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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 COMMISSION FILE NO. 0-14680
GENZYME CORPORATION
(Exact name of Registrant as specified in its charter)
MASSACHUSETTS 06-1047163
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
ONE KENDALL SQUARE 02139
CAMBRIDGE, MASSACHUSETTS (Zip Code)
(Address of principal executive offices)
(617) 252-7500
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
GENERAL DIVISION COMMON STOCK, $0.01 PAR VALUE ("GENERAL DIVISION STOCK")
TISSUE REPAIR DIVISION COMMON STOCK, $0.01 PAR VALUE ("TR STOCK")
GENERAL DIVISION STOCK PURCHASE RIGHTS
TR STOCK PURCHASE RIGHTS
WARRANTS (DATED NOVEMBER 3 AND 10, 1989) TO PURCHASE GENERAL
DIVISION STOCK AND TR STOCK SERIES N WARRANTS (DATED MAY 5, 1992)
TO PURCHASE GENERAL DIVISION STOCK AND TR STOCK
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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 twelve 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 X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 1, 1996: $2,349,667,466
Number of shares of the Registrant's General Division Stock outstanding as
of March 1, 1996: 31,844,070
Number of shares of the Registrant's TR Stock outstanding as of March 1,
1996: 12,110,503
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held May 16, 1996 are incorporated by reference into Part III
of this Form 10-K.
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NOTE REGARDING FORWARD-LOOKING STATEMENTS:
This Annual Report on Form 10-K for Genzyme Corporation (the "Company") contains
forward-looking statements concerning, among other things, the Company's
expected future revenues, operations and expenditures, estimates of the
potential markets for the Company's products and services, assessments of
competitors and potential competitors, projected timetables for the preclinical
and clinical development, regulatory approval and market introduction of the
Company's products and services and estimates of the capacity of manufacturing
and other facilities to support such products and services. All such
forward-looking statements are necessarily only estimates of future results and
the actual results achieved by the Company may differ materially from these
projections due to a number of factors, including (i) the Company's ability to
successfully complete preclinical and clinical development and obtain timely
regulatory approval and patent and other proprietary rights protection of its
products and services, (ii) decisions, and the timing of decisions, made by the
U.S. Food and Drug Administration and other agencies regarding the indications
for which the Company's products may be approved, (iii) the accuracy of the
Company's estimates of the size and characteristics of markets to be addressed
by the Company's products and services, (iv) market acceptance of the Company's
products and services, (v) the Company's ability to obtain reimbursement for its
products from third-party payers, where appropriate, and (vi) the accuracy of
the Company's information concerning the products and resources of competitors
and potential competitors. See also "Factors Affecting Future Operating Results"
under Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
PART I
ITEM 1. BUSINESS
Genzyme Corporation ("Genzyme" or the "Company") is a diversified,
integrated human health care company which operates in five major business
areas. The Company's business activities in the areas of therapeutics,
diagnostic services, diagnostic products, and pharmaceuticals are organized as
the Genzyme General Division (the "General Division"). Genzyme's activities to
develop, manufacture and market technologically advanced products for the
treatment and prevention of serious tissue damage are conducted through the
Genzyme Tissue Repair Division ("GTR"). Genzyme was incorporated in 1981.
Prior to December 16, 1994, Genzyme had one class of common stock. On
December 16, 1994, the authorized shares of common stock were redesignated as
General Division Common Stock ("General Division Stock") and a second class of
common stock, Tissue Repair Division Common Stock ("TR Stock") was authorized in
connection with the creation of GTR. The General Division Stock and the TR Stock
are intended to reflect the value and track the performance of the General
Division and GTR, respectively. Genzyme, however, continues to hold title to all
of its assets and be responsible for all of its liabilities and the holders of
the General Division Stock and the TR Stock have no specific claim against the
assets allocated to the division whose performance is associated with the class
of stock they hold. In addition, liabilities or contingencies of either division
that affect Genzyme's resources or financial condition could affect the
financial condition or results of operations of both divisions.
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Ceredase(R), Cerezyme(R), Thyrogen(R), InSight(R) and Vianain(R) are
registered trademarks of the Company. Epicel(SM) and CARTICEL(SM) are service
marks of Genzyme. Seprafilm(TM), Sepracoat(TM), Sepragel(TM) and HAL-S(TM) are
trademarks of the Company. HyperGAM(TM)+CF is a trademark of North American
Biologicals, Inc. ("NABI"). Tretinoin(LF) is a trademark of Aronex
Pharmaceuticals, Inc. ("Aronex"). Provisc(R) is a registered trademark of Alcon
Laboratories, Inc. ("Alcon"). Pulmozyme(TM) is a trademark of Genentech, Inc.
GENERAL DIVISION
SUMMARY DESCRIPTION OF MAJOR BUSINESS AREAS
The General Division's therapeutics business markets Ceredase(R) enzyme
and Cerezyme(R) enzyme, products for the treatment of Gaucher disease. The
Division's results of operations are highly dependent on sales of these products
which, for 1995, totaled $215 million. Other specialty therapeutic products
under development include Thyrogen(R) hormone for use in the diagnosis and
treatment of thyroid cancer, a line of biomaterial products based on hyaluronic
acid ("HA") principally for use to limit the formation of postoperative
adhesions (the "HA Products") and products for the treatment of cystic fibrosis
("CF"). Applications for Premarket Approval (each a "PMA") have been submitted
and are pending before the U.S. Food and Drug Administration ("FDA") for two of
the HA Products, Seprafilm(TM) bioresorbable membrane and Sepracoat(TM) coating
solution. The HA Products are being developed on behalf of a research and
development limited partnership. See "Related Entities -- Surgical Aids
Partnership." The CF products are being developed on behalf of a special purpose
accelerated research corporation. See "Related Entities -- Neozyme II
Corporation."
The General Division's diagnostic services business applies advanced
biotechnology to develop and provide high quality, sophisticated genetic
diagnostic services to physicians, hospitals, universities, medical centers,
clinical laboratories, genetic centers and managed care organizations throughout
the United States and internationally. The General Division also provides
identity testing services to state and local government agencies, attorneys and
various courts in the United States, as well as donor typing services to bone
marrow registries. The diagnostic services business was previously conducted
through IG Laboratories, Inc. ("IG"), a majority-owned (69%) subsidiary of
Genzyme, and Vivigen, Inc. ("Vivigen"), a wholly-owned subsidiary of Genzyme
that was managed by IG. In October 1995, Genzyme acquired all of the
publicly-owned shares of IG for shares of General Division Stock and IG was
merged into Genzyme. In February 1996, Genzyme announced an agreement to merge
Genetrix, Inc., a Phoenix-based operator of prenatal and cancer genetic testing
laboratories, with Genzyme in a transaction to be accounted for as a pooling of
interests. Subject to the approval of the Genetrix shareholders and the
satisfaction or waiver of certain other conditions, the merger will be
consummated, with holders of Genetrix stock receiving shares of General Division
Stock, and the operations of Genetrix will be included within the diagnostic
services business of the Genzyme General Division.
The General Division's diagnostic products business is a leading
independent supplier of diagnostic components (enzymes, substrates, antibodies
and antigens), bulk reagents and devices (including the Company's Direct LDL(TM)
test kit) to manufacturers of clinical diagnostic reagents and kits as well as
directly to clinical reference laboratories. The division also manufacturers and
sells a
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broad line of antibody and antigen based ELISA test kits. In addition, the
division distributes a broad product line of research products to academic,
industrial and governmental laboratories for use in immunology and cell biology.
The General Division's pharmaceuticals business develops, manufactures
and sells a range of active drug substances, pharmaceutical intermediates,
synthetic phospholipids, peptides, biomolecules and chemicals to the
pharmaceutical and health care industries. In 1995, the division introduced
MelaPure(TM) brand melatonin, a dietary supplement.
RELATED ENTITIES
SURGICAL AIDS PARTNERSHIP. In 1989, Genzyme sponsored the Surgical Aids
Partnership (the "Partnership"), a research and development limited partnership
that raised $36.75 million through the private placement of limited partnership
interests and warrants to purchase shares of the Company's common stock. A
wholly-owned subsidiary of Genzyme is the general partner of the Partnership and
holds a 1% partnership interest therein. The General Division entered into a
contract with the Partnership to perform research and development of products
based on HA, a naturally-occurring biopolymer, for use as surgical aids to
reduce the incidence and severity of postoperative adhesions and, in
arthroscopic procedures, as a synovial fluid replacement for which the General
Division was reimbursed its costs plus a 10% fee.
Under the terms of the various agreements between the Partnership and
Genzyme, the Partnership has the exclusive right to sell Seprafilm(TM) (formerly
called HAL-F(TM)), Sepracoat(TM) (formerly called HAL-C(TM)), Sepragel(TM)
(formerly called HAL-G(TM)), HAL-S(TM) and other HA-based surgical products in
the United States and Canada through a joint venture with the General Division
(the "Joint Venture"). The General Division was granted back an exclusive
license to sell these products outside the United States and Canada subject to a
royalty on European sales of these products under certain circumstances.
The Joint Venture was formed in 1989 for the purpose of manufacturing
and marketing the Partnership's products, but is not expected to engage in
active business until receipt of marketing approval for a product from the FDA.
The General Division will be reimbursed for its costs of manufacturing the
products and will be compensated for its general and administrative services in
an amount to be determined by the venturers. The parties will share in the
profits and losses of the Joint Venture.
The Joint Venture will be dissolved (a) upon purchase by the General
Division of all of the limited partnership interests, (b) if the General
Division does not exercise its option to purchase the limited partnership
interests (i) upon the sale, license or other disposition of all or a
substantial part of its technology by the Partnership or (ii) upon 90 days'
notice by either venturer at any time after the expiration of a one-year period
commencing after the option to purchase the limited partnership interests
expires, whichever shall first occur, (c) by operation of law, (d) upon the
bankruptcy, retirement, withdrawal or dissolution of Genzyme, (e) upon mutual
consent of the General Division and the Partnership or (f) upon the election by
the Partnership if the General Division shall fail to establish to the
satisfaction of the Partnership that it is capable of and has undertaken to
manufacture the Joint Venture's requirements for the products for a specified
period.
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All of the funds of the Partnership available to fund development of
the HA Products were spent by the end of the first quarter of 1994. Genzyme
believes that additional funds will be required to complete the development,
clinical testing and commercialization of the HA Products. While Genzyme is not
obligated to provide such funding, the option to purchase all of the limited
partnership interests terminates unless Genzyme commits, on an annual basis, to
provide funding for continuation of the research and development programs for
the next twelve month period or until receipt of FDA marketing approval for one
of the HA Products is obtained, whichever is shortest. The General Division
funded these activities in 1994 and 1995 and has committed to fund them for the
twelve-month period commencing on March 1, 1996.
In addition, the General Division has the option to buy all of the
limited partnership interests in the Partnership for an initial payment of
either cash or General Division Stock or a combination thereof, at its option,
equal to 70% of the amount initially invested by the limited partners (which
amount will be recovered by the General Division as a credit against subsequent
royalty payments) and quarterly royalty payments for a period of ten years after
the buy-out date equal to 10% of product sales in the United States and Canada
(and 6% of such sales in Europe, but only to the extent necessary to meet
certain projections made in connection with the funding of the Partnership) and
5% of any revenues derived by the General Division from sales in the United
States and Canada (and 3% in Europe, but only in the instances cited above) of
non-HA-based products that are competitive with the Partnership's products. The
option to purchase all of the limited partnership interests is exercisable
during a 90-day period commencing on the last day of the forty-eighth month
after the first commercial sale of a product by the Joint Venture, but such
commencement date will be accelerated under certain circumstances.
On January 30, 1996, Genzyme made a proposal to a special committee of
the Board of Directors of the general partner of the Partnership (the "Special
Committee"), offering to purchase substantially all of the assets of the
Partnership for approximately $93 million payable in shares of General Division
Stock. Genzyme's offer is subject to several conditions, including that the
offer receive the affirmative vote of two-thirds in interest of the limited
partners of the Partnership and that Genzyme receive satisfactory assurance from
its independent accountants that the purchase may be accounted for as a
purchase of in-process research and development. The Special Committee has
consulted with its financial and legal advisors in respect of Genzyme's offer
and negotiations between the parties are ongoing. There can be no assurance that
any agreement between the parties will be reached and, if an agreement is
reached, there can be no assurance as to its terms. Failure to reach an
agreement regarding the acquisition of the Partnership's assets by Genzyme will
not affect the respective rights and obligations of the parties under any of the
existing agreements between the parties.
GENZYME TRANSGENICS CORPORATION. In February 1993, Genzyme formed
Genzyme Transgenics Corporation ("GTC") and transferred to it all assets and
liabilities of its business in the field of transgenic technology as applied to
the development and production of recombinant proteins for therapeutic and
diagnostic uses in exchange for shares of GTC's stock. In addition, it
exclusively licensed to GTC all patents, licenses and other intellectual
property in the field (excluding that related to CFTR). In July 1993, GTC
completed an initial public offering of its common stock, which resulted in net
proceeds to GTC of approximately $11 million, after which Genzyme's ownership
interest was
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reduced to approximately 73%. In 1994, GTC acquired TSI Corporation ("TSI")
issuing common stock for the TSI common stock. As a result of that transaction,
Genzyme's percentage ownership of GTC common stock declined to approximately
40%. In February 1995, GTC exercised its put option with Genzyme, originally
entered into at the time of GTC's initial public offering, and the General
Division thereby purchased an additional 500,000 shares of GTC common stock. In
June 1995, Genzyme purchased an additional 1,333,333 shares of GTC common stock
in exchange for a $4 million reduction in the amount due from GTC under the
Genzyme - GTC Credit Agreement. In July 1995, Genzyme exchanged 33,945 shares of
General Division Common stock for 475,467 shares of GTC common stock in
connection with GTC's acquisition of Biodevelopment Laboratories, Inc.
Subsequent to these transactions, Genzyme owns approximately 48% of GTC.
In March 1996, Genzyme and GTC entered into a Convertible Debt and
Development Funding Agreement under which (i) Genzyme has made available to GTC
a $10 million credit line of 7% debt payable on March 31, 1998 and convertible
by either party into shares of GTC common stock, (ii) Genzyme has agreed to fund
the development costs associated with transgenic recombinant antithrombin III
("ATIII"), and (iii) in exchange for funding such development costs and for
making available the credit line, Genzyme has received the right to co-market
ATIII with GTC throughout the world, other than Asia.
Under contractual arrangements between Genzyme and GTC, the General
Division has, in the past, engaged GTC to perform transgenic research and
development on CFTR and may engage GTC to perform transgenic research and
development on other proteins of interest to Genzyme. GTC has contracted with
the General Division for purification and protein chemistry research and
development services. Genzyme leases laboratory and office space to GTC and
provides it with certain administrative and support services for which GTC pays
fees based on Genzyme's costs.
NEOZYME II CORPORATION. In 1992, Genzyme sponsored an initial public
offering by Neozyme II Corporation ("Neozyme II") which resulted in gross
proceeds to Neozyme II of approximately $84.5 million from the sale of units
(the "Neozyme II Units"). The Neozyme II Units consisted of one share of the
callable common stock of Neozyme II, one warrant, which expires on December 31,
1996, to purchase one share of General Division Stock and .135 share of TR
Stock at a combined exercise price of $38.25 per warrant (the "Series N
Warrants") and one warrant to purchase one share of General Division Stock and
.135 share of TR Stock, which may not be exercised unless and until Genzyme's
option to purchase all of the shares of the callable common stock of Neozyme II
terminates unexercised (the "Callable Warrants"), in which case the Callable
Warrants will be exercisable for two years. Genzyme has an option ("the
"Neozyme II Purchase Option") to purchase all of the shares of the callable
common stock of Neozyme II at any time on or before December 31, 1996. If the
Neozyme II Purchase Option is exercised, the Callable Warrants will terminate.
The exercise price of the Neozyme II Purchase Option was $83.00 per share on
December 31, 1995 and increases monthly thereafter to a final exercise price of
$117.00 per share in December 1996. The exercise price may be paid in cash,
shares of General Division Stock or any combination thereof, at the discretion
of Genzyme. If the Neozyme II Purchase Option is not exercised, the exercise
price of each Callable Warrant will be equal to the sum of the average of the
closing sale prices of one share of General Division Stock and .135 share of TR
Stock for the 20 trading days immediately preceding the exercisability
thereof.
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Genzyme has licensed to Neozyme II all technology owned or controlled
and sublicensable by it for use in developing therapeutic products for the
treatment of cystic fibrosis (the "Neozyme II Products") which products may be
commercialized on a worldwide basis exclusively and royalty-free. The Neozyme II
Products, which currently include gene therapy and protein replacement products
for the treatment of CF and a product primarily intended to treat specific
infections common in CF patients, may be expanded to include other products if
agreed upon by Genzyme and Neozyme II. Neozyme II has engaged the General
Division to conduct research, development and clinical testing of the Neozyme II
Products under a research and development agreement and will utilize
substantially all of the net proceeds from the offering, including interest
earned thereon, to fund the General Division's activities under the agreement.
Genzyme believes that additional funding will be necessary in order to complete
clinical testing and commercialization of the Neozyme II Products.
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THE BUSINESS OF THE GENERAL DIVISION
THERAPEUTICS
The General Division's strategy is to use its technological strengths,
particularly its ability to modify and produce DNA and proteins and its
expertise in fermentation, carbohydrate engineering and gene therapy, to develop
safe and effective therapeutic products for selected markets. The General
Division is currently selling Ceredase(R) enzyme and Cerezyme(R) enzyme and has
several therapeutic products in various stages of the research, development,
clinical testing and regulatory review processes. Certain of these products are
being developed on behalf of the Partnership and Neozyme II. There can be no
assurance that development of any product will be successfully completed or that
FDA approval of any product will be obtained.
GENERAL DIVISION THERAPEUTICS PRODUCT PORTFOLIO
PRODUCT INDICATION/APPLICATION SPONSOR STATUS (1)
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Ceredase(R) enzyme Treatment of Gaucher GGD Commercial sales
disease
Cerezyme(R) enzyme Treatment of Gaucher GGD Commercial sales
disease
Seprafilm(TM) bio- Surgical aid for reducing Surgical Aids Marketed in Europe,
resorbable incidence and severity of Partnership approved in Canada,
membrane postoperative adhesions PMA filed in U.S.
Sepracoat(TM) coating Surgical aid for reducing Surgical Aids PMA filed
solution incidence and severity of Partnership
postoperative adhesions
Sepragel(TM) Surgical aid for reducing Surgical Aids Preclinical
bioresorbable gel incidence and severity of Partnership development
postoperative adhesions
HAL-S(TM) synovial Orthopedic surgical aid Surgical Aids Pivotal clinical
fluid replacement Partnership trials
Thyrogen(R) hormone Adjunct for diagnosis and GGD Confirmatory
therapy of thyroid cancer pivotal study
Tretinoin(LF) Treatment of cancers GGD (conducted Phase II clinical
by Aronex) trials
Antithrombin III Treatment of ATIII GTC Preclinical
deficiencies development
CFTR Treatment of cystic Neozyme II Research
fibrosis
HyperGAM(TM)+CF Treatment and prevention of Neozyme II Phase II clinical
Pseudomonas infections in (Conducted by trials
cystic fibrosis patients NABI)
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(1) RESEARCH status indicates work up to and including small scale
production of the targeted product. PRECLINICAL DEVELOPMENT status
includes work done to increase yields and standardize manufacturing
processes and studies in animals to support an application to the FDA
to commence clinical testing in humans. Human clinical trials for
products classified by the FDA as "drugs" or "biologics" are generally
conducted in three phases: PHASE I, to determine safety and
pharmacokinetics; PHASE II, to provide preliminary evidence of
efficacy; and PHASE III, sometimes referred to as PIVOTAL TRIALS, to
provide data for proof of safety and effectiveness. Following
completion of the clinical studies, an application for marketing
approval of a new drug (an "NDA") or licensure of a biological product
(a "PLA") is submitted to the FDA. Clinical trials for products
classified by the FDA as "devices" are generally conducted in two
phases: INITIAL STUDIES to evaluate safety and feasibility, followed by
EXPANDED TRIALS to prove safety and effectiveness. An application for
marketing approval (a "PMA") is then submitted to the FDA.
CEREDASE(R) ENZYME (ALGLUCERASE INJECTION) AND CEREZYME(R) ENZYME
(IMIGLUCERASE FOR INJECTION). Treatment with Ceredase(R) or Cerezyme(R) enzyme
replacement therapy currently represents the only safe and effective treatment
for Gaucher disease, a seriously debilitating, sometimes fatal genetic disorder
caused by a deficiency in an important enzyme in the body called
glucocerebrosidase ("GCR"). This deficiency results in the accumulation of the
lipid glucocerebroside in the body. The disease is characterized by an enlarged
liver or spleen, anemia, bleeding problems, bone and joint pain, fatigue and
orthopedic complications such as repeated fractures and bone erosion.
Ceredase(R) is a modified form of human GCR in which glycoprotein remodeling
technology has been used to target GCR to the cells where the lipid accumulation
occurs. Cerezyme(R) is a recombinant form of GCR which has been remodeled in a
similar manner.
The General Division is marketing these products directly to
physicians, hospitals and treatment centers worldwide through a highly trained
sales force. The worldwide marketing effort is directed at identifying and
initiating treatment for the 5,000 Gaucher patients the General Division
believes exist worldwide. Currently, approximately one-third of these patients
are receiving treatment. Ceredase(R) is available in approximately 43 countries
worldwide. The product has received marketing approval in 11 countries with
applications pending in 4 countries.
The General Division produces Ceredase(R) enzyme from raw material
extracted from human placental tissue. Pasteur Merieux, located in France, is
the only significant commercial source of this material. The supply of starting
material available for the production of Ceredase(R) enzyme effectively limits
the amount of product that can be produced. The current available supply is not
sufficient to produce enough Ceredase(R) enzyme to supply all present patients.
Any disruption in the manufacturing process for Ceredase(R) enzyme may have a
material adverse effect on the division's revenues in any period.
To address supply constraints for Ceredase(R) enzyme, which is limited
by the amount of new material available from human placental tissue, the General
Division has developed Cerezyme(R) enzyme. Cerezyme(R) is a recombinant form of
modified GCR which has been shown in human clinical trials to be equivalent to
Ceredase(R) in its safety and effectiveness in the treatment of Gaucher disease.
In May 1994, Genzyme received U.S. marketing approval for Cerezyme(R) from the
FDA. Cerezyme(R) has also received marketing approval in Israel and Sweden and
is available on a named-patient basis in Canada, Germany and Brazil. The General
Division is presently producing Cerezyme(R) enzyme in its small-scale
manufacturing plant in Framingham, Massachusetts. A large scale mammalian cell
manufacturing facility located in Boston, Massachusetts is undergoing validation
and review prior to application for FDA approval to use it for full-scale
manufacturing of Cerezyme(R) enzyme, which application is expected to be
submitted in 1996. See Item 2. "Properties." The General Division believes that
sales of Cerezyme(R) enzyme will gradually supplant sales of Ceredase(R) enzyme.
Although protein replacement is currently the only existing therapy for
Gaucher disease, the General Division is collaborating with a university and a
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gene therapy company to develop a gene therapy for Gaucher disease. These
efforts are in the research stage.
HA PRODUCTS. The General Division is developing the HA Products to be
used during surgical procedures to limit the formation of postoperative
adhesions and, in arthroscopic procedures of the joints, as a synovial fluid
replacement.
Adhesions are fibrous structures that connect tissues or organ surfaces
that are not normally joined. They are an undesirable side effect of the body's
normal healing process following damage to tissue. Adhesions can cause
significant complications such as bowel obstruction following abdominal surgery,
infertility and pain following gynecological surgery and restricted limb motion
following musculoskeletal surgery. Moreover, adhesions that form as a result of
cardiac surgery can increase the complexity, duration and risk of subsequent
cardiac surgery. The General Division believes that approximately 6.6 million of
the 36 million abdominal, gynecologic, musculoskeletal and cardiac surgical
procedures performed each year in the U.S. could benefit from the use of the HA
Products, as could the comparable number of these procedures that are performed
each year outside the U.S.
The division currently is developing the following HA-based products:
- SEPRAFILM(TM) BIORESORBABLE MEMBRANE is a solid formulation of modified
HA and is used to separate and protect tissues and organs that have been
damaged by surgery. The membrane is designed to last several days in the
body.
- SEPRACOAT(TM) COATING SOLUTION is a liquid formulation of HA that, when
used to coat tissues and organ surfaces at the start of and throughout
surgical procedures, forms a temporary physical barrier that may protect
tissues during surgery.
- SEPRAGEL(TM) BIORESORBABLE GEL is a highly viscous gel form of modified
HA and is intended to be used to separate and protect tissues and organs
that have been damaged by surgery. Sepragel(TM) is intended to be used in
laporoscopic procedures and on tissue surfaces that are inaccessible to
Seprafilm(TM). Similar to Seprafilm(TM), the gel is designed to last
several days in the body.
- HAL-S(TM) SYNOVIAL FLUID REPLACEMENT is a liquid formulation of HA
intended to be used during arthroscopic surgery to maintain normal joint
function and to reduce pain and inflammation following surgery.
The programs to develop the four HA Products achieved a number of
significant milestones in 1995. Two pivotal clinical trials for Seprafilm(TM)
bioresorbable membrane were completed during 1995, one in abdominal surgery and
the other in gynecological surgery. The results of each of these studies
indicated that use of Seprafilm(TM) significantly reduced the incidence, extent
and severity of adhesions following surgery. Based on these results, a PMA was
filed with the FDA in October 1995 for approval to market Seprafilm(TM) in the
U.S. for abdominal and gynecological applications.
On March 25, 1996, an advisory panel of the FDA recommended that
approval be granted to market Seprafilm(TM) to reduce postoperative adhesion
formation in both types of surgery studied in the two pivotal clinical trials
conducted for
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Seprafilm(TM). The panel's recommendation for approval was conditioned on a
requirement that post-marketing surveillance be conducted to monitor possible
adverse events. The panel's recommendation will be considered in the FDA's
final review of the PMA for Seprafilm(TM), but is not binding upon the FDA.
Clinical trials for Sepracoat(TM) coating were completed in 1995. In
October 1995, Genzyme announced that the results of this study indicated that
use of Sepracoat(TM) significantly reduced the incidence of postoperative
adhesions. In January 1996, Genzyme filed a PMA to market Sepracoat(TM) for use
in abdominal, pelvic and cardio-thoracic surgical procedures. The FDA has
notified Genzyme that the Sepracoat(TM) PMA will receive expedited review.
A clinical trial for HAL-S(TM) synovial fluid replacement was completed
in November 1995. The results of this study have been collected and currently
are being reviewed and analyzed and are expected to be made available during the
first half of 1996. If the results of the study show HAL-S(TM) to be safe and
effective, a PMA to market HAL-S(TM) for such procedures will be filed with the
FDA.
Genzyme is currently developing a clinical strategy and conducting
stability studies in anticipation of filing an investigational device exemption
(an "IDE") with the FDA for Sepragel(TM) bioresorbable gel during 1996. Clinical
trials of Sepragel(TM) will commence soon after receipt of the IDE.
Genzyme, on behalf of the Joint Venture, is in the process of preparing
for marketing of Seprafilm(TM) in the U.S. and Canada. Genzyme has received
approval in Canada to market Seprafilm(TM) bioresorbable membrane on behalf of
the Joint Venture and has received authorization from the FDA to export the
product to Canada. Test marketing in Canada is expected to begin during 1996.
Genzyme has, for its own account, initiated marketing efforts for
Seprafilm(TM) in Europe. Genzyme has been notified by regulatory agencies in the
Netherlands, Sweden, Denmark and Ireland that such agencies have no objection to
Genzyme marketing Seprafilm(TM) in those countries at this time. Authorization
from the FDA for export of the product to these four countries has been
obtained, and Genzyme began test marketing Seprafilm(TM) in the Netherlands late
in 1995. In February 1996, Genzyme obtained notification that Seprafilm(TM) had
been granted the Approval of Conformity Certificate (a "CE Mark") in accordance
with the European Community ("EC") Medical Devices Directive. The CE Mark
signifies that a product meets quality standards necessary for marketing in the
EC and will allow introduction of Seprafilm(TM) more rapidly into Europe.
Genzyme believes that successful initial market penetration and
subsequent maintenance of market share for Seprafilm(TM) and Sepracoat(TM) may
require a specialized hospital-based sales force. A substantial effort to
educate surgeons and hospital administrators as to the benefits of these
products will be required in order for the products to gain broad market
acceptance. The efforts to develop marketing and sales capabilities are at an
early stage. Significant additional resources will be required to penetrate
target markets.
Funding for the development of all four of these products has been
provided by the Partnership, which has the exclusive right to commercialize
these products
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in the United States and Canada through the Joint Venture The Partnership also
has the right to a royalty on the General Division's European sales of these
products under certain circumstances. Early in 1994, the General Division began
funding development of these products on behalf of the Partnership and has
committed to continue such funding for the 12 months commencing March 1, 1996.
See "Related Entities -- Surgical Aids Partnership."
THYROGEN(R) HORMONE. The General Division is developing Thyrogen(R)
hormone, a recombinant form of human thyroid stimulating hormone ("TSH"), which
is intended for use as an adjunct to the approximately 100,000 to 200,000
diagnostic and therapeutic procedures undertaken each year to detect and treat
metastases of thyroid cancer. The General Division believes that the
administration of Thyrogen(R) hormone may be more effective and result in fewer
adverse side effects for patients undergoing current standard medical procedures
for thyroid cancer.
Thyrogen(R) hormone was demonstrated to be safe and effective in
stimulating the uptake of radioiodine for whole body scanning in a 1992 Phase
I/II clinical study. A Phase III multi-center clinical study completed late in
1993 provided evidence that the use of Thyrogen(R) hormone prior to diagnostic
scanning greatly improved the quality of life in 94% of thyroid cancer patients
tested and was effective in producing scans that were as good as or better than
conventional scans in 86%. To confirm the results of this study, the General
Division is conducting a second Phase III study. During 1996 it is anticipated
that Thyrogen(R) hormone will be made available to patients who meet certain
criteria under a treatment IND which will allow Genzyme to gather additional
information regarding use of the product while recovering appropriate costs of
the product and the treatment.
TRETINOIN(LF). The General Division is collaborating with Aronex to
develop and commercialize a proprietary liposomal formulation of the retinoid
known as all-trans retinoic acid ("Tretinoin(LF)") for the treatment of cancer.
The initial indications chosen for clinical development of Tretinoin(LF) are
acute promyelocytic leukemia and Kaposi's sarcoma. The General Division and
Aronex believe that Tretinoin(LF) will also have application in the treatment of
other cancers. Although numerous clinical studies have demonstrated the efficacy
of oral retinoids against certain cancers, the use of these drugs has been
limited because patients often develop intolerance to the drug followed by
relapse of their cancers. The General Division and Aronex believe that
Tretinoin(LF) will overcome these limitations. Separate Phase II clinical trials
of Tretinoin(LF) for treatment of acute promyelocytic leukemia and of Kaposi's
sarcoma are currently ongoing.
Pursuant to the agreements with Aronex, the General Division made a $5
million equity investment in Aronex and is required to make milestone payments
totaling $1.5 million and share in the development funding for the project. The
General Division also has an obligation to make an additional equity investment
of $5 million in Aronex following the occurrence of a clinical milestone.
ANTITHROMBIN III (ATIII). ATIII is a human blood protein which acts as
an anticoagulant. Depressed levels of ATIII can lead to increased risk of
thrombosis (clotting) in patients with either hereditary ATIII deficiency or an
acquired ATIII deficiency often associated with multiple disease states, such as
sepsis, various surgeries, multiple trauma and liver disease.
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Natural ATIII derived from donated human plasma currently is sold
worldwide for multiple indications. The General Division is funding efforts at
GTC to develop a transgenic source for ATIII to address anticipated growth in
volume requirements in the market to treat ATIII deficiency by protein
replacement therapy. The General Division believes that current sources of
plasma derived ATIII will be inadequate to address this growth. In combination
with Tufts and SMIG, GTC has developed a herd of transgenic goats at its
production facility in central Massachusetts. These goats have produced active
recombinant ATIII. GTC is preparing to file an IND to initiate a Phase I
clinical trial of ATIII and anticipates conducting this trial during 1996. The
General Division is funding this development work through a recently concluded
development funding and co-marketing agreement under which the General Division
has obtained co-marketing rights for the product outside of Asia.
CYSTIC FIBROSIS. On behalf of Neozyme II, the General Division is
engaged in research, development and clinical testing of biotherapeutic products
for the treatment of cystic fibrosis by gene therapy or protein replacement
therapy and for the treatment and prevention of Pseudomonas bacteria infections
in CF patients (the "CF Products").
CF is the most common fatal genetic disease affecting the Caucasian
population. Approximately one in every 2,500 infants in the United States is
born with the disease and there currently are approximately 30,000 cystic
fibrosis patients in North America. CF is caused by a mutation in the gene
responsible for determining the molecular structure of a protein called cystic
fibrosis transmembrane conductance regulator ("CFTR"). Although improvements
have been made over the last 20 years in alleviating certain symptoms of the
disease and delaying its progress, the underlying disease remains untreated and
patients have an average life expectancy of only 29 years.
The General Division's work has initially concentrated on two promising
approaches to correct the basic defect in CF cells: gene therapy, to augment the
mutant genes with genes that would enable the patient's cells to produce normal
CFTR protein and protein replacement therapy to replace the missing or defective
CFTR protein with properly functioning CFTR protein. For technical and
competitive reasons, the gene therapy approach has been emphasized during the
last two years, and currently the protein replacement program is largely
inactive.
Gene Therapy. In October 1993, results of a study approved by the
Recombinant DNA Advisory Committee (the "RAC") of the National Institutes of
Health (the "NIH") showed that it is possible to correct the biochemical defect
in cystic fibrosis cells in vivo. The study results were the first published
report of a successful gene transfer in cystic fibrosis patients and the first
successful application of an adenovirus vector in gene therapy. In December
1993, one of the General Division's collaborators received RAC approval for a
study involving repeat administration of the General Division's second
generation adenovirus vector to the nasal epithelium and sinus passages of CF
patients. The nasal part of the study was completed in the second quarter of
1995. Aggregated data from this study showed limited evidence of gene expression
at the intermediate doses but not at the highest dose. The virus appeared safe,
but a complex immune response to the adenovirus was measured in almost all
patients. This and other data obtained in animal studies suggests that immune
response may limit the efficacy of repeat dose therapy with adenovirus.
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A two part safety study of Genzyme's second generation adenovirus
vector administered via bronchoscope and aerosol involving 40 CF patients
commenced during 1995 and is currently on-going. In September, Genzyme switched
to the use of a third-generation adenovirus vector with an improved safety
profile as part of this same study.
In parallel with the early phase clinical studies, the General Division
is conducting extensive research into improving the safety and efficacy of
adenovirus. Particular emphasis is being placed on immunology, since it is
highly likely that new vectors or methods need to be developed so as to reduce
the patient's immune response and to increase the efficacy of adenovirus
vectors. Such improvements may be necessary in order for adenovirus vectors to
be clinically useful in chronic therapy.
In addition to its work with viral vectors, the General Division is
developing, both internally and in collaboration with others, alternative
technologies for the delivery of CFTR to CF patients. To date, the most
significant collaborative arrangement is an exclusive research agreement with
Vical, Inc. to evaluate that company's cytofectins as non-viral delivery vectors
for treating cystic fibrosis. Although substantial progress has been made in
this work, currently the optimal formulation of the best of these alternatives
is still less efficient that adenovirus.
During 1994, the General Division initiated a collaboration with a
British academic group in gene therapy utilizing lipids. Another of the General
Division's collaborators commenced a study in 1995 of a CF nasal protocol
utilizing a lipid-DNA complex containing one of Vical's proprietary cytofectins
which is currently on-going. A nasal study involving a proprietary lipid-DNA
complex developed by Genzyme commenced in January 1996.
Because of the innovative nature of gene therapy and public policy
issues surrounding the insertion of new genetic information into cells, the
General Division expects that early clinical evaluation will continue to entail
especially careful testing in a limited number of patients. The General Division
expects to continue preliminary clinical testing of its gene therapy products in
1996. The timing and results of these initial studies will determine whether and
when pivotal trials to determine safety and effectiveness will be undertaken.
These pivotal trials may involve large groups of patients for lengthy periods of
time in order to address the uncertainties surrounding insertion of new genetic
information into humans and to show clinical effectiveness in the treatment of a
progressive disease.
Protein Replacement Therapy. CFTR is a membrane protein, a class of
molecules which historically has been difficult to produce in conventional cell
culture in active form and in quantities. Genzyme, however, has developed
recombinant cell lines that synthesize the protein and, in collaboration with
researchers at GTC and elsewhere, has used transgenic expression techniques to
breed mice and rabbits which secrete human CFTR protein in their milk. Based on
these results, Genzyme engaged GTC to develop transgenic goats that express
CFTR protein in their milk. Although one transgenic goat was born, it did not
synthesize measurable CFTR in its milk and no further work is currently
underway.
HYPERGAM(TM)+CF. The General Division is developing vaccine and passive
immunization antibody-based products to treat and prevent Pseudomonas
infections. The majority of cystic fibrosis patients suffer from lung infections
caused by
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this bacteria, a major medical problem and a frequent cause of hospitalization.
In many cases, the immediate cause of death in CF patients is pulmonary failure
associated with these infections.
The General Division is collaborating on this project with NABI. NABI
is employing an exclusively licensed proprietary technology to develop
HyperGAM(TM)+CF for use in passively immunizing CF patients infected with the
bacteria. A Phase I clinical trial involving single dose administration of
HyperGAM(TM)+CF was completed in 1994 and showed that HyperGAM(TM)+CF appears to
be safe. A multi-center, dose ranging Phase II trial to assess safety and
efficacy of the product in chronic administration commenced in the first quarter
of 1995 and enrollment was completed in the first quarter of 1996.
The General Division believes that HyperGAM(TM)+CF may be complementary
to its gene therapy and protein replacement therapy products in treating or
preventing Pseudomonas infections in conjunction with correcting the basic
defect in airway cells. However, it is possible that the gene therapy and
protein replacement products may result in an effective therapy for CF which,
over time, would reduce or obviate the need for a Pseudomonas treatment.
Pursuant to the agreement with NABI, the General Division made a $5
million equity investment in NABI and is required to fund two-thirds of the
development program costs and make certain milestone payments associated with
the progress of clinical trials. NABI will manufacture the product and the
General Division will market it on a worldwide basis. Neozyme II funds the
General Division's obligations to provide development funding and make milestone
payments to NABI in exchange for the exclusive rights that the General Division
acquired to market HyperGAM(TM)+CF on a worldwide basis and the right to its
share of the profits resulting from commercialization of the product.
TRANSGENICS. GTC, Genzyme's 48%-owned affiliate, has developed methods
of protein production in transgenic animals and has produced significant
quantities of several human proteins, including CFTR, ATIII, alpha one
anti-trypsin and longer acting tissue plasminogen activator, in the milk of
animals, including mice and goats. Transgenic production of a human protein is
achieved by inserting a gene that directs the production of a desired protein
into the genetic material of an animal such that the target protein is secreted
in the milk of female offspring. GTC believes that transgenic production offers
significant economic and technological advantages over traditional protein
production systems. GTC's strategy is focused on utilizing this technology to
develop and produce a broad range of proteins, both in collaboration with
pharmaceutical and biotechnology companies and independently. GTC's work in
developing transgenic recombinant ATIII is funded by the General Division under
a funding and co-marketing agreement entered into in March 1996. See "Related
Entities -- Genzyme Transgenics Corporation."
GTC is working with the General Division and with a number of
biopharmaceutical companies on feasibility studies regarding the transgenic
production of specific proteins. During 1995, GTC completed and opened a
transgenic production facility in central Massachusetts that utilizes transgenic
goats. A specially selected goat herd was imported from New Zealand from which
transgenic animals will be bred to produce pharmaceutical proteins.
In October 1994, GTC acquired TSI, a leading provider of preclinical
testing and manufacturing support services primarily to pharmaceutical,
biotechnology and
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chemical companies. This acquisition was undertaken in order to expand GTC's
business operations and provide a more comprehensive offering of support
services to its customers. GTC's testing businesses offer broad scientific
capabilities in such fields as preclinical efficacy models, teratology,
photobiology, surgery and continuous infusion. For the year ended December 31,
1995, the testing businesses had revenues of approximately $26 million.
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DIAGNOSTIC SERVICES
The General Division's diagnostic services business unit, which
operates under the trade-name of Integrated Genetics, applies advanced
biotechnology to develop and provide high quality, sophisticated genetic
diagnostic services to physicians, hospitals, universities, medical centers,
clinical laboratories, genetic centers and managed care organizations throughout
the United States and internationally. The General Division also provides
identity testing services to state and local government agencies, attorneys and
various courts in the U.S., as well as donor typing to bone marrow registries.
On October 2, 1995, Genzyme acquired all of the publicly-owned shares
of IG and IG was merged into the General Division. See "Related Parties." In
February 1996, Genzyme announced an agreement to merge Genetrix, Inc., a
Phoenix-based operator of prenatal and cancer genetic testing laboratories, with
Genzyme in a transaction to be accounted for as a pooling of interests. Subject
to the approval of the Genetrix shareholders and the satisfaction or waiver of
certain other conditions, the merger will be consummated, with holders of
Genetrix stock receiving shares of General Division Stock, and the operations of
Genetrix will be included within the diagnostic services business of the General
Division.
GENERAL DIVISION DIAGNOSTIC SERVICES PORTFOLIO
PRODUCT INDICATION/APPLICATION STATUS
------- ---------------------- ------
Biochemical testing Screening for certain fetal Commercial
chromosomal abnormalities service
Prenatal cytogenetics Detection of fetal chromosomal Commercial
abnormalities service
InSight(R) molecular genetic Rapid detection of selected fetal Commercial
testing chromosomal abnormalities service
DNA testing Detection of single gene disorders Commercial
(CF, Fragile X, Huntington Disease, service
Gaucher Disease, etc.)
Cancer Testing -- cancer Applications used singly or in tandem Commercial
cytogenetics, flow cyto- for detection and prognosis of service
metry, fluorescent in-situ various forms of cancer
hybridization "FISH", DNA
Fetal cell separation Detection of fetal chromosomal Preclinical
abnormalities development
Identity testing Establishing paternity and identifying Commercial
potential bone marrow transplant service
donors
PRENATAL AND POSTNATAL GENETIC DIAGNOSTIC SERVICES. The General
Division offers three types of genetic diagnostic services: biochemical testing,
classical and molecular cytogenetic testing, and DNA testing. Biochemical
testing services consist primarily of a widely used screening test (AFP(3)) used
to determine if further prenatal genetic testing is appropriate. Classical and
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molecular cytogenetic testing involves the analysis of fetal cells obtained
through amniocentesis or chorionic villi sampling ("CVS") to evaluate
chromosomal abnormalities. DNA analysis is performed to determine the likelihood
that the subject has, or is a carrier for, a specific genetic disorder.
The market for these services has experienced significant growth in
recent years. The General Division's strategy is to expand its genetic
diagnostics business by providing a comprehensive range of high quality testing
services in a timely, accurate and convenient manner; by aggressively marketing
its services through a direct sales force; and by maintaining an active research
and development program that enables it to introduce additional testing services
based on new technologies. The Division also has an active program to expand its
laboratory operations through acquisition.
The InSight(R) test, a faster cytogenetic test based on in situ
hybridization of chromosome-specific DNA probes, was introduced by Integrated
Genetics in 1991. This technology permits identification of the most frequently
occurring chromosomal abnormalities within 48 hours, as compared to the one to
three weeks required to perform classical cytogenetic testing (karyotyping). The
InSight(R) analysis is offered in conjunction with a complete karyotype. Cancer
diagnostic services based on cytogenetics and a series of supporting tests
currently focus primarily on various forms of leukemias and lymphomas.
The General Division also provides testing for numerous genetic
diseases including, fragile X syndrome, spinal muscular atrophy, Huntington
disease, polycystic kidney disease, sickle cell anemia, and hemophilia. Its
current cystic fibrosis test, launched in 1994, uses samples of cells collected
by using a simple cheek brush and is capable of detecting more possible genetic
mutations (32), more rapidly and at lower cost than methods previously
available.
GENETIC IDENTITY TESTING SERVICES. The General Division also provides
identity testing services principally to state and local government agencies and
courts throughout the United States from its high volume testing laboratory in
North Carolina. Both classical blood tests and DNA tests are used to provide
customers with reports as to the likelihood of paternity. Testing services are
also performed to provide forensic medical evidence which is used to identify
suspects involved in violent crimes and DNA testing is offered to bone marrow
registries attempting to match potential donors with transplant patients.
DEVELOPMENT PROGRAMS. The General Division maintains an active program
aimed at identifying and developing new technologies and methods of performing
genetic tests and applying these methods to improve and expand its menu of
testing services. In its own research laboratories and in collaboration with
others, Integrated Genetics conducts major research and development programs in
such areas as genomics, test platforms for complex mutational analysis,
predispositional testing for cancer and other late onset diseases, and rare cell
separation and analysis methods.
Since introduction of the first generation InSight(R) rapid cytogenetic
analysis test in 1991, the Company has developed numerous other FISH probes and
various DNA tests, including a sophisticated 32-mutation cystic fibrosis cheek
brush test. In 1995, proprietary new multiple allele specific diagnostic assay
("MASDA") technology was introduced. MASDA is an efficient, accurate and cost
effective DNA test method for high throughput complex mutational analysis which
can simultaneously detect more than one hundred known mutations in hundreds of
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patient samples. Also in 1995, the genomics group, together with their
collaborators, announced the full identification of the PKD1 gene, which causes
polycystic kidney disease, a common genetic disorder that leads to renal failure
by middle age in most affected individuals. This group is also involved in the
discovery of the gene for the most common cause of inherited cardiac arrhythmia,
long QT syndrome, also known as "sudden death syndrome."
The General Division is now beginning to use the MASDA technology in
its in-house predispositional assay development. This program is aimed at
identifying causative genetic mutations associated with various cancers and
certain other diseases where the ability to test a large number of genetic
mutations is critical. Work in the genomics program continues to focus on
finding and understanding important genes that have a potential diagnostic and
therapeutic use for various sectors of Genzyme's businesses.
The General Division continues its efforts to develop methods and
procedures to isolate and genetically analyze fetal cells obtained from maternal
blood samples. The program has demonstrated the feasibility of a separation
technology involving the use of combinations of antibodies that bind selectively
to specific cell types and has developed appropriate immobilization and
analytical methods. However, at this point, the process does not meet the
Division's consistency standards well enough to commercialize it as a high
quality diagnostic test.
Fetal cells obtained from maternal blood serum could potentially be
used in lieu of cells derived from amniotic fluid or chorionic villi for genetic
testing, thereby avoiding the risk associated with amniocentesis or CVS. The
General Division believes that successful development of techniques which permit
prenatal genetic testing of samples obtained from mothers on a low risk basis,
using rapid low cost detection methods such as InSight(R), can result in a
substantial expansion of the market for prenatal testing. Significant resources
continue to be focused on this research program.
DIAGNOSTIC PRODUCTS
The General Division is a leading independent supplier of diagnostic
components (enzymes, substrates, antibodies and antigens), bulk reagents and
devices to manufacturers of clinical diagnostic reagents and kits as well as
directly to clinical reference laboratories. The division also manufactures and
sells a broad line of antibody and antigen based ELISA test kits. In addition,
the division distributes a broad product line of research products to academic,
industrial and governmental laboratories for use in immunology and cell biology.
The Diagnostic Products Division has manufacturing expertise in enzyme
fermentation, purification, reagent formulation and immunoassay test
development.
GENERAL DIVISION DIAGNOSTIC PRODUCTS PORTFOLIO
PRODUCT INDICATION/APPLICATION STATUS
------- ---------------------- ------
Cardiovascular products -- Clinical diagnostic testing Product sales
Direct LDL(TM), HDL
Diagnostic intermediates, Manufacture of bulk diagnostic products Product sales
components and bulk for blood analysis and raw materials
reagents for use in clinical chemistry reagents
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ELISA test kits Immunodiagnostic kits for blood analysis Product sales
Research products Research in immunology and cell biology Product sales
CARDIOVASCULAR PRODUCTS. The General Division sells devices and
reagents for the quantification of LDL and HDL cholesterol levels. In
particular, the General Division has developed and commercialized an in vitro
diagnostic test kit (the Direct LDL(TM) test kit) for the direct measurement of
LDL cholesterol in blood samples. The correlation between elevated blood
cholesterol levels and increased risk of coronary heart disease, one of the
leading causes of death in the United States, is well established. A high level
of LDL cholesterol in the blood indicates an increased risk of coronary heart
disease. Prior to the approval of the division's kit, there was no routine
direct standardized test for measuring LDL cholesterol and LDL cholesterol
levels were derived using several indirect measurements and estimates, each
contributing a potential source of error to the calculation.
DIAGNOSTIC INTERMEDIATES. The General Division produces and sells
critical components such as diagnostic enzymes, substrates, proteins and
reagents for use in diagnostic kits used for blood analysis in clinical
chemistry laboratories. One primary diagnostic area of emphasis for the General
Division is pancreatic function, where it provides enzymes, substrates, bulk
reagents and patented methodologies for amylase and lipase determination to
diagnostic kit manufacturers. For cardiovascular health, the General Division is
a leading supplier of cholesterol enzymes used in testing for coronary heart
disease. Sales of its diagnostic intermediates are made to over 200
manufacturers and users of diagnostic kits worldwide through its own technical
sales representatives in the U.S. and Europe and through distributors in Japan.
ELISA TEST KITS. The General Division manufactures and sells a broad
range of ELISA test kits for infectious disease and endocrinology
determinations. In addition, it supplies monoclonal and polyclonal antibodies
plus other immunoassay components to immunodiagnostic kit manufacturers.
Finally, the General Division supplies patented Contrast(TM) rapid tests for
pregnancy and Strep A determination.
RESEARCH PRODUCTS. The General Division's research products consist of
a comprehensive line of cytokines, growth factors, antibodies, proteins and
ELISA systems which play an integral role in activating and modulating the
body's immune system. These research products are used primarily to conduct
research in the areas of immunology and cellular biology.
PHARMACEUTICALS DIVISION
The General Division develops, manufactures and sells a range of active
drug substances, pharmaceutical intermediates, synthetic phospholipids,
peptides, biomolecules and chemicals to the pharmaceutical and health care
industries. These products utilize the division's capabilities in multi-step
organic chemical synthesis, fermentation, enzymology and carbohydrate
technology.
GENERAL DIVISION PHARMACEUTICALS PRODUCT PORTFOLIO
PRODUCT INDICATION/APPLICATION STATUS
------- ---------------------- ------
MelaPure(TM) Melatonin Dietary Supplement Product sales
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Clindamycin phosphate Treatment of serious infections Product sales
Hyaluronic Acid Ophthalmic products & research Product sales
applications
Active drug substances and Production of oral and parenteral Product sales
pharmaceutical drugs
intermediates
Fine chemicals Production of pharmaceutical inter- Product sales
mediates, & electronic chemicals
Synthetic phospholipids Drug delivery systems and Product sales
pharmaceutical components
Synthetic peptides Production of final dosage form Product sales
therapeutics
Amino acid derivatives Production of synthetic peptides Product sales
Biomolecules Bioprocessing and reagents Product sales
MELAPURE(TM) MELATONIN. In 1995, melatonin, a synthetic human hormone
present in a variety of foods and marketed as a dietary supplement, became the
largest selling chemical product manufactured by the General Division. In 1995,
the General Division began supplying bulk quantities of melatonin in response to
demand from manufacturers of final dosage form product. In addition, Genzyme has
developed its MelaPure(TM) Melatonin trademark and marketing program to identify
MelaPure(TM) as a high quality material. Genzyme has developed and currently
is marketing outside the U.S. a tableted finished dosage form product.
CLINDAMYCIN PHOSPHATE. The General Division currently produces and
sells clindamycin phosphate, an off-patent antibiotic widely used by hospitals
for the treatment of infections. Clindamycin phosphate is sold to pharmaceutical
companies in the United States, Europe, Japan and the Middle East through the
division's worldwide sales organization.
HYALURONIC ACID. The General Division currently produces and sells bulk
hyaluronic acid (HA) for a number of applications. Under an agreement with
Alcon, the General Division supplies HA powder to Alcon for incorporation into
Provisc(R), an HA-based ophthalmic surgical aid product, which Alcon introduced
in 1994. The General Division also receives a royalty based on Alcon's product
sales. Hyaluronic acid is also sold to a number of customers for various
research and development applications.
ACTIVE DRUG SUBSTANCES AND PHARMACEUTICAL INTERMEDIATES. The General
Division produces drug substances for leading ethical pharmaceutical companies
for formulation into a variety of dosage forms. The General Division also
supplies various pharmaceutical intermediaries which are converted to active
drug substances by the customer.
FINE CHEMICALS. The General Division has developed a range of high
value fine chemicals and chiral intermediates based on the Company's proprietary
technology in complex organic chemistry. These products include various
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synthetic starting materials and liquid crystal chemicals for the electronics
industry. The General Division markets these products through its own sales
force directly to chemical and pharmaceutical companies worldwide.
SYNTHETIC PHOSPHOLIPIDS. Phospholipids are the major structural
components of cell membranes. They are useful in drug delivery systems, emulsion
formulations and as components of pharmaceutical products such as liposomes. The
General Division has developed proprietary technology for the large scale
manufacture of synthetic phospholipids with high purity and consistency.
The General Division currently produces and sells synthetic
phospholipids to pharmaceutical and biotechnology companies for use in the
formulation and delivery of certain of their products.
SYNTHETIC PEPTIDES AND AMINO ACID DERIVATIVES. Synthetic peptides are a
class of biologically active compounds comprised of chains of amino acids. Many
of these compounds have applications as active drug compounds and are used by
the pharmaceutical industry in final dosage form preparations. The General
Division is a commercial scale GMP manufacturer of synthetic peptides for many
such applications. Amino acid derivatives are the materials used in the
production of synthetic peptides. In addition to producing these materials for
use in its own peptide manufacturing processes, the General Division sells amino
acid derivatives to the pharmaceutical industry for use in the manufacture of
peptides.
BIOMOLECULES. The General Division produces and sells a variety of
biomolecules for use as bioprocessing materials in the biotechnology and
pharmaceutical industry. These include reagents such as DTT.
COMPETITION
The General Division is engaged in a segment of the human health care
products industry that is extremely competitive. Competitors in the United
States and elsewhere are numerous and include major pharmaceutical, chemical and
biotechnology companies, many of which have substantially greater resources than
Genzyme. These companies may succeed in developing products that are more
effective than any that have been or may be developed by the General Division
and may also prove to be more successful than the General Division in producing
and marketing their products.
Each of the General Division's four business areas faces different
competitive challenges:
THERAPEUTICS. Although the General Division is not aware of any current
effective alternative to its products for the treatment for Gaucher disease
(Ceredase(R) enzyme and Cerezyme(R) enzyme), competition potentially could come
from other protein replacement therapies or gene therapy. The General Division
believes that its proprietary production techniques, exclusive raw material
source for Ceredase(R) enzyme and, to a certain extent, the orphan drug status
of its products give it a number of advantages over potential competitors using
protein replacement therapy for the treatment of Gaucher disease. Gene therapy
techniques are still in experimental stages. The General Division believes that
the principal factors that will affect competition for Ceredase(R) enzyme and
Cerezyme(R) enzyme will be clinical effectiveness and absence of adverse side
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effects. One company is attempting to develop an alternative form of recombinant
GCR by producing the enzyme in insect cells and modifying it by applying a
coating of polyethylene glycol.
The General Division believes that its expertise in developing
proprietary fermentation processes and its access to proprietary strains of
micro-organisms used in its HA production process will give it a competitive
advantage in the development of HA products. The General Division's
anti-adhesion products may face significant competition from other HA-based
products, from non-HA-based products and from changes in surgical techniques
that would obviate the use of HA. The General Division believes that the
principal factor that will affect competition in this area is acceptance of the
product by surgeons, which depends, in large part, upon product performance,
safety and price.
There are a number of organizations, both academic and commercial,
which are engaged in developing therapies to treat either the symptoms of CF or
the cause of the disease. The General Division is not aware of other
non-academic organizations working on a protein replacement therapy for CF.
Several groups are developing gene therapy approaches to the disease and also
have received RAC approval to initiate limited human studies of CF gene therapy.
In addition, other organizations are investigating pharmacological and
biological agents that would treat CF. One such product, Pulmozyme(TM), which
was developed by Genentech, Inc., currently is on the market. These groups may
succeed in developing gene therapy products before the General Division, in
obtaining patent protection that may effectively block the General Division from
commercializing its gene therapy or protein replacement products or in
developing other drug therapies that relieve the symptoms of cystic fibrosis
and, thus, compete with products under development by the General Division.
DIAGNOSTIC SERVICES. The United States market for prenatal cytogenetic
and biochemical testing is divided among approximately 500 laboratories, many of
which offer both types of testing. Of this total group, less than 20
laboratories market their services nationally. The General Division believes
that the industry as a whole is still quite fragmented, with the top 20
laboratories accounting for approximately 50% of market revenues, and with no
individual company, including Integrated Genetics, accounting for more than 18%
of the total.
Competitive factors in the genetic diagnostics services business
generally include reputation of the laboratory, range of services offered,
pricing, convenience of sample collection and pick-up, quality of analysis and
reporting and timeliness of delivery of completed reports. The General Division
believes that its research and development program, which has enabled it to
develop and introduce testing services based on new technology, and its active
sales and marketing force have played significant roles in the rapid growth of
its genetic diagnostics services business. Furthermore, in addition to the
General Division, several companies and academic groups are attempting to
develop fetal cell separation techniques. The General Division believes that its
combination of separation and analytical technologies will give it a significant
competitive advantage.
DIAGNOSTIC PRODUCTS. The General Division acts as a primary supplier of
enzymes and substrates, and generally does not compete with its customers in the
sale of complete diagnostic kits. This philosophy enables the General Division
to maintain unique relationships with major diagnostic kit manufacturers and to
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engage with them in development efforts to produce new or improved kits. The
market in the diagnostic products industry is mature and competition is based on
price, reliability of supply and the purity and specific activity of products.
PHARMACEUTICALS. Competition in the pharmaceuticals business is
affected primarily by production efficiency, product quality and price. The
General Division believes that its success in this market is due to its
technical expertise and selection of high-value, small volume products which
minimizes direct competition with larger production operations in commodity
products.
PATENTS AND PROPRIETARY TECHNOLOGY
The General Division has filed or has licensed rights to many patent
applications and patents in the United States and numerous foreign countries
relating to its processes and products. In general, patents issued in the U.S.
are effective for a period of seventeen years from date of issue, although the
GATT legislation recently passed changes this to twenty years from the filing
date for applications filed after June 8, 1995. The duration of foreign patents
varies in accordance with applicable local law. The General Division also relies
on trade secrets, proprietary know-how and continuing technological innovation
to develop and maintain a competitive position in its product areas. Genzyme's
employees, consultants and corporate partners who have access to its proprietary
information have signed confidentiality agreements. There can be no assurance
that these agreements will be honored or that others may not independently
develop similar technology.
There can be no assurance that the General Division's patent claims
will offer protection against competition, or will not be designed around or
infringed upon by others. In addition, there can be no assurance that other
companies will not be awarded patents that affect the General Division's
interests. Genzyme may be required to obtain licenses under such patents in
order to manufacture and market some of its products. There can be no assurance
that it will be able to obtain such licenses or that such licenses will be
available on commercially reasonable terms. In addition, patent litigation is
widespread in the biotechnology industry and it is not possible to predict how
this will affect the division's efforts to form strategic alliances, to conduct
clinical trials or to manufacture and market its products under development.
GOVERNMENT REGULATION
Governmental regulation, in the United States and other countries, is a
significant factor in the production and marketing of many of the General
Division's products and in its ongoing research and development activities.
FDA REGULATION. In the United States, products that do not achieve
their principal intended purpose through chemical action within or on the body
and which are not dependent upon being metabolized by the patient's body in
order to be effective are classified by the FDA as "devices" while other
products are classified as "drugs" or "biologics." The General Division's
Ceredase(R) enzyme and Cerezyme(R) enzyme are regulated in the U.S. as drugs, as
are Thyrogen(R) hormone and Tretinoin(LF). HyperGAM(TM)+CF and Neozyme II's
protein replacement and gene therapy products are regulated as biologics. The
Partnership's products are regulated as devices. The Direct Test LDL(TM)
cholesterol is classified as an in vitro diagnostic device.
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The activities required before drugs or biologics may be marketed in
the United States include (i) preclinical laboratory tests, in vitro and in vivo
preclinical studies and formulation and stability studies, (ii) the submission
to the FDA and approval of an application for human clinical testing (an "IND"),
(iii) adequate and well controlled human clinical trials to prove the safety and
effectiveness of the drug or biologic, (iv) the submission of a New Drug
Application ("NDA") for a drug or a Product License Application ("PLA") for a
biologic and (v) the approval by the FDA of the NDA or PLA.
In addition to product approval, the manufacturer of the product may
have to obtain an establishment license (for a biologic that is not considered
well characterized) or a pre-approval Good Manufacturing Practices ("GMP")
inspection (for a drug or well characterized biologic) from the FDA. Since any
license granted by the FDA is both site and process specific, any material
change by a company in the manufacturing process, equipment or location
necessitates additional FDA review and approval.
Products that are classified as devices also require FDA approval prior
to marketing. Devices are classified as Class I, II or III, depending upon the
information available to assure their safety and effectiveness. In general,
Class I and Class II devices are devices whose safety and effectiveness can
reasonably be assured through general or specific controls, respectively. Class
III devices are life sustaining, life supporting or implantable devices or new
devices which have been found not to be substantially equivalent to legally
marketed devices. The steps required for approval of a Class III device include
(i) preclinical laboratory tests and in vitro and in vivo preclinical studies,
(ii) the submission to the FDA and approval of an investigational device
exemption (an "IDE") to allow initiation of clinical testing, (iii) human
clinical studies to prove safety and effectiveness of the device, (iv) the
submission of a PMA and (v) the approval by the FDA of the PMA. Typically,
clinical testing of devices involves initial testing to evaluate safety and
feasibility and expanded trials to collect sufficient data to prove safety and
effectiveness. In addition, the procedures and the facilities used to
manufacture the device are subject to review and approval by the FDA.
A device (other than a Class III device) which is proved to be
substantially equivalent to a device marketed prior to May 28, 1976, when
government regulations for devices were first introduced, can be marketed after
approval of a 510(k) application rather than the filing of an IDE and a PMA. The
510(k) application must contain a description of the device, its methods of
manufacture and quality control procedures and the results of testing to
demonstrate that the device is substantially equivalent to the device already
marketed.
The time and expense required to perform the clinical testing necessary
to obtain FDA approval can far exceed the time and expense of the research and
development initially required to create the product. Even after initial FDA
approval has been obtained, further studies may be required to provide
additional data on safety or to gain approval for the use of a product as a
treatment for clinical indications other than those initially targeted. In
addition, use of these products during testing and after marketing approval has
been obtained could reveal side effects which, if serious, could delay, impede
or prevent marketing approval, limit uses, force a recall of the product or
expose the General Division to product liability claims.
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REGULATION OUTSIDE THE UNITED STATES. For marketing outside the United
States, the General Division is subject to foreign regulatory requirements
governing human clinical testing and marketing approval for its products. These
requirements vary by jurisdiction, differ from those in the U.S. and may
necessitate additional pre-clinical or clinical testing whether or not FDA
approval has been obtained.
Generally, the division's initial focus for obtaining marketing
approval outside the U.S. is Europe. European Community ("EC") Directives
("regulations") generally classify products either as medicinal products or
devices. For medicinal products, marketing approval may be sought using either
the centralized procedure of the Committee for Proprietary Medicine or Products
(the "CPMP") or the decentralized (mutual recognition) process. The CPMP
centralized procedure results in a recommendation for approval in all member
states, while the EC multi-state process involves country by country approval.
EC regulations for products classified as devices have been implemented for some
devices. Devices such as Genzyme's HA Products must receive market approval
through a centralized procedure, where the device receives a CE mark allowing
distribution to all member states of the European Union. For those devices where
EC regulations have not been implemented, marketing approval must be obtained on
a country by country basis. The CE mark certification requires the company to
receive International Standards Organization (ISO) certification for each
facility involved in the manufacture or distribution of the device. This
certification only comes after the development of an all inclusive quality
system which is reviewed for compliance to International Quality Standards by a
licensed "Notified Body" working within the EC. After certification is received
a product dossier is reviewed which attests to the products compliance with EC
directive 93/42/EEC for medical devices. Only after this point is a CE mark
granted
Ceredase(R) enzyme has been registered for sale in the EC through a
CPMP centralized procedure. The General Division expects Cerezyme(R) enzyme,
Thyrogen(R) hormone and the products of Neozyme II also will be regulated
through centralized CPMP procedure. Seprafilm(TM) has been granted the CE Mark.
ORPHAN DRUG ACT. The Orphan Drug Act provides incentives to
manufacturers to develop and market drugs for rare diseases and conditions
affecting fewer than 200,000 persons in the United States at the time of
application for orphan drug designation. The first developer to receive FDA
marketing approval for an orphan drug is entitled to a seven-year exclusive
marketing period in the United States for that product. However, a drug that is
considered by the FDA to be clinically superior to or different from another
approved orphan drug, even though for the same indication, is not barred from
sale in the United States during the seven-year exclusive marketing period. The
General Division has been accorded orphan drug status for Ceredase(R) enzyme and
Cerezyme(R) enzyme and has received orphan drug designation for a number of
other products currently under development, including the products of Neozyme II
and Thyrogen(R) hormone. The TretinoinLF product being developed in conjunction
with Aronex has received orphan drug designation for the treatment of leukemias.
Periodically, legislation is proposed before the United States Congress
to amend the Orphan Drug Act to reduce the seven-year exclusive marketing period
under certain circumstances. Any such legislation is not likely to affect
products currently being marketed such as Ceredase(R) enzyme and Cerezyme(R)
enzyme but could reduce the market exclusivity period for future products.
Although the Company has filed for or received orphan drug designation for
various products,
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the Company believes that the commercial success of these products including
Ceredase(R) enzyme and Cerezyme(R) enzyme will depend more significantly on the
associated safety and efficacy profile and on the price relative to competitive
or alternative treatments and other marketing characteristics of each product
than on any exclusivity afforded by the Orphan Drug Act. Additionally, these
products may be protected by patents, exclusive raw material supply contracts
and other means.
OTHER GOVERNMENT REGULATION. The General Division's operations are or
may be subject to various laws, regulations and recommendations relating to safe
working conditions, laboratory practices, the experimental use of animals and
the purchase, storage, movement, import and export and use and disposal of
hazardous or potentially hazardous substances, including radioactive compounds
and infectious disease agents used in connection with its research work. The
extent of government regulation which might result from future legislation or
administrative action cannot be predicted.
THE BUSINESS OF THE TISSUE REPAIR DIVISION
OVERVIEW
Genzyme's Tissue Repair Division ("GTR") focuses on developing,
producing and marketing technologically advanced products for the treatment and
prevention of serious tissue damage. GTR believes that strong capabilities in
three groups of core technologies -- autologous cell processing, therapeutic
protein development and biomaterials engineering -- enhance its ability to
successfully develop and market a portfolio of novel products and services to
apply to unmet medical needs in the field of tissue repair. Two services, the
Epicel(SM) Service for permanent skin replacement, and the CARTICEL(SM) Service
for repair of cartilage, currently are on the market. Several others are in
clinical evaluation. Significant additional development efforts, preclinical
testing and manufacturing scale-up activities, as appropriate, must be
completed before the products and services under development can be
commercialized. In addition, most of these products and services will require
regulatory approval. There can be no assurance that adequate resources will be
available to fund these activities or that, if funded, they will be completed
successfully, that necessary regulatory approvals will be obtained or that the
products under development will be commercialized successfully.
Genzyme created GTR in December 1994 by acquiring BioSurface
Technology, Inc. ("BioSurface") and combining it with several Genzyme programs
in the area of tissue repair. BioSurface was in the business of developing and
supplying engineered tissues grown from normal human cells using proprietary
cell culture technology.
GTR PRODUCTS AND SERVICES
GTR's activities can be divided into three main areas: cartilage
repair, consisting of the CARTICEL(SM) Service and CARTICEL II; skin repair,
including the Epicel(SM) Service and the TGF-Beta2 and Vianain(R) Debriding
Product programs; and other tissue repair opportunities in the areas of multiple
sclerosis and bone repair.
CARTILAGE REPAIR - CARTICEL(SM) SERVICE
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Cartilage tissue can be found in several parts of the body and serves
several different purposes. Articular (hyaline) cartilage is a thin layer of
tough opaque tissue that lines the opposing bone surfaces of all moving joints
in the body to provide almost frictionless movement of the joint. Another type
of cartilage (fibrocartilage) serves a shock-absorbing function in the knee and
in the spine between the vertebrae. Cartilage is also the tissue which gives
shape to the ear and the nose.
Damage to cartilage causes significant medical problems. When articular
cartilage tissue in a joint suffers more than superficial damage, it does not
regenerate and may further deteriorate over time. Even damage which creates a
small defect in articular cartilage can impair joint movement, restrict patient
mobility and cause pain and joint locking. There were an estimated 1.3 million
procedures performed in the U.S. in 1994 to treat soft tissue damage in the
knee. A substantial number of these procedures involved articular cartilage
damage.
In the most severe cases of damaged cartilage, the joint is replaced
with a metal or plastic prosthesis. In the United States, approximately 190,000
total joint replacements are performed each year at a total cost to the
healthcare system of approximately $3 billion. Total joint replacement carries a
significant risk of long term failure. Consequently, knee replacement is
considered a last resort treatment for patients under 60 years old.
Arthroscopic techniques are currently used to relieve patients' pain
and lessen the chances of further tissue damage, but they do not repair the
defect or stop the degenerative process which may lead to osteoarthritis.
Patients with osteoarthritis may require a total joint replacement, which
carries a significant risk of long-term failure. Therefore, joint replacement is
generally not recommended for patients under the age of fifty, who would likely
outlive the prosthesis.
GTR's CARTICEL(SM) Service provides autologous (or derived from a
patient's own cells) cultured articular cartilage cells for the repair of focal
cartilage defects in the knee. The service starts with a small sample of healthy
articular cartilage tissue removed from the patient's knee. After the cartilage
cells from the tissue have been grown to sufficient number in GTR's laboratory,
they are transplanted back into the cartilage defect in the patient's knee to
form new cartilage tissue. Because these laboratory-grown cells can lead to
replacement of the cartilage defect with healthy cartilage tissue, GTR believes
that the CARTICEL(SM) Service may improve joint function and significantly delay
or even eliminate the need for expensive, debilitating joint replacement
surgery. Based on market research it has conducted, GTR estimates that
CARTICEL(SM) Service is applicable in approximately 250,000 patients with
cartilage defects each year in the United States and Europe, combined.
The CARTICEL(SM) Service is an integrated program of surgeon training,
standardized cartilage cell processing, and rigorous collection and analysis of
outcomes data, which is aimed at providing broad surgeon access and achieving
and maintaining high quality patient outcomes. Although the CARTICEL(SM) Service
is not currently regulated by the FDA, GTR has developed a quality systems
approach to the delivery of this service.
GTR's CARTICEL(SM) Service has been developed based on eight years of
pioneering work by a group of Swedish physicians (the "Swedish Group"). As of
March 1, 1996, the Swedish Group, which was the first group in the world to
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report the use of cultured autologous cartilage cells to treat cartilage damage,
has treated 245 patients with knee cartilage defects. A retrospective review of
safety data on the initial 153 patients treated by the Swedish Group, which was
conducted by an independent data management organization hired by GTR and
covered eight years of data for the earliest patients, indicated no serious
adverse events directly attributable to autologous chondrocyte implantation or
post implantation joint infection. An ongoing retrospective review by GTR
presently covering approximately 80 of these patients has yielded encouraging
data on the efficacy of the treatment, as measured by joint functionality and
arthroscopic and histological evaluation, symptoms and patient assessment of
improvement. In the October 6, 1994 issue of the New England Journal of
Medicine, the Swedish Group published data on the first 23 patients to reach a
two year follow-up evaluation. As reported in this article, 19 of 23 patients
had restored or improved joint function after treatment with cultured autologous
chondrocytes.
In order to gain access to GTR's cartilage cell processing services,
surgeons must complete comprehensive training in the surgical procedure for
autologous cartilage cell implantation. As of March 1, 1996, GTR has trained
approximately 400 surgeons. In addition to GTR's three-day training program in
Sweden, GTR established a training site in Cambridge, Massachusetts in the
fourth quarter of 1995 and modified the training curriculum to concentrate the
program into one day in order to meet the increased demand for surgeon training
and to accommodate the surgeon's limited time availability. Beginning in March
1996, GTR also began offering the one day training program in the Netherlands.
With the completion of the Cambridge facility and by intensifying the training
program, GTR will have the capacity to train more than 1,200 surgeons per year.
GTR's training programs include clinical, technical and practical
orientation modules, providing a concentrated exposure to autologous
implantation technology. Physician training consists of lectures, practice of
the surgical technique and an orientation regarding reimbursement and billing
procedures. In an effort to maintain the high quality standards of the
CARTICEL(SM) Service training program, GTR utilizes videotapes of the surgical
biopsy and implantation procedures performed by the Swedish group. GTR believes
that its exclusive ability to provide surgeons with the opportunity to observe
and interact with the Swedish Group is a significant competitive advantage.
DEVELOPMENT PROGRAMS. GTR currently has a number of ongoing development
programs relating to its CARTICEL(SM) Service (collectively referred to as
CARTICEL II), including work on arthroscopic implantation procedures and
development of the CARTICEL(SM) Service for other applications. The primary
objectives of these programs are to: (i) improve GTR's general knowledge of
cartilage repair, (ii) improve the regenerative ability of the implanted,
autologous chondrocytes and (iii) expand the application of the CARTICEL(SM)
Service to the repair of large surface area defects such as those seen in
osteoarthritic joints. The CARTICEL(SM) Service is currently effective only for
the repair of small area defects (less than two centimeters in diameter).
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SKIN REPAIR
Each year approximately 2,000,000 people in the United States suffer
burn injuries. According to the National Center for Health Services,
approximately 70,000 of these patients are admitted to hospitals for serious
burn injuries. GTR estimates that approximately 25,000 of the most severely
burned patients in the United States are admitted to one of the 140 specialized
burn centers. Industry analysts estimate that approximately $1 billion is spent
in the United States annually for the treatment of burns.
Chronic skin ulcers are open, often painful wounds found predominantly
on the lower extremities of elderly patients. GTR estimates that approximately
2,600,000 cases of chronic or slow healing skin ulcers are treated in the United
States each year at a cost of more than $7 billion, with individual treatments
costing up to $40,000 per year.
GTR is developing a range of products targeted at the treatment of
burns and skin ulcers, as indicated in the following chart:
GTR SKIN REPAIR PRODUCT PORTFOLIO
PRODUCT INDICATION/APPLICATION STATUS
------- ---------------------- ------
Epicel(SM) Service Burns - Permanent skin replacement Marketed since 1988
TGF-Beta2 Tissue growth promotion Completed initial
Phase II trial;
Additional Phase II
trial began fourth
quarter, 1995
Vianain(R) Debriding Product Burns -- Wound debridement Completed two Phase
II clinical trials
Ulcers -- Wound debridement Completed pilot
trial; Phase II
trial to begin in
early 1996
EPICEL(SM) SERVICE. Skin grafts produced using the Epicel(SM) Service
are a life-saving product indicated for patients who suffer severe,
full-thickness burns and need permanent skin replacement. These epidermal grafts
are grown from a patient's own skin cells and, therefore, are not rejected by
the patient's immune system. Starting with a patient biopsy about the size of a
postage stamp, GTR can grow enough skin grafts in three to four weeks to cover a
patient's entire body surface area. Each skin graft consists of a sheet of
cultured skin cells, approximately 25 square centimeters in size and ranging
from two to eight cell layers thick, attached to a piece of surgical dressing
material. A 48 hour shelf life allows these grafts to be delivered anywhere in
the United States, Europe or Japan from GTR's production laboratories in
Cambridge, Massachusetts.
Skin grafts produced using the Epicel(SM) Service were first introduced
in 1988 and remain the only commercially available laboratory grown skin grafts
shown to provide permanent skin replacement. Most burn wounds involving less
than 60%
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body surface area are covered with conventional skin grafts within the three to
four weeks it currently takes to grow skin grafts produced using the Epicel(SM)
Service. Therefore, GTR believes that the primary candidates for the Epicel(SM)
Service are the approximately four hundred patients each year in the United
States who survive burn injuries covering more than 60% of their body surface
area. GTR markets the Epicel(SM) Service to burn centers throughout the U.S. and
in parts of Europe through its own direct sales force. GTR began marketing the
Epicel(SM) Service in Japan in 1995 through its distributor.
GTR is currently evaluating alternative approaches for use of the
Epicel(SM) Service which will represent improvements over certain limitations
that have been identified in its clinical utility and production methods.
Methods being evaluated by GTR include use of synthetic membranes and composite
skin grafts. GTR believes that advances in the field of autologous keratinocyte
grafting coupled with one or both of these technologies may allow the expanded
use of autologous keratinocyte grafting for the treatment of smaller burns as
well as for treatment of cutaneous ulcers which involve large surface areas of
the skin. In the latter case, GTR believes an improved autologous keratinocyte
graft could effectively and economically provide final wound closure following
effective debridement and induction of granulation tissue deposition at the
wound site.
TRANSFORMING GROWTH FACTOR BETA2 ("TGF-BETA2"). TGF-Beta2 is one of
a family of proteins that plays an important role in the body's ability to
promote normal wound healing by stimulating the growth of connective tissue. GTR
has licensed recombinant TGF-Beta2 from Celtrix Pharmaceuticals, Inc.
("Celtrix") and is collaborating with Celtrix on the use of TGF-Beta2 to
promote the healing of chronic skin ulcers by supplementing the body's own
production of TGF-Beta2. The product will consist of an easy-to-use collagen
sponge which serves as a delivery vehicle permitting the release of a consistent
dose of TGF-Beta2 to the wound surface over time.
In January 1994, Celtrix announced that the results of the Phase II
study of the TGF-Beta2 wound healing product in the treatment of venous ulcers
were consistent with previous findings which indicated a positive trend in wound
healing. These results also allowed Celtrix to reach several important
conclusions: (i) topically applied TGF-Beta2 is safe at the doses tested; (ii)
the delivery vehicle is well tolerated and (iii) the ease of treatment enables
patients to apply TGF-Beta2 therapy themselves. However, due to variability in
patient response in placebo groups, combined with a greater-than-expected
placebo effect, statistical significance was not achieved in this study.
In the fourth quarter of 1995, GTR began a 12 center, double-blinded,
randomized Phase II clinical trial. The study groups 200 diabetic patients
suffering from neurotrophic diabetic foot ulcers into one of three TGF-Beta2
coated collagen sponge dose groups, a placebo group or a standard of care
control group.
During the first half of 1995, GTR concentrated its efforts on refining
the formulation and manufacturing process for the TGF-Beta2 collagen sponges at
Genzyme's Allston, Massachusetts facility for use in Phase II clinical trials.
Genzyme successfully produced 10,000 sponges using bulk TGF-Beta2 from Celtrix
and collagen slurry from an outside source. Genzyme plans to manufacture
TGF-Beta 2 for phase III clinical trials in its own facilities. Upon
commercialization, GTR will make royalty payments to Celtrix based on cumulative
product sales. GTR is also obligated to make milestone payments to Celtrix for
product development related achievements.
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GTR's rights with respect to TGF-Beta2 derive from a license and
development agreement which Genzyme and Celtrix entered into in June 1994. The
agreement provides for a collaboration between the parties to develop and
commercialize TGF-Beta2 for any therapeutic uses for any clinical indication
(excluding soft tissue augmentation, vascular prostheses, and all ophthalmic and
mucositis indications). Genzyme's rights and obligations under the agreement
with Celtrix have been allocated to GTR. Pursuant to the license agreement, GTR
has worldwide commercialization rights, excluding Asia, for all systemic
indications and select other indications of TGF-Beta2. Celtrix has retained the
right to acquire rights to indications not pursued by GTR.
VIANAIN(R) DEBRIDING PRODUCT. The Vianain(R) Debriding Product is a
proprietary enzyme preparation designed to remove necrotic tissue from the wound
site. Vianain(R) Debriding Product is formulated in a hydrophilic cream delivery
vehicle so that it is highly viscous and easy to apply to and cleanse from the
wound site. Since Vianain(R) Debriding Product is designed to be applied at the
bedside by a nurse or technician, GTR believes it may also be more cost
effective to use than currently available debridement methods. GTR intends to
use the same proprietary preparation of Vianain(R) Debriding Product to remove
necrotic tissue from both burn and skin ulcers.
In October, 1995, GTR completed a Phase II clinical trial of Vianain(R)
Debriding Product in burn patients. The results of this multi-center study
indicate that (i) Vianain(R) Debriding Product is a safe and effective debriding
agent; (ii) multiple applications of Vianain(R) Debriding Product are required
to effectively debride the burn wound; (iii) a significantly higher number of
patients treated with Vianain(R) Debriding Product achieved acceptable
debridement of the wound compared to patients treated with the vehicle alone;
(iv) there was insufficient information to determine if the use of Vianain(R)
Debriding Product can speed the determination of early burn depth; and (v) there
was a trend toward decreased time to wound closure in the Vianain(R) Debriding
Product treatment group as compared to the control group, but this difference
was not statistically significant.
Based on these results, GTR is evaluating the design of a pivotal study
for the treatment of burns using Vianain(R) Debriding Product.
A Phase II single-center study evaluating the ability to transplant
skin grafts to full thickness burn injuries directly following treatment with
Vianain(R) Debriding Product in ten patients was completed in May 1995. Clinical
results indicate that the use of Vianain(R) Debriding Product does not yield an
immediately graftable bed in full thickness burns. However, it appears to be an
effective debulking agent.
Phase I clinical studies for the Vianain(R) Debriding Product for the
treatment of chronic skin ulcers were completed in June 1995. A total of 15
chronic ulcer patients (8 venous, 5 diabetic, 2 pressure) were treated.
Preliminary results indicate that Vianain(R) Debriding Product is a safe and
effective debriding agent. The product appears to be most effective in venous
ulcers; six out of eight patients experienced at least 90% debridement (the
remaining 2 patients showed 50-89% debridement) and seven patients showed a
significant increase in the amount of healthy granulation tissue present. A
Phase II study is planned to begin during 1996.
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ACTICEL(SM) WOUND DRESSINGS. Acticel(SM) wound dressings are "living
bandages" composed of three-dimensional sheets of living epidermal tissue grown
in the laboratory from donor cells and attached to synthetic dressing materials.
Acticel(SM) wound dressings provide a covering to the wound and act as a barrier
to infectious agents and prevent desiccation of the tissue. In August 1995, GTR
completed an interim analysis of data obtained from the first 77 patients in its
trial of Acticel(SM) wound dressings as a treatment for partial thickness burns.
Although the results from treatment of the second half of this patient group,
which followed a clinical investigators' meeting to discuss patient selection
and use of the product, were at a level sufficient to meet the stated trial
objectives, it did not appear that data for the entire trial would be sufficient
to support a filing of an application for marketing approval.
Based on this analysis, together with GTR's concerns as to the
commercial potential of the current product concept, and in order to focus GTR's
near term efforts on the introduction of the CARTICEL(SM) Service, GTR has
elected to discontinue patient enrollment in the trial. GTR has also determined
that it will undertake a review of the product design and commercial potential
of Acticel(SM) wound dressings prior to initiation of future clinical studies.
OTHER TISSUE REPAIR OPPORTUNITIES
MULTIPLE SCLEROSIS. Multiple sclerosis ("MS") is the most common
disease of the brain and spinal cord among young adults in the United States.
The National Multiple Sclerosis Society estimates that approximately 250,000
people in the United States suffer from multiple sclerosis. GTR believes that
the annual healthcare cost associated with care and treatment of multiple
sclerosis patients exceeds $2 billion in the United States. Patients develop
debilitating symptoms including fatigue, numbness, pain, slurred speech, blurred
vision and, ultimately, muscle spasm and paralysis. MS is rarely fatal. While
most patients are ambulatory, at least between episodes, some patients may
eventually become paralyzed and confined to a wheelchair.
Current therapy for multiple sclerosis remains inadequate. Steroids can
be used for temporary, symptomatic relief in mild cases of the disease, but
toxicity and lack of effectiveness limit their usefulness. More recently, a beta
interferon-based immunomodulator has been approved by the FDA. GTR is aware of
two other products for which NDAs have been filed, one of which is beta
interferon-based. Other therapies (such as cyclosporines, antimetabolites, gold
and radiation) appear to benefit some patients but are also associated with
treatment-limiting side effects.
GTR is developing recombinant TGF-Beta2 for formulation as an
intravenous injectable product for administration to MS patients for the
prevention of autoimmune damage of nerve tissue.
GTR is continuing the work begun by Celtrix on TGF-Beta2 in people
suffering from multiple sclerosis. In April 1994, Celtrix initiated a Phase I
clinical study with recombinant TGF-Beta2 in individuals with multiple
sclerosis. The study is being conducted by the National Institute of
Neurological Disorders and Stroke. The initial clinical evaluation of TGF-Beta2
in patients with MS is an open-label, ascending-dose safety study involving 15
patients with the progressive form of the disease. It is anticipated that this
initial study, along with on-going preclinical safety and efficacy testing of
TGF-Beta2 in MS
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animal models, will provide the basis for expanded clinical studies. GTR
continues to conduct toxicity studies of TGF-Beta2 to support future phase II
clinical trials. GTR anticipates results from the on-going Phase I trial in
1996. GTR has not committed to a development and commercialization strategy for
TGF-Beta2 for MS and has begun exploratory discussions regarding the future
grant of a license to a third-party for this indication.
BONE REPAIR
Approximately two million bone fractures occur in the United States
every year, and 500,000 of these experience problems with repair. In these
cases, repair may be inhibited by disease. When there is substantial bone loss,
current methods such as autologous bone grafts, cadaver bone grafts and
electrical stimulation vary in efficacy and side-effects. In the United States,
bone augmentation is used in nearly all of the 170,000 spinal fusion procedures
and in about 15% of the 1.3 million trauma fractures. The most recent
alternatives for repair have been hydroxyapatite or collagen-based porous bone
graft substitutes. However, these grafts are osteoconductive, meaning that they
provide a matrix for bone growth but do not contain growth promoting agents.
Current research is focusing on the development of osteoinductive or bone growth
promoting agents.
TGF-Beta2 has been shown to promote wound healing in animal models of
hard tissue repair. GTR has been approached by a number of companies in the
orthopedic implant market to evaluate the use of TGF-Beta2 in conjunction with
accelerating the healing process in segmental defect repair and general use of
implants. GTR may grant a license for use of TGF-Beta2 for this indication to a
third party.
PRODUCTION
GTR has developed and validated a commercial scale, proprietary
chondrocyte processing system for the CARTICEL(SM) Service. A total of 54
validation studies were conducted as part of this process. In addition, GTR has
developed hundreds of standard operating procedures to ensure the safety and
quality of its CARTICEL(SM) Service. These procedures incorporate GTR's quality
assurance program, consisting of facility controls, process controls and final
product testing. Furthermore, each technician undergoes three months of training
prior to handling patient cells. All production and quality control procedures
are intended to ensure traceability of operations. GTR believes that this
quality systems approach will facilitate meeting the new regulatory requirements
expected to be imposed by the FDA. See "Government Regulation."
GTR's process development efforts are directed toward expanding
autologous chondrocyte culture capacity, streamlining processing, improving
quality at lower production costs and strengthening GTR's proprietary position.
This work includes improving yields, reducing labor associated with harvesting
chondrocytes from cartilage biopsies, developing methods for extending the
viability of both biopsy specimens and final product cell suspensions, and
identifying cell culture systems that will enable GTR to automate much of the
production process for the CARTICEL(SM) Service.
GTR produces materials for its Epicel(SM) Service and CARTICEL(SM)
Service in a specialized facility designed for the production of cell based
therapies. During the second half of 1995, GTR upgraded and increased the
processing capacity of that plant for the CARTICEL(SM) Service to approximately
5,000 patients per year.
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In January 1996, GTR acquired two adjacent buildings in Framingham,
Massachusetts which it is developing as a CARTICEL(SM) Service production
facility with annual capacity of approximately 13,000 patients. This project
will be completed in 1996. See "Properties -- Tissue Repair Division." GTR
believes that it manufactures its products in compliance with GMP standards
where applicable. GTR expects that Vianain(R) and TGF-Beta2 will be manufactured
for GTR by the General Division of Genzyme, with the costs of such manufacturing
being allocated to GTR.
SALES AND MARKETING
GTR believes that successful commercialization of the CARTICEL(SM)
Service is dependent on its being accepted by and incorporated into routine use
by a large number of orthopedic surgeons. In order to gain access to GTR's
cartilage cell processing services, surgeons must complete comprehensive
training in the surgical procedure for autologous cartilage cell implantation.
GTR has trained approximately 400 surgeons through March 1, 1996 and anticipates
training 1,200 surgeons during 1996. GTR's training programs include clinical,
technical and practical orientation modules providing a concentrated exposure to
autologus implantation technology and the ability to observe the surgical
procedure, either live in Sweden or by videotape. Surgeons also are given the
opportunity to interact with the Swedish surgeons who developed these
techniques.
GTR markets the CARTICEL(SM) Service directly to orthopedic surgeons in
the United States and Europe. Since the launch of the CARTICEL(SM) Service, GTR
has built its United States and European sales and marketing organization, which
now includes a total of 24 sales people. GTR intends to expand this organization
to more than 60 by the end of 1996 with sales people experienced in the
orthopedic market.
GTR's sales force promotes the CARTICEL(SM) Service by contacting and
educating orthopedic surgeons about the CARTICEL(SM) Service and maintaining an
ongoing relationship with each surgeon who receives training from GTR; assisting
physicians with administrative, clinical and reimbursement issues involved in
arranging to perform the biopsy and implantation procedures at hospitals; and
assisting physicians in obtaining the necessary approval from the hospital's IRB
to collect outcomes data in accordance with GTR's protocol. GTR further supports
its sales and marketing efforts by attendance at and participation in orthopedic
congresses and symposia. In Europe, GTR also has access to the General
Division's sales force on a cost-sharing basis.
COMPETITION
CARTICEL(SM) SERVICE. GTR is aware of three companies, Advanced Tissue
Sciences, Inc., in conjunction with Smith and Nephew PLC, Integra LifeSciences
Corp. and LifeCell Corp. that are engaged in research on cultured cartilage
products. GTR believes that none of these firms has progressed to clinical
trials.
EPICEL(SM) SERVICE. GTR is the only commercial provider of cultured
skin grafts that have been shown to provide permanent skin replacement for burn
patients in the United States. However, GTR may face competition from companies
using other approaches to culture skin tissue. Two companies, Organogenesis,
Inc. and Advanced Tissue Sciences, have been granted expedited FDA review for
their skin substitutes. One of these products will still require a skin graft
from the patient or Epicel(SM) Service to close a full-thickness wound and thus
will not be
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competitive with GTR's Epicel(SM) Service. Integra LifeSciences Corp. has
submitted a PMA for its collagen-based dermal replacement product to the FDA.
LifeCell Corp. currently has freeze-dried enzymatically processed human cadaver
dermis on the market.
TGF-BETA2. The use of growth factors is emerging as a treatment for
partial-thickness or very small full-thickness wounds. A number of companies are
currently conducting or planning to conduct clinical trials with growth factors,
although to date, no recombinant growth factor product has received FDA
approval. Potential competitors include Chiron Corp., in collaboration with the
Ethicon division of Johnson & Johnson, Curative Technologies, Inc., and Scios
Novo, Inc. Curative Technologies, Inc., also has one product on the market which
does not require FDA approval. Such growth factors may prove to be complementary
to, as well as competitive with, TGF-Beta2. However, GTR does not believe that
growth factors can provide permanent skin replacement to compete with the
Epicel(SM) Service. Additionally, TGF-Beta2 will compete with interferon-based
immunomodulators produced by Chiron Corp. and Biogen Inc. for the treatment of
multiple sclerosis.
VIANAIN(R) DEBRIDING PRODUCT. Vianain(R) will compete primarily with
surgical debridement of necrotic tissue or mechanical debridement using
hydrotherepy and daily dressing changes to remove necrotic tissue and, to a
lesser extent, with currently available enzymatic debridement products. Surgical
and mechanical debridement procedures are painful, labor intensive and remove
viable tissue along with necrotic tissue while the enzymatic debridement
products on the market are slow-acting and of limited efficacy. Enzymatic
debridement products currently available commercially include products
manufactured by Knoll Pharmaceuticals, Parke-Davis, Boots-Flinte, Inc., Lederle
Laboratories and Rystan.
PATENTS AND PROPRIETARY RIGHTS
GTR pursues a policy of obtaining patent protection both in the United
States and in selected foreign countries for subject matter considered
patentable and important to its business. In addition, a portion of GTR's
proprietary position is based upon patents licensed by Genzyme. These license
agreements generally require GTR to pay royalties upon commercialization of
products covered by the licensed technology.
GTR received its first patent in October 1995 for its method of
freezing cells. In addition, GTR has filed and is preparing several patent
applications covering its work in cartilage repair. GTR possesses substantial
know-how in the field of autologous cell development generally, and for
CARTICEL(SM) Service in particular. Such know-how includes the production of
biopsy kits and packaging materials, procedures for quality control, sterility,
segregation and manufacturing, and product delivery, and the method by which GTR
validates assays for future development. GTR believes that this significant
technological know-how places it in a competitively advantageous position.
Biotechnology is a rapidly developing field. Many patent applications
have been filed and the scope the courts will give to the claims of patents
issued from such applications and the nature of these claims is unknown. It is
premature to predict what general trend, if any, will emerge as to the breadth
of allowed claims for biotechnology products and related uses. The allowance of
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broader claims will increase the incidence and cost of interference proceedings
in the United States and the risk of infringement litigation in the United
States and abroad. A policy of allowing narrower claims, conversely, would limit
the value of GTR's proprietary rights under patents it holds, licenses or for
which it has applied. It is possible that interference proceedings will occur
with respect to GTR's patent applications. It is also likely that subject matter
patented by others will be required by GTR to commercialize at least some of
GTR's products. No assurance can be given that licenses under any such patent
rights of others will be available on acceptable terms, if at all.
GTR's proprietary position in the culturing of epidermal tissues was
originally exclusively licensed from Harvard University and has been augmented
by recently obtained additional patents covering cool storage technology and
packaging of skin grafts produced using the Epicel(SM) Service. GTR has also
exclusively licensed, on a worldwide basis except for Italy, recent patents
covering cryopreservation of such skin grafts. GTR has extended this basic
cryopreservation technology by patenting additional developments and
improvements in the United States.
GTR also possesses know-how relating to the large scale production of
cultured epidermal grafts, the growth of other types of mammalian cells
including fibroblasts and epithelial cells, and the formulation of various types
of biomaterials, including HA. In addition to HA know-how, GTR has rights to a
series of issued United States patents in tissue repair covering modified forms
of HA.
GTR has pending and issued patents in the United States and other
countries covering the enzymatic formulation of the Vianain(R) Debriding Product
and hydrophilic cream delivery vehicle for the product.
Celtrix has obtained patents and filed patent applications in the
United States and foreign countries on the composition of TGF-Beta2, its
formulation and its therapeutic applications in wound healing, cancer, immune
therapy and bone therapy. Genzyme allocated the rights under its license with
Celtrix to GTR at the time of GTR's creation in December 1994.
There can be no assurance that patents issued or licensed to GTR will
remain free of challenge by third parties, that GTR may not unintentionally
infringe patents of third parties, or that GTR may not have to alter its product
development methods or procedures to take into account patents issued to others,
causing unexpected costs and delays. There can be no assurance that the pending
applications owned or licensed by GTR will issue in any country or that the
issued patents will provide a material commercial benefit for GTR.
While GTR seeks a strong patent position, it believes that its
competitive position will also depend on its ability to maintain its trade
secrets and proprietary know-how, to achieve market leadership in key product
areas and to obtain successful clinical results. GTR's employees, advisors and
consultants who have access to GTR proprietary information are required to sign
confidentiality agreements.
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GOVERNMENT REGULATION
Prior to launching the CARTICEL(SM) Service, GTR made a determination
that this service did not fit within any existing FDA regulatory classification.
In the absence of specific regulatory guidance, GTR has voluntarily formulated
its own standards for the processing of autologous chondrocytes in its
specialized facility and has developed policies governing surgeon training,
patient data collection and labeling. GTR believes that its quality systems
program is equivalent to the FDA's current Good Manufacturing Practices ("GMP").
In April, 1995, the FDA contacted GTR and asked for more information
regarding the regulatory status of the CARTICEL(SM) Service. In order to clarify
the situation, GTR filed a formal request in May of 1995 with the FDA
Commissioner's office to review the situation and determine appropriate
regulatory jurisdiction. The FDA was provided with information regarding GTR's
quality standards and the policies that GTR established for the CARTICEL(SM)
Service, as well as answers to specific technical questions. The FDA responded
to GTR's request for designation in July 1995, confirming in its response GTR's
belief that a formal regulatory framework appropriate to the CARTICEL(SM)
Service had not yet been established. Furthermore, the FDA informed GTR that it
intended to hold a public hearing to explore the public health impact of and
consider appropriate regulatory controls for autologous cell implants. The FDA
also informed GTR that it would not regulate the provision of the CARTICEL(SM)
Service and Epicel(SM) Services prior to the hearing and development of
regulations, and would allow GTR sufficient time to comply with any new
regulations that may be promulgated.
In November 1995 the FDA held a public hearing on the subject of
autologous cells for structural purposes as a starting point for the development
of new regulations. GTR participated in this hearing, presenting information
regarding the development, clinical application and processing related to the
CARTICEL(SM) and Epicel(SM) Services. GTR also advocated the development of
appropriate regulations to guide further development of products and services in
this area. The public comment period following the November meeting closed in
February 1996. The FDA has announced that it will review its position and
determine if regulations are required in the area of autologous cells for
structural and reconstructive purposes. The FDA has indicated that it will
provide GTR with sufficient time to comply with any regulation that it may
promulgate relating to autologous cells.
GTR has actively participated in committees with other organizations in
the field of autologous cell production in the United States and Europe to
develop industry standards. GTR's experience in this field has provided it with
the opportunity to take an active role in developing such standards.
A federal criminal statute that prohibits the transfer of any human
organ for valuable consideration for use in human transplantation, but which
permits recovery of reasonable costs associated with such activities, has not
been applied to the CARTICEL(SM) or Epicel(SM) Services. Certain states have
laws requiring the licensure of tissue and organ banks and laws governing the
sale of human organs and the safety and efficacy of drugs, devices and
biologics, including skin, all of which could be interpreted to apply to GTR's
production and distribution of cultured tissue products. Provisions in certain
states' statues prohibit the receipt of valuable consideration in connection
with the sale of human tissue by a tissue bank but permit licensed tissue
banks, including companies, to recover their reasonable costs associated with
such sales. GTR has received notice from one state's Department of Health
requiring compliance with
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its tissue bank licensure statute with respect to distribution of the Epicel(SM)
Service. Genzyme has applied for such a license.
Federal or state regulation could result in significant expense to GTR,
limit GTR's reimbursement for its services, and otherwise materially adversely
affect GTR's results of operations.
Autologous products are specifically exempt from the European Device
Directive and Pharmaceutical Directive promulgated by the European Union.
Therefore, each European country is free to impose its own regulations on the
marketing of such products. To date, GTR has not encountered any local
registration requirements for market introduction of the CARTICEL(SM) Service.
GTR is currently assessing the regulatory requirements for commercialization of
the CARTICEL(SM) Service in Japan.
GTR is also subject to various federal, state and local laws,
regulations and recommendations relating to safe working conditions, laboratory
and manufacturing practices and the use and disposal of hazardous or potentially
hazardous safety procedures used in connection with GTR's research work and
production operations. Although GTR believes that its safety procedures comply
with the standards prescribed by federal, state and local regulations, the risk
of contamination, injury or other accidental harm cannot be completely
eliminated. In the event of such an accident, GTR could be held liable for any
damages that result and any liabilities could exceed GTR's resources.
EMPLOYEES OF THE REGISTRANT
As of December 31, 1995, Genzyme (including all consolidated
subsidiaries and excluding GTC) had approximately 2,286 employees of whom 417
were engaged in research and development, 793 in manufacturing, 323 in
commercial laboratory operations, 409 in marketing, sales and distribution and
344 in administration. Doctorate degrees are held by 167 of the Company's
employees. Of the Company's employees, 1,798 are located in the United States,
252 in the UK, 151 in Europe and 15 in Japan and the Far East.
None of the Company's employees are covered by collective bargaining
agreements. The Company considers its employee relations to be excellent.
RESEARCH AND DEVELOPMENT COSTS
The information required by Item 101(c)(xi) of Regulation S-K is
incorporated by reference from Part II, Item 8 "Consolidated Financial
Statements and Supplementary Schedules" and specifically to the "Consolidated
Statements of Operations" and to Note K of "Notes to Consolidated Financial
Statements."
SALES BY GEOGRAPHIC AREA, SIGNIFICANT CUSTOMERS AND PRODUCTS
The information required by Items 101(c)(1)(i) and (vii) and 101(d) of
Regulation S-K is incorporated by reference from Part II, Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note O of "Notes to Consolidated Financial Statements."
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ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT
The current executive officers of the Company are as follows:
NAME AGE TITLE
---- --- -----
Henri A. Termeer 50 Chairman of the Board, President and Chief
Executive Officer
Geoffrey F. Cox 52 Senior Vice President, Operations
and Pharmaceuticals Division
David D. Fleming 47 Senior Vice President; President,
Diagnostics Division
John V. Heffernan 57 Senior Vice President, Human Resources
Elliott D. Hillback, Jr. 51 Senior Vice President; President,
Integrated Genetics
Mark A. Hofer 42 Senior Vice President and Chief Patent
Counsel
David J. McLachlan 57 Senior Vice President, Finance; Chief
Financial Officer
Gregory D. Phelps 47 Senior Vice President; President, Genzyme
Tissue Repair Division
James R. Rasmussen 48 Senior Vice President, Research
Alan E. Smith 50 Senior Vice President, Research
Peter Wirth 45 Senior Vice President and General Counsel
Evan M. Lebson 52 Vice President and Treasurer
John M. McPherson 47 Vice President, Biotherapeutic Product
Development; Vice President, Research and
Development, Genzyme Tissue Repair
Division
Richard A. Moscicki 44 Vice President, Clinical, Medical and
Regulatory Affairs
G. Jan van Heek 46 Vice President; President, Therapeutics
Division
Each officer's term of office extends until the meeting of the Board of
Directors following the next annual meeting of stockholders and until a
successor is elected and qualified or until his earlier resignation or
removal.
Mr. Termeer has served as President and a Director of the Company since
October 1983, as Chief Executive Officer since December 1985 and as Chairman of
the Board since May 1988. For ten years prior to joining the Company, Mr.
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Termeer worked for Baxter Travenol Laboratories, Inc., a manufacturer of human
health care products. Mr. Termeer is Chairman of the Boards of GTC and Neozyme
II. Mr. Termeer is also a director of Abiomed, Inc., AutoImmune Inc., GelTex
Pharmaceuticals, Inc. and Xenova Ltd. and a trustee of Hambrecht & Quist
Healthcare Investors and Hambrecht & Quist Life Sciences Investors.
Dr. Cox joined the Company in June 1984 and has served as Senior Vice
President, Operations of the Company since May 1988. Dr. Cox also is responsible
for the Company's Pharmaceuticals Division. For 14 years prior to joining the
Company, Dr. Cox worked for the manufacturing division of British Fermentation
Products, Ltd., a division of Gist-Brocades N.V.
Mr. Fleming joined the Company in April 1984. He has been President of
Genzyme Diagnostics Division since January 1989 and a Senior Vice President of
the Company since August 1989. For 11 years prior to joining the Company, he
worked for Baxter Travenol Laboratories, Inc.
Mr. Heffernan joined the Company as Vice President, Human Resources in
October 1989 and has served as Senior Vice President, Human Resources since May
1992. Prior to joining the Company, he served for more than five years as Vice
President, Human Resources Corporate Staff of GTE Corporation, a diversified
communications and electronics company.
Mr. Hillback has served as Senior Vice President and as President of
Integrated Genetics (formerly IG Laboratories, Inc., a majority-owned subsidiary
merged into Genzyme in October 1995) since July 1990. For one year before
joining the Company, he was President and Chief Executive Officer of Cellcor
Therapies, Inc., a biotechnology company. Prior to that, Mr. Hillback was
employed for six years in the human health care products business of The BOC
Group, Inc., most recently as President of its Glasrock Home Health Care
subsidiary. For eleven years prior to joining The BOC Group, Inc., he served in
varying capacities at Baxter Travenol Laboratories, Inc. Mr. Hillback is also a
director of IVF America, Inc., an in vitro fertilization services company in
which Genzyme holds a minority interest.
Mr. Hofer joined the Company in August 1989 as Vice President and
General Counsel, served as Senior Vice President and General Counsel from May
1992 until December 1995 and has been Senior Vice President and Chief Patent
Counsel since January 1996. Prior to joining the Company, he served as Chief
Patent Counsel for Integrated Genetics, Inc., a biotechnology company, from July
1987 until its acquisition by the Company in August 1989. From March 1981 until
July 1987, he served as Patent Counsel for Johnson & Johnson specializing in
biotechnology.
Mr. McLachlan joined the Company in December 1989 and has served as
Senior Vice President, Finance and Chief Financial Officer since that time.
Prior to joining the Company, he served for more than five years as Vice
President of Finance for Adams-Russell Electronics Inc., a defense electronics
manufacturer, and Adams-Russell Co., Inc., a cable television company. Mr.
McLachlan is also a director of HearX, Ltd.
Mr. Phelps joined the Company as Senior Vice President in November
1991. Prior to joining the Company, Mr. Phelps served as President and Chief
Executive Officer of Viagene, Inc., a biotechnology company, from October 1988
to June 1990 and of ZymoGenetics, Inc., a biotechnology company, from May 1986
to August 1988,
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and held various positions at Baxter Travenol Laboratories, Inc. from 1975 to
1986. Mr. Phelps is also a director of Neozyme II and Oxtex International Inc.
Dr. Rasmussen joined the Company in June 1984 and has served as Senior
Vice President, Research since August 1989. Prior to joining the Company, he
was an Assistant Professor of Chemistry at Cornell University.
Dr. Smith joined the Company in August 1989 as Senior Vice President,
Research. Prior to joining the Company, he served as Vice President-Scientific
Director of Integrated Genetics, Inc., from November 1984 until its acquisition
by the Company in August 1989. From October 1980 to October 1984, Dr. Smith was
head of the Biochemistry Division of the National Institute for Medical
Research, Mill Hill, London, England. Dr. Smith also serves as a director of
GTC.
Mr. Wirth joined the Company in January 1996 as Senior Vice President
and General Counsel, and remains a partner of Palmer & Dodge, a Boston,
Massachusetts law firm, a position he has held since 1982.
Mr. Lebson joined the Company in August 1989 as Executive Assistant to
the President and served as Vice President, Financial Operations from April 1990
to August 1991 and as Vice President and Treasurer since then. Prior to joining
the Company, he served as Treasurer and Chief Financial Officer of Integrated
Genetics, Inc. from 1983 until its acquisition by the Company in August 1989.
Mr. Lebson is also Vice President and Treasurer of GTC.
Dr. McPherson joined the Company in August 1989 and served as Vice
President, Therapeutic Protein Development from November 1989 to May 1993 and as
Vice President, Biotherapeutic Product Development since then. He was appointed
Vice President, Research and Development of Genzyme Tissue Repair in December
1994. Prior to joining the Company, he was, since April 1988, Director, Protein
Chemistry of Integrated Genetics, Inc.
Dr. Moscicki joined the Company in March 1992 as Medical Director,
became Vice President, Medical Affairs in early 1993 and was named Vice
President, Clinical, Medical and Regulatory Affairs in December 1993. Since
1979, he has also been a physician staff member at the Massachusetts General
Hospital and a faculty member at the Harvard Medical School.
Mr. van Heek joined the Company in September 1991 as General Manager of
its wholly-owned subsidiary, Genzyme, B.V., and became a Genzyme Vice President
and the President of Genzyme Therapeutics Division in December 1993. Prior to
joining the Company, he was, since 1988, Vice President/General Manager of the
Fenwal Division of Baxter Healthcare Corporation. Mr. van Heek also has served
as President and Treasurer of Neozyme II from March 1992 to January 1996.
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ITEM 2. PROPERTIES
Genzyme's operations are conducted in manufacturing, warehousing, pilot
plant, clinical laboratories, and research and office facilities principally in
the United States and England. All properties are leased except for certain
properties in Haverhill, England, Santa Fe, New Mexico and Framingham,
Massachusetts. Genzyme's principal properties are, for the General Division, its
extensive and flexible manufacturing facilities for the large scale production
of its complex therapeutic proteins, biomaterials, diagnostic products and
pharmaceuticals and its genetic diagnostic facilities and, for GTR, its
state-of-the-art cell processing facilities for the CARTICEL(SM) Service and the
Epicel(SM) Service.
GENERAL DIVISION
A multi-use pharmaceutical facility in Haverhill, England is used to
produce commercial quantities of active pharmaceutical products, including
phospholipids. A second multi-use pharmaceutical facility in Liestal,
Switzerland is used to produce peptides. Diagnostic enzymes and other
fermentation products are produced in a multi-purpose fermentation facility in
Maidstone, England and a protein purification plant in West Malling, England.
Ceredase(R) enzyme is produced under GMP conditions at Genzyme's FDA
inspected therapeutic products manufacturing facility located in Cambridge,
Massachusetts. Cerezyme(R) enzyme is manufactured under GMP conditions in
Genzyme's small scale mammalian cell culture facility in Framingham,
Massachusetts. This facility also is used to make Thyrogen(R) hormone for
clinical trial use and, if approved by the FDA, for distribution to patients
under a Treatment Protocol.
Construction of the approximately 135,000 square foot mammalian cell
culture production facility at Allston Landing in Boston, Massachusetts has been
completed. This multi-product plant, which contains extensive sterile filling
capacity, will be used initially to manufacture Cerezyme(R) enzyme. The
extensive and comprehensive validation, commissioning and inspection activities
for the facility and the related Cerezyme(R) enzyme manufacturing process are
nearing completion with the objective of receiving FDA approval to sell
Cerezyme(R) enzyme manufactured at the plant during 1996. The facility, which is
owned by the Company, is built on land held under a 60 year lease.
Genzyme has manufacturing capacity at two of its UK facilities to
produce commercial quantities of HA powder for its family of HA-based products
currently under development on behalf of the Partnership. Seprafilm(TM)
bioresorbable membrane is produced at commercial scale from the HA powder in a
Genzyme manufacturing facility located in Framingham, Massachusetts.
GENZYME TISSUE REPAIR
Production for the CARTICEL(SM) Service and the Epicel(SM) Service
currently occurs in a recently expanded cell processing facility located in
Cambridge, Massachusetts. This facility now has capacity to provide the
CARTICEL(SM) Service to approximately 5,000 patients per year. In addition, GTR
is constructing additional capacity for the CARTICEL(SM) Service in facilities
recently acquired in Framingham, Massachusetts. This project, which is expected
to add processing for approximately 13,000 additional patients annually, will be
completed in 1996.
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Leases for the Company's facilities contain typical commercial lease
provisions including renewal options, rent escalators and tenant responsibility
for operating expenses. The Company believes that it has or is in the process of
developing adequate manufacturing capacity to support its requirements for the
next several years.
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The principal properties in which the Company conducts its business
are described as follows:
YEAR OF
SQUARE LEASE EX-
LOCATION FUNCTION FEET PIRATION
- -------- -------- ---- --------
Boston, MA Manufacturing 135,000 Owned
Framingham, MA Manufacturing and warehousing 202,500 2002
Framingham, MA Manufacturing 17,000 2005
San Carlos, CA Manufacturing, research and 31,000 2005
administrative offices
Haverhill, England Manufacturing, warehousing, 90,000 Owned
research and development and
administrative offices
Cambridge, MA Production, research and 64,000 2000
development and administrative
offices for GTR
Cambridge, MA Manufacturing and warehousing 27,500 2001
Russelsheim, Germany Manufacturing, research and 74,000 2000
development and administrative
offices
West Malling, England Manufacturing and warehousing 12,000 1997
Maidstone, England Manufacturing and warehousing 9,000 2005
Liestal, Switzerland Manufacturing, research and 52,000 1998
development and administrative
offices
Cambridge, MA Corporate offices, research 120,000 2005
laboratories and manufacturing
Framingham, MA Research laboratories, clinical 145,000 Owned
laboratories and administrative
offices
Santa Fe, NM Clinical laboratories and administrative offices 50,000 Owned
West Malling, England Research laboratories and 18,000 2006
administrative offices
Greensboro, NC Laboratories 61,200 1997
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Genzyme also maintains sales and administrative offices in leased space
in Japan, Italy, Belgium and The Netherlands and also leases clinical laboratory
and office space at various sites in the United States.
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ITEM 3. LEGAL PROCEEDINGS
On February 16 and 17, 1995, two actions were filed in the Court of
Chancery of the State of Delaware for New Castle County, by individuals (Lenora
Isaacs and Richard Berusch in one case and Robert J. Bernard in the other case)
alleging to be stockholders of IG Laboratories, Inc. ("IG"), a former
majority-owned subsidiary of Genzyme that was merged with and into Genzyme in
October 1995 (the "Merger"). Both complaints name as defendants IG, Genzyme and
each of IG's former directors. The plaintiffs allege, among other things, that
Genzyme and the former directors of IG have breached their fiduciary duties to
the former public stockholders of IG in connection with Genzyme's offer to
acquire the shares of IG stock held by such stockholders as part of the Merger.
The plaintiffs seek class action status, an unspecified amount of damages and a
court order enjoining the Merger. The Merger became effective on October 2, 1995
with no action having been taken with respect to these complaints.
On November 9, 1995, Genzyme was named as a defendant in a lawsuit
commenced in the United States District Court of the District of Massachusetts
by Michael Spielman, on his own behalf and purportedly on behalf of a class of
approximately two hundred others. The Plaintiff was a limited partner of Genzyme
Clinical Partners, L.P. ("GCP"). The general partner of GCP was Genzyme
Development Corporation ("GDC"), a former subsidiary of Genzyme that was
dissolved in 1990 after the Company purchased the assets of GCP. The nature of
the plaintiff's claims is that for certain periods Genzyme and GDC failed to
issue to the limited partners certain federal and Massachusetts tax schedules,
and that Genzyme subsequently failed to disclose to the limited partners the
substance of certain legal advice obtained by Genzyme concerning potential
Massachusetts tax consequences of the liquidation of GCP. Genzyme has answered
the complaint, denying liability. No action has been taken by the court on the
plaintiff's request to certify the case as class action. In February 1996,
Genzyme filed a motion for summary judgment, requesting that the court enter
judgment for Genzyme on all claims asserted in the complaint. The court denied
this motion pending discovery.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders of Genzyme during
the fourth quarter of the fiscal year covered by this report.
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Prior to December 16, 1994, the Company had outstanding one class of
common stock. On December 16, 1994, the outstanding shares of the Company's
common stock were redesignated as General Division Stock on a share-for-share
basis and a second class of common stock, designated as Tissue Repair Division
Common Stock ("TR Stock"), was authorized. On December 16, 1994, 5,000,000
shares of TR Stock were issued to the stockholders of BioSurface in connection
with the Company's acquisition of BioSurface. On December 23, 1994, the Company
distributed to the holders of record of the General Division Stock at the close
of business on December 16, 1994, .135 of one share of TR Stock for each share
of General Division Stock held. The General Division Stock and TR Stock
commenced trading on December 16, 1994.
The General Division Stock and the TR Stock are traded on the
over-the-counter market and prices are quoted on the Nasdaq National Market
System under the symbols GENZ and GENZL, respectively. Prior to the
redesignation, the Common Stock traded under the GENZ symbol. As of March 1,
1996, there were 3,539 and 3,704 shareholders of record of General Division
Stock and TR Stock, respectively.
The following table sets forth, for the periods indicated, the high and
low sale prices for the Common Stock, the General Division Stock and the TR
Stock as reported by Nasdaq.
HIGH LOW
---- ---
COMMON STOCK
1994:
First Quarter ........................... $34 1/4 $25 3/4
Second Quarter .......................... 31 25 1/2
Third Quarter ........................... 38 1/2 25 1/4
Fourth Quarter(through
December 15) ........................... 34 1/2 26 1/4
GENERAL DIVISION STOCK
1995:
First Quarter ........................... $41 1/2 $27 1/4
Second Quarter .......................... 44 36
Third Quarter ........................... 64 1/4 39 1/2
Fourth Quarter .......................... 70 3/64 48
1994:
Fourth Quarter(commencing
December 16) ........................... 31 3/4 26 3/4
TR STOCK
1995:
First Quarter ........................... $ 7 3/4 $ 3 1/2
Second Quarter .......................... 7 5/8 5 1/8
Third Quarter ........................... 16 5/8 6 1/2
Fourth Quarter .......................... 18 1/2 11 3/4
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1994:
Fourth Quarter(commencing
December 16) ........................... 5 3/8 3 5/8
No cash dividends have been paid to date on the Common Stock, the
General Division Stock or the TR Stock and the Company does not anticipate
paying cash dividends in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
GENZYME CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS DATA (1)
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS FOR THE YEARS ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Revenues:
Net product sales .................... $ 304,373 $ 238,645 $ 183,366 $ 139,568 $ 72,019
Net service sales .................... 52,450 50,010 50,511 40,400 21,503
Revenues from research and development
contracts:
Related parties .................... 26,758 20,883 34,162 35,412 23,778
Other .............................. 202 1,513 2,332 3,699 4,616
--------- --------- --------- --------- ---------
383,783 311,051 270,371 219,079 121,916
Operating costs and expenses:
Cost of products sold ................ 113,964 92,226 64,704 52,514 33,164
Cost of services sold ................ 35,868 32,403 34,558 27,254 14,169
Selling, general and administrative .. 115,108 85,731 78,716 59,704 39,118
Research and development (including
research and development related
to contracts) ....................... 68,831 55,334 48,331 39,675 27,232
Purchase of in-process research and
development (2) ..................... 14,216 11,215 49,000 51,100 --
Goodwill impairment and
restructuring costs (4) ............. -- -- 26,517 -- --
Charge for purchase options and
financing expenses (3) .............. -- -- -- 16,905 --
--------- --------- --------- --------- ---------
347,987 276,909 301,826 247,152 113,683
--------- --------- --------- --------- ---------
Operating income (loss) ................. 35,796 34,142 (31,455) (28,073) 8,233
Other income and (expenses):
Minority interest in net
loss of subsidiaries ................ 1,608 1,659 9,892 1,678 2,362
Equity in loss of unconsolidated
subsidiary .......................... (1,810) (1,353) -- -- --
Charge for impaired investments ...... -- (9,431) (700) -- --
Settlement of lawsuit ................ -- (1,980) -- -- --
Investment income .................... 8,814 9,101 12,209 21,987 12,371
Interest expense ..................... (1,109) (1,354) (2,500) (7,099) (2,088)
Gain on issuance of stock by IG Labs . -- -- -- -- --
Gain on sale of GENE-TRAK ............ -- -- -- -- 4,065
--------- --------- --------- --------- ---------
7,503 (3,358) 18,901 16,560 16,710
--------- --------- --------- --------- ---------
Income (loss) before income taxes and
extraordinary credit ................... 43,299 30,784 (12,554) (11,513) 24,943
Benefit (provision) for income taxes .... (21,649) (14,481) 6,459 (18,804) (12,484)
--------- --------- --------- --------- ---------
Income (loss) before extraordinary
credit ................................. 21,650 16,303 (6,095) (30,317) 12,459
Extraordinary credit resulting from use
of operating loss carryforwards ........ -- -- -- -- 8,387
--------- --------- --------- --------- ---------
Net income (loss) ....................... $ 21,650 $ 16,303 $ (6,095) $ (30,317) $ 20,846
========= ========= ========= ========= =========
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SELECTED FINANCIAL DATA (CONTINUED)
GENZYME CORPORATION (CONTINUED)
COMMON SHARE DATA: FOR THE YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
ATTRIBUTABLE TO THE GENERAL
DIVSION:
Net income (loss) (8) ..................... $ 43,680 $ 32,054 $ 18,020 $(29,809) $ 21,107
======== ======== ======== ======== ==========
Per common and common equivalent share (8):
Income (loss) before extraordinary
credit ................................ $ 1.45 $ 1.22 $ 0.69 $ (1.33) $ 0.54
Extraordinary credit ................... -- -- -- -- 0.36
-------- -------- -------- -------- ----------
Net income (loss) ...................... $ 1.45 $ 1.22 $ 0.69 $ (1.33) $ 0.90
======== ======== ======== ======== ==========
Weighted average number of shares
outstanding ........................... 30,092 26,169 26,250 22,370 23,554
======== ======== ======== ======== ==========
ATTIRBUTABLE TO THE TISSUE REPAIR
DIVISION:
Net loss (8) .............................. $(22,030) $(15,751) $(24,115) $ (508) $ (261)
======== ======== ======== ======== ==========
Per common share (8) ...................... $ (2.28) $ (4.40) $ (7.43) $ (0.17) $ (0.10)
======== ======== ======== ======== ==========
Weighted average shares outstanding ....... 9,659 3,578 3,245 3,019 2,739
======== ======== ======== ======== ==========
CONSOLIDATED BALANCE SHEET DATA (1): DECEMBER 31,
- ---------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Cash and investments (5) ....... $326,236 $153,460 $168,953 $248,325 $283,473
Working capital ................ 352,410 103,871 99,605 166,324 147,007
Total assets ................... 905,201 658,408 542,052 481,896 403,643
Long-term debt and capital lease
obligations excluding
current portion (6) ........... 124,473 126,729 144,674 105,369 104,609
Stockholders' equity (7) ....... 705,207 418,964 334,072 322,613 268,333
There were no cash dividends paid.
- ----------
(1) In October 1992, Genzyme acquired all the outstanding common shares of
Vivigen, Inc. ("Vivigen") in a transaction accounted for as a pooling of
interests. Accordingly, Genzyme's financial data has been restated to include
Vivigen for all periods presented.
(2) In 1990, 1992, 1993, 1994 and 1995 respectively, Genzyme acquired the assets
and assumed the liabilities of Genzyme Clinical Partners, L.P. (the "Ceredase
Partnership"), all of the rights to four of the Neozyme Corporation ("Neozyme
I") development programs and Medix Biotech, Inc. ("Medix"), all of the rights to
the remaining two Neozyme I development programs, all of the outstanding stock
of BioSurface Technology, Inc. ("BioSurface") and the publicly-held, minority
interest in IG. In connection with these transactions, all of which were
accounted for as purchases, Genzyme charged to operations the following amounts
which represented the purchase of in-process research and development: 1992,
$51.1 million; 1993, $49.0 million; 1994, $11.2 million; and 1995, $14.2
million.
(3) In 1990 and 1992, respectively, Genzyme sponsored formation of Neozyme I and
Neozyme II. In connection with these transactions, Genzyme obtained options to
acquire all of the equity of each entity under certain circumstances in exchange
for the issuance of warrants to acquire the Company's stock. The value assigned
to each option ($8.2 million for Neozyme I and $16.9 million for Neozyme II) was
charged to operations in the period each option was obtained due to uncertainty
as to Genzyme's future exercise of these options.
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(4) In December 1993, the Company incurred restructuring charges of $2.8 million
related to the consolidation of laboratory operations in its diagnostic services
business. Also in December 1993, the Company wrote off $23.7 million for the
value of impaired goodwill associated primarily with IG's acquisition of Genetic
Design, Inc. ("GDI") in 1992.
(5) Cash and investments includes cash, cash equivalents, and short- and
long-term investments.
(6) In October 1991, Genzyme issued $100.0 million of its 6 3/4% convertible
subordinated notes due October 2001 and received net proceeds of $97.3 million.
In March 1996, these notes were redeemed.
(7) In April 1991, Genzyme completed the sale to the public of 4,025,000 shares
of Genzyme common stock for net proceeds of $136.4 million. In December 1994,
the outstanding shares of Genzyme common stock were redesignated as General
Division Common Stock on a share-for-share basis and a second class of common
stock designated as Tissue Repair Common Stock ("TR Stock") was distributed on
the basis of .135 of one share of TR Stock for each share of Genzyme's previous
common stock held by shareholders of record on December 16, 1994. In December
1994, Genzyme issued 5,000,000 shares of TR Stock valued at $25.3 million in
connection with the acquisition of BioSurface. In September 1995, GTR completed
the sale of 3,000,000 shares of TR Stock for net proceeds of $42.3 million. In
October 1995, the General Division completed the sale of 2,875,000 shares of
General Division Stock for net proceeds of $141.3 million.
(8) Net income (loss) attributable to the General Division and the Tissue
Repair Division and net income (loss) per share for the years ended December 31,
1991, 1992, 1993 and 1994 give effect to the management and accounting policies
adopted by the Board in connection with the creation of GTR and, accordingly,
are pro forma presentations.
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SELECTED FINANCIAL DATA (CONTINUED)
GENERAL DIVISION
COMBINED STATEMENT OF OPERATIONS DATA (1)
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS FOR THE YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Revenues:
Net product sales .................... $ 304,373 $ 238,645 $ 183,366 $ 139,568 $ 72,019
Net service sales .................... 47,230 49,686 50,511 40,400 21,503
Revenues from research and development
contracts:
Related parties .................... 26,758 20,883 29,478 32,746 21,486
Other .............................. 202 1,513 2,332 3,699 4,616
--------- --------- --------- --------- ---------
378,563 310,727 265,687 216,413 119,624
Operating costs and expenses:
Cost of products sold ................ 113,964 92,226 64,704 52,514 33,164
Cost of services sold ................ 31,137 32,116 34,558 27,254 14,169
Selling, general and administrative .. 102,167 84,767 78,015 58,881 38,296
Research and development (including
research and development related
to contracts) ....................... 57,907 51,696 45,526 37,324 25,501
Purchase of in-process research and
development (2) ..................... 14,216 -- 24,000 51,100 --
Goodwill impairment and
restructuring costs (4) ............. -- -- 26,517 -- --
Charge for purchase options
and financing expenses (3) .......... -- -- -- 16,905 --
--------- --------- --------- --------- ---------
319,391 260,805 273,320 243,978 111,130
--------- --------- --------- --------- ---------
Operating income (loss) .................. 59,172 49,922 (7,633) (27,565) 8,494
Other income and (expenses):
Minority interest in net loss
of subsidiaries ..................... 1,608 1,659 9,892 1,678 2,362
Equity in loss of unconsolidated
subsidiary .......................... (1,810) (1,353) -- -- --
Charge for impaired investments ...... -- (9,431) (700) -- --
Settlement of lawsuit ................ -- (1,980) -- -- --
Investment income .................... 7,428 9,072 12,209 21,981 12,371
Interest expense ..................... (1,069) (1,354) (2,500) (7,099) (2,088)
Gain on sale of GENE-TRAK ............ -- -- -- -- 4,065
--------- --------- --------- --------- ---------
6,157 (3,387) 18,901 16,560 16,710
--------- --------- --------- --------- ---------
Income (loss) before income taxes and
extraordinary credit .................... 65,329 46,535 11,268 (11,005) 25,204
Provision for income taxes ............... (30,506) (16,341) (2,812) (19,007) (12,589)
--------- --------- --------- --------- ---------
Income (loss) before extraordinary
credit .................................. 34,823 30,194 8,456 (30,012) 12,615
Extraordinary credit resulting from use
of operating loss carryforwards ......... -- -- -- -- 8,323
--------- --------- --------- --------- ---------
Net income (loss) ........................ 34,823 30,194 8,456 (30,012) 20,938
Tax benefit allocated from
Tissue Repair Division .................. 8,857 1,860 9,564 203 169
--------- --------- --------- --------- ---------
Net income (loss) attributable to
General Stock (8) ....................... $ 43,680 $ 32,054 $ 18,020 $ (29,809) $ 21,107
========= ========= ========= ========= =========
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SELECTED FINANCIAL DATA (CONTINUED)
GENERAL DIVISION (CONTINUED)
GENERAL DIVISION COMMON SHARE DATA: FOR THE YEARS ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Net income (loss) attributable
to General Stock(8) ................. $ 43,680 $ 32,054 $ 18,020 $(29,809) $ 21,107
======== ======== ======== ======== ==========
Per General Division Common and common
equivalent share (8):
Net income (loss) before
extraordinary credit ............ $ 1.45 $ 1.22 $ 0.69 $ (1.33) $ 0.54
======== ======== ======== ======== ==========
Net income (loss) ................ $ 1.45 $ 1.22 $ 0.69 $ (1.33) $ 0.90
======== ======== ======== ======== ==========
Average shares outstanding ....... 30,092 26,169 26,250 22,370 23,554
======== ======== ======== ======== ==========
COMBINED BALANCE SHEET DATA (1): DECEMBER 31,
- -------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Cash and investments (5) ....... $278,663 $128,652 $168,953 $248,325 $283,473
Working capital ................ 308,035 83,314 99,503 166,101 147,007
Total assets ................... 854,586 630,144 532,357 481,896 403,643
Long-term debt and capital lease
obligations excluding
current portion (6) ........... 124,473 126,555 144,674 105,369 104,609
Division equity (7) ............ 659,281 395,651 324,391 322,390 268,333
There were no cash dividends paid.
- --------------------
(1) In October 1992, the General Division acquired all the outstanding common
shares of Vivigen, Inc. ("Vivigen") in a transaction accounted for as a pooling
of interests. Accordingly, the General Division's financial data has been
restated to include Vivigen for all periods presented.
(2) In 1992,1993 and 1995, respectively, the General Division acquired all of
the rights to four of the Neozyme Corporation ("Neozyme I") development
programs, Medix Biotech, Inc. ("Medix"), all of the rights to the remaining two
Neozyme I development programs and in 1995, the publicly-held, minority interest
in IG Laboratories, Inc. ("IG"). In connection with these transactions, all of
which were accounted for as purchases, the General Division charged to
operations the following amounts which represented the purchase of in-process
research and development: 1992, $51.1 million, 1993, $24.0 million and 1995,
$14.2 million.
(3) In 1990 and 1992, respectively, the General Division sponsored formation of
Neozyme I and Neozyme II. In connection with these transactions, the General
Division obtained options to acquire all of the equity of Neozyme II under
certain circumstances in exchange for the issuance of warrants to acquire the
General Division's stock. The value assigned to each option ($8.2 million for
Neozyme I and $16.9 million for Neozyme II) was charged to operations in the
period each option was obtained due to uncertainty as to the General Division's
future exercise of these options.
(4) In December 1993, the Company incurred restructuring charges of $2.8 million
related to the consolidation of laboratory operations in its diagnostic services
business. Also in December 1993, the Company wrote off $23.7 million for the
value of impaired goodwill associated primarily with IG's acquisition of Genetic
Design, Inc. ("GDI") in 1992.
(5) Cash and investments includes cash, cash equivalents, and short- and
long-term investments.
(6) In October 1991, the Company issued $100.0 million of its 6 3/4% convertible
subordinated notes due October 2001 and received net proceeds of $97.3 million.
These notes were redeemed in March 1996.
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(7) In April 1991, the Company completed the sale to the public of 4,025,000
shares of Genzyme Common Stock for net proceeds of $136.4 million. In December
1994, the outstanding shares of Genzyme Common Stock were redesignated as
General Division Common Stock on a share-for-share basis. In October 1995, the
General Division completed the sale of 2,875,000 shares of General Division
Stock for net proceeds of $141.5 million.
(8) Net income (loss) attributable to General Division Stock and net income
(loss) per common and common equivalent share for the years ended December 31,
1991, 1992, 1993 and 1994 give effect to the provisions of Management and
Accounting Policies adopted by the Board in connection with the creation of
GTR and accordingly, are pro forma presentations.
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SELECTED FINANCIAL DATA (CONTINUED)
TISSUE REPAIR DIVISION
STATEMENT OF OPERATIONS DATA
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS FOR THE YEARS ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Revenues:
Net service sales ................. $ 5,220 $ 324 $ -- $ -- $ --
Related party revenues:
Technology license fee (2) ..... -- -- 2,000 -- --
Revenues from research and
development contracts ......... -- -- 2,684 2,666 2,291
-------- -------- -------- -------- --------
5,220 324 4,684 2,666 2,291
Operating costs and expenses:
Cost of services sold ............. 4,731 287 -- -- --
Selling, general and administrative 12,927 964 701 823 822
Research and development (including
research and development
related to contracts) ............ 10,938 3,638 2,805 2,351 1,730
Purchase of in-process research and
development (1) .................. -- 11,215 25,000 -- --
-------- -------- -------- -------- --------
28,596 16,104 28,506 3,174 2,552
-------- -------- -------- -------- --------
Operating loss ........................ (23,376) (15,780) (23,822) (508) (261)
Other income and (expenses):
Investment income ................. 1,386 29 -- -- --
Interest expense .................. (40) -- -- -- --
-------- -------- -------- -------- --------
1,346 29 -- -- --
-------- -------- -------- -------- --------
Loss before income taxes .............. (22,030) (15,751) (23,822) (508) (261)
Benefit (provision) for income taxes .. -- -- (38) -- 50
-------- -------- -------- -------- --------
Net loss .............................. (22,030) (15,751) (23,860) (508) (211)
Tax benefit allocated to
General Division ..................... -- -- (255) -- (50)
-------- -------- -------- -------- --------
Net loss attributable TR Stock (4) .... $(22,030) $(15,751) $(24,115) $ (508) $ (261)
======== ======== ======== ======== ========
TISSUE REPAIR DIVISION COMMON
SHARE DATA:
Net loss(4) ....................... $(22,030) $(15,751) $(24,115) $ (508) $ (261)
======== ======== ======== ======== ========
Per common share (4) .............. $ (2.28) $ (4.40) $ (7.43) $ (0.17) $ (0.10)
======== ======== ======== ======== ========
Weighted average shares outstanding 9,659 3,578 3,245 3,019 2,739
======== ======== ======== ======== ========
BALANCE SHEET DATA: DECEMBER 31,
- ---------------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Cash and investments $47,573 $24,808 $-- $ -- $-
Working capital .... 44,374 20,557 -- (149) --
Total assets ....... 52,649 28,435 -- -- --
Division equity (3) 45,926 23,313 -- (149) --
There were no cash dividends paid.
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SELECTED FINANCIAL DATA (CONTINUED)
TISSUE REPAIR DIVISION (CONTINUED)
- --------------------
(1) In 1994, $11.2 million of incomplete technology from the BioSurface
acquisition was charged to operations as in-process research and development. In
December 1993, the GTR exercised its option to purchase the rights to the
Vianain(R) research program being funded by Neozyme I. The transaction was
accounted for as a purchase of in-process research and development and,
accordingly, the GTR charged the $25,000,000 acquisition cost to operations in
1992.
(2) In July 1993, the GTR received a technology license fee of $2,000,000 from
Neozyme I related to expansion of the field of the Vianain(R) debriding product.
(3) In December 1994, the outstanding shares of Genzyme common stock were
redesignated as General Division Common Stock on a share-for-share basis and a
second class of common stock designated as Tissue Repair Common Stock ("TR
Stock") was distributed on the basis of .135 of one share of TR Stock for each
share of Genzyme's previous common stock held by shareholders of record on
December 16, 1994. In December 1994, Genzyme issued 5,000,000 shares of TR Stock
valued at $25.3 million in connection with the acquisition of BioSurface
Technology, Inc. In September 1995, GTR completed the sale of 3,000,000 shares
of TR Stock for net proceeds of $42.4 million.
(4) Net income (loss) attributable to Tissue Repair Division Stock and net
income (loss) per common and common equivalent share for the years ended
December 31, 1991, 1992, 1993 and 1994 give effect to the provisions of
Management and Accounting Policies adopted by the Board in connection with the
creation of GTR and accordingly, are pro forma presentations.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
On December 12, 1994, the stockholders of Genzyme Corporation
("Genzyme") approved, effective December 16, 1994 , the Genzyme Stock Proposal
as described in Genzyme's Prospectus/Proxy Statement dated November 10, 1994,
resulting in the redesignation of Genzyme's common stock into shares of General
Division Common Stock ("General Division Stock") on a share-for-share basis. In
addition, a second class of common stock, designated as Tissue Repair Common
Stock ("TR Stock") was distributed to holders of General Division Stock on the
basis of .135 of one share of TR Stock for each share of General Division Stock
held as of December 16,1994. The approval of the Genzyme Stock Proposal did not
result in any transfer of assets and liabilities of the Company or its
subsidiaries.
Genzyme continues to hold title to all its assets and be responsible
for all its liabilities and the holders of the General Division Stock and the TR
Stock have no specific claim against the assets attributed for financial
statement presentation purposes to the division whose performance is associated
with the class of stock they hold. Liabilities or contingencies of either
division that affect Genzyme's resources or financial condition could affect the
financial condition or results of operations of both divisions.
GENZYME CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion is a summary of the key factors management
considers necessary in reviewing Genzyme's results of operations, liquidity and
capital resources. Forward-looking statements contained in the following
discussion are expectations only and there can be no assurance that actual
results will not materially differ from these expectations. The reader should
consider carefully the "Factors Affecting Future Operating Results."
RESULTS OF OPERATIONS
1995 AS COMPARED TO 1994
Total revenues for 1995 were $383.8 million, an increase of 23% over
1994. Product revenues grew 28% to $304.4 million with growth of 25%, 22% and
72%, respectively, in the Therapeutic, Diagnostic Product and Pharmaceutical
product lines. The increase in sales of Therapeutic products resulted primarily
from increased shipments of Ceredase(R) enzyme, for which the rate of new
patient accruals more than offset dosage reductions, and also from the
increasing availability of Cerezyme(R) enzyme, the recombinant form of the
product. Genzyme's results of operations are highly dependent on sales of these
products which, with combined sales of $215.4 million, represented 71% of
consolidated product sales in 1995 compared to 72% in 1994. The increase in
Diagnostic Product revenue resulted from growth in each of its businesses, most
notably in Direct LDLTM test sales. The increase in Pharmaceutical revenues
resulted from the introduction of new products and a full year of operations by
a Swiss company acquired in July 1994. Service revenues for 1995 were $52.5
million, an increase of 5% from 1994 with growth in tissue repair services more
than offsetting a decline in genetics testing services. Tissue repair revenues
increased to $5.2 million for 1995 from $0.3 million in 1994, with 1994 revenues
representing activity of BioSurface Technology, Inc.("BioSurface"), acquired in
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59
December 1994 in connection with the formation of the Company's Tissue Repair
Division ("GTR"). Genetic testing revenues declined 5% from 1994 due to lower
activity in identity testing and price pressure in paternity testing, while
medical testing revenues were down 2% due to price pressure resulting from HMO
contracts.
International sales represented approximately 41% of product sales in
1995 compared with 37% in 1994. This increase was due primarily to a 49%
increase in the combined international sales of Ceredase(R)/Cerezyme(R) enzyme.
International sales are expected to account for a higher proportion of sales in
the future due to increased international marketing efforts in all areas of
Genzyme's business as well as the impact of expansion through acquisitions. As
the Company's presence in foreign markets increases, it will experience
increasing exposure to currency fluctuations which it will attempt to minimize
through asset and cash management strategies.
Revenue from research and development contracts for 1995 was $27.0
million, an increase of 20% from 1994. Revenues from Neozyme II Corporation
("Neozyme II"), an independent public company formed in 1992 to fund the
development by Genzyme of treatments for cystic fibrosis, increased 36% to $24.2
million due primarily to increased activity from collaborations with third
parties and increased clinical trial activity. In 1995, Genzyme Development
Partners, L.P. (the "Surgical Aids Partnership" or the "Partnership") formed to
fund development of products based on hyalronic acid, primarily for use in
limiting post operative adhesions (the "HA Products"), provided no revenues to
Genzyme as its funds were exhausted in the first quarter of 1994.
Gross margins for 1995 were 58%, as compared to 57% for 1994. Genzyme
provides a broad range of health care products and services, resulting in a
range of gross margins depending on the particular market conditions of each
product or service. Product margins for 1995 increased to 63% from 61% in 1994
due primarily to higher margins on Ceredase(R) enzyme resulting from raw
material yield improvements, and to the sale of higher margin products and cost
reductions by the Pharmaceutical business. Service margins for 1995 decreased to
32% from 35% due primarily to increased costs associated with introduction of a
new tissue repair service and price pressure on genetic testing services which
more than offset economies achieved in the consolidation of the genetic testing
services.
Selling, general and administrative expenses for 1995 were $115.1
million, an increase of 34% over 1994. The increase was due primarily to
increased staffing in support of the growth in several product lines, most
notably in support of the European introduction of the HA Products, the launch
of a new tissue repair service and to the ongoing operating expenses associated
with the Sygena A.G. operation acquired in July 1994.
Research and development expenses for 1995 were $68.8 million, an
increase of 24% over 1994 due to increased efforts on behalf of Neozyme II and
increased spending on internal programs, including the HA Products.
In September of 1995, Genzyme recorded a gain of $950,000 representing
the sale of certain assets by Genzyme Transgenics Corporation ("GTC"), an
unconsolidated subsidiary. In October 1995, Genzyme acquired the publicly-held,
minority interest in IG Laboratories, Inc. ("IG") for 385,000 shares of General
Division Stock valued at approximately $22.8 million. The acquisition was
accounted for as a purchase. The excess of the purchase price over the fair
market value of the net assets was approximately $18.6 million of which $14.2
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million was attributed to incomplete technology and charged to operations and
the balance to Goodwill to be amortized over 11 years.
Investment income for 1995 totaled $8.8 million, compared with $9.1
million for 1994. The decrease resulted from lower average cash and investment
balances. Investment income on the sale of securities included a loss of $0.1
million in 1995 and a gain of $1.4 million in 1994.
Interest expense for 1995 was $1.1 million, net of capitalized interest
of $9.0 million. Interest relating to Genzyme's 6 3/4% convertible subordinated
notes was $6.7 million. These notes were redeemed in March 1996. Interest on a
December 1993, $39.0 million secured loan, which was outstanding throughout 1994
and repaid in January 1995, was nil. Genzyme also incurred interest costs in
1995 and 1994 of $1.7 and $0.9 million, respectively, related to a $21.5 million
mortgage loan used to acquire real property in the second quarter of 1994.
The tax provision for 1995 varies from the U.S. Statutory tax rate
because of the provision for state income taxes, losses of majority-owned
subsidiaries which generate no current tax benefit, tax credits and taxes on
foreign earnings. The effective tax rate for 1995 was 50% as compared to 47% in
1994, largely due to the non-deductibility of the charges for in process
research and development of $14.2 and $11.2 in 1995 and 1994, respectively. The
remainder of the increase was due to changes in U.S. versus foreign taxable
income.
1994 AS COMPARED TO 1993
Total revenues for 1994 were $311.1 million, an increase of 15% over
1993. Product and service revenues were $288.7 million, an increase of 23% over
1993. Product revenues increased 30% to $239.0 million reflecting sales
increases of 39%, 10% and 17%, respectively, in the Therapeutic, Diagnostic
Products and Pharmaceutical product lines. The increase in sales of Therapeutic
products resulted primarily from increased shipments of Ceredase(R) enzyme, for
which the rate of new patient accruals more than offset dosage reductions, and
the market introduction, in 1994, of Cerezyme(R) enzyme. Related sales increased
38% to $172.9 million and represented 72% of consolidated product sales in 1994
compared to 67% in 1993. The increase in Diagnostic Product sales resulted from
increases in sales of immunobiological products, 1994 revenues associated with a
European company acquired in April 1993, and a more than doubling in revenues
from sales of Direct LDL(TM) tests. The increase in Pharmaceutical sales
resulted from the operations of a Swiss company acquired in July 1994. Service
revenues for 1994 declined 1% to $50.0 million from $50.5 million for 1993.
The drop in service revenues resulted from declines in identity testing revenues
due primarily to the loss of four state paternity contracts in mid-1993 and the
impact of increasing price pressures on public paternity testing. The medical
testing business also experienced increased price competition due to increases
in the number of HMO contracts, although year-to-year revenues remained
relatively unchanged. Service revenues in 1994 included $0.3 million from
BioSurface.
International sales represented approximately 37% of product sales in
1994 compared with 29% in 1993. This increase was due primarily to a 90%
increase in the combined international sales of Ceredase(R)/Cerezyme(R) enzyme.
Revenue from research and development contracts for 1994 was $22.4
million, a decrease of 39% from 1993. In 1993, Neozyme Corporation ("Neozyme I")
and the Surgical Aids Partnership provided revenues to Genzyme of $9.0 million
and $8.4 million, respectively. Neozyme I, an independent public company formed
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in 1990 to fund accelerated research on products at Genzyme, wound up its
business and terminated this funding to Genzyme at the end of 1993 when Genzyme
purchased the remainder of its technology. The Partnership exhausted the funds
it had available for this purpose during the first quarter of 1994. Revenues
from Neozyme II increased 42% to $17.8 million for 1994 due primarily to
increased activity relating to collaborations with third parties that began in
1993.
Gross margins for 1994 were 57%, as compared to 58% for 1993. Genzyme
provides a broad range of health care products and services, resulting in a
range of gross margins depending on the particular market conditions of each
product or service. Product margins for 1994 declined to 61% from 65% in 1993
due primarily to lower margins on Ceredase(R) enzyme as a result of the higher
cost of purchased material beginning in the second quarter of 1994. Service
margins for 1994 increased to 35% from 32% on slightly lower sales volumes due
primarily to economies achieved in the consolidation of testing activities.
Selling, general and administrative expenses for 1994 were $85.7
million, an increase of 9% over 1993. The increase was due primarily to
increased staffing in support of the growth in several product lines and to the
ongoing operating expenses associated with various operations acquired in 1993
and 1994.
Research and development expenses for 1994 were $55.3 million, an
increase of 14% over 1993 due to increased efforts on behalf of Neozyme II and
increased spending on internal programs, including the HA Products after the
exhaustion of the Partnership's funding and the Neozyme I programs acquired at
the end of 1993.
In 1994, several transactions resulted in Genzyme recording charges
totaling $22.6 million before taxes. In December, Genzyme charged $11.2 million
to operations for in-process research and development acquired in connection
with the BioSurface acquisition, $9.4 million for the write-off of impaired
value of certain equity investments and settled a lawsuit for $2.0 million.
In 1993, several transactions resulted in Genzyme recording unusual
charges totaling $75.5 million before taxes. In December, Genzyme completed
the purchase of the technology in the two remaining Neozyme I development
programs for $49.0 million in cash. Also in December, Genzyme incurred
restructuring charges of $2.8 million and wrote off $23.7 million to reduce the
carrying value of intangibles in the Diagnostic Services business. The majority
of the write-off ($21.9 million) related to the goodwill recorded in connection
with the acquisition of a paternity testing business in mid 1992.
Investment income for 1994 totaled $9.1 million, compared with $12.2
million for 1993. The decrease resulted from lower average cash and investment
balances. Investment income for 1994 and 1993 included gains of $1.4 million and
$1.6 million, respectively, on the sales of securities, the majority of which
occurred in the first quarter of each period.
Interest expense for 1994 was $1.4 million, net of capitalized interest
of $9.2 million. Interest relating to Genzyme's 6 3/4% convertible subordinated
notes was $6.7 million in each period. Interest on a December 1993 $39.0 million
secured loan, which was outstanding throughout 1994 and repaid in January 1995,
was $1.8 million for 1994. Genzyme also incurred interest expense in 1994 of
$0.9 million related to a $21.5 million mortgage loan used to acquire real
property in the second quarter of 1994.
The tax provision for 1994 varies from the U.S. Statutory tax rate
because of the provision for state income taxes, losses of majority-owned
subsidiaries which generate no current tax benefit, tax credits and taxes on
foreign earnings. The effective tax rate for 1994 was 47%, in part due to the
non-deductibility of the $11.2 million charge for in-process research and
development, as compared to a 51% benefit for 1993. The remainder of the
increase was due to changes in U.S. versus foreign taxable income and to the
lower proportion of tax exempt securities in the investment portfolio.
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LIQUIDITY AND FINANCIAL RESOURCES
Genzyme has historically financed its research and development from R&D
contracts, its operations from product sales and equity financing and its
capital requirements from equity financing and convertible debt.
In 1995, Genzyme generated $44.5 million of working capital from
operations. As of December 31, 1995, Genzyme had accounts receivable of $89.0
million, an increase of $10.8 million from December 31, 1994 due primarily to
the growth in sales of Therapeutic and Pharmaceutical products, and tissue
repair services. Inventories increased $16.2 million, or 44%, to $53.0 million
as of December 31, 1995. The increase was due to support of increased business
operations most notably in the Therapeutic business to build Ceredase(R) enzyme
inventories, in the Pharmaceutical business to meet high demand for one product
and in the newly formed HA Products business in anticipation of the launch of
new products.
In 1995, the turnover of the investment portfolio used $85.5 million of
cash. Spending for property, plant and equipment was $50.0 million, primarily in
support of manufacturing capacity for the Therapeutic and HA Products businesses
and for GTR. In addition, under an agreement with GTC, Genzyme increased its
investment by $4.0 million in February and in June converted approximately $4.0
million of GTC debt into equity. In July, Genzyme issued approximately 34,000
shares of General Division Stock in connection with the acquisition by GTC of
Biodevelopment Laboratories, Inc. in exchange for shares of newly issued GTC
stock. Genzyme's interest in GTC was approximately 48.2% at December 31, 1995.
In September 1995, Genzyme sold 3,000,000 shares of Tissue Repair
Common Stock to the public at a price of $15 per share for net proceeds of $42.3
million after underwriting discounts and commissions. In October 1995, Genzyme
sold 2,875,000 shares of General Division Stock to the public for $51.25 per
share for net proceeds of $141.5 million. Proceeds from the exercise of stock
options, warrants and stock issued through the employee stock purchase plan
provided $39.2 million. As of December 1995, Genzyme had liquid assets,
consisting of cash and cash equivalents totaling $144.4 million and short term
investments in marketable securities totaling $112.3 million. Long term
investments at December 31, 1995 were $69.6 million.
Genzyme holds an option to purchase all of the outstanding Neozyme II
callable common stock at prices which increase monthly from $200.4 million at
December 31, 1995, to $282.6 million at December 31, 1996. In addition, Genzyme
holds an option to acquire all of the partnership interests in the Surgical Aids
Partnership for approximately $26 million plus a continuing royalty payment for
a period of ten years on certain sales of products developed by the Partnership.
Genzyme has a contingent obligation to provide working capital to a joint
venture established between the Partnership and Genzyme to commercialize the
Partnership's products. The extent of that contingent obligation cannot be
measured at this time. Genzyme's decisions regarding future exercise of these
options likely will be based, in part, on the progress in the development work
conducted for each and Genzyme's evaluation of the potential commercial success
of each compared to the costs of the option. The timing of any decision
regarding the Neozyme II option exercise is likely to be influenced by the fact
that the price increases periodically until termination, and by the rate of
depletion of research and development funds. The exercise prices for the
purchase options are payable in cash, common stock or a combination of the two,
as determined by Genzyme at the time each option is exercised. Genzyme currently
does not have sufficient cash to pay the exercise prices of these options and
payments in General Division Stock would result in substantial
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dilution to the holders of General Division Stock. (See "Notes to Consolidated
Financial Statements").
The available research and development funds in the Surgical Aids
Partnership were fully expended in the first quarter of 1994 and Genzyme is not
obligated to provide additional funding. Although Genzyme is not otherwise
contractually required to do so, in January 1994, it agreed to continue funding
the development of the HA Products on behalf of the Partnership in part to delay
accelerated termination of its option to purchase the partnership interests due
to exhaustion of the Partnership's funds. This agreement, which covered the
twelve-month period starting in March 1994, was renewed by Genzyme in 1995 and
again in February 1996 for the period through February 28, 1997. Genzyme
expended $6.4 million in 1995 and expects to spend approximately $7.9 million on
the Partnership's development programs in 1996.
Genzyme expects that its available cash, investments and cash flow from
research contracts and product and service sales will be sufficient to finance
its planned operations and capital requirements for at least the next two years.
Although Genzyme currently has substantial cash resources, it has committed to
utilize a portion of its resources for certain purposes, such as completing
validation of the manufacturing facility in Boston, Massachusetts, completing
its commitment to develop manufacturing capacity sufficient to meet the
requirements for commercialization of the HA Products, the market introduction
of the HA Products, making certain payments to third parties in connection with
strategic collaborations and making the final payment for a company acquired in
1994. Genzyme's commitment to allocate up to $30 million from the General
Division to fund the operations of GTR was eliminated when GTR sold new TR Stock
to the public in September 1995; however, Genzyme retains the right to make
voluntary allocations of up to $30 million from the General Division to GTR.
Such allocation would result in dilution to holders of TR Stock. In addition,
working capital and other capital requirements may change because of
unanticipated changes in business conditions, and such other considerations as
expansion of operations, results of research and development activities,
competitive and technological developments, the timing and costs of obtaining
required regulatory approvals for new products and future acquisitions of
technology and/or product rights. As a result, Genzyme may have to obtain
additional financing. There can be no assurance that such financing will be
available on acceptable terms.
FACTORS AFFECTING FUTURE OPERATING RESULTS
DEPENDENCE ON CEREDASE(R) ENZYME
Genzyme's results of operations are highly dependent upon the sales of
Ceredase(R)/Cerezyme(R) enzyme. For 1995, these sales totaled $215.4 million as
compared to $172.9 million in 1994. Genzyme produces Ceredase(R) enzyme from an
extract of human placental tissue supplied by a French company that is the only
significant commercial source of this material. During 1994, Genzyme experienced
a major increase in the cost of the raw material used to produce Ceredase(R)
enzyme when its supplier raised the cost to Genzyme by approximately $20 million
per year. To achieve a partial recovery of the cost increase, Genzyme, early in
1994, increased the price of Ceredase(R) enzyme.
The supply of starting material available for the production of
Ceredase(R) enzyme effectively limits the amount of product that can be
produced. During 1995, Genzyme and its supplier were successful in improving the
yield of enzyme obtained from the starting material thereby increasing the
amount of product which could be produced. Nonetheless, the current supply
available is not
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sufficient to produce enough Ceredase(R) enzyme to supply all present patients.
Any disruption in the supply or manufacturing process of Ceredase(R) enzyme may
have a material adverse effect on revenue in any period.
To address supply constraints, Genzyme has developed Cerezyme(R)
enzyme, a recombinant form of the enzyme. Genzyme received approval to market
this product in the U.S. and Israel in 1994, In 1995, Genzyme received approval
in Sweden and currently is working to expedite the foreign approvals needed to
market Cerezyme(R) enzyme elsewhere abroad. Manufacturing capacity constraints
on Cerezyme(R) enzyme, presently produced in Genzyme's small scale cell culture
plant, will limit the availability of the product for new patients pending
receipt of regulatory approval to use Genzyme's large scale mammalian cell
culture manufacturing plant in Boston, Massachusetts for production of
Cerezyme(R) enzyme.
NO ASSURANCE OF COMMERCIAL SUCCESS OF THE SURGICAL PRODUCTS
Successful commercialization of the Company's line of HA Products will
depend on many factors, including the breadth of labeling claims allowed by the
FDA, the response of surgeons to the data from clinical trials, the Company's
ability to create or access a sales force able to market the HA Products, the
Company's ability to supply sufficient product to meet market demand, the degree
to which third party reimbursement is available, and the number and relative
efficacy of competitive products that may subsequently enter the market.
GTR OPERATING LOSSES AND CASH REQUIREMENTS
GTR is expected to experience significant operating losses at least
through the first half of 1997 as the Carticel(SM) service is launched and as
its research and development and clinical trial programs expand. There can be no
assurance that GTR ever will achieve a profitable level of operations or that
profitability, if achieved, can be sustained on an ongoing basis. In addition,
under the management and accounting policies adopted by the Genzyme Board of
Directors, to the extent GTR is unable to utilize its operating losses to reduce
its current or deferred income tax expense, such losses may be reallocated to
the General Division on a quarterly basis if General Division can utilize such
losses to offset current or deferred tax expense. Accordingly, any such losses
that cannot be utilized by GTR will not be carried forward to reduce GTR's taxes
payable in the future. This could result in GTR recognizing more tax expense in
the future than would have been required if GTR had retained its losses in the
form of a NOL carryforward. Genzyme anticipates that GTR's existing cash
balances and revenues will be sufficient to fund GTR's operations through the
end of 1996. However, GTR's cash requirements may vary materially from those now
planned as a result of revenue fluctuations, results of research and development
and clinical testing by GTR and its collaborators, competitive advances and
other factors. There can be no assurance that additional funding will be
available on terms that are acceptable to GTR, if at all.
TECHNOLOGY TRANSFERRED TO GENZYME DEVELOPMENT PARTNERS AND NEOZYME II
Genzyme transferred technology and commercial rights to these two
entities and has options to purchase this technology and these rights under
certain circumstances. In January 1996, Genzyme made an offer to a special
committee of the independent directors of the general partner of the Partnership
to acquire substantially all the Partnership's assets for approximately $93
million in shares of General Division Stock. The offer was made in lieu of
Genzyme's option to purchase the limited partnership interests of the
Partnership. There can be no assurance that Genzyme's offer will be accepted by
the general partner or that alternative terms proposed by the general partner,
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if any, will be acceptable to Genzyme. It is also uncertain whether Genzyme will
exercise its option to purchase the limited partnership interests in the event
no agreement is reached or whether Genzyme will exercise its option to purchase
the outstanding shares of Neozyme II callable common stock. If Genzyme does not
exercise these options or otherwise reach agreements to acquire the technologies
and commercialization rights, it will have no rights to the Neozyme II products
and its rights in North America to the HA Products will be limited to a share of
the profits from the joint venture with the Partnership. If Genzyme does
exercise these options, it will be required to make substantial cash payments or
to issue shares of General Division Stock, or both.
LEGISLATIVE ACTIVITY
Ceredase(R) enzyme, Cerezyme(R) enzyme and Genzyme products under
developmenT have been granted orphan drug designation under the Orphan Drug Act
which grants exclusive marketing rights within the United States for seven years
from the date of FDA commercial approval. Periodically, legislation is proposed
before the United States Congress to amend the Orphan Drug Act to reduce the
seven-year exclusive marketing period under certain circumstances. Such proposed
legislation would not be expected to affect Genzyme's market exclusivity for
Ceredase(R) enzyme and Cerezyme(R) enzyme but could reduce the market
exclusivity period for future products. However, the legislative outcome is
uncertain and its effect on Genzyme cannot be determined at this time.
RISKS IN PRODUCT DEVELOPMENT
Product development involves a high degree of risk, and returns to
investors are dependent upon successful development of Genzyme's products. There
can be no assurance that development of any product will be successfully
completed or that FDA approval of any of Genzyme's products under development
will be obtained.
In addition, because of the length of time and expense associated with
bringing new products through development and regulatory approval to the
marketplace, Genzyme places considerable importance on obtaining patent and
trade secret protection for its significant technologies, products and
processes. There can be no assurance that any pending patent applications filed
by Genzyme will mature into issued patents. Furthermore, there can be no
assurance that Genzyme's existing or pending patent claims will offer protection
against competition, or will not be designed around or infringed upon by others.
RISKS INHERENT IN INTERNATIONAL OPERATIONS
Foreign operations of Genzyme accounted for 41% of net product sales in
1995 as compared to 37% and 29% in 1994 and 1993, respectively. In addition,
Genzyme has direct investments in 8 subsidiaries in foreign countries (primarily
in Europe and Japan) and purchases certain raw materials from a European
supplier.
Financial results of Genzyme could be adversely or beneficially
affected by fluctuations in foreign exchange rates. Fluctuations in the value of
foreign currencies affect the U.S. dollar value of Genzyme's net investment in
foreign subsidiaries, with related effects included in a separate component of
Stockholders' equity. Operating results of foreign subsidiaries are translated
into U.S. dollars at average monthly exchange rates. In addition, the U.S.
dollar value of transactions based in foreign currency (collections on foreign
sales or payments for foreign purchases) also fluctuates with exchange rates.
The largest foreign currency exposure results from activity in British pounds,
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French francs, Swiss francs, Dutch guilders, German marks, Japanese yen and
Italian lire.
Genzyme's long-term operating strategies are formulated to minimize the
impact of foreign currency fluctuations on non-U.S. dollar denominated purchases
and sales. Genzyme manages its foreign exchange exposure primarily by entering
into forward contracts with banks to the extent that the timing of the currency
flows can reasonably be anticipated and by offsetting matching foreign currency-
denominated assets with foreign currency-denominated liabilities. Genzyme does
not hedge net foreign investments. Genzyme has no material unhedged monetary
assets, liabilities or commitments denominated in foreign currencies.
THIRD PARTY REIMBURSEMENT AND HEALTHCARE COST CONTAINMENT INITIATIVES
A majority of Genzyme's revenues are attributable directly or
indirectly to payments received from third party payers. Genzyme's revenues and
profitability may be affected by ongoing efforts of third party payers to
contain such costs. In addition, in 1994 the Clinton administration and Congress
proposed the implementation of broad-based healthcare cost containment measures.
While these proposals were not implemented, it is likely that renewed healthcare
measures will again be proposed in present or future Congressional sessions. The
effects on Genzyme of any such measures that are ultimately adopted cannot be
measured at this time.
PRODUCT LIABILITY AND LIMITATIONS OF INSURANCE
Genzyme could be subject to product liability claims in connection with
the use or misuse of its products during testing or after commercialization.
While Genzyme has taken, and continues to take, what it believes are appropriate
precautions, there can be no assurance that Genzyme will avoid significant
liability exposure. Genzyme has only limited amounts of product liability
insurance and there can be no assurance that such insurance will provide
sufficient coverage against any or all potential product liability claims. If
Genzyme attempts to obtain additional insurance in the future, there can be no
assurance that it will be able to do so on acceptable terms, if at all, or that
such insurance will provide adequate coverage against claims asserted.
SUBSEQUENT EVENTS
In January 1996, Genzyme made a conditional offer to acquire
substantially all the assets of Genzyme Development Partners, L.P., also known
as the Surgical Aids Partnership, for General Division Stock valued at $93.0
million.
In January 1996, GTR acquired certain real estate in Framingham,
Massachusetts for $6.8 million in cash, of which $5.7 million was allocated to
buildings and $1.1 million was allocated to land based on appraised values.
In January 1996, Genzyme signed a definitive agreement to acquire
Genetrix Inc., a privately held genetic testing laboratory based in Phoenix,
Arizona, in a tax-free exchange of General Division Stock valued at
approximately $36.8 million. Genetrix Inc. will be merged with Genzyme's
Integrated Genetics diagnostic services business. The transaction will be
accounted for as a pooling of interests.
In February 1996, GTC obtained a short-term loan in the amount of
$950,000 from Genzyme. The loan is due on March 31, 1996 and accrues interest at
a rate of 6 1/2% per annum.
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In March 1996, Genzyme completed the redemption of its 6 3/4% percent
convertible subordinated notes in the principal amount of $100 million. Holders
of the notes received 18.193 shares of General Division Stock and 2.553 shares
of TR Stock in conversion of each $1,000 note.
In March 1996, an advisory panel to the U.S. Food and Drug
Administration ("the FDA") recommended that Genzyme be granted approval to
market one of the HA Products, Seprafilm(TM) bioresorbable membrane. The panel's
recommendation will be considered by the FDA in its final review of Genzyme's
premarket approval application.
In March 1996, GTC entered into a Convertible Debt and Development
Funding Agreement with Genzyme under which Genzyme agreed to provide a revolving
line of credit in the amount of $10 million and has agreed to fund development
costs of the Antithrombin III ("AT-III") program through March 31, 1997. Under
the agreement, GTC granted to Genzyme co-marketing rights to AT-III in all
territories other than Asia subject to negotiation and execution of a
development and supply agreement between the parties prior to March 31, 1997.
The line of credit carries a rate of 7% and is convertible into GTC's common
stock at the average market price for the 20 day period ending two days before
the Conversion at GTC's option to maintain GTC's tangible net worth at the end
of each quarter at a level between $4.0 million and $4.2 million or by Genzyme
at any time for up to the full amount outstanding.
In March 1996, GTR utilized $8.0 million of the Company's $15.0 million
line of credit with Fleet Bank of Massachusetts.
In April 1996, the Board of Directors voted, subject in each case to
the approval of the stockholders, to adopt two amendments to the Company's 1990
Equity Incentive Plan (the "Equity Plan"). These amendments would increase the
aggregate number of shares of General Division Stock that may be subject to
grants under the Equity Plan from 7,600,000 to 9,900,000 and the aggregate
number of shares of TR Stock that may be subject to grants under the Equity Plan
from 2,000,000 to 3,300,000 subject to adjustment for stock splits, stock
dividends and certain transactions affecting the Company's capital stock.
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GENZYME GENERAL DIVISION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion is a summary of the key factors management
considers necessary in reviewing the General Division's results of operations,
liquidity and capital resources. Forward-looking statements contained in the
following discussion are expectations only and there can be no assurance that
actual results will not materially differ from these expectations. This
discussion should be read in conjunction with the financial statements and
related notes of Genzyme and considered carefully "Factors Affecting Future
Operating Results."
RESULTS OF OPERATIONS
1995 AS COMPARED TO 1994
Total revenues for 1995 were $378.6 million, an increase of 22% over
1994. Product and service revenues were $351.6 million, an increase of 22% over
1994. Product revenues increased 28% to $304.4 million reflecting sales
increases of 25%, 22% and 72%, respectively, in the Therapeutic, Diagnostic
Product and Pharmaceutical product lines. The increase in sales of Therapeutic
products resulted primarily from increased shipments of Ceredase(R) and
Cerezyme(R) enzyme for which the rate of new patient accruals more than offset
dosage reductions. The General Division's results of operations are highly
dependent on these products which, with combined sales of $215.4 million,
represented 71% of consolidated product sales in 1995 compared to 72% in 1994.
The increase in Diagnostic Product sales resulted from growth in each of its
businesses, most notably in Direct LDL(TM) test sales. The increase in
Pharmaceutical sales resulted from the introduction of new products and a full
year of operations by a Swiss company acquired in July 1994. Service revenues
for 1995 declined 5% to $47.2 million from $49.7 million for 1994. The drop in
service revenue resulted from declines in identity testing revenues and the
impact of increasing price pressures on public paternity testing. Medical
testing also experienced increased price competition due to increases in the
number of HMO contracts.
International sales represented approximately 41% of product sales in
1995 compared with 37% in 1994. This increase was due primarily to a 49%
increase in the combined international sales of Ceredase(R)/Cerezyme(R) enzyme.
International sales are expected to account for a higher proportion of sales in
the future due to increased international marketing efforts in all areas of the
General Division's business and acquisitions. As the Company's presence in
foreign markets increases, the General Division will experience increasing
exposure to currency fluctuations which it will attempt to minimize through
asset and cash management strategies.
Revenue from research and development contracts for 1995 was $27.0
million, an increase of 20% from 1994. Revenues from Neozyme II increased 36% to
$24.2 million for 1995 due primarily to increased activity relating to
collaborations with third parties that began in 1993 along with the production
of clinical trial material. In 1995, the Surgical Aids Partnership provided no
funds to the General Division as its funds were exhausted in the first quarter
of 1994.
Gross margins for 1995 were 59%, as compared to 57% for 1994. The
General Division provides a broad range of health care products and services,
resulting
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in a range of gross margins depending on the particular market conditions of
each product or service. Product margins for 1995 increased to 63% from 61% in
1994 due to higher margins on Ceredase(R) enzyme resulting from raw material
yield improvements, and to sales of higher margin products and cost reductions
by the Pharmaceutical business. Service margins for 1995 decreased to 34% from
35% as economies achieved in the consolidation of testing activities did not
fully offset lower sales volume and the effects of price competition.
Selling, general and administrative expenses for 1995 were $102.2
million, an increase of 21% over 1994. The increase was due primarily to
increased staffing in support of the growth in several product lines, most
notably in support of the European introduction of the HA Products and to the
ongoing operating expenses associated with the Sygena A.G. operation acquired in
July 1994.
Research and development expenses for 1995 were $57.9 million, an
increase of 12% over 1994 due to increased efforts on behalf of Neozyme II and
increased spending on internal programs, including the HA Products.
In September of 1995, the General Division recorded a gain of $950,000
representing the sale of certain assets by GTC, an unconsolidated subsidiary.
In October 1995, the General Division acquired the publicly-held, minority
interest in IG for 385,000 shares of General Division Stock valued at
approximately $22.8 million. The acquisition was accounted for as a purchase.
The excess of the purchase price over the fair market value of the net assets
acquired was approximately $18.6 million of which $14.2 million was attributed
to incomplete technology and charged to operations and the balance to Goodwill
to be written off over 11 years.
Investment income for 1995 totaled $7.4 million, compared with $9.1
million for 1994. The decrease resulted from lower average cash and investment
balances. Investment income for 1995 included a loss of $0.1 million and 1994
included gains of $1.4 million on the sales of securities.
Interest expense for 1995 was $1.1 million, net of capitalized interest
of $9.0 million. Interest relating to the General Division's 6-3/4% convertible
subordinated notes was $6.7 million. These notes were redeemed in March, 1996.
Interest on a December 1993 $39.0 million secured loan, which was outstanding
throughout 1994 and repaid in January 1995, was $1.8 million for 1994. The
General Division also incurred interest costs in 1995 and 1994 of $1.7 and
$0.9 million, respectively, related to a $21.5 million mortgage loan used to
acquire real property in the second quarter of 1994.
The tax provision for 1995 varies from the U.S. Statutory tax rate
because of the provision for state income taxes, losses of majority-owned
subsidiaries which generate no current tax benefit, tax credits and taxes on
foreign earnings. The effective tax rate was 47% for 1995 as compared to 35% for
1994. The increase was due to changes in U.S. versus foreign taxable income and
to certain charges recorded in 1995 for which the General Division received no
tax benefit. The allocated tax benefit generated by GTR of $8.9 million in 1995
and $1.9 million in 1994 reduced the General Division's tax rate to 33% and 31%,
respectively.
1994 AS COMPARED TO 1993
Total revenues for 1994 were $310.7 million, an increase of 17% over
1993. Product and service revenues were $288.3 million, an increase of 23% over
1993.
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Product revenues increased 30% to $238.6 million reflecting sales increases of
39%, 10% and 17%, respectively, in the Therapeutic, Diagnostic Products and
Pharmaceutical product lines. The increase in sales of Therapeutic products
resulted primarily from increased shipments of Ceredase(R) enzyme for which the
rate of new patient accruals more than offset dosage reductions, and the market
introduction, in 1994, of Cerezyme(R) enzyme. Related sales increased 38% to
$172.9 million, 72% of consolidated product sales in 1994 compared to 67% in
1993. The increase in Diagnostic Product sales resulted from increases in sales
of immunobiological products, 1994 revenues associated with a European company
acquired in April 1993, and a more than doubling in revenues from sales of
Direct LDL(TM) tests. The increase in Pharmaceutical sales resulted from the
operations of a Swiss company acquired in July 1994. Service revenues for 1994
declined 2% to $49.7 million from $50.5 million for 1993. The drop in service
revenue resulted from declines in identity testing revenues due primarily to the
loss of four state paternity contracts in mid-1993 and the impact of increasing
price pressures on public paternity testing. Medical testing also experienced
increased price competition due to increases in the number of HMO contracts,
although year-to-year revenues remained steady.
International sales represented approximately 37% of product sales in
1994 compared with 29% in 1993. This increase was due primarily to a 90%
increase in the combined international sales of Ceredase(R)/Cerezyme(R) enzyme.
Revenue from research and development contracts for 1994 was $22.4
million, a decrease of 30% from 1993. In 1993, Neozyme I and the Surgical Aids
Partnership provided revenues to Genzyme of $8.4 million. Neozyme I, an
independent public company formed in 1990 to fund accelerated research on
products at Genzyme, wound up its business and terminated this funding to
Genzyme at the end of 1993 when Genzyme purchased the remainder of its
technology. The Partnership, which funds development of the HA Products,
exhausted the funds it had available for this purpose during the first quarter
of 1994. Revenues from Neozyme II increased 40% to $17.8 million for 1994 due
primarily to increased activity relating to collaborations with third parties
that began in 1993.
Gross margins for 1994 were 57%, as compared to 58% for 1993. The
General Division provides a broad range of health care products and services,
resulting in a range of gross margins depending on the particular market
conditions of each product or service. Product margins for 1994 declined to 61%
from 65% in 1993 due primarily to lower margins on Ceredase(R) enzyme as a
result of the higher cost of purchased material beginning in the second quarter
of 1994. Service margins for 1994 increased to 35% from 32% on slightly lower
sales volumes due primarily to economies achieved in the consolidation of
testing activities.
Selling, general and administrative expenses for 1994 were $84.8
million, an increase of 9% over 1993. The increase was due primarily to
increased staffing in support of the growth in several product lines and to the
ongoing operating expenses associated with various operations acquired in 1993
and 1994.
Research and development expenses for 1994 were $51.7 million, an
increase of 14% over 1993 due to increased efforts on behalf of Neozyme II and
increased spending on internal programs, including the HA Products after the
exhaustion of the Partnership's funding and a Neozyme I program acquired at the
end of 1993.
In 1994, two transactions resulted in the General Division recording
charges totaling $11.4 million before taxes. In December, the General Division
charged $9.4 million for the write-off of impaired value of certain equity
investments and settled a lawsuit for $2.0 million.
In 1993, several transactions resulted in the General Division
recording unusual charges totaling $50.5 million before taxes. In December,
the General Division completed the purchase of the fetal cell separation
technology from Neozyme I for $24.0 million in cash. Also in December, the
General Division incurred restructuring charges of $2.8 million and wrote off
$23.7 million to reduce the carrying value of intangibles in the Diagnostic
Services business. The majority of the write-off ($21.9 million) related to
the goodwill recorded in connection with the acquisition of a paternity testing
business in mid-1992.
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Investment income for 1994 totaled $9.1 million, compared with $11.5
million for 1993. The decrease resulted from lower average cash and investment
balances. Investment income for 1994 and 1993 included gains of $1.4 million and
$1.6 million, respectively, on the sales of securities, the majority of which
occurred in the first quarter of each period.
Interest expense for 1994 was $1.4 million, net of capitalized interest
of $8.2 million. Interest relating to the General Division's 6-3/4% convertible
subordinated notes was $6.7 million in each period. Interest on a December 1993
$39.0 million secured loan, which was outstanding throughout 1994 and repaid in
January 1995, was $1.8 million for 1994. The General Division also incurred
interest expense in 1994 of $0.9 million related to a $21.5 million mortgage
loan used to acquire real property in the second quarter of 1994
The tax provision for 1994 varies from the U.S. Statutory tax rate
because of the provision for state income taxes, losses of majority-owned
subsidiaries which generate no current tax benefit, tax credits and taxes on
foreign earnings. The effective tax rate was 35% for 1994 as compared to a 51%
benefit for 1993. The increase was due to changes in U.S. versus foreign taxable
income, to the lower proportion of tax exempt securities in the investment
portfolio and to certain charges recorded in 1994 for which the General Division
received no tax benefit. The allocated tax benefit of $1.9 million generated by
GTR reduced the General Division's tax rate to 31%.
LIQUIDITY AND FINANCIAL RESOURCES
A portion of Genzyme's corporate assets and liabilities have been
attributed to the General Division based upon utilization. Management believes
the attribution to be an equitable and reasonable estimate of the assets and
liabilities which would be generated if the General Division operated on a
stand-alone basis.
In 1995, the General Division generated $64.0 million of working
capital from operations. As of December 31, 1995, the General Division had
accounts receivable of $87.1 million, an increase of $10.5 million from December
31, 1994 due primarily to the growth in sales of Therapeutic and Pharmaceutical
products. Inventories increased $15.5 million, or 42%, to $52.3 million as of
December 31, 1995. The increase was due primarily to support of increased
business operations most notably in the Therapeutic business to build
Ceredase(R) enzyme inventories, in the Pharmaceutical business to meet high
demand for one product and in the newly created HA Products business in
anticipation of the launch of new products.
In 1995, the turnover of the investment portfolio used $86.8 million of
cash. Spending for property, plant and equipment was $48.7 million primarily in
support of manufacturing capacity for the Therapeutic and HA Products
businesses. In addition, under an agreement with GTC, Genzyme increased its
investment by $4.0 million in February and in June converted approximately $4.0
million of GTC debt into equity. In July, Genzyme issued approximately 34,000
shares of General Division Stock in connection with the acquisition by GTC of
Biodevelopment Laboratories, Inc. in exchange for shares of newly issued GTC
stock. Genzyme's interest in GTC was approximately 48.2% at December 31, 1995.
In October 1995, the General Division sold 2,875,000 shares of its
common stock to the public for a price of $51.25 per share. Net proceeds from
the offering after underwriting discounts and commissions were $141.5 million.
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Proceeds from the exercise of stock options, warrants and stock issued through
the employee stock purchase plan provided $38.1 million As of December 31, 1995,
the General Division had liquid assets, consisting of cash and cash equivalents
totaling $103.6 million and short-term investments in marketable securities,
totaling $105.5 million. Long-term investments at December 31, 1995 were $69.6
million.
The General Division holds an option to purchase all of the outstanding
Neozyme II callable common stock at prices which increase monthly from $200.4
million at December 31, 1995, to $282.6 million at December 31, 1996. In
addition, the General Division holds an option to acquire all of the partnership
interests in the Surgical Aids Partnership for approximately $26 million plus a
continuing royalty payment for a period of ten years on certain sales of
products developed by the Partnership. The General Division has a contingent
obligation to provide working capital to a joint venture established between the
Partnership and the General Division to commercialize the Partnership's
products. The extent of that contingent obligation cannot be measured at this
time. The General Division's decisions regarding future exercise of these
options likely will be based, in part, on the progress in the development work
conducted for each and the General Division's evaluation of the potential
commercial success of each compared to the costs of the option. The timing of
any decision regarding the Neozyme II option exercise is likely to be influenced
by the fact that the price increases periodically until termination, and by the
rate of depletion of research and development funds. The exercise prices for the
purchase options are payable in cash, common stock or a combination of the two,
as determined by the General Division at the time each option is exercised. The
exercise of these options and payments in General Division Stock would result in
substantial dilution to the holders of General Division Stock. (See "Notes to
Combined Financial Statements").
The available research and development funds in the Surgical Aids
Partnership were fully expended in the first quarter of 1994 and the General
Division is not obligated to provide additional funding. Although the General
Division is not otherwise contractually required to do so, in January 1994, it
agreed to continue funding the development of the HA products on behalf of the
Partnership in part to delay accelerated termination of its option to purchase
the partnership interests due to exhaustion of the Partnership's funds. This
agreement, which covered the twelve-month period starting in March 1994, was
renewed by the General Division in 1995 and again in February 1996 for the
period through February, 1997. The General Division expended $6.4 million in
1995 and expects to spend approximately $7.9 million on the Partnership's
development programs in 1996.
The General Division expects that its available cash, investments and
cash flow from research contracts and product and service sales will be
sufficient to finance its planned operations and capital requirements for at
least the next two years. Although the General Division currently has
substantial cash resources, it has committed to utilize a portion of its
resources for certain purposes, such as completing validation of the
manufacturing facility in Boston, Massachusetts, completing its commitment to
develop manufacturing capacity sufficient to meet the requirements for
commercialization of the Surgical Aids Partnership's products, the market
introduction of the HA Products, making certain payments to third parties in
connection with strategic collaborations and making a final payment for a
company acquired in 1994. Genzyme's commitment to allocate up to
$30 million from the General Division to fund the operations of GTR was
eliminated when GTR sold new TR Stock to the public in September 1995; however,
Genzyme retains the right to make voluntary allocations of up to
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$30 million from the General Division to the GTR. Such allocation would result
in dilution to holders of TR Stock. In addition, working capital and other
capital requirements may change because of unanticipated changes in business
conditions, and such other considerations as expansion of operations, results of
research and development activities, competitive and technological developments,
the timing and costs of obtaining required regulatory approvals for new products
and future acquisitions of technology and/or product rights. As a result, the
General Division may have to obtain additional financing. There can be no
assurance that such financing will be available on acceptable terms.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The future operating results of the General Division may differ
materially from the results described above. Please refer to "Genzyme
Corporation and Subsidiaries -- Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Factors Affecting Future
Operating Results."
SUBSEQUENT EVENTS
In January 1996, Genzyme made a conditional offer to acquire
substantially all the assets of Genzyme Development Partners, L.P., also known
as the Surgical Aids Partnership, for General Division Stock valued at $93.0
million.
In January 1996, Genzyme signed a definitive agreement to acquire
Genetrix Inc., a privately held genetic testing laboratory based in Phoenix,
Arizona, in a tax-free exchange of General Division Stock valued at
approximately $36.8 million. Genetrix Inc. will be merged with Genzyme's
Integrated Genetics diagnostic services business. The transaction will be
accounted for as a pooling of interests.
In February 1996, GTC obtained a short-term loan in the amount of
$950,000 from Genzyme. The loan is due on March 31, 1996 and accrues interest at
a rate of 6 1/2% per annum.
In March 1996, Genzyme completed the redemption of its 6 3/4% percent
convertible subordinated notes in the principal amount of $100 million. Holders
of the notes received 18.913 shares of General Division and 2.553 shares of TR
Stock in conversion of each $1,000 note.
In March 1996, an advisory panel to the U.S. Food and Drug
Administration ("the FDA") recommended that the General Division's be granted
approval to market one of the HA Products, Seprafilm(TM) bioresorbable membrane.
The panel's recommendation will be considered by the FDA in its final review of
Genzyme's premarket approval application.
In March 1996, GTC entered into a Convertible Debt and Development
Funding Agreement with Genzyme under which Genzyme agreed to provide a revolving
line of credit in the amount of $10 million and has agreed to fund development
costs of the Antithrombin III ("AT-III") program through March 31, 1997. Under
the agreement, GTC granted to Genzyme co-marketing rights to AT-III in all
territories other than Asia subject to negotiation and execution of a
development and supply agreement between the parties prior to March 31, 1997.
The line of credit carries a rate of 7% and is convertible into GTC's common
stock at the average market price for the twenty day period ending two days
before the Conversion at GTC'S option to maintain GTC's tangible net worth at
the end of each quarter at a level between $4.0 million and $4.2 million or by
Genzyme at any time for up to the full amount outstanding.
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In April 1996, the Board of Directors voted, subject in each case to
the approval of the stockholders, to adopt two amendments to the Company's 1990
Equity Incentive Plan (the "Equity Plan"). These amendments would increase the
aggregate number of shares of General Division Stock that may be subject to
grants under the Equity Plan from 7,600,000 to 9,900,000 subject to adjustment
for stock splits, stock dividends and certain transactions affecting the
Company's capital stock.
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GENZYME TISSUE REPAIR DIVISION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion is a summary of the key factors management
considers necessary in reviewing the Genzyme Tissue Repair Division's ("GTR")
results of operations, liquidity and capital resources. Forward-looking
statements contained in the following discusson are expectations only and there
can be no assurance that actual results will not materially differ from these
expectations. This discussion should be read in conjunction with the financial
statements and related notes of Genzyme and consider carefully "Factors
Affecting Future Operating Results."
RESULTS OF OPERATIONS
1995 AS COMPARED TO 1994
Service revenues for 1995 were $5.2 million compared to $0.3 million in
1994. Revenues for 1994 consisted solely of revenues from the sale of Epicel(SM)
Service ("Epicel service") skin grafts for the period from December 16, 1994,
the acquisition date of BioSurface Technology, Inc. ("BioSurface"), through
December 31, 1994. Revenues for 1995 consisted primarily of sales of Epicel
service skin grafts and included $0.6 million from the sale of the CARTICEL(SM)
Service ("Carticel service"), GTR's cartilage repair service which commenced in
the first quarter of 1995.
Gross margins for 1995 were 9% compared to 11% in 1994. The decrease
was due to costs associated with the launch of the CARTICEL(SM) Service.
GTR incurs direct selling, general and administractive expenses as well
as a selling, general and administrative charge, based on actual amounts
incurred, from the General Division for selling, general and administrative work
performed by the General division on behalf of GTR.
Selling, general and administrative expenses for 1995 were $12.9
million. Selling, general and administrative expense in 1994 was $1.0 million
comprised solely of expenses from BioSurface. The increase was due to a full
year of operations from BioSurface and to the launch in both the United States
and Europe of the CARTICEL(SM) Service. In 1995, $4.4 million of selling,
general and administrative services were provided by the General Division to
GTR compared to $0.8 million in 1994.
Research and development expenses for 1995 were $10.9 million compared
to $3.6 million in 1994 which included $0.3 million from the operations of
BioSurface. The increase resulted from accelerated clinical trials activity for
certain tissue repair products and increased efforts on the CARTICEL(SM)
Service. In 1995, $4.7 million of research and development services were
provided by the General Division to GTR compared to $3.3 million in 1994.
Investment income for 1995 was $1,386,000 as compared to $29,000 for
1994. Investment income for 1994 resulted solely from Biosurface activity. The
increase over 1994 was due to higher average cash balances from Genzyme's
investment of $10 million in GTR and the net proceeds from the public offering
in October 1995.
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In 1994, $11.2 million of incomplete technology from the BioSurface
acquisition was charged to operations as in-process research and development.
1994 AS COMPARED TO 1993
Service revenues, which consisted solely of revenues from the sale of
Epicel service skin grafts for the period from December 16, 1994, the
acquisition date of BioSurface, through December 31, 1994, were $0.3 million.
There were no service revenues in 1993.
GTR earned no revenues from research and development contracts in 1994
as compared to $4.7 million in 1993. Neozyme I funded the development of
Vianain(R) debriding product from 1990 through the end of 1993 when Genzyme
acquired the development program from Neozyme I. Revenues from research and
development in 1993 consisted of a $2.0 million technology license fee related
to expansion of the field of Vianain(R) debriding product to include both burns
and ulcers in addition to reimbursement for GTR's costs of conducting the
Vianain(R) research.
GTR incurred direct selling, general and administrative charges as a
result of the acquisition of BioSurface. Selling, general and administrative
expenses for 1994 increased 38% to $1.0 million.
Research and development expenses for 1994 increased 30% to $3.6
million including $0.3 million related to the operations of BioSurface.
Excluding the effect of BioSurface, research and development expenses increased
19% due primarily to increased outside clinical trials related to the Vianain(R)
programs and the associated increased manufacturing support.
In 1994, $11.2 million of incomplete technology from the BioSurface
acquisition was charged to operations as in-process research and development. In
1993, GTR completed the purchase of the rights to the Vianain technology from
Neozyme I and charged the $25.0 million purchase price to operations as
in-process research and development.
LIQUIDITY AND FINANCIAL RESOURCES
A portion of Genzyme's corporate assets and liabilities have been
attributed to GTR based upon utilization. Management believes the attribution to
be an equitable and reasonable estimate of the assets and liabilities which
would be generated if GTR operated on a stand-alone basis.
In 1995, working capital from operations increased $23.8 million and as
of December 31, 1995, GTR had accounts receivable of $1.8 million and
inventories of $0.8 million, increases of $0.4 and $0.7 millions, respectively,
from 1994. The increases resulted from the introduction in the first quarter of
1995 of the CARTICEL(SM) Service on which an additional $1.3 million was spent
to expand manufacturing capacity. In September 1995, GTR sold 3,000,000 shares
its of common stock to the public for a price of $15 per share for net proceeds
of $42.3 million after underwriting discounts and commissions. As of December
1995, GTR had cash and investments of $47.6 million, an increase of $22.7
million. Significant additional funds will be required to complete
commercialization and clinical testing of GTR's products and services and to
provide additional manufacturing capacity for its CARTICEL(SM) Service. There
can be no assurance that such funds will be available on attractive terms, if at
all. Genzyme's commitment to allocate up to $30 million from the General
Division to fund the operations of GTR was eliminated when GTR sold new TR Stock
to the public in September 1995; however, Genzyme has the right to make
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voluntary allocations of up to $30 million from the General Division to GTR
hich if exercised would result in dilution of holders of TR Stock.
GTR expects that its available cash and investments will be sufficient
to finance its planned operations and capital requirements for at least one
year.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The future operating results of GTR may differ materially from the
results described above. Please refer to "Genzyme Corporation and Subsidiaries
- -- Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Factors Affecting Future Operating Results."
SUBSEQUENT EVENTS
In January 1996, GTR acquired certain real estate in Framingham,
Massachusetts for $6.8 million in cash, of which $5.7 million was allocated to
buildings and $1.1 million was allocated to land based on appraised values.
In March 1996, GTR utilized $8.0 million of the Company's $15.0 million
line of credit with Fleet Bank of Massachusetts.
In April 1996, the Board of Directors voted, subject in each case to
the approval of the stockholders, to adopt two amendments to the Company's 1990
Equity Incentive Plan (the "Equity Plan"). These amendments would increase the
aggregate number of shares of TR Stock that may be subject to grants under the
Equity Plan from 2,000,000 to 3,300,000 subject to adjustment for stock splits,
stock dividends and certain transactions affecting the Company's capital stock.
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GENZYME CORPORATION AND SUBSIDIARIES
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of GENZYME CORPORATION:
We have audited the accompanying consolidated balance sheets
of Genzyme Corporation and Subsidiaries as of December 31, 1995 and
1994 and the related consolidated statements of operations, cash flows
and stockholders' equity and the consolidated financial statement
schedule for each of the three years in the period ended December 31,
1995. The consolidated financial statements and financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the consolidated
financial position of Genzyme Corporation and Subsidiaries as of
December 31, 1995 and 1994 and the consolidated results of their
operations and their cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted
accounting principles. In addition, in our opinion, the consolidated
financial statement schedule taken as a whole presents fairly, in all
material respects, the information required to be included therein.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
March 1, 1996, except as to Note Q
which is March 26, 1996
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GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands) FOR THE YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------
1995 1994 1993
---- ---- ----
Revenues:
Net product sales ............................... $ 304,373 $ 238,645 $ 183,366
Net service sales ............................... 52,450 50,010 50,511
Revenues from research and development contracts:
Related parties ................................ 26,758 20,883 34,162
Other .......................................... 202 1,513 2,332
--------- --------- ---------
383,783 311,051 270,371
Operating costs and expenses:
Cost of products sold ........................... 113,964 92,226 64,704
Cost of services sold ........................... 35,868 32,403 34,558
Selling, general and administrative ............. 115,094 85,731 78,716
Research and development (including research
and development related to contracts) .......... 68,845 55,334 48,331
Purchase of in-process research and
development .................................... 14,216 11,215 49,000
Goodwill impairment and restructuring costs ..... -- -- 26,517
--------- --------- ---------
347,987 276,909 301,826
--------- --------- ---------
Operating income (loss) ................................ 35,796 34,142 (31,455)
Other income and (expenses):
Minority interest in net loss of subsidiaries ... 1,608 1,659 9,892
Equity in net loss of unconsolidated subsidiary . (1,810) (1,353) --
Charge for impaired investments ................. -- (9,431) (700)
Settlement of lawsuit ........................... -- (1,980) --
Investment income ............................... 8,814 9,101 12,209
Interest expense ................................ (1,109) (1,354) (2,500)
--------- --------- ---------
7,503 (3,358) 18,901
--------- --------- ---------
Income (loss) before income taxes ...................... 43,299 30,784 (12,554)
Benefit (provision) for income taxes ................... (21,649) (14,481) 6,459
--------- --------- ---------
Net income (loss) ...................................... $ 21,650 $ 16,303 $ (6,095)
========= ========= =========
The accompanying notes are an integral part of
these consolidated financial statements.
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GENZYME CORPORATION AND SUBSIDIARIES
INCOME (LOSS) PER COMMON SHARE
(Amounts in thousands, except per share data) FOR THE YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
1995 1994 1993
---- ---- ----
ATTRIBUTABLE TO THE GENERAL DIVISION:
Net income .............................. $ 34,823 $ 30,194 $ 8,456
Tax benefit allocated from
Tissue Repair Division ................. 8,857 1,860 9,564
-------- -------- --------
Net income attributable to
General Division Stock .............. $ 43,680 $ 32,054 $ 18,020
======== ======== ========
Per common and common equivalent share:
Net income ........................... $ 1.45 $ 1.22 $ 0.69
======== ======== ========
Average shares outstanding ........... 30,092 26,169 26,250
======== ======== ========
Per common share assuming full dilution:
Net income ........................... $ 1.31 $ 1.14 $ 0.69
======== ======== ========
Average shares outstanding ........... 33,311 28,159 26,250
======== ======== ========
ATTRIBUTABLE TO THE TISSUE REPAIR
DIVISION:
Net loss ................................ $(22,030) $(15,751) $(23,860)
Tax benefit allocated to General Division -- -- (255)
-------- -------- --------
Net loss attributable to TR Stock .... $(22,030) $(15,751) $(24,115)
======== ======== ========
Per common share:
Net loss ............................. $ (2.28) $ (4.40) $ (7.43)
======== ======== ========
Average shares outstanding ........... 9,659 3,578 3,245
======== ======== ========
The accompanying notes are an integral part of
these consolidated financial statements.
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GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands) DECEMBER 31,
- ---------------------------------------------------------------------------
1995 1994
---- ----
ASSETS
Current Assets:
Cash and cash equivalents .................. $144,372 $ 63,542
Short-term investments ..................... 112,303 13,073
Accounts receivable, less allowance
of $8,159 in 1995 and $6,169 in 1994 ..... 88,959 78,127
Inventories ................................ 53,042 36,840
Prepaid expenses and other current assets .. 12,531 11,074
Deferred tax assets - current .............. 7,729 4,072
-------- --------
Total current assets ..................... 418,936 206,728
Property, plant and equipment, net ............ 329,423 296,802
Other Assets:
Long-term investments ...................... 69,561 76,845
Note receivable - related party ............ 262 3,572
Intangibles, net of accumulated amortization
of $17,340 in 1995 and $12,633 in 1994 .... 29,934 29,303
Deferred tax assets - noncurrent ........... 23,645 28,473
Other noncurrent assets .................... 33,440 16,685
-------- --------
156,842 154,878
-------- --------
$905,201 $658,408
======== ========
The accompanying notes are an integral part of
these consolidated financial statements.
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GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Amounts in thousands) DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------
1995 1994
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable .......................................................... $ 21,980 $ 21,387
Accrued expenses .......................................................... 39,418 30,986
Income taxes payable ...................................................... 1,316 6,523
Deferred revenue .......................................................... 1,367 2,604
Current portion of long-term debt
and capital lease obligations ............................................ 2,445 41,357
--------- ---------
Total current liabilities ............................................. 66,526 102,857
Noncurrent Liabilities:
Long-term debt and capital lease obligations .............................. 124,473 126,729
Other noncurrent liabilities .............................................. 8,995 7,548
--------- ---------
133,468 134,277
Minority interest in subsidiaries ............................................ -- 2,310
Commitments and Contingencies (Notes D, H, J, L and Q) ....................... -- --
Stockholders' Equity:
Preferred Stock, $.01 par value, authorized 10,000,000 shares;
no shares issued and outstanding
Preferred Stock, Series A Junior participating, $.01 par value authorized
1,000,000 shares; no shares issued and outstanding
Preferred Stock, Series B Junior participating, $.01 par value authorized
400,000 shares; no shares issued and outstanding
Common Stocks:
General Division Common Stock, $0.01 par value, authorized 100,000,000
shares; 31,185,800 and 26,446,510 issued
at December 31, 1995 and 1994, respectively ............................ 312 264
Tissue Repair Division Common Stock, $0.01 par value,
authorized 40,000,000 shares; 12,112,700 and 8,674,706 issued
at December 31, 1995 and 1994, respectively ............................ 121 87
Treasury common stock, at cost:
General Division Common Stock, 52,770 and 49,686 shares at
December 31, 1995 and 1994, respectively ............................... (882) (755)
Additional paid-in capital ................................................ 724,342 470,826
Accumulated deficit ....................................................... (17,158) (38,808)
Other equity adjustments .................................................. (1,528) (12,650)
--------- ---------
705,207 418,964
--------- ---------
$ 905,201 $ 658,408
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
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GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands) FOR THE YEARS ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------
1995 1994 1993
---- ---- ----
OPERATING ACTIVITIES:
Net income (loss) .................................. $ 21,650 $ 16,303 $ (6,095)
Reconciliation of net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ................... 22,638 18,226 16,821
Write-off of impaired goodwill .................. -- -- 23,690
(Gain) loss on sale of investments .............. 110 (1,430) (1,647)
Loss on disposal of fixed assets ................ 903 -- --
Non-cash compensation expense ................... 1,013 -- --
Write-off of impaired equity investments ........ -- 9,431 --
Accrued interest/amortization on bonds .......... (355) (2,116) --
Provision for bad debts ......................... 5,415 4,331 --
Purchase of in-process research and
development for stock .......................... 14,216 11,215 --
Deferred income taxes ........................... 4,428 1,439 (27,068)
Minority interest in net loss of subsidiaries ... (1,608) (1,659) (9,892)
Equity in net loss of unconsolidated subsidiary . 1,810 1,353 --
Other ........................................... 1,458 386 831
Increase (decrease) in cash from working capital:
Accounts receivable ........................... (15,069) (14,916) (10,917)
Inventories ................................... (15,906) (10,549) (2,322)
Prepaid expenses and other current assets ..... (1,680) (1,769) (695)
Accounts payable, accrued expenses and
deferred revenue ............................. 5,679 2,782 17,608
--------- --------- ---------
Net cash provided by operating activities ..... 44,702 33,027 314
INVESTING ACTIVITIES:
Purchases of investments ........................... (142,522) (210,274) (122,723)
Purchases of restricted investments ................ (4,418) (10,000) (10,000)
Sales and maturities of investments ................ 57,055 265,851 177,043
Property, plant and equipment ...................... (49,988) (101,707) (118,436)
Cash paid as part of IG acquisition ................ (322) 5,359 (9,541)
Additional investment in unconsolidated subsidiary . (4,428) (1,465) --
Other noncurrent assets ............................ (1,265) (3,221) (504)
--------- --------- ---------
Net cash used by investing activities ......... (145,888) (55,457) (84,161)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock ............. 223,139 45,926 8,465
Proceeds from issuance of common
stock by subsidiary ............................... 1,107 319 11,136
Proceeds from issuance of debt ..................... -- 21,819 39,360
Payments of long-term debt and capital
lease obligations ................................. (41,449) (4,793) (979)
--------- --------- ---------
Net cash provided by financing activities ..... 182,797 63,271 57,982
Effect of exchange rate changes on cash ............... (781) (274) (135)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents ...... 80,830 40,567 (26,000)
Cash and cash equivalents at beginning of period ...... 63,542 22,975 48,975
--------- --------- ---------
Cash and cash equivalents at end of period ............ $ 144,372 $ 63,542 $ 22,975
========= ========= =========
The accompanying notes are an integral part of
these consolidated financial statements.
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GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(Amounts in thousands) FOR THE YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
1995 1994 1993
---- ---- ----
Supplemental disclosures of cash flows:
Cash paid during the year for:
Interest .......................... $ 9,944 $ 9,634 $ 7,333
Income taxes ...................... 19,581 13,506 16,066
Supplemental Disclosures of Non-Cash Transactions:
Settlement of note receivable -- Note F
Acquisition liability -- Note B
The accompanying notes are an integral part of
these financial statements.
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85
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SHARES IN THOUSANDS DOLLARS IN THOUSANDS
------------------- ---------------------
1995 1994 1993 1995 1994 1993
------- ------- ------- ------- ------- -------
COMMON STOCKS:
General Division Common Stock:
Balance at beginning of year ............... 26,447 24,292 23,830 $ 264 $ 243 $ 238
Shares issued in public offering ........... 2,875 -- -- 29 -- --
Issuance of General Division Common
Stock in connection with
acquisitions ............................. 420 -- -- 4 -- --
Exercise of stock options .................. 958 68 254 10 1 3
Issuance from employee stock
purchase plan ............................. 143 126 86 1 1 1
Exercise of warrants ....................... 343 1,961 122 4 19 1
------- ------- ------- ------- ------- -------
Balance at end of year ..................... 31,186 26,447 24,292 $ 312 $ 264 $ 243
======= ======= ======= ======= ======= =======
Tissue Repair Division Common Stock:
Balance at beginning of year ............... 8,675 -- -- $ 87 $ -- $ --
Shares issued in public offering ........... 3,000 -- -- 30 -- --
Issued to BioSurface shareholders .......... -- 5,000 -- -- 50 --
Issued at conversion ....................... -- 3,357 -- -- 34 --
Exercise of stock options .................. 122 -- -- 1 -- --
Issuance from employee stock
purchase plan ............................. 270 4 -- 3 -- --
Exercise of warrants ....................... 46 314 -- -- 3 --
------- ------- ------- ------- ------- -------
Balance at end of year ..................... 12,113 8,675 -- $ 121 $ 87 $ --
======= ======= ======= ======= ======= =======
TREASURY COMMON STOCK (AT COST):
General Division Common Stock:
Balance at beginning of year ............... (50) (50) (50) $ (755) $ (755) $ (751)
Purchases .................................. (3) -- -- (127) -- (4)
------- ------- ------- ------- ------- -------
Balance at end of year ................. (53) (50) (50) $ (882) $ (755) $ (755)
======= ======= ======= ======= ======= =======
ADDITIONAL PAID IN CAPITAL:
Balance at beginning of year $ 470,826 $ 397,471 $ 378,854
General Division Common Stock issued in public offering 141,247 -- --
Tissue Repair Division Common Stock issued in public offering 42,262 -- --
Issuance of General Division Common Stock in connection with
acquisitions 23,817 -- --
Tissue Repair Division Common Stock issued
to BioSurface shareholders -- 25,263 --
Tissue Repair Division Common Stock issued at conversion -- (34) --
Exercise of stock options 28,152 1,189 3,846
Issuance from employee stock purchase plan 5,140 3,005 2,358
Exercise of warrants 6,260 41,708 2,261
Gain on sale of stock by subsidiary -- -- 7,553
Tax benefit from disqualified dispositions 5,500 2,224 2,599
Non-cash compensation expense 1,013 -- --
Purchase of Treasury Stock 125 -- --
--------- --------- ---------
Balance at end of year $ 724,342 $ 470,826 $ 397,471
========= ========= =========
The accompanying notes are an integral part of these financial statements.
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GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
DOLLARS IN THOUSANDS
--------------------
1995 1994 1993
---- ---- ----
ACCUMULATED DEFICIT:
Balance at beginning of year $(38,808) $(55,111) $(49,016)
Net income (loss) 21,650 16,303 (6,095)
-------- -------- --------
Balance at end of year $(17,158) $(38,808) $(55,111)
======== ======== ========
OTHER EQUITY ADJUSTMENTS:
Foreign currency adjustments $ (3,590) $ (4,915) (7,776)
Unrealized gains/(losses) on investments 2,062 (7,735) --
-------- -------- --------
Total other equity adjustments $ (1,528) $(12,650) $ (7,776)
======== ======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
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87
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business: Genzyme Corporation (the "Company" or "Genzyme"), is a
diversified human healthcare business with product development, manufacturing
and marketing capabilities in therapeutic and diagnostic products,
pharmaceuticals, diagnostic services and tissue repair.
Basis of Presentation: The approval effective December 16, 1994 (the
"Effective Date") by the stockholders of Genzyme of the Genzyme Stock Proposal
as described in Genzyme's Prospectus/Proxy Statement dated November 10, 1994
resulted in the redesignation of Genzyme's common stock. The outstanding shares
of Genzyme common stock were redesignated as General Division Common Stock
("General Division Stock") on a share-for-share basis and a second class of
common stock, designated as Tissue Repair Division Common Stock ("TR Stock") was
distributed on the basis of .135 of one share of TR Stock for each share of
Genzyme's common stock. General Division Stock and TR Stock provide stockholders
with separate securities which are intended to reflect the performance of the
General Division and Tissue Repair Division ("GTR"), respectively, and the
allocation of tax benefits between the divisions pursuant to the management and
accounting policies adopted by the Board of Directors (the "Board") of Genzyme
Corporation. The approval of the Genzyme Stock Proposal did not result in any
transfer of assets and liabilities of the Company or its subsidiaries. The
Company prepares separate financial statements for the General Division and GTR
in addition to consolidated financial information of the Company.
Principles of Consolidation: The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries.
Investments in companies and joint ventures in which the Company has a
substantial ownership interest of approximately twenty-percent to fifty-percent,
or in which the Company participates in policy decisions are accounted for using
the equity method. Accordingly, the Company's share of the earnings of these
entities is included in combined net income. Investments of less than 20% are
reported at fair value (see "Investments"). All significant intercompany items
and transactions have been eliminated in consolidation. Certain items in the
consolidated financial statements for the periods prior to December 31, 1994
have been reclassified to conform with the current year's presentation.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
certain estimates and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.
Cash and Cash Equivalents: Cash equivalents, consisting principally of
money market funds and municipal notes purchased with initial maturities of
three months or less, are valued at cost plus accrued interest, which
approximates market.
Investments: Short-term investments include all investments with
remaining maturities of twelve months or less. Long-term investments include all
investments with remaining maturities greater than twelve months. The Company
classifies its equity investments as available-for-sale and its investments in
debt securities as either held-to-maturity or available-for-sale based on facts
and circumstances present at the time the investments are purchased. Equity
investments are included in "Other noncurrent assets" on the consolidated
balance sheet (See Note D Investments). As of December 31, 1995, the Company
classified all investments in debt
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GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
securities as available-for-sale.
These investments are reported at fair value as of the balance sheet
date with unrealized holding gains and losses (the adjustment to fair value)
included as a separate component of Stockholder's equity. If the adjustment to
fair value reflects a decline in the value of the investment, management
considers all available evidence to evaluate the extent to which the decline is
"other than temporary" based on factors including (but not limited to) (i) the
length of time and extent to which the market value has been less than cost;
(ii) the financial condition and near-term prospects of the issuer, including
any specific events which may influence the operations of the issuer; and (iii)
the intent and ability of the Company to retain its investment in the issuer for
a period of time sufficient to allow for any anticipated recovery in market
value.
Fair Value of Financial Instruments: The fair value of investments is
obtained from market quotations and is disclosed in Note D. The fair value of
the Company's subordinated debentures is obtained from a market maker in the
debentures and is disclosed in Note H. The fair value of foreign currency
forward contracts is based on forward rates in effect at December 31, 1995 and
is disclosed below (see -- Hedging).
Inventories: Inventories are valued at the lower of cost (first-in,
first-out method) or market.
Property, Plant and Equipment: Property, plant and equipment are stated
at cost. Provision for depreciation is computed using the straight-line method
over the estimated useful lives of the assets (three to ten years for plant and
equipment, five to seven years for furniture and fixtures, and twenty to forty
years for buildings). Certain specialized manufacturing equipment (with a net
book value of $34.1 million at December 31, 1995) is depreciated over its
remaining useful life using the units-of-production method. The remaining life
and recoverability of such equipment is evaluated periodically based on the
appropriate facts and circumstances. Leasehold improvements are amortized over
the lesser of the useful life or the term of the respective lease. For products
expected to be commercialized, the Company capitalizes, to construction
in-progress, the costs of manufacturing process validation and optimization
incurred beginning when the product is deemed to have demonstrated technological
feasibility and ending when the asset is substantially complete and is ready for
its intended use. Qualified costs include direct labor and material, and
incremental fixed overhead to the extent incurred. These costs are depreciated
using the units of production method.
Issuance of Stock by a Subsidiary: Gains on the issuance of stock by a
subsidiary are included in net income unless the subsidiary is a research and
development, start-up or development stage company or an entity whose viability
as a going concern is under consideration. In those situations the Company
accounts for the change in its proportionate share of subsidiary equity
resulting from the additional equity raised by the subsidiary as an equity
transaction.
Intangibles: Intangible assets consist primarily of goodwill which is
amortized on a straight-line basis over seven to eleven years. The remaining
intangibles, including customer lists, patents and a covenant not to compete are
being amortized on a straight-line basis over five to eleven years. Management's
policy regarding intangible assets is to evaluate the recoverability of its
intangible assets when the facts and circumstances suggest that these assets may
be impaired. This analysis relies on a number of factors, including operating
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89
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
results, business plans, budgets, economic projections and changes in
management's strategic direction or market emphasis. The test of such
recoverability is a comparison of the asset to expected cumulative
(undiscounted) operating income of the acquired entity over the remaining life
of the asset. If the book value of the intangible asset exceeds undiscounted
cumulative operating income, the write-down is computed as the excess of the
asset over the present value of operating income discounted at the Company's
weighted average cost of capital over the remaining amortization period. (See
Note L - Goodwill Impairment and Restructuring Costs)
Revenue Recognition: Revenues from product sales are recognized when
goods are shipped and are net of third party contractual allowances, as
applicable. Revenues from service sales are recognized when the service
procedures have been completed. Revenues from research and development contracts
are recognized over applicable contractual periods as specified by each
contract.
Translation of Foreign Currencies: The financial statements of the
Company's foreign subsidiaries are translated from local currency into U.S.
dollars using the current exchange rate at the balance sheet date for assets and
liabilities and the average exchange rate prevailing during the period for
revenues and expenses. The local currency for all Company foreign subsidiaries
is considered to be the functional currency for each entity and accordingly,
translation adjustments for these subsidiaries are reported as a separate
component of Stockholder equity. Exchange gains and losses on intercompany
balances of a long-term investment nature are also recorded as a charge or
credit to Stockholder equity. Transaction gains and losses are recorded in
income and totaled $(840,000), $(41,000), and $(322,000) for the years ended
December 31, 1995, 1994 and 1993, respectively.
Hedging: The Company enters into forward contracts to reduce foreign
currency exchange risk. Such contracts are revalued using current exchange rates
at the balance sheet date. Gains and losses on forward contracts intended to
hedge identifiable foreign currency commitments are deferred and included in the
measurement of the related foreign currency transaction. All other gains and
losses on revaluation of forward contracts are included in net income. At
December 31, 1995, the Company had forward exchange contracts valued at
$1,209,000. Related gains and losses were not material to the financial
statements.
Research and Development: Research and development costs are expensed
in the period incurred. Costs of purchased technology which management believes
has not demonstrated technological feasibility and for which there is no
alternative future use are charged to expense in the period of purchase.
Income Taxes: The Company uses the asset and liability method of
accounting for deferred income taxes. The provision for income taxes includes
income taxes currently payable and those deferred because of temporary
differences between the financial statement and tax bases of assets and
liabilities. The Company has not provided for possible U.S. taxes on the
undistributed earnings of foreign subsidiaries that are considered to be
reinvested indefinitely. At December 31, 1995, such undistributed foreign
earnings were approximately $1,731,000.
Net Income (Loss) Per Share: The method of calculating income per share
for General Division Stock and TR Stock reflects the terms of the Articles of
Organization, as amended, which provide that dividends may be declared and paid
only out of the lesser of funds of Genzyme legally available therefore and each
division's Available Dividend Amount, as defined. The Company computes income
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90
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
per share by dividing the income attributable to each class of stock by the
weighted average number of shares of that stock and dilutive common stock
equivalents and other potentially dilutive securities outstanding during the
applicable period. Income attributable to General Division Stock and TR Stock
equals the respective division's net income or loss for the relevant period
determined in accordance with generally accepted accounting principles in effect
at such time, adjusted by the amount of tax benefits allocated to or from either
division pursuant to the accounting policies adopted by the Board of Directors
(the "Board"). The accounting policies provide that, as of the end of any fiscal
quarter of Genzyme, any projected annual tax benefit attributable to any
division that cannot be utilized by such division to offset or reduce its
current or deferred income tax expense may be allocated to the other division
without any compensating payment or allocation. Further description of
management and accounting policies are included in the notes to the General
Division financial statements.
Income per share assuming full dilution is determined by dividing net
income plus subordinated debenture interest (net of capitalized amounts) by the
weighted average number of common shares outstanding during the year after
giving effect for common stock equivalents arising from stock options and
warrants and for subordinated debentures assumed converted to common stock.
Net income (loss) attributable to General Division and TR Stock and net
income (loss) per share gives effect to the provisions of the Genzyme Stock
Proposal and, accordingly, periods prior to December 15, 1994 are presented on a
pro forma basis.
Accounting for Stock-Based Compensation: Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), will require the Company to either elect expense recognition under SFAS
123 or its disclosure-only alternative for stock-based employee compensation.
The expense recognition provision encouraged by SFAS 123 would require fair
value-based financial accounting to recognize compensation expense for employee
stock compensation plans. SFAS 123 must be adopted in the Company's fiscal 1996
financial statements with comparable disclosures for the prior year. The Company
has determined that it will elect the disclosure-only alternative permitted
under SFAS 123. The Company will be required to disclose pro forma net income
and pro forma earnings per share in the footnotes using the fair value based
method beginning in fiscal 1996 with comparable disclosures for fiscal 1995. The
Company has not determined the impact of these pro forma adjustments to its net
income or earnings per share.
Financial Instruments: Financial instruments that potentially subject
the Company to significant concentrations of credit risk consist principally of
cash and cash equivalents, current and non-current investments. The Company
generally invests its cash investments in investments-grade securities.
Uncertainties: The Company is subject to risks common to companies in
the Biotechnology industry, including but not limited to, development by the
Company or its competitors of new technological innovations, dependence on key
personnel, protection of proprietary technology, and compliance with FDA
government regulations.
NOTE B ACQUISITIONS
In April 1993, the Company acquired Virotech System-Diagnostika, GmbH
in Germany, for approximately $10,200,000, of which approximately $8,100,000 was
recorded as goodwill. In May 1993 Genzyme srl, a wholly-owned subsidiary of the
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91
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company located in Italy, acquired certain assets of Omnia Res srl for
approximately $700,000, of which approximately $100,000 was recorded as
goodwill. These acquisitions were accounted for as purchases. Accordingly, the
associated net assets and operations have been included in the Company's
financial statements since the acquisition dates. Pro forma information is not
presented since the impact of the acquisition on financial statement periods
prior to the acquisition is not material.
In July 1994, the Company paid approximately $6,100,000 for
newly-issued shares of common stock representing 51% of the outstanding common
stock of Sygena A.G. ("Sygena"), a Swiss manufacturer of high performance
chemicals used in the development of pharmaceuticals. Based on certain put and
call options in the Acquisition Agreement, which effectively ensure the purchase
by the Company of the remaining outstanding shares during the period from July
1, 1996 through June 30, 1999, the Company accounted for the acquisition as a
purchase of all of the outstanding shares of Sygena, and recorded a deferred
liability at a present value of approximately 9,000,000 Swiss francs for the
purchase of the remaining shares. The excess purchase price over the net assets
acquired was approximately 5,000,000 Swiss francs (approximately $4,000,000) and
was recorded as goodwill. The net assets and operations of Sygena have been
included in the Company's financial statements from the date of acquisition. Pro
forma information is not presented since the impact of the acquisition on
financial statement periods prior to the acquisition is not material.
On December 15, 1994, Genzyme acquired BioSurface Technology, Inc.
("BioSurface") by issuing .575 of one share of TR Stock for each share of
BioSurface common stock. In the aggregate, 5,000,000 shares of TR Stock, valued
at $25,312,500, were issued representing 50% of the initial equity interest in
GTR. The acquisition was accounted for as a purchase. Accordingly, the
associated net assets and operations of BioSurface have been included in the
Company's financial statements since the date of acquisition. The excess of the
purchase price over the fair market value of the net assets acquired,
$11,215,000, was allocated to in-process research and development and charged to
operations.
The following summary, prepared on a pro forma basis, presents the
consolidated results of operations as if BioSurface had been acquired at the
beginning of the periods presented. This pro forma summary does not necessarily
reflect the results of operations as they would have been if Genzyme and
BioSurface constituted a single entity during the periods presented and is not
necessarily indicative of results which may be obtained in the future.
YEAR ENDED DECEMBER 31,
-----------------------
1994 1993
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) (UNAUDITED)
- ------------------------------------------------ ----------- -----------
Revenues ....................................... $ 317,047 $ 276,080
Net income (loss) .............................. 19,448 (13,978)
Pro forma net income (loss) per share:
Attributable to General Division ............. 1.22 0.68
Attributable to Tissue Repair Division........ (1.51) (3.78)
In October 1995, Genzyme acquired the publicly-held minority interest
in its majority-owned subsidiary, IG Laboratories, Inc. ("IG"), by issuing
approximately .125 of one share of General Division Stock for each share of IG
common stock. In the aggregate, approximately 385,255 shares of General Division
Stock, valued at approximately $22.5 million were issued. The acquisition was
accounted for as a purchase. The excess of the purchase price
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92
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
over the fair market value of the net assets acquired, approximately $18.6
million, was allocated $14.2 million to in-process research and development and
charged to operations, and $4.4 million to goodwill to be amortized over 11
years. Pro forma information is not presented since the impact of the
acquisition on financial statement periods prior to the acquisition is not
material.
In February 1996, Genzyme signed a definitive agreement to acquire
Genetrix Inc., a privately held genetic testing laboratory based in Phoenix,
Arizona, in a tax-free exchange of General Division Stock valued at
approximately $36.8 million. Genetrix Inc. will be merged with Genzyme's
Integrated Genetics diagnostic services business. The transaction will be
accounted for as a pooling of interests.
NOTE C MAJORITY-OWNED SUBSIDIARIES
IG LABORATORIES, INC. IG was an approximately 70%-owned subsidiary for
the years ended December 31, 1993, 1994 and for the period from January 1, 1995
through October 1, 1995. (See Note B).
GENZYME TRANSGENICS CORPORATION. Genzyme Transgenics Corporation
("GTC") was a majority-owned subsidiary for the years ended December 31, 1992,
1993 and for the period from January 1, 1994 through September 30, 1994. (See
Note D).
NOTE D INVESTMENTS
Investments in marketable securities at December 31 consisted of the
following:
1995 1994
-----------------------------------------------------------------
MARKET MARKET
(DOLLARS IN THOUSANDS) COST VALUE COST VALUE
- --------------------------------------------------------------------------------------------------------------------------------
Short Term:
Certificates of deposit .................... $ 1,870 $ 1,870 $ 2,979 $ 2,979
Federal agency notes ....................... 26,731 26,767 -- --
Corporate notes ............................ 80,576 80,646 4,281 4,177
U.S. Treasury notes ........................ 3,031 3,020 6,063 5,917
Municipal notes ............................ -- -- -- --
-------- -------- -------- --------
$112,208 $112,303 $ 13,323 $ 13,073
======== ======== ======== ========
Long Term:
Common stock ............................... $ -- $ -- $ -- $ --
Federal agency notes ....................... 4,047 4,053
Corporate notes ............................ 42,518 42,845 57,584 54,420
U.S. Treasury notes ........................ 22,351 22,663 24,716 22,425
Municipal notes ............................ -- -- -- --
-------- -------- -------- --------
$ 68,916 $ 69,561 $ 82,300 $ 76,845
======== ======== ======== ========
Information regarding the range of contractual maturities of
investments in debt securities at December 31, 1995 is as follows:
MARKET
(DOLLARS IN THOUSANDS) COST VALUE
------------------------------------------------------------------
Within 1 year ............................. $112,208 $112,304
After 1 year through 2 years .............. 29,997 30,137
After 2 years through 10 years ............ 38,919 39,423
-------- --------
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93
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$181,124 $181,864
======== ========
In August 1993, the Company acquired 502,512 shares of the Series E
Convertible Preferred Stock (the "Series E Stock") of Univax Biologics, Inc.,
for $5.0 million in connection with an agreement to develop and commercialize
certain products. Upon the achievement of specified clinical milestones, the
Company is committed to making future milestone payments. In November 1995,
Univax merged with North American Biologicals, Inc.("NABI") and in connection
with the merger the General Division received 526,315 shares of NABI common
stock in exchange for the Series E Stock. The investment is classified as
available-for-sale and is included in "Other noncurrent assets" in the
consolidated balance sheets at fair market value. At December 31, 1995, this
value was approximately $5.7 million compared to a value of $2.7 million at
December 31, 1994.
In September 1993, the Company acquired 714,286 shares of common stock
of Argus Pharmaceuticals, Inc. ("Argus") for $5.0 million in connection with an
agreement to develop and commercialize certain products. Upon the achievement of
certain specified clinical milestones, the Company is committed to making future
milestone payments and an additional $5.0 million investment in Argus. In August
1994, pursuant to the Common Stock Purchase Agreement, Argus delivered to the
Company an additional 132,325 shares resulting in a total of 846,611 shares held
by the Company. The investment is classified as available-for-sale and is
included in "Other noncurrent assets" in the consolidated balance sheets at fair
market value. At December 31, 1994, this value was approximately $1.8 million.
The Company believed that a portion of the impairment in the value of the
investment in Argus was "other than temporary" and accordingly, a loss of
approximately $3.3 million was charged to operations in 1994. In September 1995,
Argus combined with Triplex Pharmaceuticals and Oncologix to form Aronex. In
connection with this merger, the common stock of Argus was redesignated as
common stock of Aronex. At December 31, 1995 the value of this investment was
$3.7 million.
Pursuant to the Common Stock Purchase Agreement (the "Agreement") dated
as of June 24, 1994 between the Company and Celtrix Pharmaceuticals, Inc.
("Celtrix"), the Company acquired 1,550,388 restricted shares, approximately
11.5% of the common stock of Celtrix outstanding after the acquisition, for
$10.0 million. In November 1994, Celtrix announced a delay in the
commercialization of an application of a key product and in February 1995,
Celtrix announced that it had halted all studies related to another of its key
development products. These announcements resulted in a decline in the fair
market value of the Company's investment. The Company believed that a portion of
the impairment in the value of the investment in Celtrix was "other than
temporary". Accordingly, a loss of approximately $6.1 million was charged to
operations in 1994. In 1995, Celtrix exercised its option to require the Company
to purchase additional shares of Celtrix at fair market value. As a result in
December 1995, the Company acquired an additional 1,472,829 shares at $3 per
share. The investment is classified as available-for-sale and is included in
"Other noncurrent assets". At December 31, 1995, this value was approximately
$7.7 million.
Net realized losses included in investment income for 1995 were
$110,000 Net realized gains included in investment income for 1994 and 1993 were
$1,430,000 and $1,647,000, respectively. Gross unrealized holding gains of
$2,073,000 and unrealized holding losses of $10,000, were recorded at December
31, 1995 in Stockholders' equity as compared to unrealized holding losses of
$5,704,000 recorded at December 31, 1994.
-93-
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GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In July 1993, GTC, a wholly-owned subsidiary of the Company
specializing in transgenic technology which was incorporated in February 1993,
completed an initial public offering of 1,500,000 shares of its common stock
priced at $8.00 per share. The offering resulted in an increase in the value of
the Company's investment in GTC of $7.6 million which was recorded as an
increase to additional paid-in capital. At December 31, 1993, the Company owned
4,000,000 shares or approximately 73% of the outstanding common stock of GTC.
On October 1, 1994, GTC acquired TSI Corporation ("TSI") in a merger
transaction in which GTC issued two-tenths (0.2) of one share of GTC common
stock for each share of TSI common stock, in a transaction accounted for as a
purchase. As a result of the acquisition, the Company's percentage ownership of
GTC common stock declined from approximately 73% to approximately 40%.
Accordingly, the Company began accounting for its investment in GTC under the
equity method.
In February 1995, GTC exercised its option to sell to the Company
500,000 additional shares of GTC common stock at a price of $8.00 per share. The
$4.0 million acquisition cost has been added to the Company's equity investment
in this subsidiary. In June 1995, the Company converted approximately $4.0
million of GTC debt into equity through the acquisition of 1.3 million shares of
GTC common stock. In July 1995, GTC acquired Biodevelopment Laboratories, Inc.
("BDL"). In connection with the transaction, the Company issued approximately
34,000 shares of General Division Common Stock to former stockholders of BDL in
exchange for approximately 475,000 shares of newly issued GTC stock. In total,
GTC issued approximately 1,207,000 shares of its common stock in the
transaction, resulting in a decrease in the Company's interest in GTC to 48.2%.
Also as part of the BDL transaction, the Company guaranteed a $7.5 million line
of credit from a commercial bank in return for warrants to purchase 145,000
shares of GTC stock.
As of December 31, 1995, GTC had $6.0 million outstanding under this
line of credit. GTC had a working capital deficiency of approximately $25.1
million at December 31, 1995 and had an operating loss of approximately $4.1
million for the year then ended. Although GTC is actively seeking other
sources of financing and is directing substantial efforts to generating
positive cash flow, it is at least reasonably possible that GTC will not
generate sufficient cash flows to fund its ongoing operations and will not be
able to repay amounts outstanding under the line of credit. If this occurs, the
General Division will be responsible for at least a portion of the amounts
outstanding. (See Note Q)
The fair market value of the GTC shares, based on quoted market prices,
was $27,601,000 at December 31, 1995. The Company reported equity in GTC's
losses of $1,810,000 in 1995. Following are condensed financial data of GTC:
-94-
95
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31,
-----------------------
(DOLLARS IN THOUSANDS) 1995 1994 1993
----------------------------------------------------------------------------
Revenues....................... $38,406 $11,692 $ 3,222
Operating loss................. (2,014) (5,231) (1,327)
Net loss....................... (4,133) (5,284) (1,171)
DECEMBER 31,
------------
(DOLLARS IN THOUSANDS) 1995 1994
----------------------------------------------------------
Current assets................. $16,409 $11,629
Noncurrent assets.............. 41,478 36,364
Current liabilities............ 24,155 19,487
Noncurrent liabilities......... 6,444 9,082
NOTE E INVENTORIES
Inventories at December 31 consist of the following:
(DOLLARS IN THOUSANDS) 1995 1994
------------------------------------------------------
Raw materials.............. $12,634 $14,572
Work-in-process............ 14,821 9,247
Finished products.......... 25,587 13,021
------- -------
$53,042 $36,840
======= =======
NOTE F PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment at December 31 includes the following
(DOLLARS IN THOUSANDS) 1995 1994
----------------------------------------------------------------------
Plant and equipment.................... $109,035 $ 64,350
Land and buildings..................... 46,456 40,157
Leasehold improvements................ 52,803 32,562
Furniture and fixtures................. 7,530 8,426
Construction in progress............... 178,083 198,117
-------- --------
393,907 343,612
Less accumulated depreciation........ (64,484) (46,810)
-------- --------
Property, plant and equipment, net..... $329,423 $296,802
======== ========
Depreciation expense was $17,961,000, $13,486,000, and $10,857,000 in
1995, 1994 and 1993, respectively.
The Company is constructing a mammalian cell production facility in
Boston, Massachusetts which will be used to produce a recombinant form of
Ceredase(R) enzyme ("Cerezyme(TM)") and other products. The facility is expected
to cost approximately $151 million plus an additional $23 million of Cerezyme(R)
process validation and optimization costs. The facility is expected to be
validated and placed into service in 1996. As of December 31, 1995, the Company
had capitalized, and included in construction in progress, approximately
$151,000,000 of expenditures related to this building and approximately
-95-
96
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$33,472,000 of process validation and optimization costs related to this and
other facilities. In 1995, 1994 and 1993, the Company capitalized approximately
$9.0, $9.2 and $4.7 million of interest costs, respectively, relating to this
and other facility construction.
In June 1994, the Company acquired its Mountain Road facility in
Framingham, Massachusetts for $26.9 million of which $25.1 million was allocated
to buildings and $1.8 million was allocated to land based on appraised values.
The Company funded the purchase with $1.2 million in cash, settlement of a $4.2
million note receivable (including accrued interest) from the landlord of the
facility and the proceeds of a $21.5 million term loan from a bank (See Note H).
NOTE G ACCRUED EXPENSES
Accrued expenses at December 31 include the following:
(DOLLARS IN THOUSANDS) 1995 1994
----------------------------------------------------------------
Professional fees...................... $ 2,679 $ 3,102
Compensation........................... 12,951 8,853
Royalties.............................. 6,702 5,055
Interest............................... 1,857 2,361
Other.................................. 15,229 11,615
------- -------
$39,418 $30,986
======= =======
NOTE H LONG-TERM DEBT AND LEASES
Long-Term Debt
Long-term debt at December 31 is comprised of the following:
(DOLLARS IN THOUSANDS) 1995 1994
----------------------------------------------------------------------
Convertible subordinated notes......... $100,000 $100,000
Note payable, bank (due 1/6/95)........ - 39,000
Mortgage note payable, matures
June 13, 1999......................... 20,863 21,323
Mortgage note payable, matures
November 2014........................ 3,356 3,409
Mortgage note payable, matures
January 1, 2008...................... 747 808
Term notes payable..................... 1,626 2,879
-------- --------
126,592 167,419
Less current portion................... (2,243) (41,020)
-------- --------
$124,349 $126,399
======== ========
In 1991, the Company issued 6 3/4% Convertible Subordinated Notes due
October 1, 2001 in the aggregate principal amount of $100,000,000. The notes are
convertible into General Division Stock and TR Stock at any time at a conversion
price of $52.875 and, under certain circumstances, may be redeemed by the
Company. Net proceeds from the debentures were $97,250,000. Deferred financing
costs of $2,750,000, classified as "Other noncurrent assets" on the combined
balance sheets, are being amortized to expense over the term of the debt issue.
As of December 31, 1995, the debentures had a market value of approximately $125
million (See Note Q).
On December 21, 1993, the Company borrowed $39,000,000, under a Credit
Agreement (the "Agreement") with a bank. The interest rate in effect at
December 31, 1994 was 6.2875%. The loan was repaid January 6, 1995.
-96-
97
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The mortgage note due June 1999 is collateralized by land and buildings
with a net book value of $29,108,000 at December 31, 1995, bears interest at
7.73% annually, and is payable monthly based on a twenty year direct reduction
amortization schedule, with the remaining principal due June 13, 1999.
The mortgage note maturing November 2014 is collateralized by land and
buildings with a net book value of $5,188,000 at December 31, 1995 and bears
interest at 10.5%. The mortgage note maturing January 2008 provides the bank
with a "call or review" feature at the end of the first 60 month period,
allowing the bank to adjust the note under specific circumstances. This note
bears interest at a variable rate of prime plus 1% and is collateralized by land
and fixtures. Principal and interest are payable monthly on both of these notes.
The Company maintains a $15.0 million line of credit with Fleet Bank of
Massachusetts, the entire amount, of which, remained available at December 31,
1995.
Operating Leases
Total rent expense under operating leases was $10,006,000, $8,663,000,
and $8,734,000 in 1995, 1994 and 1993 respectively. The Company leases
facilities and personal property under certain operating leases in excess of one
year.
Future minimum payments due under the Company's long-term obligations
and capital and operating leases are as follows:
LONG-TERM CAPITAL OPERATING
(DOLLARS IN THOUSANDS) OBLIGATIONS LEASES LEASES
--------------------------------------------------------------------------------------------
1996...................................... $ 11,160 $240 $ 12,317
1997...................................... 9,381 70 12,071
1998...................................... 9,376 118 11,141
1999...................................... 27,306 - 10,942
2000...................................... 7,253 - 9,305
Thereafter................................ 111,792 - 48,273
-------- ---- --------
Total minimum payments................. 176,268 428 104,049
Less: interest............................ (49,676) (102) -
-------- ---- --------
$126,592 $326 $104,049
======== ==== ========
NOTE I STOCKHOLDERS' EQUITY
Immediately prior to the Effective Date, as defined in Note A,
approximately 15,791,000 shares of Genzyme common stock were reserved for
issuance under the Company's 1990 Equity Incentive Plan, 1988 Director Stock
Option Plan, 1990 Employee Stock Purchase Plan, outstanding warrants (the
"Warrants"), and the conversion of the 6 3/4% Convertible Subordinated Notes Due
2001 (the "Notes").
Pursuant to antidilution provisions in the agreements covering the
options, Genzyme has adjusted each option outstanding on the Effective Date to
provide for separation of the option into an option exercisable for General
Division Stock and an option exercisable for the number of shares of TR Stock
that the holder would have received if the holder had exercised the option
immediately prior to the Effective Date.
The Warrants provide that the holder of the Warrant is entitled to
receive the number of shares of General Division Stock and TR Stock upon
exercise of the Warrant that the holder would have received if the holder had
exercised the Warrant immediately prior to the Effective Date.
-97-
98
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pursuant to the indenture under which the Notes were issued, the
conversion privilege of the Notes was adjusted so that the holder of a Note
converted after the Effective Date will receive, in addition to the shares of
General Division Stock into which the Note is convertible, the same number of
shares of TR Stock as the holder would have received had the holder converted
the Note immediately prior to the Effective Date.
In September 1995, Genzyme sold 3,000,000 shares of Tissue Repair
Common Stock to the public at a price of $15 per share for net proceeds of $42.4
million after underwriting discounts and commissions. In October 1995, Genzyme
sold 2,875,000 shares of General Division Common Stock to the public for $51.25
per share for net proceeds of $141.5 million.
At December 31, 1995, approximately 11,185,804 shares of General
Division Stock and 3,478,585 shares of TR Stock were reserved for issuance under
the 1990 Equity Incentive Plan as amended, the 1988 Director Stock Option Plan
as amended, the 1990 Employee Stock Purchase Plan as amended outstanding
warrants, and the conversion of the Notes.
Preferred Stock. Shares of Preferred Stock may be issued from time to
time in one or more series. The Board of Directors may determine, in whole or in
part, the preferences, voting powers, qualifications and special or relative
rights or privileges of any such series before the issuance of any shares of
that series. The Board of Directors shall determine the number of shares
constituting each series of Preferred Stock and each series shall have a
distinguishing designation.
Stock Options. Pursuant to the Company's 1990 Equity Incentive Plan as
amended (the "Plan"), options may be granted to purchase an aggregate of
7,600,000 shares of General Division Stock and 2,000,000 shares of TR Stock. The
Plan allows the granting of incentive stock options and nonstatutory stock
options at not less than fair market value at date of grant, and stock
appreciation rights, performance shares, restricted stock and stock units to
employees and consultants of the Company, each with a maximum term of ten years.
In addition, the Company has a 1988 Director Stock Option Plan, as amended,
pursuant to which nonstatutory stock options up to a maximum of 100,000 shares
and 70,000 shares, respectively, of General Division Stock and TR Stock, at a
rate of 1,600 shares and 400 shares, respectively, for each year of service are
automatically granted at fair market value to members of the Board of Directors
of the Company upon their election or reelection as Directors. All options
expire ten years after the initial grant date and vest over various periods.
Stock option activity is summarized below:
SHARES
UNDER OPTION OPTION PRICE
------------ ------------
GENZYME CORPORATION COMMON STOCK
Outstanding at December 31, 1992..................... 2,929,067 3.00 - 72.04
Granted............................................ 1,332,240 26.25 - 45.00
Exercised.......................................... (254,171) 4.00 - 37.25
Forfeited and canceled............................. (161,782) 7.75 - 72.04
----------
Outstanding at December 31, 1993..................... 3,845,354 3.00 - 66.16
Granted............................................ 1,619,364 22.63 - 42.00
Exercised.......................................... (66,378) 3.00 - 35.25
Forfeited and canceled............................. (211,763) 8.25 - 66.16
-98-
99
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Converted at Effective Date........................ (5,186,577) 5.89 - 65.49
----------
Outstanding at December 31, 1994..................... -
==========
GENERAL DIVISION STOCK
Converted at Effective Date........................ 5,186,577 $ 5.89 - $65.49
Granted............................................ 66,674 27.25 - 32.50
Exercised.......................................... (1,250) 6.02 - 19.38
Forfeited and canceled............................. (11,151) 30.13 - 49.00
-----------
Outstanding at December 31, 1994..................... 5,240,850 5.89 - 65.49
Granted 2,070,751 5.89 - 67.63
Exercised (1,003,827) 5.89 - 60.14
Forfeited and canceled (221,441) 5.89 - 66.63
----------
Outstanding at December 31, 1995..................... 6,086,333 7.57 - 67.63
==========
TR STOCK
Converted at Effective Date........................ 464,824 $ 1.03 - $11.15
Granted............................................ 940,976 4.75 - 5.13
----------
Outstanding at December 31, 1994..................... 1,405,800 1.03 - 11.15
Granted............................................ 1,153,053 3.19 - 17.63
Exercised.......................................... (63,608) 1.68 - 9.58
Forfeited and canceled............................. (76,202) 1.68 - 8.30
----------
Outstanding at December 31, 1995..................... 2,419,043 1.03 - 17.63
==========
At December 31, 1995, 2,559,198 of the outstanding General Division
Stock options were exercisable resulting in aggregate exercise proceeds of
approximately $78,615,000 and 444,343 of the outstanding TR Stock options were
exercisable resulting in aggregate exercise proceeds of approximately
$2,457,400.
The total exercise proceeds for all options outstanding at December 31,
1995 is approximately $216,568,000 and $20,885,000 for General Division Stock
and TR Stock, respectively. Information regarding the range of option prices is
as follows:
GENERAL DIVISION STOCK TISSUE REPAIR STOCK
---------------------- -------------------
SHARES SHARES
UNDER OPTION OPTION PRICE UNDER OPTION OPTION PRICE
------------ ------------ ------------ ------------
641,247 $ 7.57 - $18.93 80,998 $1.026 - $ 3.257
1,381,472 19.38 - 29.88 1,033,340 3.300 - 5.088
765,926 30.00 - 32.13 79,855 5.109 - 5.471
785,815 32.24 - 38.84 385,115 5.492 - 6.000
704,394 38.88 110,688 6.003 8.302
726,683 39.00 - 48.75 115,768 8.325 - 16.000
1,080,796 49.00 - 67.63 613,279 16.625 - 17.625
--------- ---------
6,086,333 2,419,043
========= =========
Employee Stock Purchase Plan. The Company's 1990 Employee Stock
Purchase Plan allows full-time employees, as defined in this plan, to purchase
the Company's stock at 85% of fair market value. Under this plan, 750,000 shares
of the General Division Stock are authorized, of which 142,934, 129,938 and
85,929 shares were issued in 1995, 1994 and 1993, respectively and 600,000
shares of TR Stock are authorized, of which 269,920 and 3,613 shares of TR Stock
were issued in 1995 and 1994, respectively.
-99-
100
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Rights. In 1989, the Company's Board issued a dividend of one
preferred stock purchase right (a "Common Stock Right") on each share of Common
Stock. At the Effective Date, the Rights Agreement under which the rights were
issued was amended and restated to reflect the change in the capital structure
of the Company and the Board declared a distribution to holders of TR Stock of a
right (a "TR Stock Right") on each outstanding share of TR Stock. The Restated
Rights Agreement provides that each General Division Stock Right, which replaced
the Common Stock Right, and each TR Stock Right, when it becomes exercisable,
will entitle the holder to purchase from the Company (i) in the case of a
General Division Stock Right, one one-hundredth of a share of Series A Junior
Participating Preferred Stock at a price of $52, subject to adjustment, and (ii)
in the case of a TR Stock Right, one one-hundredth of a share of Series B Junior
Participating Preferred Stock at a price of $25, subject to adjustment.
The rights expire on March 28, 1999.
Stock Warrants. The Company has issued warrants which, when exercised,
grant the holders one share of General Division Stock and .135 shares of TR
Stock. These warrants were granted in exchange for the receipt of options to
purchase the partnership interests of Genzyme Development Partners, L.P. (the
"Surgical Aids Partnership") the callable common stock of Neozyme II Corporation
("Neozyme II"), and in connection with Genzyme's purchase of the publicly-held
shares of IG Laboratories, Inc.("IG") in exchange for IG warrants. All proceeds
from the exercise of these warrants will be allocated to the General Division
(see "TR Designated Shares"). The outstanding warrants were issued under the
following terms:
EXERCISE
ISSUE NUMBER OF PRICE
DATE ISSUED TO WARRANTS PER SHARE EXERCISE PERIOD
- ---- ---------------------------------- -------- --------- ---------------
1989 Surgical Aids Partnership,
the sales agent and its
affiliates 1,205,416 $ 16.01 November 1, 1991 to
50,285 16.03 October 31, 1996
666,399 22.91
1992 Investors in Neozyme II:
Series N 2,415,000 $38.25 Through December 31, 1996
Callable 2,415,000 See below January 1, 1997 to
December 31, 1998 unless
otherwise terminated
1995 Dr. Richard Warren 6,005 $ 42.67 Through September 30, 2000
The warrants issued to the Surgical Aids Partnership were issued in
consideration for the granting to Genzyme of an exclusive right to purchase all
of the outstanding partnership interests of the Surgical Aids Partnership.
The warrants issued to investors of Neozyme II were granted in
consideration of the option to purchase the callable common stock of Neozyme II
and had an appraised fair value of $16,905,000. The Callable Warrants
automatically terminate upon Genzyme's exercise of its option to purchase all of
the callable common stock of Neozyme II. These warrants have an exercise price
equal to the sum of the average of the closing sale prices of one share of
General Division Stock and .135 share of TR Stock for the 20 trading days
immediately preceding the exercise thereof.
Warrant activity is summarized below:
-100-
101
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WARRANTS WARRANT PRICE
-------- -------------
Outstanding at December 31, 1992..................... 8,283,246 16.01 - 41.31
Exercised........................................ (123,180) 16.01 - 23.86
Expired.......................................... (4,062) 38.79 - 41.31
----------
Outstanding at December 31, 1993..................... 8,156,004 16.01 - 38.25
Exercised........................................ (2,197,774) 16.01 - 22.91
Expired.......................................... (23,849) 16.01 - 22.91
----------
Outstanding at December 31, 1994..................... 5,934,381 16.01 - 38.25
Granted.......................................... 6,005 42.67
Exercised........................................ (343,145) 16.01 - 38.25
----------
Outstanding at December 31, 1995..................... 5,597,241 16.01 - 42.67
==========
NOTE J RESEARCH AND DEVELOPMENT AGREEMENTS
Revenues from research and development agreements with related parties
include the following:
(DOLLARS IN THOUSANDS) 1995 1994 1993
-------------------------------------------------------------------------------------------------
Technology license fees.............................. $ - $ - $ 2,000
Fees for research and development
activities:
Neozyme I....................................... - - 8,983
Surgical Aids Partnership....................... - 913 8,378
Neozyme II...................................... 24,198 17,785 12,651
Research joint venture.......................... 2,560 2,185 2,150
------- ------- -------
$26,758 $20,883 $34,162
======= ======= =======
Neozyme I and II
In 1992, the Company entered into a development contract with Neozyme
II whereby the Company was engaged to perform all research, development and
clinical testing activities related to products and programs for which Neozyme
II was licensed. The Company received $5,000,000 in 1992 under the technology
license agreement pursuant to which the Company granted Neozyme II exclusive
rights to manufacture and sell the products developed under the technology
license agreements.
The funds for Neozyme II's development contract were raised by the sale
of 2,415,000 units for net proceeds of $78,038,000. Each unit consisted of one
share of Neozyme II callable common stock, one Series N warrant and one callable
warrant to purchase one share of General Division Stock and .135 shares of TR
Stock. Included in accounts receivable as of December 31, 1995 and 1994 was
$2,469,000 and $729,000, respectively, due from Neozyme II.
The Company has an option to purchase all of the shares of the Neozyme
II callable common stock for cash, shares of General Division Stock or any
combination thereof (determined at Genzyme's sole discretion) at $117.00 per
share from January 1, 1996 through December 31, 1996, subject to downward
adjustment if exercised before December 31. Due to the uncertainties inherent in
the very early stages of the research into CFTR, management did not consider the
exercise of the option probable and, accordingly, charged to operations in 1992
the $16,905,000 appraised fair value of this purchase option.
-101-
102
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In December 1993, the Company exercised its option to purchase one of
the two remaining research programs being funded by Neozyme I, created in 1990
for a purchase price of $24,000,000 in cash. As part of the purchase, the
Company retained $0.6 million to fund the costs of the Neozyme I dissolution
which occurred in 1994, and any future tax liabilities. This transaction was
accounted for as a purchase of in-process research and development and its value
charged to operations in 1993.
The Surgical Aids Partnership
In September 1989, the Company entered into a development contract
valued at approximately $37,000,000 with the Surgical Aids Partnership ("the
Partnership") to perform research and development of products based on
hyaluronic acid for use as surgical aids to reduce the incidence and severity of
postoperative adhesions. The Company received a technology license fee of
$1,500,000 in November 1989 and was reimbursed its development costs plus 10%
through the first quarter of 1994 when the Partnership's funds were exhausted.
The General Partner believes that additional funds will be required to complete
the development, clinical testing and commercialization of the Partnership's
products. Although the Company is not obligated to provide additional funding,
the Purchase Option (see below) terminates unless the Company commits on an
annual basis to provide funding for continuation of the research and development
programs for the next twelve month period or until receipt of FDA approval of
one of the Partnership's products is obtained, whichever is shortest. The
Company spent approximately $6.4 million and $6.5 million on the Partnership's
development programs in 1995 and 1994, respectively and has committed to fund
the programs in 1996, expecting to spend approximately $7.9 million (unaudited).
Included in accounts receivable as of December 31, 1994 was $199,000 due from
the Partnership.
The Company also entered into a joint venture agreement with the
Partnership to manufacture and market the Partnership's products, to share in
the profits, to make non-interest bearing loans for working capital
deficiencies, and to make capital contributions as deemed necessary by the
Partnership in connection with the business of the joint venture. The exact
amounts and timing of these expenditures and contributions cannot be determined
at this time.
The Company also obtained an option (the "Purchase Option") to purchase
all of the outstanding partnership interests for a payment of approximately
$26,000,000 in cash, General Division Stock or a combination thereof determined
at Genzyme's sole discretion, plus future royalty payments. The Purchase Option
does not become exercisable until at least twenty-four months after the first
commercial sale of a product of the Partnership.
Deferred revenue from related parties at December 31 includes the
following:
(DOLLARS IN THOUSANDS) 1995 1994
-----------------------------------------------------------------------------
Neozyme II.......................................... 186
Other............................................... 47 38
----- ----
$ 47 $224
===== ====
NOTE K GOODWILL IMPAIRMENT AND RESTRUCTURING COSTS
In the fourth quarter of 1993, the Company recognized an expense of
$23.7 million to reduce the carrying value of intangibles to the realizable
value based on revised estimates of continuing value and future benefits. The
majority of the write-off, $21.9 million, related to the goodwill recorded in
-102-
103
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
connection with the acquisition of Genetic Design Inc. ("GDI") in June 1992. The
goodwill write-off was based on an analysis of GDI's business conducted in the
fourth quarter of 1993, including the loss of significant state public paternity
testing contracts, which indicated that the environment for public paternity
testing, GDI's primary business market, had changed significantly since the
acquisition, and therefore called into question the carrying value of the
acquisition-related GDI goodwill. The business review disclosed the development
of a competitive environment which emphasized cost rather than service and
performance, intense price competition from a major competitor, a general
reduction in the ordering of identity tests due to governmental budgetary
restrictions and uncertainties as to the level of federal funding of state
testing activities, a cost structure at GDI which made it difficult for GDI to
continue as an effective competitor in a slow-growth, cost-driven environment
and the decreased likelihood of sufficient support in Congress for passage of
additional social legislation which would significantly increase federal funding
of state testing activities. These changed circumstances resulted in a
determination to reduce the carrying value of GDI goodwill to zero at the end of
1993. The remaining $1.8 million of write-offs consisted of approximately $1.1
million of patent rights resulting from the purchase of Enzymatix Ltd. by
Genzyme Ltd. (UK) and approximately $0.7 million of intangible assets resulting
from the acquisition of a clinical testing laboratory by IG. Also in the fourth
quarter of 1993, the Company incurred restructuring charges of $2.8 million
related to the consolidation of laboratory operations in its Diagnostic Services
business. The expenses were related to severance of $1.2 million for an
estimated 45 employees; lease costs of $0.8 million; equipment movement and
disposal of $0.2 million; costs incurred to restructure the Company's paternity
product line of $0.2 million and other costs of $0.4 million. All costs were
cash expenditures in 1994. The restructuring plan was undertaken to consolidate
lab testing services into the Company's most cost-effective testing locations,
transfer virtually all accounting functions to the Company's headquarters and
streamline the paternity product line at GDI.
NOTE L COMMITMENTS AND CONTINGENCIES
In December 1994, the Company fully settled litigation brought by
Granada BioSciences, Inc., Houston, Texas, by payment of $1,980,000 in cash. The
dispute arose out of a contract between Granada R&D Ventures, a predecessor of
Granada BioSciences, and Integrated Genetics, prior to its merger with the
Company in 1989, regarding development of recombinant fertility hormones for
cows and other animals.
From time to time the Company has been subject to legal proceedings and
claims arising in connection with its business. At December 31, 1995, there were
no asserted claims against the Company which, in the opinion of management, if
adversely decided would have a material adverse effect on the Company's
financial position and results of operations.
-103-
104
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M INCOME TAXES
Income (loss) before income taxes and the related income tax expense
(benefit) are as follows for the year ended December 31:
(DOLLARS IN THOUSANDS) 1995 1994 1993
--------------------------------------------------------------------------------------------------------
Domestic (includes $15.2 million in charges
for purchased research and development and
acquisition expenses in 1995, and includes
$11.2 million and $49 million in charges
for purchased research and development
in 1994 and 1993 respectively) ........................... $40,551 $27,217 $(14,314)
Foreign.................................................... 2,748 3,567 1,760
------- ------- --------
Total................................................ $43,299 $30,784 $(12,554)
======= ======= ========
Currently payable:
Federal................................................. $11,051 $ 8,565 $ 14,606
State................................................... 4,803 3,627 5,090
Foreign................................................. 1,367 850 913
------- -------- --------
Total current........................................ 17,221 13,042 20,609
Deferred:
Federal................................................. 4,507 1,092 (22,804)
State................................................... (79) 347 (4,264)
-------- -------- --------
Total deferred....................................... 4,428 1,439 (27,068)
------- -------- --------
Provision (benefit) for income taxes....................... $21,649 $14,481 $ (6,459)
======= ======= ========
Provisions for income taxes were at rates other than the U.S. Federal
statutory tax rate for the following reasons:
1995 1994 1993
- ------------------------------------------------------------------------------------------------------
Tax at U.S. statutory rate.................................. 35.0% 35.0% 35.0%
Losses in foreign subsidiary and less
than 80%-owned subsidiaries with
no current tax benefit..................................... 1.0 2.5 23.2
State taxes, net............................................ 5.2 5.7 1.5
Federal rate change......................................... - - (1.0)
Tax exempt interest......................................... - - (3.9)
Foreign sales corporation................................... (2.0) (4.3) (1.7)
Benefit of tax credits...................................... - (2.9) (1.4)
Purchase accounting adjustments............................. - - 1.8
Current year realization of tax
benefits of purchased technology and
purchase options........................................... - - (8.8)
Other, net.................................................. 3.0 (4.1) 2.2
Utilization of operating loss
carryforwards.............................................. (5.2) - (0.5)
----- ----- ----
Effective tax rate before certain
charges - expense.......................................... 37.0 31.9 46.4
Gross charge for purchased research
and development and purchase options
net of related deferred tax benefits....................... 13.0 14.9 (97.8)
---- ---- -----
Effective tax rate - expense (benefit)...................... 50.0% 46.8% (51.4)%
==== ===== =====
-104-
105
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31 the components of net deferred tax assets were as
follows :
(DOLLARS IN THOUSANDS) 1995 1994
----------------------------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforwards........................... $ 10,216 $ 15,908
Intangible amortization.................................... 24,515 26,630
Purchase of in-process research
and development........................................... 15,666 15,687
Unrealized capital losses.................................. 2,561 5,587
Other...................................................... 9,609 3,977
-------- --------
Gross deferred tax asset................................... 62,567 67,789
Valuation allowance........................................ (20,637) (32,233)
-------- --------
Net deferred tax asset........................................ 41,930 35,556
Deferred tax liabilities:
Depreciable assets......................................... (10,556) (3,011)
--------- ---------
Net deferred tax asset........................................ $ 31,374 $ 32,545
======== ========
At December 31, 1995 and 1994, valuation allowances of $20.6 million
and $32.2 million, respectively, were recorded to offset a portion of the
deferred tax assets related to the realization of net operating loss
carryforwards, and deductions relating to the purchase of in-process research
and development and the future disposition of certain stock purchase options.
Realization of the net deferred tax asset is dependent on generating sufficient
taxable income prior to the expiration of loss carryforwards. Although
realization is not assured, management believes that it is more likely than not
that all of the net deferred tax assets will be realized. The amount of the
deferred tax asset considered realizable, however, could be reduced in the near
term if estimates of future taxable income during the carryforward period are
reduced.
A total of $1.5 million of the valuation allowance relates to tax
assets arising from the IG Labs acquisition. If any portion of this tax asset is
ultimately realized, the remaining goodwill related to the IG Labs acquisition
will be reduced accordingly.
At December 31, 1995, the Company had U.S. net operating loss
carryforwards of $26.4 million for income tax purposes. These carryforwards
expire from 2000 to 2010. Utilization of tax net operating loss carryforwards
may be limited under section 382 of the Internal Revenue Code of 1986.
At December 31, 1995, the Company also had U.K. operating loss
carry-forwards for income tax purposes of approximately $2.9 million which are
available indefinitely to offset future taxable income in the U.K.
NOTE N BENEFIT PLANS
The Company has defined-benefit pension plans covering substantially
all the employees of its foreign subsidiaries. Pension expense for 1995, 1994
and 1993 was $498,000, $266,000 and $206,000, respectively. Pension costs are
funded as accrued. Actuarial and other disclosures regarding the plans are not
presented because they are not material.
Genzyme has a domestic employee savings plan under Section 401(k) of
the Internal Revenue Code covering substantially all employees of the Company.
The plan allows employees to make contributions up to a specified percentage of
-105-
106
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
their compensation, a portion of which are matched by the Company. The Company
contributed $696,000, $587,000, and $342,000 to the plan in 1995, 1994 and 1993,
respectively.
-106-
107
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE O FINANCIAL INFORMATION BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS AND
SUPPLIERS
The Company operates in one industry, the human healthcare industry,
and manufactures and markets its products in two major geographic areas, the
United States and Europe. The Company's principal manufacturing facilities are
located in the United Kingdom and the United States.
The Company purchases products from its United Kingdom subsidiaries for
sale to United States customers. Transfer prices from the foreign subsidiaries
are intended to allow the United States parent to produce profit margins
commensurate with its sales and marketing effort. The Netherlands subsidiary is
the European distributor of the Company's therapeutic products. Certain
information by geographic area follows (dollars in thousands):
THE
UNITED NETHER- ELIMI- COMBI-
STATES LANDS OTHER NATION NATION
-------- -------- ----- ------ ------
1995
Net sales -
unaffiliated customers............. $252,358 $70,532 $33,933 $ - $356,823
Transfers between geo-
graphic areas...................... 74,697 - 23,658 (98,355) -
-------- ------- ------- -------- --------
327,055 70,532 57,591 (98,355) 356,823
Pre-tax income (loss)............... 43,911 836 1,852 (3,300) 43,299
Net income (loss.................... 23,826 540 584 (3,300) 21,650
Assets.............................. 923,867 27,703 80,287 (126,656) 905,201
Liabilities......................... 161,338 26,652 12,004 - 199,994
1994
Net sales -
unaffiliated customers............. $224,655 $38,535 $25,465 $ - $288,655
Transfers between geo-
graphic areas...................... 38,590 - 12,784 (51,374) -
-------- ------- ------- -------- --------
263,245 38,535 38,249 (51,374) 288,655
Pre-tax income (loss)............... 28,544 578 3,155 (1,493) 30,784
Net income (loss.................... 14,736 417 2,643 (1,493) 16,303
Assets.............................. 637,024 16,384 69,130 (64,130) 658,408
Liabilities......................... 212,027 15,704 11,713 - 239,444
1993
Net sales -
unaffiliated customers............. $214,822 $ - $19,055 $ - $233,877
Transfers between geo-
graphic areas...................... 1,998 - 10,640 (12,638) -
-------- ------- ------- -------- --------
216,820 - 29,695 (12,638) 233,877
Pre-tax income (loss)............... (14,772) 165 1,595 458 (12,554)
Net income (loss) (7,400) 104 743 458 (6,095)
Assets.............................. 547,915 566 45,608 (52,037) 542,052
Liabilities......................... 203,381 384 4,215 - 207,980
-107-
108
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Substantially all revenue from research and development contracts is
earned in the United States. Entities comprising Other include the Company's
operations in the United Kingdom, Belgium, Japan, Switzerland, Italy and
Germany. Export sales from the United States were $20,539,000, $23,902,000 and
$33,343,000 in 1995, 1994 and 1993, respectively. Export sales by the
Netherlands subsidiary amounted to $66,216,000 in 1995. In 1995, 1994 and 1993,
the Company marketed its Ceredase(R)/Cerezyme(TM) enzyme product directly to
physicians, hospitals and treatment centers, and sold products representing
approximately 14%, 17% and 18%, respectively, of net revenue to an unaffiliated
distributor.
NOTE P QUARTERLY RESULTS (UNAUDITED)
Summarized quarterly financial data (in thousands of dollars except per
share amounts) for the years ended December 31, 1995, 1994 and 1993 are
displayed in the following table.
1ST 2ND 3RD 4TH
QTR QTR QTR QTR
--- --- --- ---
1995
Net sales ................................... $ 88,189 $ 93,605 $ 95,919 $ 106,070
Gross profit ................................ 47,683 48,433 53,185 57,690
Net income (4) .............................. 8,056 7,940 10,710 (5,056)
Income per share (1):
Attributable to General Division:
Primary ................................. 0.43 0.46 0.53 0.08
Fully diluted ........................... 0.40 0.43 0.49 0.07
Attributable to TR Stock ................. (0.45) (0.57) (0.59) (0.64)
1994
Net sales ................................... $ 73,282 $ 75,378 $ 79,180 $ 83,211
Gross profit ................................ 40,049 40,101 41,407 42,469
Net income (3) .............................. 9,062 8,493 9,006 (10,258)
Income per share (1):
Attributable to General Division:
Primary ................................. 0.38 0.37 0.38 0.09
Fully diluted ........................... 0.35 0.35 0.35 0.09
Attributable to TR Stock ................. (0.25) (0.34) (0.32) (3.56)
1993
Net sales ................................... $ 62,292 $ 68,556 $ 72,395 $ 67,128
Gross profit ................................ 32,712 35,489 35,279 31,135
Net income (loss) (2) ....................... 10,889 11,577 13,522 (42,083)
Income (loss) per share
(pro forma) (1) ............................ 0.42 0.44 0.44 (0.67)
- ------------------
(1) Cumulative quarterly income per share data does not equal the annual
amounts due to changes in the average common and common equivalent
shares outstanding.
(2) Includes charges in the fourth quarter of $50.5 million (See Notes J
and K).
(3) Includes charges in the fourth quarter of 1994 of $11.4 million (See
Notes D and L) for the write down of investments and the settlement of
a lawsuit and an $11.2 million charge for acquired incomplete
technology. (See Note B).
(4) Includes charges in the fourth quarter of 1995 of $14.2 million for
acquired incomplete technology. (See Note B).
-108-
109
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE Q SUBSEQUENT EVENTS
In January 1996, Genzyme made a conditional offer to acquire
substantially all the assets of the Partnership for General Division Stock
valued at $93.0 million.
In January 1996, GTR acquired certain real estate in Framingham,
Massachusetts for $6.8 million in cash, of which $5.7 million was allocated to
buildings and $1.1 million was allocated to land based on appraised values.
In January 1996, GTC obtained a short-term loan in the amount of
$950,000 from Genzyme. The loan is due on March 31, 1996 and accrues interest at
a rate of 6 1/2% per annum.
In February 1996, the Company announced a planned redemption of its
6 3/4% Convertible Subordinated Notes. All holders elected to convert their
notes into shares of General Division Stock and TR Stock. Holders of the notes
received 18.913 shares of General Division Stock and 2.553 shares of TR Stock
in conversion of each $1,000 note. Supplementary earnings per share for the
General Division which gives effect to the conversion of the notes as if such
conversion took place at the beginning of each period presented, is equal to
fully diluted earnings per share.
In March 1996, an advisory panel to the U.S. Food and Drug
Administration ("the FDA") recommended that Genzyme be granted approval to
market one of the HA Products, Seprafilm(TM) bioresorbable membrane. The panel's
recommendation will be considered by the FDA in its final review of Genzyme's
premarket approval application.
In March 1996, GTC entered into a Convertible Debt and Development
Funding Agreement with Genzyme under which Genzyme agreed to provide a revolving
line of credit in the amount of $10 million and has agreed to fund development
costs of the Antithrombin III ("AT-III") program through March 31, 1997. Under
the Agreement, GTC granted to Genzyme co-marketing rights to AT-III in all
territories other than Asia subject to negotiation and execution of a
development and supply agreement between the parties prior to March 31, 1997.
The line of credit carries a rate of 7% and is convertible into GTC's common
stock at the average market price for the 20 day period ending two days before
the Conversion at GTC's option to maintain GTC's tangible net worth at the end
of each quarter at a level between $4.0 million and $4.2 million or by Genzyme
at any time for up to the full amount outstanding.
In March 1996, the GTR utilized $8.0 million of the Company's $15.0
million available credit line with Fleet Bank.
In March 1996, the Board voted, subject in each case to the approval of
the stockholders, to adopt two amendments to the Company's 1990 Equity
Incentive Plan (the "Equity Plan"). These amendments would increase the
aggregate number of shares of General Division Stock that may be subject to
grants under the Equity Plan from 7,600,000 to 9,900,000 and the aggregate
number of shares of TR Stock that may be subject to grants under the Equity
Plan from 2,000,000 to 3,300,000 subject to adjustment for stock splits, stock
dividends and certain transactions affecting the Company's capital stock.
-109-
110
GENZYME CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
========================================================================================================================
Column A Column B Column C Column D Column E
- ------------------------------------------------------------------------------------------------------------------------
Additions
------------------------------
Balance at Charged to Charged Balance
beginning Costs and to Other at end
Description of period Expenses Accounts Deductions of Period
- ------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1995:
Allowance for doubtful accounts...... $6,169,100 $5,390,000 $3,400,100(1) $8,159,000
Inventory Reserve.................... $1,131,000 $2,920,700 $ 969,500 $3,082,200
Year ended December 31, 1994:
Allowance for doubtful accounts...... $5,317,600 $4,330,800 $ 176,800(2) $3,656,100(1) $6,169,100
Inventory Reserve.................... $1,321,500 $ 514,000 $ 704,500 $1,131,000
Year ended December 31, 1993:
Allowance for doubtful accounts...... $7,888,900 $2,571,300(1) $5,317,600
Inventory Reserve.................... $1,272,800 $2,163,800 $2,115,100 $1,321,500
- -------------------
(1) Uncollectible accounts written off, net of recoveries.
(2) Reserve acquired in acquisition.
-110-
111
GENZYME GENERAL DIVISION
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of GENZYME CORPORATION:
We have audited the accompanying combined balance sheets of
the Genzyme General Division (as described in Note A) as of December
31, 1995 and 1994 and the related combined statements of operations
and cash flows and the combined financial statement schedule for each
of the three years in the period ended December 31, 1995. The combined
financial statements and financial statement schedule are the
responsibility of Genzyme Corporation's management. Our
responsibility is to express an opinion on these combined financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements of Genzyme
General Division present fairly, in all material respects, the
financial position of Genzyme General Division as of December 31, 1995
and 1994 and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles. In addition, in our
opinion, the combined financial statement schedule taken as a whole
presents fairly, in all material respects, the information required to
be included therein.
As more fully described in Note A to these financial
statements, Genzyme General Division is a business group of Genzyme
Corporation; accordingly, the combined financial statements of Genzyme
General Division should be read in connection with the audited
consolidated financial statements of Genzyme Corporation and
Subsidiaries.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
March 1, 1996, except as to Note R
which is March 26, 1996
-111-
112
GENZYME GENERAL DIVISION
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
(AMOUNTS IN THOUSANDS) DECEMBER 31,
- ------------------------------------------------------------------------------------------------------
1995 1994 1993
---- ---- ----
Revenues:
Net product sales........................................ $304,373 $238,645 $183,366
Net service sales......................................... 47,230 49,686 50,511
Revenues from research and development
contracts:
Related parties......................................... 26,758 20,883 29,478
Other................................................... 202 1,513 2,332
-------- -------- --------
378,563 310,727 265,687
Operating costs and expenses:
Cost of products sold..................................... 113,964 92,226 64,704
Cost of services sold..................................... 31,137 32,116 34,558
Selling, general and administrative....................... 102,167 84,767 78,015
Research and development (including research
and development related to contracts..................... 57,907 51,696 45,526
Purchase of in-process research and
development.............................................. 14,216 - 24,000
Goodwill impairment and restructuring costs............... - - 26,517
-------- -------- --------
319,391 260,805 273,320
-------- -------- --------
Operating income (loss........................................ 59,172 49,922 (7,633)
Other income and (expenses):
Minority interest in net loss of subsidiaries............. 1,608 1,659 9,892
Equity in net loss of unconsolidated subsidiary........... (1,810) (1,353) -
Charge for impaired investments........................... - (9,431) (700)
Settlement of lawsuit..................................... - (1,980) -
Investment income......................................... 7,428 9,072 12,209
Interest expense.......................................... (1,069) (1,354) (2,500)
-------- -------- --------
6,157 (3,387) 18,901
-------- --------- --------
Income before income taxes.................................... 65,329 46,535 11,268
Provision for income taxes.................................... (30,506) (16,341) (2,812)
--------- -------- --------
Net income.................................................... 34,823 30,194 8,456
Tax benefit allocated from
Tissue Repair Division....................................... 8,857 1,860 9,564
-------- -------- --------
Net income attributable to Genzyme
General Division Stock....................................... $ 43,680 $ 32,054 $ 18,020
======== ======== ========
The accompanying notes are an integral part of these combined financial
statements.
-112-
113
GENZYME GENERAL DIVISION
COMBINED STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEARS ENDED
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) DECEMBER 31,
- ---------------------------------------------------------------------------------
1995 1994 1993
-------- -------- -------
Net income attributable to Genzyme
General Division Stock ................ $ 43,680 $ 32,054 $18,020
======== ======== =======
Income per General Division Common and
common equivalent share:
Net income ......................... $ 1.45 $ 1.22 $ 0.69
======== ======== =======
Weighted average shares outstanding 30,092 26,169 26,250
======== ======== =======
Income per General Division Common Share
assuming full dilution:
Net income ......................... $ 1.31 $ 1.14 $ 0.69
======== ======== =======
Weighted average shares outstanding 33,311 28,159 26,250
======== ======== =======
The accompanying notes are an integral part of these combined financial
statements.
-113-
114
GENZYME GENERAL DIVISION
COMBINED BALANCE SHEETS
(AMOUNTS IN THOUSANDS) DECEMBER 31,
- ----------------------------------------------------------------------------------------------
1995 1994
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents ..................................... $103,631 $ 46,549
Short-term investments ........................................ 105,471 7,155
Accounts receivable, less allowance of $7,833 in 1995
and $5,992 in 1994 ........................................... 87,121 76,641
Inventories ................................................... 52,281 36,764
Prepaid expenses and other current assets ..................... 12,345 10,790
Due from Tissue Repair Division ............................... 2,034 171
Deferred tax assets - current ................................. 7,729 4,072
-------- --------
Total current assets ........................................ 370,612 182,142
Property, plant and equipment, net ............................... 327,461 295,346
Other Assets:
Long-term investments ......................................... 69,561 74,948
Note receivable - related party ............................... 262 3,572
Intangibles, net of accumulated amortization of $17,340 in 1995
and $12,633 in 1994 .......................................... 29,934 29,303
Deferred tax assets - noncurrent .............................. 23,645 28,473
Other noncurrent assets ....................................... 33,111 16,360
-------- --------
156,513 152,656
-------- --------
$854,586 $630,144
======== ========
LIABILITIES AND DIVISION EQUITY
Current Liabilities:
Accounts payable .............................................. $ 19,548 $ 20,859
Accrued expenses .............................................. 38,069 27,766
Income taxes payable .......................................... 1,316 6,523
Deferred revenue - related parties ............................ 47 224
Deferred revenue - unaffiliated entities ...................... 1,320 2,380
Current portion of long-term debt and capital lease obligations 2,276 41,076
-------- --------
Total current liabilities ................................... 62,576 98,828
Noncurrent Liabilities:
Long-term debt and capital lease obligations .................. 124,473 126,555
Other noncurrent liabilities .................................. 8,256 6,800
-------- --------
132,729 133,355
Minority interest in subsidiaries ................................ -- 2,310
Commitments and Contingencies (Notes D, F, J, M and R) ............. -- --
Division equity (Note C) ......................................... 659,281 395,651
-------- --------
$854,586 $630,144
======== ========
The accompanying notes are an integral part of these combined financial
statements.
-114-
115
GENZYME GENERAL DIVISION
COMBINED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES: 1995 1994 1993
--------- --------- ---------
Net income ......................................... $ 34,823 $ 30,194 $ 8,456
Reconciliation of net income to net
cash provided by operating activities:
Depreciation and amortization ................... 22,010 18,200 16,821
Write-off of impaired goodwill .................. -- -- 23,690
Gain (loss) on sale of investments .............. 110 (1,430) (1,647)
Loss on disposal of fixed assets ................ 743 -- --
Non-cash compensation expense ................... 131 -- --
Write-off of impaired equity investments ........ -- 9,431 --
Accrued interest/amortization on bonds .......... (279) (2,072) --
Provision for bad debts ......................... 5,184 4,331 --
Purchase of in-process research
and development for stock ...................... 14,216 -- --
Deferred income taxes ........................... 4,428 1,439 (17,373)
Minority interest in net loss of subsidiaries ... (1,608) (1,659) (9,892)
Equity in net loss of unconsolidated subsidiary . 1,810 1,353 --
Other ........................................... 1,458 386 --
Increase (decrease) in cash from working capital:
Accounts receivable .......................... (14,486) (14,712) (10,917)
Inventories .................................. (15,221) (10,858) (2,322)
Prepaid expenses and other current assets .... (1,778) (1,958) (695)
Accounts payable, accrued expenses
and deferred revenue ........................ 14,423 2,976 18,202
Due from Genzyme Tissue Repair Division ...... (1,863) -- --
--------- --------- ---------
Net cash provided by operating activities .... 64,101 35,621 24,323
INVESTING ACTIVITIES:
Purchases of investments ........................... (125,835) (210,274) (122,723)
Purchases of restricted investments ................ (4,418) (10,000) (10,000)
Sales and maturities of investments ................ 39,064 265,851 177,043
Property, plant and equipment ...................... (48,694) (101,707) (118,436)
Cash paid as part of IG acquisition ................ (322) (222) (9,541)
Additional investment in unconsolidated subsidiary . (4,428) (1,465) --
Other noncurrent assets ............................ (1,172) (3,221) (504)
--------- --------- ---------
Net cash used by investing activities ........ (145,805) (61,038) (84,161)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock ............. 179,623 45,040 --
Proceeds from issuance of TR Stock ................. -- 872 --
Proceeds from issuance of common stock
by subsidiary ..................................... 1,107 319 --
Issuance of debt ................................... -- 21,819 39,360
Payments of debt and capital lease obligations ..... (41,163) (4,793) (979)
Net cash (to) from Genzyme ......................... -- (13,993) (4,408)
--------- --------- ---------
Net cash provided by financing activities .... 139,567 49,264 33,973
Effect of exchange rate changes on cash ................ (781) (273) (135)
--------- --------- ---------
Increase (decrease) in cash and cash
equivalents ........................................... 57,082 23,574 (26,000)
Cash and cash equivalents, beginning of period ......... 46,549 22,975 48,975
--------- --------- ---------
Cash and cash equivalents, end of period ............... $ 103,631 $ 46,549 $ 22,975
========= ========= =========
The accompanying notes are an integral part of these combined financial
statements.
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GENZYME GENERAL DIVISION
COMBINED STATEMENTS OF CASH FLOWS - (CONTINUED)
(AMOUNTS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------
1995 1994 1993
----- ------- -------
Supplemental cash flow information:
Cash paid during the year for:
Interest ................................................... $ 9,944 $ 9,634 $ 7,333
Income taxes ............................................... 19,581 13,506 16,066
Supplemental disclosures of non-cash transactions:
Settlement of note receivable -- Note H
Acquisition liability -- Note D
Allocation of tax benefit -- Note B
The accompanying notes are an integral part of these combined financial
statements.
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GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business: Genzyme General Division (the "General Division"), a division
of Genzyme Corporation (the "Company" or "Genzyme"), is a diversified human
health care business with product development, manufacturing and marketing
capabilities in therapeutic and diagnostic products, pharmaceuticals, and
diagnostic services.
Basis of Presentation: The approval effective December 16, 1994 (the
"Effective Date") by the stockholders of Genzyme of the Genzyme Stock Proposal
as described in Genzyme's Prospectus/Proxy Statement dated November 10, 1994
resulted in the redesignation of Genzyme's common stock. The outstanding shares
of Genzyme common stock were redesignated as General Division Common Stock
("General Division Stock") on a share-for-share basis and a second class of
common stock, designated as Tissue Repair Division Common Stock ("TR Stock") was
distributed on the basis of .135 of one share of TR Stock for each share of
Genzyme's common stock held by stockholders of record on October 14, 1994.
General Division Stock and TR Stock provide stockholders with separate
securities which are intended to reflect the performance of the General Division
and Tissue Repair Division ("GTR"), respectively, and the allocation of tax
benefits between the divisions pursuant to the management and accounting
policies adopted by the Board of Directors (the "Board") of Genzyme Corporation.
Dividends to the holders of General Division Stock will be limited to
the lesser of funds of Genzyme legally available for the payment of dividends
and the Available Tissue Repair Dividend Amount, as defined in Genzyme's
Articles of Organization, as amended. Although there is no requirement to do so,
the Board would declare and pay dividends on General Division Stock, if any,
based primarily on the earnings, financial condition, cash flow and business
requirements of the General Division. There is currently no intention of paying
dividends.
Genzyme, subject to certain conditions, has the right to exchange each
outstanding share of TR Stock for any combination of cash and/or shares of
General Division Stock at a 30% premium over Fair Market Value. In addition,
following a disposition of all or substantially all assets of GTR, the shares of
TR Stock are subject to mandatory exchange by Genzyme for cash and/or shares of
General Division Stock at a 30% premium over Fair Market Value as determined by
the trading prices during a specified period prior to public announcement of the
disposition. Shares of General Division Stock are not subject to either optional
or mandatory exchange.
On all matters as to which common stockholders generally are entitled
to vote, holders of General Division Stock are entitled to one vote per share
and holders of TR Stock are entitled to .29 votes per share from the Effective
Date through December 31, 1996. On January 1, 1997 and on each January 1 every
two years thereafter, the number of votes to which the holder of each share of
TR Stock shall be entitled shall be adjusted and fixed for two-periods to equal
the quotient (expressed as a decimal rounded to the nearest two decimal places)
obtained by dividing the fair market value of one share of TR Stock by the fair
market value of one share of General Division Stock as of such date. If no
shares of General Division Stock are outstanding on such date, or if shares of
TR Stock are entitled to vote separately as a class, each share of TR Stock
shall have one vote. Holders of each class vote together as a single class.
Except in limited circumstances provided under Massachusetts law and in
Genzyme's Articles of Organization, as amended, and in the management and
accounting policies adopted by the Board, holders of each class of common stock
will have no rights to vote on matters as a separate class. Separate meetings
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118
of the holders of each class of common stock will not be held. If, when a
stockholder vote is taken on any matter as to which a separate vote by either
class is not required and the holders of either class of common stock would have
more than the number of votes required to approve any such matter, the holders
of that class will control the outcome of the vote on that matter.
The combined financial statements of the General Division include the
financial position and results of operations and cash flows of all businesses of
Genzyme except those of GTR. The General Division's financial statements are
prepared using amounts included in Genzyme's consolidated financial statements.
Corporate allocations reflected in these financial statements are determined
based upon methods which management believes to be reasonable (see Note B).
Genzyme provides holders of General Division Stock separate financial
statements, management's discussion and analysis, descriptions of businesses and
other relevant information for the General Division in addition to consolidated
financial information of Genzyme. Notwithstanding the attribution of assets and
liabilities (including contingent liabilities) between the General Division and
GTR for the purposes of preparing their respective historical and future
financial statements, this attribution and the change in the capital structure
of Genzyme as a result of the approval of the Genzyme Stock Proposal does not
affect legal title to the assets or responsibility for the liabilities of
Genzyme or any of its subsidiaries. Holders of General Division Stock are
shareholders of Genzyme, which continue to be responsible for all of its
liabilities. Liabilities or contingencies of either division that affect
Genzyme's resources or financial condition could affect the financial condition
or results of operations of both divisions. Accordingly, Genzyme's consolidated
financial statements should be read in connection with the General Division's
financial statements.
Except as stated in the amended articles, the accounting policies
applicable to the preparation of the financial statements of the General
Division may be modified or rescinded at the sole discretion of the Board
without the approval of the shareholders, although there is no intention to do
so.
Principles of Combination: The combined financial statements include
the accounts of the General Division and its wholly-owned subsidiaries.
Investments in companies and joint ventures in which the General Division has a
substantial ownership interest of approximately twenty-percent to fifty-percent,
or in which the General Division participates in policy decisions are accounted
for using the equity method. Accordingly, the General Division's share of the
earnings of these entities is included in combined net income. Investments of
less than 20% are reported at fair value. All significant intercompany items and
transactions have been eliminated in combination. Certain items in the combined
financial statements for the periods prior to December 31, 1994 have been
reclassified to conform with the current year's presentation.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
certain estimates and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.
Cash and Cash Equivalents: Cash equivalents, consisting principally of
money market funds and municipal notes purchased with initial maturities of
three months or less, are valued at cost plus accrued interest, which
approximates market.
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GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Investments: Short-term investments include all investments with
remaining maturities of twelve months or less. Long-term investments include
all investments with remaining maturities greater than twelve months. The
General Division classifies its equity investments as available-for-sale and
its investments in debt securities as either held-to-maturity or
available-for-sale based on facts and circumstances present at the time the
investments are purchased. Equity investments are included in "Other noncurrent
assets" on the combined balance sheet (See Note F - Investments). As of
December 31, 1995, the General Division classified all investments in debt
securities as available-for-sale.
These investments are reported at fair value as of the balance sheet
date with unrealized holding gains and losses (the adjustment to fair value)
included in Division equity. If the adjustment to fair value reflects a decline
in the value of the investment, management considers all available evidence to
evaluate the extent to which the decline is "other than temporary" based on
factors including (but not limited to) (i) the length of time and extent to
which the market value has been less than cost; (ii) the financial condition and
near-term prospects of the issuer, including any specific events which may
influence the operations of the issuer; and (iii) the intent and ability of the
holder to retain its investment in the issuer for a period of time sufficient to
allow for any anticipated recovery in market value.
Fair Value of Financial Instruments: The fair value of investments is
obtained from market quotations and is disclosed in Note F. The fair value of
the General Division's subordinated debentures is obtained from a market maker
in the debentures and is disclosed in Note J. The fair value of foreign currency
forward contracts is based on forward rates in effect at December 31, 1995 and
is disclosed below (see -- Hedging).
Inventories: Inventories are valued at the lower of cost (first-in,
first-out method) or market.
Property, Plant and Equipment: Property, plant and equipment are stated
at cost. Provision for depreciation is generally computed using the
straight-line method over the estimated useful lives of the assets (three to ten
years for plant and equipment, five to seven years for furniture and fixtures,
and twenty to forty years for buildings). Certain manufacturing equipment (with
a net book value of $34.1 million at December 31, 1995) is depreciated over its
remaining useful life using the units-of-production method. The remaining life
and recoverability of such equipment is evaluated periodically based on the
appropriate facts and circumstances. Leasehold improvements are amortized over
the lesser of the useful life or the term of the respective lease. For products
expected to be commercialized, the General Division capitalizes, to construction
in-progress, the costs of manufacturing process validation and optimization
incurred beginning when the product is deemed to have demonstrated technological
feasibility and ending when the asset is substantially complete and is ready for
its intended use. Qualified costs include direct labor and material, and
incremental fixed overhead to the extent incurred. These costs are depreciated
using the units of production method.
Issuance of Stock by a Subsidiary: Gains on the issuance of stock by a
subsidiary are included in net income unless the subsidiary is a research and
development, start-up or development stage company or an entity whose viability
as a going concern is under consideration. In those situations the General
Division accounts for the change in its proportionate share of subsidiary equity
resulting from the additional equity raised by the subsidiary as an equity
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GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
transaction.
Intangibles: Intangible assets consist primarily of goodwill which is
amortized on a straight-line basis over seven to eleven years. The remaining
intangibles, including customer lists, patents and a covenant not to compete are
being amortized on a straight-line basis over five to eleven years. Management's
policy is to evaluate the recoverability and useful lives of its intangible
assets when the facts and circumstances suggest that these assets may be
impaired or their useful lives may have changed. This analysis relies on a
number of factors, including operating results, business plans, budgets,
economic projections and changes in management's strategic direction or market
emphasis. The test of such recoverability is a comparison of the asset to
expected cumulative (undiscounted) operating income of the acquired entity over
the remaining life of the asset. If the book value of the intangible asset
exceeds undiscounted cumulative operating income, the write-down is computed as
the excess of the asset over the present value of operating income discounted at
the General Division's weighted average cost of capital over the remaining
amortization period. (See Note M - Goodwill Impairment and Restructuring Costs)
Revenue Recognition: Revenues from product sales are recognized when
goods are shipped and are net of third party contractual allowances, as
applicable. Revenues from service sales are recognized when the service
procedures have been completed. Revenues from research and development contracts
are recognized over applicable contractual periods as specified by each
contract.
Translation of Foreign Currencies: The financial statements of the
General Division's foreign subsidiaries are translated from local currency into
U.S. dollars using the current exchange rate at the balance sheet date for
assets and liabilities and the average exchange rate prevailing during the
period for revenues and expenses. The local currency for all General Division
foreign subsidiaries is considered to be the functional currency for each entity
and accordingly, translation adjustments for these subsidiaries are charged or
credited to Division equity. Exchange gains and losses on intercompany balances
of a long-term investment nature are also recorded as a charge or credit to
Division equity. Transaction gains and losses are recorded in income and totaled
$(840,000), $(41,000), and $(322,000) for the years ended December 31, 1995,
1994 and 1993, respectively.
Hedging: The General Division enters into forward contracts to reduce
foreign currency exchange risk. Such contracts are revalued using current
exchange rates at the balance sheet date. Gains and losses on forward contracts
intended to hedge identifiable foreign currency commitments are deferred and
included in the measurement of the related foreign currency transaction. All
other gains and losses on revaluation of forward contracts are included in net
income. At December 31, 1995, the General Division had forward exchange
contracts valued at $1,209,000. Related gains and losses were not material to
the financial statements.
Research and Development: Research and development costs are expensed
in the period incurred. Costs of purchased technology which management believes
has not demonstrated technological feasibility and for which there is no
alternative future use are charged to expense in the period of purchase.
Income Taxes: The General Division uses the asset and liability method
of accounting for deferred income taxes. The provision for income taxes includes
income taxes currently payable and those deferred because of temporary
differences between the financial statement and tax bases of assets and
liabilities. The General Division has not provided for possible U.S. taxes on
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GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
the undistributed earnings of foreign subsidiaries that are considered to be
reinvested indefinitely. At December 31, 1995, such undistributed foreign
earnings were approximately $1,731,000.
Net Income Per Share: The method of calculating income per share for
General Division Stock reflects the terms of the Articles of Organization, as
amended, which provide that dividends may be declared and paid only out of the
lesser of funds of Genzyme legally available therefore and each division's
Available Dividend Amount, as defined. For the purpose of computing net income
per common share of General Division Stock for periods prior to December 12,
1994, the number of shares and share equivalents of General Division Stock prior
to the Effective Date are assumed to be the same as the total number of shares
and share equivalents of Genzyme common stock. The General Division computes
income per share by dividing the income attributable to General Division Stock
by the weighted average number of shares of General Division Stock and dilutive
common stock equivalents and other potentially dilutive securities outstanding
during the applicable period. Income attributable to General Division Stock
equals the General Division's net income or loss for the relevant period
determined in accordance with generally accepted accounting principles in effect
at such time, adjusted by the amount of tax benefits allocated to or from the
General Division pursuant to the accounting policies adopted by the Board. The
accounting policies provide that, as of the end of any fiscal quarter of
Genzyme, any projected annual tax benefit attributable to any division that
cannot be utilized by such division to offset or reduce its current or deferred
income tax expense may be allocated to the other division without any
compensating payment or allocation.
Income per share assuming full dilution is determined by dividing net
income plus subordinated debenture interest (net of capitalized amounts) by the
weighted average number of common shares outstanding during the year after
giving effect for common stock equivalents arising from stock options and
warrants and for subordinated debentures assumed converted to common stock.
Net income attributable to General Division Stock and net income per
share for the years ended December 31, 1994 and 1993, give effect to the
provisions of the accounting policies adopted by the Board in connection with
the creation of the General Division and, accordingly, are pro forma
presentations.
Accounting for Stock-Based Compensation: Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123"), will require the Company to either elect expense recognition under SFAS
123 or its disclosure-only alternative for stock-based employee compensation.
The expense recognition provision encouraged by SFAS 123 would require fair
value-based financial accounting to recognize compensation expense for employee
stock compensation plans. SFAS 123 must be adopted in the Company's fiscal 1996
financial statements with comparable disclosures for the prior year. The Company
has determined that it will elect the disclosure-only alternative permitted
under SFAS 123. The Company will be required to disclose pro forma net income
and pro forma earnings per share in the footnotes using the fair value based
method beginning in fiscal 1996 with comparable disclosures for fiscal 1995. The
Company has not determined the impact of these pro forma adjustments to its net
income or earnings per share.
Financial Instruments: Financial instruments that potentially subject
the Company to significant concentrations of credit risk consist principally of
cash and cash equivalents, current and non-current investments. The Company
generally invests its cash investments in investments-grade securities.
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122
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Uncertainties: The Company is subject to risks common to companies in
the Biotechnology industry, including but not limited to, development by the
Company or its competitors of new technological innovations, dependence on key
personnel, protection of proprietary technology, and compliance with FDA
government regulations.
NOTE B RELATED PARTY TRANSACTIONS
The following policies may be modified or rescinded by action of the
Board, or the Board may adopt additional policies, without approval of the
shareholders of Genzyme, although the Board has no present intention to do so.
Genzyme allocated certain corporate general and administrative expenses,
research and development expense and income taxes in accordance with the
policies described below.
Financial Matters: As a matter of policy, the Company manages the
financial activities of the General Division and GTR on a centralized basis.
These financial activities include the investment of surplus cash; the issuance,
repayment and repurchase of short-term and long-term debt and the issuance and
repurchase of common stock. In preparing these financial statements for each of
the three years in the period ended December 31, 1995, transactions primarily
related to investments, short-term and long-term debt (including convertible
debt), related net interest and other financial costs have been attributed to
the General Division based upon its cash flows for the periods presented after
giving consideration to the debt and equity structure of the Company. At
December 31, 1995, the Company attributed all of its short-term and long-term
debt to the General Division based upon the specific purpose for which the debt
was incurred and the cash flow requirements of the General Division. All of the
Company's interest costs have been allocated to the General Division (see Note
J). The Company believes this method of allocation to be equitable and a
reasonable estimate of such costs as if the General Division operated on a
stand-alone basis.
To the extent borrowings are deemed to occur between the General
Division and GTR, intercompany accounts have been established bearing interest
at the rate in effect from time to time under the Company's unsecured credit
lines or, if no such credit lines exist, at the prime rate charged by The First
National Bank of Boston from time to time. To date no such borrowings have
occurred; however, at December 31, 1995 GTR owed the General Division $2.0
million for services rendered in the normal course of business.
Shared Services: Genzyme's corporate general and
administrative functions and certain sales and marketing efforts related to
foreign market penetration are performed by the General Division. General,
administrative, sales and marketing expenses have been allocated to GTR based
upon utilization of such services as if the General Division and GTR operated on
a stand-alone basis. Management believes that such allocation is a reasonable
estimate of such expenses. These allocations for the years ended December 31,
1995, 1994 and 1993 were $4,355,000, $833,000 and $701,000, respectively. In
addition, costs incurred by the General Division related to research and
development for GTR products are charged to GTR. These charges for the years
ended December 31, 1995, 1994 and 1993 were $4,730,000 $3,331,000 and
$2,805,000, respectively.
Income Taxes: The General Division is included in the consolidated U.S.
federal income tax return filed by Genzyme. Genzyme allocates current and
deferred taxes to its divisions by determining the tax provision of each
division, in accordance with generally accepted accounting principles, as if it
were a separate taxpayer. Accordingly, the realizability of deferred tax assets
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GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
is assessed at the Division level. The sum of the tax provisions calculated for
individual divisions of Genzyme may not equal the consolidated tax provision
under this approach. The treatment of the allocation of a division's projected
tax benefit for purposes of income per share computation is discussed in Note A.
Inter-Division Asset Transfers. The Board may at any time and from time
to time reallocate any program, product or other asset from one Division to any
other Division. All such reallocations will be done at fair market value,
determined by the Board, taking into account, in the case of a program under
development, the commercial potential of the program, the phase of clinical
development of the program, the expenses associated with realizing any income
from the program, the likelihood and timing of any such realization and other
matters that the Board and its financial advisors deem relevant. The
consideration for such reallocation may be paid by one Division to another in
cash or, in lieu of cash or other consideration, the Board may elect to account
for a reallocation of assets from GTR to the General Division as an increase in
the General Designated Shares and a reallocation of assets from the General
Division to GTR as either an increase in the TR Designated Shares or a reduction
in the General Designated Shares, if any, except that a reallocation of assets
from GTR to the General Division may not be accounted for as an increase in
General Designated Shares without a class vote of the holders of TR Stock.
NOTE C DIVISION EQUITY
The following analyzes the Division equity of the General Division for
the periods presented:
(DOLLARS IN THOUSANDS) 1995 1994 1993
- -------------------------------------------------------------------------------------------
Balance at beginning of period .............. $ 395,651 $ 324,391 $ 322,390
Net income .................................. 34,823 30,194 8,456
Allocation of tax benefits
generated by Tissue Repair Division......... 8,857 11,423 --
Exercise of options.......................... 27,921 1,190 --
Shares issued in connection with
Employee Stock Purchase Plan................ 4,161 2,992 --
Exercise of warrants......................... 6,264 41,730 --
Shares issued in public offering ............ 141,276 -- --
Acquisition of publicly held minority
share of IG................................. 22,460 -- --
Shares issued in connection with GTC's
acquisition of BDL......................... 1,360 -- --
Tax benefit of disqualified
dispositions............................... 5,500 2,224 --
Compensation expense ........................ 131 -- --
Foreign currency translation................. 1,325 2,861 (1,064)
Unrealized gain/(loss) on investments........ 9,552 (7,480) --
Net cash (to) from Genzyme .................. -- (13,874) (5,391)
--------- --------- ---------
$ 659,281 $ 395,651 $ 324,391
========= ========= =========
In October 1995, Genzyme sold 2,875,000 shares of General Division
Common Stock to the public for $51.25 per share for net proceeds of $141.5
million.
Included in Division Equity is the cumulative foreign currency
translation adjustments of $(3,590,000) and $(4,915,000) at December 31, 1995,
and 1994 respectively.
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124
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Immediately prior to the Effective Date, as defined in Note A,
approximately 15,791,000 shares of Genzyme common stock were reserved for
issuance under the Company's 1990 Equity Incentive Plan, 1988 Director Stock
Option Plan, 1990 Employee Stock Purchase Plan, and upon the exercise of
outstanding warrants (the "Warrants"), and the conversion of the 6 3/4%
Convertible Subordinated Notes Due 2001 (the "Notes").
Pursuant to antidilution provisions in the agreements covering the
options, Genzyme has adjusted each option outstanding on the Effective Date to
provide for separation of the option into an option exercisable for General
Division Stock and an option exercisable for the number of shares of TR Stock
that the holder would have received if the holder had exercised the option
immediately prior to the Effective Date.
The Warrants provide that the holder of the Warrant is entitled to
receive the number of shares of General Division Stock and TR Stock upon
exercise of the Warrant that the holder would have received if the holder had
exercised the Warrant immediately prior to the Effective Date.
Pursuant to the indenture under which the Notes were issued, the
conversion privilege of the Notes was adjusted so that the holder of a Note
converted after the Effective Date will receive, in addition to the shares of
General Division Stock into which the Note is convertible, the same number of
shares of TR Stock as the holder would have received had the holder converted
the Note immediately prior to the Effective Date.
At December 31, 1995, approximately 11,185,804 shares of General
Division Stock were reserved for issuance under the 1990 Equity Incentive Plan
as amended, the 1988 Director Stock Option Plan as amended, the 1990 Employee
Stock Purchase Plan as amended, and upon the exercise of outstanding warrants,
and the conversion of the Notes.
Preferred Stock. Shares of Preferred Stock may be issued from time to
time in one or more series. The Board of Directors may determine, in whole or in
part, the preferences, voting powers, qualifications and special or relative
rights or privileges of any such series before the issuance of any shares of
that series. The Board of Directors shall determine the number of shares
constituting each series of Preferred Stock and each series shall have a
distinguishing designation.
Stock Options. Pursuant to the Company's 1990 Equity Incentive Plan as
amended (the "Plan"), options may be granted to purchase an aggregate of
7,600,000 shares of General Division Stock and 2,000,000 shares of TR Stock. The
Plan allows the granting of incentive stock options and nonstatutory stock
options at not less than fair market value at date of grant, and stock
appreciation rights, performance shares, restricted stock and stock units to
employees and consultants of the Company, each with a maximum term of ten years.
In addition, the Company has a 1988 Director Stock Option Plan, as amended,
pursuant to which nonstatutory stock options up to a maximum of 100,000 shares
and 70,000 shares, respectively, of General Division Stock and TR Stock, at a
rate of 1,600 shares and 400 shares, respectively, for each year of service are
automatically granted at fair market value to members of the Board of Directors
of the Company upon their election or reelection as Directors. All options
expire ten years after the initial grant date.
Stock option activity is summarized below:
SHARES
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GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
UNDER OPTION OPTION PRICE
------------ ------------
GENZYME CORPORATION COMMON STOCK
Outstanding at December 31, 1992..................... 2,929,067 3.00 - 72.04
Granted............................................ 1,332,240 26.25 - 45.00
Exercised.......................................... (254,171) 4.00 - 37.25
Forfeited and canceled............................. (161,782) 7.75 - 72.04
----------
Outstanding at December 31, 1993..................... 3,845,354 3.00 - 66.16
Granted............................................ 1,619,364 22.63 - 42.00
Exercised.......................................... (66,378) 3.00 - 35.25
Forfeited and canceled............................. (211,763) 8.25 - 66.16
Converted at Effective Date........................ (5,186,577) 5.89 - 65.49
----------
Outstanding at December 31, 1994..................... -
==========
GENERAL DIVISION STOCK
Converted at Effective Date........................ 5,186,577 $ 5.89 - $65.49
Granted............................................ 66,674 27.25 - 32.50
Exercised.......................................... (1,250) 6.02 - 19.38
Forfeited and canceled............................. (11,151) 30.13 - 49.00
-----------
Outstanding at December 31, 1994..................... 5,240,850 5.89 - 65.49
Granted 2,070,751 5.89 - 67.63
Exercised (1,003,827) 5.89 - 60.14
Forfeited and canceled (221,441) 5.89 - 66.63
----------
Outstanding at December 31, 1995..................... 6,086,333 7.57 - 67.63
==========
At December 31, 1995 and 1994, 2,559,198 and 2,336,498 of the
outstanding options were exercisable resulting in aggregate exercise proceeds of
approximately $78,867,000 and $63,343,000, respectively.
The total exercise proceeds for all options outstanding at December 31,
1995 is approximately $216,568,000. Information regarding the range of option
prices is as follows:
SHARES
UNDER OPTION OPTION PRICE
------------ ------------
641,247 $ 7.57 - $18.93
1,381,472 19.38 - 29.88
765,926 30.00 - 32.13
785,815 32.24 - 38.84
704,394 38.88
726,683 39.00 - 48.75
1,080,796 49.00 - 67.63
---------
6,086,333
=========
Employee Stock Purchase Plan. The Company's 1990 Employee Stock
Purchase Plan allows full-time employees, as defined in this plan, to purchase
the Company's stock at 85% of fair market value. Under this plan, 750,000 shares
of the General Division Stock are authorized of which 142,934, 129,938 and
85,929 shares were issued in 1995, 1994 and 1993, respectively.
Stock Rights. In 1989, the Company's Board issued a dividend of one
preferred stock purchase right (a "Common Stock Right") on each share of Common
Stock. At the Effective Date, the Rights Agreement under which the rights were
issued was amended and restated to reflect the change in the capital structure
-125-
126
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
of the Company and the Board declared a distribution to holders of TR Stock of a
right (a "TR Stock Right") on each outstanding share of TR Stock. The Restated
Rights Agreement provides that each General Division Stock Right, which replaced
the Common Stock Right, and each TR Stock Right, when it becomes exercisable,
will entitle the holder to purchase from the Company (i) in the case of a
General Division Stock Right, one one-hundredth of a share of Series A Junior
Participating Preferred Stock at a price of $52, subject to adjustment, and (ii)
in the case of a TR Stock Right, one one-hundredth of a share of Series B Junior
Participating Preferred Stock at a price of $25, subject to adjustment. The
rights expire on March 28, 1999.
Stock Warrants. The Company has issued warrants which, when exercised,
grant the holders one share of General Division Stock and .135 shares of TR
Stock. These warrants were granted in exchange for the receipt of options to
purchase the partnership interests of Genzyme Development Partners, L.P. (the
"Surgical Aids Partnership") the callable common stock of Neozyme II Corporation
("Neozyme II"), and in connection with Genzyme's purchase of the publicly-held
shares of IG Laboratories, Inc.("IG") in exchange for IG warrants. All proceeds
from the exercise of these warrants will be allocated to the General Division
(see "TR Designated Shares"). The outstanding warrants were issued under the
following terms:
EXERCISE
ISSUE NUMBER OF PRICE
DATE ISSUED TO WARRANTS PER SHARE EXERCISE PERIOD
- ---- --------- -------- --------- ---------------
1989 Surgical Aids Partnership,
the sales agent and its
affiliates 1,205,416 $16.01 November 1, 1991 to
50,285 16.03 October 31, 1996
666,399 22.91
1992 Investors in Neozyme II:
Series N 2,415,000 $38.25 Through December 31, 1996
Callable 2,415,000 See below January 1, 1997 to
December 31, 1998 unless
otherwise terminated
1995 Dr. Richard Warren 6,005 $42.67 Through September 30, 2000
The warrants issued to the Surgical Aids Partnership were issued in
consideration for the granting to Genzyme of an exclusive right to purchase all
of the outstanding partnership interests of the Surgical Aids Partnership.
The warrants issued to investors of Neozyme II were granted in
consideration of the option to purchase the callable common stock of Neozyme II
and had an appraised fair value of $16,905,000. The Callable Warrants
automatically terminate upon the General Division's exercise of its option to
purchase all of the callable common stock of Neozyme II. These warrants have an
exercise price equal to the sum of the average of the closing sale prices of
one share of General Division Stock and .135 share of TR Stock for the 20
trading days immediately preceding the exercise thereof.
Warrant activity is summarized below:
WARRANTS WARRANT PRICE
-------- -------------
Outstanding at December 31, 1992..................... 8,283,246 16.01 - 41.31
Exercised........................................ (123,180) 16.01 - 23.86
Expired.......................................... (4,062) 38.79 - 41.31
----------
-126-
127
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Outstanding at December 31, 1993 8,156,004 16.01 - 38.25
Exercised ..................... (2,197,774) 16.01 - 22.91
Expired ....................... (23,849) 16.01 - 22.91
----------
Outstanding at December 31, 1994 5,934,381 16.01 - 38.25
Granted ....................... 6,005 42.67
Exercised ..................... (343,145) 16.01 - 38.25
----------
Outstanding at December 31, 1995 .. 5,597,241 16.01 - 42.67
==========
TR Designated Shares. Pursuant to Genzyme's Articles of Organization,
as amended, TR Designated Shares are authorized shares of TR Stock which are not
issued and outstanding, but which the Board may from time to time issue, sell or
otherwise distribute without allocating the proceeds or other benefits of such
issuance, sale or distribution to GTR. At the Effective Date, 5,000,000 TR
Designated Shares were established. As a result of the distribution of
approximately 3,300,000 shares of TR Stock to holders of General Division Stock,
the number of TR Designated Shares were reduced by a corresponding amount. The
remaining 1,700,000 TR Designated Shares were reserved for issuance upon the
exercise of Genzyme stock options and warrants and the conversion of Genzyme's
convertible notes which were outstanding on the Effective Date. TR Designated
Share activity is summarized below:
TR DESIGNATED
SHARES
------
Established at Effective Date.................................. 5,000,000
Stock dividend to holders of
Genzyme Common Stock.......................................... (3,356,713)
Stock options exercised........................................ (168)
Stock warrants exercised....................................... (233,412)
----------
Balance at December 31, 1994................................ 1,409,707
Stock options exercised........................................ (72,942)
Stock warrants exercised....................................... (46,244)
ESPP shares issued (3,613)
----------
Outstanding at December 31, 1995............................ 1,286,908
==========
The number of TR Designated Shares will be decreased by the number of
shares of TR Stock issued by Genzyme, the proceeds of which are allocated to the
General Division; the number of shares of TR Stock issued as a dividend to
holders of General Division stock; and the number of shares of TR Stock issued
upon the conversion of convertible securities, including the Notes, attributed
to the General Division. In addition, the number of TR Designated Shares can be
increased as a result of certain inter-division transactions. The remaining TR
Designated Shares are reserved for issuance upon the exercise of the Notes, the
aforementioned warrants and the stock options which resulted from the conversion
of Genzyme options into TR Stock and General Division Stock options (See Note
M).
NOTE D ACQUISITIONS
In April 1993, the General Division acquired Virotech
System-Diagnostika, GmbH in Germany, for approximately $10,200,000, of which
approximately $8,100,000 was recorded as goodwill. In May 1993 Genzyme srl, a
wholly-owned subsidiary of the General Division located in Italy, acquired
certain assets of Omnia Res srl for approximately $700,000, of which
approximately $100,000 was recorded as goodwill. These acquisitions were
accounted for as purchases.
-127-
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GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Accordingly, the associated net assets and operations have been included in the
General Division's financial statements since the acquisition dates. Pro forma
information is not presented since the impact of the acquisition on financial
statement periods prior to the acquisitions is not material.
In July 1994, the General Division paid approximately $6,100,000 for
newly-issued shares of common stock representing 51% of the outstanding common
stock of Sygena A.G. ("Sygena"), a Swiss manufacturer of high performance
chemicals used in the development of pharmaceuticals. Based on certain put and
call options in the Acquisition Agreement, which effectively ensure the
purchase by the General Division of the remaining outstanding shares during the
period from July 1, 1996 through June 30, 1999, the General Division accounted
for the acquisition as a purchase of all of the outstanding shares of Sygena,
and recorded a deferred liability at a present value of approximately 8,600,000
Swiss francs for the purchase of the remaining shares. The excess purchase
price over the net assets acquired was approximately 5,399,600 Swiss francs
(approximately $4,000,000) and was recorded as goodwill. The net assets and
operations of Sygena have been included in the General Division's financial
statements from the date of acquisition. Pro forma information is not presented
since the impact of the acquisition on financial statement periods prior to the
acquisition is not material.
On December 15, 1994, the General Division acquired BioSurface
Technology, Inc. ("BioSurface") by issuing .575 of one share of TR Stock for
each share of BioSurface common stock. In the aggregate, 5,000,000 shares of TR
Stock, valued at $25,312,500, were issued representing 50% of the initial equity
interest in GTR. The acquisition was accounted for as a purchase. Accordingly,
the associated net assets and operations of BioSurface have been included in the
General Division's financial statements since the date of acquisition. The
excess of the purchase price over the fair market value of the net assets
acquired, $11,215,000, was allocated to in-process research and development and
charged to operations. Pro forma information is not presented since the impact
of the acquisition on financial statement periods prior to the acquisition is
not material.
The following summary, prepared on a pro forma basis, presents the
consolidated results of operations as if BioSurface had been acquired at the
beginning of the periods presented. This pro forma summary does not necessarily
reflect the results of operations as they would have been if Genzyme and
BioSurface constituted a single entity during the periods presented and is not
necessarily indicative of results which may be obtained in the future.
YEAR ENDED DECEMBER 31,
--------------------------------
1994 1993
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------
Revenues................................................................. $317,047 $276,080
Net income (loss......................................................... 19,448 (13,978)
Pro forma net income (loss) per share:
Attributable to General Division..................................... 1.22 0.68
Attributable to Tissue Repair Division............................... (1.51) (3.78)
In October 1995, the General Division acquired the publicly-held
minority interest in its majority-owned subsidiary, IG Laboratories, Inc.
("IG"), by issuing approximately .125 of one share of General Division Stock for
each share of IG common stock. In the aggregate, approximately 385,255 shares of
General Division Stock, valued at approximately $22,460,000 were issued. The
-128-
129
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
acquisition was accounted for as a purchase. The excess of the purchase price
over the fair market value of the net assets acquired, approximately
$18,563,000, was allocated $14,216,000 to in-process research and development
and charged to operations, and $4,347,000 to Goodwill to be amortized over 11
years.
NOTE E MAJORITY-OWNED SUBSIDIARIES
INTEGRATED GENETICS, INC. IG was an approximately seventy-percent-
owned subsidiary for the years ended December 31, 1993 and 1994 and for the
period from January 1, 1995 through October 1, 1995. (See Note D).
GENZYME TRANSGENICS CORPORATION. Genzyme Transgenics Corporation
("GTC") was a majority-owned subsidiary for the year ended December 31, 1993 and
for the period from January 1, 1994 through September 30, 1994. (See Note F).
NOTE F INVESTMENTS
Investments in marketable securities at December 31 consisted of the
following:
1995 1994
--------------------------------------------------
MARKET MARKET
(DOLLARS IN THOUSANDS) COST VALUE COST VALUE
- ---------------------------------------------------------------------------------------
Short Term:
Certificates of deposit $ 1,870 $ 1,870 $ 2,979 $ 2,979
Federal agency notes .. 25,696 25,731 -- --
Corporate notes ....... 77,800 77,870 4,281 4,176
U.S. Treasury notes ... -- -- -- --
Municipal notes ....... -- -- -- --
-------- -------- -------- --------
$105,366 $105,471 $ 7,260 $ 7,155
======== ======== ======== ========
Long Term:
Common stock .......... $ -- $ -- $ -- $ --
Federal agency notes .. 4,047 4,053
Corporate notes ....... 42,518 42,845 57,584 54,420
U.S. Treasury notes ... 22,351 22,663 22,709 20,528
Municipal notes ....... -- -- -- --
-------- -------- -------- --------
$ 68,916 $ 69,561 $ 80,293 $ 74,948
======== ======== ======== ========
Information regarding the range of contractual maturities of
investments in debt securities at December 31, 1995 is as follows:
MARKET
(DOLLARS IN THOUSANDS) COST VALUE
---------------------------------------------------------------------------
Within 1 year................................... $105,371 $105,472
After 1 year through 2 years.................... 29,997 30,137
After 2 years through 10 years.................. 38,919 39,423
-------- --------
$174,287 $175,032
========= ========
In August 1993, the General Division acquired 502,512 shares of the
Series E Convertible Preferred Stock (the "Series E Stock") of Univax Biologics,
Inc., for $5.0 million in connection with an agreement to develop and
commercialize certain products. Upon the achievement of specified clinical
milestones, the General Division is committed to making future milestone
payments. In November 1995, Univax merged with North American Biologicals,
Inc.("NABI") and in connection with the merger the General Division received
526,315 shares of NABI
-129-
130
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
common stock in exchange for the Series E Stock. The investment is classified as
available-for-sale and is included in "Other noncurrent assets" in the
consolidated balance sheets at fair market value. At December 31, 1995, this
value was approximately $5.7 million compared to a value of $2.7 million at
December 31, 1994. At that time, General Division believed the decline in value
was temporary and accordingly, an unrealized loss of approximately $2,300,000
was recorded as a charge to Stockholders' equity.
In September 1993, the General Division acquired 714,286 shares of
common stock of Argus Pharmaceuticals, Inc. ("Argus") for $5.0 million in
connection with an agreement to develop and commercialize certain products. Upon
the achievement of certain specified clinical milestones, the General Division
is committed to making future milestone payments and an additional $5.0 million
investment in Argus. In August 1994, pursuant to the Common Stock Purchase
Agreement, Argus delivered to the General Division an additional 132,325 shares
resulting in a total of 846,611 shares held by the General Division. The
investment is classified as available-for-sale and is included in "Other
noncurrent assets" in the combined balance sheets at fair market value. At
December 31, 1994, this value was approximately $1.8 million. The General
Division believed that a portion of the impairment in the value of the
investment in Argus was "other than temporary" and accordingly, a loss of
approximately $3.3 million was charged to operations in 1994. In September 1995,
Argus combined with Triplex Pharmaceuticals and Oncologix to form Aronex. In
connection with this merger, the common stock of Argus was redesignated as
common stock of Aronex. At December 31,1995 the value of this investment was
$3.7 million.
Pursuant to the Common Stock Purchase Agreement (the "Agreement") dated
as of June 24, 1994 between the General Division and Celtrix Pharmaceuticals,
Inc. ("Celtrix"), the General Division acquired 1,550,388 restricted shares,
approximately 11.5% of the common stock of Celtrix outstanding after the
acquisition, for $10.0 million. In November 1994, Celtrix announced a delay in
the commercialization of an application of a key product and in February 1995,
Celtrix announced that it had halted all studies related to another of its key
development products. These announcements resulted in a decline in the fair
market value of the General Division's investment. The General Division believed
that a portion of the impairment in the value of the investment in Celtrix was
"other than temporary". Accordingly, a loss of approximately $6.1 million was
charged to operations in 1994. In 1995, Celtrix exercised its option to require
the Company to purchase additional shares of Celtrix at fair market value. As a
result in December 1995, the General Division acquired an additional 1,472,829
shares at $3 per share. The investment is classified as available-for-sale. At
December 31, 1995, this value was approximately $7.7 million.
Gross realized losses included in investment income for 1995 were
$110,000 Net realized gains included in investment income for 1994 and 1993 were
$1,430,000 and $1,647,000, respectively. Gross unrealized gains in the
investment portfolio at December 31, 1995 were $2,073,000. Gross unrealized
losses in the investment portfolio at December 31, 1994 were $5,449,000.
In July 1993, GTC, a wholly-owned subsidiary of the Company
specializing in transgenic technology which was incorporated in February 1993,
completed an initial public offering of 1,500,000 shares of its common stock
priced at $8.00 per share. The offering resulted in an increase in the value of
the Company's investment in GTC of $7.6 million which was recorded as an
increase to additional paid-in capital. At December 31, 1993, the Company owned
4,000,000 shares or approximately 73% of the outstanding common stock of GTC.
-130-
131
On October 1, 1994, GTC acquired TSI Corporation ("TSI") in a merger
transaction in which GTC issued two-tenths (0.2) of one share of GTC common
stock for each share of TSI common stock, in a transaction accounted for as a
purchase. As a result of the acquisition, the Company's percentage ownership of
GTC common stock declined from approximately 73% to approximately 40%.
Accordingly, the General Division began accounting for its investment in GTC
under the equity method.
In February 1995, GTC exercised its option to sell to the General
Division 500,000 additional shares of GTC common stock at a price of $8.00 per
share. The $4.0 million acquisition cost has been added to the General
Division's equity investment in this subsidiary. In June 1995, the General
Division converted approximately $4.0 million of GTC debt into equity through
the acquisition of 1.3 million shares of GTC common stock. In July 1995, GTC
acquired Biodevelopment Laboratories, Inc. ("BDL"). In connection with the
transaction, the General Division issued approximately 34,000 shares of General
Division Stock to former stockholders of BDL in exchange for approximately
475,000 shares of newly issued GTC stock. In total, GTC issued approximately
1,207,000 shares of its common stock in the transaction, resulting in a decrease
in the General Division's interest in GTC to 48.2%. Also as part of the BDL
transaction, the Company guaranteed a $7.5 million line of credit from a
commercial bank in return for warrants to purchase 145,000 shares of GTC stock.
As of December 31, 1995, GTC had $6.0 million outstanding under this
line of credit. GTC had a working capital deficiency of approximately $25.1
million at December 31, 1995 and had an operating loss of approximately $4.1
million for the year then ended. Although GTC is actively seeking other
sources of financing and is directing substantial efforts to generating
positive cash flow, it is at least reasonably possible that GTC will not
generate sufficient cash flows to fund its ongoing operations and will not be
able to repay amounts outstanding under the line of credit. If this occurs, the
General Division will be responsible for at least a portion of the amounts
outstanding. (See Note R)
The fair market value of the GTC shares, based on quoted market prices,
was $27,601,000 at December 31, 1995. The Company reported equity in GTC's
losses of $1,810,000 in 1995. Following are condensed financial data of GTC:
-131-
132
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31,
-----------------------------------------
(DOLLARS IN THOUSANDS) 1995 1994 1993
-------------------------------------------------------------------------------------------
Revenues...................................... $38,406 $11,692 $ 3,222
Operating loss................................ (2,014) (5,231) (1,327)
Net loss...................................... (4,133) (5,284) (1,171)
DECEMBER 31,
-----------------------
(DOLLARS IN THOUSANDS) 1995 1994
-------------------------------------------------------------------------
Current assets................................ $16,409 $11,629
Noncurrent assets............................. 41,478 36,364
Current liabilities........................... 24,155 19,487
Noncurrent liabilities........................ 6,444 9,082
NOTE G INVENTORIES
Inventories at December 31 consist of the following:
(DOLLARS IN THOUSANDS) 1995 1994
------------------------------------------------------------------
Raw materials.......................... $12,527 $14,517
Work-in-process........................ 14,167 9,227
Finished products...................... 25,587 13,020
------- -------
$52,281 $36,764
======= =======
NOTE H PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment at December 31 includes the following
(DOLLARS IN THOUSANDS) 1995 1994
----------------------------------------------------------------------------------------
Plant and equipment...................................... $106,877 $ 63,084
Land and buildings....................................... 46,456 40,157
Leasehold improvements................................... 52,521 32,367
Furniture and fixtures................................... 7,530 8,405
Construction in progress................................. 177,903 198,117
-------- --------
391,287 342,130
Less accumulated depreciation.......................... (63,826) (46,784)
-------- --------
Property, plant and equipment, net....................... $327,461 $295,346
======== ========
Depreciation expense was $17,333,000, $13,459,000, and $10,857,000 in
1995, 1994 and 1993, respectively.
The General Division is constructing a mammalian cell production
facility in Boston, Massachusetts which will be used to produce a recombinant
form of Ceredase(R) enzyme ("Cerezyme(R)") and other products. The facility is
expected to cost approximately $151 million plus an additional $23 million of
Cerezyme(R)
-132-
133
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
process validation and optimization costs. The facility is expected to be
validated and placed into service in 1996. As of December 31, 1995, the General
Division had capitalized, and included in construction in progress,
approximately $151,000,000 of expenditures related to this building and
approximately $33,472,000 of process validation and optimization costs related
to this and other facilities. In 1995, 1994 and 1993, the General Division
capitalized approximately $9.0, $9.2 and $4.7 million of interest costs,
respectively, relating to this and other facility construction.
In June 1994, the General Division acquired its Mountain Road facility
in Framingham, Massachusetts for $26.9 million of which $25.1 million was
allocated to buildings and $1.8 million was allocated to land based on appraised
values. The General Division funded the purchase with $1.2 million in cash,
settlement of a $4.2 million note receivable (including accrued interest) from
the landlord of the facility and the proceeds of a $21.5 million term loan from
a bank (See Note J.)
NOTE I ACCRUED EXPENSES
Accrued expenses at December 31 include the following:
(DOLLARS IN THOUSANDS) 1995 1994
-----------------------------------------------------------------------------------
Professional fees........................................ $ 2,472 $ 924
Compensation............................................. 12,025 8,004
Royalties................................................ 6,606 4,949
Interest................................................. 1,857 2,361
Other.................................................... 15,109 11,528
------- -------
$38,069 $27,766
======= =======
NOTE J LONG-TERM DEBT AND LEASES
Long-Term Debt
Long-term debt at December 31 is comprised of the following:
(DOLLARS IN THOUSANDS) 1995 1994
----------------------------------------------------------------------------------------
Convertible subordinated notes........................... $100,000 $100,000
Note payable, bank (due 1/6/95........................... - 39,000
Mortgage note payable, matures
June 13, 1999........................................... 20,863 21,323
Mortgage note payable, matures
November 2014........................................... 3,356 3,409
Mortgage note payable, matures
January 1, 2008......................................... 747 808
Term notes payable....................................... 1,626 2,879
-------- --------
126,592 167,419
Less current portion..................................... (2,243) (41,020)
-------- --------
$124,349 $126,399
======== ========
In 1991, the Company issued 6 3/4% Convertible Subordinated
Notes due October 1, 2001 in the aggregate principal amount of $100,000,000. The
notes are convertible into General Division Stock and TR Stock at any time at a
conversion price of $52.875 and, under certain circumstances, may be redeemed by
the Company. Net proceeds from the debentures were $97,250,000. Deferred
financing costs of $2,750,000, classified as "Other noncurrent assets" on the
combined balance sheets, are being amortized to expense over the term of the
debt issue. As of December 31, 1995, the debentures had a market value of
-133-
134
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
approximately $125 million (See Note R).
On December 21, 1993, the Company borrowed $39,000,000, under a Credit
Agreement (the "Agreement") with a bank. The interest rate in effect at December
31, 1994 was 6.2875%. The loan was repaid January 6, 1995.
The mortgage note due June 1999 is collateralized by land and buildings
with a net book value of $29,108,000 at December 31, 1995, bears interest at
7.73% annually, and is payable monthly based on a twenty year direct reduction
amortization schedule, with the remaining principal due June 13, 1999.
The mortgage note maturing November 2014 is collateralized by land and
buildings with a net book value of $5,188,000 at December 31, 1995 and bears
interest at 10.5%. The mortgage note maturing January 2008 provides the bank
with a "call or review" feature at the end of the first 60 month period,
allowing the bank to adjust the note under specific circumstances. This note
bears interest at a variable rate of prime plus 1% and is collateralized by land
and fixtures. Principal and interest are payable monthly on both of these notes.
The Company maintains a $15.0 million line of credit with Fleet Bank of
Massachusetts, the entire amount, of which, remained available at December 31,
1995.
Operating Leases
Total rent expense under operating leases was $8,603,000, $8,578,000,
and $8,734,000 in 1995, 1994 and 1993 respectively. The General Division leases
facilities and personal property under certain operating leases in excess of one
year.
Future minimum payments due under the General Division's long-term
obligations and capital and operating leases are as follows:
LONG-TERM CAPITAL OPERATING
(DOLLARS IN THOUSANDS) OBLIGATIONS LEASES LEASES
--------------------------------------------------------------------------------------------
1996...................................... $ 11,160 $ 67 $10,643
1997...................................... 9,381 70 10,441
1998...................................... 9,376 118 9,575
1999...................................... 27,306 - 9,381
2000...................................... 7,253 - 7,744
Thereafter................................ 111,792 - 43,158
-------- ---- -------
Total minimum payments................. 176,268 255 90,942
Less: interest............................ (49,676) (98) -
-------- ---- -------
$126,592 $157 $90,942
======== ==== =======
NOTE K RESEARCH AND DEVELOPMENT AGREEMENTS
Revenues from research and development agreements with related parties
include the following:
(DOLLARS IN THOUSANDS) 1995 1994 1993
-------------------------------------------------------------------------------------------------
Fees for research and development
activities:
Neozyme I....................................... $ - $ - $ 6,299
Surgical Aids Partnership....................... - 913 8,378
Neozyme II...................................... 24,198 17,785 12,651
Research joint venture.......................... 2,560 2,185 2,150
------- ------- -------
-134-
135
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
$26,758 $20,883 $29,478
======= ======= =======
Neozyme I and II
In 1992, the General Division entered into a development contract with
Neozyme II whereby the General Division was engaged to perform all research,
development and clinical testing activities related to products and programs for
which Neozyme II was licensed. The General Division received $5,000,000 in 1992
under the technology license agreement pursuant to which the General Division
granted Neozyme II exclusive rights to manufacture and sell the products
developed under the technology license agreements.
The funds for Neozyme II's development contract were raised by the
sale of 2,415,000 units for net proceeds of $78,038,000. Each unit consisted of
one share of Neozyme II callable common stock, one Series N warrant and one
callable warrant to purchase one share of General Division Stock and .135 shares
of TR Stock. Included in accounts receivable as of December 31, 1995 and 1994
was $2,469,000 and $729,000, respectively, due from Neozyme II.
The General Division has an option to purchase all of the shares of
the Neozyme II callable common stock for cash, shares of General Division Stock
or any combination thereof (determined at Genzyme's sole discretion) at
$117.00 per share from January 1, 1996 through December 31, 1996, subject to
downward adjustment if exercised before December 31 in any exercise period. Due
to the uncertainties inherent in the very early stages of the research into
CFTR, management did not consider the exercise of the option probable and,
accordingly, charged to operations in 1992 the $16,905,000 appraised fair value
of this purchase option.
In December 1993, the General Division exercised its option to
purchase one of the two remaining research programs being funded by Neozyme I
(a special purpose accelerated research corporation created in 1990) for a
purchase price of $24,000,000 in cash. As part of the purchase, the General
Division retained $0.6 million to fund the costs of the Neozyme I dissolution
which occurred in 1994, and any future tax liabilities. This transaction was
accounted for as a purchase of in-process research and development and its
value charged to operations in 1993.
The Surgical Aids Partnership
In September 1989, the General Division entered into a development
contract valued at approximately $37,000,000 with the Surgical Aids Partnership
("the Partnership") to perform research and development of products based on
hyaluronic acid for use as surgical aids to reduce the incidence and severity of
postoperative adhesions. The General Division received a technology license fee
of $1,500,000 in November 1989 and was reimbursed its development costs plus 10%
through the first quarter of 1994 when the Partnerships funds were exhausted.
The General Partner believes that additional funds will be required to complete
the development, clinical testing and commercialization of the Partnership's
products. Although the General Division is not obligated to provide additional
funding, the Purchase Option (see below) terminates unless the General Division
commits on an annual basis to provide funding for continuation of the research
and development programs for the next twelve month period or until receipt of
FDA approval of one of the Partnership's products is obtained, whichever is
shortest. The General Division spent approximately $6.4 million and $6.5 million
on the Partnership's development programs in 1995 and 1994, respectively, and
has committed to fund the programs in 1996, expecting to spend approximately
$7.9 million (unaudited). Included in accounts receivable as of
-135-
136
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1994 was $199,000 due from the Partnership.
The General Division also entered into a joint venture agreement with
the Partnership to manufacture and market the Partnership's products, to share
in the profits, to make non-interest bearing loans for working capital
deficiencies, and to make capital contributions as deemed necessary by the
Partnership in connection with the business of the joint venture. The exact
amounts and timing of these expenditures and contributions cannot be determined
at this time.
The General Division also obtained an option (the "Purchase Option") to
purchase all of the outstanding partnership interests for a payment of
approximately $26,000,000 in cash, General Division Stock or a combination
thereof determined at Genzyme's sole discretion, plus future royalty payments.
The Purchase Option does not become exercisable until at least twenty-four
months after the first commercial sale of a product of the Partnership.
Deferred revenue from related parties at December 31 includes the
following:
(DOLLARS IN THOUSANDS) 1995 1994
-----------------------------------------------------------------------------
Neozyme II ........................................ - 186
Research joint venture ............................. - -
Other ............................................. 47 38
---- ----
$ 47 $224
==== ====
NOTE L GOODWILL IMPAIRMENT AND RESTRUCTURING COSTS
In the fourth quarter of 1993, the General Division recognized an
expense of $23.7 million to reduce the carrying value of intangibles to the
realizable value based on revised estimates of continuing value and future
benefits. The majority of the write-off, $21.9 million, related to the goodwill
recorded in connection with the acquisition of Genetic Design, Inc. ("GDI") in
June 1992. The goodwill write-off was based on an analysis of GDI's business
conducted in the fourth quarter of 1993, including the loss of significant state
public paternity testing contracts, which indicated that the environment for
public paternity testing, GDI's primary business market, had changed
significantly since the acquisition, and therefore called into question the
carrying value of the acquisition-related GDI goodwill. The business review
disclosed the development of a competitive environment which emphasized cost
rather than service and performance, intense price competition from a major
competitor, a general reduction in the ordering of identity tests due to
governmental budgetary restrictions and uncertainties as to the level of federal
funding of state testing activities, a cost structure at GDI which made it
difficult for GDI to continue as an effective competitor in a slow-growth,
cost-driven environment and the decreased likelihood of sufficient support in
Congress for passage of additional social legislation which would significantly
increase federal funding of state testing activities. These changed
circumstances resulted in a determination to reduce the carrying value of GDI
goodwill to zero at the end of 1993. The remaining $1.8 million of write-offs
consisted of approximately $1.1 million of patent rights resulting from the
purchase of Enzymatix Ltd. by Genzyme Ltd. (UK) and approximately $0.7 million
of intangible assets resulting from the acquisition of a clinical testing
laboratory by IG. Also in the fourth quarter of 1993, the General Division
incurred restructuring charges of $2.8 million related to the consolidation of
laboratory operations in its Diagnostic Services business. The expenses were
related to severance of $1.2 million for an estimated 45 employees; lease costs
of $0.8 million;
-136-
137
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
equipment movement and disposal of $0.2 million; costs incurred to restructure
the General Division's paternity product line of $0.2 million and other costs of
$0.4 million. All costs were cash expenditures in 1994. The restructuring plan
was undertaken to consolidate lab testing services into the General Division's
most cost-effective testing locations, transfer virtually all accounting
functions to the General Division's headquarters and streamline the paternity
product line at GDI.
NOTE M COMMITMENTS AND CONTINGENCIES
In December 1994, the General Division fully settled litigation brought
by Granada BioSciences, Inc., Houston, Texas, by payment of $1,980,000 in cash.
The dispute arose out of a contract between Granada R&D Ventures, a predecessor
of Granada BioSciences, and Integrated Genetics, prior to its merger with the
General Division in 1989, regarding development of recombinant fertility
hormones for cows and other animals.
From time to time the General Division has been subject to legal
proceedings and claims arising in connection with its business. At December 31,
1995, there were no asserted claims against the General Division which, in the
opinion of management, if adversely decided would have a material adverse effect
on the General Division's financial position and results of operations.
Genzyme's commitment to allocate up to $30 million from the General
Division to fund the operations of GTR was eliminated when GTR sold newly issued
TR Stock to the public in September, 1995; however, Genzyme has the right to
make voluntary allocations of up to $30 million from the General Division to
GTR. Such allocations would reduce the Funding Commitment on a dollar-for-dollar
basis and increase the number of TR Designated Shares at the rate of one share
for each $10 so allocated.
-137-
138
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE N INCOME TAXES
Income (loss) before income taxes and the related income tax expense
(benefit) are as follows for the year ended December 31:
(DOLLARS IN THOUSANDS) 1995 1994 1993
--------------------------------------------------------------------------------------------------------
Domestic (includes $15.2 million in charges
for purchased research and development and
acquisition expenses in 1995, and
$24 million in charges for purchased
research and development in 1993) ........................... $62,633 $42,968 $ 9,508
Foreign ..................................................... 2,696 3,567 1,760
------- ------- --------
Total .................................................. $65,329 $46,535 $ 11,268
======= ======= ========
Currently payable:
Federal .................................................. $18,780 $10,727 $ 14,276
State .................................................... 5,949 3,965 4,996
Foreign .................................................. 1,349 850 913
------- ------- --------
Total current ......................................... 26,078 15,542 20,185
Deferred:
Federal ................................................... 4,507 518 (14,638)
State ................................................... (79) 281 (2,735)
------- ------- --------
Total deferred ......................................... 4,428 799 (17,373)
------- ------- --------
Provision for income taxes ................................... $30,506 $16,341 $ 2,812
======= ======= ========
Provisions for income taxes were at rates other than the U.S. Federal
statutory tax rate for the following reasons:
1995 1994 1993
--------------------------------------------------------------------------------------------------
Tax at U.S. statutory rate ................................... 35.0% 35.0% 35.0%
Losses in foreign subsidiary and less
than 80%-owned subsidiaries with
no current tax benefit ...................................... 0.8 1.6 24.0
State taxes, net ............................................ 5.2 5.8 4.2
Federal rate change .......................................... - - (1.0)
Tax exempt interest .......................................... - - (4.0)
Foreign sales corporation .................................... (1.4) (2.8) (1.8)
Benefit of tax credits ....................................... - (1.9) (1.4)
Purchase accounting adjustments .............................. - - 1.8
Current year realization of tax
benefits of purchased technology and
purchase options ........................................... - - (9.1)
Other, net .................................................. 2.1 (2.7) 2.2
Utilization of operating loss
carryforwards ............................................... (3.8) - (0.5)
---- ----- -----
Effective tax rate before certain charges .................. 37.9 35.0 49.4
Gross charge for purchased research
and development and purchase options
net of related deferred tax benefits ........................ 8.8 - (24.4)
----- ----- -----
46.7 35.0 25.0
Allocated tax benefits generated by
Tissue Repair Division ...................................... (13.6) (4.0) (84.9)
----- ----- -----
Effective tax rate attributable to
General Division Stockholders.............................. 33.1% 31.0% (59.9%)
===== ===== =====
-138-
139
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
At December 31 the components of net deferred tax assets were as
follows:
(DOLLARS IN THOUSANDS) 1995 1994
---------------------------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforwards .......................... $ 10,216 $ 15,908
Intangible amortization ................................... 16,100 17,575
Purchase of in-process research
and development ......................................... 15,666 15,687
Unrealized capital losses.................................. 2,561 5,587
Other .................................................... 9,609 3,977
Allocation of tax benefit from
Tissue Repair Division .................................. 8,415 9,055
-------- --------
Gross deferred tax asset ............................. 62,567 67,789
Valuation allowance ....................................... (20,637) (32,233)
-------- --------
Net deferred tax asset ............................... 41,930 35,556
Deferred tax liabilities:
Depreciable assets ........................................ (10,556) (3,011)
-------- --------
Net deferred tax asset ............................... $ 31,374 $ 32,545
======== ========
At December 31, 1995 and 1994, valuation allowances of $20.6 million
and $32.2 million, respectively, were recorded to offset a portion of the
deferred tax assets related to the realization of net operating loss
carryforwards, and deductions relating to the purchase of in-process research
and development and the future disposition of certain stock purchase options.
Realization of the net deferred tax asset is dependent on generating sufficient
taxable income prior to the expiration of loss carryforwards. Although
realization is not assured, management believes that it is more likely than not
that all of the net deferred tax assets will be realized. The amount of the
deferred tax asset considered realizable, however, could be reduced in the near
term if estimates of future taxable income during the carryforward period are
reduced.
A total of $1.5 million of the valuation allowance relates to tax
assets arising from the IG Labs acquisition (See Note D). If any portion of this
tax asset is ultimately realized, the remaining goodwill relating to the IG Labs
acquisition will be reduced accordingly.
At December 31, 1995, the General Division had U.S. net operating loss
carryforwards of $26.4 million for income tax purposes. These carryforwards
expire from 2000 to 2010. Utilization of tax net operating loss carryforwards
may be limited under section 382 of the Internal Revenue Code of 1986.
At December 31, 1995, the General Division also had U.K. operating loss
carryforwards for income tax purposes of approximately $2.9 million which are
available indefinitely to offset future taxable income in the U.K.
NOTE O BENEFIT PLANS
The General Division has defined-benefit pension plans covering
substantially all the employees of its foreign subsidiaries. Pension expense for
1995, 1994 and 1993 was $498,000, $266,000 and $206,000, respectively. Pension
costs are funded as accrued. Actuarial and other disclosures regarding the plans
are not presented because they are not material.
Genzyme has a domestic employee savings plan under Section 401(k) of
the Internal Revenue Code covering substantially all employees of the General
Division. The plan allows employees to make contributions up to a specified
percentage of their compensation, a portion of which are matched by the General
-139-
140
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
Division. The General Division contributed $660,000, $587,000, and $342,000 to
the plan in 1995, 1994 and 1993, respectively.
-140-
141
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE P FINANCIAL INFORMATION BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS AND
SUPPLIERS
The General Division operates in one industry, the human healthcare
industry and manufactures and markets its products in two major geographic
areas, the United States and Europe. The General Division's principal
manufacturing facilities are located in the United Kingdom and the United
States.
The General Division purchases products from its United Kingdom
subsidiaries for sale to United States customers. Transfer prices from the
foreign subsidiaries are intended to allow the United States parent to produce
profit margins commensurate with its sales and marketing effort. The
Netherlands subsidiary is the European distributor of the General Division's
therapeutic products. Certain information by geographic area follows (dollars
in thousands):
THE
UNITED NETHER- ELIMI- COMBI-
STATES LANDS OTHER NATION NATION
------ ------- ----- ------ ------
1995
Net sales -
unaffiliated customers ..... $ 247,138 $ 70,532 $ 33,933 $ -- $ 351,603
Transfers between geo-
graphic areas .............. 74,697 -- 23,658 (98,355) --
--------- --------- --------- --------- ---------
321,835 70,532 57,591 (98,355) 351,603
Pre-tax income .............. 65,941 836 1,852 (3,300) 65,329
Net income .................. 45,856 540 584 (3,300) 43,680
Assets ...................... 873,252 27,703 80,287 (126,656) 854,586
Liabilities ................. 156,650 26,652 12,003 -- 195,305
1994
Net sales -
unaffiliated customers ..... $ 224,331 $ 38,535 $ 25,465 $ -- $ 288,331
Transfers between geo-
graphic areas .............. 38,590 -- 12,784 (51,374) --
--------- --------- --------- --------- ---------
262,921 38,535 38,249 (51,374) 288,331
Pre-tax income .............. 44,295 578 3,155 (1,493) 46,535
Net income .................. 28,627 417 2,643 (1,493) 30,194
Assets ...................... 608,760 16,384 69,130 (64,130) 630,144
Liabilities ................. 204,766 15,704 11,713 -- 232,183
1993
Net sales -
unaffiliated customers ..... $ 214,822 $ -- $ 19,055 $ -- $ 233,877
Transfers between geo-
graphic areas .............. 1,998 -- 10,640 (12,638) --
--------- --------- --------- --------- ---------
216,820 -- 29,695 (12,638) 233,877
Pre-tax income .............. 9,050 165 1,595 458 11,268
Net income .................. 7,151 104 743 458 8,456
Assets ...................... 538,220 566 45,608 (52,037) 532,357
Liabilities ................. 203,367 384 4,215 -- 207,966
-141-
142
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
Substantially all revenue from research and development contracts is
earned in the United States. Entities comprising Other include the Division's
operations in the United Kingdom, Belgium, Japan, Switzerland, Italy, France and
Germany. Export sales from the United States were $20,539,000, $23,902,000 and
$33,343,000 in 1995, 1994 and 1993, respectively. Export sales by the
Netherlands subsidiary amounted to $66,216,000 and $35,973,000 in 1995 and 1994
respectively. In 1995, 1994 and 1993, the Company marketed its Ceredase(R)/
Cerezyme(R) enzyme product directly to physicians, hospitals and treatment
centers, and sold products representing approximately 14%, 17% and 18%,
respectively, of net revenue to an unaffiliated distributor.
NOTE Q QUARTERLY RESULTS (UNAUDITED)
Summarized quarterly financial data (in thousands of dollars except
per share amounts) for the years ended December 31, 1995, 1994 and 1993 are
displayed in the following table.
1ST 2ND 3RD 4TH
QTR QTR QTR QTR
--- --- --- ---
1995
Net sales ................................................ $87,159 $92,358 $94,484 $104,562
Gross profit ............................................ 47,378 48,066 53,100 57,958
Net income (4)............................................ 11,998 12,967 16,092 2,623
Income per share (1):
Primary ............................................. 0.43 0.46 0.53 0.08
Fully diluted ........................................ 0.40 0.43 0.49 0.07
1994
Net sales ................................................ $73,282 $75,378 $79,180 $ 82,887
Gross profit ............................................ 40,049 40,101 41,407 42,432
Net income (3) ........................................... 9,877 9,622 10,065 2,490
Income per share (1):
Primary .............................................. 0.38 0.37 0.38 0.09
Fully diluted......................................... 0.35 0.35 0.35 0.09
1993
Net sales ................................................ $61,651 $ 67,801 $69,674 $ 66,561
Gross profit ............................................ 32,712 35,489 35,279 31,135
Net income (loss) (2)..................................... 10,965 11,703 11,635 (16,283)
Income (loss) per share
(pro forma) (1).......................................... 0.42 0.44 0.44 (0.67)
- -------------------
(1) Cumulative quarterly income per share data does not equal the annual amounts
due to changes in the average common and common equivalent shares outstanding.
(2) Includes charges in the fourth quarter of $50.5 million (See Notes K and L).
(3) Includes charges in the fourth quarter of 1994 of $11.4 million (See Notes F
and M) for the write down of investments and the settlement of a lawsuit and an
$11.2 million charge for acquired incomplete technology. (See Note D).
(4) Includes charges in the fourth quarter of 1995 of $14.2 million for acquired
incomplete technology. (See Note B).
NOTE R SUBSEQUENT EVENTS
-142-
143
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
In January 1996, Genzyme made a conditional offer to acquire
substantially all the assets of the Partnership for General Division Stock
valued at $93.0 million.
In February 1996, GTC obtained a short-term loan in the amount of
$950,000 from Genzyme. The loan is due on March 31, 1996 and accrues interest at
a rate of 6 1/2% per annum.
In February 1996, the General Division signed a definitive agreement to
acquire Genetrix Inc., a privately held genetic testing laboratory based in
Phoenix, Arizona, in a tax-free exchange of General Division Stock valued at
approximately $36.8 million. Genetrix Inc. will be merged with the General
Division's Integrated Genetics diagnostic services business. The transaction
will be accounted for as a pooling of interests.
In February 1996, the General Division announced a planned redemption
of its 6 3/4% Convertible Subordinated Notes. All holders elected to convert
their notes into shares of General Division Stock and TR Stock. Holders of the
notes received 18.913 shares of General Division Stock and 2.553 shares of TR
Stock in conversion of each $1,000 note. Supplementary earnings per share for
the General Division which gives effect to the conversion of the notes as if
such conversion took place at the beginning of each period presented, is equal
to fully diluted earnings per share.
In March 1996, an advisory panel to the U.S. Food and Drug
Administration ("the FDA") recommended that Genzyme be granted approval to
market one of the HA Products, Seprafilm(TM) bioresorbable membrane. The panel's
recommendation will be considered by the FDA in its final review of Genzyme's
premarket approval application.
In March 1996, GTC entered into a Convertible Debt and Development
Funding Agreement with the General Division under which the General Division
agreed to provide a revolving line of credit in the amount of $10 million and
has agreed to fund development costs of the Antithrombin III ("AT-III") program
through March 31, 1997. Under the Agreement GTC granted to the General Division
co-marketing rights to AT-III in all territories other than Asia subject to
negotiation and execution of a development and supply agreement between the
parties prior to March 31, 1997. The line of credit carries a rate of 7% and is
convertible into GTC's Common Stock at the average market price for the 20 day
period ending two days before the Conversion at GTC's option to maintain GTC's
tangible net worth at the end of each quarter at a level between $4.0 million
and $4.2 million or by Genzyme at any time for up to the full amount
outstanding.
In March 1996, the Board of Directors voted, subject in each case to
the approval of the stockholders, to adopt two amendments to the Company's 1990
Equity Incentive Plan (the "Equity Plan"). These amendments would increase the
aggregate number of shares of General Division Stock that may be subject to
grants under the Equity Plan from 7,600,000 to 9,900,000 subject to adjustment
for stock splits, stock dividends and certain transactions affecting the
Company's capital stock.
-143-
144
GENZYME GENERAL DIVISION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
==========================================================================================================
Column A Column B Column C Column D Column E
- ----------------------------------------------------------------------------------------------------------
Additions
----------------------
Balance at Charged to Charged Balance
beginning Costs and to Other at end
Description of period Expenses Accounts Deductions of Period
- ----------------------------------------------------------------------------------------------------------
Year ended December 31, 1995:
Allowance for doubtful accounts....... $5,992,300 $5,180,000 $3,338,500(1) $7,833,800
Inventory Reserve..................... $1,131,000 $2,920,700 $ 969,500 $3,082,200
Year ended December 31, 1994:
Allowance for doubtful accounts....... $5,317,600 $4,330,800 $3,656,100(1) $5,992,300
Inventory Reserve..................... $1,321,500 $ 514,000 $ 704,500 $1,131,000
Year ended December 31, 1993:
Allowance for doubtful accounts....... $7,888,900 $2,571,300(1) $5,317,600
Inventory Reserve..................... $1,272,800 $2,163,800 $2,115,100 $1,321,500
- -----------
(1) Uncollectible accounts written off, net of recoveries.
-144-
145
GENZYME TISSUE REPAIR DIVISION
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of GENZYME CORPORATION:
We have audited the accompanying combined balance sheets of
Genzyme Tissue Repair Division (as described in Note A) as of December
31, 1995 and 1994, and the related combined statements of operations
and cash flows and the combined financial statement schedule for each
of the three years in the period ended December 31, 1995. The combined
financial statements and financial statement schedule are the
responsibility of Genzyme Corporation's management. Our responsibility
is to express an opinion on these combined financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the combined financial statements of Genzyme
Tissue Repair Division present fairly, in all material respects, the
financial position of Genzyme Tissue Repair Division as of December 31,
1995 and 1994 and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles. In addition,
in our opinion, the combined financial statement schedule taken as a
whole presents fairly, in all material respects, the information
required to be included therein.
As more fully described in Note A to these financial
statements, Genzyme Tissue Repair Division is a business group of
Genzyme Corporation; accordingly, the combined financial statements of
Genzyme Tissue Repair Division should be read in conjunction with the
audited consolidated financial statements of Genzyme Corporation and
Subsidiaries.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
March 1, 1996, except as to Note O
which is March 26, 1996
-145-
146
GENZYME TISSUE REPAIR DIVISION
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) DECEMBER 31,
- ------------------------------------------------------------------------------------
1995 1994 1993
---- ---- ----
Revenues:
Net service sales............................. $ 5,220 $ 324 $ -
Related party revenues:
Technology license fee..................... - - 2,000
Revenues from research and development
contracts................................. - - 2,684
-------- -------- --------
5,220 324 4,684
Operating costs and expenses:
Cost of services sold......................... 4,731 287 -
Selling, general and administrative........... 12,927 964 701
Research and development (including research
and development related to contracts)........ 10,938 3,638 2,805
Purchase of in-process research and
development.................................. - 11,215 25,000
-------- -------- --------
28,596 16,104 28,506
-------- -------- --------
Operating loss ................................... (23,376) (15,780) (23,822)
Other income and (expenses):
Investment income............................. 1,386 29 -
Interest expense.............................. (40) - -
-------- -------- --------
1,346 29 -
-------- -------- --------
Loss before income taxes.......................... (22,030) (15,751) (23,822)
Provision for income taxes........................ - - (38)
-------- -------- --------
Net loss.......................................... (22,030) (15,751) (23,860)
Tax benefit allocated to General
Division ........................................ - - (255)
-------- -------- --------
Net loss attributable to Tissue Repair Stock...... $(22,030) $(15,751) $(24,115)
======== ======== ========
Per Tissue Repair Division Common Share:
Net loss...................................... $ (2.28) $ (4.40) $ (7.43)
======== ======== ========
Weighted average shares outstanding........... 9,659 3,578 3,245
======== ======== ========
The accompanying notes are an integral part of these
combined financial statements.
-146-
147
GENZYME TISSUE REPAIR DIVISION
COMBINED BALANCE SHEETS
(AMOUNTS IN THOUSANDS) DECEMBER 31,
- --------------------------------------------------------------------------------
1995 1994
---- ----
ASSETS
Current Assets:
Cash and cash equivalents.............................. $40,741 $16,993
Short-term investments................................. 6,832 5,918
Accounts receivable, less allowance of $325 in 1995
and $177 in 1994...................................... 1,838 1,486
Inventories............................................ 761 76
Prepaid expenses and other current assets.............. 186 284
------- -------
Total current assets................................. 50,358 24,757
Property, plant and equipment, net........................ 1,962 1,456
Other Assets:
Long-term investments.................................. - 1,897
Other noncurrent assets................................ 329 325
------- -------
329 2,222
------- -------
$52,649 $28,435
======= =======
LIABILITIES AND DIVISION EQUITY
Current Liabilities:
Accounts payable....................................... $ 2,432 $ 528
Accrued expenses....................................... 1,349 3,220
Payable to Genzyme General Division.................... 2,034 171
Current portion of capital lease obligations........... 169 281
------- -------
Total current liabilities............................ 5,984 4,200
Noncurrent Liabilities:
Capital lease obligations.............................. - 174
Other noncurrent liabilities........................... 739 748
------- -------
739 922
Commitments and Contingencies (Notes D, J, M and O)....... - -
Division Equity (Note C).................................. 45,926 23,313
------- -------
$52,649 $28,435
======= =======
The accompanying notes are an integral part of these
combined financial statements.
-147-
148
GENZYME TISSUE REPAIR DIVISION
COMBINED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------
1995 1994 1993
---- ---- ----
OPERATING ACTIVITIES:
Net loss............................................ $(22,030) $(15,751) $(23,860)
Reconciliation of net loss to net
cash used by operating activities:
Depreciation and amortization.................... 628 26 -
Loss on disposal of assets....................... 160 - -
Non-cash compensation expense.................... 882 - -
Accrued interest/amortization on bonds........... (76) (45) -
Provision for bad debts.......................... 231 - -
Purchase of in-process research and
development for stock........................... - 11,215 -
Increase (decrease) in cash from working capital:
Accounts receivable........................... (583) (204) -
Inventories................................... (685) 309 -
Prepaid expenses and other current assets..... 98 18 -
Accounts payable, accrued expenses
and deferred revenue......................... 33 1,666 (149)
Payable to Genzyme General Division........... 1,863 171 -
-------- -------- --------
Net cash flow used by operating activities.... (19,479) (2,595) (24,009)
INVESTING ACTIVITIES:
Cash acquired in aquisition for stock, net.......... - 5,581 -
Purchases of investments............................ (16,687) - -
Sales and maturities of investments................. 17,991 - -
Purchase of property, plant & equipment............. (1,294) - -
Investments in non-current assets................... (13) - -
-------- -------- --------
Net cash flow provided (used) by investing
activities................................... (3) 5,581 -
FINANCING ACTIVITIES:
Proceeds from issuance of common stock.............. 43,516 14 -
Net cash from Genzyme............................... - 13,993 24,009
Payment of debt and capital leases.................. (286) - -
-------- -------- --------
Net cash provided by financing activities..... 43,230 14,007 24,009
-------- -------- --------
Increase in cash and cash equivalents................... 23,748 16,993 -
Cash and cash equivalents, beginning of period.......... 16,993 - -
-------- -------- --------
Cash and cash equivalents, end of period................ $ 40,741 $ 16,993 $ -
======== ======== ========
The accompanying notes are an integral part of these
combined financial statements.
-148-
149
GENZYME TISSUE REPAIR DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business: Genzyme Tissue Repair Division ("GTR"), a division of Genzyme
Corporation (the "Company" or "Genzyme"), develops and commercializes products
and services for the prevention or repair of tissue injury as a consequence of
accidental or disease related trauma. GTR uses cell, enzyme, growth factor and
matrix technologies to develop products that will augment or positively modify
naturally-occurring biological processes involved in tissue repair.
Basis of Presentation: The approval effective December 16, 1994 (the
"Effective Date") by the stockholders of Genzyme of the Genzyme Stock Proposal
as described in Genzyme's Prospectus/Proxy Statement dated November 10, 1994
resulted in the redesignation of Genzyme's common stock. The outstanding shares
of Genzyme common stock were redesignated as General Division Common Stock
("General Division Stock") on a share-for-share basis and a second class of
common stock, designated as Tissue Repair Division Common Stock ("TR Stock") was
distributed on the basis of .135 of one share of TR Stock for each share of
Genzyme's previous common stock held by stockholders of record on October 14,
1994. General Division Stock and TR Stock provide stockholders with separate
securities which are intended to reflect the performance of the Genzyme General
Division (the "General Division") and GTR, respectively.
Net income (loss) per common share has been included in the Statements
of Operations. For the purpose of computing net loss per common share of TR
Stock, the number of shares of TR Stock prior to the Effective Date are assumed
to be the total number of shares of Genzyme common stock multiplied by .135.
Dividends to the holders of TR Stock will be limited to the lesser of
funds of Genzyme legally available for the payment of dividends and the
Available Tissue Repair Dividend Amount, as defined in Genzyme's Articles of
Organization, as amended. Although there is no requirement to do so, the Board
would declare and pay dividends on TR Stock, if any, based primarily on the
earnings, financial condition, cash flow and business requirements of GTR. There
is currently no intention of paying dividends.
Genzyme, subject to certain conditions, has the right to exchange each
outstanding share of TR Stock for any combination of cash and/or shares of
General Division Stock at a 30% premium over Fair Market Value. In addition,
following a disposition of all or substantially all assets of GTR, the shares of
TR Stock are subject to mandatory exchange by Genzyme for cash and/or shares of
General Division Stock at a 30% premium over Fair Market Value as determined by
the trading prices during a specified period prior to public announcement of the
disposition. Shares of General Division Stock are not subject to either optional
or mandatory exchange.
Holders of General Division Stock and TR Stock each are entitled to one
vote per share and vote together as a single class on all matters as to which
common stockholders generally are entitled to vote. Except in limited
circumstances provided under Massachusetts law and in Genzyme's Articles of
Organization, as amended, and in the management and accounting policies adopted
by Genzyme's Board of Directors (the "Board"), holders of each class of common
stock will have no rights to vote on matters as a separate class. Separate
meetings of the holders of each class of common stock will not be held. If, when
a stockholder vote is taken on any matter as to which a separate vote by either
class is not required and the holders of either class of common stock would have
more than the number of votes required to approve any such matter, the holders
of that class will control the outcome of the vote on that matter.
-149-
150
GENZYME TISSUE REPAIR DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
The financial statements of GTR include the financial position, results
of operations and cash flows of the tissue repair operations of Genzyme. GTR's
financial statements are prepared using the amounts included in Genzyme's
consolidated financial statements. Corporate allocations reflected in these
financial statements are determined based upon methods which management believes
to be reasonable (see Note B).
Genzyme provides holders of TR Stock separate financial statements,
management's discussion and analysis, descriptions of businesses and other
relevant information for GTR in addition to consolidated financial information
of Genzyme. Notwithstanding the attribution of assets and liabilities (including
contingent liabilities) between the General Division and GTR for the purposes of
preparing their respective historical and future financial statements, this
attribution and the change in the capital structure of Genzyme as a result of
the approval of the Genzyme Stock Proposal does not affect legal title to the
assets or responsibility for the liabilities of Genzyme or any of its
subsidiaries. Holders of TR Stock are shareholders of Genzyme, which continue to
be responsible for all of its liabilities. Liabilities or contingencies of
either division that affect Genzyme's resources or financial condition could
affect the financial condition or results of operations of both divisions.
Accordingly, Genzyme's consolidated financial statements should be read in
connection with GTR's financial statements.
Except as stated in the amended articles, the accounting policies
applicable to the preparation of the financial statements of GTR may be modified
or rescinded at the sole discretion of the Board without the approval of the
shareholders, although there is no intention to do so.
Principles of Combination: The accompanying combined financial
statements reflect the combined accounts of all of Genzyme's tissue repair
businesses. All material intercompany items and transactions have been
eliminated in combination.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
certain estimates and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.
Cash and Cash Equivalents: Cash equivalents, consisting principally of
money market funds and municipal notes purchased with initial maturities of
three months or less, are valued at cost plus accrued interest, which
approximates market.
Investments: Short-term investments include all investments with
remaining maturities of twelve months or less. Long-term investments include all
investments with remaining maturities greater than twelve months. GTR classifies
its equity investments as available-for-sale and its investments in debt
securities as either held-to-maturity or available-for-sale based on facts and
circumstances present at the time the investments are purchased. As of December
31, 1995, the Company classified all investments, consisting solely of debt
securities, as available-for-sale (See Note F - Investments).
Fair Value of Financial Instruments: The fair value of investments is
obtained from market quotations and is disclosed in Note F.
Inventories: Inventories are valued at the lower of cost (first-in,
-150-
151
GENZYME TISSUE REPAIR DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
first-out method) or market.
Property, Plant and Equipment: Property, plant and equipment are stated
at cost. Provision for depreciation is computed using the straight-line method
over the estimated useful lives of the assets (three to ten years for plant and
equipment, five to seven years for furniture and fixtures, and twenty-five to
forty years for buildings). Leasehold improvements are amortized over the lesser
of the useful life or the term of the respective lease.
Revenue Recognition: GTR's two commercial tissue repair services are
autologous epidermal skin grafts produced using the Epicel[SM] Service and the
culturing of autologous cartilage cells using the CARTICEL[SM] Service. GTR
recognizes service revenue at the time skin grafts or cartilage cells are
shipped. Cancellation charges may be assessed upon the cancellation of an
Epicel[SM] order. These charges are dependent upon order size and stage of skin
graft growth and are recognized upon order cancellation and when collection is
determined to be probable. Revenues from research and development contracts are
recognized over applicable contractual periods as specified by each contract.
Non-refundable technology license fees are recognized as revenue upon
consummation of the related agreement.
Research and Development: Research and development costs are expensed
in the period incurred. Costs of purchased technology which management believes
has not demonstrated technological feasibility and for which there is no
alternative future use are charged to expense in the period of purchase.
Income Taxes: GTR uses the asset and liability method of accounting for
deferred income taxes. The provision for income taxes includes income taxes
currently payable and those deferred because of temporary differences between
the financial statement and tax bases of assets and liabilities. See Note B for
allocation of Genzyme's income taxes to GTR.
Net Loss Per Share: The method of calculating earnings per share for TR
Stock reflects the terms of the Articles of Organization, as amended, which
provide that dividends may be declared and paid only out of the lesser of funds
of Genzyme legally available therefore and each division's Available Dividend
Amount, as defined. For the purpose of computing net income per common share of
TR Stock for periods prior to December 12, 1994, the number of shares and share
equivalents of TR Stock prior to the Effective Date are assumed to be the same
as the total number of shares and share equivalents of Genzyme common stock
multiplied by .135. GTR computes income per share by dividing the income
attributable to TR Stock by the weighted average number of shares of TR stock
and dilutive common stock equivalents and other potentially dilutive securities
outstanding during the applicable period. Income attributable to TR Stock equals
GTR's net income or loss for the relevant period determined in accordance with
generally accepted accounting principles in effect at such time, adjusted by the
amount of tax benefits allocated to or from GTR pursuant to the accounting
policies adopted by the Board. The accounting policies provide that, as of the
end of any fiscal quarter of Genzyme, any projected annual tax benefit
attributable to any division that cannot be utilized by such division to offset
or reduce its current or deferred income tax expense may be allocated to the
other division without any compensating payment or allocation. Net loss
attributable to TR Stock and net loss per common and common equivalent share for
the years ended December 31, 1993 and 1994 give effect to the provisions of the
management and accounting policies adopted by the Board in connection with the
creation of GTR and, accordingly, are pro forma presentations.
Accounting for Stock-Based Compensation: Statement of Financial
Accounting
-151-
152
GENZYME TISSUE REPAIR DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123"), will
require the Company to either elect expense recognition under SFAS 123 or its
disclosure-only alternative for stock-based employee compensation. The expense
recognition provision encouraged by SFAS 123 would require fair value-based
financial accounting to recognize compensation expense for employee stock
compensation plans. SFAS 123 must be adopted in the Company's fiscal 1996
financial statements with comparable disclosures for the prior year. The Company
has determined that it will elect the disclosure-only alternative permitted
under SFAS 123. The Company will be required to disclose pro forma net income
and pro forma earnings per share in the footnotes using the fair value based
method beginning in fiscal 1996 with comparable disclosures for fiscal 1995. The
Company has not determined the impact of these pro forma adjustments to its net
income or earnings per share.
Financial Instruments: Financial instruments that potentially subject
the Company to significant concentrations of credit risk consist principally of
cash and cash equivalents, current and non-current investments. The Company
generally invests its cash investments in investments-grade securities.
Uncertainties: The Company is subject to risks common to companies in
the Biotechnology industry including, but not limited to, development by the
Company or its competitors of new technological innovations, dependence on key
personnel, protection of proprietary technology, and compliance with FDA
government regulations.
NOTE B RELATED PARTY TRANSACTIONS
The following policies may be modified or rescinded by action of the
Board, or the Board may adopt additional policies, without approval of the
shareholders of Genzyme, although the Board has no present intention to do so.
Genzyme allocates certain corporate general and administrative expenses,
research and development expense and income taxes in accordance with the
policies described below.
Financial Matters: As a matter of policy, the Company manages the
financial activities of the General Division and GTR on a centralized basis.
These financial activities include the investment of surplus cash; the issuance,
repayment and repurchase of short-term and long-term debt and the issuance and
repurchase of common stock. At December 31, 1995, the Company attributed none of
its short-term and long-term debt to GTR based upon the specific purpose for
which the debt was incurred and the cash flow requirements of GTR. Accordingly,
none of the Company's interest expense has been allocated to GTR. The Company
believes this method of allocation to be equitable and a reasonable estimate of
such costs as if GTR operated on a stand-alone basis.
To the extent borrowings are deemed to occur between GTR and the
General Division, intercompany accounts have been established bearing interest
at the rate in effect from time to time under the Company's unsecured credit
lines or, if no such credit lines exist, at the prime rate charged by The First
National Bank of Boston from time to time. To date no such borrowings have
occurred, however at December 31, 1995 GTR owed the General Division $2.0
million for services rendered in the normal course of business.
Shared Services: Genzyme's corporate general and administrative
functions and certain sales and marketing efforts related to foreign market
penetration are performed by the General Division. General, administrative,
sales and marketing expenses have been allocated to GTR based upon utilization
of such services as if the General Division and GTR operated on a stand-alone
basis.
-152-
153
GENZYME TISSUE REPAIR DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Management believes that such allocation is a reasonable estimate of such
expenses. These allocations for the years ended December 31, 1995, 1994 and 1993
were $4,355,000, $833,000 and $701,000, respectively. In addition, costs
incurred by the General Division related to research and development for GTR
products are charged to GTR. These charges for the years ended December 31,
1995, 1994 and 1993 were $4,730,000 $3,331,000 and $2,805,000, respectively.
Income Taxes: GTR is included in the consolidated U.S. federal income
tax return filed by Genzyme. Genzyme allocates current and deferred taxes to its
divisions by applying the provisions of FAS 109 to each division as if it were a
separate taxpayer. Accordingly, the realizability of deferred tax assets is
assessed at the GTR level. The sum of the amounts calculated for individual
divisions of Genzyme may not equal the consolidated amount under this approach.
GTR reports current and deferred tax assets and liabilities as a net
intercompany payable or receivable.
Under the terms of the Genzyme Stock Proposal, as of the end of any
fiscal quarter of Genzyme Corporation, any projected tax benefit attributable to
any division that cannot be utilized by such division to offset or reduce its
current or deferred income tax expense may be allocated to any other division
without any compensating payment or allocation. The treatment of such allocation
for purposes of earnings per share computation is discussed in Note A.
Inter-Division Asset Transfers. The Board may at any time and from time
to time reallocate any program, product or other asset from one division to any
other division. All such reallocations will be done at fair market value,
determined by the Board, taking into account, in the case of a program under
development, the commercial potential of the program, the phase of clinical
development of the program, the expenses associated with realizing any income
from the program, the likelihood and timing of any such realization and other
matters that the Board and its financial advisors deem relevant. The
consideration for such reallocation may be paid by one Division to another in
cash or, in lieu of cash or other consideration, the Board may elect to account
for a reallocation of assets from GTR to the General Division as an increase in
the General Designated Shares and a reallocation of assets from the General
Division to GTR as either an increase in the TR Designated Shares or a reduction
in the General Designated Shares, if any, except that a reallocation of assets
from GTR to the General Division may not be accounted for as an increase in
General Designated Shares without a class vote of the holders of TR Stock.
NOTE C DIVISION EQUITY
The following analyzes the equity of GTR for the periods presented:
(AMOUNTS IN THOUSANDS) DECEMBER 31,
------------------------------------------------------------------------------------------------
1995 1994 1993
---- ---- ----
Balance at beginning of period........... $ 23,313 $ - $ (149)
Net loss................................. (22,030) (15,751) (23,860)
Shares issued in connection with
acquisition of BioSurface............... - 25,312 -
Shares issued in connection with
Employee Stock Purchase Plan............ 983 14 -
Exercise of stock options................ 241
Shares issued in public offering......... 42,292
Compensation expense..................... 882
Unrealized gain(loss) on investments..... 245 (255) -
-153-
154
GENZYME TISSUE REPAIR DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Net cash from Genzyme.................... - 13,993 24,009
-------- -------- --------
Balance at end of period............... $ 45,926 $ 23,313 $ -
======== ======== ========
Immediately prior to the Effective Date, as defined in Note A,
approximately 15,791,000 shares of Genzyme common stock were reserved for
issuance under the Company's 1990 Equity Incentive Plan, 1988 Director Stock
Option Plan, 1990 Employee Stock Purchase Plan, outstanding warrants (the
"Warrants"), and conversion of the 6 3/4% Convertible Subordinated Notes Due
2001 (the "Notes").
Pursuant to antidilution provisions in the agreements covering the
options, Genzyme has adjusted each option outstanding on the Effective Date to
provide for separation of the option into an option exercisable for General
Division Stock and an option exercisable for the number of shares of TR Stock
that the holder would have received if the holder had exercised the option
immediately prior to the Effective Date (with any resultant fractional shares of
TR Stock rounded down to the nearest whole number). Upon exercise of these
options, all proceeds will be allocated to the General Division (See TR
Designated Shares).
The Warrants provide that the holder of the Warrant is entitled to
receive the number of shares of General Division Stock and TR Stock upon
exercise of the Warrant that the holder would have received if the holder had
exercised the Warrant immediately prior to the Effective Date.
Pursuant to the indenture under which the Notes were issued, the
conversion privilege of the Notes was adjusted so that the holder of a Note
converted after the Effective Date will receive, in addition to the shares of
General Division Stock into which the Note is convertible, the same number of
shares of TR Stock as the holder would have received had the holder converted
the Note immediately prior to the Effective Date.
In September 1995, GTR sold 3,000,000 shares of TR Stock to the public
at a price of $15 per share for net proceeds of $42.4 million after
underwriting discounts and commissions.
At December 31, 1995, approximately 3,478,585 shares of TR Stock were
reserved for issuance under the 1990 Equity Incentive Plan as amended, the 1988
Director Stock Option Plan as amended, the 1990 Employee Stock Purchase Plan as
amended, outstanding warrants, and conversion of the Notes.
Preferred Stock. Shares of Preferred Stock may be issued from time to
time in one or more series. The Board of Directors may determine, in whole or in
part, the preferences, voting powers, qualifications and special or relative
rights or privileges of any such series before the issuance of any shares of
that series. The Board of Directors shall determine the number of shares
constituting each series of Preferred Stock and each series shall have a
distinguishing designation.
Stock Options. Pursuant to the Company's 1990 Equity Incentive Plan as
amended (the "Plan"), options may be granted to purchase an aggregate of
2,000,000 shares of TR Stock. The Plan allows the granting of incentive stock
and nonstatutory stock options at not less than fair market value at date of
grant, and stock appreciation rights, performance shares, restricted stock and
stock units to employees and consultants of the Company, each with a maximum
term of ten years. In addition, the Company has a 1988 Director Stock Option
Plan, as amended, pursuant to which nonstatutory stock options up to a maximum
of 70,000 shares of TR Stock, at a rate of 400 shares for each year of service
are automatically granted at fair market value to members of the Board of
Directors of the Company upon their election or reelection as Directors. All
options expire ten years after the initial grant date and are subject to various
vesting provisions.
-154-
155
GENZYME TISSUE REPAIR DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
At the Effective Date of the Genzyme Stock Proposal, Genzyme granted
initial options to purchase a total of 939,851 shares of TR Stock to employees
of the Company who will devote a substantial portion of their efforts to GTR.
These options, (i) had an exercise price of $4.75, the closing price of TR Stock
on the first date such shares were traded on the NASDAQ National Market System
or the closing price of such shares on the six-month anniversary of such date,
(ii) become exercisable 20% on the effective date of the grant and 20% on each
of the next four anniversaries thereof and (iii) have a term of ten years. At
the six month anniversary date the closing price of the TR Stock was $6.25 and
accordingly, compensation expense equal to 939,851 shares multiplied by the
difference in the exercise price of $4.75 and $6.25, the six month anniversary
price, will be recognized over the period of service of the holders. In 1995,
GTR recorded $882,000 of related compensation expense and will record the
balance of $505,000 over the next 3 years.
Stock option activity is summarized below:
SHARES
UNDER OPTION OPTION PRICE
------------ ------------
GENZYME CORPORATION COMMON STOCK
Outstanding at December 31, 1992........ 2,929,067 3.00 - 72.04
Granted............................... 1,332,240 26.25 - 45.00
Exercised............................. (254,171) 4.00 - 37.25
Forfeited and canceled................ (161,782) 7.75 - 72.04
----------
Outstanding at December 31, 1993........ 3,845,354 3.00 - 66.16
Granted............................... 1,619,364 22.63 - 42.00
Exercised............................. (66,378) 3.00 - 35.25
Forfeited and canceled................ (211,763) 8.25 - 66.16
Converted at Effective Date........... (5,186,577) 6.02 - 65.49
----------
Outstanding at December 31, 1994........ -
==========
TR STOCK
Converted at Effective Date........... 464,824 $ 1.03 - $11.15
Granted............................... 940,976 4.75 - 5.13
----------
Outstanding at December 31, 1994........ 1,405,800 1.03 - 11.15
Granted............................... 1,153,053 3.19 - 17.63
Exercised............................. (63,608) 1.68 - 9.58
Forfeited and canceled................ (76,202) 1.68 - 8.30
----------
Outstanding at December 31,1995 2,419,043 1.03 - 17.63
==========
At December 31, 1995 and 1994, 444,343 and 327,393 of the outstanding
options were exercisable with aggregate exercise proceeds of approximately
$2,457,400 and $1,657,800, respectively.
The total exercise proceeds for all options outstanding at December 31,
1995 is approximately $20,885,000 Information regarding the range of option
prices is as follows:
SHARES
UNDER OPTION OPTION PRICE
------------ ------------
80,998 $1.026 - $ 3.257
1,033,340 3.300 - 5.088
79,855 5.109 - 5.471
385,115 5.492 - 6.000
110,688 6.003 8.302
-155-
156
GENZYME TISSUE REPAIR DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
115,768 8.325 - 16.000
613,279 16.625 - 17.625
---------
2,419,043
=========
Employee Stock Purchase Plan. The Company's 1990 Employee Stock
Purchase Plan allows employees to purchase the Company's stock at 85% of fair
market value. Under this plan 600,000 shares of TR Stock are authorized, of
which 269,920 and 3,613 shares of TR Stock were issued in 1995 and 1994,
respectively.
Stock Rights. In 1989, the Company's Board of Directors issued a
dividend of one preferred stock purchase right (a "Common Stock Right") on each
share of Common Stock. At the Effective Date, the Rights Agreement under which
the rights were issued was amended and restated to reflect the change in the
capital structure of the Company and the Board declared a distribution to
holders of TR Stock of a right (a "TR Stock Right") on each outstanding share of
TR Stock. The Restated Rights Agreement provides that each General Division
Stock Right, which replaced the Common Stock Right, and each TR Stock Right,
when it becomes exercisable, will entitle the holder to purchase from the
Company (i) in the case of a General Division Stock Right, one one-hundredth of
a share of Series A Junior Participating Preferred Stock at a price of $52,
subject to adjustment, and (ii) in the case of a TR Stock Right, one
one-hundredth of a share of Series B Junior Participating Preferred Stock at a
price of $25, subject to adjustment. The rights expire on March 28, 1999.
Stock Warrants. The Company has issued warrants which, when exercised,
grant the holders one share of General Division Stock and .135 shares of TR
Stock. These warrants were granted in exchange for the receipt of options by the
General Division to purchase the partnership interests of Genzyme Development
Partners, L.P. (the "Surgical Aids Partnership") the callable common stock of
Neozyme II Corporation ("Neozyme II"), and in connection to Genzyme's purchase
of the publicly-held shares of IG Laboratories, Inc.("IG") in exchange for IG
warrants. All proceeds from the exercise of these warrants will be allocated to
the General Division (see "TR Designated Shares"). The outstanding warrants were
issued under the following terms:
EXERCISE
ISSUE NUMBER OF PRICE
DATE ISSUED TO WARRANTS PER SHARE EXERCISE PERIOD
- ---- --------- -------- --------- ---------------
1989 Surgical Aids Partnership,
the sales agent and its
affiliates 1,205,416 $16.01 November 1, 1991 to
50,285 16.03 October 31, 1996
666,399 22.91
1992 Investors in Neozyme II:
Series N 2,415,000 $38.25 Through December 31, 1996
Callable 2,415,000 See below January 1, 1997 to
December 31, 1998 unless
otherwise terminated
1995 Dr. Richard Warren 6,005 $42.67 Through September 30, 2000
The warrants issued to the Surgical Aids Partnership were issued in
consideration for the granting to Genzyme of an exclusive right to purchase all
of the outstanding partnership interests of the Surgical Aids Partnership.
The warrants issued to investors of Neozyme II were granted in
consideration
-156-
157
GENZYME TISSUE REPAIR DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
of the option to purchase the callable common stock of Neozyme II and had an
appraised fair value of $16,905,000. The Callable Warrants automatically
terminate upon General Division's exercise of its option to purchase all of the
callable common stock of Neozyme II. These warrants have an exercise price equal
to the sum of the average of the closing sale prices of one share of General
Division Stock and .135 share of TR Stock for the 20 trading days immediately
preceding the exercise thereof.
Warrant activity is summarized below:
WARRANTS WARRANT PRICE
Outstanding at December 31, 1992........... 8,283,246 16.01 - 41.31
Exercised.............................. (123,180) 16.01 - 23.86
Expired................................ (4,062) 38.79 - 41.31
----------
Outstanding at December 31, 1993........... 8,156,004 16.01 - 38.25
Exercised.............................. (2,197,774) 16.01 - 22.91
Expired................................ (23,849) 16.01 - 22.91
----------
Outstanding at December 31, 1994........... 5,934,381 16.01 - 38.25
Granted................................ 6,005 42.67
Exercised.............................. (343,145) 16.01 - 38.25
----------
Outstanding at December 31, 1995........... 5,597,241 16.01 - 42.67
==========
TR Designated Shares. Pursuant to Genzyme's Articles of Organization,
as amended, TR Designated Shares are authorized shares of TR Stock which are not
issued and outstanding, but which the Board may from time to time issue, sell or
otherwise distribute without allocating the proceeds or other benefits of such
issuance, sale or distribution to GTR. At the Effective Date, 5,000,000 TR
Designated Shares were established. As a result of the distribution of
approximately 3,300,000 shares of TR Stock to holders of General Division Stock,
the number of TR Designated Shares were reduced by a corresponding amount. The
remaining 1,700,000 TR Designated Shares were reserved for issuance upon the
exercise of Genzyme stock options and warrants and the conversion of Genzyme's
convertible notes which were outstanding on the Effective Date. TR Designated
Share activity is summarized below:
TR DESIGNATED
SHARES
-------------
Established at Effective Date.................. 5,000,000
Stock dividend to holders of
Genzyme Common Stock.......................... (3,356,713)
Stock options exercised........................ (168)
Stock warrants exercised....................... (233,412)
----------
Balance at December 31, 1994................ 1,409,707
Stock options exercised........................ (72,942)
Stock warrants exercised....................... (46,244)
ESPP shares issued (3,613)
----------
Balance at December 31, 1995................ 1,286,908
==========
The number of TR Designated Shares will be decreased by the number of
shares of TR Stock issued by Genzyme, the proceeds of which are allocated to the
General Division; the number of shares of TR Stock issued as a dividend to
holders of General Division stock; and the number of shares of TR Stock issued
upon the conversion of convertible securities, including the Notes, attributed
to the General Division. In addition, the number of TR Designated Shares can be
increased as a result of certain inter-division transactions. The remaining TR
-157-
158
GENZYME TISSUE REPAIR DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Designated Shares are reserved for issuance upon the exercise of the Notes, the
aforementioned warrants and the stock options which resulted from the conversion
of Genzyme options into TR Stock and General Division Stock options (See Note
M).
NOTE D RESEARCH AND DEVELOPMENT AGREEMENTS
Revenues from research and development agreements with related parties
include the following (dollars in thousands):
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
1995 1994 1993
Technology license fees........ $- $- $2,000
Fees for research and
development activities:
Neozyme I.................. - - 2,684
-- -- ------
$- $- $4,684
== == ======
Neozyme I
In 1990, GTR entered into a development contract with Neozyme I,
whereby GTR was engaged to perform all research, development and clinical
testing activities related to products and programs in the field of the
Vianain(R) debriding product for which Neozyme I was licensed. GTR received
$549,000 in 1990 under a technology license agreement (the "Agreement") pursuant
to which GTR granted Neozyme I exclusive rights to manufacture and sell
Vianain(R). In July 1993, GTR received an additional technology license fee of
$2,000,000 from Neozyme I related to expansion of the field of the Vianain(R)
debriding product. In December 1993, GTR exercised its option to purchase the
Vianain(R) research program being funded by Neozyme I for a purchase price of
$25,000,000 in cash. The transaction was accounted for as a purchase of
in-process research and development and the value charged to operations in the
fourth quarter of 1993.
Celtrix Pharmaceuticals, Inc.
In connection with the Common Stock Purchase Agreement dated June 24,
1994 between Genzyme and Celtrix Pharmaceuticals, Inc. ("Celtrix"), GTR entered
into a License and Development Agreement (the "License Agreement") with Celtrix.
The License Agreement granted GTR worldwide rights (excluding Asia) to
manufacture and market products based on Transforming Growth Factor Beta2 for
certain applications. In exchange, GTR agreed to fund development work relating
to the products at both Celtrix and the General Division and to make milestone
and royalty payments to Celtrix.
NOTE E ACQUISITION OF BIOSURFACE TECHNOLOGY, INC.
On December 15, 1994, Genzyme acquired BioSurface Technology, Inc.
("BST") by issuing .575 of one share of TR Stock for each share of BST common
stock. In the aggregate, 5,000,000 shares of TR Stock, valued at $25,312,500,
were issued representing 50% of the initial equity interest in GTR. The
acquisition was accounted for as a purchase. Accordingly, the associated net
assets and operations of BST have been included in GTR's financial statements
since the date of acquisition. The excess of the purchase price over the fair
market value of the net assets acquired, $11,215,000, was charged to in-process
research and development.
The following summary, prepared on a pro forma basis, presents the
-158-
159
GENZYME TISSUE REPAIR DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
consolidated results of operations as if BST had been acquired at the beginning
of the periods presented. This pro forma summary does not necessarily reflect
the results of operations as they would have been if GTR and BST constituted a
single entity during the periods presented and is not necessarily indicative of
results which may be obtained in the future.
YEAR ENDED DECEMBER 31,
----------------------------
1994 1993
(Unaudited) (Unaudited)
--------------------------------------------------------------
(Dollars in thousands, except per share amounts)
Revenues....................... $ 6,320 $ 10,393
Net loss....................... (12,606) (31,617)
Pro forma net loss per share... (1.51) (3.78)
NOTE F INVESTMENTS
Investments in marketable securities at December 31 consisted of the
following (dollars in thousands):
1995 1994
---------------------------------
MARKET MARKET
(DOLLARS IN THOUSANDS) COST VALUE COST VALUE
--------------------------------------------------------------------------
Short Term:
Federal agency notes......... $1,035 $1,036 $ - $ -
Corporate notes.............. 2,776 2,776 - -
U.S. Treasury notes.......... 3,031 3,020 6,063 5,918
------ ------ ------ ------
$6,842 $6,832 $6,063 $5,918
====== ====== ====== ======
Long Term:
U.S. Treasury notes.......... $ - $ - $2,007 $1,897
====== ====== ====== ======
Gross unrealized losses in the investment portfolio at December 31,
1995 were $10,000 as compared to $255,000 at December 31, 1994.
Information regarding the range of contractual maturities of
investments in debt securities at December 31, 1995 is as follows:
MARKET
(DOLLARS IN THOUSANDS) COST VALUE
------------------------------------------------------------------------
Within 1 year................. $6,842 $6,832
====== ======
NOTE G INVENTORIES
Inventories at December 31 consist of the following:
(DOLLARS IN THOUSANDS) 1995 1994
--------------------------------------------------------------
Raw materials.............. $107 $55
Work-in-process............ 654 21
---- ---
$761 $76
==== ===
NOTE H PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment at December 31 includes the following:
(DOLLARS IN THOUSANDS) 1995 1994
-----------------------------------------------------------------
Laboratory equipment................... $1,180 $1,266
Computer and office equipment.......... 978 21
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160
GENZYME TISSUE REPAIR DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Leasehold improvements................. 282 195
Assets under construction 179 -
------ ------
2,619 1,482
Less accumulated depreciation.......... (657) (26)
------ ------
$1,962 $1,456
====== ======
The net book value of laboratory, computer and office equipment under
capital leases at December 31, 1995 and 1994 totaled $146,000 and $470,000,
respectively.
Depreciation expense was $628,000, $26,000 and $0 in 1995, 1994 and
1993, respectively.
NOTE I ACCRUED EXPENSES
Accrued expenses at December 31 include the following:
(DOLLARS IN THOUSANDS) 1995 1994
---------------------------------------------------------------
Professional fees...................... $ 207 $2,178
Compensation........................... 926 849
Royalties.............................. 96 106
Other.................................. 120 87
------ ------
$1,349 $3,220
====== ======
NOTE J LEASE COMMITMENTS
Capital Leases
GTR leases certain laboratory, computer and office equipment under
capital leases. In connection with master lease agreements, GTR has granted the
lessors certain security interests in a certificate of deposit. This collateral
of approximately $293,000 is included in other noncurrent assets at December 31,
1995.
Operating Leases
Total rent expense under operating leases was $1,403,000 and $1,352,000
in 1995 and 1994, respectively. GTR leases facilities and personal property
under certain operating leases in excess of one year.
Future minimum payments due under GTR's capital and operating leases are
as follows:
CAPITAL OPERATING
(DOLLARS IN THOUSANDS) LEASES LEASES
------------------------------------------------------------------------
1996................................ $173 $ 1,674
1997................................ - 1,630
1998................................ - 1,566
1999................................ - 1,561
2000................................ - 1,561
Thereafter.......................... - 5,115
---- -------
Total minimum payments........... 173 13,107
Less: interest...................... 4 -
---- -------
$169 $13,107
==== =======
NOTE K INCOME TAXES
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GENZYME TISSUE REPAIR DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
The following summarizes GTR's provision for (benefit from) income taxes
(in thousands):
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
---- ---- ----
Federal income taxes:
Current........................... $ - $(132) $ 132
Deferred.......................... - 132 (132)
State income taxes:
Current........................... - - 38
Deferred.......................... - - -
---- ----- -----
Total income tax expense (benefit)..... $ - $ - $ 38
==== ===== =====
The differences between the effective tax rates and the U.S. federal
statutory tax rates were as follows:
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994 1993
---- ---- ----
U.S. Federal income tax statutory rate.. (35.0)% (35.0)% (34.0)%
State income taxes, net of federal
benefit................................ (5.2) (6.0) 0.2
Deductions subject to deferred tax
valuation allowance.................... 40.2 41.0 35.0
Benefit from net operating loss
carryforward........................... - - (1.0)
----- ----- -----
Effective tax rate...................... -% -% .2%
===== ===== =====
At December 31, 1995 and 1994, the components of deferred tax assets
and liabilities were as follows (in thousands):
1995 1994
---- ----
Deferred assets
Net operating loss carryforward...... $ 11,865 $ 2,368
Intangible amortization.............. 8,415 9,055
-------- --------
Total deferred tax assets......... 20,280 11,423
Tax benefit allocated to
General Division.................... (20,280) (11,423)
-------- --------
Net deferred tax assets........... $ - $ -
======== ========
The deferred tax assets of GTR cannot be utilized by the Division to
offset or reduce current or deferred income tax expense. Accordingly, the
deferred tax assets have been allocated to the General Division.
GTR reports current and deferred tax assets and liabilities as a net
intercompany payable or receivable. GTR's 1995 tax expense has been funded by
Genzyme.
NOTE L BENEFIT PLANS
Genzyme has a domestic employee savings plan under Section 401(k) of
the Internal Revenue Code covering substantially all employees of GTR. The plan
allows employees to make contributions up to a specified percentage of their
compensation, a portion of which are matched by GTR. GTR made $35,587 and $0 in
contributions to the plan in 1995 and 1994, respectively.
NOTE M GENERAL DIVISION FUNDING COMMITMENT AND PURCHASE OPTION
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GENZYME TISSUE REPAIR DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Genzyme's former obligation to allocate up to $30 million in cash from
the General Division to GTR in the period through June 1998 (the "Funding
Commitment") was eliminated by the consummation of GTR's public offering on
September 22, 1995, which provided GTR with $42.4 million in net proceeds from
the offering after underwriting discounts. Notwithstanding the elimination of
the Funding Commitment, Genzyme still has an option to allocate to GTR, at $10
per TR Designated Share, up to $30 million from the General Division (the
"Purchase Option"). Consequently, a maximum of 3,000,000 of TR Designated Shares
may be issued in connection with the exercise of the Purchase Option.
NOTE N QUARTERLY RESULTS (UNAUDITED)
Summarized quarterly financial data (in thousands of dollars except per
share amounts) for the years ended December 31, 1995 and 1994 are displayed in
the following table:
1ST 2ND 3RD 4TH
QTR QTR QTR QTR
--- --- --- ---
1995
Net sales..................... $ 1,030 $ 1,247 $ 1,435 $ 1,508
Gross profit(loss)............ 305 367 85 (268)
Net loss...................... (3,942) (5,027) (5,382) (7,679)
Loss per common share......... (0.45) (0.57) (0.59) (0.64)
1994
Net sales..................... $ - $ - $ - $ 324
Gross profit(loss)............ - - - 37
Net loss (1).................. (815) (1,129) (1,059) (12,747)
Loss per common share (1)..... (0.25) (0.34) (0.32) (3.56)
- ----------------
(1) Includes special charges related to the purchase of in-process research
and development in the fourth quarter of $11,215 (See Note E).
NOTE O SUBSEQUENT EVENTS
In January 1996, GTR acquired certain real estate in Framingham,
Massachusetts for $6.8 million in cash, of which $5.7 million was allocated to
buildings and $1.1 million was allocated to land based on appraised values.
In March 1996, GTR utilized $8.0 million of the Company's $15.0 million
line of credit with Fleet Bank of Massachusetts.
In March 1996, the Board of Directors voted, subject in each case to
the approval of the stockholders, to adopt two amendments to the Company's 1990
Equity Incentive Plan (the "Equity Plan"). These amendments would increase the
aggregate number of shares of shares of TR Stock that may be subject to grants
under the Equity Plan from 2,000,000 to 3,300,000 subject to adjustment for
stock splits, stock dividends and certain transactions affecting the Company's
capital stock.
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GENZYME TISSUE REPAIR DIVISION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
============================================================================================================================
Column A Column B Column C Column D Column E
- ----------------------------------------------------------------------------------------------------------------------------
Additions
----------------------
Balance at Charged to Charged Balance
beginning Costs and to Other at end
Description of period Expenses Accounts Deductions of Period
- ----------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1995:
Allowance for doubtful accounts .......... $176,800 $210,000 $61,600(1) $325,200
Year ended December 31, 1994:
Allowance for doubtful accounts .......... -- $176,800(2) $176,800
- -------------
(1) Uncollectible accounts written off, net of recoveries.
(2) Reserve acquired in acquisition.
-163-
164
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this item is contained in part under the caption "Executive
Officers of the Registrant" in Part I, Item 1A hereof and the remainder is
incorporated herein by reference from the discussion responsive thereto under
the captions "Election of Directors" and "Securities Exchange Act Reporting" in
the Company's Proxy Statement relating to the 1996 Annual Meeting of
Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is incorporated herein by reference from the
discussion responsive thereto under the following captions in the Company's
Proxy Statement relating to the 1996 Annual Meeting of Stockholders:
"Election of Directors - Director Compensation", "Executive Compensation"
and "Compensation Committee Interlocks and Insider Participation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item is incorporated herein by reference from the
discussion responsive thereto under the caption "Share Ownership" in the
Company's Proxy Statement relating to the 1996 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is incorporated herein by reference from (1) the
discussion responsive thereto under the caption "Certain Transactions" in the
Company's Proxy Statement relating to the 1996 Annual Meeting of Stockholders,
and (2) from the discussion herein under Item 1 "Business - Related Entities."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS
The financial statements are listed under Part II, Item 8 of this Report.
2. FINANCIAL STATEMENT SCHEDULES
The financial statement schedules are listed under Part II, Item 8 of this
Report.
-164-
165
3. EXHIBITS
The exhibits are listed below under Part IV, Item 14(c) of this report.
(B) REPORTS ON FORM 8-K
Reports on Form 8-K were filed with the Commission during the fourth
quarter of 1995 to report the following items as of the dates indicated:
- Genzyme filed a report on Form 8-K dated October 12, 1995 reporting
under Item 5 of Form 8-K the acquisition of its majority-owned subsidiary,
IG Laboratories, Inc. ("IG Labs") in a transaction in which IG Labs was
merged with and into Genzyme. The report incorporated by reference the
contents of Genzyme's press release dated September 29, 1995.
(C) EXHIBITS
EXHIBIT DESCRIPTION
NO. -----------
- -------
*3.1 - Articles of Organization of Genzyme. Filed as Exhibit 3.1 to
Genzyme's Form 10-K for 1994..
*3.2 - By-laws of Genzyme. Filed as Exhibit 3.2 to Genzyme's Form 8-K dated
December 31, 1991.
*4.1 - Amended and Restated Rights Agreement, dated as of October 13, 1994
between Genzyme and American Stock Transfer and Trust Company. Filed
as Exhibit 4 to Genzyme's Form 8-K dated December 29, 1994.
*4.2 - Indenture dated as of October 11, 1991 between Genzyme and State
Street Bank and Trust Company. Filed as Exhibit 4.1 to Genzyme's Form
8-K dated October 11, 1991.
*4.3 - First Supplement dated as of December 20, 1991 to Indenture dated as
of October 11, 1991 between Genzyme and State Street Bank and Trust
Company. Filed as Exhibit 4.1 to Genzyme's Form 8-K dated December
31, 1991.
*4.4 - Global Note of Genzyme in the principal amount of $100,000,000 dated
October 11, 1991, payable to Cede and Co., as nominee for The
Depository Trust Company. Filed as Exhibit 4.2 to Genzyme's Form 8-K
dated October 11, 1991.
*4.5 - Specimen Warrant to purchase Genzyme Common Stock issued to limited
partners of Genzyme Development Partners, L.P. on November 3, 1989.
Filed as Exhibit 4.3 to Genzyme's Form 10-K for 1990.
*4.6 - Specimen Warrant to purchase Genzyme Common Stock issued to limited
partners of Genzyme's Development Partners, L.P. on November 10,
1989. Filed as Exhibit 4.4 to Genzyme's Form 10-K for 1990.
*4.7 - Specimen Warrant to purchase Genzyme Common Stock issued to Paine
Webber Development Company on November 10, 1989. Filed as Exhibit 4.5
to Genzyme's Form 10-K for 1990.
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166
EXHIBIT DESCRIPTION
NO. -----------
- -------
*4.8 - Specimen Series N Warrant to purchase Genzyme Common Stock issued to
shareholders of Neozyme II Corporation ("Neozyme II"). Filed as
Exhibit 28.5 to Genzyme's Form 10-Q for March 31, 1992.
*4.9 - Specimen Callable Warrant to purchase Genzyme Common Stock issued to
shareholders of Neozyme II. Filed as Exhibit 28.6 to Genzyme's Form
10-Q for March 31, 1992.
*10.1 - Leases by Whatman Reeve Angel Limited to Whatman Biochemicals Limited
dated May 1, 1981. Filed as Exhibit 10.12 to Genzyme's Registration
Statement on Form S-1, File No. 33-4904.
*10.2 - Lease dated as of September 15, 1989 for 95-111 Binney Street,
Cambridge, Massachusetts between Genzyme and the Trustees of the
Cambridge East Trust. Filed as Exhibit 10.2 to Genzyme's Form 10-K
for 1992, and incorporated herein by reference. First amendment of
lease dated February 28, 1994. Filed as Exhibit 10.2 to Genzyme's
Form 10-K for 1993.
*10.3 - Lease dated December 20, 1988 for Building 1400, One Kendall Square,
Cambridge, Massachusetts between Genzyme and the Trustees of Old
Binney Realty Trust, as amended by letters dated December 20, 1988,
January 19, 1989 and January 31, 1989. Filed as Exhibit 10.18 to
Genzyme's Form 10-K for 1988, and incorporated herein by reference.
Addendum dated September 20, 1991 to Lease for Building 1400, One
Kendall Square, Cambridge, Massachusetts. Filed as Exhibit 19.1 to
Genzyme's Form 10-Q dated September 30, 1991, and incorporated herein
by reference. Addenda dated August 2, 1990 and April 6, 1993 to Lease
for Building 1400, One Kendall Square, Cambridge, Massachusetts.
Filed as Exhibit 10.3 to Genzyme's Form 10-K for 1993.
*10.4 - Lease dated December 20, 1988 for Building 700, One Kendall Square,
Cambridge, Massachusetts between Genzyme and Trustees of Old Kendall
Realty Trust, as amended by letters dated December 20, 1988 and
January 31, 1989. Filed as Exhibit 10.19 to Genzyme's Form 10-K for
1988.
*10.5 - Lease dated September 30, 1985 for 51 New York Avenue, Framingham,
Massachusetts. Filed as Exhibit 10.8 to Genzyme's Form 10-K for 1990,
and incorporated herein by reference. Amendment No. 1, dated October
11, 1990, and Amendment No. 2, dated May 12, 1993, to lease for 51
New York Avenue, Framingham, Massachusetts. Filed as Exhibit 10.5 to
Genzyme's Form 10-K for 1993.
*10.6 - Lease dated April 30, 1990 for 64 Sidney Street, Cambridge,
Massachusetts between BioSurface Technology, Inc. ("BioSurface") and
Forest City 64 Sidney Street, Inc. Filed as Exhibit 10.22 to
BioSurface's Registration Statement on Form S-1, File No. 33-55874.
*10.7 - Sublease Lease dated May 22, 1992 for three buildings at 74-84 New
York Avenue, Framingham, Massachusetts between Genzyme and Prime
Computer, Inc. Filed as Exhibit 10.7 to Genzyme's Form 10-K for 1993.
-166-
167
EXHIBIT DESCRIPTION
NO. -----------
- -------
*10.8 - Lease dated May 22, 1992 for three buildings at 74-84 New York
Avenue, Framingham, Massachusetts between Genzyme and Mark L. Fins,
David J. Winstanley and Bruce A. Gurall, tenants in common. Filed as
Exhibit 10.8 to Genzyme's Form 10-K for 1993.
*10.9 - Lease dated June 1, 1992 for land at Allston Landing, Allston,
Massachusetts between Allston Landing Limited Partnership and the
Massachusetts Turnpike Authority. Filed as Exhibit 10.9 to Genzyme's
Form 10-K for 1993.
*10.10 - Underlease for Block 13 building at Kings Hill Business Park West
Malling Kent among Rouse and Associates Block 13 Limited, Genzyme
(UK) Limited and Genzyme Corporation. Filed as Exhibit 10.11 to
Genzyme's Registration Statement on Form 8-B dated December 31, 1991,
filed on March 2, 1992.
*10.11 - Agreement of Limited Partnership dated as of September 13, 1989
between Genzyme Development Corporation II, as General Partner, and
each of the Limited Partners named therein. Filed as Exhibit 10(aa)
to Genzyme's Registration Statement on Form S-4, File No. 33-32343.
*10.12 - Cross License Agreement dated as of September 13, 1989 between
Genzyme Corporation and Genzyme Development Partners, L.P. Filed as
Exhibit 10(bb) to Genzyme's Registration Statement on Form S-4, File
No. 33-32343.
*10.13 - Development Agreement dated as of September 13, 1989 between Genzyme
Corporation and Genzyme Development Partners, L.P. Filed as Exhibit
10(cc) to Genzyme's Registration Statement on Form S-4, File No.
33-32343.
*10.14 - Amendment No. 1 dated January 4, 1994 to Development Agreement dated
as of September 13, 1989 between Genzyme and Genzyme Development
Partners, L.P. Filed as Exhibit 10.14 to Genzyme's Form 10-K for
1993.
*10.15 - Notice dated January 4, 1994 from Genzyme to Genzyme Development
Partners, L.P. Filed as Exhibit 10.15 to Genzyme's Form 10-K for
1993.
*10.16 - Notice dated January 13, 1995 from Genzyme to Genzyme Development
Partners, L.P. Filed as Exhibit 10.16 to Genzyme's Form 10K for
1994.
10.17 Notice dated February 22, 1996 from Genzyme to Genzyme Development
Partners, L.P. Filed herewith.
*10.18 - Partnership Purchase Option Agreement dated as of September 13, 1989
between Genzyme Corporation, Genzyme Development Corporation II,
Genzyme Development Partners, L.P. each Class A Limited Partner and
the Class B Limited Partner. Filed as Exhibit 10(dd) to Genzyme's
Registration Statement on Form S-4, File No. 33-32343.
-167-
168
EXHIBIT DESCRIPTION
NO. -----------
- -------
*10.19 - Partnership Purchase Agreement, undated and unexecuted, between
Genzyme Corporation, Genzyme Development Corporation II, Genzyme
Development Partners, L.P., each Class A Limited Partner and the
Class B Limited Partner, as the case may be. Filed as Exhibit 10(ee)
to Genzyme's Registration Statement on Form S-4, File No. 33-32343.
*10.20 - Joint Venture Agreement dated as of September 13, 1989 between
Genzyme Corporation and Genzyme Development Partners, L.P. Filed as
Exhibit 10(ff) to Genzyme's Registration Statement on Form S-4, File
No. 33-32343.
*10.21 - Technology License and Supply Agreement dated as of September 8, 1989
between Imedex and Genzyme. Filed as Exhibit 10.30 to Genzyme's Form
10-K for 1990.**
*10.22 - 1988 Director Stock Option Plan. Filed as Annex VIII to Genzyme's
Registration Statement on Form S-4, File No. 33-83346.
*10.23 - 1990 Equity Incentive Plan. Filed as Annex VII to Genzyme's
Registration Statement on Form S-4, File No. 33-83346.
*10.24 - 1990 Employee Stock Purchase Plan. Filed as Annex IX to Genzyme's
Registration Statement on Form S-4, File No. 33-83346.
*10.25 - Executive Employment Agreement dated as of January 1, 1990 between
Genzyme and Henri A. Termeer. Filed as Exhibit 10.32 to Genzyme's
Form 10-K for 1990.
*10.26 - Form of Severance Agreement between Genzyme and certain senior
executives, together with schedule identifying the provisions
applicable to each executive. Filed as Exhibit 10.33 to Genzyme's
Form 10-K for 1990, and incorporated herein by reference. Current
schedule identifying the executives filed as Exhibit 10.32 to
Genzyme's Form 10-K for 1993.
*10.27 - Form of Indemnification Agreement between Genzyme and certain senior
executives, together with schedule identifying the provisions
applicable to each executive. Filed as Exhibit 10.34 to Genzyme's
Form 10-K for 1990, and incorporated herein by reference. Current
schedule identifying the executives filed as Exhibit 10.33 to
Genzyme's Form 10-K for 1993.
*10.28 - Consulting Agreement dated March 1, 1993 between Genzyme and Henry E.
Blair. Filed as Exhibit 10.29 to Genzyme's 10-K for 1992, and
incorporated herein by reference. Consulting Agreement dated February
3, 1994 between Genzyme and Henry E. Blair. Filed as Exhibit 10.35 to
Genzyme's Form 10-K for 1993.
*10.29 - Technology License Agreement dated April 28, 1992 between Genzyme and
Neozyme II. Filed as Exhibit 28.7 to Genzyme's Form 10-Q for March
31, 1992.
-168-
169
EXHIBIT DESCRIPTION
NO. -----------
- -------
*10.30 - Research and Development Agreement dated April 28, 1992 between
Genzyme and Neozyme II. Filed as Exhibit 28.8 to Genzyme's Form 10-Q
for March 31, 1992.
*10.31 - Purchase Option Agreement dated April 28, 1992 among Genzyme,
PaineWebber Incorporated, Shearson Lehman Brothers, Inc., Cowen &
Company, PaineWebber International (U.K.) Ltd., and Lehman Brothers
International Limited. Filed as Exhibit 28.9 to Genzyme's Form 10-Q
for March 31, 1992.
*10.32 - Administrative Agreement dated April 28, 1992 between Genzyme and
Neozyme II. Filed as Exhibit 28.10 to Genzyme's Form 10-Q for March
31, 1992.
*10.33 - Series 1992 Note of Neozyme II dated April 28, 1992. Filed as Exhibit
28.11 to Genzyme's Form 10-Q for March 31, 1992.
*10.34 - Amendment No. 1 to Technology License Agreement and Research and
Development Agreement between Genzyme and Neozyme II dated as of
August 11, 1993. Filed as Exhibit 10.42 to Genzyme's Form 10-K for
1993.
*10.35 - Technology Transfer Agreement between Genzyme and Genzyme Transgenics
Corporation ("GTC") dated as of May 1, 1993. Filed as Exhibit 2.1 to
the Registration Statement on Form S-1 of GTC (File No. 33-62872).
*10.36 - Research and Development Agreement between Genzyme and GTC dated as
of May 1, 1993. Filed as Exhibit 10.1 to the Registration Statement
on Form S-1 of GTC (File No. 33-62872).
*10.37 - Services Agreement between Genzyme and GTC dated as of May 1, 1993.
Filed as Exhibit 10.2 to the Registration Statement on Form S-1 of
GTC (File No. 33-62872).
*10.38 - Series A Convertible Preferred Stock Purchase Agreement between
Genzyme and GTC dated as of May 1, 1993. Filed as Exhibit 10.5 to the
Registration Statement on Form S-1 of GTC (File No. 33-62872).
10.39 - Convertible Debt and Development Funding Agreement dated as of March
29, 1996 between Genzyme and GTC. Filed herewith.
*10.40 - Common Stock Purchase Agreement between Argus Pharmaceuticals, Inc.
and Genzyme Corporation dated as of September 10, 1993. Filed as
Exhibit A to Schedule 13D filed by Genzyme on September 20, 1993.* *
*10.41 - Agreement and Plan of Reorganization dated as of July 25, 1994, as
amended, among Genzyme Corporation, Phoenix Acquisition Corporation
and BioSurface Technology, Inc. Filed as Annex X to Genzyme's
Registration Statement on Form S-4, File No. 33-83346.
*10.42 - Agreement and Plan of Merger dated as of January 11, 1996 among
Genzyme, Genetrix, Inc and the Principal Stockholders of Genetrix.
Filed as Exhibit 2 to Genzyme's Regristration Statement on Form S-4,
File No. 333-1105.
-169-
170
EXHIBIT DESCRIPTION
NO. -----------
- -------
*10.43 - License and Development Agreement between Celtrix Pharmaceuticals,
Inc. ("Celtrix") and Genzyme Corporation dated as of June 24, 1994.
Filed as Exhibit 10.42 to Celtrix's Annual Report on Form 10-K for
the fiscal year ended March 31, 1994. **
*10.44 - Common Stock Purchase Agreement dated as of June 24, 1994 between
Celtrix and Genzyme Corporation. Filed as Exhibit A to Schedule 13D
filed by Genzyme on July 5, 1994.
11 - Computation of weighted average shares used in computing per share
amounts. Filed herewith.
21 - Subsidiaries of the Registrant. Filed herewith.
23.1 - Consent of Coopers & Lybrand L.L.P. Filed herewith.
23.2 - Consent of Coopers & Lybrand L.L.P. relating to the Annual Report of
Genzyme Corporation Retirement Savings Plan on Form 11-K. To be
filed by amendment.
27.1 - Financial Data Schedule for Genzyme General Division (for EDGAR
filing purposes only).
27.2 - Financial Data Schedule for Genzyme Tissue Repair Division (for
EDGAR filing purposes only).
99 - Information, financial statements and exhibits required by Form 11-K
with respect to the Genzyme Corporation Retirement Savings Plan. To
be filed by amendment.
* Indicates exhibit previously filed with the Securities and Exchange Commission
and incorporated by reference. Exhibits filed with Forms 10-K, 10-Q, 8-K or 8-B
of Genzyme Corporation were filed under Commission File No. 0-14680.
* * Confidential treatment has been granted for the deleted portions of Exhibits
10.21, 10.40 and 10.43.
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
Exhibits 10.22 through 10.28 above are management contracts or compensatory
plans or arrangements in which the executive officers or directors of Genzyme
participate.
-170-
171
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned.
GENZYME CORPORATION
By: /s/David J. McLachlan
------------------------------
David J. McLachlan
Senior Vice President, Finance
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the date indicated.
SIGNATURES TITLE DATE
- ---------- ----- ----
/s/Henri A. Termeer Director and Principal March 29, 1996
- --------------------------------- Executive Officer
Henri A. Termeer
/s/Constantine E. Anagnostopoulos Director March 29, 1996
- ---------------------------------
Constantine E. Anagnostopoulos
/s/Douglas A. Berthiaume Director March 29, 1996
- ---------------------------------
Douglas A. Berthiaume
/s/Henry E. Blair Director March 29, 1996
- ---------------------------------
Henry E. Blair
/s/Charles L. Cooney Director March 29, 1996
- ---------------------------------
Charles L. Cooney
/s/Henry R. Lewis Director March 29, 1996
- ---------------------------------
Henry R. Lewis
/s/Robert J. Carpenter Director March 29, 1996
- ---------------------------------
Robert J. Carpenter
/s/David J. McLachlan Principal Financial and March 29, 1996
- --------------------------------- Accounting Officer
David J. McLachlan
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EXHIBIT PAGE
NO. DESCRIPTION NO.
- ------- ----------- ----
EXHIBIT INDEX
*3.1 - Articles of Organization of Genzyme. Filed as Exhibit 3.1 to
Genzyme's Form 10-K for 1994..
*3.2 - By-laws of Genzyme. Filed as Exhibit 3.2 to Genzyme's Form 8-K dated
December 31, 1991.
*4.1 - Amended and Restated Rights Agreement, dated as of October 13, 1994
between Genzyme and American Stock Transfer and Trust Company. Filed
as Exhibit 4 to Genzyme's Form 8-K dated December 29, 1994.
*4.2 - Indenture dated as of October 11, 1991 between Genzyme and State
Street Bank and Trust Company. Filed as Exhibit 4.1 to Genzyme's Form
8-K dated October 11, 1991.
*4.3 - First Supplement dated as of December 20, 1991 to Indenture dated as
of October 11, 1991 between Genzyme and State Street Bank and Trust
Company. Filed as Exhibit 4.1 to Genzyme's Form 8-K dated December
31, 1991.
*4.4 - Global Note of Genzyme in the principal amount of $100,000,000 dated
October 11, 1991, payable to Cede and Co., as nominee for The
Depository Trust Company. Filed as Exhibit 4.2 to Genzyme's Form 8-K
dated October 11, 1991.
*4.5 - Specimen Warrant to purchase Genzyme Common Stock issued to limited
partners of Genzyme Development Partners, L.P. on November 3, 1989.
Filed as Exhibit 4.3 to Genzyme's Form 10-K for 1990.
*4.6 - Specimen Warrant to purchase Genzyme Common Stock issued to limited
partners of Genzyme's Development Partners, L.P. on November 10,
1989. Filed as Exhibit 4.4 to Genzyme's Form 10-K for 1990.
*4.7 - Specimen Warrant to purchase Genzyme Common Stock issued to Paine
Webber Development Company on November 10, 1989. Filed as Exhibit 4.5
to Genzyme's Form 10-K for 1990.
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173
EXHIBIT PAGE
NO. DESCRIPTION NO.
- ------- ----------- ----
*4.8 - Specimen Series N Warrant to purchase Genzyme Common Stock issued to
shareholders of Neozyme II Corporation ("Neozyme II"). Filed as
Exhibit 28.5 to Genzyme's Form 10-Q for March 31, 1992.
*4.9 - Specimen Callable Warrant to purchase Genzyme Common Stock issued to
shareholders of Neozyme II. Filed as Exhibit 28.6 to Genzyme's Form
10-Q for March 31, 1992.
*10.1 - Leases by Whatman Reeve Angel Limited to Whatman Biochemicals Limited
dated May 1, 1981. Filed as Exhibit 10.12 to Genzyme's Registration
Statement on Form S-1, File No. 33-4904.
*10.2 - Lease dated as of September 15, 1989 for 95-111 Binney Street,
Cambridge, Massachusetts between Genzyme and the Trustees of the
Cambridge East Trust. Filed as Exhibit 10.2 to Genzyme's Form 10-K
for 1992, and incorporated herein by reference. First amendment of
lease dated February 28, 1994. Filed as Exhibit 10.2 to Genzyme's
Form 10-K for 1993.
*10.3 - Lease dated December 20, 1988 for Building 1400, One Kendall Square,
Cambridge, Massachusetts between Genzyme and the Trustees of Old
Binney Realty Trust, as amended by letters dated December 20, 1988,
January 19, 1989 and January 31, 1989. Filed as Exhibit 10.18 to
Genzyme's Form 10-K for 1988, and incorporated herein by reference.
Addendum dated September 20, 1991 to Lease for Building 1400, One
Kendall Square, Cambridge, Massachusetts. Filed as Exhibit 19.1 to
Genzyme's Form 10-Q dated September 30, 1991, and incorporated herein
by reference. Addenda dated August 2, 1990 and April 6, 1993 to Lease
for Building 1400, One Kendall Square, Cambridge, Massachusetts.
Filed as Exhibit 10.3 to Genzyme's Form 10-K for 1993.
*10.4 - Lease dated December 20, 1988 for Building 700, One Kendall Square,
Cambridge, Massachusetts between Genzyme and Trustees of Old Kendall
Realty Trust, as amended by letters dated December 20, 1988 and
January 31, 1989. Filed as Exhibit 10.19 to Genzyme's Form 10-K for
1988.
*10.5 - Lease dated September 30, 1985 for 51 New York Avenue, Framingham,
Massachusetts. Filed as Exhibit 10.8 to Genzyme's Form 10-K for 1990,
and incorporated herein by reference. Amendment No. 1, dated October
11, 1990, and Amendment No. 2, dated May 12, 1993, to lease for 51
New York Avenue, Framingham, Massachusetts. Filed as Exhibit 10.5 to
Genzyme's Form 10-K for 1993.
*10.6 - Lease dated April 30, 1990 for 64 Sidney Street, Cambridge,
Massachusetts between BioSurface Technology, Inc. ("BioSurface") and
Forest City 64 Sidney Street, Inc. Filed as Exhibit 10.22 to
BioSurface's Registration Statement on Form S-1, File No. 33-55874.
*10.7 - Sublease Lease dated May 22, 1992 for three buildings at 74-84 New
York Avenue, Framingham, Massachusetts between Genzyme and Prime
Computer, Inc. Filed as Exhibit 10.7 to Genzyme's Form 10-K for 1993.
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174
EXHIBIT PAGE
NO. DESCRIPTION NO.
- ------- ----------- ----
*10.8 - Lease dated May 22, 1992 for three buildings at 74-84 New York
Avenue, Framingham, Massachusetts between Genzyme and Mark L. Fins,
David J. Winstanley and Bruce A. Gurall, tenants in common. Filed as
Exhibit 10.8 to Genzyme's Form 10-K for 1993.
*10.9 - Lease dated June 1, 1992 for land at Allston Landing, Allston,
Massachusetts between Allston Landing Limited Partnership and the
Massachusetts Turnpike Authority. Filed as Exhibit 10.9 to Genzyme's
Form 10-K for 1993.
*10.10 - Underlease for Block 13 building at Kings Hill Business Park West
Malling Kent among Rouse and Associates Block 13 Limited, Genzyme
(UK) Limited and Genzyme Corporation. Filed as Exhibit 10.11 to
Genzyme's Registration Statement on Form 8-B dated December 31, 1991,
filed on March 2, 1992.
*10.11 - Agreement of Limited Partnership dated as of September 13, 1989
between Genzyme Development Corporation II, as General Partner, and
each of the Limited Partners named therein. Filed as Exhibit 10(aa)
to Genzyme's Registration Statement on Form S-4, File No. 33-32343.
*10.12 - Cross License Agreement dated as of September 13, 1989 between
Genzyme Corporation and Genzyme Development Partners, L.P. Filed as
Exhibit 10(bb) to Genzyme's Registration Statement on Form S-4, File
No. 33-32343.
*10.13 - Development Agreement dated as of September 13, 1989 between Genzyme
Corporation and Genzyme Development Partners, L.P. Filed as Exhibit
10(cc) to Genzyme's Registration Statement on Form S-4, File No.
33-32343.
*10.14 - Amendment No. 1 dated January 4, 1994 to Development Agreement dated
as of September 13, 1989 between Genzyme and Genzyme Development
Partners, L.P. Filed as Exhibit 10.14 to Genzyme's Form 10-K for
1993.
*10.15 - Notice dated January 4, 1994 from Genzyme to Genzyme Development
Partners, L.P. Filed as Exhibit 10.15 to Genzyme's Form 10-K for
1993.
*10.16 - Notice dated January 13, 1995 from Genzyme to Genzyme Development
Partners, L.P. Filed as Exhibit 10.16 to Genzyme's Form 10K for
1994.
10.17 Notice dated February 22, 1996 from Genzyme to Genzyme Development
Partners, L.P. Filed herewith.
*10.18 - Partnership Purchase Option Agreement dated as of September 13, 1989
between Genzyme Corporation, Genzyme Development Corporation II,
Genzyme Development Partners, L.P. each Class A Limited Partner and
the Class B Limited Partner. Filed as Exhibit 10(dd) to Genzyme's
Registration Statement on Form S-4, File No. 33-32343.
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175
EXHIBIT PAGE
NO. DESCRIPTION NO.
- ------- ----------- ----
*10.19 - Partnership Purchase Agreement, undated and unexecuted, between
Genzyme Corporation, Genzyme Development Corporation II, Genzyme
Development Partners, L.P., each Class A Limited Partner and the
Class B Limited Partner, as the case may be. Filed as Exhibit 10(ee)
to Genzyme's Registration Statement on Form S-4, File No. 33-32343.
*10.20 - Joint Venture Agreement dated as of September 13, 1989 between
Genzyme Corporation and Genzyme Development Partners, L.P. Filed as
Exhibit 10(ff) to Genzyme's Registration Statement on Form S-4, File
No. 33-32343.
*10.21 - Technology License and Supply Agreement dated as of September 8, 1989
between Imedex and Genzyme. Filed as Exhibit 10.30 to Genzyme's Form
10-K for 1990.**
*10.22 - 1988 Director Stock Option Plan. Filed as Annex VIII to Genzyme's
Registration Statement on Form S-4, File No. 33-83346.
*10.23 - 1990 Equity Incentive Plan. Filed as Annex VII to Genzyme's
Registration Statement on Form S-4, File No. 33-83346.
*10.24 - 1990 Employee Stock Purchase Plan. Filed as Annex IX to Genzyme's
Registration Statement on Form S-4, File No. 33-83346.
*10.25 - Executive Employment Agreement dated as of January 1, 1990 between
Genzyme and Henri A. Termeer. Filed as Exhibit 10.32 to Genzyme's
Form 10-K for 1990.
*10.26 - Form of Severance Agreement between Genzyme and certain senior
executives, together with schedule identifying the provisions
applicable to each executive. Filed as Exhibit 10.33 to Genzyme's
Form 10-K for 1990, and incorporated herein by reference. Current
schedule identifying the executives filed as Exhibit 10.32 to
Genzyme's Form 10-K for 1993.
*10.27 - Form of Indemnification Agreement between Genzyme and certain senior
executives, together with schedule identifying the provisions
applicable to each executive. Filed as Exhibit 10.34 to Genzyme's
Form 10-K for 1990, and incorporated herein by reference. Current
schedule identifying the executives filed as Exhibit 10.33 to
Genzyme's Form 10-K for 1993.
*10.28 - Consulting Agreement dated March 1, 1993 between Genzyme and Henry E.
Blair. Filed as Exhibit 10.29 to Genzyme's 10-K for 1992, and
incorporated herein by reference. Consulting Agreement dated February
3, 1994 between Genzyme and Henry E. Blair. Filed as Exhibit 10.35 to
Genzyme's Form 10-K for 1993.
*10.29 - Technology License Agreement dated April 28, 1992 between Genzyme and
Neozyme II. Filed as Exhibit 28.7 to Genzyme's Form 10-Q for March
31, 1992.
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176
EXHIBIT PAGE
NO. DESCRIPTION NO.
- ------- ----------- ----
*10.30 - Research and Development Agreement dated April 28, 1992 between
Genzyme and Neozyme II. Filed as Exhibit 28.8 to Genzyme's Form 10-Q
for March 31, 1992.
*10.31 - Purchase Option Agreement dated April 28, 1992 among Genzyme,
PaineWebber Incorporated, Shearson Lehman Brothers, Inc., Cowen &
Company, PaineWebber International (U.K.) Ltd., and Lehman Brothers
International Limited. Filed as Exhibit 28.9 to Genzyme's Form 10-Q
for March 31, 1992.
*10.32 - Administrative Agreement dated April 28, 1992 between Genzyme and
Neozyme II. Filed as Exhibit 28.10 to Genzyme's Form 10-Q for March
31, 1992.
*10.33 - Series 1992 Note of Neozyme II dated April 28, 1992. Filed as Exhibit
28.11 to Genzyme's Form 10-Q for March 31, 1992.
*10.34 - Amendment No. 1 to Technology License Agreement and Research and
Development Agreement between Genzyme and Neozyme II dated as of
August 11, 1993. Filed as Exhibit 10.42 to Genzyme's Form 10-K for
1993.
*10.35 - Technology Transfer Agreement between Genzyme and Genzyme Transgenics
Corporation ("GTC") dated as of May 1, 1993. Filed as Exhibit 2.1 to
the Registration Statement on Form S-1 of GTC (File No. 33-62872).
*10.36 - Research and Development Agreement between Genzyme and GTC dated as
of May 1, 1993. Filed as Exhibit 10.1 to the Registration Statement
on Form S-1 of GTC (File No. 33-62872).
*10.37 - Services Agreement between Genzyme and GTC dated as of May 1, 1993.
Filed as Exhibit 10.2 to the Registration Statement on Form S-1 of
GTC (File No. 33-62872).
*10.38 - Series A Convertible Preferred Stock Purchase Agreement between
Genzyme and GTC dated as of May 1, 1993. Filed as Exhibit 10.5 to the
Registration Statement on Form S-1 of GTC (File No. 33-62872).
10.39 - Convertible Debt and Development Funding Agreement dated as of March
29, 1996 between Genzyme and GTC. Filed herewith.
*10.40 - Common Stock Purchase Agreement between Argus Pharmaceuticals, Inc.
and Genzyme Corporation dated as of September 10, 1993. Filed as
Exhibit A to Schedule 13D filed by Genzyme on September 20, 1993.* *
*10.41 - Agreement and Plan of Reorganization dated as of July 25, 1994, as
amended, among Genzyme Corporation, Phoenix Acquisition Corporation
and BioSurface Technology, Inc. Filed as Annex X to Genzyme's
Registration Statement on Form S-4, File No. 33-83346.
*10.42 - Agreement and Plan of Merger dated as of January 11, 1996 among
Genzyme, Genetrix, Inc and the Principal Stockholders of Genetrix.
Filed as Exhibit 2 to Genzyme's Regristration Statement on Form S-4,
File No. 333-1105.
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EXHIBIT PAGE
NO. DESCRIPTION NO.
- ------- ----------- ----
*10.43 - License and Development Agreement between Celtrix Pharmaceuticals,
Inc. ("Celtrix") and Genzyme Corporation dated as of June 24, 1994.
Filed as Exhibit 10.42 to Celtrix's Annual Report on Form 10-K for
the fiscal year ended March 31, 1994. **
*10.44 - Common Stock Purchase Agreement dated as of June 24, 1994 between
Celtrix and Genzyme Corporation. Filed as Exhibit A to Schedule 13D
filed by Genzyme on July 5, 1994.
11 - Computation of weighted average shares used in computing per share
amounts. Filed herewith.
21 - Subsidiaries of the Registrant. Filed herewith.
23.1 - Consent of Coopers & Lybrand L.L.P. Filed herewith.
23.2 - Consent of Coopers & Lybrand L.L.P. relating to the Annual Report of
Genzyme Corporation Retirement Savings Plan on Form 11-K. To be
filed by amendment.
27.1 - Financial Data Schedule for Genzyme General Division (for EDGAR
filing purposes only).
27.2 - Financial Data Schedule for Genzyme Tissue Repair Division (for
EDGAR filing purposes only).
99 - Information, financial statements and exhibits required by Form 11-K
with respect to the Genzyme Corporation Retirement Savings Plan. To
be filed by amendment.
* Indicates exhibit previously filed with the Securities and Exchange Commission
and incorporated by reference. Exhibits filed with Forms 10-K, 10-Q, 8-K or 8-B
of Genzyme Corporation were filed under Commission File No. 0-14680.
* * Confidential treatment has been granted for the deleted portions of Exhibits
10.21, 10.40 and 10.43.
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