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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


ý

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

For the quarterly period ended March 31, 2003

or

o

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

For the transition period from                             to                            

Commission file number 0-14680


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

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

One Kendall Square, Cambridge, Massachusetts
(Address of principal executive offices)

 

02139
(zip code)

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

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

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:

Genzyme General Division Common Stock   215,788,807
Genzyme Biosurgery Division Common Stock   40,686,433
Genzyme Molecular Oncology Division Common Stock   16,982,963



NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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


        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:


        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:

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

 
   
PART I.   FINANCIAL INFORMATION

ITEM 1.

 

Financial Statements

GENZYME CORPORATION AND SUBSIDIARIES
  Unaudited, Consolidated Statements of Operations for the Three Months Ended March 31, 2003 and 2002
  Unaudited, Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002
  Unaudited, Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2003 and 2002
  Notes to Unaudited, Consolidated Financial Statements

GENZYME GENERAL
  Unaudited, Combined Statements of Operations for the Three Months Ended March 31, 2003 and 2002
  Unaudited, Combined Balance Sheets as of March 31, 2003 and December 31, 2002
  Unaudited, Combined Statements of Cash Flows for the Three Months Ended March 31, 2003 and 2002
  Notes to Unaudited, Combined Financial Statements

GENZYME BIOSURGERY
  Unaudited, Combined Statements of Operations for the Three Months Ended March 31, 2003 and 2002
  Unaudited, Combined Balance Sheets as of March 31, 2003 and December 31, 2002
  Unaudited, Combined Statements of Cash Flows for the Three Months Ended March 31, 2003 and 2002
  Notes to Unaudited, Combined Financial Statements

GENZYME MOLECULAR ONCOLOGY
  Unaudited, Combined Statements of Operations for the Three Months Ended March 31, 2003 and 2002
  Unaudited, Combined Balance Sheets as of March 31, 2003 and December 31, 2002
  Unaudited, Combined Statements of Cash Flows for the Three Months Ended March 31, 2003 and 2002
  Notes to Unaudited, Combined Financial Statements

ITEM 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk

ITEM 4.

 

Controls and Procedures

PART II.

 

OTHER INFORMATION

ITEM 2.

 

Changes in Securities

ITEM 6.

 

Exhibits and Reports on Form 8-K

Signatures

i


PART 1.    Financial Information

ITEM 1.    Financial Statements


GENZYME CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited, amounts in thousands)

 
  Three Months Ended
March 31,

 
 
  2003
  2002
 
Revenues:              
  Net product sales   $ 346,489   $ 266,626  
  Net service sales     31,498     26,683  
  Revenues from research and development contracts:              
    Related parties     438     612  
    Other     3,434     4,019  
   
 
 
      Total revenues     381,859     297,940  
   
 
 

Operating costs and expenses:

 

 

 

 

 

 

 
  Cost of products sold     94,834     72,154  
  Cost of services sold     16,978     15,018  
  Selling, general and administrative     114,224     102,958  
  Research and development (including research and development related to contracts)     75,631     82,141  
  Amortization of intangibles     17,505     17,597  
   
 
 
      Total operating costs and expenses     319,172     289,868  
   
 
 
Operating income     62,687     8,072  
   
 
 

Other income (expenses):

 

 

 

 

 

 

 
  Equity in net loss of unconsolidated affiliates     (4,194 )   (4,094 )
  Gain on investments in equity securities         166  
  Other     750     (864 )
  Investment income     11,614     13,437  
  Interest expense     (6,490 )   (6,806 )
   
 
 
      Total other income     1,680     1,839  
   
 
 
Income before income taxes     64,367     9,911  
Provision for income taxes     (18,998 )   (3,138 )
   
 
 
Net income before cumulative effect of change in accounting for goodwill     45,369     6,773  
Cumulative effect of change in accounting for goodwill         (98,270 )
   
 
 
Net income (loss)   $ 45,369   $ (91,497 )
   
 
 

Comprehensive income (loss), net of tax:

 

 

 

 

 

 

 
  Net income (loss)   $ 45,369   $ (91,497 )
   
 
 
  Other comprehensive income (loss), net of tax:              
    Foreign currency translation adjustments     14,774     (9,200 )
    Gain on affiliate sale of stock, net of tax     2,856      
    Unrealized gains (losses) on securities, net of tax     3,999     (23,957 )
    Other     69     378  
   
 
 
  Other comprehensive income (loss)     21,698     (32,779 )
   
 
 
Comprehensive income (loss)   $ 67,067   $ (124,276 )
   
 
 

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

1


 
  Three Months Ended
March 31,

 
 
  2003
  2002
 
Net income (loss) per share:              
Allocated to Genzyme General Stock:              
  Genzyme General division net income   $ 57,793   $ 24,309  
  Tax benefit allocated from Genzyme Biosurgery     2,322     4,299  
  Tax benefit allocated from Genzyme Molecular Oncology     1,763     2,130  
   
 
 
  Net income allocated to Genzyme General Stock   $ 61,878   $ 30,738  
   
 
 
 
Net income per share of Genzyme General Stock:

 

 

 

 

 

 

 
    Basic   $ 0.29   $ 0.14  
   
 
 
    Diluted   $ 0.28   $ 0.14  
   
 
 
 
Weighted average shares outstanding:

 

 

 

 

 

 

 
    Basic     215,091     213,332  
   
 
 
    Diluted     220,432     221,064  
   
 
 

Allocated to Biosurgery Stock:

 

 

 

 

 

 

 
  Genzyme Biosurgery net loss before cumulative effect of change in accounting for goodwill   $ (14,102 ) $ (20,382 )
  Cumulative effect of change in accounting for goodwill         (98,270 )
   
 
 
  Genzyme Biosurgery division net loss     (14,102 )   (118,652 )
  Allocated tax benefit     2,408     2,448  
   
 
 
  Net loss allocated to Biosurgery Stock   $ (11,694 ) $ (116,204 )
   
 
 
 
Net loss per share of Biosurgery Stock—basic and diluted:

 

 

 

 

 

 

 
    Net loss per share before cumulative effect of change in accounting for goodwill   $ (0.29 ) $ (0.46 )
    Per share cumulative effect of change in accounting for goodwill         (2.48 )
   
 
 
  Net loss per share of Biosurgery Stock—basic and diluted   $ (0.29 ) $ (2.94 )
   
 
 
 
Weighted average shares outstanding

 

 

40,578

 

 

39,564

 
   
 
 

Allocated to Molecular Oncology Stock:

 

 

 

 

 

 

 
  Net loss   $ (4,815 ) $ (6,031 )
   
 
 
  Net loss per share of Molecular Oncology Stock—basic and diluted   $ (0.28 ) $ (0.36 )
   
 
 
 
Weighted average shares outstanding

 

 

16,939

 

 

16,763

 
   
 
 

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)

 
  March 31,
2003

  December 31,
2002

 
ASSETS              

Current assets:

 

 

 

 

 

 

 
  Cash and cash equivalents   $ 400,302   $ 406,811  
  Short-term investments     114,889     105,992  
  Accounts receivable, net     310,035     287,141  
  Inventories     226,478     238,809  
  Prepaid expenses and other current assets     45,982     45,187  
  Deferred tax assets     106,167     105,094  
   
 
 
    Total current assets     1,203,853     1,189,034  

Property, plant and equipment, net

 

 

831,040

 

 

802,448

 
Long-term investments     719,127     682,201  
Notes receivable—related parties     12,021     11,918  
Goodwill, net     592,089     592,075  
Other intangible assets, net     716,960     734,478  
Investments in equity securities     54,496     42,945  
Other noncurrent assets     34,655     27,950  
   
 
 
    Total assets   $ 4,164,241   $ 4,083,049  
   
 
 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 
  Accounts payable   $ 41,933   $ 44,458  
  Accrued expenses     175,908     190,754  
  Income taxes payable     78,203     61,964  
  Deferred revenue     20,746     15,887  
  Current portion of long-term debt, convertible note and capital lease obligations     294,549     294,737  
   
 
 
    Total current liabilities     611,339     607,800  

Long-term debt and capital lease obligations

 

 

25,026

 

 

25,038

 
Convertible debentures     575,000     575,000  
Deferred revenue—noncurrent     3,611     1,771  
Deferred tax liabilities     156,242     159,747  
Other noncurrent liabilities     16,099     15,846  
   
 
 
    Total liabilities     1,387,317     1,385,202  
   
 
 
Commitments and contingencies (Note 10)              

Stockholders' equity:

 

 

 

 

 

 

 
  Preferred stock, $0.01 par value          
  Common stock:              
    Genzyme General Stock, $0.01 par value     2,155     2,148  
    Biosurgery Stock, $0.01 par value     406     405  
    Molecular Oncology Stock, $0.01 par value     169     169  
  Additional paid-in capital—Genzyme General Stock     1,822,608     1,810,963  
  Additional paid-in capital—Biosurgery Stock     823,566     823,364  
  Additional paid-in capital—Molecular Oncology Stock     148,864     148,799  
  Deferred compensation     (364 )   (605 )
  Notes receivable from stockholders     (12,857 )   (12,706 )
  Accumulated deficit     (85,599 )   (130,968 )
  Accumulated other comprehensive income     77,976     56,278  
   
 
 
    Total stockholders' equity     2,776,924     2,697,847  
   
 
 
    Total liabilities and stockholders' equity   $ 4,164,241   $ 4,083,049  
   
 
 

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)

 
  Three Months Ended
March 31,

 
 
  2003
  2002
 
Cash Flows from Operating Activities:              
  Net income (loss)   $ 45,369   $ (91,497 )
  Reconciliation of net income (loss) to net cash provided by operating activities:              
    Depreciation and amortization     35,614     31,547  
    Non-cash compensation expense     242     392  
    Provision for bad debts     1,119     2,163  
    Equity in net loss of unconsolidated affiliates     4,194     4,094  
    Gain on investments in equity securities         (166 )
    Deferred income tax benefit     (4,964 )   (3,802 )
    Other     618     1,820  
    Cumulative effect of change in accounting for goodwill         98,270  
    Increase (decrease) in cash from working capital changes:              
      Accounts receivable     (21,057 )   3,695  
      Inventories     13,353     (3,659 )
      Prepaid expenses and other current assets     (504 )   (7,621 )
      Accounts payable, accrued expenses and deferred revenue     (13,980 )   (18,481 )
      Income taxes payable and tax benefits from stock options     16,386     5,961  
   
 
 
        Cash flows from operating activities     76,390     22,716  
   
 
 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 
  Purchases of investments     (167,469 )   (118,015 )
  Sales and maturities of investments     119,850     172,878  
  Purchases of equity securities     (1,400 )   (1,610 )
  Purchases of property, plant and equipment     (45,752 )   (43,541 )
  Investments in unconsolidated affiliates     (4,112 )   (8,151 )
  Other     (602 )   2,697  
   
 
 
        Cash flows from investing activities     (99,485 )   4,258  
   
 
 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 
  Proceeds from issuance of common stock     9,011     11,736  
  Proceeds from draw on credit facility         35,000  
  Payments of debt and capital lease obligations     (202 )   (693 )
  Bank overdraft     2,289     (2,000 )
  Payments of notes receivable from stockholders         136  
  Other     249     (714 )
   
 
 
        Cash flows from financing activities     11,347     43,465  
   
 
 

Effect of exchange rate changes on cash

 

 

5,239

 

 

(1,916

)
   
 
 

Increase (decrease) in cash and cash equivalents

 

 

(6,509

)

 

68,523

 
Cash and cash equivalents at beginning of period     406,811     247,011  
   
 
 
Cash and cash equivalents at end of period   $ 400,302   $ 315,534  
   
 
 

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:

2.    Basis of Presentation and Significant Accounting Policies

        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.

        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):

 
  Three Months Ended
March 31,

 
  2003
  2002
Tax benefits allocated from:            
  Genzyme Biosurgery   $ 2,322   $ 4,299
  Genzyme Molecular Oncology     1,763     2,130
   
 
    Total   $ 4,085   $ 6,429
   
 

        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):

Genzyme Biosurgery   $ 214,142
Genzyme Molecular Oncology     47,478

        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):

 
  Three Months Ended
March 31,

 
 
  2003
  2002
 
Net income (loss):              
  As reported   $ 45,369   $ (91,497 )
  Add: stock-based compensation included in as reported, net of tax     153     247  
  Deduct: pro forma stock-based compensation expense, net of tax     (13,384 )   (17,432 )
   
 
 
  Pro forma   $ 32,138   $ (108,682 )
   
 
 
Net income per share allocated to Genzyme General Stock:              
  Basic:              
    As reported   $ 0.29   $ 0.14  
    Add: stock-based compensation, net of tax, included in net income per share allocated to Genzyme General Stock—as reported     0.00     0.00  
    Deduct: pro forma stock-based compensation expense per share, net of tax     (0.05 )   (0.06 )
   
 
 
    Pro forma   $ 0.24   $ 0.08  
   
 
 
  Diluted:              
    As reported   $ 0.28   $ 0.14  
    Add: stock-based compensation, net of tax, included in net income per share allocated to Genzyme General Stock—as reported     0.00     0.00  
    Deduct: pro forma stock-based compensation expense per share, net of tax     (0.05 )   (0.07 )
   
 
 
    Pro forma   $ 0.23   $ 0.07  
   
 
 
Net loss per share allocated to Biosurgery Stock—basic and diluted:              
  As reported   $ (0.29 ) $ (2.94 )
  Deduct: pro forma stock-based compensation expense per share, net of tax     (0.03 )   (0.04 )
   
 
 
  Pro forma   $ (0.32 ) $ (2.98 )
   
 
 
Net loss per share allocated to Molecular Oncology Stock—basic and diluted:              
  As reported   $ (0.28 ) $ (0.36 )
  Deduct: pro forma stock-based compensation expense per share, net of tax     (0.05 )   (0.05 )
   
 
 
  Pro forma   $ (0.33 ) $ (0.41 )
   
 
 

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



        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

        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):

 
  Three Months Ended
March 31,

 
  2003
  2002
Genzyme General division net income   $ 57,793   $ 24,309
Tax benefit allocated from Genzyme Biosurgery     2,322     4,299
Tax benefit allocated from Genzyme Molecular Oncology     1,763     2,130
   
 
Net income allocated to Genzyme General Stock—basic and diluted   $ 61,878   $ 30,738
   
 
Shares used in computing net income per common share—basic     215,091     213,332
  Effect of dilutive securities:            
    Stock options (1)     5,332     7,712
    Warrants and stock purchase rights     9     20
   
 
      Dilutive potential common shares (2)     5,341     7,732
   
 
Shares used in computing net income per share—diluted (1,2)     220,432     221,064
   
 
Net income per share of Genzyme General Stock:            
  Basic   $ 0.29   $ 0.14
   
 
  Diluted   $ 0.28   $ 0.14
   
 

 
  Three Months Ended
March 31,

 
  2003
  2002
Shares of Genzyme General Stock issuable for options   13,739   7,096
   
 

9


        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):

 
  Three Months Ended
March 31,

 
  2003
  2002
Shares of Biosurgery Stock issuable for options   7,864   6,694
Warrants to purchase shares of Biosurgery Stock   7   8
Biosurgery designated shares (1)   3,119   3,107
Biosurgery designated shares reserved for options (1)   74   89
Shares issuable upon conversion of the 6.9% convertible subordinated note allocated to Genzyme Biosurgery (2)   358   358
   
 
Total shares excluded from the calculation of diluted net loss per share of Biosurgery Stock   11,422   10,256
   
 

        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):

 
  Three Months Ended
March 31,

 
  2003
  2002
Shares of Molecular Oncology Stock issuable for options   3,501   1,534
Molecular Oncology designated shares (1)   1,651   1,651
   
 
Total shares excluded from the calculation of diluted net loss per share of Molecular Oncology Stock   5,152   3,185
   
 

10


4.    Inventories (amounts in thousands)

 
  March 31,
2003

  December 31,
2002

Raw materials   $ 53,783   $ 45,751
Work-in-process     86,396     77,274
Finished products     86,299     115,784
   
 
  Total   $ 226,478   $ 238,809
   
 

        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.

        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):

 
  As of
December 31,
2002

  Adjustments
  As of
March 31,
2003

 
Goodwill:                    
  Genzyme General:                    
    Therapeutics   $ 380,854   $   $ 380,854  
    Renal     82,477         82,477  
    Diagnostic Products (1)     33,216     2     33,218  
    Other (1)     56,633     12     56,645  
   
 
 
 
      Total     553,180     14     553,194  
  Genzyme Biosurgery     122,271         122,271  
  Genzyme Molecular Oncology              
   
 
 
 
      Total     675,451     14     675,465  
Accumulated amortization     (83,376 )       (83,376 )
   
 
 
 
Goodwill, net   $ 592,075   $ 14   $ 592,089  
   
 
 
 

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

 
  As of March 31, 2003
  As of December 31, 2002
 
  Gross
Other
Intangible
Assets

  Accumulated
Amortization

  Net
Other
Intangible
Assets

  Gross
Other
Intangible
Assets

  Accumulated
Amortization

  Net
Other
Intangible
Assets

Technology   $ 551,846   $ (99,212 ) $ 452,634   $ 551,836   $ (88,222 ) $ 463,614
Patents     196,997     (40,801 )   156,196     196,997     (37,014 )   159,983
Trademarks     91,754     (17,441 )   74,313     91,754     (15,945 )   75,809
License fees     26,862     (7,742 )   19,120     26,862     (7,261 )   19,601
Distribution agreements     13,950     (3,987 )   9,963     13,950     (3,550 )   10,400
Customer lists     8,324     (4,239 )   4,085     8,324     (4,031 )   4,293
Other     11,602     (10,953 )   649     12,242     (11,464 )   778
   
 
 
 
 
 
  Total   $ 901,335   $ (184,375 ) $ 716,960   $ 901,965   $ (167,487 ) $ 734,478
   
 
 
 
 
 

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:

        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):

Year Ended December 31,

  Estimated
Amortization
Expense

2003 (remaining nine months)   $ 52,638
2004     69,725
2005     69,205
2006     66,703
2007     66,633
2008     65,817

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.

        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

 
  Three Months Ended
March 31,

   
 
 
  Increase/
(Decrease)
% Change

 
 
  2003
  2002
 
 
  (Amounts in thousands, except percentage data)

 
Provision for income taxes   $ (18,998 ) $ (3,138 ) 505 %
Effective tax rate     30 %   32 %    

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

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:

17


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

 
  Three Months Ended
March 31,

 
 
  2003
  2002
 
Revenues:              
  Genzyme General:              
    Therapeutics   $ 197,211   $ 161,307  
    Renal (1)     58,766     29,532  
    Diagnostic Products     23,196     19,838  
    Other (2)     34,364     30,787  
    Eliminations/Adjustments (3)     508     683  
   
 
 
      Total Genzyme General     314,045     242,147  
  Genzyme Biosurgery     65,626     53,371  
  Genzyme Molecular Oncology     2,188     2,422  
   
 
 
      Total   $ 381,859   $ 297,940  
   
 
 

Net income (loss):

 

 

 

 

 

 

 
  Genzyme General:              
    Therapeutics   $ 51,132   $ 31,842  
    Renal (1)     3,795     (5,127 )
    Diagnostic Products     1,962     (1,445 )
    Other (2)     1,345     2,191  
    Eliminations/Adjustments (3)     (441 )   (3,152 )
   
 
 
      Net income for Genzyme General     57,793     24,309  
   
 
 
 
Genzyme Biosurgery:

 

 

 

 

 

 

 
    Net loss for Genzyme Biosurgery before cumulative effect of change in accounting for goodwill     (14,102 )   (20,382 )
    Cumulative effect of change in accounting for goodwill (4)         (98,270 )
   
 
 
      Net loss for Genzyme Biosurgery     (14,102 )   (118,652 )
   
 
 
 
Genzyme Molecular Oncology

 

 

(4,815

)

 

(6,031

)
   
 
 
  Eliminations/Adjustments (5)     6,493     8,877  
   
 
 
      Total   $ 45,369   $ (91,497 )
   
 
 

18


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

 
  March 31,
2003

  December 31,
2002

 
Segment Assets:              
  Genzyme General (1):              
    Therapeutics   $ 1,103,664   $ 1,127,493  
    Renal     474,859     467,164  
    Diagnostic Products     103,395     103,636  
    Other (2)     88,620     89,705  
    Eliminations/Adjustments (3)     1,884,371     1,767,803  
   
 
 
      Total Genzyme General     3,654,909     3,555,801  
  Genzyme Biosurgery     541,563     560,792  
  Genzyme Molecular Oncology     7,428     13,981  
  Eliminations/Adjustments (4)     (39,659 )   (47,525 )
   
 
 
      Total   $ 4,164,241   $ 4,083,049  
   
 
 

19


20



GENZYME GENERAL

A Division of Genzyme Corporation

Combined Statements of Operations

(Unaudited, amounts in thousands)

 
  Three Months Ended
March 31,

 
 
  2003
  2002
 
Revenues:              
  Net product sales   $ 289,039   $ 218,463  
  Net service sales     24,455     21,175  
  Revenues from research and development contracts:              
    Related parties     438     612  
    Other     113     1,897  
   
 
 
      Total revenues     314,045     242,147  
   
 
 

Operating costs and expenses:

 

 

 

 

 

 

 
  Cost of products sold     69,576     47,599  
  Cost of services sold     13,464     11,866  
  Selling, general and administrative     85,246     76,390  
  Research and development (including research and development related to contracts)     56,329     63,836  
  Amortization of intangibles     9,736     9,718  
   
 
 
      Total operating costs and expenses     234,351     209,409  
   
 
 
Operating income     79,694     32,738  
   
 
 

Other income (expenses):

 

 

 

 

 

 

 
  Equity in net loss of unconsolidated affiliates     (4,194 )   (4,094 )
  Gain on investments in equity securities         166  
  Other     780     (897 )
  Investment income     11,281     12,952  
  Interest expense     (4,277 )   (4,541 )
   
 
 
      Total other income     3,590     3,586  
   
 
 
Income before income taxes     83,284     36,324  
Provision for income taxes     (25,491 )   (12,015 )
   
 
 
Division net income   $ 57,793   $ 24,309  
   
 
 

Comprehensive income (loss) net of tax:

 

 

 

 

 

 

 
  Division net income   $ 57,793   $ 24,309  
   
 
 
  Other comprehensive income (loss), net of tax:              
    Foreign currency translation adjustments     13,404     (5,363 )
    Gain on affiliate sale of stock, net of tax     2,856      
    Unrealized gains (losses) on securities, net of tax     4,046     (23,865 )
    Other     69     378  
   
 
 
  Other comprehensive income (loss)     20,375     (28,850 )
   
 
 
Comprehensive income (loss)   $ 78,168   $ (4,541 )
   
 
 

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

21



GENZYME GENERAL

A Division of Genzyme Corporation

Combined Balance Sheets

(Unaudited, amounts in thousands)

 
  March 31,
2003

  December 31,
2002

ASSETS            

Current assets:

 

 

 

 

 

 
  Cash and cash equivalents   $ 378,111   $ 372,605
  Short-term investments     108,333     94,339
  Accounts receivable, net     274,632     251,318
  Inventories     184,932     196,396
  Prepaid expenses and other current assets     43,184     42,558
  Due from Genzyme Biosurgery     27,350     32,641
  Due from Genzyme Molecular Oncology     5,033     5,494
  Deferred tax assets     104,622     105,094
   
 
    Total current assets     1,126,197     1,100,445

Property, plant and equipment, net

 

 

779,199

 

 

749,840
Long-term investments     719,127     682,201
Notes receivable—related parties     12,021     11,918
Goodwill, net     481,713     481,699
Other intangible assets, net     441,927     451,661
Investments in equity securities     52,246     42,945
Due from Genzyme Biosurgery—noncurrent     8,821     9,390
Other noncurrent assets     33,658     25,702
   
 
    Total assets   $ 3,654,909   $ 3,555,801
   
 

LIABILITIES AND DIVISION EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 
  Accounts payable   $ 32,622   $ 35,978
  Accrued expenses     152,919     170,186
  Income taxes payable     76,079     58,107
  Deferred revenue     15,530     10,588
  Current portion of long-term debt and capital lease obligations     18     13
   
 
    Total current liabilities     277,168     274,872

Long-term debt and capital lease obligations

 

 

25,026

 

 

25,038
Convertible debentures     575,000     575,000
Deferred revenue—noncurrent     3,611    
Deferred tax liability     80,836     81,933
Other noncurrent liabilities     13,238     13,074
   
 
    Total liabilities     974,879     969,917

Commitments and contingencies (Note 9)

 

 

 

 

 

 

Division equity

 

 

2,680,030

 

 

2,585,884
   
 
    Total liabilities and division equity   $ 3,654,909   $ 3,555,801
   
 

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

22



GENZYME GENERAL

A Division of Genzyme Corporation

Combined Statements of Cash Flows

(Unaudited, amounts in thousands)

 
  Three Months Ended
March 31,

 
 
  2003
  2002
 
Cash Flows from Operating Activities:              
  Division net income   $ 57,793   $ 24,309  
  Reconciliation of division net income to net cash from operating activities:              
    Depreciation and amortization     26,256     21,981  
    Non-cash compensation expense     242     392  
    Provision for bad debts     949     1,968  
    Equity in net loss of unconsolidated affiliates     4,194     4,094  
    Gain on investments in equity securities         (166 )
    Deferred income tax benefit     (2,556 )   (3,802 )
    Other     757     2,068  
    Increase (decrease) in cash from working capital changes:              
      Accounts receivable     (21,521 )   2,890  
      Inventories     12,268     (6,493 )
      Prepaid expenses and other current assets     (361 )   (7,680 )
      Due from Genzyme Biosurgery     5,860     6,270  
      Due from Genzyme Molecular Oncology     461     1,194  
      Accounts payable, accrued expenses and deferred revenue     (11,602 )   (7,433 )
      Income taxes payable and tax benefits from stock options     22,204     7,792  
   
 
 
        Cash flows from operating activities     94,944     47,384  
   
 
 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 
  Purchases of investments     (167,469 )   (105,356 )
  Sales and maturities of investments     114,814     172,867  
  Purchases of equity securities     (1,025 )   (1,610 )
  Purchases of property, plant and equipment     (44,952 )   (42,689 )
  Investments in unconsolidated affiliates     (4,112 )   (8,151 )
  Other     (620 )   2,645  
   
 
 
        Cash flows from investing activities     (103,364 )   17,706  
   
 
 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 
  Allocated proceeds from issuance of Genzyme General Stock     8,744     11,625  
  Payments of debt and capital lease obligations     (9 )   (443 )
  Receipt of NeuroCell joint venture refund from Genzyme Biosurgery         27,063  
  Bank overdraft     (348 )   (1,664 )
  Other     238     (2,855 )
   
 
 
        Cash flows from financing activities     8,625     33,726  
   
 
 

Effect of exchange rate changes on cash

 

 

5,301

 

 

(1,406

)
   
 
 

Increase in cash and cash equivalents

 

 

5,506

 

 

97,410

 
Cash and cash equivalents at beginning of period     372,605     167,253  
   
 
 
Cash and cash equivalents at end of period   $ 378,111   $ 264,663  
   
 
 

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

23



GENZYME GENERAL

A Division of Genzyme Corporation

Notes To Unaudited, Combined Financial Statements

1.    Description of Business

        Genzyme General is our operating division that develops and markets:

2.    Basis of Presentation and Significant Accounting Policies

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

        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 SFAS No. 123, as amended, and 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."

24


        In accordance with the disclosure requirements of SFAS No. 148, the following table sets forth Genzyme General's division net income 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 (amounts in thousands):

 
  Three Months Ended
March 31,

 
 
  2003
  2002
 
Division net income:              
  As reported   $ 57,793   $ 24,309  
  Add: stock-based compensation included in as reported, net of tax     153     247  
  Deduct: pro forma stock-based compensation expense, net of tax     (12,121 )   (15,773 )
   
 
 
  Pro forma   $ 45,825   $ 8,783  
   
 
 

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

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

3.    Net Income Per Share

        Note 3., "Net Income (Loss) Per Share," to our consolidated financial statements contains information regarding the calculation of earnings per share for each series of our stock using the two-class method. We present earnings per share data only in our consolidated financial statements because Genzyme Corporation is the issuer of the securities. Our divisions do not and cannot issue securities because they are not companies or legal entities.

4.    Inventories (amounts in thousands)

 
  March 31,
2003

  December 31,
2002

Raw materials   $ 41,514   $ 33,934
Work-in-process     77,475     68,441
Finished products     65,943     94,021
   
 
  Total   $ 184,932   $ 196,396
   
 

        Genzyme General capitalizes 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

25



sale, it would likely result in the write-off of the inventory and a charge to earnings. At March 31, 2003, Genzyme General's 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 for the development and commercialization of Aldurazyme enzyme as an enzyme replacement therapy for people with an LSD known as 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, Genzyme General adopted SFAS No. 142, "Goodwill and Other Intangible Assets," which requires that ratable amortization of goodwill and certain intangible assets be replaced with periodic tests of goodwill's impairment and that other intangible assets be amortized over their useful lives unless these lives are determined to be indefinite. 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 circumstances 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 changes in circumstances that would have caused an impairment review.

        Effective January 1, 2002, in accordance with the provisions of SFAS No. 142, Genzyme General ceased amortizing goodwill. The following table provides information on the changes in net goodwill attributable to Genzyme General's reporting segments during the three months ended March 31, 2003 (amounts in thousands):

 
  As of
December 31,
2002

  Adjustments
  As of
March 31,
2003

 
Goodwill:                    
  Genzyme General:                    
    Therapeutics   $ 380,854   $   $ 380,854  
    Renal     82,477         82,477  
    Diagnostic Products (1)     33,216     2     33,218  
    Other (1)     56,633     12     56,645  
   
 
 
 
      Total     553,180     14     553,194  
Accumulated amortization     (71,481 )       (71,481 )
   
 
 
 
Goodwill, net   $ 481,699   $ 14   $ 481,713  
   
 
 
 

26


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

 
  As of March 31, 2003
  As of December 31, 2002
 
  Gross
Other
Intangible
Assets

  Accumulated
Amortization

  Net
Other
Intangible
Assets

  Gross
Other
Intangible
Assets

  Accumulated
Amortization

  Net
Other
Intangible
Assets

Technology   $ 378,467   $ (63,333 ) $ 315,134   $ 378,457   $ (56,294 ) $ 322,163
Patents     117,574     (18,814 )   98,760     117,574     (16,863 )   100,711
Trademarks     6,526     (999 )   5,527     6,526     (890 )   5,636
License fees     25,972     (7,551 )   18,421     25,972     (7,114 )   18,858
Customer lists     8,324     (4,239 )   4,085     8,324     (4,031 )   4,293
Other     10,045     (10,045 )       10,045     (10,045 )  
   
 
 
 
 
 
  Total   $ 546,908   $ (104,981 ) $ 441,927   $ 546,898   $ (95,237 ) $ 451,661
   
 
 
 
 
 

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

        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 Genzyme General's 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):

Year Ended December 31,

  Estimated
Amortization
Expense

2003 (remaining nine months)   $ 29,270
2004     38,937
2005     38,844
2006     36,478
2007     36,475
2008     35,764

6.    Sale of GTC Common Stock

        On April 4, 2002, GTC purchased approximately 2.8 million shares of GTC common stock held by us and allocated to Genzyme General for an aggregate consideration of $9.6 million. We received

27



$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 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, Genzyme General's division 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. Genzyme General 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

        In January 2002, we formed 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, which 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 Genzyme General's

28



investment in Peptimmune in other noncurrent assets and an increase to other comprehensive income in division equity in Genzyme General's combined 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, Genzyme General began accounting for our investment in Peptimmune under the equity method of accounting.

9.    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 Genzyme General's results of operations, financial condition or liquidity. For more information regarding legal proceedings and claims, we suggest that you read Note 10., "Other Commitments and Contingencies," to our consolidated financial statements. We incorporate that information into this note by reference.

        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.

        In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others—an interpretation of FASB Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34." Genzyme General applied the disclosure provisions of FIN 45 as of December 31, 2002. For more information, we suggest that you read Note 10., "Other Commitments and Contingencies—Guarantees," to our consolidated financial statements. We incorporate that information into this note by reference.

10.    Tax Provision

 
  Three Months Ended
March 31,

   
 
 
  Increase/
(Decrease)
% Change

 
 
  2003
  2002
 
 
  (Amounts in thousands, except percentage data)

 
Provision for income taxes   $ (25,491 ) $ (12,015 ) 112 %
Effective tax rate     31 %   33 %    

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

29


11.    Segment Information

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


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

 
  Three Months Ended
March 31,

 
 
  2003
  2002
 
Revenues:              
  Therapeutics   $ 197,211   $ 161,307  
  Renal (1)     58,766     29,532  
  Diagnostic Products     23,196     19,838  
  Other (2)     34,364     30,787  
  Eliminations/Adjustments (3)     508     683  
   
 
 
    Total   $ 314,045   $ 242,147  
   
 
 

Division net income:

 

 

 

 

 

 

 
  Therapeutics   $ 51,132   $ 31,842  
  Renal (1)     3,795     (5,127 )
  Diagnostic Products     1,962     (1,445 )
  Other (2)     1,345     2,191  
  Eliminations/Adjustments (3)     (441 )   (3,152 )
   
 
 
    Division net income   $ 57,793   $ 24,309  
   
 
 

30


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

 
  March 31,
2003

  December 31,
2002

Segment Assets (1):            
  Therapeutics   $ 1,103,664   $ 1,127,493
  Renal     474,859     467,164
  Diagnostic Products     103,395     103,636
  Other (2)     88,620     89,705
  Eliminations/Adjustments (3)     1,884,371     1,767,803
   
 
    Total   $ 3,654,909   $ 3,555,801
   
 

31



GENZYME BIOSURGERY

A Division of Genzyme Corporation

Combined Statements of Operations

(Unaudited, amounts in thousands)

 
  Three Months Ended
March 31,

 
 
  2003
  2002
 
Revenues:              
  Net product sales   $ 57,450   $ 48,163  
  Net service sales     7,043     5,208  
  Revenues from research and development contracts     1,133      
   
 
 
    Total revenues     65,626     53,371  
   
 
 

Operating costs and expenses:

 

 

 

 

 

 

 
  Cost of products sold     25,258     24,555  
  Cost of services sold     3,514     3,033  
  Selling, general and administrative     27,244     24,499  
  Research and development (including research and development related to contracts)     13,939     11,872  
  Amortization of intangibles     7,769     7,879  
   
 
 
    Total operating costs and expenses     77,724     71,838  
   
 
 
Operating loss     (12,098 )   (18,467 )
   
 
 

Other income (expenses):

 

 

 

 

 

 

 
  Other     (30 )   33  
  Investment income     219     297  
  Interest expense     (2,193 )   (2,245 )
   
 
 
    Total other expenses     (2,004 )   (1,915 )
   
 
 
Division net loss before cumulative effect of change in accounting for goodwill     (14,102 )   (20,382 )
Cumulative effect of change in accounting for goodwill         (98,270 )
   
 
 
Division net loss   $ (14,102 ) $ (118,652 )
   
 
 

Comprehensive loss, net of tax:

 

 

 

 

 

 

 
  Division net loss   $ (14,102 ) $ (118,652 )
  Other comprehensive income (loss), net of tax:              
    Foreign currency translation adjustments     1,369     (3,838 )
   
 
 
Comprehensive loss   $ (12,733 ) $ (122,490 )
   
 
 

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

32



GENZYME BIOSURGERY

A Division of Genzyme Corporation

Combined Balance Sheets

(Unaudited, amounts in thousands)

 
  March 31,
2003

  December 31,
2002

ASSETS            
Current assets:            
  Cash and cash equivalents   $ 21,996   $ 32,747
  Accounts receivable, net     35,352     35,594
  Inventories     41,546     42,413
  Prepaid expenses and other current assets     2,188     2,015
   
 
    Total current assets     101,082     112,769

Property, plant and equipment, net

 

 

51,825

 

 

52,582
Goodwill, net     110,376     110,376
Other intangible assets, net     275,033     282,817
Investment in equity securities     2,250    
Other noncurrent assets     997     2,248
   
 
    Total assets   $ 541,563   $ 560,792
   
 

LIABILITIES AND DIVISION EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 
  Accounts payable   $ 9,311   $ 8,480
  Accrued expenses     24,464     23,665
  Due to Genzyme General     27,350     32,641
  Deferred revenue     2,228     1,126
  Current portion of long-term debt, convertible note and capital lease obligations     294,531     294,724
   
 
    Total current liabilities     357,884     360,636

Due to Genzyme General—noncurrent

 

 

8,821

 

 

9,390
Deferred revenue—noncurrent         1,771
Other noncurrent liabilities     2,861     2,772
   
 
    Total liabilities     369,566     374,569

Commitments and contingencies (Notes 6, 8)

 

 

 

 

 

 

Division equity

 

 

171,997

 

 

186,223
   
 
    Total liabilities and division equity   $ 541,563   $ 560,792
   
 

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

33



GENZYME BIOSURGERY

A Division of Genzyme Corporation

Combined Statements of Cash Flows

(Unaudited, amounts in thousands)

 
  Three Months Ended
March 31,

 
 
  2003
  2002
 
Cash Flows from Operating Activities:              
  Division net loss   $ (14,102 ) $ (118,652 )
  Reconciliation of division net loss to net cash used in operating activities:              
    Depreciation and amortization     9,348     9,535  
    Provision for bad debts     170     195  
    Other     (154 )   (98 )
    Cumulative effect of change in accounting for goodwill         98,270  
    Increase (decrease) in cash from working capital changes:              
      Accounts receivable     286     406  
      Inventories     1,085     2,834  
      Prepaid expenses and other current assets     (147 )   (44 )
      Accounts payable and accrued expenses     (2,815 )   (2,211 )
      Due to Genzyme General     (5,860 )   (6,270 )
   
 
 
        Cash flows from operating activities     (12,189 )   (16,035 )
   
 
 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 
  Purchase of equity securities     (375 )    
  Purchases of property, plant and equipment     (800 )   (852 )
  Other     18     52  
   
 
 
        Cash flows from investing activities     (1,157 )   (800 )
   
 
 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 
  Allocated proceeds from issuance of Biosurgery Stock     203     109  
  Proceeds from draw on credit facility         35,000  
  Payments of debt and capital lease obligations     (193 )   (250 )
  Payment of NeuroCell joint venture refund to Genzyme General         (27,063 )
  Bank overdraft     2,637     (336 )
  Payments received for notes receivable from stockholders         136  
  Other     11     2,141  
   
 
 
        Cash flows from financing activities     2,658     9,737  
   
 
 

Effect of exchange rate changes on cash

 

 

(63

)

 

(510

)
   
 
 

Decrease in cash and cash equivalents

 

 

(10,751

)

 

(7,608

)
Cash and cash equivalents at beginning of period     32,747     38,623  
   
 
 
Cash and cash equivalents at end of period   $ 21,996   $ 31,015  
   
 
 
Supplemental disclosure of non-cash transaction:              
  Investment in Excigen, Inc.—Note 6.              

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

34



GENZYME BIOSURGERY

A Division of Genzyme Corporation

Notes to Unaudited, Combined Financial Statements

1.    Description of Business

        Genzyme Biosurgery is our operating division that develops and markets biotherapeutic and biomaterial products, with an emphasis on products that meet medical needs in the orthopaedics, cardiovascular and broader surgical areas.

2.    Basis of Presentation and Significant Accounting Policies

        The unaudited, combined financial statements of Genzyme Biosurgery for each period include the statements of operations, balance sheets and statements of cash flows of the businesses we allocate to Genzyme Biosurgery. We also allocate a portion of our corporate operations to Genzyme Biosurgery using methods described in our allocation policy included in Note A., "Summary of Significant Accounting Policies—Allocation Policy," to Genzyme Biosurgery's combined financial statements included in Exhibit 13.3 to our 2002 Form 10-K. These unaudited, combined financial statements are prepared using amounts included in our unaudited, consolidated financial statements included in this Form 10-Q. We prepared these unaudited, combined financial statements for Genzyme Biosurgery following the requirements of the SEC for interim reporting. As permitted under these rules, we condense or omit certain footnotes and other financial information that are normally required by 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 Genzyme Biosurgery's financial position and operating results. Since these are interim financial statements, you should also read the combined financial statements and notes for Genzyme Biosurgery 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.

        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 SFAS No. 123, as amended, and 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."

        In accordance with the disclosure requirements of SFAS No. 148, the following table sets forth Genzyme Biosurgery's division net loss data as if compensation expense for our stock-based

35



compensation plans was determined in accordance with SFAS No. 123, as amended, based on the fair value at the grant dates of the awards (amounts in thousands):

 
  Three Months Ended
March 31,

 
 
  2003
  2002
 
Division net loss:              
  As reported   $ (14,102 ) $ (118,652 )
  Deduct: pro forma stock-based compensation expense, net of tax     (1,281 )   (1,689 )
   
 
 
  Pro forma   $ (15,383 ) $ (120,341 )
   
 
 

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

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

3.    Net Income (Loss) Per Share

        Note 3., "Net Income (Loss) Per Share," to our consolidated financial statements contains information regarding the calculation of earnings per share for each series of our stock using the two-class method. We present earnings per share data only in our consolidated financial statements because Genzyme Corporation is the issuer of the securities. Our divisions do not and cannot issue securities because they are not companies or legal entities.

4.    Inventories (amounts in thousands)

 
  March 31,
2003

  December 31,
2002

Raw materials   $ 12,269   $ 11,817
Work-in-process     8,921     8,833
Finished products     20,356     21,763
   
 
  Total   $ 41,546   $ 42,413
   
 

5.    Goodwill and Other Intangible Assets

        Effective January 1, 2002, Genzyme Biosurgery adopted SFAS No. 142, "Goodwill and Other Intangible Assets," which requires that ratable amortization of goodwill and certain intangible assets be replaced with periodic tests of goodwill's impairment and that other intangible assets be amortized over

36



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 circumstances 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 changes in circumstances that would have caused an impairment review.

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

        Effective January 1, 2002, in accordance with the provisions of SFAS No. 142, Genzyme Biosurgery ceased amortizing goodwill. There were no changes in net goodwill attributable to Genzyme Biosurgery's reporting segments in the three months ended March 31, 2003. The following table provides information on net goodwill attributable to Genzyme Biosurgery's reporting segments as of March 31, 2003 (amounts in thousands):

 
  As of
March 31,
2003

 
Goodwill:        
  Orthopaedics   $ 113,857  
  Biosurgical Specialties     8,414  
   
 
    Total     122,271  
Accumulated amortization     (11,895 )
   
 
Goodwill, net   $ 110,376  
   
 

37


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

 
  As of March 31, 2003
  As of December 31, 2002
 
  Gross
Other
Intangible
Assets

  Accumulated
Amortization

  Net
Other
Intangible
Assets

  Gross
Other
Intangible
Assets

  Accumulated
Amortization

  Net
Other
Intangible
Assets

Technology   $ 173,379   $ (35,879 ) $ 137,500   $ 173,379   $ (31,928 ) $ 141,451
Patents     79,423     (21,987 )   57,436     79,423     (20,151 )   59,272
Trademarks     85,228     (16,442 )   68,786     85,228     (15,055 )   70,173
License fees     890     (191 )   699     890     (147 )   743
Distribution agreements     13,950     (3,987 )   9,963     13,950     (3,550 )   10,400
Other     1,557     (908 )   649     2,197     (1,419 )   778
   
 
 
 
 
 
  Total   $ 354,427   $ (79,394 ) $ 275,033   $ 355,067   $ (72,250 ) $ 282,817
   
 
 
 
 
 

        All of Genzyme Biosurgery's other intangible assets are amortized over their estimated useful lives, which range from 2 years to 40 years. Total amortization expense for Genzyme Biosurgery's other intangible assets was:

        The estimated future amortization expense for Genzyme Biosurgery's 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):

Year Ended December 31,

  Estimated
Amortization
Expense

2003 (remaining nine months)   $ 23,368
2004     30,788
2005     30,361
2006     30,225
2007     30,158
2008     30,053

6.    Investment in Excigen, Inc.

        In March 2003, we entered into a collaboration with Excigen, Inc., a recently created biotechnology company in Baltimore, Maryland focused on developing gene therapies for treating cardiac arrhythmias. In connection with the collaboration, we acquired 1,440,000 shares of the convertible preferred stock of Excigen and a warrant to acquire an additional 865,882 shares of convertible preferred stock, in exchange for our commitment to provide Excigen with up to $2.3 million in funding and $2.3 million

38



worth of research, clinical, regulatory and manufacturing services, which services are to be provided by Genzyme Biosurgery. We provided the initial $0.4 million of the cash commitment in March 2003, with the balance of $1.9 million to be paid in future installments. We allocate our ownership interest in Excigen to Genzyme Biosurgery. As a result of our ownership interest, we will account for our investment in Excigen under the equity method of accounting.

7.    Revolving Credit Facility

        Genzyme Biosurgery has 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 aggregate, 2.5% at March 31, 2003. We intend to refinance our revolving credit facility prior to its expiration in December 2003.

8.    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 Genzyme Biosurgery's results of operations, financial condition or liquidity. For more information regarding legal proceedings and claims, we suggest that you read Note 10., "Other Commitments and Contingencies," to our consolidated financial statements. We incorporate that information into this note by reference.

        In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others—an interpretation of FASB Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34." Genzyme Biosurgery applied the disclosure provisions of FIN 45 as of December 31, 2002. For more information, we suggest that you read Note 10, "Other Commitments and Contingencies—Guarantees," to our consolidated financial statements. We incorporate that information into this note by reference.

9.    Segment Information

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

39



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

 
  Three Months Ended
March 31,

 
  2003
  2002
Revenues:            
  Orthopaedics   $ 32,851   $ 24,175
  Biosurgical Specialties     13,763     11,021
  Cardiac Science (1)     32    
  Cardiac Devices (1)     18,980     18,175
   
 
    Total   $ 65,626   $ 53,371
   
 

Gross Margin:

 

 

 

 

 

 
  Orthopaedics   $ 23,233   $ 15,185
  Biosurgical Specialties     6,895     5,471
  Cardiac Science (1,2)     (471 )  
  Cardiac Devices (1,2)     7,197     5,127
   
 
    Total   $ 36,854   $ 25,783
   
 

(1)
In January 2003, as a result of a change in how Genzyme Biosurgery reviews its business, the activities of its former Cardiothoracic reporting segment were reallocated into two separate reporting segments called Cardiac Science and Cardiac Devices. Genzyme Biosurgery has reclassified 2002 disclosures to conform to our 2003 presentation.

(2)
Revenues from and costs associated with the sale of FocalSeal®-L surgical sealant are primarily allocated to Genzyme Biosurgery's Cardiac Devices reporting segment. For the three months ended March 31, 2003, in accordance with a change in how Genzyme Biosurgery manages its business, $0.5 million of costs associated with the sale of FocalSeal-L surgical sealant were allocated to Genzyme Biosurgery's Cardiac Science reporting segment. No comparable amounts were allocated to its Cardiac Science reporting segment in the same period of 2002.

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

40



GENZYME MOLECULAR ONCOLOGY

A Division of Genzyme Corporation

Combined Statements of Operations

(Unaudited, amounts in thousands)

 
  Three Months Ended
March 31,

 
 
  2003
  2002
 
Revenues:              
  Service revenue   $   $ 300  
  Revenue from research and development contracts     1,477     1,469  
  Licensing revenue     704     653  
  Royalty revenue     7      
   
 
 
    Total revenues     2,188     2,422  
   
 
 

Operating costs and expenses:

 

 

 

 

 

 

 
  Cost of services sold         119  
  Cost of revenue from research and development contracts, licensing and royalty revenue     1,172     1,135  
  Selling, general and administrative     1,734     2,069  
  Research and development     4,191     5,298  
   
 
 
    Total operating costs and expenses     7,097     8,621  
   
 
 
Operating loss     (4,909 )   (6,199 )
   
 
 

Other income (expenses):

 

 

 

 

 

 

 
  Investment income     114     188  
  Interest expense     (20 )   (20 )
   
 
 
    Total other income     94     168  
   
 
 
Division net loss   $ (4,815 ) $ (6,031 )
   
 
 

Comprehensive loss, net of tax:

 

 

 

 

 

 

 
  Division net loss   $ (4,815 ) $ (6,031 )
   
 
 
  Other comprehensive income (loss), net of tax:              
    Foreign currency translation adjustments     1     1  
    Unrealized losses on securities, net of tax     (47 )   (92 )
   
 
 
  Other comprehensive loss     (46 )   (91 )
   
 
 
Comprehensive loss   $ (4,861 ) $ (6,122 )
   
 
 

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

41



GENZYME MOLECULAR ONCOLOGY

A Division of Genzyme Corporation

Combined Balance Sheets

(Unaudited, amounts in thousands)

 
  March 31,
2003

  December 31,
2002

ASSETS            

Current assets:

 

 

 

 

 

 
  Cash and cash equivalents   $ 195   $ 1,459
  Short-term investments     6,556     11,653
  Accounts receivable, net     51     229
  Prepaid expenses and other current assets     610     614
   
 
    Total current assets     7,412     13,955

Equipment, net

 

 

16

 

 

26
   
 
    Total assets   $ 7,428   $ 13,981
   
 

LIABILITIES AND DIVISION EQUITY (DEFICIT)

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 
  Accrued expenses   $ 649   $ 760
  Due to Genzyme General     5,033     5,494
  Deferred revenue     2,988     4,173
   
 
    Total liabilities     8,670     10,427

Commitments and contingencies (Note 4)

 

 

 

 

 

 

Division equity (deficit)

 

 

(1,242

)

 

3,554
   
 
    Total liabilities and division equity (deficit)   $ 7,428   $ 13,981
   
 

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

42



GENZYME MOLECULAR ONCOLOGY

A Division of Genzyme Corporation

Combined Statements of Cash Flows

(Unaudited, amounts in thousands)

 
  Three Months Ended
March 31,

 
 
  2003
  2002
 
Cash Flows from Operating Activities:              
  Division net loss   $ (4,815 ) $ (6,031 )
  Reconciliation of division net loss to net cash used in operating activities:              
    Depreciation     10     31  
    Other     15     (150 )
    Increase (decrease) in cash from working capital changes:              
      Accounts receivable     178     399  
      Prepaid expenses and other current assets     4     103  
      Accrued expenses and deferred revenue     (1,296 )   (1,791 )
      Due to Genzyme General     (461 )   (1,194 )
   
 
 
        Cash flows from operating activities     (6,365 )   (8,633 )
   
 
 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 
  Purchases of investments         (12,659 )
  Sales and maturities of investments     5,036     11  
   
 
 
        Cash flows from investing activities     5,036     (12,648 )
   
 
 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 
  Allocated proceeds from issuance of Molecular Oncology Stock     64     2  
   
 
 
        Cash flows from financing activities     64     2  
   
 
 

Effect of exchange rate changes on cash

 

 

1

 

 


 
   
 
 

Decrease in cash and cash equivalents

 

 

(1,264

)

 

(21,279

)
Cash and cash equivalents at beginning of period     1,459     41,135  
   
 
 
Cash and cash equivalents at end of period   $ 195   $ 19,856  
   
 
 

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

43



GENZYME MOLECULAR ONCOLOGY

A Division of Genzyme Corporation

Notes To Unaudited, Combined Financial Statements

1.    Business Description

        Genzyme Molecular Oncology is our operating division that 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

        The unaudited, combined financial statements of Genzyme Molecular Oncology for each period include the statements of operations, balance sheets and statements of cash flows of the businesses we allocate to Genzyme Molecular Oncology. We also allocate a portion of our corporate operations to Genzyme Molecular Oncology using methods described in our allocation policy included in Note A., "Summary of Significant Accounting Policies—Allocation Policy," to Genzyme Molecular Oncology's combined financial statements included in Exhibit 13.4 to our 2002 Form 10-K. These unaudited, combined financial statements are prepared using amounts included in our unaudited, consolidated financial statements included in this Form 10-Q. We prepared these unaudited, combined financial statements for Genzyme Molecular Oncology following the requirements of the SEC for interim reporting. As permitted under these rules, we condense or omit certain footnotes and other financial information that are normally required by accounting principles generally accepted in the U.S.

        These financial statements include all normal and recurring adjustments that we consider necessary for the fair presentation of Genzyme Molecular Oncology's financial position and operating results. Since these are interim financial statements, you should also read the financial statements and notes for Genzyme Molecular Oncology included in our 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.

        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 SFAS No. 123, as amended, and 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."

        In accordance with the disclosure requirements of SFAS No. 148, the following table sets forth Genzyme Molecular Oncology's division net loss data as if compensation expense for our stock-based

44



compensation plans was determined in accordance with SFAS No. 123, as amended, based on the fair value at the grant dates of the awards (amounts in thousands):

 
  Three Months Ended
March 31,

 
 
  2003
  2002
 
Division net loss:              
  As reported   $ (4,815 ) $ (6,031 )
  Deduct: pro forma stock-based compensation expense, net of tax     (718 )   (936 )
   
 
 
  Pro forma   $ (5,533 ) $ (6,967 )
   
 
 

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

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

3.    Net Income (Loss) Per Share

        Note 3., "Net Income (Loss) Per Share," to our consolidated financial statements contains information regarding the calculation of earnings per share for each series of our stock using the two-class method. We present earnings per share data only in our consolidated financial statements because Genzyme Corporation is the issuer of the securities. Our divisions do not and cannot issue securities because they are not companies or legal entities.

4.    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 Genzyme Molecular Oncology's results of operations, financial condition or liquidity.

        In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others—an interpretation of FASB Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34." Genzyme Molecular Oncology applied the disclosure provisions of FIN 45 as of December 31, 2002. For more information, we suggest that you read Note 10., "Other Commitments and Contingencies—Guarantees," to our consolidated financial statements. We incorporate that information into this note by reference.

45


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

        When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that characterize our business. In particular, we encourage you to review the risks and uncertainties described under "Factors Affecting Future Operating Results" in Exhibit 99.2 to our 2002 Form 10-K. These risks and uncertainties could cause our actual results to differ materially from those forecast in forward-looking statements or implied by past results and trends. Forward-looking statements are statements that attempt to project or anticipate future developments in our business; we encourage you to review the examples of forward-looking statements under "Note Regarding Forward-Looking Statements." These statements, like all statements in this report, speak only as of the date of this report (unless another date is indicated), and we undertake no obligation to update or revise the statements in light of future developments.

INTRODUCTION

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

        We have three series of common stock—Genzyme General Division common stock, which we refer to as "Genzyme General Stock," Genzyme Biosurgery Division common stock, which we refer to as "Biosurgery Stock," and Genzyme Molecular Oncology Division common stock, which we refer to as "Molecular Oncology Stock." We also refer to our series of stock as "tracking stock." Unlike typical common stock, each of our tracking stocks is designed to track the financial performance of a specific subset of our business operations and its allocated assets, rather than the operations and assets of our entire company. The chief mechanisms intended to cause each tracking stock to "track" the financial performance of each division are provisions in our charter governing dividends and distributions. The provisions governing dividends provide that our board of directors has discretion to decide if and when to declare dividends, subject to certain limitations. To the extent that the following amount does not exceed the funds that would be legally available for dividends under Massachusetts law, the dividend limit for a stock corresponding to a division is the greater of:

46


        The provisions in our charter governing dividends and distributions factor the assets and liabilities and income or losses attributable to a division into the determination of the amount available to pay dividends on the associated tracking stock. In addition, our income tax allocation policy provides that if, at 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 allocate the tax benefit to other divisions in proportion to their taxable income without any compensating payments or allocation to the division generating the benefit. Genzyme Biosurgery and Genzyme Molecular Oncology have not yet generated taxable income, and thus have not had the ability to use any projected annual tax benefits. Genzyme General has generated taxable income, providing it with the ability to utilize the tax benefits generated by Genzyme Biosurgery and Genzyme Molecular Oncology. Consistent with our policy, we have allocated the tax benefits generated by Genzyme Biosurgery and Genzyme Molecular Oncology to Genzyme General without making any compensating payments or allocations to the division that generated the benefit.

        The losses of Genzyme Biosurgery and Genzyme Molecular Oncology may decline in the future. If these losses do decline, and we expect the losses of Genzyme Biosurgery to do so, the tax benefits allocated to Genzyme General will also decline. In addition, if our board of directors decided to change our tax allocation policy, it could reduce the tax benefits allocated to any division that is profitable at the time the change becomes effective, and reduce the earnings allocated to the associated series of tracking stock. Any change in the earnings allocated to a tracking stock also impacts the amount available to pay dividends for that tracking stock. Currently, Genzyme General is our only profitable division.

        Deferred tax assets and liabilities can arise from purchase accounting and relate to a division that does not satisfy the realizability criteria of SFAS No. 109, "Accounting for Income Taxes." Such deferred tax assets and liabilities are allocated to the division to which the acquisition was allocated. As a result, the periodic changes in these deferred tax assets and liabilities do not result in a tax expense or benefit to that division. However, the change in these deferred tax assets and liabilities impacts our consolidated tax provision. Such change is added to division net income for purposes of determining net income allocated to a tracking stock. If our board of directors modified the policy for allocating changes in these deferred tax assets and liabilities, the income attributable to each series of tracking stock could be materially different. As a result of any such changes, the amount available to pay dividends for each of our tracking stocks could also be materially different.

        Within these parameters, and other general limits under our charter and Massachusetts law, the amount of any dividend payment will be at the board of directors' discretion. To date, we have never paid or declared a cash dividend on shares of any of our series of common stock, nor do we anticipate doing so in the foreseeable future. Unless declared, no dividends accrue on our tracking stocks.

        Our charter also requires that distributions be made to holders of Biosurgery Stock or Molecular Oncology Stock if all or substantially all of the assets allocated to that stock's corresponding division are sold to a third party. This mandatory distribution can be in the form of a dividend, a redemption of the division's related tracking stock or an exchange of that tracking stock for Genzyme General Stock, as chosen by our board of directors in its discretion. The distribution, if by dividend or redemption, must equal in value the net after-tax proceeds received from the sale. If our board of directors chooses to make the distribution by issuing Genzyme General Stock in exchange for the selling division's related tracking stock, then the exchange must be effected at a 10% premium to the corresponding tracking stock's average market price calculated over a ten day period beginning on the first business day following the announcement of the sale.

47



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

        To determine earnings per share, we allocate our earnings to each series of our common stock based on the earnings attributable to that series of stock. The earnings attributable to each series of stock is defined in our charter as the net income or loss of the corresponding division determined in accordance with accounting principles generally accepted in the U.S. and as adjusted for tax benefits allocated to or from that division in accordance with our management and accounting policies. Our charter also requires that all of our income and expenses be allocated among our divisions in a reasonable and consistent manner. Our board of directors, however, retains considerable discretion in interpreting and changing the methods of allocating earnings to each series of common stock without shareholder approval. As market or competitive conditions warrant, we may create new series of tracking stock, combine existing tracking stock or change our earnings allocation methodology. Because the earnings allocated to each series of stock are based on the income or losses attributable to each corresponding division, we provide financial statements and management's discussion and analysis for the corporation as well as for each of our divisions to aid investors in evaluating our performance and the performance of each of our divisions.

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

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES

        Our critical accounting policies are set forth under the heading "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations—Critical Accounting Policies and Significant Estimates" in Exhibit 13.1 to our 2002 Form 10-K. There have been no changes to these policies and no significant changes to these estimates since December 31, 2002.

A.    RESULTS OF OPERATIONS

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

48




GENZYME CORPORATION

REVENUES

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

 
  Three Months Ended
March 31,

   
 
 
  Increase/
(Decrease)
% Change

 
 
  2003
  2002
 
 
  (Amounts in thousands, except percentage data)

 
Product revenue   $ 346,489   $ 266,626   30 %
Service revenue     31,498     26,683   18 %
   
 
     
  Total product and service revenue     377,987     293,309   29 %
Research and development revenue     3,872     4,631   (16 )%
   
 
     
  Total revenues   $ 381,859   $ 297,940   28 %
   
 
     

Product Revenue

        We derive product revenue from sales by:

49


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

 
  Three Months Ended
March 31,

   
 
 
  Increase/
(Decrease)
% Change

 
 
  2003
  2002
 
 
  (Amounts in thousands, except percentage data)

 
Genzyme General:                  
  Therapeutics:                  
    Cerezyme enzyme   $ 167,187   $ 148,066   13 %
    Other therapeutic products     30,024     11,445   162 %
   
 
     
      Total Therapeutics     197,211     159,511   24 %
 
Renal

 

 

58,766

 

 

29,532

 

99

%
  Diagnostic Products     23,196     19,838   17 %
  Other     9,866     9,582   3 %
   
 
     
      Total product revenue—Genzyme General     289,039     218,463   32 %
   
 
     

Genzyme Biosurgery:

 

 

 

 

 

 

 

 

 
  Orthopaedics     26,354     19,998   32 %
  Biosurgical Specialties     12,104     9,990   21 %
  Cardiac Science     12       N/A  
  Cardiac Devices     18,980     18,175   4 %
   
 
     
      Total product revenue—Genzyme Biosurgery     57,450     48,163   19 %
   
 
     
      Total product revenues   $ 346,489   $ 266,626   30 %
   
 
     

Genzyme General—Therapeutics

        The increase in our Therapeutics product revenue for the three months ended March 31, 2003, as compared to the same period of 2002, was primarily due to continued growth in sales of Cerezyme enzyme for the treatment of Type 1 Gaucher disease and increased sales of other therapeutic products. Other therapeutic products revenue consists primarily of:


        The growth in sales of Cerezyme enzyme for the three months ended March 31, 2003, as compared to the same period of 2002, was attributable to our continued identification of new Gaucher disease patients worldwide, particularly in Europe, resulting from a significant investment in our global sales and marketing infrastructure. The growth in European sales of Cerezyme enzyme for the period was positively impacted by the weakened U.S. Dollar against the Euro. During the three months ended March 31, 2003, as compared to the same period of 2002, the U.S. Dollar weakened against the Euro on average by approximately 22%, which positively impacted sales of Cerezyme enzyme by $10.5 million. Sales of Cerezyme enzyme were approximately 48% of our total product revenue for the three months ended March 31, 2003 as compared to 56% for the same period of 2002.

50


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

        We are aware of companies that have initiated efforts to develop competitive products, and other companies may do so in the future. For example, Oxford Glycosciences plc, which we refer to as OGS, is developing Zavesca®, a small molecule drug candidate for the treatment of Type 1 Gaucher disease. Zavesca has been granted orphan drug status in the U.S. for treatment of Type 1 Gaucher and Fabry diseases, and has been designated as an orphan medicinal product in the European Union for the treatment of Type 1 Gaucher disease. In July 2002, the FDA issued a "non approvable" letter to OGS in response to its New Drug Application (NDA) for Zavesca; in November 2002, however, the agency agreed to examine additional data in support of that NDA. OGS filed an amendment to its NDA for Zavesca with additional data in March 2003. Also in November 2002, the European Commission approved OGS's Marketing Authorisation Application (MAA) for Zavesca as an oral therapy for use in patients with mild to moderate Type 1 Gaucher disease for whom enzyme replacement therapy is unsuitable. OGS will be required to submit follow-up safety data on the product as a condition of such approval. In January 2003, a licensee of OGS submitted an application for approval of Zavesca with the Israeli Ministry of Health. To date, virtually all Gaucher disease patients who have received enzyme therapy have experienced strong clinical benefit with few side effects so we do not expect the competition from Zavesca to have a significant impact on our sales of Cerezyme enzyme.

        Other therapeutic products revenue consists primarily of sales of Thyrogen hormone, Fabrazyme enzyme and bulk sales of and royalties earned on sales of WelChol bile acid binder. The increase in other therapeutic products revenue for the three months ended March 31, 2003 as compared to the same period of 2002 is attributable to:

Genzyme General—Renal

        In September 2002, we created the Renal reporting segment consisting primarily of amounts attributable to the manufacture and sale of Renagel phosphate binder. Previously, amounts attributable

51



to the manufacture and sale of Renagel phosphate binder had been included as a component of Genzyme General's Therapeutics reporting segment. We have reclassified our 2002 disclosures to conform to our 2003 presentation. We expect sales of Renagel phosphate binder to increase, driven primarily by the continued adoption of the product by nephrologists worldwide. The increase in sales of Renagel phosphate binder will be dependent on several factors, including:

        Sales of Renagel phosphate binder increased 99% for the three months ended March 31, 2003, as compared to the same period of 2002, primarily due to increased sales in both the U.S. and Europe. In the first three months of 2003, U.S. sales of Renagel phosphate binder increased 98% to $41.8 million as compared to the same period in 2002, primarily due to:

The price increase for Renagel phosphate binder, effective in February 2003, did not have a significant impact on sales of the product for the three months ended March 31, 2003. In Europe, sales of Renagel phosphate binder increased 100% for the three months ended March 31, 2003, as compared to the same period of 2002, primarily due to:

52


        During the three months ended March 31, 2003, we obtained reimbursement approval for the 800 mg tablet formulation of Renagel phosphate binder in France, the last major European market where this form of the product had previously been unavailable. In addition, in March 2003, we began shipping Renagel phosphate binder tablets to the European market from our new Current Good Manufacturing Practices, or cGMP, manufacturing facility in Waterford, Ireland, upon receiving approval from the European Agency for the Evaluation of Medicinal Products, or EMEA, to commence production of Renagel phosphate binder at the plant. We anticipate that the FDA will approve production of Renagel phosphate binder at the plant during 2003. Sales of Renagel phosphate binder were approximately 17% of our total product revenue for the three months ended March 31, 2003 as compared to 11% for the same period of 2002.

Diagnostic Products

        Diagnostic Products product revenue increased 17% for the three months ended March 31, 2003 as compared to the same period of 2002. The increase was primarily attributable to:

Other Product Revenue

        Other product revenue increased 3% to $9.9 million for the three months ended March 31, 2003 as compared to the same period of 2002. The increase was primarily attributable to a 4% increase in the combined sales of liquid crystals, lipids, peptides and amino acid derivatives to $7.0 million, offset by a 1% decrease in the sales of hyaluronan-based products to $2.8 million.

Genzyme Biosurgery—Orthopaedics

        Orthopaedics product revenue increased 32% to $26.4 million for the three months ended March 31, 2003, as compared to the same period of 2002, primarily due to an increase in sales of Synvisc viscosupplementation product. Synvisc viscosupplementation product sales increased primarily due to increased utilization of the product within the existing customer base as well as the creation of new accounts. We believe that a potentially significant competitor is currently seeking FDA approval for a viscosupplementation product for possible U.S. launch during the second half of 2003 that could have an adverse affect on future sales of Synvisc viscosupplementation product.

Genzyme Biosurgery—Biosurgical Specialties

        In January 2003, Genzyme Biosurgery reallocated two suture product lines from its Biosurgical Specialties reporting segment to its Cardiac Devices reporting segment, so that all suture product lines are reflected as components of its Cardiac Devices reporting segment. In addition, Genzyme Biosurgery reallocated its cardiovascular Sepra products from its Cardiac Devices reporting segment to its Biosurgical Specialties reporting segment. We have reclassified Genzyme Biosurgery's 2002 disclosures to conform to its 2003 presentation.

        Biosurgical Specialties product revenue increased 21% to $12.1 million for the three months ended March 31, 2003, as compared to the same period of 2002, primarily due to a 23% increase in the sales of Sepra products to $10.4 million primarily due to increased market penetration.

53



Genzyme Biosurgery—Cardiac Devices

        In January 2003, as a result of a change in how Genzyme Biosurgery reviews its business, the activities of its former Cardiothoracic reporting segment were reallocated into two separate reporting segments called Cardiac Science and Cardiac Devices. Genzyme Biosurgery has reclassified its 2002 disclosures to conform to the 2003 presentation.

        Cardiac Devices product revenue increased 4% to $19.0 million for the three months ended March 31, 2003, as compared to the same period of 2002, primarily due to an 8% increase in the sales of instruments for minimally-invasive and off-pump cardiac surgery to $3.3 million as a result of increased market penetration. Additionally, there was a 21% increase in the combined sales of surgical closures for cardiac surgery and surgical closures sold to original equipment manufacturers to $6.3 million for the three months ended March 31, 2003, as compared to the same period of 2002.

Service Revenue

        We derive service revenues from four principal sources:

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

 
  Three Months Ended
March 31,

   
 
 
  Increase/
(Decrease)
% Change

 
 
  2003
  2002
 
 
  (Amounts in thousands, except percentage data)

 
Genzyme General—Other   $ 24,455   $ 21,175   15 %
   
 
     

Genzyme Biosurgery:

 

 

 

 

 

 

 

 

 
  Orthopaedics     6,067     4,177   45 %
  Biosurgical Specialties     973     1,031   (6 )%
  Cardiac Science     3       N/A  
   
 
     
    Total service revenue—Genzyme Biosurgery     7,043     5,208   35 %
   
 
     

Genzyme Molecular Oncology

 

 


 

 

300

 

(100

)%
   
 
     
    Total service revenues   $ 31,498   $ 26,683   18 %
   
 
     

        The 15% increase in Genzyme General's other service revenue for the three months ended March 31, 2003, as compared to the same period of 2002, is primarily attributable to:

54


        Genzyme Biosurgery's Orthopaedics service revenue increased 45% to $6.1 million for the three months ended March 31, 2003, as compared to the same period of 2002, primarily due to a change in the classification of $1.5 million of reimbursed expenses from partners as service revenue.

        The 6% decrease in Genzyme Biosurgery's Biosurgical Specialties service revenue to $1.0 million for the three months ended March 31, 2003 as compared to same period of 2002 is attributable to decreased sales of Epicel skin grafts, which are used to treat victims of severe burns. Sales of Epicel skin grafts are variable based upon a number of unpredictable factors, including the number of severe burn patients and their survival rate prior to treatment with Epicel skin grafts.

        Genzyme Molecular Oncology's service revenue for the three months ended March 31, 2002 consists of revenues from the provision of services related to the SAGE genomics technology for which there are no comparable amounts in the same period of 2003. Genzyme Molecular Oncology provides these services sporadically as customers request them. The focus of its SAGE business remains directed to granting licenses to the technology.

International Product and Service Revenue

        A substantial portion of our revenue was generated outside of the U.S. Most of these revenues were attributable to sales of Cerezyme enzyme. The following table provides information regarding the change in international product and service revenue as a percentage of total product and service revenue during the periods presented:

 
  Three Months Ended
March 31,

   
 
 
  Increase/
(Decrease)
% Change

 
 
  2003
  2002
 
 
  (Amounts in thousands, except percentage data)

 
International product and service revenue   $ 159,420   $ 120,221   33 %
% of total product and service revenue     42 %   41 %    

        International sales of Cerezyme enzyme increased 22% to $94.9 million for the three months ended March 31, 2003, as compared to $77.8 million in the same period of 2002, primarily due to:

        International sales of Renagel phosphate binder increased 103% to $16.9 million for the three months ended March 31, 2003, as compared to $8.4 million for the same period of 2002, primarily due to:

        International sales of Fabrazyme enzyme increased 198% to $11.8 million for the three months ended March 31, 2003, as compared to $4.0 million for the same period of 2002, primarily due to:

55


        International product and service revenue as a percent of total product and service revenue increased for the three months ended March 31, 2003, as compared to the same period of 2002, primarily due to the overall increase in international product and service sales and a $15.1 million positive impact on sales resulting from a 22% increase in the average exchange rate of the Euro.

Research and Development Revenue

        We derive research and development revenue primarily from:

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

 
  Three Months Ended
March 31,

   
 
 
  Increase/
(Decrease)
% Change

 
 
  2003
  2002
 
 
  (Amounts in thousands, except percentage data)

 
Genzyme General:                  
  Therapeutics   $   $ 1,796   (100 )%
  Other     43     31   39 %
  Eliminations/Adjustments     508     682   (26 )%
   
 
     
    Total research and development revenue—Genzyme General     551     2,509   (78 )%
   
 
     

Genzyme Biosurgery:

 

 

 

 

 

 

 

 

 
  Orthopaedics     430       N/A  
  Biosurgical Specialties     686       N/A  
  Cardiac Science     17       N/A  
   
 
     
    Total research and development revenue—Genzyme Biosurgery     1,133       N/A  
   
 
     

Genzyme Molecular Oncology

 

 

2,188

 

 

2,122

 

3

%
   
 
     
Total research and development revenues   $ 3,872   $ 4,631   (16 )%
   
 
     

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

        Research and development revenue for Genzyme Biosurgery's Orthopaedics reporting segment is primarily due to reimbursements received from a partner for development projects associated with Synvisc supplementation product. Research and development revenue for Genzyme Biosurgery's

56



Biosurgical Specialties reporting segment is primarily due to a milestone payment received for Hylaform® biomaterial product.

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

        The slight increase in research and development revenue allocated to Genzyme Molecular Oncology for the three months ended March 31, 2003, as compared to the same period of 2002, is primarily due to a planned increase in the amount of research performed on behalf of Purdue.

MARGINS

 
  Three Months Ended
March 31,

   
 
 
  Increase/
(Decrease)
% Change

 
 
  2003
  2002
 
 
  (Amounts in thousands, except percentage data)

 
Product margin:                  
  Genzyme General   $ 219,463   $ 170,864   28 %
  % of total product revenue     63 %   64 %    
 
Genzyme Biosurgery

 

$

32,192

 

$

23,608

 

36

%
  % of total product revenue     9 %   9 %    
 
Total product margin

 

$

251,655

 

$

194,472

 

29

%
  % of total product revenue     73 %   73 %    

Service margin:

 

 

 

 

 

 

 

 

 
  Genzyme General   $ 10,991   $ 9,309   18 %
  % of total service revenue     35 %   35 %    
 
Genzyme Biosurgery

 

$

3,529

 

$

2,175

 

62

%
  % of total service revenue     11 %   8 %    
 
Genzyme Molecular Oncology

 

$


 

$

181

 

(100

)%
  % of total service revenue         1 %    
 
Total service margin

 

$

14,520

 

$

11,665

 

24

%
  % of total service revenue     46 %   44 %    

Total product and service gross margin

 

$

266,175

 

$

206,137

 

29

%
% of total product and service revenue     70 %   70 %    

Product Margin

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

57


        The 28% increase in Genzyme General's overall product margin for the three months ended March 31, 2003, as compared to same period of 2002, was primarily attributable to a 32% increase in product revenue. The increase in product margin was primarily attributable to an increase in sales of Therapeutics products, in addition to increased sales of Renal and Diagnostic Products for the three months ended March 31, 2003, as compared to same period of 2002.

        Product margin for Genzyme General's Therapeutics reporting segment increased 20% for the three months ended March 31, 2003, as compared to the same period of 2002. This was due to a 24% increase in sales of Therapeutics products primarily attributable to increased sales of Cerezyme enzyme, Thyrogen hormone and Fabrazyme enzyme for the three months ended March 31, 2003, as compared to the same period of 2002. The increase in product margin was offset, in part, by the write off of $2.3 million of Cerezyme enzyme finished goods due to production issues, for which there is no similar write off in the same period of 2002.

        Product margin for Genzyme General's Renal reporting segment increased 94% for the three months ended March 31, 2003, as compared to the same period of 2002. This was primarily due to an increase in sales of Renagel phosphate binder for the three months ended March 31, 2003, as compared to the same period in 2002, offset by an increase in the rebate reserve for the product corresponding to an increase in our estimates of the percentage of patients being reimbursed by government programs. In addition, product margin for the Renal reporting segment is impacted by sales of bulk sevelamer, a lower margin product, to our Asian marketing partners.

        Product margin for Genzyme General's Diagnostic Products increased 103% for the three months ended March 31, 2003, as compared to the same period of 2002. This was primarily due to a 17% increase in sales of Diagnostic Products for the three months ended March 31, 2003, as compared to the same period of 2002, and a 13% decrease in the cost of products sold for the three months ended March 31, 2003, as compared to the same period of 2002. The decrease in the cost of products sold is partially attributable to a charge of $2.9 million recorded in the three months ended March 31, 2002, for the closure of a Diagnostic Products manufacturing facility in San Carlos, California for which there is no comparable amount in the three months ended March 31, 2003.

        We expect that in the future Genzyme General's product margin as a percentage of product revenue will trend slightly lower, primarily due to lower margins normally attributable to Renagel phosphate binder and a product mix shift as sales of Diagnostic Products continue to increase.

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

        The 36% increase in product margin for the three months ended March 31, 2003 as compared to the same period of 2002 was primarily attributable to a $9.3 million increase in product revenue. The increase in product revenue was primarily due to an increase in sales of Synvisc viscosupplementation product due to increased utilization of the product within the existing customer base as well as the creation of new accounts, and an increase in sales of Sepra products due to increased market penetration.

58


Service Margin

        The 18% increase in Genzyme General's service margin for the three months ended March 31, 2003, as compared to the same period of 2002, was primarily due to:

Service margin as a percentage of service revenue was consistent for the three month period ending March 31, 2003, as compared to the same period of 2002. This was primarily attributable to a 15% increase in service revenue for the three months ended March 31, 2003, which was partially offset by a 13% increase in the cost of services sold for the same period.

        Service margin for services allocated to Genzyme Biosurgery increased 62% for the three months ended March 31, 2003, as compared to the same period of 2002, and service margin as a percentage of service revenue increased primarily due to a 45% increase in sales of Orthopaedics services. This increase is a result of the classification of $1.5 million of reimbursed expenses from partners as service revenue.

OPERATING EXPENSES

Selling, General and Administrative Expenses

        Selling, general and administrative expenses increased $11.3 million, or 11%, to $114.2 million for the three months ended March 31, 2003, as compared to same period a year ago, primarily due to:


        The increases in selling, general and administrative expenses for the three months ended March 31, 2003, as compared to the same period of 2002, were offset by a net decrease of approximately $1.3 million attributable to administrative activities that we do not specifically allocate to a particular segment of Genzyme General and an overall decrease in expenses relating to Genzyme Biosurgery's Cardiac Devices business primarily due to increased operating efficiencies and reductions in staffing in 2002.

59


Research and Development Expenses

        Research and development expenses decreased $6.5 million, or 8%, to $75.6 million for the three months ended March 31, 2003, as compared to the same period of 2002, primarily due to a $9.9 million decrease in spending for Therapeutics research and development programs. This decrease was offset by:

        The $9.9 million decrease in spending for Therapeutics research and development programs resulted from $10.8 million of additional charges that were included in research and development expenses for the three months ended March 31, 2002, for which there were no comparable amounts during the same period of 2003. The $10.8 million consisted of:

Amortization of Intangibles

        There was no significant change in amortization of intangibles expense for the three months ended March 31, 2003, as compared to the same period in 2002.

Purchase of In-Process Research and Development

Novazyme

        In September 2001, in connection with our acquisition of Novazyme, we acquired a technology platform that we believe can be leveraged in the development of treatments for various LSDs. As of the acquisition date, the technology platform had not achieved technological feasibility and would require significant further development to complete. Accordingly, we allocated to IPR&D and charged to expense $86.8 million, representing the portion of the purchase price attributable to the technology platform. Genzyme General recorded this amount as a charge to expense in its combined statements of operations for the year ended December 31, 2001.

        The platform technology is specific to LSDs and there is currently no alternative use for the technology in the event that it fails as a platform for enzyme replacement therapy for the treatment of LSDs. As of March 31, 2003, we estimate that it will take approximately six to eight years and an investment of approximately $100 million to $125 million to complete the development of, obtain approval for and commercialize the first product based on this technology platform.

GelTex

        In December 2000, in connection with the acquisition of GelTex, we allocated approximately $118.0 million of the purchase price to IPR&D, which Genzyme General recorded as a charge to expense in its combined statements of operations for the year ended December 31, 2000. As of

60



March 31, 2003, the technological feasibility of the projects had not yet been reached and no significant departures from the assumptions included in the valuation analysis had occurred.

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

Program

  Program Description or
Indication

   
  Development Status
at March 31, 2003

  Value at
Acquisition
Date

  Estimated
Cost to Complete at
March 31,
2003

  Year of
Expected
Product
Launch

 
   
   
   
  (in millions)

   
Renagel phosphate
    binder
  Next stage non-absorbed polymer phosphate binder for the treatment of hyperphosphatemia     Clinical studies scheduled for completion in 2004 and 2005   $ 19.7   $ 10.2   2005

Tolevamer toxin binder

 

C. difficile associated diarrhea

 


 

Phase 2 trial expected to be completed in 2003

 

 

37.4

 

 

48.0

 

2007

GT56-252
    oral iron chelator

 

Iron overload disease

 


 

Phase 1 trial ongoing

 

 

15.7

 

 

34.7

 

2007

GT316-235
    fat absorption
    inhibitor

 

Anti-obesity

 


 

Expected to file an IND in 2004

 

 

17.8

 

 

59.3

 

2010

Polymer

 

Oral mucositis

 


 

Expected to file an IND in 2004

 

 

17.8

 

 

37.7

 

2008

DENSPM

 

Psoriasis

 


 

Program cancelled during 2001; no further development planned

 

 

3.4

 

 

N/A

 

N/A

GT102-279

 

Second generation lipid-lowering compound

 


 

Program cancelled during 2001; no further development planned

 

 

6.2

 

 

N/A

 

N/A
               
 
   
                $ 118.0   $ 189.9    
               
 
   

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

        In connection with our acquisition of Biomatrix, we allocated approximately $82.1 million to IPR&D, which Genzyme Biosurgery recorded as a charge to expense in its combined statements of operations for the year ended December 31, 2000. As of March 31, 2003, the technological feasibility of the Biomatrix IPR&D projects had not yet been reached and no significant departures from the assumptions included in the valuation analysis had occurred.

61


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

Program

  Program Description or
Indication

   
  Development Status at
March 31, 2003

  Value at
Acquisition
Date

  Estimated
Cost to
Complete
at March 31,
2003

  Year of
Expected
Product
Launch

 
   
   
   
  (in millions)

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






  Received conditional FDA approval for hip indication clinical trial in U.S.
Preclinical activities in U.S. and clinical trial in Europe for knee indications
Preclinical for other joints
Product launched for hip indication in Europe in September 2002
  $ 33.8   $ 22.3   2002 to 2008

Visco-augmentation and Visco-separation

 

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

 








 

Preclinical—gynecological and pelvic indications
Clinical trials—pivotal safety and efficacy study on-going in U.S. for Hylaform biomaterials
Phase 2—spine indications; program cancelled during 2002; no further development planned

 

 

48.3





N/A

 

 

4.2





N/A

 

2003 to 2006




N/A

 

 

 

 

 

 

 

 



 



 

 

 

 

 

 

 

 

 

 

$

82.1

 

$

26.5

 

 

 

 

 

 

 

 

 

 



 



 

 

        Except for our viscosupplementation product for the hip launched in Europe in 2002, substantial additional research and development will be required prior to any of our acquired IPR&D programs and technology platforms reaching technological feasibility. In addition, once research is completed, each product will need to complete a series of clinical trials and receive FDA or other regulatory approvals prior to commercialization. Our current estimates of the time and investment required to develop these products and technologies may change depending on the different applications that we may choose to pursue. We cannot give assurances that these programs will ever reach feasibility or develop into products that can be marketed profitably. In addition, we cannot guarantee that we will be able to develop and commercialize products before our competitors develop and commercialize products for the same indications. If products based on our acquired IPR&D programs and technology platforms do not become commercially viable, our results of operations could be materially affected.

62



OTHER INCOME AND EXPENSES

 
  Three Months Ended
March 31,

   
 
 
  Increase/
(Decrease)
% Change

 
 
  2003
  2002
 
 
  (Amounts in thousands, except percentage data)

 
Equity in net loss of unconsolidated affiliates   $ (4,194 ) $ (4,094 ) 2 %
Gain on investments in equity securities         166   (100 )%
Other     750     (864 ) 187 %
Investment income     11,614     13,437   (14 )%
Interest expense     (6,490 )   (6,806 ) (5 )%
   
 
     
  Total other income   $ 1,680   $ 1,839   (9 )%
   
 
     

Equity in Net Loss of Unconsolidated Affiliates

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

Joint Venture

  Partner
  Effective Date
  Product/Indication
BioMarin/ Genzyme LLC   BioMarin Pharmaceutical Inc.   September 1998   Aldurazyme enzyme for the treatment of mucopolysaccharidosis-I

Diacrin/Genzyme LLC (1)

 

Diacrin, Inc.

 

October 1996

 

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

(1)
The joint venture is no longer actively developing these products.

        The following table presents our equity in net loss of unconsolidated affiliates by entity for the periods presented:

 
  Three Months Ended
March 31,

   
 
Joint Venture/Unconsolidated Affiliate

  Increase/
(Decrease)
% Change

 
  2003
  2002
 
 
  (Amounts in thousands, except percentage data)

 
BioMarin/Genzyme LLC   $ (4,051 ) $ (2,842 ) 43 %
Diacrin/Genzyme LLC     (143 )   (150 ) (5 )%
GTC         (1,102 ) (100 )%
   
 
     
  Total   $ (4,194 ) $ (4,094 ) 2 %
   
 
     

        We record in equity in net loss of unconsolidated affiliates our portion of the results of our joint ventures with BioMarin and Diacrin and, through May 2002, our portion of the losses of GTC.

        Our equity in net loss of unconsolidated affiliates increased 2% to $4.2 million for the three months ended March 31, 2003, as compared to the same period of 2002. The increase was attributable to:

63


        On April 4, 2002, GTC purchased approximately 2.8 million shares of GTC common stock held by us and allocated to Genzyme General for an aggregate consideration of $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.

        In January 2002, we formed 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.

Gain on Investments in Equity Securities

        We did not record any significant realized gains or losses related to our investments in equity securities for the three months ended March 31, 2003 and 2002.

        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 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

64



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 the investments for which we have recorded unrealized losses at March 31, 2003 if the stocks do not recover within the next three to six months, all of which will be allocated to Genzyme General.

Other

        We periodically enter foreign currency forward contracts, all of which have durations of less than three months. These contracts have not been designated as hedges and, accordingly, unrealized gains or losses on these contracts are reported in current earnings. The notional settlement value of foreign currency forward contracts outstanding as of March 31, 2003 is $50.6 million. At both March 31, 2003 and 2002, these contracts had a fair value of $0.2 million, representing an unrealized loss.

        For the three months ended March 31, 2003, we also recorded in other in our consolidated statements of operations and the combined statements of operations of Genzyme General an unrealized gain of $0.1 million to reflect the change in value of our warrants to purchase shares of GTC common stock from January 1, 2003 to March 31, 2003, as compared to an unrealized loss of $(1.2) million for the same period of 2002.

Investment Income

        Our investment income decreased 14% for the three months ended March 31, 2003, as compared to the same period of 2002, primarily due to a decrease in interest rates despite higher average cash balances.

Interest Expense

        Our interest expense decreased 5% for the three months ended March 31, 2003, as compared to the same period of 2002, primarily due to a slight decline in debt balances outstanding resulting from the repayment, in 2002, of notes payable, aggregating $7.0 million, assumed in connection with our acquisitions of Novazyme in September 2001 and GelTex in December 2000.

Tax Provision

 
  Three Months Ended
March 31,

   
 
 
  Increase/
(Decrease)
% Change

 
 
  2003
  2002
 
 
  (Amounts in thousands, except percentage data)

 
Provision for income taxes   $ (18,998 ) $ (3,138 ) 505 %
Effective tax rate     30 %   32 %    

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

The decrease in our effective tax rate for the three months ended March 31, 2003, as compared to the same period of 2002 is primarily due to increased benefits from orphan drug credits.

65


CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR GOODWILL

        On January 1, 2002, we adopted SFAS No. 142, 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. SFAS No. 142 requires a transitional impairment test to compare the fair value of a reporting unit with the carrying amount of the goodwill.

        In November 2001, we sold our Snowden-Pencer line of surgical instruments. 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 devices reporting unit, under SFAS No. 121, did not indicate an impairment based on the undiscounted cash flows of the business. However, the impairment analysis indicated that the goodwill allocated to Genzyme Biosurgery's cardiothoracic devices 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, Genzyme Biosurgery tested the goodwill of the 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. Genzyme Biosurgery recorded an impairment charge of $98.3 million, which was reflected as a cumulative effect of a change in accounting for goodwill in our consolidated statements of operations and the combined statements of operations for Genzyme Biosurgery for the three months ended March 31, 2002.

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GENZYME GENERAL
A Division of Genzyme Corporation

        The following discussion summarizes the key factors our management believes necessary for an understanding of Genzyme General's financial statements. When reviewing this discussion, you should keep in mind the substantial risks and uncertainties that characterize our business. In particular, we encourage you to review the risks and uncertainties described under "Factors Affecting Future Operating Results" in Exhibit 99.2 to our 2002 Form 10-K. These risks and uncertainties could cause our actual results to differ materially from those forecast in forward-looking statements or implied by past results and trends. Forward-looking statements are statements that attempt to project or anticipate future developments in our business; we encourage you to review the examples of forward-looking statements under "Note Regarding Forward-Looking Statements." These statements, like all statements in this report, speak only as of the date of this report (unless another date is indicated), and we undertake no obligation to update or revise the statements in light of future developments.

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES

        The critical accounting policies and significant estimates for Genzyme General are set forth under the heading "Management's Discussion and Analysis of Genzyme General's Financial Condition and Results of Operations—Critical Accounting Policies and Significant Estimates" in Exhibit 13.2 to our 2002 Form 10-K. There have been no changes to these policies and no significant changes to these estimates since December 31, 2002.

REVENUES

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

 
  Three Months Ended
March 31,

   
 
 
  Increase/
(Decrease)
% Change

 
 
  2003
  2002
 
 
  (Amounts in thousands, except percentage data)

 
Product revenue   $ 289,039   $ 218,463   32 %
Service revenue     24,455     21,175   15 %
   
 
     
  Total product and service revenue     313,494     239,638   31 %
Research and development revenue     551     2,509   (78 )%
   
 
     
  Total revenues   $ 314,045   $ 242,147   30 %
   
 
     

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Product and Service Revenue

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

 
  Three Months Ended
March 31,

   
 
 
  Increase/
(Decrease)
% Change

 
 
  2003
  2002
 
 
  (Amounts in thousands, except percentage data)

 
Product revenue:                  
  Therapeutics:                  
    Cerezyme enzyme   $ 167,187   $ 148,066   13 %
    Other therapeutic products     30,024     11,445   162 %
   
 
     
      Total Therapeutics     197,211     159,511   24 %
 
Renal

 

 

58,766

 

 

29,532

 

99

%
  Diagnostic Products     23,196     19,838   17 %
  Other     9,866     9,582   3 %
   
 
     
      Total product revenue     289,039     218,463   32 %

Service revenue:

 

 

 

 

 

 

 

 

 
  Other     24,455     21,175   15 %
   
 
     
      Total product and service revenue   $ 313,494   $ 239,638   31 %
   
 
     

Therapeutics

        Genzyme General's increase in Therapeutics product revenue for the three months ended March 31, 2003, as compared to the same period of 2002, was primarily due to continued growth in sales of Cerezyme enzyme for the treatment of Type 1 Gaucher disease and increased sales of other therapeutic products. Other therapeutic products revenue consists primarily of:

        The growth in sales of Cerezyme enzyme for the three months ended March 31, 2003, as compared to the same period of 2002, was attributable to Genzyme General's continued identification of new Gaucher disease patients worldwide, particularly in Europe, resulting from a significant investment in our global sales and marketing infrastructure. The growth in European sales of Cerezyme enzyme for the period was positively impacted by the weakened U.S. Dollar against the Euro. During the three months ended March 31, 2003, as compared to the same period of 2002, the U.S. Dollar weakened against the Euro on average by approximately 22%, which positively impacted sales of Cerezyme enzyme by $10.5 million. Sales of Cerezyme enzyme were approximately 58% of Genzyme General's total product revenue for the three months ended March 31, 2003, as compared to 68% for the same period of 2002.

        Genzyme General's results of operations are highly dependent on sales of Cerezyme enzyme and a reduction in revenue from sales of this product would adversely affect its results of operations. Revenue

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

        Genzyme General is aware of companies that have initiated efforts to develop competitive products, and other companies may do so in the future. For example, OGS is developing Zavesca, a small molecule drug candidate for the treatment of Type 1 Gaucher disease. Zavesca has been granted orphan drug status in the U.S. for treatment of Type 1 Gaucher and Fabry diseases, and has been designated as an orphan medicinal product in the European Union for the treatment of Type 1 Gaucher disease. In July 2002, the FDA issued a "non approvable" letter to OGS in response to its NDA for Zavesca; in November 2002, however, the agency agreed to examine additional data in support of that NDA. OGS filed an amendment to its NDA for Zavesca with additional data in March 2003. Also in November 2002, the European Commission approved OGS's MAA for Zavesca as an oral therapy for use in patients with mild to moderate Type 1 Gaucher disease for whom enzyme replacement therapy is unsuitable. OGS will be required to submit follow-up safety data on the product as a condition of such approval. In January 2003, a licensee of OGS submitted an application for approval of Zavesca with the Israeli Ministry of Health. To date, virtually all Gaucher disease patients who have received enzyme therapy have experienced strong clinical benefit with few side effects so we do not expect the competition from Zavesca to have a significant impact on our sales of Cerezyme enzyme.

        Other therapeutic products revenue consists primarily of sales of Thyrogen hormone, Fabrazyme enzyme and bulk sales of and royalties earned on sales of WelChol bile acid binder. The increase in other therapeutic products revenue for the three months ended March 31, 2003, as compared to the same period of 2002, is attributable to:

Renal

        In September 2002, we created the Renal reporting segment consisting primarily of amounts attributable to the manufacture and sale of Renagel phosphate binder. Previously, amounts attributable to the manufacture and sale of Renagel phosphate binder had been included as a component of

69



Genzyme General's Therapeutics reporting segment. We have reclassified Genzyme General's 2002 disclosures to conform to its 2003 presentation. Genzyme General expects sales of Renagel phosphate binder to increase, driven primarily by the continued adoption of the product by nephrologists worldwide. The increase in sales of Renagel phosphate binder will be dependent on several factors, including:

        Sales of Renagel phosphate binder increased 99% for the three months ended March 31, 2003, as compared to the same period of 2002, primarily due to increased sales in both the U.S. and Europe. In the first three months of 2003, U.S. sales of Renagel phosphate binder increased 98% to $41.8 million as compared to the same period in 2002, primarily due to:

The price increase for Renagel phosphate binder, effective in February 2003, did not have a significant impact on sales of the product for the three months ended March 31, 2003. In Europe, sales of Renagel phosphate binder increased 100% for the three months ended March 31, 2003, as compared to the same period of 2002, primarily due to:

        During the three months ended March 31, 2003, we obtained reimbursement approval for the 800 mg tablet formulation of Renagel phosphate binder in France, the last major European market where

70



this form of the product had previously been unavailable. In addition, in March 2003, we began shipping Renagel phosphate binder tablets to the European market from our new cGMP manufacturing facility in Waterford, Ireland, upon receiving approval from the EMEA to commence production of Renagel phosphate binder at the plant. We anticipate that the FDA will approve production of Renagel phosphate binder at the plant during 2003. Sales of Renagel phosphate binder were approximately 20% of Genzyme General's total product revenue for the three months ended March 31, 2003 as compared to 14% for the same period of 2002.

Diagnostic Products

        Diagnostic Products product revenue increased 17% for the three months ended March 31, 2003 as compared to the same period of 2002. The increase was primarily attributable to:

Other Product and Service Revenue

        Other product revenue increased 3% to $9.9 million for the three months ended March 31, 2003 as compared to the same period of 2002. The increase was primarily attributable to a 4% increase in the combined sales of liquid crystals, lipids, peptides and amino acid derivatives to $7.0 million, offset by a 1% decrease in the sales of hyaluronan-based products to $2.8 million.

        Service revenue increased 15% for the three months ended March 31, 2003 as compared to the same period of 2002. The increase was primarily attributable to:


International Product and Service Revenue

        A substantial portion of Genzyme General's revenue was generated outside of the U.S. Most of these revenues were attributable to sales of Cerezyme enzyme. The following table provides information regarding the change in international product and service revenue as a percentage of total product and service revenue during the periods presented:

 
  Three Months Ended
March 31,

   
 
 
  Increase/
(Decrease)
% Change

 
 
  2003
  2002
 
 
  (Amounts in thousands, except percentage data)

 
International product and service revenue.   $ 140,609   $ 103,514   36 %
  % of total product and service revenue     45 %   43 %    

        International sales of Cerezyme enzyme increased 22% to $94.9 million for the three months ended March 31, 2003, as compared to $77.8 million in the same period of 2002, primarily due to:

71


        International sales of Renagel phosphate binder increased 103% to $16.9 million for the three months ended March 31, 2003, as compared to $8.4 million for the same period of 2002, primarily due to:

        International sales of Fabrazyme enzyme increased 198% to $11.8 million for the three months ended March 31, 2003, as compared to $4.0 million for the same period of 2002, primarily due to:

        International product and service revenue as a percent of total product and service revenue increased for the three months ended March 31, 2003, as compared to the same period of 2002, primarily due to the overall increase in international product and service sales and a $15.1 million positive impact on sales resulting from a 22% increase in the average exchange rate of the Euro.

Research and Development Revenue

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

 
  Three Months Ended
March 31,

   
 
 
  Increase/
(Decrease)
% Change

 
 
  2003
  2002
 
 
  (Amounts in thousands, except percentage data)

 
Therapeutics   $   $ 1,796   (100 )%
Other     43     31   39 %
Eliminations/Adjustments     508     682   (26 )%
   
 
     
  Total research and development revenues   $ 551   $ 2,509   (78 )%
   
 
     

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

72



MARGINS

 
  Three Months Ended
March 31,

   
 
 
  Increase/
(Decrease)
% Change

 
 
  2003
  2002
 
 
  (Amounts in thousands, except percentage data)

 
Product margin   $ 219,463   $ 170,864   28 %
  % of product revenue     76 %   78 %    

Service margin

 

 

10,991

 

 

9,309

 

18

%
  % of service revenue     45 %   44 %    

Total gross margin

 

$

230,454

 

$

180,173

 

28

%
  % of total product and service revenue     74 %   75 %    

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

Product Margin

        The 28% increase in Genzyme General's overall product margin for the three months ended March 31, 2003, as compared to same period of 2002, was primarily attributable to a 32% increase in product revenue. The increase in product margin was primarily attributable to an increase in sales of Therapeutics products, in addition to increased sales of Renal and Diagnostic Products for the three months ended March 31, 2003, as compared to same period of 2002.

        Product margin for the Therapeutics reporting segment increased 20% for the three months ended March 31, 2003, as compared to the same period of 2002. This was due to a 24% increase in sales of Therapeutics products primarily attributable to increased sales of Cerezyme enzyme, Thyrogen hormone and Fabrazyme enzyme for the three months ended March 31, 2003, as compared to the same period of 2002. The increase in product margin for the three months ended March 31, 2003 was offset, in part, by the write off of $2.3 million of Cerezyme enzyme finished goods due to production issues, for which there is no similar write off in the same period of 2002.

        Product margin for the Renal reporting segment increased 94% for the three months ended March 31, 2003 as compared to the same period of 2002. This was primarily due to an increase in sales of Renagel phosphate binder for the three months ended March 31, 2003, as compared to the same period in 2002, offset by an increase in the rebate reserve for the product corresponding to an increase in our estimates of the percentage of patients being reimbursed by government programs. In addition, product margin for the Renal reporting segment is impacted by sales of bulk sevelamer, a lower margin product, to our Asian marketing partners.

        Product margin for Diagnostic Products increased 103% for the three months ended March 31, 2003, as compared to the same period of 2002. This was primarily due to a 17% increase in sales of Diagnostic Products for the three months ended March 31, 2003, as compared to the same period of 2002, and a 13% decrease in the cost of products sold for the three months ended March 31, 2003, as compared to the same period of 2002. The decrease in the cost of products sold is partially attributable to a charge of $2.9 million recorded in the three months ended March 31, 2002, for the closure of a Diagnostic Products manufacturing facility in San Carlos, California for which there is no comparable amount in the three months ended March 31, 2003.

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        We expect that in the future Genzyme General's product margin as a percentage of product revenue will trend slightly lower, primarily due to lower margins normally attributable to Renagel phosphate binder and a product mix shift as sales of Diagnostic Products continue to increase.

Service Margin

        The 18% increase in service margin for the three month period ended March 31, 2003, as compared to the same period of 2002, was primarily due to:

Service margin as a percentage of service revenue increased slightly for the three month period ending March 31, 2003 as compared to the same period of 2002. This was primarily attributable to a 15% increase in service revenue for the three months ended March 31, 2003, which was partially offset by a 13% increase in the cost of services sold for the same period.

OPERATING EXPENSES

Selling, General and Administrative Expenses

        Selling, general and administrative expenses increased $8.9 million or 12% to $85.2 million for the three months ended March 31, 2003, as compared to the same period of 2002, primarily due to:

        The increases in selling, general and administrative expenses for the three months ended March 31, 2003, as compared to the same period of 2002, were offset by a net decrease of approximately $1.3 million attributable to administrative activities that we do not specifically allocate to a particular segment of Genzyme General.

Research and Development Expenses

        Research and development expenses decreased $7.5 million or 12% to $56.3 million for the three months ended March 31, 2003, as compared to the same period of 2002, primarily due to a $9.9 million decrease in spending for Therapeutics research and development programs offset by a $1.3 million increase in the cost of post-marketing clinical development efforts for Renagel phosphate binder.

        The $9.9 million decrease in spending for Therapeutics research and development programs resulted from $10.8 million of additional charges that were included in research and development expenses for the three months ended March 31, 2002, for which there were no comparable amounts during the same period of 2003. The $10.8 million consisted of:

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Amortization of Intangibles

        Amortization of intangibles expense remained constant at $9.7 million for the three months ended March 31, 2003, as compared to the same period of 2002.

Purchase of In-Process Research and Development

Novazyme

        In September 2001, in connection with our acquisition of Novazyme, we acquired a technology platform that we believe can be leveraged in the development of treatments for various LSDs. As of the acquisition date, the technology platform had not achieved technological feasibility and would require significant further development to complete. Accordingly, we allocated to IPR&D and charged to expense $86.8 million, representing the portion of the purchase price attributable to the technology platform. Genzyme General recorded this amount as a charge to expense in its combined statements of operations for the year ended December 31, 2001.

        The platform technology is specific to LSDs and there is currently no alternative use for the technology in the event that it fails as a platform for enzyme replacement therapy for the treatment of LSDs. As of March 31, 2002, we estimate that it will take approximately six to eight years and an investment of approximately $100 million to $125 million to complete the development of, obtain approval for and commercialize the first product based on this technology platform.

GelTex

        In December 2000, in connection with the acquisition of GelTex, we allocated approximately $118.0 million of the purchase price to IPR&D, which Genzyme General recorded as a charge to expense in its combined statement of operations for the year ended December 31, 2000. As of March 31, 2003, the technological feasibility of the projects had not yet been reached and no significant departures from the assumptions included in the valuation analysis had occurred.

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

Program

  Program Description or
Indication

   
  Development Status
at March 31, 2003

  Value at
Acquisition
Date

  Estimated
Cost to
Complete at
March 31,
2003

  Year of
Expected
Product
Launch

 
   
   
   
  (in millions)

   
Renagel phosphate binder   Next stage non-absorbed polymer phosphate binder for the treatment of hyperphospatemia     Clinical studies scheduled for completion in 2004 and 2005   $ 19.7   $ 10.2   2005

Tolevamer toxin binder

 

C. difficile associated diarrhea

 


 

Phase 2 trial expected to be completed in 2003

 

 

37.4

 

 

48.0

 

2007

GT56-252
    oral iron chelator

 

Iron overload disease

 


 

Phase 1/2 trial ongoing

 

 

15.7

 

 

34.7

 

2007

GT316-235
    fat absorption
    inhibitor

 

Anti-obesity

 


 

Expected to file an IND in 2004

 

 

17.8

 

 

59.3

 

2010

Polymer

 

Oral mucositis

 


 

Expected to file an IND in 2004

 

 

17.8

 

 

37.7

 

2008

DENSPM

 

Psoriasis

 


 

Program cancelled during 2001; no further development planned

 

 

3.4

 

 

N/A

 

N/A

GT102-279

 

Second generation lipid-lowering compound

 


 

Program cancelled during 2001; no further development planned

 

 

6.2

 

 

N/A

 

N/A
               
 
   
                $ 118.0   $ 189.9    
               
 
   

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

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OTHER INCOME AND EXPENSES

 
  Three Months Ended
March 31,

   
 
 
  Increase/
(Decrease)
% Change

 
 
  2003
  2002
 
 
  (Amounts in thousands, except percentage data)

 
Equity in net loss of unconsolidated affiliates   $ (4,194 ) $ (4,094 ) 2 %
Gain on investments in equity securities         166   (100 )%
Other     780     (897 ) (187 )%
Investment income     11,281     12,952   (13 )%
Interest expense     (4,277 )   (4,541 ) (6 )%
   
 
     
  Total other income (expenses)   $ 3,590   $ 3,586   0 %
   
 
     

Equity in Net Loss of Unconsolidated Affiliates

        The following table presents our equity in net loss of unconsolidated affiliates by entity for the periods presented:

 
  Three Months Ended
March 31,

   
 
Joint Venture/Unconsolidated Affiliate

  Increase/
(Decrease)
% Change

 
  2003
  2002
 
 
  (Amounts in thousands, except percentage data)

 
BioMarin/Genzyme LLC   $ (4,051 ) $ (2,842 ) 43 %
Diacrin/Genzyme LLC     (143 )   (150 ) (5 )%
GTC         (1,102 ) (100 )%
   
 
     
  Total   $ (4,194 ) $ (4,094 ) 2 %
   
 
     

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

        Genzyme General's equity in net loss of unconsolidated affiliates increased 2% to $4.2 million for the three months ended March 31, 2003 as compared to the same period of 2002. The increase was attributable to:


        On April 4, 2002, GTC purchased approximately 2.8 million shares of GTC common stock held by us and allocated to Genzyme General for an aggregate consideration of $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

77


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.

        In January 2002, we formed 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, which 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 Genzyme General's investment in Peptimmune in other noncurrent assets and an increase to other comprehensive income in division equity in Genzyme General's combined 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, Genzyme General began accounting for our investment in Peptimmune under the equity method of accounting.

Gain on Investment in Equity Securities

        Genzyme General did not record any significant realized gains or losses related to its investments in equity securities for the three months ended March 31, 2003 and 2002.

        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 the investment on our consolidated balance sheets and the combined balance sheets 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, Genzyme General's division 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. Genzyme General will record impairment charges related to the investments for which it has recorded unrealized losses at March 31, 2003 if the stocks do not recover within the next three to six months, all of which will be allocated to Genzyme General.

78



Other

        Genzyme General periodically enters foreign currency forward contracts, all of which have durations of less than three months. These contracts have not been designated as hedges and, accordingly, unrealized gains or losses on these contracts are reported in current earnings. The notional settlement value of foreign currency forward contracts outstanding as of March 31, 2003 is $50.6 million. At both March 31, 2003 and 2002, these contracts had a fair value of $0.2 million, representing an unrealized loss.

        For the three months ended March 31, 2003, Genzyme General also recorded in other in our consolidated statements of operations and the combined statements of operations of Genzyme General an unrealized gain of $0.1 million to reflect the change in value of our warrants to purchase shares of GTC common stock from January 1, 2003 to March 31, 2003 as compared to an unrealized loss of $(1.2) million for the same period of 2002.

Investment Income

        Genzyme General's investment income decreased 13% for the three months ended March 31, 2003, as compared to the same period of 2002, primarily due to a decrease in interest rates despite higher average cash balances.

Interest Expense

        Genzyme General's interest expense decreased 6% for the three months ended March 31, 2003, as compared to the same period of 2002, primarily due to a slight decline in debt balances outstanding resulting from the repayment, in 2002, of notes payable, aggregating $7.0 million, assumed in connection with our acquisitions of Novazyme in September 2001 and GelTex in December 2000.

Tax Provision

 
  Three Months Ended
March 31,

   
 
 
  Increase/
(Decrease)
% Change

 
 
  2003
  2002
 
 
  (Amounts in thousands, except percentage data)

 
Provision for income taxes   $ (25,491 ) $ (12,015 ) 112 %
Effective tax rate     31 %   33 %    

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

The decrease in our effective tax rate for the three months ended March 31, 2003, as compared to the same period of 2002, is primarily due to increased benefits from orphan drug credits.

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GENZYME BIOSURGERY
A Division of Genzyme Corporation

        The following discussion summarizes the key factors our management believes necessary for an understanding of Genzyme Biosurgery's financial statements. When reviewing this discussion, you should keep in mind the substantial risks and uncertainties that characterize our business. In particular, we encourage you to review the risks and uncertainties described under "Factors Affecting Future Operating Results" in Exhibit 99.2 to our 2002 Form 10-K. These risks and uncertainties could cause our actual results to differ materially from those forecast in forward-looking statements or implied by past results and trends. Forward-looking statements are statements that attempt to project or anticipate future developments in our business; we encourage you to review the examples of forward-looking statements under "Note Regarding Forward-Looking Statements." These statements, like all statements in this report, speak only as of the date of this report (unless another date is indicated), and we undertake no obligation to update or revise the statements in light of future developments.

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES

        The critical accounting policies and significant estimates for Genzyme Biosurgery are set forth under the heading "Management's Discussion and Analysis of Genzyme Biosurgery's Financial Condition and Results of Operations—Critical Accounting Policies and Significant Estimates" in Exhibit 13.3 to our 2002 Form 10-K. There have been no changes to these policies and no significant changes to these estimates since December 31, 2002.

REVENUES

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

 
  Three Months Ended
March 31,

   
 
 
  Increase/
(Decrease)
% Change

 
 
  2003
  2002
 
 
  (Amounts in thousands, except percentage data)

 
Product revenue:                  
  Orthopaedics   $ 26,354   $ 19,998   32 %
  Biosurgical Specialties     12,104     9,990   21 %
  Cardiac Science     12       N/A  
  Cardiac Devices     18,980     18,175   4 %
   
 
     
    Total product revenue     57,450     48,163   19 %
   
 
     

Service revenue:

 

 

 

 

 

 

 

 

 
  Orthopaedics     6,067     4,177   45 %
  Biosurgical Specialties     973     1,031   (6 )%
  Cardiac Science     3       N/A  
   
 
     
    Total service revenue     7,043     5,208   35 %
   
 
     
Research and development revenue:                  
  Orthopaedics     430       N/A  
  Biosurgical Specialties     686       N/A  
  Cardiac Science     17       N/A  
   
 
     
    Total research and development revenue     1,133       N/A  
   
 
     
   
Total revenues

 

$

65,626

 

$

53,371

 

23

%
   
 
     

80


Product Revenue

        In January 2003, Genzyme Biosurgery reallocated two suture product lines from its Biosurgical Specialties reporting segment to its Cardiac Devices reporting segment, so that all suture product lines are reflected as components of its Cardiac Devices reporting segment. In addition, Genzyme Biosurgery reallocated its cardiovascular Sepra products from its Cardiac Devices reporting segment to its Biosurgical Specialties reporting segment. Genzyme Biosurgery has reclassified its 2002 disclosures to conform to its 2003 presentation.

        Orthopaedics product revenue increased 32% to $26.4 million for the three months ended March 31, 2003 as compared to the same period of 2002 primarily due to an increase in sales of Synvisc viscosupplementation product. Synvisc viscosupplementation product sales increased primarily due to increased utilization of the product within the existing customer base as well as the creation of new accounts. We believe that a potentially significant competitor is currently seeking FDA approval for a viscosupplementation product for possible U.S. launch during the second half of 2003 that could have an adverse affect on future sales of Synvisc viscosupplementation product.

        Biosurgical Specialties product revenue increased 21% to $12.1 million for the three months ended March 31, 2003, as compared to the same period of 2002, primarily due to a 23% increase in the sales of Sepra products to $10.4 million primarily due to increased market penetration.

        In January 2003, as a result of a change in how Genzyme Biosurgery reviews its business, the activities of its former Cardiothoracic reporting segment were reallocated into two separate reporting segments called Cardiac Science and Cardiac Devices. Genzyme Biosurgery has reclassified 2002 disclosures to conform to our 2003 presentation. Cardiac Devices products include fluid management (chest drainage) systems, surgical closures, biomaterials, and instruments for conventional and minimally invasive cardiac surgery. Cardiac Devices product revenue increased 4% to $19.0 million for the three months ended March 31, 2003, as compared to the same period of 2002, primarily due to an 8% increase in the sales of instruments for minimally-invasive and off-pump cardiac surgery to $3.3 million as a result of increased market penetration. Additionally, there was a 21% increase in the combined sales of surgical closures for cardiac surgery and surgical closures sold to original equipment manufacturers to $6.3 million for the three months ended March 31, 2003 as compared to the same period of 2002.

Service Revenue

        Orthopaedics service revenue increased 45% to $6.1 million for the three months ended March 31, 2003, as compared to the same period of 2002, primarily due to the classification of $1.5 million of reimbursed expenses from partners as service revenue.

        The 6% decrease in Biosurgical Specialties service revenue to $1.0 million for the three months ended March 31, 2003 as compared to same period of 2002 is attributable to decreased sales of Epicel skin grafts, which are used to treat victims of severe burns. Sales of Epicel skin grafts are variable based upon a number of unpredictable factors, including the number of severe burn patients and their survival rate prior to treatment with Epicel skin grafts.

International Revenue

        International revenue as a percentage of total sales for the three months ended March 31, 2003 was 29% as compared to 31% in the same period of 2002. The decrease was primarily due to the increase in sales of Synvisc supplementation product in the U.S.

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MARGINS

 
  Three Months Ended
March 31,

   
 
 
  Increase/
(Decrease)
% Change

 
 
  2003
  2002
 
 
  (Amounts in thousands, except percentage data)

 
Product margin   $ 32,192   $ 23,608   36 %
  % of product revenue     56 %   49 %    

Service margin

 

$

3,529

 

$

2,175

 

62

%
  % of service revenue     50 %   42 %    

Total gross margin

 

$

35,721

 

$

25,783

 

39

%
  % of total product and service revenue     55 %   48 %    

Product Margin

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

        The 36% increase in product margin and product margin as a percentage of product revenue for the three months ended March 31, 2003 as compared to the same period of 2002 was primarily attributable to an increase in product revenue of $9.3 million. The increase in product revenue was primarily due to an increase in sales of Synvisc viscosupplementation product due to increased utilization of the product within the existing customer base as well as the creation of new accounts, and an increase in sales of Sepra products due to increased market penetration.

Service Margin

        Service margin for services allocated to Genzyme Biosurgery increased 62% for the three months ended March 31, 2003 as compared to the same period of 2002 and service margin as a percentage of service revenue increased primarily due to a 36% increase in sales of Orthopaedics services. This increase is a result of the classification of $1.5 million of reimbursed expenses from partners as service revenue.

OPERATING EXPENSES

Selling, General and Administrative

        Selling, general and administrative expenses increased 11% for the three months ended March 31, 2003, as compared to the same period of 2002. The increase was primarily due to the creation of a sales force and an increase in sales operations in France in 2003 as we began to sell Synvisc viscosupplementation product directly to customers rather than through a distributor effective January 1, 2003. Also contributing to this increase was the classification of $1.5 million of reimbursed expenses from partners as service revenue. These increases were partially offset by an overall decrease in expenses relating to the Cardiac Devices business primarily due to increased operating efficiencies and reductions in staffing in 2002.

Research and Development

        Research and development expenses increased 17% for the three months ended March 31, 2003, as compared to the same period of 2002. The increase was primarily due to a $1.3 million increase in spending on the Orthopaedics business product development programs, particularly other indications

82



for Synvisc viscosupplementation product and a $1.1 million increase in the Cardiac Science business product development programs, particularly cardiac cell therapy, as a result of clinical trials initiated during the three months ended March 31, 2003.

Amortization of Intangibles

        There was no significant change in amortization of intangibles expense for the three months ended March 31, 2003, as compared to the same period of 2002.

Purchase of In-Process Research And Development

        In connection with our acquisition of Biomatrix, we allocated approximately $82.1 million to IPR&D, which Genzyme Biosurgery recorded as a charge to expense in its combined statement of operations for the year ended December 31, 2000. As of March 31, 2003, the technological feasibility of the Biomatrix IPR&D projects had not yet been reached and no significant departures from the assumptions included in the valuation analysis had occurred.

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

Program

  Program Description or
Indication

   
  Development Status at
March 31, 2003

  Value at
Acquisition
Date

  Estimated
Cost to
Complete at
March 31,
2003

  Year of
Expected
Product
Launch

 
   
   
   
  (in millions)

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






  Received conditional FDA approval for hip indication clinical trial in U.S.
Preclinical activities in U.S. and clinical trial in Europe for knee indications
Preclinical for other joints
Product launched for hip indication in Europe in September 2002
  $ 33.8   $ 22.3   2002 to 2008

Visco-augmentation and Visco-separation (Adhesion prevention)

 

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

 








 

Preclinical—gynecological and pelvic indications
Clinical trials—pivotal safety and efficacy study on-going in U.S. for Hylaform biomaterials.
Phase 2—spine indications; program cancelled during 2002; no further development planned

 

 

48.3





N/A

 

 

4.2





N/A

 

2003 to 2006




N/A

 

 

 

 

 

 

 

 



 



 

 

 

 

 

 

 

 

Total:

 

$

82.1

 

$

26.5

 

 

 

 

 

 

 

 

 

 



 



 

 

        Except for our viscosupplementation product for the hip launched in Europe in 2002, substantial additional research and development will be required prior to any of our acquired IPR&D programs and technology platforms reaching technological feasibility. In addition, once research is completed, each product will need to complete a series of clinical trials and receive FDA or other regulatory approvals prior to commercialization. Our current estimates of the time and investment required to develop these products and technologies may change depending on the different applications that we may choose to pursue. We cannot give assurances that these programs will ever reach feasibility or

83



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

OTHER INCOME AND EXPENSE

 
  Three Months Ended
March 31,

   
 
 
  Increase/
(Decrease)
% Change

 
 
  2003
  2002
 
 
  (Amounts in thousands, except percentage data)

 
Other   $ (30 ) $ 33   (191 )%
Investment income     219     297   (26 )%
Interest expense     (2,193 )   (2,245 ) (2 )%
   
 
     
  Total other expenses   $ (2,004 ) $ (1,915 ) 5 %
   
 
     

Investment Income

        Investment income decreased 26% for the three months ended March 31, 2003, as compared to the same period of 2002, as a result of a decrease in interest rates and decline average cash balances.

Interest Expense

        Interest expense decreased in the three months ended March 31, 2003, as compared to the same period a year ago, primarily as a result of a decline in interest rates used to calculate interest on borrowings allocated to Genzyme Biosurgery from our revolving credit facility.

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR GOODWILL

        On January 1, 2002, we adopted SFAS No. 142, which requires that ratable amortization of goodwill 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. SFAS No. 142 requires a transitional impairment test to compare the fair value of a reporting unit with the carrying amount of the goodwill.

        In November 2001, we sold our Snowden-Pencer line of surgical instruments. 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, 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, Genzyme Biosurgery tested the goodwill of the 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. Genzyme Biosurgery recorded an impairment charge of $98.3 million, which was reflected as a cumulative effect of a change in accounting for goodwill in our consolidated statements of operations and the combined statements of operations for Genzyme Biosurgery for the three months ended March 31, 2002.

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GENZYME MOLECULAR ONCOLOGY
A Division of Genzyme Corporation

        The following discussion summarizes the key factors our management believes are necessary for an understanding of Genzyme Molecular Oncology's financial statements. When reviewing this discussion, you should keep in mind the substantial risks and uncertainties that characterize our business. In particular, we encourage you to review the risks and uncertainties described under "Factors Affecting Future Operating Results" in Exhibit 99.2 to our 2002 Form 10-K. These risks and uncertainties could cause actual results to differ materially from those forecast in forward-looking statements or implied by past results and trends. Forward-looking statements are statements that attempt to project or anticipate future developments in our business; we encourage you to review the examples of forward-looking statements under "Note Regarding Forward-Looking Statements." These statements, like all statements in this report, speak only as of the date of this report (unless another date is indicated) and we undertake no obligation to update or revise the statements in light of future developments.

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES

        The critical accounting policies and significant estimates for Genzyme Molecular Oncology are set forth under the heading "Management's Discussion and Analysis of Genzyme Molecular Oncology's Financial Condition and Results of Operations—Critical Accounting Policies and Significant Estimates" in Exhibit 13.4 to our 2002 Form 10-K. There have been no changes to these policies and no significant changes to these estimates since December 31, 2002.

REVENUES

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

 
  Three Months Ended
March 31,

   
 
 
  Increase/
(Decrease)
% Change

 
 
  2003
  2002
 
 
  (Amounts in thousands, except percentage data)

 
Service revenue   $   $ 300   (100 )%
Research and development revenue     1,477     1,469   1 %
Licensing revenue     704     653   8 %
Royalty revenue     7       N/A  
   
 
     
  Total revenues   $ 2,188   $ 2,422   (10 )%
   
 
     

        Service revenue for the three months ended March 31, 2002 consists of revenues from the provision of services related to the SAGE genomics technology. Genzyme Molecular Oncology provides these services sporadically as customers request them. The focus of its SAGE business remains directed to the grant of licenses to the technology. No service revenues were recorded for the three months ended March 31, 2003.

        Research and development revenue for both the three months ended March 31, 2003 and 2002 consists of $1.5 million of revenue for research performed on behalf of:

        Licensing revenue for the three months ended March 31, 2003 and March 31, 2002 consisted primarily of technology access fees Genzyme Molecular Oncology received from Purdue and Kirin

85



resulting from those collaborations. Genzyme Molecular Oncology is amortizing these fees over the course of the associated research programs. For the three months ended March 31, 2003, Genzyme Molecular Oncology recognized $0.7 million of the technology access fees it received from Purdue and Kirin, consistent with the same period of 2002. Genzyme Molecular Oncology also recognizes licensing revenue from licenses of rights to the SAGE technology.

        Royalty revenue consists of royalties received under licenses to the SAGE technology.

COST OF REVENUES

 
  Three Months Ended
March 31,

   
 
 
  Increase/
(Decrease)
% Change

 
 
  2003
  2002
 
 
  (Amounts in thousands, except percentage data)

 
Cost of services sold   $   $ 119   (100 )%
Cost of revenue from research and development contracts, licensing and royalty revenue     1,172     1,135   3 %
   
 
     
  Total cost of revenues   $ 1,172   $ 1,254   (7 )%
   
 
     

        Genzyme Molecular Oncology's cost of services sold for the three months ended March 31, 2002 includes $0.1 million of costs associated with the performance of services using the SAGE technology.

        Genzyme Molecular Oncology's cost of research and development contracts, licensing and royalty revenue for the three months ended March 31, 2003 and 2002 includes:

OPERATING EXPENSES

Selling, General and Administrative Expenses

        Genzyme Molecular Oncology's selling, general and administrative expenses decreased 16% to $1.7 million for the three months ended March 31, 2003, as compared to the same period of 2002, primarily due to continued efforts within Genzyme Molecular Oncology to manage overall expenses and available cash.

Research and Development Expenses

        Genzyme Molecular Oncology's research and development expenses decreased 21% to $4.2 million and total research and development expenses, including collaborator-funded expenses, decreased 17% to $5.4 million for the three months ended March 31, 2003. Both decreases are primarily due to a planned reduction in research and development spending as part of efforts to conserve available cash. Genzyme Molecular Oncology is managing its cash reserves closely by focusing its research and development spending on programs that it believes have the greatest potential for successful commercialization or valuable collaboration.

OTHER INCOME AND EXPENSES

        Genzyme Molecular Oncology's other income decreased 44% to $0.1 million for the three months ended March 31, 2003, as compared to $0.2 million in the same period of 2002, primarily due to a decrease in investment income. Investment income decreased as a result of lower average cash balances.

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B.    LIQUIDITY AND CAPITAL RESOURCES

GENZYME CORPORATION

        At March 31, 2003, we had cash, cash equivalents, and short- and long-term investments of $1.2 billion, an increase of $39.3 million from December 31, 2002.

        Our operating activities generated $76.4 million of cash for the three months ended March 31, 2003, as compared to $22.7 million for the same period of 2002. Net cash provided by operating activities was primarily the result of our net income of $45.4 million and:

These increases were offset, in part, by a $5.8 million net increase in certain working capital accounts.

        Our investing activities utilized $99.5 million in cash for the three months ended March 31, 2003, as compared to the $4.3 million of cash provided by our investing activities for the same period of 2002. Net cash utilized by investing activities consisted primarily of:

        In February 2003, the CPMP of the European Union issued a positive opinion on our MAA for Aldurazyme enzyme. This non-binding opinion has been forwarded to the EMEA for consideration and a final determination is expected later in 2003 regarding the marketing and sale of Aldurazyme enzyme in the European Union as a treatment for the non-neurological manifestations of MPS I in patients with a confirmed diagnosis of the disease. (See "Subsequent Events—Aldurazyme Enzyme" below.)

        Our financing activities provided $11.3 million in cash for the three months ended March 31, 2003 as compared to $43.5 million provided for the same period of 2002. Cash provided by financing activities was primarily the result of:

        We have access to a $350.0 million revolving credit facility, all of which matures in December 2003. 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.

        The disclosure of payments we have committed to make under our contractual obligations is set forth under the heading "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations—Liquidity and Capital Resources" in

87


Exhibit 13.1 to our 2002 Form 10-K. There have been no material changes to our contractual obligations since December 31, 2002.

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

        Our cash reserves may be further reduced to pay the $10.0 million outstanding principal and accrued interest under our 6.9% convertible subordinated note due May 14, 2003, which may be converted into shares of Biosurgery Stock and to pay principal and interest on the $575.0 million in principal under our 3% convertible subordinated debentures due May 15, 2021, which may be converted into shares of Genzyme General Stock. Holders of the debentures may require us to repurchase all or part of their debentures for cash on May 15, 2006, 2011 or 2016, at a price equal to 100% of the principal amount of the debentures plus accrued interest through the date prior to the date of repurchase. Additionally, if certain fundamental changes occur, each holder may require us to repurchase, for cash, all or a portion of the holder's debentures. On or after May 20, 2004, we may redeem for cash all or part of the debentures that have not previously been converted or repurchased. The redemption price would be 100.75% of the principal amount if redeemed from May 20, 2004 through May 14, 2005, and 100% of the principal amount thereafter.

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

        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.

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        The staff of the FTC is investigating our acquisition of Novazyme. 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, 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.

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 FASB issued FIN 46, "Consolidation of Variable Interest Entities, an interpretation of 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.

Subsequent Events

Fabrazyme Enzyme

        On April 24, 2003, the FDA granted marketing approval for Fabrazyme enzyme for Fabry disease. Fabrazyme has received Orphan Drug designation, which provides seven years of market exclusivity in the U.S. We have agreed with the FDA on a number of post-marketing commitments, including:

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Aldurazyme Enzyme

        On April 30, 2003, the FDA granted marketing approval for Aldurazyme enzyme as an enzyme replacement therapy for people with MPS I. Aldurazyme is indicated for patients with the Hurler and Hurler-Scheie forms of MPS I, and for Scheie patients with moderate to severe symptoms. Aldurazyme has been granted Orphan Drug status in the U.S., which provides seven years of market exclusivity. Together with our partner BioMarin, we have agreed with the FDA on post-marketing commitments, including:

We will commercialize Aldurazyme in the U.S. Aldurazyme will be manufactured at BioMarin's plant in California and sent to either our manufacturing facility in Allston, Massachusetts or to a third-party facility for the final filing and finish process. 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 FDA approval of the Aldurazyme enzyme BLA.

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GENZYME GENERAL
A Division of Genzyme Corporation

        At March 31, 2003, Genzyme General had cash, cash equivalents, and short- and long-term investments of $1.2 billion, an increase of $56.4 million from December 31, 2002.

        Genzyme General's operating activities generated $94.9 million of cash for the three months ended March 31, 2003, as compared to $47.4 million for the same period of 2002. Net cash provided by operating activities was favorably impacted by Genzyme General's division net income of $57.8 million, and:


These favorable impacts were supplemented by a $7.3 million net decrease in certain working capital accounts.

        Genzyme General's investing activities utilized $103.4 million of cash for the three months ended March 31, 2003, as compared to providing $17.7 million for the same period of 2002. Net cash utilized by investing activities consisted primarily of:

        In February 2003, the CPMP of the European Union issued a positive opinion on the MAA for Aldurazyme enzyme. This non-binding opinion has been forwarded to the EMEA for consideration and a final determination is expected later in 2003 regarding the marketing and sale of Aldurazyme enzyme in the European Union as a treatment for the non-neurological manifestations of MPS I in patients with a confirmed diagnosis of the disease (see "Subsequent Events—Aldurazyme Enzyme" below.)

        Genzyme General's financing activities provided $8.6 million of cash for the three months ended March 31, 2003, as compared to $33.7 million provided for the same period of 2002. Cash provided by financing activities was primarily the result of $8.7 million of cash provided from the issuance of common stock partially offset by $0.3 million of cash used to repay bank overdrafts.

        Genzyme General has access to our $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. We intend to refinance our revolving credit facility prior to its expiration in December 2003.

        Our board of directors has made $25.0 million of Genzyme General's cash available to Genzyme Biosurgery. Under this arrangement, Genzyme Biosurgery is able to draw down funds as needed in exchange for Biosurgery designated shares based on the fair market value (as defined in our charter) of Biosurgery Stock at the time of the draw. At March 31, 2003, $3.0 million remained available to Genzyme Biosurgery under this arrangement. Our board of directors has also made $30.0 million of

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Genzyme General's cash available to Genzyme Molecular Oncology. Under this arrangement, Genzyme Molecular Oncology is able to draw down funds as needed in exchange for Molecular Oncology designated shares based on the fair market value (as defined in our charter) of Molecular Oncology Stock at the time of the draw. At March 31, 2003, $11.0 million remained available to Genzyme Molecular Oncology under this arrangement.

        The disclosure of payments we have committed to make under contractual obligations using cash allocated to Genzyme General is set forth under the heading "Management's Discussion and Analysis of Genzyme General's Financial Condition and Results of Operations—Liquidity and Capital Resources" in Exhibit 13.2 to our 2002 Form 10-K. There have been no material changes to the contractual obligations allocated to Genzyme General since December 31, 2002.

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

        Genzyme General's cash resources will be reduced to the extent that we are required to use cash allocated to Genzyme General to settle the liabilities of Genzyme Biosurgery or Genzyme Molecular Oncology. In addition, Genzyme General's cash reserves will be further reduced to pay principal and interest on the $575.0 million in principal under our 3% convertible subordinated debentures due May 15, 2021, which may be converted into shares of Genzyme General Stock. Holders of the debentures may require us to repurchase all or part of their debentures for cash on May 15, 2006, 2011 or 2016, at a price equal to 100% of the principal amount of the debentures plus accrued interest through the date prior to the date of repurchase. Additionally, if certain fundamental changes occur, each holder may require us to repurchase, for cash, all or a portion of the holder's debentures. On or after May 20, 2004, we may redeem for cash all or part of the debentures that have not previously been converted or repurchased. The redemption price would be 100.75% of the principal amount if redeemed from May 20, 2004 through May 14, 2005, and 100% of the principal amount thereafter.

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

        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

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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. Genzyme General has not accrued any amounts in connection with this contingency.

        The staff of the FTC is investigating our acquisition of Novazyme. 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.

Subsequent Events

Fabrazyme Enzyme

        On April 24, 2003, the FDA granted marketing approval for Fabrazyme enzyme for Fabry disease. Fabrazyme has received Orphan Drug designation, which provides seven years of market exclusivity in the U.S. We have agreed with the FDA on a number of post-marketing commitments, including:


Aldurazyme Enzyme

        On April 30, 2003, the FDA granted marketing approval for Aldurazyme enzyme as an enzyme replacement therapy for people with MPS I. Aldurazyme is indicated for patients with the Hurler and Hurler-Scheie forms of MPS I, and for Scheie patients with moderate to severe symptoms. Aldurazyme has been granted Orphan Drug status in the U.S., which provides seven years of market exclusivity. Together with our partner BioMarin, we have agreed with the FDA on post-marketing commitments, including:

We will commercialize Aldurazyme in the U.S. Aldurazyme will be manufactured at BioMarin's plant in California and sent to either our manufacturing facility in Allston, Massachusetts or to a third-party facility for the final filing and finish process. 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 FDA approval of the Aldurazyme enzyme BLA.

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GENZYME BIOSURGERY
A Division of Genzyme Corporation

        At March 31, 2003, Genzyme Biosurgery had cash and cash equivalents of $22.0 million, a decrease of $10.8 million from December 31, 2002.

        Genzyme Biosurgery's operating activities used $12.2 million of cash for the three months ended March 31, 2003, as compared to $16.0 million for the same period of 2002. Net cash used by operating activities was impacted by:

        These items impacting operating activities were offset by $9.3 million provided by depreciation and amortization, of which, $1.5 million resulted from the depreciation of property, plant and equipment and $7.8 million resulted from the amortization of intangible assets, including intangible assets acquired in connection with our acquisitions of Biomatrix and Focal.

        Genzyme Biosurgery's investing activities used $1.2 million in cash for the three months ended March 31, 2003, as compared to $0.8 million for the same period of 2002.

        Genzyme Biosurgery's financing activities provided $2.7 million in cash for the three months ended March 31, 2003, as compared to $9.7 million for the same period of 2002. primarily due to bank overdrafts.

        In connection with our acquisition of Biomatrix, we assumed a 6.9% convertible subordinated note due May 14, 2003, in favor of UBS Warburg LLC. The $10.0 million principal of this note remains outstanding and was included in current portion of long-term debt, convertible notes and capital lease obligations in Genzyme Biosurgery's combined balance sheet at March 31, 2003.

        Genzyme Biosurgery has access to our $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 aggregate, 2.5% at March 31, 2003. We intend to refinance our revolving credit facility prior to its expiration in December 2003.

        Our board of directors has made $25.0 million of Genzyme General's cash available to Genzyme Biosurgery. Under this arrangement, Genzyme Biosurgery is able to draw down funds as needed in exchange for Biosurgery designated shares based on the fair market value (as defined in our charter) of Biosurgery Stock at the time of the draw. At March 31, 2003, $3.0 million remained available to Genzyme Biosurgery under this arrangement.

        In March 2003, we entered into a collaboration with Excigen, a recently created biotechnology company in Baltimore, Maryland focused on developing gene therapies for treating cardiac arrhythmias. In connection with the collaboration, we acquired 1,440,000 shares of the convertible preferred stock of Excigen and a warrant to acquire an additional 865,882 shares of convertible preferred stock, in exchange for our commitment to provide Excigen with up to $2.3 million in funding and $2.3 million worth of research, clinical, regulatory and manufacturing services, which services are to be provided by Genzyme Biosurgery. We provided the initial $0.4 million of the cash commitment in March 2003, with the balance of $1.9 million to be paid in future installments. We allocate our ownership interest in Excigen to Genzyme Biosurgery.

        The disclosure of payments we have committed to make under contractual obligations using cash allocated to Genzyme Biosurgery is set forth under the heading "Management's Discussion and Analysis of Genzyme Biosurgery's Financial Condition and Results of Operations—Liquidity and Capital Resources" in Exhibit 13.3 to our 2002 Form 10-K. Excluding the agreements with Excigen

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described above, there have been no material changes to the contractual obligations allocated to Genzyme Biosurgery since December 31, 2002.

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

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

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

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

95



        On April 17, 2002, 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. Genzyme Biosurgery has not accrued any amounts in connection with this contingency.

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GENZYME MOLECULAR ONCOLOGY
A Division of Genzyme Corporation

        At March 31, 2003, Genzyme Molecular Oncology had cash, cash equivalents and short-term investments of $6.8 million, a decrease of $6.4 million from December 31, 2002.

        Genzyme Molecular Oncology's operating activities used $6.4 million of cash for the three months ended March 31, 2003, as compared to $8.6 million for the same period of 2002. Operating activities were impacted by Genzyme Molecular Oncology's division net loss of $4.8 million for the three months ended March 31, 2003 and by $1.6 million attributable to a net increase in certain working capital accounts in the same period.

        Genzyme Molecular Oncology's investing activities provided $5.0 million of cash for the three months ended March 31, 2003, as compared to utilizing $12.6 million in the same period of 2002. Net cash provided by investing activities was attributable to the sales and maturities of investments.

        Genzyme Molecular Oncology's financing activities for the three months ended March 31, 2003 provided $0.1 million of allocated proceeds from the issuance of Molecular Oncology Stock under our stock purchase program.

        Genzyme Molecular Oncology has access to our $350.0 million revolving credit facility that matures in December 2003, of which $66.0 million remained available for borrowing at March 31, 2003. We intend to refinance our revolving credit facility prior to its expiration in December 2003.

        Our board of directors has made $30.0 million of Genzyme General's cash available to Genzyme Molecular Oncology. Under this arrangement, Genzyme Molecular Oncology is able to draw down funds as needed in exchange for Molecular Oncology designated shares based on the fair market value (as defined in our charter) of Molecular Oncology Stock at the time of the draw. At March 31, 2003, $11.0 million remained available to Genzyme Molecular Oncology under this arrangement.

        We anticipate that Genzyme Molecular Oncology's current cash resources, together with amounts available from the following sources, will be sufficient to fund its anticipated operations through the end of 2003:

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

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

97


        The disclosure of payments we have committed to make under contractual obligations using cash allocated to Genzyme Molecular Oncology is set forth under the heading "Management's Discussion and Analysis of Genzyme Molecular Oncology's Financial Condition and Results of Operations—Liquidity and Capital Resources" in Exhibit 13.4 to our 2002 Form 10-K. There have been no material changes to the contractual obligations allocated to Genzyme Molecular Oncology since December 31, 2002.

        Genzyme Molecular Oncology will require significant additional financing to continue operations at anticipated levels. We cannot guarantee that Genzyme Molecular Oncology will be able to obtain any additional financing, extend any existing financing arrangement, or obtain either on terms that we consider favorable. To this end, management is managing its cash reserves closely by focusing its research and development spending on programs that it believes have the greatest potential for successful commercialization or valuable collaboration. If Genzyme Molecular Oncology has insufficient funds or is unable to raise additional funds, it may delay, reduce or eliminate certain of its programs. Genzyme Molecular Oncology may also have to sell or give to third parties rights to commercialize technologies or products that it would otherwise have sought to commercialize itself.

ITEM 3.    QUANTITATIVE AND QUALITATIVE ANALYSIS OF MARKET RISK

        We are exposed to potential loss from financial market risks that may occur as a result of changes in interest rates, equity prices and foreign currency exchange rates. Our exposure to these risks has not materially changed since December 31, 2002.

        We incorporate by reference our disclosure related to market risk which is set forth under the heading "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations—Market Risk," "—Interest Rate Risk," "—Foreign Exchange Risk" and "—Equity Price Risk" in Exhibit 13.1 to our 2002 Form 10-K.

ITEM 4.    CONTROLS AND PROCEDURES

        Our chief executive officer and our chief financial officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13(a)-14 and 15(d)-14 under the Securities Exchange Act of 1934) as of a date (the "Evaluation Date") within 90 days before the filing date of this quarterly report. Based upon that evaluation, our chief executive officer and our chief financial officer have concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective in ensuring that they received, in a timely manner, the information that we and our consolidated subsidiaries are required to disclose in the reports filed or submitted by us under the Securities Exchange Act of 1934. There were no significant changes in our internal controls or in other factors that could significantly affect our disclosure controls and procedures subsequent to the Evaluation Date.

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PART II.    OTHER INFORMATION

ITEM 2.    CHANGES IN SECURITIES

        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.

ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K

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

SIGNATURES

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

    GENZYME CORPORATION

 

 

By:

 

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

DATE: May 7, 2003

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CERTIFICATION

I, Henri A. Termeer, certify that:

        1.     I have reviewed this quarterly report on Form 10-Q of Genzyme Corporation (the "Registrant");

        2.     Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

        3.     Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report;

        4.     The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:

        5.     The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function):

        6.     The Registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


Date: May 7, 2003

 

 

 

/s/  
HENRI A. TERMEER      
Henri A. Termeer
Chief Executive Officer

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CERTIFICATION

I, Michael S. Wyzga, certify that:

        1.     I have reviewed this quarterly report on Form 10-Q of Genzyme Corporation (the "Registrant");

        2.     Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

        3.     Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report;

        4.     The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:

        5.     The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function):

        6.     The Registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


Date: May 7, 2003

 

 

 

/s/  
MICHAEL S. WYZGA      
Michael S. Wyzga
Chief Financial Officer

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

EXHIBIT INDEX

Exhibit
No.

  Description

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

*3.2

 

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

99.1

 

Written Statement of the Chief Executive Officer. Filed herewith.

99.2

 

Written Statement of the Chief Financial Officer. Filed herewith.

*
Indicates an exhibit previously filed with the SEC under Commission File No. 0-14680 and incorporated herein by reference.