 2001
Approval to commence Phase 1 trials in Europe obtained 2001

 

 

15.7

 

 

23.5

 

2007

 

GT316-235 Fat absorption inhibitor

 

Anti-obesity

 


 

Expected to file an IND in the first half of 2003

 

 

17.8

 

 

38.2

 

2010

 

Polymer

 

Oral Mucositis

 


 

IND expected to be filed in the second quarter of 2003

 

 

17.8

 

 

29.1

 

2008

 

DENSPM

 

Psoriasis

 


 

Program cancelled during 2001; no further development planned

 

 

3.4

 

 

N/A

 

N/A

 

GT102-279

 

Second generation lipid-lowering compound

 


 

Program cancelled during 2001; no further development planned

 

 

6.2

 

 

N/A

 

N/A

 
               
 
     
                $ 118.0   $ 127.0      
               
 
     

(1)
Year of launch not estimable due to early stage of the program.

        Substantial additional research and development will be required prior to any of our acquired IPR&D programs and technology platforms reaching technological feasibility. In addition, once developed each product will need to complete a series of clinical trials and receive FDA or other regulatory approvals prior to commercialization. Our current estimates of the time and investment required to develop these products and technologies may change depending on the different

81



applications that we may choose to pursue. We cannot give assurances that these programs will ever reach feasibility or develop into products that can be marketed profitably. In addition, we cannot guarantee that we will be able to develop and commercialize products before our competitors develop and commercialize products for the same indications. If products based on our acquired IPR&D programs and technology platforms do not become commercially viable, our results of operations could be materially affected.

OTHER INCOME AND EXPENSES

 
  Three Months Ended
June 30,

   
  Six Months Ended
June 30,

   
 
 
  Increase/
(Decrease)
% Change

  Increase/
(Decrease)
% Change

 
 
  2002
  2001
  2002
  2001
 
 
  (Unaudited, amounts in thousands, except percentage data)

 
Equity in net loss of unconsolidated affiliates   $ (3,948 ) $ (11,016 ) (64 )% $ (8,042 ) $ (19,495 ) (59 )%
Gain (loss) on investments in equity securities     343     (1,532 ) (122 )%   509     (1,532 ) (133 )%
Minority interest in net loss of subsidiary         725   (100 )%       1,999   (100 )%
Other     1,749     (171 ) (1,123 )%   852     (3,888 ) (122 )%
Investment income     12,079     11,798   2 %   25,031     21,011   19 %
Interest expense     (4,678 )   (7,282 ) (36 )%   (9,219 )   (13,680 ) (33 )%
   
 
     
 
     
  Total other income (expenses)   $ 5,545   $ (7,478 ) (174 )% $ 9,131   $ (15,585 ) (159 )%
   
 
     
 
     

Equity in Net Loss of Unconsolidated Affiliates

        Genzyme General records in equity in net loss of unconsolidated affiliates its portion of the results of our joint ventures with BioMarin, Pharming and Diacrin and through May 31, 2002, its portion of the results of GTC.

        Genzyme General's equity in net loss of unconsolidated affiliates decreased for both the three and six months ended June 30, 2002, as compared to the same periods a year ago, primarily as the result of the August 2001 termination of our strategic alliance with Pharming for the development of a CHO-cell derived product for the treatment of Pompe disease. In addition, in August 2001, we became responsible for funding the costs to produce transgenically-derived alpha-glucosidase and related clinical trial costs for Pharming/Genzyme LLC until the patients currently enrolled in the clinical trial of the product can be transitioned to a CHO-cell product. Genzyme General's share of losses for both joint ventures was $4.1 million for the three months ended June 30, 2001 and $6.8 million for the six months ended June 30, 2001.

        The decreases in equity in net loss of unconsolidated affiliates for the three and six months ended June 30, 2002 as compared to the same periods a year ago were also attributable to decreased losses from our joint ventures with BioMarin and Diacrin, which were offset in part by a slight increase in losses in our equity position in GTC.

        On April 4, 2002, GTC purchased approximately 2.8 million shares of GTC common stock held by us and allocated to Genzyme General for an aggregate consideration of approximately $9.6 million. We received approximately $4.8 million in cash and a promissory note for the remaining amount of approximately $4.8 million. The shares of GTC common stock were valued at $3.385 per share in this transaction, using the simple average of the high and low transaction prices quoted on the Nasdaq National Market on April 1, 2002. We have committed to a 24-month lock-up provision on the remaining 4.9 million shares of GTC common stock held by us and allocated to Genzyme General,

82



which is approximately 18% of the shares of GTC common stock outstanding as of June 30, 2002. We accounted for our investment in GTC under the equity method of accounting until May 2002, at which point we ceased to have significant influence over GTC. We began accounting for our investment in GTC under the cost method of accounting in June 2002.

        Because of the 24-month lock-up provision, the remaining 4.9 million shares of GTC common stock held by us do not qualify as marketable securities under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities". As a result, we carry the investment on our combined balance sheet at cost, subject to review for impairment. Based on the market price of GTC common stock at June 30, 2002, our remaining investment would have an unrealized loss of $8.3 million. Because we have assessed the decline in the market price of GTC common stock to be temporary, we have not recorded an associated impairment charge.

Minority Interest in Net Loss of Subsidiary

        As a result of our combined direct (until July 2001) and indirect interest in ATIII LLC, Genzyme General had consolidated the results of ATIII LLC, recording GTC's portion of the losses of that joint venture as minority interest. In July 2001, we transferred our 50% ownership interest in ATIII LLC to GTC and stopped recording minority interest.

Investment Income

        Genzyme General's investment income increased 2% for the three months ended June 30, 2002 and increased 19% for the six months ended June 30, 2002 as compared to the same periods a year ago primarily due to higher average cash balances. The higher cash balances resulted primarily from our May 2001 private placement of $575.0 million in principal of 3% convertible subordinated debentures due May 2021. Net proceeds from the offering were approximately $562.1 million. We allocated the principal balance of the debentures and the net proceeds from the offering to Genzyme General.

Interest Expense

        Genzyme General's interest expense decreased 36% for the three months ended June 30, 2002 and decreased 33% for the six months ended June 30, 2002 as compared to the same periods a year ago primarily due to the June 2001 redemption of our $250.0 million in principal 51/4% convertible subordinated notes due 2005, which was partially offset by the May 2001 private placement of $575.0 million in principal of 3% convertible subordinated debentures due May 2021. Also in May 2001, Genzyme General used a portion of the $562.1 million in proceeds from the private placement of the 3% convertible subordinated debentures due May 2021 to repay the $150.0 million we had drawn under our revolving credit facility in December 2000.

Tax Provision

 
  Three Months Ended
June 30,

   
  Six Months Ended
June 30,

   
 
 
  Increase/
(Decrease)
% Change

  Increase/
(Decrease)
% Change

 
 
  2002
  2001
  2002
  2001
 
 
  (Unaudited, amounts in thousands, except percentage data)

 
Provision for income taxes   $ (17,964 ) $ (15,803 ) 14 % $ (29,979 ) $ (30,679 ) (2 )%
Effective tax rate     29 %   42 %       30 %   40 %    

        Genzyme General's tax rates for all periods vary from the U.S. statutory tax rate as a result of its:

83


        Genzyme General's effective tax rate for both the three and six months ended June 30, 2001 also varied from the U.S. statutory rate due to nondeductible goodwill amortization expense. Genzyme General stopped recording non-deductible goodwill amortization expense upon the adoption of SFAS No. 142 in fiscal year 2002.

Cumulative Effect of Change in Accounting Principle

        On January 1, 2001, we adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that we recognize all derivative instruments as either assets or liabilities in Genzyme General's combined balance sheet and measure those instruments at fair value. Subsequent changes in fair value are reflected in income, unless the derivative is part of a qualified hedging relationship.

        In accordance with the transition provisions of SFAS No. 133, Genzyme General recorded a cumulative effect adjustment of $4.2 million, net of tax, in its unaudited, combined statements of operations for the three months ended March 31, 2001 to recognize the fair value of our warrants to purchase shares of GTC common stock held on January 1, 2001 and allocated to Genzyme General. Transition adjustments pertaining to interest rate swaps designated as cash-flow hedges and foreign currency forward contracts allocated to Genzyme General were not significant. For the three months ended June 30, 2002, Genzyme General recorded a charge of $0.9 million in other expense in its unaudited, combined statement of operations to reflect the change in value of its warrants to purchase shares of GTC common stock from April 1, 2002 to June 30, 2002 as compared to $0.2 million for the same period a year ago. For the six months ended June 30, 2002, Genzyme General recorded a charge of $2.1 million in other expense to reflect the change in fair value of its warrants to purchase shares of GTC common stock from January 1, 2002 to June 30, 2002 as compared to $3.8 million for the same period a year ago. Genzyme General also recorded a charge of $1.1 million ($1.7 million pre-tax) in division equity in its unaudited, combined balance sheets to reflect the change in value of its interest rate swaps during the six month period ended June 30, 2002 as compared to $0.5 million ($0.8 million pre-tax) for the same period a year ago. At June 30, 2002, Genzyme General's interest rate swaps had a fair-market value of $(3.1) million.

84



GENZYME BIOSURGERY
A Division of Genzyme Corporation

        The following discussion summarizes the key factors our management believes necessary for an understanding of Genzyme Biosurgery's financial statements.

DISPOSITION

        In November 2001, we sold our Snowden-Pencer line of surgical instruments, consisting of reusable surgical instruments for open and endoscopic surgery, including general, plastic, gynecological and open cardiovascular surgery, for $15.9 million in net cash. The purchaser acquired all of the assets directly associated with the Snowden-Pencer products, and is subleasing from us a manufacturing facility that we lease in Tucker, Georgia. The assets sold had a net carrying value of approximately $41.0 million at the time of the sale. We recorded a loss of $25.0 million in our consolidated financial statements and in the combined financial statements of Genzyme Biosurgery in connection with this sale.

ACQUISITIONS

        In January 2001, Focal exercised its option to require us to purchase $5.0 million in Focal common stock. After that purchase we held approximately 22% of the outstanding shares of Focal common stock and began accounting for our investment under the equity method of accounting. In June 2001, we acquired the remaining 78% of the outstanding shares of Focal common stock not previously acquired. Focal shareholders received 0.1545 of a share of Biosurgery Stock for each share of Focal common stock they held. We issued approximately 2.1 million shares of Biosurgery Stock as consideration, valued at approximately $9.5 million. We also assumed all of the outstanding options to purchase Focal common stock and exchanged them for options to purchase Biosurgery Stock on an as-converted basis. We accounted for the acquisition as a purchase and allocated it to Genzyme Biosurgery. Accordingly, the results of operations of Focal are included in our consolidated financial statements and in the combined financial statements of Genzyme Biosurgery from June 30, 2001, the date of acquisition.

        In January 2001, we acquired the outstanding Class A limited partnership interests in GDP, a limited partnership engaged in developing, producing and commercializing Sepra products, for an aggregate of $25.7 million in cash plus royalties on sales of certain Sepra products for ten years. In August 2001, we purchased the remaining outstanding GDP limited partnership interests, consisting of two Class B interests, for an aggregate of $180,000 plus additional royalties on sales of certain Sepra products for ten years. We accounted for the acquisitions as purchases and allocated them to Genzyme Biosurgery. Accordingly, the results of operations of GDP are included in our consolidated financial statements and the combined financial statements of Genzyme Biosurgery from January 9, 2001, the date of acquisition of the Class A interests.

CRITICAL ACCOUNTING POLICIES

        The critical accounting policies for Genzyme Biosurgery are set forth under the heading "Management's Discussion and Analysis of Genzyme Biosurgery's Financial Condition and Results of Operations—Critical Accounting Policies" in Exhibit 13.3 to our 2001 Form 10-K. Except for Genzyme Biosurgery's policy regarding asset impairments, as described below, there have been no changes to these policies since December 31, 2001.

Asset Impairments

        In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and amends APB No. 30,

85



"Reporting Results of Operations—Reporting the Effects of Disposal of a Segment of a Business." SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001, and was adopted by Genzyme Biosurgery, as required, on January 1, 2002.

        Genzyme Biosurgery periodically evaluates long-lived assets for potential impairment under SFAS No. 144. Genzyme Biosurgery performs these evaluations whenever events or changes in circumstances suggest that the carrying value of an asset or group of assets is not recoverable. Indicators of potential impairment include:

        If Genzyme Biosurgery believes an indicator of potential impairment exists, it tests to determine whether the impairment recognition criterion in SFAS No. 144 has been met. In evaluating long-lived assets for potential impairment, Genzyme Biosurgery makes several significant estimates and judgments, including:

Use of different estimates and judgments could yield significantly different results in this analysis and could result in materially different asset impairment charges.

        Effective January 1, 2002, Genzyme Biosurgery adopted SFAS No. 142, "Goodwill and Other Intangible Assets," which requires that ratable amortization of goodwill and certain intangible assets be replaced with periodic tests of goodwill's impairment and that other intangible assets be amortized over their useful lives unless these lives are determined to be indefinite. Unlike SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of," goodwill impairment tests performed under SFAS No. 142 do not involve an initial test comparing the projected undiscounted cash flows to the carrying amount of goodwill. Instead, SFAS No. 142 requires that goodwill be tested using a two-step process. The first step compares the fair value of the reporting unit with the unit's carrying value, including goodwill. When the carrying value of the reporting unit is greater than fair value, the unit's goodwill may be impaired, and the second step must be completed to measure the amount of the goodwill impairment charge, if any. In the second step, the implied fair value of the reporting unit's goodwill is compared with the carrying amount of the unit's goodwill. If the carrying amount is greater than the implied fair value, the carrying value of the goodwill must be written down to its implied fair value. Effective January 1, 2002, we reclassified $1.8 million of acquired workforce intangible assets, previously classified as other intangible assets, net of related deferred tax liabilities, to goodwill as required by SFAS No. 142.

        In November 2001, we sold our Snowden-Pencer line of surgical instruments, a component of our Biosurgical Specialties segment, and recorded a loss of $25.0 million, which we allocated to Genzyme Biosurgery. Our subsequent test of the remaining long-lived assets related to the remaining products of our surgical instruments and medical devices business line, which make up the majority of our cardiothoracic reporting unit, under SFAS No. 121, did not indicate an impairment based on the undiscounted cash flows of the business. However, the impairment analysis indicated that the goodwill allocated to the cardiothoracic reporting unit would be impaired if the analysis was done using

86



discounted cash flows, as required by SFAS No. 142. Therefore, in the three months ended March 31, 2002, upon adoption of SFAS No. 142, we tested the goodwill of our cardiothoracic reporting unit in accordance with the transitional provisions of that standard, using the present value of expected future cash flows to estimate the fair value of this reporting unit. We recorded an impairment charge of $98.3 million, which we reflected as a cumulative effect of a change in accounting for goodwill in our unaudited, consolidated statements of operations and the unaudited, combined statements of operations for Genzyme Biosurgery for the three months ended March 31, 2002.

        We have completed the transitional impairment test for the $112.7 million of net goodwill related to Genzyme Biosurgery's other reporting units in the six months ended June 30, 2002, as provided by SFAS No. 142, and determined that no additional impairment charges were required. We are required to perform impairment tests under SFAS No. 142 annually and whenever events or changes in circumstances suggest that the carrying value of an asset may not be recoverable. For all of our acquisitions, various analyses, assumptions and estimates were made at the time of each acquisition specifically regarding product development, market conditions and cash flows that were used to determine the valuation of goodwill and intangibles. The possibility exists that those estimates could prove to be inaccurate, which could result in an impairment of goodwill.

REVENUES

        The components of Genzyme Biosurgery's total revenues are described in the following table:

 
  Three Months Ended
June 30,

   
  Six Months Ended
June 30,

   
 
 
  Increase/
(Decrease)
% Change

  Increase/
(Decrease)
% Change

 
 
  2002
  2001
  2002
  2001
 
 
  (Unaudited, amounts in thousands, except percentage data)

 
Product revenue:                                  
  Cardiothoracic   $ 17,532   $ 17,367   1 % $ 34,053   $ 35,656   (4 )%
  Orthopaedics     25,767     21,709   19 %   45,765     37,777   21 %
  Biosurgical Specialties     13,925     15,357   (9 )%   25,569     29,624   (14 )%
   
 
     
 
     
    Total product revenue     57,224     54,433   5 %   105,387     103,057   2 %
   
 
     
 
     

Service revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Orthopaedics     4,728     4,779   (1 )%   8,905     9,128   (2 )%
  Biosurgical Specialties     876     1,151   (24 )%   1,907     2,330   (18 )%
   
 
     
 
     
    Total service revenue     5,604     5,930   (5 )%   10,812     11,458   (6 )%
   
 
     
 
     
Research and development revenue:                                  
  Other     35     1   3,400 %   35     5   600 %
   
 
     
 
     
    Total revenues   $ 62,863   $ 60,364   4 % $ 116,234   $ 114,520   1 %
   
 
     
 
     

Product Revenue

        Cardiothoracic products include fluid management (chest drainage) systems, surgical closures, biomaterials and instruments for conventional, minimally invasive and off-pump cardiac surgery.

        Cardiothoracic product revenue increased 1% for the three months ended June 30, 2002, as compared to the same period a year ago, primarily due to a 28% increase in the combined sales of FocalSeal-L surgical sealant and instruments for minimally-invasive and off-pump cardiac surgery to $4.6 million. The increase was partially offset by a 3% decline in revenue from sales of surgical closures to $4.6 million due to our withdrawal of certain commodity suture lines in Europe and an 8% decline in the combined revenues from sales of fluid management systems and instruments for cardiac surgery to $8.3 million.

87



        Cardiothoracic product revenue decreased 4% for the six months ended June 30, 2002, as compared to the same period a year ago, primarily due to a 13% decline in revenue from sales of surgical closures to $8.7 million resulting from our withdrawal of certain commodity suture lines in Europe and a 10% decline in the combined revenues from sales of fluid management systems and instruments for cardiac surgery to $16.6 million. These decreases were partially offset by a 22% increase in the combined sales of FocalSeal-L surgical sealant and instruments for minimally-invasive and off-pump cardiac surgery to $8.7 million.

        Orthopaedics product revenue increased $4.1 million, or 19%, for the three months and $8.0 million, or 21%, for the six months ended June 30, 2002, as compared to the same periods a year ago, primarily due to increased sales of Synvisc viscosupplementation product.

        Biosurgical Specialties product revenue decreased $1.4 million, or 9%, in the three months ended June 30, 2002, as compared to the same period a year ago. The decrease is due to a $4.8 million, or 97%, decrease in sales of surgical instruments due to the sale of our Snowden-Pencer line of surgical instruments during the fourth quarter of 2001, partially offset by a $1.8 million, or 25%, increase in sales of Sepra products and a $1.4 million, or 331%, increase in the sale of Hylaform products.

        Biosurgical Specialties product revenue decreased $4.1 million, or 14%, for the six months ended June 30, 2002, as compared to the same period a year ago. The decrease is due to a $9.1 million, or 94%, decrease in sales of surgical instruments due to the sale of our Snowden-Pencer line of surgical instruments during the fourth quarter of 2001, partially offset by a $3.8 million, or 27%, increase in sales of Sepra products and a $1.7 million, or 155%, increase in the sale of Hylaform products.

Service Revenue

        Orthopaedics service revenue did not change significantly during the three and six months ended June 30, 2002 when compared to the same periods a year ago. Increased sales of Carticel chondrocyte services in the U.S. for both the three and six months ended June 30, 2002 were offset by decreased European sales of the service in each period. We have not been actively seeking new partners or marketing Carticel chondrocytes in Europe since the second quarter of 2001. The decrease in Biosurgical Specialties service revenue for both the three and six months ended June 30, 2002, as compared to the same periods a year ago, is attributable to decreased sales of Epicel skin grafts services in each period.

International Revenue

        International revenue as a percentage of total sales for the three months ended June 30, 2002 was 19% as compared to 21% in the same period of 2001. International sales as a percentage of total sales for both the six months ended June 30, 2002 and 2001 was 21%.

88



MARGINS

 
  Three Months Ended
June 30,

   
  Six Months Ended
June 30,

   
 
 
  Increase/
(Decrease)
% Change

  Increase/
(Decrease)
% Change

 
 
  2002
  2001
  2002
  2001
 
 
  (Unaudited, amounts in thousands, except percentage data)

 
Product margin   $ 31,467   $ 22,302   41 % $ 55,075   $ 42,288   30 %
  % of product revenue     55%     41%         52%     41%      

Service margin

 

$

2,019

 

$

3,119

 

(35

)%

$

4,194

 

$

5,510

 

(24

)%
  % of service revenue     36%     53%         39%     48%      

Total gross margin

 

$

33,486

 

$

25,421

 

32

%

$

59,269

 

$

47,798

 

24

%
  % of total product and service revenue     53%     42%         51%     42%      

        Genzyme Biosurgery provides a broad range of healthcare products and services. As a result, Genzyme Biosurgery's gross margin may vary significantly depending on the market conditions of each product or service.

Product Margin

        The 41% increase in product margin and the increase in product margin as a percentage of product revenue for the three months ended June 30, 2002 as compared to the same period a year ago was primarily attributable to a modest increase in revenue and a favorable 20% decrease in cost of products sold. The decrease in the cost of products sold was primarily related to our December 2000 acquisition of Biomatrix, which was allocated to Genzyme Biosurgery. As part of the acquisition, we adjusted the acquired inventory to fair value, resulting in an increase of $11.3 million. This amount was fully amortized to cost of products sold as the acquired inventory was sold in 2001. For the three months ended June 30, 2001, $5.3 million was charged to cost of products sold. Excluding this adjustment, Genzyme Biosurgery's product margin for the three months ended June 30, 2001 would have been 51%.

        The 30% increase in product margin and the increase in product margin as a percentage of product revenue for the six months ended June 30, 2002 as compared to the same period a year ago was primarily attributable to a modest increase in revenue and a favorable 17% decrease in cost of products sold. For the six months ended June 30, 2001, $11.3 million related to the Biomatrix acquisition was charged to cost of products sold. Excluding this adjustment, Genzyme Biosurgery's product margin for the six months ended June 30, 2001 would have been 52%.

        Excluding the adjustments described above, product margin increased in the three and six months ended June 30, 2002, as compared to the same periods in 2001, as a result of an increase in sales of Synvisc viscosupplementation product, a higher margin product.

Service Margin

        Service margins decreased for both the three and six months ended June 30, 2002 as compared to the same periods a year ago, primarily due to decreased sales of both Carticel chondrocytes and Epicel skin grafts.

OPERATING EXPENSES

Selling, General and Administrative Expenses

        Selling, general and administrative expenses decreased 20% for the three and six months ended June 30, 2002 as compared to the same periods in 2001. The decrease was primarily due to a

89



$1.3 million reduction for the three months and $6.0 million reduction for the six months ended June 30, 2002 when compared to the same periods a year ago in selling, general and administrative expenses related to the sale of our former Snowden-Pencer line of surgical instruments and to efforts within Genzyme Biosurgery to streamline and consolidate selling efforts.

        In addition, the three and six months ended June 30, 2001 include $5.5 million of costs associated with the consolidation of European operations, for which there were no comparable amounts in the same periods of 2002.

Research and Development Expenses

        Research and development expenses increased 9% during the three months ended June 30, 2002 as compared to the same period in 2001. The increase was primarily due to a $0.6 million increase in spending on the cardiothoracic development programs, particularly cell therapy, and a $0.5 million increase in spending on the orthopaedics development programs, particularly Synvisc viscosupplementation product.

        Research and development expenses increased 10% during the six months ended June 30, 2002 as compared to the same period in 2001. The increase was primarily due to a $1.0 million increase in spending on the cardiothoracic development programs, particularly cell therapy, and a $0.4 million increase in spending on the orthopaedics development programs, particularly Synvisc viscosupplementation product.

Amortization of Intangibles

        Amortization of intangibles expense decreased 34% to $7.9 million for the three months ended June 30, 2002 and 32% to $15.7 million for the six months ended June 30, 2002 as compared to the same periods in 2001 due to Genzyme Biosurgery's adoption of SFAS No. 142 in January 2002. SFAS No. 142 requires that ratable amortization of goodwill and certain intangible assets be replaced with periodic tests of the goodwill's impairment and that other intangible assets be amortized over their useful lives unless these lives are determined to be indefinite. In accordance with the provisions of SFAS No. 142, Genzyme Biosurgery ceased amortizing goodwill as of January 1, 2002. Had SFAS No. 142 been in effect on January 1, 2001, Genzyme Biosurgery's amortization of intangible expense would have been as follows:

 
  Three Months Ended June 30, 2001
  Six Months Ended June 30, 2001
 
  As
Reported

  Goodwill
Amortization
Adjustment

  As
Adjusted

  As
Reported

  Goodwill
Amortization
Adjustment

  As
Adjusted

 
  (Unaudited, amounts in thousands)

Amortization of intangibles   $ 11,992   $ (3,789 ) $ 8,203   $ 23,313   $ (7,856 ) $ 15,457

Purchase Of In-Process Research And Development

Biomatrix

        In connection with our acquisition of Biomatrix, we allocated approximately $82.1 million to IPR&D, which Genzyme Biosurgery recorded as a charge to expense in its combined statement of operations for the year ended December 31, 2000. As of June 30, 2002, the technological feasibility of the Biomatrix IPR&D projects had not yet been reached and no significant departures from the assumptions included in the valuation analysis had occurred.

90



        Below is a brief description of the Biomatrix IPR&D projects, including an estimation of when our management believes we may realize revenues from the sales of these products in the respective application:

Program

  Program Description or
Indication

   
  Development Status
at June 30, 2002

  Value at
Acquisition
Date

  Estimated
Cost to
Complete
at June 30,
2002

  Year of
Expected
Product
Launch

 
   
   
   
  (Amounts in millions)

   
Visco-supplementation   Use of elastoviscous solutions and viscoelastic gels in disease conditions to supplement tissues and body fluids, alleviating pain and restoring normal function.  





  Prelaunch for hip indication in Europe
Preclinical for hip indication in U.S.
Preclinical for knee indication
Preclinical for other joints
  $ 33.8   (1)   2002 to 2008

Visco-augmentation and Visco-separation
(Adhesion prevention)

 

Use of viscoelastic gels to provide scaffolding for tissue regeneration and to separate tissues and decrease formation of adhesions and excessive scars after surgery.

 




 

Preclinical—gynecological and pelvic indications
Phase 2—spine indications

 

 

48.3

 

(1)

 

2003 to 2006

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

$

82.1

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

(1)
Costs to complete are not estimable due to the early stage of these programs.

        Substantial additional research and development will be required prior to any of our acquired IPR&D programs and technology platforms reaching technological feasibility. In addition, once developed, each product will need to complete a series of clinical trials and receive FDA or other regulatory approvals prior to commercialization. Our current estimates of the time and investment required to develop these products and technologies may change depending on the different applications that we may choose to pursue. We cannot give assurances that these programs will ever reach feasibility or develop into products that can be marketed profitably. In addition, we cannot guarantee that we will be able to develop and commercialize products before our competitors develop and commercialize products for the same indications. If products based on our acquired IPR&D programs and technology platforms do not become commercially viable, our results of operations could be materially affected.

OTHER INCOME AND EXPENSES

 
  Three Months Ended
June 30,

   
  Six Months Ended
June 30,

   
 
 
  Increase/
(Decrease)
% Change

  Increase/
(Decrease)
% Change

 
 
  2002
  2001
  2002
  2001
 
 
  (Unaudited, amounts in thousands, except percentage data)

 
Equity in net loss of unconsolidated affiliate   $   $ (780 ) (100 )% $   $ (1,316 ) (100 )%
Other     78     38   105 %   111     45   147 %
Investment income     326     427   (24 )%   623     939   (34 )%
Interest expense     (2,361 )   (3,470 ) (32 )%   (4,606 )   (8,429 ) (45 )%
   
 
     
 
     
  Total other income (expenses)   $ (1,957 ) $ (3,785 ) (48 )% $ (3,872 ) $ (8,761 ) (56 )%
   
 
     
 
     

Equity in Net Loss of Unconsolidated Affiliate

        In January 2001, Focal exercised its option to require us to purchase $5.0 million in Focal common stock at a price of $2.06 per share. After that purchase we held approximately 22% of the outstanding

91



shares of Focal common stock and began accounting for our investment under the equity method of accounting. We allocated our investment in Focal to Genzyme Biosurgery. Genzyme Biosurgery recorded in equity in net loss of unconsolidated affiliate its portion of the results of Focal. On June 30, 2001, we acquired the remaining 78% of the outstanding shares in an exchange of shares of Biosurgery Stock for shares of Focal common stock. Genzyme Biosurgery's equity in net loss of unconsolidated affiliate decreased in the three and six months ended June 30, 2002 when compared to the same periods in 2001 because Genzyme Biosurgery began accounting for Focal as a wholly-owned subsidiary when the remaining outstanding shares were purchased.

Investment Income

        Investment income decreased in the three and six months ended June 30, 2002 as compared to the same periods in 2001, despite higher average cash balances, as a result of a decline in interest rates.

Interest Expense

        Interest expense decreased in the three and six months ended June 30, 2002 as compared to the same periods in 2001 primarily as a result of a decrease in interest rates used to calculate interest on borrowings from our revolving credit facility.

Cumulative Effect of Change in Accounting for Goodwill

        On January 1, 2002, we adopted SFAS No. 142 which requires that ratable amortization of goodwill be replaced with periodic impairment testing of goodwill. Accordingly, Genzyme Biosurgery ceased amortizing goodwill effective January 1, 2002.

        In accordance with the transitional provisions of SFAS No. 142, Genzyme Biosurgery tested the impairment of the goodwill for its cardiothoracic reporting unit and recorded an impairment charge of $98.3 million in its combined statement of operations for the three months ended March 31, 2002, which it reported as the cumulative effect of change in accounting for goodwill.

92



GENZYME MOLECULAR ONCOLOGY
A Division of Genzyme Corporation

        The following discussion summarizes the key factors management believes are necessary for an understanding of Genzyme Molecular Oncology's financial statements.

CRITICAL ACCOUNTING POLICIES

        The critical accounting policies for Genzyme Molecular Oncology are set forth under the heading "Management's Discussion and Analysis of Genzyme Molecular Oncology's Financial Condition and Results of Operations—Critical Accounting Policies" in Exhibit 13.4 to our 2001 Form 10-K. Except for Genzyme Molecular Oncology's policy regarding asset impairment, as described below, there have been no changes to these policies since December 31, 2001.

Asset Impairments

        In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and amends APB No. 30, "Reporting Results of Operations—Reporting the Effects of Disposal of a Segment of a Business." SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001, and was adopted by Genzyme Molecular Oncology, as required, on January 1, 2002.

        Genzyme Molecular Oncology periodically evaluates long-lived assets for potential impairment under SFAS No. 144. Genzyme Molecular Oncology performs these evaluations whenever events or changes in circumstances suggest that the carrying value of an asset or group of assets is not recoverable. Indicators of potential impairment include:

        If Genzyme Molecular Oncology believes an indicator of potential impairment exists, it tests to determine whether the impairment recognition criterion in SFAS No. 144 has been met. In evaluating long-lived assets for potential impairment, Genzyme Molecular Oncology makes several significant estimates and judgments, including:

Use of different estimates and judgments could yield significantly different results in this analysis and could result in materially different asset impairment charges.

93



REVENUES

        The components of Genzyme Molecular Oncology's total revenues are described in the following table:

 
  Three Months Ended
June 30,

   
  Six Months Ended
June 30,

   
 
 
  Increase/
(Decrease)
% Change

  Increase/
(Decrease)
% Change

 
 
  2002
  2001
  2002
  2001
 
 
  (Unaudited, amounts in thousands, except percentage data)

 
Service revenue   $ 185   $   N/A   $ 485   $   N/A  
Research and development revenue     1,469     703   109 %   2,938     1,406   109 %
Licensing revenue     673     548   23 %   1,326     1,212   9 %
Royalty revenue     19     28   (32 )%   19     73   (74 )%
   
 
     
 
     
  Total revenues   $ 2,346   $ 1,279   83 % $ 4,768   $ 2,691   77 %
   
 
     
 
     

        Service revenue for the six months ended June 30, 2002 includes $0.3 million received under an agreement with a pharmaceutical company related to LongSAGE. This was Genzyme Molecular Oncology's first agreement related to this technology, so no such revenues were recorded for the three and six months ended June 30, 2001.

        Research and development revenue for the three months ended June 30, 2002 consists of $0.9 million of revenue for research performed on behalf of Purdue under the cancer antigen discovery agreement that was initiated in October 2000 and $0.6 million of revenue for research performed on behalf of Kirin under a collaboration agreement related to the tumor endothelial marker (TEM) program that was initiated in November 2001. Research and development revenue for the three months ended June 30, 2001 is solely attributable to research performed under the agreement with Purdue. Research and development revenue increased in the six months ended June 30, 2002 as compared to the same period in 2001 due to the addition of work performed under the Kirin collaboration, combined with an increase in resources applied to the Purdue collaboration.

        Licensing revenue for the three and six months ended June 30, 2002 consisted primarily of technology access fees Genzyme Molecular Oncology received from Purdue and Kirin resulting from those collaborations. Genzyme Molecular Oncology is amortizing these fees over the course of the associated research programs. For the three months ended June 30, 2002, Genzyme Molecular Oncology recognized $0.4 million of the technology access fee it received from Purdue, consistent with the same period in 2001, and $0.3 million of the fee it received from Kirin in the fourth quarter of 2001. For the six months ended June 30, 2002, Genzyme Molecular Oncology recognized $0.8 million of the technology fee it received from Purdue, consistent with the same period in 2001, and $0.5 million of the fee it received from Kirin. Genzyme Molecular Oncology also recognizes licensing revenue from licenses of rights to the SAGE technology and, prior to the transfer of its non-core in vitro cancer diagnostic assets to Genzyme General in December 2001, licenses associated with these assets. Those licensing revenues decreased $0.1 million in the three months ended June 30, 2002 as compared to the same period of 2001 and $0.4 million in the six months ended June 30, 2002 as compared to the same period of 2001 primarily due to the transfer of the diagnostic assets to Genzyme General. As a result of the asset transfer, Genzyme Molecular Oncology will no longer be receiving license revenue under its diagnostic patent estate.

        Royalty revenue consists of royalties received under licenses to the SAGE technology and, through December 2001, under Genzyme Molecular Oncology's diagnostic assets. Because Genzyme Molecular Oncology transferred its in vitro cancer diagnostic assets to Genzyme General in December 2001, it will not receive royalty revenue generated by those assets in the future.

94



COST OF REVENUES

 
  Three Months Ended
June 30,

   
  Six Months Ended
June 30,

   
 
 
  Increase/
(Decrease)
% Change

  Increase/
(Decrease)
% Change

 
 
  2002
  2001
  2002
  2001
 
 
  (Unaudited, amounts in thousands, except percentage data)

 
Cost of services sold   $ 168   $   N/A   $ 287   $   N/A  
Cost of research and development contracts and licensing revenue     1,167     485   141 %   2,302     1,029   124 %
   
 
     
 
     
  Total cost of revenues   $ 1,335   $ 485   175 % $ 2,589   $ 1,029   152 %
   
 
     
 
     

        Genzyme Molecular Oncology's cost of services sold for the six months ended June 30, 2002 includes $0.1 million of costs associated with the performance of services using the LongSAGE technology on behalf of third parties for which there were no similar amounts in the same period of 2001.

        Genzyme Molecular Oncology's cost of research and development contracts and licensing revenue for the three and six months ended June 30, 2002 and 2001 includes:

        Cost of research and development contracts and licensing revenue increased for both the three and six months ended June 30, 2002 as compared to the same periods in 2001 primarily due to the addition of work performed under the Kirin collaboration, combined with an increase in resources applied to the Purdue collaboration.

OPERATING EXPENSES

Selling, General and Administrative Expenses

        Genzyme Molecular Oncology's selling, general and administrative expenses increased 17% to $2.1 million for the three months ended June 30, 2002 and increased 13% to $4.2 million for the six months ended June 30, 2002 as compared to the same periods of 2001 as a result of enhanced business development efforts and increased expenses related to information technology, legal, accounting and general management services.

Research and Development Expenses

        Genzyme Molecular Oncology's research and development expenses decreased 30% to $5.3 million for the three months ended June 30, 2002 and 20% to $10.6 million for the six months ended June 30, 2002 as compared to the same periods of 2001 primarily due to a planned increase in the amount of research and development funded by collaborators. These collaborator-funded research expenses are included in Genzyme Molecular Oncology's cost of research and development contracts and licensing revenues rather than as a research and development expense. Total research and development expenses, including collaborator-funded expenses, decreased 19% to $6.5 million and 9% to $12.9 million for the three and six months ended June 30, 2002 as compared to the same periods of 2001 primarily due to the timing of certain clinical trial expenses combined with some non-recurring expenses incurred in the patient-specific vaccine program during the second quarter of 2001.

95


OTHER INCOME AND EXPENSES

        Genzyme Molecular Oncology's other income decreased 22% to $0.2 million for the three months ended June 30, 2002 and decreased 45% to $0.4 million for the six months ended June 30, 2002 as compared to the same periods in 2001 primarily due to a decrease in interest income in each period. Interest income declined 18% for the three months ended June 30, 2002 and 41% for the six months ended June 30, 2002 as compared to the same periods of 2001, as a result of a decline in interest rates despite higher average cash balances.

B.    LIQUIDITY AND CAPITAL RESOURCES

GENZYME CORPORATION

        At June 30, 2002 and December 31, 2001, we had cash, cash equivalents, and short- and long-term investments of $1.1 billion.

        Our operating activities generated $63.4 million of cash for the six months ended June 30, 2002. Net cash provided by operating activities was impacted by our net loss of $63.2 million and $43.8 million attributable to the net decrease in working capital, offset by:

        Our investing activities used $80.9 million of cash for the six months ended June 30, 2002. Net cash used in investing activities was primarily the result of:

Net cash utilized in investing activities was offset by $32.2 million of cash provided from net of purchases, sales and maturity of investments;

        As of June 30, 2002, our property, plant and equipment includes approximately $16.0 million of costs related to the development of a manufacturing site adjacent to our existing facilities in Framingham, Massachusetts, which is allocated to Genzyme General. In the fourth quarter of 2001, we suspended development of this site in favor of developing the manufacturing site we acquired from Pharming N.V. in Geel, Belgium and allocated to Genzyme General. We are considering alternative uses for the site and intend to make a decision in 2002 regarding its future use. We believe that the costs incurred by Genzyme General to-date for the Framingham site will be realized in the future construction at the site.

        In May 2002, we restructured our collaboration agreement with Dyax for the development of the kallikrein inhibitor DX-88 and increased the line of credit we extended to Dyax from $3.0 million to $7.0 million. In connection with the increase, Dyax issued a senior secured promissory note in the principal amount of $7.0 million to us under which it can request periodic advances of not less than

96



$250,000 in principal, subject to certain conditions. Advances under this note bear interest at the prime rate plus 2% and are due, together with any accrued but unpaid interest, in May 2005. In June 2002, Dyax drew $4.0 million under the note, which we recorded as a note receivable-related party in our unaudited, consolidated balance sheet and the unaudited, combined balance sheet of Genzyme General. Dyax is considered a related party because the chairman and chief executive officer of Dyax is a member of our board of directors. Pursuant to the terms of the note, we are not obligated to make advances in excess of $1.5 million during any subsequent calendar quarter.

        Our financing activities provided $58.0 million of cash for the six months ended June 30, 2002. Net cash provided by financing activities was primarily the result of:

        We have access to a $350.0 million revolving credit facility, all of which matures in December 2003. During the first quarter of 2002, we drew down $35.0 million under this facility and allocated the borrowings to Genzyme Biosurgery. At June 30, 2002, $269.0 million had been drawn down and remained outstanding under the $350.0 million facility, all of which was allocated to Genzyme Biosurgery. Borrowings under this facility bear interest at LIBOR plus an applicable margin. The terms of the revolving credit facility include various covenants, including financial covenants, which require us to meet minimum liquidity and interest coverage ratios and to meet maximum leverage ratios. We currently are in compliance with these covenants and do not anticipate falling out of compliance.

        We believe that our available cash, investments and cash flow from operations will be sufficient to fund our planned operations and capital requirements for the foreseeable future. Although we have substantial cash resources and positive cash flow, we intend to use substantial portions of our available cash for:

        Our cash reserves will be further reduced to pay interest on the $575.0 million in principal under our 3% convertible subordinated debentures due May 2021, which may be convertible into shares of Genzyme General Stock. If we use cash to pay or redeem any of this debt, including principal and interest due on it, our cash reserves will be diminished. To satisfy these and other commitments, we may have to obtain additional financing. We cannot guarantee that we will be able to obtain any additional financing, extend any existing financing arrangement, or obtain either on favorable terms.

        The disclosure of payments we have committed to make under contractual obligations is set forth under the heading "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations—Liquidity and Capital Resources" in Exhibit 13.1 to our 2001 Form 10-K. Except for our commitments under our revolving credit facility, as described above, and operating leases, as described below, there have been no material changes to our contractual obligations since December 31, 2001.

        In May 2002, we entered into an agreement to lease an 85,808 square foot building and related parking area in Westborough, Massachusetts for Genzyme General's genetic testing business. The term

97



of the lease is ten years with rent payable in advance commencing August 1, 2002. Yearly fixed rent payments during the term of the lease are as follows (amounts in thousands):

August–December 2002   $ 261
2003     627
2004     714
2005     930
2006     1,060
Thereafter     7,097
   
Total   $ 10,689
   

Pursuant to the terms of the net lease agreement, we are obligated to pay, in addition to yearly fixed rent, the taxes, betterment assessments, insurance costs, utility charges, base operating costs and certain other expenses related to the property under lease. Subject to certain conditions, the lease provides us with an option to extend the lease for two additional five-year terms and a one-time option, exercisable during the first five years of the lease, to purchase the land and building under lease.

        To satisfy these and other commitments, we may have to obtain additional financing. We cannot guarantee that we will be able to obtain any additional financing, extend any existing financing arrangement, or obtain either on favorable terms.

New Accounting Pronouncements

        In August 2001, the FASB issued SFAS, No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. SFAS No. 143 will be effective for our fiscal year ending December 31, 2003. We are in the process of assessing the effect of adopting SFAS No. 143 on our consolidated and combined financial statements.

        In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes EITF Issue 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF Issue 94-3, a liability for an exit cost as defined in EITF Issue 94-3 was recognized at the date of an entity's commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. We will adopt the provisions of SFAS No. 146 for exit or disposal activities that are initiated after December 31, 2002 as required by the standard.

Subsequent Events

        In July 2002, together with BioMarin, we submitted the final portion of the "rolling" BLA for Aldurazyme enzyme to the FDA. As part of the BLA submission, we have formally requested Priority Review, which is an FDA procedure generally reserved for products that address an unmet medical need. We expect a decision regarding the FDA's acceptance of the Aldurazyme BLA and its Priority Review status by the end of September 2002. Pursuant to the terms of our joint venture agreement with BioMarin for the development and commercialization of Aldurazyme, we are obligated to pay BioMarin a $12.1 million milestone payment upon receipt of FDA approval of the Aldurazyme BLA. If the FDA accepts the BLA and grants Priority Review, we anticipate receiving a response from the FDA regarding the application to market Aldurazyme in the United States six months from the submission date of the completed application.

98



        In July 2002, we also entered into an agreement to lease 61,101 square feet of additional office space in Cambridge, Massachusetts for Genzyme Biosurgery. The term of the lease is seven years with rent payable in advance commencing the earlier of October 1, 2002 or the date we occupy the premises to conduct business, as defined in the lease agreement. Yearly fixed rent payments during the term of the lease are as follows (amounts in thousands):

October–December 2002   $ 519
2003     2,075
2004     2,090
2005     2,151
2006     2,197
Thereafter     6,043
   
Total   $ 15,075
   

Pursuant to the terms of the lease agreement, we are obligated to pay, in addition to yearly fixed rent, our pro rata share of the landlord's operating costs and the real estate taxes for the property. In addition, the landlord will charge us for direct use of electricity at cost. Subject to certain conditions, the lease provides us with an option to extend the lease for two additional five-year terms and three options to lease a total of 45,577 square feet of additional space at the property. In addition, the lease provides us with first offer options as to additional space that becomes available in the building.

99


GENZYME GENERAL
A Division of Genzyme Corporation

        At June 30, 2002, Genzyme General had cash, cash equivalents, and short- and long-term investments of $1.1 billion, an increase of $38.8 million from December 31, 2001.

        Genzyme General's operating activities generated $97.4 million of cash for the six months ended June 30, 2002. Net cash provided by operating activities was primarily the result of Genzyme General's net income of $68.7 million and:

Genzyme General's operating activities were impacted by a $24.1 million net decrease in working capital.

        Genzyme General's investing activities utilized $59.1 million of cash for the six months ended June 30, 2002. Net cash utilized in investing activities consisted primarily of:

Net cash utilized in investing activities was offset by $52.1 million of cash provided from Genzyme General's net of purchases, sales and maturity of investments.

        As of June 30, 2002, Genzyme General's property, plant and equipment includes approximately $16.0 million of costs related to the development of a manufacturing site adjacent to our existing facilities in Framingham, Massachusetts, which is allocated to Genzyme General. In the fourth quarter of 2001, Genzyme General suspended development of this site in favor of developing the manufacturing site we acquired from Pharming N.V. in Geel, Belgium and allocated to Genzyme General. We are considering alternative uses for the site and intend to make a decision in 2002 regarding its future use. We believe that the costs incurred by Genzyme General to-date for the Framingham site will be realized in the future construction at the site.

        In May 2002, we restructured our collaboration agreement with Dyax for the development of the kallikrein inhibitor DX-88 and increased the line of credit we extended to Dyax from $3.0 million to $7.0 million. In connection with the increase, Dyax issued a senior secured promissory note in the principal amount of $7.0 million to us under which it can request periodic advances of not less than $250,000 in principal, subject to certain conditions. Advances under this note bear interest at the prime rate plus 2% and are due, together with any accrued but unpaid interest, in May 2005. In June 2002, Dyax drew $4.0 million under the note, which we recorded as a note receivable-related party in our unaudited, consolidated balance sheet and the unaudited, combined balance sheet of Genzyme General. Dyax is considered a related party because the chairman and chief executive officer of Dyax is a member of our board of directors. Pursuant to the terms of the note, we are not obligated to make advances in excess of $1.5 million during any subsequent calendar quarter.

100



        Genzyme General's financing activities provided $47.8 million of cash for the six months ended June 30, 2002 primarily the result of:


        Genzyme General, together with our other operating divisions, has access to a $350.0 million revolving credit facility, all of which matures in December 2003. At June 30, 2002, $269.0 million had been drawn down and remained outstanding under the $350.0 million facility, all of which was allocated to Genzyme Biosurgery. Borrowings under this facility bear interest at LIBOR plus an applicable margin.

        Our board of directors has made $25.0 million of Genzyme General's cash available to Genzyme Biosurgery. Under this arrangement, Genzyme Biosurgery is able to draw down funds as needed in exchange for Biosurgery designated shares based on the fair market value (as defined in our charter) of Biosurgery Stock at the time of the draw. At June 30, 2002, $3.0 million remained available to Genzyme Biosurgery under this arrangement. Our board of directors has made $30.0 million of Genzyme General's cash available to Genzyme Molecular Oncology. Under this arrangement, Genzyme Molecular Oncology is able to draw down funds as needed in exchange for Molecular Oncology designated shares based on the fair market value (as defined in our charter) of Molecular Oncology Stock at the time of the draw. At June 30, 2002, $11.0 million remained available to Genzyme Molecular Oncology under this arrangement.

        We believe that Genzyme General's available cash, investments and cash flow from operations will be sufficient to fund its planned operations and capital requirements for the foreseeable future. Although Genzyme General currently has substantial cash resources and positive cash flow, it intends to use substantial portions of its available cash for:

        Genzyme General's cash reserves will be further reduced to pay interest on the $575.0 million in principal under our 3% convertible subordinated debentures due May 2021, which may be convertible into shares of Genzyme General Stock. If Genzyme General uses cash to pay or redeem any of this debt, including principal and interest due on it, its cash reserves will be diminished. In addition, Genzyme General's cash resources will be reduced to the extent that we are required to use cash allocated to Genzyme General to settle the liabilities of Genzyme Biosurgery or Genzyme Molecular Oncology.

        The disclosure of payments we have committed to make under contractual obligations using cash allocated to Genzyme General is set forth under the heading "Management's Discussion and Analysis of Genzyme General's Financial Condition and Results of Operations—Liquidity and Capital Resources" in Exhibit 13.2 to our 2001 Form 10-K. Except for our commitments under operating leases allocated to Genzyme General, as described below, there have been no material changes to the contractual obligations allocated to Genzyme General since December 31, 2001.

101



        In May 2002, we entered into an agreement to lease an 85,808 square foot building and related parking area in Westborough, Massachusetts for Genzyme General's genetic testing business. The term of the lease is ten years with rent payable in advance commencing August 1, 2002. Yearly fixed rent payments during the term of the lease are as follows (amounts in thousands):

August–December 2002   $ 261
2003     627
2004     714
2005     930
2006     1,060
Thereafter     7,097
   
Total   $ 10,689
   

Pursuant to the terms of the net lease agreement, we are obligated to pay, in addition to yearly fixed rent, the taxes, betterment assessments, insurance costs, utility charges, base operating costs and certain other expenses related to the property under lease. Subject to certain conditions, the lease provides us with an option to extend the lease for two additional five-year terms and a one-time option, exercisable during the first five years of the lease, to purchase the land and building under lease.

        To satisfy these and other commitments, we may have to obtain additional financing for Genzyme General. We cannot guarantee that we will be able to obtain any additional financing, extend any existing financing arrangement, or obtain either on favorable terms.

Subsequent Event

        In July 2002, together with BioMarin, we submitted the final portion of the "rolling" BLA for Aldurazyme enzyme to the FDA. As part of the BLA submission, we have formally requested Priority Review, which is an FDA procedure generally reserved for products that address an unmet medical need. We expect a decision regarding the FDA's acceptance of the Aldurazyme BLA and its Priority Review status by the end of September 2002. Pursuant to the terms of our joint venture agreement with BioMarin for the development and commercialization of Aldurazyme, we are obligated to pay BioMarin a $12.1 million milestone payment upon receipt of FDA approval of the Aldurazyme BLA. If the FDA accepts the BLA and grants Priority Review, we anticipate receiving a response from the FDA regarding the application to market Aldurazyme in the United States six months from the submission date of the completed application.

102



GENZYME BIOSURGERY

        At June 30, 2002, Genzyme Biosurgery had cash and cash equivalents of $27.2 million, a decrease of approximately $11.5 million from December 31, 2001.

        Genzyme Biosurgery's operating activities used $18.0 million in cash in the first half of 2002. Operating activities were impacted by Genzyme Biosurgery's division net loss of $136.2 million, offset by:

        Genzyme Biosurgery's investing activities used $1.9 million of cash for the six months ended June 30, 2002 primarily to fund capital expenditures.

        Genzyme Biosurgery's financing activities provided $10.1 million of net cash for the six months ended June 30, 2002. Net cash provided by financing activities was primarily a result of the $35.0 million draw under the revolving credit facility allocated to Genzyme Biosurgery. This was partially offset by a $27.1 million payment to Genzyme General, representing a refund of $20.0 million of the $25.0 million Genzyme Biosurgery received from Genzyme General in connection with the transfer to Genzyme General of Genzyme Biosurgery's interest in Diacrin/Genzyme LLC, plus accrued interest of 13.5% per annum.

        Genzyme Biosurgery, together with our other operating divisions, has access to a $350.0 million revolving credit facility, all of which matures in December 2003. During the first quarter of 2002, we drew down $35.0 million under this facility and allocated the borrowings to Genzyme Biosurgery. At June 30, 2002, $269.0 million had been drawn down and remained outstanding under the $350.0 million facility, all of which was allocated to Genzyme Biosurgery. Borrowings under this facility bear interest at LIBOR plus an applicable margin.

        Our board of directors has made $25.0 million of Genzyme General's cash available to Genzyme Biosurgery. Under this arrangement, Genzyme Biosurgery is able to draw down funds as needed in exchange for Biosurgery designated shares based on the fair market value (as defined in our charter) of Biosurgery Stock at the time of the draw. At June 30, 2002, $3.0 million remained available to Genzyme Biosurgery under this arrangement.

        We anticipate that Genzyme Biosurgery's cash resources, together with amounts available from the following sources, will be sufficient to finance its planned operations and capital requirements through the fourth quarter of 2003:

        Genzyme Biosurgery intends to use substantial portions of its available cash for:

103


        Genzyme Biosurgery's cash needs may differ from those planned as a result of many factors, including the:

        The disclosure of payments we have committed to make under contractual obligations using cash allocated to Genzyme Biosurgery is set forth under the heading "Management's Discussion and Analysis of Genzyme Biosurgery's Financial Condition and Results of Operations—Liquidity and Capital Resources" in Exhibit 13.3 to our 2001 Form 10-K. Except for the $27.1 million refund paid by Genzyme Biosurgery to Genzyme General in February 2002 and commitments under our revolving credit facility that are allocated to Genzyme Biosurgery, as described above, and commitments under operating leases allocated to Genzyme Biosurgery, as described below, there have been no material changes to the contractual obligations allocated to Genzyme Biosurgery since December 31, 2001.

        Genzyme Biosurgery will require significant additional financing to continue operations at anticipated levels. We cannot guarantee that we will be able to obtain any additional financing, extend any existing financing arrangement, or obtain either on terms that we consider favorable. If Genzyme Biosurgery has insufficient funds or is unable to raise additional funds, it may delay, scale back or eliminate certain of its programs. Genzyme Biosurgery may also have to give third parties rights to commercialize technologies or products that it would otherwise have sought to commercialize itself.

Subsequent Event

        In July 2002, we entered into an agreement to lease 61,101 square feet of additional office space in Cambridge, Massachusetts for Genzyme Biosurgery. The term of the lease is seven years with rent payable in advance commencing the earlier of October 1, 2002 or the date we occupy the premises to

104



conduct business, as defined in the lease agreement. Yearly fixed rent payments during the term of the lease are as follows (amounts in thousands):

October–December 2002   $ 519
2003     2,075
2004     2,090
2005     2,151
2006     2,197
Thereafter     6,043
   
Total   $ 15,075
   

Pursuant to the terms of the lease agreement, we are obligated to pay, in addition to yearly fixed rent, our pro rata share of the landlord's operating costs and the real estate taxes for the property. In addition, the landlord will charge us for direct use of electricity at cost. Subject to certain conditions, the lease provides us with an option to extend the lease for two additional five-year terms and three options to lease a total of 45,577 square feet of additional space at the property. In addition, the lease provides us with first offer options on additional space that becomes available in the building.

105


GENZYME MOLECULAR ONCOLOGY
A Division of Genzyme Corporation

        At June 30, 2002, Genzyme Molecular Oncology had cash, cash equivalents, short- and long-term investments of $25.5 million, a decrease of $15.7 million from cash and cash equivalents of $41.1 million at December 31, 2001.

        Genzyme Molecular Oncology's operating activities used $16.0 million of cash for the six months ended June 30, 2002. Operating activities were impacted by Genzyme Molecular Oncology's division net loss of $12.3 million for the six months ended June 30, 2002 and $3.7 million attributable to the net decrease in working capital.

        Genzyme Molecular Oncology's investing activities used $19.9 million of cash for the six months ended June 30, 2002 for the net purchases and sales of investments.

        Genzyme Molecular Oncology's financing activities provided $0.2 million of allocated proceeds from the issuance of Molecular Oncology Stock in connection with the exercise of options to purchase shares of Molecular Oncology Stock under our stock plans.

        Genzyme Molecular Oncology, together with our other operating divisions, has access to our $350.0 million revolving credit facility that matures in December 2003. As of June 30, 2002, $81.0 million remained available for borrowing under this facility. Borrowings under this facility bear interest at LIBOR plus an applicable margin.

        Our board of directors has made $30.0 million of Genzyme General's cash available to Genzyme Molecular Oncology. Under this arrangement, Genzyme Molecular Oncology is able to draw down funds as needed in exchange for Molecular Oncology designated shares based on the fair market value (as defined in our charter) of Molecular Oncology Stock at the time of the draw. At June 30, 2002, $11.0 million remained available to Genzyme Molecular Oncology under this arrangement.

        We anticipate that Genzyme Molecular Oncology's current cash resources, together with amounts available from the following sources, will be sufficient to fund its operations through the third quarter of 2004:

        Genzyme Molecular Oncology plans to spend substantial amounts of funds on, among other things:

        Genzyme Molecular Oncology's cash needs may differ from those planned as a result of many factors, including the:

106


        The disclosure of payments we have committed to make under contractual obligations using cash allocated to Genzyme Molecular Oncology is set forth under the heading "Management's Discussion and Analysis of Genzyme Molecular Oncology's Financial Condition and Results of Operations—Liquidity and Capital Resources" in Exhibit 13.4 to our 2001 Form 10-K. There have been no material changes to the contractual obligations allocated to Genzyme Molecular Oncology since December 31, 2001.

        Genzyme Molecular Oncology may require significant additional financing to continue operations at anticipated levels. We cannot guarantee that Genzyme Molecular Oncology will be able to obtain any additional financing, extend any existing financing arrangement, or obtain either on terms that we consider favorable. If Genzyme Molecular Oncology has insufficient funds or is unable to raise additional funds, it may delay, reduce or eliminate certain of its programs. Genzyme Molecular Oncology may also have to sell or give to third parties rights to commercialize technologies or products that it would otherwise have sought to commercialize itself.

ITEM 3. QUANTITATIVE AND QUALITATIVE ANALYSIS OF MARKET RISK

        We are exposed to potential loss from financial market risks that may occur as a result of changes in interest rates, equity prices and foreign exchange rates. Our exposure to these risks has not materially changed since December 31, 2001.

        We incorporate by reference our disclosure related to market risk which is set forth under the heading "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations—Market Risk," "—Interest Rate Risk," "—Foreign Exchange Risk;" and "—Equity Price Risk" in Exhibit 13.1 to our 2001 Form 10-K.

107



PART II.    OTHER INFORMATION

ITEM 4.    Submission of Matters to a Vote of Security Holders


 
  Number of Votes
Nominee

  For
  Withheld
Constantine E. Anagnostopulos        
  Genzyme General Stock   179,209,463   2,552,684
  Biosurgery Stock*   8,206,976   293,481
  Molecular Oncology Stock*   4,010,799   50,637
   
 
  Total   191,427,238   2,896,802
   
 
 
  Number of Votes
Nominee

  For
  Withheld
Robert J. Carpenter        
  Genzyme General Stock   163,675,556   18,086,591
  Biosurgery Stock*   7,247,970   1,252,488
  Molecular Oncology Stock*   3,863,941   197,494
   
 
  Total   174,787,467   19,536,573
   
 
 
  Number of Votes
Nominee

  For
  Withheld
Charles L. Cooney        
  Genzyme General Stock   178,873,038   2,889,109
  Biosurgery Stock*   8,180,316   320,142
  Molecular Oncology Stock*   4,011,026   50,410
   
 
  Total   191,064,380   3,259,661
   
 

108


b.
Proposal to amend our 1999 Employee Stock Purchase Plan to increase the number of shares of Genzyme General Stock authorized for issuance under the plan by 300,000 shares.

 
  Number of
Votes for

  Number of
Votes Against

  Number of Votes
Abstaining

  Number of
Broker Non-Votes

Genzyme General Stock   172,725,791   8,232,545   803,810   N/A
Biosurgery Stock*   8,101,724   378,527   20,205   N/A
Molecular Oncology Stock*   3,786,998   264,145   10,291   N/A
   
 
 
   
Total   184,614,513   8,875,217   834,306   N/A
   
 
 
   
c.
Proposal to amend our 1999 Employee Stock Purchase Plan to increase the number of shares of Biosurgery Stock authorized for issuance under the plan by 400,000 shares.

 
  Number of
Votes for

  Number of
Votes Against

  Number of Votes
Abstaining

  Number of
Broker Non-Votes

Genzyme General Stock   172,658,332   8,294,378   809,435   N/A
Biosurgery Stock*   8,091,156   389,850   19,451   N/A
Molecular Oncology Stock*   3,782,947   267,335   11,153   N/A
   
 
 
   
Total   184,532,435   8,951,563   840,039   N/A
   
 
 
   
d.
Proposal to amend our 1999 Employee Stock Purchase Plan to increase the number of shares of Molecular Oncology Stock authorized for issuance under the plan by 150,000 shares.

 
  Number of
Votes for

  Number of
Votes Against

  Number of Votes
Abstaining

  Number of
Broker Non-Votes

Genzyme General Stock   136,297,055   8,298,495   827,001   N/A
Biosurgery Stock*   4,806,592   385,762   21,994   N/A
Molecular Oncology Stock*   1,536,127   269,052   9,590   N/A
   
 
 
   
Total   142,639,774   8,953,309   858,585   N/A
   
 
 
   
e.
Proposal to amend our 2001 Equity Incentive Plan to increase the number of shares of Genzyme General Stock authorized for issuance under the plan by 5,000,000 shares.

 
  Number of
Votes for

  Number of
Votes Against

  Number of Votes
Abstaining

  Number of
Broker Non-Votes

Genzyme General Stock   147,184,461   33,720,390   857,295   N/A
Biosurgery Stock*   7,523,131   951,825   25,499   N/A
Molecular Oncology Stock*   3,682,833   339,211   39,391   N/A
   
 
 
   
Total   158,390,425   35,011,426   922,185   N/A
   
 
 
   

109


f.
Proposal to amend our 2001 Equity Incentive Plan to increase the number of shares of Biosurgery Stock authorized for issuance under the plan by 1,000,000 shares.

 
  Number of
Votes for

  Number of
Votes Against

  Number of Votes
Abstaining

  Number of
Broker Non-Votes

Genzyme General Stock   145,097,823   35,812,269   852,054   N/A
Biosurgery Stock*   7,504,864   973,498   22,095   N/A
Molecular Oncology Stock*   3,673,149   349,001   39,285   N/A
   
 
 
   
Total   156,275,836   37,134,768   913,434   N/A
   
 
 
   
g.
Proposal to amend our 2001 Equity Incentive Plan to increase the number of shares of Molecular Oncology Stock authorized for issuance under the plan by 1,000,000 shares.

 
  Number of
Votes for

  Number of
Votes Against

  Number of Votes
Abstaining

  Number of
Broker Non-Votes

Genzyme General Stock   109,023,890   35,528,417   870,246   N/A
Biosurgery Stock*   4,246,564   943,064   24,720   N/A
Molecular Oncology Stock*   1,441,391   334,613   38,766   N/A
   
 
 
   
Total   114,711,845   36,806,094   933,732   N/A
   
 
 
   

*
Represents the actual number of shares of Biosurgery Stock and Molecular Oncology Stock voted multiplied by 0.28.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

110



GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, JUNE 30, 2002

SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

    GENZYME CORPORATION

DATE: August 14, 2002

 

By:

 

/s/  
MICHAEL S. WYZGA      
Michael S. Wyzga
Senior Vice President, Finance,
Chief Financial Officer, and
Chief Accounting Officer

111



GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, JUNE 30, 2002

EXHIBIT INDEX

Exhibit No.

  Description

*3.1   Restated Articles of Organization of Genzyme, as amended. Filed as Exhibit 3 to Genzyme's Form 8-K filed on June 6, 2001.

*3.2

 

By-laws of Genzyme, as amended. Filed as Exhibit 3.2 to Genzyme's Form 10-Q for the quarter ended September 30, 1999.

10.1

 

Lease dated as of May 9, 2002 for 3400 Computer Drive, Westborough, Massachusetts, between EMC Corporation and Genzyme. Filed herewith.

10.2

 

Form of Severance Agreement between Genzyme and the executive officers listed on the schedule attached thereto. Filed herewith.

10.3

 

Amended and Restated Collaboration Agreement, dated May 31, 2002, between Genzyme and Dyax Corporation. Filed herewith.

99.1

 

Written Statement of Chief Executive Officer, dated August 14, 2002. Filed herewith.

99.2

 

Written Statement of Chief Financial Officer, dated August 14, 2002. Filed herewith.

*
Indicates an exhibit previously filed with the Securities and Exchange Commission and incorporated herein by reference. Exhibits filed with Forms 8-K and 10-Q of Genzyme Corporation were filed under Commission File No. 0-14680.



QuickLinks

TABLE OF CONTENTS
GENZYME CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations (Unaudited, amounts in thousands)
GENZYME CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations (Continued) (Unaudited, amounts in thousands, except per share amounts)
GENZYME CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets (Amounts in thousands)
GENZYME CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited, amounts in thousands)
GENZYME CORPORATION AND SUBSIDIARIES Notes To Unaudited, Consolidated Financial Statements
GENZYME GENERAL A Division of Genzyme Corporation Combined Statements of Operations (Unaudited, amounts in thousands)
GENZYME GENERAL A Division of Genzyme Corporation Combined Balance Sheets (Amounts in thousands)
GENZYME GENERAL A Division of Genzyme Corporation Combined Statements of Cash Flows (Unaudited, amounts in thousands)
GENZYME GENERAL A Division of Genzyme Corporation Notes To Unaudited, Combined Financial Statements
GENZYME BIOSURGERY A Division of Genzyme Corporation Combined Statements of Operations (Unaudited, amounts in thousands)
GENZYME BIOSURGERY A Division of Genzyme Corporation Combined Balance Sheets (Amounts in thousands)
GENZYME BIOSURGERY A Division of Genzyme Corporation Combined Statements of Cash Flows (Unaudited, amounts in thousands)
GENZYME BIOSURGERY A Division of Genzyme Corporation Notes to Unaudited, Combined Financial Statements
GENZYME MOLECULAR ONCOLOGY A Division of Genzyme Corporation Combined Statements of Operations (Unaudited, amounts in thousands)
GENZYME MOLECULAR ONCOLOGY A Division of Genzyme Corporation Combined Balance Sheets (Amounts in thousands)
GENZYME MOLECULAR ONCOLOGY A Division of Genzyme Corporation Combined Statements of Cash Flows (Unaudited, amounts in thousands)
GENZYME MOLECULAR ONCOLOGY A Division of Genzyme Corporation Notes To Unaudited, Combined Financial Statements
GENZYME BIOSURGERY
SIGNATURES
EXHIBIT INDEX