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

FORM 10-Q

For the transition period from                               to                              

Commission file number 0-14680

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

(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 of Genzyme Stock outstanding as of April 29, 2005: 252,282,367

NOTE REGARDING REFERENCES TO OUR SERIES OF STOCK

        Throughout this Form 10-Q, the words "we," "us," "our" and "Genzyme" refer to Genzyme Corporation as a whole, and "our board of directors" refers to the board of directors of Genzyme Corporation. Genzyme has one outstanding series of common stock, which we refer to as "Genzyme Stock."

NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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



•

timing of, and availability of data from, clinical trials;



•

merger and acquisition activity, including our pending merger with Bone Care International, Inc., or Bone Care International, and finalization of the purchase accounting for our acquisitions of ILEX Oncology, Inc., or ILEX, and Verigen AG, or Verigen;



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completion of a post-closing working capital assessment for our acquisition of substantially all of the pathology/oncology testing assets related to the Physician Services and Analytical Services business units of IMPATH Inc., or IMPATH;



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estimates of the future amortization expenses for our intangible assets;



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entry into new collaborations and licensing agreements;



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



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sales and marketing plans;



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



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



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expected future revenues, operations and expenditures;



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allocation of expenditures related to our research and development programs;



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projected future earnings and earnings per share;



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assessment of the outcome and financial impact of litigation and other governmental proceedings and the potential impact of unasserted claims;



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projected cash needs;



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U.S. and foreign income tax audits, including our provision for liabilities and assessment of the potential financial impact of favorable settlement of these audits or expiration of the applicable statute of limitations;



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assessment of the impact of recent tax legislation and accounting pronouncements, including Statement of Financial Accounting Standards, or SFAS, No. 123R, and the proposed amendment to SFAS No. 128;



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expected future payments related to employee benefits and leased facilities acquired from ILEX, IMPATH, and SangStat Medical Corporation, or SangStat, and the expected timing of these payments;

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expected future payments upon achievement of development and commercial milestones related to our acquisition of Verigen and the anticipated timing of our purchase of the remaining outstanding shares of Verigen; and



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expected future payments we will pay Wyeth based on the volume of Synvisc sales, and the basis for determining our amortization expense related to such payments in future periods.

        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:

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



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



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



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



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



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market acceptance of our products and services;



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the use of cash in business combinations or other strategic initiatives;



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



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our ability to satisfy the post-marketing commitments made as a condition of the marketing approvals of Fabrazyme and Aldurazyme;



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



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the content and timing of submissions to and decisions made by the United States Food and Drug Administration, commonly referred to as the FDA, the European Agency for the Evaluation of Medicinal Products, or EMEA, and other regulatory agencies;



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



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our ability to increase market penetration outside the United States for Fabrazyme, Thyrogen and Renagel;



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market acceptance of Thymoglobulin, Campath and Clolar in expanded areas of use and new markets;



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



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



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our ability to successfully launch Clolar;



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our ability to establish and maintain strategic license, collaboration and distribution arrangements and to manage our relationships with collaborators, distributors and partners;

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our reliance on third parties to provide us with materials and services in connection with the manufacture of our products;



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



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decisions made by the United States District Court, arbitrators for the American Arbitrators Association, the United Kingdom Competition Appeal Tribunal, the Federal Trade Commission and other judicial bodies and regulatory and dispute resolution authorities;



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



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the resolution of litigation related to the consolidation of our tracking stocks;



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the initiation of legal proceedings by or against us;



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the impact of changes in the exchange rate for the Euro and other currencies on our product and service revenues in future periods;



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our ability to successfully integrate Verigen, ILEX and the businesses acquired from IMPATH;



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the number of diluted shares considered outstanding, which will depend on business combination activity, our stock price, and potential changes in accounting rules;



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the outcome of our IRS audit; and



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

        We have included more detailed descriptions of these and other risks and uncertainties in Item 2 of this report under the heading "Factors Affecting Future Operating Results." We encourage you to read those descriptions carefully. We caution investors not to place substantial 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 these statements.

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®, Renagel®, Cerezyme®, Ceredase®, Fabrazyme®, Thyrogen®, Synvisc®, Carticel®, Seprafilm®, Epicel®, IMPATH®, Myozyme®, Aldurazyme®, Thymoglobulin®, Lymphoglobuline®, Campath®, and MACI® are registered trademarks of Genzyme or its subsidiaries, Sepra™, VERIGEN™ and Clolar™ are trademarks of Genzyme or its subsidiaries. WelChol® is a registered trademark of Sankyo Pharma, Inc. Gengraf® is a registered trademark of Abbott Laboratories. All rights reserved.

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GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, MARCH 31, 2005
TABLE OF CONTENTS

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GENZYME CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations and Comprehensive Income

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

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

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GENZYME CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

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

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

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GENZYME CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited, amounts in thousands)

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

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GENZYME CORPORATION AND SUBSIDIARIES

Notes To Unaudited, Consolidated Financial Statements

1. Description of Business

        We are a global biotechnology company dedicated to making a major impact on the lives of people with serious diseases. Our broad product portfolio is focused on rare genetic disorders, renal disease, orthopaedics, organ transplant, and diagnostic and predictive testing. We are organized into five financial reporting units, which we also consider to be our reporting segments:

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Renal, which develops, manufactures and distributes products that treat patients suffering from renal diseases, including chronic renal failure. The unit derives substantially all of its revenue from sales of Renagel (including sales of bulk sevelamer);



•

Therapeutics, which develops, manufactures and distributes therapeutic products, with a focus on products to treat patients suffering from genetic diseases and other chronic debilitating diseases, including a family of diseases known as lysosomal storage disorders, or LSDs, and other specialty therapeutics, such as Thyrogen. The unit derives substantially all of its revenue from sales of Cerezyme, Fabrazyme and Thyrogen;



•

Transplant, which develops, manufactures and distributes therapeutic products that address pre-transplantation, prevention and treatment of acute rejection in organ transplantation, as well as other auto-immune disorders. The unit derives its revenue primarily from sales of Thymoglobulin and Lymphoglobuline;



•

Biosurgery, which develops, manufactures and distributes biotherapeutics and biomaterial products, with an emphasis on products that meet medical needs in orthopaedics and broader surgical areas. The unit derives its revenue primarily from sales of Synvisc and the Sepra line of products; and



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Diagnostics/Genetics, which develops, manufactures and distributes in vitro diagnostics products, and provides testing services for the oncology, and prenatal and reproductive markets.

        We report the activities of our oncology, bulk pharmaceuticals and cardiovascular business units under the caption "Other." We report our corporate, general and administrative operations and corporate science activities that we do not allocate to our financial reporting units, under the caption "Corporate." Effective January 1, 2005, as a result of changes in how we review our business, we re-allocated the programs of our former drug discovery and development business unit, formerly reported under the caption "Other," amongst several of our existing reporting segments and business units as follows:

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our tolevamer research and development program, for the treatment of C. difficile associated diarrhea, is now included in our Renal reporting segment;



•

our deferitrin (iron chelator) research and development program is now included in our Therapeutics reporting segment;



•

WelChol, an adjunctive therapy for the reduction of elevated LDL cholesterol in patients with primary hypercholesterolemia, is now included in our bulk pharmaceuticals business unit and as a result, will continue to be reported under the caption "Other;" and



•

our other drug discovery research and development programs are now included in our corporate science activities under the caption "Corporate."

We have reclassified our 2004 segment disclosures to conform to our 2005 presentation.

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2. Basis of Presentation and Significant Accounting Policies

Basis of Presentation

        Our unaudited, consolidated financial statements for each period include the statements of operations and comprehensive income, balance sheets and statements of cash flows for our corporate operations taken as a whole. We have eliminated all significant intercompany items and transactions in consolidation. We prepare 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 United States. We have reclassified certain 2004 data to conform to our 2005 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 audited, consolidated financial statements and notes included in our 2004 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.

Accounting for Stock-Based Compensation

        In accounting for stock-based compensation, we do not recognize compensation expense for qualifying options granted to our employees and directors 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 Genzyme 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 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."

        The following table sets forth our 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):

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        The following table sets forth the impact to our historical net income per share data as if compensation expense for our stock-based compensation plans was determined in accordance with SFAS No. 123, as amended.

        The effects of applying SFAS No. 123, as amended, are not necessarily representative of the effects on reported net income (loss) in future years. Additional awards in future years are anticipated.

Recent Accounting Pronouncements

        SFAS No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4."    In November 2004, the Financial Accounting Standards Board, or FASB, issued SFAS No. 151, "Inventory Costs, an amendment of Accounting Research Bulletin, or ARB, No. 43, Chapter 4." SFAS No. 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs and wasted materials spoilage should be recognized as current period charges in all circumstances. SFAS No. 151 will be effective for us beginning January 1, 2006. We have not yet determined the impact, if any, SFAS No. 151 will have on our consolidated financial statements.

        SFAS No. 123R, "Share-Based Payment, an amendment of FASB Statement Nos. 123 and 95."    In December 2004, the FASB issued a revision to SFAS No. 123, also known as SFAS 123R, "Share-Based Payments," which replaces SFAS No. 123, "Accounting for Stock-Based Compensation," and supersedes Accounting Principles Board, or APB, Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123R will require all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations based on their fair values. SFAS 123R allows alternative methods for determining the fair value of share based payments to employees and alternative methods of implementation. In April 2005, the SEC issued a new rule that allows companies to implement SFAS 123R at the beginning of the next fiscal year, instead of the next reporting period, that begins after June 15, 2005. As a result, we plan to implement SFAS 123R in the reporting period starting January 1, 2006. We expect that SFAS 123R will have a significant impact on our financial statements. We expect that the adoption of SFAS 123R will cause us to record, as expense each quarter, a non-cash accounting charge approximating the fair value of such share based compensation meeting the criteria outlined in the provisions of SFAS 123R. We have not yet determined which valuation method we will use or the method of implementation.

        Proposed Amendment to SFAS No. 128, "Earnings Per Share."    The FASB has proposed amending SFAS No. 128, "Earnings per Share," to make it consistent with International Accounting Standard 33, "Earnings per Share," and make earnings per share computations comparable on a global basis. Under

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the proposed amendment, each quarter, the year-to-date earnings per share computation would be performed independently from the quarterly computation. Additionally, for all contracts that could be settled in either cash or shares of stock, companies would assume that settlement would occur by the issuance of shares for purposes of computing diluted earnings per share, even if they intend to settle by paying cash or have a history of cash-only settlements, and regardless of who controls the means of settlement. Lastly, under the proposed amendment, shares that would be issued upon conversion of a mandatory convertible security would be included in the weighted average number of shares outstanding used in computing basic earnings per share from the date that conversion becomes mandatory, using the if-converted method, regardless of whether the result is anti-dilutive. The proposed amended standard was expected to be issued during the first quarter of 2005. However, the FASB has not yet finalized the revised effective date of the proposed amendment or its transition provisions. Retrospective application in all periods presented will be required, and which could cause us to restate previously reported earnings per share. We do not expect that the provisions of the amended SFAS 128 will have a significant impact on our results of operations.

3. Net Income Per Share of Genzyme Stock

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

(1)

Reflects the retroactive application of the provisions of EITF 04-8. The assumed conversion of our $690.0 million in principal of 1.25% convertible senior notes was dilutive for the three months ended March 31, 2005, however, the assumed conversion of these notes had no impact on diluted earnings per share for the three months ended March 31, 2004.

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(2)

We did not include the securities described in the following table in the computation of diluted earnings per share because these securities had an exercise price greater than the average market price of Genzyme Stock during both periods (amounts in thousands):

(3)

We did not retroactively include the potentially dilutive effect of the assumed conversion of the $575.0 million in principal of 3% convertible subordinated debentures in the computation of dilutive earnings per share for Genzyme Stock for the three months ended March 31, 2004, because we redeemed these debentures for cash in June 2004. The debentures were contingently convertible into approximately 8.2 million shares of Genzyme Stock at an initial conversion price of $70.30 per share.

4. Mergers and Acquisitions

Pending Merger with Bone Care International

        On May 4, 2005, we entered into an Agreement and Plan of Merger with Bone Care International, a Wisconsin corporation and Macbeth Corporation, a newly-formed Wisconsin corporation and our wholly-owned subsidiary. Bone Care International is a specialty pharmaceutical company with a focus in nephrology. The all cash transaction is valued at $33.00 per share, or approximately $600 million, net of Bone Care International's $119 million of cash and cash equivalents at March 31, 2005. Completion of the merger is subject to several conditions, including approval of the merger by Bone Care International's stockholders, expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and other customary closing conditions. We expect to close the transaction during the third quarter of 2005.

Completed Acquisitions

Acquisition of Verigen

        In February 2005, we acquired Verigen, a private company based in Germany with a proprietary cell therapy product for cartilage repair (Matrix-induced Autologous Chondrocyte Implantation, or MACI) currently sold in Europe and Australia. We paid $10.5 million in initial cash payments and may be obligated to make additional cash payments of up to an aggregate of approximately $40 million over the next six years based upon the achievement of development and commercial milestones relating to regulatory approval and commercialization of MACI in the United States, as well as contingent payments on worldwide sales of that product. To date we have acquired approximately 96% of Verigen's outstanding shares and anticipate acquiring the remaining outstanding shares in the second half of 2005.

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        The purchase price was allocated to the estimated fair value of the acquired tangible and intangible assets and assumed liabilities as follows (amounts in thousands):

        The purchase price was allocated to the intangible assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The estimated fair value of the assets acquired and liabilities assumed exceeded the initial payments by $9.8 million resulting in negative goodwill. Pursuant to SFAS No. 142, we recorded as a liability, contingent consideration up to the amount of the negative goodwill. When and if contingent payments come due, we will apply the payments against the $9.8 million contingent liability. Contingent payments in excess of $9.8 million, if any, will be recorded as goodwill.

        The allocation of the purchase price remains subject to potential adjustments, including the purchase of Verigen's remaining outstanding shares in the second half of 2005, the valuation of acquired tax assets and restructuring liabilities. Pro forma results are not presented for the acquisition of Verigen because the acquisition did not have a significant effect on our results of operations.

Acquisition of Synvisc Sales and Marketing Rights from Wyeth

        On January 6, 2005 we consummated an arrangement with Wyeth under which we reacquired the sales and marketing rights to Synvisc in the United States as well as in Germany, Poland, Greece, Portugal and the Czech Republic. In exchange for the sales and marketing rights, we paid a total of $121.0 million in cash to Wyeth in the first quarter of 2005, which is included in distribution agreements, a component of other intangible assets, net, in our consolidated balance sheet as of March 31, 2005. We also made contingent payments totaling $2.5 million to Wyeth in the first quarter of 2005 and will make a series of additional contingent payments to Wyeth based on the volume of Synvisc sales in the covered territories. These contingent payments could extend out to June 2012, or could total a maximum of $293.7 million, whichever comes first. Upon closing this transaction, we began to record revenue from sales of Synvisc to end-users in these territories. We are now recording selling, general and administrative, or SG&A, expenses related to the additional Synvisc sales force we assumed from Wyeth, and we continue to record all of the research and development expenses related to Synvisc.

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        We determined that the contingent payments to Wyeth represent contingent purchase price. Accordingly, as contingent payments are made in the future, the amounts will be recorded as additional purchase price for the underlying intangible asset. We expect to calculate amortization expense for this intangible asset based on an economic use model, taking into account forecasted sales of Synvisc and the resulting estimated contingent payments. We also plan to update the estimates used in this amortization calculation based on changes in forecasted sales and resulting estimated contingent payments.

        The reacquired Synvisc distribution rights relate to a currently marketed product and provide us with rights we did not previously have and therefore qualify in substance as an asset versus an acquired business. As a result, we do not provide pro forma results for our reacquisition of the Synvisc distribution rights because the acquisition does not constitute an acquired business.

Acquisition of ILEX

        In December 2004, we completed our acquisition of ILEX, an oncology drug development company. Pursuant to the merger agreement, each share of ILEX common stock outstanding was converted into the right to receive 0.4682 of a share of Genzyme Stock. An aggregate of 18,457,679 shares of Genzyme Stock were issued as consideration. We paid cash for any fractional shares that resulted from the conversion of the ILEX common stock to Genzyme Stock. In addition, we assumed all of the outstanding options to purchase shares of ILEX common stock. These ILEX options were converted into options to acquire 1,736,654 shares of Genzyme Stock, in accordance with the exchange ratio referred to above. The transaction had a total value of approximately $1.1 billion, based on the 39.4 million shares of ILEX stock outstanding at the date of acquisition, and the $55.88 per share value of Genzyme Stock exchanged in the acquisition. We accounted for the acquisition as a purchase and, accordingly, included its results of operations in our consolidated statements of operations from December 20, 2004, the date of acquisition.

        The purchase price was allocated to the intangible assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the purchase price over the estimated fair value of the assets acquired and liabilities assumed amounted to $478.1 million, which was allocated to goodwill. We expect that substantially all of the amount allocated to goodwill will not be deductible for tax purposes.

        The allocation of the purchase price remains subject to potential adjustments, including adjustments for liabilities associated with certain exit activities.

        In connection with our acquisition of ILEX, we initiated an integration plan to consolidate and restructure certain functions and operations, including the relocation and termination of certain ILEX personnel and the closure of certain of ILEX's leased facilities. These costs have been recognized as liabilities assumed in connection with the acquisition of ILEX in accordance with EITF 95-3 and are subject to potential adjustments as certain exit activities are confirmed or refined. The following table

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summarizes the liabilities established for exit activities related to the acquisition of ILEX (amounts in thousands):

        We expect to pay employee related benefits to the former employees of ILEX through the first quarter of 2006.

        We also recorded an estimated tax liability of $40.9 million related to the integration of ILEX.

Acquisition of Physician Services and Analytical Services Business Units of IMPATH

        In May 2004, we acquired substantially all of the pathology/oncology testing assets related to the Physician Services and Analytical Services business units of IMPATH, a national medical testing provider, for total cash consideration of $215.3 million, including acquisition costs. We accounted for the acquisition as a purchase and, accordingly, included its results of operations related to these business units in our consolidated statements of operations from May 1, 2004, the date of acquisition. The purchase price is subject to adjustment based upon the completion of a post-closing assessment of the working capital of the acquired business units as of April 30, 2004, which we expect to complete in 2005.

        The purchase price was allocated to the intangible assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the purchase price over the estimated fair value of the assets acquired and liabilities assumed amounted to $157.5 million, which was allocated to goodwill. Pro forma results are not presented for our acquisition of the pathology/oncology testing assets of IMPATH because the acquisition did not have a significant effect on our results of operations.

        In connection with the acquisition of these assets, we initiated an integration plan to consolidate and restructure certain functions and operations, including the relocation and termination of certain personnel and the closure of certain of the facilities leased by these business units of IMPATH. These costs have been recognized as liabilities assumed in connection with the purchase of the IMPATH

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assets in accordance with EITF 95-3. The following table summarizes the liabilities established for exit activities related to this acquisition (amounts in thousands):

        We expect to pay employee related benefits to former employees of the Physician Services and Analytical Services business units of IMPATH and make payments related to the closure of certain of the facilities leased by these business units through the end of 2005.

Acquisition of Alfigen

        In February 2004, we acquired substantially all of the assets of Alfigen, a national genetic testing provider based in Pasadena, California, for an aggregate purchase price of $47.5 million in cash. We accounted for the acquisition as a purchase and, accordingly, the results of operations of Alfigen are included in our consolidated financial statements from February 21, 2004, the date of acquisition.

        The purchase price was allocated to the intangible assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the purchase price over the estimated fair value of the assets acquired and liabilities assumed amounted to $33.2 million, which was allocated to goodwill. Pro forma results are not presented for the acquisition of Alfigen because the acquisition did not have a significant effect on our results of operations.

Acquisition of SangStat

        In September 2003, we completed an all cash tender offer for the outstanding common stock (and associated preferred stock purchase rights) of SangStat for $22.50 per outstanding SangStat share. The aggregate consideration paid (or set aside) was $636.6 million in cash. We accounted for the acquisition as a purchase. Accordingly, the results of operations of SangStat are included in our consolidated financial statements from September 11, 2003, the day after the expiration of the successful tender offer.

        In connection with the acquisition of SangStat, we initiated an integration plan to consolidate and restructure certain functions and operations of SangStat, including the relocation and termination of certain SangStat personnel and the closure of certain of SangStat's leased facilities. These costs have been recognized as liabilities assumed in connection with the purchase of SangStat in accordance with

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EITF 95-3. The following table summarizes the liabilities established for exit activities related to the acquisition of SangStat (amounts in thousands):

(1)

Includes costs associated with the closure of leased facilities in California, Germany, Spain and Canada.

        We expect to pay employee related benefits and make payments related to leased facilities through the first half of 2005.

Pro Forma Financial Summary

        The following pro forma financial summary is presented as if the acquisition of ILEX was completed as of the beginning of 2004. The pro forma combined results are not necessarily indicative of the actual results that would have occurred had the acquisition been consummated on that date, or of the future operations of the combined entities. Material nonrecurring charges related to this acquisition, such as an in process research and development, or IPR&D, charge of $254.5 million resulting from the acquisition of ILEX, are included in the following pro forma financial summary (amounts in thousands, except per share amounts):

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5. Inventories

        We capitalize inventory produced for commercial sale, which may result in the capitalization of inventory that has not 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. Our total inventories included $7.7 million at March 31, 2005 and $5.5 million at December 31, 2004, of inventory for Myozyme, primarily consisting of finished goods, which has not yet been approved for sale. In December 2004, we submitted a marketing application for Myozyme in the European Union.

6. Goodwill and Other Intangible Assets

Goodwill

        The following table contains the changes in our net goodwill during the three months ended March 31, 2005 (amounts in thousands):

(1)

The adjustments to goodwill include foreign currency revaluation adjustments for goodwill denominated in foreign currencies.

(2)

Includes the goodwill resulting from the acquisition of ILEX in December 2004. We recorded $0.4 million of additional adjustments to the goodwill in 2005 primarily related to revisions of estimates of liabilities related to exit activities.

        We are required to perform impairment tests related to goodwill 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. There were no such events in the first quarter of 2005.

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Other Intangible Assets

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

(1)

Includes core technology valued at $11.9 million resulting from our acquisition of Verigen in February 2005. The value assigned to this technology will be amortized over its estimated useful life of 10 years.

(2)

Includes $136.5 million in intangible assets related to our reacquisition of the Synvisc sales and marketing rights from Wyeth in January 2005.

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

•

$41.2 million for the three months ended March 31, 2005; and



•

$26.2 million for the three months ended March 31, 2004.

        The estimated future amortization expense for other intangible assets as of March 31, 2005 for the remainder of fiscal year 2005 and the five succeeding fiscal years is as follows (amounts in thousands):

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7. Investments in Equity Securities

        We review the carrying value of each of our strategic investments in equity securities on a quarterly basis for potential impairment.

        At March 31, 2005, our stockholders' equity includes $34.3 million of unrealized gains and $8.1 million of unrealized losses related to our investments in strategic equity securities of which $7.2 million of the unrealized losses are related to our investment in the common stock of BioMarin Pharmaceutical Inc. The market value of BioMarin stock has remained below our costs for the last fifteen months, however, based on the following facts and circumstances, we continue to believe that the decline in market value is considered to be temporary:

•

improved results of operations of BioMarin/Genzyme LLC in the first quarter of 2005;



•

in February 2005, BioMarin announced that the FDA has accepted for filing and assigned six-month review status to the Biologics License Application for rhASB (galsulfase), BioMarin's investigational enzyme replacement therapy for the treatment of mucopolysaccharidosis VI. BioMarin has stated that the FDA is scheduled to take action on the application, under the Prescription Drug User Fee Act, by May 31, 2005;



•

in April 2005, BioMarin announced that it has randomized the first patient in its Phase 3 clinical trial of Phenoptin (sapropterin hydrochloride), an investigational oral, small molecule therapeutic for the treatment of the genetic disease phenylketonuria. BioMarin has publicly announced that it expects to announce data from this trial in the second half of 2005;



•

industry analyst reports on BioMarin indicate improved confidence with strong buy ratings and target prices in excess of our cost;



•

our intention and ability to hold our investment in BioMarin common stock for a period of time sufficient to allow for the anticipated recovery in market value; and



•

recovery in the fair market value of BioMarin common stock since March 31, 2005.

8. Joint Venture with BioMarin Pharmaceutical Inc.

        We formed BioMarin/Genzyme LLC, a joint venture with BioMarin Pharmaceutical Inc., to develop and market Aldurazyme, a recombinant form of the human enzyme alpha-L-iduronidase which is being developed to treat an LSD known as mucopolysaccharidosis I, or MPS I. We record our portion of the income (losses) of BioMarin/Genzyme LLC in equity in income (loss) of equity method investments in our consolidated statements of operations. Our portion of BioMarin/Genzyme LLC's net income was $0.2 million for the three months ended March 31, 2005, as compared to our portion of BioMarin/Genzyme LLC's net loss of $3.1 million for the same period of 2004.

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        Condensed financial information for BioMarin/Genzyme LLC is summarized below (amounts in thousands):

9. Revolving Credit Facility

        In December 2003, we entered into a three year $350.0 million revolving credit facility, maturing in December 2006. As of December 31, 2004, $100.0 million in principal remained outstanding under this facility. In January 2005, we repaid the entire $100.0 million in principal outstanding under the credit facility. Borrowings under this credit facility bear interest at LIBOR plus an applicable margin. The terms of our revolving credit facility include various covenants, including financial covenants that require us to meet minimum liquidity and interest coverage ratios and to meet maximum leverage ratios. We currently are in compliance with these covenants.

10. Other Commitments and Contingencies

Legal Proceedings

        We periodically become subject to legal proceedings and claims arising in connection with our business.

        Four lawsuits have been filed against us regarding the exchange of all of the outstanding shares of Biosurgery Stock for shares of Genzyme Stock in connection with the elimination of our tracking stocks in July 2003. Each of the lawsuits is a purported class action on behalf of holders of Biosurgery Stock. The first case, filed in Massachusetts Superior Court in May 2003, alleged a breach of the implied covenant of good faith and fair dealing in our charter and a breach of our board of directors' fiduciary duties. The plaintiff in this case sought an injunction to adjust the exchange ratio for the tracking stock exchange. The Court dismissed the complaint in November 2003, but the plaintiff in this case has appealed this dismissal. This appeal was argued before the Massachusetts Appeals Court in March 2005 and we are awaiting the Appeals Court's ruling. Two substantially similar cases were filed in Massachusetts Superior Court in August and October 2003. These cases were consolidated in January 2004, and in July 2004, the consolidated case was stayed pending disposition of a fourth case, which was filed in the U.S. District Court for the Southern District of New York in June 2003. This case alleges violations of federal securities laws, common law fraud, and a breach of the merger agreement with Biomatrix, Inc., or Biomatrix, in addition to the state law claims contained in the other cases. The plaintiffs are seeking an adjustment to the exchange ratio, the rescission of the acquisition of Biomatrix, and unspecified compensatory damages. We believe each of these cases is without merit and continue to defend against them vigorously.

        On March 27, 2003, the Office of Fair Trade, or OFT, in the United Kingdom issued a decision against our wholly-owned subsidiary, Genzyme Limited, finding that Genzyme Limited held a dominant

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position and abused that dominant position with no objective justification by pricing Cerezyme in a way that excludes other delivery/homecare service providers from the market for the supply of home delivery and homecare services to Gaucher patients being treated with Cerezyme. In conjunction with this decision, the OFT imposed a fine on Genzyme Limited and required modification to its list price for Cerezyme in the United Kingdom. Genzyme Limited appealed this decision to the Competition Appeal Tribunal. On May 6, 2003, the Tribunal issued an order that stayed the OFT's decision, but required Genzyme Limited to provide a homecare distributor a discount of 3% per unit during the appeal process. The Tribunal issued its judgment on Genzyme Limited's appeal on March 11, 2004, rejecting portions of the OFT's decision and upholding others. The Tribunal found that the list price of Cerezyme should not be reduced, but that Genzyme Limited must negotiate a price for Cerezyme that will allow homecare distributors an appropriate margin. These negotiations are ongoing. The Tribunal also reduced the fine imposed by the OFT for violation of U.K. competition laws. In response to the Tribunal's decision, we recorded an initial liability of approximately $11 million in our 2003 financial statements and additional liabilities totaling approximately $3 million during 2004, all of which remain in accrued expenses in our consolidated balance sheet as of March 31, 2005. On April 13, 2004, Genzyme Limited filed an application with the Tribunal for permission to appeal to the High Court. The application is still pending.

        In June 2003, we filed suit in U.S. District Court for the District of Massachusetts, as co-plaintiff with Biogen IDEC and Abbott Laboratories against Columbia University seeking a declaration that Columbia's U.S. Patent 6,455,275 is invalid. The patent relates to the manufacture of recombinant proteins in Chinese hamster ovary, or CHO, cells, which are the cells we use to manufacture Cerezyme, Fabrazyme and Thyrogen, and which our joint venture partner BioMarin uses to manufacture Aldurazyme. This new patent was issued by the USPTO in September 2002 from a family of patents and patent applications originally filed in 1980. We are licensed under the patent family for a royalty of 1.5% of sales but, because we were confident that the new patent was mistakenly issued by the USPTO and is invalid, we did not pay the royalty pending the outcome of the litigation. We then received notice from Columbia that we were in breach of our license agreement. A hearing on motions for a summary judgment was scheduled for November 2004; however, Columbia rescinded the breach notification and filed with the Court a covenant not to enforce its patent 6,455,275 against any plaintiff in this litigation. In view of this covenant, the Court granted Columbia's motion to dismiss the plaintiff's main claim for lack of subject matter jurisdiction.

        We are not able to predict the outcome of these cases or estimate with certainty the amount or range of any possible loss we might incur if we do not prevail in the final, non-appealable determinations of these matters. Therefore, except for the liabilities recorded in connection with the Tribunal's decision regarding Cerezyme pricing in the United Kingdom, we have not accrued any amounts in connection with these potential contingencies. We cannot provide you with assurance that the matters listed above, or other legal proceedings, will not have a material adverse impact on our financial condition or results of operations.

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11. Provision for Income Taxes

        Our effective tax rate for both periods varies from the U.S. statutory tax rate as a result of:

•

our provision for state income taxes;



•

the tax benefits from export sales and domestic production activities;



•

nondeductible charges for IPR&D recorded in March 2005;



•

benefits related to tax credits; and



•

the foreign tax rate differential.

        We are currently under IRS audit for tax years 1996 to 1999 and 2002 to 2003. We believe that we have provided sufficiently for all audit exposures. Favorable settlement of these audits or the expiration of the statute of limitations on the assessment of income taxes for any tax year may result in a reduction of future tax provisions, which could be significant. Any such benefit would be recorded upon final resolution of the audit or expiration of the applicable statute of limitations.

        In October 2004, the U.S. enacted the American Jobs Creation Act of 2004, or the Act, which repeals the FSC Repeal and Extraterritorial Income Exclusion Act of 2000, or ETI, export subsidy for transactions after 2004 with two years of transition relief (2005-2006). The Act also provides a 9% deduction for income from domestic production activities which will be phased in over the years 2005-2010. While we are still evaluating the net impact of this new legislation, we do not expect it to have a material effect on our ongoing effective tax rate.

        In addition, the Act creates a temporary incentive for U.S. multinational corporations to repatriate accumulated income earned outside the U.S. While we are still evaluating this provision, we do not expect to benefit from the repatriation provisions under this Act.

12. Defined Benefits Pension Plans

        We have defined benefit pension plans for certain employees in foreign countries. These plans are funded in accordance with requirements of the appropriate regulatory bodies governing each plan.

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Components of Net Periodic Benefit Costs

        The components of net pension expense for the periods presented are as follows (amounts in thousands):

Employer Contributions

        At December 31, 2004, we recorded net prepaid benefit costs of $5.0 million related to our defined benefit pension plans. For the three months ended March 31, 2005, we contributed $0.7 million to our pension plan in the United Kingdom. We anticipate making approximately $2.2 million of additional contributions to this plan in 2005 to satisfy our annual funding obligation.

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 reporting segments as described in Note 1, "Description of Business," to this Form 10-Q. As described in Note 1. above, effective January 1, 2005, as a result of changes in how we review our business, we re-allocated the programs of our former drug discovery and development business unit, formerly reported under the caption "Other," amongst several of our existing reporting segments and business units as follows:

•

our tolevamer research and development program is now included in our Renal reporting segment;



•

our deferitrin (iron chelator) research and development program is now included in our Therapeutics reporting segment;



•

WelChol is now included in our bulk pharmaceuticals business unit and as a result, will continue to be reported under the caption "Other;" and



•

our other drug discovery research and development programs are now included in our corporate science activities under the caption "Corporate."

We have reclassified our 2004 segment disclosures to conform to our 2005 presentation.

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        The following table provides information concerning the operations in our reporting segments (amounts in thousands):