Back to GetFilings.com

Use these links to rapidly review the document
GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, MARCH 31, 2003 TABLE OF CONTENTS

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

FORM 10-Q

Commission file number 0-14680

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

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

Indicate by check mark whether the Registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act). Yes ý    No o

The number of shares outstanding of each of the issuer's series of common stock as of April 30, 2003:

NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

•

projected timetables for the preclinical and clinical development of, regulatory submissions and approvals for, and market introduction of, our products and services;



•

the entry into new collaborations and licensing agreements;



•

estimates of the potential markets for our products and services, including the anticipated drivers for future growth;



•

sales and marketing plans;



•

assessments of competitors and potential competitors and the anticipated impact of potentially competitive products on our revenues;



•

estimates of the capacity of, and the projected timetable of approvals for, manufacturing and other facilities to support our products and services;



•

expected future revenues, operations and expenditures;



•

allocations of revenue, expenses, liabilities and income tax benefits;



•

maintenance of financial covenants contained in our revolving credit facility and our intention to refinance this facility in 2003;



•

assessment of the outcome of litigation and other governmental proceedings;



•

expectations concerning future dividends and stock option awards; and



•

projected cash needs.

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

•

our ability to successfully complete preclinical and clinical development of our products and services;



•

our ability to manufacture sufficient amounts of our products for development and commercialization activities and to do so in a timely and cost-effective manner;



•

our ability to obtain and maintain adequate patent and other proprietary rights protection of our products and services and successfully enforce our proprietary rights;



•

the scope, validity and enforceability of patents and other proprietary rights held by third parties and their impact on our ability to commercialize our products and services;



•

the accuracy of our estimates of the size and characteristics of the markets to be addressed by our products and services, including growth projections;



•

market acceptance of our products and services;



•

our ability to identify new patients for our products and services;



•

our ability to identify new collaborators and licensees and to negotiate mutually satisfactory agreements with them;



•

the accuracy of our information regarding the products and resources of our competitors and potential competitors;



•

the content and timing of submissions to and decisions made by the Food and Drug Administration, commonly referred to as the FDA, and other regulatory agencies;

•

decisions made by the U.S. Federal Trade Commission, commonly referred to as the FTC, the United States District Court, the United Kingdom Competition Appeal Tribunal and other judicial bodies;



•

approval of the manufacturing facilities for Fabrazyme® and Aldurazyme® enzymes and Renagel® phosphate binder;



•

the availability of reimbursement for our products and services from third-party payors, and the extent of such coverage;



•

our ability to expand manufacturing capacity for Renagel phosphate binder and Myozyme™ enzyme;



•

our ability to optimize dosing and improve patient compliance with Renagel phosphate binder;



•

our ability to effectively manage wholesaler inventories of Renagel phosphate binder and the levels of compliance with our inventory management programs;



•

our ability to establish and maintain strategic license, collaboration and distribution arrangements;



•

the continued funding and operation of our joint ventures by our partners;



•

our ability to successfully increase market penetration for Synvisc® viscosupplementation product as a treatment for osteoarthritis of the knee and to expand its use in other joints;



•

our ability to increase market penetration in Europe for our Fabrazyme enzyme, Thyrogen® hormone and Renagel phosphate binder;



•

decisions made by our board of directors with respect to dividends, stock option awards and other matters under our charter and management and accounting policies; and



•

the possible disruption of our operations due to terrorist activities and armed conflict, including as a result of the disruption of operations of regulatory authorities, our subsidiaries, our manufacturing facilities and our customers, suppliers, distributors, couriers, collaborative partners, licensees and clinical trial sites.

        We have included more detailed descriptions of these risks and uncertainties in Exhibit 99.2, "Factors Affecting Future Operating Results," to our Annual Report on Form 10-K for the fiscal year ended December 31, 2002. We encourage you to read those descriptions carefully. We caution investors not to place undue reliance on the forward-looking statements contained in this report. These statements, like all statements in this report, speak only as of the date of this report (unless another date is indicated) and we undertake no obligation to update or revise the statements. Holders of Genzyme General Stock, Biosurgery Stock and Molecular Oncology Stock are stockholders of Genzyme Corporation and are subject to all of the risks and uncertainties of Genzyme Corporation described in Exhibit 99.2 to our 2002 Form 10-K.

NOTE REGARDING REFERENCES TO GENZYME DIVISIONS AND SERIES OF STOCK

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

•

Genzyme General Division = "Genzyme General;"



•

Genzyme Biosurgery Division = "Genzyme Biosurgery;" and



•

Genzyme Molecular Oncology Division = "Genzyme Molecular Oncology."

        We currently have three designated series of common stock. Each of these series is intended to reflect the value and track the performance of one of our divisions. We refer to each series of common stock as follows:

•

Genzyme General Division Common Stock = "Genzyme General Stock;"



•

Genzyme Biosurgery Division Common Stock = "Biosurgery Stock;" and



•

Genzyme Molecular Oncology Division Common Stock = "Molecular Oncology Stock."

NOTE REGARDING INCORPORATION BY REFERENCE

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

NOTE REGARDING TRADEMARKS

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

GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, MARCH 31, 2003
TABLE OF CONTENTS

i

PART 1.    Financial Information

ITEM 1.    Financial Statements

GENZYME CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited, amounts in thousands)

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

1

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

2

GENZYME CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited, amounts in thousands, except par value amounts)

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

3

GENZYME CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited, amounts in thousands)

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

4

GENZYME CORPORATION AND SUBSIDIARIES

Notes To Unaudited, Consolidated Financial Statements

1.    Description of Business

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

•

Genzyme General, which develops and markets:



•

therapeutic products, with an expanding focus on products to treat patients suffering from genetic diseases and other chronic debilitating diseases, including a family of diseases known as lysosomal storage disorders, or LSDs, and other specialty therapeutics;



•

renal products, with a focus on products that treat patients suffering from renal diseases, including chronic renal failure;



•

diagnostic products, with a focus on in vitro diagnostics; and



•

other products and services, such as genetic testing services and pharmaceutical drug materials.



•

Genzyme Biosurgery, which develops and markets biotherapeutic and biomaterial products, with an emphasis on products that meet medical needs in the orthopaedics, cardiovascular and broader surgical areas; and



•

Genzyme Molecular Oncology, which is developing a new generation of cancer products focused on cancer vaccines and angiogenesis inhibitors through the integration of its genomics, gene and cell therapy, small molecule drug discovery and protein therapeutic capabilities.

2.    Basis of Presentation and Significant Accounting Policies

Basis of Presentation

        Our unaudited, consolidated financial statements for each period include the statements of operations, balance sheets and statements of cash flows of each of our divisions, and for our corporate operations taken as a whole. We eliminate all significant intracompany items and transactions in consolidation. We prepared our unaudited, consolidated financial statements following the requirements of the SEC for interim reporting. As permitted under these rules, we condense or omit certain footnotes and other financial information that are normally required by accounting principles generally accepted in the U.S. We have reclassified certain 2002 data to conform to our 2003 presentation.

        These financial statements include all normal and recurring adjustments that we consider necessary for the fair presentation of our financial position and operating results. Since these are interim financial statements, you should also read our consolidated financial statements and notes included in our 2002 Form 10-K. Revenues, expenses, assets and liabilities can vary from quarter to quarter. Therefore, the results and trends in these interim financial statements may not be indicative of results for future periods.

Net Income (Loss) Per Share

        We calculate earnings per share for each series of stock using the two-class method. To calculate basic earnings per share for each series of stock, we divide the earnings allocated to each series of stock by the weighted average number of outstanding shares of that series of stock during the applicable period. When we calculate diluted earnings per share, we also include in the denominator all potentially dilutive securities outstanding during the applicable period. We allocate our earnings to each

5

series of our common stock based on the earnings attributable to that series of stock. The earnings attributable to Genzyme General Stock, as defined in our charter, is equal to the net income or loss of Genzyme General determined in accordance with accounting principles generally accepted in the U.S., and as adjusted for tax benefits allocated to or from Genzyme General in accordance with our management and accounting policies. Earnings attributable to Biosurgery Stock and Molecular Oncology Stock are defined similarly and, as such, are based on the net income or loss of the corresponding division as adjusted for the allocation of tax benefits.

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

        In future periods, Genzyme Biosurgery and Genzyme Molecular Oncology may recognize deferred tax assets in the calculation of their respective tax provisions determined on a separate division basis in accordance with accounting principles generally accepted in the U.S. However, to the extent the benefit of those deferred tax assets has been previously allocated to Genzyme General in accordance with our management and accounting policies, the benefit will be reflected as a reduction of net income in determining net income (loss) attributable to Biosurgery Stock or Molecular Oncology Stock. As of March 31, 2003, the total tax benefits previously allocated to Genzyme General from Genzyme Biosurgery and Genzyme Molecular Oncology were (amounts in thousands):

Accounting for Stock-Based Compensation

        In accounting for stock-based compensation, we do not recognize compensation expense for options granted under the provisions of our stock-based compensation plans with fixed terms and an exercise price greater than or equal to the fair market value of the underlying series of our common stock on the date of grant. All stock-based awards to non-employees are accounted for at their fair value in accordance with Statement of Financial Accounting Standards, or SFAS, No. 123, as amended, and Emerging Issues Task Force, or EITF, Issue No. 96-18, "Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services."

6

        In accordance with the disclosure requirements of SFAS No. 148, the following table sets forth our net income (loss) data as if compensation expense for our stock-based compensation plans was determined in accordance with SFAS No. 123, as amended, based on the fair value at the grant dates of the awards. The resulting compensation expense would be allocated to each division in accordance with our allocation policies (amounts in thousands, except per share amounts):

The effects of applying SFAS No. 123 are not likely to be representative of the effects on reported net income (loss) in future years. Additional awards in future years are anticipated.

7

New Accounting Pronouncements

        In November 2002, the EITF published Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables," or EITF Issue No. 00-21, which addresses how to determine whether a revenue arrangement involving multiple deliverables contains more than one unit of accounting for the purposes of revenue recognition and how the revenue arrangement consideration should be measured and allocated to the separate units of accounting. EITF Issue No. 00-21 applies to all revenue arrangements that we enter into after June 30, 2003. We do not expect the adoption of EITF Issue No. 00-21 to have a material impact on our financial condition or results of operations.

        In January 2003, the Financial Accounting Standards Board, or FASB, issued FASB Interpretation No., or FIN, 46, "Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin, or ARB, No. 51." FIN 46 requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. Variable interest entities that effectively disperse risk will not be consolidated unless a single party holds an interest or combination of interests that effectively recombines risks that were previously dispersed. FIN 46 also requires enhanced disclosure requirements related to variable interest entities. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003 to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003.

8

3.    Net Income (Loss) Per Share

Genzyme General Stock:

        The following table sets forth our computation of basic and diluted net income per share allocated to Genzyme General Stock (amounts in thousands, except per share amounts):

---

(1)

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

(2)

We did not include the potentially dilutive effect of the assumed conversion of the $575.0 million in principal of 3% convertible subordinated debentures allocated to Genzyme General in the computation of Genzyme General's dilutive earnings per share for the three months ended March 31, 2003 and 2002, because the conditions for conversion had not been met. The debentures are contingently convertible into approximately 8.2 million shares of Genzyme General Stock at an initial conversion price of $70.30 per share.

9

Biosurgery Stock:

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

---

(1)

Biosurgery designated shares are authorized shares of Biosurgery Stock that are not issued and outstanding, but which our board of directors may issue, sell or distribute without allocating the proceeds or benefits to Genzyme Biosurgery. As of March 31, 2003, there were approximately 3.2 million Biosurgery designated shares.



(2)

These shares are issuable upon the conversion of the 6.9% convertible subordinated note we assumed in connection with the acquisition of Biomatrix, Inc. in 2000. This note is due May 14, 2003.

Molecular Oncology Stock:

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

---

(1)

Molecular Oncology designated shares are authorized shares of Molecular Oncology Stock that are not issued and outstanding, but which our board of directors may issue, sell, or distribute without allocating the proceeds or benefits to Genzyme Molecular Oncology. As of March 31, 2003, there were approximately 1.7 million Molecular Oncology designated shares.

10

4.    Inventories (amounts in thousands)

        We capitalize inventory produced for commercial sale, which may result in the capitalization of inventory that has not yet been approved for sale. If a product is not approved for sale, it would likely result in the write-off of the inventory and a charge to earnings. At March 31, 2003, our total inventories include $8.6 million of inventory for products that have not yet been approved for sale.

        We own a 50% interest in our joint venture with BioMarin Pharmaceutical, Inc., or BioMarin, for the development and commercialization of Aldurazyme® enzyme as an enzyme replacement therapy for people with an LSD known as mucopolysaccharidosis I, or MPS I. At March 31, 2003, our joint venture had $23.1 million of Aldurazyme enzyme inventory that had not yet been approved for sale, of which $11.5 million represents our portion of the unapproved inventory of the joint venture. On April 30, 2003, the FDA granted U.S. marketing approval for Aldurazyme enzyme.

5.    Goodwill and Other Intangible Assets

        Effective January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets," which requires that ratable amortization of goodwill and certain intangible assets be replaced with periodic tests of goodwill's impairment and that other intangible assets be amortized over their useful lives unless these lives are determined to be indefinite. We are required to perform impairment tests under SFAS No. 142 annually, which we perform in the third quarter, and whenever events or changes in circumstance suggest that the carrying value of an asset may not be recoverable. During the three months ended March 31, 2003, there were no events or circumstances that would have caused an impairment review.

Goodwill

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

11

combined statements of operations for Genzyme Biosurgery for the three months ended March 31, 2002.

        Effective January 1, 2002, in accordance with the provisions of SFAS No. 142, we ceased amortizing goodwill. The following table provides information on the changes in our net goodwill during the three months ended March 31, 2003 (amounts in thousands):

---

(1)

The adjustments to goodwill for the three months ended March 31, 2003 relate to foreign currency adjustments on goodwill denominated in foreign currencies.

Other Intangible Assets

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

12

        All of our other intangible assets are amortized over their estimated useful lives, which range between 1.5 years to 40 years. Total amortization expense for our other intangible assets was:

•

$17.5 million for the three months ended March 31, 2003; and



•

$17.9 million for the three months ended March 31, 2002.

        Amortization expense for the three months ended March 31, 2002 includes $0.3 million related to the amortization of a non-compete agreement that was charged to cost of products sold. This agreement concluded and the related intangible asset was fully amortized as of December 31, 2002.

        The estimated future amortization expense for other intangible assets as of March 31, 2003 for the remainder of fiscal year 2003 and the five succeeding fiscal years is as follows (amounts in thousands):

6.    Sale of GTC Common Stock

        On April 4, 2002, GTC Biotherapeutics, Inc., formerly known as Genzyme Transgenics Corporation and which we refer to as GTC, purchased approximately 2.8 million shares of GTC common stock held by us and allocated to Genzyme General for an aggregate consideration of $9.6 million. We received $4.8 million in cash and a promissory note for the remaining amount. The shares of GTC common stock sold were valued at $3.385 per share in this transaction, using the simple average of the high and low transaction prices quoted on the Nasdaq National Market on April 1, 2002. We have committed to a 24-month lock-up provision on the remaining 4.9 million shares of GTC common stock held by us and allocated to Genzyme General, which is approximately 18% of the shares of GTC common stock outstanding as of March 31, 2003. We accounted for our investment in GTC under the equity method of accounting until May 2002, at which point our ownership interest and board representation was reduced below 20% and we did not have any other factors of significant influence. Accordingly, we ceased to have significant influence over GTC and we began accounting for our investment in GTC under the cost method of accounting in June 2002. Equity in net loss of unconsolidated affiliates in our consolidated statements of operations and the combined statements of operations of Genzyme General for the three months ended March 31, 2002 includes charges of $1.1 million representing our portion of the losses of GTC.

7.    Investments in Equity Securities

        Because we are within the first 12 months of the 24-month lock-up provision described above, the remaining 4.9 million shares of GTC common stock held by us do not qualify as marketable securities under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." As a result, we carry our investment in GTC on our consolidated balance sheets and the combined balance sheets

13

of Genzyme General at cost, subject to review for impairment. Based on the market price of GTC common stock at March 31, 2003, our remaining investment would have an unrealized gain of $1.7 million. Effective April 4, 2003, we will begin the last 12 months of the 24-month lock-up provision and, as a result, the remaining shares of GTC common stock that we hold will qualify as marketable securities under SFAS No. 115 and be carried on our consolidated balance sheets and the combined balance sheets of Genzyme General at fair value.

        At March 31, 2003, our stockholders' equity includes $6.3 million of unrealized gains and $8.0 million of unrealized losses related to our other investments in equity securities, all of which are allocated to Genzyme General. We believe the losses related to our other investments in equity securities are temporary. We will record impairment charges related to these investments if the stocks do not recover within the next three to six months, all of which will be allocated to Genzyme General.

8.    Investment in Peptimmune, Inc.

        In January 2002, we formed Peptimmune, Inc., or Peptimmune, as our wholly-owned subsidiary, by contributing $5.0 million of cash and $0.3 million of other assets allocated to Genzyme General to Peptimmune in exchange for 5.5 million shares of Peptimmune's Series A voting preferred stock and 100 shares of Peptimmune common stock. We allocated our investment in Peptimmune to Genzyme General. We consolidated the results of Peptimmune through February 2003 because during that period we owned 100% of the outstanding stock of Peptimmune. In March 2003, our investment in Peptimmune decreased to approximately 12% as a result of the sale by Peptimmune of shares of its Series B voting preferred stock to third party investors. In accordance with our policy pertaining to affiliate sales of stock, we recorded a $2.9 million net gain ($4.5 million pre-tax) due to the issuance by Peptimmune of shares of its Series B voting preferred stock, which was recorded as an increase to our investment in Peptimmune in other noncurrent assets and an increase to other comprehensive income in stockholders' equity in our consolidated balance sheet as of March 31, 2003. Although our ownership interest in Peptimmune has declined below 20%, certain factors exist that cause us to continue to have significant influence over Peptimmune. The chairman, president and chief executive officer of Peptimmune is a member of our board of directors, one of our corporate officers is a consultant to Peptimmune and we have several service agreements with Peptimmune. Accordingly, in March 2003, we began accounting for our investment in Peptimmune under the equity method of accounting.

9.    Revolving Credit Facility

        We have access to a $350.0 million revolving credit facility, all of which matures in December 2003. At March 31, 2003, $284.0 million was outstanding under this facility, all of which was allocated to Genzyme Biosurgery. Borrowings under this facility bear interest at LIBOR plus an applicable margin, which was, in the aggregate, 2.5% at March 31, 2003. The terms of the revolving credit facility include various covenants, including financial covenants, which require us to meet minimum liquidity and interest coverage ratios and to meet maximum leverage ratios. We currently are in compliance with these covenants. We intend to refinance our revolving credit facility prior to its expiration in December 2003.

14

10.    Other Commitments and Contingencies

        We periodically become subject to legal proceedings and claims arising in connection with our business. We do not believe that there were any asserted claims against us as of March 31, 2003 which, if adversely decided, would have a material adverse effect on our results of operations, financial condition or liquidity.

        In 2001, Genzyme Limited, our wholly-owned subsidiary in the United Kingdom, established a home nursing and infusion service to support patients receiving Cerezyme® enzyme and our other enzyme replacement therapies following the expiration of a contract with a third party service provider. This third party lodged a complaint with the Office of Fair Trading in the United Kingdom. The OFT is a non-governmental organization empowered to enforce certain consumer and competition legislation in the United Kingdom. The OFT commenced an investigation of this service, alleging that it contravened competition laws in the United Kingdom. While we believe that the provision of home healthcare services by our subsidiary and our pricing for Cerezyme enzyme in the United Kingdom fully complies with applicable laws, we cooperated in this investigation. On March 27, 2003, the OFT ruled that this service did, in fact, violate United Kingdom competition law, and as a result fined Genzyme Limited approximately 6.8 million Pounds Sterling and required modifications to our pricing structure for Cerezyme enzyme in the United Kingdom. We have appealed this finding to the United Kingdom Competition Appeal Tribunal, receiving an automatic stay of the fine, and seeking a stay of the order on Cerezyme pricing. Hearings were held on April 16, 2003 and May 1, 2003 regarding the stay of the OFT's decision. On May 6, 2003, the Tribunal issued an order that stays the OFT's decision but which requires Genzyme Limited to provide one supplier a modest discount during the pendancy of the appeal process. We are confident that we will prevail on appeal and believe it probable that we will not have to pay a material fine or permanently modify our Cerezyme pricing structure. We have not accrued any amounts in connection with this contingency.

        The staff of the FTC is investigating our acquisition of Novazyme Pharmaceuticals, Inc. The FTC is one of the agencies responsible for enforcing federal antitrust laws. While we do not believe that the acquisition should be deemed to contravene antitrust laws, we have been cooperating with the FTC in its investigation which is currently ongoing.

        On April 17, 2002, Snowden Pencer, Inc., or SPI, initiated dispute resolution procedures alleging that we breached representations and warranties and committed fraud and intentional conduct relating to the sale of our Snowden-Pencer line of surgical instruments to SPI in November 2001. On April 7, 2003, SPI filed a notice of arbitration with the American Arbitration Association. An arbitration hearing is anticipated to take place within the next 60-90 days. We believe the claims made by SPI are without merit and intend to vigorously defend the claims. Based on the advice of counsel, management does not believe that it is probable that we will be required to pay a material amount in connection with this claim. We have not accrued any amounts in connection with this contingency.

        Pursuant to the terms of our joint venture agreement with BioMarin, we are obligated to pay BioMarin a $12.1 million milestone payment upon receipt of U.S. marketing approval from the FDA for Aldurazyme enzyme. On April 30, 2003, the FDA granted U.S. marketing approval for Aldurazyme enzyme.

Guarantees

        In November 2002, the FASB issued FIN 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others—an

15

interpretation of FASB Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34." FIN 45 clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing certain guarantees. FIN 45 also requires additional disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees it has issued. The accounting requirements for the initial recognition of guarantees are applicable on a prospective basis for guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for all guarantees outstanding, regardless of when they were issued or modified, beginning with periods ending after December 15, 2002. We applied the disclosure provisions of FIN 45 as of December 31, 2002, as required.

        We have agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is, or was serving, at our request in such capacity. The term of the indemnification period is for the officer's or director's lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have a Director and Officer insurance policy that limits our exposure and enables us to recover a portion of any future amounts paid. As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal. We have no liabilities recorded for these agreements as of March 31, 2003.

        We enter into standard indemnification agreements in our ordinary course of business. Pursuant to these agreements, we indemnify, hold harmless, and agree to reimburse the indemnified parties for losses suffered or incurred by the indemnified parties, generally our business partners or customers, in connection with any U.S. patent, or any copyright or other intellectual property infringement claim by any third party with respect to our products. The term of these indemnification agreements is generally perpetual any time after execution of the agreement. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited. We have no liabilities recorded for these agreements as of March 31, 2003.

11.    Tax Provision

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

•

provision for state income taxes;



•

tax benefits from export sales; and



•

use of tax credits.

16

12.    Common Stock

        As required under our charter, on January 1, 2003, the number of votes associated with a share of Biosurgery Stock and a share of Molecular Oncology Stock were adjusted so that for the period from January 1, 2003 through December 31, 2004, each share of Biosurgery Stock will entitle the holder to .08 of a vote, and each share of Molecular Oncology Stock will entitle the holder to .07 of a vote. A share of Genzyme General Stock continues to entitle its holder to 1 vote.

13.    Segment Information

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

•

Therapeutics, which develops, manufactures and distributes human therapeutic products with an expanding focus on products to treat patients suffering from genetic diseases and other chronic debilitating diseases, including a family of diseases known as LSDs, and other specialty therapeutics. The segment derives substantially all of its revenue from sales of Cerezyme enzyme, Fabrazyme® enzyme and Thyrogen® hormone;



•

Renal, which develops products that treat patients suffering from renal diseases, including chronic renal failure. The segment derives substantially all of its revenue from sales of Renagel® phosphate binder;



•

Diagnostic Products, which provides diagnostic products to niche markets focusing on in vitro diagnostics;



•

Genzyme Biosurgery, which develops and markets biotherapeutic and biomaterial products, with an emphasis on products that meet medical needs in the orthopaedics, cardiovascular and broader surgical areas; and



•

Genzyme Molecular Oncology, which is developing a new generation of cancer products focused on cancer vaccines and angiogenesis inhibitors through the integration of its genomics, gene and cell therapy, small molecule drug discovery and protein therapeutic capabilities.

17

        We have provided information concerning the operations in these reportable segments in the following table (amounts in thousands):

---

(1)

In September 2002, we created our Renal reporting segment consisting primarily of amounts attributable to the manufacture and sale of Renagel phosphate binder and amounts attributable to our research and development programs focused on renal diseases. Previously, amounts attributable to the manufacture and sale of Renagel phosphate binder had been included as a component of our Therapeutics reporting

18

segment and amounts attributable to our renal research and development programs had been included in Eliminations/Adjustments for Genzyme General. We have reclassified our segment disclosures for the three months ended March 31, 2002 to conform to the presentation for the three months ended March 31, 2003.

(2)

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



(3)

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



(4)

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



(5)

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

Segment Assets

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