-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JB8fJFu8X7IKGTjRbaZGCmVZgIO4kES/o8kl6HI8FQpU3btnTXoF3cOULGOfPLtw ZKxhCoFXVVapDC6wEMuhgw== /in/edgar/work/0000912057-00-044948/0000912057-00-044948.txt : 20001018 0000912057-00-044948.hdr.sgml : 20001018 ACCESSION NUMBER: 0000912057-00-044948 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20001017 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENZYME CORP CENTRAL INDEX KEY: 0000732485 STANDARD INDUSTRIAL CLASSIFICATION: [2836 ] IRS NUMBER: 061047163 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-14680 FILM NUMBER: 741145 BUSINESS ADDRESS: STREET 1: ONE KENDALL SQ CITY: CAMBRIDGE STATE: MA ZIP: 02139 BUSINESS PHONE: 6172527500 MAIL ADDRESS: STREET 1: ONE KENDALL SQUARE CITY: CAMBRIDGE STATE: MA ZIP: 02139 10-K/A 1 a10-ka.txt 10-K/A - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 2 TO FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NO. 0-14680 ------------------------ GENZYME CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MASSACHUSETTS 06-1047163 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) ONE KENDALL SQUARE 02139 CAMBRIDGE, MASSACHUSETTS (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
(617) 252-7500 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) ------------------------------ Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: GENZYME GENERAL DIVISION COMMON STOCK, $0.01 PAR VALUE ("GENZYME GENERAL STOCK") GENZYME MOLECULAR ONCOLOGY DIVISION COMMON STOCK, $0.01 PAR VALUE ("MOLECULAR ONCOLOGY STOCK") GENZYME SURGICAL PRODUCTS DIVISION COMMON STOCK, $0.01 PAR VALUE ("SURGICAL PRODUCTS STOCK") GENZYME TISSUE REPAIR DIVISION COMMON STOCK, $0.01 PAR VALUE ("TISSUE REPAIR STOCK") GENZYME GENERAL STOCK PURCHASE RIGHTS MOLECULAR ONCOLOGY STOCK PURCHASE RIGHTS SURGICAL PRODUCTS STOCK PURCHASE RIGHTS TISSUE REPAIR STOCK PURCHASE RIGHTS 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 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 /X/ NO / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K / /. Aggregate market value of voting stock held by non-affiliates of the Registrant as of March 1, 2000: $5,874,532,711 Number of shares of the Registrant's Genzyme General Stock outstanding as of March 1, 2000: 84,710,732 Number of shares of the Registrant's Molecular Oncology Stock outstanding as of March 1, 2000: 13,514,512 Number of shares of the Registrant's Surgical Products Stock outstanding as of March 1, 2000: 14,854,067 Number of shares of the Registrant's Tissue Repair Stock outstanding as of March 1, 2000: 28,524,138 ------------------------ DOCUMENTS INCORPORATED BY REFERENCE The consolidated financial statements and related notes of Genzyme Corporation and the combined financial statements and related notes of Genzyme General, Genzyme Molecular Oncology, Genzyme Surgical Products and Genzyme Tissue Repair contained in Exhibits 13.1 through 13.5 of this Form 10-K are incorporated by reference into Parts I and II of this Form 10-K. Portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders held on May 25, 2000 are incorporated by reference into Part III of this Form 10-K. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE REGARDING FORWARD-LOOKING STATEMENTS This Form 10-K contains forward-looking statements, including statements regarding our: - Projected timetables for the preclinical and clinical development of, regulatory submissions and approvals for, and market introduction of our products and services; - Estimates of the potential markets for our products and services; - Sales and marketing plans; - Assessments of competitors and potential competitors; - Estimates of the capacity of manufacturing and other facilities to support our products and services; - Planned creation of a new division; - Planned acquisition of Biomatrix, Inc.; - Expected future revenues, operations and expenditures; and - Projected cash needs. These statements are based upon the current assumptions of our management and are only expectations of future results. These statements are subject to risks and uncertainties, and our actual results may differ significantly from those that are described in this Form 10-K. These risks and uncertainties include: - Our ability to successfully complete preclinical and clinical development of our products and services; - Our ability to manufacture sufficient amounts of our products for development and commercialization activities; - Our ability to obtain and maintain adequate patent and other proprietary rights protection of our products and services; - The content and timing of decisions made by the FDA and other regulatory agencies; - The accuracy of our estimates of the size and characteristics of the markets to be addressed by our products and services; - Market acceptance of our products and services; - Our ability to obtain reimbursement for our products and services from third-party payors; - Our ability to establish and maintain licenses, strategic collaborations and distribution arrangements; - The continued funding of our joint ventures; - The accuracy of our information regarding the products and resources of our competitors and potential competitors; and - The likelihood that the regulatory and other approvals required to create a new division and to complete the Biomatrix acquisition will be obtained. We have included more detailed descriptions of these risks and uncertainties in Exhibit 99.2, "Factors Affecting Future Operating Results," to this Form 10-K. We encourage you to read those descriptions carefully. 2 NOTE REGARDING REFERENCES TO GENZYME DIVISIONS Throughout this Form 10-K, 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 four operating divisions as follows: - Genzyme General Division = "Genzyme General;" - Genzyme Molecular Oncology Division = "Genzyme Molecular Oncology;" - Genzyme Surgical Products Division = "Genzyme Surgical Products;" and - Genzyme Tissue Repair Division = "Genzyme Tissue Repair." 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-K. Please read that information. NOTE REGARDING TRADEMARKS Genzyme-Registered Trademark-, Cerezyme-Registered Trademark-, Ceredase-Registered Trademark-, Thyrogen-Registered Trademark-, N-geneous-REGISTERED TRADEMARK- LDL, N-geneous-REGISTERED TRADEMARK- HDL, Contrast-REGISTERED TRADEMARK-, InSight-Registered Trademark-, MASDA-Registered Trademark-, Sepra Film-Registered Trademark-, Pleur-evac-Registered Trademark-, Thora-Klex-Registered Trademark-, Tevdek-Registered Trademark-, Polydek-Registered Trademark-, Deklene-REGISTERED TRADEMARK-, Cohn Cardiac Immobilizer-REGISTERED TRADEMARK-, SaphLITE-REGISTERED TRADEMARK-, Sepragel-REGISTERED TRADEMARK-, Diamond-Line-REGISTERED TRADEMARK-, Diamond-Flex-REGISTERED TRADEMARK-, Diamond-Touch-REGISTERED TRADEMARK- and Carticel-REGISTERED TRADEMARK- are registered trademarks of Genzyme. Fabrazyme-TM-, Afp4-TM-, GlyPro-TM-, SAGE-TM-, EndoCABG-TM-, Sahara-TM-, Genzyme OPCAB Elite-TM-, Cohn Cardiac Stabilizer-TM-, Switch-Blade-TM-, Seprafilm-TM-, Sepracoat-TM-, Sepramesh-TM-, Seprapack-TM-, CV Seprafilm-TM-, Epicel-TM- and QuickTack-TM- are trademarks of Genzyme. Genzyme-Registered Trademark- is a service mark of Genzyme. Renagel-Registered Trademark- is a registered trademark of GelTex Pharmaceuticals, Inc. NeuroCell-TM--PD and NeuroCell-TM--HD are trademarks of Diacrin, Inc. FocalSeal-Registered Trademark--L is a registered trademark of Focal, Inc. Provisc-Registered Trademark- is a registered trademark of Alcon Laboratories, Inc. Pulmozyme-Registered Trademark- is a registered trademark of Genentech, Inc. AVONEX-Registered Trademark- is a registered trademark of Biogen, Inc. Synvisc-REGISTERED TRADEMARK- is a registered trademark of Biomatrix, Inc. Aldurazyme-TM- is a trademark of BioMarin/Genzyme LLC. 3 TABLE OF CONTENTS
PAGE -------- PART I ITEM 1. BUSINESS.................................................... 5 General..................................................... 5 Recent Development.......................................... 5 Genzyme General--Products and Development Programs.......... 6 Genzyme Molecular Oncology--Development Programs and Services.................................................... 11 Genzyme Surgical Products--Products and Development Programs.................................................... 14 Genzyme Tissue Repair--Products and Development Programs.... 17 Competition................................................. 18 Patents, License Agreements and Trademarks.................. 22 Government Regulation....................................... 23 Employees................................................... 26 Research and Development Costs.............................. 26 Sales by Geographic Area, Significant Customers and Products.................................................... 26 ITEM 1A. EXECUTIVE OFFICERS.......................................... 27 ITEM 2. PROPERTIES.................................................. 28 ITEM 3. LEGAL PROCEEDINGS........................................... 30 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 30 PART II MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......................................... 31 ITEM 5. ITEM 6. SELECTED FINANCIAL DATA..................................... 33 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................... 33 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................................................ 33 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 33 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.................................... 34 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 34 ITEM 11. EXECUTIVE COMPENSATION...................................... 34 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................................. 34 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 34 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K......................................................... 35 14(a)(1) Financial Statements............................... 35 14(a)(2) Financial Statement Schedules...................... 36 14(a)(3) Exhibits........................................... 37 14(b) Reports on Form 8-K................................... 37 14(c) Exhibits.............................................. 37
4 PART I ITEM 1. BUSINESS GENERAL We are a biotechnology company that develops innovative products and services for major unmet medical needs. We were founded in 1981 and became a Massachusetts corporation in 1991. We currently have four operating divisions. We also have four series of common stock -- or "tracking" stock -- which are designed to reflect the value and track the financial performance of our divisions. Our four divisions and the series of stock designed to track them are: - Genzyme General, which develops and markets therapeutic products and diagnostic products and services, with an emphasis on therapies for genetic diseases. Genzyme General Stock, which is listed on the Nasdaq National Market-TM- under the symbol "GENZ," is designed to reflect the value and track the performance of Genzyme General. - Genzyme Molecular Oncology, which is developing cancer products, with a focus on cancer vaccines and angiogenesis inhibitors. It is shaping these new therapies through the integration of its genomics, gene discovery, cell therapy, gene therapy, small molecule drug discovery, and protein therapeutic efforts. Molecular Oncology Stock, which is listed on Nasdaq under the symbol "GZMO," is designed to reflect the value and track the performance of Genzyme Molecular Oncology. - Genzyme Surgical Products, which develops and markets a portfolio of devices, biomaterials and biotherapeutics for the cardiothoracic and general surgery markets. Surgical Products Stock, which is listed on Nasdaq under the symbol "GZSP," is designed to reflect the value and track the performance of Genzyme Surgical Products. - Genzyme Tissue Repair, which develops and markets biological products for orthopedic injuries, such as cartilage damage, and severe burns. Tissue Repair Stock, which is listed on Nasdaq under the symbol "GZTR," is designed to reflect the value and track the performance of Genzyme Tissue Repair. The divisions are not separate companies or legal entities. They are subsets of Genzyme's operations among which we allocate all of our products, services, programs, assets and liabilities for presentation purposes in our financial statements. These separate, division-based financial statements do not represent any physical segregation of assets or separate division accounts; they are an accounting presentation only. Assets presented as allocated to a division remain assets owned by the company and, therefore, remain subject to liabilities of Genzyme as a whole, such as any company-wide claims of creditors, product liability plaintiffs and stockholder litigation. RECENT DEVELOPMENT In March 2000, we entered into an agreement to acquire Biomatrix, Inc. Upon the effectiveness of our Registration Statement on Form S-4 and completion of the merger, we will form a new operating division called Genzyme Biosurgery and create a new series of common stock designed to reflect its value and track its performance. We refer to this stock as "Biosurgery Stock." In connection with the merger, and upon Genzyme shareholder approval, the assets and liabilities currently allocated to Genzyme Surgical Products and Genzyme Tissue Repair will be reallocated to Genzyme Biosurgery and shares of Surgical Products Stock and Tissue Repair Stock will be exchanged for Biosurgery Stock. We will account for the acquisition of Biomatrix as a purchase. Biomatrix stockholders will receive $37 in cash, one share of Biosurgery Stock, or a combination of cash and stock for each share of Biomatrix Stock they hold. The merger agreement provides that we will pay cash for only up to 28.38% of the outstanding shares of Biomatrix common stock that receive merger consideration, or up to approximately $245.0 million. 5 Holders of Surgical Products Stock will receive 0.6060 share of Biosurgery Stock in exchange for each share of Surgical Products Stock they hold and holders of Tissue Repair Stock will receive 0.3352 share of Biosurgery Stock in exchange for each share of Tissue Repair Stock they hold. For more information about the merger and the merger consideration, we encourage you to carefully read our Registration Statement on Form S-4 (File No. 333-34972) filed with the SEC on April 18, 2000 and as amended from time to time. The acquisition is subject to: - approval by Biomatrix's shareholders; - approval by our shareholders, including separate approvals by the holders of shares of Surgical Products Stock and Tissue Repair Stock; and - other customary closing conditions. GENZYME GENERAL--PRODUCTS AND DEVELOPMENT PROGRAMS Genzyme General primarily consists of two business units, Therapeutics and Diagnostics. The Therapeutics business unit focuses on developing and marketing products for genetic diseases, including a family of diseases known as lysosomal storage diseases, and specialty therapeutics. The Diagnostics business unit develops, markets and distributes IN VITRO diagnostic products and genetic testing services. THERAPEUTICS The Therapeutics business unit currently has three therapeutics products on the market and several other products in varying stages of development. The following chart contains information about many of these products and product candidates.
PRODUCT INDICATION STATUS COLLABORATOR OR LICENSOR - --------------------- --------------------- --------------------- ------------------------ CEREDASE-REGISTERED TRADEMARK- Type I Gaucher Marketed since 1991 None (ALGLUCERASE FOR disease and 1995, INJECTION) AND respectively; CEREZYME-REGISTERED TRADEMARK- available in 55 (IMIGLUCERASE FOR countries INJECTION) RENAGEL-REGISTERED TRADEMARK- Reduction of serum Marketed since 1998; GelTex Pharmaceuticals, CAPSULES phosphorus in approved in the U.S. Inc.* (SEVELAMER patients with in 1998, Israel in HYDROCHLORIDE) end-stage renal 1999 and in Europe in disease 2000 THYROGEN-REGISTERED TRADEMARK- Use in follow-up Marketed since 1998; None HORMONE screening of patients approved in the U.S. who have been treated in 1998 and Brazil in for thyroid cancer 2000 FABRAZYME-TM- Fabry disease Pivotal trial None (AFGALSIDASE BETA completed; BLA FOR INJECTION) submission planned for first half of 2000 TRANSGENIC Heparin resistance One Phase III trial Genzyme Transgenics ANTITHROMBIN III successfully Corporation* completed; a confirmatory Phase III trial ongoing ALDURAZYME-TM- Mucopolysaccharidosis-I One Phase III trial BioMarin Pharmaceutical, (ALRONIDASE FOR successfully Inc.* INJECTION) completed; a confirmatory Phase III trial planned for 2000
6
PRODUCT INDICATION STATUS COLLABORATOR OR LICENSOR - --------------------- --------------------- --------------------- ------------------------ RENAGEL-REGISTERED TRADEMARK- Dialysis Phase III trial GelTex Pharmaceuticals, TABLETS ongoing Inc.* RENAGEL-REGISTERED TRADEMARK- Hemodialysis (Europe) Phase III trial GelTex Pharmaceuticals, CAPSULES ongoing Inc.* AVONEX-REGISTERED TRADEMARK- Relapsing/remitting Pivotal trial planned Biogen, Inc. (INTERFERON-BETA forms of multiple for first half of 1A) sclerosis in Japan 2000 NEUROCELL-TM--PD Parkinson's disease Phase II trial Diacrin, Inc.* completed NEUROCELL-TM--HD Huntington's disease Phase I trial Diacrin, Inc.* completed TRANSGENIC ALPHA- Pompe disease Phase II pilot trial Pharming Group N.V.* GLUCOSIDASE in Europe ongoing GENE THERAPY Gaucher disease Phase I trial ongoing University of Pittsburgh DHA DERIVATIVE (GENZ Cystic fibrosis Clinical trial Beth Israel Deaconess 66055) planned for 2000 Medical Center EPI-KAL2 Hereditary angioedema Clinical trial Dyax Corp. planned for 2000 ACID SPHINGOMYELINASE Type B Niemann-Pick Clinical trial Mt. Sinai School of disease planned for 2000 Medicine PEPTIDE THERAPY Pemphigus vulgaris In development None (added program through our acquisition of Peptimmune, Inc. in July 1999) GENE THERAPY Cystic Fibrosis In development University of Michigan and the Hospital for Sick Children in Toronto, Ontario GENE THERAPY Lysosomal storage In development Genovo, Inc. diseases
- ------------------------ * If you would like information about our strategic collaborations marked with an asterisk, you should read Note I to our consolidated financial statements, which we are incorporating into this discussion by reference. Genzyme General also sells synthetic phospholipids, synthetic peptides and amino acid derivatives, which are used in research as raw materials for pharmaceutical manufacturers. It also produces and sells bulk hyaluronic acid for a number of applications. Under an agreement with Alcon Laboratories, Inc., Genzyme General supplies pharmaceutical-grade hyaluronic acid powder to Alcon for incorporation into Provisc-Registered Trademark-, an ophthalmic surgical aid product. In addition, hyaluronic acid is sold to a number of customers for various research and development applications. We have provided more details on our therapeutic products and our late-stage development programs below. CEREZYME-REGISTERED TRADEMARK- (IMIGLUCERASE FOR INJECTION)/CEREDASE-REGISTERED TRADEMARK- (ALGLUCERASE FOR INJECTION). Treatment with Cerezyme-Registered Trademark- enzyme or Ceredase-Registered Trademark- enzyme replacement therapy currently represents the only safe and effective treatment available for Type I Gaucher disease, a lysosomal storage disease. We entered the market in 1991 with Ceredase-Registered Trademark- enzyme. Because production of Ceredase-Registered Trademark- enzyme was subject to supply constraints, we developed Cerezyme-Registered Trademark- enzyme, a recombinant form of human alpha glucocerebrosidase, the enzyme that is deficient in Gaucher patients. Recombinant technology uses specially engineered cells to produce enzymes, or other substances, by inserting into cells of one organism the genetic material of a different 7 species. In the case of Cerezyme-Registered Trademark- enzyme, Chinese hamster ovary cells are engineered to produce human alpha glucocerebrosidase. We stopped producing Ceredase-Registered Trademark- enzyme, except for small quantities, during 1998 after substantially all patients who previously used Ceredase-Registered Trademark- enzyme were converted to Cerezyme-Registered Trademark- enzyme. Genzyme General is marketing these products directly to physicians, hospitals and treatment centers worldwide through a highly trained sales force. This marketing effort is directed at identifying and initiating treatment for the estimated 5,000 Gaucher patients Genzyme General believes exist worldwide. Genzyme General received marketing approval for Cerezyme-Registered Trademark- enzyme in five countries as well as the 15 countries forming the European Union and for Ceredase-Registered Trademark- enzyme in 13 countries. Our results of operations are highly dependent on sales of these products. Sales of Cerezyme-Registered Trademark- and Ceredase-Registered Trademark- enzymes totaled approximately $479 million in 1999, which represented approximately 70% of Genzyme's product revenue in that year. Sales of these products totaled $411 million, or 67% of Genzyme's product revenue, in 1998 and $333 million, or 67% of Genzyme's product revenue, in 1997. RENAGEL-REGISTERED TRADEMARK- (SEVELAMER HYDROCHLORIDE). Renagel-Registered Trademark- capsules are used for the reduction of serum phosphorus in patients with end-stage renal disease. There are an estimated 280,000 end-stage renal failure patients in the United States, approximately 95% of whom receive a phosphate control product. There are also an estimated 170,000 end-stage renal failure patents in Europe. In connection with our joint venture with GelTex Pharmaceuticals, Genzyme General is marketing Renagel-Registered Trademark- capsules directly to nephrologists, renal dieticians and payors through a dedicated sales force. It plans to launch Renagel-Registered Trademark- capsules on a country-by-country basis in Europe during 2000 following receipt of pricing and reimbursement approvals. Genzyme General and GelTex Pharmaceuticals are also developing a new tablet form of the RenaGel-Registered Trademark- product designed to have a higher potency and to be smaller and more convenient than the capsule form. THYROGEN-REGISTERED TRADEMARK- (THYROTROPIN ALFA FOR INJECTION). Thyrogen-Registered Trademark- hormone was developed by Genzyme General to allow patients to continue taking their thyroid hormone supplements while they are being screened for metastases. This allows patients to avoid the debilitating effects of hypothyroidism. In the United States, physicians order approximately 135,000 thyroglobulin tests and 25,000 radioiodine imaging whole body scans each year for thyroid cancer patients. Thyrogen-Registered Trademark- hormone is being co-marketed in the United States under an agreement with Knoll Pharmaceutical Company. Brazil has the highest incidence of thyroid cancer in the developed world, outside of the United States. Physicians order approximately 28,000 thyroglobulin tests and 12,000 radioiodine imaging whole body scans each year in Brazil for thyroid cancer patients. Biobras S.A. will exclusively distribute and market the product in Brazil. FABRAZYME-TM- (ALGALSIDASE BETA FOR INJECTION). Fabrazyme-TM- enzyme is a recombinant form of the human enzyme alpha-galactosidase. Genzyme General is developing Fabrazyme-TM- enzyme as a treatment for Fabry disease. Fabry disease is a lysosomal storage disease that is estimated to affect 1 in 40,000 males worldwide, with an estimated 2,000 to 4,000 patients worldwide. Genzyme General has completed a multi-center pivotal clinical trial of Fabrazyme-TM- enzyme and intends to file for regulatory approval in the United States in the first half of 2000. ANTITHROMBIN III. Antithrombin III, also known as ATIII, is a protein naturally produced by the body that, when bound to heparin, prevents blood clotting. Genzyme General and Genzyme Transgenics are developing transgenically-produced recombinant ATIII. Transgenic proteins are produced by inserting human DNA into animal cells so that the target protein, or drug, is secreted into the milk of female offspring during lactation. Genzyme General and Genzyme Transgenics successfully completed a Phase III clinical trial of transgenic ATIII to restore heparin sensitivity in heparin-resistant patients undergoing elective heart surgery requiring cardiopulmonary bypass. An on going confirmatory Phase III clinical trial is designed to compare transgenic ATIII to plasma-derived ATIII and is scheduled to conclude in 2000. Genzyme currently owns approximately 30% of the outstanding shares of Genzyme Transgenics common stock. ALDURAZYME-TM- (ALRONIDASE FOR INJECTION). Genzyme General's partner BioMarin Pharmaceutical successfully completed a Phase III clinical trial of Aldurazyme-TM- enzyme, a recombinant form of the human 8 enzyme alpha-L-iduronidase. Aldurazyme-TM- enzyme is designed to treat a lysosomal storage disease known as mucopolysaccharidosis I, or MPS-I. A confirmatory Phase III clinical trial is scheduled for 2000. Approximately 2,000 to 3,000 people in the developed world have been diagnosed with MPS-I. AVONEX-REGISTERED TRADEMARK- (INTERFERON-BETA 1A). In September 1998, Genzyme entered into an agreement with Biogen Inc. under which Genzyme General will commercialize and exclusively distribute AVONEX-Registered Trademark- in Japan, following regulatory approval. AVONEX-Registered Trademark- is Biogen's treatment for relapsing/remitting forms of multiple sclerosis. Genzyme General is managing the clinical development program for AVONEX-Registered Trademark- in Japan and is working to obtain registration and reimbursement approvals for the product. Genzyme General estimates that there are at least 5,000 multiple sclerosis patients in Japan. Genzyme General has several other research and development programs in process. It is dedicated to capitalizing on its expertise in proteins, gene and cell therapy, and small molecules to grow its pipeline. It recently formed an Emerging Technology Group to focus on using this expertise to accelerate internal development programs, form additional strategic collaborations and pursue out-licensing opportunities. DIAGNOSTICS DIAGNOSTIC PRODUCTS Genzyme General develops, markets and distributes IN VITRO products, with an emphasis on point-of-care, clinical chemistry and rapid test products. Genzyme General sold its bioreagents and ELISA immunochemistry product lines to an operating unit of Sybron Laboratory Products Corp. in July 1999 and the primary assets of its research products business to Techne Corporation in July 1998. These sales reflect the sharpened focus of the diagnostic products business. Genzyme General sells its diagnostic products through its technical sales representatives in the United States and Europe and through distributors in Japan. CARDIOVASCULAR PRODUCTS. Genzyme General sells devices and reagents for the measurement of low-density lipoprotein, or LDL, and high-density lipoprotein, or HDL, cholesterol levels. Genzyme General's N-geneous-REGISTERED TRADEMARK- LDL and Liquid N-geneous-REGISTERED TRADEMARK- HDL tests accurately measure cholesterol levels directly without the labor intensive pretreatment steps that were previously needed and are easily adaptable to automated chemistry analyzers. Both tests are being distributed in the United States by Genzyme General under an agreement with the manufacturer of the tests, Daiichi Pure Chemicals Co., Ltd., of Tokyo. In addition to the United States. Genzyme General is also the exclusive marketing partner for the N-geneous-REGISTERED TRADEMARK- LDL and Liquid N-geneous-REGISTERED TRADEMARK- HDL tests in Europe and the rest of the world, with the exception of Asia, where Genzyme General holds co-exclusive distribution rights. GLYPRO-TM- ASSAY. Genzyme General's GlyPro-TM- test is an improved tool for monitoring diabetes. The GlyPro-TM- test measures blood sugar levels over several weeks, which is a valuable resource for reducing diabetes-related complications. DIAGNOSTIC INTERMEDIATES. Genzyme General produces and sells intermediates such as diagnostic enzymes, substrates and reagents for use in diagnostic kits used for blood analysis in clinical chemistry laboratories. One area of emphasis is pancreatic function, where Genzyme General provides enzymes, substrates, bulk reagents and patented methodologies for amylase and lipase determination to diagnostic kit manufacturers. Genzyme General is also a primary supplier of cholesterol enzymes used in testing for coronary heart disease. RAPID TESTS. Genzyme General's product portfolio includes its patented Contrast-TM- rapid tests for pregnancy, Strep A and infectious mononucleosis determination. It also introduced the first combination rapid test for the two most common causes of parasitic intestinal disease. DEVELOPMENT PROGRAMS. In October 1999, Genzyme General and Skye PharmaTech Inc. formed a collaboration to develop and market a point-of-care stroke diagnostic product. Skye is developing the product, and Genzyme General will exclusively manufacture and market the product worldwide following approval. Stroke is the third leading cause of death in the United States, affecting approximately 700,000 9 people annually, with a similar incidence in Europe. Approximately 150,000 Americans die as a result of stroke each year. Genzyme General is conducting research programs for point-of-care products for diabetes and infectious diseases. Other development programs include homocysteine and Lpa-cholesterol tests to determine cardiovascular disease risk and a liquid lipase test for pancreatitis. GENETIC DIAGNOSTIC SERVICES Genzyme General applies advanced biotechnology to develop and provide high quality, sophisticated genetic diagnostic services in the United States and internationally through a national network of laboratories and a direct sales force as well as through joint ventures in Germany and Japan. Genzyme General offers three types of genetic diagnostic services: - Biochemical testing services, which consist primarily of a widely used screening test known as AFP3 to determine if further prenatal genetic testing is appropriate; - Classical and molecular cytogenetic testing services, which involve the analysis of fetal cells obtained through amniocentesis or a process known as chorionic villi sampling to evaluate chromosomal abnormalities; and - DNA testing, which is performed to determine the likelihood that the patient has, or is a carrier for, a specific genetic disorder, such as cystic fibrosis and Gaucher disease. Genzyme General employs over 90 board certified genetics professionals who interpret results and provide genetic counseling and support services to medical practitioners and their patients. We have described some of Genzyme General's genetic diagnostic tests and programs below. AFP4-TM- TEST. Genzyme General added this advanced screening test to its comprehensive prenatal genetic services program during the fourth quarter of 1999. This test is more accurate than the AFP3 test in detecting mutations associated with Down syndrome and is expected to replace triple marker screening over time. INSIGHT-REGISTERED TRADEMARK- TEST. Genzyme General's InSight-REGISTERED TRADEMARK- test is a molecular cytogenetic test that permits identification of the most frequently occurring chromosomal abnormalities within 48 hours, which is significantly faster than the one to three weeks required to perform classical cytogenetic testing (karyotyping). The InSight-REGISTERED TRADEMARK- analysis is provided in conjunction with a complete karyotype. MASDA-REGISTERED TRADEMARK- TECHNOLOGY. Genzyme General's patented multiplex allele-specific diagnostic assay, which is known as the MASDA-REGISTERED TRADEMARK- technology, is used for simultaneous analysis of up to 500 DNA for over 100 genetic mutations in a single test. The MASDA-REGISTERED TRADEMARK- technology not only provides high-throughput analysis of different patient samples for different genetic diseases, but also identifies multiple mutations in a single patient's DNA sample. Genzyme General is pursuing a number of commercialization strategies for the MASDA-REGISTERED TRADEMARK- technology. In addition, the MASDA-REGISTERED TRADEMARK- technology is being used to provide genetic profiling services for clinical trials being conducted by pharmaceutical companies. HEREDITARY NONPOLYPOSIS COLON CANCER. Genzyme General introduced a test that screens for mutations associated with the most common form of hereditary colon cancer, hereditary nonpolyposis colon cancer, which is also known as HNPCC or Lynch Syndrome. HNPCC accounts for between approximately 3 and 6% of all colorectal cancers in the United States, or an estimated 4,000 to 8,000 cases every year. Genzyme General introduced this test in July 1999. ADENOMATOUS POLYPOSIS COLI. Genzyme General's APC I1307K test, also introduced in 1999, screens for a gene mutation associated with an increased risk of colorectal cancer in Ashkenazi Jewish families. The specific gene mutation occurs more frequently in this population and has been found in approximately 28 percent of Ashkenazi Jewish individuals who have both a personal history and family history of colon cancer. 10 CF86 TEST. Introduced in 1999, Genzyme General's CF86 test screens for 86 genetic mutations associated with cystic fibrosis. DEVELOPMENT PROGRAMS. Genzyme General is developing additional platforms for complex mutational analysis and conducts major research and development programs in such areas as genomics and rare cell separation and analysis methods. Genzyme General is also developing a multiple disease carrier test using the MASDA-Registered Trademark- technology and integrated scanning sequencing approaches for rapid detection of both previously characterized and unknown gene mutations. GENZYME MOLECULAR ONCOLOGY--DEVELOPMENT PROGRAMS AND SERVICES Genzyme Molecular Oncology is developing a new generation of cancer therapeutics based upon the growing understanding of the molecular basis of cancer. Genzyme Molecular Oncology believes that these therapeutics have the potential to treat multiple types of cancer, minimize toxicity and side effects, and complement both existing and novel therapies. It uses its functional genomics tools and draws upon capabilities in gene therapy, cell therapy, protein therapy and small molecule drugs to select and pursue the most appropriate of these approaches for each cancer target. Genzyme Molecular Oncology complements its internal resources through collaborations with some of the world's preeminent researchers in cancer research. DEVELOPMENT PROGRAMS Genzyme Molecular Oncology is developing products in the following three therapeutic classes: - vaccines that treat cancer by stimulating the body's immune system to fight tumor cells; - angiogenesis inhibitors that treat cancer by preventing the formation and development of blood vessels that tumors require for growth; and - pathway regulators that treat cancer by regulating one or more of the metabolic processes in cancer cells necessary for tumor cells to grow and survive. The following chart describes the development status of Genzyme Molecular Oncology's development programs:
PRODUCT/PROGRAM TYPES OF CANCER STATUS - --------------- --------------- ------------------------ CANCER VACCINES Dendritic/tumor cell fusion Breast Phase I/II trial ongoing Melanoma IND filed Kidney Preclinical Melan-A/MART-1 and gp100 antigens Melanoma Phase I/II trial ongoing NY-ESO-1 antigen Multiple Preclinical ANGIOGENESIS INHIBITORS aaATIII Multiple Preclinical Small molecules Multiple Research Gene therapy Multiple Research CANCER PATHWAY REGULATORS Small molecules Multiple Research
11 Genzyme Molecular Oncology owns all commercial rights to each of these programs other than aaATIII, which it is co-developing with ATIII LLC, the joint venture between Genzyme General and Genzyme Transgenics. CANCER VACCINES Genzyme Molecular Oncology believes that the most successful cancer vaccines will be those that activate a cellular immune response directed at the tumor. Its program features two types of vaccines for generating a tumor-specific cellular immune response: - where the specific tumor antigens are not known, Genzyme Molecular Oncology uses a technique that fuses the patient's own tumor cells with dendritic cells, creating a cell therapy product; and - where specific tumor antigens have been identified as targets of the cellular immune response, Genzyme Molecular Oncology uses gene-based or peptide-based tumor vaccines. Antigens are molecular markers in tumor cells that enable the body's immune system to recognize and respond to these cells as being foreign. Dendritic cells are specialized immune system cells that capture antigens and present them to T cells that selectively recognize them. T cells are the immune system's cellular response to disease. Genzyme Molecular Oncology believes that both of the vaccine types described above will provide clinical benefit and have commercial potential. Development of antigen-specific vaccines, however, is currently limited by the lack of known tumor-specific antigens. Therefore, cell fusion may be more broadly applicable in the near term. Over time, as Genzyme Molecular Oncology identifies more tumor-specific antigens, it anticipates having the ability to provide off-the-shelf vaccines that are customized based on the set of specific antigens present in the patient's tumor. BREAST CANCER FUSION VACCINE. Working with the Dana-Farber Cancer Institute and the Beth Israel Deaconess Medical Center in Boston, Genzyme Molecular Oncology initiated a Phase I/II clinical trial for the treatment of metastatic breast cancer in September 1999. The vaccine used in this trial is produced using a chemical fusion process to combine the patient's own cancer cells and dendritic cells derived from the patient. The end points for this trial are safety, immunologic response and clinical response. KIDNEY CANCER AND MELANOMA FUSION VACCINES. An academic group in Germany has recently published clinical data for the treatment of kidney cancer with a vaccine produced using electrofusion to combine a patient's cancer cells with dendritic cells derived from another source. The clinical response rate reported in that study was significantly higher than has been achieved with standard therapy in that patient population. Because of the positive results reported in the German study, Genzyme Molecular Oncology plans to commence four additional Phase I clinical trials for cell fusion vaccines in 2000. These trials will be in kidney cancer and in melanoma. For each type of cancer, Genzyme Molecular Oncology intends to conduct two trials, one using vaccine produced in the manner used in its breast cancer trial and one using vaccine produced in the manner used in the German study. These trials should provide Genzyme Molecular Oncology insight into the safety and efficacy of cell fusion vaccines in a variety of cancer indications, as well as a comparison of these two processes for producing cell fusion vaccines. MELAN-A/MART-1 AND GP100 ANTIGEN-SPECIFIC VACCINES. In collaboration with Dr. Steven Rosenberg at the National Cancer Institute, Genzyme Molecular Oncology has conducted two Phase I clinical trials. In these trials, adenoviral gene delivery vectors carrying either the Melan-A/MART-1 or gp100 gene were evaluated for safety, immunologic reactivity and potential therapeutic effect when administered IN VIVO alone or in conjunction with recombinant interleukin-2. The results from these clinical studies indicated that the adenoviral vectors were safe and well tolerated, and that a small but notable number of both the 36 patients immunized with Melan-A/MART-1 and the 18 patients treated with gp100 showed clinically significant tumor regression. These responses were seen in very late stage (stage IV) metastatic disease 12 patients, who are a heavily pre-treated patient population not expected to mount a robust immune response and who, as a group, have a very short life expectancy. In April 1999, Genzyme Molecular Oncology initiated a Phase I/II trial in melanoma patients at Massachusetts General Hospital. This trial involves extracting dendritic cells from the patient and combining these cells with a vaccine containing Melan-A/MART-1 and gp100 EX VIVO. The treated cells are then injected into the patient. In this trial, Genzyme Molecular Oncology will assess safety, immunologic response and clinical response. Throughout the trial Genzyme Molecular Oncology will be performing a comprehensive analysis of the patient's immune response to the vaccine to help it to understand better why some patients respond well to the therapy while others do not. Genzyme Molecular Oncology is also conducting pre-clinical studies to support a Phase I/II IN VIVO melanoma trial expected to begin early in the second half of 2000. For this study, Genzyme Molecular Oncology plans to utilize both the Melan-A/MART-1 and gp100 tumor antigens. In this trial, Genzyme Molecular Oncology intends to monitor patient immune responses in order to further elucidate the immunology of cancer to enhance its antigen-specific vaccine development efforts. NY-ESO-1 ANTIGEN-SPECIFIC VACCINES. NY-ESO-1 is an antigen expressed in a subset of a number of different tumor types, including breast cancer, melanoma and lung cancer. Genzyme Molecular Oncology is conducting pre-clinical development to support a Phase I/II clinical trial for NY-ESO-1-positive tumors to be performed in collaboration with the Ludwig Institute. In this trial, Genzyme Molecular Oncology plans to enroll patients with tumors that express NY-ESO-1 regardless of the location of the tumor. In this way, the trial will offer an opportunity to shift the paradigm for treating cancer from one based on the anatomical location of the tumor to one based on the antigenic profile of the tumor. ANGIOGENISIS INHIBITORS Genzyme Molecular Oncology is pursuing proteins, small molecules and gene therapies for use as angiogenesis inhibitors. Angiogenesis is the growth of new blood vessels. A modified form of ATIII that is known as aaATIII is Genzyme Molecular Oncology's lead development candidate in its angiogenesis inhibition program. While ATIII does not inhibit angiogenesis, preclinical studies have shown that when it is modified to aaATIII, the modified compound acts as a potent angiogenesis inhibitor. CANCER PATHWAY REGULATORS Cancer pathway regulators treat cancer by regulating one or more metabolic processes required for growth and survival of cancer cells. Genzyme Molecular Oncology has early stage programs focusing on small molecule drugs. Genzyme Molecular Oncology's small molecule drug discovery effort relies upon its access to extensive libraries of compounds and multiple high-throughput assays. The number of small molecules in Genzyme's libraries of chemical compounds now exceeds two million compounds. Genzyme Molecular Oncology also has access to compound libraries of other companies. SAGE-TM- TECHNOLOGY PLATFORM Genzyme Molecular Oncology's SAGE-TM- technology is a patented high-throughput, high efficiency method of simultaneously detecting and measuring the expression level of virtually all genes expressed in a cell at a given time. The SAGE-TM- technology detects and quantifies expression of novel as well as known genes and, because of its high efficiency and sensitivity, SAGE-TM- technology can detect genes expressed at low levels. Some of the uses of SAGE-TM- technology are comparison of disease tissue with healthy tissue, comparison of genes expressed at different stages of disease, elucidation of disease pathways and measurement of response to and toxicity of drug candidates. Genzyme Molecular Oncology continues to enhance the power of its SAGE-TM- technology through software and bioinformatics development, technology improvements, database expansion and the integration of the SAGE-TM- technology with other genomics tools, such as microarrays. 13 Genzyme Molecular Oncology has used its SAGE-TM- technology to analyze the most prevalent types of cancer and corresponding normal tissue and also has access to SAGE-TM- data generated in the laboratories of Drs. Bert Vogelstein and Kenneth Kinzler at The Johns Hopkins University. Genzyme Molecular Oncology has accumulated from its proprietary analyses, its collaborators and the Cancer Genome Anatomy Project at the NCI a database of over 3.5 million SAGE-TM- gene sequence identification tags, representing over 125,000 unique genes. Genzyme Molecular Oncology is also using its SAGE-TM- technology extensively in its drug discovery and development efforts to identify genes that are functionally relevant. In cancer vaccines, Genzyme Molecular Oncology combines the SAGE-TM- technology with other proprietary tools to identify tumor-specific antigens. In angiogenesis inhibition, Genzyme Molecular Oncology is using the SAGE-TM- technology to dissect the genetic pathways for angiogenesis and to explore and understand the mechanism of action of drug candidates discovered in functional assays. In cancer pathway regulation, Genzyme Molecular Oncology is using the SAGE-TM- technology to identify targets to use in high-throughput screens. In addition to using the SAGE-TM- technology in its drug discovery and development programs, Genzyme Molecular Oncology is using the SAGE-TM-technology and its proprietary SAGE-TM- database to generate revenues through licenses and service agreements and database collaborations. ANTIGEN DISCOVERY PLATFORM Genzyme Molecular Oncology is seeking to stimulate a cellular immune response against tumors by using vaccines to present tumor-specific antigens to the immune system. Genzyme Molecular Oncology has built a proprietary, state-of-the-art antigen discovery platform that combines identification and validation in one step. Genzyme Molecular Oncology is using this platform to rapidly and efficiently identify and validate target antigens for incorporation into novel antigen-specific cancer vaccines. Genzyme Molecular Oncology plans to analyze the cancer cells extracted from the patients in its on-going cell fusion vaccine clinical trials using its antigen discovery technologies in order to identify the antigens associated with anti-tumor and expand the development of its antigen-specific vaccines. GENZYME SURGICAL PRODUCTS--PRODUCTS AND DEVELOPMENT PROGRAMS In addition to providing traditional devices and closures for the cardiothoracic, general and plastic surgery markets, Genzyme Surgical Products develops and markets products for minimally invasive cardiovascular surgery, biomaterials and biotherapeutics. Genzyme Surgical Products' sales force markets products directly to surgeons and hospital administrators throughout the United States and Europe. It also uses a network of distributors in Europe, Asia and Latin America. Genzyme Surgical Products' biomaterials program includes products based on hyaluronic acid that are intended to reduce the incidence and extent of adhesions (scar tissue) that form after surgery. Hyaluronic acid is a substance that is naturally created by the body to lubricate and protect tissue. These products are known as the Sepra family of products and are being developed on behalf of Genzyme Development Partners, L.P. Genzyme Surgical Products has the exclusive right to sell the Sepra family of products in the United States and Canada on behalf of our joint venture with Genzyme Development Partners and the exclusive right to sell these products outside the United States and Canada for its own benefit. Genzyme Surgical Products sells the Sepra family of products in Luxembourg, Germany, Austria, Switzerland and Japan through distributors. If you would like more information about our relationship with Genzyme Development Partners and the joint venture, you should read Note M. to our consolidated financial statements, which we are incorporating into this discussion by reference. CARDIOTHORACIC SURGERY TRADITIONAL INSTRUMENTS AND DEVICES. Genzyme Surgical Products' cardiothoracic surgery business consists of a comprehensive portfolio of products, including fluid management and chest drainage systems, 14 sutures and cardiovascular instruments. Its line of fluid management systems consists primarily of self-contained, disposable chest drainage devices used to drain blood from the chest cavity following open-heart surgery, other surgical procedures and trauma. Genzyme Surgical Products also sells autotransfusion devices that allow the collection of blood shed by the patient and its reinfusion postoperatively, which eliminates the risks associated with blood transfusions. Genzyme Surgical Products' self-contained, disposable Pleur-evac-Registered Trademark- chest drainage unit was introduced in 1967 and is the market leader in chest drainage devices. Genzyme Surgical Products also sells a line of dry suction-controlled chest drainage and autotransfusion devices under the Sahara-TM- and Thora-Klex-Registered Trademark- brand names. It markets sutures, including the Tevdek-Registered Trademark- and Polydek-Registered Trademark- valve sutures and Deklene-Registered Trademark- bypass sutures. Genzyme Surgical Products also sells aortic punches, which are used during coronary artery bypass surgery to make clean, round openings in the aorta prior to grafting. Finally, its Diamond-Line-Registered Trademark- portfolio of hand-held, reusable instruments includes needleholders, scissors, forceps, graspers, dissectors and retractors. MINIMALLY INVASIVE CARDIOVASCULAR SURGERY SYSTEMS. Genzyme Surgical Products markets products for minimally invasive cardiovascular surgery, with a focus on beating-heart surgery. In beating-heart surgery, procedures are performed on the heart without stopping the heart and without the use of a heart/lung machine to circulate blood and supply oxygen. This allows surgeons to avoid the complications often associated with the use of heart/lung machines. Genzyme Surgical Products' newest product in this line is known as the Genzyme OPCAB Elite-TM- beating-heart platform. The Genzyme OPCAB Elite-TM- system is designed to allow surgeons to conduct multi-vessel coronary artery bypass surgery while the heart continues to beat. It combines reusable retractors with disposable devices such as stabilizers, sutures and punches. A central component of the system is the Cohn Cardiac Stabilizer-TM- device, which allows surgeons to isolate and stabilize a small section of the heart to have clear access to the blood vessels. In addition, Genzyme Surgical Products has introduced minimally invasive saphenous vein harvest and valve replacement instruments. For example, its SaphLITE-Registered Trademark- II system is used to remove the saphenous vein from the leg for use as a graft in coronary artery bypass procedures. BIOMATERIALS. Genzyme Surgical Products has obtained the exclusive right to distribute FocalSeal-Registered Trademark--L in North America for pulmonary, cardiovascular and gastrointestinal procedures following regulatory approval of the product. FocalSeal-Registered Trademark--L is a biomaterial developed by Focal, Inc. for the prevention of air and fluid leaks following surgery. FocalSeal-Registered Trademark--L recently received approval in Canada, and Genzyme Surgical Products expects it to be approved in the United States in 2000. Approximately 70,000 lung surgeries are performed in the United States annually, with almost all patients at risk for debilitating air leaks. Genzyme Surgical Products recently obtained approval in the European Union for its CV Seprafilm-TM- cardiovascular adhesion barrier, which is designed to reduce the formation of adhesions following open-heart surgery. In addition, it has completed the safety phase of a clinical trial for this product in the United States in infants undergoing multi-stage procedures for the repair of congenital heart defects. BIOTHERAPEUTICS. Genzyme Surgical Products also has several biotherapeutic products in various stages of research and development. It is developing HIF-1 alpha, which is a naturally occurring compound that has been shown to trigger the expression of many proteins associated with angiogenesis. Genzyme Surgical Products is conducting a Phase I clinical trial of HIF-1 alpha in patients with peripheral vascular disease, a condition caused by blocked arteries in the limbs. Following review of a protocol by the Recombinant DNA Advisory Committee of the National Institutes of Health, Genzyme Surgical Products also plans to begin a second Phase I clinical trial of the product in patients with coronary artery disease undergoing bypass surgery who have an area of the heart that is not suitable for surgical revascularization. Genzyme Surgical Products is conducting research on other gene therapy approaches to congestive heart failure and restenosis. In addition, through a collaboration with a research group at the Toronto 15 Hospital in Canada, Genzyme Surgical Products is also conducting research on cell therapy approaches to congestive heart failure. GENERAL SURGERY Genzyme Surgical Products has established a growing presence in the general surgery market through its biomaterials and endoscopic instruments. BIOMATERIALS. Genzyme Surgical Products has an extensive line of biomaterial products on the market and in development for the general surgery market, including many products included in the Sepra family of products.
PRODUCT INDICATION STATUS - ------- ----------------------------- ----------------------------- SEPRA FILM-REGISTERED Abdominal/pelvic surgery Marketed in the U.S. since TRADEMARK- BIORESORBABLE 1996; approved in the U.S. MEMBRANE and Europe in 1996, in Canada and Israel in 1997, in Japan in 1998 and in several other countries SEPRA Small bowel obstructions Phase IV clinical trial FILM-REGISTERED TRADEMARK- ongoing BIORESORBABLE MEMBRANE SEPRA Abdominal/pelvic surgery Marketed in Europe since 1999 FILM-REGISTERED TRADEMARK- II ADHESION BARRIER SEPRACOAT-TM- COATING Open surgery Marketed in Europe since 1996 SOLUTION SEPRAMESH-TM- PRODUCT Hernia repair Received 510(k) clearance in 2000 SEPRAPAK-TM- PRODUCT Sinus packing Listed with the FDA SEPRAGEL-REGISTERED TRADEMARK- Open and laproscopic surgery In development BIORESORBABLE GEL
Genzyme Surgical Products' lead product in the general surgery market is Sepra Film-Registered Trademark- bioresorbable membrane. It is currently conducting a Phase IV clinical trial to test the ability of the Sepra Film-Registered Trademark- product to reduce the incidence of bowel obstructions. Genzyme Surgical Products is also marketing Sepra Film-Registered Trademark- II adhesion barrier, a second generation Sepra Film-Registered Trademark- product designed to have increased plasticity, as an adhesion prevention product for open and laparoscopic surgery in Europe. In addition, Genzyme Surgical Products has developed the Sepramesh-TM- product, a prosthetic surgical mesh product for use in hernia repairs. Other Sepra products are in earlier stages of development. Genzyme Surgical Products is developing Sepragel-Registered Trademark- bioresorbable gel for use during laparoscopic surgery as well as in open surgery as a complement to the Sepra Film-Registered Trademark- product. Genzyme Surgical Products is also currently developing anti-adhesion products for other surgical applications. ENDOSCOPIC INSTRUMENTS. Genzyme Surgical Products carries an extensive line of high-quality endoscopic instruments for general and gynecological surgery. Its Diamond-Line-Registered Trademark- technology extends to a full portfolio of retractors, forceps, scissors, needle-holders, graspers and clamps. The leading products in the portfolio are its Diamond-Flex-Registered Trademark- and Diamond-Touch-Registered Trademark- instruments. Diamond-Flex-Registered Trademark- retractors and forceps are the only reusable instruments on the market with articulating heads that allow gentle repositioning of organs and tissue at varying angles. The Diamond-Touch-Registered Trademark- instruments provide ergonomically designed contoured handles for superior positioning, comfort and control. Genzyme Surgical Products' Switch-Blade-TM- tips are the second major component of its endoscopic surgery portfolio. Switch-Blade-TM- tips are disposable scissor tips that are attached to reusable shafts. 16 OTHER PRODUCTS Genzyme Surgical Products also manufactures products for the plastic surgery market. This distinct product line consists of hand-held instruments, endoscopic plastic surgery equipment, sutures and surgical compression garments. GENZYME TISSUE REPAIR--PRODUCTS AND DEVELOPMENT PROGRAMS Genzyme Tissue Repair is a leading developer of biological products for the fields of orthopedics and burn care. Over the course of the last year, Genzyme Tissue Repair has taken several steps to streamline its operations and focus its business strategy, including transferring the NeuroCell-TM- program to Genzyme General. Genzyme Tissue Repair is dedicated to expanding and improving its Carticel-Registered Trademark- product and accelerating its bio-orthopedic development programs. CARTICEL-REGISTERED TRADEMARK- AUTOLOGOUS CULTURED CHONDROCYTES. Genzyme Tissue Repair's lead product, Carticel-REGISTERED TRADEMARK- chondrocytes, is used to treat damaged articular knee cartilage. Genzyme Tissue Repair employs a proprietary process to grow autologous--a patient's own--cartilage cells for use in repairing damaged knee cartilage. The FDA has required Genzyme Tissue Repair to conduct two confirmatory post-marketing studies of Carticel-REGISTERED TRADEMARK- chondrocytes. The FDA approved new clinical designs for these trials in February 2000. The first study measures outcomes of patients in Genzyme Tissue Repair's registry who did not respond to other treatment before being implanted with Carticel-Registered Trademark- chondrocytes. It will compare outcomes before and after implantation. Genzyme Tissue Repair expects to complete this study in 2000. The second study is designed to compare the long-term clinical effect of treatment with Carticel-REGISTERED TRADEMARK- chondrocytes to other treatments. Genzyme Tissue Repair believes that for Carticel-REGISTERED TRADEMARK- chondrocytes to be commercially successful, it must be routinely used by a large number of orthopedic surgeons. It markets Carticel-REGISTERED TRADEMARK- chondrocytes to orthopedic surgeons in the United States and Europe directly and through distributors. Genzyme Tissue Repair also trains orthopedic surgeons, collects and analyzes outcomes data through a registry, and assists physicians and patients in obtaining reimbursements from third-party payers. The commercial success of Carticel-REGISTERED TRADEMARK- chondrocytes will also depend on its ability to increase the approval rate for reimbursement of the product from third-party payers. For this reason, approximately one-third of its 59-person U.S. sales and reimbursement staff is involved directly in claims processing and educating insurers about the appropriate uses of the Carticel-REGISTERED TRADEMARK- chondrocytes. Genzyme Tissue Repair expects that Carticel-REGISTERED TRADEMARK- sales may be lower in the summer months as fewer operative procedures are typically performed during those months. EPICEL-TM- SKIN GRAFTS. Genzyme Tissue Repair's Epicel-TM- skin grafts are cultured autologous skin cells used for permanent skin replacement for patients with severe burns. Epicel-TM- skin grafts were first introduced in 1987. These epidermal grafts are grown from a patient's own skin cells and, therefore, are not rejected by the patient's immune system. Most burn wounds involving less than 60% body surface area are covered with conventional skin grafts within the three to four weeks it currently takes to grow skin grafts produced using the Epicel-TM- service. Therefore, Genzyme Tissue Repair believes that the primary candidates for Epicel-TM- skin grafts are the approximately 800 patients each year in the U.S. who survive burn injuries covering more than 60% of their body surface area. Genzyme Tissue Repair markets Epicel-TM- skin grafts to burn centers in the U.S. and parts of Europe through its own direct sales force and in Japan through a distributor. Sales of Epicel-TM- skin grafts fluctuate from quarter to quarter depending on the number of unpredictable factors, including the number and survival rate of severe burn patients who are treated with Epicel-TM- skin grafts. CARTICEL-REGISTERED TRADEMARK- II. Carticel-REGISTERED TRADEMARK- II is a next-generation product based on the development of a pre-formed autologous cartilage tissue implant. The implant is intended to allow the procedure to be performed arthroscopically. If it is successfully developed, Carticel-REGISTERED TRADEMARK- II could significantly decrease rehabilitation time 17 for patients and allow surgeons to treat larger cartilage defects. Genzyme Tissue Repair plans to complete preclinical studies of Carticel-REGISTERED TRADEMARK- II in 2000. QUICKTACK-TM- PERIOSTEAL FIXATION SYSTEM. QuickTack-TM- is a small device designed to be used instead of sutures during the Carticel-REGISTERED TRADEMARK- implant procedure. It is expected to simplify the procedure and significantly decrease the time needed for surgery. Genzyme Tissue Repair plans to submit a 510(k) application for the Quick Tack-TM- periosteal fixation system to the FDA in the first half of 2000. OSTEOARTHRITIS. Genzyme Tissue Repair has is conducting pre-clinical studies of an innovative small molecule therapy for the treatment of osteoarthritis. PHOTOACTIVE TISSUE WELDING TECHNOLOGY. Genzyme Tissue Repair is conducting proof of concept studies of a photoactive tissue welding technology it licensed from PhotoBioMed Corp. It intends to seek a partner to develop and commercialize this technology. OTHER DEVELOPMENT PROGRAMS. Genzyme Tissue Repair has a number of ongoing development programs supporting Carticel-REGISTERED TRADEMARK- chondrocytes. Genzyme Tissue Repair is conducting basic research and development into the biology of cartilage and the cartilage repair process. The objective of this research is to identify biologic materials that promote more rapid regeneration of articular cartilage, to develop new methods for the repair of arthritic joints and large surface area cartilage defects and to enable the implantation procedure to be performed less invasively. Genzyme Tissue Repair is also committing resources to meet requirements specified by the FDA for validation of certain product manufacturing parameters. COMPETITION We are engaged in a segment of the human health care products industry that is extremely competitive. Our competitors in the United States and elsewhere are numerous and include major pharmaceutical, surgical device and biotechnology companies. Some of these competitors may have more extensive research and development, regulatory, manufacturing and production capabilities. Some competitors may have greater financial resources. These companies may succeed in developing products that are more effective than any that we have or may develop and may also prove to be more successful than we are in producing and marketing products and services. In addition, technological advances or different approaches developed by one or more of our competitors may render our products obsolete, less effective or uneconomical. Each of our products and services faces different competitive challenges: CEREZYME-REGISTERED TRADEMARK- ENZYME AND CEREDASE-REGISTERED TRADEMARK- ENZYME. Although Genzyme General is not aware of any current effective alternative to its products for the treatment of Gaucher disease, competition potentially could come from other protein replacement therapies, small molecules or gene therapy. Genzyme General is aware of other companies attempting to develop alternative treatments for Gaucher disease. However, Genzyme General believes that its proprietary production techniques and, to a certain extent, the orphan drug status of its products, which provides market exclusivity in the United States until May 2001, give it a number of advantages over potential competitors using protein replacement therapy for the treatment of Gaucher disease. Gene therapy techniques are still in experimental stages. Genzyme General believes that the principal factors that will affect competition for Cerezyme-Registered Trademark- enzyme and Ceredase-Registered Trademark- enzyme will be clinical effectiveness and absence of adverse side effects. RENAGEL-REGISTERED TRADEMARK- CAPSULES. Phosphate binders are currently the only available treatment for hyperphosphatemia. There are several phosphate binders available or under development. A prescription calcium acetate preparation is currently the only other product approved in the United States for the control of elevated phosphorus levels in patients with chronic kidney failure. Other products used as phosphate binders include over-the-counter calcium- and aluminum-based antacids and dietary calcium 18 supplements. Calcium acetate and calcium carbonate, the most commonly used agents, must be taken at sufficient doses to achieve adequate reductions in phosphate absorption, which can lead to constipation and patient noncompliance. In addition, calcium therapy requires frequent monitoring because its use can cause hypercalcemia. Aluminum hydroxide is more effective at lower doses than calcium acetate or calcium carbonate, but it is infrequently used because aluminum absorbed from the intestinal tract accumulates in the tissues of patients with chronic kidney failure, causing aluminum-related osteomalacia, anemia and dialysis dementia. ANTITHROMBIN III. Individuals who have a deficiency of ATIII are treated currently with plasma-derived ATIII. Genzyme General and Genzyme Transgenics believe transgenic ATIII may represent a more attractive therapeutic than the current plasma-derived product in light of: - the risks of viral transmission from pooled plasma products in general; - the limited volume of ATIII available from plasma; and - the impracticality of producing sufficient quantities of ATIII in cell culture systems. NEUROCELL-TM- -PD AND NEUROCELL-TM- -HD. While there currently are no effective long-term therapies for advanced Parkinson's disease and no effective treatments for Huntington's disease, Genzyme General is aware of other companies and institutions pursuing research and development of alternative treatments for the diseases. Experimental therapies under development for Parkinson's disease include surgical destruction of certain portions of the brain (pallidotomy), gene therapy, cell therapy, the use of growth factors and neuroprotectant therapy. CYSTIC FIBROSIS. There are a number of academic and commercial organizations engaged in developing therapies to treat either the symptoms of cystic fibrosis or the cause of the disease. Several groups are developing gene therapy approaches to the disease and also have received approval from the FDA and the Recombinant DNA Advisory Committee to initiate limited human studies of cystic fibrosis gene therapy. In addition, other organizations are investigating pharmacological and biological agents that would treat cystic fibrosis. One such product, Pulmozyme-Registered Trademark-, which was developed by Genentech, Inc., is currently on the market. These groups may succeed in developing gene therapy products before Genzyme General, in obtaining patent protection blocking Genzyme General from commercializing its cystic fibrosis products or in developing other drug therapies that relieve the symptoms of cystic fibrosis. DIAGNOSTIC PRODUCTS. Genzyme General acts as a primary supplier of enzymes and substrates, and generally does not compete with its customers in the sale of complete diagnostic kits. The market in the diagnostic products industry is mature and competition is based on price, reliability of supply and the purity and specific activity of products. GENETIC DIAGNOSTIC SERVICES. The U.S. market for human genetic testing is divided among approximately 500 laboratories. Of this total group, less than 20 laboratories market their services nationally. Genzyme General believes that the industry as a whole is still quite fragmented, with the top 20 laboratories accounting for approximately 50% of market revenues, and with no individual company accounting for more than 18% of the total other than Genzyme, which accounts for approximately 22% of the total. Genzyme General believes, however, that the industry will experience increasing consolidation as smaller laboratories face the challenges of more complex and stringent regulation. Competitive factors in the genetic diagnostics services business generally include reputation of the laboratory, range of services offered, pricing, convenience of sample collection and pick-up, quality of analysis and reporting and timeliness of delivery of completed reports. Genzyme General believes that its research and development program, which has enabled it to develop and introduce testing services based on new technology, and its active sales and marketing force have played significant roles in the growth of its genetic diagnostics services business. 19 CANCER. Competition in the field of cancer therapeutics is intense. Genzyme Molecular Oncology faces, and will continue to face, significant competition from organizations such as large pharmaceutical and biotechnology companies, universities, government agencies and other research institutions. Competition can arise from the use of the same or similar technologies as those currently used or contemplated to be used by Genzyme Molecular Oncology, as well as from existing therapies. Any or all of these may be more effective or less expensive than those developed by Genzyme Molecular Oncology. For instance, other companies provide genomics services that are competitive with the SAGE-TM- technology. Genzyme Molecular Oncology relies on its collaborators for support in some of its cancer research and development programs and intends to rely on these partners for preclinical evaluation and clinical development of its potential products and services. In addition, certain of its partners are conducting multiple product development programs in the same fields as those in which they are collaborating with Genzyme Molecular Oncology. Genzyme Molecular Oncology's product candidates, therefore, may be subject to competition with potential products under development by one or more of its partners. CHEST DRAINAGE AND FLUID MANAGEMENT SYSTEMS, INSTRUMENTS AND SUTURES. The principal methods by which Genzyme Surgical Products competes in the cardiothoracic and general surgery markets are: - continued innovative product development; - the performance and breadth of its product lines; - brand name recognition; - sales force training; and - educational services, including sponsorship of training programs in advanced surgical techniques. Its chief competitors in the chest drainage and fluid management market are Atrium Medical Corporation and Sherwood-Davis & Geck, a division of Tyco International, Ltd. Genzyme Surgical Products primarily competes with Karl Storz Endoscopy America, Inc., Scanlan International, Inc., Pilling Weck Surgical Instruments and the Codman division of Johnson & Johnson Ltd. in the reusable instruments market. U.S. Surgical Corporation, a division of Tyco, and the Ethicon division of Johnson & Johnson are Genzyme Surgical Products' primary competitors in the cardiovascular sutures market. MINIMALLY INVASIVE CARDIOVASCULAR SURGERY. Genzyme Surgical Products faces competitors in the minimally invasive cardiovascular surgery field. CardioThoracic Systems, Inc., which was recently acquired by Guidant Corporation, was founded solely to pursue minimally invasive cardiovascular surgery and was among the first companies to draw national attention to the technology. CardioThoracic Systems is also the leader in both the minimally invasive direct coronary artery bypass and off-pump coronary artery bypass markets. Several major surgical products companies have also entered the minimally invasive cardiovascular surgery market, including Medtronic, Inc., U.S. Surgical and Ethicon. THERAPIES FOR ISCHEMIC HEART DISEASE. There is considerable competition in the development of protein and gene therapies to induce angiogenesis for the treatment of ischemic heart disease. Several companies have initiated clinical trials of gene and protein therapies for ischemic heart disease, and other companies have products that are still in preclinical development. Genzyme Surgical Products is aware of ongoing research on cell-based approaches to restoring cardiac function to infarcted tissue. Academic institutions and private companies are also conducting research to develop mechanical devices to reduce ventricular size or to minimize ventricular dilation. THERAPIES FOR PERIPHERAL VASCULAR DISEASE. There is considerable competition in the development of protein and gene therapies to induce angiogenesis for the treatment of peripheral vascular disease. 20 ADHESION BARRIERS. Genzyme Surgical Products believes that its expertise in developing proprietary fermentation processes and its access to proprietary strains of micro-organisms used in its hyaluronic acid production process will give it a competitive advantage in the marketing of the Sepra family of products. Its anti-adhesion products may face significant competition, however, from other products based on hyaluronic acid as well as from other products and changes in surgical techniques that may obviate the use of hyaluronic acid. Genzyme Surgical Products believes that the principal factor that will affect competition in this area is acceptance of the product by surgeons, which depends, in large part, upon product performance, safety and price. Sepra Film-Registered Trademark- bioresorbable membrane does not have significant direct competition in the colorectal surgery market. Ethicon markets Interceed-Registered Trademark-, an anti-adhesion barrier that may have properties similar to the Sepra Film-Registered Trademark- product, but is indicated only for selected gynecological indications. Interceed-Registered Trademark- has been shown to lose its anti-adhesion properties in the presence of blood. Lifecore Biomedical, Inc. and Ethicon's Intergel-TM- product, a gel-based anti-adhesion product, is marketed in Europe. Gliatech, Inc. currently markets Adcon-L for the prevention of adhesions following lumbar surgery. In addition, it has initiated clinical trials of Adcon-A and Adcon-P, which are designed to limit adhesions after abdominal and pelvic surgery. Life Medical Sciences, Inc. is developing REPEL for gynecological surgery and REPEL-CV for cardiovascular surgery. These adhesion barrier membranes are in early clinical trials. PLASTIC SURGERY AND ENDOSCOPIC SURGERY INSTRUMENTS. Genzyme Surgical Products' main competitors for the market in plastic surgery instruments are Karl Storz, Padgett Instruments, Inc., the V. Mueller division of Allegiance Corporation and Walter Lorenz Surgical, Inc. In the endoscopic plastic surgery market, its competitors include Circon Corporation, OLYMPUS Winter & Ibe GmbH, Stryker Corporation, and Karl Storz. CARTICEL-REGISTERED TRADEMARK- CHONDROCYTES. Genzyme Tissue Repair is aware of two other companies, Verigen, Inc. and Codon, which are both culturing autologous chondrocytes for cartilage repair in Europe. In addition, Genzyme Tissue Repair knows of three other companies, Advanced Tissue Sciences, Inc. in conjunction with Smith & Nephew PLC, Integra LifeSciences Corp. and LifeCell Corp., which are engaged in research on cultured cartilage products. In addition, a surgical technique known as osteochondral grafting may be competitive to Carticel-REGISTERED TRADEMARK- chondrocytes. This procedure, which can be performed arthroscopically, involves transferring plugs of low weight bearing cartilage and bone to the area of a defect. Smith & Nephew, Arthrex, Inc. and Innovasive Devices, Inc. are known to have programs relating to this procedure. EPICEL-TM- SKIN GRAFTS. Genzyme Tissue Repair is the only commercial provider of cultured skin grafts that have been shown to provide permanent skin replacement for burn patients in the U.S. However, Genzyme Tissue Repair may face competition from companies using other approaches to culture skin tissue. Integra is marketing a collagen-based dermal replacement product for severely burned patients. This product will still require a skin graft from the patient or Epicel-TM- skin grafts to close a full-thickness wound, however, and therefore will not compete directly with Epicel-TM- skin grafts. Advanced Tissue Sciences, Inc. has received approval for a temporary wound covering for burns. Organogenesis, Inc. has submitted a Pre-Market Approval application for a product to be used for the closure of venous stasis ulcers. LifeCell Corp. currently has freeze-dried enzymatically processed human cadaver dermis on the market. 21 PATENTS, LICENSE AGREEMENTS AND TRADEMARKS In general, we pursue a policy of obtaining patent protection both in the United States and in selected foreign countries for subject matter we consider patentable and important to our business. In addition, a portion of our proprietary position is based upon patents that we have licensed from others either through collaboration or traditional license agreements, including patents relating to: - Renagel-Registered Trademark- capsules; - Transgenic ATIII; - Aldurazyme-TM- enzyme; - AVONEX-Registered Trademark- (Interferon-beta 1a); - NeuroCell-TM--PD and NeuroCell-TM--HD; - Alpha-glucosidase; - DHA derivative; - Acid sphingomyelinase; - EPI-KAL2; - the HNPCC and APC I1307K tests; - TGF-(2); - SAGE-TM- technology; - cell fusion technology; - viral and non-viral gene therapy technology; - drug delivery technology; - various cancer related genes such as p53; - HIF-1 alpha; - Cohn Cardiac Stabilizer-TM- device; - Epicel-TM- skin grafts; and - photoactive tissue welding technology. These collaboration and license agreements generally require us to share profits with our collaborative partners or pay royalties to our licensors upon commercialization of products covered by the licensed technology. Generally, patents issued in the United States are effective for the longer of 17 years from date of issue or 20 years from the effective filing date of the corresponding patent application if filed prior to June 8, 1995; and 20 years from the filing date for applications filed after June 8, 1995. In some cases, the patent term can be extended to recapture a portion of the term lost during FDA regulatory review. The duration of foreign patents varies in accordance with applicable local law. We also rely on trade secrets, proprietary know-how and continuing technological innovation to develop and maintain a competitive position in our product areas. We require our employees, consultants and corporate partners who have access to our proprietary information to sign confidentiality agreements. Our patent position and proprietary technology are subject to certain risks and uncertainties. We have included information about these risks and uncertainties in Exhibit 99.2, "Factors Affecting Future Operating Results," to this Form 10-K. We encourage you to read those descriptions, which we are incorporating into this discussion by reference. 22 Our products and services are sold around the world under brand-name trademarks and service marks. Trademark protection continues in some countries as long as the mark is used; in other countries, as long as its registered. Registrations generally are for fixed, but renewable, terms. We consider our registered trademarks Genzyme-Registered Trademark-, Cerezyme-Registered Trademark-, Ceredase-Registered Trademark-, Thyrogen-Registered Trademark-, N-geneous-REGISTERED TRADEMARK- LDL, N-geneous-REGISTERED TRADEMARK- HDL, Contrast-REGISTERED TRADEMARK-, InSight-Registered Trademark-, MASDA-Registered Trademark-, Sepra Film-Registered Trademark-, Pleur-evac-Registered Trademark-, Thora-Klex-Registered Trademark-, Tevdek-Registered Trademark-, Polydek-Registered Trademark-, Deklene-REGISTERED TRADEMARK-, Cohn Cardiac Immobilizer-REGISTERED TRADEMARK-, SaphLITE-REGISTERED TRADEMARK-, Sepragel-REGISTERED TRADEMARK-, Diamond-Line-REGISTERED TRADEMARK-, Diamond-Flex-REGISTERED TRADEMARK-, Diamond-Touch-REGISTERED TRADEMARK-, and Carticel-REGISTERED TRADEMARK-, together with our trademarks Fabrazyme-TM-, Afp4-TM-, GlyPro-TM-, SAGE-TM-, EndoCABG-TM-, Sahara-TM-, Genzyme OPCAB Elite-TM-, Cohn Cardiac Stabilizer-TM-, Switch-Blade-TM-, Seprafilm-TM-, Sepracoat-TM-, Sepramesh-TM-, SepraPak-TM-, CV Seprafilm-TM-, Epicel-TM- and QuickTack-TM-, in the aggregate, to be of material importance to our business. GOVERNMENT REGULATION Regulation by governmental authorities in the United States and other countries is a significant factor in the development, manufacture and commercialization of our products and services. FDA REGULATION We expect that all of our products and services will require approval of the FDA and corresponding agencies in other countries before they can be marketed. In the United States, the FDA classifies products as either "devices," "drugs" or "biologics." Products that do not achieve their principal intended purpose through chemical action within or on the body and which are not dependent upon being metabolized by the patient's body in order to be effective are classified by the FDA as "devices" while other products are classified as "drugs" or "biologics." The activities required before drugs or biologics may be marketed in the United States include: - pre-clinical laboratory tests, IN VITRO and IN VIVO pre-clinical studies and formulation and stability studies; - the submission to the FDA and approval of an application for human clinical testing, which is known as an Investigational New Drug application; - adequate and well controlled human clinical trials to prove the safety and effectiveness of the drug or biologic; - the submission of a New Drug Application for a drug or a Product License Application for a biologic or a Biologic License Application for biologics identified by the FDA as "Specified Biologics;" and - the approval by the FDA of the New Drug Application, Product License Application or Biologic License Application. In addition to product approval, the manufacturer of the product may have to obtain an establishment license (for a biologic that is not considered well characterized) or a pre-approval Good Manufacturing Practices inspection (for a drug or well-characterized biologic) from the FDA. Since any license granted by the FDA is both site and process specific, any material change by a company in the manufacturing process, equipment or location necessitates additional FDA review and approval. Products that are classified as devices also require FDA approval prior to marketing. Devices are classified as Class I, II or III, depending upon the information available to assure their safety and effectiveness. In general, Class I and Class II devices are devices whose safety and effectiveness can 23 reasonably be assured through general or specific controls, respectively. Class III devices are life sustaining, life supporting or implantable devices or new devices which have been found not to be substantially equivalent to legally marketed devices. The steps required for approval of a Class III device include: - pre-clinical laboratory tests and IN VITRO and IN VIVO pre-clinical studies; - the submission to the FDA and approval of an Investigational Device Exemption application to allow initiation of clinical testing; - human clinical studies to prove safety and effectiveness of the device; - the submission of a Pre-Marketing Application; and - the approval by the FDA of the Pre-Marketing Application. Typically, clinical testing of devices involves initial testing to evaluate safety and feasibility and expanded trials to collect sufficient data to prove safety and effectiveness. In addition, the procedures and the facilities used to manufacture the device are subject to review and approval by the FDA. A device (other than a Class III device) which is proven to be substantially equivalent to a device marketed prior to May 28, 1976, when government regulations for devices were first introduced, can be marketed after approval of a 510(k) application rather than the filing of an Investigational Device Exemption application and a Pre-Marketing Application. The 510(k) application must contain a description of the device, its methods of manufacture and quality control procedures and the results of testing to demonstrate that the device is substantially equivalent to the device already marketed. In May 1996, the FDA published a new guidance document that provided for the regulation of products such as Carticel-Registered Trademark- chondrocytes that use manipulated autologous structural cells. Under these regulations, companies that currently are not marketing autologous cultured chondrocytes would likely be required to provide a prospective randomized blinded control study comparing the treatment to alternative treatments. Genzyme Tissue Repair estimates that it could take eight years for any competitor to complete a study of this nature that would demonstrate the clinical efficacy of its proposed treatment. In August 1997, the FDA granted Genzyme Tissue Repair a Biologic License Application under these regulations for Carticel-Registered Trademark- chondrocytes. Genzyme Tissue Repair has initiated discussions with the FDA regarding an application for Epicel-TM- skin grafts, which has been on the market as an unregulated medical device. Genzyme Tissue Repair expects that the FDA will permit Epicel-TM- skin grafts to remain on the market until its regulatory status is resolved. The time and expense required to perform the clinical testing necessary to obtain FDA approval can far exceed the time and expense of the research and development initially required to create the product. Even after initial FDA approval has been obtained, we could be required to conduct further studies to provide additional data on safety or to gain approval for the use of a product as a treatment for additional clinical indications. In addition, use of these products during testing and after marketing approval has been obtained could reveal side effects which, if serious, could delay, impede or prevent marketing approval, limit uses, force a recall of the product or expose us to product liability claims. REGULATION OUTSIDE OF THE UNITED STATES For marketing outside the United States, we are subject to foreign regulatory requirements governing human clinical testing and marketing approval for our products. These requirements vary by jurisdiction, differ from those in the United States and may require us to perform additional pre-clinical or clinical testing whether or not FDA approval has been obtained. The amount of time required to obtain necessary approvals may be longer or shorter than that required for FDA approval. In many foreign countries, pricing and reimbursement approvals are also required. 24 Our initial focus for obtaining marketing approval outside the United States is typically Europe. European Union Regulations and Directives generally classify healthcare products either as medicinal products or devices. For medicinal products, marketing approval may be sought using either the centralized procedure of the Committee for Proprietary Medicinal Products or the decentralized, mutual recognition process. The centralized procedure results in a recommendation in all member states, while the European Union multi-state process involves country by country approval. European Union regulations for products classified as devices have been implemented for some devices. Devices such as the Sepra family of products must receive market approval through a centralized procedure, where the device receives a CE Mark allowing distribution to all member states of the European Union. For those devices where European Union regulations have not been implemented, marketing approval must be obtained on a country by country basis. The CE Mark certification requires us to receive International Standards Organization certification for each facility involved in the manufacture or distribution of the device. This certification comes only after the development of an all inclusive quality system, which is reviewed for compliance to International Quality Standards by a licensed "Notified Body" working within the European Union. After certification is received a product dossier is reviewed which attests to the product's compliance with European Union directive 93/42/EEC for medical devices. Only after this point is a CE Mark granted. Autologous products are specifically exempt from the European Device Directive and Pharmaceutical Directive promulgated by the European Union. Therefore, each European country is free to impose its own regulations on the marketing of these products. To date, Genzyme Tissue Repair has not encountered any local registration requirement for market introduction of Carticel-REGISTERED TRADEMARK- chondrocytes. During September 1997, the Spanish national health system approved Carticel-REGISTERED TRADEMARK- chondrocytes for use by public hospitals, representing the first broad approval of the product by a reimbursement authority in Europe. Genzyme Tissue Repair is assessing the regulatory requirements for commercialization of Carticel-REGISTERED TRADEMARK- chondrocytes in Japan. OTHER GOVERNMENT REGULATION GOOD MANUFACTURING PRACTICES. All facilities and manufacturing techniques used for the manufacture of products for clinical use or for sale must comply with applicable "Good Manufacturing Practices," the FDA regulations governing the production of pharmaceutical products. ORPHAN DRUG ACT. The Orphan Drug Act provides incentives to manufacturers to develop and market drugs for rare diseases and conditions affecting fewer than 200,000 persons in the United States at the time of application for orphan drug designation. The first developer to receive FDA marketing approval for an orphan drug is entitled to a seven-year exclusive marketing period in the United States for that product. However, a drug that the FDA considers to be clinically superior to or different from another approved orphan drug, even though for the same indication, is not barred from sale in the United States during the seven-year exclusive marketing period. Similar legislation was adopted in the European Union in the beginning of 2000, but the market exclusivity granted in Europe is for ten years. Legislation periodically has been introduced in recent years to change the U.S. Orphan Drug Act to shorten the period of automatic market exclusivity and to allow marketing rights to simultaneous developers of a drug. We cannot be sure of whether the Orphan Drug act will be amended or, if amended, what effect the changes would have on us. REGULATION OF DIAGNOSTIC SERVICES. The Clinical Laboratories Improvement Act provides for the regulation of clinical laboratories by the U.S. Department of Health and Human Services. Regulations promulgated under the act affect our genetics laboratories. REGULATION OF GENE THERAPY PRODUCTS. In addition to FDA requirements, the National Institutes of Health has established guidelines providing that transfers of recombinant DNA into human subjects at 25 NIH laboratories or with NIH funds must be approved by the NIH Director. The NIH has established the Recombinant DNA Advisory Committee to review gene therapy protocols. We expect that all of our gene therapy protocols will be subject to review by the Recombinant DNA Advisory Committee. In the U.K., our gene therapy protocols will be subject to review by the Gene Therapy Advisory Committee. The recent death of a patient undergoing gene therapy using an adenoviral vector to deliver the therapeutic gene has been widely publicized. As a result of the death, the U.S. Senate has commenced hearings to determine whether additional legislation is required to protect volunteers and patients who participate in gene therapy clinical trials. Additionally, the Recombinant DNA Advisory Committee has discussed extensively the use of adenoviral vectors in gene therapy clinical trials and intends to issue a report in March 2000 on the adverse events reported by investigators using adenoviral vectors. Increased scrutiny could delay or increase the costs of our gene therapy product development efforts or clinical trials. TISSUE AND ORGAN BANK LAWS. A federal criminal statute that prohibits the transfer of any human organ for valuable consideration for use in human transplantation, but which permits recovery of reasonable costs associated with transplant activities. This statute has not been applied to Carticel-REGISTERED TRADEMARK- chondrocytes or Epicel-TM- skin grafts. Certain states have laws requiring the licensure of tissue and organ banks and laws governing the sale of human organs and the safety and efficacy of drugs, devices and biologics, including skin. These state laws could be interpreted to apply to Genzyme Tissue Repair's production and distribution of cultured tissue products. Provisions in certain states' statutes prohibit the receipt of valuable consideration in connection with the sale of human tissue by a tissue bank, but permit licensed tissue banks, including companies, to recover their reasonable costs associated with human tissue sales. The application of these or other regulations to Genzyme Tissue Repair could result in significant expense to Genzyme Tissue Repair, limit reimbursement for Genzyme Tissue Repair's services and otherwise materially adversely affect Genzyme Tissue Repair's results of operations. OTHER LAWS AND REGULATIONS. Our operations are or may be subject to various federal, state and local laws, regulations and recommendations relating to safe working conditions, laboratory and manufacturing practices and the purchase, storage, movement, use and disposal of hazardous or potentially hazardous substances used in connection with our research work and manufacturing operations, including radioactive compounds and infectious disease agents. Although we believe that our safety procedures comply with the standards prescribed by federal, state and local regulations, the risk of contamination, injury or other accidental harm cannot be eliminated completely. In the event of an accident, we could be held liable for any damages that result and any liabilities could exceed our resources. EMPLOYEES As of December 31, 1999, we had approximately 3,800 employees, including all of our consolidated subsidiaries and excluding Genzyme Transgenics Corporation. None of our employees are covered by collective bargaining agreements. We consider our employee relations to be excellent. RESEARCH AND DEVELOPMENT COSTS We have provided the information required by Item 101(c)(1)(xi) of Regulation S-K in Part II, Item 8, "Consolidated Financial Statements and Supplementary Schedules" and specifically in the Genzyme Corporation and Subsidiaries Consolidated Statements of Operations and in Note M., "Research and Development Agreements" to our consolidated financial statements set forth in Exhibit 13.1 to this Form 10-K. We are incorporating that information into this section by reference. SALES BY GEOGRAPHIC AREA, SIGNIFICANT CUSTOMERS AND PRODUCTS We have provided the information required by Items 101(c)(1)(i) and (vii) and 101(d) of Regulation S-K under the heading "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations" and in Note Q., "Segment Information" to 26 our consolidated financial statements, which are set forth in Exhibit 13.1 to this Form 10-K. We are incorporating that information into this section by reference. ITEM 1A. EXECUTIVE OFFICERS Our executive officers at March 31, 2000 were as follows:
NAME AGE TITLE - ---- -------- ----- Henri A. Termeer........................................ 54 Chairman of the Board, President and Chief Executive Officer Russell J. Campanello................................... 44 Senior Vice President, Human Resources Earl M. Collier, Jr..................................... 52 Executive Vice President; President, Genzyme Surgical Products David D. Fleming........................................ 51 Group Senior Vice President, Diagnostic Products Richard A. Moscicki, M.D................................ 48 Chief Medical Officer; Senior Vice President, Clinical, Medical and Regulatory Affairs Alan E. Smith, Ph.D..................................... 54 Chief Scientific Officer; Senior Vice President, Research G. Jan van Heek......................................... 50 Executive Vice President, Therapeutics and Genetics Peter Wirth............................................. 49 Chief Legal Officer; Executive Vice President; Clerk Michael S. Wyzga........................................ 45 Chief Financial and Accounting Officer; Senior Vice President, Finance
MR. TERMEER has served as our President and a Director since October 1983, as Chief Executive Officer since December 1985 and as Chairman of the Board since May 1988. For ten years prior to joining us, Mr. Termeer worked for Baxter Travenol Laboratories, Inc., a manufacturer of human health care products. Mr. Termeer is a director of ABIOMED, Inc., AutoImmune Inc., Diacrin, Inc., GelTex Pharmaceuticals, Inc. and Genzyme Transgenics Corporation, and a trustee of Hambrecht & Quist Healthcare Investors and Hambrecht & Quist Life Sciences Investors. MR. CAMPANELLO joined us in February 1998 as Senior Vice President, Human Resources. Prior to joining us, from March 1996 to February 1998, Mr. Campanello served as Vice President of Nets Incorporated, an internet-based marketing company, and from June 1987 to February 1996 he served as Vice President, Human Resources of Lotus Development Corp., a computer software company. Mr. Campanello is a director of Webhire, Inc., an application services provider in the internet recruiting marketplace. Nets, Incorporated filed for Chapter 11 bankruptcy protection in May 1997. MR. COLLIER joined us in January 1997 as Senior Vice President, Health Systems, served as Executive Vice President, Surgical Products and Health Systems from July 1997 until June 1999, and was named President of Genzyme Surgical Products when it was formed in June 1999. Mr. Collier is also responsible for Genzyme Tissue Repair. Prior to joining us, Mr. Collier was President of Vitas HealthCare Corporation (formerly Hospice Care Incorporated), a provider of health care services, from October 1991 until August 1995. Prior to that, Mr. Collier was a partner in the Washington, D.C. law firm of Hogan & Hartson, which he joined in 1981. 27 MR. FLEMING joined us in April 1984 and has served as Group Senior Vice President, Diagnostic Products since September 1996. From September 1996 until January 2000 he also served as Group Senior Vice President, Diagnostic Products and Genetics. Prior to that date, he served as President of our diagnostics business unit since January 1989 and has been a Senior Vice President since August 1989. For 11 years prior to joining us, he worked for Baxter Travenol Laboratories, Inc. DR. MOSCICKI joined us in March 1992 as Medical Director, became Vice President, Medical Affairs in early 1993 and was named Vice President, Clinical, Medical and Regulatory Affairs in December 1993. In September 1996 he became Senior Vice President, Clinical, Medical and Regulatory Affairs and Chief Medical Officer. Since 1979, he has also been a physician staff member at the Massachusetts General Hospital and a faculty member at the Harvard Medical School. DR. SMITH joined us in August 1989 as Senior Vice President, Research and became Chief Scientific Officer in September 1996. Prior to joining us, he served as Vice President-Scientific Director of Integrated Genetics, Inc. from November 1984 until its acquisition by us in August 1989. From October 1980 to October 1984, Dr. Smith was head of the Biochemistry Division of the National Institute for Medical Research, Mill Hill, London, England, and from 1972 to October 1980 he was a member of the scientific staff at the Imperial Cancer Research Fund in London, England. Dr. Smith also serves as a director of Genzyme Transgenics Corporation. MR. VAN HEEK joined us in September 1991 as General Manager of our wholly-owned subsidiary, Genzyme, B.V., and became a corporate Vice President and President of our therapeutics business unit in December 1993. From September 1996 through July 1997, he served as Group Senior Vice President. Therapeutics and from July 1997 through December 1999 served as Executive Vice President, Therapeutics and Tissue Repair. Since January 2000 he has served as Executive Vice President, Therapeutics and Genetics, with responsibility for our therapeutics and genetics business units and international operations. Prior to joining us, Mr. van Heek was Vice President/General Manager of the Fenwal Division of Baxter Healthcare Corporation. MR. WIRTH joined us in January 1996 and has served as Executive Vice President and Chief Legal Officer since September 1996. Mr. Wirth has responsibility for Genzyme's corporate development and legal activities, Genzyme Molecular Oncology and our emerging technologies business unit. From January 1996 to September 1996, Mr. Wirth served as Senior Vice President and General Counsel. Mr. Wirth was a partner of Palmer & Dodge LLP, a Boston, Massachusetts law firm, from 1982 through September 1996. Mr. Wirth remains of counsel to Palmer & Dodge LLP. MR. WYZGA joined us in February 1998 as Vice President and Corporate Controller, served as Senior Vice President, Corporate Controller and Chief Accounting Officer since January 1999, and as Senior Vice President, Finance and Chief Financial Officer since July 1999. Prior to joining us, from February 1997 to February 1998, Mr. Wyzga served as Chief Financial Officer of Sovereign Hill Software, Inc., a software company. From November 1995 to February 1997, he served as Vice President of Finance and Chief Financial Officer of CACHELINK Corporation, a client/server software company. From October 1994 to November 1995 Mr. Wyzga served as Vice President of Finance for Lotus Development Corporation and he also served from August 1993 to October 1994 as Director of Plans and Controls and from April 1991 to August 1993 as Manager of Plans and Controls for Lotus. ITEM 2. PROPERTIES Our operations are conducted in manufacturing, warehousing, pilot plant, clinical laboratories, and research and office facilities that are located principally in: - the United States; - the United Kingdom; 28 - the Netherlands; - Switzerland; and - Germany. We lease all of our properties except for certain properties in: - Haverhill, England; - West Malling, England; - Coventry, Connecticut; - Fall River, Massachusetts; - Framingham, Massachusetts; - Allston, Massachusetts; and - Santa Fe, New Mexico. Our principal properties are: - for Genzyme General, our manufacturing facilities for the large scale production of our therapeutic proteins, diagnostic products and its genetic diagnostic facilities; - for Genzyme Surgical Products, our manufacturing facilities for the large scale production of surgical instruments and biomaterials; and - for Genzyme Tissue Repair, our cell processing facilities for Carticel-Registered Trademark- chondrocytes and Epicel-TM- skin grafts. Our selling and marketing activities are concentrated at facilities we have leased in Cambridge, Massachusetts and the Netherlands. We conduct our research and development activities primarily at our laboratory facilities in the United States. Leases for our facilities contain typical commercial lease provisions including renewal options, rent escalators and tenant responsibility for operating expenses. We believe that we have or are in the process of developing adequate manufacturing capacity to support our requirements for the next several years. GENZYME GENERAL THERAPEUTICS In October 1996, we received FDA approval to manufacture Cerezyme-Registered Trademark- enzyme at our multi-product manufacturing facility at Allston Landing in Boston, Massachusetts. The facility, which we own and which contains extensive sterile filling capacity, is built on land that we hold under a 60-year lease. We have entered into a contract manufacturing agreement with RenaGel LLC, the entity formed in connection with our joint venture with GelTex Pharmaceuticals under which, upon receipt of necessary regulatory approvals, we will manufacture a portion of the joint venture's minimum supply requirements for Renagel-Registered Trademark- Capsules in our facilities in Haverhill, England. We manufacture Thyrogen-Registered Trademark- hormone under Good Manufacturing Practices conditions in our small-scale manufacturing facility in Framingham, Massachusetts. We use a multi-use pharmaceutical facility in Liestal, Switzerland to produce peptides. 29 DIAGNOSTICS Genzyme General's diagnostic test kits and reagents are produced in manufacturing facilities in San Carlos, California, Cambridge, Massachusetts and Russelsheim, Germany. We produce diagnostic enzymes and other fermentation products in a multi-purpose fermentation facility in Maidstone, England and a protein purification plant in West Malling, England. In 1997, we completed construction of a new fermentation facility and warehousing facility in West Malling, England. Our genetic testing business primarily conducts operations in clinical laboratory and administrative the facilities we own in Framingham, Massachusetts and Santa Fe, New Mexico. GENZYME MOLECULAR ONCOLOGY Genzyme Molecular Oncology provides SAGE-TM- services from facilities we own in Framingham, Massachusetts. GENZYME SURGICAL PRODUCTS We have manufacturing capacity at two facilities in the United Kingdom to produce commercial quantities of hyaluronic acid powder for the Sepra family of products. Sepra Film-Registered Trademark- bioresorbable membrane is produced at commercial scale from the hyaluronic acid powder in our manufacturing facility in Framingham, Massachusetts. In July 1996, we acquired or assumed the leases for certain office, laboratory and manufacturing facilities in Fall River, Massachusetts, Coventry, Connecticut, Tucker, Georgia and Russelsheim, Germany for use in manufacturing and warehousing our surgical products. GENZYME TISSUE REPAIR Production for Carticel-Registered Trademark- chondrocytes and Epicel-TM- skin grafts occurs primarily in our cell processing facilities in Cambridge, Massachusetts. The facility has the capacity to provide Carticel-Registered Trademark- chondrocytes to approximately 5,000 patients per year. In 1996, Genzyme Tissue Repair established a surgeon training center at our facility in the Netherlands in conjunction with the Carticel-Registered Trademark- program. ITEM 3. LEGAL PROCEEDINGS As of March 31, 2000, there are no pending legal proceedings deemed material by us to which we are, or any of our subsidiaries is, a party, or to which any of the property of our company or of our subsidiaries is subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS We did not submit any matters to a vote of our security holders during the fourth quarter of the fiscal year ended December 31, 1999. 30 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS We have four series of common stock: - Genzyme General Division Common Stock; - Genzyme Molecular Oncology Division Common Stock; - Genzyme Surgical Products Division Common Stock; and - Genzyme Tissue Repair Division Common Stock. These securities are designed to reflect the value and track the performance of the company's four operating divisions: Genzyme General, Genzyme Molecular Oncology, Genzyme Surgical Products and Genzyme Tissue Repair. All four series of stock are traded on the over-the-counter market and prices are quoted on The Nasdaq National Market-TM- system under the symbols GENZ, GZMO, GZSP and GZTR. On November 16, 1998, we distributed to the holders of record of Genzyme General Stock on November 2, 1998, 0.10805 shares of Molecular Oncology Stock for each share of Genzyme General Stock held. Molecular Oncology Stock began trading on Nasdaq November 16, 1998. On June 28, 1999, we distributed to the holders of record of Genzyme General Stock on June 14, 1999, 0.17901 shares of Surgical Products Stock for each share of Genzyme General Stock held. The Surgical Products Stock began trading on Nasdaq June 28, 1999. As of March 21, 2000, there were 2,307 stockholders of record of Genzyme General Stock, 2,198 stockholders of record of Molecular Oncology Stock, 2,086 stockholders of record of Surgical Products Stock and 5,423 stockholders of record of Tissue Repair Stock. 31 The following table sets forth, for the periods indicated, the high and low sale price for each series of our stock as reported by Nasdaq.
HIGH LOW -------- -------- GENZYME GENERAL STOCK 1999: First Quarter........................................ $55 3/4 $41 5/8 Second Quarter....................................... 53 5/8 36 3/8 Third Quarter........................................ 63 1/8 44 3/4 Fourth Quarter....................................... 48 3/8 30 3/4 1998: First Quarter........................................ $34 $25 3/8 Second Quarter....................................... 33 23 1/2 Third Quarter........................................ 36 1/4 23 3/4 Fourth Quarter....................................... 50 29 11/16 MOLECULAR ONCOLOGY STOCK 1999: First Quarter........................................ $ 5 1/2 $ 2 5/16 Second Quarter....................................... 3 31/32 2 5/8 Third Quarter........................................ 10 5/8 2 5/8 Fourth Quarter....................................... 7 3/8 4 3/16 1998: Fourth Quarter....................................... $15 $ 2 SURGICAL PRODUCTS STOCK 1999: Second Quarter....................................... $ 8 $ 4 Third Quarter........................................ 7 5/8 3 5/16 Fourth Quarter....................................... 6 7/16 4 5/8 TISSUE REPAIR STOCK 1999: First Quarter........................................ $ 4 1/8 $ 2 7/32 Second Quarter....................................... 2 5/8 1 15/16 Third Quarter........................................ 2 1/4 1 9/16 Fourth Quarter....................................... 3 9/16 1 5/16 1998: First Quarter........................................ $ 9 1/4 $ 6 1/2 Second Quarter....................................... 9 3/16 5 Third Quarter........................................ 7 1/8 2 3/8 Fourth Quarter....................................... 3 3/4 2 1/32
We have never paid any cash dividends on any series of our common stock and we do not anticipate paying cash dividends in the foreseeable future. In August 1999, the Canadian Medical Discoveries Fund exercised its option to require us and StressGen to repurchase the fund's interest in StressGen/Genzyme LLC. We repurchased one-half of the fund's interest in the joint venture on October 12, 1999 for $3,934,651 by issuing to the fund 617,200 shares of Molecular Oncology Stock. The Canadian Medical Discoveries Fund is a venture capital fund based in Ontario, Canada. We issued the 617,200 shares of Molecular Oncology Stock to the fund in reliance on Section 4(2) and Regulation S under the Securities Act of 1933, as amended. 32 ITEM 6. SELECTED FINANCIAL DATA We incorporate our Selected Financial Data into this section by reference from: - Exhibit 13.1 hereto under the heading "Genzyme Corporation--Selected Financial Data;" - Exhibit 13.2 hereto under the heading "Genzyme General--Selected Financial Data;" - Exhibit 13.3 hereto under the heading "Genzyme Molecular Oncology--Selected Financial Data;" - Exhibit 13.4 hereto under the heading "Genzyme Surgical Products--Selected Financial Data;" and - Exhibit 13.5 hereto under the heading "Genzyme Tissue Repair--Selected Financial Data." ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS We incorporate our Management's Discussion and Analysis of Financial Condition and Results of Operations into this section by reference from: - Exhibit 13.1 hereto under the heading "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations;" - Exhibit 13.2 hereto under the heading "Management's Discussion and Analysis of Genzyme General's Financial Condition and Results of Operations;" - Exhibit 13.3 hereto under the heading "Management's Discussion and Analysis of Genzyme Molecular Oncology's Financial Condition and Results of Operations;" - Exhibit 13.4 hereto under the heading "Management's Discussion and Analysis of Genzyme Surgical Products' Financial Condition and Results of Operations;" and - Exhibit 13.5 hereto under the heading "Management's Discussion and Analysis of Genzyme Tissue Repair's Financial Condition and Results of Operations." ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We incorporate our Quantitative and Qualitative Disclosures About Market Risk by reference into this section from the section entitled "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operation--New Accounting Pronouncements, Euro, Year 2000 and Market Risk" in Exhibit 13.1 hereto. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA We incorporate the financial statements filed as part of this Annual Report on Form 10-K into this section by reference from: - Exhibit 13.1 hereto under the heading "Genzyme Corporation and Subsidiaries' Consolidated Financial Statements" and the notes thereto; - Exhibit 13.2 hereto under the heading "Genzyme General Combined Financial Statements" and the notes thereto; - Exhibit 13.3 hereto under the heading "Genzyme Molecular Oncology Combined Financial Statements" and the notes thereto; - Exhibit 13.4 hereto under the heading "Genzyme Surgical Products Combined Financial Statements" and the notes thereto; and 33 - Exhibit 13.5 hereto under the heading "Genzyme Tissue Repair Selected Financial Data" and the notes thereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE During the period from January 1, 1999 to the filing date of this Form 10-K, no independent accountant who was previously engaged as the principal accountant to audit our financial statements has resigned, indicated that it has declined to stand for re-election after the completion of the current audit or been dismissed. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT We incorporate information regarding our directors and executive officers into this section by reference from the section entitled "Executive Officers of the Registrant" in Part I, Item 1A of this Form 10-K and the sections entitled "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the proxy statement for our 2000 annual meeting of stockholders. ITEM 11. EXECUTIVE COMPENSATION We incorporate information regarding the compensation of our directors and executive officers into this section by reference from the sections entitled "Election of Directors--Director Compensation" and "Executive Compensation" in the proxy statement for our 2000 annual meeting of stockholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT We incorporate information regarding the ownership of our securities by our directors, executive officers and 5% stockholders into this section by reference from the section entitled "Share Ownership" in the proxy statement for our 2000 annual meeting of stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS We incorporate information regarding transactions with related parties into this section by reference from the section entitled "Certain Transactions" in the proxy statement for our 2000 annual meeting of stockholders. 34 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A)(1). FINANCIAL STATEMENTS We are incorporating the following financial statements (and related notes) of Genzyme Corporation and Subsidiaries into this section by reference from Exhibit 13.1 hereto:
PAGE* -------- GENZYME CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations--For the Years Ended December 31, 1999, 1998 and 1997.................... GCS-30 Consolidated Balance Sheets--December 31, 1999 and 1998................................................. GCS-32 Consolidated Statements of Cash Flows--For the Years Ended December 31, 1999, 1998 and 1997.................... GCS-33 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1999, 1998 and 1997.............. GCS-35 Notes to Consolidated Financial Statements.............. GCS-38 Report of Independent Accountants....................... GCS-93 - ------------------------ * References are to page numbers in Exhibit 13.1. We are incorporating the following financial statements (and related notes) of Genzyme General into this section by reference from Exhibit 13.2 hereto: PAGE* -------- GENZYME GENERAL Combined Statements of Operations--For the Years Ended December 31, 1999, 1998 and 1997.................... GG-18 Combined Balance Sheets--December 31, 1999 and 1998..... GG-19 Combined Statements of Cash Flows--For the Years Ended December 31, 1999, 1998 and 1997.................... GG-20 Notes to Combined Financial Statements.................. GG-22 Report of Independent Accountants....................... GG-44
- ------------------------ * References are to page numbers in Exhibit 13.2. We are incorporating the following financial statements (and related notes) of Genzyme Molecular Oncology into this section by reference from Exhibit 13.3 hereto:
PAGE* -------- GENZYME MOLECULAR ONCOLOGY Combined Statements of Operations--For the Years Ended December 31, 1999, 1998 and 1997.................... GMO-13 Combined Balance Sheets--December 31, 1999 and 1998..... GMO-14 Combined Statements of Cash Flows--For the Years Ended December 31, 1999, 1998 and 1997.................... GMO-15 Notes to Combined Financial Statements.................. GMO-16 Report of Independent Accountants....................... GMO-30
- ------------------------ * References are to page numbers in Exhibit 13.3. 35 We are incorporating the following financial statements (and related notes) of Genzyme Surgical Products into this section by reference from Exhibit 13.4 hereto:
PAGE* -------- GENZYME SURGICAL PRODUCTS Combined Statements of Operations--For the Years Ended December 31, 1999, 1998 and 1997.................... GSP-16 Combined Balance Sheets--December 31, 1999 and 1998..... GSP-17 Combined Statements of Cash Flows--For the Years Ended December 31, 1999, 1998 and 1997.................... GSP-18 Notes to Combined Financial Statements.................. GSP-19 Report of Independent Accountants....................... GSP-34
- ------------------------ * References are to page numbers in Exhibit 13.4 hereto. We are incorporating the following financial statements (and related notes) of Genzyme Tissue Repair into this section by reference from Exhibit 13.5 hereto:
PAGE* -------- GENZYME TISSUE REPAIR Combined Statements of Operations--For the Years Ended December 31, 1999, 1998 and 1997.................... GTR-13 Combined Balance Sheets--December 31, 1999 and 1998..... GTR-14 Combined Statements of Cash Flows--For the Years Ended December 31, 1999, 1998 and 1997.................... GTR-15 Notes to Combined Financial Statements.................. GTR-16 Report of Independent Accountants....................... GTR-29
- ------------------------ * References are to page numbers in Exhibit 13.5 hereto. (A)(2). FINANCIAL STATEMENT SCHEDULES The schedules listed below for Genzyme General, Genzyme Surgical Products, Genzyme Tissue Repair and Genzyme Corporation and Subsidiaries are filed as part of this Form 10-K:
PAGE* --------- GENZYME CORPORATION AND SUBSIDIARIES Schedule II--Valuation and Qualifying Accounts.......... GCS-94 GENZYME GENERAL Schedule II--Valuation and Qualifying Accounts.......... GG-45 GENZYME SURGICAL PRODUCTS Schedule II--Valuation and Qualifying Accounts.......... GSP-35 GENZYME TISSUE REPAIR Schedule II--Valuation and Qualifying Accounts.......... GTR-30
All other schedules are omitted as the information required is inapplicable or the information is presented in (i) the Genzyme General Combined Financial Statements or notes thereto, (ii) the Genzyme Surgical Products Combined Financial Statements or notes thereto or (iii) the Genzyme Tissue Repair Combined Financial Statements or notes thereto or (iv) the Genzyme Corporation and Subsidiaries Consolidated Financials or notes thereto. 36 (A)(3). EXHIBITS The exhibits are listed below under Part IV, Item 14(c) of this Form 10-K. (B). REPORTS ON FORM 8-K On October 21, 1999, we filed a Current Report on Form 8-K to announce that we entered into an Agreement and Plan of Merger which provided for the merger of Cell Genesys, Inc. with and into a subsidiary of Genzyme. (C). EXHIBITS
EXHIBIT NO. DESCRIPTION - ----------- ----------- *3.1-- Restated Articles of Organization of Genzyme, as amended. Filed as Exhibit 1 to Genzyme's Registration Statement on Form 8-A dated June 18, 1997. *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. *4.1-- Series Designation for Genzyme Molecular Oncology Division Common Stock, $.01 par value. Filed as Exhibit 2 to Genzyme's Registration Statement on Form 8-A dated June 18, 1997. *4.2-- Series Designation for Genzyme Series A, Series B, Series C and Series D Junior Participating Preferred Stock, $.01 par value. Filed as Exhibit 2 to Amendment No. 1 to Genzyme's Registration Statement on Form 8-A dated June 11, 1999. *4.3-- Amended and Restated Renewed Rights Agreement dated as of June 10, 1999 between Genzyme and American Stock Transfer & Trust Company. Filed as Exhibit 4 to Amendment No. 1 to our Registration Statement on Form 8-A dated June 11, 1999. Genzyme's Current Report on Form 8-K dated March 17, 1999. *4.4-- Warrant issued to Richard Warren, Ph.D. Filed as Exhibit 4 to the Form 8-K of IG Laboratories, Inc. dated October 11, 1990 (File No. 0-18439). *4.5-- Series Designation for Genzyme Surgical Products Division common stock, $.01 par value. Filed as Exhibit 2 to Genzyme's Registration Statement on Form 8-A dated June 11, 1999. *4.6-- Form of Genzyme General Division Convertible Debenture. Filed as Exhibit 10.7 to Genzyme's Form 10-Q for the quarter ended September 30, 1997. *4.7-- Registration Rights Agreement dated as of August 29, 1997 by and among Genzyme and the entities listed on the signature pages thereto. Filed as Exhibit 10.8 to Genzyme's Form 10-Q for the quarter ended September 30, 1997. *4.8-- Warrant Agreement between Genzyme and Comdisco, Inc. Filed as Exhibit 10.22 to a Form 10 of PharmaGenics, Inc. (File No. 0-20138). *4.9-- Indenture, dated as of May 22, 1998, between Genzyme and State Street Bank and Trust Company, as Trustee, including the form of Note. Filed as Exhibit 4.3 to Genzyme's Registration Statement on Form S-3 (File No. 333-59513). *4.10-- Registration Rights Agreement, dated as of May 19, 1998, among Genzyme, Credit Suisse First Boston Corporation, Goldman, Sachs & Co. and Cowen & Company. Filed as Exhibit 4.4 to Genzyme's Registration Statement on Form S-3 (File No. 333-59513).
37
EXHIBIT NO. DESCRIPTION - ----------- ----------- *4.11-- Purchase Agreement, dated as of May 19, 1998, among Genzyme, Credit Suisse First Boston Corporation, Goldman, Sachs & Co. and Cowen & Company. Filed as Exhibit 4.5 to Genzyme's Registration Statement on Form S-3 (File No. 333-59513). *10.1-- Leases by Whatman Reeve Angel Limited to Whatman Biochemicals Limited dated May 1, 1981. Filed as Exhibit 10.12 to Genzyme's Registration Statement on Form S-1 (File No. 33-4904). *10.2-- Lease dated as of September 15, 1989 for 95-111 Binney Street, Cambridge, Massachusetts between Genzyme and the Trustees of the Cambridge East Trust. Filed as Exhibit 10.2 to Genzyme's Form 10-K for 1992. First amendment of lease dated February 28, 1994. Filed as Exhibit 10.2 to Genzyme's Form 10-K for 1993. *10.3-- Lease dated December 20, 1988 for Building 1400, One Kendall Square, Cambridge, Massachusetts between Genzyme and the Trustees of Old Binney Realty Trust, as amended by letters dated December 20, 1988, January 19, 1989 and January 31, 1989. Filed as Exhibit 10.18 to Genzyme's Form 10-K for 1988. Addendum dated September 20, 1991 to Lease for Building 1400, One Kendall Square, Cambridge, Massachusetts. Filed as Exhibit 19.1 to Genzyme's Form 10-Q for the quarter ended September 30, 1991. Addenda dated August 2, 1990 and April 6, 1993 to Lease for Building 1400, One Kendall Square, Cambridge, Massachusetts. Filed as Exhibit 10.3 to Genzyme's Form 10-K for 1993. *10.4-- Lease dated December 20, 1988 for Building 700, One Kendall Square, Cambridge, Massachusetts between Genzyme and Trustees of Old Kendall Realty Trust, as amended by letters dated December 20, 1988 and January 31, 1989. Filed as Exhibit 10.19 to Genzyme's Form 10-K for 1988. *10.5-- Lease dated September 30, 1985 for 51 New York Avenue, Framingham, Massachusetts. Filed as Exhibit 10.8 to Genzyme's Form 10-K for 1990. Amendment No. 1, dated October 11, 1990, and Amendment No. 2, dated May 12, 1993, to lease for 51 New York Avenue, Framingham, Massachusetts. Filed as Exhibit 10.5 to Genzyme's Form 10-K for 1993. *10.6-- Lease dated April 30, 1990 for 64 Sidney Street, Cambridge, Massachusetts between BioSurface Technology, Inc. and Forest City 64 Sidney Street, Inc. Filed as Exhibit 10.22 to BioSurface's Registration Statement on Form S-1 (File No. 33-55874). *10.7-- Sublease Lease dated May 22, 1992 for three buildings at 74-84 New York Avenue, Framingham, Massachusetts between Genzyme and Prime Computer, Inc. Filed as Exhibit 10.7 to Genzyme's Form 10-K for 1993. *10.8-- Lease dated May 22, 1992 for three buildings at 74-84 New York Avenue, Framingham, Massachusetts between Genzyme and Mark L. Fins, David J. Winstanley and Bruce A. Gurall, tenants in common. Filed as Exhibit 10.8 to Genzyme's Form 10-K for 1993. *10.9-- Lease dated June 1, 1992 for land at Allston Landing, Allston, Massachusetts between Allston Landing Limited Partnership and the Massachusetts Turnpike Authority. Filed as Exhibit 10.9 to Genzyme's Form 10-K for 1993. *10.10-- Underlease for Block 13 building at Kings Hill Business Park West Malling Kent among Rouse and Associates Block 13 Limited, Genzyme (UK) Limited and Genzyme. Filed as Exhibit 10.11 to Genzyme's Registration Statement on Form 8-B dated December 31, 1991, filed on March 2, 1992.
38
EXHIBIT NO. DESCRIPTION - ----------- ----------- *10.11-- Lease dated November 12, 1998 for Metrowest Place, 15 Pleasant Street Connector, Framingham, Massachusetts, between Consolidated Group Service Company Limited Partnership and Genzyme. Previously filed. *10.12-- Agreement of Limited Partnership dated as of September 13, 1989 between Genzyme Development Corporation II, as General Partner, and each of the Limited Partners named therein. Filed as Exhibit 10(aa) to Genzyme's Registration Statement on Form S-4 (File No. 33-32343). *10.13-- Cross License Agreement dated as of September 13, 1989 between Genzyme and Genzyme Development Partners, L.P. Filed as Exhibit 10(bb) to Genzyme's Registration Statement on Form S-4 (File No. 33-32343). *10.14-- Development Agreement dated as of September 13, 1989 between Genzyme and Genzyme Development Partners. Filed as Exhibit 10(cc) to Genzyme's Registration Statement on Form S-4 (File No. 33-32343). *10.15-- Amendment No. 1 dated January 4, 1994 to Development Agreement dated as of September 13, 1989 between Genzyme and Genzyme Development Partners. Filed as Exhibit 10.14 to Genzyme's Form 10-K for 1993. *10.16-- Partnership Purchase Option Agreement dated as of September 13, 1989 between Genzyme, Genzyme Development Corporation II, Genzyme Development Partners, each Class A Limited Partner and the Class B Limited Partner. Filed as Exhibit 10(dd) to Genzyme's Registration Statement on Form S-4 (File No. 33-32343). *10.17-- Partnership Purchase Agreement, undated and unexecuted, between Genzyme Corporation, Genzyme Development Corporation II, Genzyme Development Partners, each Class A Limited Partner and the Class B Limited Partner, as the case may be. Filed as Exhibit 10(ee) to Genzyme's Registration Statement on Form S-4 (File No. 33-32343). *10.18-- Amended and Restated Joint Venture Agreement between Genzyme and Genzyme Development Partners. Filed as Exhibit 10.1 to Genzyme Development Partners' Form 10-Q for the quarter ended March 31, 1997 (File No. 0-18554). *10.19-- Tax Indemnification Agreement between Genzyme and General Development Partners. Filed as Exhibit 10.2 to Genzyme Development Partners' Form 10-Q for the quarter ended March 31, 1997 (File No. 0-18554). *10.20-- Marketing and Distribution Agreement between Genzyme and Genzyme Ventures II. Filed as Exhibit 10.3 to Genzyme Development Partners' Form 10-Q for the quarter ended March 31, 1997 (File No. 0-18554). *10.21-- Technology License and Supply Agreement dated as of September 8, 1989 between Imedex and Genzyme. Filed as Exhibit 10.30 to Genzyme's Form 10-K for 1990.** *10.22-- 1998 Director Stock Option Plan, as amended. Filed as Exhibit 10.22 to Genzyme's Form 10-K for 1998. *10.23-- 1990 Equity Incentive Plan, as amended. Filed as Exhibit 99.1 to Genzyme's Form S-8 dated August 8, 1997 (File No. 333-33249). *10.24-- 1999 Employee Stock Purchase Plan. Previously filed. *10.25-- 1996 Directors' Deferred Compensation Plan. Filed as Exhibit 99.1 to Genzyme's Form S-8 dated August 8, 1997 (File No. 333-33251).
39
EXHIBIT NO. DESCRIPTION - ----------- ----------- *10.26-- Executive Employment Agreement dated as of January 1, 1990 between Genzyme and Henri A. Termeer. Filed as Exhibit 10.32 to Genzyme's Form 10-K for 1990. *10.27-- Form of Severance Agreement between Genzyme and certain senior executives, together with schedule identifying the provisions applicable to each executive. Filed as Exhibit 10.33 to Genzyme's Form 10-K for 1990. Current schedule identifying the executives filed as Exhibit 10.27 to Genzyme's Form 10-K for 1998. *10.28-- Form of Indemnification Agreement between Genzyme and certain senior executives, together with schedule identifying the provisions applicable to each executive. Filed as Exhibit 10.34 to Genzyme's Form 10-K for 1990. Current schedule identifying the executives filed as Exhibit 10.28 to Genzyme's Form 10-K for 1998. *10.29-- Executive Employment Agreement dated as of January 1, 1996 between Genzyme and Peter Wirth. Filed as Exhibit 10.1 to Genzyme's Form 10-Q for the quarter ended March 31, 1996. *10.30-- Consulting Agreement dated December 14, 1998 between Genzyme and Charles L. Cooney, Ph.D. Filed as Exhibit 10.30 to Genzyme's Form 10-K for 1998. *10.31-- Consulting Agreement dated December 31, 1998 between Genzyme and Robert J. Carpenter. Filed as Exhibit 10.31 to Genzyme's Form 10-K for 1998. *10.32-- Consulting Agreement dated July 1, 1998 between Genzyme and Henry E. Blair. Filed as Exhibit 10.32 to Genzyme's Form 10-K for 1998. *10.33-- Technology Transfer Agreement between Genzyme and Genzyme Transgenics Corporation dated as of May 1, 1993. Filed as Exhibit 2.1 to the Registration Statement on Form S-1 of Genzyme Transgenics Corporation (File No. 33-62872). *10.34-- Research and Development Agreement between Genzyme and Genzyme Transgenics Corporation dated as of May 1, 1993. Filed as Exhibit 10.1 to the Registration Statement on Form S-1 of Genzyme Transgenics Corporation (File No. 33-62872). *10.35-- Services Agreement between Genzyme and Genzyme Transgenics Corporation dated as of May 1, 1993. Filed as Exhibit 10.2 to the Registration Statement on Form S-1 of Genzyme Transgenics Corporation (File No. 33-62872). *10.36-- Series A Convertible Preferred Stock Purchase Agreement between Genzyme and Genzyme Transgenics Corporation dated as of May 1, 1993. Filed as Exhibit 10.5 to the Registration Statement on Form S-1 of Genzyme Transgenics Corporation (File No. 33-62872). *10.37-- Second Amended and Restated Convertible Debt Agreement dated as of December 28, 1998 by and between Genzyme and Genzyme Transgenics Corporation. Filed as Exhibit 10.37 to Genzyme's Form 10-K for 1998. *10.38-- Amended and Restated Operating Agreement of ATIII LLC dated as of January 1, 1998 by and among Genzyme and Genzyme Transgenics Corporation. Filed as Exhibit 10.52.1 to Genzyme Transgenics Corporation's Form 10-K for 1997 (File No. 0-21794).** *10.39-- Purchase Agreement dated as of January 1, 1998 by and between Genzyme and Genzyme Transgenics Corporation. Filed as Exhibit 10.52.2 to Genzyme Transgenics Corporation's Form 10-K for 1997 (File No. 0-21794).**
40
EXHIBIT NO. DESCRIPTION - ----------- ----------- *10.40-- Collaboration Agreement dated as of January 1, 1997 by and among Genzyme, Genzyme Transgenics Corporation and ATIII LLC. Filed as Exhibit 10.52.3 to Genzyme Transgenics Corporation's Form 10-K for 1997 (File No. 0-21794).** *10.41-- Credit Agreement dated November 12, 1999 among Genzyme and those of its subsidiaries party thereto, Fleet National Bank, as Administrative Agent, and ABN AMRO Bank N.V. as Syndication Agent and Mellon Bank, N.A. as Documentation Agent. *10.42-- Collaboration Agreement dated as of June 17, 1997 by and among Genzyme, GelTex Pharmaceuticals, Inc. and RenaGel LLC. Filed as Exhibit 10.18 to GelTex Pharmaceuticals, Inc. Form 10-Q for the quarter ended June 30, 1997 (File No. 0-26872).** *10.43-- Purchase Agreement dated as of June 17, 1997 by and between Genzyme and GelTex Pharmaceuticals, Inc.. Filed as Exhibit 10.19 to GelTex Pharmaceuticals, Inc.'s Form 10-Q for the quarter ended June 30, 1997 (File No. 0-26872).** *10.44-- Operating Agreement of RenaGel LLC dated as of June 17, 1997 by and among Genzyme, GelTex Pharmaceuticals, Inc. and RenaGel, Inc. Filed as Exhibit 10.20 to GelTex Pharmaceuticals, Inc.'s Form 10-Q for the quarter ended June 30, 1997 (File No. 0-26872). *10.45-- Purchase Agreement dated as of August 29, 1997 by and among Genzyme Corporation and the entities listed on the signature pages thereto. Filed as Exhibit 10.5 to Genzyme's Form 10-Q for the quarter ended September 30, 1997. *10.46-- Collaboration Agreement dated September 4, 1998 among Genzyme, BioMarin Pharmaceutical, Inc. and BioMarin/Genzyme LLC. Previously filed as Exhibit 10.24 to BioMarin Pharmaceutical, Inc.'s Registration Statement on Form S-1 (File No. 333-77701).** *10.47-- Purchase Agreement dated September 4, 1998 between Genzyme and BioMarin Pharmaceutical, Inc. Previously filed as Exhibit 10.25 to BioMarin Pharmaceutical, Inc.'s Registration Statement on Form S-1 (File No. 333-77701) and incorporated herein by reference. *10.48-- Operating Agreement of BioMarin/Genzyme LLC. Previously filed as Exhibit 10.30 to BioMarin Pharmaceutical, Inc.'s Registration Statement on Form S-1 (File No. 333-77701) and incorporated herein by reference. *10.49-- Agreement and Plan of Merger dated as of March 6, 2000 by and among Genzyme, Seagull Merger Corporation and Biomatrix, Inc. Filed as Exhibit 99.1 to Genzyme's Form 8-K filed on March 15, 2000. 13.1-- The 1999 Financial Statements of Genzyme Corporation and Subsidiaries. Filed herewith. 13.2-- The 1999 Financial Statements of Genzyme General Division. Filed herewith. 13.3-- The 1999 Financial Statements of Genzyme Molecular Oncology Division. Filed herewith. 13.4-- The 1999 Financial Statements of Genzyme Surgical Products Division. Filed herewith. 13.5-- The 1999 Financial Statements of Genzyme Tissue Repair Division. Filed herewith. *21-- Subsidiaries of the Registrant. Previously filed. 23.1-- Consent of PricewaterhouseCoopers LLP. Filed herewith.
41
EXHIBIT NO. DESCRIPTION - ----------- ----------- *23.2-- Consent of PricewatehouseCoopers LLP relating to the Annual Report of Genzyme Corporation Retirement Savings Plan on Form 10-K. Previously filed. 23.3-- Consent of PricewaterhouseCoopers LLP relating to Genzyme Corporation Form 10-K. (To be filed). 27-- Financial Data Schedule for Genzyme Corporation. Filed herewith. *99.1-- Management and Accounting Policies Governing the Relationship of Genzyme Divisions. Filed as Exhibit 99.1 to Genzyme's Registration Statement on Form S-3 dated March 3, 2000 (File No. 333-31548). *99.2-- Factors Affecting Future Operating Results. Previously filed.
- ------------------------ * Indicates exhibit previously filed with the Securities and Exchange Commission and incorporated herein by reference. Exhibits filed with Forms 10-K, 10-Q, 8-K, 8-A, 8-B or Schedule 14A of Genzyme Corporation were filed under Commission File No. 0-14680. ** Confidential treatment has been granted for the deleted portions of Exhibits 10.21, 10.38-10.40, 10.42 and 10.43 and 10.46 EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS Exhibits 10.22 through 10.32 above are management contracts or compensatory plans or arrangements in which the executive officers or directors of Genzyme participate. 42 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 Dated: , 2000 By: /s/ MICHAEL S. WYZGA ----------------------------------------- Michael S. Wyzga Senior Vice President and Chief Financial Officer
43 EX-13.1 2 ex-13_1.txt EXHIBIT 13.1 EXHIBIT 13.1 FINANCIAL STATEMENTS
PAGE NO. -------- GENZYME CORPORATION AND SUBSIDIARIES Consolidated Selected Financial Data........................ GCS-2 Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations................................................ GCS-7 Consolidated Statements of Operations--For the Years Ended December 31, 1999, 1998 and 1997.......................... GCS-32 Consolidated Balance Sheets--December 31, 1999 and 1998..... GCS-34 Consolidated Statements of Cash Flows--For the Years Ended December 31, 1999, 1998 and 1997.......................... GCS-35 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1999, 1998 and 1997.............. GCS-37 Notes to Consolidated Financial Statements.................. GCS-40 Report of Independent Accountants........................... GCS-95
GCS-1 GENZYME CORPORATION CONSOLIDATED SELECTED FINANCIAL DATA We have four series of common stock--Genzyme General Stock, Molecular Oncology Stock, Surgical Products Stock and Tissue Repair Stock--which we refer to as "tracking stock." Unlike typical common stock, each of our tracking stocks is designed to track the financial performance of a specified subset of our business operations and its allocated assets, rather than operations and assets of our entire company. Each tracking stock is a common stock of Genzyme Corporation, not of a division; each division is not a company or legal entity, and therefore does not and cannot issue stock. The chief mechanisms intended to cause each tracking stock to "track" the financial performance of each division are provisions in our charter governing dividends and distributions. Under these provisions, our charter: - factors 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; and - requires us to exchange, redeem or distribute a dividend to the holders of Molecular Oncology Stock, Surgical Products Stock, or Tissue Repair Stock if all or substantially all of the assets allocated to those corresponding divisions are sold to a third party. To determine earnings per share, we allocate Genzyme's earnings to each series of our common stock based on the earnings attributable to that series of stock. The earnings attributable to each series of stock is defined in our charter as the net income or loss of the corresponding division determined in accordance with generally accepted accounting principles and as adjusted for tax benefits allocated to or from the division in accordance with our management and accounting policies. Our charter also requires that all income and expenses of Genzyme be allocated among the divisions in a reasonable and consistent manner. Our board of directors, however, retains considerable discretion in determining the types, magnitudes and extent of allocations to each series of common stock without shareholder approval. Because the earnings allocated to each series of stock are based on the income or losses attributable to each corresponding division, we include financial statements and management's discussion and analysis of Genzyme Corporation and of each division to aid investors in evaluating Genzyme's performance and the performance of each of its divisions. Income (loss) allocated to Genzyme General Stock and Surgical Products Stock, and earnings per share of Genzyme General Stock, have been revised for all periods presented as described in Note A. to our consolidated financial statements under the caption "Net Income (Loss) Per Share--Revision." GCS-2 GENZYME CORPORATION CONSOLIDATED SELECTED FINANCIAL DATA (CONTINUED) CONSOLIDATED STATEMENTS OF OPERATIONS DATA
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (AMOUNTS IN THOUSANDS) Revenues: Net product sales....................... $683,482 $613,685 $529,927 $424,483 $304,373 Net service sales....................... 79,448 74,791 67,158 68,950 52,450 Revenues from research and development contracts: Related parties....................... 2,012 5,745 8,356 23,011 26,758 Other................................. 7,346 15,114 3,400 2,310 202 -------- -------- -------- -------- -------- Total revenues...................... 772,288 709,335 608,841 518,754 383,783 Operating costs and expenses: Cost of products sold(1)................ 182,337 211,076 206,028 155,930 113,964 Cost of services sold................... 49,444 48,586 47,289 54,082 35,868 Selling, general and administrative..... 242,797 215,203 200,476 162,264 110,447 Research and development (including research and development related to contracts)............................ 150,516 119,005 89,558 80,849 68,845 Amortization of intangibles............. 24,674 24,334 17,245 8,849 4,647 Purchase of in-process research and development(2)........................ 5,436 -- 7,000 130,639 14,216 Other................................... -- -- -- 1,465 -- -------- -------- -------- -------- -------- Total operating costs and expenses.... 655,204 618,204 567,596 594,078 347,987 -------- -------- -------- -------- -------- Operating income (loss)................... 117,084 91,131 41,245 (75,324) 35,796 Other income (expenses): Equity in net loss of unconsolidated affiliates............................ (42,696) (29,006) (12,258) (5,373) (1,810) Gain on affiliate sale of stock(3)...... 6,683 2,369 -- 1,013 -- Minority interest....................... 3,674 4,285 -- -- 1,608 Gain on sale of investments in equity securities............................ 1,963 3,391 -- 1,711 -- Gain on sale of product line(4)......... 8,018 31,202 -- -- -- Charge for impaired investments......... (5,712) (3,397) -- -- -- Other(5)................................ 14,527 -- (2,000) -- -- Investment income....................... 36,158 25,055 11,409 15,341 8,814 Interest expense........................ (21,771) (22,593) (12,667) (6,990) (1,109) -------- -------- -------- -------- -------- Total other income (expenses)......... 844 11,306 (15,516) 5,702 7,503 -------- -------- -------- -------- -------- Income (loss) before income taxes......... 117,928 102,437 25,729 (69,622) 43,299 Provision for income taxes................ (46,947) (39,870) (12,100) (3,195) (21,649) -------- -------- -------- -------- -------- Net income (loss)......................... $ 70,981 $ 62,567 $ 13,629 $(72,817) $ 21,650 ======== ======== ======== ======== ========
GCS-3 GENZYME CORPORATION CONSOLIDATED SELECTED FINANCIAL DATA (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NET INCOME (LOSS) PER SHARE: ALLOCATED TO GENZYME GENERAL STOCK (REVISED)(6,7,10): Genzyme General net income (loss)................ $142,077 $133,052 $ 76,642 $(10,687) $ 40,368 Genzyme Surgical Products net loss............... (27,523) (49,856) (29,740) (44,313) (9,273) Tax benefit allocated from Genzyme Molecular Oncology....................................... 7,812 3,527 2,755 -- -- Tax benefit allocated from Genzyme Surgical Products....................................... 16,128 17,936 10,112 7,487 3,728 Tax benefit allocated from Genzyme Tissue Repair......................................... 10,866 16,394 17,666 17,011 8,857 -------- -------- -------- -------- -------- Net income (loss) allocated to Genzyme General Stock.......................................... $149,360 $121,053 $ 77,435 $(30,502) $ 43,680 ======== ======== ======== ======== ======== Net income (loss) per share of Genzyme General Stock: Basic.......................................... $ 1.80 $ 1.53 $ 1.01 $ (0.45) $ 0.79 ======== ======== ======== ======== ======== Diluted........................................ $ 1.71 $ 1.48 $ 0.98 $ (0.45) $ 0.68 ======== ======== ======== ======== ======== Weighted average shares outstanding: Basic.......................................... 83,092 79,063 76,531 68,289 55,531 ======== ======== ======== ======== ======== Diluted........................................ 93,228 85,822 78,925 68,289 63,967 ======== ======== ======== ======== ======== ALLOCATED TO MOLECULAR ONCOLOGY STOCK(7,8): Net loss......................................... $(28,832) $(19,107) $(19,578) ======== ======== ======== Net loss per share of Molecular Oncology Stock--basic and diluted....................... $ (2.25) $ (3.81) $ (4.64) ======== ======== ======== Weighted average shares outstanding.............. 12,826 5,019 3,929 ======== ======== ======== ALLOCATED TO SURGICAL PRODUCTS STOCK (REVISED)(7,9,10): Net loss......................................... $(20,514) ======== Net loss per share of Surgical Products Stock--basic and diluted....................... $ (1.38) ======== Weighted average shares outstanding.............. 14,835 ======== ALLOCATED TO TISSUE REPAIR STOCK(7): Net loss......................................... $(30,040) $(40,386) $(45,984) $(42,315) $(22,030) ======== ======== ======== ======== ======== Net loss per share of Tissue Repair Stock--basic and diluted.................................... $ (1.26) $ (1.99) $ (3.07) $ (3.38) $ (2.28) ======== ======== ======== ======== ======== Weighted average shares outstanding.............. 23,807 20,277 14,976 12,525 9,659 ======== ======== ======== ======== ========
CONSOLIDATED BALANCE SHEET DATA
DECEMBER 31, ------------------------------------------------------------ 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- -------- (AMOUNTS IN THOUSANDS) Cash, cash equivalents, short- and long-term investments................................ $ 652,990 $ 575,729 $ 246,341 $ 187,955 $326,236 Working capital.............................. 592,249 417,116 350,822 395,605 352,410 Total assets................................. 1,787,281 1,688,854 1,295,453 1,270,508 905,201 Long-term debt and convertible debt(11)...... 290,622 287,225 170,276 241,998 124,473 Stockholders' equity......................... 1,356,392 1,172,535 1,012,050 902,309 705,207
GCS-4 GENZYME CORPORATION CONSOLIDATED SELECTED FINANCIAL DATA (CONTINUED) There were no cash dividends paid. - ------------------------ (1) Cost of products sold for 1997 includes an $18.1 million charge in connection with the discontinuance of our melatonin, bulk pharmaceuticals and fine chemicals product lines. Cost of products sold for 1998 includes a $14.8 million charge to write-down excess Ceredase-Registered Trademark- enzyme inventory and a $10.4 million charge to write-down our Sepra products inventory to net realizable value. (2) Charges for in-process research and development were incurred in connection with the following acquisitions: - 1995--$14.2 million from the acquisition of a minority interest in IG Laboratories, Inc. - 1996--$106.4 million from the acquisition of Neozyme II Corporation and $24.2 million from the acquisition of Deknatel Snowden Pencer, Inc. - 1997--$7.0 million from the acquisition of PharmaGenics, Inc. - 1999--$5.4 million from the acquisition of Peptimmune, Inc. (3) Gain on affiliate sale of stock in 1999 represents the gain on our investment in Genzyme Transgenics Corporation ("GTC") as a result of GTC's various issuances of additional shares of its stock. (4) Gain on sale of product line of $31.2 million in 1998 relates to the sale of our research products business assets to Techne Corporation in July 1998. Gain on sale of product line in 1999 consists of $7.5 million, representing the payment of a note receivable that we received as partial consideration for the sale of Genetic Design, Inc. to Laboratory Corporation of America in 1996. (5) Other income in 1999 includes the receipt of a $14.4 million payment associated with the termination of our agreement to acquire Cell Genesys, Inc., net of acquisition related expenses. (6) Until the distribution of Surgical Products Stock on June 28, 1999, Genzyme Surgical Products' losses were included in the determination of income allocated to Genzyme General Stock. Further, until the distribution of Molecular Oncology Stock on June 18, 1997, Genzyme Molecular Oncology's losses were included in the determination of income allocated to Genzyme General Stock. If the shares of Surgical Products Stock initially issued on June 28, 1999 were assumed to be outstanding since January 1, 1995, net income allocated to Genzyme General Stock and weighted average shares outstanding would have been as follows:
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (AMOUNTS IN THOUSANDS) Net income allocated to Genzyme General Stock.................................... $176,883 $170,909 $107,175 $ 13,811 $ 52,953 Weighted average shares outstanding: Basic.................................... 83,092 79,063 76,531 68,289 55,531 Diluted.................................. 93,228 85,822 78,925 73,038 63,967
(7) To determine earnings per share, we allocate Genzyme's earnings to each series of our common stock based on the earnings attributable to that series of stock. The earnings attributable to Genzyme General Stock is defined in our charter as the net income or loss of Genzyme General determined in accordance with generally accepted accounting principles and as adjusted for tax benefits allocated to or from Genzyme General in accordance with our management and accounting policies. Earnings attributable to Molecular Oncology Stock, Surgical Products Stock and Tissue Repair Stock are defined similarly and, as such, are based on the net income or loss of the corresponding division. GCS-5 GENZYME CORPORATION CONSOLIDATED SELECTED FINANCIAL DATA (CONTINUED) (8) We created Genzyme Molecular Oncology on June 18, 1997. Prior to this date, the operations of Genzyme Molecular Oncology were included in the results of Genzyme General. Net loss per share of Molecular Oncology Stock for 1997 is calculated using the net loss allocated to Genzyme Molecular Oncology for the period June 18, 1997 through December 31, 1997 and the weighted average shares outstanding during the same period. Loss per share data is not presented for Genzyme Molecular Oncology for the years ended December 31, 1995 and 1996, or for the period from January 1, 1997 to June 17, 1997, as there were no shares of Molecular Oncology Stock outstanding. (9) We created Genzyme Surgical Products on June 28, 1999. Prior to this date, the operations of Genzyme Surgical Products were included in the operations allocated to Genzyme General and, therefore, in the net income allocated to Genzyme General Stock. Net loss per share of Surgical Products Stock for 1999 is calculated using the net loss allocated to Genzyme Surgical Products for the period June 28, 1999 through December 31, 1999 and the weighted average shares outstanding during the same period. Loss per share data is not presented for Genzyme Surgical Products for the years ended December 31, 1995, 1996, 1997 and 1998, as there were no shares of Surgical Products Stock outstanding. If the shares of Surgical Products Stock initially issued on June 28, 1999 were assumed to be outstanding since January 1, 1995, net loss allocated to Surgical Products Stock and weighted average shares outstanding would have been as follows:
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (AMOUNTS IN THOUSANDS) Net loss allocated to Surgical Products Stock...................................... $(48,037) $(49,856) $(29,740) $(44,313) $(9,273) Weighted average shares outstanding--basic and diluted................................ 14,800 14,800 14,800 14,800 14,800
(10) The allocation of Genzyme's historical earnings has been revised to reflect an allocation of Genzyme's earnings to each series of common stock actually outstanding in periods prior to June 1999 and to each series of common stock, including Surgical Products Stock, thereafter. See Note A. to the consolidated financial statements. (11) Long-term debt and convertible debt consists primarily of $218.0 million and $118.0 million outstanding under a revolving credit facility in 1996 and 1997, respectively. Long-term debt and convertible debt in 1998 and 1999 consists primarily of $250.0 million in principal of 5 1/4% convertible subordinated notes due June 2005. GCS-6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF GENZYME CORPORATION AND SUBSIDIARIES' FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION This discussion contains forward-looking statements. These forward-looking statements represent the expectations of our management as of the filing date of this annual report. Actual results could differ materially from those anticipated by the forward-looking statements due to the risks and uncertainties described under the caption "Factors Affecting Future Operating Results" below. You should consider carefully each of these risks and uncertainties in evaluating our financial condition and results of operations. We are a biotechnology company that develops innovative products and services for significant unmet medical needs. We have four operating divisions: - Genzyme General, which develops and markets: - therapeutic products, with an expanding focus on products to treat patients suffering from lysosomal storage disorders and other specialty therapeutics; - diagnostic products, with a focus on IN VITRO diagnostics; and - other products and services, such as genetic testing services and lipids and peptides for drug delivery. - Genzyme Molecular Oncology, which is developing cancer products, with a focus on therapeutic vaccines and angiogenesis inhibitors; - Genzyme Surgical Products, which develops, manufactures and markets surgical products for cardiovascular surgery and general surgery; and - Genzyme Tissue Repair, which develops and markets biological products for orthopedic injuries, such as cartilage damage, and severe burns. In June 1997, we formed Genzyme Molecular Oncology by acquiring PharmaGenics, Inc. and combining it with several of our ongoing programs in the field of oncology. In June 1999, we established Genzyme Surgical Products. The business of Genzyme Surgical Products previously operated as a business unit of Genzyme General. The discussion that follows reflects the results of operations as if Genzyme Surgical Products had existed as a separate division of Genzyme for all periods presented. The greater segregation of assets, liabilities and earnings (losses) resulting from the creation of Genzyme Molecular Oncology and Genzyme Surgical Products is a trend that we do not expect to continue. As discussed below, Genzyme Surgical Products and Genzyme Tissue Repair will be combined into Genzyme Biosurgery upon the completion of the Biomatrix acquisition, reducing the segregation of assets among our divisions and reducing the series of common stock outstanding. As market or competitive conditions warrant, we may create new series of tracking stock or change our earnings allocation methodology. However, at the present time, we have no plans to do so. We prepare the financial statements of Genzyme in accordance with generally accepted accounting principles. We present financial information and accounting policies specific to Genzyme in the accompanying consolidated financial statements. Note A., "Summary of Significant Accounting Policies," to our accompanying consolidated financial statements contains our accounting policies. We have four series of common stock--Genzyme General Stock, Molecular Oncology Stock, Surgical Products Stock and Tissue Repair Stock--which we refer to 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 GCS-7 business operations and its allocated assets, rather than operations and assets of our entire company. The chief mechanisms intended to cause each tracking stock to "track" the financial performance of each division are provisions in our charter governing dividends and distributions. Under these provisions, our charter: - factors 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; and - requires us to exchange, redeem or distribute a dividend to the holders of Molecular Oncology Stock, Surgical Products Stock, or Tissue Repair Stock if all or substantially all of the assets allocated to those corresponding divisions are sold to a third party (a dividend or redemption payment must equal in value the net after-tax proceeds from the sale; an exchange must be for Genzyme General Stock at a 10% premium to the exchanged stock's average market price following the announcement of the sale. To determine earnings per share, we allocate Genzyme's earnings to each series of our common stock based on the earnings attributable to that series of stock. The earnings attributable to each series of stock is defined in our charter as the net income or loss of the corresponding division determined in accordance with generally accepted accounting principles and as adjusted for tax benefits allocated to or from the division in accordance with our management and accounting policies. Our charter also requires that all income and expenses of Genzyme be allocated among the divisions in a reasonable and consistent manner. However, subject to fiduciary duties, our board of directors can, at its discretion, change the methods of allocating earnings to each series of common stock. We intend to allocate earnings using our current methods for the foreseeable future. See "Earnings Allocations" below. Because the earnings allocated to each series of stock are based on the income or losses attributable to each corresponding division, we include financial statements and management's discussion and analysis of Genzyme Corporation and of each division to aid investors in evaluating Genzyme's performance and the performance of each of its divisions. While each tracking stock is designed to reflect a division's performance, it is common stock of Genzyme Corporation and not of a division; each division is not a company or legal entity, and therefore does not and cannot issue stock. Consequently, holders of a series of tracking stock have no specific rights to assets allocated to the corresponding division. Genzyme Corporation continues to hold title to all of the assets allocated to each division and is 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. We provide separate financial statements for each of our divisions as well as consolidated financial statements that include the consolidated results of each of our divisions and our corporate operations taken as a whole. You should read this discussion and analysis of our financial position and results of operations in conjunction with those consolidated financial statements and related notes, which are included in this annual report. In March 2000, we entered into an agreement to acquire Biomatrix, Inc. Upon completion of the acquisition, we will form a new operating division, and the assets allocated to Genzyme Surgical Products and Genzyme Tissue Repair will be re-allocated to that new division. See "Subsequent Event" below. GCS-8 RESULTS OF OPERATIONS The following discussion summarizes the key factors our management believes are necessary for an understanding of our consolidated financial statements. The components of our consolidated statements of operations are described in the following table:
99/98 98/97 INCREASE/(DECREASE) INCREASE/(DECREASE) 1999 1998 1997 % CHANGE % CHANGE -------- -------- -------- ------------------- ------------------- (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Total revenues................ $772,288 $709,335 $608,841 9% 17% Cost of products and service sold........................ 231,781 259,662 253,317 (11)% 3% Selling, general and administrative.............. 242,797 215,203 200,476 13% 7% Research and development (including research and development related to contracts).................. 150,516 119,005 89,558 26% 33% Amortization of intangibles... 24,674 24,334 17,245 1% 41% Purchase of in-process research and development.... 5,436 -- 7,000 N/A N/A -------- -------- -------- Total operating costs and expenses.................... 655,204 618,204 567,596 6% 9% -------- -------- -------- Operating income.............. 117,084 91,131 41,245 28% 121% Other income (expenses), net......................... 844 11,306 (15,516) (93)% 173% -------- -------- -------- Income before income taxes.... 117,928 102,437 25,729 15% 298% Provision for income taxes.... (46,947) (39,870) (12,100) 18% 230% -------- -------- -------- Net income.................... $ 70,981 $ 62,567 $ 13,629 13% 359% ======== ======== ========
REVENUES
99/98 98/97 INCREASE/(DECREASE) INCREASE/(DECREASE) 1999 1998 1997 % CHANGE % CHANGE -------- -------- -------- ------------------- ------------------- (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Product revenue............... $683,482 $613,685 $529,927 11% 16% Service revenue............... 79,448 74,791 67,158 6% 11% -------- -------- -------- Total product and service revenue..................... 762,930 688,476 597,085 11% 15% Research and development revenue..................... 9,358 20,859 11,756 (55)% 77% -------- -------- -------- Total revenues................ $772,288 $709,335 $608,841 9% 17% ======== ======== ========
GCS-9 PRODUCT REVENUE We derive product revenue from sales by Genzyme General of therapeutic, diagnostic and other products, including Cerezyme-Registered Trademark- enzyme and Ceredase-Registered Trademark- enzyme, and sales by Genzyme Surgical Products of cardiovascular, general surgery and other products, including Sepra Film-Registered Trademark- bioresorbable membrane.
99/98 98/97 INCREASE/(DECREASE) INCREASE/(DECREASE) 1999 1998 1997 % CHANGE % CHANGE -------- -------- -------- ------------------- ------------------- (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Genzyme General: Therapeutics................ $488,705 $413,645 $332,712 18% 24% Diagnostic products......... 57,971 65,683 66,288 (12)% (1)% Other....................... 24,825 30,399 30,092 (18)% 1% Genzyme Surgical Products: Cardiovascular surgery products.................. 77,966 74,545 79,560 5% (6)% General surgery products.... 25,192 20,249 14,813 24% 37% Other....................... 8,823 9,164 6,462 (4)% 42% -------- -------- -------- Total product revenues........ $683,482 $613,685 $529,927 11% 16% ======== ======== ========
1999 AS COMPARED TO 1998 Our increase in product revenue was largely due to: - increased sales of Cerezyme-Registered Trademark- enzyme, which is a therapy for the treatment of Gaucher disease; and - increased sales of Sepra Film-Registered Trademark- bioresorbable membrane and instruments for minimally invasive cardiac surgery. The increase in sales of Cerezyme-Registered Trademark- enzyme in 1999 was attributable to our identification of new Gaucher disease patients throughout the world. We also sell Ceredase-Registered Trademark- enzyme for the treatment of Gaucher disease, but we have successfully converted virtually all Gaucher disease patients to a treatment regimen using Cerezyme-Registered Trademark- enzyme. Our operations are highly dependent on sales of Cerezyme-Registered Trademark- enzyme and a reduction in revenue from sale of this product would adversely affect our results of operations. Revenue from Cerezyme-Registered Trademark- enzyme would be impacted negatively if competitors developed alternative treatments for Gaucher disease and the alternative products gained commercial acceptance. We are aware of companies that have initiated efforts to develop competitive products and other companies may do so in the future. Information on the growth of sales of Cerezyme-Registered Trademark- enzyme and Ceredase-Registered Trademark- enzyme in 1999 and their relationship to our total product revenues for each year is provided in the table below:
99/98 INCREASE/(DECREASE) 1999 1998 % CHANGE -------- -------- ------------------- (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Sales of Cerezyme-Registered Trademark- enzyme and Ceredase-Registered Trademark- enzyme.............. $478,538 $411,060 16% % of total product revenue........................... 70% 67%
Sales of Sepra Film-Registered Trademark- bioresorbable membrane, which is used to limit the incidence and severity of postoperative adhesions, increased 43% to $13.3 million in 1999 as compared to $9.3 million in 1998. Cardiovascular surgery products include chest drainage and fluid management systems, surgical closures, biomaterials, and instruments for conventional and minimally invasive cardiac surgery. The GCS-10 increase in cardiovascular surgery product revenues in 1999 was primarily attributable to increased sales of instruments for minimally invasive cardiac surgery. The increases in product revenue were partially offset by a decrease in diagnostic products revenue for 1999 as compared to 1998, which reflects the sale of the research products business to Techne Corporation in July 1998 and immunochemistry product line to an operating unit of Sybron Laboratory Products Corporation in July 1999. Diagnostic products revenue includes royalties on product sales by Techne's biotechnology group. 1998 AS COMPARED TO 1997 Our increase in product revenue primarily due to: - increased sales of Cerezyme-Registered Trademark- enzyme; and - an 88% increase in sales of Sepra Film-Registered Trademark- bioresorbable membrane from $4.9 million in 1997 to $9.3 million in 1998, primarily as a result of increased market acceptance of the product. The increase in product revenue for 1998 was partially offset by decreased cardiovascular surgery product revenues as a result of a decrease in sales of fluid management products, which were $39.8 million in 1998, compared to $42.3 million in 1997. The decrease in fluid management product sales was due to the termination of a group-purchasing contract in 1997, the impact of which was realized in 1998. For both 1998 and 1997, our product revenue consisted mainly of sales of Cerezyme-Registered Trademark- enzyme and Ceredase-Registered Trademark- enzyme as indicated in the table below:
98/97 INCREASE/(DECREASE) 1998 1997 % CHANGE -------- -------- ------------------- (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Sales of Cerezyme-Registered Trademark- enzyme and Ceredase-Registered Trademark- enzyme.............. $411,060 $332,712 24% % of total product revenue........................... 60% 54%
SERVICE REVENUE We derive service revenue from four principal sources: - genetic testing services performed by Genzyme General; - Genzyme Tissue Repair's Carticel-Registered Trademark- chondrocytes for the treatment of cartilage damage; - Genzyme Tissue Repair's Epicel-TM- skin grafts for the treatment of severe burns; and - genomics services using Genzyme Molecular Oncology's SAGE-TM- gene expression technology.
99/98 98/97 INCREASE/(DECREASE) INCREASE/(DECREASE) 1999 1998 1997 % CHANGE % CHANGE -------- -------- -------- ------------------- ------------------- (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Genzyme General............... $ 57,223 $ 55,445 $ 55,835 3% (1)% Genzyme Molecular Oncology.... 1,920 2,229 467 (14)% 377% Genzyme Tissue Repair......... 20,305 17,117 10,856 19% 58% -------- -------- -------- Total service revenue......... $ 79,448 $ 74,791 $ 67,158 6% 11% ======== ======== ========
GCS-11 1999 AS COMPARED TO 1998 Our service revenue increased during 1999, as compared to 1998, as a result of increases in the provision of genetic testing services as well as increased sales of Carticel-Registered Trademark- chondrocytes and Epicel-TM- skin grafts. The increase in sales of Carticel-Registered Trademark- chondrocytes was a result of continued increases in the numbers of patients treated and surgeons trained as well as an increase in the number of insurance reimbursement approvals. Sales of genomics services decreased during this period as a result of a decline in the provision of genomics services using Genzyme Molecular Oncology's SAGE-TM- gene expression technology. 1998 AS COMPARED TO 1997 Our service revenue during 1998 increased from 1997 primarily as a result of increased sales of Carticel-Registered Trademark- chondrocytes and Epicel-TM- skin grafts. Service revenues for genetic testing in 1998 were level with 1997. The growth in sales of Carticel-Registered Trademark- chondrocytes is primarily attributable to increased acceptance by orthopedic surgeons and insurance companies, most notably following the issuance by the U.S. Food and Drug Administration (FDA) of a biologics license to Genzyme Tissue Repair for Carticel-Registered Trademark- chondrocytes. The increase in sales of Epicel-TM- skin grafts was due to penetration of Epicel-TM- skin grafts into the catastrophic burn market. The increased market share resulted from increased surgeon awareness and from product improvements designed to ease the surgical procedure. INTERNATIONAL PRODUCT AND SERVICE REVENUE A substantial portion of our revenue was generated outside of the United States, as described in the following table. Most of this revenue was attributable to sales of Cerezyme-Registered Trademark- enzyme. The following table shows international product and service revenue:
99/98 98/97 INCREASE/(DECREASE) INCREASE/(DECREASE) 1999 1998 1997 % CHANGE % CHANGE -------- -------- -------- ------------------- ------------------- (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Total international product and service revenue......... $311,080 $281,744 $220,592 10% 28% ======== ======== ======== % of total product and service revenue..................... 41% 41% 37%
MARGINS
99/98 98/97 INCREASE/(DECREASE) INCREASE/(DECREASE) 1999 1998 1997 % CHANGE % CHANGE -------- -------- -------- ------------------- ------------------- (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Product margin................ $501,145 $402,609 $323,899 24% 24% % of product revenue........ 73% 66% 61% Service margin................ 30,004 26,205 19,869 14% 32% % of service revenue........ 38% 35% 30% Total gross margin............ 531,149 428,814 343,768 24% 25% % of total product and service revenues.......... 70% 62% 58%
We provide a broad range of healthcare products and services. As a result, our gross margin varies significantly based on the category of product or service. Sales of therapeutic products, including Cerezyme-Registered Trademark- enzyme, result in higher margins than sales of surgical or diagnostic products. GCS-12 During 1998, we recorded a $25.2 million charge to cost of products sold. The components of this charge were: - a $14.8 million charge related to the operations of Genzyme General to write down excess inventory used to make Ceredase-Registered Trademark- enzyme. We took this charge following our determination that, based on the status of our efforts to convert Gaucher disease patients to a treatment regimen using Cerezyme-Registered Trademark- enzyme, our existing supply of Ceredase-Registered Trademark- enzyme was sufficient to meet estimated patient needs. - a $10.4 million charge related to the operations of Genzyme Surgical Products to write down our inventory of Sepra products to net realizable value. The Sepra products are our line of products and product candidates designed to limit post-operative adhesions. During the third quarter of 1998, we revised our forecasted sales of Sepra products and, in accordance with our policy, analyzed the Sepra products inventory to determine whether the carrying value exceeded the net realizable value. The revised forecast showed slower sales growth as well as higher manufacturing and sales and marketing costs than originally expected. In addition, our inventory on-hand had a relatively high cost per unit because production was significantly less than originally planned. As a result, in the third quarter of 1998, we recorded a charge to cost of products sold to write down our Sepra products inventory to net realizable value. Without the effect of this charge, our product margin for 1998 would have been 70% and our total gross margin during that period would have been 66%. During 1997, we recorded a charge of $5.5 million to cost of products sold allocated to Genzyme Surgical Products relating to the manufacture of Sepracoat-TM- coating solution. We took this charge after an advisory panel of the FDA recommended against granting market approval for this product in 1997. This product is sold outside the United States. Without the effect of this charge, our product margin for 1997 would have been 62% and our total gross margin during that period still would have been 58%. Excluding the charges described above, the increases in product margin and total gross margin during both periods were a result of increased efficiency and process improvements in manufacturing as well as increased sales of Cerezyme-Registered Trademark- enzyme. Our service margin also increased during both periods. These increases were attributable to: - an increase in sales of DNA and cancer testing services; - increased sales of Carticel-Registered Trademark- chondrocytes; and - a reduction in labor, materials and production costs for Carticel-Registered Trademark- chondrocytes and Epicel-TM- skin grafts. OPERATING EXPENSES 1999 AS COMPARED TO 1998 The increase in selling, general and administrative expense in 1999 as compared to 1998 was related to: - increased expenditures to support the increased sales of Cerezyme-Registered Trademark- enzyme; - costs associated with the market introduction of Thyrogen-Registered Trademark- hormone in January 1999; - increased staffing to support the growth in several of Genzyme General's product lines; GCS-13 - a $3.0 million increase to the reserve for doubtful accounts in Genzyme General's genetic testing business as a result of a comprehensive review of contract receivable and self-pay receivables during 1999; and - an increase in professional service fees and higher fringe benefit expenses and costs in connection with the creation of Genzyme Surgical Products as a separate division of Genzyme. The increase in selling, general and administrative expense in 1999 as compared to 1998 was partially offset by the following: - reduced legal costs in 1999 associated with our prosecution and maintenance of Genzyme Molecular Oncology's intellectual property portfolio; and - a one-time charge taken in 1998 to write off costs incurred in connection with a public offering of Molecular Oncology Stock that was not completed. The increase in research and development expense in 1999 as compared to 1998 was a result of: - increased costs for the program to develop transgenic recombinant human antithrombin III, which is conducted through our consolidated joint venture, ATIII LLC, discussed in "--Minority Interest" below; - increased spending on Genzyme General's program to develop Fabrazyme-TM- enzyme for the treatment of Fabry disease; - increased spending on Genzyme General's cell and gene therapy programs; - the initiation of a clinical trial for Genzyme Molecular Oncology's melanoma tumor vaccine product; - the increase in the number of research personnel and related expenses required to support the continued development of Genzyme Molecular Oncology's cancer vaccine and angiogenesis inhibitor programs; - increased spending for Genzyme Surgical Products' cell and gene therapy programs and the initiation of several clinical trials for its products; - increased spending on the development programs for Genzyme Surgical Products' surgical instruments and devices; - a $2 million milestone payment made by Genzyme Surgical Products to a collaborator in June 1999. The increase in research and development expense in 1999 as compare to 1998 was partially offset by the following: - Genzyme Tissue Repair's termination of its TGF-beta and other research and development programs; and - a $1.7 million charge taken by Genzyme Surgical Products in the third quarter of 1998 to write off certain costs related to equipment that it used to manufacture the Sepra products. In the fourth quarter of 1998, Genzyme General began amortizing a milestone payment that it made to GelTex Pharmaceuticals, Inc. upon FDA approval of Renagel-Registered Trademark- capsules. As a result, amortization of intangibles increased slightly during 1999 as compared to 1998. In 1999, we acquired Peptimmune, Inc., a privately-held company whose lead development program was a preclincal research stage program focused on a treatment for pemphigus vulgaris, a rare genetic disease. Because the technology acquired had narrow utility and no application to our ongoing programs, we considered it to have no alternative future use. As a result, we allocated $5.4 million of the purchase price to in-process technology. We recorded this amount as a one-time charge to operations in 1999. We GCS-14 will record our expenses related to the development of the acquired technology as research and development expense until the time at which it reaches technological feasibility. Given the inherent risk in developing early-stage biotechnology products, we may never demonstrate the feasibility of that technology. See "--Factors Affecting Future Operating Results" below. In addition, given the history of consolidation in the biotechnology industry, we expect that we will complete additional acquisitions in the future. Some of these acquisitions will result in a further investment by us in in-process technology. 1998 AS COMPARED TO 1997 The increase in selling, general and administrative expense in 1998 as compared to 1997 was related to: - increased sales and marketing costs related to the product launch of Thyrogen-Registered Trademark- hormone; - increased expenditures to support the increased sales of Cerezyme-Registered Trademark- enzyme; - increased administrative support needed to support the growth of Genzyme Molecular Oncology; and - a one-time charge taken in the third quarter of 1998 to write off costs incurred in connection with a public offering of Molecular Oncology Stock that was not completed. The increase in selling, general and administrative expense in 1998 as compared to 1997 was partially offset by the following: - a one time charge of $1.9 million in 1997 related to the manufacture and sale of Sepracoat-TM- coating solution; and - efforts within Genzyme Tissue Repair to streamline operations. The increase in research and development expense in 1998 as compared to 1997 was attributable to the following: - $12.0 million in additional costs resulting from the consolidation of the results of ATIII LLC, for which there were no comparable amounts in 1997; - an increase in research personnel and related expenses to support Genzyme Molecular Oncology's SAGE-TM-, gene therapy and small molecule programs; - higher expenditures in Genzyme Surgical Products' cardiovascular gene and cell therapy scientific research and additional clinical trials initiated for the Sepra products; and - a $1.7 million charge taken by Genzyme Surgical Products in the third quarter of 1998 to write off certain costs related to equipment that it used to manufacture the Sepra products. GCS-15 OTHER INCOME AND EXPENSES
99/98 98/97 INCREASE/(DECREASE) INCREASE/(DECREASE) 1999 1998 1997 % CHANGE % CHANGE -------- -------- -------- ------------------- ------------------- (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Equity in net loss of unconsolidated affiliates... $(42,696) $(29,006) $(12,258) 47% 137% Gain on affiliate sale of stock....................... 6,683 2,369 -- 182% N/A Minority interest............. 3,674 4,285 -- (14)% N/A Gain on sale of investments in equity securities........... 1,963 3,391 -- (42)% N/A Gain on sale of product line........................ 8,018 31,202 -- (74)% N/A Charge for impaired investments................. (5,712) (3,397) -- 68% N/A Other......................... 14,527 -- (2,000) N/A N/A Investment income............. 36,158 25,055 11,409 44% 120% Interest expense.............. (21,771) (22,593) (12,667) (4)% 78% -------- -------- -------- Total other income (expense), net......................... $ 844 $ 11,306 $(15,516) (93)% 171% ======== ======== ========
EQUITY IN NET LOSS OF UNCONSOLIDATED AFFILIATES At December 31, 1999, we owned approximately 33% of the common stock of Genzyme Transgenics Corporation, which we refer to as GTC. We record in net loss of unconsolidated affiliates our portion of its results. We also record the results of the following joint ventures in net loss of unconsolidated affiliates:
JOINT VENTURE PARTNER(S) EFFECTIVE DATE PRODUCT/INDICATION GENZYME DIVISION ------------- ---------- -------------- ------------------ ---------------- RenaGel LLC GelTex Pharmaceuticals, June 1997 Renagel-Registered Trademark- Genzyme General Inc. capsules reduction of serum phosphorus in patients with end-stage renal disease BioMarin/ Genzyme LLC BioMarin Pharmaceutical September 1998 Aldurazyme-TM- enzyme for the Genzyme General Inc. treatment of mucopolysaccharidosis-I Pharming/ Genzyme LLC Pharming Group, N.V. October 1998 Human alpha-glucosidase for the Genzyme General treatment of Pompe disease Diacrin/Genzyme LLC Diacrin, Inc. October 1996 Products using porcine fetal cells Genzyme Tissue for the treatment of Parkinson's Repair (until May and Huntington's diseases 1999); Genzyme General (after May 1999) StressGen/ Genzyme StressGen July 1997 Stress gene therapies for the Genzyme Molecular LLC(1) Biotechnologies Corp.; treatment of cancer Oncology Canadian Medical Discoveries Fund Inc. (until October 1999)
- ------------------------------ (1) StressGen/Genzyme LLC was dissolved in December 1999. Our equity in net loss of unconsolidated affiliates increased as a result of: - increased losses from our joint ventures with GelTex, BioMarin, Pharming and Diacrin in both periods; and GCS-16 - a $1.0 million charge incurred in connection with our repurchase of one-half of the Canadian Medical Discoveries Fund's interest in StressGen/Genzyme LLC in October 1999. These increases were offset in part by decreased losses from GTC for both periods. GAIN ON AFFILIATE SALE OF STOCK GTC, an unconsolidated affiliate, periodically issues additional shares of its common stock. As described in Note A to our consolidated financial statements, it is our policy to record gains on the issuance of stock by our subsidiaries and affiliates. Accordingly, we recorded a $6.7 million gain in 1999 and a $2.4 million gain in 1998. The issuance of additional shares by GTC in 1999 reduced our ownership interest in GTC from 40% to 33%. The issuance of additional shares by GTC in 1998 reduced our ownership interest in GTC from 43% to 40%. MINORITY INTEREST In 1998, we formed ATIII LLC, a joint venture with GTC for the development and commercialization of transgenic recombinant human antithrombin III. We are funding 70% of the first $33.0 million in development costs, excluding facility costs, under this program and 50% of all development costs thereafter. We will pay 50% of all new facility costs to be incurred by ATIII LLC. All profits of ATIII LLC will be split equally; losses are allocated based on the amount of funding provided by each venturer. Because our combined direct and indirect interest in ATIII LLC is in excess of 50%, we consolidate the results of ATIII LLC and record GTC's portion of the ATIII LLC's losses as minority interest. ATIII LLC had losses of $12.2 million and $12.0 million in 1999 and 1998, respectively, of which GTC's portion was $3.7 million and $4.3 million, respectively. GAIN ON SALE OF INVESTMENTS IN EQUITY SECURITIES We recorded gains of $2.0 million in January 1999 and $3.4 million in December 1998 upon our sales of shares of Techne Corporation common stock that we received when we sold our research products business to Techne. GAIN ON SALE OF PRODUCT LINE In July 1999, we recorded a gain of $0.5 million in connection with the sale of our immunochemistry product lines to an operating unit of Sybron Laboratory Products Corporation. In June 1999, we recorded a gain of $7.5 million representing the payment of a note receivable that we received as partial consideration for the sale of Genetic Design, Inc. in 1996. We had previously fully reserved the amount of this note because we considered the repayment of the note to be uncertain. In July 1998, we recorded a gain of $31.2 million in connection with the sale of our research products business to Techne. CHARGE FOR IMPAIRED INVESTMENTS We recorded a $5.7 million charge in 1999 in connection with our investments in the common stock of Pharming Group N.V. and IntegraMed America, Inc., and a $3.4 million charge in 1998 in connection with our investment in the common stock of Celtrix Pharmaceuticals, Inc. because we considered the decline in the value of those investments to be other than temporary. In connection with these assessments, we concluded that substantial evidence existed that the value of the investments would recover to at least our cost. This included continued positive progress in the issuers' scientific programs, ongoing activity in our collaborations with the issuers, and a lack of any substantial company-specific adverse events causing the declines in value. However, given the significance and GCS-17 duration of the declines as of the end of the applicable quarter, we concluded that it was unclear over what period such price recoveries would take place and that, accordingly, the positive evidence suggesting that the investments would recover to at least our purchase price was not sufficient to overcome the presumption that the current market price was the best indicator of the value each of these investments. OTHER In December 1999, we recorded a net gain of $14.4 million upon receipt of a payment associated with the termination of our agreement to acquire Cell Genesys, Inc. INVESTMENT INCOME Our investment income for both periods increased because our cash balances were higher. The increase in cash balances was attributable to our issuance in May 1998 of $250.0 million in principal amount of 5 1/4% convertible subordinated notes and increased cash generated from operations. INTEREST EXPENSE Our interest expense increased in both periods primarily as a result of the issuance of the 5 1/4% convertible subordinated notes. The increase in both periods was partially offset due to Genzyme Tissue Repair completing the accretion of the conversion feature of the 6% convertible subordinated note in the second quarter of 1998. During 1998, the holder of this note converted $0.6 million of principal into shares of Tissue Repair Stock. During 1999, the holder of this note converted the remaining principal amount of $12.4 million into shares of Tissue Repair Stock. TAX PROVISION
99/98 98/97 INCREASE/(DECREASE) INCREASE/(DECREASE) 1999 1998 1997 % CHANGE % CHANGE -------- -------- -------- ------------------- ------------------- (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Provision for income taxes.... $(46,947) $(39,870) $(12,100) 18% 230% Net tax rate.................. 40% 39% 47%
Our tax rates for all periods vary from the U.S. statutory tax rate as a result of our: - provision for state income taxes; - use of a foreign sales corporation; - nondeductible amortization of intangibles; - use of tax credits; and - share of losses of unconsolidated affiliates. EARNINGS ALLOCATIONS Genzyme allocates its earnings to each of our series of common stock based on the earnings attributable to that series of stock. The earnings attributable to each series of stock is defined in our charter as the net income or loss of the corresponding division determined in accordance with generally accepted accounting principles and as adjusted for tax benefits allocated to or from the division in GCS-18 accordance with our management and accounting policies. The earnings allocated to each series of common stock are indicated in the table below (in thousands):
1999 1998 1997 -------- -------- -------- Earnings allocated to: Genzyme General Stock..................................... $149,630 $121,053 $ 77,435 Molecular Oncology Stock.................................. (28,832) (19,107) (19,578) Surgical Products Stock................................... (20,514) -- -- Tissue Repair Stock....................................... (30,040) (40,386) (45,984)
In connection with the creation of Genzyme Surgical Products as a separate division and the distribution of Surgical Products Stock on June 28, 1999, we modified the way that we allocate income and losses to our series of stock. Through June 27, 1999, the operations of Genzyme Surgical Products were included in Genzyme General, and the losses of Genzyme Surgical Products were allocated to Genzyme General Stock. Since June 28, 1999, the losses of Genzyme Surgical Products were no longer included in the determination of income allocated to Genzyme General Stock. This change in the methodology of allocating income or losses has resulted in an increase in the income allocated to Genzyme General Stock that is not due to operational changes or new business. Subsequent to the creation of Genzyme Surgical Products, pursuant to the Company's management and accounting policies, tax benefits generated by Genzyme Surgical Products continued to be allocated to Genzyme General Stock. From January 1, 1999 through June 27, 1999, the net loss of Genzyme Surgical Products of $27.5 million was allocated to Genzyme General Stock. From June 28, 1999 through December 31, 1999, the net loss of Genzyme Surgical Products of $20.5 million was allocated to Surgical Products Stock and excluded from income allocated to Genzyme General Stock. As a result of this change in allocation methodology, income allocated to Genzyme General Stock in 1999 was $20.5 million (or 16%) higher than what would have been allocated had Genzyme Surgical Products remained a part of Genzyme General. If the shares of Surgical Products Stock initially issued on June 28, 1999 were assumed to be outstanding since January 1, 1997, net income allocated to Genzyme General Stock, net loss allocated to Surgical Products Stock and weighted average shares outstanding would have been as follows:
1999 1998 1997 -------- -------- -------- Genzyme General: Net income allocated to Genzyme General Stock............. $176,883 $170,909 $107,175 Weighted average shares outstanding: Basic................................................... 83,092 79,063 76,531 Diluted................................................. 93,228 85,822 78,925 Genzyme Surgical Products: Net loss allocated to Surgical Products Stock............. $(48,037) $(49,856) $(29,740) Weighted average shares outstanding--basic and diluted 14,800 14,800 14,800
As noted above, the tax benefits associated with the losses of Genzyme Surgical Products for the period from June 28, 1999 to December 31, 1999, which amounted to $6.9 million, continued to be allocated to Genzyme General Stock. Our management and accounting policies provide that, if as of the end of any fiscal quarter, a division can not 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 any compensating payments or allocation to the division GCS-19 generating the benefit. Tax benefits allocated to Genzyme General, which are included in earnings attributable to Genzyme General Stock, are as follows (in thousands):
1999 1998 1997 -------- -------- -------- Tax benefits allocated from: Genzyme Molecular Oncology................................ $ 7,812 $ 3,527 $ 2,755 Genzyme Surgical Products................................. 16,128 17,936 10,112 Genzyme Tissue Repair..................................... 10,866 16,394 17,666 -------- -------- -------- Total................................................... $ 34,806 $ 37,857 $ 30,533 ======== ======== ========
These tax benefits represent 23%, 31% and 39% of earnings allocated to Genzyme General Stock in 1999, 1998 and 1997, respectively. The amount of tax benefits allocated to Genzyme General fluctuate based on the results of Genzyme Molecular Oncology, Genzyme Surgical Products and Genzyme Tissue Repair. If the losses of those divisions decline, as they are expected to, then the tax benefits allocated to Genzyme General will also decline. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1999, we had cash, cash-equivalents, and short- and long-term investments of $653.0 million, an increase of $77.3 million from December 31, 1998. We generated $204.0 million in cash from our operations in 1999. Our investing activities used $182.2 million in cash in 1999. These activities generated: - $11.1 million from the sale of Techne common stock; - $8.4 million from the payment of a note issued in connection with our sale of Genetic Design; - $5.0 million from the sale of our immunochemistry product lines; and - $0.9 million from the distribution of cash from StressGen/Genzyme LLC upon the joint venture's dissolution. These activities used: - $70.6 million for net purchases of investments; - $57.7 million to fund capital expenditures; - $40.0 million to fund our investments in joint ventures; - $6.5 million to fund our acquisition of Peptimmune; - $10.0 million to make a milestone payment to GelTex upon the first anniversary of FDA approval of Renagel-Registered Trademark- capsules; - $6.6 million to purchase shares of GTC's preferred stock; - $10.0 million to purchase shares of BioMarin common stock; - $3.4 million to purchase shares of Genovo, Inc. common stock; and - $4.0 million to purchase shares of Focal Inc. common stock. In 1999, we received $60.0 million in cash from employee stock plans and borrowed $5.0 million under a bank credit facility. In 1999, we used $85.1 million in cash to repay debt and capital lease obligations. In 1999, we refinanced our $225 million revolving credit facility with a $50.0 million revolving credit facility that matures in November 2000 and a $100.0 million revolving credit facility that matures in GCS-20 November 2002. At December 31, 1999, $23.0 million was outstanding under the credit facility, of this amount, we have allocated $18.0 million to Genzyme Tissue Repair and $5.0 million to Genzyme Molecular Oncology. Amounts borrowed under this revolving credit facility bear interest at a floating rate based upon an applicable margin above either the prime rate announced by Fleet National Bank or the London InterBank Offered Rate. We must repay all borrowings under this facility no later than November 12, 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: - product development and marketing; - expanding facilities; - working capital; and - strategic business initiatives. Our cash reserves will be further reduced to pay principal and interest on the following debt: - $250.0 million in principal under our 5 1/4% convertible subordinated notes due June 2005, which are convertible into Genzyme General Stock, Molecular Oncology Stock and Surgical Products Stock; - $23.0 million under a revolving credit facility with a group of commercial banks due November 12, 2002. Of this amount, we have allocated $18.0 million to Genzyme Tissue Repair and $5.0 million to Genzyme Molecular Oncology; and - $21.2 million in principal under our 5% convertible subordinated debentures due August 2003, which are convertible into Genzyme General Stock. If we use cash to pay or redeem this debt, including the interest due on it, our cash reserves will be diminished. In addition, if we exercise our option to purchase the limited partnership interests in Genzyme Development Partners, L.P. and use cash to pay all or a portion of the purchase price, our cash resources will be diminished. See Note M., "Research and Development Contracts," to the accompanying consolidated financial statements. We currently intend to provide approximately $6.0 million of funding to GDP for the Sepra programs through 2000, based on the 2000 budget for the programs. Future funding commitments for the Sepra development programs will be evaluated on an annual basis. In March 2000, we entered into an agreement to acquire Biomatrix, Inc. The consideration for the proposed acquisition consists of shares of a new series of our common stock and up to approximately $245 million in cash, allocated at the option of Biomatrix stockholders. To the extent we use cash to complete this acquisition, our cash reserves will be diminished. To satisfy these and other commitments, we may have to obtain additional financing. We cannot guarantee that we will be able to obtain any additional financing, extend any existing financing arrangement, or obtain either on favorable terms. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133, as amended by SFAS 137, is effective for our fiscal year beginning January 1, 2001. SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that we recognize all derivative instruments as either assets or liabilities on our GCS-21 balance sheets and measure those instruments at fair value. We are currently assessing the effects of adopting SFAS 133 and have not yet made a determination of the impact SFAS 133 will have on our consolidated financial statements. In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101") which summarizes the staff's view in applying generally accepted accounting principles to selected revenue recognition issues. SAB 101 will be effective beginning October 1, 2000. We are currently assessing the impact of SAB 101 on our revenue recognition policy. EURO--THE NEW EUROPEAN CURRENCY On January 1, 1999, eleven of the fifteen member countries of the European Union established fixed conversion rates between their existing sovereign currencies and the Euro and adopted the Euro as their common legal currency. The Euro trades on currency exchanges and is available for non-cash transactions. These participating countries now issue sovereign debt exclusively in Euros, and have redenominated their outstanding sovereign debt. These countries no longer control their own monetary policies by directing independent interest rates for their legacy currencies. Instead, the authority to direct monetary policy, including money supply and official interest rates for the Euro, is exercised by the new European Central Bank. The legacy currencies of these 11 countries are scheduled to remain legal tender in those countries as denominations of the Euro until January 1, 2002. Until that date, public and private parties may pay for goods and services using either the Euro or the participating country's legacy currency on a "no compulsion, no prohibition" basis. We have formed committees to address the business implications of the Euro conversion, communicate information about the conversion throughout the organization, create global coordination among functional areas and address specific accounting, treasury and tax issues relating to the Euro. Our management believes that the Euro conversion will not affect any of our outstanding foreign exchange forward contracts, or any other material commercial contracts. Similarly, our management does not foresee any increased currency exchange rate risk as a result of the Euro conversion. We are assessing whether there are any long term competitive implications of the Euro conversion. While no material risks have been identified to date, individual European governments may pressure us to have consistent European pricing, and individual customers and distributors in Europe may choose to begin purchasing products in the country where the Euro price is lowest. Because the Internal Revenue Service has not yet issued final regulations regarding the Euro, no assessment can be made as to the tax consequences of the conversion at this time. If the temporary regulations currently in place are adopted in their entirety, we believe that there will be no material tax consequences of the conversion. Because our existing accounting and finance software is currently able to use Euro-based accounts, we believe that the cost of upgrading software and other information systems for the conversion will be immaterial. YEAR 2000 Many computer systems and other equipment with embedded chips or processors experience problems handling dates beyond the year 1999. As a result, older programs may experience operating difficulties that cause date-sensitive transaction errors unless they are modified or upgraded to adequately address the problem. GCS-22 We conducted a Year 2000 compliance program intended to identify and minimize our exposure to Year 2000 problems. The compliance program was a coordinated effort conducted by each of our divisions, business units and departments using our own MIS personnel. The program involved four phases: - conducting an inventory of our Year 2000 issues; - prioritizing identified systems, programs and equipment based on materiality to our operations; - assessing Year 2000 compliance; and - resolving Year 2000 issues through upgrades, replacements or repairs. As of the date of this annual report, we have not experienced any material adverse effects on our business, results of operations or financial condition as a result of the Year 2000 issue. In 1999, we also conducted a survey of third parties that we consider critical to our business about their Year 2000 readiness. Based on the results of this survey, we believe that our critical suppliers and distributors have successfully transitioned into the year 2000 and we are not presently aware of any third party Year 2000 problems that could have a significant impact on our business. We will continue to monitor our operations and the operations of third parties critical to our operations for potential Year 2000 problems. However, we do not anticipate that we will discover any future Year 2000 issues that will have a material effect on our business, results of operations or financial condition. As of March 23, 2000, total costs incurred in connection with our Year 2000 compliance program were approximately $1.2 million and were funded through operations. MARKET RISK We are exposed to potential loss from exposure to market risks represented principally by changes in interest rates, foreign exchange rates, and equity prices. At December 31, 1999 we held various derivative contracts in the form of foreign exchange forwards. The derivatives contain no leverage or option features. We also held a number of other financial instruments, including investments in marketable securities, and had balances outstanding under several debt securities. INTEREST RATE RISK We are exposed to potential loss due to changes in interest rates. The principal interest rate exposure is to changes in domestic interest rates. Investments with interest rate risk include short-term deposits with financial institutions, and short-term and long-term investments in marketable securities. Debt with interest rate risk includes fixed rate convertible debt and borrowings under a credit facility. To estimate the potential loss due to changes in interest rates we performed a sensitivity analysis for a one-day horizon. In order to estimate the potential loss, we used an adverse change in interest rates of 100 basis points across the yield curve at year-end. We used the following assumptions in preparing the sensitivity analysis: - convertibles that are "in-the-money" at year end are considered equity securities and are excluded; - convertibles that are "out-of-the-money" at year end are treated as fixed rate debt securities and we assumed we will repay the principal amount in full at maturity and we ignored the exercise of embedded equity option; and - financial instruments contain no other call or leverage features material to our analysis. On this basis, we estimate the potential loss in fair value from changes in interest rates to be $3.1 million, virtually all of which is attributable to Genzyme General. GCS-23 The estimate of potential loss does not include a separate determination of potential losses due to changes in credit spreads. Our investments are investment grade securities and deposits are with investment grade financial institutions. We believe that the realization of losses due to changes in credit spreads is unlikely. The potential loss estimated above on all market risk sensitive instruments reflects a fair value loss on debt offset by a fair value loss on assets. We expect to hold our debt to maturity or conversion, whichever is sooner. Therefore, the realization of the potential loss on debt obligations is unlikely. FOREIGN EXCHANGE RISK As a result of our worldwide operations, we face exposure to adverse movements in foreign currency exchange rates, primarily to the Euro and its component currencies, British pounds and Japanese yen. These exposures are reflected in market risk sensitive instruments, including foreign currency receivables and payables and foreign exchange forward contracts. During 1999, our risk management strategy for foreign exchange exposure periodically included the use of forward contracts. As of December 31, 1999, we estimate the potential loss in fair value of the forward contracts due to a 10% change in exchange rates to be $2.1 million, virtually all of which is attributable to Genzyme General. EQUITY PRICE RISK We hold investments in a limited number of domestic and European equity securities, substantially all of which are allocated to Genzyme General. We estimate the potential loss in fair value due to a 10% decrease in equity prices of each security held at year-end to be $8.9 million. This estimate assumes no change in foreign exchange rates from year-end spot rates. The increase in potential equity risk is largely explained by the fact that the size of our portfolio has increased from a market value of $51 million to $96 million. FACTORS AFFECTING FUTURE OPERATING RESULTS The future operating results of Genzyme Corporation and its subsidiaries could differ materially from the results described above due to the following risks and uncertainties, which relate to us generally and affect all of our operating divisions. A REDUCTION IN REVENUES FROM SALES OF PRODUCTS THAT TREAT GAUCHER DISEASE WOULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS. We generate a majority of our product revenues from sales of enzyme-replacement products for patients with Gaucher disease. We entered this market in 1991 with Ceredase-Registered Trademark- enzyme. Because production of Ceredase-Registered Trademark- enzyme was subject to supply constraints, we developed Cerezyme-Registered Trademark- enzyme, a recombinant form of the enzyme. Recombinant technology uses specially engineered cells to produce enzymes, or other substances, by inserting into the cells of one organism the genetic material of a different species. In the case of Cerezyme-Registered Trademark- enzyme, Chinese hamster ovary cells are engineered to produce human alpha glucocerebrosidase. We stopped producing Ceredase-Registered Trademark- enzyme, except for small quantities, during 1998, after substantially all the patients who previously used Ceredase-Registered Trademark- enzyme converted to Cerezyme-Registered Trademark- enzyme. Sales of Ceredase-Registered Trademark- enzyme and Cerezyme-Registered Trademark- enzyme totaled $478.5 million for the year ended December 31, 1999, representing approximately 70% of our product revenues for that year. Because our business is highly dependent on Cerezyme-Registered Trademark- enzyme, a reduction in revenue from sales of this product would have an adverse effect on our operations and may cause the value of our securities to decline substantially. Revenues from Cerezyme-Registered Trademark- enzyme would be impacted negatively if competitors develop alternative treatments for Gaucher disease and these alternative products gained commercial acceptance. Some companies have initiated efforts to develop competitive products, and other companies may do so in the future. Cerezyme-Registered Trademark- enzyme has orphan drug status, providing it with market exclusivity in the U.S. until May 2001. We also have patents protecting its manufacturing method until 2010 and its GCS-24 composition until 2013. We cannot predict the effect that the expiration of orphan drug status and market exclusivity will have on sales of Cerezyme-Registered Trademark- enzyme after May 2001. GOVERNMENT REGULATION IMPOSES SIGNIFICANT COSTS AND RESTRICTIONS ON THE DEVELOPMENT AND COMMERCIALIZATION OF OUR PRODUCTS AND SERVICES. Our ability to successfully satisfy regulatory requirements will significantly determine our future success. We cannot guarantee that any required regulatory approvals will be granted or that they will be granted on a timely basis. The production and sale of healthcare products and provision of health care services are highly regulated. In particular, the U.S. Food and Drug Administration (FDA) and comparable agencies in foreign countries must approve human therapeutic and diagnostic products before they are marketed. This approval process can involve lengthy and detailed laboratory and clinical testing, sampling activities and other costly and time-consuming procedures. This regulation may delay the time at which a product or service first can be sold, limit how a product or service may be used, or adversely impact third party reimbursement. In addition, therapies that have received, or in the future receive, regulatory approval for commercial sale may still face subsequent regulatory difficulties. The FDA and comparable foreign regulatory agencies, for example, may require postmarketing clinical trials. In addition, a marketed therapy, its manufacturer and the manufacturer's facilities are subject to continual review and periodic inspections by regulatory agencies. The discovery of previously unknown problems with a therapy, manufacturer or facility can result in restrictions on the therapy or manufacturer, including withdrawal of the therapy from the market. The failure to comply with applicable regulatory approval requirements can result in, among other things: - warning letters; - fines and other civil penalties; - suspended regulatory approvals; - refusal to approve pending applications or supplements to approved applications; - suspension of product sales in the U.S. and/or exports from the U.S.; - product recalls; and - seizure of products. LEGISLATIVE CHANGES MAY ADVERSELY IMPACT OUR BUSINESS. Some of our products, including Cerezyme-Registered Trademark- enzyme, have been designated as orphan drugs under the Orphan Drug Act. The Orphan Drug Act provides incentives to manufacturers to develop and market drugs for rare diseases, generally by entitling the first developer that receives FDA marketing approval for an orphan drug to a seven-year exclusive marketing period in the U.S. for that product. Legislation periodically has been introduced in recent years to change the Orphan Drug Act to shorten the period of automatic market exclusivity and to allow marketing rights to simultaneous developers of the drug. We cannot be sure whether the Orphan Drug Act will be amended, or if amended, what effect the changes may have on us. We have also received orphan drug designation for some of our products that are still in development, including Fabrazyme-TM- enzyme for the treatment of Fabry disease. We are aware of other companies developing products for the treatment of Fabry disease. If any of those companies receive FDA approval for their Fabry disease therapy before we receive FDA approval for Fabrazyme-TM- enzyme, the Orphan Drug Act will preclude us from selling Fabrazyme-TM- enzyme in the U.S. for up to seven years. GCS-25 In addition, healthcare reform is an area of significant government focus. Any reform measures, if adopted, could adversely affect: - the pricing of therapeutic products in the U.S. or internationally; and - the amount of reimbursement available from governmental agencies or other third party payers. BECAUSE THE DEVELOPMENT OF OUR PRODUCTS INVOLVES A LENGTHY AND COMPLEX PROCESS, IT IS UNCERTAIN WHETHER WE WILL BE ABLE TO COMMERCIALIZE ANY OF OUR PRODUCTS CURRENTLY IN DEVELOPMENT. Before we can commercialize our development-stage products, we will need to: - conduct substantial research and development; - undertake preclinical and clinical testing; and - pursue regulatory approvals. This process involves a high degree of risk and takes several years. Our product development efforts may fail for many reasons, including: - the product fails in preclinical studies; - clinical trials may not support the safety or effectiveness of the product; or - we fail to obtain the required regulatory approvals. We cannot guarantee that we will successfully develop any particular product. ANY MARKETABLE PRODUCTS THAT WE DEVELOP MAY NOT BE COMMERCIALLY SUCCESSFUL. The commercial success of any marketable product that we develop will depend on many factors, including: - regulation by the FDA and other government authorities; - market acceptance by doctors and hospital administrators; - the effectiveness of our sales force; - the effectiveness of our production and marketing capabilities; - the success of competitive products; and - the availability of third party reimbursement. We cannot guarantee that any product we successfully develop will be commercially successful. WE MAY REQUIRE SIGNIFICANT ADDITIONAL FINANCING WHICH MAY NOT BE AVAILABLE ON FAVORABLE TERMS, IF AT ALL. As of December 31, 1999, we had approximately $653.0 million in cash, cash equivalents and short-and long-term investments, excluding investments in equity securities. Although we currently have substantial cash resources and positive cash flow, we intend to use substantial portions of our available cash for: - product development and marketing; - expanding facilities; - working capital; and - strategic business initiatives. GCS-26 We will further reduce available cash reserves to pay principal and interest on the following debt: - In May 1998, we issued $250.0 million in convertible notes, the entire principal amount of which is allocated to Genzyme General. These convertible notes bear interest at an annual rate of 5.25% and mature on June 1, 2005. However, the holders of these notes may exchange principal on the notes for shares of Genzyme General Stock, Molecular Oncology Stock, and Surgical Products Stock. - As of December 31, 1999, we owed approximately $23.0 million under a revolving credit facility with a group of commercial banks. Of this amount, we have allocated $18.0 million to Genzyme Tissue Repair and $5.0 million to Genzyme Molecular Oncology. Amounts borrowed under this revolving credit facility bear interest at a floating rate based upon an applicable margin above either the prime rate announced by Fleet National Bank or the London InterBank Offered Rate. We must repay all borrowings under this facility no later than November 12, 2002. - In August 1998, we issued $21.2 million in convertible debentures, the entire principal amount of which is allocated to Genzyme General. These convertible debentures bear interest at an annual rate of 5% and mature on August 29, 2003, but the holders of these convertible debentures may exchange principal, and under some circumstances interest, on the convertible debentures for shares of Genzyme General Stock. If we use cash to pay or redeem this debt, including the principal and interest due on it, our cash reserves will be diminished. In March 2000, we entered into an agreement to acquire Biomatrix, Inc. The consideration for the proposed acquisition consists of shares of a new series of our common stock and up to approximately $245 million in cash. To the extent we use cash to complete this acquisition, our cash reserves will be diminished. To satisfy these and other commitments, we may have to obtain additional financing. We cannot guarantee that we will be able to obtain any additional financing, extend any existing financing arrangement, or obtain either on favorable terms. WE MAY FAIL TO PROTECT ADEQUATELY OUR PROPRIETARY TECHNOLOGY, WHICH WOULD ALLOW COMPETITORS TO TAKE ADVANTAGE OF OUR RESEARCH AND DEVELOPMENT EFFORTS. Our long-term success largely depends on our ability to obtain and maintain patent and other proprietary right protection for our technology and products. If we fail to obtain or maintain these protections, we may not be able to prevent third parties from using our proprietary rights. Patents based on our currently pending or our future patent applications may not issue. In addition, our issued patents may not contain claims sufficiently broad to protect us against third parties with similar technologies or products, or provide us with any competitive advantage. Further, our patents, our collaborators' patents, and those patents for which we have license rights may be challenged, narrowed, invalidated or circumvented. The U.S. Patent and Trademark Office and the courts have not established a consistent policy regarding the breadth of claims allowed in biotechnology patents. The allowance of broader claims may increase the incidence and cost of patent interference proceedings and the risk of infringement litigation. On the other hand, the allowance of narrower claims may limit the value of our proprietary rights. Any policies that are adopted may result in changes in or interpretations of the patent laws that adversely affect our patent position. We also rely upon trade secrets, proprietary know-how, and continuing technological innovation to remain competitive. We have taken measures to protect our trade secrets and know-how, including the use of confidentiality agreements with our employees, consultants and corporate collaborators. It is possible GCS-27 that these agreements may be breached and that any remedies for a breach will not make us whole. We also cannot guarantee that other parties will not independently develop our know-how or otherwise obtain access to our technology. WE MAY BE REQUIRED TO LICENSE TECHNOLOGY FROM COMPETITORS IN ORDER TO DEVELOP AND COMMERCIALIZE SOME OF OUR PRODUCTS AND SERVICES, AND IT IS UNCERTAIN WHETHER THESE LICENSES WILL BE AVAILABLE. Third party patent rights and pending patent applications filed by third parties, if issued, may cover some of the products that we or our strategic collaborators are developing or testing. As a result, we or a strategic collaborator may be required to obtain licenses from the holders of these patents in order to use, manufacture or sell these products and services, and payments under these licenses may reduce the profitability of the products. Furthermore, we cannot be sure that these licenses would be available to us on acceptable terms or at all. If these licenses are not available, our or our strategic collaborators' ability to commercialize these products and services may be impaired. WE MAY INCUR SUBSTANTIAL COSTS AS A RESULT OF LITIGATION OR OTHER PROCEEDINGS RELATING TO PATENT AND OTHER INTELLECTUAL PROPERTY RIGHTS. If we or one of our strategic collaborators initiate litigation to enforce our patent or license rights, or are required to defend these rights in response to third party claims, it could consume a substantial portion of our resources. We cannot guarantee that we or our strategic collaborator would prevail in such litigation. If we do not prevail, we or our strategic collaborators may be required to: - pay monetary damages; - stop commercial activities relating to the affected products or services; or - obtain a license in order to continue manufacturing or marketing the affected products or services. If we are required to pay damages or if commercial activities are disrupted, our business or financial position may be negatively impacted. In addition, if we or our strategic collaborators are required to obtain a license, we cannot guarantee that one would be made available to us or made available on acceptable terms or at all. WE MAY BE LIABLE FOR PRODUCT LIABILITY CLAIMS NOT COVERED BY INSURANCE. Individuals who use our products or services may bring product liability claims against us. While we have taken, and continue to take, what we believe are appropriate precautions, we cannot guarantee that we will avoid significant liability exposure. We have only limited amounts of product liability insurance, and we cannot be sure that this insurance will provide sufficient coverage against any product liability claims. If we attempt to obtain additional insurance in the future, we may not be able to do so on acceptable terms, and any additional insurance we do obtain may not provide adequate coverage against any asserted claims. In addition, regardless of merit or eventual outcome, product liability claims may result in: - diversion of management time and attention; - expenditure of large amounts of cash on legal fees, expenses and payment of damages; - decreased demand for our products and services; and - injury to our reputation. OUR COMPETITORS IN THE BIOTECHNOLOGY AND PHARMACEUTICAL INDUSTRIES MAY HAVE SUPERIOR PRODUCTS, MANUFACTURING CAPABILITIES OR MARKETING EXPERTISE. The human health care products and services industry is extremely competitive. Our competitors include major pharmaceutical companies and other biotechnology companies. Some of these competitors GCS-28 may have more extensive research and development, marketing and production capabilities. Some competitors also may have greater financial resources than us. Our future success will depend on our ability to develop and market effectively our products against those of our competitors. IF WE ARE UNABLE TO KEEP UP WITH RAPID TECHNOLOGICAL CHANGES, OUR PRODUCTS OR SERVICES MAY BECOME OBSOLETE. The field of biotechnology is characterized by significant and rapid technological change. Although we attempt to expand our technological capabilities in order to remain competitive, research and discoveries by others may make our products or services obsolete. For example, some of our competitors may develop a product to treat Gaucher disease that is more effective or less expensive than Cerezyme-Registered Trademark- enzyme. IF WE FAIL TO OBTAIN ADEQUATE LEVELS OF REIMBURSEMENT FOR OUR PRODUCTS FROM THIRD PARTY PAYERS, THE COMMERCIAL POTENTIAL OF OUR PRODUCTS WILL BE SIGNIFICANTLY LIMITED. A substantial portion of our revenue comes from payments by third party payers, including government health administration authorities and private health insurers. Third party payers may not reimburse patients for newly approved health care products. Increasingly, third party payers are attempting to contain healthcare costs by: - challenging the prices charged for healthcare products and services; - limiting both coverage and the amount of reimbursement for new therapeutic products; - denying or limiting coverage for products that are approved by the FDA, but are considered experimental or investigational by third party payers; and - refusing, in some cases, to provide coverage when an approved product is used for disease indications in a way that has not received FDA marketing approval. Government and other third party payers may not provide adequate insurance coverage or reimbursement for our products and services, which could impair our financial results. In addition, Congress occasionally has discussed implementing broad-based measures to contain healthcare costs. It is possible that Congress will enact legislation specifically designed to contain healthcare costs. We cannot predict the effect that legislation of this type would have on our business. CHANGES IN THE ECONOMIC, POLITICAL, LEGAL AND BUSINESS ENVIRONMENTS IN THE FOREIGN COUNTRIES IN WHICH WE DO BUSINESS COULD CAUSE OUR INTERNATIONAL SALES AND OPERATIONS, WHICH ACCOUNT FOR A SIGNIFICANT PERCENTAGE OF OUR CONSOLIDATED NET SALES, TO BE LIMITED OR DISRUPTED. Our international operations accounted for 41% of our consolidated revenues in 1999 and 1998, and we expect that international sales will continue to account for a significant percentage of our revenues for the foreseeable future. In addition, we have direct investments in a number of subsidiaries outside of the U.S., primarily in Europe and Japan. Our international sales and operations could be limited or disrupted, and the value of our direct investments may be adversely affected, by any of the following: - fluctuations in currency exchange rates; - the imposition of government controls; - less favorable intellectual property or other applicable laws; - the inability to obtain any necessary foreign regulatory approvals of products in a timely manner; - import and export license requirements; - political instability; - trade restrictions; - changes in tariffs; GCS-29 - difficulties in staffing and managing international operations; and - longer payment cycles. A significant portion of our business is conducted in currencies other than the U.S. dollar, which is our reporting currency. We recognize foreign currency gains or losses arising from our operations in the period incurred. As a result, currency fluctuations among the U.S. dollar and the currencies in which we do business have caused foreign currency transaction gains and losses in the past and will likely do so in the future. We cannot predict the effects of exchange rate fluctuations upon our future operating results because of the number of currencies involved, the variability of currency exposures and the potential volatility of currency exchange rates. SEVERAL ANTI-TAKEOVER PROVISIONS MAY DEPRIVE OUR STOCKHOLDERS OF THE OPPORTUNITY TO RECEIVE A PREMIUM FOR THEIR SHARES UPON A CHANGE IN CONTROL. Provisions of Massachusetts law and our charter, by-laws and shareholder rights plan could delay or prevent a change in control of Genzyme or a change in our management. Our tracking stock structure may also deprive our stockholders of the opportunity to receive a premium for their shares upon a change in control because, in order to obtain control of a particular division, an acquiror would have to obtain control of the entire corporation. In addition, our board of directors may, in their sole discretion: - exchange shares of Molecular Oncology Stock, Surgical Products Stock or Tissue Repair Stock for Genzyme General Stock at a 30% premium over the market value of the exchanged shares; and - issue shares of undesignated preferred stock from time to time in one or more series. Either of these board actions could increase the cost of an acquisition of Genzyme and thus discourage a takeover attempt. SUBSEQUENT EVENTS GENZYME TRANSGENICS In February 2000, we recorded a gain of $20.3 million relating to a public offering of 3.5 million common shares by our unconsolidated affiliate, Genzyme Transgenics Corporation ("GTC"). The public offering resulted in net proceeds to GTC of $75.2 million (after the exercise of the underwriters' overallotment option). As a result of the issuance of additional shares by GTC, our ownership interest in GTC decreased from 33% to 28%. ACQUISITION OF BIOMATRIX, INC. AND FORMATION OF GENZYME BIOSURGERY In March 2000, we entered into an agreement to acquire Biomatrix, Inc. Upon the effectiveness of our Registration Statement on Form S-4 and completion of the merger, we will form a new operating division called Genzyme Biosurgery and create a new series of common stock that is intended to reflect its value and track its performance. We refer to this stock as "Biosurgery Stock." In connection with the merger, and upon Genzyme shareholder approval, the assets and liabilities allocated to Genzyme Surgical Products and Genzyme Tissue Repair will be re-allocated to Genzyme Biosurgery and shares of Surgical Products Stock and Tissue Repair Stock will be exchanged for Biosurgery Stock. We will account for the acquisition of Biomatrix as a purchase. Biomatrix stockholders will receive $37.00 in cash, one share of Biosurgery Stock or a combination of cash and stock for each share of Biomatrix common stock they hold. The merger agreement provides that we will pay cash for up to 28.38% of the outstanding shares of Biomatrix common stock that receive merger consideration, or up to approximately $245.0 million. GCS-30 Holders of Surgical Products Stock will receive 0.6060 share of Biosurgery Stock in exchange for each share of Surgical Products Stock they hold and holders of Tissue Repair Stock will receive 0.3352 share of Biosurgery Stock in exchange for each share of Tissue Repair Stock they hold. For more information about the merger and the merger consideration, we encourage you to carefully read our Registration Statement on Form S-4 (File No. 333-34972) filed with the SEC on April 18, 2000 and as amended from time to time. The acquisition is subject to: - approval by Biomatrix's shareholders; - approval by our shareholders, including separate approvals by the holders of shares of Surgical Products Stock and Tissue Repair Stock; and - other customary closing conditions. REGISTRATION STATEMENT In March 2000, we filed a prospectus with the SEC covering the offering of 3,000,000 shares of Molecular Oncology Stock (plus 450,000 shares issuable upon exercise of the underwriters' over-allotment option). The proceeds of the offering were to be used by Genzyme Molecular Oncology to fund research, pre-clinical and clinical development programs, to repay existing indebtedness, and for working capital and general corporate purposes. GCS-31 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 1999 1998 1997 --------- --------- --------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues: Net product sales......................................... $683,482 $613,685 $529,927 Net service sales......................................... 79,448 74,791 67,158 Revenue from research and development contracts: Related parties......................................... 2,012 5,745 8,356 Other................................................... 7,346 15,114 3,400 -------- -------- -------- Total revenues........................................ 772,288 709,335 608,841 Operating costs and expenses: Cost of products sold..................................... 182,337 211,076 206,028 Cost of services sold..................................... 49,444 48,586 47,289 Selling, general and administrative....................... 242,797 215,203 200,476 Research and development (including research and development related to contracts)....................... 150,516 119,005 89,558 Amortization of intangibles............................... 24,674 24,334 17,245 Purchase of in-process research and development........... 5,436 -- 7,000 -------- -------- -------- Total operating costs and expenses.................... 655,204 618,204 567,596 -------- -------- -------- Operating income............................................ 117,084 91,131 41,245 Other income (expenses): Equity in net loss of unconsolidated affiliates........... (42,696) (29,006) (12,258) Gain on affiliate sale of stock........................... 6,683 2,369 -- Gain on sale of investments in equity securities.......... 1,963 3,391 -- Minority interest......................................... 3,674 4,285 -- Gain on sale of product line.............................. 8,018 31,202 -- Charge for impaired investments........................... (5,712) (3,397) -- Other..................................................... 14,527 -- (2,000) Investment income......................................... 36,158 25,055 11,409 Interest expense.......................................... (21,771) (22,593) (12,667) -------- -------- -------- Total other income (expenses)......................... 844 11,306 (15,516) -------- -------- -------- Income before income taxes.................................. 117,928 102,437 25,729 Provision for income taxes.................................. (46,947) (39,870) (12,100) -------- -------- -------- Net income.................................................. $ 70,981 $ 62,567 $ 13,629 ======== ======== ======== Comprehensive income, net of tax: Net income................................................ $ 70,981 $ 62,567 $ 13,629 -------- -------- -------- Other comprehensive income (loss), net of tax: Foreign currency translation adjustments................ (14,883) 7,681 (11,704) -------- -------- -------- Unrealized gains (losses) on securities: Unrealized gains (losses) arising during the period... 24,946 (6,043) 817 Reclassification adjustment for losses included in net income.............................................. 2,092 2,100 -- -------- -------- -------- Unrealized gains (losses) on securities, net........ 27,038 (3,943) 817 -------- -------- -------- Other comprehensive income (loss)......................... 12,155 3,738 (10,887) -------- -------- -------- Comprehensive income...................................... $ 83,136 $ 66,305 $ 2,742 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. GCS-32 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 1999 1998 1997 --------- --------- --------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NET INCOME (LOSS) PER SHARE: ALLOCATED TO GENZYME GENERAL STOCK (REVISED--SEE NOTE A): Genzyme General net income................................ $142,077 $133,052 $ 76,642 Genzyme Surgical Products net loss........................ (27,523) (49,856) (29,740) Tax benefit allocated from Genzyme Molecular Oncology..... 7,812 3,527 2,755 Tax benefit allocated from Genzyme Surgical Products...... 16,128 17,936 10,112 Tax benefit allocated from Genzyme Tissue Repair.......... 10,866 16,394 17,666 -------- -------- -------- Net income allocated to Genzyme General Stock............. $149,360 $121,053 $ 77,435 ======== ======== ======== Net income per share of Genzyme General Stock: Basic................................................... $ 1.80 $ 1.53 $ 1.01 ======== ======== ======== Diluted................................................. $ 1.71 $ 1.48 $ 0.98 ======== ======== ======== Weighted average shares outstanding: Basic................................................... 83,092 79,063 76,531 ======== ======== ======== Diluted................................................. 93,228 85,822 78,925 ======== ======== ======== ALLOCATED TO MOLECULAR ONCOLOGY STOCK (SEE NOTE A): Net loss.................................................. $(28,832) $(19,107) $(19,578) ======== ======== ======== Net loss per share of Molecular Oncology Stock--basic and diluted ................................................ $ (2.25) $ (3.81) $ (4.64) ======== ======== ======== Weighted average shares outstanding....................... 12,826 5,019 3,929 ======== ======== ======== ALLOCATED TO SURGICAL PRODUCTS STOCK (REVISED--SEE NOTE A): Net loss.................................................. $(20,514) ======== Net loss per share of Surgical Products Stock--basic and diluted................................................. $ (1.38) ======== Weighted average shares outstanding....................... 14,835 ======== ALLOCATED TO TISSUE REPAIR STOCK: Net loss.................................................. $(30,040) $(40,386) $(45,984) ======== ======== ======== Net loss per share of Tissue Repair Stock--basic and diluted................................................. $ (1.26) $ (1.99) $ (3.07) ======== ======== ======== Weighted average shares outstanding....................... 23,807 20,277 14,976 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. GCS-33 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ----------------------- 1999 1998 ---------- ---------- (AMOUNTS IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents................................. $ 130,156 $ 118,612 Short-term investments.................................... 255,846 175,453 Accounts receivable, net.................................. 166,803 163,042 Inventories............................................... 117,269 109,833 Prepaid expenses and other current assets................. 18,918 31,467 Deferred tax assets--current.............................. 41,195 39,725 ---------- ---------- Total current assets.................................... 730,187 638,132 Property, plant and equipment, net........................ 383,181 382,619 Long-term investments..................................... 266,988 281,664 Intangibles, net.......................................... 253,153 279,516 Deferred tax assets--noncurrent........................... 18,631 24,277 Investments in equity securities.......................... 97,859 51,977 Other noncurrent assets................................... 37,283 30,669 ---------- ---------- Total assets............................................ $1,787,282 $1,688,854 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 27,853 $ 27,604 Accrued expenses.......................................... 73,359 72,370 Payable to joint venture.................................. -- 1,181 Income taxes payable...................................... 27,946 16,543 Deferred revenue.......................................... 3,700 2,731 Current portion of long-term debt and capital lease obligations............................................. 5,080 100,568 ---------- ---------- Total current liabilities............................... 137,938 220,997 Noncurrent liabilities: Long-term debt.............................................. 18,000 3,087 Convertible notes and debentures............................ 272,622 284,138 Other noncurrent liabilities................................ 2,330 8,078 ---------- ---------- Total liabilities....................................... 430,890 516,300 Commitments and contingencies (See Notes) Stockholders' equity: Preferred Stock, $0.01 par value, 10,000,000 shares authorized; no shares issued and outstanding............ -- -- Preferred Stock, Series A Junior Participating, $0.01 par value, 2,000,000 shares authorized; no shares issued and outstanding................................. -- -- Preferred Stock, Series B Junior Participating, $0.01 par value, 400,000 shares authorized; no shares issued and outstanding........................................ -- -- Preferred Stock, Series C Junior Participating, $0.01 par value, 400,000 shares authorized; no shares issued and outstanding........................................ -- -- Preferred Stock, Series D Junior Participating, $0.01 par value, 600,000 shares authorized; no shares issued and outstanding........................................ -- -- Common Stock $0.01 par value, 390,000,000 shares authorized; 141,000,483 issued and outstanding: Genzyme General Stock, $0.01 par value, 200,000,000 shares authorized; 84,351,662 shares issued and 84,245,304 shares outstanding at December 31, 1999 and 81,517,446 shares issued and 81,411,088 shares outstanding at December 31, 1998....................... 842 814 Molecular Oncology Stock, $0.01 par value, 40,000,000 shares authorized; 13,421,018 shares issued and outstanding at December 31, 1999 and 12,648,295 shares issued and outstanding at December 31, 1998............ 134 126 Surgical Products Stock, $0.01 par value, 60,000,000 shares authorized; 14,835,161 shares issued and outstanding at December 31,1999........................ 148 -- Tissue Repair Stock, $0.01 par value, 40,000,000 shares authorized; 28,503,728 shares issued and 28,498,729 shares outstanding at December 31, 1999 and 20,925,809 shares issued and 20,920,810 shares outstanding at December 31, 1998...................................... 285 209 Treasury common stock, at cost: Genzyme General Stock, 106,358 shares at both December 31, 1999 and 1998........................................... (901) (901) Additional paid-in capital--Genzyme General Stock........... 635,996 958,827 Additional paid-in capital--Molecular Oncology Stock........ 67,672 63,427 Additional paid-in capital--Surgical Products Stock......... 376,123 -- Additional paid-in capital--Tissue Repair Stock............. 217,103 174,198 Retained earnings (accumulated deficit)..................... 57,202 (13,779) Accumulated other comprehensive income (loss)............... 1,788 (10,367) ---------- ---------- Total stockholders' equity.................................. 1,356,392 1,172,554 ---------- ---------- Total liabilities and stockholders' equity.................. $1,787,282 $1,688,854 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. GCS-34 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 1999 1998 1997 --------- --------- --------- (AMOUNTS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income.................................................. $ 70,981 $ 62,567 $ 13,629 Reconciliation of net income to net cash provided by operating activities: Depreciation and amortization............................. 70,651 58,869 50,964 Loss on disposal of fixed assets.......................... 1,008 108 1,258 Non-cash compensation expense............................. 68 8,740 3,160 Equity in loss of unconsolidated affiliates............... 42,696 29,006 12,258 Accrued interest/amortization of marketable securities.... (493) (6,923) (900) Provisions for bad debts and inventory.................... 18,599 11,990 14,580 Accretion of debt conversion feature...................... -- 3,025 2,028 Gain on affiliate sale of stock........................... (6,683) (2,369) -- Minority interest in net loss of subsidiary............... (3,674) (4,285) -- Gain on sale of product line.............................. (8,018) (31,202) -- Gain on sale of investments in equity securities.......... (1,963) (3,391) -- Charge for impaired investments........................... 5,712 3,397 -- Deferred income tax benefit............................... (6,061) (5,669) (5,061) Charge for in-process research and development............ 5,436 -- 7,000 Other..................................................... 626 26 528 Increase (decrease) in cash from working capital: Accounts receivable..................................... (18,682) (46,215) (11,076) Inventories............................................. (15,258) 27,907 (29,299) Prepaid expenses and other assets....................... 12,215 (11,987) (10,062) Accounts payable, accrued expenses, income taxes payable and deferred revenue.................................. 36,851 17,509 (9,333) --------- --------- --------- Net cash provided by operating activities............. 204,011 111,103 39,674 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments.................................... (509,177) (441,487) (147,897) Sales and maturities of investments......................... 438,530 136,605 81,185 Proceeds from sale of investments in equity securities...... 11,090 9,564 -- Acquisitions of property, plant and equipment............... (57,724) (39,467) (29,309) Sale of property, plant and equipment....................... 188 1,262 852 Proceeds from sale of product line.......................... 5,000 24,760 -- Acquisitions, net of acquired cash and assumed liabilities............................................... (6,500) (9,949) 9 Purchase of technology rights............................... (11,400) (15,100) -- Purchase of investments in equity securities................ (17,700) (25,783) (13,993) Investments in unconsolidated affiliates.................... (46,621) (21,974) -- Loans to affiliates......................................... -- (1,000) (4,601) Proceeds from notes receivable.............................. 8,360 -- -- Repayment of loans by affiliates............................ -- 3,019 -- Final distribution from joint venture....................... 881 -- -- Other....................................................... 2,859 (5,592) (1,419) --------- --------- --------- Net cash used in investing activities................. (182,214) (385,142) (115,173)
The accompanying notes are an integral part of these consolidated financial statements. GCS-35 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- (AMOUNTS IN THOUSANDS) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock...................... 59,986 76,860 156,036 Proceeds from issuance of debt.............................. 5,000 250,000 32,127 Payments of debt............................................ (85,081) (38,833) (101,115) Bank overdraft.............................................. 9,625 -- -- Other....................................................... 2,289 1,884 -- -------- -------- -------- Net cash (used in) provided by financing activities... (8,181) 289,911 87,048 Effect of exchange rate changes on cash..................... (2,072) 334 (2,275) -------- -------- -------- Increase in cash and cash equivalents....................... 11,544 16,206 9,274 Cash and cash equivalents at beginning of period............ 118,612 102,406 93,132 -------- -------- -------- Cash and cash equivalents at end of period.................. $130,156 $118,612 $102,406 ======== ======== ======== Supplemental disclosures of cash flows: Cash paid during the year for: Interest.................................................. $ 20,151 $ 17,385 $ 9,811 Income taxes.............................................. $ 30,992 $ 24,463 $ 18,887 Supplemental disclosures of non-cash transactions: Other gains and charges--Note B. Dispositions of assets--Note C. Acquisitions--Note D. Investment in unconsolidated affiliate--Note I. Conversion of 5% convertible subordinated note--Note K. Conversion of 6% convertible subordinated debentures into 5% convertible subordinated debentures--Note K. Warrant exercise--Note L. Distributions of Genzyme Molecular Oncology, Genzyme Surgical Products and Genzyme Tissue Repair designated shares--Note L.
The accompanying notes are an integral part of these consolidated financial statements. GCS-36 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SHARES IN THOUSANDS DOLLARS IN THOUSANDS ------------------------------ ------------------------------ 1999 1998 1997 1999 1998 1997 -------- -------- -------- -------- -------- -------- COMMON STOCKS: GENZYME GENERAL STOCK: Balance at beginning of year........................ 81,395 77,693 75,537 $ 814 $ 777 $ 755 Issuance of Genzyme General Stock under stock plans............................................. 2,850 3,695 2,117 28 37 22 Exercise of warrants................................ -- 7 39 -- -- -- ------ ------ ------ ----- ----- ----- Balance at end of year.............................. 84,245 81,395 77,693 $ 842 $ 814 $ 777 ====== ====== ====== ===== ===== ===== MOLECULAR ONCOLOGY STOCK: Balance at beginning of year........................ 12,648 3,929 -- $ 126 $ 39 $ -- Issuance of Molecular Oncology Stock under stock plans............................................. 129 1 -- 2 -- -- Exercise of warrants................................ -- 1 -- -- -- -- Issuance of Genzyme Molecular Oncology designated shares............................................ 27 8,717 -- -- 87 -- Issuance of Molecular Oncology Stock in connection with the purchase of joint venture interest....... 617 -- -- 6 -- -- Issuance of Molecular Oncology Stock in connection with the acquisition of PharmaGenics.............. -- -- 3,929 -- -- 39 ------ ------ ------ ----- ----- ----- Balance at end of year.............................. 13,421 12,648 3,929 $ 134 $ 126 $ 39 ====== ====== ====== ===== ===== ===== SURGICAL PRODUCTS STOCK: Balance at beginning of year........................ -- -- -- $ -- $ -- $ -- Initial distribution of Genzyme Surgical Products designated shares................................. 14,792 -- -- 148 -- -- Issuance of Surgical Products Stock under stock plans............................................. 43 -- -- -- -- ------ ------ ------ ----- ----- ----- Balance at end of year.............................. 14,835 -- -- $ 148 $ -- $ -- ====== ====== ====== ===== ===== ===== TISSUE REPAIR STOCK: Balance at beginning of year........................ 20,921 19,941 13,162 $ 209 $ 199 $ 132 Issuance of Tissue Repair Stock under stock plans... 320 756 487 3 8 4 Issuance of Genzyme Tissue Repair designated shares............................................ -- 2,292 -- -- 23 Shares issued in public offering.................... -- -- 4,000 -- -- 40 Issuance of Tissue Repair Stock in connection with conversion of 6% convertible note................. 7,258 224 -- 73 2 -- ------ ------ ------ ----- ----- ----- Balance at end of year.............................. 28,499 20,921 19,941 $ 285 $ 209 $ 199 ====== ====== ====== ===== ===== ===== TREASURY COMMON STOCK (AT COST): GENZYME GENERAL STOCK: Balance at beginning of year........................ (106) (106) (106) $(901) $(901) $(890) Purchases........................................... -- -- -- -- -- (11) ------ ------ ------ ----- ----- ----- Balance at end of year.............................. (106) (106) (106) $(901) $(901) $(901) ====== ====== ====== ===== ===== =====
The accompanying notes are an integral part of these consolidated financial statements. GCS-37 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
1999 1998 1997 -------- -------- -------- (AMOUNTS IN THOUSANDS) ADDITIONAL PAID-IN CAPITAL: GENZYME GENERAL STOCK: Balance at beginning of year............................ $958,827 $895,347 $871,020 Issuance of Genzyme General Stock under stock plans..... 59,587 74,323 35,888 Exercise of warrants.................................... -- 289 855 Allocation to Genzyme Tissue Repair for Genzyme Tissue Repair designated shares.............................. (4,937) -- (14,892) Tax benefit from disqualified dispositions.............. 24,238 18,561 4,127 Allocation of cash to Genzyme Molecular Oncology for Genzyme Molecular Oncology designated shares.......... -- (5,000) (2,886) Allocation to Genzyme Surgical Products................. (376,271) -- -- Exchange of 6% debentures convertible into shares of Molecular Oncology Stock for 5% debentures convertible into shares of Genzyme General Stock.................. -- (19,802) -- Conversion of note receivable from Genzyme Molecular Oncology into Genzyme Molecular Oncology designated shares................................................ -- (2,696) -- Transfer of interest in joint venture from Genzyme Tissue Repair......................................... (25,000) -- -- Loss on purchase of facility from Genzyme Tissue Repair................................................ -- (711) -- Payment to Genzyme Tissue Repair for research program... (100) (250) -- Stock compensation expense.............................. 58 48 1,218 Purchase of treasury stock.............................. -- -- 10 Other................................................... (406) (1,282) 7 -------- -------- -------- Balance at end of year.................................. $635,996 $958,827 $895,347 ======== ======== ======== MOLECULAR ONCOLOGY STOCK: Balance at beginning of year............................ $ 63,427 $ 34,517 $ -- Issuance of Molecular Oncology Stock under stock plans................................................. 306 7 -- Issuance of Molecular Oncology Stock in connection with declared dividend of Genzyme Molecular Oncology designated shares..................................... -- (87) -- Conversion of note payable to Genzyme General into Genzyme Molecular Oncology designated shares.......... -- 2,696 -- Issuance of Molecular Oncology Stock in connection with the acquisition of PharmaGenics....................... -- -- 27,330 Sale of warrants........................................ -- -- 724 Value of debt conversion feature........................ -- -- 3,529 Exchange of 6% debentures convertible into shares of Molecular Oncology Stock for 5% debentures convertible into shares of Genzyme General Stock.................. -- 19,802 -- Allocation from Genzyme General for Genzyme Molecular Oncology designated shares............................ -- 5,000 2,886 Shares issued upon purchase of joint venture interest... 3,929 -- -- Stock compensation expense (unearned compensation), net................................................... 10 113 (116) Other................................................... -- 1,379 164 -------- -------- -------- Balance at end of year.................................. $ 67,672 $ 63,427 $ 34,517 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. GCS-38 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
1999 1998 1997 -------- -------- -------- (AMOUNTS IN THOUSANDS) SURGICAL PRODUCTS STOCK: Balance at beginning of year.............................. $ -- $ -- $ -- Allocation from Genzyme General........................... 376,271 -- -- Initial distribution of Genzyme Surgical Products designated shares....................................... (148) -- -- -------- -------- -------- Balance at end of year.................................... $376,123 $ -- $ -- ======== ======== ======== TISSUE REPAIR STOCK: Balance at beginning of year.............................. $174,198 $170,430 $122,385 Issuance of Tissue Repair Stock under stock plans......... 458 2,101 2,434 Issuance of Genzyme Tissue Repair designated shares....... -- -- (23) Issuance of Tissue Repair Stock in public offering........ -- -- 28,997 Issuance of Tissue Repair Stock in connection with conversion of 6% convertible note....................... 12,410 598 -- Value of debt conversion feature.......................... -- -- 1,524 Gain on transfer of interest in joint venture to Genzyme General................................................. 25,000 -- -- Gain on transfer of facility.............................. -- 711 -- Payment from Genzyme General for research program......... 100 250 -- Allocation from Genzyme General for Genzyme Tissue Repair designated shares....................................... 4,937 -- 14,892 Stock compensation expense (unearned compensation), net... -- 108 221 -------- -------- -------- Balance at end of year.................................... $217,103 $174,198 $170,430 ======== ======== ======== RETAINED EARNINGS (ACCUMULATED DEFICIT): Balance at beginning of year.............................. $(13,779) $(76,346) $(89,975) Net income................................................ 70,981 62,567 13,629 -------- -------- -------- Balance at end of year.................................... $ 57,202 $(13,779) $(76,346) ======== ======== ======== ACCUMULATED OTHER COMPREHENSIVE INCOME, NET OF TAX: Balance at beginning of year.............................. $(10,367) $(12,005) $ (1,118) Foreign currency translation adjustments.................. (14,883) 7,681 (11,704) Unrealized gains (losses) on investments.................. 27,038 (6,043) 817 -------- -------- -------- Accumulated other comprehensive income (loss)............. $ 1,788 $(10,367) $(12,005) ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. GCS-39 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS We are a biotechnology company that develops innovative products and services for significant unmet medical needs. We have four operating divisions: - Genzyme General, which develops and markets: - therapeutic products, with an expanding focus on products to treat patients suffering from lysosomal storage disorders and other specialty therapeutics; - diagnostic products, with a focus on IN VITRO diagnostics; and - other products and services, such as genetic testing and lipids and peptides for drug delivery. - Genzyme Molecular Oncology, which is developing cancer products, with a focus on therapeutic vaccines and angiogenesis inhibitors; - Genzyme Surgical Products, which develops, manufactures and markets surgical products for cardiovascular surgery and general surgery; and - Genzyme Tissue Repair, which develops and markets biological products for orthopedic injuries, such as cartilage damage, and severe burns. We currently have four designated series of common stock designed to reflect the value and track the performance of one of our divisions. We refer to our series of common stock as follows: - Genzyme General Division Common Stock = "Genzyme General Stock;" - Genzyme Molecular Oncology Division Common Stock = "Molecular Oncology Stock;" - Genzyme Surgical Products Division Common Stock = "Surgical Products Stock;" and - Genzyme Tissue Repair Division Common Stock = "Tissue Repair Stock." In June 1999, we created the Genzyme Surgical Products division. The business of Genzyme Surgical Products previously operated as a business unit of Genzyme General. Upon the creation of Genzyme Surgical Products, we transferred $150.0 million in cash, cash equivalents and investments, and certain other assets, from Genzyme General to Genzyme Surgical Products. In exchange, 14.8 million shares of Surgical Products Stock were distributed as a dividend to holders of Genzyme General Stock. BASIS OF PRESENTATION Our consolidated financial statements for each period include the balance sheets, results of operations and cash flows of each of our divisions and corporate operations taken as a whole. We eliminate all significant intracompany items and transactions in consolidation. We have reclassified certain 1998 and 1997 data to conform with our 1999 presentation. TRACKING STOCKS We have four series of common stock--Genzyme General Stock, Molecular Oncology Stock, Surgical Products Stock and Tissue Repair Stock--which we refer to 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 operations and assets of our entire company. The GCS-40 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) chief mechanisms intended to cause each tracking stock to "track" the financial performance of each division are provisions in our charter governing dividends and distributions. Under these provisions, our charter: - factors 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; and - requires us to exchange, redeem or distribute a dividend to the holders of Molecular Oncology Stock, Surgical Products Stock, or Tissue Repair Stock if all or substantially all of the assets allocated to those corresponding divisions are sold to a third party (a dividend or redemption payment must equal in value the net after-tax proceeds from the sale; an exchange must be for Genzyme General Stock at a 10% premium to the exchanged stock's average market price following the announcement of the sale). To determine earnings per share, we allocate Genzyme's earnings to each series of our common stock based on the earnings attributable to that series of stock. The earnings attributable to each series of stock is defined in our charter as the net income or loss of the corresponding division determined in accordance with generally accepted accounting principles and as adjusted for tax benefits allocated to or from the division in accordance with our management and accounting policies. Our charter also requires that all income and expenses of Genzyme be allocated among the divisions in a reasonable and consistent manner. However, subject to its fiduciary duties, our board of directors can, at its discretion, change the methods of allocating earnings to each series of common stock. We intend to allocate earnings using our current methods for the foreseeable future. Because the earnings allocated to each series of stock are based on the income or losses attributable to each corresponding division, we include financial statements and management's discussion and analysis of Genzyme Corporation and of each division to aid investors in evaluating Genzyme's performance and the performance of each of its divisions. While each tracking stock is designed to reflect each division's performance, it is common stock of Genzyme Corporation and not of a division; each division is not a company or legal entity, and therefore does not and cannot issue stock. Consequently, holders of each tracking stock have no specific rights to assets allocated to each division. Genzyme Corporation continues to hold title to all of the assets allocated to the corresponding division and is responsible for all of its liabilities, regardless of what it deems 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. ALLOCATION POLICY Our charter sets forth what operations and assets are initially allocated to each division and states that going forward the division will also include all business, products or programs, developed by or acquired for the division, as determined by our board of directors. We then manage and account for transactions between our divisions and with third parties, and any resulting re-allocations of assets and liabilities, by applying consistently across divisions a detailed set of policies established by our board of directors. We GCS-41 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) publicly disclose our divisional management and accounting policies, which appear in Exhibit 99.1 to this Annual Report on Form 10-K. Our charter requires that all assets and liabilities of Genzyme be allocated among the divisions. Our board of directors, however, retains considerable discretion in determining the types, magnitudes and extent of allocations to each series of common stock without shareholder approval. Our allocations to our divisions are based on one of the following methodologies: - Specific identification--assets that are dedicated to the production of goods of a division or which solely benefit a division are allocated to that division. Liabilities incurred as a result of the performance of services for the benefit of a division or in connection with the expenses incurred which directly benefit a division are allocated to the division. Such specifically identified assets and liabilities include cash, investments, accounts receivable, inventories, property and equipment, intangible assets, accounts payable, accrued expenses and deferred revenue. Revenues from the licensing of a division's products or services to third parties and the related costs are allocated to a division; - Actual usage--expenses are charged to the division for whose benefit such expenses are incurred. Research and development, sales and marketing and direct general and administrative services are charged to the divisions for which the service is performed on a cost basis. Such charges are generally based on direct labor hours; - Proportionate usage--costs incurred which benefit more than one division are allocated based on management's estimate of the proportionate benefit each division receives. Such costs include facilities, legal, finance, human resources, executive and investor relations; or - Board directed--programs and products, both internally developed and acquired, are allocated to divisions by the board of directors. The board also allocates long-term debt and strategic investments. PRINCIPLES OF CONSOLIDATION We use the equity method to account for investments in entities in which we have a substantial ownership interest (20% to 50%), or in which we participate in policy decisions. Our consolidated net income includes our share of the earnings of these entities. We report at fair value investments in entities in which our ownership interest is less than 20%. DIVIDEND POLICY We have never paid a cash dividend on shares of our stock. We currently intend to retain our earnings to finance future growth and do not anticipate paying any cash dividends on our stock in the foreseeable future. USE OF ESTIMATES Under generally accepted accounting principles, we are required to make certain estimates and assumptions that affect reported amounts of assets, liabilities, revenues, expenses, and disclosure of contingent assets and liabilities in our financial statements. Our actual results could differ from these estimates. GCS-42 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FINANCIAL INSTRUMENTS A number of financial instruments subject us to significant credit risk, including cash and cash equivalents, current and non-current investments, and accounts receivable. We generally invest our cash in investment-grade securities to mitigate risk. CASH AND CASH EQUIVALENTS We value our cash and cash equivalents at cost plus accrued interest, which we believe approximates their market value. Our cash equivalents consist principally of money market funds and municipal notes with initial maturities of three months or less. INVESTMENTS We classify our investments with remaining maturities of twelve months or less as short-term investments. We classify our investments with remaining maturities of greater than twelve months as long-term investments. We classify our investments in debt securities as either held-to-maturity or available-for-sale based on facts and circumstances present at the time we purchase the securities. We report available-for-sale investments at fair value as of each balance sheet date and include any unrealized holding gains and losses (the adjustment to fair value) in stockholders' equity. If any adjustment to fair value reflects a decline in the value of the investment, we consider all available evidence to evaluate the extent to which the decline is "other than temporary" and mark the investment to market through a charge to our statement of operations. As of each balance sheet date presented, we classified all of our investments in debt securities as available-for-sale. We classify all of our equity investments as available-for-sale. If our investment is in a publicly traded security, we calculate fair value based on market quotations. Investments in equity securities for which fair value is not readily determinable are carried at cost. INVENTORIES We value inventories at cost or, if lower, fair value. We determine cost using the first-in, first-out method. We analyze our inventory levels quarterly and establish reserves against: - inventory that has become obsolete; - inventory that has a cost basis in excess of its expected net realizable value; and - inventory in excess of expected requirements. We utilize inventory reserves in accordance with the guidance contained in the Securities and Exchange Commission's Staff Accounting Bulletin No. 100. Accordingly, inventory reserves that are established to write down inventory to net realizable value are released as the related inventory is sold. Reserves for excess inventory quantities are released as the related inventory is disposed of or, if there is an unanticipated increase in the demand for the product, when the inventory is sold. Inventory with a life in excess of its shelf life is disposed of and the related costs are written off. GCS-43 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY, PLANT AND EQUIPMENT We record property, plant and equipment at cost. When we dispose of these assets, we remove the related cost and accumulated depreciation and amortization from the related accounts on our balance sheet and include any resulting gain or loss in our statement of operations. We generally compute depreciation using the straight-line method over the estimated useful lives of the assets. We compute useful lives as follows: - plant and equipment--three to ten years - furniture and fixtures--five to seven years - buildings--20 to 40 years We depreciate certain specialized manufacturing equipment and facilities allocated to Genzyme General over their remaining useful lives using the units-of-production method. We evaluate the remaining life and recoverability of this equipment periodically based on the appropriate facts and circumstances. We amortize leasehold improvements over their useful life or, if shorter, the term of the applicable lease. For products we expect to be commercialized, we capitalize, to construction-in-progress, the costs we incur in validating the manufacturing process. We begin this capitalization when we consider the product to have demonstrated technological feasibility and end this capitalization when the asset is substantially complete and ready for its intended use. These capitalized costs include incremental labor and direct material, and incremental fixed overhead and interest. We generally depreciate these costs using the units-of-production method. INTANGIBLES Our intangible assets consist of: - goodwill; - covenants not to compete; - customer lists; and - patents, trademarks, trade names and other technology rights. We amortize intangible assets using the straight-line method over useful lives of three to 40 years. We evaluate the recoverability of our intangible and other long-lived assets when the facts and circumstances suggest that these assets may be impaired. When we conduct such an evaluation we consider several factors including operating results, business plans, economic projections, strategic plans and market emphasis. Our evaluations also compare expected cumulative, undiscounted operating incomes or cash flows of these assets with the net book values of the related intangible assets. We charge unrealizable intangible and long-lived asset values to operations if our evaluations indicate that the value of these assets are impaired. GCS-44 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) TRANSLATION OF FOREIGN CURRENCIES We translate the financial statements of our foreign subsidiaries from local currency into U.S. dollars using: - the current exchange rate at each balance sheet date for assets and liabilities; and - the average exchange rate prevailing during each period for revenues and expenses. We consider the local currency for all of our foreign subsidiaries to be the functional currency for that subsidiary. As a result, we included translation adjustments for these subsidiaries in stockholders' equity. We also record as a charge or credit to stockholders' equity exchange gains and losses on intercompany balances that are of a long-term investment nature. Our stockholders' equity includes cumulative foreign currency adjustments of $19.7 million at December 31, 1999 and $4.8 million at December 31, 1998. Our gains and losses on all other foreign currency transactions are included in our results of operations. We recorded a net gain of $0.1 million in 1999, a net gain of $0.3 million in 1998 and a net loss of $0.3 million in 1997. FOREIGN CURRENCY HEDGING We periodically enter into forward contracts to reduce our foreign currency exchange risk. On each balance sheet date, we revalue these contracts using the exchange rates that are then in effect. We include in net income all gains and losses resulting from these revaluations, although these amounts are not material to our financial statements. We had $6.0 million outstanding in foreign currency forward contracts at December 31, 1999. These forward contracts, which were denominated in Euros, had a fair value of $0.7 million. We allocated these contracts to Genzyme General. We had no forward contracts at December 31, 1998. INTEREST RATE HEDGE AGREEMENTS We use interest rate hedge agreements to mitigate the interest rate risks and costs that are inherent in our debt portfolio. We enter into these agreements primarily to change the fixed/variable interest rate mix of the portfolio, which reduces our exposure to movements in interest rates. We do not hold or issue derivative financial instruments for trading purposes. We recognize in income any differential that we may receive or pay under contracts designated as hedges. This recognition occurs over the life of the applicable contract as an adjustment to interest expense. We estimate the fair value of interest rate hedge agreements based on the amount it would cost to terminate the agreements. REVENUE RECOGNITION We recognize revenue from product sales when we ship the product and title has passed, net of any applicable third party contractual allowances and rebates. We recognize revenue from service sales when we have finished providing the service or when we have achieved an applicable milestone. We recognize revenue from research and development contracts over the term of the applicable contract and as we incur costs related to that contract. Up-front license fees and milestone payments are recognized as revenue only if there are no remaining performance obligations and the fees are non-refundable. GCS-45 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) We receive royalties related to the manufacture, sale or use of our products or technologies under license arrangements with third parties. For those arrangements where royalties are reasonably estimable, we recognize revenue based on estimates of royalties earned during the applicable period and adjust for differences between the estimated and actual royalties in the following quarter. Historically, these adjustments have not been material. For those arrangements where royalties are not reasonably estimable, we recognize revenue upon receipt of licensee royalty statements. RESEARCH AND DEVELOPMENT We expense research and development costs in the period incurred. We also expense the cost of purchased technology in the period of purchase if we believe that the technology has not demonstrated technological feasibility and that it does not have an alternative future use. ISSUANCE OF STOCK BY A SUBSIDIARY OR AN AFFILIATE We include gains on the issuance of stock by our subsidiaries and affiliates in net income unless that subsidiary or affiliate is a research and development, start-up or development stage company or an entity whose viability as a going concern is under consideration. In those situations, we account for the change in our equity ownership of that subsidiary or affiliate as an equity transaction. INCOME TAXES We use the asset and liability method of accounting for deferred income taxes. Our provision for income taxes includes income taxes currently payable and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities. We file a consolidated return and allocate income taxes to each division based upon the financial statement income, taxable income, credits and other amounts properly allocable to each division under generally accepted accounting principles as if it were a separate taxpayer. We assess the realizability of our deferred tax assets at the division level. As a result, our consolidated tax provision may not equal the sum of the divisions' tax provisions. We have not provided for possible U.S. taxes on the undistributed earnings of foreign subsidiaries. We do not believe it is practicable to determine the tax liability associated with the repatriation of our foreign earnings because it is our policy to indefinitely reinvest these earnings in non-U.S. operations. At December 31, 1999, these undistributed foreign earnings totaled approximately $6.0 million. NET INCOME (LOSS) PER SHARE We calculate earnings per share for each series of stock using the two-class method. To calculate basic earnings per share for each series of stock, we divide the earnings allocated to each series of stock by the weighted average number of outstanding shares of that series of stock during the applicable period. When we calculate diluted earnings per share, we also include in the denominator all potentially dilutive securities outstanding during the applicable period. We allocate Genzyme's earnings to each series of our common stock based on the earnings attributable to that series of stock. The earnings attributable to Genzyme General Stock, as defined in our charter, is equal to the net income or loss of Genzyme General determined in accordance with generally accepted accounting principles and as adjusted for tax benefits allocated to or from Genzyme General in accordance with our management and accounting policies. GCS-46 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Earnings attributable to Molecular Oncology Stock, Surgical Products Stock and Tissue Repair 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 can not 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:
YEAR ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- ---- (AMOUNTS IN THOUSANDS) Tax benefits allocated from: Genzyme Molecular Oncology....................... $ 7,812 $ 3,527 $ 2,755 Genzyme Surgical Products........................ 16,128 17,936 10,112 Genzyme Tissue Repair............................ 10,866 16,394 17,666 ------- ------- ------- Total............................................ $34,806 $37,857 $30,533 ======= ======= =======
In future periods, Genzyme Molecular Oncology, Genzyme Surgical Products or Genzyme Tissue Repair may recognize deferred tax assets in the calculation of their respective tax provisions determined on a separate division basis in accordance with generally accepted accounting principles. However, to the extent the benefit of those deferred tax assets has been previously allocated to Genzyme General in accordance with the management and accounting policies, such benefit will be reflected as a reduction of net income to determine net income attributable to Molecular Oncology Stock, Surgical Products Stock or Tissue Repair Stock. As of December 31, 1999, the total tax benefits previously allocated to Genzyme General were (in thousands): Genzyme Molecular Oncology.................................. $17,048 Genzyme Surgical Products................................... 58,106 Genzyme Tissue Repair....................................... 82,590
REVISION We had previously reported income (loss) allocated to Genzyme General Stock and Surgical Products Stock, and earnings per share of Genzyme General Stock, as adjusted to retroactively reflect the changes in earnings allocations resulting from the June 1999 creation and distribution of Surgical Products Stock. The allocation of Genzyme's historical earnings has been revised to reflect an allocation of Genzyme's earnings to each series of common stock outstanding in periods prior to June 1999 and to each series of common stock, including Surgical Products Stock, thereafter. The impact of these revisions for the years ended December 31, 1999, 1998 and 1997 are as follows: GCS-47 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 1999 1998 1997 --------- --------- --------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) GENZYME GENERAL: PREVIOUSLY REPORTED (PRO FORMA INFORMATION PREVIOUSLY REPORTED AS HISTORICAL): Net income allocated to Genzyme General Stock........... $176,883 $170,909 $107,175 ======== ======== ======== Net income per share of Genzyme General Stock: Basic................................................. $ 2.13 $ 2.16 $ 1.40 ======== ======== ======== Diluted............................................... $ 2.00 $ 2.06 $ 1.36 ======== ======== ======== AS REVISED: Net income allocated to Genzyme General Stock........... $149,360 $121,053 $ 77,435 ======== ======== ======== Net income per share of Genzyme General Stock: Basic................................................. $ 1.80 $ 1.53 $ 1.01 ======== ======== ======== Diluted............................................... $ 1.71 $ 1.48 $ 0.98 ======== ======== ======== GENZYME SURGICAL PRODUCTS: PREVIOUSLY REPORTED (PRO FORMA INFORMATION PREVIOUSLY REPORTED AS HISTORICAL): Net loss allocated to Surgical Products Stock........... $(48,037) $(49,856) $(29,740) ======== ======== ======== AS REVISED: Net loss allocated to Surgical Products Stock........... $(20,514) ======== Net loss per share of Surgical Products Stock--basic and diluted............................................... $ (1.38) ======== Weighted average shares outstanding..................... 14,835 ========
If the shares of Surgical Products Stock initially issued on June 28, 1999 were assumed to be outstanding since January 1, 1997, net income allocated to Genzyme General Stock, net loss allocated to Surgical Products Stock and weighted average shares outstanding would have been as follows:
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 1999 1998 1997 --------- --------- --------- (AMOUNTS IN THOUSANDS) GENZYME GENERAL: Net income allocated to Genzyme General Stock............. $176,883 $170,909 $107,175 Weighted average shares outstanding: Basic................................................... 83,092 79,063 76,531 Diluted................................................. 93,228 85,822 78,925 GENZYME SURGICAL PRODUCTS: Net loss allocated to Surgical Products Stock............. $(48,037) $(49,856) $(29,740) Weighted average shares outstanding--basic and diluted.... 14,800 14,800 14,800
GCS-48 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) GENZYME GENERAL STOCK (REVISED): The following table sets forth our computation of basic and diluted earnings per share of Genzyme General Stock:
1999 1998 1997 --------- --------- --------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Genzyme General net income............................ $142,077 $133,052 $ 76,642 Genzyme Surgical Products net loss.................... (27,523) (49,856) (29,740) Tax benefit allocated from Genzyme Molecular Oncology............................................ 7,812 3,527 2,755 Tax benefit allocated from Genzyme Surgical Products............................................ 16,128 17,936 10,112 Tax benefit allocated from Genzyme Tissue Repair...... 10,866 16,394 17,666 -------- -------- -------- Net income allocated to Genzyme General Stock--basic........................................ 149,360 121,053 77,435 Effect of dilutive securities (net of tax): 5 1/4% convertible subordinated notes(1): Interest expense.................................. 8,375 4,911 -- Amortization of purchasers' discount and offering costs(2)........................................ 597 348 -- 5% convertible subordinated debentures(3): Interest expense.................................. 676 258 -- Amortization of debt offering costs(4)............ 113 434 -- -------- -------- -------- Net income allocated to Genzyme General Stock--diluted...................................... $159,121 $127,004 $ 77,435 ======== ======== ======== Shares used in net income per common share--basic..... 83,092 79,063 76,531 Effect of dilutive securities: Employee and director stock options............... 3,173 2,661 2,387 Warrants.......................................... 20 10 7 5 1/4% convertible subordinated notes(1).......... 6,313 3,874 -- 5% convertible subordinated debentures(3)......... 630 214 -- -------- -------- -------- Dilutive potential common shares(5)................. 10,136 6,759 2,394 -------- -------- -------- Shares used in net income per common share--diluted(5)................................... 93,228 85,822 78,925 ======== ======== ======== Net income per share of Genzyme General Stock: Basic............................................... $ 1.80 $ 1.53 $ 1.01 ======== ======== ======== Diluted(5).......................................... $ 1.71 $ 1.48 $ 0.98 ======== ======== ========
- ------------------------ (1) We issued these notes in May 1998. (2) We are amortizing the purchasers' discount and offering costs of approximately $7.0 million over the term of these notes, which mature in June 2005. (3) We issued these debentures in August 1998. (4) We are amortizing the offering costs of approximately $0.9 million over the term of these debentures, which mature in August 2003. GCS-49 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (5) We did not include the securities described in the following table in the computation of Genzyme General's diluted earnings per share for each period because these securities had an exercise price greater than the average market price of Genzyme General Stock:
DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- (AMOUNTS IN THOUSANDS) Shares of Genzyme General Stock issuable for options*....... 2,094 2,827 5,921 Shares of Genzyme General Stock issuable for warrants....... 26 40 40 ----- ----- ----- Total shares with exercise prices greater than the average market price of Genzyme General Stock during the period... 2,120 2,867 5,961 ===== ===== =====
- ------------------------ *These options had exercise price ranges of $48.06--$62.33 in 1999, $28.67--$47.88 in 1998, and $23.59--$38.00 in 1997. MOLECULAR ONCOLOGY STOCK: We created Genzyme Molecular Oncology on June 18, 1997. Prior to this date, the operations of Genzyme Molecular Oncology were included in the results of Genzyme General. Net loss per share of Molecular Oncology Stock for 1997 is calculated using the net loss allocated to Genzyme Molecular Oncology for the period June 18, 1997 through December 31, 1997 and the weighted average shares outstanding during the same period. Loss per share data is not presented for Genzyme Molecular Oncology for the years ended December 31, 1995 and 1996, or for the period from January 1, 1997 to June 17, 1997, as there were no shares of Molecular Oncology Stock outstanding. In accounting for the acquisition of PharmaGenics, Genzyme Molecular Oncology recorded a valuation allowance against a $2.9 million tax asset related to acquired net operating losses due to the application of the Company's policy of accounting for income taxes at the divisional level as if each division were a separate taxpayer. As a result, Genzyme Molecular Oncology recorded an additional $2.9 million of goodwill that was not recorded at the consolidated level. The amortization of this goodwill increases the loss of Genzyme Molecular Oncology and, therefore, the loss allocated to Molecular Oncology Stock. This additional amortization amounted to approximately $1.0 million in 1999 and 1998 and $0.5 million in 1997. 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 GCS-50 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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.
DECEMBER 31, ------------------------------ 1999 1998 1997 (2) -------- -------- -------- (AMOUNTS IN THOUSANDS) Shares of Molecular Oncology Stock issuable for options............................................. 1,809 1,158 826 Warrants to purchase Molecular Oncology Stock......... 10 10 10 Genzyme Molecular Oncology designated shares issuable upon conversion of 5 1/4% convertible subordinated notes allocated to Genzyme General(1)............... 682 682 -- Genzyme Molecular Oncology designated shares(1)....... 1,006 728 6,000 ----- ----- ----- Total shares excluded from the calculation of diluted net loss per share of Molecular Oncology Stock...... 3,507 2,578 6,836 ===== ===== =====
- ------------------------ (1) Genzyme Molecular Oncology designated shares are shares of Molecular Oncology Stock that are not issued and outstanding, but which our board of directors may issue, sell or distribute without allocating the proceeds to Genzyme Molecular Oncology. As of December 31, 1999, there were 1,688,237 Genzyme Molecular Oncology designated shares, assuming that a public offering of Molecular Oncology Stock is not completed prior to June 18, 2000. If such an offering is completed prior to that date, the number of Genzyme Molecular Oncology designated shares reserved for issuance in connection with a draw under an interdivisional financing arrangement in 1998 will decrease based on a formula set forth in our charter. (2) For the period from June 17, 1997 through December 31, 1997. SURGICAL PRODUCTS STOCK (REVISED): We created Genzyme Surgical Products on June 28, 1999. Prior to this date, the operations of Genzyme Surgical Products were included in the operations allocated to Genzyme General and, therefore, in the net income allocated to Genyzme General Stock. Net loss per share data of Surgical Products Stock is calculated using the net loss allocated to Genzyme Surgical Products for the period June 28, 1999 through December 31, 1999 and weighted average shares outstanding during the same period. Loss per share data is not presented for Surgical Products Stock for the years ended December 31, 1998 and 1997 as there were no shares of Surgical Products Stock outstanding. If the shares of Surgical Products Stock initially issued on June 28, 1999 were assumed to be outstanding since January 1, 1997, net loss allocated to Surgical Products Stock and weighted average shares outstanding would have been as follows:
FOR THE YEARS DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- (AMOUNTS IN THOUSANDS) Net loss allocated to Surgical Products Stock........................................ $(48,037) $(49,856) $(29,740) Weighted average shares outstanding--basic and diluted...................................... 14,800 14,800 14,800
GCS-51 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Basic and diluted net loss per share of Surgical Products Stock is the same. We did not include the securities described in the following table in the computation of Surgical Products 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 Surgical Products Stock.
DECEMBER 31, ---------------------- 1999(2) ---------------------- (AMOUNTS IN THOUSANDS) Shares of Surgical Products Stock issuable for options............................................... 2,991 Genzyme Surgical Products designated shares issuable upon conversion of 5 1/4% convertible subordinated notes allocated to Genzyme General(1)................. 1,130 ----- Total shares excluded from the calculation of diluted net loss per share of Surgical Products Stock......... 4,121 =====
- ------------------------ (1) Genzyme Surgical Products designated shares are shares of Surgical Products Stock that are not issued and outstanding, but which our board of directors may issue, sell or distribute without allocating the proceeds to Genzyme Surgical Products. (2) For the period from June 28, 1999 through December 31, 1999. TISSUE REPAIR STOCK: For all periods presented, basic and diluted net loss per share of Tissue Repair Stock is the same. We did not include the securities described in the following table in the computation of Tissue Repair 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 Tissue Repair Stock.
DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- (AMOUNTS IN THOUSANDS) Shares of Tissue Repair Stock issuable for options.......... 4,176 3,398 2,777 Genzyme Tissue Repair designated shares(1).................. 2,238 716 885 Shares of Tissue Repair Stock issuable upon conversion of 5% convertible subordinated note............................. -- 7,810 1,772 ----- ------ ----- Total shares excluded from the calculation of diluted net loss per share of Tissue Repair Stock..................... 6,414 11,924 5,434 ===== ====== =====
- ------------------------ (1) Genzyme Tissue Repair designated shares are shares of Tissue Repair Stock that are not issued and outstanding, but which our board of directors may issue, sell or distribute without allocating the proceeds to Genzyme Tissue Repair. GCS-52 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) COMPREHENSIVE INCOME As of January 1, 1998, we adopted SFAS 130, "Reporting Comprehensive Income," which establishes standards for reporting comprehensive income, which consists of net income and all changes in equity from non-shareholder sources. ACCOUNTING FOR STOCK BASED COMPENSATION As permitted under SFAS 123, we include pro forma net income and pro forma earnings per share information (calculated using the fair value based method) under the heading "Compensation Expense" in Note L., "Stockholders' Equity," to these consolidated financial statements. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133, as amended by SFAS 137, is effective for our fiscal year beginning January 1, 2001. SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that we recognize all derivative instruments as either assets or liabilities on our balance sheets and measure those instruments at fair value. We are currently assessing the effects of adopting SFAS 133 and have not yet made a determination of the impact SFAS 133 will have on our consolidated financial statements. In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101") which summarizes the staff's view in applying generally accepted accounting principles to selected revenue recognition issues. SAB 101 will be effective beginning October 1, 2000. We are currently assessing the impact of SAB 101 on our revenue recognition policy. UNCERTAINTIES We are subject to risks and uncertainties common to companies in the biotechnology industry. These risks and uncertainties may affect our future results, and include: - our ability to successfully complete preclinical and clinical development of our products and services; - our ability to manufacture sufficient amounts of our products for development and commercialization activities; - our ability to obtain timely regulatory approval of our products and services; - our ability to obtain and maintain adequate patent and other proprietary rights protection of our products and services; - the content and timing of decisions made by the FDA and other regulatory agencies regarding our products and services; - the accuracy of our estimates of the size and characteristics of the markets to be addressed by our products and services; - market acceptance of our products and services; GCS-53 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) - our ability to obtain reimbursement for our products and services by third party payers; - our ability to establish and maintain licenses, strategic collaborations and distribution arrangements; - the continued funding of our joint ventures; and - the accuracy of our information regarding the products and resources of our competitors and potential competitors. NOTE B. OTHER GAINS AND CHARGES During the fourth quarter of 1999, we recorded a net gain of $14.4 million upon receipt of a payment associated with the termination of our agreement to acquire Cell Genesys, Inc. We recorded this gain as other income in our statement of operations and allocated it to Genzyme General. During the third quarter of 1998, we recorded a $25.2 million charge to cost of products sold. The components of this charge are: - a $14.8 million charge related to the operations of Genzyme General to write down excess inventory used to make Ceredase-Registered Trademark- enzyme. We took this charge following our determination that, based on the status of our efforts to convert Gaucher disease patients to a treatment regimen using Cerezyme-Registered Trademark- enzyme, our existing supply of Ceredase-Registered Trademark- enzyme was sufficient to meet estimated patient needs. - a $10.4 million charge related to the operations of Genzyme Surgical Products to write down our inventory of Sepra products to net realizable value. The Sepra products are our line of products and product candidates designed to limit post-operative adhesions. During the third quarter of 1998, we revised our forecasted sales of Sepra products and, in accordance with our policy, analyzed the Sepra products inventory to determine whether the carrying value exceeded the net realizable value. The revised forecast showed slower sales growth as well as higher manufacturing and sales and marketing costs than originally expected. In addition, our inventory on-hand had a relatively high cost per unit because production was significantly less than originally planned. As a result, in the third quarter of 1998, we recorded a charge to cost of products sold to write down our Sepra products inventory to net realizable value. We also recorded $29.1 million in other charges in the fourth quarter of 1997. The components of these charges are: - an $18.1 million charge to cost of products sold to write down excess inventory in our melatonin, bulk pharmaceuticals and fine chemical product lines. We took this charge, which was allocated to Genzyme General, after we discontinued these product lines. - a $5.5 million charge to cost of products sold and a $3.5 million charge to selling, general and administrative expense relating to the manufacture and sale of Sepracoat-TM- coating solution. We took these charges, which were allocated to Genzyme Surgical Products, after an FDA advisory panel recommended against granting marketing approval for the product. - a $2.0 million charge to other expense relating to our uncertainty in collecting a note receivable that we issued when we sold Genetic Design, Inc. This charge was allocated to Genzyme General. GCS-54 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE C. DISPOSITIONS OF ASSETS SYBRON LABORATORY PRODUCTS In July 1999, we sold the assets of our immunochemistry product line to an operating unit of Sybron Laboratory Products Corp. for $5.0 million in cash. We recorded a gain of $0.5 million in connection with the sale of this product line. The immunochemistry product line had been allocated to Genzyme General. LABORATORY CORPORATION OF AMERICA In 1996, we sold Genetic Design to Laboratory Corporation of America. A portion of the purchase price was a note for which we previously had fully reserved because of uncertainty regarding collection. In April 1999, we received an $8.4 million payment on that note and recorded a $7.5 million gain in connection with that payment. Genetic Design had been allocated to Genzyme General. TECHNE In July 1998, we sold the assets of our research products business to Techne Corporation in exchange for: - $24.8 million in cash; - approximately 987,000 shares of Techne common stock; and - royalties on product sales by Techne's biotechnology group through June 2003. We will record royalty income as it is earned. In 1998, we recorded a $31.2 million gain in connection with the sale of this business and an additional $3.4 million gain upon the sale of a portion of our investment in Techne common stock. We recorded these gains as gain on sale of equity investments. In 1999, we recorded a gain of $2.0 million upon the sale of our remaining shares of Techne common stock. The research products business had been allocated to Genzyme General. NOTE D. ACQUISITIONS PEPTIMMUNE In July 1999, we acquired Peptimmune, Inc., a privately-held company whose lead development program focuses on a treatment for pemphigus vulgaris. We allocated this acquisition to Genzyme General and accounted for it as a purchase. We allocated the aggregate purchase price of $6.5 million and assumed liabilities of $0.3 million to the tangible and intangible assets we acquired from Peptimmune based on their respective fair values (amounts in thousands): Property, plant & equipment................................. $ 128 Deferred tax asset.......................................... 1,229 In-process technology....................................... 5,436 ------ Total..................................................... $6,793 ======
The $5.4 million allocated to in-process research and development represents the value we assigned to Peptimmune's programs that were still in the development stage and for which there was no alternative future use. We recorded this amount as a charge to operations. GCS-55 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE D. ACQUISITIONS (CONTINUED) PHARMAGENICS In June 1997, we acquired PharmaGenics, Inc., a company engaged in the research and development of products for the treatment of cancer and other diseases. We accounted for this acquisition, which was allocated to Genzyme Molecular Oncology, as a purchase. We allocated the aggregate purchase price of $27.5 million, plus acquisition costs of $2.5 million and assumed liabilities of $4.9 million, to the tangible and intangible assets we acquired from PharmaGenics based on their respective fair values (amounts in thousands): Equipment................................................... $ 208 Other assets................................................ 50 Completed technology (to be amortized over 3 years)......... 20,000 Goodwill (to be amortized over 3 years)..................... 12,293 Deferred tax asset.......................................... 2,900 Deferred tax liability (to be amortized over 3 years)....... (7,600) In-process technology....................................... 7,000 ------- Total..................................................... $34,851 =======
In 1998, we made an adjustment of $0.5 million in the amount of liabilities we assumed. The $7.0 million allocated to in-process research and development represents the value we assigned to PharmaGenics' programs that were still in the development stage and for which there was no alternative future use. We assigned values to all of PharmaGenics' programs (both complete and in-process) by selecting the maximum anticipated value of these programs and comparing them to the values of comparable technologies. In 1997, we recorded a one-time charge to operations for the amount of the purchase price allocated to in-process technology. The deferred tax liability of $7.6 million results from the temporary difference between the book and tax basis of the completed technology computed at a 38.0% incremental tax rate. NOTE E. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS We periodically enter into interest rate swap contracts to reduce borrowing costs by effectively modifying the interest rate under our debt instruments. We generally enter into these contracts concurrently with the issuance of the debt they are intended to modify. The notional amount, interest payment and maturity dates of these contracts generally match the principal, interest payment and maturity dates of the related debt. As a result, any market risk or opportunity associated with a swap contract is fully offset by the opposite market impact on the related debt. We record payments that we make or receive under these contracts as interest expense. We had no outstanding interest rate hedge agreements at December 31, 1999. At December 31, 1998, we had one open interest rate hedge agreement for which the fair value was $1.3 million in favor of the bank. NOTE F. ACCOUNTS RECEIVABLE AND INTANGIBLE ASSETS Our trade receivables primarily represent amounts due from distributors, healthcare service providers, and companies and institutions engaged in research, development or production of pharmaceutical and GCS-56 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE F. ACCOUNTS RECEIVABLE AND INTANGIBLE ASSETS (CONTINUED) biopharmaceutical products. We perform credit evaluations of our customers on an ongoing basis and generally do not require collateral. We state accounts receivable at fair value after reflecting an allowance for doubtful accounts. This allowance was $19.3 million at December 31, 1999 and $13.9 million at December 31, 1998. The following table contains information on Genzyme Corporation's intangible assets for the periods presented:
WEIGHTED WEIGHTED AVERAGE AVERAGE ESTIMATED ESTIMATED USEFUL USEFUL DECEMBER 31, LIFE DECEMBER 31, LIFE 1999 (YEARS) 1998 (YEARS) ------------ --------- ------------ --------- (AMOUNTS IN THOUSANDS, EXCEPT USEFUL LIFE DATA) Tradenames....................................... $ 45,878 40 $ 45,878 40 Goodwill......................................... 210,728 29 221,693 28 License fees..................................... 25,982 15 25,490 15 Customer lists................................... 8,324 10 12,369 10 Completed technology............................. 20,000 3 20,000 3 Non-compete agreements........................... 6,000 5 6,910 5 Patents.......................................... 16,279 12 16,204 12 Other............................................ 5,145 4 311 5 -------- -------- 338,336 348,855 Less accumulated amortization.................... (85,183) (69,339) -------- -------- Intangible assets, net........................... $253,153 $279,516 ======== ========
NOTE G. INVENTORIES
DECEMBER 31, ----------------------- 1999 1998 ---------- ---------- (AMOUNTS IN THOUSANDS) Raw materials........................................... $ 39,958 $ 41,328 Work-in-process......................................... 44,559 27,474 Finished products....................................... 32,752 41,031 -------- -------- Total................................................. $117,269 $109,833 ======== ========
GCS-57 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE H. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31, ----------------------- 1999 1998 ---------- ---------- (AMOUNTS IN THOUSANDS) Plant and equipment..................................... $246,068 $257,706 Land and buildings...................................... 188,892 156,067 Leasehold improvements.................................. 93,159 71,425 Furniture and fixtures.................................. 17,374 17,619 Construction-in-progress................................ 28,371 30,805 -------- -------- 573,864 533,622 Less accumulated depreciation........................... (190,683) (151,003) -------- -------- Property, plant and equipment, net...................... $383,181 $382,619 ======== ========
Our depreciation expense was $40.7 million in 1999, $39.2 million in 1998, and $33.5 million in 1997. We attribute our fixed assets among our operating divisions based on use. We have capitalized approximately $39.4 million, which represents the costs we have incurred in validating the manufacturing process for products which have reached technological feasibility. We have capitalized the following amounts of interest costs incurred in financing the construction of our manufacturing facilities:
1999 1998 1997 - ------------ ------------ ------------ $ 1.0 million..... $0.7 million $0.5 million
Our estimated cost of completion for assets under construction as of December 31, 1999 is $39.4 million. GCS-58 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE I. INVESTMENTS MARKETABLE SECURITIES
DECEMBER 31, ------------------------------------------------- 1999 1998 ----------------------- ----------------------- COST MARKET VALUE COST MARKET VALUE -------- ------------ -------- ------------ (AMOUNTS IN THOUSANDS) Cash equivalents(1): Corporate notes............................... $ 51,038 $ 51,023 $ 8,131 $ 8,129 Money market fund............................. 26,527 26,527 70,805 70,805 -------- -------- -------- -------- $ 77,565 $ 77,550 $ 78,936 $ 78,934 ======== ======== ======== ======== Short-term: Corporate notes............................... $252,711 $251,779 $175,002 $175,453 Federal....................................... 4,065 4,067 -- -- -------- -------- -------- -------- $256,776 $255,846 $175,002 $175,453 ======== ======== ======== ======== Long-term: Corporate notes............................... $175,080 $172,387 $226,002 $226,259 Federal....................................... 4,081 4,026 33,412 33,581 U.S. Treasury notes........................... 90,904 90,575 21,323 21,824 -------- -------- -------- -------- $270,065 $266,988 $280,737 $281,664 ======== ======== ======== ======== Investments in equity securities.............. $ 63,983 $ 97,859 $ 62,244 $ 51,977 ======== ======== ======== ========
- ------------------------ (1) Cash equivalents are included as part of cash and cash equivalents on our balance sheet. We attribute marketable securities among our operating divisions. REALIZED AND UNREALIZED GAINS AND LOSSES ON MARKETABLE SECURITIES AND EQUITY INVESTMENTS We recorded gains of $2.0 million in 1999 and $3.4 million in 1998 upon the sale of our investment in shares of Techne common stock. We also recorded a $5.7 million charge in 1999 in connection with our investments in the common stock of Pharming Group N.V. and IntegraMed America, Inc. and a $3.4 million charge in 1998 in connection with our investment in the common stock of Celtrix Pharmaceuticals, Inc. because we considered the decline in the value of those investments to be other than temporary. In connection with these assessments, we concluded that evidence existed that the value of the investments would recover to at least our cost. This included continued positive progress in the issuers' scientific programs, ongoing activity in our collaborations with the issuers, and a lack of any substantial company-specific adverse events causing the declines in value. However, given the significance and duration of the declines as of the end of the applicable quarter, we concluded that it was unclear over what period such price recoveries would take place and that, accordingly, the positive evidence suggesting that the investments would recover to at least our purchase price was not sufficient to overcome the presumption that the current market price was the best indicator of the value of these investments. GCS-59 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE I. INVESTMENTS (CONTINUED) We record gross unrealized holding gains and losses in stockholders' equity. The following table sets forth the amount we recorded:
DECEMBER 31, ----------------------------- 1999 1998 ------------- ------------- Unrealized holding gains........................ $37.1 million $3.6 million Unrealized holding losses....................... $6.9 million $12.5 million
The following table contains information regarding the range of contractual maturities of our investments in debt securities:
DECEMBER 31, ------------------------------------------------- 1999 1998 ----------------------- ----------------------- COST MARKET VALUE COST MARKET VALUE -------- ------------ -------- ------------ (AMOUNTS IN THOUSANDS) Within 1 years.......................... $334,341 $333,396 $253,939 $254,387 1-2 years............................... 168,704 166,152 259,363 259,788 2-10 years.............................. 101,361 100,836 21,373 21,876 -------- -------- -------- -------- $604,406 $600,384 $534,675 $536,051 ======== ======== ======== ========
GCS-60 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE I. INVESTMENTS (CONTINUED) We attribute strategic investments in equity securities of unconsolidated entities among our operating divisions. All of the investments included in the following table are allocated to Genzyme General except for our investment in Focal, Inc., which we allocate to Genzyme Surgical Products.
DECEMBER 31, 1999 ------------------------------------- ADJUSTED UNREALIZED COST MARKET VALUE GAIN/(LOSS) -------- ------------ ----------- (AMOUNTS IN THOUSANDS) Entity Abiomed, Inc................................ $15,804 $42,404 $26,600 Aronex Pharmaceutical Inc................... 1,693 1,323 (370) BioMarin Pharmaceutical Inc................. 18,000 24,705 6,705 Celtrix Pharmaceuticals, Inc. (1)........... 4,898 8,692 3,794 Dyax Corporation............................ 3,000 3,000 -- Focal, Inc.................................. 4,000 3,140 (860) GelTex Pharmaceuticals, Inc................. 2,500 1,281 (1,219) Genovo, Inc................................. 3,400 3,400 -- Integramed America, Inc. (2)................ 117 115 (2) Pharming Group, N.V. (3).................... 7,886 7,723 (163) Other....................................... 2,076 2,076 -- ------- ------- ------- Total..................................... $63,374 $97,859 $34,485 ======= ======= =======
DECEMBER 31, 1998 ---------------------------------------------- ADJUSTED COST MARKET VALUE UNREALIZED LOSS ------------- ------------ --------------- (AMOUNTS IN THOUSANDS) Total................................. $62,244 $51,977 $10,267 ======= ======= =======
- ------------------------ (1) In December 1998, we determined that a portion of the impairment in our investment in Celtrix was other than temporary and recorded a charge to operations of $3.4 million. (2) In December 1999, we determined that a portion of the impairment in our investment in Integramed America was other than temporary and recorded a charge to operations of $0.2 million. (3) Our investment in Pharming is denominated in Euros. We translated this investment into U.S. dollars at the current exchange rate on December 31, 1999. In June 1999, we determined that a portion of the impairment in our investment in Pharming was other than temporary and recorded a charge to operations of $5.5 million. GENZYME TRANSGENICS CORPORATION At December 31, 1999, we owned approximately 33% of the outstanding common stock of Genzyme Transgenics Corporation and record in net loss of unconsolidated affiliates our portion of its results. We refer to Genzyme Transgenics Corporation in this note as "GTC." Our portion of GTC's net losses was $7.1 million in 1999, $7.4 million in 1998, and $2.9 million in 1997. The fair market value of our investment in GTC common stock was $93.8 million on December 31, 1999 and $41.8 million on December 31, 1998. GCS-61 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE I. INVESTMENTS (CONTINUED) In November 1999, we purchased $6.6 million in shares of Series B convertible preferred stock of GTC. We can convert these shares into shares of GTC common stock at any time at a price of $6.30 per share. We will receive an escalating annual dividend of between 11% and 12% on amounts that we convert into common stock. Our Chairman and Chief Executive Officer is a director of GTC. The following table contains condensed statement of operations and balance sheet data for GTC:
YEAR ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- (AMOUNTS IN THOUSANDS) Revenues....................................... $ 68,784 $ 62,412 $ 62,938 Operating loss................................. (2,666) (19,365) (8,352) Net loss....................................... (18,761) (19,950) (9,343)
AT DECEMBER 31, ------------------------- 1999 1998 -------- -------- (AMOUNTS IN THOUSANDS) Current assets........................................ $29,604 $32,417 Noncurrent assets..................................... 54,708 50,920 Current liabilities................................... 43,471 37,297 Noncurrent liabilities................................ 14,676 9,836
AGREEMENTS WITH GTC We have a number of agreements with GTC, including the following: - services agreement under which GTC pays us for services provided by us, including treasury, data processing and laboratory support services. - sublease agreement under which we sublease a portion of one of our facilities in Framingham, Massachusetts; and - research and development agreement under which each of the parties performs research services for the other. During 1999, we received approximately $2.2 million from GTC under these agreements and we paid GTC approximately $1.2 million under the research and development agreement. At December 31, 1999, GTC owed Genzyme $0.5 million under these agreements. We have guaranteed GTC's obligations under a $17.5 million revolving credit facility and a $7.1 million term loan with a commercial bank. In exchange for this guarantee, GTC issued us a warrant to purchase up to 288,000 shares of GTC common stock at an exercise price of $4.875 per share. Of these shares, 192,000 are currently exercisable. GTC also issued us a warrant to purchase 145,000 shares of GTC common stock at an exercise price of $2.84375 per share in connection with our guarantee of GTC's obligations under a prior credit facility. All of the shares subject to this warrant are exercisable. We have also made a $6.3 million line of credit available to GTC. No amounts were outstanding under this credit line as of December 31, 1999. This credit line expires in March 2000. Upon expiration, GTC may GCS-62 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE I. INVESTMENTS (CONTINUED) convert any outstanding balance into a three-year term loan. The line of credit requires GTC to meet financial covenants similar to those under GTC's bank credit facility. ATIII LLC. In 1998, we formed ATIII LLC, a joint venture with GTC for the development and commercialization of transgenic recombinant human antithrombin III. We are funding 70% of the first $33.0 million in development costs, excluding facility costs, under this program and 50% of all development costs thereafter. We will pay 50% of all new facility costs to be incurred by ATIII LLC. All profits of ATIII LLC will be split equally; losses are allocated based on the amount of funding provided by each venturer. As our combined direct and indirect interest in ATIII LLC is in excess of 50%, we consolidate the results of ATIII LLC and record GTC's portion of the ATIII LLC's losses as minority interest. We allocate our ownership interest in ATIII LLC to Genzyme General. Under the agreement which established ATIII LLC joint venture in 1998, we initially owned a 3.7% interest in ATIII LLC and GTC owned a 96.3% interest. In accordance with the executed purchase agreement, GTC sold and assigned a 46.3% ownership interest in ATIII LLC to us so that we each own 50% of the venture. In connection with the purchase agreement, Genzyme has agreed to pay to GTC: - $2.5 million after the second consecutive quarter in which net sales of collaboration products for such quarter exceed $5 million; and - $10 million on the first full approval, if and when approved by the FDA of a major market country or by the European Union's European Medicines Evaluation Agency ("EMEA") of: - a biologics license application ("BLA") filed by ATIII LLC for the use of transgenic ATIII for the treatment of sepsis; or - an amendment to the BLA previously filed by ATIII LLC and approved by the FDA of a major market country or by the EMEA to add sepsis as an indication for transgenic ATIII. As of December 31, 1999 and 1998, none of the above milestone events have been achieved and no payments have been made. DYAX CORP. In March 1996, we entered into two license agreements with Dyax Corp. and Protein Engineering Corporation, a wholly-owned subsidiary of Dyax, for Dyax's phage display technology. We pay annual license maintenance fees of $50,000 for this license. We will also make milestone payments and pay royalties on net sales of diagnostic and therapeutic products discovered, made or developed using the licensed technology. In September 1996, we subleased office and laboratory space in Cambridge, Massachusetts to Dyax. Current rent under this sublease is $53,943 per month. In October 1998, we entered into a collaboration agreement with Dyax to develop and commercialize one of Dyax's proprietary compounds for the treatment of chronic inflammatory diseases. Dyax will fund the first $6.0 million in development costs, and the parties will split all subsequent development costs equally. In connection with that agreement, we made an investment of $3.0 million in the convertible preferred stock of Dyax and made a $3.0 million line of credit available to help Dyax fund its operations. To date, Dyax has not borrowed any money under the line of credit. We will make milestone payments to Dyax upon FDA approval of products that arise out of the collaboration, and we will share equally with Dyax all profits from the sale of these products. GCS-63 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE I. INVESTMENTS (CONTINUED) One of our directors is chairman and chief executive officer of Dyax and three of our directors are directors of Dyax. INVESTMENTS IN JOINT VENTURES Except as described below, we own a 50% interest in the following joint ventures:
JOINT VENTURE PARTNER(S) EFFECTIVE DATE PRODUCT/INDICATION GENZYME DIVISION - ------------- ---------- -------------- ------------------ ---------------- RenaGel LLC GelTex Pharmaceuticals, June 1997 Renagel-Registered Trademark- Genzyme General Inc.(1) capsules for the reduction of serum phosphorus in patients with end-stage renal disease BioMarin/ Genzyme LLC BioMarin Pharmaceutical September 1998 Alpha-L-iduronidase for the Genzyme General Inc. treatment of mucopolysaccharidosis-I Pharming/ Genzyme LLC Pharming Group, N.V. October 1998 Human alpha-glucosidase for the Genzyme General treatment of Pompe disease Diacrin/ Genzyme LLC Diacrin, Inc.(2) October 1996 Products using porcine fetal cells Genzyme Tissue for the treatment of Parkinson's Repair (until May and Huntington's diseases 1999); Genzyme General (after May 1999) StressGen/ Genzyme StressGen July 1997 Stress gene therapies for the Genzyme Molecular LLC Biotechnologies Corp.; treatment of cancer Oncology Canadian Medical Discoveries Fund Inc. (until October 1999)
- ------------------------------ (1) Our Chairman and Chief Executive Officer is a director of GelTex and one of our other directors is Chairman of GelTex. (2) Our Chairman and Chief Executive Officer is a director of Diacrin. In July 1997, together with StressGen Biotechnologies Corp. and the Canadian Medical Discoveries Fund, Inc. ("CMDF"), we established StressGen/Genzyme LLC, a joint venture to develop stress gene therapies for the treatment of cancer. Because CMDF had the right to require StressGen and Genzyme to purchase its membership interest in the joint venture, we recorded 50% of the net operating losses of the joint venture. As of December 31, 1998, our portion of the cumulative losses of StressGen/Genzyme LLC exceeded our initial capital contribution to the joint venture by $1.2 million and, as a result, we recorded the $1.2 million as a liability. For the period January through August 1999, we recorded an additional $0.8 million of losses from the joint venture increasing the liability related to the joint venture to $2.0 million. In August 1999, CMDF exercised its put right and StressGen and Genzyme were required to purchase its membership interest in the joint venture at an aggregate price of $10.0 million (Canadian) As a result, Genzyme was obligated to repurchase one-half of the CMDF's interest in the joint venture for approximately $3.9 million ($5.0 million (Canadian)). To record the exercise of the put option, we recorded: - a $1.9 million increase to our liability related to the joint venture, thus increasing the liability to $3.9 million; GCS-64 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE I. INVESTMENTS (CONTINUED) - a $0.9 million increase to our investment in joint venture to reflect our 50% interest in the net assets of the joint venture; and - a $1.0 million charge to equity in net loss of unconsolidated affiliates because, at that time, it was expected that the joint venture would be dissolved and the joint venture interest would have no value beyond the cash it held. We completed the repurchase of CMDF's interest in October 1999 by issuing to CMDF 617,200 shares of Molecular Oncology Stock at a price of $6.375 per share. The purchase price was calculated in accordance with the joint venture agreements based on the market price of Molecular Oncology Stock over a period prior to the repurchase. To record the repurchase, we increased stockholders' equity by $3.9 million to reflect the issuance of the shares of Molecular Oncology Stock and decreased our liability related to the joint venture by $3.9 million to zero. We agreed to dissolve StressGen/Genzyme LLC in December 1999 and in connection with the dissolution the joint venture received a cash distribution of $0.9 million which was equal to Genzyme's investment in the joint venture at that time. We do not present summary financial information for StressGen/Genzyme LLC because we do not consider the impact of its activities to be material to our operations for the years ended December 31, 1999 and 1998. The following tables describe: - the amount of funding we have provided to each joint venture to date; - amounts due to us by each joint venture as of December 31, 1999 for services we provided on behalf of the joint venture, which we have recorded on our balance sheet as prepaids and other current assets; - our portion of the losses of each joint venture for the periods presented, which we have recorded as charges to equity in net loss of unconsolidated affiliates in our statement of operations; and - total net losses of each joint venture for the periods presented. GCS-65 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE I. INVESTMENTS (CONTINUED)
TOTAL FUNDING RECEIVABLES AS OF AS OF JOINT VENTURE/ DECEMBER 31, DECEMBER 31, UNCONSOLIDATED AFFILIATE 1999 1999 - ------------------------------------------------------------ ------------- ------------ (AMOUNTS IN MILLIONS) RenaGel LLC (1)............................................. $29.1 $2.1 BioMarin/Genzyme LLC........................................ 8.3 0.5 Pharming/Genzyme LLC........................................ 14.9 0.4 Diacrin/Genzyme LLC......................................... 23.7 1.0 StressGen/Genzyme LLC....................................... 0.7 -- Genzyme Transgenics Corp.................................... -- 0.6 ----- ---- Totals...................................................... $76.7 $4.6
- ------------------------ (1) As part of this joint venture, we made payments to GelTex of $10.0 million in 1999 and $15.0 million in 1998 in exchange for certain technology access rights. We capitalized these payments and are amortizing these amounts over 15 years.
OUR PORTION OF THE NET LOSSES FROM OUR UNCONSOLIDATED TOTAL LOSSES OF OUR AFFILIATES UNCONSOLIDATED AFFILIATES JOINT VENTURE/ ------------------- ------------------------------ UNCONSOLIDATED AFFILIATE 1999 1998 1997 1999 1998 1997 - ---------------------------------------------------- -------- -------- -------- -------- -------- -------- (AMOUNTS IN MILLIONS) (AMOUNTS IN MILLIONS) RenaGel LLC......................................... $ (8.1) $ (7.6) $ (2.3) $(15.9) $(15.1) $ (4.6) BioMarin/Genzyme LLC................................ (7.0) (0.9) -- (13.9) (1.8) -- Pharming/Genzyme LLC................................ (10.3) (4.0) -- (10.7) (4.1) -- Diacrin/Genzyme LLC................................. (8.0) (7.7) (6.7) (10.7) (9.6) (6.8) StressGen/Genzyme LLC (1)........................... (1.9) (1.6) (0.3) (1.3) (3.4) (0.4) Genzyme Transgenics Corp............................ (7.1) (7.3) (2.9) (18.8) (20.0) (9.3) Other............................................... (0.3) 0.1 (0.1) -- (0.2) (0.3) ------ ------ ------ ------ ------ ------ Totals.............................................. $(42.7) $(29.0) $(12.3) $(71.3) $(54.2) $(21.4)
- ------------------------ (1) Because the Canadian Medical Discoveries Fund had the right to require us to repurchase the fund's interest in the joint venture, we recorded 50% of the losses incurred by the joint venture. When the fund exercised its repurchase right in August 1999, we recorded a $1.0 million charge to our statement of operations in connection with the repurchase. GCS-66 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE I. INVESTMENTS (CONTINUED) Condensed financial information for our joint ventures, including the allocation of losses, is summarized below:
FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------ 1999 1998 1997 ------------ ------------ ------------ (AMOUNTS IN THOUSANDS) Revenue.......................................... $ 89,884 $ 62,638 $ 62,938 Gross profit..................................... 20,828 2,256 8,109 Operating expenses............................... (145,717) (113,569) (83,624) Net loss......................................... (71,343) (54,186) (21,398)
DECEMBER 31, ----------------------- 1999 1998 -------- -------- (AMOUNTS IN THOUSANDS) Current assets.............................................. $57,897 $47,578 Noncurrent assets........................................... 62,865 58,349 Current liabilities......................................... 56,626 47,915 Noncurrent liabilities...................................... 14,676 14,410
NOTE J. ACCRUED EXPENSES
DECEMBER 31, ------------------------- 1999 1998 -------- -------- (AMOUNTS IN THOUSANDS) Compensation.......................................... $25,909 $23,310 Technology access fee................................. -- 10,000 Professional fees..................................... 3,908 6,146 Royalties............................................. 7,667 6,895 Rebates............................................... 7,125 5,663 Other................................................. 28,750 20,375 ------- ------- $73,359 $72,389 ======= =======
NOTE K. LONG-TERM DEBT AND LEASES LONG-TERM DEBT While Genzyme Corporation is responsible for repaying all long-term debt obligations, we allocate these obligations to our operating divisions for financial reporting purposes based on the intended use of the funds. GCS-67 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE K. LONG-TERM DEBT AND LEASES (CONTINUED) Our long-term debt consists of the following:
DECEMBER 31, ----------------------- 1999 1998 ---------- ---------- (AMOUNTS IN THOUSANDS) 5 1/4% convertible subordinated notes................... $250,000 $250,000 Revolving credit facility maturing in November 2002..... 23,000 -- Revolving credit facility maturing in November 1999..... -- 100,000 5% convertible subordinated debentures.................. 22,622 21,559 6% convertible subordinated note........................ -- 12,579 Mortgage notes.......................................... -- 3,167 -------- -------- 295,622 387,305 -------- -------- Less current portion.................................... (5,000) (100,080) -------- -------- $290,622 $287,225 ======== ========
Over the next five years, we will be required to repay the following principal amounts on our long-term debt (excluding capital leases):
2000 2001 2002 2003 2004 AFTER 2004 - ------------ ------------ ------------- ------------- ------------ -------------- $ 5.0 million..... $ -- $18.0 million $22.6 million $ -- $250.0 million
REVOLVING CREDIT FACILITY In November 1999, our $225 million revolving credit facility matured. We refinanced this facility with a $50.0 million revolving credit facility that matures in November 2000 and a $100.0 million revolving credit facility that matures in November 2002. When we refinanced the credit facility, $100.0 million was outstanding. Of this amount, we: - repaid the $82.0 million that was allocated to Genzyme General; and - refinanced the $18.0 million that was allocated to Genzyme Tissue Repair under the new credit facility. Loans under the new credit facility bear interest at LIBOR plus an applicable margin pursuant to the terms and conditions defined in the credit agreement, and are collateralized by the stock of Genzyme Securities Corporation. This facility requires us to satisfy a number of financial covenants. At December 31, 1999, $23.0 million was outstanding under the facility that matures in November 2002. Of this amount, $5.0 million was allocated to Genzyme Molecular Oncology and $18.0 million was allocated to Genzyme Tissue Repair. The interest rate on these borrowings was approximately 6.8%. 5 1/4% CONVERTIBLE SUBORDINATED NOTES In May 1998, we issued $250.0 million in principal of 5 1/4% convertible subordinated notes due June 2005. After deducting the initial purchasers' discount and offering costs, we received $243.0 million in proceeds from this issuance. GCS-68 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE K. LONG-TERM DEBT AND LEASES (CONTINUED) We pay interest on the notes on June 1 and December 1 of each year and made the first interest payment in December 1998. The notes are convertible into one share of Genzyme General Stock, 0.10805 share of Molecular Oncology Stock and 0.17901 share of Surgical Products Stock at a price of $39.60 and contain anti-dilution adjustments. We may redeem all or part of the notes at our option after June 10, 2001 at the following prices (expressed as a percentage of the principal amount), plus accrued interest:
ON OR BEFORE 5/31/02 6/1/02--5/31/03 6/1/03--5/31/04 ON OR AFTER 6/1/04 - -------------------- --------------- --------------- ------------------ 102.63%...... 101.75% 100.88% 100.00%
The fair value of these notes at December 31, 1999 was $317.5 million. 5% CONVERTIBLE SUBORDINATED NOTE In February 1997, we issued a 6% convertible subordinated note in a principal amount of $13.0 million. This note was convertible into shares of Tissue Repair Stock at a discount to the market value of that stock. We recorded charges to interest expense of $0.2 million in 1999, $0.5 million in 1998 and $1.1 million in 1997, to reflect the accretion to fair value of the conversion feature of this note. In 1998, the holder of this note converted $0.6 million in principal amount into 223,405 shares of Tissue Repair Stock. We paid $1.1 million in accrued interest in connection with these conversions. In 1999, the holder converted the remaining $12.4 million in principal amount into 7,257,573 shares of Tissue Repair Stock. We paid $0.5 million in accrued interest in connection with these conversions. As of December 31, 1999, there was no principal or interest remaining on this convertible note. 5% CONVERTIBLE SUBORDINATED DEBENTURES In August 1997, we issued $20.0 million in principal of 6% convertible subordinated debentures. These debentures were convertible into shares of Molecular Oncology Stock at a discount to the market value of that stock. We recorded charges to interest expense of $1.9 million in 1998 and $0.9 million in 1997 to reflect the accretion to fair value of the conversion feature of the 6% debentures. In accordance with the terms of these debentures, they were exchanged in August 1998 for $21.2 million in principal of 5% convertible subordinated debentures due August 2003. These debentures are convertible into shares of Genzyme General Stock. In November 1998 we reserved approximately 3.0 million Genzyme Molecular Oncology designated shares for issuance in connection with this exchange. In October 1999 we increased the number of Genzyme Molecular Oncology designated shares reserved in connection with this exchange by approximately 0.3 million. MORTGAGE NOTES In 1999, we repaid the remaining $3.1 million of principal and accrued interest of $0.1 million under our mortgage note due in December 2000. This obligation had been allocated to Genzyme General. GCS-69 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE K. LONG-TERM DEBT AND LEASES (CONTINUED) OPERATING LEASES We lease facilities and personal property under operating leases with terms in excess of one year. Our total expense under operating leases was:
1999 1998 1997 ---- ---- ---- $22.2 million....... $18.4 million $16.3 million
Over the next five years, we will be required to repay the following amounts under operating leases:
2000 2001 2002 2003 2004 AFTER 2004 - -------------- ------------- ------------- ------------- ------------- -------------- $17.5 million....... $17.0 million $15.7 million $13.6 million $13.1 million $119.9 million
In June 1992, one of our wholly-owned subsidiaries entered into a 65-year land lease with an unaffiliated lessor. Our expenses under this lease were $1.5 million in 1999 and 1998 and $1.3 million in 1997. Our rent under this lease increases every five years based on the Consumer Price Index or, if higher, 3% per year. NOTE L. STOCKHOLDERS' EQUITY COMMON STOCK We have four series of common stock--Genzyme General Stock, Molecular Oncology Stock, Surgical Products Stock and Tissue Repair Stock--which we refer to 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 related allocated assets, rather than operations and assets of our entire company. The chief mechanism intended to cause our tracking stock to "track" the financial performance of a corresponding division are special 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 of Genzyme Corporation that would be legally available for dividends under Massachusetts law, the dividend limit for a stock corresponding to a division is the greater of: - the amount that would be legally available for dividends under Massachusetts law if the division were a separate corporation; or - the amount by which the greater of the fair value of the division's allocated net assets, or its allocated paid-in capital plus allocated earnings, exceeds its corresponding stock's par value, preferred stock preferences and debt obligations. 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 Molecular Oncology Stock, Surgical Products Stock or Tissue Repair 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 GCS-70 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE L. STOCKHOLDERS' EQUITY (CONTINUED) 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 following announcement of the sale. While tracking stock is designed to reflect a division's performance, it is common stock of the entire company. Therefore, a holder of tracking stock is a common stockholder subject to risks of investing in the business, assets and liabilities of Genzyme as a whole. For instance, the assets allocated to any division are nonetheless 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, a holder of tracking stock would have no direct claim against the assets allocated to the corresponding tracked division; a holder of tracking stock would only have the rights of a common stockholder in the combined assets of Genzyme, subject also to the Genzyme charter's allocation of liquidation units as discussed below under the subheading "Liquidation Units." RIGHTS OF COMMON STOCK VOTING RIGHTS Genzyme General Stock is entitled to one vote per share, which is never adjusted. However, the votes per share of our other series of common stock are adjusted every two years. Specifically, on January 1, 2001 and every second anniversary thereafter, the vote per share to which each series is entitled is recalculated based on that stock's fair market value divided by the fair market value of a share of Genzyme General Stock, with "fair market value" meaning the average closing price over the 20 consecutive trading days beginning the 30th trading day preceding the January 1st adjustment date. During the 2000 fiscal year, each series of common stock is entitled the following vote per share:
SERIES VOTE PER SHARE - ------ -------------- Genzyme General Stock....................................... 1.00 Molecular Oncology Stock.................................... 0.08 Surgical Products Stock..................................... 0.61 Tissue Repair Stock......................................... 0.06
LIQUIDATION UNITS If we were to dissolve, liquidate or wind up our affairs, other than as part of a merger, business combination or sale of substantially all of our assets, our stockholders would receive any remaining assets according to the percentage of total liquidation units that they hold. Each series of our common stock is entitled to the following liquidation units:
SERIES UNITS - ------ -------- Genzyme General Stock....................................... 100 Molecular Oncology Stock.................................... 25 Surgical Products Stock..................................... 61 Tissue Repair Stock......................................... 58
GCS-71 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE L. STOCKHOLDERS' EQUITY (CONTINUED) Although we adjust liquidation units to prevent dilution in the event of some subdivisions, combinations or distributions of common stock, we do not adjust them to reflect changes in the relative market value or performance of the tracked divisions. PREFERRED STOCK Our charter permits us to issue shares of preferred stock at any time in one or more series. Our board of directors will establish the preferences, voting powers, qualifications, and special or relative rights or privileges of any series of preferred stock before it is issued. STOCK RIGHTS Under our shareholder rights plan, each outstanding share of Genzyme General Stock, Molecular Oncology Stock, Surgical Products Stock and Tissue Repair Stock also represents one preferred stock purchase right for that series of stock. When the stock purchase rights become exercisable, the holders of our common stock will be entitled to purchase the following: - Genzyme General stock right: 0.01 share of Series A Junior Participating Preferred Stock for $300.00; - Molecular Oncology stock right: 0.01 share of Series C Junior Participating Preferred Stock for $26.00; - Surgical Products stock right: 0.01 share of Series D Junior Participating Preferred Stock for $150.00; and - Tissue Repair stock right: 0.01 share of Series B Junior Participating Preferred Stock for $26.00. A stock purchase right becomes exercisable either: - ten days after our board of directors announces that a third party has become the owner of 15% or more of the total voting power of our outstanding common stock combined, or - ten business days after a third party announces or initiates a tender or exchange offer that would result in that party owning 15% or more of the total voting power of our outstanding common stock combined. In either case, the board of directors can extend the ten-day delay. These stock purchase rights expire in March 2009. STOCK OFFERINGS In 1997, we sold 4,000,000 shares of Tissue Repair Stock for net proceeds of $29.0 million. DIRECTORS' DEFERRED COMPENSATION PLAN Each member of our board of directors who is not also one of our officers or employees may defer receipt of all or a portion of the cash compensation payable to him or her as a director and receive either cash or stock in the future. Under this plan, the director may defer his or her compensation until his or her services as a director cease or until another date specified by the director. GCS-72 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE L. STOCKHOLDERS' EQUITY (CONTINUED) Under a deferral agreement, a participant indicates the percentage of deferral to allocate to cash and stock, upon which a cash deferral account and a stock deferral account is established. The cash account bears interest at the rate paid on 90-day Treasury bills with interest payable quarterly. The stock account is for amounts invested in hypothetical shares of Genzyme General Stock, Molecular Oncology Stock, Surgical Products Stock or Tissue Repair Stock. Under the deferral agreement, a participant directs us how to allocate amounts among each series of stock. These amounts will be converted into shares quarterly at the average closing price of the stock for all trading days during the quarter, for each series of stock. Distributions are paid in a lump sum or in annual installments for up to five years. Payments begin the year following a director's termination of service or, subject to certain restrictions, a year elected by the participant. As of December 31, 1999, one of the six eligible directors was participating in this plan. We have reserved the following numbers of shares to cover distributions credited to stock accounts under the plan: - 50,000 shares of Genzyme General Stock; - 50,000 shares of Molecular Oncology Stock; - 50,000 shares of Surgical Products Stock; and - 100,000 shares of Tissue Repair Stock. We had not made any distributions under this plan as of December 31, 1999. EQUITY PLANS At December 31, 1999, we had reserved the following numbers of shares for issuance under our 1990 Equity Incentive Plan, 1997 Equity Incentive Plan, 1998 Director Stock Option Plan, and 1999 Employee Stock Purchase Plan: - 13,126,000 shares of Genzyme General Stock; - 4,011,000 shares of Molecular Oncology Stock; - 3,800,000 shares of Surgical Products Stock; and - 5,544,000 shares of Tissue Repair Stock. STOCK OPTIONS The following number of shares are currently authorized and available for grant under our 1990 Equity Incentive Plan and 1997 Equity Incentive Plan: - 24,500,000 shares of Genzyme General Stock; - 3,500,000 shares of Molecular Oncology Stock; - 3,200,000 shares of Surgical Products Stock; and - 5,300,000 shares of Tissue Repair Stock. GCS-73 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE L. STOCKHOLDERS' EQUITY (CONTINUED) The purpose of these two plans is to attract and retain key employees and consultants, provide an incentive for them to achieve long-range performance goals, and enable them to participate in our long-term growth. Under these two plans, we grant stock options with exercise prices not less than fair market value at date of grant. The plans provide for the grant of stock appreciation rights, performance shares, restricted stock and stock units. Each of these instruments has a maximum term of ten years and generally vest over four years. The Board-appointed compensation committee determines the terms and conditions of each award, including who is eligible to receive awards, the form of payment of the exercise price, the number of shares granted and the exercise date. No incentive stock options may be granted under the 1997 plan. After March 15, 2000, no incentive stock options may be granted under the 1990 plan. The following number of shares are currently authorized and available for grant under our 1998 Director Stock Option Plan: - 340,000 shares of Genzyme General Stock; - 140,000 shares of Molecular Oncology Stock; - 100,000 shares of Surgical Products Stock; and - 200,000 shares of Tissue Repair Stock. Options under our 1998 Director Stock Option Plan are automatically granted with an exercise price at fair market value to non-employee members of our board of directors when they are elected or re-elected as directors. These options expire ten years after the initial grant date and vest on the date of each annual board of directors meeting following the date of grant. GCS-74 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE L. STOCKHOLDERS' EQUITY (CONTINUED) The following table depicts activity under our various stock option plans:
WEIGHTED SHARES UNDER AVERAGE NUMBER OPTION EXERCISE PRICE EXERCISABLE ------------ -------------- ----------- GENZYME GENERAL STOCK: Outstanding at December 31, 1996................. 14,065,483 $20.48 6,505,835 Granted........................................ 2,083,936 29.86 Exercised...................................... (1,760,934) 16.25 Forfeited and cancelled........................ (1,041,218) 23.77 ----------- Outstanding at December 31, 1997................. 13,347,267 22.22 6,982,224 Granted........................................ 2,482,222 29.61 Exercised...................................... (3,319,203) 20.11 Forfeited and cancelled........................ (917,556) 27.21 ----------- Outstanding at December 31, 1998................. 11,592,730 24.00 5,579,267 Granted........................................ 1,647,719 43.43 Granted--premium price......................... 1,272,376 58.97 Exercised...................................... (2,526,838) 20.63 Forfeited and cancelled........................ (376,480) 30.22 ----------- Outstanding at December 31, 1999................. 11,609,507 $31.11 5,633,053 =========== MOLECULAR ONCOLOGY STOCK: Outstanding at June 18, 1997..................... -- Granted........................................ 826,334 $ 7.00 ----------- Outstanding at December 31, 1997................. 826,334 7.00 180,063 Granted........................................ 386,867 6.83 Exercised...................................... (886) 7.00 Forfeited and cancelled........................ (54,530) 7.00 ----------- Outstanding at December 31, 1998................. 1,157,785 6.96 391,044 Granted........................................ 286,363 3.46 Granted--premium price......................... 402,615 5.39 Exercised...................................... (362) 3.50 Forfeited and cancelled........................ (37,291) 6.67 ----------- Outstanding at December 31, 1999................. 1,809,110 $ 6.14 656,648 ===========
GCS-75 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE L. STOCKHOLDERS' EQUITY (CONTINUED)
WEIGHTED SHARES UNDER AVERAGE NUMBER OPTION EXERCISE PRICE EXERCISABLE ------------ -------------- ----------- SURGICAL PRODUCTS STOCK: Outstanding at June 28, 1999................... -- Granted........................................ 3,050,690 $ 6.65 Exercised...................................... 0 -- Forfeited and cancelled........................ (60,120) 6.69 ----------- Outstanding at December 31, 1999................. 2,990,570 $ 6.65 563,048 =========== TISSUE REPAIR STOCK: Outstanding at December 31, 1996................. 2,574,219 $10.73 739,421 Granted........................................ 636,605 9.84 Exercised...................................... (100,407) 5.21 Forfeited and cancelled........................ (333,655) 12.75 ----------- Outstanding at December 31, 1997................. 2,776,762 10.50 1,084,532 Granted........................................ 996,019 5.44 Exercised...................................... (71,491) 4.83 Forfeited and cancelled........................ (303,344) 10.47 ----------- Outstanding at December 31, 1998................. 3,397,946 9.13 1,464,732 Granted........................................ 667,120 2.22 Granted--premium price......................... 402,615 7.71 Exercised...................................... (357) 2.09 Forfeited and cancelled........................ (291,558) 7.49 ----------- Outstanding at December 31, 1999................. 4,175,766 $ 8.02 1,905,031 ===========
In 1999, we granted the following stock options with exercise prices above fair market value: - 1,272,376 shares of Genzyme General Stock at 120% of fair market value on the date of grant; - 402,615 shares of Molecular Oncology Stock at 200% of fair market value on the date of grant; and - 402,615 shares of Tissue Repair Stock at 200% of fair market value on the date of grant. The total exercise proceeds for all options outstanding at December 31, 1999 is: - $361,260,000 for Genzyme General Stock; - $11,106,000 for Molecular Oncology Stock; - $19,897,000 for Surgical Products Stock, and - $33,482,000 for Tissue Repair Stock. GCS-76 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE L. STOCKHOLDERS' EQUITY (CONTINUED) The following table contains information regarding the range of option prices as of December 31, 1999: GENZYME GENERAL STOCK:
WEIGHTED EXERCISABLE AVERAGE ------------------------------- NUMBER REMAINING WEIGHTED WEIGHTED RANGE OF OUTSTANDING CONTRACTUAL AVERAGE NUMBER AVERAGE EXERCISE PRICES AS OF 12/31/99 LIFE EXERCISE PRICE AS OF 12/31/99 EXERCISE PRICE - --------------------- -------------- ----------- -------------- -------------- -------------- $8.19--$19.44....... 2,710,664 3.94 $15.92 1,840,504 $16.48 19.50--27.56........ 2,456,522 6.80 26.06 1,342,620 25.30 27.63--28.00........ 829,734 6.09 27.96 761,791 27.97 28.06--58.06........ 4,325,198 8.03 35.81 1,688,138 31.73 58.88--62.33........ 1,287,389 9.08 58.98 0 0.00 ---------- ---- ------ --------- ------ $8.19--$62.33....... 11,609,507 6.79 $31.11 5,633,053 $24.71
MOLECULAR ONCOLOGY STOCK:
WEIGHTED EXERCISABLE AVERAGE ------------------------------- NUMBER REMAINING WEIGHTED WEIGHTED RANGE OF OUTSTANDING CONTRACTUAL AVERAGE NUMBER AVERAGE EXERCISE PRICES AS OF 12/31/99 LIFE EXERCISE PRICE AS OF 12/31/99 EXERCISE PRICE - --------------------- -------------- ----------- -------------- -------------- -------------- $2.31--$5.75 658,396 9.18 $4.63 39,627 $3.48 7.00 1,150,714 7.97 7.00 617,021 7.00 --------- ---- ----- ------- ----- $2.31--$7.00 1,809,110 8.41 $6.14 656,648 $6.79
SURGICAL PRODUCTS STOCK:
WEIGHTED EXERCISABLE AVERAGE ------------------------------- NUMBER REMAINING WEIGHTED WEIGHTED RANGE OF OUTSTANDING CONTRACTUAL AVERAGE NUMBER AVERAGE EXERCISE PRICES AS OF 12/31/99 LIFE EXERCISE PRICE AS OF 12/31/99 EXERCISE PRICE - --------------------- -------------- ----------- -------------- -------------- -------------- $4.63--$5.94 79,400 9.86 $5.33 0 $0.00 6.69--7.50 2,911,170 9.65 6.69 563,048 6.69 --------- ---- ----- ------- ----- $4.63--$7.50 2,990,570 9.66 $6.65 563,048 $6.69
TISSUE REPAIR STOCK:
WEIGHTED EXERCISABLE AVERAGE ------------------------------- NUMBER REMAINING WEIGHTED WEIGHTED RANGE OF OUTSTANDING CONTRACTUAL AVERAGE NUMBER AVERAGE EXERCISE PRICES AS OF 12/31/99 LIFE EXERCISE PRICE AS OF 12/31/99 EXERCISE PRICE - ----------------------- -------------- ----------- -------------- -------------- -------------- $1.63--$3.50 859,572 9.20 $2.41 83,128 $2.31 4.03--6.50 1,244,702 6.32 5.60 942,694 5.37 6.63--9.88 976,902 8.32 8.58 315,066 9.36 10.00--17.50 1,048,037 6.21 14.35 527,816 12.98 17.63--25.75 46,553 6.10 22.10 36,327 22.01 --------- ---- ----- --------- ----- $1.63--$25.75 4,175,766 7.35 $8.02 1,905,031 $8.32
GCS-77 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE L. STOCKHOLDERS' EQUITY (CONTINUED) EMPLOYEE STOCK PURCHASE PLAN Our 1999 Employee Stock Purchase Plan is an amendment and replacement of our 1990 Employee Stock Purchase Plan. This plan allows full-time employees to purchase our stock at 85% of fair market value. The number of shares authorized for purchase under the plan are: - 589,299 shares of Genzyme General Stock; - 500,000 shares of Molecular Oncology Stock; - 500,000 shares of Surgical Products Stock; and - 500,001 shares of Tissue Repair Stock. We place limitations on the number of shares of each series of stock that can be purchased under the plan in a given year. The following table shows the shares purchased by employees under both plans:
SHARES ISSUED GENZYME GENERAL STOCK MOLECULAR ONCOLOGY STOCK TISSUE REPAIR STOCK - ------------- --------------------- ------------------------ ------------------- 1997................. 366,922 0 280,819 1998................. 388,048 0 515,936 1999................. 313,180 126,066 208,375 Available for purchase as of December 31, 1999............... 351,472 373,934 345,744
As of December 31, 1999, we had not offered shares of Surgical Products Stock for sale to employees. STOCK COMPENSATION PLANS We apply APB Opinion 25 and related interpretations in accounting for our five stock-based compensation plans: the 1990 Equity Incentive Plan, the 1997 Equity Plan (both of which are stock option plans), the 1990 Employee Stock Purchase Plan, the 1999 Employee Stock Purchase Plan, and the 1998 Director Stock Option Plan. We do not recognize compensation expense for options granted and shares purchased under the provisions of these plans for options granted to employees with an exercise price greater than or equal to fair market value. 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 123, "Accounting for Stock-Based GCS-78 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE L. STOCKHOLDERS' EQUITY (CONTINUED) Compensation," 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:
1999 1998 1997 --------- --------- --------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) CONSOLIDATED: Net income (loss): As reported............................................. $ 70,981 $ 62,567 $ 13,629 Pro forma............................................... $ 46,382 $ 43,986 $ (2,150) ALLOCATED TO GENZYME GENERAL STOCK (REVISED): Basic income per share: As reported............................................. $ 1.80 $ 1.53 $ 1.01 Pro forma............................................... $ 1.59 $ 1.36 $ .85 Diluted income per share: As reported............................................. $ 1.71 $ 1.48 $ .98 Pro forma............................................... $ 1.52 $ 1.32 $ .83 ALLOCATED TO MOLECULAR ONCOLOGY STOCK: Basic and diluted loss per share: As reported............................................. $ (2.25) $ (3.81) $ (4.64) Pro forma............................................... $ (2.34) $ (3.99) $ (4.69) ALLOCATED TO SURGICAL PRODUCTS STOCK (REVISED): Basic and diluted loss per share: As reported............................................. $ (1.38) -- -- Pro forma............................................... $ (1.53) -- -- ALLOCATED TO TISSUE REPAIR STOCK: Basic and diluted loss per share: As reported............................................. $ (1.26) $ (1.99) $ (3.07) Pro forma............................................... $ (1.40) $ (2.19) $ (3.31)
GCS-79 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE L. STOCKHOLDERS' EQUITY (CONTINUED) We estimate the fair value of each option grant using the Black-Scholes option-pricing model. In computing these PRO FORMA amounts, we used the following assumptions:
RISK-FREE DIVIDEND TERM OF GRANT INTEREST RATE VOLATILITY YIELD (IN YEARS) AVERAGE FAIR VALUE ------------- ---------- -------- ------------- ------------------ GENZYME GENERAL STOCK: 1999.................................... 5.58% 45% 0 5 $20.31 1998.................................... 5.59% 44% 0 4 $12.87 1997.................................... 5.96% 42% 0 4 $12.21 MOLECULAR ONCOLOGY STOCK: 1999.................................... 5.58% 70% 0 5 $ 2.16 1998.................................... 5.59% 70% 0 4 $ 3.92 1997.................................... 5.96% 45% 0 4 $ 2.97 SURGICAL PRODUCTS STOCK: 1999.................................... 5.58% 42% 0 5 $ 2.99 TISSUE REPAIR STOCK: 1999.................................... 5.58% 68% 0 5 $ 1.36 1998.................................... 5.59% 73% 0 4 $ 3.27 1997.................................... 5.96% 70% 0 4 $ 5.66
For stock options that were granted in 1999 at prices above fair market value, we made the following assumptions:
RISK-FREE DIVIDEND TERM OF GRANT INTEREST RATE VOLATILITY YIELD (IN YEARS) AVERAGE FAIR VALUE ------------- ---------- -------- ------------- ------------------ Genzyme General Stock............... 4.73% 45% 0 5 $15.26 Molecular Oncology Stock............ 4.73% 70% 0 5 $ 2.03 Tissue Repair Stock................. 4.73% 68% 0 5 $ 1.05
WARRANTS In 1997, we sold warrants to purchase a total of 120,000 shares of Genzyme General Stock for an aggregate purchase price of $1.0 million (Canadian). All of these warrants were cancelled in August 1999 when the Canadian Medical Discoveries Fund exercised its right to require us to repurchase the fund's interest in StressGen/Genzyme LLC. In 1992 and 1995, we issued warrants which, if exercised between December 16, 1994 and July 10, 1997, would have entitled the holders to purchase two shares of Genzyme General Stock and .0675 share of Tissue Repair Stock. If the holders had exercised the warrants after July 10, 1997, they would have received two shares of Genzyme General Stock and .0975 share of Tissue Repair Stock. We granted these warrants in exchange for the receipt of options to purchase the callable common stock of Neozyme II Corporation and in connection with our acquisition of IG Laboratories, Inc. GCS-80 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE L. STOCKHOLDERS' EQUITY (CONTINUED) Activity for Genzyme General warrants is summarized below:
WARRANTS EXERCISE PRICE -------- -------------------- Outstanding at December 31, 1996................... 35,319 $16.01--$44.20 Granted.......................................... 120,000 30.18 Exercised........................................ (19,340) 44.20 -------- Outstanding at December 31, 1997................... 135,979 16.01--44.20 -------- Exercised........................................ (13,019) 42.67--44.20 Expired.......................................... (2,960) 44.20 -------- Outstanding at December 31, 1998................... 120,000 30.18 Cancelled........................................ (120,000) 30.18 -------- Outstanding at December 31, 1999................... 0 -- ========
When we acquired PharmaGenics in 1997, we assumed a warrant that expires in 2001. This warrant is exercisable into 9,563 shares of Molecular Oncology Stock at $8.04 per share. DESIGNATED SHARES Designated shares are authorized shares of Molecular Oncology Stock, Surgical Products Stock and Tissue Repair Stock that are not issued and outstanding, but which our board of directors may issue, sell or distribute without allocating the proceeds or benefits to the division that the series of stock tracks. Designated shares are not eligible to receive dividends and cannot be voted by Genzyme. We create designated shares when we transfer cash or other assets from Genzyme General to Genzyme Molecular Oncology, Genzyme Surgical Products or Genzyme Tissue Repair or from other interdivision transactions. Our board of directors may issue designated shares: - as a stock dividend to the holders of Genzyme General Stock; - by selling the shares in a public or private sale and allocating all of the proceeds to Genzyme General; and - when convertible securities are converted, the proceeds of which will be allocated to Genzyme General. DISTRIBUTION OF DESIGNATED SHARES We will distribute designated shares of Molecular Oncology Stock, Surgical Products Stock and Tissue Repair Stock each year to holders of Genzyme General Stock if the number of designated shares of a particular series exceeds 10% of the number of shares of that series issued and outstanding as of the following dates: - November 30, 2000 for Molecular Oncology Stock; - June 30, 2000 for Surgical Products Stock; and - May 31, 2000 for Tissue Repair Stock. GCS-81 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE L. STOCKHOLDERS' EQUITY (CONTINUED) We will not distribute designated shares reserved for issuance upon the exercise or conversion of Genzyme General convertible securities and the number of designated shares our board of directors may reserve for sale not later than six months after these dates. Any proceeds from the sale of designated shares will be allocated to Genzyme General. Designated share activity is summarized in the following table:
GENZYME GENZYME GENZYME MOLECULAR SURGICAL TISSUE ONCOLOGY PRODUCTS REPAIR DESIGNATED DESIGNATED DESIGNATED SHARES SHARES SHARES ------------ ----------- ---------- Balance at December 31, 1996............ -- -- 1,793,592 Established at merger................. 6,000,000 -- -- Stock options exercised............... -- -- (103,729) Stock warrants exercised.............. -- -- (2,617) Exercise of Genzyme Tissue Repair purchase option..................... -- -- 1,000,000 Increase from equity line............. -- -- 489,810 Dividend distribution................. -- -- (2,292,003) ------------ ---------- Balance at December 31, 1997............ 6,000,000 -- 885,053 Debenture exchange.................... 3,028,571 -- -- Credit facility exchange.............. 385,972 -- -- Increase from equity line (1)......... 714,286 -- -- Dividend distribution................. (8,717,485) -- -- Stock options exercised............... -- -- (167,064) Stock warrants exercised.............. (1,352) -- (1,721) ------------ ---------- Balance at December 31, 1998............ 1,409,992 -- 716,268 Established........................... -- 16,000,000 -- Dividend distribution................. (14,835,161) Debenture adjustment.................. 278,245 -- Increase from equity line............. -- -- 1,633,399 Stock options exercised............... -- -- (111,614) ------------ ----------- ---------- Balance at December 31, 1999............ 1,688,237 1,164,839 2,238,053 ============ =========== ==========
- ------------------------ (1) Assumes that a public offering of Molecular Oncology Stock does not occur prior to June 18, 2000. If such an offering is completed prior to that date, the number of Genzyme Molecular Oncology designated shares reserved for issuance in connection with this transaction will decrease based on a formula set forth in our charter. In October 1999, we adjusted the number of Genzyme Molecular Oncology designated shares reserved in connection with the exchange in August 1998 of 6% debentures convertible into Molecular Oncology Stock into 5% debentures convertible into Genzyme General Stock. We made this adjustment based on the fair market value of Molecular Oncology Stock on October 16, 1999 in accordance with the terms of the exchange established by our board. GCS-82 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE L. STOCKHOLDERS' EQUITY (CONTINUED) In June 1999, we distributed Genzyme Surgical Products designated shares to holders of Genzyme General Stock. In November 1998, we distributed Genzyme Molecular Oncology designated shares to holders of Genzyme General Stock. Prior to our acquisition of PharmaGenics, we made a credit facility available to fund PharmaGenics' operating costs pending completion of the acquisition. When the acquisition was completed, the $2,450,000 drawn by PharmaGenics under this facility became a liability allocated to Genzyme Molecular Oncology. In September 1998, our board of directors approved the exchange of that credit facility to Genzyme General, plus accrued interest of $246,080, for Genzyme Molecular Oncology designated shares based on the fair market value of the Molecular Oncology Stock. We reclassified the amount of the note and the accrued interest to division equity upon the exchange. In July 1997, we distributed Genzyme Tissue Repair designated shares to holders of Genzyme General Stock and reserved approximately 394,000 Genzyme Tissue Repair designated shares for issuance upon the exercise of Genzyme General Stock options and warrants outstanding on the record date. We had an option to allocate up to $30.0 million in cash from Genzyme General to Genzyme Tissue Repair, at $10.00 per Genzyme Tissue Repair designated share. In June 1997, our board of directors allocated $10.0 million in cash from Genzyme General to Genzyme Tissue Repair in exchange for 1,000,000 Genzyme Tissue Repair designated shares. This option has expired. INTERDIVISIONAL FINANCING ARRANGEMENTS GENZYME MOLECULAR ONCOLOGY In 1997, our board of directors made $25.0 million of Genzyme General's cash available to Genzyme Molecular Oncology. This arrangement was subject to dollar-for dollar reduction by the proceeds of outside financing allocated to Genzyme Molecular Oncology. When Genzyme issued $20.0 million in principal of 6% convertible subordinated debentures in August 1997 and allocated the proceeds to Genzyme Molecular Oncology, the amount available under the arrangement was reduced to $5.0 million. In September 1998, Genzyme Molecular Oncology drew the remaining $5.0 million available under this arrangement in exchange for Genzyme Molecular Oncology designated shares. In August 1998, our board of directors made an additional $30.0 million of Genzyme General's cash available to Genzyme Molecular Oncology. Under the terms of this arrangement, Genzyme Molecular Oncology may draw down funds as needed each quarter in exchange for Genzyme Molecular Oncology designated shares based on the fair market value of Molecular Oncology Stock (as defined in our charter) at the time of the draw. As of December 31, 1999, Genzyme Molecular Oncology had not yet drawn any funds from this arrangement. GENZYME TISSUE REPAIR In October 1996, our board of directors made $20.0 million of Genzyme General's cash available to Genzyme Tissue Repair in order for Genzyme Tissue Repair to fund its obligations under its joint venture with Diacrin. Under this arrangement, Genzyme Tissue Repair may draw down funds as needed each quarter in exchange for Genzyme Tissue Repair designated shares based on the fair market value of Tissue GCS-83 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE L. STOCKHOLDERS' EQUITY (CONTINUED) Repair Stock (as defined in our charter) at the time of the draw. Genzyme Tissue Repair made a $7.0 million draw under this line in 1997. In May 1998, our board of directors increased the amount committed under this arrangement from $13.0 million to $50.0 million. Genzyme Tissue Repair made a $5.0 million draw in February 1999. In May 1999, the amount available under this arrangement was reduced by $25.0 million in connection with the reallocation of our ownership interest in Diacrin/Genzyme LLC from Genzyme Tissue Repair to Genzyme General. NOTE M. RESEARCH AND DEVELOPMENT AGREEMENTS Our revenues from research and development agreements with related parties include the following:
1999 1998 1997 -------- -------- -------- (AMOUNTS IN THOUSANDS) Genzyme Transgenics Corporation......................... $1,516 $3,568 $8,041 StressGen/Genzyme LLC................................... 496 2,177 315 ------ ------ ------ $2,012 $5,745 $8,356 ====== ====== ======
We allocate all of our research and development agreements with unconsolidated affiliates to our operating divisions based on the business to which the research relates. GENZYME TRANSGENICS CORPORATION. Note I., "Investments," contains disclosure regarding our relationship with Genzyme Transgenics Corporation. JOINT VENTURES. Note I., "Investments," contains disclosure regarding the following joint ventures: - RenaGel LLC; - BioMarin/Genzyme LLC; - Pharming/Genzyme LLC; - Diacrin/Genzyme LLC; - ATIII LLC; and - StressGen/Genzyme LLC. Genzyme Development Partners, L.P. was formed in September 1989 to develop, produce and derive income from the sale of the Sepra products. We refer to Genzyme Development Partners as GDP. One of our wholly-owned subsidiaries is the general partner of GDP. In September 1989, we also formed a joint venture with GDP to manufacture and market the Sepra products in the United States and Canada for use in human clinical trials or human clinical procedures. We refer to this joint venture as GVII. We consolidate GVII for financial statement purposes and allocate it to Genzyme Surgical Products. We have the option to purchase all of the outstanding partnership interests in GDP for approximately $26.0 million in cash, Genzyme General Stock or Surgical Products Stock or a combination of cash and either series of stock, plus future royalty payments on the sale of the Sepra products. We can exercise this option during the 90-day period beginning on August 31, 2000. This option will be accelerated if at any GCS-84 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE M. RESEARCH AND DEVELOPMENT AGREEMENTS (CONTINUED) time prior to August 31, 2000 GDP receives distributions from GVII of at least $5.5 million. While we had no obligation to fund the research and development activities of GDP, we elected to fund the following amounts:
1999 1998 1997 - ------------ ------------ ------------ $ 9.0 million..... $8.4 million $7.3 million
We currently intend to provide approximately $6.0 million of funding to GDP for the Sepra programs through 2000, based on the 2000 budget for the programs. Future funding commitments for the Sepra development programs will be evaluated on an annual basis. We believe, however, that additional funds will be required to complete the development, clinical testing and commercialization of GDP's products. NOTE N. 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 December 31, 1999 which, if adversely decided, would have a material adverse effect on our results of operations, financial condition, or liquidity. NOTE O. INCOME TAXES Our income (loss) before income taxes and the related income tax expense (benefit) are described in the following table:
DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- (AMOUNTS IN THOUSANDS) Domestic(1).................................... $101,548 $ 92,923 $16,907 Foreign........................................ 16,380 9,514 8,822 -------- -------- ------- Total...................................... $117,928 $102,437 $25,729 ======== ======== ======= Currently payable: Federal...................................... $ 41,638 $ 32,501 $11,344 State........................................ 2,990 6,375 1,754 Foreign...................................... 5,733 4,016 2,971 -------- -------- ------- Total...................................... $ 50,361 $ 42,892 $16,069 ======== ======== ======= Deferred: Federal...................................... $ (3,036) $ (2,180) $(3,723) State........................................ (378) (842) (246) -------- -------- ------- Total...................................... (3,414) $ (3,022) $(3,969) ======== ======== ======= Provision for income taxes................... $ 46,947 $ 39,870 $12,100 ======== ======== =======
- ------------------------ (1) Includes $5.4 million in charges for purchased research and development and acquisition expenses in 1999 and $7.0 million in similar charges in 1997 as well as $5.7 million in charges for impaired investments in 1999. GCS-85 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE O. INCOME TAXES (CONTINUED) Our provisions for income taxes were at rates other than the U.S. federal statutory tax rate for the following reasons:
1999 1998 1997 -------- -------- -------- Tax at U.S. statutory rate............................. 35.0% 35.0% 35.0% Losses in less than 80% owned subsidiaries with no current tax benefit.................................. 0.2 1.7 3.1 State taxes, net....................................... 1.3 3.5 3.0 Foreign sales corporation.............................. (4.0) (3.2) (6.7) Nondeductible amortization............................. 3.3 4.2 10.6 Benefit of tax credits................................. (3.3) (3.9) (7.7) Nondeductible interest and other....................... 3.9 1.6 (0.4) ---- ---- ----- Effective tax rate before certain charges.............. 36.4% 38.9% 36.9% ---- ---- ----- Charge for impaired investment......................... 1.7% Charge for purchased research and development net of related tax benefit.................................. 1.7% -- 10.1% ---- ---- ----- Effective tax rate..................................... 39.8% 38.9% 47.0% ==== ==== =====
The components of net deferred tax assets are described in the following table:
DECEMBER 31, ----------------------- 1999 1998 ---------- ---------- (AMOUNTS IN THOUSANDS) Deferred tax assets: Net operating loss carryforwards...................... $ 5,568 $ 6,853 Tax credits........................................... 10,648 3,714 Deferred loss......................................... -- 2,002 Intangible amortization............................... 38,757 42,717 Investments in unconsolidated subsidiaries............ 3,396 3,108 Realized and unrealized capital losses................ 11,405 10,139 Reserves, accruals and other.......................... 48,531 44,509 -------- -------- Gross deferred tax asset................................ $118,305 $113,042 Valuation allowance..................................... (18,963) (16,700) -------- -------- $ 99,342 $ 96,342 Deferred tax liabilities: Depreciable assets.................................... (24,736) (28,479) Realized and unrealized capital gains................. (12,686) -- Deferred gain......................................... (878) -- Intangible amortization............................... (1,213) (3,861) -------- -------- Net deferred tax asset................................ $ 59,829 $ 64,002 ======== ========
As a result of uncertainty surrounding our ability to realize certain favorable tax attributes that primarily relate to capital losses from the purchase of in-process research and development, we placed GCS-86 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE O. INCOME TAXES (CONTINUED) valuation allowances of $19.0 million in 1999 and $16.7 million in 1998 against otherwise recognizable deferred tax assets. Our ability to realize the benefit of net deferred tax assets is dependent on our generating sufficient taxable income before loss carryforwards expire. While it is not assured, we believe that it is more likely than not that we will be able to realize all of our net deferred tax assets. The amount we can realize, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. For U.S. income tax purposes, we had net operating loss carryforwards of $15.9 million in 1999 and $19.6 million in 1998. Our net operating loss carryforwards expire between 2003 and 2019. Prior to expiration, our ability to use these carryforwards may be limited under U.S. tax laws, specifically Section 382 of the Internal Revenue Code. Approximately, $10.6 million of the tax carryforwards we have available for federal income tax purposes relate to exercises of non-qualified stock options and disqualifying dispositions of incentive stock options. The tax benefits from stock exercises under these plans, if realized, will be credited to additional paid-in capital. NOTE P. BENEFIT PLANS We have a 401(k) plan that covers nearly all of our employees. We also maintain a separate 401(k) plan for the former employees of Deknatel Snowden Pencer, Inc., which we acquired in 1996. These plans permit qualifying employees to make contributions up to a specified percentage of their compensation, and we match a portion of those contributions. We contributed the following amounts to the 401(k) plans:
1999 1998 1997 ------------ ------------ ------------ Allocated to Genzyme General.......... $3.9 million $3.0 million $1.1 million Allocated to Genzyme Surgical 0.8 million Products............................ 0.8 million 0.8 million Allocated to Genzyme Tissue Repair.... 0.1 million 0.1 million 0.2 million ------------ ------------ ------------ $4.8 million $3.9 million $2.1 million ============ ============ ============
We also maintain defined-benefit pension plans for qualifying employees of a number of our foreign subsidiaries and qualifying former employees of Deknatel Snowden Pencer. We fund pension costs as they are accrued. Our expense related to these plans was:
1999 1998 1997 ------------ ------------ ------------ Allocated to Genzyme General.......... $1.3 million $0.8 million $0.8 million Allocated to Genzyme Surgical 0.5 million Products............................ 0.3 million 0.3 million ------------ ------------ ------------ $1.8 million $1.1 million $1.1 million ============ ============ ============
We do not present actuarial and other disclosures for these plans because we do not consider them to be material. GCS-87 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE Q. SEGMENT INFORMATION In accordance with SFAS 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 131, we have five reportable segments: - Therapeutics, which develops, manufactures and distributes human therapeutic products for significant unmet medical needs. The business derives substantially all of its revenue from sales of Cerezyme-Registered Trademark- enzyme. - Diagnostic Products, which provides diagnostic products to niche markets, focusing on in vitro diagnostics. - Genzyme Molecular Oncology, which is developing cancer products, with a focus on therapeutic vaccines and angiogenesis inhibitors. - Genzyme Surgical Products, which develops, manufactures and markets surgical products for cardiovascular surgery and general surgery. - Genzyme Tissue Repair, which develops and markets biological products for orthopedic injuries, such as cartilage repair, and severe burns. GCS-88 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE Q. SEGMENT INFORMATION (CONTINUED) We have provided information concerning the operations in these reportable segments in the following table:
DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- (AMOUNTS IN THOUSANDS) Revenues: Genzyme General: Therapeutics............................................ $488,705 $413,645 $332,712 Diagnostic Products..................................... 57,971 65,683 66,288 Other................................................... 86,409 85,846 86,927 Eliminations/Adjustments(1)............................. 2,281 4,145 10,441 -------- -------- -------- Total Genzyme General................................. 635,366 569,319 496,368 Genzyme Molecular Oncology.............................. 4,619 19,407 782 Genzyme Surgical Products............................... 111,981 103,958 100,835 Genzyme Tissue Repair................................... 20,402 17,117 10,856 Eliminations/Adjustments(2)............................. (80) (466) -- -------- -------- -------- Total....................................................... $772,288 $709,335 $608,841 ======== ======== ======== Depreciation and Amortization Expense: Genzyme General: Therapeutics............................................ $ 21,068 $ 10,862 $ 10,054 Diagnostic Products..................................... 1,909 4,715 4,540 Other................................................... 6,422 11,470 7,410 Eliminations/Adjustments(1)............................. 20,835 10,711 12,818 -------- -------- -------- Total Genzyme General................................. 50,234 37,758 34,822 Genzyme Molecular Oncology.............................. 12,057 12,354 5,245 Genzyme Surgical Products............................... 8,181 8,449 8,220 Genzyme Tissue Repair................................... 1,186 1,757 2,482 Eliminations/Adjustments(3)............................. (1,007) (1,449) 195 -------- -------- -------- Total....................................................... $ 70,651 $ 58,869 $ 50,964 ======== ======== ======== Equity in Net Loss of Unconsolidated Affiliates: Genzyme General: Therapeutics............................................ $(30,094) $(12,480) $ (2,310) Diagnostic Products..................................... -- -- -- Other................................................... 56 (107) (71) Eliminations/Adjustments(4)............................. (7,385) (7,152) (3,401) -------- -------- -------- Total Genzyme General................................. (37,423) (19,739) (5,782) Genzyme Molecular Oncology.............................. (1,870) (1,647) (258) Genzyme Surgical Products............................... (35) 54 158 Genzyme Tissue Repair................................... (3,368) (7,674) (6,719) Eliminations/adjustments................................ -- -- 343 -------- -------- -------- Total....................................................... $(42,696) $(29,006) $(12,258) ======== ======== ========
GCS-89 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE Q. SEGMENT INFORMATION (CONTINUED)
DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- (AMOUNTS IN THOUSANDS) Income Tax (Expense) Benefits: Genzyme General: Therapeutics............................................ $(84,859) $(76,606) $(61,389) Diagnostic Products..................................... (2,485) (13,755) (1,409) Other................................................... 2,952 2,134 8,658 Eliminations/Adjustments(1)............................. (8) 7,853 10,415 -------- -------- -------- Genzyme General tax provision......................... (84,400) (80,374) (43,725) Genzyme Molecular Oncology................................ 2,647 2,647 1,092 Genzyme Surgical Products................................. -- -- -- Genzyme Tissue Repair..................................... -- -- -- Eliminations/Adjustments(11).............................. 34,806 37,857 30,533 -------- -------- -------- Total....................................................... $(46,947) $(39,870) $(12,100) ======== ======== ======== Net Income: Genzyme General: Therapeutics(5)......................................... $133,854 $120,832 $104,527 Diagnostic Products(6).................................. 3,915 21,694 2,400 Other(7)................................................ (4,661) (3,367) (14,741) Eliminations/Adjustments(8)............................. 8,969 (6,107) (15,544) -------- -------- -------- Net income for Genzyme General........................ 142,077 133,052 76,642 Genzyme Molecular Oncology................................ (28,832) (19,107) (19,578) Genzyme Surgical Products(9).............................. (48,037) (49,856) (29,740) Genzyme Tissue Repair..................................... (30,040) (40,386) (45,984) Eliminations/Adjustments(10).............................. 35,813 38,864 32,289 -------- -------- -------- Total....................................................... $ 70,981 $ 62,567 $ 13,629 ======== ======== ========
- ------------------------ (1) Includes primarily amounts related to Genzyme General's corporate research and development and administrative activities that we do not specifically allocate to a particular segment of Genzyme General. (2) Represents the elimination of inter-divisional revenues. (3) Consists primarily of a difference in amortization due to $2.9 million of additional goodwill associated with the PharmaGenics acquisition carried at the Genzyme Molecular Oncology as compared to amounts carried at the consolidated level and other adjustments related to our corporate activities that we do not specifically allocate to a particular segment. The difference in the amortization results from the application of our policy to account for income taxes at the divisional level as if each division were a separate taxpayer. (4) Represents our portion of the net loss of Genzyme Transgenics Corporation, an unconsolidated affiliate, which we do not specifically allocate to a particular segment of Genzyme General. GCS-90 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE Q. SEGMENT INFORMATION (CONTINUED) (5) Therapeutics' net income for 1998 includes a $14.8 million charge to write down excess inventory used to make Ceredase-Registered Trademark- enzyme. (6) Diagnostic Products' net income for 1998 and 1999 includes gains on the sale of product lines of $0.5 million in 1999 and $31.2 million in 1998. (7) Other net income for 1999 includes a $7.5 million gain on the sale of a product line. (8) Includes the net income for Genzyme General's corporate administrative and research and development activities which we do not specifically allocate to a particular segment of Genzyme General. Includes a $14.4 million gain upon receipt of a payment associated with the termination of the agreement to acquire Cell Genesys, Inc. (9) In 1998, Genzyme Surgical Products recorded a $10.4 million charge to cost of goods sold to reduce Sepra products inventory to net realizable value. (10) Includes income tax benefits that have not been recognized in the tax provisions of any of the divisions. Also includes the elimination of inter-divisional revenues and expenses and a difference in amortization due to $2.9 million of additional goodwill associated with the PharmaGenics acquisition carried at the Genzyme Molecular Oncology as compared to amounts carried at corporate levels. The difference in the amortization results from the application of our policy to account for income taxes at the divisional level as if each division were a separate taxpayer. (11) Represents income tax benefits that have not been recognized in the tax provisions of any of the divisions.
DECEMBER 31, ----------------------- 1999 1998 ---------- ---------- (AMOUNTS IN THOUSANDS) Segment Assets: Genzyme General: Therapeutics............................................ $ 338,960 $ 326,305 Diagnostic Products..................................... 40,266 49,430 Other................................................... 83,088 94,930 Eliminations/Adjustments................................ 937,269 939,726 ---------- ---------- Total Genzyme General................................. 1,399,583 1,410,391 Genzyme Molecular Oncology................................ 9,692 35,952 Genzyme Surgical Products................................. 370,924 277,578 Genzyme Tissue Repair..................................... 19,648 18,954 Eliminations/Adjustments.................................. (12,565) (52,321) ---------- ---------- Total....................................................... $1,787,282 $1,690,554 ========== ==========
GCS-91 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE Q. SEGMENT INFORMATION (CONTINUED) Segment assets for Genzyme include accounts receivable, inventory, and certain fixed and intangible assets. Eliminations/Adjustments for Genzyme General consists of the differences between the total assets for Genzyme General's segments and the total combined assets for Genzyme General as follows:
DECEMBER 31, ----------------------- 1999 1998 ---------- ---------- (AMOUNTS IN THOUSANDS) Cash, cash equivalents, and short- and long-term investments............................................... $513,905 $575,729 Deferred tax assets-current................................. 41,195 39,725 Intangibles, net............................................ 33,871 40,079 Property, plant and equipment, net.......................... 172,165 133,995 Investment in equity securities............................. 94,719 51,977 Deferred tax assets-noncurrent.............................. 18,631 24,277 Other....................................................... 50,218 21,623 -------- -------- Total Eliminations/Adjustments............................ $924,704 $887,405 ======== ========
We operate in the healthcare industry, and we manufacture and market our products primarily in the United States and Europe. Our principal manufacturing facilities are located in the United States, the United Kingdom, Switzerland and Germany. We purchase products from our English and Swiss subsidiaries for sale to customers in the United States. We set transfer prices from our foreign subsidiaries to allow us to produce profit margins commensurate with our sales and marketing effort. Our Dutch subsidiary is our primary distributor of therapeutic products in Europe. No subsidiary in any individual foreign country has revenue from external customers in excess of 10% of our total revenue. The following table contains certain financial information by geographic area:
DECEMBER 31, -------------------------------- 1999 1998 1997 -------- ---------- -------- (AMOUNTS IN THOUSANDS) Revenues: U.S....................................................... $512,304 $ 485,864 $446,991 Europe.................................................... 184,169 171,302 158,121 Other..................................................... 75,815 52,169 3,729 -------- ---------- -------- Total................................................... $772,288 $ 709,335 $608,841 ======== ========== ======== Long-lived assets: U.S....................................................... $732,771 $ 970,898 $755,040 Other..................................................... 52,540 57,247 54,349 -------- ---------- -------- Total................................................... $785,311 $1,028,145 $809,389 ======== ========== ========
Our results of operations are highly dependent on sales of Ceredase-Registered Trademark- and Cerezyme-Registered Trademark- enzymes. Sales of these products represented 70% of product revenue in 1999, 67% of product revenue in 1998, and 63% of product revenue in 1997. We sell these products directly to physicians, hospitals and treatment centers as well as through unaffiliated distributors. Sales to one distributor represented 20% of Ceredase-Registered Trademark- and Cerezyme-Registered Trademark- enzyme revenues in 1999, 19% of these revenues in 1998, and 18% of these revenues in 1997. We believe that our credit risk associated with trade receivables is mitigated as a result of the fact that we GCS-92 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE Q. SEGMENT INFORMATION (CONTINUED) sell these products to a large number of customers in a number of different industries and over a broad geographic area. NOTE R. QUARTERLY RESULTS (UNAUDITED)
2ND 1ST QUARTER QUARTER 3RD QUARTER 4TH QUARTER 1999 1999 1999 1999 ----------- --------- ----------- ----------- (AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS) Net revenue...................................... $183,744 $186,684 $191,415 $210,445 Gross profit..................................... 126,526 128,683 133,404 142,536 Net income....................................... 16,057 6,291 13,778 34,855 Income per share: Allocated to Genzyme General Stock (Revised-- Note A): Basic........................................ $ 0.40 $ 0.28 $ 0.46 $ 0.66 Diluted...................................... $ 0.38 $ 0.28 $ 0.43 $ 0.62 Allocated to Molecular Oncology Stock: Basic and diluted............................ $ (0.56) $ (0.64) $ (0.60) $ (0.46) Allocated to Surgical Products Stock (Revised-- Note A): Basic and diluted............................ N/A $ (0.06) $ (0.74) $ (0.59) Allocated to Tissue Repair Stock: Basic and diluted............................ $ (0.44) $ (0.37) $ (0.25) $ (0.22)
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER 1998 1998 1998 1998 ----------- ----------- ----------- ----------- (AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS) Net revenue..................................... $160,551 $174,874 $173,394 $200,516 Gross profit.................................... 99,434 111,436 87,142 130,802 Net income...................................... 7,784 13,096 14,967 26,720 Income per share: Allocated to Genzyme General Stock (Revised-- Note A): Basic....................................... $ 0.32 $ 0.40 $ 0.41 $ 0.40 Diluted..................................... $ 0.31 $ 0.39 $ 0.39 $ 0.39 Allocated to Molecular Oncology Stock: Basic....................................... $ (1.66) $ (1.90) $ (2.06) $ 0.36 Diluted..................................... $ (1.66) $ (1.90) $ (2.06) $ 0.22 Allocated to Tissue Repair Stock: Basic and diluted........................... $ (0.57) $ (0.52) $ (0.47) $ (0.44)
GCS-93 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE S. SUBSEQUENT EVENTS GENZYME TRANSGENICS CORPORATION In February 2000, we recorded a gain of $20.3 million relating to a public offering of 3.5 million common shares by our unconsolidated affiliate, Genzyme Transgenics Corporation ("GTC"). The public offering resulted in net proceeds to GTC of $75.2 million (after the exercise of the underwriters' overallotment option). As a result of the issuance of additional shares by GTC, our ownership interest in GTC decreased from 33% to 28%. ACQUISITION OF BIOMATRIX, INC. AND FORMATION OF GENZYME BIOSURGERY In March 2000, we entered into an agreement to acquire Biomatrix, Inc. Upon the effectiveness of our Registration Statement on Form S-4 and completion of the merger, we will form a new operating division called Genzyme Biosurgery and create a new series of common stock that is intended to reflect its value and track its performance. We refer to this stock as "Biosurgery Stock." In connection with the merger, and upon Genzyme shareholder approval, the assets and liabilities allocated to Genzyme Surgical Products and Genzyme Tissue Repair will be re-allocated to Genzyme Biosurgery and shares of Surgical Products Stock and Tissue Repair Stock will be exchanged for Biosurgery Stock. We will account for the acquisition of Biomatrix as a purchase. Biomatrix stockholders will receive $37.00 in cash, one share of Biosurgery Stock or a combination of cash and stock for each share of Biomatrix common stock they hold. The merger agreement provides that we will pay cash for up to 28.38% of the outstanding shares of Biomatrix common stock that receive merger consideration, or up to approximately $245.0 million. Holders of Surgical Products Stock will receive 0.6060 share of Biosurgery Stock in exchange for each share of Surgical Products Stock they hold and holders of Tissue Repair Stock will receive 0.3352 share of Biosurgery Stock in exchange for each share of Tissue Repair Stock they hold. REGISTRATION STATEMENT In March 2000, we filed a prospectus with the SEC covering the offering of 3,000,000 shares of Molecular Oncology Stock (plus 450,000 shares issuable upon exercise of the underwriters' over-allotment option). The proceeds of the offering were to be used by Genzyme Molecular Oncology to fund research, pre-clinical and clinical development programs, to repay existing indebtedness, and for working capital and general corporate purposes. GCS-94 REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF GENZYME CORPORATION: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Genzyme Corporation and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. The consolidated financial statements for each of the three years in the period ended December 31, 1999 have been revised, as described in Note A. /s/ PRICEWATERHOUSECOOPERS LLP Boston, Massachusetts February 23, 2000, except for the information in Note A, as to which the date is October 11, 2000 GCS-95 GENZYME CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ------------------------- ------------------- --------------------------------- ----------- ------------- ADDITIONS --------------------------------- BALANCE AT CHARGED TO COSTS CHARGED TO BALANCE AT DESCRIPTION BEGINNING OF PERIOD AND EXPENSES OTHER ACCOUNTS DEDUCTIONS END OF PERIOD - ------------------------- ------------------- ---------------- -------------- ----------- ------------- Year ended December 31, 1999: Allowance for doubtful accounts............... $11,299,100 $12,775,200 $ -- $ 3,789,400 $20,284,900 Inventory reserve........ $40,410,100 $ 5,568,400 $ -- $ 8,378,400 $37,600,100 Year ended December 31, 1998: Allowance for doubtful accounts............... $ 9,730,700 $ 5,482,000 $ -- $ 3,913,600 $11,299,100 Inventory reserve........ $27,518,300 $31,664,000 $ -- $18,772,200 $40,410,100 Year ended December 31, 1997: Allowance for doubtful accounts............... $13,292,900 $ 2,835,000 $ -- $ 6,397,200(1) $ 9,730,700 Inventory reserve........ $10,912,300 $19,505,000 $ -- $ 2,899,000 $27,518,300
- ------------------------ (1) Uncollectible accounts written off, net of recoveries. GCS-96 EX-13.2 3 ex-13_2.txt EXHIBIT 13.2 EXHIBIT 13.2 FINANCIAL STATEMENTS
PAGE NO. -------- GENZYME GENERAL A DIVISION OF GENZYME CORPORATION Combined Selected Financial Data.......................... GG-2 Management's Discussion and Analysis of Genzyme General's Financial Condition and Results of Operations........... GG-5 Combined Statements of Operations--For the Years Ended December 31, 1999, 1998 and 1997........................ GG-18 Combined Balance Sheets--December 31, 1999 and 1998....... GG-19 Combined Statements of Cash Flows--For the Years Ended December 31, 1999, 1998 and 1997........................ GG-20 Notes to Combined Financial Statements.................... GG-22 Report of Independent Accountants......................... GG-45
GG-1 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION COMBINED SELECTED FINANCIAL DATA Genzyme General is our operating division that develops and markets: - therapeutic products, with an expanding focus on products to treat patients suffering from lysosomal storage disorders and other specialty therapeutics; - diagnostic products, with a focus on IN VITRO diagnostics; and - other products and services, such as genetic testing services and lipids and peptides for drug delivery. A series of our common stock, Genzyme General Division Common Stock (which we refer to as "Genzyme General Stock") is designed to reflect the value and track the performance of this division. Genzyme General Stock is common stock of Genzyme Corporation, not of Genzyme General; Genzyme General is a division, not a company or legal entity, and therefore does not and cannot issue stock. The chief mechanisms intended to cause Genzyme General Stock to "track" the financial performance of Genzyme General are provisions in our charter governing dividends and distributions. Under these provisions, our charter factors the assets and liabilities and income or losses attributable to Genzyme General into the determination of the amount available to pay dividends on Genzyme General Stock. To determine earnings per share, we allocate Genzyme's earnings to each series of our common stock based on the earnings attributable to that series of stock. The earnings attributable to Genzyme General Stock is defined in our charter as the net income or loss of Genzyme General determined in accordance with generally accepted accounting principles and as adjusted for tax benefits allocated to or from Genzyme General in accordance with our management and accounting policies. Our charter also requires that all income and expenses of Genzyme be allocated among the divisions in a reasonable and consistent manner. Our board of directors, however, retains considerable discretion in determining the types, magnitudes and extent of allocations to each series of common stock without shareholder approval. Because the earnings allocated to Genzyme General Stock are based on the income or losses attributable to Genzyme General, we include financial statements and management's discussion and analysis of Genzyme General to aid investors in evaluating its performance. The following combined selected financial data reflect the results of operations and financial position of the operations and assets we have allocated to Genzyme General and should be read in conjunction with the financial statements of Genzyme General and accompanying notes. On June 28, 1999, we created of Genzyme Surgical Products as a separate division of Genzyme, distributed Surgical Products Stock, and modified the way that we allocate income and losses to our series of stock. These combined selected financial data reflect the results and financial position of the operations and assets we have allocated to Genzyme General as if the operations of Genzyme Surgical Products had been accounted for as a separate division for all periods presented. Although the results of Genzyme General for all periods presented no longer include the results of Genzyme Surgical Products, this does not impact the historical allocation of Genzyme's earnings among its series of common stock. Through June 27, 1999, the losses of Genzyme Surgical Products were allocated to Genzyme General Stock. From June 28, 1999, the losses of Genzyme Surgical Products were no longer included in the determination of income allocated to Genzyme General Stock. Subsequent to the creation of Genzyme Surgical Products, pursuant to the Company's management and accounting policies, tax benefits generated by Genzyme Surgical Products continued to be allocated to Genzyme General Stock. The greater segregation of assets, liabilities and earnings or losses resulting from the creation of Genzyme Surgical Products is a trend that we do not expect to continue. We plan to combine Genzyme Surgical Products and Genzyme Tissue Repair into Genzyme Biosurgery upon the completion of the Biomatrix acquisition, reducing the segregation of assets among our divisions and reducing the series of common stock outstanding. As market or competitive conditions warrant, we may create new series of GG-2 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION COMBINED SELECTED FINANCIAL DATA (CONTINUED) tracking stock or change our earnings allocation methodology. However, at the present time, we have no plans to do so. COMBINED STATEMENTS OF OPERATIONS DATA
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (AMOUNTS IN THOUSANDS) Revenues: Net product sales........................... $571,531 $509,727 $429,092 $373,769 $304,365 Net service sales........................... 57,223 55,445 55,835 61,638 47,230 Revenues from research and development contracts: Related parties........................... 1,516 3,568 8,041 23,011 26,758 Other..................................... 5,096 579 3,400 2,310 202 -------- -------- -------- -------- -------- Total revenues.......................... 635,366 569,319 496,368 460,728 378,555 Operating costs and expenses: Cost of products sold(1).................... 115,125 138,802 146,226 123,276 113,231 Cost of services sold....................... 35,637 34,240 35,451 42,889 31,137 Selling, general and administrative......... 149,427 126,172 118,616 107,219 94,944 Research and development (including research and development related to contracts)..... 97,746 73,139 62,905 62,276 51,936 Amortization of intangibles................. 8,106 7,610 6,887 5,865 4,647 Purchase of in-process research and development(2)............................ 5,436 -- -- 106,469 14,216 Other....................................... -- -- -- 1,000 -- -------- -------- -------- -------- -------- Total operating costs and expenses........ 411,477 379,963 370,085 448,994 310,111 -------- -------- -------- -------- -------- Operating income.............................. 223,889 189,356 126,283 11,734 68,444 Other income (expenses): Equity in net loss of unconsolidated affiliates................................ (37,423) (19,739) (5,782) (3,656) (1,809) Gain on affiliate sale of stock(3).......... 6,683 2,369 -- 1,013 -- Gain on sale of investment in equity securities................................ 1,963 3,391 -- 1,711 -- Minority interest........................... 3,674 4,285 -- -- 1,608 Gain on sale of product line(4)............. 8,018 31,202 -- -- -- Charge for impaired investments............. (5,712) (3,397) -- -- -- Other(5).................................... 14,389 -- (2,000) -- -- Investment income........................... 30,881 22,953 9,940 13,825 7,428 Interest expense............................ (19,885) (16,994) (8,074) (6,784) (1,069) -------- -------- -------- -------- -------- Total other income (expenses)............. 2,588 24,070 (5,916) 6,109 6,158 -------- -------- -------- -------- -------- Income before income taxes.................. 226,477 213,426 120,367 17,843 74,602 Provision for income taxes.................. (84,400) (80,374) (43,725) (28,530) (34,234) -------- -------- -------- -------- -------- Division net income (loss).................. $142,077 $133,052 $ 76,642 $(10,687) $ 40,368 ======== ======== ======== ======== ========
GG-3 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION COMBINED SELECTED FINANCIAL DATA (CONTINUED) COMBINED BALANCE SHEET DATA
DECEMBER 31, -------------------------------------------------------- 1999 1998 1997 1996 1995 ---------- ---------- -------- -------- -------- (AMOUNTS IN THOUSANDS) Cash and investments................... $ 513,905 $ 556,097 $192,222 $169,543 $278,663 Working capital........................ 487,561 381,685 273,697 340,817 307,918 Total assets........................... 1,399,583 1,410,391 960,490 975,910 854,411 Long-term debt and convertible debt(6).............................. 272,622 274,646 117,978 223,846 124,473 Division equity........................ 1,007,614 939,967 745,895 645,185 659,106
- ------------------------ (1) Cost of products sold for 1997 includes a $18.1 million charge in connection with the discontinuance of our melatonin, bulk pharmaceuticals and fine chemicals product lines. Cost of products sold for 1998 includes a $14.8 million charge to write-down excess Ceredase-Registered Trademark- enzyme inventory. (2) Charges for the purchase of in-process research and development were incurred in connection with the following acquisitions: - 1995-$14.2 million from the acquisition of a minority interest in IG Laboratories, Inc. - 1996-$106.4 million from the acquisition of Neozyme II Corporation - 1999-$5.4 million from the acquisition of Peptimmune, Inc. (3) Gain on affiliate sale of stock in 1999 represents the gain on our investment in Genzyme Transgenics Corporation ("GTC") as a result of GTC's various issuances of additional shares of its stock. (4) Gain on sale of product line of $31.2 million in 1998 relates to the sale of our research products business assets to Techne Corporation in July 1998. Gain on sale of product line in 1999 consists of $7.5 million, representing the payment of a note receivable that we received as partial consideration for the sale of Genetic Design, Inc. to Laboratory Corporation of America in 1996. (5) Other income in 1999 includes the receipt of a $14.4 million payment associated with the termination of our agreement to acquire Cell Genesys, Inc., net of acquisition related expenses. (6) Long-term debt and convertible debt consists primarily of $200.0 million and $100.0 million outstanding under a revolving credit facility in 1996 and 1997, respectively. Long-term debt and convertible debt in 1998 and 1999 consists primarily of $250.0 million in principal of 5 1/4% convertible subordinated notes due June 2005. GG-4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF GENZYME GENERAL'S FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION This discussion contains forward-looking statements. These forward-looking statements represent the expectations of our management as of the filing date of this annual report. Actual results could differ materially from those anticipated by the forward-looking statements due to the risks and uncertainties described under the caption "Factors Affecting Future Operating Results" for Genzyme General and Genzyme Corporation included in this annual report. You should consider carefully each of these risks and uncertainties in evaluating the financial condition and results of operations of Genzyme General and Genzyme. We prepare the financial statements of Genzyme General in accordance with generally accepted accounting principles. We present financial information and accounting policies specific to Genzyme General in the accompanying combined financial statements. We present financial information and accounting policies relevant to the corporation and its operating divisions taken as a whole in our consolidated financial statements. You should read the consolidated financial statements in conjunction with the financial statements of Genzyme General. Note A., "Summary of Significant Accounting Policies," to our accompanying consolidated financial statements contains our accounting policies. Genzyme General Division Common Stock, which we refer to as "Genzyme General Stock," is a series of our common stock that is designed to reflect the value and track the performance of Genzyme General. The chief mechanisms intended to cause Genzyme General Stock to "track" the financial performance of Genzyme General are provisions in our charter governing dividends and distributions. Under these provisions, our charter factors the assets and liabilities and income or losses attributable to Genzyme General into the determination of the amount available to pay dividends on Genzyme General Stock. To determine earnings per share, we allocate Genzyme's earnings to each series of our common stock based on the earnings attributable to that series of stock. The earnings attributable to Genzyme General Stock is defined in our charter as the net income or loss of Genzyme General determined in accordance with generally accepted accounting principles and as adjusted for tax benefits allocated to or from Genzyme General in accordance with our management and accounting policies. Our charter also requires that all income and expenses of Genzyme be allocated among the divisions in a reasonable and consistent manner. However, subject to its fiduciary duties, our board of directors can, at its discretion, change the methods of allocating earnings to each series of common stock. We intend to allocate earnings using our current methods for the foreseeable future. Because the earnings allocated to Genzyme General Stock are based on the income or losses attributable to Genzyme General, we include financial statements and management's discussion and analysis of Genzyme General to aid investors in evaluating its performance. While Genzyme General Stock is designed to reflect Genzyme General's performance, it is common stock of Genzyme Corporation and not Genzyme General; Genzyme General is a division, not a company or legal entity, and therefore does not and cannot issue stock. Consequently, holders of Genzyme General Stock have no specific rights to assets allocated to Genzyme General. Genzyme Corporation continues to hold title to all of the assets allocated to Genzyme General and is responsible for all of its liabilities, regardless of what we deem for financial statement presentation purposes as allocated to any division. Holders of Genzyme General 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 Genzyme GG-5 General Stock and other tracking stockholders would only have the rights of common stockholders in the combined assets of Genzyme. Our charter requires us to manage and account for transactions between Genzyme General and our other divisions and with third parties, and any resulting re-allocations of assets and liabilities, by applying consistently across divisions a detailed set of policies established by our board of directors. We publicly disclose our divisional management and accounting policies, which appear in Exhibit 99.1 to this Annual Report on Form 10-K. Our charter requires that all assets and liabilities of Genzyme be allocated among the divisions. Our board of directors, however, retains considerable discretion in determining the types, magnitudes and extent of allocations to each series of common stock without shareholder approval. In June 1999, we established Genzyme Surgical Products as a separate division of Genzyme. Genzyme General transferred $150.0 million in cash, cash equivalents and investments, and certain other assets, to Genzyme Surgical Products in connection with the creation of Genzyme Surgical Products as a separate division of Genzyme. The business of Genzyme Surgical Products previously operated as a business unit of Genzyme General. These financial statements reflect the financial position, results of operations and cash flows allocated to Genzyme General as if the operations of Genzyme Surgical Products had been separately accounted for as its own division of the corporation for all periods presented. By excluding Genzyme Surgical Products' results of operations, and therefore its operating losses, from Genzyme General's results, the net income of Genzyme General has increased for all periods presented. Genzyme General's tax provision also increased because the tax benefits associated with Genzyme Surgical Products losses are not reflected in Genzyme General's tax provision. Although such benefits are allocated to Genzyme General Stock in the determination of Genzyme's earnings allocations, those benefits do not enter into the determination of Genzyme General's tax provision under generally accepted accounting principles. The impact on Genzyme General's net income of the exclusion of Genzyme Surgical Products' results of operations is as follows (in thousands):
1999 1998 1997 -------- -------- -------- Genzyme Surgical Products net loss.......................... $48,037 $49,856 $29,740 Tax benefit................................................. (16,128) (17,936) (10,112) ------- ------- ------- Increase in Genzyme General's net income.................... $31,909 $31,920 $19,628 ======= ======= =======
These increases represented 22%, 24% and 26% of Genzyme General's net income for 1999, 1998 and 1997, respectively. The greater segregation of assets, liabilities and earnings or losses resulting from the creation of Genzyme Surgical Products is a trend that we do not expect to continue. We plan to combine Genzyme Surgical Products and Genzyme Tissue Repair into Genzyme Biosurgery upon the completion of the Biomatrix acquisition, reducing the segregation of assets among our divisions and reducing the series of common stock outstanding. At this time, we have no plans to create new series of tracking stock or to change our earnings allocation methodology. We present earnings per share and earnings allocation data for Genzyme General Stock in our consolidated financial statements. We present financial information and accounting policies specific to Genzyme General in the accompanying combined financial statements. We present financial information and accounting policies relevant to the corporation and its operating divisions taken as a whole in our consolidated financial statements. You should, therefore, read this discussion and analysis of Genzyme General's financial position and results of operations in conjunction with the financial statements and related notes of Genzyme General, the discussion and analysis of Genzyme's financial position and results of operations, and the consolidated financial statements and related notes of Genzyme, all of which are included in this annual report. GG-6 RESULTS OF OPERATIONS The following discussion summarizes the key factors our management believes are necessary for an understanding of Genzyme General's financial statements. The components of Genzyme General's combined statements of operations are described in the following table:
99/98 98/97 INCREASE/ INCREASE/ (DECREASE) (DECREASE) 1999 1998 1997 % CHANGE % CHANGE -------- -------- -------- ---------- ---------- (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Total revenues............................ $635,366 $569,319 $496,368 12% 15% Cost of products and services sold........ 150,762 173,042 181,677 (13)% (5)% Selling, general and administrative....... 149,427 126,172 118,616 18% 6% Research and development (including research and development related to contracts).............................. 97,746 73,139 62,905 34% 16% Amortization of intangibles............... 8,106 7,610 6,887 7% 10% Purchase of in-process research and development............................. 5,436 -- -- 100% N/A -------- -------- -------- Total operating costs and expenses.... 411,477 379,963 370,085 8% 3% -------- -------- -------- Operating income.......................... 223,889 189,356 126,283 18% 50% Other income (expenses), net.............. 2,588 24,070 (5,916) (89)% 507% -------- -------- -------- Income before income taxes................ 226,477 213,426 120,367 6% 77% Provision for income taxes................ (84,400) (80,374) (43,725) 5% 84% -------- -------- -------- Division net income....................... $142,077 $133,052 $ 76,642 7% 74% ======== ======== ========
REVENUES
99/98 98/97 INCREASE/ INCREASE/ (DECREASE) (DECREASE) 1999 1998 1997 % CHANGE % CHANGE -------- -------- -------- ---------- ---------- (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Product revenue........................... $571,531 $509,727 $429,092 12% 19% Service revenue........................... 57,223 55,445 55,835 3% (1)% -------- -------- -------- Total product and service revenue..... 628,754 565,172 484,927 11% 17% Research and development revenue.......... 6,612 4,147 11,441 59% (64)% -------- -------- -------- Total revenues........................ $635,366 $569,319 $496,368 12% 15% ======== ======== ========
GG-7 The following table sets forth Genzyme General's product and service revenue on a segment basis:
99/98 98/97 INCREASE/ INCREASE/ (DECREASE) (DECREASE) 1999 1998 1997 % CHANGE % CHANGE -------- -------- -------- ---------- ---------- (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Therapeutics.............................. $488,705 $413,645 $332,712 18% 24% Diagnostic Products....................... 57,971 65,683 66,288 (12)% (1)% Other: Product revenue......................... 24,855 30,399 30,092 (18)% 1% Service revenue......................... 57,223 55,445 55,835 3% (1)% -------- -------- -------- Total product and service revenue......... $628,754 $565,172 $484,927 11% 17% ======== ======== ========
THERAPEUTICS Genzyme General's increase in product revenue during both periods is largely due to increased sales of Cerezyme-Registered Trademark- enzyme, which was attributed to the identification of new Gaucher disease patients throughout the world and strong international sales. We have provided information regarding the growth in sales of Genzyme General's Gaucher disease therapies during both periods in the following table:
99/98 98/97 INCREASE/ INCREASE/ (DECREASE) (DECREASE) 1999 1998 1997 % CHANGE % CHANGE -------- -------- -------- ---------- ---------- (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Sales of Cerezyme-Registered Trademark- enzyme and Ceredase-Registered Trademark- enzyme... $478,538 $411,060 $332,712 16% 24% % of total product revenue................ 84% 81% 78%
Genzyme General's results of operations are highly dependent on sales of Cerezyme-Registered Trademark- enzyme and a reduction in revenue from sales of this product would adversely affect its results of operations. Revenue from Cerezyme-Registered Trademark- enzyme would be impacted negatively if competitors developed alternative treatments for Gaucher disease and the alternative products gained commercial acceptance. Genzyme General is aware of companies that have initiated efforts to develop competitive products and other companies may do so in the future. Therapeutics revenue for each period also includes sales of Thyrogen-Registered Trademark- hormone, which is an adjunctive diagnostic tool for well differentiated thyroid cancer. DIAGNOSTIC PRODUCTS The decrease in diagnostic products revenue for 1999 as compared to 1998 reflects the sale of the research products business to Techne Corporation in July 1998 and immunochemistry product line to an operating unit of Sybron Laboratory Products Corp. in July 1999. Diagnostic products revenue includes royalties on product sales by Techne's biotechnology group. OTHER Other revenue for each period include sales of: - lipids and peptides for drug delivery; and - genetic testing services. GG-8 INTERNATIONAL PRODUCT AND SERVICE REVENUE A substantial portion of Genzyme General's revenue was generated outside of the United States, as described in the following table. Most of these revenues were attributable to sales of Cerezyme-Registered Trademark- enzyme.
99/98 98/97 INCREASE/ INCREASE/ (DECREASE) (DECREASE) 1999 1998 1997 % CHANGE % CHANGE -------- -------- -------- ---------- ---------- (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) International product and service revenue................................. $273,851 $248,363 $217,777 10% 14% % of total product and service revenue.... 44% 44% 45%
MARGINS
99/98 98/97 INCREASE/ INCREASE/ (DECREASE) (DECREASE) 1999 1998 1997 % CHANGE % CHANGE -------- -------- -------- ---------- ---------- (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Product margin............................ $456,406 $370,925 $282,866 23% 31% % of product revenue.................. 80% 73% 66% Service margin............................ 21,586 21,205 20,384 2% 4% % of service revenue.................. 38% 38% 37% Total gross margin........................ 477,992 392,130 303,250 22% 29% % of total product and service revenue............................. 76% 69% 63%
Genzyme General provides a broad range of healthcare products and services. As a result, Genzyme General's gross margin varies significantly based on the category of product or service. Sales of therapeutic products, including Cerezyme-Registered Trademark- enzyme, result in higher margins than diagnostic products. During 1998, Genzyme General recorded a $14.8 million charge to cost of products sold to write down excess inventory used to make Ceredase-Registered Trademark- enzyme. Without the effect of this charge, Genzyme General's product margin for 1998 would have been 76% and its total gross margin during that period would have been 72%. Excluding the charge described above, the increases in product margin and total gross margin during each period are a result of increased efficiency and process improvements in manufacturing as well as increased sales of Cerezyme-Registered Trademark- enzyme. Our service margin also increased during each period as a result of increases in sales of DNA and cancer testing services. OPERATING EXPENSES 1999 AS COMPARED TO 1998 The increase in selling, general and administrative expenses in 1999 as compared to 1998 is related to: - increased staffing to support the growth in several of Genzyme General's product lines; - a $3.0 million increase to the reserve for doubtful accounts in Genzyme General's genetic testing business as a result of a comprehensive review of contract receivables and self-pay receivables during 1999; - costs associated with the market introduction of Thyrogen-Registered Trademark- hormone in January 1999; and GG-9 - increased expenditures to support the increased sales of Cerezyme-Registered Trademark- enzyme. The increase in research and development expense in 1999 as compared to 1998 is a result of: - increased costs for the program to develop transgenic recombinant human antithrombin III, which is conducted through our consolidated joint venture, ATIII LLC, discussed in "--Minority Interest" below; - increased spending on Genzyme General's program to develop Fabrazyme-TM- enzyme for the treatment of Fabry disease; - increased spending on Genzyme General's cell and gene therapy programs. In the fourth quarter of 1998, Genzyme General began amortizing a milestone payment that it made to GelTex Pharmaceuticals, Inc. upon FDA approval of Renagel-Registered Trademark- capsules. As a result, amortization of intangibles increased slightly during 1999 as compared to 1998. In 1999, we acquired Peptimmune, Inc., a privately-held company whose lead development program was a preclincal research stage program focused on a treatment for pemphigus vulgaris, a rare genetic disease. Because the technology acquired had narrow utility and no application to our ongoing programs, we considered it to have no alternative future use. As a result, we allocated $5.4 million of the purchase price to in-process technology. We recorded this amount as a one-time charge to operations in 1999. We will record our expenses related to the development of the acquired technology as research and development expense until the time at which it reaches technological feasibility. Given the inherent risk in developing early-stage biotechnology products, we may never demonstrate the feasibility of that technology. See "--Factors Affecting Future Operating Results" below. In addition, given the history of consolidation in the biotechnology industry, we expect that we will complete additional acquisitions in the future. Some of these acquisitions will result in a further investment by us in in-process technology. 1998 AS COMPARED TO 1997 The increase in selling, general and administrative expenses in 1998 as compared to 1997 was related to: - increased sales and marketing costs related to the product launch of Thyrogen-Registered Trademark- hormone; and - increased expenditures to support the increased sales of Cerezyme-Registered Trademark- enzyme. The increase in research and development expense in 1998 as compared to 1997 was primarily attributable to $12.0 million in costs resulting from the consolidation of the results of ATIII LLC, for which there were no comparable amounts in 1997. GG-10 OTHER INCOME AND EXPENSES
99/98 98/97 INCREASE/ INCREASE/ (DECREASE) (DECREASE) 1999 1998 1997 % CHANGE % CHANGE -------- -------- -------- ---------- ---------- (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Equity in net loss of unconsolidated affiliates................................ $(37,423) $(19,739) $(5,782) 90% 241% Gain on affiliate sale of stock............. 6,683 2,369 -- 182% N/A Gain on sale of investments in equity securities................................ 1,963 3,391 -- (42)% N/A Minority interest........................... 3,674 4,285 -- (14)% N/A Gain on sale of product line................ 8,018 31,202 -- (74)% N/A Charge for impaired investments............. (5,712) (3,397) -- 68% N/A Other....................................... 14,389 -- (2,000) N/A N/A Investment income........................... 30,881 22,953 9,940 35% 131% Interest expense............................ (19,885) (16,994) (8,074) 17% 110% -------- -------- ------- Total other income (expense), net....... $ 2,588 $ 24,070 $(5,916) (89)% 507% ======== ======== =======
1999 AS COMPARED TO 1998 EQUITY IN NET LOSS OF UNCONSOLIDATED AFFILIATES Genzyme General records in equity in net loss of unconsolidated affiliates its portion of the results of its joint ventures with GelTex, BioMarin Pharmaceutical Inc., Pharming Group, N.V. and Diacrin, Inc. Genzyme General also records a portion of the results of Genzyme Transgenics in equity in net loss of unconsolidated affiliates. Genzyme General's equity in net loss of unconsolidated affiliates increased in 1999 as compared to 1998 as a result of: - increased losses from RenaGel LLC, our joint venture with GelTex to develop and commercialize Renagel-Registered Trademark- capsules; - increased losses from our joint venture with BioMarin to develop and commercialize Aldurazyme(TM) enzyme for the treatment of mucopolysaccharidosis-I, which was formed in September 1998; - increased losses from our joint venture with Pharming to develop a therapy for Pompe disease, which was formed in October 1998; and - the reallocation of our joint venture with Diacrin from Genzyme Tissue Repair to Genzyme General in May 1999. These increases were offset in part by decreased losses from Genzyme Transgenics for both periods. GAIN ON AFFILIATE SALE OF STOCK Genzyme Transgenics Corporation ("GTC"), an unconsolidated affiliate, periodically issues additional shares of its common stock. As described in Note A. to our consolidated financial statements, it is our policy to record gains on the issuance of stock by our subsidiaries and affiliates. Accordingly, we recorded a $6.7 million gain in 1999 and a $2.4 million gain in 1998. The issuance of additional shares by GTC in 1999 reduced our ownership interest in GTC from 40% to 33%. The issuance of additional shares by GTC in 1998 reduced our ownership interest in GTC from 43% to 40%. GG-11 MINORITY INTEREST In 1998, we formed ATIII LLC, a joint venture with GTC for the development and commercialization of transgenic recombinant human antithrombin III. We are funding 70% of the first $33.0 million in development costs, excluding facility costs, under this program and 50% of all development costs thereafter. We will pay 50% of all new facility costs to be incurred by ATIII LLC. All profits of ATIII LLC will be split equally; losses are allocated based on the amount of funding provided by each venturer. Because Genzyme General's combined direct and indirect interest in ATIII LLC is in excess of 50%, it consolidates the results of ATIII LLC and records GTC's portion of the ATIII LLC's losses as minority interest. ATIII LLC had losses of $12.2 million in 1999, of which GTC's portion was $3.7 million. In 1998, ATIII LLC has losses of $12.0 million, of which GTC's portion was $4.3 million. GAIN ON SALE OF INVESTMENTS IN EQUITY SECURITIES Genzyme General recorded gains of $2.0 million in January 1999 and $3.4 million in December 1998 upon the sales of shares of Techne Corporation common stock that it received when it sold its research products business to Techne Corporation. GAIN ON SALE OF PRODUCT LINE In July 1999, Genzyme General recorded a gain of $0.5 million in connection with the sale of its immunochemistry product lines to an operating unit of Sybron Laboratory Products Corporation. In June 1999, Genzyme General recorded a gain of $7.5 million representing the payment of a note receivable that it received as partial consideration for the sale of Genetic Design, Inc. in 1996. Genzyme General had previously fully reserved the amount of this note because it considered the repayment of the note to be uncertain. In July 1998, Genzyme General recorded a gain of $31.2 million in connection with the sale of its research products business to Techne. CHARGE FOR IMPAIRED INVESTMENTS Genzyme General recorded a $5.7 million charge in 1999 in connection with its investments in the common stock of Pharming Group N.V. and IntegraMed America, Inc., and a $3.4 million charge in 1998 in connection with its investment in the common stock of Celtrix Pharmaceuticals, Inc. because we considered the decline in the value of those investments to be other than temporary. In connection with these assessments, we concluded that substantial evidence existed that the value of the investments would recover to at least its cost. This included continued positive progress in the issuers' scientific programs, ongoing activity in Genzyme General's collaborations with the issuer, and a lack of any substantial company-specific adverse events causing the declines in value. However, given the significance and duration of the declines as of the end of the applicable quarter, we concluded that it was unclear over what period such price recoveries would take place and that, accordingly, the positive evidence suggesting that the investments would recover to at least Genzyme General's purchase price was not sufficient to overcome the presumption that the current market price was the best indicator of the value of these investments. OTHER In December 1999, Genzyme General recorded a net gain of $14.4 million upon receipt of a payment associated with the termination of an agreement to acquire Cell Genesys, Inc. GG-12 INVESTMENT INCOME Investment income increased in both periods because our cash balances were higher. The increase in cash balances was attributable to the issuance in May 1998 of $250.0 million in principal amount of 5 1/4% convertible subordinated notes and increased cash generated from operations. INTEREST EXPENSE Genzyme General's interest expense increased in both periods, primarily as a result of the issuance of the 5 1/4% convertible subordinated notes. TAX PROVISION
99/98 98/97 INCREASE/ INCREASE/ (DECREASE) (DECREASE) 1999 1998 1997 % CHANGE % CHANGE -------- -------- -------- ---------- ---------- (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Provision for income taxes................. $(84,400) $(80,374) $(43,725) 5% 84% Effective tax rate......................... 37% 38% 36%
Genzyme General's tax rates for all periods vary from the U.S. statutory tax rate as a result of its: - provision for state income taxes; - use of a foreign sales corporation; - nondeductible amortization of intangibles; - use of tax credits; and - share of losses of unconsolidated affiliates. GG-13 LIQUIDITY AND CAPITAL RESOURCES At December 31, 1999, Genzyme General had cash, cash-equivalents, and short- and long-term investments of $513.9 million, a decrease of $42.2 million from December 31, 1998. Genzyme General generated $284.8 million in cash from its operations in 1999. Genzyme General's investing activities utilized $192.7 million in cash in 1999. Investing activities generated: - $5.0 million from the sale of Genzyme General's immunochemistry product line; - $11.1 million from the sale of Techne common stock; and - $8.4 million from the payment of a note issued in connection with the sale of Genetic Design. Investing activities used: - $93.4 million for Genzyme General's net purchases of investments; - $52.9 million to fund capital expenditures; - $36.4 million to fund Genzyme General's investments in joint ventures; - $6.5 million to fund its acquisition of Peptimmune; - $10.0 million to GelTex to make a milestone payment upon the first anniversary of FDA approval of Renagel-Registered Trademark- capsules; - $6.6 million to Genzyme Transgenics for the purchase of preferred stock; - $10.0 million to Biomarin for the purchase of shares of common stock; and - $3.4 million to Genovo, Inc. for the purchase of shares of preferred stock. In 1999, $59.2 million in cash proceeds were allocated to Genzyme General from the exercise of options to purchase shares of Genzyme General Stock and shares of Genzyme General Stock issued under our employee stock plans. Genzyme General's financing activities used the following cash during 1999: - $85.0 million to repay short-term debt and capital lease obligations; and - $49.4 million paid to Genzyme Surgical Products in connection with the creation of Genzyme Surgical Products as a separate division of Genzyme. - $30.0 million paid to Genzyme Tissue Repair for the transfer of the interest in Diacrin/Genzyme LLC and a draw by Genzyme Tissue Repair under an interdivisional financing arrangement. In 1998, our board of directors made $30.0 million of Genzyme General's cash available to Genzyme Molecular Oncology. Under the terms of this interdivisional financing arrangement, Genzyme Molecular Oncology may draw down funds as needed each quarter in exchange for Genzyme Molecular Oncology designated shares. Genzyme Molecular Oncology designated shares are shares of Molecular Oncology Stock that are not issued and outstanding, but which our board of directors may issue, sell or distribute without allocating the proceeds to Genzyme Molecular Oncology. Genzyme Molecular Oncology has not yet drawn any funds under this arrangement. In 1998, our board of directors also made $50.0 million of Genzyme General's cash available to Genzyme Tissue Repair. Under the terms of this interdivisional financing arrangement, Genzyme Tissue Repair may draw down funds as needed each quarter in exchange for Genzyme Tissue Repair designated shares. Genzyme Tissue Repair designated shares are shares of Tissue Repair Stock that are not issued and outstanding, but which our board of directors may issue, sell or distribute without allocating the proceeds to Genzyme Tissue Repair. In February 1999, Genzyme Tissue Repair made a $5.0 million draw under this GG-14 arrangement in exchange for 1,633,399 Genzyme Tissue Repair designated shares. In May 1999, the amount available under this interdivisional financing arrangement was reduced by $25.0 million in connection with the reallocation of our ownership interest in Diacrin/Genzyme LLC from Genzyme Tissue Repair to Genzyme General. In June 1999, Genzyme General transferred $150.0 million in cash, cash equivalents and investments to Genzyme Surgical Products in connection with the creation of Genzyme Surgical Products as a separate division of Genzyme. In exchange for this transfer, approximately 14.8 million shares of Surgical Products Stock were issued and distributed as a dividend to holders of Genzyme General Stock. Genzyme General, together with our other operating divisions, has access to Genzyme's revolving credit facilities. At December 31, 1999, $50.0 million was available under a facility that matures in November 2000 and $77.0 million was available under a facility that matures in November 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: - product development and marketing; - expanding facilities; - working capital; and - strategic business initiatives. Genzyme General's cash reserves will be further reduced to pay principal and interest on the following debt: - $21.2 million in principal under our 5% convertible subordinated debentures due August 2003, which are convertible into Genzyme General Stock; and - $250.0 million in principal under our 5 1/4% convertible subordinated notes due June 2005, which are convertible into Genzyme General Stock. If Genzyme General uses cash to pay or redeem this debt, including the interest due on it, its cash reserves will be diminished. In addition, Genzyme General's cash resources will be reduced to the extent that the liabilities allocated to Genzyme Molecular Oncology, Genzyme Surgical Products or Genzyme Tissue Repair affect our consolidated results of operations. To satisfy these and other commitments, Genzyme 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. NEW ACCOUNTING PRONOUNCEMENTS, EURO, YEAR 2000 AND MARKET RISK See "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations" included in this annual report. FACTORS AFFECTING FUTURE OPERATING RESULTS The future operating results of Genzyme General could differ materially from the results described above due to the risks and uncertainties described below and under the heading "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations--Factors Affecting Future Operating Results" included in this annual report. GG-15 A REDUCTION IN REVENUES FROM SALES OF PRODUCTS THAT TREAT GAUCHER DISEASE WOULD HAVE AN ADVERSE EFFECT ON GENZYME GENERAL'S BUSINESS. Genzyme General generates a majority of its product revenues from sales of Ceredase-Registered Trademark- enzyme and Cerezyme-Registered Trademark- enzyme, which are products for patients with Gaucher disease. Sales of Ceredase-Registered Trademark- enzyme and Cerezyme-Registered Trademark- enzyme totaled $478.5 million for the year ended December 31, 1999, representing approximately 84% of Genzyme General's product revenues for that year. Because Genzyme General's business is highly dependent on Cerezyme-Registered Trademark- enzyme, a reduction in revenue from sales of this product would have an adverse effect on its operations and may cause the value of Genzyme General Stock to decline substantially. Revenues from Cerezyme-Registered Trademark- enzyme would be impacted negatively if competitors develop alternative treatments for Gaucher disease and these alternative products gained commercial acceptance. Some companies have initiated efforts to develop competitive products, and other companies may do so in the future. Cerezyme-Registered Trademark- enzyme has orphan drug status, providing it with market exclusivity in the U.S. until May 2001. We also have patents protecting its manufacturing method until 2010 and its composition until 2013. We cannot predict the effect that the expiration of orphan drug status and market exclusivity will have on sales of Cerezyme-Registered Trademark- enzyme after May 2001. GENZYME GENERAL MAY NOT BE ABLE TO SUCCESSFULLY COMMERCIALIZE THYROGEN-REGISTERED TRADEMARK- HORMONE AND RENAGEL-REGISTERED TRADEMARK- CAPSULES. In January 1999, Genzyme General, together with Knoll Pharmaceutical Company, launched U.S. sales of Thyrogen-Registered Trademark- recombinant thyroid stimulating hormone for use in the treatment of thyroid cancer. At about the same time, Genzyme General, in collaboration with GelTex Pharmaceuticals, Inc., launched Renagel-Registered Trademark- capsules, a non-absorbed phosphate binder used in the treatment of end-stage renal disease. The commercial success of Thyrogen-Registered Trademark- hormone and Renagel-Registered Trademark- capsules will depend on a number of factors, including: - regulation by the FDA; - the ability to obtain regulatory approvals in foreign countries; - the development and commercial success of competitive products; and - the availability of third party reimbursement. Genzyme General cannot be sure that market penetration of Thyrogen-Registered Trademark- hormone and Renagel-Registered Trademark- capsules will increase. IF THE STRATEGIC COLLABORATIONS GENZYME GENERAL HAS ENTERED INTO TO DEVELOP AND COMMERCIALIZE ITS PRODUCTS ARE NOT SUCCESSFUL, GENZYME GENERAL'S RESULTS OF OPERATIONS WILL BE ADVERSELY IMPACTED. Several of Genzyme General's strategic initiatives involve collaborations with other biotechnology companies and arrangements with academic medical centers. These include: - a joint venture with GelTex for the commercialization of Renagel-Registered Trademark- capsules; - an agreement with Knoll Pharmaceutical Company for the marketing of Thyrogen-Registered Trademark- hormone in the U.S.; - an agreement with Biogen, Inc. for the marketing of AVONEX-Registered Trademark- (Interferon-beta 1a), Biogen's treatment for relapsing forms of multiple sclerosis, in Japan following regulatory approval; - a joint venture with BioMarin for the development and commercialization of Aldurazyme(TM) enzyme for the treatment of the lysosomal storage known as mucopolysaccharidosis I; GG-16 - a joint venture with Genzyme Transgenics for the development and commercialization of transgenic antithrombin III, a human protein that Genzyme Transgenics produces in the milk of genetically modified animals; - a joint venture with Pharming for the development and commercialization of human alpha-glucosidase for the treatment of Pompe disease; - an agreement with Genovo for the development of gene therapy products for the treatment of lysosomal storage disorders; - a relationship with Mount Sinai Medical Center for the development of a therapy for the treatment of Niemann-Pick disease; - a joint venture with Diacrin to develop and commercialize products and processes using porcine fetal cells for the treatment of Parkinson's disease and Huntington's disease; and - an agreement with Dyax Corp. to develop and commercialize the protein EPI-KAL2 for the treatment of chronic inflammatory diseases. Genzyme General plans to enter into additional collaborations in the future. The success of these arrangements are largely dependent on the efforts and skills of Genzyme General's collaborators. Genzyme General cannot guarantee that: - these agreements will not be terminated; - its strategic collaborators will devote significant resources to the collaborations; or - any of these collaborations will result in the successful development or commercialization of any products. OUR OPTION TO PURCHASE LIMITED PARTNERSHIP INTERESTS COULD DILUTE THE RIGHTS OF HOLDERS OF GENZYME GENERAL STOCK. We organized Genzyme Development Partners, L.P., a special purpose research and development entity, in 1989 and transferred to it technology and commercial rights to our hyaluronic acid-based products designed to prevent the occurrence and severity of post-operative adhesions. These products, which we refer to as the Sepra products, are now allocated to Genzyme Surgical Products. We have an option to purchase the limited partnership interests in the partnership. If this option is exercised, we may have to issue shares of Genzyme General Stock or make substantial cash payments or both. If we make payments in Genzyme General Stock, the rights of holders of Genzyme General Stock could be diluted and the market price of that stock may fall. If we make cash payments, our cash resources would diminish. SUBSEQUENT EVENT In February 2000, Genzyme General recorded a gain of $20.3 million relating to a public offering of 3.5 million common shares by our unconsolidated affiliate, GTC. The public offering resulted in net proceeds to GTC of $75.2 million (after the exercise of the underwriters' overallotment option). As a result of the issuance of the additional shares by GTC, Genzyme General's ownership interest in GTC decreased from 33% to 28%. GG-17 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- (AMOUNTS IN THOUSANDS) Revenues: Net product sales......................................... $571,531 $509,727 $429,092 Net service sales......................................... 57,223 55,445 55,835 Revenue from research and development contracts: Related parties......................................... 1,516 3,568 8,041 Other................................................... 5,096 579 3,400 -------- -------- -------- Total revenues........................................ 635,366 569,319 496,368 Operating costs and expenses: Cost of products sold..................................... 115,125 138,802 146,226 Cost of services sold..................................... 35,637 34,240 35,451 Selling, general and administrative....................... 149,427 126,172 118,616 Research and development (including research and development relating to contracts)...................... 97,746 73,139 62,905 Amortization of intangibles............................... 8,106 7,610 6,887 Purchase of in-process research and development........... 5,436 -- -- -------- -------- -------- Total operating costs and expenses...................... 411,477 379,963 370,085 -------- -------- -------- Operating income............................................ 223,889 189,356 126,283 Other income (expenses): Equity in net loss of unconsolidated affiliates........... (37,423) (19,739) (5,782) Gain on affiliate sale of stock........................... 6,683 2,369 -- Gain on sale of investments in equity securities.......... 1,963 3,391 -- Minority interest......................................... 3,674 4,285 -- Gain on sale of product line.............................. 8,018 31,202 -- Charge for impaired investments........................... (5,712) (3,397) -- Other..................................................... 14,389 -- (2,000) Investment income......................................... 30,881 22,953 9,940 Interest expense.......................................... (19,885) (16,994) (8,074) -------- -------- -------- Total other income (expenses)......................... 2,588 24,070 (5,916) -------- -------- -------- Income before income taxes.................................. 226,477 213,426 120,367 Provision for income taxes.................................. (84,400) (80,374) (43,725) -------- -------- -------- Division net income......................................... $142,077 $133,052 $ 76,642 ======== ======== ======== Comprehensive income, net of tax: Division net income......................................... $142,077 $133,052 $ 76,642 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments.................. (14,883) 7,681 (11,704) Unrealized gains (losses) on securities: Unrealized gains (losses) arising during the period..... 26,785 (6,059) 833 Reclassification adjustment for losses included in division net income.................................... 2,092 2,100 -- -------- -------- -------- Unrealized gains (losses) on securities, net............ 28,877 (3,959) 833 -------- -------- -------- Other comprehensive income (loss)......................... 13,994 3,722 (10,871) -------- -------- -------- Comprehensive income........................................ $156,071 $136,774 $ 65,771 ======== ======== ========
The accompanying notes are an integral part of these combined financial statements. GG-18 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION COMBINED BALANCE SHEETS
DECEMBER 31, ----------------------- 1999 1998 ---------- ---------- (AMOUNTS IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents................................. $ 94,523 $ 100,012 Short-term investments.................................... 214,240 174,421 Accounts receivable, net.................................. 141,949 137,615 Inventories............................................... 84,384 85,162 Prepaid expenses and other current assets................. 17,632 27,727 Due from Genzyme Molecular Oncology....................... 3,793 4,773 Due from Genzyme Surgical Products........................ 6,406 -- Due from Genzyme Tissue Repair............................ 683 548 Deferred tax assets--current.............................. 41,195 39,725 ---------- ---------- Total current assets.................................... 604,805 569,983 Property, plant and equipment, net........................ 362,548 362,743 Long-term investments..................................... 205,142 281,664 Intangibles, net.......................................... 75,370 85,851 Deferred tax assets--noncurrent........................... 19,844 28,138 Investments in equity securities.......................... 94,719 51,977 Other noncurrent assets................................... 37,155 30,035 ---------- ---------- Total assets............................................ $1,399,583 $1,410,391 ========== ========== LIABILITIES AND DIVISION EQUITY Current liabilities: Accounts payable.......................................... $ 23,229 $ 22,324 Accrued expenses.......................................... 62,514 65,643 Income taxes payable...................................... 27,946 16,532 Deferred revenue.......................................... 3,475 1,231 Current portion of long-term debt and capital lease obligations............................................. 80 82,568 ---------- ---------- Total current liabilities............................... 117,244 188,298 Noncurrent liabilities: Long-term debt.............................................. -- 3,087 Convertible notes and debentures............................ 272,622 271,559 Other noncurrent liabilities................................ 2,103 7,480 ---------- ---------- Total liabilities....................................... 391,969 470,424 Commitments and contingencies (See Notes) Division equity (Note M).................................... 1,007,614 939,967 ---------- ---------- Total liabilities and division equity................... $1,399,583 $1,410,391 ========== ==========
The accompanying notes are an integral part of these combined financial statements. GG-19 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 1999 1998 1997 --------- --------- --------- (AMOUNTS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Division net income......................................... $ 142,077 $ 133,052 $ 76,642 Reconciliation of division net income to net cash provided by operating activities: Depreciation and amortization............................. 50,234 37,758 34,822 Loss on disposal of fixed assets.......................... 971 108 1,234 Non-cash compensation expense............................. 58 8,519 2,881 Equity in loss of unconsolidated affiliates............... 37,423 19,739 5,440 Accrued interest/amortization of marketable securities.... (1,647) (7,242) (571) Provision for bad debts and inventory..................... 14,194 8,113 13,440 Accretion of debt conversion feature...................... -- 705 -- Gain on affiliate sale of stock........................... (6,683) (2,369) -- Minority interest in net loss of subsidiary............... (3,674) (4,285) -- Gain on sale of product line.............................. (8,018) (31,202) -- Gain on sale of investments in equity securities.......... (1,963) (3,391) -- Charge for impaired investments........................... 5,712 3,397 -- Deferred income tax benefit............................... (3,414) (3,022) (3,969) Charge for in-process research and development............ 5,436 -- -- Other..................................................... 556 26 528 Increase (decrease) in cash from working capital: Accounts receivable..................................... (18,459) (36,437) (13,669) Inventories............................................. (3,435) 27,928 (31,676) Prepaid expenses and other assets....................... 9,925 (10,785) (9,033) Due from Genzyme Molecular Oncology..................... 980 (553) (2,011) Due from Genzyme Surgical Products...................... (6,406) -- -- Due from Genzyme Tissue Repair.......................... (135) 665 391 Accounts payable, accrued expenses, income taxes payable and deferred revenue.................................. 71,026 52,275 21,192 --------- --------- --------- Net cash provided by operating activities........... 284,758 192,999 95,641 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments.................................... (494,016) (439,431) (131,197) Sales and maturities of investments......................... 400,630 118,871 80,867 Proceeds from sale of investments in equity securities...... 11,090 9,564 -- Acquisitions of property, plant and equipment............... (52,910) (53,312) (25,344) Sales of property, plant and equipment...................... -- 1,795 -- Proceeds from sale of product line.......................... 5,000 24,760 -- Acquisitions, net of acquired cash and assumed liabilities............................................... (6,500) (9,949) -- Purchase of technology rights............................... (10,000) (15,100) -- Purchase of equity investments.............................. (13,700) (25,783) (6,449) Investments in unconsolidated affiliates.................... (43,027) (14,811) -- Loans to affiliates......................................... -- (1,000) (4,601) Proceeds from notes receivable.............................. 8,360 -- -- Repayment of loans by affiliates............................ -- 3,019 -- Other....................................................... 2,388 (4,431) (134) --------- --------- --------- Net cash used in investing activities............... (192,685) (405,808) (86,858)
GG-20 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION COMBINED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 1999 1998 1997 --------- --------- --------- (AMOUNTS IN THOUSANDS) CASH FLOWS FROM FINANCING ACTIVITIES: Allocated proceeds from issuance of Genzyme General Stock................................................... 59,216 74,649 123,837 Proceeds from issuance of debt............................ -- 250,000 -- Payments of debt.......................................... (84,985) (33,236) (100,945) Net cash allocated to Genzyme Molecular Oncology.......... -- (5,000) (5,000) Net cash allocated to Genzyme Surgical Products........... (49,414) (41,484) (19,003) Net cash allocated to Genzyme Tissue Repair............... (30,037) (155) (14,892) Bank overdraft............................................ 7,220 -- -- Other..................................................... 2,510 2,412 (242) --------- --------- --------- Net cash provided by (used in) financing activities........................................ (95,490) 247,186 (16,245) Effect of exchange rate changes on cash................... (2,072) 334 (2,275) --------- --------- --------- Increase (decrease) in cash and cash equivalents.......... (5,489) 34,711 (9,737) Cash and cash equivalents at beginning of period.......... 100,012 65,301 75,038 --------- --------- --------- Cash and cash equivalents at end of period................ $ 94,523 $ 100,012 $ 65,301 ========= ========= ========= Supplemental disclosures of cash flows: Cash paid during the year for: Interest................................................ $ 18,508 $ 15,047 $ 8,684 Income taxes............................................ $ 30,992 $ 24,463 $ 18,887 Supplemental disclosures of non-cash transactions: Transfer of investments to Genzyme Surgical Products-- Note A. Other gains and charges--Note C. Dispositions of assets--Note D. Peptimmune acquisition--Note E. Investment in unconsolidated affiliate--Note J. Conversion of 5% convertible subordinated notes--Note L. Conversion of 6% convertible subordinated debentures into 5% convertible subordinated debentures--Note L. Warrant exercise--Note M.
The accompanying notes are an integral part of these combined financial statements. GG-21 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS Genzyme General is our operating division that develops and markets: - therapeutic products, with an expanding focus on products to treat patients suffering from lysosomal storage disorders and other specialty therapeutics; - diagnostic products, with a focus on IN VITRO diagnostics; and - other products and services, such as genetic testing and lipids and peptides for drug delivery. BASIS OF PRESENTATION The combined financial statements of Genzyme General for each period include the balance sheets, results of operations and 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 below. These combined financial statements are prepared using amounts included in our consolidated financial statements included in this annual report. We have reclassified certain 1998 and 1997 data to conform with the 1999 presentation. We prepare the financial statements of Genzyme General in accordance with generally accepted accounting principles. We present financial information and accounting policies specific to Genzyme General in the accompanying combined financial statements. We present financial information and accounting policies relevant to the corporation and its operating divisions taken as a whole in our consolidated financial statements. You should read the consolidated financial statements in conjunction with the financial statements of Genzyme General. Note A., "Summary of Significant Accounting Policies," to our consolidated financial statements contains our accounting policies. We incorporate that information into this note by reference. TRACKING STOCK Genzyme General Division Common Stock, which we refer to as "Genzyme General Stock," is a series of our common stock that is designed to reflect the value and track the performance of Genzyme General. The chief mechanisms intended to cause Genzyme General Stock to "track" the financial performance of Genzyme General are provisions in our charter governing dividends and distributions. Under these provisions, our charter factors the assets and liabilities and income or losses attributable to Genzyme General into the determination of the amount available to pay dividends on Genzyme General Stock. To determine earnings per share, we allocate Genzyme's earnings to each series of our common stock based on the earnings attributable to that series of stock. The earnings attributable to Genzyme General Stock, is defined in our charter as the net income or loss of Genzyme General determined in accordance with generally accepted accounting principles and as adjusted for tax benefits allocated to or from Genzyme General in accordance with our management and accounting policies. Our charter requires that all income and expenses of Genzyme be allocated among the divisions in a reasonable and consistent manner. However, subject to its fiduciary duties, our board of directors can, at its discretion, change the GG-22 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) methods of allocating earnings to each series of common stock. We intend to allocate earnings using our current methods for the foreseeable future. Because the earnings allocated to Genzyme General Stock are based on the income or losses attributable to Genzyme General, we include financial statements and management's discussion and analysis of Genzyme General to aid investors in evaluating its performance. While Genzyme General Stock is designed to reflect Genzyme General's performance, it is common stock of Genzyme Corporation and not Genzyme General; Genzyme General is a division, not a company or legal entity, and therefore does not and cannot issue stock. Consequently, holders of Genzyme General Stock have no specific rights to assets allocated to Genzyme General. Genzyme Corporation continues to hold title to all of the assets allocated to Genzyme General and is responsible for all of its liabilities, regardless of what we deem for financial statement presentation purposes as allocated to any division. Holders of Genzyme General 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 Genzyme General Stock and other tracking stockholders would only have the rights of common stockholders in the combined assets of Genzyme. ALLOCATION POLICY Our charter requires us to manage and account for transactions between Genzyme General and our other divisions and with third parties, and any resulting re-allocations of assets and liabilities, by applying consistently across divisions a detailed set of policies established by our board of directors. We publicly disclose our divisional management and accounting policies, which appear in Exhibit 99.1 to this Annual Report on Form 10-K. Our charter requires that all assets and liabilities of Genzyme be allocated among the divisions. Our board of directors, however, retains considerable discretion in determining the types, magnitudes and extent of allocations to each series of common stock without shareholder approval. Our allocations to our divisions are based on one of the following methodologies: - Specific identification--assets that are dedicated to the production of goods of a division or which solely benefit a division are allocated to that division. Liabilities incurred as a result of the performance of services for the benefit of a division or in connection with the expenses incurred which directly benefit a division are allocated to the division. Such specifically identified assets and liabilities include cash, investments, accounts receivable, inventories, property and equipment, intangible assets, accounts payable, accrued expenses and deferred revenue. Revenues from the licensing of a division's products or services to third parties and the related costs are allocated to a division; - Actual usage--expenses are charged to the division for whose benefit such expenses are incurred. Research and development, sales and marketing and direct general and administrative services are charged to the divisions for which the service is performed on a cost basis. Such charges are generally based on direct labor hours; GG-23 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) - Proportionate usage--costs incurred which benefit more than one division are allocated based on management's estimate of the proportionate benefit each division receives. Such costs include facilities, legal, finance, human resources, executive and investor relations; or - Board directed--programs and products, both internally developed and acquired, are allocated to divisions by the board of directors. The board of directors also allocates long-term debt and strategic investments. Note B., "Policies Governing the Relationship of Genzyme's Operating Divisions," further describes our policies concerning interdivisional transactions and income tax allocations. We believe that the divisional allocations are reasonable and have been consistently applied. However, the division's results of operations may not be indicative of what would have been realized if the division was a stand-alone entity. PRINCIPLES OF COMBINATION In June 1999, we created Genzyme Surgical Products as a separate division of Genzyme. Genzyme General transferred $150.0 million in cash, cash equivalents and investments, and certain other assets, to Genzyme Surgical Products in connection with the creation of Genzyme Surgical Products as a separate division of Genzyme. The business of Genzyme Surgical Products previously operated as a business unit of Genzyme General. These financial statements reflect the financial position, results of operations and cash flows allocated to Genzyme General as if the operations of Genzyme Surgical Products had been separately accounted for as its own division of the corporation for all periods presented. We use the equity method to account for investments in entities in which Genzyme General has a substantial ownership interest (20% to 50%), or in which it participates in policy decisions. Genzyme General's consolidated net income includes its share of the earnings of these entities. We report at fair value investments in entities in which Genzyme General's ownership interest is less than 20%. TRANSLATION OF FOREIGN CURRENCIES We translate the financial statements of foreign subsidiaries allocated to Genzyme General from local currency into U.S. dollars and include translation adjustments for these subsidiaries in division equity. Genzyme General's division equity includes cumulative foreign currency translation charges of $19.7 million at December 31, 1999 and $4.8 million at December 31, 1998. We include exchange gains and losses on intercompany balances which are long-term in nature in our division equity. Our gains and losses on all other transactions are included in our results of operations. Genzyme General recorded a net gain of $0.6 million in 1999, a net gain of $0.3 million in 1998 and a net loss of $0.1 million in 1997. REVENUE RECOGNITION Genzyme General recognizes revenue from product sales when it ships the product and title has passed, net of any applicable third party contractual allowances and rebates. Genzyme General recognizes revenue from service sales when it has finished providing the service or when it has achieved an applicable milestone. Genzyme General recognizes revenue from research and development contracts over the term GG-24 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) of the applicable contract and as it incurs costs related to that contract. Up front license fees, milestone fees and royalty revenue are recognized as revenue only if there are no remaining performance obligations and the fees are non-refundable. Genzyme General receives royalties related to the manufacture, sale or use of products or technologies under license arrangements with third parties. For those arrangements where royalties are reasonably estimable, Genzyme General recognizes revenue based on based on estimates of royalties earned during the applicable period and adjusts for differences between the estimated and actual royalties in the following quarter. Historically, these adjustments have not been material. For those arrangements where royalties are not reasonably estimable, Genzyme General recognizes revenue upon receipt of licensee royalty statements. NET INCOME (LOSS) PER SHARE Earnings per share is calculated for each series of Genzyme stock using the two-class method, as further described in the notes to our consolidated financial statements. We present earnings per share data only in the consolidated financial statements of Genzyme because Genzyme Corporation is the issuer of the securities. Genzyme's divisions do not and cannot issue securities because they are not companies or legal entities. NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS Because each of our operating divisions is a part of a single company, our board of directors has adopted policies to address issues that may arise among divisions and to govern the management of and the relationships between each division. With some exceptions that are mentioned specifically in this note, our board of directors may modify or rescind these policies, or adopt additional policies, in its sole discretion without stockholder approval, subject only to our board of directors' fiduciary duty to stockholders. Generally accepted accounting principles require that any change in policy be preferable (in accordance with these principles) to the previous policy. INTERDIVISION ASSET TRANSFERS Our board of directors may at any time reallocate any program, product or other asset from one division to any other division. We account for interdivision asset transfers at book value. The consideration paid for an asset transfer generally must be fair value as determined by our board of directors. The difference between the consideration paid and the book value of the assets transferred is recorded in division equity. Our board of directors determines fair value using the following methodologies: a risk-adjusted discounted cash flow model or a comparable transaction model. The risk-adjusted discounted cash flow model estimates fair value by taking the discounted value of all the cash inflows and outflows related to a program or product over a specified period of time, generally the economic life of the project, adjusted for the probabilities of certain outcomes occurring or not occurring. GG-25 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS (CONTINUED) In performing this analysis, we consider various factors that could affect the success or failure of the program including: - the duration, cost and probability of success of each phase of development; - the current and potential size of the market and barriers to entry into the market; - the maximum number of patients likely to be treated with the product and the speed with which that maximum number will be reached; - reimbursement policies and pricing limitations; - current and potential competitors; - the net proceeds received by us upon the sale of the program or product; and - the costs of manufacturing and marketing the product or program. The comparable transaction model estimates fair value through comparison to valuations established for other transactions within the biotechnology and biosurgical areas involving similar programs and products having similar terms and structure. In identifying comparable transactions, we consider, among other factors, the following: - the similarity of market opportunity; - the comparability of the medical needs addressed; - the similarity of the regulatory, reimbursement and competitive environment; - the stage of product or program development; and - the risk profile of successfully commercializing the product or program. We customarily use the comparable transaction model to corroborate valuations derived under the risk-adjusted discounted cash flow model. When determining the fair value of a program under development using either model, our board of directors also takes into account the following criteria: - the commercial potential of the program; - the phase of clinical development of the program; - the expenses associated with realizing any income from the program and the likelihood and time of the realization; and - other matters that our board of directors and its financial advisors, if any, deem relevant. One division may compensate another division for a reallocation with cash or other consideration having a value equal to the fair market value of the reallocated assets. In the case of a reallocation of assets from Genzyme General to another division, our board of directors may elect instead to account for the reallocation as an increase in the designated shares representing the division to which the assets are GG-26 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS (CONTINUED) reallocated in accordance with the provisions of our charter. No gain or loss is recognized as a result of these transfers. Our policy regarding transfers of assets between divisions may not be changed by our board of directors without the approval of the holders of Genzyme General Stock voting as a separate class unless the policy change does not affect Genzyme General. OTHER INTERDIVISION TRANSACTIONS Our divisions may engage in transactions directly with one or more other divisions or jointly with one or more other divisions and one or more third parties. These transactions may include agreements by one division to provide products and services for use by another division, license agreements and joint ventures or other collaborative arrangements involving more than one division to develop new products and services jointly and with third parties. These transactions are subject to the following conditions: - We charge research and development (including clinical and regulatory support), distribution, sales, marketing, and general and administrative services (including allocated space) performed by one division for another division to the division for which the services are performed on a cost basis. We charge direct costs to the division for which we incur them. We allocate direct labor and indirect costs in reasonable and consistent manners based on the use by a division of relevant services. Divisions performing services for other divisions do not recognize revenue for the services they perform. - We charge the manufacturing of goods and performance of services by one division exclusively for another division to the division for which it is performed on a cost basis. We include in manufacturing costs an interest charge (based on our short-term borrowing rate at the beginning of the fiscal year) on the gross fixed assets used in the manufacturing process. We determine gross fixed assets for the facility used at the beginning of each fiscal year. We allocate direct labor and indirect costs in reasonable and consistent manners based on the benefit received by a division of related goods and services. Divisions performing services for other divisions do not recognize revenue for the services they perform. - Other than transactions involving research and development, manufacturing, distribution, sales, marketing, general and administrative services, which are addressed above, all interdivisional transactions are performed on terms and conditions obtainable in arm's length transactions with third parties. Divisions performing services for other divisions do not recognize revenue for the services they perform. - Our board must approve interdivisional transactions that are performed on terms and conditions other than as described above and are material to one or more of the participating divisions. In giving its approval, our board must determine that the transaction is fair and reasonable to each participating division and to holders of the common stock representing each participating division. - Divisions may make loans to other divisions. Any loan of $1 million or less matures within 18 months and accrues interest at the best borrowing rate available to the corporation for a loan of like type and duration. Our board of directors must approve any loan in excess of $1 million. In GG-27 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS (CONTINUED) giving its approval, our board of directors must determine that the material terms of the loan, including the interest rate and maturity date, are fair and reasonable to each participating division and to holders of the common stock representing each such division. - All material interdivisional transactions are set forth in a written agreement that is signed by an authorized member of the management team of each division involved in the transaction. TAX ALLOCATIONS We file a consolidated return and allocate income taxes to each division based upon the financial statement income, taxable income, credits and other amounts properly allocable to each division under generally accepted accounting principles as if it were a separate taxpayer. We assess the realizability of our deferred tax assets at the division level. As a result, our consolidated tax provision may not equal the sum of the divisions' tax provision. As of the end of any fiscal quarter, however, if 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 the other divisions in proportion to their taxable income without any compensating payment or allocation. Tax benefits allocated to Genzyme General are recorded as a credit to division equity. ACCESS TO TECHNOLOGY AND KNOW-HOW Genzyme General has unrestricted access to all technology and know-how owned or controlled by Genzyme Corporation that may be useful in its business, subject to any obligations or limitations that apply to the corporation generally. NOTE C. OTHER GAINS AND CHARGES During the fourth quarter of 1999, Genzyme General recorded a net gain of $14.4 million upon receipt of a payment associated with the termination of an agreement to acquire Cell Genesys, Inc. Genzyme General recorded this gain as other income. During the third quarter of 1998, Genzyme General recorded a $14.8 million charge to cost of products sold to write down excess inventory used to make Ceredase-Registered Trademark- enzyme. Genzyme General took this charge following a determination that, based on the status of efforts to convert Gaucher disease patients to a treatment regimen using Cerezyme-Registered Trademark- enzyme, the existing supply of Ceredase-Registered Trademark- enzyme was sufficient to meet estimated patient needs. Genzyme General also recorded $20.1 million in other charges in the fourth quarter of 1997. The components of these charges are: - an $18.1 million charge to cost of products sold to write down excess inventory in Genzyme General's melatonin, bulk pharmaceuticals and fine chemical product lines. Genzyme General took this charge after it discontinued these product lines; and - a $2.0 million charge to other expense relating to uncertainty in collecting a note receivable that was issued upon the sale of Genetic Design, Inc. GG-28 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE D. DISPOSITIONS OF ASSETS In July 1998, we sold the assets of our research products business to Techne Corporation in exchange for: - $24.8 million in cash; - approximately 987,000 shares of Techne common stock; and - royalties on product sales by Techne's biotechnology group through June 2003. We will record royalty income as it is earned. In 1998, we recorded a $31.2 million gain in connection with the sale of this business and an additional $3.4 million gain upon the sale of a portion of our investment in Techne common stock. In 1999, we recorded a gain of $2.0 million upon the sale of our remaining shares of Techne common stock. The $3.4 million and $2.0 million gains were recorded as gains on sale of investments in equity securities. The research products business had been allocated to Genzyme General. Note C., "Dispositions of Assets," to our consolidated financial statements contains information regarding: - the sale of Genzyme General's immunochemistry product lines to an operating unit of Sybron Laboratory Products Corp.; and - the sale of Genetic Design to Laboratory Corporation of America. We incorporate that information into this note by reference. NOTE E. PEPTIMMUNE ACQUISITION In July 1999, we acquired Peptimmune, Inc., a privately-held company whose lead development program focuses on a treatment for pemphigus vulgaris. We allocated this acquisition to Genzyme General and accounted for it as a purchase. We allocated the aggregate purchase price of $6.5 million and assumed liabilities of $0.3 million to the tangible and intangible assets we acquired from Peptimmune based on their respective fair values (amounts in thousands): Property, plant & equipment................................. $ 128 Deferred tax asset.......................................... 1,229 In-process technology....................................... 5,436 ------ Total................................................... $6,793 ======
The $5.4 million allocated to in-process technology represents the value we assigned to Peptimmune's programs that were still in the development stage and for which there was no alternative future use. Genzyme General recorded this amount as a charge to operations. NOTE F. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS Note E., "Off-Balance Sheet Financial Instruments," to our consolidated financial statements contains information regarding interest rate swap contracts that are allocated to Genzyme General. We incorporate that information into this note by reference. GG-29 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE G. ACCOUNTS RECEIVABLE AND INTANGIBLE ASSETS Genzyme General's trade receivables primarily represent amounts due from distributors, healthcare service providers and companies and institutions engaged in research, development or production of pharmaceutical and biopharmaceutical products. Genzyme General performs credit evaluations of its customers on an ongoing basis and generally does not require collateral. Genzyme General states accounts receivable at fair value after reflecting an allowance for doubtful accounts. This allowance was $17.6 million at December 31, 1999 and $9.9 million at December 31, 1998. The following table contains information on Genzyme General's intangible assets for the periods presented:
WEIGHTED WEIGHTED AVERAGE AVERAGE ESTIMATED ESTIMATED USEFUL USEFUL DECEMBER 31, LIFE DECEMBER 31, LIFE 1999 (YEARS) 1998 (YEARS) ------------ --------- ------------ --------- (AMOUNTS IN THOUSANDS, EXCEPT USEFUL LIFE DATA) Goodwill......................................... $ 69,376 13 $ 79,644 12 License fees..................................... 25,092 15 25,000 15 Customer lists................................... 8,324 10 8,324 10 Non-compete agreements........................... 6,000 5 6,910 5 Other............................................ 5,105 5 5,241 5 -------- -------- 113,897 125,119 Less accumulated amortization.................... (38,527) (39,268) -------- -------- Intangible assets, net........................... $ 75,370 $ 85,851 ======== ========
NOTE H. INVENTORIES
DECEMBER 31, ----------------------- 1999 1998 -------- -------- (AMOUNTS IN THOUSANDS) Raw materials.......................................... $24,057 $29,497 Work-in-process........................................ 40,592 23,359 Finished products...................................... 19,735 32,306 ------- ------- Total.............................................. $84,384 $85,162 ======= =======
GG-30 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE I. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31, ----------------------- 1999 1998 ---------- ---------- (AMOUNTS IN THOUSANDS) Plant and equipment..................................... $230,151 $243,816 Land and buildings...................................... 180,624 147,806 Leasehold improvements.................................. 90,128 68,414 Furniture and fixtures.................................. 13,169 13,516 Construction-in-progress................................ 26,964 30,191 -------- -------- 541,036 503,743 Less accumulated depreciation........................... (178,488) (141,000) -------- -------- Property, plant and equipment, net...................... $362,548 $362,743 ======== ========
Genzyme General's depreciation expense was $36.9 million in 1999, $34.9 million in 1998, and $28.4 million in 1997. Genzyme General has capitalized approximately $34.6 million, which represents the costs it has incurred in validating the manufacturing process for products which have reached technological feasibility. Genzyme General has capitalized the following amounts of interest costs incurred in financing the construction of manufacturing facilities:
1999 1998 1997 ---- ---- ---- $0.9 million $0.7 million $0.5 million
The estimated cost of completion for assets under construction is $37.4 million as of December 31, 1999. GG-31 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE J. INVESTMENTS MARKETABLE SECURITIES
DECEMBER 31, ----------------------------------------- 1999 1998 ------------------- ------------------- COST MARKET COST MARKET -------- -------- -------- -------- (AMOUNTS IN THOUSANDS) Cash equivalents(1): Corporate notes........................... $ 34,108 $ 34,108 $ 8,131 $ 8,129 Money market fund......................... 22,210 22,210 70,805 70,805 -------- -------- -------- -------- $ 56,318 $ 56,318 $ 78,936 $ 78,934 ======== ======== ======== ======== Short-term: Corporate notes........................... $210,954 $210,173 $173,970 $174,421 Federal agencies.......................... 4,085 4,067 -- -- -------- -------- -------- -------- $215,039 $214,240 $173,970 $174,421 ======== ======== ======== ======== Long-term: Corporate notes........................... $137,482 $135,509 $226,002 $226,259 Federal................................... -- -- 33,412 33,581 U.S. Treasury notes....................... 69,925 69,633 21,323 21,824 -------- -------- -------- -------- $207,407 $205,142 $280,737 $281,664 ======== ======== ======== ======== Investments in equity securities.......... $ 59,983 $ 94,719 $ 62,244 $ 51,977 ======== ======== ======== ========
- ------------------------ (1) Cash equivalents are included as part of cash and cash equivalents on our balance sheets. REALIZED AND UNREALIZED GAINS AND LOSSES ON MARKETABLE SECURITIES AND INVESTMENTS IN EQUITY SECURITIES Genzyme General recorded gains of $2.0 million in 1999 and $3.4 million in 1998 upon the sale of its investment in shares of Techne common stock. Genzyme General also recorded a $5.7 million charge in 1999 in connection with its investments in the common stock of Pharming Group N.V. and IntegraMed America, Inc. and a $3.4 million charge in 1998 in connection with its investment in the common stock of Celtrix Pharmaceuticals, Inc. because we considered the decline in the value of those investments to be other than temporary. In connection with these assessments, we concluded that evidence existed that the value of the investments would recover to at least its cost. This included continued positive progress in the issuers' scientific programs, ongoing activity in Genzyme General's collaborations with the issuers, and a lack of any substantial company-specific adverse events causing the declines in value. However, given the significance and duration of the declines as of the end of the applicable quarter, we concluded that it was unclear over what period such price recoveries would take place and that, accordingly, the positive evidence suggesting that the investments would recover to at least Genzyme General's purchase price was GG-32 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE J. INVESTMENTS (CONTINUED) not sufficient to overcome the presumption that the current market price was the best indicator of the value of these investments. Genzyme General records gross unrealized holding gains and losses in division equity. The following table sets forth the amounts recorded:
DECEMBER 31, ----------------------------- 1999 1998 ------------- ------------- Unrealized holding gains........................ $37.1 million $3.6 million Unrealized holding losses....................... $5.0 million $12.5 million
The following table contains information regarding the range of contractual maturities of Genzyme General's investments in debt securities:
DECEMBER 31, ----------------------------------------- 1999 1998 ------------------- ------------------- COST MARKET COST MARKET -------- -------- -------- -------- (AMOUNTS IN THOUSANDS) Within 1 years.............................. $271,357 $270,558 $252,907 $253,355 1-2 years................................... 106,046 104,306 259,363 259,788 2-10 years.................................. 101,361 100,836 21,373 21,876 -------- -------- -------- -------- $478,764 $475,700 $533,643 $535,019 ======== ======== ======== ========
Note I., "Investments," to our consolidated financial statements contains information regarding Genzyme General's: - Equity investments in: - Abiomed, Inc.; - Aronex Pharmaceuticals, Inc.; - BioMarin; - Celtrix Pharmaceuticals, Inc.; - GelTex; - Genovo, Inc.; - Integramed America, Inc.; and - Pharming. - Investments in and relationships with Dyax Corporation, Genzyme Transgenics and ATIII LLC; and - Investments in the following joint ventures: - BioMarin/Genzyme LLC; - Diacrin/Genzyme LLC; - Pharming/Genzyme LLC; and GG-33 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE J. INVESTMENTS (CONTINUED) - RenaGel LLC. We incorporate that information into this note by reference. NOTE K. ACCRUED EXPENSES
DECEMBER 31, ----------------------- 1999 1998 -------- -------- (AMOUNTS IN THOUSANDS) Compensation........................................... $21,363 $20,434 Technology access fee.................................. -- 10,000 Professional fees...................................... 2,938 4,853 Royalties.............................................. 6,891 5,846 Rebates................................................ 7,126 5,663 Other.................................................. 24,196 18,847 ------- ------- $62,514 $65,643 ======= =======
NOTE L. LONG-TERM DEBT AND LEASES LONG-TERM DEBT
DECEMBER 31, ----------------------- 1999 1998 ---------- ---------- (AMOUNTS IN THOUSANDS) 5 1/4% convertible subordinated notes....................... $250,000 $250,000 Revolving credit facility maturing in November 1999......... -- $ 82,000 5% convertible subordinated debentures...................... 22,622 21,559 Mortgage notes.............................................. -- 3,167 -------- -------- $272,622 $356,726 Less current portion........................................ -- (82,080) -------- -------- $272,622 $274,646 ======== ========
Over the next five years, Genzyme General will be required to repay the following principal amounts on its long-term debt (excluding capital leases):
2000 2001 2002 2003 2004 AFTER 2004 ---- ---- ---- ---- ---- ---------- $0.0 million $0.0 million $0.0 million $22.6 million $0.0 million $250.0 million
REVOLVING CREDIT FACILITY; CONVERTIBLE DEBT; MORTGAGE NOTE Note K. "Long Term Debt and Leases," to our consolidated financial statements contains information regarding our: - revolving credit facilities; GG-34 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE L. LONG-TERM DEBT AND LEASES (CONTINUED) - 5 1/4% convertible subordinated notes due June 2005; - 5% convertible subordinated debentures due August 2003; and - mortgage note. We incorporate that information into this note by reference. OPERATING LEASES Genzyme General leases facilities and personal property under operating leases with terms in excess of one year. Genzyme General's total expense under operating leases was:
1999 1998 1997 ---- ---- ---- $20.7 million $16.3 million $14.2 million
Over the next five years, Genzyme General will be required to repay the following amounts under operating leases:
2000 2001 2002 2003 2004 AFTER 2004 ---- ---- ---- ---- ---- ---------- $15.8 million $15.3 million $14.0 million $11.9 million $11.4 million $115.4 million
In June 1992, one of our wholly-owned subsidiaries entered into a 65-year land lease with an unaffiliated lessor. Our expenses under this lease, which are allocated to Genzyme General, were $1.5 million in 1999 and 1998, and $1.3 million in 1997. Our rent under this lease increases every five years based on the Consumer Price Index or, if higher, 3% per year. Genzyme Tissue Repair leases from Genzyme General a portion of a research and development facility. Genzyme Tissue Repair is obligated to pay Genzyme General $0.6 million per year for 3 years commencing on July 1, 1998. Diacrin/Genzyme LLC has subleased a portion of this facility and is obligated to pay Genzyme Tissue Repair rent of $0.4 million per year pursuant to the terms of the sublease agreement. GG-35 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE M. DIVISION EQUITY The following table contains the components of division equity for Genzyme General for the periods presented:
1999 1998 1997 ---------- -------- -------- (AMOUNTS IN THOUSANDS) Balance at beginning of period.............................. $ 939,967 $745,895 $645,185 Division net income....................................... 142,077 133,052 76,642 Allocation of tax benefits generated by: Genzyme Molecular Oncology.............................. 7,812 3,527 2,755 Genzyme Surgical Products............................... 16,128 17,936 10,112 Genzyme Tissue Repair................................... 10,866 16,394 17,666 Allocated proceeds from issuance of Genzyme General Stock under stock plans......................................... 59,587 74,360 35,963 Allocated proceeds from exercise of warrants to purchase Genzyme General Stock..................................... -- 289 855 Allocation of cash: To Genzyme Molecular Oncology for designated shares(1)............................................. -- (5,000) -- To Genzyme Surgical Products for designated shares(1)... (176,706) (41,975) (25,669) To Genzyme Tissue Repair for designated shares(1)....... (4,937) -- (14,892) To Genzyme Tissue Repair for research program........... (100) (250) -- To Genzyme Tissue Repair for transfer of interest in joint venture......................................... (25,000) -- -- Allocated tax benefit from disqualifying dispositions....... 24,238 18,561 4,127 Conversion of debentures for Genzyme Molecular Oncology designated shares(1)...................................... -- (19,802) -- Conversion of note receivable for Genzyme Molecular Oncology designated shares(1)...................................... -- (2,696) -- Loss on purchase of facility from Genzyme Tissue Repair..... -- (711) -- Allocation of acquired deferred tax asset................... -- -- 2,900 Allocated stock compensation expense........................ 58 48 1,218 Allocated equity adjustments................................ 13,624 339 (10,967) ---------- -------- -------- Balance at end of period.................................... $1,007,614 $939,967 $745,895 ========== ======== ========
- ------------------------ (1) Designated shares are shares of our common stock that are not issued and outstanding, but which our board of directors may issue, sell or distribute without allocating the proceeds to the division corresponding to that series of stock. As of December 31, 1999, there were 1,688,237 Genzyme Molecular Oncology designated shares, 1,164,839 Genzyme Surgical Products designated shares and 2,238,053 Genzyme Tissue Repair designated shares. The number of Genzyme Molecular Oncology designated shares assumes that a public offering of Molecular Oncology Stock is not completed prior to June 18, 2000. If such an offering is completed prior to that date, the number of Genzyme Molecular Oncology designated shares reserved for issuance in connection with a draw under an equity line of credit in 1998 will decrease based on a formula set forth in our charter. GG-36 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE M. DIVISION EQUITY (CONTINUED) INTERDIVISIONAL FINANCING ARRANGEMENTS GENZYME MOLECULAR ONCOLOGY In 1997, our board of directors made $25.0 million of Genzyme General's cash available to Genzyme Molecular Oncology. This arrangement was subject to dollar-for-dollar reduction by the proceeds of outside financing allocated to Genzyme Molecular Oncology. When Genzyme issued $20.0 million in principal of 6% convertible subordinated debentures in August 1997 and allocated the proceeds to Genzyme Molecular Oncology, the amount available under the arrangement was reduced to $5.0 million. In September 1998, Genzyme Molecular Oncology drew the remaining $5.0 million available under this arrangement in exchange for Genzyme Molecular Oncology designated shares. In August 1998, our board of directors made an additional $30.0 million of Genzyme General's cash available to Genzyme Molecular Oncology. Under the terms of this arrangement, Genzyme Molecular Oncology may draw down funds as needed cash quarter in exchange for Genzyme Molecular Oncology designated shares based on the fair market value of Molecular Oncology Stock (as defined in our charter) at the time of the draw. As of December 31, 1999, Genzyme Molecular Oncology had not yet drawn any funds from this arrangement. GENZYME TISSUE REPAIR In October 1996, our board of directors made $20.0 million of Genzyme General's cash available to Genzyme Tissue Repair in order for Genzyme Tissue Repair to fund its obligations under its joint venture with Diacrin. Under this arrangement, Genzyme Tissue Repair may draw down funds as needed each quarter in exchange for Genzyme Tissue Repair designated shares based on the fair market value of Tissue Repair Stock (as defined in our charter) at the time of the draw. Genzyme Tissue Repair made a $7.0 million draw under this line in 1997. In May 1998, our board of directors increased the amount committed under this arrangement from $13.0 million to $50.0 million. Genzyme Tissue Repair made a $5.0 million draw in February 1999. In May 1999, the amount available under this arrangement was reduced by $25.0 million in connection with the reallocation of our ownership interest in Diacrin/Genzyme LLC from Genzyme Tissue Repair to Genzyme General. STOCK COMPENSATION PLANS We apply APB Opinion 25 and related interpretations in accounting for our five stock-based compensation plans: the 1990 Equity Incentive Plan, the 1997 Equity Plan (both of which are stock option plans), the 1990 Employee Stock Purchase Plan, the 1999 Employee Stock Purchase Plan, and the 1998 Director Stock Option Plan. We do not recognize compensation expense for options granted and shares purchased under the provisions of these plans for options granted to employees with an exercise price greater than or equal to fair market value. The following table sets forth division net income data for Genzyme General as if compensation expense for our stock-based compensation plans was determined in accordance with SFAS 123 based on GG-37 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE M. DIVISION EQUITY (CONTINUED) the fair value at the grant dates of the awards, and the compensation expense related to Genzyme General Stock awards would be allocated to Genzyme General in accordance with our allocation policies:
1999 1998 1997 -------- -------- -------- (AMOUNTS IN THOUSANDS) Division net income: As reported............................... $142,077 $133,052 $ 76,642 Pro forma................................. $124,417 $119,477 $ 64,635
Note L., "Stockholders' Equity," to our consolidated financial statements contains information regarding the assumptions we made in calculating pro forma compensation expense in accordance with SFAS 123. The effects of applying SFAS 123 are not likely to be representative of the effects on reported division net income in future years. SFAS 123 does not apply to awards granted prior to 1995, and additional awards are anticipated in future years. NOTE N. RESEARCH AND DEVELOPMENT AGREEMENTS Genzyme General's revenue from research and development agreements with Genzyme Transgenics Corporation was:
1999 1998 1997 ---- ---- ---- $1.5 million $3.6 million $8.0 million
Note M., "Research and Development Agreements," to our consolidated financial statements contains information regarding Genzyme General's: - Relationships with Genzyme Transgenics Corporation; and - Investments in the following joint ventures: - BioMarin/Genzyme LLC; - Diacrin/Genzyme LLC; - Pharming/Genzyme LLC; and - RenaGel LLC. We incorporate that information in this note by reference. NOTE O. 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 December 31, 1999 which, if adversely decided, would have a material adverse effect on Genzyme General's results of operations, financial condition or liquidity. GG-38 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE P. INCOME TAXES Genzyme General's income before income taxes and the related income tax expense (benefit) are described in the following table:
1999 1998 1997 -------- -------- -------- (AMOUNTS IN THOUSANDS) Domestic(1)................................... $210,097 $204,182 $112,349 Foreign....................................... 16,380 9,514 8,822 -------- -------- -------- Total..................................... $226,477 $213,696 $121,171 ======== ======== ======== Currently payable: Federal....................................... $ 77,779 $ 69,567 $ 40,426 State......................................... 4,302 9,354 4,286 Foreign....................................... 5,733 4,016 2,971 -------- -------- -------- Total..................................... $ 87,814 $ 82,937 $ 47,683 ======== ======== ======== Deferred: Federal....................................... $ (3,036) $ (1,734) $ (3,713) State......................................... (378) (829) (245) -------- -------- -------- Total..................................... (3,414) $ (2,563) $ (3,958) -------- -------- -------- Provision for income taxes.................... $ 84,400 $ 80,374 $ 43,725 ======== ======== ========
- ------------------------ (1) Includes $5.4 million in charges for purchased research and development and $5.5 million in charges for impaired investments in 1999. Genzyme General's provisions for income taxes were at rates other than the U.S. federal statutory tax rate for the following reasons:
1999 1998 1997 -------- -------- -------- Tax at U.S. statutory rate............................... 35.0% 35.0% 35.0% Losses in foreign subsidiary and less than 80% owned subsidiaries with no current tax benefit............... 0.1 0.8 0.8 State taxes, net......................................... 1.2 3.1 3.0 Foreign sales corporation................................ (2.2) (1.5) (1.8) Nondeductible amortization............................... 0.7 0.8 1.4 Benefit of tax credits................................... (1.4) (1.0) (1.3) Other, net............................................... 2.2 0.5 (0.8) ---- ---- ----- Effective tax rate before certain charges................ 35.6% 37.7% 36.3% Charge for impaired investment........................... 0.5 -- -- Charge for purchased research and development............ 0.5 -- -- ---- ---- ----- Effective tax rate....................................... 36.6% 37.7% 36.3% ==== ==== =====
GG-39 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE P. INCOME TAXES (CONTINUED) The components of net deferred tax assets are described in the following table:
DECEMBER 31, ----------------------- 1999 1998 ---------- ---------- (AMOUNTS IN THOUSANDS) Deferred tax assets: Net operating loss carryforwards.................... $ 3,164 $ 2,423 Tax credits......................................... 9,413 3,714 Deferred loss....................................... -- 2,002 Intangible amortization............................. 36,496 38,271 Investments in unconsolidated subsidiary............ 3,396 3,108 Realized and unrealized capital losses.............. 10,088 8,822 Reserves, accruals and other........................ 37,055 35,798 Allocation of tax asset from Genzyme Molecular Oncology.......................................... 3,787 15,621 Allocation of tax asset from Genzyme Tissue Repair............................................ 15,510 2,648 -------- -------- Gross deferred tax asset................................ $118,909 $112,407 Valuation allowance..................................... (17,646) (15,383) -------- -------- 101,263 97,024 Deferred tax liabilities: Depreciable assets.................................. (22,591) (26,373) Realized and unrealized capital gains............... (12,686) -- Deferred gains...................................... (878) -- Allocation of tax liability from Genzyme Surgical Products.......................................... (4,069) (2,788) -------- -------- Net deferred tax asset.............................. $ 61,039 $ 67,863 ======== ========
As a result of uncertainty surrounding our ability to realize certain tax benefits that primarily relate to capital losses from the purchase of in-process research and development, we placed valuation allowances of $17.6 million in 1999 and $15.4 million in 1998 against otherwise recognizable deferred tax assets. Our ability to realize the benefit of net deferred tax assets is dependent on our generating sufficient taxable income before loss carryforwards expire. While it is not assured, we believe that it is more likely than not that we will be able to realize all of our net deferred tax assets. The amount we can realize, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. At December 31, 1999, Genzyme General had for U.S. income tax purposes allocated net operating loss carryforwards of $9.0 million and an allocated tax credit carryforward of $9.4 million. The net operating loss carryforwards expire between 2003 and 2019 and, prior to expiration, Genzyme General's ability to use this carryforward may be limited under U.S. tax laws. Tax credits of $4.9 million will carryforward indefinitely and approximately $4.5 million of the tax credit carryforwards will expire from 2014 to 2019. Approximately $9.4 million of the tax credit carryforwards relate to exercises of non-qualified stock options and disqualifying dispositions of incentive stock options, the tax benefit of which, if realized, will be credited to additional paid-in-capital. GG-40 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE Q. BENEFIT PLANS Note P., "Benefit Plans," to our consolidated financial statements contains information regarding our 401(k) and other pension plans. We incorporate that information into this note by reference. NOTE R. SEGMENT INFORMATION In accordance with SFAS 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 131, Genzyme General has two reportable segments: - Therapeutics, which develops, manufactures and distributes human therapeutic products for significant unmet medical needs. The business derives substantially all of its revenue from sales of Cerezyme-Registered Trademark- enzyme; and - Diagnostic Products, which provides diagnostic products to niche markets, focusing on in vitro diagnostics. GG-41 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE R. SEGMENT INFORMATION (CONTINUED) We have provided information concerning the operations in these reportable segments in the following table:
DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- (AMOUNTS IN THOUSANDS) Revenues: Therapeutics.............................................. $488,705 $413,645 $332,712 Diagnostic Products....................................... 57,971 65,683 66,288 Other..................................................... 86,409 85,846 86,927 Eliminations/Adjustments(1)............................... 2,281 4,145 10,441 -------- -------- -------- Total....................................................... $635,366 $569,319 $496,368 ======== ======== ======== Depreciation and amortization expense: Therapeutics.............................................. $ 21,068 $ 10,862 $ 10,054 Diagnostic Products....................................... 1,909 4,715 4,540 Other..................................................... 6,422 11,470 7,410 Eliminations/Adjustments(1)............................... 20,835 10,711 12,818 -------- -------- -------- Total....................................................... $ 50,234 $ 37,758 $ 34,822 ======== ======== ======== Equity in net loss of unconsolidated affiliates: Therapeutics.............................................. $(30,094) $(12,480) $ (2,310) Diagnostic Products....................................... -- -- -- Other..................................................... 56 (107) (71) Eliminations/Adjustments(2)............................... (7,385) (7,152) (3,401) -------- -------- -------- Total....................................................... $(37,423) $(19,739) $ (5,782) ======== ======== ======== Income tax (expense) benefits: Therapeutics.............................................. $(84,859) $(76,606) $(61,389) Diagnostic Products....................................... (2,485) (13,755) (1,409) Other..................................................... 2,952 2,134 8,658 Eliminations/Adjustments(1)............................... (8) 7,853 10,415 -------- -------- -------- Total....................................................... $(84,400) $(80,374) $(43,725) ======== ======== ======== Division net income: Therapeutics (3).......................................... $133,854 $120,832 $104,527 Diagnostic Products (4)................................... 3,915 21,694 2,400 Other (5)................................................. (4,661) (3,367) (14,741) Eliminations/Adjustments(6)............................... 8,969 (6,107) (15,544) -------- -------- -------- Total....................................................... $142,077 $133,052 $ 76,642 ======== ======== ========
- ------------------------ (1) Includes primarily amounts related to Genzyme General's research and development and administrative activities that we do not specifically allocate to a particular segment of Genzyme General. GG-42 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE R. SEGMENT INFORMATION (CONTINUED) (2) Represents our portion of the net loss of Genzyme Transgenics Corporation, an unconsolidated affiliate, which we do not specifically allocate to a particular segment of Genzyme General. (3) Therapeutics' net income for 1998 includes a $14.8 million charge to write down excess inventory used to make Ceredase-Registered Trademark- enzyme. (4) Diagnostic Products' net income for 1998 and 1999 includes gains on the sale of product lines of $0.5 million in 1999 and $31.2 million in 1998. (5) Other net income for 1999 includes a $7.5 million gain on the sale of a product line. (6) Includes the net income for Genzyme General's corporate administrative and research and development activities which we do not specifically allocate to a particular segment of Genzyme General. Includes a $14.4 million gain upon receipt of a payment associated with the termination of the agreement to acquire Cell Genesys, Inc.
DECEMBER 31, ----------------------- 1999 1998 ---------- ---------- (AMOUNTS IN THOUSANDS) Segment Assets: Therapeutics....................................... $ 338,960 $ 326,305 Diagnostic Products................................ 40,266 49,430 Other.............................................. 83,088 94,930 Eliminations/Adjustments........................... 937,269 939,726 ---------- ---------- Total................................................ $1,399,583 $1,410,391 ========== ==========
Segment assets for Genzyme include accounts receivable, inventory, and certain fixed and intangible assets. Eliminations/Adjustments for Genzyme General consists of the differences between the total assets for Genzyme General's segments and the total combined assets for Genzyme General as follows:
DECEMBER 31, ----------------------- 1999 1998 ---------- ---------- (AMOUNTS IN THOUSANDS) Cash, cash equivalents, and short- and long-term investments........................................... $513,905 $556,097 Deferred tax assets-current............................. 41,195 39,725 Intangibles, net........................................ 34,341 41,556 Property, plant and equipment, net...................... 172,165 133,995 Investment in equity securities......................... 94,719 51,977 Deferred tax assets-noncurrent.......................... 18,631 28,138 Other................................................... 62,313 88,238 -------- -------- Total................................................... $937,269 $939,726 ======== ========
Genzyme General operates in the healthcare industry, and manufactures and markets its products primarily in the United States and Europe. Genzyme General's principal manufacturing facilities are located in the United States, the United Kingdom, Switzerland and Germany. It purchases products from our English and Swiss subsidiaries for sale to customers in the United States. Genzyme General sets transfer prices from our foreign subsidiaries to allow it to produce profit margins commensurate with its GG-43 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE R. SEGMENT INFORMATION (CONTINUED) sales and marketing effort. Our Dutch subsidiary is Genzyme General's primary distributor of therapeutic products in Europe. No subsidiary in any individual foreign country has revenue form external customers in excess of 10% of our total revenue. The following table contains certain financial information by geographic area:
1999 1998 1997 -------- -------- -------- (AMOUNTS IN THOUSANDS) Revenues: United States............................... $412,611 $371,587 $363,455 Europe...................................... 158,428 147,088 134,637 Other....................................... 64,327 50,644 1,724 -------- -------- -------- Total......................................... $635,366 $569,319 $496,368 ======== ======== ======== Long-lived assets: United States............................... $647,024 $755,023 $506,085 Other....................................... 52,541 57,247 54,198 -------- -------- -------- Total......................................... $699,565 $812,270 $560,283 ======== ======== ========
Genzyme General's results of operations are highly dependent on sales of Ceredase-Registered Trademark- and Cerezyme-Registered Trademark- enzymes. Sales of these products represented 84% of Genzyme General's product revenue in 1999, 81% of product revenue in 1998, and 78% of product revenue in 1997. Genzyme General sells these products directly to physicians, hospitals and treatment centers as well as through unaffiliated distributors. Sales to one distributor represented 20% of Ceredase-Registered Trademark- and Cerezyme-Registered Trademark- enzyme revenues in 1999, 19% of these revenues in 1998, and 18% of these revenues in 1997. We believe that our credit risk associated with trade receivables is mitigated as a result of the fact that these products are sold to a large number of customers in a number of different industries and over a broad geographic area. NOTE S. QUARTERLY RESULTS (UNAUDITED)
1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- (AMOUNTS IN THOUSANDS) 1999 Net revenue......................................... $150,766 $154,205 $157,669 $172,726 Gross profit........................................ 113,519 117,557 120,693 126,223 Division net income................................. 33,505 27,913 29,971 50,688 1998 Net revenue......................................... 129,896 $141,779 $142,225 $155,419 Gross profit........................................ 89,089 98,860 86,546 117,635 Division net income................................. 25,135 31,289 40,202 36,426
NOTE T. SUBSEQUENT EVENT In February 2000, Genzyme General recorded a gain of $20.3 million relating to a public offering of 3.5 million common shares by our unconsolidated affiliate, Genzyme Transgenics Corporation. The public offering resulted in net proceeds to GTC of $75.2 million (after the exercise of the underwriter's overallotment option). As a result of the issuance of the additional shares by GTC, Genzyme General's ownership interest in GTC decreased from 33% to 28%. GG-44 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Genzyme Corporation: In our opinion, the accompanying combined balance sheets and the related combined statements of operations and of cash flows present fairly, in all material respects, the financial position of Genzyme General (as described in Note A) at December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related combined financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As more fully described in Note A to these financial statements, Genzyme General is a division of Genzyme Corporation; accordingly, the combined financial statements of Genzyme General should be read in conjunction with the audited consolidated financial statements of Genzyme Corporation and Subsidiaries. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts February 23, 2000 GG-45 GENZYME GENERAL DIVISION A DIVISION OF GENZYME CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ------------------------- ------------------- --------------------------------- ----------- ------------- ADDITIONS --------------------------------- BALANCE AT CHARGED TO COSTS CHARGED TO BALANCE AT DESCRIPTION BEGINNING OF PERIOD AND EXPENSES OTHER ACCOUNTS DEDUCTIONS END OF PERIOD - ------------------------- ------------------- ---------------- -------------- ----------- ------------- Year ended December 31, 1999: Allowance for doubtful accounts............... $ 9,913,100 $12,216,200 $ -- $ 3,167,400(1) $18,961,900 Inventory reserve........ $17,631,100 $ 1,978,000 $ -- $ 3,918,000 $15,691,100 Year ended December 31, 1998: Allowance for doubtful accounts............... $ 8,415,700 $ 5,059,000 $ -- $ 3,561,600(1) $ 9,913,100 Inventory reserve........ $15,471,300 $18,178,000 $ -- $16,018,200 $17,631,100 Year ended December 31, 1997: Allowance for doubtful accounts............... $11,967,900 $ 2,080,000 $ -- $ 5,632,200(1) $ 8,415,700 Inventory reserve........ $ 2,631,300 $15,101,000 $ -- $ 2,261,000 $15,471,300
- ------------------------ (1) Uncollectible accounts written off, net of recoveries. GG-46 EX-13.3 4 ex-13_3.txt EXHIBIT 13.3 EXHIBIT 13.3 FINANCIAL STATEMENTS
PAGE NO. -------- GENZYME MOLECULAR ONCOLOGY A DIVISION OF GENZYME CORPORATION Combined Selected Financial Data.......................... GMO-2 Management's Discussion and Analysis of Genzyme Molecular Oncology's Financial Condition and Results of Operations.............................................. GMO-4 Combined Statements of Operations--For the Years Ended December 31, 1999, 1998 and 1997................................................ GMO-13 Combined Balance Sheets--December 31, 1999 and 1998....... GMO-14 Combined Statements of Cash Flows--For the Years Ended December 31, 1999, 1998 and 1997................................................ GMO-15 Notes to Combined Financial Statements.................... GMO-16 Report of Independent Accountants......................... GMO-30
GMO-1 GENZYME MOLECULAR ONCOLOGY A DIVISION OF GENZYME CORPORATION COMBINED SELECTED FINANCIAL DATA Genzyme Molecular Oncology is our operating division that is developing cancer products, with a focus on cancer vaccines and angiogenesis inhibitors. A series of our common stock, Genzyme Molecular Oncology Division Common Stock (which we refer to as "Molecular Oncology Stock") is designed to reflect the value and track the performance of this division. Molecular Oncology Stock is common stock of Genzyme Corporation, not of Genzyme Molecular Oncology; Genzyme Molecular Oncology is a division, not a company or legal entity, and therefore does not and cannot issue stock. The chief mechanisms intended to cause Molecular Oncology Stock to "track" the financial performance of Genzyme Molecular Oncology are provisions in our charter governing dividends and distributions. Under these provisions, our charter: - factors the assets and liabilities and income or losses attributable to Genzyme Molecular Oncology into the determination of the amount available to pay dividends on Molecular Oncology Stock; and - requires us to exchange, redeem or distribute a dividend to the holders of Molecular Oncology Stock if all or substantially all of the assets allocated to Genzyme Molecular Oncology are sold to a third party. To determine earnings per share we allocate Genzyme's earnings to each series of our common stock based on the earnings attributable to that series of stock. The earnings attributable to Molecular Oncology Stock is defined in our charter as the net income or loss of Genzyme Molecular Oncology determined in accordance with generally accepted accounting principles and as adjusted for tax benefits allocated to or from Genzyme Molecular Oncology in accordance with our management and accounting policies. Our charter also requires that all income and expenses of Genzyme be allocated among the divisions in a reasonable and consistent manner. Our board of directors, however, retains considerable discretion in determining the types, magnitudes and extent of allocations to each series of common stock without shareholder approval. Because the earnings allocated to Molecular Oncology Stock are based on the income or losses attributable to Genzyme Molecular Oncology, we include financial statements and management's discussion and analysis of Genzyme Molecular Oncology to aid investors in evaluating its performance. The following combined selected financial data reflect the results of operations and financial position of the operations and assets we have allocated to Genzyme Molecular Oncology and should be read in conjunction with the financial statements of Genzyme Molecular Oncology and accompanying notes. GMO-2 GENZYME MOLECULAR ONCOLOGY A DIVISION OF GENZYME CORPORATION COMBINED SELECTED FINANCIAL DATA COMBINED STATEMENT OF OPERATIONS DATA
FOR THE YEARS ENDED DECEMER 31, ---------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (AMOUNTS IN THOUSANDS) Revenues: Service revenue............................ $ 1,920 $ 2,229 $ 467 $ -- $ -- Service revenue--related party............. 50 466 -- -- -- Research and development revenue--related party.................................... 496 2,177 315 -- -- Research and development revenue........... -- 3,256 -- -- -- Licensing revenue.......................... 2,125 11,275 -- -- -- Royalty revenue............................ 28 4 -- -- -- -------- -------- -------- ------- ------- Total revenues........................... 4,619 19,407 782 -- -- Operating costs and expenses: Cost of service revenues................... 620 1,374 50 -- -- Cost of research and development revenues................................. 698 4,073 287 -- -- Selling, general and administrative........ 5,529 7,155 2,118 185 87 Research and development................... 15,997 12,743 5,341 818 377 Amortization of intangibles................ 11,825 11,983 5,127 -- -- Purchase of in-process research and development (1).......................... -- -- 7,000 -- -- -------- -------- -------- ------- ------- Total operating costs and expenses....... 34,669 37,328 19,923 1,003 464 -------- -------- -------- ------- ------- Operating loss............................... (30,050) (17,921) (19,141) (1,003) (464) Other income (expenses): Equity in net loss of joint venture........ (1,870) (1,647) (258) -- -- Interest income............................ 469 782 392 -- -- Interest expense........................... (28) (2,968) (1,663) -- -- -------- -------- -------- ------- ------- Total other income (expenses)............ (1,429) (3,833) (1,529) -- -- -------- -------- -------- ------- ------- Loss before income taxes..................... (31,479) (21,754) (20,670) (1,003) (464) Tax benefit.................................. 2,647 2,647 1,092 -- -- -------- -------- -------- ------- ------- Division net loss............................ $(28,832) $(19,107) $(19,578) $(1,003) $ (464) ======== ======== ======== ======= =======
COMBINED BALANCE SHEET DATA
DECEMBER 31, ---------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (AMOUNTS IN THOUSANDS) Cash and investments............... $ 3,587 $11,900 $21,229 $ -- $ -- Working capital.................... (5,889) 9,189 11,953 -- -- Total assets....................... 9,692 35,952 53,801 -- -- Long-term debt and convertible debt............................. -- -- 24,606 -- -- Parent company investment.......... -- -- -- 1,504 501 Division equity.................... (1,215) 23,364 13,466 -- --
- ------------------------ (1) A $7.0 million charge for the purchase of in-process research and development was incurred in connection with the acquisition of PharmaGenics, Inc. in 1997. GMO-3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF GENZYME MOLECULAR ONCOLOGY'S FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION This discussion contains forward-looking statements. These forward-looking statements represent the expectations of our management as of the filing date of this annual report. Actual results could differ materially from those anticipated by the forward-looking statements due to the risks and uncertainties described under the caption "Factors Affecting Future Operating Results" for Genzyme Molecular Oncology and Genzyme Corporation included in this annual report. You should consider carefully each of these risks and uncertainties in evaluating the financial condition and results of operations of Genzyme Molecular Oncology and Genzyme. We formed Genzyme Molecular Oncology as a separate division of Genzyme on June 18, 1997 by acquiring PharmaGenics, Inc. and combining it with several of our ongoing programs in the field of oncology. We prepare the financial statements of Genzyme Molecular Oncology in accordance with generally accepted accounting principles. We present financial information and accounting policies specific to Genzyme Molecular Oncology in the accompanying combined financial statements. We present financial information and accounting policies relevant to the corporation and its operating divisions taken as a whole in our consolidated financial statements. You should read the consolidated financial statements in conjunction with the financial statements of Genzyme Molecular Oncology. Note A., "Summary of Significant Accounting Policies," to our consolidated financial statements contains our accounting policies. Genzyme Molecular Oncology Division Common Stock, which we refer to as "Molecular Oncology Stock," is a series of our common stock that is designed to reflect the value and track the performance of Genzyme Molecular Oncology. The chief mechanisms intended to cause Molecular Oncology Stock to "track" the financial performance of Genzyme Molecular Oncology are provisions in our charter governing dividends and distributions. Under these provisions, our charter: - factors the assets and liabilities and income or losses attributable to Genzyme Molecular Oncology into the determination of the amount available to pay dividends on Molecular Oncology Stock; and - requires us to exchange, redeem or distribute a dividend to the holders of Molecular Oncology Stock if all or substantially all of the assets allocated to Genzyme Molecular Oncology are sold to a third party (a dividend or redemption payment must equal in value the net after-tax proceeds from the sale; an exchange must be for Genzyme General Stock at a 10% premium to the exchanged stock's average market price following the announcement of the sale). To determine earnings per share, we allocate Genzyme's earnings to each series of our common stock based on the earnings attributable to that series of stock. The earnings attributable to Molecular Oncology Stock is defined in our charter as the net income or loss of Genzyme Molecular Oncology determined in accordance with generally accepted accounting principles and as adjusted for tax benefits allocated to or from Genzyme Molecular Oncology in accordance with our management and accounting policies. Our charter also requires that all income and expenses of Genzyme be allocated among the divisions in a reasonable and consistent manner. However, subject to its fiduciary duties, our board of directors can, at its discretion, change the methods of allocating earnings to each series of common stock. We intend to allocate earnings using our current methods for the foreseeable future. Because the earnings allocated to Molecular Oncology Stock are based on the income or losses attributable to Genzyme Molecular Oncology, we include financial statements and management's discussion and analysis of Genzyme Molecular Oncology to aid investors in evaluating its performance. While Molecular Oncology Stock is designed to reflect Genzyme Molecular Oncology's performance, it is common stock of Genzyme Corporation and not Genzyme Molecular Oncology; Genzyme Molecular GMO-4 Oncology is a division, not a company or legal entity, and therefore does not and cannot issue stock. Consequently, holders of Molecular Oncology Stock have no specific rights to assets allocated to Genzyme Molecular Oncology. Genzyme Corporation continues to hold title to all of the assets allocated to Genzyme Molecular Oncology and is responsible for all of its liabilities, regardless of what we deem for financial statement presentation purposes as allocated to any division. Holders of Molecular Oncology 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 Molecular Oncology Stock and other tracking stockholders would only have the rights of common stockholders in the combined assets of Genzyme. Our charter sets forth what programs and businesses are initially allocated to Genzyme Molecular Oncology and states that going forward the division will also include all businesses, products or programs, developed by or acquired for the division, as determined by our board of directors. We then manage and account for transactions between Genzyme Molecular Oncology and our other divisions and with third parties, and any resulting re-allocations of assets and liabilities, by applying consistently across divisions a detailed set of policies established by our board of directors. We publicly disclose our divisional management and accounting policies, which appear in Exhibit 99.1 to this Annual Report on Form 10-K. Our charter requires that all assets and liabilities of Genzyme be allocated among the divisions. Our board of directors, however, retains considerable discretion in determining the types, magnitudes and extent of allocations to each series of common stock without shareholder approval. We present earnings per share data for Molecular Oncology Stock in our consolidated financial statements. We present financial information and accounting policies specific to Genzyme Molecular Oncology in the accompanying combined financial statements. We present financial information and accounting policies relevant to the corporation and its operating divisions taken as a whole in our consolidated financial statements. You should, therefore, read this discussion and analysis of Genzyme Molecular Oncology's financial position and results of operations in conjunction with the financial statements and related notes of Genzyme Molecular Oncology, the discussion and analysis of Genzyme's financial position and results of operations, and the consolidated financial statements and related notes of Genzyme, all of which are included in this annual report. GMO-5 RESULTS OF OPERATIONS The following discussion summarizes the key factors management believes are necessary for an understanding of Genzyme Molecular Oncology's financial statements. The components of Genzyme Molecular Oncology's combined statements of operations are described in the following table:
99/98 98/97 INCREASE/(DECREASE) INCREASE/(DECREASE) 1999 1998 1997 % CHANGE % CHANGE -------- -------- -------- ------------------- ------------------- (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Total revenues................ $ 4,619 $ 19,407 $ 782 (76%) 2,382% Cost of revenues.............. 1,318 5,447 337 (76%) 1,516% Selling, general and administrative.............. 5,529 7,155 2,118 (23%) 238% Research and development...... 15,997 12,743 5,341 26% 139% Amortization of intangibles... 11,825 11,983 5,127 (1%) 134% Purchase of in-process research and development.... -- -- 7,000 0% (100%) -------- -------- -------- Total operating costs and expenses.................. 34,669 37,328 19,923 (7%) 87% -------- -------- -------- Operating loss................ (30,050) (17,921) (19,141) (68%) 6% Other expenses, net........... (1,429) (3,833) (1,529) 63% (151%) -------- -------- -------- Loss before income taxes...... (31,479) (21,754) (20,670) (45%) (5%) Tax benefit................... 2,647 2,647 1,092 0% 142% -------- -------- -------- Division net loss............. $(28,832) $(19,107) $(19,578) (51%) 2% ======== ======== ========
REVENUES
99/98 98/97 INCREASE/(DECREASE) INCREASE/(DECREASE) 1999 1998 1997 % CHANGE % CHANGE -------- -------- -------- ------------------- ------------------- (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Service revenue............... $ 1,970 $ 2,695 $ 467 (27%) 477% Research and development revenue..................... 496 5,433 315 (91%) 1,625% Licensing revenue............. 2,125 11,275 -- (81%) 100% Royalty revenue............... 28 4 -- 600% 100% -------- -------- -------- Total revenues.............. $ 4,619 $ 19,407 $ 782 (76%) 2,382% ======== ======== ========
1999 AS COMPARED TO 1998 Service revenue decreased as a result of a decline in the provision of genomics services using Genzyme Molecular Oncology's SAGE-TM- gene expression technology. Research and development revenue also decreased as a result of a reduction in work performed by Genzyme Molecular Oncology on behalf of StressGen/Genzyme LLC (Genzyme Molecular Oncology's joint venture with StressGen Biotechnologies Corporation and the Canadian Medical Discoveries Fund, Inc. to develop stress gene therapies for the treatment of cancer that was dissolved in 1999) and the completion of research and development work performed on behalf of Schering-Plough in 1998. GMO-6 Licensing revenue decreased in 1999 as a result of the receipt in 1998 of a licensing fee and milestone payments under a license agreement with Schering-Plough relating to p53 gene therapy. This amount was partially offset by amounts received upon the grant by Genzyme Molecular Oncology of licenses under its rights to the SAGE-TM- gene expression technology and the MDM2 protein. 1998 AS COMPARED TO 1997 The increase in Genzyme Molecular Oncology's research and development and licensing revenue was primarily due to $13.0 million in revenue recorded in connection with a research and license agreement with Schering-Plough. Genzyme Molecular Oncology's revenue includes work performed for StressGen/ Genzyme LLC. COST OF REVENUES 1999 AS COMPARED TO 1998 Genzyme Molecular Oncology's cost of revenues includes: - work performed on behalf of StressGen/Genzyme LLC; - services performed using the SAGE-TM- technology on behalf of third parties; - performance of gene therapy research on behalf of Schering-Plough; and - royalties payable to third parties. Cost of revenues decreased in 1999 as a result of the completion of the Schering-Plough research project and a reduction in the royalty rate payable by Genzyme Molecular Oncology for using the SAGE-TM- gene expression technology on behalf of third parties. 1998 AS COMPARED TO 1997 The increase in Genzyme Molecular Oncology's cost of revenues in 1998 was primarily attributable to: - costs related to the delivery of services using the SAGE-TM- technology; - royalties payable for using the SAGE-TM- technology on behalf of third parties; and - costs incurred in connection with research and development performed on behalf of StressGen/ Genzyme LLC and Schering-Plough. SG&A AND R&D EXPENSES 1999 AS COMPARED TO 1998 Genzyme Molecular Oncology's selling, general and administrative expense decreased primarily as a result of: - reduced legal costs in 1999 associated with the prosecution and maintenance of its intellectual property portfolio; and - a one-time charge taken in 1998 to write off costs incurred in connection with a public offering of Molecular Oncology Stock that was not completed. Genzyme Molecular Oncology's research and development expense increased as a result of: - the initiation of a clinical trial for its melanoma tumor vaccine product; and - an increase in the number of research personnel and related expenses required to support the continued development of its cancer vaccine and angiogenesis inhibitor programs. GMO-7 1998 AS COMPARED TO 1997 Genzyme Molecular Oncology's selling, general and administrative expense increased in 1998 primarily as a result of: - increased administrative support needed to support the growth of its business; and - a one-time charge taken in the third quarter of 1998 to write off costs incurred in connection with a public offering of Molecular Oncology Stock that was not completed. Genzyme Molecular Oncology's research and development expense increased in 1998 as a result of increases in research personnel and related expenses to support Genzyme Molecular Oncology's SAGE-TM-, gene therapy and small molecule programs. AMORTIZATION OF INTANGIBLES Genzyme Molecular Oncology's amortization of intangibles is attributable to intangible assets acquired in connection with the acquisition of PharmaGenics, Inc. in June 1997. Because Genzyme Molecular Oncology only amortized these assets over a six month period in 1997, amortization expense increased in 1998. OTHER INCOME AND EXPENSES 1999 AS COMPARED TO 1998 Genzyme Molecular Oncology's other expenses decreased because it had reduced interest expense resulting from the transfer of its convertible debt to Genzyme General in August 1998. The decrease in interest expense, however, was offset in part by a $1.0 million charge taken by Genzyme Molecular Oncology in the third quarter of 1999 in connection with its repurchase of one-half of the Canadian Medical Discoveries Fund's interest in StressGen/Genzyme LLC. StressGen/Genzyme LLC was dissolved in December 1999 and, as a result, Genzyme Molecular Oncology will no longer incur expenses related to this joint venture. 1998 AS COMPARED TO 1997 Interest income increased in 1998 mainly as the result of higher average cash balances. Interest expense increased to $3.0 million in 1998 compared to $1.7 million in 1997. The increase in interest expense is the result of interest and related amortization of the discount on the 6% convertible debentures issued in August 1997. These debentures, which had been convertible into shares of Molecular Oncology Stock, were exchanged in August 1998 for 5% convertible debentures convertible into shares of Genzyme General Stock. StressGen/Genzyme LLC was established in July 1997. Genzyme Molecular Oncology recorded an equity in net loss of the joint venture of $1.6 million in 1998 and $0.3 million in 1997. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1999, Genzyme Molecular Oncology had cash, cash equivalents and short-term investments of $3.6 million, a decrease of $8.3 million from December 31, 1998. In 1999, Genzyme Molecular Oncology used $14.6 million of cash for operations. Investing activities provided $2.0 million of cash, which consisted primarily of $1.0 million in proceeds from the maturities of investments, and $0.9 million from the distribution of cash from StressGen/Genzyme LLC upon the joint venture's dissolution. Financing activities provided $5.0 million of cash from the issuance of debt. In addition $0.3 million of cash proceeds were allocated to Genzyme Molecular Oncology from the exercise GMO-8 of options to purchase shares of Molecular Oncology Stock and the issuance of Molecular Oncology Stock under our employee stock purchase plan. In 1998, our board of directors made $30.0 million of Genzyme General's cash available to Genzyme Molecular Oncology. Under the terms of this arrangement, Genzyme Molecular Oncology may draw down funds as needed in exchange for Genzyme Molecular Oncology designated shares. Genzyme Molecular Oncology designated shares are shares of Molecular Oncology Stock that are not issued and outstanding, but which our board of directors may issue, sell, or distribute without allocating the proceeds to Genzyme Molecular Oncology. Genzyme Molecular Oncology has not yet drawn down any funds under this arrangement. At December 31, 1999, $5.0 million of funds outstanding under one of our revolving credit facilities was allocated to Genzyme Molecular Oncology. Genzyme Molecular Oncology, together with our other operating divisions, has access to our revolving credit facilities. At December 31, 1999, $50.0 million was available under a facility that matures in November 2000 and $77.0 million was available under a facility that matures in November 2002. We anticipate that Genzyme Molecular Oncology's current cash resources, together with amounts available from the following sources, will be sufficient to fund its operations through 2000: - the $30.0 million interdivisional financing arrangement from Genzyme General; - our revolving credit facilities; - revenues generated from the SAGE-TM- gene expression technology; and - revenues from license agreements. We expect Genzyme Molecular Oncology to have significant operating losses for the next several years. Genzyme Molecular Oncology plans to spend substantial amounts of money on, among other things: - research and development; - preclinical and clinical testing; and - pursuing regulatory approvals. Genzyme Molecular Oncology's cash needs may differ from those planned as a result of many factors, including the: - results of research and development and clinical testing; - achievement of milestones under existing strategic alliances; - ability to establish and maintain additional strategic collaborations and licensing arrangements; - costs of protecting its intellectual property rights; - development of competitive products and services; and - ability to satisfy regulatory requirements of the FDA and other government authorities. Genzyme Molecular Oncology may require significant additional financing to continue operations. We cannot guarantee that we will be able to obtain any additional financing for Genzyme Molecular Oncology or find it on favorable terms. If Genzyme Molecular Oncology has insufficient funds or we are unable to raise additional funds for Genzyme Molecular Oncology, it may delay, scale back or eliminate certain of its programs. Genzyme Molecular Oncology may also have to give third parties rights to commercialize technologies or products that it would otherwise have sought to commercialize itself. GMO-9 NEW ACCOUNTING PRONOUNCEMENTS, EURO, YEAR 2000 AND MARKET RISK See "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations" included in this annual report. FACTORS AFFECTING FUTURE OPERATING RESULTS The future operating results of Genzyme Molecular Oncology could differ materially from the results described above due to the risks and uncertainties described below and under the heading "Management's Discussion and analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations--Factors Affecting Future Operating Results" included in this annual report. GENZYME MOLECULAR ONCOLOGY MAY NEVER BE ABLE TO SUCCESSFULLY DEVELOP OR COMMERCIALIZE ANY OF ITS CANCER THERAPIES. Genzyme Molecular Oncology does not have any cancer therapies on the market and its only therapies in clinical development are its melanoma and breast cancer vaccines. Before commercializing any cancer therapies, Genzyme Molecular Oncology will need to conduct substantial research and development, including, in some cases, the replication of preclinical studies performed by its collaborators, undertake preclinical and clinical testing and obtain regulatory approvals. This process involves a high degree of uncertainty and may take several years. Its product development efforts may fail for many reasons, including: - the product fails in preclinical studies; - clinical trials may not support the safety or effectiveness of the product; or - we fail to obtain the required regulatory approvals. We cannot guarantee that Genzyme Molecular Oncology will successfully develop any particular product or that any product it successfully develops will gain market acceptance. GENZYME MOLECULAR ONCOLOGY ANTICIPATES FUTURE LOSSES AND MAY NEVER BECOME PROFITABLE. Genzyme Molecular Oncology has not generated significant revenues to date and does not expect to do so for several years. As of December 31, 1999, Genzyme Molecular Oncology had an accumulated deficit of approximately $69.0 million. It expects to have significant operating losses for the next several years. Genzyme Molecular Oncology plans to spend substantial amounts of money on, among other things: - research and development; - preclinical and clinical testing; and - pursuing regulatory approvals. We cannot guarantee that the efforts underlying these expenditures will be successful or that Genzyme Molecular Oncology's operations will ever be profitable. IF GENZYME MOLECULAR ONCOLOGY FAILS TO OBTAIN THE CAPITAL NECESSARY TO FUND ITS OPERATIONS, IT WILL BE UNABLE TO FUND DEVELOPMENT PROGRAMS AND COMPLETE CLINICAL TRIALS. We anticipate that Genzyme Molecular Oncology's current cash resources, together with amounts available under a line of credit from Genzyme General and revenues generated from our SAGE-TM- technology and license agreements, will be sufficient to fund its operations through 2000. Genzyme Molecular Oncology's cash needs may differ from those planned, however, because of many factors, including the: - results of research and development and clinical testing; GMO-10 - achievement of milestones under existing strategic collaborations; - ability to establish and maintain additional strategic collaborations and licensing arrangements; - costs of protecting its intellectual property rights; - development of competing products and services; and - ability to satisfy regulatory requirements of the FDA and other government authorities. Genzyme Molecular Oncology may require significant additional financing to continue operations at anticipated levels. We cannot guarantee that we will be able to obtain any additional financing for Genzyme Molecular Oncology or find it on favorable terms. If Genzyme Molecular Oncology has insufficient funds or we are unable to raise additional funds for Genzyme Molecular Oncology, it may have to delay, reduce or eliminate some of its programs. Genzyme Molecular Oncology may also have to give third parties rights to commercialize technologies or products that it would otherwise have sought to commercialize itself. GENZYME MOLECULAR ONCOLOGY MAY NOT RECEIVE SIGNIFICANT PAYMENTS FROM COLLABORATORS DUE TO UNSUCCESSFUL RESULTS IN EXISTING COLLABORATIONS OR A FAILURE TO ENTER INTO FUTURE COLLABORATIONS. Genzyme Molecular Oncology's strategy to develop and commercialize some of its products and services includes entering into various arrangements with academic and corporate collaborators and licensees. It depends on the success of these parties in performing research, preclinical and clinical testing and marketing. These arrangements may require Genzyme Molecular Oncology to transfer important rights to its corporate collaborators and licensees. These collaborators and licensees could choose not to devote resources to these arrangements or, under certain circumstances, may terminate them early. In addition, these collaborators and licensees, outside of their arrangements with Genzyme Molecular Oncology, may develop technologies or products that are competitive with those that Genzyme Molecular Oncology is developing. As a result, we cannot guarantee that Genzyme Molecular Oncology will receive revenues from these relationships or that any of its strategic collaborations will continue or not terminate early. In addition, we cannot guarantee that Genzyme Molecular Oncology will be able to enter into collaborations in the future. GENZYME MOLECULAR ONCOLOGY MAY BE REQUIRED TO LICENSE TECHNOLOGY FROM COMPETITORS IN ORDER TO DEVELOP AND COMMERCIALIZE SOME OF ITS PRODUCTS AND SERVICES, AND IT IS UNCERTAIN WHETHER THESE LICENSES WILL BE AVAILABLE. Third party patent rights and pending patent applications filed by third parties, if issued, may cover some of the products Genzyme Molecular Oncology is developing or testing. As a result, Genzyme Molecular Oncology may be required to obtain licenses from the holders of these patents in order to use or sell certain products and services. We cannot guarantee that these licenses will be made available on acceptable terms or at all. If these licenses are not available, Genzyme Molecular Oncology's ability to commercialize its products and services may be impaired. In its cancer vaccine program, Genzyme Molecular Oncology is in the process of evaluating the therapeutic administration of peptide products and genes that encode specific tumor antigens, including MART-1 and gp100. Genzyme Molecular Oncology is aware of two issued U.S. patents directed to the gene that encodes MART-1. While it has obtained rights under one of these patents, Genzyme Molecular Oncology is still in the process of evaluating the scope and validity of the other to determine whether it needs to obtain a license. Genzyme Molecular Oncology is also evaluating an issued U.S. patent covering the gene that encodes gp100 and three published Patent Cooperation Treaty applications by three different applicants that may cover antigens derived from gp100. Genzyme Molecular Oncology is in the process of evaluating the scope and validity of these patents and patent applications to determine whether it needs to obtain licenses. GMO-11 GENZYME MOLECULAR ONCOLOGY MAY INCUR SUBSTANTIAL COSTS AS A RESULT OF LITIGATION OR OTHER PROCEEDINGS RELATING TO PATENT AND OTHER INTELLECTUAL PROPERTY RIGHTS. If Genzyme Molecular Oncology or one of its strategic collaborators initiate litigation to enforce Genzyme Molecular Oncology's patent or license rights, or are required to defend these rights in response to third party claims, its business or financial position may be negatively affected. Genzyme Molecular Oncology has licensed its p53 gene therapy rights to Schering-Plough. These patent rights are the subject of an interference proceeding in the U.S. and an opposition proceeding in Europe. Adverse determinations in these proceedings may negatively affect Genzyme Molecular Oncology's ability to receive future milestones and product royalties under its agreement with Schering-Plough. ADVERSE EVENTS IN THE FIELD OF GENE THERAPY MAY NEGATIVELY AFFECT REGULATORY APPROVAL OR PUBLIC PERCEPTION OF GENZYME MOLECULAR ONCOLOGY'S GENE THERAPY PRODUCTS. The recent death of a patient undergoing gene therapy using an adenoviral vector to deliver a therapeutic gene has been widely publicized. This death and any other adverse events in the field of gene therapy that may occur in the future may result in greater governmental regulation and potential regulatory delays relating to the testing or approval of Genzyme Molecular Oncology's gene therapy products. As a result of this death, the U.S. Senate has commenced hearings to determine whether additional legislation is required to protect volunteers and patients who participate in gene therapy clinical trials. Additionally, the Recombinant DNA Advisory Committee, which acts as an advisory body to the National Institutes of Health (NIH), has extensively discussed the use of adenoviral vectors in gene therapy clinical trials and recently issued a draft report on the safety of adenoviral vectors. While this draft report recommends that clinical trials using adenoviral vectors should continue with caution, it also suggested a number of changes in the way gene therapy clinical trials are conducted. If any new guidelines are adopted by the NIH, Genzyme Molecular Oncology's gene therapy clinical trials could be delayed or become more expensive to conduct. Genzyme Molecular Oncology has reported to the FDA and the NIH that there have been three deaths in its Phase I/II melanoma cancer vaccine trial at Massachusetts General Hospital. The principal investigator for this trial indicated that each of these deaths was due to disease progression and not related to the patient's treatment. Deaths are not unexpected in a clinical trial treating patients with advanced stage melanoma because these patients have short life expectancies. Genzyme Molecular Oncology cannot, however, rule out the possibility that its cancer vaccines may be a contributing cause of death for patients in the future. The commercial success of any gene therapy products that Genzyme Molecular Oncology develops will depend in part on public acceptance of the use of gene therapies for the prevention or treatment of human diseases. Public attitudes may be influenced by claims that gene therapy is unsafe, and gene therapy may not gain the acceptance of the public or the medical community. Negative public reaction to gene therapy could result in greater government regulation and stricter clinical trial oversight and commercial product labeling requirements of gene therapies and could cause a decrease in the demand for any gene therapy product that Genzyme Molecular Oncology may develop. SUBSEQUENT EVENT In March 2000, we filed a prospectus with the SEC covering the offering of 3,000,000 shares of Molecular Oncology Stock (plus 450,000 shares issuable upon exercise of the underwriters' over-allotment option). The proceeds of the offering were to be allocated to Genzyme Molecular Oncology to fund research, pre-clinical and clinical development programs, to repay existing indebtedness, and for working capital and general corporate purposes. GMO-12 GENZYME MOLECULAR ONCOLOGY A DIVISION OF GENZYME CORPORATION COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 1999 1998 1997 --------- --------- --------- (AMOUNTS IN THOUSANDS) Revenues: Service revenue........................................... $ 1,920 $ 2,229 $ 467 Service revenue--related party............................ 50 466 -- Research and development--related party................... 496 2,177 315 Research and development.................................. -- 3,256 -- Licensing revenue......................................... 2,153 11,279 -- --------- --------- --------- Total revenues........................................ 4,619 19,407 782 Operating costs and expenses: Cost of service revenues.................................. 620 1,374 50 Cost of research and development revenue.................. 698 4,073 287 Selling, general and administrative....................... 5,529 7,155 2,118 Research and development.................................. 15,997 12,743 5,341 Amortization of intangibles............................... 11,825 11,983 5,127 Purchase of in-process research and development........... -- -- 7,000 --------- --------- --------- Total operating costs and expenses.................... 34,669 37,328 19,923 --------- --------- --------- Operating loss.............................................. (30,050) (17,921) (19,141) Other income (expenses): Equity in net loss of joint venture....................... (1,870) (1,647) (258) Interest income........................................... 469 782 392 Interest expense.......................................... (28) (2,968) (1,663) --------- --------- --------- Total other income (expenses)......................... (1,429) (3,833) (1,529) --------- --------- --------- Loss before income taxes.................................... (31,479) (21,754) (20,670) Tax benefit................................................. 2,647 2,647 1,092 --------- --------- --------- Division net loss........................................... $ (28,832) $ (19,107) $ (19,578) ========= ========= ========= Comprehensive loss, net of tax: Division net loss........................................... $ (28,832) $ (19,107) $ (19,578) Other comprehensive income (loss), net of tax Unrealized gains (losses) on securities arising during the period.................................................. -- 7 (7) --------- --------- --------- Comprehensive loss.......................................... $ (28,832) $ (19,100) $ (19,585) ========= ========= =========
The accompanying notes are an integral part of these combined financial statements. GMO-13 GENZYME MOLECULAR ONCOLOGY A DIVISION OF GENZYME CORPORATION COMBINED BALANCE SHEETS
DECEMBER 31, ----------------------- 1999 1998 -------- -------- (AMOUNTS IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents................................. $ 3,587 $10,868 Short-term investments.................................... -- 1,032 Accounts receivable, net.................................. -- 5,931 Prepaid expenses and other current assets................. 218 85 ------- ------- Total current assets.................................. 3,805 17,916 Equipment, net............................................ 467 791 Intangibles, net.......................................... 5,420 17,245 ------- ------- Total assets.......................................... $ 9,692 $35,952 ======= ======= LIABILITIES AND DIVISION EQUITY Current liabilities: Accrued expenses.......................................... $ 676 $ 1,273 Due to Genzyme General.................................... 3,793 4,773 Payable to joint venture.................................. -- 1,181 Deferred revenue.......................................... 225 1,500 Current portion of long-term debt......................... 5,000 -- ------- ------- Total current liabilities............................. 9,694 8,727 Deferred tax liability...................................... 1,213 3,861 ------- ------- Total liabilities..................................... 10,907 12,588 Commitments and contingencies (See Notes) Division equity (Note H).................................... (1,215) 23,364 ------- ------- Total liabilities and division equity................. $ 9,692 $35,952 ======= =======
The accompanying notes are an integral part of these combined financial statements. GMO-14 GENZYME MOLECULAR ONCOLOGY A DIVISION OF GENZYME CORPORATION COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 1999 1998 1997 --------- --------- --------- (AMOUNTS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Division net loss........................................... $ (28,832) $ (19,107) $ (19,578) Reconciliation of division net loss to net cash used in operating activities: Depreciation and amortization............................. 12,057 12,353 5,245 Charge for in-process technology.......................... -- -- 7,000 Deferred tax benefit...................................... (2,647) (2,647) (1,092) Accretion of debt conversion feature...................... -- 1,867 957 Equity in loss of joint venture........................... 1,870 1,647 258 Accrued interest/amortization of marketable securities.... 10 131 (141) Gain on sale of equipment................................. (54) -- -- Provision for bad debts................................... 256 100 -- Non-cash compensation expense............................. 10 114 58 Increase (decrease) in cash from working capital: Accounts receivable..................................... 5,675 (5,915) (117) Prepaid expenses and other current assets............... (75) 986 (773) Accrued expenses, payable to joint venture and deferred revenue............................................... (1,927) 1,779 2,139 Due to Genzyme General.................................. (980) 553 2,011 --------- --------- --------- Net cash used in operating activities................. (14,637) (8,139) (4,033) CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of PharmaGenics, Inc., net of acquired cash..... -- -- 9 Investment in unconsolidated affiliate...................... -- -- (724) Purchases of investments.................................... -- (2,056) (6,086) Distribution from joint venture............................. 881 -- -- Maturities of investments................................... 1,022 7,120 -- Acquisitions of equipment................................... (43) (559) (357) Sale of equipment........................................... 188 -- -- Other....................................................... -- (488) -- --------- --------- --------- Net cash provided by (used in) investing activities... 2,048 4,017 (7,158) CASH FLOWS FROM FINANCING ACTIVITIES: Allocation of debt from Genzyme General..................... -- -- 5,000 Cash allocated from Genzyme General......................... -- 5,000 -- Allocated proceeds from issuance of debt.................... 5,000 -- -- Allocated proceeds from issuance of Molecular Oncology Stock..................................................... 308 7 -- Allocated proceeds from issuance of warrants................ -- -- 724 Allocated proceeds from issuance of convertible debentures, net....................................................... -- -- 19,150 Repayments of debts......................................... -- (5,000) -- Parent company investment, Genzyme General.................. -- -- 1,371 Other....................................................... -- (27) (44) --------- --------- --------- Net cash provided by (used in) financing activities... 5,308 (20) 26,201 Increase (decrease) in cash and cash equivalents............ (7,281) (4,142) 15,010 Cash and cash equivalents at beginning of period............ 10,868 15,010 -- --------- --------- --------- Cash and cash equivalents at end of period.................. $ 3,587 $ 10,868 $ 15,010 ========= ========= ========= Supplemental disclosures of non-cash transactions: PharmaGenics acquisition--Note D. Repurchase of interest in StressGen/Genzyme LLC--Note F.
The accompanying notes are an integral part of these combined financial statements. GMO-15 GENZYME MOLECULAR ONCOLOGY A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS Genzyme Molecular Oncology is our operating division that is developing cancer products, with a focus on cancer vaccines and angiogenesis inhibitors. BASIS OF PRESENTATION The combined financial statements of Genzyme Molecular Oncology for each period include the balance sheets, results of operations and 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 below. These combined financial statements are prepared using amounts included in our consolidated financial statements included in this annual report. We have reclassified certain 1998 and 1997 data to conform with the 1999 presentation. We prepare the financial statements of Genzyme Molecular Oncology in accordance with generally accepted accounting principles. We present financial information and accounting policies specific to Genzyme Molecular Oncology in the accompanying combined financial statements. We present financial information and accounting policies relevant to the corporation and its operating divisions taken as a whole in our consolidated financial statements. You should read the consolidated financial statements in conjunction with the financial statements of Genzyme Molecular Oncology. Note A., "Summary of Significant Accounting Policies," to our consolidated financial statements contains our accounting policies. We incorporate that information into this note by reference. TRACKING STOCK Genzyme Molecular Oncology Division Common Stock, which we refer to as "Molecular Oncology Stock," is a series of our common stock that is designed to reflect the value and track the performance of Genzyme Molecular Oncology. The chief mechanisms intended to cause Molecular Oncology Stock to "track" the financial performance of Genzyme Molecular Oncology are provisions in our charter governing dividends and distributions. Under these provisions, our charter: - factors the assets and liabilities and income or losses attributable to Genzyme Molecular Oncology into the determination of the amount available to pay dividends on Molecular Oncology Stock; and - requires us to exchange, redeem or distribute a dividend to the holders of Molecular Oncology Stock if all or substantially all of the assets allocated to Genzyme Molecular Oncology are sold to a third party (a dividend or redemption payment must equal in value the net after-tax proceeds from the sale; an exchange must be for Genzyme General Stock at a 10% premium to the exchanged stock's average market price following the announcement of the sale). To determine earnings per share, we allocate Genzyme's earnings to each series of our common stock based on the earnings attributable to that series of stock. The earnings attributable to Molecular Oncology Stock, is defined in our charter as the net income or loss of Genzyme Molecular Oncology determined in accordance with generally accepted accounting principles and as adjusted for tax benefits allocated to or from Genzyme Molecular Oncology in accordance with our management and accounting policies. Our charter also requires that all income and expenses of Genzyme be allocated among the divisions in a reasonable and consistent manner. However, subject to its fiduciary duties, our board of directors can, at GMO-16 GENZYME MOLECULAR ONCOLOGY A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) its discretion, change the methods of allocating earnings to each series of common stock. We intend to allocate earnings using our current methods for the foreseeable future. Because the earnings allocated to Molecular Oncology Stock are based on the income or losses attributable to Genzyme Molecular Oncology, we include financial statements and management's discussion and analysis of Genzyme Molecular Oncology to aid investors in evaluating its performance. While Molecular Oncology Stock is designed to reflect Genzyme Molecular Oncology's performance, it is common stock of Genzyme Corporation and not Genzyme Molecular Oncology; Genzyme Molecular Oncology is a division, not a company or legal entity, and therefore does not and cannot issue stock. Consequently, holders of Molecular Oncology Stock have no specific rights to assets allocated to Genzyme Molecular Oncology. Genzyme Corporation continues to hold title to all of the assets allocated to Genzyme Molecular Oncology and is responsible for all of its liabilities, regardless of what we deem for financial statement presentation purposes as allocated to any division. Holders of Molecular Oncology 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 Molecular Oncology Stock and other tracking stockholders would only have the rights of common stockholders in the combined assets of Genzyme. ALLOCATION POLICY Our charter sets forth what operations and assets are initially allocated to Genzyme Molecular Oncology and states that going forward the division will also include all business, products or programs, developed by or acquired for the division, as determined by our board of directors. We then manage and account for transactions between Genzyme Molecular Oncology and our other divisions and with third parties, and any resulting re-allocations of assets and liabilities, by applying consistently across divisions a detailed set of policies established by our board of directors. We publicly disclose our divisional management and accounting policies, which appear in Exhibit 99.1 to this Annual Report on Form 10-K. Our charter requires that all assets and liabilities of Genzyme be allocated among the divisions. Our board of directors, however, retains considerable discretion in determining the types, magnitudes and extent of allocations to each series of common stock without shareholder approval. Our allocations to our divisions are based on one of the following methodologies: - Specific identification--assets that are dedicated to the production of goods of a division or which solely benefit a division are allocated to that division. Liabilities incurred as a result of the performance of services for the benefit of a division or in connection with the expenses incurred which directly benefit a division are allocated to the division. Such specifically identified assets and liabilities include cash, investments, accounts receivable, inventories, property and equipment, intangible assets, accounts payable, accrued expenses and deferred revenue. Revenues from the licensing of a division's products or services to third parties and the related costs are allocated to a division; - Actual usage--expenses are charged to the division for whose benefit such expenses are incurred. Research and development, sales and marketing and direct general and administrative services are GMO-17 GENZYME MOLECULAR ONCOLOGY A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) charged to the divisions for which the service is performed on a cost basis. Such charges are generally based on direct labor hours; - Proportionate usage--costs incurred which benefit more than one division are allocated based on management's estimate of the proportionate benefit each division receives. Such costs include facilities, legal, finance, human resources, executive and investor relations; or - Board directed--programs and products, both internally developed and acquired, are allocated to divisions by the board of directors. The board of directors also allocates long-term debt and strategic investments. Note B., "Policies Governing the Relationship of Genzyme's Operating Divisions," further describes our policies concerning interdivisional transactions and income tax allocations. We believe that the divisional allocations are reasonable and have been consistently applied. However, the division's results of operations may not be indicative of what would have been realized if the division was a stand-alone entity. TRANSLATION OF FOREIGN CURRENCIES We translate the financial statements of foreign subsidiaries allocated to Genzyme Molecular Oncology from local currency into U.S. dollars and include translation adjustments for these subsidiaries in division equity. Genzyme Molecular Oncology records gains and losses in foreign currency transactions in income. We include exchange gains and losses on intercompany balances which are long-term in nature in our division equity. Our gains and losses on all other transactions are included in our results of operations. REVENUE RECOGNITION Genzyme Molecular Oncology recognizes service revenue when the service procedures have been completed or applicable milestones have been achieved. Revenues from research and development contracts are recognized over applicable contractual periods as specified by each contract and as costs related to the contracts are incurred. Up-front license fees and milestone payments are recognized as revenue only if there are no remaining performance obligations and the fees are non-refundable. Genzyme Molecular Oncology receives royalties related to the use of its technologies under license arrangements with third parties. For those arrangements where royalties are reasonably estimable, Genzyme Molecular Oncology recognizes revenue based on estimates of royalties earned during the applicable period and adjusts for differences between the estimated and actual royalties in the following quarter. Historically, these adjustments have not been material. For those arrangements where royalties are not reasonably estimable, Genzyme Molecular Oncology recognizes revenue upon receipt of licensee royalty statements. NET INCOME (LOSS) PER SHARE Earnings per share is calculated for each series of Genzyme stock using the two-class method, as further described in the notes to the consolidated financial statements. We present earnings per share data GMO-18 GENZYME MOLECULAR ONCOLOGY A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) only in the consolidated financial statements of Genzyme because Genzyme Corporation is the issuer of the securities. Genzyme's divisions do not and cannot issue securities because they are not companies or legal entities. NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS Because each of our operating divisions is a part of a single company, our board of directors has adopted policies to address issues that may arise among divisions and to govern the management of and the relationships between each division. With some exceptions that are mentioned specifically in this note, our board of directors may modify or rescind these policies, or adopt additional policies, in its sole discretion without stockholder approval, subject only to our board of directors' fiduciary duty to stockholders. Generally accepted accounting principles require that any change in policy be preferable (in accordance with these principles) to the previous policy. INTERDIVISION ASSET TRANSFERS Our board of directors may at any time reallocate any program, product or other asset from one division to any other division. We account for interdivision asset transfers at book value. The consideration paid for an asset transfer generally must be fair value as determined by our board of directors. The difference between the consideration paid and the book value of the assets transferred is recorded in division equity. Our board of directors determines fair value using the following methodologies: a risk-adjusted discounted cash flow model or a comparable transaction model. The risk-adjusted discounted cash flow model estimates fair value by taking the discounted value of all the cash inflows and outflows related to a program or product over a specified period of time, generally the economic life of the project, adjusted for the probabilities of certain outcomes occurring or not occurring. In performing this analysis, we consider various factors that could affect the success or failure of the program including: - the duration, cost and probability of success of each phase of development; - the current and potential size of the market and barriers to entry into the market; - the maximum number of patients likely to be treated with the product and the speed with which that maximum number will be reached; - reimbursement policies and pricing limitations; - current and potential competitors; - the net proceeds received by us upon the sale of the program or product; and - the costs of manufacturing and marketing the product or program. The comparable transaction model estimates fair value through comparison to valuations established for other transactions within the biotechnology and biosurgical areas involving similar programs and GMO-19 GENZYME MOLECULAR ONCOLOGY A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS (CONTINUED) products having similar terms and structure. In identifying comparable transactions, we consider, among other factors, the following: - the similarity of market opportunity; - the comparability of the medical needs addressed; - the similarity of the regulatory, reimbursement and competitive environment; - the stage of product or program development; and - the risk profile of successfully commercializing the product or program. We customarily use the comparable transaction model to corroborate valuations derived under the risk-adjusted discounted cash flow model. When determining the fair value of a program under development using either model, our board of directors also takes into account the following criteria: - the commercial potential of the program; - the phase of clinical development of the program; - the expenses associated with realizing any income from the program and the likelihood and time of the realization; and - other matters that our board of directors and its financial advisors, if any, deem relevant. One division may compensate another division for a reallocation with cash or other consideration having a value equal to the fair market value of the reallocated assets. In the case of a reallocation of assets from Genzyme General to Genzyme Molecular Oncology, our board of directors may elect instead to account for the reallocation as an increase in Genzyme Molecular Oncology designated shares in accordance with the provisions of our charter. No gain or loss is recognized as a result of these transfers. Our policy regarding transfers of assets between divisions may not be changed by our board without the approval of the holders of Molecular Oncology Stock voting as a separate class unless the policy change does not affect Genzyme Molecular Oncology. OTHER INTERDIVISION TRANSACTIONS Our divisions may engage in transactions directly with one or more other divisions or jointly with one or more other divisions and one or more third parties. These transactions may include agreements by one division to provide products and services for use by another division, license agreements and joint ventures or other collaborative arrangements involving more than one division to develop new products and services jointly and with third parties. These transactions are subject to the following conditions:
- We charge research and development (including clinical and regulatory support), distribution, sales, marketing, and general and administrative services (including allocated space) performed by one division for another division to the division for which the services are performed on a cost
GMO-20 GENZYME MOLECULAR ONCOLOGY A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS (CONTINUED) basis. We charge direct costs to the division for which we incur them. We allocate direct labor and indirect costs in reasonable and consistent manners based on the use by a division of relevant services. Divisions performing services for other divisions do not recognize revenue for the services they perform. - We charge the manufacturing of goods and performance of services by one division exclusively for another division to the division for which it is performed on a cost basis. We include in manufacturing costs an interest charge (based on our short-term borrowing rate at the beginning of the fiscal year) on the gross fixed assets used in the manufacturing process. We determine gross fixed assets for the facility used at the beginning of each fiscal year. We allocate direct labor and indirect costs in reasonable and consistent manners based on the benefit received by a division of related goods and services. Divisions performing services for other divisions do not recognize revenue for the services they perform. - Other than transactions involving research and development, manufacturing, distribution, sales, marketing, general and administrative services, which are addressed above, all interdivisional transactions are performed on terms and conditions obtainable in arm's length transactions with third parties. Divisions performing services for other divisions do not recognize revenue for the services they perform. - Our board of directors must approve interdivisional transactions that are performed on terms and conditions other than as described above and are material to one or more of the participating divisions. In giving its approval, our board of directors must determine that the transaction is fair and reasonable to each participating division and to holders of the common stock representing each participating division. - Divisions may make loans to other divisions. Any loan of $1 million or less matures within 18 months and accrues interest at the best borrowing rate available to the corporation for a loan of like type and duration. Our board of directors must approve any loan in excess of $1 million. In giving its approval, our board of directors must determine that the material terms of the loan, including the interest rate and maturity date, are fair and reasonable to each participating division and to holders of the common stock representing each such division. - All material interdivisional transactions are set forth in a written agreement that is signed by an authorized member of the management team of each division involved in the transaction.
On December 31, 1999, Genzyme Molecular Oncology owed Genzyme General approximately $3.8 million in connection with these services. On December 31, 1998, approximately $4.8 million was owed. TAX ALLOCATIONS We file a consolidated tax return and allocate income taxes to Genzyme Molecular Oncology based upon the financial statement income, taxable income, credits and other amounts properly allocable to each division under generally accepted accounting principles as if it were a separate taxpayer. We assess the realizability of our deferred tax assets at the division level. As a result, our consolidated tax provision may not equal the sum of the divisions' tax provision. As of the end of any fiscal quarter, however, if Genzyme Molecular Oncology cannot use any projected annual tax benefit attributable to it to offset or reduce its GMO-21 GENZYME MOLECULAR ONCOLOGY A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS (CONTINUED) current or deferred income tax expense, we may allocate the tax benefit to the other divisions in proportion to their taxable income without any compensating payment or allocation. ACCESS TO TECHNOLOGY AND KNOW-HOW Genzyme Molecular Oncology has unrestricted access to all technology and know-how owned or controlled by Genzyme Corporation that may be useful in its business, subject to any obligations or limitations that apply to the corporation generally. NOTE C. ACCOUNTS RECEIVABLE AND INTANGIBLE ASSETS Genzyme Molecular Oncology's trade receivables primarily represent amounts due from third party collaborators. Genzyme Molecular Oncology performs credit evaluations of its customers on an ongoing basis and generally does not require collateral. Genzyme Molecular Oncology states accounts receivable at fair value after reflecting an allowance for doubtful accounts. This allowance was $0.3 million at December 31, 1999 and $0.1 million at December 31, 1998. The following table contains information on Genzyme Molecular Oncology's intangible assets for the periods presented:
WEIGHTED AVERAGE WEIGHTED AVERAGE ESTIMATED ESTIMATED DECEMBER 31, USEFUL LIFE DECEMBER 31, USEFUL LIFE 1999 (YEARS) 1998 (YEARS) ------------ ---------------- ------------ ---------------- (AMOUNTS IN THOUSANDS, EXCEPT USEFUL LIFE DATA) Goodwill............................... $14,405 3 $14,405 3 Completed technology................... 20,000 3 20,000 3 ------- ------- $34,405 $34,405 Less accumulated amortization.......... (28,985) (17,160) ------- ------- Intangible assets, net................. $ 5,420 $17,245 ======= =======
NOTE D. PHARMAGENICS ACQUISITION In June 1997, we acquired PharmaGenics, Inc., a company engaged in the research and development of products for the treatment of cancer and other diseases. We allocated this acquisition to Genzyme Molecular Oncology and accounted for it as a purchase. We allocated the aggregate purchase price of $27.5 million, plus acquisition costs of $2.5 million and assumed liabilities of $4.9 million, to the tangible and intangible assets we acquired from PharmaGenics based on their respective fair values (amounts in thousands): Equipment.................................................. $ 208 Other assets............................................... 50 Completed technology (to be amortized over 3 years)........ 20,000 Goodwill (to be amortized over 3 years).................... 15,193 Deferred tax liability (to be amortized over 3 years)...... (7,600) In-process technology...................................... 7,000 ------- Total.................................................. $34,851 =======
In 1998, we made an adjustment of $0.5 million in the amount of liabilities we assumed. GMO-22 GENZYME MOLECULAR ONCOLOGY A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE D. PHARMAGENICS ACQUISITION (CONTINUED) The $7.0 million allocated to in-process research and development represents the value we assigned to PharmaGenics's programs that were still in the development stage and for which there was no alternative use. We assigned values to all of PharmaGenics's programs (both complete and in-process) by selecting the maximum anticipated value of these programs and comparing them to the values of comparable technologies. In 1997, we recorded a one-time charge to operations for the amount of the purchase price allocated to in-process technology. NOTE E. EQUIPMENT
DECEMBER 31, ------------------------- 1999 1998 -------- -------- (AMOUNTS IN THOUSANDS) Equipment.............................................. $ 966 $1,111 Furniture and fixtures................................. 13 13 ------ ------ $ 979 $1,124 Less accumulated depreciation.......................... (512) (333) ------ ------ Equipment, net......................................... $ 467 $ 791 ====== ======
Genzyme Molecular Oncology's depreciation expense was $232,000 in 1999, $255,000 in 1998, and $74,000 in 1997. NOTE F. INVESTMENT IN STRESSGEN/GENZYME LLC In July 1997, together with StressGen Biotechnologies Corp. and the Canadian Medical Discoveries Fund, Inc. ("CMDF"), we established StressGen/Genzyme LLC, a joint venture to develop stress gene therapies for the treatment of cancer. Because CMDF had the right to require StressGen and Genzyme Molecular Oncology to purchase its membership interest in the joint venture, Genzyme Molecular Oncology recorded 50% of the net operating losses of the joint venture. As of December 31, 1998, Genzyme Molecular Oncology's portion of the cumulative losses of StressGen/Genzyme LLC exceeded our initial capital contribution to the joint venture by $1.2 million and, as a result, Genzyme Molecular Oncology recorded the $1.2 million as a liability. For the period January through August 1999, Genzyme Molecular Oncology recorded an additional $0.8 million of losses from the joint venture, increasing the liability related to the joint venture to $2.0 million. In August 1999, CMDF exercised its put right and StressGen and Genzyme Molecular Oncology were required to purchase its membership interest in the joint venture at an aggregate price of $10.0 million (Canadian). As a result, Genzyme Molecular Oncology was obligated to repurchase one-half of the CMDF's interest in the joint venture for approximately $3.9 million ($5.0 million (Canadian)). To record the exercise of the put option, Genzyme Molecular Oncology recorded: - a $1.9 million increase to their liability related to the joint venture, thus increasing the liability to $3.9 million; - a $0.9 million increase to their investment in joint venture to reflect their 50% interest in the net assets of the joint venture; and - a $1.0 million charge to equity in net loss of unconsolidated affiliates because, at that time, it was expected that the joint venture would be dissolved and the joint venture interest would have no value beyond the cash it held. GMO-23 GENZYME MOLECULAR ONCOLOGY A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE F. INVESTMENT IN STRESSGEN/GENZYME LLC (CONTINUED) Genzyme Molecular Oncology completed the repurchase of CMDF's interest in October 1999 by issuing to CMDF 617,200 shares of Molecular Oncology Stock at a price of $6.375 per share. The purchase price was calculated in accordance with the joint venture agreements based on the market price of Molecular Oncology Stock over a period prior to the repurchase. To record the repurchase, Genzyme Molecular Oncology increased stockholders' equity by $3.9 million to reflect the issuance of the shares of Molecular Oncology Stock and decreased their liability related to the joint venture by $3.9 million to zero. Genzyme Molecular Oncology agreed to dissolve StressGen/Genzyme LLC in December 1999 and in connection with the dissolution the joint venture, received a cash distribution of $0.9 million which was equal to Genzyme Molecular Oncology's investment in the joint venture at that time. Genzyme Molecular Oncology does not present summary financial information for StressGen/ Genzyme LLC because the impact of its activities are not considered to be material to their operations for the years ended December 31, 1999 and 1998. NOTE G. DEBT INSTRUMENTS REVOLVING CREDIT FACILITY In November 1999, our $225.0 million revolving credit facility matured. We refinanced this facility with a $50.0 million revolving credit facility that matures in November 2000 and a $100.0 million revolving credit facility that matures in November 2002. At December 31, 1999, $5.0 million of the amount outstanding under our revolving credit facility was allocated to Genzyme Molecular Oncology. On that date, the interest rate on this borrowing was 6.765%. Genzyme Molecular Oncology incurred interest expense of approximately $11,000 on the $5.0 million outstanding in 1999. Additionally, Genzyme Molecular Oncology incurred interest expense of approximately $73,000 in 1998 and $160,000 in 1997 on amounts borrowed under our credit facility that matured in 1999. 6% CONVERTIBLE SUBORDINATED DEBENTURES In August 1997, we issued $20.0 million in principal of 6% convertible subordinated debentures. These debentures were convertible into shares of Molecular Oncology Stock at a discount to the market value of that stock. Genzyme Molecular Oncology recorded charges to interest expense of $1.9 million in 1998 and $0.9 million in 1997 to reflect the accretion to fair value of the conversion feature of this debenture. In accordance with the terms of these debentures, they were exchanged in August 1998 for $21.2 million in principal of 5% convertible subordinated debentures convertible into Genzyme General Stock. In November 1998 we reserved approximately 3.0 million Genzyme Molecular Oncology designated shares for issuance in connection with this exchange. In October 1999 we increased the number of Genzyme Molecular Oncology designated shares reserved in connection with this exchange by approximately 0.3 million. GMO-24 GENZYME MOLECULAR ONCOLOGY A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE H. DIVISION EQUITY The following table contains the components of division equity for Genzyme Molecular Oncology for the periods presented:
DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- (AMOUNTS IN THOUSANDS) Balance at beginning of period.............................. $ 23,364 $ 13,466 $ -- Division net loss........................................... (28,832) (19,107) (19,578) Allocation of cash from Genzyme General for Genzyme Molecular Oncology designated shares(1)................... -- 5,000 1,381 Conversion of debentures into Genzyme Molecular Oncology designated shares......................................... -- 19,802 -- Conversion of note payable into Genzyme Molecular Oncology designated shares......................................... -- 2,696 -- Allocated proceeds from issuance of Molecular Oncology Stock under stock plans......................................... 308 7 -- Allocated proceeds from sale of warrants.................... -- -- 724 Allocated stock compensation expense........................ 10 114 (116) Allocated value of Molecular Oncology Stock issued upon acquisition of PharmaGenics............................... -- -- 27,369 Allocated value of Molecular Oncology Stock issued upon repurchase of joint venture interest...................... 3,935 -- -- Allocated value of debt conversion feature.................. -- -- 3,529 Unrealized gain (loss) on investments....................... -- 7 (7) Allocated equity adjustments................................ -- 1,379 164 -------- -------- -------- Balance at end of period.................................... $ (1,215) $ 23,364 $ 13,466 ======== ======== ========
- ------------------------ (1) Genzyme Molecular Oncology designated shares are shares of Molecular Oncology Stock that are not issued and outstanding, but which our board of directors may issue, sell or distribute without allocating the proceeds to Genzyme Molecular Oncology. As of December 31, 1999, there were 1,688,237 Genzyme Molecular Oncology designated shares, assuming a public offering of Molecular Oncology Stock is not completed prior to June 18, 2000. If such an offering is completed prior to that date, the number of Genzyme Molecular Oncology designated shares reserved for issuance in connection with this transaction will decrease based on a formula set forth in our charter. GMO-25 NOTE H. DIVISION EQUITY (CONTINUED) STOCK COMPENSATION PLANS We apply APB Opinion 25 and related interpretations in accounting for our five stock-based compensation plans: the 1990 Equity Incentive Plan, the 1997 Equity Plan (both of which are stock option plans), the 1990 Employee Stock Purchase Plan, the 1999 Employee Stock Purchase Plan, and the 1998 Director Stock Option Plan. We do not recognize compensation expense for options granted and shares purchased under the provisions of these plans for options granted to employees with an exercise price greater than or equal to fair market value. The following table sets forth division net loss data for Genzyme Molecular Oncology as if compensation expense for our stock-based compensation plans was determined in accordance with SFAS 123 based on the fair value at the grant dates of the awards, and the compensation expense related to Molecular Oncology Stock awards would be allocated to Genzyme Molecular Oncology in accordance with our allocation policies:
DECEMBER 31, --------------------------------- 1999 1998 1997 --------- --------- --------- (AMOUNTS IN THOUSANDS) Division net loss: As reported............................................. $ (28,832) $ (19,107) $ (19,578) Pro forma............................................... $ (29,973) $ (20,018) $ (19,787)
Note L., "Stockholders' Equity," to our consolidated financial statements contains information regarding the assumptions we made in calculating pro forma compensation expense in accordance with SFAS 123. INTERDIVISIONAL FINANCING ARRANGEMENT In 1997, our board of directors made $25.0 million of Genzyme General's cash available to Genzyme Molecular Oncology. This arrangement was subject to dollar-for dollar reduction by the proceeds of outside financing received by Genzyme Molecular Oncology. When we issued $20.0 million in principal of 6% convertible subordinated debentures in August 1997, the amount available under the arrangement was reduced to $5.0 million. In September 1998, Genzyme Molecular Oncology drew the remaining $5.0 million available under this arrangement in exchange for Genzyme Molecular Oncology designated shares. In August 1998, our board of directors made an additional $30.0 million of Genzyme General's cash available to Genzyme Molecular Oncology. Under the terms of this arrangement, Genzyme Molecular Oncology may draw down funds as needed each quarter in exchange for Genzyme Molecular Oncology designated shares based on the fair market value of Molecular Oncology Stock (as defined in our charter) at the time of the draw. As of December 31, 1999, Genzyme Molecular Oncology had not yet drawn any funds from this arrangement. NOTE I. 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 December 31, 1999 which, if adversely decided, would have a material adverse effect on Genzyme Molecular Oncology's results of operations, financial condition, or liquidity. GMO-26 NOTE J. INCOME TAXES There was no provision for income taxes due to Genzyme Molecular Oncology's continuing operating losses. As part of the acquisition of PharmaGenics, Genzyme Molecular Oncology recorded a deferred tax liability of $7.6 million resulting from the difference between the book and tax basis of the completed technology computed at a 38% incremental tax rate. This amount is being amortized over three years consistent with the life of the completed technology. Genzyme Molecular Oncology recorded deferred tax benefits of $2.6 million in each of 1999 and 1998 and $1.1 million in 1997. Genzyme Molecular Oncology's income (loss) before income taxes and the related income tax expense (benefit) are described in the following table:
DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- (AMOUNTS IN THOUSANDS) Currently payable: Federal................................................... $ -- $ -- $ -- State..................................................... -- -- -- -------- -------- -------- Total................................................. $ -- $ -- $ -- ======== ======== ======== Deferred: Federal................................................... $ (2,438) $ (2,438) $ (1,006) State..................................................... (209) (209) (86) -------- -------- -------- Total income tax benefit.............................. $ (2,647) $ (2,647) $ (1,092) ======== ======== ========
Genzyme Molecular Oncology's provisions for income taxes were at rates other than the U.S. federal statutory tax rate for the following reasons:
1999 1998 1997 -------- -------- ------- Tax at U.S. statutory rate.................................. (35.0)% (35.0)% (35.0)% State taxes, net............................................ (1.1) (2.0) (3.0) Tax credits................................................. (2.5) (2.5) (2.4) Nondeductible interest...................................... -- 3.0 2.7 Nondeductible amortization.................................. 5.4 8.1 6.4 Deductions subject to deferred tax valuation allowance...... 24.8 16.2 22.4 ----- ----- ----- Effective tax rate.......................................... (8.4)% (12.2)% (8.9)% ===== ===== =====
GMO-27 NOTE J. INCOME TAXES (CONTINUED) The components of net deferred tax assets are described in the following table:
DECEMBER 31, ----------------------- 1999 1998 -------- -------- (AMOUNTS IN THOUSANDS) Deferred tax assets: Net operating loss carryforwards.......................... $ 14,720 $ 8,166 Reserves and other........................................ 177 -- Tax credits............................................... 2,209 1,003 -------- -------- Gross deferred tax asset.................................... 17,106 9,169 Valuation allowance......................................... (17,106) (9,169) -------- -------- Net deferred tax asset...................................... -- -- Deferred tax liabilities: Intangible amortization................................... (1,213) (3,861) -------- -------- Net deferred tax liabilities.............................. $ (1,213) $ (3,861) ======== ========
As a result of uncertainty surrounding our ability to realize certain tax benefits that primarily relate to operating loss carryforwards, capital losses from the purchase of in-process research and development, we placed valuation allowances of $17.1 million in 1999 and $9.2 million in 1998 against otherwise recognizable deferred tax assets. As Genzyme Molecular Oncology recognizes these deferred tax assets in accordance with generally accepted accounting principles, the benefits of those assets will be reflected in its tax provision. However, the benefit of these deferred tax assets has previously been allocated to Genzyme General in accordance with our management and accounting policies. NOTE K. BENEFIT PLANS Note P., "Benefit Plans," to our consolidated financial statements contains information regarding our 401(k) plan. We incorporate that information into this note by reference. NOTE L. SIGNIFICANT CUSTOMERS Genzyme Molecular Oncology has two significant pharmaceutical customers. The following table describes the revenue for each customer in comparison to total revenue (amounts in thousands):
% OF % OF % OF TOTAL TOTAL TOTAL 1999 REVENUE 1998 REVENUE 1997 REVENUE -------- -------- -------- -------- -------- -------- Customer A.................. $2,800 61% $ 933 5% $467 60% Customer B.................. -- -- $13,000 67% -- --
GMO-28 NOTE L. SIGNIFICANT CUSTOMERS (CONTINUED) The portion of Genzyme Molecular Oncology's revenues related to work performed on behalf of StressGen/Genzyme LLC were: - $0.5 million, or 11% of total revenues in 1999; - $2.2 million, or 11% of total revenues in 1998; and - $0.3 million, or 40% of total revenues in 1997. NOTE M. SUBSEQUENT EVENT In March 2000, we filed a prospectus with the SEC covering the offering of 3,000,000 shares of Molecular Oncology Stock (plus 450,000 shares issuable upon exercise of the underwriters' over-allotment option). The proceeds of the offering were to be used by Genzyme Molecular Oncology to fund research, pre-clinical and clinical development programs, to repay existing indebtedness, and for working capital and general corporate purposes. GMO-29 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Genzyme Corporation: In our opinion, the accompanying combined balance sheets and the related combined statements of operations and of cash flows present fairly, in all material respects, the financial position of Genzyme Molecular Oncology (as described in Note A) at December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As more fully described in Note A to these financial statements, Genzyme Molecular Oncology is a division of Genzyme Corporation; accordingly, the combined financial statements of Genzyme Molecular Oncology should be read in conjunction with the audited consolidated financial statements of Genzyme Corporation and Subsidiaries. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts February 23, 2000 GMO-30 EX-13.4 5 ex-13_4.txt EXHIBIT 13.4 EXHIBIT 13.4 FINANCIAL STATEMENTS
PAGE NO. -------- GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION Combined Selected Financial Data.......................... GSP-2 Management's Discussion and Analysis of Genzyme Surgical Products' Financial Condition and Results of Operations.............................................. GSP-5 Combined Statements of Operations--For the Years Ended December 31, 1999, 1998 and 1997................................................ GSP-16 Combined Balance Sheets--December 31, 1999 and 1998....... GSP-17 Combined Statements of Cash Flows--For the Years Ended December 31, 1999, 1998 and 1997................................................ GSP-18 Notes to Combined Financial Statements.................... GSP-19 Report of Independent Accountants......................... GSP-34
GSP-1 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION COMBINED SELECTED FINANCIAL DATA Genzyme Surgical Products is our operating division that develops, manufactures and markets surgical products for cardiovascular surgery and general surgery. A series of our common stock, Genzyme Surgical Products Division Common Stock (which we refer to as "Surgical Products Stock") is designed to reflect the value and track the performance of this division. Surgical Products Stock is common stock of Genzyme Corporation, not of Genzyme Surgical Products; Genzyme Surgical Products is a division, not a company or legal entity, and therefore does not and cannot issue stock. The chief mechanisms intended to cause Surgical Products Stock to "track" the financial performance of Genzyme Surgical Products are provisions in our charter governing dividends and distributions. Under these provisions, our charter: - factors the assets and liabilities and income or losses attributable to Genzyme Surgical Products into the determination of the amount available to pay dividends on Surgical Products Stock; and - requires us to exchange, redeem or distribute a dividend to the holders of Surgical Products Stock if all or substantially all of the assets allocated to Genzyme Surgical Products are sold to a third party. To determine earnings per share, we allocate Genzyme's earnings to each series of our common stock based on the earnings attributable to that series of stock. The earnings attributable to Surgical Products Stock is defined in our charter as the net income or loss of Genzyme Surgical Products determined in accordance with generally accepted accounting principles and as adjusted for tax benefits allocated to or from Genzyme Surgical Products in accordance with our management and accounting policies. Our charter also requires that all income and expenses of Genzyme be allocated among the divisions in a reasonable and consistent manner. Our board of directors, however, retains considerable discretion in determining the types, magnitudes and extent of allocations to each series of common stock without shareholder approval. Because the earnings allocated to Surgical Products Stock are based on the income or losses attributable to Genzyme Surgical Products, we include financial statements and management's discussion and analysis of Genzyme Surgical Products to aid investors in evaluating its performance. The following combined selected financial data reflect the results of operations and financial position of the operations and assets we have allocated to Genzyme Surgical Products and should be read in conjunction with the financial statements of Genzyme Surgical Products and accompanying notes. We established Genzyme Surgical Products as a division in June 1999. The business of Genzyme Surgical Products had previously been accounted for as a business unit of Genzyme General. The products and assets allocated to Genzyme Surgical Products are those we acquired upon the purchase of Deknatel Snowden Pencer, Inc. in 1996, the Sepra products (our line of products and product candidates designed to limit post-operative adhesions), and our research and development programs in biomaterials and gene and cell therapy for cardiovascular disease. Genzyme General transferred $150.0 million in cash, cash equivalents and investments, and certain other assets, to Genzyme Surgical Products in connection with the creation of Genzyme Surgical Products as a separate division of Genzyme. In exchange for this transfer, we issued approximately 14.8 million shares of Surgical Products Stock and distributed them as a dividend to holders of Genzyme General Stock. These financial statements reflect the financial position, results of operations and cash flows attributable to Genzyme Surgical Products as if it had been accounted for as a separate division of the corporation for all periods presented. GSP-2 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION COMBINED SELECTED FINANCIAL DATA COMBINED STATEMENTS OF OPERATIONS DATA
FOR THE YEARS ENDED DECEMBER 31, -------------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- --------- --------- -------- (AMOUNTS IN THOUSANDS) Net product sales(1).................... $ 111,981 $ 103,958 $ 100,835 $ 50,714 $ 8 Operating costs and expenses: Cost of products sold(2).............. 67,242 72,274 59,802 32,654 733 Selling, general and administrative... 63,237 57,297 54,061 28,399 2,576 Research and development.............. 28,056 18,618 11,287 7,693 5,971 Amortization of intangibles........... 5,750 5,748 5,647 2,984 -- Purchase of in-process research and development(3)...................... -- -- -- 24,170 -- --------- --------- --------- --------- -------- Total operating costs and expenses.......................... 164,285 153,937 130,797 95,900 9,280 --------- --------- --------- --------- -------- Operating loss.......................... (52,304) (49,979) (29,962) (45,186) (9,272) Other income (expenses): Equity in net income (loss) of unconsolidated affiliates........... (35) (6) (78) 2 (1) Other................................. 138 60 236 8 -- Investment income..................... 4,199 144 98 84 -- Interest expense...................... (35) (75) (34) (58) -- --------- --------- --------- --------- -------- Total other income (expenses)....... 4,267 123 222 36 (1) --------- --------- --------- --------- -------- Loss before income taxes................ (48,037) (49,856) (29,740) (45,150) (9,273) Tax benefit............................. -- -- -- 837 -- --------- --------- --------- --------- -------- Division net loss....................... $ (48,037) $ (49,856) $ (29,740) $ (44,313) $ (9,273) ========= ========= ========= ========= ========
GSP-3 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION COMBINED SELECTED FINANCIAL DATA COMBINED BALANCE SHEET DATA
DECEMBER 31, ---------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (AMOUNTS IN THOUSANDS) Cash and investments(4)....................... $126,125 $ -- $ 975 $ 2,182 $ -- Working capital(4)............................ 98,465 32,714 34,279 40,556 118 Total assets(4)............................... 370,924 234,216 242,566 253,609 175 Division equity(4)............................ 353,918 227,088 234,969 239,040 175
- ------------------------ (1) On July 1, 1996, we acquired Deknatel Snowden Pencer, Inc., or "DSP". (2) Cost of products sold for 1998 includes a $10.4 million charge to write-down our Sepra products inventory to net realizable value. (3) In 1996, we recorded a $24.2 million charge for the purchase of in-process research and development in connection with its acquisition of DSP. (4) We created Genzyme Surgical Products as a separate division of Genzyme on June 28, 1999. Prior to this date, the operations of Genzyme Surgical Products were included in the allocated results of Genzyme General. On June 28, 1999, Genzyme General transferred $150.0 million in cash, cash equivalents, investments and certain other assets to Genzyme Surgical Products in connection with the creation of Genzyme Surgical Products as a separate division of Genzyme. In exchange for this transfer, we issued approximately 14.8 million shares of Surgical Products Stock. GSP-4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF GENZYME SURGICAL PRODUCTS' FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION This discussion contains forward-looking statements. These forward-looking statements represent the expectations of our management as of the filing date of this annual report. Actual results could differ materially from those anticipated by the forward-looking statements due to the risks and uncertainties described under the caption "Factors Affecting Future Operating Results" for Genzyme Surgical Products and Genzyme Corporation included in this annual report. You should consider carefully each of these risks and uncertainties in evaluating the financial condition and results of operations of Genzyme Surgical Products and Genzyme. We established Genzyme Surgical Products as a separate division of Genzyme in June 1999. The business of Genzyme Surgical Products had previously been accounted for as a business unit of Genzyme General. The products and assets allocated to Genzyme Surgical Products are those we acquired upon the purchase of Deknatel Snowden Pencer, Inc. in 1996, the Sepra products (our line of products and product candidates designed to limit post-operative adhesions), and our research and development programs in biomaterials and gene and cell therapy for cardiovascular disease. Genzyme General transferred $150.0 million in cash, cash equivalents, investments, and certain other assets, to Genzyme Surgical Products in connection with the creation of Genzyme Surgical Products as a separate division of Genzyme. In exchange for this transfer, we issued approximately 14.8 million shares of Surgical Products Stock and distributed them as a dividend to holders of Genzyme General Stock. These financial statements reflect the financial position, results of operations and cash flows attributable to Genzyme Surgical Products as if it had been accounted for as a separate division of the corporation for all periods presented. We prepare the financial statements of Genzyme Surgical Products in accordance with generally accepted accounting principles. We present financial information and accounting policies specific to Genzyme Surgical Products in the accompanying combined financial statements. We present financial information and accounting policies relevant to the corporation and its operating divisions taken as a whole in our consolidated financial statements. You should read the consolidated financial statements in conjunction with the financial statements of Genzyme Surgical Products. Note A., "Summary of Significant Accounting Policies," to our consolidated financial statements contains our accounting policies. Genzyme Surgical Products Common Stock, which we refer to as "Surgical Products Stock," is a series of our common stock that is designed to reflect the value and track the performance of Genzyme Surgical Products. The chief mechanisms intended to cause Surgical Products Stock to "track" the financial performance of Genzyme Surgical Products are provisions in our charter governing dividends and distributions. Under these provisions, our charter: - factors the assets and liabilities and income or losses attributable to Genzyme Surgical Products into the determination of the amount available to pay dividends on Surgical Products Stock; and - requires us to exchange, redeem or distribute a dividend to the holders of Surgical Products Stock if all or substantially all of the assets allocated to Genzyme Surgical Products are sold to a third party (a dividend or redemption payment must equal in value the net after-tax proceeds from the sale; an exchange must be for Genzyme General Stock at a 10% premium to the exchanged stock's average market price following the announcement of the sale). To determine earnings per share, we allocate Genzyme's earnings to each series of our common stock based on the earnings attributable to that series of stock. The earnings attributable to Surgical Products Stock is defined in our charter as the net income or loss of Genzyme Surgical Products determined in accordance with generally accepted accounting principles and as adjusted for tax benefits allocated to or from Genzyme Surgical Products in accordance with our management and accounting policies. Our charter GSP-5 also requires that all income and expenses of Genzyme be allocated among the divisions in a reasonable and consistent manner. However, subject to its fiduciary duties, our board of directors can, at its discretion, change the methods of allocating earnings to each series of common stock. We intend to allocate earnings using our current methods for the foreseeable future. Because the earnings allocated to Surgical Products Stock are based on the income or losses attributable to Genzyme Surgical Products, we include financial statements and management's discussion and analysis of Genzyme Surgical Products to aid investors in evaluating its performance. While Surgical Products Stock is designed to reflect Genzyme Surgical Products' performance, it is common stock of Genzyme Corporation and not Genzyme Surgical Products; Genzyme Surgical Products is a division, not a company or legal entity, and therefore does not and cannot issue stock. Consequently, holders of Genzyme Surgical Products Stock have no specific rights to assets allocated to Genzyme Surgical Products. Genzyme Corporation continues to hold title to all of the assets allocated to Genzyme Surgical Products and is responsible for all of its liabilities, regardless of what we deem for financial statement presentation purposes as allocated to any division. Holders of Surgical Products 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 Surgical Products Stock and other tracking stockholders would only have the rights of common stockholders in the combined assets of Genzyme. Our charter sets forth what programs and businesses are initially allocated to Genzyme Surgical Products and states that going forward the division will also include all businesses, products or programs, developed by or acquired for the division, as determined by our board of directors. We then manage and account for transactions between Genzyme Surgical Products and our other divisions and with third parties, and any resulting re-allocations of assets and liabilities, by applying consistently across divisions a detailed set of policies established by our board of directors. We publicly disclose our divisional management and accounting policies, which appear in Exhibit 99.1 to this Annual Report on Form 10-K. Our charter requires that all assets and liabilities of Genzyme be allocated among the divisions. Our board of directors, however, retains considerable discretion in determining the types, magnitudes and extent of allocations to each series of common stock without shareholder approval. We present earnings per share data for Surgical Products Stock in our consolidated financial statements. We present financial information and accounting policies specific to Genzyme Surgical Products in the accompanying combined financial statements. We present financial information and accounting policies relevant to the corporation and its operating divisions taken as a whole in our consolidated financial statements. You should, therefore, read this discussion and analysis of Genzyme Surgical Products' financial position and results of operations in conjunction with the financial statements and related notes of Genzyme Surgical Products, the discussion and analysis of Genzyme's financial position and results of operations, and the consolidated financial statements and related notes of Genzyme, all of which are included in this annual report. In March 2000, we entered into an agreement to acquire Biomatrix, Inc. Upon completion of the acquisition, we will form a new operating division, and the assets and liabilities allocated to Genzyme Surgical Products and Genzyme Tissue Repair will be re-allocated to that new division. For more information you should read the section entitled "Subsequent Event" below. RESULTS OF OPERATIONS The following discussion summarizes the key factors our management believes are necessary for an understanding of Genzyme Surgical Products' financial statements. GSP-6 The components of Genzyme Surgical Products' combined statements of operations are described in the following table:
99/98 98/97 INCREASE/(DECREASE) INCREASE/(DECREASE) 1999 1998 1997 % CHANGE % CHANGE --------- --------- --------- ------------------- ------------------- (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Total revenues............ $ 111,981 $ 103,958 $ 100,835 8% 3% Cost of products sold..... 67,242 72,274 59,802 (7)% 21% Selling, general and administrative.......... 63,237 57,297 54,061 10% 6% Research and development............. 28,056 18,618 11,287 51% 65% Amortization of intangibles............. 5,750 5,748 5,647 0% 2% --------- --------- --------- Total operating costs and expenses........ 164,285 153,937 130,797 7% 18% --------- --------- --------- Operating loss............ (52,304) (49,979) (29,962) 5% 67% Other income (expenses), net..................... 4,267 123 222 3,369% (45)% --------- --------- --------- Division net loss......... $ (48,037) $ (49,856) $ (29,740) (4)% 68% ========= ========= =========
REVENUES
99/98 98/97 INCREASE/(DECREASE) INCREASE/(DECREASE) 1999 1998 1997 % CHANGE % CHANGE -------- -------- -------- ------------------- ------------------- (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Cardiovascular surgery products................ $ 77,966 $ 74,545 $ 79,560 5% (6)% General surgery products................ 25,192 20,249 14,813 24% 37% Other products............ 8,823 9,164 6,462 (4)% 42% -------- -------- -------- Total revenues...... $111,981 $103,958 $100,835 8 % 3 % ======== ======== ========
1999 AS COMPARED TO 1998 Cardiovascular surgery products include chest drainage and fluid management systems, surgical closures, biomaterials, and instruments for conventional and minimally invasive cardiac surgery. The increase in cardiovascular surgery product revenues in 1999 was primarily attributable to increased sales of instruments for minimally invasive cardiac surgery. The increase in general surgery product revenues was due primarily to the increase in sales of Sepra Film-Registered Trademark- bioresorbable membrane. Sales of Sepra Film-Registered Trademark- bioresorbable membrane in 1999 were $13.4 million compared to $9.3 million in 1998. Other surgery product revenues consisted of sales of Genzyme Surgical Products' Snowden-Pencer-Registered Trademark-line of instruments for plastic surgery and products sold to original equipment manufacturers, including sutures. International sales as a percentage of total sales in 1999 were 30% as compared to 29% in 1998. GSP-7 1998 AS COMPARED TO 1997 Cardiovascular surgery product revenues decreased as a result of a decrease in sales of fluid management products, which were $39.8 million in 1998 compared to $42.3 million in 1997. The decrease in fluid management product sales was due to the termination of a group-purchasing contract in 1997, the impact of which was realized in 1998. The increase in general surgery product revenues in 1998 is primarily due to increased product sales of Sepra Film-Registered Trademark- bioresorbable membrane. These product sales increased 88% to $9.3 million in 1998 compared to $4.9 million in 1997, primarily as a result of increased market acceptance. International sales as a percentage of total sales in 1998 were 29% compared to 28% in 1997. MARGINS
99/98 98/97 INCREASE/(DECREASE) INCREASE/(DECREASE) 1999 1998 1997 % CHANGE % CHANGE -------- -------- -------- ------------------- ------------------- (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Gross margins.................... $44,739 $31,684 $41,033 41% (23%) % of total revenues.......... 40% 30% 41%
1999 AS COMPARED TO 1998 Genzyme Surgical Products sells a broad range of products. As a result, Genzyme Surgical Products' gross margins may vary significantly depending on the particular market conditions of each product line. During the third quarter of 1998, Genzyme Surgical Products revised its forecasted sales of Sepra products and, in accordance with our policy, analyzed the Sepra products inventory to determine whether the carrying value exceeded the net realizable value. The revised forecast showed slower sales growth as well as higher manufacturing and sales and marketing costs than originally expected. In addition, the Sepra products inventory on-hand had a relatively high cost per unit because production was significantly less than originally planned. As a result, in the third quarter of 1998, Genzyme Surgical Products recorded a $10.4 million charge to cost of products sold to write down its Sepra products inventory to net realizable value. Without the effect of this charge, Genzyme Surgical Products' gross margin for 1998 would have been 40%. 1998 AS COMPARED TO 1997 In 1997, Genzyme Surgical Products recorded charges of $5.5 million to cost of products sold and $1.9 million to selling, general and administrative expense relating to the manufacture and sale of Sepracoat-TM- coating solution. Genzyme Surgical Products took these charges after an FDA advisory panel recommended against granting market approval of this product in 1997. This product is sold outside of the United States. Excluding this charge and the charge described above, gross margins for 1998 were 40% compared to 46% in 1997. The decrease in gross margins, excluding the other charges described below, was primarily due to lower average selling prices of fluid management products in 1998 and increased sales in 1998 of lower margin products such as Sepra Film-Registered Trademark- bioresorbable membrane. GSP-8 SG&A AND R&D EXPENSES 1999 AS COMPARED TO 1998 Genzyme Surgical Products' selling, general and administrative expense increased in 1999 as a result of higher fringe benefit expenses and costs associated with the creation of Genzyme Surgical Products as a separate division of Genzyme. Genzyme Surgical Products' research and development expense for 1998 includes a $1.7 million charge taken in the third quarter of 1998 to write off certain costs related to equipment that it used to manufacture the Sepra products. Excluding this charge, the increase in research and development costs was a result of the increased spending for Genzyme Surgical Products' cell and gene therapy programs as well as the initiation of several clinical trials for its products. The increase in research and development costs was also attributable to a $2.0 million milestone payment to a collaborator that was recorded in June 1999. 1998 AS COMPARED TO 1997 Excluding a charge of $1.9 million in 1997 related to the manufacture and sale of Sepracoat-TM- coating solution, selling, general and administrative expense increased by 10% over 1997. The increase in selling, general and administrative expense was primarily due to increased charges from Genzyme General, a result of increased support for Genzyme Surgical Products' sales and marketing programs and initiatives. Sepracoat-TM- coating solution was discontinued for the U.S. market after an advisory panel of the FDA recommended against granting market approval of this product. However, this product is sold outside the United States. The increase in research and development expense was primarily due to higher expenditures in cardiovascular gene and cell therapy scientific research as well as additional clinical trials initiated for the Sepra products. In addition, during 1998, Genzyme Surgical Products wrote off $1.7 million of certain costs related to equipment used to manufacture the Sepra products. OTHER INCOME AND EXPENSES
99/98 98/97 INCREASE/(DECREASE) INCREASE/(DECREASE) 1999 1998 1997 % CHANGE % CHANGE -------- -------- -------- ------------------- ------------------- (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Equity in net loss of unconsolidated affiliates........................ $ (35) $ (6) $ (78) 483% (92%) Other............................... 138 60 236 130% (75%) Investment income................... 4,199 144 98 2,816% 47% Interest expense.................... (35) (75) (34) (53%) 121% ------ ------ ------ Total other income.............. $4,267 $ 123 $ 222 3,369% (45%) ====== ====== ======
The increase in other income and expenses in 1999 was primarily due to an increase in investment income. Investment income increased because Genzyme Surgical Products had a higher average cash balance as a result of the allocation to Genzyme Surgical Products in June 1999 of $150.0 million in cash from Genzyme General. GSP-9 LIQUIDITY AND CAPITAL RESOURCES At December 31, 1999, Genzyme Surgical Products had cash, cash equivalents, and short- and long-term investments of $126.1 million. Genzyme Surgical Products had no cash, cash equivalents, and short-and long-term investments at December 31, 1998. Genzyme Surgical Products used $41.0 million in cash for operations in 1999. This was primarily due to Genzyme Surgical Products' net loss of $48.0 million for the year. Genzyme Surgical Products' investing activities in 1999 generated $21.7 million in cash from net sales of investments, used $4.0 million to purchase shares of Focal Inc. common stock, and used $3.9 million to fund capital expenditures. Primarily as a result of the allocation of assets from Genzyme General in connection with the creation of Genzyme Surgical Products as a separate division of Genzyme, financing activities generated $50.9 million of cash in 1999. In June 1999, Genzyme General transferred $150.0 million in cash, cash equivalents and investments to Genzyme Surgical Products in connection with the establishment of Genzyme Surgical Products as a separate division of Genzyme. In exchange for this transfer, approximately 14.8 million shares of Surgical Products Stock were issued and distributed as a dividend to holders of Genzyme General Stock. Genzyme Surgical Products, together with our other operating divisions, has access to our revolving credit facilities. At December 31, 1999, $50.0 million was available under a facility that matures in November 2000 and $77.0 million was available under a facility that matures in November 2002. Genzyme Surgical Products believes that its cash resources, together with the revenues generated from its products and distribution agreements, will be sufficient to finance its planned operations and capital requirements through 2001. Although Genzyme Surgical Products currently has substantial cash resources, it intends to use substantial portions of its available cash for: - research and development; - product development and marketing, including for the Sepra products; - expanding facilities; and - working capital. In addition, if Genzyme Surgical Products exercises its option to purchase the limited partnership interests in Genzyme Development Partners, L.P. and uses cash to pay all or a portion of the purchase price, Genzyme Surgical Products' cash resources will be diminished (See Note L., "Genzyme Development Partners, L.P.," to Genzyme Surgical Products' combined financial statements, which are included in this report and the discussion below). Genzyme Surgical Products currently intends to provide approximately $6.0 million of funding to GDP for the Sepra programs through 2000, based on the 2000 budget for the programs. Future funding commitments for the Sepra development programs will be evaluated on an annual basis. In March 2000, we entered into an agreement to acquire BioMatrix, Inc. The consideration for the proposed acquisition consists of shares of a new series of our common stock and up to approximately $245 million in cash, allocated at the option of Biomatrix stockholders. To the extent Genzyme Surgical Products uses cash to complete this acquisition, its cash reserves will be diminished. Genzyme Surgical Products' cash needs may differ from those planned as a result of many factors, including the: - results of research and development efforts; - ability to establish and maintain strategic alliances; - ability to enter into licensing arrangements and additional distribution arrangements; GSP-10 - costs involved in enforcing patent claims and other intellectual property rights; - market acceptance of novel approaches and therapies; - development of competitive products; and - ability to satisfy regulatory requirements of the FDA and other governmental authorities. Genzyme Surgical Products may require significant additional financing to continue operations beyond 2001. We cannot guarantee that we will be able to obtain any additional financing for Genzyme Surgical Products or find it on favorable terms. If Genzyme Surgical Products has insufficient funds or we are unable to raise additional funds for Genzyme Surgical Products, it may delay, scale back or eliminate certain of its programs. Genzyme Surgical Products may also have to give third parties rights to commercialize technologies or products that it would otherwise have sought to commercialize itself. NEW ACCOUNTING PRONOUNCEMENTS, EURO, YEAR 2000 AND MARKET RISK See "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations" included in this annual report. FACTORS AFFECTING FUTURE OPERATING RESULTS The future operating results of Genzyme Surgical Products could differ materially from the results described above due to the risks and uncertainties described below and under the heading "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations--Factors Affecting Future Operating Results" included in this annual report. GENZYME SURGICAL PRODUCTS ANTICIPATES FUTURE LOSSES AND MAY NEVER BECOME PROFITABLE. Genzyme Surgical Products expects to have significant operating losses for the next several years. It plans to spend substantial amounts of money on, among other things: - conducting research and development activities; - pursuing regulatory approvals; - conducting commercialization activities; and - providing surgeon education and training. We cannot guarantee that the efforts underlying these expenditures will be successful or that Genzyme Surgical Products' operations will ever be profitable. It may be years before the division generates any revenue from sales of products currently under development. IF GENZYME SURGICAL PRODUCTS FAILS TO OBTAIN CAPITAL NECESSARY TO FUND ITS OPERATIONS, IT WILL BE UNABLE TO FUND DEVELOPMENT PROGRAMS AND COMPLETE CLINICAL TRIALS. We anticipate that Genzyme Surgical Products' current cash resources, together with revenues generated from its products and distribution agreements, will be sufficient to fund its operations through 2001. However, its cash needs may differ from those planned because of many factors, including: - the ability to become profitable; - the results of research and development efforts; - the ability to establish strategic collaborations and licensing arrangements for research and development programs; - the achievement of milestones under strategic collaborations; - the ability to establish and maintain additional distribution arrangements; GSP-11 - the enforcement of patent and other intellectual property rights; - market acceptance of novel approaches and therapies; - the development of competitive products; and - the ability to satisfy regulatory requirements of the FDA and other government authorities. Genzyme Surgical Products may require significant additional financing to continue operations at anticipated levels. We cannot guarantee that we will be able to obtain any additional financing for Genzyme Surgical Products or find it on favorable terms. If Genzyme Surgical Products has insufficient funds or we are unable to raise additional funds for Genzyme Surgical Products, it may have to delay, reduce or eliminate some of its programs. Genzyme Surgical Products may also have to give third parties rights to commercialize technologies or products that it would otherwise have sought to commercialize itself. IF GENZYME SURGICAL PRODUCTS EXERCISES AN OPTION TO PURCHASE INTERESTS IN GENZYME DEVELOPMENT PARTNERS, ITS CASH RESOURCES MAY DIMINISH AND THE RIGHTS OF ITS STOCKHOLDERS MAY BE DILUTED. In 1989, we organized Genzyme Development Partners, L.P., a special purpose research and development entity, and transferred to it technology and commercial rights to the Sepra products. We have an option to purchase the limited partnership interests in the partnership under certain circumstances for approximately $26 million plus continuing royalties based on certain sales of the Sepra products. We have allocated the purchase option to Genzyme Surgical Products. The option's exercise price is payable in cash, shares of Genzyme General Stock or a combination of the two, as determined by Genzyme Surgical Products when it exercises the option. If Genzyme Surgical Products exercises this option, it will have to make substantial cash payments or compensate Genzyme General with Genzyme Surgical Products designated shares for the Genzyme General Stock used, or both. If the division makes cash payments, its cash resources would diminish. If it makes the payment in whole or in part in shares of Genzyme General Stock, then our board of directors would need to approve the issuance of Genzyme General Stock in return for Genzyme General having reserved for it a number of Genzyme Surgical Products designated shares with a fair market value equal to the fair market value of the shares of Genzyme General Stock. Those Genzyme Surgical Products designated shares would be shares of Surgical Products Stock that our board would have the option to issue from time to time with all proceeds allocable to Genzyme General. Beginning on June 30, 2000, and on every June 30th thereafter, we will have to distribute substantially all the Genzyme Surgical Products designated shares if the number of those shares exceeds 10% of the number of shares of Surgical Products Stock then outstanding. We cannot guarantee that our board of directors would authorize the issuance of shares of Genzyme General Stock for payment of the option exercise price and the reservation of any Genzyme Surgical Products designated shares. If our board of directors reserves and subsequently distributes or otherwise disposes of any Genzyme Surgical Products designated shares, this would substantially dilute the rights of the holders of Surgical Products Stock and could significantly affect the market price of Surgical Products Stock. If Genzyme Surgical Products does not exercise the option or otherwise purchase the partnership, the partnership would have the right to sell or otherwise transfer to a third party a license to background technology that we granted to it. A sale or transfer of this technology may terminate our joint venture with the partnership to manufacture and sell the Sepra products in the U.S. and Canada. In addition, failure to exercise the option would cause the joint venture to become terminable upon 90 days' prior notice by either Genzyme or Genzyme Development Partners. GSP-12 GENZYME SURGICAL PRODUCTS IS DEVOTING SIGNIFICANT RESOURCES TO DEVELOPING NOVEL ALTERNATIVE PRODUCTS AND TREATMENTS THAT MAY NOT BE COMMERCIALLY SUCCESSFUL. Genzyme Surgical Products is devoting a significant amount of money to developing products that will represent alternatives to traditional surgical procedures or treatments. These products will likely require several years of aggressive and costly marketing before they might become widely accepted by the surgical community. Genzyme Surgical Products is developing products that are designed to enable surgeons to perform minimally invasive cardiovascular surgery. The medical conditions that can be treated with minimally invasive cardiovascular surgery are currently being treated with widely accepted surgical procedures such as coronary artery bypass grafting and catheter-based treatments, including balloon angioplasty, atherectomy and coronary stenting. To date, minimally invasive cardiovascular surgery has been performed on a limited basis and its further adoption by the surgical community will partly depend on Genzyme Surgical Products' ability to educate cardiothoracic surgeons about its effectiveness and to facilitate the training of cardiothoracic surgeons in minimally invasive cardiovascular surgery techniques. Similarly, until recently surgeons have not used products designed to reduce the incidence and extent of postoperative adhesions. Since 1996, when Sepra Film-Registered Trademark- bioresorbable membrane was introduced, market acceptance of anti-adhesion products has been slow. To increase sales of the Sepra products, Genzyme Surgical Products has had to educate surgeons and hospital administrators about the problems of, and costs associated with, adhesions and the benefit of preventing adhesions. It has also had to train surgeons on the proper handling and use of these products. We cannot guarantee that Genzyme Surgical Products' efforts in educating and training the surgical community will result in the widespread adoption of minimally invasive cardiovascular surgery and anti-adhesion products or that surgeons adopting these procedures and products will use Genzyme Surgical Products' products. ADVERSE EVENTS IN THE FIELD OF GENE THERAPY MAY NEGATIVELY AFFECT REGULATORY APPROVAL OR PUBLIC PERCEPTION OF GENZYME SURGICAL PRODUCTS' GENE THERAPY PRODUCTS. The recent death of a patient undergoing gene therapy using an adenoviral vector to deliver a therapeutic gene has been widely publicized. This death and any other adverse events in the field of gene therapy that may occur in the future may result in greater governmental regulation and potential regulatory delays relating to the testing or approval of Genzyme Surgical Products' gene therapy products. As a result of this death, the U.S. Senate has commenced hearings to determine whether additional legislation is required to protect volunteers and patients who participate in gene therapy clinical trials. Additionally, the Recombinant DNA Advisory Committee, which acts as an advisory body to the National Institutes of Health (NIH), has extensively discussed the use of adenoviral vectors in gene therapy clinical trials and recently issued a draft report on the safety of adenoviral vectors. While this draft report recommends that clinical trials using adenoviral vectors should continue with caution, it also suggested a number of changes in the way gene therapy clinical trials are conducted. If any new guidelines are adopted by the NIH, Genzyme Surgical Products' gene therapy clinical trials could be delayed or become more expensive to conduct. The commercial success of any gene therapy products that Genzyme Surgical Products develops will depend in part on public acceptance of the use of gene therapies for the prevention or treatment of human diseases. Public attitudes may be influenced by claims that gene therapy is unsafe, and gene therapy may not gain the acceptance of the public or the medical community. Negative public reaction to gene therapy could result in greater government regulation and stricter clinical trial oversight and commercial product labeling requirements of gene therapies and could cause a decrease in the demand for any gene therapy product that Genzyme Surgical Products may develop. GSP-13 COMPETITION FROM OTHER MEDICAL DEVICE AND TECHNOLOGY COMPANIES COULD HURT GENZYME SURGICAL PRODUCTS' PERFORMANCE. The human health care products and services industry is extremely competitive. Major medical device and technology companies compete or may compete with Genzyme Surgical Products. These include such companies as: - Atrium Medical Corporation and Sherwood-Davis & Geck, a division of Tyco International, Ltd. in the cardiovascular chest drainage and fluid management market; - The Ethicon division of Johnson & Johnson Ltd. and U.S. Surgical Corporation, a division of Tyco in the cardiovascular closure market; - CardioThoracic Systems, Inc., Medtronic, Inc., U.S. Surgical, Guidant Corporation, Baxter Healthcare Corporation and Ethicon in the minimally invasive cardiovascular surgery market; - Ethicon, Lifecore Biomedical, Inc., Life Medical Sciences, Inc. and Gliatech, Inc. in the anti-adhesion market; and - Karl Storz Endoscopy America, Inc., Scanlan International, Inc., Pilling Weck Surgical Instruments and the Codman division of Johnson & Johnson Ltd. in the reusable instruments market. These competitors may have superior research and development, marketing and production capabilities. Some competitors also may have greater financial resources than Genzyme Surgical Products. The division is likely to incur significant costs developing and marketing new products without any guarantee that it will be commercially successful. The future success of Genzyme Surgical Products will depend on its ability to effectively develop and market its products against those of its competitors. THE TREND TOWARD CONSOLIDATION IN THE SURGICAL DEVICES INDUSTRY MAY ADVERSELY AFFECT GENZYME SURGICAL PRODUCTS' ABILITY TO MARKET SUCCESSFULLY ITS PRODUCTS TO SOME SIGNIFICANT PURCHASERS. The current trend among hospitals and other significant consumers of surgical devices is to combine into larger purchasing groups to increase their purchasing power and thus reduce their purchase price for surgical devices. Partly in response to this development, surgical device manufacturers have been consolidating to be able to offer a more comprehensive product line to these larger purchasing groups. In order to successfully market its products to larger purchasing groups, Genzyme Surgical Products may have to expand its product lines or enter into joint marketing or distribution agreements with other manufacturers of surgical devices. We cannot guarantee that it will be able to employ either of these initiatives or that, when employed, these initiatives will increase the marketability of its products. GENZYME SURGICAL PRODUCTS MAY NOT RECEIVE SIGNIFICANT PAYMENTS FROM COLLABORATORS DUE TO UNSUCCESSFUL RESULTS IN EXISTING COLLABORATIONS OR A FAILURE TO ENTER INTO FUTURE COLLABORATIONS. Genzyme Surgical Products' strategy to develop and commercialize some of its products and services includes entering into various arrangements with academic and corporate collaborators and licensees. It depends on the success of these parties in performing research, preclinical and clinical testing and marketing. These arrangements may require Genzyme Surgical Products to transfer important rights to its corporate collaborators and licensees. These collaborators and licensees could choose not to devote resources to these arrangements or, under certain circumstances, may terminate them early. In addition, these collaborators and licensees, outside of their arrangements with Genzyme Surgical Products, may develop technologies or products that are competitive with those that Genzyme Surgical Products is developing. As a result, we cannot guarantee that Genzyme Surgical Products will receive revenues from these relationships or that any of its strategic collaborations will continue or not terminate early. In addition, we cannot guarantee that Genzyme Surgical Products will be able to enter into collaborations in the future. GSP-14 SUBSEQUENT EVENT In March 2000, we entered into an agreement to acquire Biomatrix, Inc. Upon the effectiveness of our Registration Statement on Form S-4 and completion of the merger, we will form a new operating division called Genzyme Biosurgery and create a new series of common stock is intended to reflect its value and track its performance. We refer to this stock as "Biosurgery Stock." In connection with the merger, and upon Genzyme shareholder approval, the assets and liabilities allocated to Genzyme Surgical Products will be re-allocated to Genzyme Biosurgery and shares of Surgical Products Stock will be exchanged for Biosurgery Stock. We will account for the acquisition of Biomatrix as a purchase. Biomatrix stockholders will receive $37.00 in cash, one share of Biosurgery Stock or a combination of cash and stock for each share of Biomatrix common stock they hold. The merger agreement provides, however, that the cash component of the merger consideration will not exceed 28.38% of the total merger consideration, or approximately $245 million. Holders of Surgical Products Stock will receive 0.6060 share of Biosurgery Stock in exchange for each share of Surgical Products Stock they hold. For more information about the merger and the merger consideration, we encourage you to carefully read our Registration Statement on Form S-4 (File No. 333-34972) filed with the SEC on April 18, 2000 and as amended from time to time. The acquisition is subject to: - approval by Biomatrix's shareholders; - approval by our shareholders, including separate approvals of the holders of Surgical Products Stock and Tissue Repair Stock; and - other customary closing conditions. GSP-15 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 1999 1998 1997 --------- --------- --------- (AMOUNTS IN THOUSANDS) Total revenues.............................................. $ 111,981 $ 103,958 $ 100,835 Operating costs and expenses: Cost of products sold..................................... 67,242 72,274 59,802 Selling, general and administrative....................... 63,237 57,297 54,061 Research and development.................................. 28,056 18,618 11,287 Amortization of intangibles............................... 5,750 5,748 5,647 --------- --------- --------- Total operating costs and expenses.................... 164,285 153,937 130,797 --------- --------- --------- Operating loss.............................................. (52,304) (49,979) (29,962) Other income (expenses): Equity in net loss of unconsolidated affiliates........... (35) (6) (78) Other..................................................... 138 60 236 Investment income......................................... 4,199 144 98 Interest expense.......................................... (35) (75) (34) --------- --------- --------- Total other income (expenses)......................... 4,267 123 222 --------- --------- --------- Division net loss........................................... $ (48,037) $ (49,856) $ (29,740) ========= ========= ========= Comprehensive loss, net of tax: Division net loss........................................... $ (48,037) $ (49,856) $ (29,740) Other comprehensive income (loss), net of tax: Unrealized losses on securities arising during the period.................................................. (1,839) -- -- --------- --------- --------- Comprehensive loss.......................................... $ (49,876) $ (49,856) $ (29,740) ========= ========= =========
The accompanying notes are an integral part of these combined financial statements. GSP-16 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION BALANCE SHEETS
DECEMBER 31, ----------------------- 1999 1998 ---------- ---------- (AMOUNTS IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents................................. $ 22,673 $ -- Short-term investments.................................... 41,606 -- Accounts receivable, net.................................. 19,886 15,663 Inventories............................................... 30,491 22,026 Prepaid expenses and other current assets................. 815 1,932 -------- -------- Total current assets.................................. 115,471 39,621 Property, plant and equipment, net........................ 17,621 16,249 Long-term investments..................................... 61,846 -- Intangibles, net.......................................... 172,833 177,897 Investment in equity securities........................... 3,140 -- Other..................................................... 13 449 -------- -------- Total assets.......................................... $370,924 $234,216 ======== ======== LIABILITIES AND DIVISION EQUITY Current liabilities: Accounts payable.......................................... $ 3,562 $ 3,925 Accrued expenses.......................................... 7,038 2,982 Due to Genzyme General.................................... 6,406 -- -------- -------- Total current liabilities............................. 17,006 6,907 Noncurrent liabilities...................................... -- 221 -------- -------- Total liabilities..................................... 17,006 7,128 Commitments and contingencies (Note K) Division equity (Note J).................................... 353,918 227,088 -------- -------- Total liabilities and division equity................. $370,924 $234,216 ======== ========
The accompanying notes are an integral part of these combined financial statements. GSP-17 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 1999 1998 1997 --------- --------- --------- (AMOUNTS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Division net loss........................................... $ (48,037) $ (49,856) $ (29,740) Reconciliation of division net loss to net cash used in operating activities: Depreciation and amortization............................. 8,181 8,008 8,831 Equity in loss of unconsolidated affiliate................ 35 6 78 Accrued interest/amortization of marketable securities.... 1,144 -- -- Loss on sale of plant and equipment....................... 91 -- -- Provision for bad debts and inventory..................... 1,431 526 759 Other..................................................... -- (60) (236) Increase (decrease) in cash from working capital: Accounts receivable..................................... (4,579) (2,140) 3,179 Inventories............................................. (9,540) 3,791 2,865 Prepaid expenses and other assets....................... 1,117 (1,469) 259 Accounts payable and accrued expenses................... 2,709 1,885 (2,123) Due to Genzyme General.................................. 6,406 -- -- --------- --------- --------- Net cash used in operating activities................. (41,042) (39,309) (16,128) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments.................................... (15,161) -- -- Sales and maturities of investments......................... 36,878 -- -- Purchase of investments in equity securities................ (4,000) -- -- Acquisitions of property, plant and equipment............... (3,877) (1,959) (3,112) Purchase of technology rights............................... (1,400) -- -- Other....................................................... 401 (688) (1,039) --------- --------- --------- Net cash provided by (used in) investing activities... 12,841 (2,647) (4,151) CASH FLOWS FROM FINANCING ACTIVITIES: Net cash allocated from Genzyme General..................... 49,414 41,484 19,003 Payments of debt and capital lease obligations.............. -- (152) (173) Bank overdraft.............................................. 1,681 -- -- Other....................................................... (221) (351) 242 --------- --------- --------- Net cash provided by financing activities............. 50,874 40,981 19,072 Increase (decrease) in cash and cash equivalents............ 22,673 (975) (1,207) Cash and cash equivalents at beginning of period............ -- 975 2,182 --------- --------- --------- Cash and cash equivalents at end of period.................. $ 22,673 $ -- $ 975 ========= ========= ========= Supplemental cash flow information: Cash paid during the year for interest $ 35 $ 9 $ 29 Supplemental disclosures of non-cash transactions: Transfer of investment--Note A. Transfer of property, plant and equipment--Note F.
The accompanying notes are an integral part of these combined financial statements. GSP-18 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS Genzyme Surgical Products is our operating division that develops, manufactures and markets surgical products for cardiovascular surgery and general surgery. BASIS OF PRESENTATION The combined financial statements of Genzyme Surgical Products for each period include the balance sheets, results of operations and cash flows of the businesses we allocate to Genzyme Surgical Products. We also allocate a portion of our corporate operations to Genzyme Surgical Products using methods described in our allocation policy below. These combined financial statements are prepared using amounts included in our consolidated financial statements included in this annual report. We have reclassified certain 1998 and 1997 data to conform with the 1999 presentation. We prepare the financial statements of Genzyme Surgical Products in accordance with generally accepted accounting principles. We present financial information and accounting policies specific to Genzyme Surgical Products in the accompanying combined financial statements. We present financial information and accounting policies relevant to the corporation and its operating divisions taken as a whole in our consolidated financial statements. You should read the consolidated financial statements in conjunction with the financial statements of Genzyme Surgical Products. Note A., "Summary of Significant Accounting Policies," to our consolidated financial statements contains our accounting policies. We incorporate that information into this note by reference. TRACKING STOCK Genzyme Surgical Products Common Stock, which we refer to as "Surgical Products Stock," is a series of our common stock that is designed to reflect the value and track the performance of Genzyme Surgical Products. The chief mechanisms intended to cause Surgical Products Stock to "track" the financial performance of Genzyme Surgical Products are provisions in our charter governing dividends and distributions. Under these provisions, our charter: - factors the assets and liabilities and income or losses attributable to Genzyme Surgical Products into the determination of the amount available to pay dividends on Surgical Products Stock; and - requires us to exchange, redeem or distribute a dividend to the holders of Surgical Products Stock if all or substantially all of the assets allocated to Genzyme Surgical Products are sold to a third party (a dividend or redemption payment must equal in value the net after-tax proceeds from the sale; an exchange must be for Genzyme General Stock at a 10% premium to the exchanged stock's average market price following the announcement of the sale). To determine earnings per share, we allocate Genzyme's earnings to each series of our common stock based on the earnings attributable to that series of stock. The earnings attributable to Surgical Products Stock is defined in our charter as the net income or loss of Genzyme Surgical Products determined in accordance with generally accepted accounting principles and as adjusted for tax benefits allocated to or from Genzyme Surgical Products in accordance with our management and accounting policies. Our charter also requires that all income and expenses of Genzyme be allocated among the divisions in a reasonable and consistent manner. However, subject to its fiduciary duties, our board of directors can, at its discretion, GSP-19 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) change the methods of allocating earnings to each series of common stock. We intend to allocate earnings using our current methods for the foreseeable future. Because the earnings allocated to Surgical Products Stock are based on the income or losses attributable to Genzyme Surgical Products, we include financial statements and management's discussion and analysis of Genzyme Surgical Products to aid investors in evaluating its performance. While Surgical Products Stock is designed to reflect Genzyme Surgical Products' performance, it is common stock of Genzyme Corporation and not Genzyme Surgical Products; Genzyme Surgical Products is a division, not a company or legal entity, and therefore does not and cannot issue stock. Consequently, holders of Surgical Products Stock have no specific rights to assets allocated to Genzyme Surgical Products. Genzyme Corporation continues to hold title to all of the assets allocated to Genzyme Surgical Products and is responsible for all of its liabilities, regardless of what we deem for financial statement presentation purposes as allocated to any division. Holders of Surgical Products 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 Surgical Products Stock and other tracking stockholders would only have the rights of common stockholders in the combined assets of Genzyme. ALLOCATION POLICY Our charter sets forth what operations and assets are initially allocated to Genzyme Surgical Products and states that going forward the division will also include all business, products or programs, developed by or acquired for the division, as determined by our board of directors. We then manage and account for transactions between Genzyme Surgical Products and our other divisions and with third parties, and any resulting re-allocations of assets and liabilities, by applying consistently across divisions a detailed set of policies established by our board of directors. We publicly disclose our divisional management and accounting policies, which appear in Exhibit 99.1 to this Annual Report on Form 10-K. Our charter requires that all assets and liabilities of Genzyme be allocated among the divisions. Our board of directors, however, retains considerable discretion in determining the types, magnitudes and extent of allocations to each series of common stock without shareholder approval. Our allocations to our divisions are based on one of the following methodologies: - Specific identification--assets that are dedicated to the production of goods of a division or which solely benefit a division are allocated to that division. Liabilities incurred as a result of the performance of services for the benefit of a division or in connection with the expenses incurred which directly benefit a division are allocated to the division. Such specifically identified assets and liabilities include cash, investments, accounts receivable, inventories, property and equipment, intangible assets, accounts payable, accrued expenses and deferred revenue. Revenues from the licensing of a division's products or services to third parties and the related costs are allocated to a division; - Actual usage--expenses are charged to the division for whose benefit such expenses are incurred. Research and development, sales and marketing and direct general and administrative services are GSP-20 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) charged to the divisions for which the service is performed on a cost basis. Such charges are generally based on direct labor hours; - Proportionate usage--costs incurred which benefit more than one division are allocated based on management's estimate of the proportionate benefit each division receives. Such costs include facilities, legal, finance, human resources, executive and investor relations; or - Board directed--programs and products, both internally developed and acquired, are allocated to divisions by the board of directors. The board of directors also allocates long-term debt and strategic investments. Note B., "Policies Governing the Relationship of Genzyme's Operating Divisions," further describes our policies concerning interdivisional transactions and income tax allocations. We believe that the divisional allocations are reasonable and have been consistently applied. However, the division's results of operations may not be indicative of what would have been realized if the division was a stand-alone entity. TRANSLATION OF FOREIGN CURRENCIES We translate the financial statements of foreign subsidiaries allocated to Genzyme Surgical Products from local currency into U.S. dollars and record translation adjustments for these subsidiaries to division equity. Genzyme Surgical Products records gains and losses in foreign currency transactions in income. We include exchange gains and losses on intercompany balances which are long-term in nature in our division equity. Our gains and losses on all other transactions are included in our results of operations. REVENUE RECOGNITION Genzyme Surgical Products recognizes revenue from product sales when it ships the product and title has passed, net of any applicable third party contractual allowances and rebates. NET INCOME (LOSS) PER SHARE Earnings per share is calculated for each series of Genzyme stock using the two-class method, as further described in the notes to the consolidated financial statements. We present earnings per share data only in the consolidated financial statements of Genzyme because Genzyme Corporation is the issuer of the securities Genzyme's divisions do not and cannot issue securities because they are not companies or legal entities. NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS Because each of our operating divisions is a part of a single company, our board of directors has adopted policies to address issues that may arise among divisions and to govern the management of and the relationships between each division. With some exceptions that are mentioned specifically in this note, our board of directors may modify or rescind these policies, or adopt additional policies, in its sole GSP-21 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS (CONTINUED) discretion without stockholder approval, subject only to our board of directors' fiduciary duty to stockholders. Generally accepted accounting principles require that any change in policy be preferable (in accordance with these principles) to the previous policy. INTERDIVISION ASSET TRANSFERS Our board of directors may at any time reallocate any program, product or other asset from one division to any other division. We account for interdivision asset transfers at book value. The consideration paid for an asset transfer generally must be fair value as determined by our board of directors. The difference between the consideration paid and the book value of the assets transferred is recorded in division equity. Our board of directors determines fair value using the following methodologies: a risk-adjusted discounted cash flow model or a comparable transaction model. The risk-adjusted discounted cash flow model estimates fair value by taking the discounted value of all the cash inflows and outflows related to a program or product over a specified period of time, generally the economic life of the project, adjusted for the probabilities of certain outcomes occurring or not occurring. In performing this analysis, we consider various factors that could affect the success or failure of the program including: - the duration, cost and probability of success of each phase of development; - the current and potential size of the market and barriers to entry into the market; - the maximum number of patients likely to be treated with the product and the speed with which that maximum number will be reached; - reimbursement policies and pricing limitations; - current and potential competitors; - the net proceeds received by us upon the sale of the program or product; and - the costs of manufacturing and marketing the product or program. The comparable transaction model estimates fair value through comparison to valuations established for other transactions within the biotechnology and biosurgical areas involving similar programs and products having similar terms and structure. In identifying comparable transactions, we consider, among other factors, the following: - the similarity of market opportunity; - the comparability of the medical needs addressed; - the similarity of the regulatory, reimbursement and competitive environment; - the stage of product or program development; and - the risk profile of successfully commercializing the product or program. GSP-22 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS (CONTINUED) We customarily use the comparable transaction model to corroborate valuations derived under the risk-adjusted discounted cash flow model. GSP-23 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS (CONTINUED) When determining the fair value of a program under development using either model, our board of directors also takes into account the following criteria in the case of a program under development: - the commercial potential of the program; - the phase of clinical development of the program; - the expenses associated with realizing any income from the program and the likelihood and time of the realization; and - other matters that our board of directors and its financial advisors, if any, deem relevant. One division may compensate another division for a reallocation with cash or other consideration having a value equal to the fair market value of the reallocated assets. In the case of a reallocation of assets from Genzyme General to Genzyme Surgical Products, our board of directors may elect instead to account for the reallocation as an increase in Genzyme Surgical Products designated shares in accordance with the provisions of our charter. Genzyme Surgical Products designated shares are shares of Surgical Products Stock that are not issued and outstanding, but which our board of directors may issue, sell, or distribute without allocating the proceeds to Genzyme Surgical Products. No gain or loss is recognized as a result of these transfers. Our policy regarding transfers of assets between divisions may not be changed by our board of directors without the approval of the holders of Surgical Products Stock voting as a separate class unless the policy change does not affect Genzyme Surgical Products. OTHER INTERDIVISION TRANSACTIONS Our divisions may engage in transactions directly with one or more other divisions or jointly with one or more other divisions and one or more third parties. These transactions may include agreements by one division to provide products and services for use by another division, license agreements and joint ventures or other collaborative arrangements involving more than one division to develop new products and services jointly and with third parties. These transactions are subject to the following conditions: - We charge research and development (including clinical and regulatory support), distribution, sales, marketing, and general and administrative services (including allocated space) performed by one division for another division to the division for which the services are performed on a cost basis. We charge direct costs to the division for which we incur them. We allocate direct labor and indirect costs in reasonable and consistent manners based on the use by a division of relevant services. Divisions performing services for other divisions do not recognize revenue for the services they perform. - We charge the manufacturing of goods and performance of services by one division exclusively for another division to the division for which it is performed on a cost basis. We include in manufacturing costs an interest charge (based on our short-term borrowing rate at the beginning of the fiscal year) on the gross fixed assets used in the manufacturing process. To perform this calculation, we determine gross fixed assets for the facility used at the beginning of each fiscal year and apply our short-term borrowing rate. We allocate direct labor and indirect costs in reasonable and consistent GSP-24 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS (CONTINUED) manners based on the benefit received by a division of related goods and services. Divisions performing services for other divisions do not recognize revenue for the services they perform. - Other than transactions involving research and development, manufacturing, distribution, sales, marketing, general and administrative services, which are addressed above, all interdivisional transactions are performed on terms and conditions obtainable in arm's length transactions with third parties. Divisions performing services for other divisions do not recognize revenue for the services they perform. - Our board of directors must approve interdivisional transactions that are performed on terms and conditions other than as described above and are material to one or more of the participating divisions. In giving its approval, our board of directors must determine that the transaction is fair and reasonable to each participating division and to holders of the common stock representing each participating division. - Divisions may make loans to other divisions. Any loan of $1 million or less matures within 18 months and accrues interest at the best borrowing rate available to the corporation for a loan of like type and duration. Our board of directors must approve any loan in excess of $1 million. In giving its approval, our board of directors must determine that the material terms of the loan, including the interest rate and maturity date, are fair and reasonable to each participating division and to holders of the common stock representing each such division. - All material interdivisional transactions are set forth in a written agreement that is signed by an authorized member of the management team of each division involved in the transaction. TAX ALLOCATIONS We file a consolidated tax return and allocate income taxes to each division based upon the financial statement income, taxable income, credits and other amounts properly allocable to each division under generally accepted accounting principles as if it were a separate taxpayer. We assess the realizability of our deferred tax assets at the division level. As a result, our consolidated tax provision may not equal the sum of the divisions' tax provision. As of the end of any fiscal quarter, however, if 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 the other divisions in proportion to their taxable income without any compensating payment or allocation. ACCESS TO TECHNOLOGY AND KNOW-HOW Genzyme Surgical Products has unrestricted access to all technology and know-how owned or controlled by Genzyme Corporation that may be useful in its business, subject to any obligations or limitations that apply to the corporation generally. NOTE C. OTHER CHARGES During the third quarter of 1998, Genzyme Surgical Products revised its forecasted sales of Sepra products and, in accordance with our policy, analyzed the Sepra products inventory to determine whether GSP-25 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE C. OTHER CHARGES (CONTINUED) the carrying value exceeded the net realizable value. The revised forecast showed slower sales growth as well as higher manufacturing and sales and marketing costs than originally expected. In addition, the Sepra products inventory on-hand had a relatively high cost per unit because production was significantly less than originally planned. As a result, in the third quarter of 1998, Genzyme Surgical Products recorded a $10.4 million charge to cost of products sold to write down its Sepra products inventory to net realizable value. In the fourth quarter of 1997, Genzyme Surgical Products also recorded a $5.5 million charge to cost of products sold and a $1.9 million charge to selling, general and administrative expense relating to the manufacturing and sale of Sepracoat-TM- coating solution. Genzyme Surgical Products took these charges after an FDA advisory panel recommended against granting marketing approval for the product. NOTE D. ACCOUNTS RECEIVABLE AND INTANGIBLE ASSETS Genzyme Surgical Products' trade receivables primarily represent amounts due from healthcare service providers. Genzyme Surgical Products performs credit evaluations of its customers on an ongoing basis and generally does not require collateral. Genzyme Surgical Products states accounts receivable at fair value after reflecting an allowance for doubtful accounts. This allowance was $0.3 million at December 31, 1999 and $0.4 million at December 31, 1998. The following table contains information on Genzyme Surgical Products' intangible assets for the periods presented:
WEIGHTED WEIGHTED AVERAGE AVERAGE ESTIMATED ESTIMATED USEFUL USEFUL DECEMBER 31, LIFE DECEMBER 31, LIFE 1999 (YEARS) 1998 (YEARS) ------------ --------- ------------ --------- (AMOUNTS IN THOUSANDS, EXCEPT USEFUL LIFE DATA) Goodwill......................................... $129,847 40 $130,544 40 Tradenames....................................... 45,878 40 45,878 40 Patents.......................................... 15,319 12 15,319 12 Other............................................ 1,890 9 490 14 -------- -------- 192,934 192,231 Less accumulated amortization.................... (20,101) (14,334) -------- -------- Intangible assets, net........................... $172,833 $177,897 ======== ========
NOTE E. INVENTORIES
DECEMBER 31, ------------------------- 1999 1998 -------- -------- (AMOUNTS IN THOUSANDS) Raw materials......................................... $15,473 $11,567 Work-in-process....................................... 2,029 1,734 Finished products..................................... 12,989 8,725 ------- ------- Total inventory................................... $30,491 $22,026 ======= =======
GSP-26 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE F. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31, ------------------------- 1999 1998 -------- -------- (AMOUNTS IN THOUSANDS) Plant and equipment................................... $10,276 $ 8,934 Land and buildings.................................... 8,268 8,261 Leasehold improvements................................ 434 434 Furniture and fixtures................................ 4,001 3,944 Construction-in-progress.............................. 1,407 614 ------- ------- 24,386 22,187 Less accumulated depreciation......................... (6,765) (5,938) ------- ------- Property, plant and equipment, net.................... $17,621 $16,249 ======= =======
Genzyme Surgical Products' depreciation expense was $2.4 million in 1999, $2.5 million in 1998, and $2.7 million in 1997. The estimated cost of completion for assets under construction as of December 31, 1999 is $1.9 million. NOTE G. INVESTMENTS Genzyme Surgical Products had no cash, cash equivalents, and short- and long-term investments at December 31, 1998. Investments in marketable securities at December 31, 1999 consisted of the following:
DECEMBER 31, 1999 ------------------- MARKET COST VALUE -------- -------- (AMOUNTS IN THOUSANDS) Cash equivalents(1): Corporate notes....................................... $16,930 $16,915 Money market fund..................................... 4,317 4,317 ------- ------- $21,247 $21,232 ======= ======= Short-term: Corporate notes....................................... $41,757 $41,606 ======= ======= Long-term: Corporate notes....................................... $37,598 $36,878 Federal............................................... 4,081 4,026 U.S. Treasury notes................................... 20,979 20,942 ------- ------- $62,658 $61,846 ======= ======= Investment in equity securities....................... $ 4,000 $ 3,140 ======= =======
- ------------------------ (1) Cash equivalents are included as part of cash and cash equivalents on our balance sheets. GSP-27 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE G. INVESTMENTS (CONTINUED) Genzyme Surgical Products records gross unrealized holding gains and losses in division equity. The following table sets forth the amounts recorded:
DECEMBER 31, 1999 ------------ Unrealized holding losses............................. $1,839
The following table contains information regarding the range of contractual maturities of Genzyme Surgical Products' investments in debt securities:
DECEMBER 31, 1999 ---------------------- MARKET COST VALUE -------- -------- (AMOUNTS IN THOUSANDS) Within 1 year.......................................... $ 63,004 $ 62,838 1-2 years.............................................. 62,658 61,846 -------- -------- $125,662 $124,684 ======== ========
Note I., "Investments," to our consolidated financial statements contains information regarding Genzyme Surgical Products' equity investment in Focal, Inc. We incorporate that information into this note by reference. NOTE H. ACCRUED EXPENSES
DECEMBER 31, ---------------------- 1999 1998 -------- -------- (AMOUNTS IN THOUSANDS) Compensation............................................... $2,812 $1,555 Professional fees.......................................... 466 291 Royalties.................................................. 610 523 Other...................................................... 3,150 613 ------ ------ $7,038 $2,982 ====== ======
NOTE I. LONG-TERM DEBT AND LEASES REVOLVING CREDIT FACILITY Note K., "Long Term Debt and Leases," to our consolidated financial statements contains information regarding our revolving credit facilities. We incorporate that information into this note by reference. GSP-28 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE I. LONG-TERM DEBT AND LEASES (CONTINUED) OPERATING LEASES Genzyme Surgical Products leases facilities and personal property under operating leases with terms in excess of one year. Genzyme Surgical Products' total expense under operating leases was:
1999 1998 1997 - ------------------------ ------------------------ ------------------------ $0.2 million $0.2 million $0.2 million
Over the next five years, Genzyme Surgical Products will be required to repay the following amounts under operating leases:
2000 2001 2002 2003 2004 AFTER 2004 - --------------------- ----------- ----------- ----------- ----------- ----------- $0.2 $0.3 $0.3 $0.3 $3.0 $0.2 million million million million million million
NOTE J. DIVISION EQUITY The following table contains the components of division equity for Genzyme Surgical Products for the periods presented:
DECEMBER 31, ------------------------------------ 1999 1998 1997 -------- -------- -------- (AMOUNTS IN THOUSANDS) Balance at beginning of period............... $227,088 $234,969 $239,040 Division net loss............................ (48,037) (49,856) (29,740) Unrealized gain (loss) on investments........ (1,839) -- -- Allocation from Genzyme General.............. 176,706 41,975 25,669 -------- -------- -------- Balance at end of period..................... $353,918 $227,088 $234,969 ======== ======== ========
STOCK COMPENSATION PLANS We apply APB Opinion 25 and related interpretations in accounting for our five stock-based compensation plans: the 1990 Equity Incentive Plan, the 1997 Equity Plan (both of which are stock option plans), the 1990 Employee Stock Purchase Plan, the 1999 Employee Stock Purchase Plan, and the 1998 Director Stock Option Plan. We do not recognize compensation expense for options granted and shares purchased under the provisions of these plans for options granted to employees with an exercise price greater than or equal to fair market value. The following table sets forth division net loss data for Genzyme Surgical Products as if compensation expense for our stock-based compensation plans was determined in accordance with SFAS 123 based on GSP-29 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE J. DIVISION EQUITY (CONTINUED) the fair value at the grant dates of the awards, and the compensation expense related to Surgical Products Stock awards would be allocated to Genzyme Surgical Products in accordance with our allocation policies:
DECEMBER 31, 1999 ------------ Division net loss: As reported......................................... $ (48,037) Pro forma........................................... $ (50,583)
Note L., "Stockholders' Equity," to our consolidated financial statements contains information regarding the assumptions we made in calculating pro forma compensation expense in accordance with SFAS 123. NOTE K. 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 December 31, 1999 which, if adversely decided, would have a material adverse effect on Genzyme Surgical Products' results of operations, financial condition, or liquidity. NOTE L. GENZYME DEVELOPMENT PARTNERS Genzyme Development Partners, L.P. was formed in September 1989 to develop, produce and derive income from the sale of the Sepra products. We refer to Genzyme Development Partners as GDP. One of our wholly-owned subsidiaries is the general partner of GDP. In September 1989, we also formed a joint venture with GDP to manufacture and market the Sepra products in the United States and Canada for use in human clinical trials or human clinical procedures. We refer to this joint venture as GVII. We consolidate GVII for financial statement purposes and allocate it to Genzyme Surgical Products. We have the option to purchase all of the outstanding partnership interests in GDP for approximately $26.0 million in cash, Genzyme General Stock or Surgical Products Stock, or a combination of both, plus future royalty payments on the sale of the Sepra products. We can exercise this option during the 90-day period beginning on August 31, 2000. This option will be accelerated if at any time prior to August 31, 2000 GDP receives distributions from GVII of at least $5.5 million. If we exercise this right, we will allocate the acquisition of GDP to Genzyme Surgical Products. While we have no obligation to fund the research and development activities of GDP, it elected to fund the following amounts:
1999 1998 1997 - ------------ ------------ ------------ $ 9.0 million..... $8.4 million $7.3 million
We intend to provide approximately $6.0 million of funding to GDP for the Sepra programs through 2000, based on the 2000 budget for the programs. Future funding commitments for the Sepra development programs will be evaluated on an annual basis. We believe, however, that additional funds will be required to complete the development, clinical testing and commercialization of GDP's products. GSP-30 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE M. INCOME TAXES Genzyme Surgical Products' provisions for income taxes were at rates other than the U.S. federal statutory tax rate for the following reasons:
1999 1998 1997 -------- -------- -------- Tax at U.S. statutory rate.................................. (35.0)% (35.0)% (35.0)% State taxes, net............................................ (1.2) (3.1) (3.0) Nondeductible amortization.................................. 2.3 2.3 4.0 Other, net.................................................. 0.3 -- -- Deductions subject to deferred tax valuation allowance...... 33.6% 35.8% 34.0% ----- ----- ----- Effective tax rate.......................................... 0.0% 0.0% 0.0% ===== ===== =====
The components of net deferred tax assets are described in the following table:
DECEMBER 31, ------------------------- 1999 1998 -------- -------- (AMOUNTS IN THOUSANDS) Deferred tax assets: Net operating loss carryforwards................. $ 64,156 $ 48,701 Unrealized capital losses........................ -- 1,317 Reserves and other............................... 5,638 4,908 -------- -------- Gross deferred tax asset............................. 69,794 54,926 Valuation allowance.................................. (60,087) (45,896) -------- -------- $ 9,707 $ 9,030 Deferred tax liabilities: Intangible amoritization......................... (7,390) (6,712) Depreciable assets............................... (2,317) (2,318) -------- -------- Net deferred tax asset............................... $ -- $ -- ======== ========
As a result of uncertainty surrounding our ability to realize certain tax benefits that primarily relate to operating loss carryforwards, we placed valuation allowances of $60.1 million in 1999 and $45.9 million in 1998 against otherwise recognizable deferred tax assets. As Genzyme Surgical Products recognizes these deferred tax assets in accordance with generally accepted accounting principles, the benefits of those assets are reflected in its tax provision. However, the benefit of these deferred tax assets has previously been allocated to Genzyme General in accordance with our management and accounting policies. NOTE N. BENEFIT PLANS Note P., "Benefit Plans," to our consolidated financial statements contains information regarding our 401(k) and other pension plans. We incorporate that information into this note by reference. GSP-31 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE O. SEGMENT INFORMATION We present segment information in a manner consistent with the method we use to report this information to our management and have restated our 1997 segment information to conform with this method of presentation. Applying SFAS 131, Genzyme Surgical Products has two reportable segments: - Cardiovascular Surgery, which includes chest drainage systems, instruments and closures used in coronary artery bypass, valve replacement, and other cardiothoracic surgeries; and - General Surgery, which includes surgical instruments and Sepra Film-Registered Trademark- bioresorbable membrane. We have provided information concerning the operations in these reportable segments in the following table:
DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- (AMOUNTS IN THOUSANDS) Revenues: Cardiovascular Surgery.................................. $ 77,966 $ 74,545 $ 79,560 General Surgery......................................... 25,192 20,249 14,813 Other................................................... 8,823 9,164 6,462 -------- -------- -------- Total....................................................... $111,981 $103,958 $100,835 ======== ======== ======== Gross Profit: Cardiovascular Surgery.................................. $ 33,360 $ 29,596 $ 33,494 General Surgery......................................... 8,604 (490) 4,772 Other................................................... 2,775 2,578 2,767 -------- -------- -------- Total....................................................... $ 44,739 $ 31,684 $ 41,033 ======== ======== ========
The Other category includes amounts attributable to our products for plastic surgery. The following table contains revenue information by geographic area:
DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- (AMOUNTS IN THOUSANDS) Revenues: U.S..................................................... $ 78,854 $ 74,072 $ 71,898 Germany................................................. 16,886 17,400 16,839 Other................................................... 16,241 12,486 12,098 -------- -------- -------- Total................................................. $111,981 $103,958 $100,835 ======== ======== ========
All long-lived assets are in the United States. GSP-32 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE O. SEGMENT INFORMATION (CONTINUED) Genzyme Surgical Products markets its products directly to physicians and hospitals. Genzyme Surgical Products also markets its products through distributors and had the following sales as a percentage of total revenue to two unaffiliated distributors:
DECEMBER 31, ---------------------------- 1999 1998 1997 -------- -------- ---- (AMOUNTS IN THOUSANDS) Revenues: Distributor A........................................... 16% 18% 20% Distributor B........................................... 9% 8% 11%
NOTE Q. QUARTERLY RESULTS (UNAUDITED)
1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- (AMOUNTS IN THOUSANDS) 1999: Net revenue............................................ $ 27,353 $ 26,681 $ 27,385 $30,562 Gross profit........................................... 11,509 9,242 10,587 13,401 Division net loss...................................... (10,745) (17,658) (10,953) (8,681) 1998: Net revenue............................................ $ 24,227 $ 27,201 $ 24,904 $27,626 Gross profit........................................... 9,504 11,942 (919) 11,157 Division net loss...................................... (9,118) (9,886) (21,519) (9,333)
NOTE R. SUBSEQUENT EVENT In March 2000, we entered into an agreement to acquire Biomatrix, Inc. Upon the effectiveness of our Registration Statement on Form S-4 and completion of the merger, we will form a new operating division called Genzyme Biosurgery and create a new series of common stock designed to reflect its value and track its performance. We refer to this stock as "Biosurgery Stock." In connection with the merger, and upon Genzyme shareholder approval, the assets and liabilities allocated to Genzyme Surgical Products and Genzyme Tissue Repair will be reallocated to Genzyme Biosurgery and shares of Surgical Products Stock and Tissue Repair Stock will be exchanged for Biosurgery Stock. We will account for the acquisition of Biomatrix as a purchase. Biomatrix stockholders will receive $37 in cash, one share of Biosurgery Stock, or a combination of cash and stock for each share of Biomatrix Stock they hold. The merger agreement provides that we will pay cash for up to 28.38% of the outstanding shares of Biomatrix common stock that receive merger consideration, or up to approximately $245.0 million. Holders of Surgical Products Stock will receive 0.6060 share of Biosurgery Stock in exchange for each share of Surgical Products Stock they hold and holders of Tissue Repair Stock will receive 0.3352 share of Biosurgery Stock in exchange for each share of Tissue Repair Stock they hold. GSP-33 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Genzyme Corporation: In our opinion, the accompanying combined balance sheets and the related combined statements of operations and of cash flows present fairly, in all material respects, the financial position of Genzyme Surgical Products (as described in Note A) at December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related combined financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As more fully described in Note A to these financial statements, Genzyme Surgical Products is a division of Genzyme Corporation; accordingly, the combined financial statements of Genzyme Surgical Products should be read in conjunction with the audited consolidated financial statements of Genzyme Corporation and Subsidiaries. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts February 23, 2000 GSP-34 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - -------------------------- ------------------- --------------------------------- ---------- ------------- ADDITIONS --------------------------------- BALANCE AT CHARGED TO COSTS CHARGED TO BALANCE AT DESCRIPTION BEGINNING OF PERIOD AND EXPENSES OTHER ACCOUNTS DEDUCTIONS END OF PERIOD - -------------------------- ------------------- ---------------- -------------- ---------- ------------- Year ended December 31, 1999: Allowance for doubtful accounts................ $ 365,000 $ 375,000 $ -- $ 407,000(1) $ 333,000 Inventory reserve......... $12,127,000 $ 1,056,000 $ -- $4,460,000 $ 8,723,000 Year ended December 31, 1998: Allowance for doubtful accounts................ $ 476,000 $ 166,000 $ -- $ 277,000(1) $ 365,000 Inventory reserve......... $ 3,700,000 $10,758,000 $ -- $2,331,000 $12,127,000 Year ended December 31, 1997: Allowance for doubtful accounts................ $ 917,000 $ 275,000 $ -- $ 716,000(1) $ 476,000 Inventory reserve......... $ 3,854,000 $ 484,000 $ -- $ 638,000 $ 3,700,000
- ------------------------ (1) Uncollectible accounts written off, net of recoveries. GSP-35 EX-13.5 6 ex-13_5.txt EXHIBIT 13.5 EXHIBIT 13.5 FINANCIAL STATEMENTS
PAGE NO. -------- GENZYME TISSUE REPAIR A DIVISION OF GENZYME CORPORATION Combined Selected Financial Data.......................... GTR-2 Management's Discussion and Analysis of Genzyme Tissue Repair's Financial Condition and Results of Operations.............................................. GTR-4 Combined Statements of Operations--For the Years Ended December 31, 1999, 1998 and 1997........................ GTR-13 Combined Balance Sheets--December 31, 1999 and 1998....... GTR-14 Combined Statements of Cash Flows--For the Years Ended December 31, 1999, 1998 and 1997........................ GTR-15 Notes to Combined Financial Statements.................... GTR-16 Report of Independent Accountants......................... GTR-29
GTR-1 GENZYME TISSUE REPAIR A DIVISION OF GENZYME CORPORATION COMBINED SELECTED FINANCIAL DATA Genzyme Tissue Repair is our operating division that develops and markets biological products for orthopedic injuries, such as cartilage damage, and severe burns. A series of our common stock, Genzyme Tissue Repair Division Common Stock (which we refer to as "Tissue Repair Stock") is designed to reflect the value and track the performance of this division. Tissue Repair Stock is common stock of Genzyme Corporation, not of Genzyme Tissue Repair; Genzyme Tissue Repair is a division, not a company or legal entity, and therefore does not and cannot issue stock. The chief mechanisms intended to cause Tissue Repair Stock to "track" the financial performance of Genzyme Tissue Repair are provisions in our charter governing dividends and distributions. Under these provisions, our charter: - factors the assets and liabilities and income or losses attributable to Genzyme Tissue Repair into the determination of the amount available to pay dividends on Tissue Repair Stock; and - requires us to exchange, redeem or distribute a dividend to the holders of Tissue Repair Stock if all or substantially all of the assets allocated to Genzyme Tissue Repair are sold to a third party To determine earnings per share, we allocate Genzyme's earnings to each series of our common stock based on the earnings attributable to that series of stock. The earnings attributable to Tissue Repair Stock is defined in our charter as the net income or loss of Genzyme Tissue Repair determined in accordance with generally accepted accounting principles and as adjusted for tax benefits allocated to or from Genzyme Tissue Repair in accordance with our management and accounting policies. Our charter also requires that all income and expenses of Genzyme be allocated among the divisions in a reasonable and consistent manner. Our board of directors, however retains considerable discretion in determining the types, magnitudes and extent of allocations to each series of common stock without shareholder approval. Because the earnings allocated to Tissue Repair Stock are based on the income or losses attributable to Genzyme Tissue Repair, we include financial statements and management's discussion and analysis of Genzyme Tissue Repair to aid investors in evaluating its performance. The following combined selected financial data reflect the results of operations and financial position of the operations and assets we have allocated to Genzyme Tissue Repair and should be read in conjunction with the financial statements of Genzyme Tissue Repair and accompanying notes. GTR-2 GENZYME TISSUE REPAIR A DIVISION OF GENZYME CORPORATION COMBINED SELECTED FINANCIAL DATA COMBINED STATEMENT OF OPERATIONS DATA
FOR THE YEARS ENDED DECEMBER 31, -------------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- --------- --------- -------- (AMOUNTS IN THOUSANDS) Net service sales........................ $ 20,402 $ 17,117 $ 10,856 $ 7,312 $ 5,220 Operating costs and expenses: Cost of services sold................ 13,237 13,438 11,788 11,193 4,731 Selling, general and administrative..................... 24,604 24,579 25,571 27,111 12,927 Research and development............. 8,019 10,432 10,845 10,880 10,938 --------- --------- --------- --------- -------- Total operating costs and expenses......................... 45,860 48,449 48,204 49,184 28,596 --------- --------- --------- --------- -------- Operating loss........................... (25,458) (31,332) (37,348) (41,872) (23,376) Other income (expenses): Equity in net loss of joint venture(1)......................... (3,368) (7,674) (6,719) (1,727) -- Interest income...................... 609 1,176 979 1,432 1,386 Interest expense..................... (1,823) (2,556) (2,896) (148) (40) --------- --------- --------- --------- -------- Total other income (expenses)...... (4,582) (9,054) (8,636) (443) 1,346 --------- --------- --------- --------- -------- Division net loss........................ $ (30,040) $ (40,386) $ (45,984) $ (42,315) $(22,030) ========= ========= ========= ========= ========
COMBINED BALANCE SHEET DATA
DECEMBER 31, ---------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (AMOUNTS IN THOUSANDS) Cash and investments........................... $ 9,373 $ 7,732 $31,915 $16,230 $47,573 Working capital................................ 12,112 (6,461) 31,623 14,232 44,374 Total assets................................... 19,648 18,954 57,226 42,593 52,649 Long-term debt................................. 18,000 12,579 31,089 18,000 -- Division equity................................ (3,455) (16,396) 20,203 18,084 45,926
- ------------------------ (1) Operations of Diacrin/Genzyme LLC, our joint venture with Diacrin, Inc., commenced in October 1996. In May 1999, we reallocated our ownership interest in the joint venture from Genzyme Tissue Repair to Genzyme General. GTR-3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF GENZYME TISSUE REPAIR'S FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION This discussion contains forward-looking statements. These forward-looking statements represent the expectations of our management as of the filing date of this annual report. Actual results could differ materially from those anticipated by the forward-looking statements due to the risks and uncertainties described under the caption "Factors Affecting Future Operating Results" for Genzyme Tissue Repair and Genzyme Corporation included in this annual report. You should consider carefully each of these risks and uncertainties in evaluating the financial condition and results of operations of Genzyme Tissue Repair and Genzyme. We prepare the financial statements of Genzyme Tissue Repair in accordance with generally accepted accounting principles. We present financial information and accounting policies specific to Genzyme Tissue Repair in the accompanying combined financial statements. We present financial information and accounting policies relevant to the corporation and its operating divisions taken as a whole in our consolidated financial statements. You should read the consolidated financial statements in conjunction with the financial statements of Genzyme Tissue Repair. Note A., "Summary of Significant Accounting Policies," to our accompanying consolidated financial statements contains our accounting policies. Genzyme Tissue Repair Division Common Stock, which we refer to as "Tissue Repair Stock," is a series of our common stock that is designed to reflect the value and track the performance of Genzyme Tissue Repair. The chief mechanisms intended to cause Tissue Repair Stock to "track" the financial performance of Genzyme Tissue Repair are provisions in our charter governing dividends and distributions. Under these provisions, our charter: - factors the assets and liabilities and income or losses attributable to Genzyme Tissue Repair into the determination of the amount available to pay dividends on Tissue Repair Stock; and - requires us to exchange, redeem or distribute a dividend to the holders of Tissue Repair Stock if all or substantially all of the assets allocated to Genzyme Tissue Repair are sold to a third party (a dividend or redemption payment must equal in value the net after-tax proceeds from the sale; an exchange must be for Genzyme General Stock at a 10% premium to the exchanged stock's average market price following the announcement of the sale.) To determine earnings per share, we allocate Genzyme's earnings to each series of our common stock based on the earnings attributable to that series of stock. The earnings attributable to Tissue Repair Stock is defined in our charter as the net income or loss of Genzyme Tissue Repair determined in accordance with generally accepted accounting principles and as adjusted for tax benefits allocated to or from Genzyme Tissue Repair in accordance with our management and accounting policies. Our charter also requires that all income and expenses of Genzyme be allocated among the divisions in a reasonable and consistent manner. However, subject to its fiduciary duties, our board of directors can, at its discretion, change the methods of allocating earnings to each series of common stock. We intend to allocate earnings using our current methods for the foreseeable future. Because the earnings allocated to Tissue Repair Stock are based on the income or losses attributable to Genzyme Tissue Repair, we include financial statements and management's discussion and analysis of Genzyme Tissue Repair to aid investors in evaluating its performance. While Tissue Repair Stock is designed to reflect Genzyme Tissue Repair's performance, it is common stock of Genzyme Corporation and not Genzyme Tissue Repair; Genzyme Tissue Repair is a division, not a company or legal entity, and therefore does not and cannot issue stock. Consequently, holders of Tissue Repair Stock have no specific rights to assets allocated to Genzyme Tissue Repair. Genzyme Corporation continues to hold title to all of the assets allocated to Genzyme Tissue Repair and is responsible for all of GTR-4 its liabilities, regardless of what we deem for financial statement presentation purposes as allocated to any division. Holders of Tissue Repair 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 Tissue Repair Stock and other tracking stockholders would only have the rights of common stockholders in the combined assets of Genzyme. Our charter sets forth what programs and businesses are initially allocated to Genzyme Tissue Repair and states that going forward the division will also include all businesses, products or programs, developed by or acquired for the division, as determined by our board of directors. We then manage and account for transactions between Genzyme Tissue Repair and our other divisions and with third parties, and any resulting re-allocations of assets and liabilities, by applying consistently across divisions a detailed set of policies established by our board of directors. We publicly disclose our divisional management and accounting policies, which appear in Exhibit 99.1 to this Annual Report on Form 10-K. Our charter requires that all assets and liabilities of Genzyme be allocated among the divisions. Our board of directors, however, retains considerable discretion in determining the types, magnitudes and extent of allocations to each series of common stock without shareholder approval. We present earnings per share data for Tissue Repair Stock in our consolidated financial statements. We present financial information and accounting policies specific to Genzyme Tissue Repair in the accompanying combined financial statements. We present financial information and accounting policies relevant to the corporation and its operating divisions taken as a whole in our consolidated financial statements. You should, therefore, read this discussion and analysis of Genzyme Tissue Repair's financial position and results of operations in conjunction with the financial statements and related notes of Genzyme Tissue Repair, the discussion and analysis of Genzyme's financial position and results of operations, and the consolidated financial statements and related notes of Genzyme, all of which are included in this annual report. In March 2000, we entered into an agreement to acquire Biomatrix, Inc. Upon completion of the acquisition, we will form a new operating division, and the assets and liabilities allocated to Genzyme Surgical Products and Genzyme Tissue Repair will be re-allocated to that new division. For more information you should read the section entitled "Subsequent Event" below. RESULTS OF OPERATIONS The following discussion summarizes the key factors management believes are necessary for an understanding of Genzyme Tissue Repair's financial statements. GTR-5 The components of Genzyme Tissue Repair's combined statements of operations are described in the following table:
99/98 98/97 INCREASE/ INCREASE/ (DECREASE) (DECREASE) 1999 1998 1997 % CHANGE % CHANGE -------- -------- -------- ---------- ---------- (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Total revenues......................... $ 20,402 $ 17,117 $ 10,856 19% 58% Cost of revenues....................... 13,237 13,438 11,788 (1)% 14% Selling, general and administrative.... 24,604 24,579 25,571 0% (4)% Research and development............... 8,019 10,432 10,845 (23)% (4)% -------- -------- -------- Total operating costs and expenses....................... 45,860 48,449 48,204 (5)% 1% -------- -------- -------- Operating loss......................... (25,458) (31,332) (37,348) (19)% (16)% Other expenses, net.................... (4,582) (9,054) (8,636) (49)% 5% -------- -------- -------- Division net loss...................... $(30,040) $(40,386) $(45,984) (26)% (12)% ======== ======== ========
REVENUES
99/98 98/97 INCREASE/ INCREASE/ (DECREASE) (DECREASE) 1999 1998 1997 % CHANGE % CHANGE -------- -------- -------- ---------- ---------- (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Carticel-Registered Trademark- chondrocytes........................... $15,213 $10,978 $ 6,598 39% 66% Epicel-TM- skin grafts................... 5,092 6,030 4,258 (16)% 42% Other.................................... 97 109 -- (11)% N/A ------- ------- ------- Total revenues....................... $20,402 $17,117 $10,856 19% 58% ======= ======= =======
The increase in sales of Carticel-Registered Trademark- chondrocytes during both periods was a result of continued increases in the numbers of patients treated and surgeons trained as well as increases in the number of insurance reimbursement approvals. Revenue from Epicel-TM- skin grafts varies from year to year depending on the number of patients requiring severe burn care. MARGINS
99/98 99/97 INCREASE/ INCREASE/ (DECREASE) (DECREASE) 1999 1998 1997 % CHANGE % CHANGE -------- -------- ----- ---------- ---------- (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Gross margins.................................. $7,165 $3,679 $(932) 95% 495% % of total revenues........................ 35% 21% (9)%
Genzyme Tissue Repair's gross margins improved in both periods as a result of: - Increased sales of Carticel-Registered Trademark- chondrocytes; - Reductions in labor and manufacturing expenses; and - Decreased material expenses. GTR-6 SG&A AND R&D EXPENSES Genzyme Tissue Repair's selling, general and administrative expenses remained flat, while revenues increased, in 1999 compared to 1998 as a result of its efforts to streamline operations. Its selling, general and administrative expense decreased in 1998 compared to 1997 also as a result of its efforts to streamline operations. Genzyme Tissue Repair's research and development expense decreased in 1999 compared to 1998 due to the termination of its TGF-beta and other research and development programs. Its research and development expense decreased slightly in 1998 compared to 1997. OTHER INCOME AND EXPENSES
99/98 98/97 INCREASE/ INCREASE/ (DECREASE) (DECREASE) 1999 1998 1997 % CHANGE % CHANGE -------- -------- ------- ---------- ---------- (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Equity in net loss of joint venture....... $(3,368) $(7,674) $(6,719) (56)% 14% Interest income........................... 609 1,176 979 (48)% 20% Interest expense.......................... (1,823) (2,556) (2,896) (29)% (12)% ------- ------- ------- Total other income (expense), net... $(4,582) $(9,054) $(8,636) (49)% 5% ======= ======= =======
1999 AS COMPARED TO 1998 Equity in net loss of joint venture decreased in 1999 compared to 1998 as a result of the reallocation of Genzyme's ownership interest in Diacrin/Genzyme LLC from Genzyme Tissue Repair to Genzyme General in May 1999. As a result, Genzyme Tissue Repair will not recognize losses related to the joint venture going forward. In the period of 1999 prior to the transfer, Genzyme Tissue Repair provided $3.6 million in funding to the joint venture and realized a net loss of $3.4 million from the joint venture. During 1998, Genzyme Tissue Repair realized 12 months of losses from the joint venture. Interest income decreased in 1999 compared to 1998 as a result of lower average cash balances. In the second quarter of 1998, Genzyme Tissue Repair completed the accretion of the conversion feature of the 6% convertible subordinated note. Interest expense decreased in 1999 as a result. During 1999, the holder of this note converted the remaining principal amount of $12.4 million into shares of Tissue Repair Stock. 1998 AS COMPARED TO 1997 Equity in net loss of joint venture increased in 1998 compared to 1997 as a result of increased clinical trial activity during 1998. During 1998, Genzyme Tissue Repair provided $7.2 million of funding to Diacrin/Genzyme LLC and realized a net loss of $7.7 million from the joint venture. Interest income increased in 1998 compared to 1997 as a result of higher average cash balances. In the second quarter of 1998, Genzyme Tissue Repair completed the accretion of the conversion feature of the 6% convertible subordinated note. Interest expense decreased in 1997 as a result. During 1998, the holder of this note converted $0.6 million of principal into shares of Tissue Repair Stock. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1999, Genzyme Tissue Repair had cash and cash equivalents of $9.4 million, a decrease of $1.6 million from December 31, 1998. GTR-7 Genzyme Tissue Repair used $25.1 million in cash for operations during 1999. This is primarily due to Genzyme Tissue Repair's net loss of $30.0 million for the year. During 1999, Genzyme Tissue Repair used $4.4 million in cash as a result of its investing activities. This amount included $3.6 million contributed to Diacrin/Genzyme LLC and $0.9 million used to purchase equipment. Genzyme Tissue Repair's financing activities generated $31.1 million in cash during 1999. This included $25.0 million in cash allocated from Genzyme General in connection with the transfer of our interest in Diacrin/Genzyme LLC to Genzyme General, and $5.0 million allocated to Genzyme Tissue Repair under its interdivisional financing arrangement from Genzyme General. At December 31, 1999, $18.0 million of funds outstanding under our revolving credit facility was allocated to Genzyme Tissue Repair. Genzyme Tissue Repair, together with our other operating divisions, has access to our revolving credit facilities. At December 31, 1999, $50.0 million was available under a facility that matures in November 2000 and $77.0 million was available under a facility that matures in November 2002. In October 1996, our board of directors made $20.0 million of Genzyme General's cash available to Genzyme Tissue Repair in order for Genzyme Tissue Repair to fund its obligations under its joint venture with Diacrin. Under this arrangement, Genzyme Tissue Repair may draw down funds as needed each quarter in exchange for Genzyme Tissue Repair designated shares based on the fair market value of Tissue Repair Stock (as defined in our charter) at the time of the draw. Genzyme Tissue Repair made a $7.0 million draw under this arrangement in 1997. In May 1998, our board of directors increased the amount committed under this arrangement from $20.0 million to $50.0 million. Genzyme Tissue Repair made a $5.0 million draw in February 1999. In May 1999, the amount available under this arrangement was reduced to $25.0 million in connection with the reallocation of our ownership interest in Diacrin/Genzyme LLC from Genzyme Tissue Repair to Genzyme General. We anticipate that Genzyme Tissue Repair's current cash resources, together with the $20.0 million that remains available under an interdivisional financing arrangement of credit from Genzyme General, will be sufficient to fund its operations through the end of 2000. If Diacrin/Genzyme LLC does not initiate a Phase III clinical trial of NeuroCell-TM- PD by June 30, 2000, Genzyme Tissue Repair will be required to pay Genzyme General $20 million plus accrued interest at 13.5% per annum. Genzyme Tissue Repair may pay Genzyme General in cash, Genzyme Tissue Repair designated shares, or a combination of both, at its option. If this milestone is not achieved and Genzyme Tissue Repair elects to repay Genzyme General in cash, its cash reserves will be substantially diminished or depleted in their entirety. Genzyme Tissue Repair's cash needs may differ from those planned as a result of many factors, including the: - ability to satisfy regulatory requirements of the FDA and other government agencies; - results of research and development and clinical testing; - enforcement of patent and other intellectual property rights; and - development of competitive products and services. Genzyme Tissue Repair will require substantial additional funds in order to continue operations at current levels beyond 2000. We cannot guarantee that we will be able to obtain any additional financing for Genzyme Tissue Repair or find it on favorable terms. If Genzyme Tissue Repair has insufficient funds or we are unable to raise additional funds for Genzyme Tissue Repair, it may be required to delay, scale back GTR-8 or eliminate certain of its programs. Genzyme Tissue Repair may also have to give third parties rights to commercialize technologies or products that it would otherwise have sought to commercialize itself. NEW ACCOUNTING PRONOUNCEMENTS, EURO, YEAR 2000 AND MARKET RISK See "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations" included in this annual report. FACTORS AFFECTING FUTURE OPERATING RESULTS The future operating results of Genzyme Tissue Repair could differ materially from the results described above due to the risks and uncertainties described below and under the heading "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations--Factors Affecting Future Operating Results" included in this annual report. THE COMMERCIAL SUCCESS OF GENZYME TISSUE REPAIR'S LEAD PRODUCT, CARTICEL-REGISTERED TRADEMARK- CHONDROCYTES, IS UNCERTAIN. Carticel-Registered Trademark- chondrocytes are used to treat knee cartilage damage. This service involves a proprietary process for growing autologous (a patient's own) cartilage cells to replace those that are damaged or lost. Revenues from Carticel-Registered Trademark- chondrocytes accounted for approximately 75% of Genzyme Tissue Repair's 1999 revenue. The commercial success of Carticel-Registered Trademark- chondrocytes will depend on many factors including: POSITIVE RESULTS FROM POST-MARKETING STUDIES. - We have agreed with the FDA to conduct two post-marketing studies to confirm the effectiveness of Carticel-Registered Trademark- chondrocytes. The first study compares clinical outcomes of patients in Genzyme Tissue Repair's registry who did not respond to treatment before being implanted with Carticel-Registered Trademark-chondrocytes. This study will measure outcomes before and after implantation with Carticel-Registered Trademark- chondrocytes. The second study compares the long-term clinical effects of treatment with Carticel-Registered Trademark-chondrocytes to other available treatments. If these studies demonstrate that treatment with Carticel-Registered Trademark- chondrocytes is not superior to the alternatives studied, the FDA may suspend or withdraw its approval of Carticel-Registered Trademark- chondrocytes. If Genzyme Tissue Repair cannot market Carticel-Registered Trademark- chondrocytes in the U.S., its financial results will be negatively impacted. FDA APPROVAL OF RELATED DEVICE. - Genzyme Tissue Repair has developed a device to improve the procedure for implanting Carticel-Registered Trademark-chondrocytes and plans to file for marketing approval with the FDA. Genzyme Tissue Repair believes it will begin marketing this device in 2000. We cannot guarantee that the FDA will approve this device, that this device will improve the procedure for implanting Carticel-Registered Trademark- chondrocytes, or that this device will gain commercial acceptance. THE AVAILABILITY OF THIRD PARTY REIMBURSEMENT. - Since the FDA approved Carticel-Registered Trademark- chondrocytes, we have seen a substantial increase in the number of third party payers who cover it. Some third party payers, however, do not cover Carticel-Registered Trademark-chondrocytes. We cannot guarantee that any third party payers will continue to cover it or that additional third party payers will begin to provide reimbursement. - Although FDA approval is a crucial factor in insurance plans deciding to cover new treatments, a number of major insurance plans also base such decisions on their own or third party evaluations of such treatments. One independent association that conducts such evaluations is the Blue Cross Blue Shield Association. The Blue Cross Blue Shield Association has determined that its Technology Assessment Committee does not believe that Carticel-Registered Trademark- chondrocytes meets all of its published GTR-9 criteria for new treatments. We believe that Carticel-Registered Trademark- chondrocytes does in fact meet all of such criteria and are discussing the evaluation with the Blue Cross Blue Shield Association. While individual Blue Cross Blue Shield plans representing more than 50% of Blue Cross Blue Shield policyholders have provided policy coverage for Carticel-Registered Trademark- chondrocytes without a favorable evaluation by the Blue Cross Blue Shield Association, many Blue Cross Blue Shield plans have delayed approving Carticel-Registered Trademark- chondrocytes from coverage under their policies as a direct result of this unfavorable ruling. Since these remaining plans represent a significant percentage of insured lives in the U.S., this ruling has delayed our access to a substantial portion of the market for Carticel-Registered Trademark- chondrocytes. THE SUCCESS OF COMPETITIVE PRODUCTS. - The process we use to grow a patient's cartilage cells is not patentable, and we do not yet have significant patent protection covering the other processes used in providing Carticel-Registered Trademark- chondrocytes. Consequently, we cannot prevent a competitor from developing the ability to grow cartilage cells and from offering a product or service that is similar or superior to Carticel-Registered Trademark- chondrocytes. If a competitor were to develop such ability and obtain FDA approval for a competitive product or service, Genzyme Tissue Repair's financial results of operations would be negatively impacted. We are aware of at least two other companies that are growing autologous cartilage cells for cartilage repair in the European market. Also, several pharmaceutical and biotechnology companies are developing alternative treatments for knee cartilage damage. One or more of these companies may develop products or services superior to the Carticel-Registered Trademark- chondrocytes. MARKET ACCEPTANCE BY ORTHOPEDIC SURGEONS. - We are marketing Carticel-Registered Trademark- chondrocytes to orthopedic surgeons. We cannot guarantee that we will train enough surgeons who incorporate it into their practice to make it commercially successful. GENZYME TISSUE REPAIR ANTICIPATES FUTURE LOSSES AND MAY NEVER BECOME PROFITABLE. We expect Genzyme Tissue Repair to have significant operating losses at least through 2000 as it continues to commercialize Carticel-Registered Trademark- chondrocytes and to conduct research and development and clinical programs. We cannot guarantee that Genzyme Tissue Repair's operations will ever be profitable. IF GENZYME TISSUE REPAIR FAILS TO OBTAIN CAPITAL NECESSARY TO FUND ITS OPERATIONS, IT WILL BE UNABLE TO FUND DEVELOPMENT PROGRAMS AND COMPLETE CLINICAL TRIALS. We anticipate that Genzyme Tissue Repair's current cash resources, together with amounts available under an interdivisional financing arrangement from Genzyme General, will be sufficient to fund Genzyme Tissue Repair's operations through the end of 2000. In 1999, Genzyme Tissue Repair received $25 million in cash from Genzyme General in connection with the transfer to Genzyme General of our interest in our joint venture with Diacrin, Inc. If the joint venture does not initiate a Phase III clinical trial of NeuroCell-TM--PD by June 30, 2000, Genzyme Tissue Repair will be required to pay Genzyme General $20 million plus accrued interest at 13.5%. Genzyme Tissue Repair may repay this amount in cash, Genzyme Tissue Repair designated shares, or combination of both, at its option. Genzyme Tissue Repair designated shares are shares of Tissue Repair Stock that are not issued and outstanding, but which our board of directors may issue, sell or distribute without allocating the proceeds to Genzyme Tissue Repair. If these milestones are not achieved, and Genzyme Tissue Repair elects to repay Genzyme General in cash, its cash reserves will be substantially diminished or depleted in their entirety. If Genzyme Tissue Repair elects to repay Genzyme General in Genzyme Tissue Repair designated shares, this would substantially dilute the rights of the holders of Tissue Repair Stock and could significantly affect the market price of Tissue Repair Stock. GTR-10 Genzyme Tissue Repair's cash needs may differ from those planned as a result of various factors, including the: - ability to satisfy regulatory requirements of the FDA and other government agencies; - results of research and development and clinical testing; - enforcement of patent and other intellectual property rights; and - development of competitive products and services. Genzyme Tissue Repair will require substantial additional funds in order to continue operations at current levels beyond 2000. We cannot guarantee that we will be able to obtain any additional financing for Genzyme Tissue Repair or find it on favorable terms. If Genzyme Tissue Repair has insufficient funds or we are unable to raise additional funds for Genzyme Tissue Repair, it may be required to delay, scale back or eliminate certain of its programs. Genzyme Tissue Repair may also have to give rights to third parties to commercialize technologies or products that it would otherwise commercialize itself. GENZYME TISSUE REPAIR'S RESULTS FLUCTUATE QUARTERLY AND THIS COULD HAVE AN ADVERSE EFFECT ON ITS OPERATIONS. We expect that the revenues from the sale of the Carticel-Registered Trademark- chondrocytes will fluctuate based on Genzyme Tissue Repair's success in penetrating the market, the availability of competitive procedures and the availability of third party reimbursement. We cannot predict the timing or magnitude of these fluctuations. Furthermore, we expect that revenues from Carticel-Registered Trademark- chondrocytes will be lower in the summer months because fewer operations are typically performed during those months. We also expect that revenues from the sale of Epicel-TM- skin grafts will continue to fluctuate from quarter to quarter. This fluctuation is a result of several unpredictable factors, including the number and survival rate of severe burn patients who are treated with Epicel-TM- skin grafts. Since Genzyme Tissue Repair must maintain extensive tissue culture facilities and a trained staff for both Carticel-Registered Trademark- chondrocytes and Epicel-TM- skin grafts, a significant portion of its costs are fixed and, therefore, fluctuations in demand can have an adverse effect on its results of operations. GENZYME TISSUE REPAIR RELIES ON KEY COLLABORATORS TO SUPPORT FURTHER RESEARCH AND DEVELOPMENT OF CARTICEL-REGISTERED TRADEMARK-CHONDROCYTES AND THESE EFFORTS COULD SUFFER IF IT EXPERIENCES PROBLEMS WITH THESE COLLABORATORS. Carticel-Registered Trademark- chondrocytes were developed based on the work of a group of Swedish physicians. Genzyme Tissue Repair had consulting agreements with the two leaders of that group. These agreements, however, expired in 1998 and Genzyme Tissue Repair is currently negotiating renewals of these agreements. Pending these negotiations, these physicians are continuing to advise Genzyme Tissue Repair on the commercialization and further development Carticel-Registered Trademark- chondrocytes. We cannot guarantee that the two physicians will sign a new consulting agreement or continue to advise Genzyme Tissue Repair. In addition, individuals who are familiar with the know-how underlying Carticel-Registered Trademark- chondrocytes through their association with these physicians may disclose such information to our competitors. Either event could have an adverse effect on Genzyme Tissue Repair's results of operations. We have entered into a sponsored research agreement with the University of Gothenburg in Sweden and certain physicians, including the two physicians discussed above. The purpose of the agreement is to conduct additional research on Carticel-Registered Trademark- chondrocytes. The agreement prohibits each member of the research team from disclosing any information relating to Genzyme Tissue Repair or its business that they acquire in connection with their work under the agreement. The agreement also states that all inventions that the members conceive or reduce to practice during the course of the research program will be GTR-11 Genzyme Tissue Repair's property, with royalties payable to the inventing member. We cannot guarantee that these members will honor their obligations under the sponsored research agreement. SUBSEQUENT EVENT In March 2000, we entered into an agreement to acquire Biomatrix, Inc. Upon the effectiveness of our Registration Statement on Form S-4 and completion of the merger, we will form a new operating division called Genzyme Biosurgery and create a new series of common stock designed to reflect its value and track its performance. We refer to this stock as "Biosurgery Stock". In connection with the merger, and upon Genzyme shareholder approval, the assets and liabilities allocated to Genzyme Surgical Products and Genzyme Tissue Repair will be reallocated to Genzyme Biosurgery and shares of Surgical Products Stock and Tissue Repair Stock will be exchanged for Biosurgery Stock. We will account for the acquisition of Biomatrix as a purchase. Biomatrix stockholders will receive $37 in cash, one share of Biosurgery Stock, or a combination of cash and stock for each share of Biomatrix Stock they hold. The merger agreement provides that we will pay cash for up to 28.38% of the outstanding shares of Biomatrix common stock that receive merger consideration, or up to approximately $245.0 million. Holders of Surgical Products Stock will receive 0.6060 share of Biosurgery Stock in exchange for each share of Surgical Products Stock they hold and holders of Tissue Repair Stock will receive 0.3352 share of Biosurgery Stock in exchange for each share of Tissue Repair Stock they hold. For more information about the merger and the merger consideration, we encourage you to carefully read our Registration Statement on Form S-4 (File No. 333-34972) filed with the SEC on April 18, 2000 and as amended from time to time. The acquisition is subject to: - approval by Biomatrix shareholders; - approval by our shareholders, including separate approvals by the holders of shares of Surgical Products Stock and Tissue Repair Stock; and - other customary closing conditions. GTR-12 GENZYME TISSUE REPAIR A DIVISION OF GENZYME CORPORATION COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, --------------------------------------- 1999 1998 1997 --------- --------- --------- (AMOUNTS IN THOUSANDS) Total revenues........................................... $ 20,402 $ 17,117 $ 10,856 Operating costs and expenses: Cost of services sold.................................. 13,237 13,438 11,788 Selling, general and administrative.................... 24,604 24,579 25,571 Research and development............................... 8,019 10,432 10,845 --------- --------- --------- Total operating costs and expenses................. 45,860 48,449 48,204 --------- --------- --------- Operating loss........................................... (25,458) (31,332) (37,348) Other income (expenses): Equity in net loss of joint venture.................... (3,368) (7,674) (6,719) Interest income........................................ 609 1,176 979 Interest expense....................................... (1,823) (2,556) (2,896) --------- --------- --------- Total other income (expenses)...................... (4,582) (9,054) (8,636) --------- --------- --------- Division net loss........................................ $ (30,040) $ (40,386) $ (45,984) ========= ========= ========= Comprehensive loss, net of tax: Division net loss........................................ $ (30,040) $ (40,386) $ (45,984) Other comprehensive income (loss), net of tax: Unrealized gains on securities arising during the period............................................... -- 9 (9) --------- --------- --------- Comprehensive loss....................................... $ (30,040) $ (40,377) $ (45,993) ========= ========= =========
The accompanying notes are an integral part of these combined financial statements. GTR-13 GENZYME TISSUE REPAIR A DIVISION OF GENZYME CORPORATION COMBINED BALANCE SHEETS
DECEMBER 31, ----------------------- 1999 1998 -------- -------- (AMOUNTS IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents................................. $ 9,373 $ 7,732 Accounts receivable, net.................................. 4,968 3,833 Inventories............................................... 2,394 2,645 Other current assets...................................... 253 1,723 ------- -------- Total current assets.................................... 16,988 15,933 Plant and equipment, net.................................... 2,545 2,836 Other....................................................... 115 185 ------- -------- Total assets............................................ $19,648 $ 18,954 ======= ======== LIABILITIES AND DIVISION EQUITY Current liabilities: Accounts payable.......................................... $ 1,062 $ 1,355 Accrued expenses.......................................... 3,131 2,491 Due to Genzyme General.................................... 683 548 Current portion of long-term debt......................... -- 18,000 ------- -------- Total current liabilities............................... 4,876 22,394 Convertible note, net....................................... -- 12,579 Long-term debt.............................................. 18,000 -- Other....................................................... 227 377 ------- -------- Total liabilities....................................... 23,103 35,350 Commitments and Contingencies (See Notes) Division equity (Note I).................................... (3,455) (16,396) ------- -------- Total liabilities and division equity................... $19,648 $ 18,954 ======= ========
The accompanying notes are an integral part of these combined financial statements. GTR-14 GENZYME TISSUE REPAIR A DIVISION OF GENZYME CORPORATION COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 1999 1998 1997 --------- --------- --------- (AMOUNTS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Division net loss......................................... $ (30,040) $ (40,386) $ (45,984) Reconciliation of division net loss to net cash used in operating activities: Depreciation and amortization............................. 1,186 1,757 2,482 Loss on disposal of property, plant and equipment......... -- -- 24 Non-cash compensation expense............................. -- 108 221 Accrued interest/amortization on bonds.................... -- 188 (188) Provision for bad debts and inventory..................... 2,718 2,985 4,400 Accretion of debt discount................................ 220 453 1,071 Equity in net loss of joint venture....................... 3,368 7,674 6,719 Amortization of deferred rent............................. (150) (150) (150) Increase (decrease) in cash from working capital: Accounts receivable..................................... (1,319) (1,869) (1,024) Inventories............................................. (2,283) (3,400) (4,070) Other current assets.................................... 1,248 (719) (587) Accounts payable and accrued expenses................... (151) (574) (39) Due to Genzyme General.................................. 135 (665) (391) --------- --------- --------- Net cash used in operating activities................. (25,068) (34,598) (37,516) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments.................................. -- -- (10,614) Sales and maturities of investments....................... -- 10,614 318 Investment in joint venture............................... (3,594) (7,163) (6,820) Purchases of property, plant and equipment................ (894) (670) (496) Sale of property, plant and equipment to Genzyme General................................................. -- 16,500 852 Other..................................................... 70 15 (428) --------- --------- --------- Net cash provided by (used in) investing activities... (4,418) 19,296 (17,188) CASH FLOWS FROM FINANCING ACTIVITIES: Allocated proceeds from issuance of Tissue Repair Stock, net..................................................... 462 2,204 31,475 Allocated proceeds from issuance of debt, net............. -- -- 13,542 Payments of debt and capital lease obligations............ (96) (445) 3 Cash allocated from Genzyme General....................... 30,037 155 14,892 Bank overdraft............................................ 724 -- -- --------- --------- --------- Net cash provided by financing activities............. 31,127 1,914 59,912 Increase (decrease) in cash and cash equivalents............ 1,641 (13,388) 5,208 Cash and cash equivalents at beginning of period............ 7,732 21,120 15,912 --------- --------- --------- Cash and cash equivalents at end of period.................. $ 9,373 $ 7,732 $ 21,120 ========= ========= ========= Supplemental cash flow information: Cash paid during the year for interest.................... $ 1,594 $ 2,265 $ 1,127 Supplemental disclosures of non-cash transactions: Transfer of plant and equipment--Note E. Conversion of 5% convertible subordinated note--Note H.
The accompanying notes are an integral part of these combined financial statements. GTR-15 GENZYME TISSUE REPAIR A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS Genzyme Tissue Repair is our operating division that develops and markets biological products for orthopedic injuries, such as cartilage damage, and severe burns. BASIS OF PRESENTATION The combined financial statements of Genzyme Tissue Repair for each period include the balance sheets, results of operations and cash flows of the businesses we allocate to Genzyme Tissue Repair. We also allocate a portion of our corporate operations to Genzyme Tissue Repair using methods described in our allocation policy below. These combined financial statements are prepared using amounts included in our consolidated financial statements included in this annual report. We have reclassified certain 1998 and 1997 data to conform with the 1999 presentation. We prepare the financial statements of Genzyme Tissue Repair in accordance with generally accepted accounting principles. We present financial information and accounting policies specific to Genzyme Tissue Repair in the accompanying combined financial statements. We present financial information and accounting policies relevant to the corporation and its operating divisions taken as a whole in our consolidated financial statements. You should read the consolidated financial statements in conjunction with the financial statements of Genzyme Tissue Repair. Note A., "Summary of Significant Accounting Policies," to our consolidated financial statements contains our accounting policies. We incorporate that information into this note by reference. TRACKING STOCK Genzyme Tissue Repair Division Common Stock, which we refer to as "Tissue Repair Stock," is a series of our common stock that is designed to reflect the value and track the performance of Genzyme Tissue Repair. The chief mechanisms intended to cause Tissue Repair Stock to "track" the financial performance of Genzyme Tissue Repair are provisions in our charter governing dividends and distributions. Under these provisions, our charter: - factors the assets and liabilities and income or losses attributable to Genzyme Tissue Repair into the determination of the amount available to pay dividends on Tissue Repair Stock; and - requires us to exchange, redeem or distribute a dividend to the holders of Tissue Repair Stock if all or substantially all of the assets allocated to Genzyme Tissue Repair are sold to a third party (a dividend or redemption payment must equal in value the net after-tax proceeds from the sale; an exchange must be for Genzyme General Stock at a 10% premium to the exchanged stock's average market price following the announcement of the sale). To determine earnings per share, we allocate Genzyme's earnings to each series of our common stock based on the earnings attributable to that series of stock. The earnings attributable to Tissue Repair Stock, is defined in our charter as the net income or loss of Genzyme Tissue Repair determined in accordance with generally accepted accounting principles and as adjusted for tax benefits allocated to or from Genzyme Tissue Repair in accordance with our management and accounting policies. Our charter also requires that all income and expenses of Genzyme be allocated among the divisions in a reasonable and consistent manner. However, subject to its fiduciary duties, our board of directors can, at its discretion, GTR-16 GENZYME TISSUE REPAIR A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) change the methods of allocating earnings to each series of common stock. We intend to allocate earnings using our current methods for the foreseeable future. Because the earnings allocated to Tissue Repair Stock are based on the income or losses attributable to Genzyme Tissue Repair, we include financial statements and management's discussion and analysis of Genzyme Tissue Repair to aid investors in evaluating its performance. While Tissue Repair Stock is designed to reflect Genzyme Tissue Repair's performance, it is common stock of Genzyme Corporation and not Genzyme Tissue Repair; Genzyme Tissue Repair is a division, not a company or legal entity, and therefore does not and cannot issue stock. Consequently, holders of Tissue Repair Stock have no specific rights to assets allocated to Genzyme Tissue Repair. Genzyme Corporation continues to hold title to all of the assets allocated to Genzyme Tissue Repair and is responsible for all of its liabilities, regardless of what we deem for financial statement presentation purposes as allocated to any division. Holders of Tissue Repair 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 Tissue Repair Stock and other tracking stockholders would only have the rights of common stockholders in the combined assets of Genzyme. ALLOCATION POLICY Our charter sets forth what operations and assets are initially allocated to Genzyme Tissue Repair and states that going forward the division will also include all business, products or programs, developed by or acquired for the division, as determined by our board of directors. We then manage and account for transactions between Genzyme Tissue Repair and our other divisions and with third parties, and any resulting re-allocations of assets and liabilities, by applying consistently across divisions a detailed set of policies established by our board of directors. We publicly disclose our divisional management and accounting policies, which appear in Exhibit 99.1 to this Annual Report on Form 10-K. Our charter requires that all assets and liabilities of Genzyme be allocated among the divisions. Our board of directors, however, retains considerable discretion in determining the types, magnitudes and extent of allocations to each series of common stock without shareholder approval. Our allocations to our divisions are based on one of the following methodologies: - Specific identification--assets that are dedicated to the production of goods of a division or which solely benefit a division are allocated to that division. Liabilities incurred as a result of the performance of services for the benefit of a division or in connection with the expenses incurred which directly benefit a division are allocated to the division. Such specifically identified assets and liabilities include cash, investments, accounts receivable, inventories, property and equipment, intangible assets, accounts payable, accrued expenses and deferred revenue. Revenues from the licensing of a division's products or services to third parties and the related costs are allocated to a division; - Actual usage--expenses are charged to the division for whose benefit such expenses are incurred. Research and development, sales and marketing and direct general and administrative services are GTR-17 GENZYME TISSUE REPAIR A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) charged to the divisions for which the service is performed on a cost basis. Such charges are generally based on direct labor hours; - Proportionate usage--costs incurred which benefit more than one division are allocated based on management's estimate of the proportionate benefit each division receives. Such costs include facilities, legal, finance, human resources, executive and investor relations; or - Board directed--programs and products, both internally developed and acquired, are allocated to divisions by the board of directors. The board of directors also allocates long-term debt and strategic investments. Note B., "Policies Governing the Relationship Between Genzyme's Operating Divisions," further describes our policies concerning interdivisional transactions and income tax allocations. We believe that the divisional allocations are reasonable and have been consistently applied. However, the division's results of operations may not be indicative of what would have been realized if the division was a stand-alone entity. TRANSLATION OF FOREIGN CURRENCIES We translate the financial statements of foreign subsidiaries allocated to Genzyme Tissue Repair from local currency into U.S. dollars and include translation adjustments for these subsidiaries in division equity. Genzyme Tissue Repair records gains and losses in foreign currency transactions in income. We include exchange gains and losses on intercompany balances which are long-term in nature in our division equity. Our gains and losses on all other transactions are included in our results of operations. REVENUE RECOGNITION Genzyme Tissue Repair recognizes revenue from sales of Carticel-Registered Trademark- chondrocytes and Epicel-TM- skin grafts when the cartilage or skin cells, as applicable, are shipped and title has passed. Cancellation charges apply to cancelled shipments of Epicel-TM- skin grafts. NET INCOME (LOSS) PER SHARE Earnings per share is calculated for each series of Genzyme stock using the two-class method, as further described in the notes to the consolidated financial statements. We present earnings per share data only in the consolidated financial statements of Genzyme because Genzyme Corporation is the issuer of the securities. Genzyme's divisions do not and cannot issue securities because they are not companies or legal entities. NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS Because each of our operating divisions is a part of a single company, our board of directors has adopted policies to address issues that may arise among divisions and to govern the management of and the relationships between each division. With some exceptions that are mentioned specifically in this note, our board of directors may modify or rescind these policies, or adopt additional policies, in its sole GTR-18 GENZYME TISSUE REPAIR A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS (CONTINUED) discretion without stockholder approval, subject only to our board of directors' fiduciary duty to stockholders. Generally accepted accounting principles require that any change in policy be preferable (in accordance with these principles) to the previous policy. INTERDIVISION ASSET TRANSFERS Our board of directors may at any time reallocate any program, product or other asset from one division to any other division. We account for interdivision asset transfers at book value. The consideration paid for an asset transfer generally must be fair value as determined by our board of directors. The difference between the consideration paid and the book value of the assets transferred is recorded in division equity. Our board of directors determines fair value using the following methodologies: a risk-adjusted discounted cash flow model or a comparable transaction model. The risk-adjusted discounted cash flow model estimates fair value by taking the discounted value of all the cash inflows and outflows related to a program or product over a specified period of time, generally the economic life of the project, adjusted for the probabilities of certain outcomes occurring or not occurring. In performing this analysis, we consider various factors that could affect the success or failure of the program including: - the duration, cost and probability of success of each phase of development; - the current and potential size of the market and barriers to entry into the market; - the maximum number of patients likely to be treated with the product and the speed with which that maximum number will be reached; - reimbursement policies and pricing limitations; - current and potential competitors; - the net proceeds received by us upon the sale of the program or product; and - the costs of manufacturing and marketing the product or program. The comparable transaction model estimates fair value through comparison to valuations established for other transactions within the biotechnology and biosurgical areas involving similar programs and products having similar terms and structure. In identifying comparable transactions, we consider, among other factors, the following: - the similarity of market opportunity; - the comparability of the medical needs addressed; - the similarity of the regulatory, reimbursement and competitive environment; - the stage of product or program development; and - the risk profile of successfully commercializing the product or program. GTR-19 GENZYME TISSUE REPAIR A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS (CONTINUED) We customarily use the comparable transaction model to corroborate valuations derived under the risk-adjusted discounted cash flow model. When determining the fair value of a program under development using either model, our board of directors also takes into account the following criteria in the case of a program under development: - the commercial potential of the program; - the phase of clinical development of the program; - the expenses associated with realizing any income from the program and the likelihood and time of the realization; and - other matters that our board of directors and its financial advisors, if any, deem relevant. One division may compensate another division for a reallocation with cash or other consideration having a value equal to the fair market value of the reallocated assets. In the case of a reallocation of assets from Genzyme General to Genzyme Tissue Repair, our board of directors may elect instead to account for the reallocation as an increase in Genzyme Tissue Repair designated shares in accordance with the provisions of our charter. No gain or loss is recognized as a result of these transfers. Our policy regarding transfers of assets between divisions may not be changed by our board of directors without the approval of the holders of Tissue Repair Stock voting as a separate class unless the policy change does not affect Genzyme Tissue Repair. OTHER INTERDIVISION TRANSACTIONS Our divisions may engage in transactions directly with one or more other divisions or jointly with one or more other divisions and one or more third parties. These transactions may include agreements by one division to provide products and services for use by another division, license agreements and joint ventures or other collaborative arrangements involving more than one division to develop new products and services jointly and with third parties. These transactions are subject to the following conditions: - We charge research and development (including clinical and regulatory support), distribution, sales, marketing, and general and administrative services (including allocated space) performed by one division for another division to the division for which the services are performed on a cost basis. We charge direct costs to the division for which we incur them. We allocate direct labor and indirect costs in reasonable and consistent manners based on the use by a division of relevant services. Divisions performing services for other divisions do not recognize revenue for the services they perform. - We charge the manufacturing of goods and performance of services by one division exclusively for another division to the division for which it is performed on a cost basis. We include in manufacturing costs an interest charge (based on our short-term borrowing rate at the beginning of the fiscal year) on the gross fixed assets used in the manufacturing process. To perform this calculation, we determine gross fixed assets for the facility used at the beginning of each fiscal year and apply our short-term borrowing rate. We allocate direct labor and indirect costs in reasonable and consistent GTR-20 GENZYME TISSUE REPAIR A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS (CONTINUED) manners based on the benefit received by a division of related goods and services. Divisions performing services for other divisions do not recognize revenue for the services they perform. - Other than transactions involving research and development, manufacturing, distribution, sales, marketing, general and administrative services, which are addressed above, all interdivisional transactions are performed on terms and conditions obtainable in arm's length transactions with third parties. Divisions performing services for other divisions do not recognize revenue for the services they perform. - Our board of directors must approve interdivisional transactions that are performed on terms and conditions other than as described above and are material to one or more of the participating divisions. In giving its approval, our board of directors must determine that the transaction is fair and reasonable to each participating division and to holders of the common stock representing each participating division. - Divisions may make loans to other divisions. Any loan of $1 million or less matures within 18 months and accrues interest at the best borrowing rate available to the corporation for a loan of like type and duration. Our board of directors must approve any loan in excess of $1 million. In giving its approval, our board of directors must determine that the material terms of the loan, including the interest rate and maturity date, are fair and reasonable to each participating division and to holders of the common stock representing each such division. - All material interdivisional transactions are set forth in a written agreement that is signed by an authorized member of the management team of each division involved in the transaction. TAX ALLOCATIONS We file a consolidated tax return and allocate income taxes to Genzyme Tissue Repair based upon the financial statement income, taxable income, credits and other amounts properly allocable to each division under generally accepted accounting principles as if it were a separate taxpayer. We assess the realizability of our deferred tax assets at the division level. As a result, our consolidated tax provision may not equal the sum of the divisions' tax provision. As of the end of any fiscal quarter, however, if Genzyme Tissue Repair 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 the other divisions in proportion to their taxable income without any compensating payment or allocation. ACCESS TO TECHNOLOGY AND KNOW-HOW Genzyme Tissue Repair has unrestricted access to all technology and know-how owned or controlled by Genzyme Corporation that may be useful in its business, subject to any obligations or limitations that apply to the corporation generally. NOTE C. ACCOUNTS RECEIVABLE Genzyme Tissue Repair performs credit evaluations of its customers on an ongoing basis and generally does not require collateral. Genzyme Tissue Repair states accounts receivable at fair value after GTR-21 GENZYME TISSUE REPAIR A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE C. ACCOUNTS RECEIVABLE (CONTINUED) reflecting an allowance for doubtful accounts. This allowance was $1.0 million at December 31, 1999 and 1998. NOTE D. INVENTORIES
DECEMBER 31, ------------------- 1999 1998 ------ ------ (AMOUNTS IN THOUSANDS) Raw materials............................................ $ 428 $ 264 Work-in-process.......................................... 1,938 2,381 Finished products........................................ 28 -- ------ ------ Total inventory.................................... $2,394 $2,645 ====== ======
NOTE E. PLANT AND EQUIPMENT
DECEMBER 31, ----------------------- 1999 1998 ------- ------- (AMOUNTS IN THOUSANDS) Plant and equipment.................................... $ 4,675 $ 3,845 Leasehold improvements................................. 2,597 2,577 Furniture and fixtures................................. 191 146 ------- ------- 7,463 6,568 Less accumulated depreciation.......................... (4,918) (3,732) ------- ------- Plant and equipment, net............................... $ 2,545 $ 2,836 ======= =======
Genzyme Tissue Repair's depreciation and amortization expense was $1.2 million in 1999, $1.6 million in 1998, and $2.3 million in 1997. In June 1998, our board of directors reallocated a manufacturing facility (including land, building and equipment) from Genzyme Tissue Repair to Genzyme General in exchange for $16.5 million in cash. Genzyme Tissue Repair recorded a gain in division equity of approximately $0.7 million in connection with this reallocation. NOTE F. DIACRIN JOINT VENTURE In May 1999, we reallocated our ownership interest in Diacrin/Genzyme LLC, our joint venture with Diacrin, Inc. for the development and commercialization of NeuroCell-TM--PD for the treatment of Parkinson's disease and NeuroCell-TM--HD for the treatment of Huntington's disease, from Genzyme Tissue Repair to Genzyme General in exchange for $25.0 million in cash. For the period October 1996 through May 1999, Genzyme Tissue Repair provided a total of $19.5 million of funding to the joint venture, $5.1 million of which was provided by Genzyme General in exchange for 489,810 Genzyme Tissue Repair designated shares. Genzyme Tissue Repair realized net losses from the joint venture of $3.4 million in 1999, $7.7 million in 1998 and $6.8 million in 1997. GTR-22 GENZYME TISSUE REPAIR A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE F. DIACRIN JOINT VENTURE (CONTINUED) If Diacrin/Genzyme LLC does not initiate a Phase III clinical trial of NeuroCell-TM--PD by June 30, 2000, Genzyme Tissue Repair is required to pay Genzyme General $20 million plus accrued interest at 13.5% per annum. Genzyme Tissue Repair may pay Genzyme General in cash, Genzyme Tissue Repair designated shares, or a combination of both, at its option. Condensed financial information and allocation of the losses of the Diacrin/Genzyme LLC are summarized below:
FOR THE YEAR ENDED DECEMBER 31, ------------------------------- 1999 1998 1997 --------- -------- -------- (AMOUNTS IN THOUSANDS) Operating expenses............................ $ (10,718) $ (9,595) $ (6,809) Net loss...................................... (10,713) (9,595) (6,809)
DECEMBER 31, --------------- 1999 1998 ---- ---- (AMOUNTS IN THOUSANDS) Current assets.............................................. $443 $364 Noncurrent assets........................................... 192 220 Current liabilities......................................... 972 885 Noncurrent liabilities...................................... -- --
NOTE G. ACCRUED EXPENSES
DECEMBER 31, ------------------- 1999 1998 ------ ------ (AMOUNTS IN THOUSANDS) Compensation............................................. $1,569 $1,271 Professional fees........................................ 334 505 Royalties................................................ 97 88 Other.................................................... 1,131 627 ------ ------ Total accrued expenses............................. $3,131 $2,491 ====== ======
NOTE H. DEBT INSTRUMENTS AND OPERATING LEASES REVOLVING CREDIT FACILITY During 1999, we refinanced our revolving credit facility allocated to Genzyme Tissue Repair, which matured in October 1999. At December 31, 1999, $18.0 million of the amount outstanding under our new revolving credit facility was allocated to Genzyme Tissue Repair. On that date, the interest rate on this borrowing was approximately 6.635%. Genzyme Tissue Repair incurred interest expense of $0.2 million on amounts borrowed under this revolving credit facility. GTR-23 GENZYME TISSUE REPAIR A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE H. DEBT INSTRUMENTS AND OPERATING LEASES (CONTINUED) Genzyme Tissue Repair incurred interest expense of $0.8 million in 1999, $1.1 million in 1998 and $1.1 million in 1997 on amounts borrowed under our credit facility that matured in 1999. 5% CONVERTIBLE SUBORDINATED NOTE In February 1997, we issued a 5% convertible subordinated note in a principal amount of $13.0 million. This note was convertible into shares of Tissue Repair Stock at a discount to the market value of Tissue Repair Stock. Genzyme Tissue Repair recorded a $0.2 million charge to interest expense in 1999, $0.5 million in 1998 and $1.1 million in 1997, to reflect the accretion to fair value of the conversion feature of this note. In 1998, the holder of this note converted $0.6 million in principal amount into 223,405 shares of Tissue Repair Stock. Genzyme Tissue Repair paid $1.1 million in accrued interest in connection with these conversions. In 1999, the holder converted the remaining $12.4 million in principal amount into 7,257,573 shares of Tissue Repair Stock. Genzyme Tissue Repair paid $0.5 million in accrued interest in connection with these conversions. As of December 31, 1999, there was no principal or interest remaining on this convertible note. OPERATING LEASES Genzyme Tissue Repair leases facilities and personal property under operating leases with terms in excess of one year. Genzyme Tissue Repair's total expense under operating leases was:
1999 1998 1997 ---- ---- ---- $1.7 million $2.2 million $1.8 million
Over the next five years, Genzyme Tissue Repair will be required to repay the following amounts under operating leases:
2000 2001 2002 2003 2004 AFTER 2004 ---- ---- ---- ---- ---- ---------- $1.9 million $1.8 million $1.5 million $1.5 million $1.5 million $1.5 million
GTR-24 GENZYME TISSUE REPAIR A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE I. DIVISION EQUITY The following table contains the components of division equity for Genzyme Tissue Repair for the periods presented:
DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- (AMOUNTS IN THOUSANDS) Balance at beginning of period.............................. $(16,396) $ 20,203 $ 18,084 Division net loss........................................... (30,040) (40,386) (45,984) Allocated proceeds from issuance of Tissue Repair Stock under stock plans......................................... 397 2,109 2,438 Allocation of cash to Genzyme Tissue Repair for designated shares(1)................................................. 5,001 -- 14,892 Tissue Repair Stock issued in public offering............... -- -- 29,037 Payment from Genzyme General for research program........... 100 250 -- Payment from Genzyme General for transfer of interest in joint venture............................................. 25,000 -- -- Allocated stock compensation expense........................ -- 108 221 Allocated value of debt conversion feature.................. -- -- 1,524 Allocated value of Tissue Repair Stock issued upon conversion of convertible debt............................ 12,483 600 -- Allocated gain on transfer of facility...................... -- 711 -- Allocated equity adjustments................................ -- 9 (9) -------- -------- -------- Balance at end of period.................................... $ (3,455) $(16,396) $(20,203) ======== ======== ========
- ------------------------ (1) Genzyme Tissue Repair designated shares are shares of Tissue Repair Stock that are not issued and outstanding, but which our board of directors may issue, sell or distribute without allocating the proceeds to Genzyme Tissue Repair. As of December 31, 1999, there were 2,238,053 Genzyme Tissue Repair designated shares. STOCK COMPENSATION PLANS We apply APB Opinion 25 and related interpretations in accounting for our five stock-based compensation plans: the 1990 Equity Incentive Plan, the 1997 Equity Plan (both of which are stock option plans), the 1990 Employee Stock Purchase Plan, the 1999 Employee Stock Purchase Plan, and the 1998 Director Stock Option Plan. We do not recognize compensation expense for options granted and shares purchased under the provisions of these plans for options granted to employees with an exercise price greater than or equal to fair market value. The following table sets forth division net loss data for Genzyme Tissue Repair as if compensation expense for our stock-based compensation plans was determined in accordance with SFAS 123 based on GTR-25 GENZYME TISSUE REPAIR A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE I. DIVISION EQUITY (CONTINUED) the fair value at the grant dates of the awards, and the compensation expense related to Tissue Repair Stock awards would be allocated to Genzyme Tissue Repair in accordance with our allocation policies:
DECEMBER 31, --------------------------------------- 1999 1998 1997 --------- --------- --------- (AMOUNTS IN THOUSANDS) Division net loss: As reported......................... $ (30,040) $ (40,386) $ (45,984) Pro forma........................... $ (33,292) $ (44,481) $ (49,547)
Note L, "Stockholders' Equity," to our consolidated financial statements contains information regarding the assumptions we made in calculating pro forma compensation expense in accordance with SFAS 123. INTERDIVISIONAL FINANCING ARRANGEMENT In October 1996, our board of directors made $20.0 million of Genzyme General's cash available to Genzyme Tissue Repair in order for Genzyme Tissue Repair to fund its obligations under its joint venture with Diacrin. Under this arrangement, Genzyme Tissue Repair may draw down funds as needed each quarter in exchange for Genzyme Tissue Repair designated shares based on the fair market value of Tissue Repair Stock (as defined in our charter) at the time of the draw. Genzyme Tissue Repair made a $7.0 million draw under this line in 1997. In May 1998, our board of directors increased the amount committed under this arrangement from $13.0 million to $50.0 million. Genzyme Tissue Repair made a $5.0 million draw in February 1999. In May 1999, the amount available under this arrangement was reduced to $25.0 million in connection with the reallocation of our ownership interest in Diacrin/Genzyme LLC from Genzyme Tissue Repair to Genzyme General. NOTE J. 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 December 31, 1999 which, if adversely decided, would have a material adverse effect on Genzyme Tissue Repair's results of operations, financial condition, or liquidity. GTR-26 GENZYME TISSUE REPAIR A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE K. INCOME TAXES Genzyme Tissue Repair's provisions for income taxes were at rates other than the U.S. federal statutory tax rate for the following reasons:
1999 1998 1997 ------- ------- ------- Tax at U.S. statutory rate...................... (35.0)% (35.0)% (35.0)% State taxes, net................................ (1.3) (2.8) (3.0) Benefit of tax credits.......................... (0.1) (3.4) (1.4) Other, net...................................... 0.2 0.6 1.0 Deductions subject to deferred tax valuation allowance..................................... 36.2 40.6 38.4 ----- ----- ----- Effective tax rate.............................. 0.0 % 0.0 % 0.0 % ===== ===== =====
The components of net deferred tax assets are described in the following table:
DECEMBER 31, ------------------- 1999 1998 -------- -------- (AMOUNTS IN THOUSANDS) Deferred tax assets: Net operating loss carryforwards..................... $ 66,011 $ 55,582 Tax credits.......................................... 2,360 2,331 Intangible amortization.............................. 9,651 10,586 Reserves and other................................... 5,830 5,035 -------- -------- Gross deferred tax assets................................ $ 83,852 $ 73,534 Valuation allowance...................................... (83,852) (73,534) -------- -------- Net deferred tax asset................................... $ -- $ -- ======== ========
As a result of uncertainty surrounding our ability to realize certain tax benefits that primarily relate to operating loss carryforwards, we placed valuation allowances of $83.9 million in 1999 and $73.5 million in 1998 against otherwise recognizable deferred tax assets. As Genzyme Tissue Repair recognizes these deferred tax assets in accordance with generally accepted accounting principles, the benefits of those assets are reflected in its tax provision. However, the benefit of these deferred tax assets has previously been allocated to Genzyme General in accordance with our management and accounting policies. NOTE L. BENEFIT PLANS Note P. "Benefit Plans," to our consolidated financial statements contains information regarding our 401(k) plan. We incorporate that information into this note by reference. NOTE M. SUBSEQUENT EVENT In March 2000, we entered into an agreement to acquire Biomatrix, Inc. Upon the effectiveness of our Registration Statement on Form S-4 and completion of the merger, we will form a new operating division GTR-27 GENZYME TISSUE REPAIR A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE M. SUBSEQUENT EVENT (CONTINUED) called Genzyme Biosurgery and create a new series of common stock designed to reflect its value and track its performance. We refer to this stock as "Biosurgery Stock." In connection with the merger, and upon Genzyme shareholder approval, the assets and liabilities allocated to Genzyme Surgical Products and Genzyme Tissue Repair will be reallocated to Genzyme Biosurgery and shares of Surgical Products Stock and Tissue Repair Stock will be exchanged for Biosurgery Stock. We will account for the acquisition of Biomatrix as a purchase. Biomatrix stockholders will receive $37 in cash, one share of Biosurgery Stock, or a combination of cash and stock for each share of Biomatrix Stock they hold. The merger agreement provides that we will pay cash for up to 28.38% of the outstanding shares of Biomatrix common stock that receive merger consideration, or up to approximately $245.0 million. Holders of Surgical Products Stock will receive 0.6060 share of Biosurgery Stock in exchange for each share of Surgical Products Stock they hold and holders of Tissue Repair Stock will receive 0.3352 share of Biosurgery Stock in exchange for each share of Tissue Repair Stock they hold. GTR-28 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Genzyme Corporation: In our opinion, the accompanying combined balance sheets and the related combined statements of operations and cash flows present fairly, in all material respects, the financial position of Genzyme Tissue Repair (as described in Note A) at December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related combined financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significantly estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As more fully described in Note A to these financial statements, Genzyme Tissue Repair is a division of Genzyme Corporation; accordingly, the combined financial statements of Genzyme Tissue Repair should be read in conjunction with the audited consolidated financial statements of Genzyme Corporation and Subsidiaries. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts February 23, 2000 GTR-29 GENZYME TISSUE REPAIR A DIVISION OF GENZYME CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ------------------------- ------------------- --------------------------------- ---------- ------------- ADDITIONS --------------------------------- BALANCE AT CHARGED TO COSTS CHARGED TO BALANCE AT DESCRIPTION BEGINNING OF PERIOD AND EXPENSES OTHER ACCOUNTS DEDUCTIONS END OF PERIOD - ------------------------- ------------------- ---------------- -------------- ---------- ------------- Year ended December 31, 1999: Allowance for doubtful accounts............... $ 1,021,000 $ 184,000 $ -- $ 215,000(1) $ 990,000 Inventory reserve........ $10,652,000 $ 2,534,000 $ -- $ -- $13,186,000 Year ended December 31, 1998: Allowance for doubtful accounts............... $ 839,000 $ 257,000 $ -- $ 75,000(1) $ 1,021,000 Inventory reserve........ $ 8,347,000 $ 2,728,000 $ -- $ 423,000 $10,652,000 Year ended December 31, 1997: Allowance for doubtful accounts............... $ 408,000 $ 480,000 $ -- $ 49,000(1) $ 839,000 Inventory reserve........ $ 4,427,000 $ 3,920,000 $ -- $ -- $ 8,347,000
- ------------------------ (1) Uncollectible accounts written off, net of recoveries. GTR-30 EX-23.1 7 a2018968zex-23_1.txt EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Genzyme Corporation on Form S-8 (File Nos. 33-8881, 33-15616, 33-26329, 33-29918, 33-35067, 33-37236, 33-41933, 33-55656, 33-68188, 33-58359, 33-60437, 333-10003, 333-33249, 333-83677, 33-30007, 33-68208, 33-58351, 333-33265, 333-10005, 333-33251, 333-83669, 33-22464, 33-29440, 33-51416, 33-68186, 33-58353, 33-58355, 33-60435, 333-33291, 333-64095, 33-21241, 333-42371, 333-64103, 333-81275, 333-87967, 333-81277, 333-83673 and 333-83681) and on Form S-3 (file Nos. 33-61853, 333-59513, 333-68629, 33-64901, 333-31548, 333-82395, 333-34913, 333-26351, 333-87449 and 333-82395) of our report, dated February 23, 2000, except for the information in Note A as to which the date is October 11, 2000, on our audits of the consolidated financial statements and financial statement schedule of Genzyme Corporation, and our reports dated February 23, 2000 on our audits of the combined financial statements and financial statement schedule of Genzyme General Division, the combined financial statements and financial statement schedule of Genzyme Tissue Repair Division, the combined financial statements and financial statement schedule of Genzyme Surgical Products Division and the combined financial statements of Genzyme Molecular Oncology Division as of December 31, 1999 and 1998, and for each of the three years in the period ended December 31, 1999, which reports are included in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts October 12, 2000 EX-27 8 a2018968zex-27.txt EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF GENZYME CORPORATION AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 130,156 522,834 186,094 19,291 117,269 730,187 573,864 190,683 1,787,282 137,938 0 0 0 1,409 1,354,983 1,787,282 762,930 772,288 182,337 231,781 385,461 15,347 21,771 117,928 46,947 70,981 0 0 0 70,981 1.80 1.71 Genzyme reports earnings per share for each of its four series of common stock. The earnings per share information presented on this schedule represents earnings per share data for net income allocated to Genzyme General Stock. For the period presented, net income allocated to Genzyme General Stock was $149,360. For the period presented, net loss allocated to Molecular Oncology Stock was $(28,832), or $(2.25) per basic and diluted share of Molecular Oncology Stock, net loss attributable to Surgical Products Stock was $(20,514), or $(1.38) per basic and diluted share of Surgical Products Stock, and net loss allocated to Tissue Repair Stock was $(30,040), or $(1.26) per basic and diluted share of Tissue Repair Stock. We created Genzyme Surgical Products on June 28, 1999. Prior to this date, the operations of Genzyme Surgical Products were included in the operations allocated to Genzyme General and, therefore, in the net income allocated to Genzyme General Stock. Net loss per share of Surgical Products Stock for 1999 is calculated using the net loss allocated to Genzyme Surgical Products for the period June 28, 1999 through December 31, 1999 and the weighted average shares outstanding during the same period.
-----END PRIVACY-ENHANCED MESSAGE-----