-----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, WPtcqQBbqA6zqsHDc7kd4CFFVzOsVVqXq52OvVgtC71RHMDKxJfA4SMMmvOjg2LF 7lUe0C+B6oMyx6mMqy3VYQ== 0000912057-01-528295.txt : 20010815 0000912057-01-528295.hdr.sgml : 20010815 ACCESSION NUMBER: 0000912057-01-528295 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENZYME CORP CENTRAL INDEX KEY: 0000732485 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 061047163 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-14680 FILM NUMBER: 1708155 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-Q 1 a2056102z10-q.txt FORM 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NUMBER 0-14680 ------------------------ GENZYME CORPORATION (Exact name of registrant as specified in its charter) MASSACHUSETTS 06-1047163 (State or other jurisdiction (IRS Employer Identification No.) of incorporation or organization) ONE KENDALL SQUARE, CAMBRIDGE, 02139 MASSACHUSETTS (zip code) (Address of principal executive offices)
(617) 252-7500 (Registrant's telephone number, including area code) ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / The number of shares outstanding of each of the issuer's series of common stock as of July 31, 2001: Genzyme General Division Common Stock....................... 207,640,118 Genzyme Biosurgery Division Common Stock.................... 39,366,313 Genzyme Molecular Oncology Division Common Stock............ 16,674,396
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE REGARDING FORWARD-LOOKING STATEMENTS This report on Form 10-Q contains forward-looking statements, including statements regarding our: - planned divestiture of the Snowden-Pencer-Registered Trademark- product lines and sale of our manufacturing facilities in Quebec, Canada and the expected timing of these transactions; - planned acquisition of Novazyme Pharmaceuticals, Inc. and the expected timing of the transaction; - planned redemption of our $21.2 million 5% convertible debentures; - planned acquisition of the Class B limited partnership interests of Genzyme Development Partners, L.P.; - expected future revenues, operations and expenditures; - product development and commercialization plans and expected timetables; and - projected cash needs. These statements 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 report on Form 10-Q. 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 submissions to and decisions made by the Food and Drug Administration, commonly referred to as the FDA, and other regulatory agencies; - the impact of the May 2001 expiration of the orphan drug status of Cerezyme-Registered Trademark- and Ceredase-Registered Trademark- enzymes on our revenues from these products; - the FDA's response to the additional data and clarification we submitted in connection with our Biologics License Application submission for Fabrazyme-TM- enzyme; - our ability to expand manufacturing capacity for sevelamer hydrochloride for Renagel-Registered Trademark- capsules and tablets; - our ability to optimize dosing and improve patient compliance with Renagel-Registered Trademark- capsules and tablets; - our ability to successfully increase market penetration for Synvisc-Registered Trademark- viscosupplementation product as a treatment for osteoarthritis of the knee and to expand its use in other joints; - the accuracy of our estimates of the size and characteristics of the markets to be addressed by our products and services, including growth projections; - market acceptance of our products and services; - our ability to obtain reimbursement for our products and services from third-party payors, and the extent of such coverage; - our ability to establish and maintain strategic license, collaboration and distribution arrangements; - the continued funding of our joint ventures; - our ability to successfully negotiate purchase and sale agreements for our Snowden-Pencer-Registered Trademark- product lines and manufacturing facility in Quebec, Canada; - the accuracy of our information regarding the products and resources of our competitors and potential competitors; - the operational integration and other risks associated with acquisitions; - the satisfaction of conditions to closing the proposed acquisition of Novazyme and the timing thereof; and - the conditions in the financial markets relevant to the proposed acquisition of Novazyme. For a further description of these risks and other uncertainties, we encourage you to carefully read Exhibit 99.2, "Factors Affecting Future Operating Results," to our Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 2000 (our "2000 Form 10-K"). NOTE REGARDING REFERENCES TO GENZYME DIVISIONS AND SERIES OF STOCK Throughout this Form 10-Q, the words "we," "us," "our" and "Genzyme" refer to Genzyme Corporation and all of its operating divisions taken as a whole, and "our board of directors" refers to the board of directors of Genzyme Corporation. In addition, we refer to our three operating divisions as follows: - Genzyme General Division = "Genzyme General;" - Genzyme Biosurgery Division = "Genzyme Biosurgery;" and - Genzyme Molecular Oncology Division = "Genzyme Molecular Oncology." We currently have three designated series of common stock. Each of these series is intended to reflect the value and track the performance of one of our divisions. We refer to each series of common stock as follows: - Genzyme General Division Common Stock = "Genzyme General Stock;" - Genzyme Biosurgery Division Common Stock = "Biosurgery Stock;" and - Genzyme Molecular Oncology Division Common Stock = "Molecular Oncology Stock." Holders of Genzyme General Stock, Biosurgery Stock and Molecular Oncology Stock are stockholders of Genzyme Corporation and are subject to all of the risks and uncertainties of Genzyme Corporation described in Exhibit 99.2 to our 2000 Form 10-K. NOTE REGARDING INCORPORATION BY REFERENCE The Securities and Exchange Commission allows us to disclose important information to you by referring you to other documents we have filed with the SEC. The information that we refer you to is "incorporated by reference" into this Form 10-Q. Please read that information. NOTE REGARDING TRADEMARKS GENZYME-Registered Trademark-, CEREZYME-Registered Trademark-, CEREDASE-Registered Trademark-, THYROGEN-Registered Trademark-, CARTICEL-Registered Trademark-, EPICEL-Registered Trademark- and SNOWDEN-PENCER-Registered Trademark- are registered trademarks of Genzyme. SAGE-TM-, SEPRA-TM-, SEPRAFILM-TM-, SEPRAMESH-TM-, SEPRAGEL-TM- and FABRAZYME-TM- are trademarks of Genzyme. GENZYME-Registered Trademark- is a registered service mark of Genzyme. RENAGEL-Registered Trademark- is a registered trademark of GelTex Pharmaceuticals, Inc. SYNVISC-Registered Trademark-, HYLAFORM-Registered Trademark- and HYLAGEL-Registered Trademark- are registered trademarks of Genzyme Biosurgery Corporation. FOCALSEAL-Registered Trademark- is a registered trademark of Focal, Inc. NEUROCELL-TM- is a trademark of Diacrin/Genzyme LLC. ALDURAZYME-TM- is a trademark of BioMarin/Genzyme LLC. WELCHOL-TM- is a trademark of Sankyo Pharma Inc. GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, JUNE 30, 2001 TABLE OF CONTENTS
PAGE NO. -------- PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements GENZYME CORPORATION AND SUBSIDIARIES Unaudited, Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2001 and 2000.......................... 1 Consolidated Balance Sheets as of June 30, 2001 (unaudited) and December 31, 2000................................................ 3 Unaudited, Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2001 and 2000.............................. 4 Notes to Unaudited, Consolidated Financial Statements............. 5 GENZYME GENERAL Unaudited, Combined Statements of Operations for the Three and Six Months Ended June 30, 2001 and 2000.............................. 22 Combined Balance Sheets as of June 30, 2001 (unaudited) and December 31, 2000................................................ 23 Unaudited, Combined Statements of Cash Flows for the Six Months Ended June 30, 2001 and 2000..................................... 24 Notes to Unaudited, Combined Financial Statements................. 25 GENZYME BIOSURGERY Unaudited, Combined Statements of Operations for the Three and Six Months Ended June 30, 2001 and 2000.............................. 34 Combined Balance Sheets as of June 30, 2001 (unaudited) and December 31, 2000................................................ 35 Unaudited, Combined Statements of Cash Flows for the Six Months Ended June 30, 2001 and 2000..................................... 36 Notes to Unaudited, Combined Financial Statements................. 37 GENZYME MOLECULAR ONCOLOGY Unaudited, Combined Statements of Operations for the Three and Six Months Ended June 30, 2001 and 2000.............................. 42 Combined Balance Sheets as of June 30, 2001 (unaudited) and December 31, 2000................................................ 43 Unaudited, Combined Statements of Cash Flows for the Six Months Ended June 30, 2001 and 2000..................................... 44 Notes to Unaudited, Combined Financial Statements................. 45 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 46 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk........................................................ 92 PART II. OTHER INFORMATION ITEM 2. Changes in Securities and Use of Proceeds................... 93 ITEM 4. Submission of Matters to a Vote of Security Holders......... 94 ITEM 6. Exhibits and Reports on Form 8-K............................ 96 Signatures............................................................ 98
PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED, AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- ------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Revenues: Net product sales......................................... $273,473 $201,439 $524,303 $385,860 Net service sales......................................... 24,235 21,347 47,995 42,313 Revenues from research and development contracts: Related parties......................................... 1,313 157 1,632 303 Other................................................... 1,620 970 4,972 3,567 -------- -------- -------- -------- Total revenues........................................ 300,641 223,913 578,902 432,043 -------- -------- -------- -------- Operating costs and expenses: Cost of products sold..................................... 79,600 53,643 156,132 101,902 Cost of services sold..................................... 13,428 11,967 26,849 23,818 Selling, general and administrative....................... 103,666 67,428 194,780 128,979 Research and development (including research and development related to contracts)....................... 62,414 28,577 119,524 84,276 Amortization of intangibles............................... 30,174 5,684 59,165 11,782 Purchase of in-process research and development........... 8,768 -- 8,768 -- -------- -------- -------- -------- Total operating costs and expenses.................... 298,050 167,299 565,218 350,757 -------- -------- -------- -------- Operating income............................................ 2,591 56,614 13,684 81,286 -------- -------- -------- -------- Other income (expenses): Equity in net loss of unconsolidated affiliates........... (11,796) (11,313) (20,811) (19,446) Gain on affiliate sale of stock........................... -- -- -- 20,270 Gain (loss) on sale of investments in equity securities... (1,532) 14,165 (1,532) 14,165 Minority interest in net loss of subsidiary............... 725 1,352 1,999 2,208 Other..................................................... (133) 5,193 (3,843) 5,195 Investment income......................................... 12,493 10,631 22,641 20,575 Interest expense.......................................... (10,766) (3,836) (22,136) (7,775) -------- -------- -------- -------- Total other income (expenses)......................... (11,009) 16,192 (23,682) 35,192 -------- -------- -------- -------- Income (loss) before income taxes........................... (8,418) 72,806 (9,998) 116,478 Benefit from (provision for) income taxes................... 2,064 (23,314) 2,734 (35,168) -------- -------- -------- -------- Net income (loss) before cumulative effect of change in accounting principle...................................... (6,354) 49,492 (7,264) 81,310 Cumulative effect of change in accounting principle, net of tax....................................................... -- -- 4,167 -- -------- -------- -------- -------- Net income (loss)........................................... $ (6,354) $ 49,492 $ (3,097) $ 81,310 ======== ======== ======== ======== Comprehensive income (loss), net of tax: Net income (loss)......................................... $ (6,354) $ 49,492 $ (3,097) $ 81,310 -------- -------- -------- -------- Other comprehensive income (loss), net of tax: Foreign currency translation adjustments................ (3,723) (132) (17,844) (10,355) -------- -------- -------- -------- Unrealized gain (loss) on interest rate swap contract, net of tax............................................ 52 -- (455) -- -------- -------- -------- -------- Unrealized gains (losses) on securities: Unrealized gains (losses) arising during the period... 21,654 (47,925) (987) 4,374 Reclassification adjustment for (gains) losses included in net income.............................. 973 (5,501) 973 (5,501) -------- -------- -------- -------- Unrealized gains (losses) on securities, net.......... 22,627 (53,426) (14) (1,127) -------- -------- -------- -------- Other comprehensive income (loss)......................... 18,956 (53,558) (18,313) (11,482) -------- -------- -------- -------- Comprehensive income (loss)................................. $ 12,602 $ (4,066) $(21,410) $ 69,828 ======== ======== ======== ========
The accompanying notes are an integral part of these unaudited, consolidated financial statements. 1 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED) (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- ------------------- 2001 2000 2001 2000 -------- -------- -------- -------- NET INCOME (LOSS) PER SHARE: ALLOCATED TO GENZYME GENERAL STOCK: Net income before cumulative effect of change in accounting principle.................................... $ 21,718 $ 63,990 $ 46,863 $109,299 Cumulative effect of change in accounting principle, net of tax.................................................. -- -- 4,167 -- -------- -------- -------- -------- Genzyme General net income................................ 21,718 63,990 51,030 109,299 Tax benefit allocated from Genzyme Biosurgery........... 9,627 4,604 17,743 9,836 Tax benefit allocated from Genzyme Molecular Oncology... 3,854 2,441 6,680 3,537 -------- -------- -------- -------- Net income allocated to Genzyme General Stock......... $ 35,199 $ 71,035 $ 75,453 $122,672 ======== ======== ======== ======== Net income per share of Genzyme General Stock: Basic: Net income per share before cumulative effect of change in accounting principle...................... $ 0.18 $ 0.42 $ 0.37 $ 0.72 Per share cumulative effect of change in accounting principle, net of tax............................... -- -- 0.02 -- -------- -------- -------- -------- Net income per share allocated to Genzyme General Stock............................................... $ 0.18 $ 0.42 $ 0.39 $ 0.72 ======== ======== ======== ======== Diluted: Net income per share before cumulative effect of change in accounting principle...................... $ 0.17 $ 0.39 $ 0.35 $ 0.67 Per share cumulative effect of change in accounting principle, net of tax............................... -- -- 0.02 -- -------- -------- -------- -------- Net income per share allocated to Genzyme General Stock............................................... $ 0.17 $ 0.39 $ 0.37 $ 0.67 ======== ======== ======== ======== Weighted average shares outstanding: Basic................................................. 196,423 169,897 194,086 169,450 ======== ======== ======== ======== Diluted............................................... 205,685 190,088 203,290 189,770 ======== ======== ======== ======== ALLOCATED TO BIOSURGERY STOCK: Net loss................................................ $(37,608) $(72,935) Allocated tax benefit................................... 4,386 8,990 -------- -------- Net loss allocated to Biosurgery Stock.................. $(33,222) $(63,945) ======== ======== Net loss per share of Biosurgery Stock--basic and diluted............................................... $ (0.91) $ (1.75) ======== ======== Weighted average shares outstanding..................... 36,659 36,531 ======== ======== ALLOCATED TO MOLECULAR ONCOLOGY STOCK: Net loss................................................ $ (8,331) $ (7,363) $(14,605) $(12,420) ======== ======== ======== ======== Net loss per share of Molecular Oncology Stock--basic and diluted........................................... $ (0.52) $ (0.54) $ (0.91) $ (0.92) ======== ======== ======== ======== Weighted average shares outstanding..................... 16,088 13,626 15,998 13,561 ======== ======== ======== ======== ALLOCATED TO SURGICAL PRODUCTS STOCK: Net loss................................................ $(10,367) $(20,410) ======== ======== Net loss per share of Surgical Products Stock--basic and diluted............................................... $ (0.70) $ (1.37) ======== ======== Weighted average shares outstanding..................... 14,905 14,880 ======== ======== ALLOCATED TO TISSUE REPAIR STOCK: Net loss................................................ $ (4,031) $ (9,002) ======== ======== Net loss per share of Tissue Repair Stock--basic and diluted............................................... $ (0.14) $ (0.31) ======== ======== Weighted average shares outstanding..................... 28,666 28,598 ======== ========
The accompanying notes are an integral part of these unaudited, consolidated financial statements. 2 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS)
JUNE 30, DECEMBER 31, 2001 2000 ----------- ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 439,304 $ 236,213 Short-term investments.................................... 98,834 104,586 Accounts receivable, net.................................. 238,204 205,094 Inventories............................................... 166,146 170,341 Prepaid expenses and other current assets................. 44,627 37,681 Deferred tax assets--current.............................. 47,021 46,836 ---------- ---------- Total current assets.................................. 1,034,136 800,751 Property, plant and equipment, net.......................... 553,358 504,412 Long-term investments....................................... 456,036 298,841 Notes receivable--related party............................. 10,327 10,350 Intangibles, net............................................ 1,573,563 1,539,782 Investments in equity securities............................ 116,599 121,251 Other noncurrent assets..................................... 52,817 42,713 ---------- ---------- Total assets.......................................... $3,796,836 $3,318,100 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 33,543 $ 26,165 Accrued expenses.......................................... 139,375 139,683 Income taxes payable...................................... 51,687 46,745 Deferred revenue.......................................... 3,044 8,609 Current portion of long-term debt and capital lease obligations............................................. 20,435 19,897 ---------- ---------- Total current liabilities............................. 248,084 241,099 Long-term debt and capital lease obligations................ 230,674 381,560 Convertible notes and debentures............................ 609,210 283,680 Deferred tax liabilities.................................... 225,144 230,384 Other noncurrent liabilities................................ 7,672 6,236 ---------- ---------- Total liabilities..................................... 1,320,784 1,142,959 ---------- ---------- Stockholders' equity: Genzyme General Stock, $0.01 par value.................... 2,074 956 Biosurgery Stock, $0.01 par value......................... 394 364 Molecular Oncology Stock, $0.01 par value................. 167 159 Treasury Stock--Genzyme General-at cost................... (901) (901) Additional paid-in capital--Genzyme General Stock......... 2,006,823 1,269,284 Additional paid-in capital--Biosurgery Stock.............. 448,588 823,353 Additional paid-in capital--Molecular Oncology Stock...... 61,759 111,484 Deferred compensation..................................... (4,905) (9,943) Notes receivable from stockholders........................ (11,682) (14,760) Accumulated deficit....................................... (8,835) (5,738) Accumulated other comprehensive income (loss)............. (17,430) 883 ---------- ---------- Total stockholders' equity.............................. 2,476,052 2,175,141 ---------- ---------- Total liabilities and stockholders' equity............ $3,796,836 $3,318,100 ========== ==========
The accompanying notes are an integral part of these unaudited, consolidated financial statements. 3 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED, AMOUNTS IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, --------------------- 2001 2000 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)......................................... $ (3,097) $ 81,310 Reconciliation of net income (loss) to net cash provided by operating activities: Depreciation and amortization........................... 78,025 32,838 Non-cash compensation expense........................... 4,972 -- Charge for in-process research and development.......... 8,768 -- Provision for bad debts................................. 1,825 4,311 Note received from a collaborator....................... -- (10,000) Minority interest in net loss of subsidiary............. (1,999) (2,208) Equity in net loss of unconsolidated affiliates......... 20,811 19,446 Gain on affiliate sale of stock......................... -- (20,270) (Gain) loss on sale of investments in equity securities............................................ 1,532 (14,165) Deferred income tax expense (benefit)................... (14,811) 4,668 Other................................................... (1,167) (253) Increase (decrease) in cash from working capital changes: Accounts receivable................................... (39,734) (21,718) Inventories........................................... 11,252 (12,507) Prepaid expenses and other current assets............. 1,321 (3,764) Accounts payable, accrued expenses, income taxes payable and deferred revenue........................ (4,969) 12,274 --------- --------- Net cash provided by operating activities............. 62,729 69,962 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments.................................. (359,534) (322,868) Sales and maturities of investments....................... 210,764 330,971 Acquisitions, net of acquired cash........................ (83,420) -- Purchases of equity securities............................ (8,318) (5,000) Purchase of property, plant and equipment................. (72,067) (35,859) Investments in unconsolidated affiliates.................. (22,744) (12,856) Other..................................................... 785 (770) --------- --------- Net cash used in investing activities................. (334,534) (46,382) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock.................... 59,079 30,965 Payments of notes receivable from stockholders............ 3,204 -- Proceeds from issuance of debt............................ 562,062 -- Payments of debt and capital lease obligations............ (151,303) (5,000) Bank overdraft............................................ 2,007 -- Other..................................................... 2,403 2,054 --------- --------- Net cash provided by financing activities............. 477,452 28,019 --------- --------- Effect of exchange rate changes on cash..................... (2,556) (3,025) --------- --------- Increase in cash and cash equivalents....................... 203,091 48,574 Cash and cash equivalents at beginning of period............ 236,213 130,156 --------- --------- Cash and cash equivalents at end of period.................. $ 439,304 $ 178,730 ========= =========
The accompanying notes are an integral part of these unaudited, consolidated financial statements. 4 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION Our unaudited, consolidated financial statements for each period include the balance sheets, statements 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 prepared our unaudited, consolidated financial statements following the requirements of the SEC for interim reporting. As permitted under these rules, certain footnotes or other financial information that are normally required by generally accepted accounting principles can be condensed or omitted. We have reclassified certain 2000 data to conform to our 2001 presentation. These financial statements include all normal and recurring adjustments that we consider necessary for the fair presentation of our financial position and operating results. Since these are interim financial statements, you should also read the financial statements and notes included in our 2000 Form 10-K. Revenues, expenses, assets and liabilities can vary from quarter to quarter. Therefore, the results and trends in these interim financial statements may not be indicative of the results for future periods. 2. ACQUISITIONS CLASS A LIMITED PARTNERSHIP INTERESTS OF GENZYME DEVELOPMENT PARTNERS, L.P. In January 2001, we purchased all of the outstanding Class A limited partnership interests of Genzyme Development Partners, L.P., which we refer to as GDP, for a payment of approximately $25.7 million in cash plus royalties payable over ten years on sales of certain Sepra-TM- products. We allocated the acquired limited partnership interests of GDP to Genzyme Biosurgery. As a result of the acquisition, significant control over the activities of GDP passed to us. The acquisition was accounted for as a purchase, and the purchase price was allocated to the fair value of the intangible assets acquired as follows (amounts in thousands): Patents (to be amortized over 8 years)...................... $ 5,909 Trademarks (to be amortized over 10 years).................. 2,755 Technology (to be amortized over 10 years).................. 8,827 Goodwill (to be amortized over 10 years).................... 8,234 ------- Total................................................... $25,725 =======
Accordingly, the results of operations of GDP are included in our consolidated financial statements and the combined financial statements of Genzyme Biosurgery from the date of acquisition. WYNTEK DIAGNOSTICS, INC. In June 2001, we acquired all of the outstanding capital stock of privately-held Wyntek Diagnostics, Inc., for $65.0 million in cash. Wyntek is a provider of high quality point of care rapid diagnostic tests for pregnancy and infectious diseases. We allocated the acquisition to Genzyme General and accounted for the acquisition as a purchase. Accordingly, the results of operations of Wyntek are included in our consolidated financial statements and the combined financial statements of Genzyme General from the date of acquisition. 5 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. ACQUISITIONS (CONTINUED) The purchase price and the allocation of the purchase price to the fair value of the acquired tangible and intangible assets and liabilities is as follows (amounts in thousands): Cash paid................................................... $65,000 Acquisition costs........................................... 234 ------- Total purchase price.................................... $65,234 ======= Cash and cash equivalents................................... $ 4,974 Current assets.............................................. 4,966 Property, plant and equipment............................... 1,843 Deferred tax assets......................................... 2,312 Intangible assets (to be amortized over 5 to 10 years)...... 39,444 In-process research and development......................... 8,768 Goodwill (to be amortized over 10 years).................... 19,908 Deferred tax liability...................................... (14,197) Assumed liabilities......................................... (2,784) ------- Allocated purchase price................................ $65,234 =======
In connection with the acquisition of Wyntek, we allocated approximately $8.8 million of the purchase price to in-process research and development or IPR&D. Our management assumes responsibility for determining the IPR&D valuation and expects the final valuation will be completed upon closing the transaction. The fair value assigned to purchased IPR&D was estimated by discounting, to present value, the cash flows expected to result from the project once it has reached technological feasibility. A discount rate consistent with the risks of the project was used to estimate the present value of cash flows. In estimating future cash flows, management considered other tangible and intangible assets required for successful exploitation of the technology resulting from the purchased IPR&D project and adjusted future cash flows for a charge reflecting the contribution to value of these assets. The value assigned to purchased IPR&D was the amount attributable to the efforts of Wyntek up to the time of acquisition. This amount was estimated through application of the "stage of completion" calculation by multiplying total estimated revenue for IPR&D by the percentage of completion of the purchased research and development project at the time of acquisition. The nature of the efforts to develop the purchased IPR&D into commercially viable products, principally relates to the completion and/or acceleration of existing development programs, including the mandatory completion of several phases of clinical trials and the costs necessary to manage the projects and trials. Assuming the approval of the product by the FDA, costs related to the wide scale manufacturing, distribution, and marketing of the product are included in the projection. The resulting net cash flows from such project are based on our management's estimates of revenues, cost of sales, research and development expenses, sales and marketing expenses, general and administrative expenses, and the anticipated income tax effect. The discounting of net cash flows back to their present value is based on the weighted average cost of capital, or WACC. The WACC calculation produces the average required rate of return of an investment in an operating enterprise, based on various required rates of return from investments in various areas of that enterprise. The discount rate utilized in discounting the net cash flows from 6 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. ACQUISITIONS (CONTINUED) purchased IPR&D was 25%. This discount rate is higher than our WACC due to the inherent uncertainties surrounding the successful development of the purchased IPR&D. The forecast data employed in the analyses was based upon product level forecast information we obtained from numerous internal and external resources. These resources included external market research and internal experts. Our senior management reviewed and challenged the forecast data and related assumptions and utilized the information in analyzing IPR&D. The forecast data and assumptions are inherently uncertain and unpredictable. However, based upon the information available at this time, our management believes the forecast data and assumptions to be reasonable. These assumptions may be incomplete or inaccurate, and no assurance can be given that unanticipated events and circumstances will not occur. Accordingly, actual results may vary from the forecasted results. Any such variance may result in a material adverse effect on our financial condition and results of operations. In the allocation of purchase price to the IPR&D, the concept of alternative future use was specifically considered for the program under development. The acquired IPR&D consists of Wyntek's work to complete the program. There are no alternative uses for the in-process program in the event that the program fails in clinical trials or is otherwise not feasible. The development effort for the acquired IPR&D does not possess an alternative future use for us as defined by generally accepted accounting principles. Consequently, in accordance with generally accepted accounting principles, the amount allocated to IPR&D was charged as an expense in our financial statements for the three and six months ended June 30, 2001. We are amortizing the remaining acquired intangible assets arising from the acquisition on a straight-line basis over their estimated lives, which range from 5 years to 10 years. Below is a brief description of the IPR&D program associated with Wyntek's cardiovascular disease diagnostic product, including an estimation of when management believes we may realize revenues from the sale of this product. Wyntek is currently developing a cardiovascular product to rapidly measure the quantitative levels of cardiac marker proteins. These are the leading markers for the diagnosis of acute myocardial infarction. The product consists of a mobile, stand-alone, quantitative diagnostic device and a reaction strip that detects disease specific marker proteins. The device will be used to read reaction strips at the patient's bedside or in an emergency room setting. Wyntek expects to complete the regulatory review process and file its application for marketing approval in early 2002 and begin selling the product during the second half of 2002. Studies to date have demonstrated the viability of this product but there can be no assurance that the regulatory authorities will approve this product. A discount rate of 25% was used in valuing the projected cash flows. FOCAL, INC. In January 2001, Focal, Inc., a public company and developer of synthetic biopolymers used in surgery, exercised its option to require us to purchase $5.0 million in Focal common stock at a price of $2.06 per share. After that purchase we held approximately 22% of the outstanding shares of Focal common stock and began accounting for our investment under the equity method of accounting. We allocated this investment to Genzyme Biosurgery. On June 30, 2001, we acquired the remaining 78% of the outstanding shares in an exchange of shares of Biosurgery Stock for shares of Focal common stock. Focal shareholders received 0.1545 of a share of Biosurgery Stock for each share of Focal common 7 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. ACQUISITIONS (CONTINUED) stock they held. We issued approximately 2.1 million shares of Biosurgery Stock as merger consideration. We allocated the acquired assets and liabilities to Genzyme Biosurgery and accounted for the acquisition as a purchase. The purchase price and the allocation of the purchase price to the fair value of the acquired tangible and intangible assets and liabilities is as follows (amounts in thousands): Issuance of 2.1 million shares of Biosurgery Stock.......... $ 9,450 Issuance of options to purchase 231,566 shares of Biosurgery Stock..................................................... 351 Acquisition costs........................................... 638 Existing equity investment in Focal......................... 5,488 Cash paid to selling security holder........................ 11 ------- Total purchase price.................................... $15,938 ======= Cash and cash equivalents................................... $ 2,331 Current assets.............................................. 6,003 Property, plant and equipment............................... 1,818 Notes receivable from related party......................... 168 Intangible assets (to be amortized over 3 to 12 years)...... 7,909 Goodwill (to be amortized over 12 years).................... 615 Assumed liabilities......................................... (3,273) Notes receivable from stockholders.......................... 367 ------- Allocated purchase price.............................. $15,938 =======
UNAUDITED PRO FORMA FINANCIAL SUMMARY In December 2000, we acquired GelTex, a public company engaged in developing therapeutic products based on polymer technology. We accounted for the acquisition as a purchase and allocated it to Genzyme General. In December 2000, we also acquired Biomatrix, a public company engaged in the development and manufacture of viscoelastic biomaterials for use in orthopedic and other medical applications. The following unaudited pro forma financial summary is presented as if the acquisitions of GelTex, Biomatrix, Wyntek and Focal were completed as of January 1, 2001 and 2000. The unaudited pro forma combined results are not necessarily indicative of the actual results that would have occurred had the acquisitions been consummated at those dates, or of the future operations of the combined entities. Material nonrecurring charges, such as the acquired in-process research and development charges of $118.0 million resulting from the acquisition of GelTex, $82.1 million resulting from the 8 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. ACQUISITIONS (CONTINUED) acquisition of Biomatrix and $8.8 million resulting from the acquisition of Wyntek, are not reflected in the following pro forma financial summary:
FOR THE SIX MONTHS ENDED JUNE 30, --------------------------------- 2001 2000 --------------- --------------- (UNAUDITED, AMOUNTS IN THOUSANDS) Total revenues................................ $587,461 $524,610 Income before extraordinary items and cumulative effect of change in accounting principle................................... (12,162) 2,015 Net income (loss)............................. (7,995) 2,015 Net income allocated to Genzyme General Stock: Net income allocated to Genzyme General Stock before cumulative effect of change in accounting principle................... $ 73,140 $ 83,607 Cumulative effect of change in accounting principle, net of tax..................... 4,167 -- -------- -------- Net income allocated to Genzyme General Stock..................................... $ 77,370 $ 83,607 ======== ======== Net income per share allocated to Genzyme General Stock: Basic: Net income per share before cumulative effect of change in accounting principle............................... $ 0.38 $ 0.47 Per share cumulative effect of change in accounting principle, net of tax........ 0.02 -- -------- -------- Net income per share allocated to Genzyme General Stock........................... $ 0.40 $ 0.47 ======== ======== Diluted: Net income per share before cumulative effect of change in accounting principle............................... $ 0.36 $ 0.45 Per share cumulative effect of change in accounting principle, net of tax........ 0.02 -- -------- -------- Net income per share allocated to Genzyme General Stock........................... $ 0.38 $ 0.45 ======== ======== Net loss allocated to Biosurgery Stock........ $(83,484) $(74,009) ======== ======== Net loss per share allocated to Genzyme Biosurgery Stock--basic and diluted......... $ 2.16 $ (1.93) ======== ========
9 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. INVENTORIES (AMOUNTS IN THOUSANDS)
JUNE 30, DECEMBER 31, 2001 2000 ----------- ------------ (UNAUDITED) Raw materials........................................ $ 50,986 $ 51,545 Work-in-process...................................... 85,306 73,520 Finished products.................................... 29,854 45,276 -------- -------- Total............................................ $166,146 $170,341 ======== ========
4. PRIVATE PLACEMENT OF $575.0 MILLION 3% CONVERTIBLE SUBORDINATED DEBENTURES In May 2001, we completed the private placement of $575.0 million in principal of 3% convertible subordinated debentures due May 2021. Net proceeds from the offering were approximately $562.1 million. We have allocated the principal amount of the debentures and the net proceeds from the offering to Genzyme General. We will pay interest on these debentures on May 15 and November 15 each year using cash allocated to Genzyme General. The first interest payment will be made on November 15, 2001. The debentures are convertible, upon the satisfaction of certain conditions, into shares of Genzyme General Stock at an initial conversion price of $70.30 per share. The conversion price is subject to adjustments. Holders of the debentures may require us to repurchase all or part of their debentures for cash on May 15, 2006, 2011 or 2016, at a price equal to 100% of the principal amount of the debentures plus accrued interest through the date prior to the date of purchase. Additionally, if certain fundamental changes occur, each holder may require us to repurchase, for cash, all or a portion of the holder's debentures. On or after May 20, 2004, we may redeem for cash all or part of the debentures that have not previously been converted or repurchased. Genzyme General used a portion of these proceeds to repay the $150.0 million it had drawn under our revolving credit facility in December 2000 to finance a portion of the cash component of the consideration for the GelTex acquisition. We expect to utilize the remaining proceeds from the sale of the debentures for Genzyme General's working capital and general corporate purposes. 5. REDEMPTION OF $250.0 MILLION 5 1/4% CONVERTIBLE SUBORDINATED NOTES In June 2001, we completed the redemption of our $250.0 million 5 1/4% convertible subordinated notes due 2005. Prior to the redemption date, holders of the notes elected to convert substantially all of the principal of the notes into approximately 12,597,000 shares of Genzyme General Stock, 685,000 shares of Biosurgery Stock and 682,000 shares of Molecular Oncology Stock. On June 15, 2001, the redemption date, we redeemed the remaining notes using cash allocated to Genzyme General. 6. DERIVATIVE FINANCIAL INSTRUMENTS On January 1, 2001, we adopted Statement of Financial Accounting Standards or SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS 137 and SFAS 138. 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 in our consolidated balance sheet and measure those instruments at fair value. Subsequent changes in fair value are reflected in current earnings or other comprehensive income, depending on whether a derivative instrument is designated as part of a hedge relationship and, if it is, the type of hedge relationship. 10 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) In accordance with the transition provisions of SFAS 133, we recorded a cumulative-effect adjustment of $4.2 million, net of tax, in our unaudited, consolidated statement of operations for the six months ended June 30, 2001 to recognize the fair value of certain common stock warrants held on January 1, 2001. Transition adjustments pertaining to interest rate swaps designated as cash-flow hedges and foreign currency forward contracts were not significant. For the three months ended June 30, 2001, we recorded a charge of $0.2 million in other expense to reflect the change in value of certain common stock warrants from April 1, 2001 to June 30, 2001. For the six months ended June 30, 2001, we recorded a charge of $3.8 million in other expense to reflect the change in value of certain common stock warrants from January 1, 2001 to June 30, 2001. We also recorded a charge of $0.5 million in other comprehensive income for the six months ended June 30, 2001 to reflect the change in value of our interest rate swap contract during the period, net of tax. In the normal course of business, we manage risks associated with foreign exchange rates, interest rates and equity prices through a variety of strategies, including the use of hedging transactions, executed in accordance with our policies. Our hedging transactions include, but are not limited to, the use of various derivative financial instruments. As a matter of policy, we do not use derivative instruments unless there is an underlying exposure. We do not use derivative instruments for trading or speculative purposes. 7. TAX BENEFIT (PROVISION)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, INCREASE/ JUNE 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA) Benefit from (provision for) income taxes.................... $2,064 $(23,314) (109)% $2,734 $(35,168) (108)% Effective tax rate................ 25% 32% 27% 30%
Our tax rates for both 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; and - use of tax credits. The decrease in our effective tax rate for both the three and six months ended June 30, 2001, as compared to the same periods a year ago, was primarily attributable to increased losses from Genzyme Biosurgery and a charge of $8.8 million for in-process research and development resulting from our acquisition of Wyntek in June 2001, offset in part by an increase in non-deductible amortization of intangibles consisting largely of goodwill resulting from our acquisitions of GelTex and Biomatrix in December 2000. The tax benefit for the three and six months ended June 30, 2001 includes a $2.2 million benefit resulting from the release of excess tax reserves. 11 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. NET INCOME (LOSS) PER SHARE We calculate earnings per share for each series of stock using the two-class method. To calculate basic earnings per share for each series of stock, we divide the earnings allocated to each series of stock by the weighted average number of outstanding shares of that series of stock during the applicable period. When we calculate diluted earnings per share, we also include in the denominator all potentially dilutive securities outstanding during the applicable period. We allocate our earnings to each 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. Earnings attributable to Biosurgery Stock and Molecular Oncology Stock are defined similarly and, as such, are based on the net income or loss of the corresponding division as adjusted for the allocation of tax benefits. We calculate the income tax provision of each division as if that division were a separate taxpayer, which process includes assessing realizability of deferred tax assets at the division level. Our management and accounting policies provide that, if as of the end of any fiscal quarter, a division cannot use any projected annual tax benefit attributable to it to offset or reduce its current or deferred income tax expense, we may allocate the tax benefit to other divisions in proportion to their taxable income without compensating payment or allocation to the division generating the benefit. The tax benefits allocated to Genzyme General, which are included in earnings attributable to Genzyme General Stock, were:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- ------------------- 2001 2000 2001 2000 -------- -------- -------- -------- (UNAUDITED, AMOUNTS IN THOUSANDS) Tax benefits allocated from: Genzyme Biosurgery.................. $ 9,627 $4,604 $17,743 $ 9,836 Genzyme Molecular Oncology.......... 3,854 2,441 6,680 3,537 ------- ------ ------- ------- Total............................. $13,481 $7,045 $24,423 $13,373 ======= ====== ======= =======
In the three and six months ended June 30, 2001, we allocated $4.4 million and $9.0 million of tax benefits to Genzyme Biosurgery due to changes in the deferred tax liability established for our acquisition of Biomatrix in December 2000. In future periods, Genzyme Biosurgery or Genzyme Molecular Oncology may recognize deferred tax assets in the calculation of their respective tax provisions determined on a separate division basis in accordance with 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, the benefit will be reflected as a reduction of net income to determine net income attributable to Biosurgery Stock or Molecular Oncology Stock. As of June 30, 2001, the total tax benefits previously allocated to Genzyme General were (in thousands): Genzyme Biosurgery.......................................... $186,462 Genzyme Molecular Oncology.................................. 31,204
12 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. NET INCOME (LOSS) PER SHARE (CONTINUED) GENZYME GENERAL STOCK TWO-FOR-ONE STOCK SPLIT At our annual meeting on May 31, 2001, our shareholders approved an amendment to our charter which increased the total number of authorized shares of Genzyme common stock from 390,000,000 to 690,000,000 and increased the number of such shares designated as Genzyme General Stock from 200,000,000 to 500,000,000. On June 1, 2001, we completed a two-for-one split of Genzyme General Stock by means of a 100% stock dividend paid to Genzyme General division stockholders of record on May 24, 2001. We distributed a total of 97,184,967 shares of Genzyme General Stock to Genzyme General division stockholders in connection with the stock split. All share and per share amounts for Genzyme General Stock have been retroactively revised for all periods presented to reflect the two-for-one split.
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------- ------------------- 2001 2000 2001 2000 --------- --------- -------- -------- (UNAUDITED, AMOUNTS IN THOUSANDS) Genzyme General net income before cumulative effect of change in accounting principle............................ $ 21,718 $ 63,990 $ 46,863 $109,299 Cumulative effect of change in accounting principle, net of tax(1).................................................... -- -- 4,167 -- -------- -------- -------- -------- Genzyme General net income.................................. 21,718 63,990 51,030 109,299 Tax benefit allocated from Genzyme Biosurgery............... 9,627 4,604 17,743 9,836 Tax benefit allocated from Genzyme Molecular Oncology....... 3,854 2,441 6,680 3,537 -------- -------- -------- -------- Net income allocated to Genzyme General Stock--basic........ 35,199 71,035 75,453 122,672 Effect of dilutive securities, net of tax(2): 5 1/4% convertible subordinated notes: Interest expense.......................................... -- 2,250 -- 4,358 Amortization of purchasers' discount and offering costs(3)................................................ -- 161 -- 311 5% convertible subordinated debentures: Interest expense.......................................... -- 179 -- 350 Amortization of debt offering costs(4).................... -- 30 -- 60 -------- -------- -------- -------- Net income allocated to Genzyme General Stock--diluted...... $ 35,199 $ 73,655 $ 75,453 $127,751 ======== ======== ======== ======== Shares used in computing net income per common share--basic.............................................. 196,423 169,897 194,086 169,450 Effect of dilutive securities: Stock options(5).......................................... 9,195 6,305 9,123 6,434 Warrants.................................................. 67 -- 81 -- 5 1/4% convertible subordinated notes(2).................. -- 12,626 -- 12,626 5% convertible subordinated debentures(2)................. -- 1,260 -- 1,260 -------- -------- -------- -------- Dilutive potential common shares........................ 9,262 20,191 9,204 20,320 -------- -------- -------- -------- Shares used in computing net income per common share-- diluted(6)................................................ 205,685 190,088 203,290 189,770 ======== ======== ======== ========
13 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. NET INCOME (LOSS) PER SHARE (CONTINUED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------- ------------------- 2001 2000 2001 2000 --------- --------- -------- -------- (UNAUDITED, AMOUNTS IN THOUSANDS) Net income per share of Genzyme General Stock: Basic: Net income per share before cumulative effect of change in accounting principle............................... $ 0.18 $ 0.42 $ 0.37 $ 0.72 Per share cumulative effect of change in accounting principle, net of tax(1).............................. -- -- 0.02 -- -------- -------- -------- -------- Net income per share allocated to Genzyme General Stock................................................. $ 0.18 $ 0.42 $ 0.39 $ 0.72 ======== ======== ======== ======== Diluted (2,6): Net income per share before cumulative effect of change in accounting principle............................... $ 0.17 $ 0.39 $ 0.35 $ 0.67 Per share cumulative effect of change in accounting principle, net of tax(1).............................. -- -- 0.02 -- -------- -------- -------- -------- Net income per share allocated to Genzyme General Stock................................................. $ 0.17 $ 0.39 $ 0.37 $ 0.67 ======== ======== ======== ========
- -------------------------- (1) This represents a cumulative effect adjustment resulting from the January 1, 2001 required adoption of SFAS 133 to record the fair value of certain derivative assets held on January 1, 2001. (2) The net income per share allocated to Genzyme General Stock on a diluted basis and weighted average shares--diluted for the six months ended June 30, 2001 excludes the dilutive effect of the convertible notes and debentures allocated to Genzyme General as the effect would be anti-dilutive. (3) We had been amortizing the debt discount and offering costs of approximately $7.0 million over the term of the 5 1/4% convertible subordinated notes, until they were converted or redeemed in the second quarter of 2001. (4) We are amortizing the debt offering costs of approximately $0.9 million over the term of the 5% convertible subordinated debentures, which mature in August 2003. We have called these debentures for redemption in the third quarter of 2001. (5) We did not include the securities described in the following table in the computation of Genzyme General's diluted earnings per share because these securities had an exercise price greater than the average market price of Genzyme General Stock during the following periods:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------- ------------------- 2001 2000 2001 2000 --------- --------- -------- -------- (UNAUDITED, AMOUNTS IN THOUSANDS) Shares of Genzyme General Stock issuable for options........................................... 1,726 7,230 1,091 6,580 ===== ===== ===== =====
- -------------------------- (6) The net income per share allocated to Genzyme General Stock on a diluted basis and weighted average shares--diluted for the three and six months ended June 30, 2001, exclude the dilutive effect of the $575.0 million debentures allocated to Genzyme General in May 2001 because the conditions to conversion had not been met. 14 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. NET INCOME (LOSS) PER SHARE (CONTINUED) BIOSURGERY STOCK We created Biosurgery Stock on December 18, 2000. We created the Genzyme Biosurgery Division by combining the businesses of our former Genzyme Surgical Products and Genzyme Tissue Repair divisions as well as the acquired business of Biomatrix. Accordingly, we amended our charter to create Biosurgery Stock and to eliminate Genzyme Surgical Products Division common stock, which we refer to as "Surgical Products Stock," and Genzyme Tissue Repair Division common stock, which we refer to as "Tissue Repair Stock." Each outstanding share of, and option to purchase, Surgical Products Stock was converted into the right to receive 0.6060 of a share of, or option to purchase, Biosurgery Stock, and each outstanding share of, and option to purchase, Tissue Repair Stock was converted into the right to receive 0.3352 of a share of, or option to purchase, Biosurgery Stock. Prior to December 18, 2000, the net losses of Genzyme Surgical Products and Genzyme Tissue Repair were allocated to Surgical Products Stock and Tissue Repair Stock. For all periods presented, basic and diluted net loss per share of Biosurgery Stock are the same. We did not include the securities described in the following table in the computation of Biosurgery Stock diluted net loss per share for each period because these securities would have an anti-dilutive effect due to the net loss allocated to Biosurgery Stock.
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ---------------- 2001 2000 ------------------ ---------------- (UNAUDITED, AMOUNTS IN THOUSANDS) Shares of Biosurgery Stock issuable for options............ 6,852 5,644 Warrants to purchase Biosurgery Stock...................... 3 3 Biosurgery designated shares reserved for options.......... 97 97 Biosurgery designated shares............................... 1,200 1,200 Shares issuable upon conversion of 6.9% convertible subordinated note allocated to Genzyme Biosurgery........ 358 358 ----- ----- Total shares excluded from the calculation of diluted net loss per share of Biosurgery Stock....................... 8,510 7,302 ===== =====
MOLECULAR ONCOLOGY STOCK For all periods presented, basic and diluted net loss per share of Molecular Oncology Stock are the same. We did not include the securities described in the following table in the computation of 15 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. NET INCOME (LOSS) PER SHARE (CONTINUED) Molecular Oncology Stock diluted net loss per share for each period because these securities would have an anti-dilutive effect due to the net loss allocated to Molecular Oncology Stock.
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- ------------------- 2001 2000 2001 2000 -------- -------- -------- -------- (UNAUDITED, AMOUNTS IN THOUSANDS) Shares of Molecular Oncology Stock issuable for options............................................. 1,294 566 1,139 619 Warrants to purchase Molecular Oncology Stock......... -- 10 -- 10 Molecular Oncology designated shares issuable upon conversion of 5 1/4% convertible subordinated notes allocated to Genzyme General........................ -- 682 -- 682 Molecular Oncology designated shares.................. 1,318 1,318 1,318 1,318 ----- ----- ----- ----- Total shares excluded from the calculation of diluted net loss per share of Molecular Oncology Stock...... 2,612 2,576 2,457 2,629 ===== ===== ===== =====
9. SEGMENT REPORTING We present segment information in a manner consistent with the method we use to report this information to our management. We have four reportable segments: - Therapeutics, which as part of Genzyme General develops, manufactures and sells human therapeutic products with an expanding focus on products that treat patients suffering from lysosomal storage disorders and other specialty therapeutics. The business derives substantially all its revenue from sales of Cerezyme-Registered Trademark- enzyme and Renagel-Registered Trademark- phosphate binder; - Diagnostic Products, which as part of Genzyme General provides diagnostic products to niche markets focusing on IN VITRO diagnostics; - Genzyme Biosurgery, which develops, manufactures and sells instruments, devices, biomaterials and biotherapeutic products to improve or replace surgery, with an emphasis on the orthopaedics and cardiothoracic markets; and - Genzyme Molecular Oncology, which utilizes its functional genomics and antigen discovery technology platforms to develop novel cancer products focused on cancer vaccines and angiogenesis inhibitors and to generate partnering revenue developing cancer products, with a focus on therapeutic vaccines and angiogenesis inhibitors. 16 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. SEGMENT REPORTING (CONTINUED) We have provided information concerning the operations in these reportable segments in the following table:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- ------------------- 2001 2000 2001 2000 -------- -------- -------- -------- (UNAUDITED, AMOUNTS IN THOUSANDS) Revenues: Genzyme General: Therapeutics(1)................................. $188,543 $148,578 $365,330 $282,396 Diagnostic Products(2).......................... 17,790 15,539 34,214 30,777 Other........................................... 31,352 22,414 60,464 43,836 Eliminations/Adjustments(3)..................... 1,313 163 1,683 311 -------- -------- -------- -------- Total Genzyme General......................... 238,998 186,694 461,691 357,320 Genzyme Biosurgery(4)............................. 60,364 36,256 114,520 71,205 Genzyme Molecular Oncology........................ 1,279 963 2,691 3,518 -------- -------- -------- -------- Total......................................... $300,641 $223,913 $578,902 $432,043 ======== ======== ======== ======== Net income (loss): Genzyme General: Therapeutics(1)................................. $ 37,692 $ 54,252 $ 72,031 $ 83,515 Diagnostic Products(2).......................... (4,877) 815 (4,095) 1,530 Other........................................... 2,888 (625) 4,872 (796) Eliminations/Adjustments(3,5)................... (13,985) 9,548 (25,945) 25,050 -------- -------- -------- -------- Net income for Genzyme General before cumulative effect of change in accounting principle...... 21,718 63,990 46,863 109,299 Cumulative effect of change in accounting principle, net of tax(5)...................... -- -- 4,167 -- -------- -------- -------- -------- Genzyme General net income...................... 21,718 63,990 51,030 109,299 Genzyme Biosurgery(4)............................. (33,222) (14,398) (63,945) (29,412) Genzyme Molecular Oncology........................ (8,331) (7,363) (14,605) (12,420) Eliminations/Adjustments(6)....................... 13,481 7,263 24,423 13,843 -------- -------- -------- -------- Total........................................... $ (6,354) $ 49,492 $ (3,097) $ 81,310 ======== ======== ======== ========
- ------------------------ (1) In December 2000, we acquired GelTex and allocated the acquisition to Genzyme General. The operations of GelTex are included in our Therapeutics segment for the three and six months ended June 30, 2001. (2) In June 2001, we acquired Wyntek and allocated the acquisition to Genzyme General. The results of operations of Wyntek are included in our Diagnostic Products segment from June 1, 2001, the date of acquisition. (3) 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. The six months ended June 30, 2000 also includes a gain of $20.3 million relating to a 17 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. SEGMENT REPORTING (CONTINUED) public offering of common stock by Genzyme Transgenics Corporation, an unconsolidated affiliate, which we recognized in accordance with our policy pertaining to affiliate sales of stock. (4) In December 2000, we acquired Biomatrix and allocated the acquisition to Genzyme Biosurgery. The operations of Biomatrix are included in the Genzyme Biosurgery segment for the three and six months ended June 30, 2001. On June 30, 2001, we acquired Focal and allocated the acquisition to Genzyme Biosurgery. The results of operations of Focal will be included in the results of the Genzyme Biosurgery segment from the date of acquisition. (5) On January 1, 2001, in connection with the adoption of SFAS 133, Genzyme General recorded a cumulative-effect adjustment of $4.2 million, net of tax, to recognize the fair value of certain common stock warrants. Eliminations/adjustments for Genzyme General includes a charge of $0.2 million and $3.8 million for the three and six months ended June 30, 2001 to reflect the change in value of certain common stock warrants from April 1, 2001 to June 30, 2001 and from January 1, 2001 to June 30, 2001. (6) Includes income tax benefits that have not been recognized in the tax provisions of the divisions. SEGMENT ASSETS (AMOUNTS IN THOUSANDS):
JUNE 30, DECEMBER 31, 2001 2000 ----------- ------------ (UNAUDITED) Genzyme General(1): Therapeutics...................................... $1,352,728 $1,341,656 Diagnostic Products(2)............................ 183,064 89,236 Other............................................. 80,914 77,153 Eliminations/Adjustments(3)....................... 1,438,221 991,008 ---------- ---------- Total Genzyme General........................... 3,054,927 2,499,053 Genzyme Biosurgery(4)............................... 770,326 811,600 Genzyme Molecular Oncology.......................... 16,918 30,752 Eliminations/Adjustments(5)......................... (45,335) (23,305) ---------- ---------- Total........................................... $3,796,836 $3,318,100 ========== ==========
- ------------------------ (1) Segment assets for Genzyme General include primarily accounts receivable, inventory and certain fixed and intangible assets. (2) Segment assets for Diagnostic Products as of June 30, 2001 include $73.4 million of additional assets resulting from the acquisition of Wyntek in June 2001, including $39.4 million of intangible assets and $19.9 million of goodwill. (3) Segment assets for Eliminations/Adjustments for Genzyme General consists of the difference between the total assets for Genzyme General's segments and total combined assets for Genzyme General. Eliminations/Adjustments for June 30, 2001 include net proceeds of $562.1 million from the private placement of $575.0 million in principal of 3% convertible subordinated debentures which was completed in May 2001. Genzyme General used a portion of these proceeds to repay 18 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. SEGMENT REPORTING (CONTINUED) the $150.0 million it had drawn under our revolving credit facility in December 2000 to finance a portion of the cash component of the consideration for the GelTex merger. (4) Segment assets for Genzyme Biosurgery at June 30, 2001 include: - $25.7 million of additional assets resulting from the acquisition of the Class A limited partnership interests of Genzyme Development Partners, L.P., including $17.5 million of intangible assets and $8.2 million of goodwill; and - $18.8 million of additional assets resulting from the acquisition of Focal, Inc., including $7.9 million of intangible assets and $1.8 million of property, plant and equipment. (5) Represents the elimination of inter-tracking stock balances. 10. NEW ACCOUNTING PRONOUNCEMENTS In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all business combinations be accounted for under the purchase method only and that certain acquired intangible assets in a business combination be recognized as assets apart from goodwill. SFAS No. 142 requires that ratable amortization of goodwill be replaced with periodic tests of the goodwill's impairment and that intangible assets other than goodwill be amortized over their useful lives. SFAS No. 141 is effective for all business combinations initiated after June 30, 2001 and for all business combinations accounted for by the purchase method for which the date of acquisition is after June 30, 2001. The provisions of SFAS No. 142 will be effective for fiscal years beginning after December 15, 2001, and will thus be adopted by us, as required, in fiscal year 2002. The impact of SFAS No. 141 and SFAS No. 142 on our financial statements has not yet been determined. 11. SUBSEQUENT EVENTS INTERDIVISIONAL FINANCING ARRANGEMENT At June 30, 2001, $15.0 million of Genzyme General's cash remained available to Genzyme Biosurgery under a $25.0 million interdivisional financing arrangement with Genzyme General. We re-allocated this arrangement to Genzyme Biosurgery from Genzyme Tissue Repair upon the formation of Genzyme Biosurgery in December 2000. Under the terms of this arrangement, Genzyme Biosurgery may draw down funds as needed each quarter in exchange for Biosurgery designated shares based on the fair market value (as defined in our charter) of Biosurgery Stock at the time of the draw. Biosurgery designated shares are shares of Biosurgery Stock that are not issued and outstanding, but which our board of directors may issue, sell or distribute without allocating the proceeds to Genzyme Biosurgery. In July 2001, Genzyme Biosurgery drew $12.0 million of cash under this arrangement in exchange for an additional reserve of 1,902,949 Biosurgery designated shares. INTENDED REDEMPTION OF $21.2 MILLION 5% CONVERTIBLE SUBORDINATED DEBENTURES On July 18, 2001, we sent notices to the holders of our $21.2 million 5% convertible subordinated debentures indicating our intention to redeem any debentures that remain outstanding on August 30, 2001 at a price equal to 103% of the $21.2 million principal amount, plus accrued interest through the date of redemption. We intend to pay the redemption price in cash. 19 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. SUBSEQUENT EVENTS (CONTINUED) TRANSFER OF GENZYME'S 50% OWNERSHIP INTEREST IN ATIII LLC TO GENZYME TRANSGENICS CORPORATION On July 31, 2001, we transferred our 50% ownership interest in ATIII LLC, our joint venture with Genzyme Transgenics for the development and commercialization of transgenic recombinant human antithrombin III or ATIII, to Genzyme Transgenics. In exchange for our interest in the joint venture, we will receive a royalty on worldwide net sales (excluding Asia) of any of its products based on ATIII beginning three years after the first commercial sale of each such product up to a cumulative maximum amount of $30.0 million. ACQUISITION OF GDP CLASS B LIMITED PARTNERSHIP INTERESTS In July 2001, we notified the holders of the two Class B limited partnership interests in GDP that we are exercising our option to buy the Class B limited partnership interests for a payment of $70,000 per interest plus royalties on sales of certain Sepra-TM- products. We will purchase the Class B limited partnership interests on August 31, 2001. We will allocate the purchase of the GDP Class B limited partnership interests to Genzyme Biosurgery. NEUROCELL-TM- JOINT VENTURE REFUND Diacrin/Genzyme LLC, our joint venture with Diacrin, Inc. to develop and commercialize NeuroCell-TM--PD as a treatment for Parkinson's disease, did not initiate a phase 3 clinical trial of NeuroCell-TM--PD by June 30, 2001. Because a phase 3 trial of the product was not initiated by June 30, 2001, Genzyme General had the right to elect to receive a refund of $20.0 million of the $25.0 million Genzyme Biosurgery received from Genzyme General in connection with the transfer to Genzyme General of Genzyme Biosurgery's interest in the joint venture plus accrued interest thereon at a rate of 13.5% per annum. On August 2, 2001, Genzyme General notified Genzyme Biosurgery of its election to receive the refund. Genzyme Biosurgery can pay the refund amount in cash, Biosurgery designated shares or both. The refund is due and payable within 90 days after Genzyme Biosurgery received the notice from Genzyme General. ACQUISITION OF NOVAZYME PHARMACEUTICALS, INC. On August 6, 2001, we entered into a definitive agreement to acquire Novazyme Pharmaceuticals, Inc., for $137.5 million, payable in shares of Genzyme General Stock plus the assumption of all outstanding options and warrants to purchase shares of Novazyme common stock on an as-converted basis. Novazyme is a privately held company that is developing biotherapies for the treatment of lysosomal storage disorders. Novazyme shareholders are also eligible to receive two subsequent payments totaling $87.5 million if we receive U.S. marketing approval for two products using certain of Novazyme's technologies. The contingent payments are also payable in shares of Genzyme General Stock. The acquisition is subject to customary closing conditions. We expect to complete the acquisition in the third quarter of 2001. PHARMING GROUP, N.V. RECEIVERSHIP On August 10, 2001, Pharming Group, N.V., a public company in the Netherlands and our partner for the development of therapies for Pompe disease, announced that it would file for receivership in order to seek protection from its creditors. At June 30, 2001, we have an $8.5 million investment in Pharming common stock and a 7% convertible senior note from Pharming for the principal amount of 20 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. SUBSEQUENT EVENTS (CONTINUED) $10.0 million, plus accrued and unpaid interest of approximately $0.2 million. In addition, we have two joint ventures with Pharming for the development of Pompe disease therapies. At June 30, 2001, Pharming owed the joint ventures an aggregate amount of $1.7 million for its share of program costs, and the joint ventures owed us approximately $6.4 million for reimbursement of program costs incurred by us. At this time, the status of Pharming's receivership and our position as a creditor is not known and we are therefore unable to determine the impact, if any, on the realizable value of amounts due to us. Accordingly, no adjustments have been made to our consolidated financial statements or the combined financial statements of Genzyme General as of June 30, 2001. 21 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION COMBINED STATEMENTS OF OPERATIONS (UNAUDITED, AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------- ------------------- 2001 2000 2001 2000 --------- --------- -------- -------- Revenues: Net product sales......................................... $219,040 $171,470 $421,246 $326,809 Net service sales......................................... 18,305 15,061 36,537 30,181 Revenues from research and development contracts: Related parties......................................... 1,313 157 1,632 303 Other................................................... 340 6 2,276 27 -------- -------- -------- -------- Total revenues........................................ 238,998 186,694 461,691 357,320 -------- -------- -------- -------- Operating costs and expenses: Cost of products sold..................................... 47,469 37,051 95,363 69,271 Cost of services sold..................................... 10,617 8,944 20,901 17,772 Selling, general and administrative....................... 66,558 42,972 125,089 81,194 Research and development (including research and development related to contracts)....................... 42,405 15,391 82,591 58,134 Amortization of intangibles............................... 18,182 2,011 35,852 3,979 Purchase of in-process research and development........... 8,768 -- 8,768 -- -------- -------- -------- -------- Total operating costs and expenses...................... 193,999 106,369 368,564 230,350 -------- -------- -------- -------- Operating income............................................ 44,999 80,325 93,127 126,970 -------- -------- -------- -------- Other income (expenses): Equity in net loss of unconsolidated affiliates........... (11,016) (11,313) (19,495) (19,446) Gain on affiliate sale of stock........................... -- -- -- 20,270 Gain (loss) on sale of investment in equity securities.... (1,532) 14,165 (1,532) 14,165 Minority interest in net loss of subsidiary............... 725 1,352 1,999 2,208 Other..................................................... (171) 5,174 (3,888) 5,153 Investment income......................................... 11,798 8,639 21,011 16,726 Interest expense.......................................... (7,282) (3,441) (13,680) (6,992) -------- -------- -------- -------- Total other income (expenses)........................... (7,478) 14,576 (15,585) 32,084 -------- -------- -------- -------- Income before income taxes.................................. 37,521 94,901 77,542 159,054 Provision for income taxes.................................. (15,803) (30,911) (30,679) (49,755) -------- -------- -------- -------- Division net income before cumulative effect of change in accounting principle...................................... 21,718 63,990 46,863 109,299 Cumulative effect of change in accounting principle, net of tax....................................................... -- -- 4,167 -- -------- -------- -------- -------- Division net income......................................... $ 21,718 $ 63,990 $ 51,030 $109,299 ======== ======== ======== ======== Comprehensive income (loss), net of tax: Division net income....................................... $ 21,718 $ 63,990 $ 51,030 $109,299 -------- -------- -------- -------- Other comprehensive income (loss), net of tax: Foreign currency translation adjustments................ (4,227) (174) (17,647) (10,397) -------- -------- -------- -------- Unrealized gain (loss) on interest rate swap contract, net of tax............................................ 52 -- (455) -- -------- -------- -------- -------- Unrealized gains (losses) on securities: Unrealized gains (losses) arising during the period... 21,654 (43,424) (1,084) 6,785 Reclassification adjustment for (gains) losses included in division net income..................... 973 (5,501) 973 (5,501) -------- -------- -------- -------- Unrealized gains (losses) on securities, net............ 22,627 (48,925) (111) 1,284 -------- -------- -------- -------- Other comprehensive income (loss)......................... 18,452 (49,099) (18,213) (9,113) -------- -------- -------- -------- Comprehensive income........................................ $ 40,170 $ 14,891 $ 32,817 $100,186 ======== ======== ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. 22 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION COMBINED BALANCE SHEETS (AMOUNTS IN THOUSANDS)
JUNE 30, DECEMBER 31, 2001 2000 ----------- ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 400,142 $ 135,841 Short-term investments.................................... 98,796 96,644 Accounts receivable, net.................................. 191,213 165,911 Inventories............................................... 108,331 108,767 Prepaid expenses and other current assets................. 34,936 28,012 Due from Genzyme Biosurgery............................... 38,680 18,645 Due from Genzyme Molecular Oncology....................... 6,655 4,660 Deferred tax assets--current.............................. 47,021 46,836 ---------- ---------- Total current assets.................................... 925,774 605,316 Property, plant and equipment, net.......................... 495,382 446,759 Long-term investments....................................... 456,036 298,841 Notes receivable--related party............................. 10,159 10,350 Intangibles, net............................................ 1,000,223 977,147 Investments in equity securities............................ 116,599 119,648 Other noncurrent assets..................................... 50,754 40,992 ---------- ---------- Total assets............................................ $3,054,927 $2,499,053 ========== ========== LIABILITIES AND DIVISION EQUITY Current liabilities: Accounts payable.......................................... $ 22,151 $ 20,091 Accrued expenses.......................................... 107,073 98,201 Income taxes payable...................................... 43,835 40,442 Deferred revenue.......................................... 1,189 6,401 Current portion of long-term debt and capital lease obligations............................................. 1,449 1,448 ---------- ---------- Total current liabilities............................... 175,697 166,583 Long-term debt and capital lease obligations................ 29,486 180,556 Convertible notes and debentures............................ 599,210 273,680 Deferred tax liabilities.................................... 128,363 124,613 Other noncurrent liabilities................................ 5,652 3,341 ---------- ---------- Total liabilities....................................... 938,408 748,773 ---------- ---------- Division equity............................................. 2,116,519 1,750,280 ---------- ---------- Total liabilities and division equity................... $3,054,927 $2,499,053 ========== ==========
The accompanying notes are an integral part of these unaudited, combined financial statements. 23 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED, AMOUNTS IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, -------------------- 2001 2000 --------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Division net income....................................... $ 51,030 $109,299 Reconciliation of division net income to net cash provided by operating activities: Depreciation and amortization........................... 50,794 22,844 Notes received from a collaborator...................... -- (10,000) Non-cash compensation expense........................... 4,972 -- Provision for bad debts................................. 1,597 4,124 Deferred income tax (benefit) expense................... (14,811) 5,882 Charge for in-process research and development.......... 8,768 -- Equity in net loss of unconsolidated affiliates......... 19,495 19,446 Gain on affiliate sale of stock......................... -- (20,270) Gain (loss) on sale of investment in equity securities............................................ 1,532 (14,165) Minority interest in net loss of subsidiary............. (1,999) (2,208) Other................................................... (1,243) (1,148) Increase (decrease) in cash from working capital changes: Accounts receivable................................... (31,613) (19,219) Inventories........................................... 1,820 (4,183) Prepaid expenses and other assets..................... 1,174 (3,529) Due from Genzyme Biosurgery........................... (20,035) (1,513) Due from Genzyme Molecular Oncology................... (1,995) (311) Accounts payable, accrued expenses, income taxes payable and deferred revenue........................ 33,968 22,260 --------- -------- Net cash provided by operating activities........... 103,454 107,309 --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments.................................. (359,534) (239,134) Sales and maturities of investments....................... 202,972 228,343 Purchases of equity securities............................ (3,318) -- Purchase of property, plant and equipment................. (69,584) (34,187) Acquisitions, net of cash acquired........................ (60,026) -- Investments in unconsolidated affiliates.................. (22,744) (12,856) Other..................................................... 1,444 3.047 --------- -------- Net cash used in investing activities............... (310,790) (54,787) --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Allocated proceeds from issuance of Genzyme General Stock................................................... 57,934 28,346 Allocated proceeds from issuance of debt.................. 562,062 -- Payments of debt.......................................... (151,083) -- Net cash allocated to Genzyme Biosurgery.................. 7 (4,940) Net cash allocated to Genzyme Molecular Oncology.......... -- (15,000) Bank overdraft............................................ 2,660 1,116 Other..................................................... 2,617 938 --------- -------- Net cash provided by financing activities........... 474,197 10,460 --------- -------- Effect of exchange rate changes on cash..................... (2,560) (3,031) --------- -------- Increase in cash and cash equivalents....................... 264,301 59,951 Cash and cash equivalents at beginning of period............ 135,841 94,523 --------- -------- Cash and cash equivalents at end of period.................. $ 400,142 $154,474 ========= ========
The accompanying notes are an integral part of these unaudited, combined financial statements. 24 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The unaudited, combined financial statements of Genzyme General for each period include the balance sheets, statements 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 included in Exhibit 99.1 to our 2000 Form 10-K. These unaudited, combined financial statements are prepared using amounts included in our unaudited, consolidated financial statements included in this Form 10-Q. We prepared these unaudited, combined financial statements for Genzyme General following the requirements of the SEC for interim reporting. As permitted under these rules, certain footnotes or other financial information that are normally required by generally accepted accounting principles can be condensed or omitted. We have reclassified certain 2000 data to conform to our 2001 presentation. These financial statements include all normal and recurring adjustments that we consider necessary for the fair presentation of Genzyme General's financial position and operating results. Since these are interim financial statements, you should also read the financial statements and notes for Genzyme General included in our 2000 Form 10-K. Revenues, expenses, assets and liabilities can vary from quarter to quarter. Therefore, the results and trends in these interim financial statements may not be indicative of the results for future periods. 2. ACQUISITIONS WYNTEK DIAGNOSTICS, INC. In June 2001, we acquired all of the outstanding capital stock of privately-held Wyntek Diagnostics, Inc., for $65.0 million in cash. Wyntek is a provider of high quality point of care rapid diagnostic tests for pregnancy and infectious diseases. We allocated the acquisition to Genzyme General and accounted for the acquisition as a purchase. Accordingly, the results of operations of Wyntek are included in our consolidated financial statements and the combined financial statements of Genzyme General from the date of acquisition. The purchase price and the allocation of the purchase price to the fair value of the acquired tangible and intangible assets and liabilities is as follows (amounts in thousands): Cash paid................................................... $65,000 Acquisition costs........................................... 234 ------- Total purchase price...................................... $65,234 ======= Cash and cash equivalents................................... $ 4,974 Current assets.............................................. 4,966 Property, plant and equipment............................... 1,843 Deferred tax assets......................................... 2,312 Intangible assets (to be amortized over 5 to 10 years)...... 39,444 In-process research and development......................... 8,768 Goodwill (to be amortized over 10 years).................... 19,908 Deferred tax liability...................................... (14,197) Assumed liabilities......................................... (2,784) ------- Allocated purchase price.................................. $65,234 =======
25 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 2. ACQUISITIONS (CONTINUED) In connection with the acquisition of Wyntek, we allocated approximately $8.8 million of the purchase price to in-process research and development or IPR&D. Our management assumes responsibility for determining the IPR&D valuation and expects the final valuation will be completed upon closing the transaction. The fair value assigned to purchased IPR&D was estimated by discounting, to present value, the cash flows expected to result from the project once it has reached technological feasibility. A discount rate consistent with the risks of the project was used to estimate the present value of cash flows. In estimating future cash flows, management considered other tangible and intangible assets required for successful exploitation of the technology resulting from the purchased IPR&D project and adjusted future cash flows for a charge reflecting the contribution to value of these assets. The value assigned to purchased IPR&D was the amount attributable to the efforts of Wyntek up to the time of acquisition. This amount was estimated through application of the "stage of completion" calculation by multiplying total estimated revenue for IPR&D by the percentage of completion of the purchased research and development project at the time of acquisition. The nature of the efforts to develop the purchased IPR&D into commercially viable products, principally relates to the completion and/or acceleration of existing development programs, including the mandatory completion of several phases of clinical trials and the costs necessary to manage the projects and trials. Assuming the approval of the product by the FDA, costs related to the wide scale manufacturing, distribution, and marketing of the product are included in the projection. The resulting net cash flows from such project are based on our management's estimates of revenues, cost of sales, research and development expenses, sales and marketing expenses, general and administrative expenses, and the anticipated income tax effect. The discounting of net cash flows back to their present value is based on the weighted average cost of capital, or WACC. The WACC calculation produces the average required rate of return of an investment in an operating enterprise, based on various required rates of return from investments in various areas of that enterprise. The discount rate utilized in discounting the net cash flows from purchased IPR&D was 25%. This discount rate is higher than our WACC due to the inherent uncertainties surrounding the successful development of the purchased IPR&D. The forecast data employed in the analyses was based upon product level forecast information we obtained from numerous internal and external resources. These resources included external market research and internal experts. Our senior management reviewed and challenged the forecast data and related assumptions and utilized the information in analyzing IPR&D. The forecast data and assumptions are inherently uncertain and unpredictable. However, based upon the information available at this time, our management believes the forecast data and assumptions to be reasonable. These assumptions may be incomplete or inaccurate, and no assurance can be given that unanticipated events and circumstances will not occur. Accordingly, actual results may vary from the forecasted results. Any such variance may result in a material adverse effect on our financial condition and results of operations. In the allocation of purchase price to the IPR&D, the concept of alternative future use was specifically considered for the program under development. The acquired IPR&D consists of Wyntek's work to complete the program. There are no alternative uses for the in-process program in the event that the program fails in clinical trials or is otherwise not feasible. The development effort for the acquired IPR&D does not possess an alternative future use for us as defined by generally accepted 26 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 2. ACQUISITIONS (CONTINUED) accounting principles. Consequently, in accordance with generally accepted accounting principles, the amount allocated to IPR&D was charged as an expense in our financial statements for the three and six months ended June 30, 2001. We are amortizing the remaining acquired intangible assets arising from the acquisition on a straight-line basis over their estimated lives, which range from 5 years to 10 years. Below is a brief description of the IPR&D program associated with Wyntek's cardiovascular disease diagnostic product, including an estimation of when management believes we may realize revenues from the sale of this product. Wyntek is currently developing a cardiovascular product to rapidly measure the quantitative levels of cardiac marker proteins. These are the leading markers for the diagnosis of acute myocardial infarction. The product consists of a mobile, stand-alone, quantitative diagnostic device and a reaction strip that detects disease specific marker proteins. The device will be used to read reaction strips at the patient's bedside or in an emergency room setting. Wyntek expects to complete the regulatory review process and file its application for marketing approval in early 2002 and begin selling the product during the second half of 2002. Studies to date have demonstrated the viability of this product but there can be no assurance that the regulatory authorities will approve this product. A discount rate of 25% was used in valuing the projected cash flows. UNAUDITED PRO FORMA FINANCIAL SUMMARY: In December 2000, we acquired GelTex, a public company engaged in developing therapeutic products based on polymer technology. We accounted for the acquisition as a purchase and allocated it to Genzyme General. The following unaudited pro forma financial summary is presented as if the acquisitions of GelTex and Wyntek were completed as of January 1, 2001 and 2000. The unaudited pro forma combined results are not necessarily indicative of the actual results that would have occurred had the acquisitions been consummated on those dates, or of the future operations of the combined entities. Material nonrecurring charges, such as acquired in-process research and development charges of $118.0 million resulting from the acquisition of GelTex and $8.8 million resulting from the acquisition of Wyntek, are not reflected in the following pro forma financial summary:
FOR THE SIX MONTHS ENDED JUNE 30, --------------------------------- 2001 2000 --------------- --------------- (UNAUDITED, AMOUNTS IN THOUSANDS) Total revenues................................ $470,103 $405,645 Income before extraordinary items and cumulative effect of change in accounting principle................................... 48,717 70,234 Division net income........................... 52,884 70,234
27 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 3. INVENTORIES (AMOUNTS IN THOUSANDS)
JUNE 30, DECEMBER 31, 2001 2000 ----------- ------------ (UNAUDITED) Raw materials........................................ $ 35,453 $ 30,275 Work-in-process...................................... 55,467 47,880 Finished products.................................... 17,411 30,612 -------- -------- Total.............................................. $108,331 $108,767 ======== ========
4. PRIVATE PLACEMENT OF $575.0 MILLION 3% CONVERTIBLE SUBORDINATED DEBENTURES In May 2001, we completed the private placement of $575.0 million in principal of 3% convertible subordinated debentures due May 2021. Net proceeds from the offering were approximately $562.1 million. We have allocated the principal amount of the debentures and the net proceeds from the offering to Genzyme General. We will pay interest on these debentures on May 15 and November 15 each year using cash allocated to Genzyme General. The first interest payment will be made on November 15, 2001. The debentures are convertible, upon the satisfaction of certain conditions, into shares of Genzyme General Stock at an initial conversion price of $70.30 per share. The conversion price is subject to adjustment. Holders of the debentures may require us to repurchase all or part of their debentures for cash on May 15, 2006, 2011 or 2016, at a price equal to 100% of the principal amount of the debentures plus accrued interest through the date prior to the date of purchase. Additionally, if certain fundamental changes occur, each holder may require us to repurchase, for cash, all or a portion of the holder's debentures. On or after May 20, 2004, we may redeem for cash all or part of the debentures that have not previously been converted or repurchased. Genzyme General used a portion of these proceeds to repay the $150.0 million it had drawn under our revolving credit facility in December 2000 to finance a portion of the cash component of the consideration for the GelTex acquisition. Genzyme General expects to utilize the remaining proceeds from the sale of the debentures for working capital and general corporate purposes. 5. REDEMPTION OF $250.0 MILLION 5 1/4% CONVERTIBLE SUBORDINATED NOTES In June 2001, we completed the redemption of our $250.0 million 5 1/4% convertible subordinated notes due 2005. Prior to the redemption date, holders of the notes elected to convert substantially all of the principal of the notes into approximately 12,597,000 shares of Genzyme General Stock, 685,000 shares of Biosurgery Stock and 682,000 shares of Molecular Oncology Stock. On June 15, 2001, the redemption date, we redeemed the remaining notes using cash allocated to Genzyme General. 6. TAX PROVISION
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, INCREASE/ JUNE 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA) Provision for income taxes....... $(15,803) $(30,911) (49)% $(30,679) $(49,755) (38)% Effective tax rate............... 42% 33% 40% 31%
28 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 6. TAX PROVISION (CONTINUED) 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; and - use of tax credits. The increase in Genzyme General's effective tax rate for both the three and six month periods ending June 30, 2001 as compared to the same periods a year ago was primarily attributable to an increase in nondeductable amortization of intangibles, consisting largely of goodwill resulting from our December 2000 acquisition of GelTex. The tax provision for the three and six months ended June 30, 2001 includes a $2.2 million benefit resulting from the release of excess tax reserves. 7. DERIVATIVE FINANCIAL INSTRUMENTS On January 1, 2001, we adopted SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS 137 and SFAS 138. 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 in our combined balance sheet and measure those instruments at fair value. Subsequent changes in fair value are reflected in current earnings or other comprehensive income, depending on whether a derivative instrument is designated as part of a hedge relationship and, if it is, the type of hedge relationship. In accordance with the transition provisions of SFAS 133, Genzyme General recorded a cumulative-effect adjustment of $4.2 million, net of tax, in its unaudited, combined statement of operations for the six months ended June 30, 2001 to recognize the fair value of certain common stock warrants held on January 1, 2001. Transition adjustments pertaining to interest rate swaps designated as cash-flow hedges and foreign currency forward contracts allocated to Genzyme General were not significant. For the three months ended June 30, 2001, Genzyme General recorded a charge of $0.2 million in other expense to reflect the change in value of certain common stock warrants from April 1, 2001 to June 30, 2001. For the six months ended June 30, 2001, Genzyme General recorded a charge of $3.8 million in other expense to reflect the change in value of certain common stock warrants from January 1, 2001 to June 30, 2001. Genzyme General also recorded a charge of $0.5 million in division equity for the six months ended June 30, 2001, to reflect the change in value of our interest rate swap contract during the period, net of tax. In the normal course of business, we manage risks associated with foreign exchange rates, interest rates and equity prices through a variety of strategies, including the use of hedging transactions, executed in accordance with our policies. Our hedging transactions include, but are not limited to, the use of various derivative financial instruments. As a matter of policy, we do not use derivative instruments unless there is an underlying exposure. We do not use derivative instruments for trading or speculative purposes. 29 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 8. SEGMENT REPORTING We present segment information for Genzyme General in a manner consistent with the method we use to report this information to our management. Genzyme General has two reportable segments: - Therapeutics, which develops, manufactures and sells human therapeutic products with an expanding focus on products that treat patients suffering from lysosomal storage disorders and other specialty therapeutics. The business derives substantially all its revenue from sales of Cerezyme-Registered Trademark- enzyme and Renagel-Registered Trademark- phosphate binder; and - Diagnostic Products, which provides diagnostic products to niche markets focusing on IN VITRO diagnostics. We have provided information concerning the operations in these reportable segments in the following table:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- ------------------- 2001 2000 2001 2000 -------- -------- -------- -------- (UNAUDITED, AMOUNTS IN THOUSANDS) Revenues: Therapeutics(1)................................... $188,543 $148,578 $365,330 $282,396 Diagnostic Products(2)............................ 17,790 15,539 34,214 30,777 Other............................................. 31,352 22,414 60,464 43,836 Eliminations/Adjustments(3)....................... 1,313 163 1,683 311 -------- -------- -------- -------- Total........................................... $238,998 $186,694 $461,691 $357,320 ======== ======== ======== ======== Division net income: Therapeutics(1)................................... $ 37,692 $ 54,252 $ 72,031 $ 83,515 Diagnostic Products(2)............................ (4,877) 815 (4,095) 1,530 Other............................................. 2,888 (625) 4,872 (796) Eliminations/Adjustments(3,4)..................... (13,985) 9,548 (25,945) 25,050 -------- -------- -------- -------- Division net income before cumulative effect of change in accounting principle.................. 21,718 63,990 46,863 109,299 Cumulative effect of change in accounting principle, net of tax(4)........................ -- -- 4,167 -- -------- -------- -------- -------- Division net income............................. $ 21,718 $ 63,990 $ 51,030 $109,299 ======== ======== ======== ========
- ------------------------ (1) In December 2000, we acquired GelTex and allocated the acquisition to Genzyme General. The operations of GelTex are included in our Therapeutics segment for the three and six months ended June 30, 2001. (2) In June 2001, we acquired Wyntek and allocated the acquisition to Genzyme General. The results of operations of Wyntek are included in our Diagnostic Products segment from June 1, 2001, the date of acquisition. (3) 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 30 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 8. SEGMENT REPORTING (CONTINUED) General. The amount for the six months ended June 30, 2000 also includes a gain of $20.3 million relating to a public offering of common stock by Genzyme Transgenics, an unconsolidated affiliate, which we recognized in accordance with our policy pertaining to affiliate sales of stock. (4) On January 1, 2001, in connection with the adoption of SFAS 133, Genzyme General recorded a cumulative-effect adjustment of $4.2 million, net of tax, to recognize the fair value of certain common stock warrants. Eliminations/Adjustments for Genzyme General includes a charge of $0.2 million for the three months ended June 30, 2001 and $3.8 million for the six months ended June 30, 2001 to reflect the change in value of certain common stock warrants. SEGMENT ASSETS (AMOUNTS IN THOUSANDS):
JUNE 30, DECEMBER 31, 2001 2000 ----------- ------------ (UNAUDITED) Therapeutics........................................ $1,352,728 $1,341,656 Diagnostic Products(1).............................. 183,064 89,236 Other............................................... 80,914 77,153 Eliminations/Adjustments(2)......................... 1,438,221 991,008 ---------- ---------- Total............................................. $3,054,927 $2,499,053 ========== ==========
- ------------------------ (1) Segment assets for Diagnostic Products as of June 30, 2001 include $73.4 million of additional assets resulting from the acquisition of Wyntek in June 2001, including $39.4 million of intangible assets, $19.9 million of goodwill. (2) Segment assets for Eliminations/Adjustments for June 30, 2001 include net proceeds of $562.1 million from the private placement of $575.0 million in principal of 3% convertible subordinated debentures which was completed in May 2001. Genzyme General used a portion of these proceeds to repay the $150.0 million it had drawn under our revolving credit facility in December 2000 to finance a portion of the cash component of the consideration for the GelTex merger. 9. NEW ACCOUNTING PRONOUNCEMENTS We have included the impact that recently issued accounting standards will have on our financial statements in Note 10., "New Accounting Pronouncements," to our unaudited, consolidated financial statements, which we incorporate by reference into this note. 10. SUBSEQUENT EVENTS INTERDIVISIONAL FINANCING ARRANGEMENT At June 30, 2001, $15.0 million of Genzyme General's cash remained available to Genzyme Biosurgery under a $25.0 million interdivisional financing arrangement with Genzyme General. We re-allocated this arrangement to Genzyme Biosurgery from Genzyme Tissue Repair upon the formation of Genzyme Biosurgery in December 2000. Under the terms of this arrangement, Genzyme Biosurgery 31 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 10. SUBSEQUENT EVENTS (CONTINUED) may draw down funds as needed each quarter in exchange for Biosurgery designated shares based on the fair market value (as defined in our charter) of Biosurgery Stock at the time of the draw. Biosurgery designated shares are shares of Biosurgery Stock that are not issued and outstanding, but which our board of directors may issue, sell or distribute without allocating the proceeds to Genzyme Biosurgery. In July 2001, Genzyme Biosurgery drew $12.0 million of cash under this arrangement in exchange for an additional reserve of 1,902,949 Biosurgery designated shares and used $8.5 million of the proceeds to pay a portion of the $38.7 million due to Genzyme General. INTENDED REDEMPTION OF $21.2 MILLION 5% CONVERTIBLE SUBORDINATED DEBENTURES On July 18, 2001, we sent notices to the holders of our $21.2 million 5% convertible subordinated debentures indicating our intention to redeem any debentures that remain outstanding on August 30, 2001 at a price equal to 103% of the $21.2 million principal amount, plus accrued interest through the date of redemption. We intend to pay the redemption price in cash. TRANSFER OF GENZYME'S 50% OWNERSHIP INTEREST IN ATIII LLC TO GENZYME TRANSGENICS CORPORATION On July 31, 2001, we transferred our 50% ownership interest in ATIII LLC, our joint venture with Genzyme Transgenics for the development and commercialization of ATIII, to Genzyme Transgenics. In exchange for our interest in the joint venture, we will receive a royalty on worldwide net sales (excluding Asia) of any of its products based on ATIII beginning three years after the first commercial sale of each such product up to a cumulative maximum amount of $30.0 million. NEUROCELL-TM- JOINT VENTURE REFUND Diacrin/Genzyme LLC, our joint venture with Diacrin, Inc. to develop and commercialize NeuroCell-TM--PD as a treatment for Parkinson's disease, did not initiate a phase 3 clinical trial of NeuroCell-TM--PD by June 30, 2001. Because a phase 3 trial of the product was not initiated by June 30, 2001, Genzyme General had the right to elect to receive a refund of $20.0 million of the $25.0 million Genzyme Biosurgery received from Genzyme General in connection with the transfer to Genzyme General of Genzyme Biosurgery's interest in the joint venture plus accrued interest thereon at a rate of 13.5% per annum. On August 2, 2001, Genzyme General notified Genzyme Biosurgery of its election to receive the refund. Genzyme Biosurgery can pay the refund amount in cash, Biosurgery designated shares or both. The refund is due and payable within 90 days after Genzyme Biosurgery received the notice from Genzyme General. ACQUISITION OF NOVAZYME PHARMACEUTICALS, INC. On August 6, 2001, we entered into a definitive agreement to acquire Novazyme, for $137.5 million, payable in shares of Genzyme General Stock plus the assumption of all outstanding options and warrants to purchase shares of Novazyme common stock on an as-converted basis. Novazyme is a privately held company that is developing biotherapies for the treatment of lysosomal storage disorders. Novazyme shareholders are also eligible to receive two subsequent payments totaling $87.5 million if we receive U.S. marketing approval for two products using certain of Novazyme's technologies. The contingent payments are also payable in shares of Genzyme General Stock. The 32 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 10. SUBSEQUENT EVENTS (CONTINUED) acquisition is subject to customary closing conditions. We expect to complete the acquisition in the third quarter of 2001. PHARMING GROUP, N.V. RECEIVERSHIP On August 10, 2001, Pharming Group, N.V., a public company in the Netherlands and our partner for the development of therapies for Pompe disease, announced that it would file for receivership in order to seek protection from its creditors. At June 30, 2001, we have an $8.5 million investment in Pharming common stock and a 7% convertible senior note from Pharming for the principal amount of $10.0 million, plus accrued and unpaid interest of approximately $0.2 million. In addition, we have two joint ventures with Pharming for the development of Pompe disease therapies. At June 30, 2001, Pharming owed the joint ventures an aggregate amount of $1.7 million for its share of program costs, and the joint ventures owed us approximately $6.4 million for reimbursement of program costs incurred by us. At this time, the status of Pharming's receivership and our position as a creditor is not known and we are therefore unable to determine the impact, if any, on the realizable value of amounts due to us. Accordingly, no adjustments have been made to our consolidated financial statements or the combined financial statements of Genzyme General as of June 30, 2001. 33 GENZYME BIOSURGERY A DIVISION OF GENZYME CORPORATION COMBINED STATEMENTS OF OPERATIONS (UNAUDITED, AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- ------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Revenues: Net product sales................................. $54,433 $29,969 $103,057 $ 59,051 Net service sales................................. 5,930 6,286 11,458 12,132 Revenues from research and development contracts....................................... 1 1 5 22 -------- -------- -------- -------- Total revenues................................ 60,364 36,256 114,520 71,205 -------- -------- -------- -------- Operating costs and expenses: Cost of products sold............................. 32,131 16,592 60,769 32,631 Cost of services sold............................. 2,811 3,023 5,948 6,046 Selling, general and administrative............... 35,297 22,668 65,989 44,807 Research and development.......................... 11,956 8,453 22,675 17,295 Amortization of intangibles....................... 11,992 1,427 23,313 2,853 -------- -------- -------- -------- Total operating costs and expenses............ 94,187 52,163 178,694 103,632 -------- -------- -------- -------- Operating loss...................................... (33,823) (15,907) (64,174) (32,427) -------- -------- -------- -------- Other income (expenses): Equity in net loss of unconsolidated affiliate.... (780) -- (1,316) -- Other............................................. 38 19 45 42 Investment income................................. 427 1,815 939 3,599 Interest expense.................................. (3,470) (325) (8,429) (626) -------- -------- -------- -------- Total other income (expenses)................. (3,785) 1,509 (8,761) 3,015 -------- -------- -------- -------- Division net loss................................... $(37,608) $(14,398) $(72,935) $(29,412) ======== ======== ======== ======== Comprehensive loss, net of tax: Division net loss................................. $(37,608) $(14,398) $(72,935) $(29,412) -------- -------- -------- -------- Other comprehensive income (loss), net of tax: Foreign currency translation adjustments........ 504 42 (197) 42 -------- -------- -------- -------- Unrealized gains (losses) on securities: Unrealized gains (losses) arising during the period...................................... -- (7,060) 97 (3,782) Reclassification adjustment for (gains) losses included in division net loss............... -- -- -- -- -------- -------- -------- -------- Unrealized gains (losses) on securities, net......................................... -- (7,060) 97 (3,782) -------- -------- -------- -------- Other comprehensive income (loss)................. 504 (7,018) (100) (3,740) -------- -------- -------- -------- Comprehensive loss.................................. $(37,104) $(21,416) $(73,035) $(33,152) ======== ======== ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. 34 GENZYME BIOSURGERY A DIVISION OF GENZYME CORPORATION COMBINED BALANCE SHEETS (AMOUNTS IN THOUSANDS)
JUNE 30, DECEMBER 31, 2001 2000 ----------- ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 22,989 $ 78,163 Short-term investments.................................... 38 -- Accounts receivable, net.................................. 46,668 38,952 Inventories............................................... 57,815 61,574 Prepaid expenses and other current assets................. 9,451 9,543 -------- -------- Total current assets.................................. 136,961 188,232 Property, plant and equipment, net.......................... 57,794 57,409 Notes receivable--related party............................. 168 -- Intangibles, net............................................ 573,340 562,635 Investment in equity securities............................. -- 1,603 Other noncurrent assets..................................... 2,063 1,721 -------- -------- Total assets.......................................... $770,326 $811,600 ======== ======== LIABILITIES AND DIVISION EQUITY Current liabilities: Accounts payable.......................................... $ 11,392 $ 6,074 Accrued expenses.......................................... 39,078 46,245 Due to Genzyme General.................................... 38,680 18,645 Current portion of long-term debt and capital lease obligations............................................. 18,986 18,449 -------- -------- Total current liabilities............................. 108,136 89,413 Long-term debt and capital lease obligations................ 201,188 201,004 Convertible notes........................................... 10,000 10,000 Other noncurrent liabilities................................ -- 77 -------- -------- Total liabilities..................................... 319,324 300,494 -------- -------- Division equity............................................. 451,002 511,106 -------- -------- Total liabilities and division equity................. $770,326 $811,600 ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. 35 GENZYME BIOSURGERY A DIVISION OF GENZYME CORPORATION COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED, AMOUNTS IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, ------------------- 2001 2000 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Division net loss......................................... $(72,935) $(29,412) Reconciliation of division net loss to net cash used in operating activities: Depreciation and amortization........................... 27,169 4,965 Provision for bad debts................................. 228 187 Equity in net loss of unconsolidated affiliate.......... 1,316 -- Other................................................... (76) 981 Increase (decrease) in cash from working capital changes: Accounts receivable................................... (8,029) (2,360) Inventories........................................... 9,432 (8,324) Prepaid expenses and other current assets............. 261 (441) Accounts payable, accrued expenses and income taxes payable............................................. (3,909) 3,035 Due to Genzyme General................................ 20,035 1,513 -------- -------- Net cash used in operating activities............... (26,508) (29,856) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments.................................. -- (76,944) Sales and maturities of investments....................... -- 102,628 Purchase of equity securities............................. (5,000) (5,000) Purchase of property, plant and equipment................. (2,483) (1,672) Acquisition, net of acquired cash......................... (23,394) -- Other..................................................... (659) (3,817) -------- -------- Net cash provided by (used in) investing activities........................................ (31,536) 15,195 -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Allocated proceeds from issuance of Biosurgery Stock...... 756 1,253 Net cash allocated from Genzyme General................... (7) 4,940 Payments of capital lease obligations..................... (220) -- Payments of notes receivable from stockholders............ 3,204 -- Bank overdraft............................................ (653) (413) Other..................................................... (214) -- -------- -------- Net cash provided by financing activities........... 2,866 5,780 -------- -------- Effect of exchange rate changes on cash..................... 4 6 -------- -------- Decrease in cash and cash equivalents....................... (55,174) (8,875) Cash and cash equivalents at beginning of period............ 78,163 32,046 -------- -------- Cash and cash equivalents at end of period.................. $ 22,989 $ 23,171 ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. 36 GENZYME BIOSURGERY A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The unaudited, combined financial statements of Genzyme Biosurgery for each period include the balance sheets, statements of operations and cash flows of the businesses we allocate to Genzyme Biosurgery. We also allocate a portion of our corporate operations to Genzyme Biosurgery using methods described in our allocation policy included in Exhibit 99.1 to our 2000 Form 10-K. These unaudited combined financial statements were prepared using amounts included in our unaudited, consolidated financial statements included in this Form 10-Q. We prepared these unaudited, combined financial statements for Genzyme Biosurgery following the requirements of the SEC for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by generally accepted accounting principles can be condensed or omitted. We have reclassified certain 2000 data to conform to our 2001 presentation. These financial statements include all normal and recurring adjustments that we consider necessary for the fair presentation of Genzyme Biosurgery's financial position and operating results. Since these are interim financial statements, you should also read the financial statements and notes for Genzyme Biosurgery included in our 2000 Form 10-K. Revenues, expenses, assets and liabilities can vary from quarter to quarter. Therefore, the results and trends in these interim financial statements may not be indicative of the results for future periods. In December 2000, we acquired Biomatrix, Inc. We accounted for the acquisition as a purchase. Immediately prior to the acquisition, we combined two of our operating divisions, Genzyme Surgical Products and Genzyme Tissue Repair, to form a new division called Genzyme Biosurgery. We allocated the acquired assets and liabilities of Biomatrix to Genzyme Biosurgery. The combination of Genzyme Surgical Products and Genzyme Tissue Repair to form Genzyme Biosurgery did not result in any adjustments to the book values of the net assets of the divisions because they remained divisions of the same corporation. We present the financial statements of Genzyme Biosurgery as though the divisions had been combined for all periods presented, and include the operations of Biomatrix from the date of acquisition. 2. ACQUISITIONS CLASS A LIMITED PARTNERSHIP INTERESTS OF GENZYME DEVELOPMENT PARTNERS, L.P. In January 2001, we purchased all of the outstanding GDP Class A limited partnership interests for a payment of approximately $25.7 million in cash plus royalties payable over ten years on sales of certain Sepra-TM- products. We allocated the acquired limited partnership interests of GDP to Genzyme Biosurgery. As a result of the acquisition, significant control over the activities of GDP passed to us. The acquisition was accounted for as a purchase, and the purchase price was allocated to the fair value of the intangible assets acquired as follows (amounts in thousands): Patents (to be amortized over 8 years)...................... $ 5,909 Trademarks (to be amortized over 10 years).................. 2,755 Technology (to be amortized over 10 years).................. 8,827 Goodwill (to be amortized over 10 years).................... 8,234 ------- Total................................................... $25,725 =======
37 GENZYME BIOSURGERY A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 2. ACQUISITIONS (CONTINUED) Accordingly, the results of operations of GDP are included in the combined financial statements of Genzyme Biosurgery from the date of acquisition. FOCAL, INC. In January 2001, Focal, Inc., a public company and developer of synthetic biopolymers used in surgery, exercised its option to require us to purchase $5.0 million in Focal common stock at a price of $2.06 per share. After that purchase we held approximately 22% of the outstanding shares of Focal common stock and began accounting for our investment under the equity method of accounting. We allocated this investment to Genzyme Biosurgery. On June 30, 2001, we acquired the remaining 78% of the outstanding shares in an exchange of shares of Biosurgery Stock for shares of Focal common stock. Focal shareholders received 0.1545 of a share of Biosurgery Stock for each share of Focal common stock they held. We issued approximately 2.1 million shares of Biosurgery Stock as merger consideration. We allocated the acquired assets and liabilities to Genzyme Biosurgery and accounted for the acquisition as a purchase. The purchase price and the allocation of the purchase price to the fair value of the acquired tangible and intangible assets and liabilities is as follows (amounts in thousands): Issuance of 2.1 million shares of Biosurgery Stock.......... $ 9,450 Issuance of options to purchase 231,566 shares of Biosurgery Stock..................................................... 351 Acquisition costs........................................... 638 Existing equity investment in Focal......................... 5,488 Cash paid to selling security holder........................ 11 ------- Total purchase price.................................... $15,938 ======= Cash and cash equivalents................................... $ 2,331 Current assets.............................................. 6,003 Property, plant and equipment............................... 1,818 Notes receivable from related party......................... 168 Intangible assets (to be amortized over 3 to 12 years)...... 7,909 Goodwill (to be amortized over 12 years).................... 615 Assumed liabilities......................................... (3,273) Notes receivable from stockholders.......................... 367 ------- Allocated purchase price................................ $15,938 =======
UNAUDITED PRO FORMA FINANCIAL SUMMARY In December 2000, we also acquired Biomatrix, a public company engaged in the development and manufacture of viscoelastic biomaterials for use in orthopaedic and other medical applications. We accounted for this acquisition as a purchase and allocated it to Genzyme Biosurgery. The following unaudited pro forma financial summary is presented as if the acquisitions of Focal and Biomatrix were completed as of January 1, 2001 and 2000. The unaudited pro forma combined results are not necessarily indicative of the actual results that would have occurred had the acquisition been 38 GENZYME BIOSURGERY A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 2. ACQUISITIONS (CONTINUED) consummated at that date, or of the future operations of the combined entities. Material nonrecurring charges, such as the acquired in-process and development charge of $82.1 million related to our Biomatrix acquisition, are not reflected in the following pro forma financial summary.
FOR THE SIX MONTHS ENDED JUNE 30, --------------------------------- 2001 2000 --------------- --------------- (UNAUDITED, AMOUNTS IN THOUSANDS) Total revenues................................ $114,667 $115,447 Division net loss............................. (83,484) (74,009)
3. INVENTORIES (AMOUNTS IN THOUSANDS)
JUNE 30, DECEMBER 31, 2001 2000 ----------- ------------ (UNAUDITED) Raw materials........................................ $15,533 $21,270 Work-in-process...................................... 29,839 25,640 Finished products.................................... 12,443 14,664 ------- ------- Total............................................ $57,815 $61,574 ======= =======
4. SEGMENT REPORTING We present segment information in a manner consistent with the method we use to report this information to our management. Genzyme Biosurgery has three reportable segments: - Cardiothoracic, which includes chest drainage systems, lung sealants, instruments and closures used in coronary artery bypass, valve replacement, lung surgery and other cardiothoracic surgeries; - Orthodpaedics, which includes the Synvisc-Registered Trademark- viscosupplementation product and Carticel-Registered Trademark- chondrocytes; and - Biosurgical Specialties, which includes the Sepra-TM- products, instruments for general and plastic surgery, and Epicel-Registered Trademark- skin grafts. 39 GENZYME BIOSURGERY A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 4. SEGMENT REPORTING (CONTINUED) We have provided information concerning the operations in these reportable segments in the following table:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- ------------------- 2001 2000 2001 2000 -------- -------- -------- -------- (UNAUDITED, AMOUNTS IN THOUSANDS) Revenues(1): Cardiothoracic..................................... $17,367 $19,786 $ 35,656 $39,436 Orthopaedics....................................... 26,488 4,577 46,905 9,109 Biosurgical Specialties............................ 16,508 11,892 31,954 22,638 Other(2)........................................... 1 1 5 22 ------- ------- -------- ------- Total................................................ $60,364 $36,256 $114,520 $71,205 ======= ======= ======== ======= Gross Profit(1): Cardiothoracic..................................... $ 5,291 $ 8,332 $ 12,455 $16,719 Orthopaedics....................................... 19,417 3,948 32,946 7,881 Biosurgical Specialties............................ 714 4,360 2,398 7,906 Other(2)........................................... -- 1 4 22 ------- ------- -------- ------- Total................................................ $25,422 $16,641 $ 47,803 $32,528 ======= ======= ======== =======
- ------------------------ (1) In December 2000, we acquired Biomatrix and allocated the acquisition to Genzyme Biosurgery. The operations of Biomatrix are included in the results of Genzyme Biosurgery for the three and six months ended June 30, 2001. On June 30, 2001, we acquired Focal and allocated the acquisition to Genzyme Biosurgery's Cardiothoracic segment. The results of operations of Focal will be included in the results of Genzyme Biosurgery from the date of acquisition. (2) The Other category includes revenue from Genzyme Biosurgery's research and development contracts which we do not allocate to a particular segment of Genzyme Biosurgery. We do not allocate assets within Genzyme Biosurgery for purposes of segment information. Total assets for Genzyme Biosurgery at June 30, 2001 of $770.3 million include: - $25.7 million of additional assets resulting from the acquisition of the Class A limited partnership interests of GDP, including $17.5 million of intangible assets and $8.2 million of goodwill; and - $18.8 million of additional assets resulting from the acquisition of Focal, including $7.9 million of intangible assets and $1.8 million of property, plant and equipment. 5. NEW ACCOUNTING PRONOUNCEMENTS We have included the impact that recently issued accounting standards will have on our financial statements in Note 10., "New Accounting Pronouncements," to our unaudited, consolidated financial statements, which we incorporate by reference into this note. 40 GENZYME BIOSURGERY A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 6. SUBSEQUENT EVENTS INTERDIVISIONAL FINANCING ARRANGEMENT At June 30, 2001, $15.0 million of Genzyme General's cash remained available to Genzyme Biosurgery under a $25.0 million interdivisional financing arrangement with Genzyme General. We re-allocated this arrangement to Genzyme Biosurgery from Genzyme Tissue Repair upon the formation of Genzyme Biosurgery in December 2000. Under the terms of this arrangement, Genzyme Biosurgery may draw down funds as needed each quarter in exchange for Biosurgery designated shares based on the fair market value (as defined in our charter) of Biosurgery Stock at the time of the draw. Biosurgery designated shares are shares of Biosurgery Stock that are not issued and outstanding, but which our board of directors may issue, sell or distribute without allocating the proceeds to Genzyme Biosurgery. In July 2001, Genzyme Biosurgery drew $12.0 million of cash under this arrangement in exchange for an additional reserve of 1,902,949 Biosurgery designated shares and used $8.5 million of the proceeds to pay a portion of the $38.7 million due to Genzyme General. ACQUISITION OF GDP CLASS B LIMITED PARTNERSHIP INTERESTS In July 2001, we notified the holders of the two Class B limited partnership interests in GDP that we are exercising our option to buy the Class B limited partnership interests for a payment of $70,000 per interest plus royalties on sales of certain Sepra-TM- products. We will purchase the Class B limited partnership interests on August 31, 2001. We will allocate the purchase of the GDP Class B limited partnership interests to Genzyme Biosurgery. NEUROCELL-TM- JOINT VENTURE REFUND Diacrin/Genzyme LLC, our joint venture with Diacrin, Inc. to develop and commercialize NeuroCell-TM--PD as a treatment for Parkinson's disease, did not initiate a phase 3 clinical trial of NeuroCell-TM--PD by June 30, 2001. Because a phase 3 trial of the product was not initiated by June 30, 2001, Genzyme General had the right to elect to receive a refund of $20.0 million of the $25.0 million Genzyme Biosurgery received from Genzyme General in connection with the transfer to Genzyme General of Genzyme Biosurgery's interest in the joint venture plus accrued interest thereon at a rate of 13.5% per annum. On August 2, 2001, Genzyme General notified Genzyme Biosurgery of its election to receive the refund. Genzyme Biosurgery can pay the refund amount in cash, Biosurgery designated shares or both. The refund is due and payable within 90 days after Genzyme Biosurgery received the notice from Genzyme General. 41 GENZYME MOLECULAR ONCOLOGY A DIVISION OF GENZYME CORPORATION COMBINED STATEMENTS OF OPERATIONS (UNAUDITED, AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- ------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Revenues: Licensing revenue.................................. $ 548 $ 920 $ 1,212 $ 3,470 Royalty revenue.................................... 28 43 73 48 Research and development revenue................... 703 -- 1,406 -- ------- ------- -------- -------- Total revenues................................... 1,279 963 2,691 3,518 ------- ------- -------- -------- Operating costs and expenses: Cost of revenues................................... 485 139 1,029 195 Selling, general and administrative................ 1,811 1,788 3,702 2,978 Research and development (including research and development related to contracts)................ 7,568 4,594 13,229 8,652 Amortization of intangibles........................ -- 2,464 -- 5,420 ------- ------- -------- -------- Total operating costs and expenses............... 9,864 8,985 17,960 17,245 ------- ------- -------- -------- Operating loss....................................... (8,585) (8,022) (15,269) (13,727) ------- ------- -------- -------- Other income (expenses): Interest income.................................... 268 177 691 250 Interest expense................................... (14) (70) (27) (157) ------- ------- -------- -------- Total other income (expenses).................... 254 107 664 93 ------- ------- -------- -------- Loss before income taxes............................. (8,331) (7,915) (14,605) (13,634) Tax benefit.......................................... -- 552 -- 1,214 ------- ------- -------- -------- Division net loss.................................... $(8,331) $(7,363) $(14,605) $(12,420) ======= ======= ======== ======== Comprehensive loss, net of tax: Division net loss.................................. $(8,331) $(7,363) $(14,605) $(12,420) Other comprehensive loss, net of tax: Unrealized gains (losses) on securities arising during the period.............................. -- -- -- -- ------- ------- -------- -------- Comprehensive loss................................... $(8,331) $(7,363) $(14,605) $(12,420) ======= ======= ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. 42 GENZYME MOLECULAR ONCOLOGY A DIVISION OF GENZYME CORPORATION COMBINED BALANCE SHEETS (AMOUNTS IN THOUSANDS)
JUNE 30, DECEMBER 31, 2001 2000 ----------- ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $16,173 $22,209 Short-term investments.................................... -- 7,942 Accounts receivable, net.................................. 323 231 Prepaid expenses and other current assets................. 240 126 ------- ------- Total current assets.................................... 16,736 30,508 Equipment, net.............................................. 182 244 ------- ------- Total assets............................................ $16,918 $30,752 ======= ======= LIABILITIES AND DIVISION EQUITY Current liabilities: Accrued expenses.......................................... $ 1,076 $ 1,540 Due to Genzyme General.................................... 6,655 4,660 Deferred revenue--current portion......................... 1,855 2,208 ------- ------- Total current liabilities............................... 9,586 8,408 Deferred revenue--long-term portion......................... 2,020 2,818 ------- ------- Total liabilities....................................... 11,606 11,226 Division equity............................................. 5,312 19,526 ------- ------- Total liabilities and division equity................... $16,918 $30,752 ======= =======
The accompanying notes are an integral part of these unaudited, combined financial statements. 43 GENZYME MOLECULAR ONCOLOGY A DIVISION OF GENZYME CORPORATION COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED, AMOUNTS IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, ------------------- 2001 2000 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Division net loss......................................... $(14,605) $(12,420) Reconciliation of division net loss to net cash used in operating activities: Depreciation and amortization........................... 62 5,499 Deferred income tax benefit............................. -- (1,214) Other................................................... 152 (86) Increase (decrease) in cash from working capital changes: Accounts receivable................................... (92) (139) Prepaid expenses and other current assets............. (114) 206 Accrued expenses, deferred revenue and other.......... (1,615) 765 Due to Genzyme General................................ 1,995 311 -------- -------- Net cash used in operating activities............... (14,217) (7,078) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments.................................. -- (6,790) Sales and maturities of investments....................... 7,792 -- -------- -------- Net cash provided by (used in) investing activities........................................ 7,792 (6,790) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Allocated proceeds from issuance of Molecular Oncology Stock................................................... 389 1,366 Repayment of debt......................................... -- (5,000) Net cash allocated from Genzyme General................... -- 15,000 -------- -------- Net cash provided by financing activities........... 389 11,366 -------- -------- Decrease in cash and cash equivalents....................... (6,036) (2,502) Cash and cash equivalents at beginning of period............ 22,209 3,587 -------- -------- Cash and cash equivalents at end of period.................. $ 16,173 $ 1,085 ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. 44 GENZYME MOLECULAR ONCOLOGY A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The unaudited, combined financial statements of Genzyme Molecular Oncology for each period include the balance sheets, statements 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 included in Exhibit 99.1 to our 2000 Form 10-K. These unaudited, combined financial statements are prepared using amounts included in our unaudited, consolidated financial statements included in this Form 10-Q. We prepared these unaudited, combined financial statements for Genzyme Molecular Oncology following the requirements of the SEC for interim reporting. As permitted under these rules, certain footnotes or other financial information that are normally required by generally accepted accounting principles can be condensed or omitted. We have reclassified certain 2000 data to conform to our 2001 presentation. These financial statements include all normal and recurring adjustments that we consider necessary for the fair presentation of Genzyme Molecular Oncology's financial position and operating results. Since these are interim financial statements, you should also read the financial statements and notes for Genzyme Molecular Oncology included in our 2000 Form 10-K. Revenues, expenses, assets and liabilities can vary from quarter to quarter. Therefore, the results and trends in these interim financial statements may not be indicative of the results for future periods. 2. NEW ACCOUNTING PRONOUNCEMENTS We have included the impact that recently issued accounting standards will have on our financial statements in Note 10., "New Accounting Pronouncements," to our unaudited, consolidated financial statements, which we incorporate by reference into this note. 45 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion contains forward-looking statements. Actual results could differ materially from those anticipated by the forward-looking statements due to the risks and uncertainties described in the section of this report on Form 10-Q entitled "Note Regarding Forward-Looking Statements" and in Exhibit 99.2 to our 2000 Form 10-K. 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 three 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 lipid and peptide products for drug delivery. - Genzyme Biosurgery, which develops, manufactures and sells instruments, devices, biomaterials and biotherapeutic products to improve or replace surgery, with an emphasis on the orthopaedics and cardiothoracic markets; and - Genzyme Molecular Oncology, which utilizes its functional genomics and antigen discovery technology platforms to develop novel cancer products focused on cancer vaccines and angiogenesis inhibitors and to generate partnering revenue developing cancer products, with a focus on therapeutic vaccines and angiogenesis inhibitors. We currently have three designated series of common stock--Genzyme General Division common stock, which we refer to as "Genzyme General Stock," Genzyme Biosurgery Division common stock, which we refer to as "Biosurgery Stock" and Genzyme Molecular Oncology Division common stock, which we refer to as "Molecular Oncology Stock." We also refer to our series of stock as "tracking stock." Unlike typical common stock, each of our tracking stocks is designed to track the financial performance of a specific subset of our business operations and its allocated assets, rather than the operations and assets of our entire company. The chief mechanisms intended to cause each tracking stock to "track" the financial performance of each division are provisions in our charter governing the 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 Biosurgery Stock or Molecular Oncology 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 average market price of the exchanged stock following the announcement of the sale). To determine earnings per share, we allocate our earnings to each series of our common stock based on the earnings attributable to that series of stock. The earnings attributable to each series of stock is defined in our charter as the net income or loss of the corresponding division determined in accordance with generally accepted accounting principles and as adjusted for tax benefits allocated to or from that division in accordance with our management and accounting policies. Our charter also requires that all of our income and expenses be allocated among our divisions in a reasonable and 46 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. Our board of directors has also adopted accounting policies relating to the management of our operating divisions. These policies are set forth in Exhibit 99.1 to our 2000 Form 10-K. 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 for the corporation as well as for each of our divisions to aid investors in evaluating our performance and the performance of each of our divisions. While each tracking stock is designed to reflect a division's performance, it is common stock of Genzyme Corporation and not of a division; each division is not a company or a 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 stock holders in the combined assets of Genzyme. We provide separate financial statements for each of our divisions as well as consolidated statements that include the consolidated results of each of our divisions and our corporate operations taken as a whole. You should read this discussion of and analysis of our financial position and results of operations in conjunction with those unaudited, consolidated financial statements and related notes, which are included in this report. In June 2001, we acquired all of the outstanding capital stock of privately-held Wyntek Diagnostics, Inc., for $65.0 million in cash. Wyntek is a provider of high quality point of care rapid diagnostic tests for pregnancy and infectious diseases. We allocated the acquisition to Genzyme General and accounted for the acquisition as a purchase. Accordingly, the results of operations of Wyntek are included in our consolidated financial statements and the combined financial statements of Genzyme General from June 1, 2001, the date of acquisition. In June 2001, we acquired Focal, Inc., a public company and developer of synthetic biopolymers used in surgery. We allocated the acquired assets and liabilities to Genzyme Biosurgery. The results of operations of Focal will be included in our consolidated results and the results of Genzyme Biosurgery from June 30, 2001, the date of acquisition. In December, 2000, we acquired GelTex Pharmaceuticals, Inc., a public company engaged in developing therapeutic products based on polymer technology. We accounted for the acquisition as a purchase and allocated it to Genzyme General. Accordingly, the results of operations of GelTex are included in our consolidated financial statements and the combined financial statements of Genzyme General from the date of acquisition. As part of the acquisition of GelTex, we acquired all of GelTex's interest in RenaGel LLC, our joint venture with GelTex. Our consolidated financial statements and the combined financial statements for Genzyme General reflect the consolidation of RenaGel LLC from the date of acquisition of GelTex. Prior to the acquisition of GelTex, we accounted for our investment in RenaGel LLC under the equity method. In December 2000, we also acquired Biomatrix, Inc., a company that develops, manufactures, markets and sells a series of proprietary viscoelastic products based on hyaluronan technology that are used in therapeutic medical applications and skin care. We allocated the acquisition to Genzyme 47 Biosurgery. The operations of Biomatrix are included in our consolidated financial statements and the combined financial statements of Genzyme Biosurgery from the date of acquisition. A. RESULTS OF OPERATIONS GENZYME CORPORATION The components of our consolidated statements of operations are described in the following table:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, INCREASE/ JUNE 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Total revenues.................. $300,641 $223,913 34% $578,902 $432,043 34% -------- -------- -------- -------- Cost of products and services sold.......................... 93,028 65,610 42% 182,981 125,720 46% Selling, general and administrative................ 103,666 67,428 54% 194,780 128,979 51% Research and development (including research and development related to contracts).................... 62,414 28,577 118% 119,524 84,276 42% Amortization of intangibles..... 30,174 5,684 431% 59,165 11,782 402% Purchase of in-process research and development............... 8,768 -- N/A 8,768 -- N/A -------- -------- -------- -------- Total operating costs and expenses.................. 298,050 167,299 78% 565,218 350,757 61% -------- -------- -------- -------- Operating income................ 2,591 56,614 (95)% 13,684 81,286 (83)% Other income (expenses), net.... (11,009) 16,192 (168)% (23,682) 35,192 (167)% -------- -------- -------- -------- Income (loss) before income taxes......................... (8,418) 72,806 (112)% (9,998) 116,478 (109)% Benefit from (provision for) income taxes.................. 2,064 (23,314) (109)% 2,734 (35,168) (108)% -------- -------- -------- -------- Net income (loss) before cumulative effect of change in accounting principle.......... (6,354) 49,492 (113)% (7,264) 81,310 (109)% Cumulative effect of change in accounting principle, net of tax........................... -- -- -- 4,167 -- N/A -------- -------- -------- -------- Net income (loss)............... $ (6,354) $ 49,492 (113)% $ (3,097) $ 81,310 (104)% ======== ======== ======== ========
REVENUES The components of our revenues are described in the following table:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, INCREASE/ JUNE 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Product revenue................. $273,473 $201,439 36% $524,303 $385,860 36% Service revenue................. 24,235 21,347 14% 47,995 42,313 13% -------- -------- -------- -------- Total product and service revenue..................... 297,708 222,786 34% 572,298 428,173 34% Research and development revenue....................... 2,933 1,127 160% 6,604 3,870 71% -------- -------- -------- -------- Total revenues.............. $300,641 $223,913 34% $578,902 $432,043 34% ======== ======== ======== ========
48 PRODUCT REVENUE We derive product revenue from sales by Genzyme General of therapeutic products, including Cerezyme-Registered Trademark- and Ceredase-Registered Trademark- enzymes and Renagel-Registered Trademark- phosphate binder, diagnostic products and other products, and sales by Genzyme Biosurgery of cardiothoracic products, including FocalSeal-Registered Trademark--L surgical sealant, orthopaedic products, including Synvisc-Registered Trademark- viscosupplementation product, and biosurgical specialties products, including Seprafilm-TM- bioresorbable membrane. The following table sets forth our product revenue on a segment basis:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, INCREASE/ JUNE 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Genzyme General: Therapeutics: Cerezyme-Registered Trademark- and Ceredase-Registered Trademark- enzymes................... $141,312 $134,854 5% $280,943 $263,459 7% Renagel-Registered Trademark- phosphate binder.......... 40,408 10,218 295% 69,003 10,218 575% Thyrogen-Registered Trademark- hormone................... 4,420 3,506 26% 8,600 6,867 25% Other therapeutic products.................. 2,083 -- N/A 4,579 1,852 147% -------- -------- -------- -------- Total Therapeutics........ 188,223 148,578 27% 363,125 282,396 29% Diagnostic Products........... 17,790 15,539 14% 34,214 30,777 11% Other......................... 13,027 7,353 77% 23,907 13,636 75% -------- -------- -------- -------- Total product revenue-- Genzyme General....... 219,040 171,470 28% 421,246 326,809 29% -------- -------- -------- -------- Genzyme Biosurgery: Cardiothoracic................ 17,367 19,786 (12)% 35,656 39,436 (10)% Orthopaedics.................. 21,709 -- N/A 37,777 -- N/A Biosurgical Specialties....... 15,357 10,183 51% 29,624 19,615 51% -------- -------- -------- -------- Total product revenue-- Genzyme Biosurgery.... 54,433 29,969 82% 103,057 59,051 75% -------- -------- -------- -------- Total product revenues.............. $273,473 $201,439 36% $524,303 $385,860 36% ======== ======== ======== ========
Product revenue continued to increase in both the three and six month periods ended June 30, 2001 as compared to the same periods a year ago, due primarily to increased sales of Renagel-Registered Trademark- phosphate binder, which is used to reduce serum phosphorus levels in patients with end-stage renal disease on dialysis, and continued growth in sales of Cerezyme-Registered Trademark- enzyme for the treatment of Type I Gaucher disease. We began recording revenues from Renagel-Registered Trademark- phosphate binder during the second quarter of 2000 under an amended distribution arrangement with GelTex, which we acquired in December 2000. Prior to this amendment, revenues from Renagel-Registered Trademark- phosphate binder were recorded by RenaGel LLC, our joint venture with GelTex, and were $8.0 million for the three month period ended March 31, 2000. Sales of Renagel-Registered Trademark- phosphate binder in both the three and six months ended June 30, 2001 include sales of capsules and the new 800 mg tablet formulation. We launched the tablet formulation in the United States during the third quarter of 2000. In the first quarter of 2001, the higher-than-anticipated demand for the 800 mg tablet formulation and certain production constraints resulted in a temporary shortage of this dosage form of Renagel-Registered Trademark- phosphate binder. Patients taking the 800 mg tablets were shifted to an equivalent dose of 400 mg Renagel-Registered Trademark- tablets or 403 mg Renagel-Registered Trademark- capsules while we built an inventory of 800 mg tablets to support our re-launch of this dosage form in June 2001. Despite the 49 temporary shortage of the 800 mg tablet formulation, sales of Renagel-Registered Trademark- phosphate binder increased significantly in each of the three and six months ended June 30, 2001 in comparison to the same periods of 2000 due to accelerating adoption of the product by nephrologists, as evidenced by significant increases in both renewal prescriptions and new prescriptions. The steady growth in sales of Cerezyme-Registered Trademark- enzyme in the three and six months ended June 30, 2001 was attributable to our continued identification of new Gaucher disease patients worldwide coupled with significant investment in our global infrastructure that has continued to increase international sales of this product. Additionally, we continue to market Ceredase-Registered Trademark- enzyme for the treatment of Gaucher disease, although we have successfully converted virtually all Gaucher disease patients to a treatment regimen using Cerezyme-Registered Trademark- enzyme. Our 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. We are aware of companies that have initiated efforts to develop competitive products and other companies may do so in the future. Although orphan drug status for Cerezyme-Registered Trademark- enzyme, which provided us with exclusive marketing rights for Cerezyme-Registered Trademark- enzyme in the United States, expired in May 2001, we continue to have patents protecting our method of manufacturing Cerezyme-Registered Trademark- enzyme until 2010 and the composition of Cerezyme-Registered Trademark- enzyme as made by that process until 2013. The expiration of market exclusivity and orphan drug status in May 2001 will likely subject Cerezyme-Registered Trademark- enzyme to increased competition, which may decrease the amount of revenue we receive from this product or the growth of that revenue. The following table provides information regarding the change in sales of our Gaucher disease therapies as a percentage of total product revenue during the periods presented:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, INCREASE/ JUNE 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Sales of Cerezyme-Registered Trademark- and Ceredase-Registered Trademark- enzymes....................... $141,312 $134,854 5% $280,943 $263,459 7% % of total product revenue...... 52% 67% 54% 68%
Although sales of Genzyme General's Gaucher disease therapies continue to increase, the decline as a percentage of total product revenue is a trend we expect will continue in the second half of 2001. Genzyme General expects that growth in the sales of Renagel-Registered Trademark- phosphate binder will continue to increase. Revenue from sales of Renagel-Registered Trademark- phosphate binder represented approximately 15% of our total product revenue for the three month period ended June 30, 2001 as compared to 5% for the same period a year ago. For the six month period ended June 30, 2001, sales of Renagel-Registered Trademark- phosphate binder represented approximately 13% of our total product revenue as compared to 3% for the same period a year ago. Therapeutics revenue for each period also includes sales of Thyrogen-Registered Trademark- hormone, which is an adjunctive diagnostic tool for well-differentiated thyroid cancer. Revenues for Thyrogen-Registered Trademark- hormone increased for the three months and six months ended June 30, 2001 as compared to the same periods a year ago, due primarily to increased market penetration. Other therapeutics revenue increased for both the three and six months ended June 30, 2001 due primarily to increased sales of Fabrazyme-TM- enzyme in France under an Authorisation Temporaire d'utilisation from the French Medicines Agency. Diagnostic Products's revenues increased for the three and six-month periods ended June 30, 2001 as compared to the same periods in 2000, due primarily to increased sales of infectious disease testing 50 products and HDL and LDL cholesterol testing products. Also contributing to the increase for both periods is the addition of sales of point of care rapid diagnostic tests for pregnancy and infectious diseases that we obtained through our acquisition of Wyntek, which we acquired on June 1, 2001. Diagnostic Product's revenue also includes royalties on product sales by Techne Corporation's biotechnology group. The increase in other product revenue for the three and six months ended June 30, 2001 as compared to the same periods in 2000, was primarily attributable to increased sales of lipids and peptides for drug delivery. The increase in other service revenue in each of the three and six months ended June 30, 2001 is due to increased sales of genetic testing services attributable to expanded presence in the prenatal market and a broader test menu in oncology. The decrease in cardiothoracic revenue in the three and six months ended June 30, 2001 when compared to the same periods of 2000 was due to decreased sales of chest drainage systems resulting from competitive pricing pressures in that market as well as the withdrawal from certain commodity suture lines in Europe. The decreases were offset, in part, by the continued sales revenue growth in the minimally invasive cardiac surgery products and sales revenue from the FocalSeal-Registered Trademark--L surgical sealant. We added FocalSeal-Registered Trademark--L surgical sealant to the cardiothoracic product category in the third quarter of 2000 pursuant to a distribution and marketing agreement with Focal which, prior to our acquisition of Focal in June 2001, provided us with exclusive distribution rights for this product in North America. The orthopaedics product revenue increased for the three and six months ended June 30, 2001 when compared to the same periods of 2000 primarily due to the sales of Synvisc-Registered Trademark- viscosupplementation product, which was added to the orthopaedics product category in December 2000 through our acquisition of Biomatrix. The increase in biosurgical specialties product revenue in the three and six months ended June 30, 2001 when compared to the same periods of 2000 is due to increases in sales of Seprafilm-TM- bioresorbable membrane and Sepramesh-TM- biosurgical composite. An increase in sales to original equipment manufacturers and sales generated from Hylaform-Registered Trademark- and skin care products, which was added to the biosurgical specialties product category in December 2000, also contributed to the overall increase in biosurgical specialties product revenue. SERVICE REVENUE We derive service revenues from three principal sources: - genetic testing services performed by Genzyme General; - Genzyme Biosurgery's Carticel-Registered Trademark- chondrocytes for the treatment of cartilage damage; and - Genzyme Biosurgery's Epicel-Registered Trademark- skin grafts for the treatment of severe burns. The following table sets forth our service revenues on a segment basis:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, INCREASE/ JUNE 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Genzyme General................... $18,305 $15,061 22% $36,537 $30,181 21% Genzyme Biosurgery................ 5,930 6,286 (6)% 11,458 12,132 (6)% ------- ------- ------- ------- Total service revenues.......... $24,235 $21,347 14% $47,995 $42,313 13% ======= ======= ======= =======
51 The increase in other service revenue in each of the three and six months ended June 30, 2001 is due to increased sales of genetic testing services attributable to expanded presence in the prenatal market and a broader test menu in oncology, which was offset in part by a decrease in sales of Epicel-Registered Trademark- skin grafts during the same period. RESEARCH AND DEVELOPMENT REVENUE The following table sets forth our research and development revenues on a segment basis:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, INCREASE/ JUNE 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Genzyme General................... $1,653 $ 163 914% $3,908 $ 330 1,084% Genzyme Biosurgery................ 1 1 -- 5 22 (77)% Genzyme Molecular Oncology........ 1,279 963 33% 2,691 3,518 (24)% ------ ------ ------ ------ Total research and development revenues...................... $2,933 $1,127 160% $6,604 $3,870 71% ====== ====== ====== ======
The increase in research and development revenue in the three months ended June 30, 2001 is primarily attributable to $1.0 million of additional research and development services performed on behalf of Genzyme Transgenics Corporation. For the six months ended June 30, 2001 research and development revenue increased primarily due to $2.2 million of revenue recognized by GelTex and $1.4 million recognized under the development agreement with Purdue Pharma for which there are no similar amounts in the same period of 2000. In addition, in the six months ended June 30, 2001 we recorded $1.3 million of additional revenue from research and development services we performed on behalf of Genzyme Transgenics. The increases in research and development revenue under these contracts for the six months ended June 30, 2001 was offset in part by a $2.0 million development milestone payment received under a license agreement with Schering-Plough Corporation in the six months ended June 30, 2000 for which there is no similar amount in 2001. 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 these revenues were attributable to sales of Cerezyme-Registered Trademark- enzyme, which increased 4% and 10% to $71.4 million and $149.2 million in the three and six months ended June 30, 2001 from $68.8 million and $135.8 million in the same periods last year. Despite an approximate 6% decline in the average exchange rate of the euro for both the three and six month periods ended June 30, 2001 as compared to a year ago, international sales of Cerezyme-Registered Trademark- enzyme increased for both periods due primarily to the continued identification of new Gaucher disease patients worldwide coupled with significant investment in our global infrastructure. International product and service revenue as a percent of total product and service revenue decreased in both the three and six months ended June 30, 2001 due primarily to increased sales of Renagel-Registered Trademark- phosphate binder in the United States. 52 The following table provides information regarding the change in international product and service sales as a percentage of total product and service revenue during the periods presented:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, INCREASE/ JUNE 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) International product and service revenue............... $100,875 $88,410 14% $209,778 $175,187 20% % of total product and service revenue....................... 34% 40% 37% 41%
MARGINS
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, INCREASE/ JUNE 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Product margin: Genzyme General............... $171,571 $134,419 28% $325,883 $257,538 27% % of total product revenue.... 63% 67% 62% 67% Genzyme Biosurgery............ 22,302 13,377 66% 42,288 26,420 60% % of total product revenue.... 8% 6% 8% 7% Total product margin.......... $193,873 $147,796 31% $368,171 $283,958 30% % of total product revenue.... 71% 73% 70% 74% Service margin: Genzyme General............... $ 7,688 $ 6,117 26% $ 15,636 $ 12,409 26% % of total service revenue.... 32% 29% 33% 29% Genzyme Biosurgery............ 3,119 3,263 (4)% 5,510 6,086 (9)% % of total service revenue.... 13% 15% 11% 14% Total service margin.......... $ 10,807 $ 9,380 15% $ 21,146 $ 18,495 14% % of total service revenue.... 45% 44% 44% 44% Total gross margin: Genzyme General............... $179,259 $140,536 28% $341,519 $269,947 27% % of total product and service revenue..................... 60% 63% 60% 63% Genzyme Biosurgery............ 25,421 $ 16,640 53% 47,798 32,506 47% % of total product and service revenue..................... 9% 8% 8% 8% Total gross margin............ $204,680 $157,176 30% $389,317 $302,453 29% % of total product and service revenue..................... 69% 71% 68% 71%
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. PRODUCT MARGIN Product margins for products allocated to Genzyme General increased for the three and six months ended June 30, 2001 as compared to the same periods a year ago primarily as a result of 53 increased sales of Cerezyme-Registered Trademark- enzyme and Renagel-Registered Trademark- phosphate binder during the first six months of 2001. This increase was partially offset by charges to cost of products sold of $4.7 million for the three months ended June 30, 2001 and $8.2 million for the six months ended June 30, 2001 relating to the increased basis of the inventory obtained in connection with our acquisition of GelTex in December 2000. The decrease in Genzyme General's product margin as a percentage of product revenue for the three and six month periods ended June 30, 2001 as compared to the same periods a year ago is primarily attributable to increased sales of Renagel-Registered Trademark- phosphate binder, a lower margin product. The lower margin attributable to Renagel-Registered Trademark- phosphate binder was offset in part by increased efficiencies and process improvements in manufacturing Cerezyme-Registered Trademark- enzyme. Product margins for products allocated to Genzyme Biosurgery increased during the period due to increased sales of higher margin products such as Synvisc-Registered Trademark- viscosupplementation products and devices for minimally invasive cardiac surgery. This increase was partially offset by charges to cost of products sold of $5.3 million for the three months ended June 30, 2001 and $11.3 million for the six months ended June 30, 2001 to amortize a portion of the increase to fair value of the inventory obtained in connection with our acquisition of Biomatrix in December 2000. Without the effect of these charges, Genzyme Biosurgery's product margins for the three months ended June 30, 2001 would have increased 107% to $16.9 million and would have increased 103% to $53.6 million for the six months ended June 30, 2001. SERVICE MARGINS Service margins for services allocated to Genzyme General for the three and six months ended June 30, 2001, as compared to the same periods a year ago, continued to increase primarily as a result of increased sales of our higher margin DNA and cancer testing services. Service margins for services allocated to Genzyme Biosurgery decreased for the three and six months ended June 30, 2001 as a result of a decrease in Carticel-Registered Trademark- chondrocytes and Epicel-Registered Trademark- skin grafts service revenue and an increase in the fixed costs associated with these services. OPERATING EXPENSES The increase in selling, general and administrative expenses for the three and six months ended June 30, 2001 as compared to the same periods a year ago, is attributable to: - increased staffing to support the growth in several of Genzyme General's product lines; - increased expenditures to support the increased sales of Cerezyme-Registered Trademark- enzyme, Renagel-Registered Trademark- phosphate binder, Thyrogen-Registered Trademark- hormone and Fabrazyme-TM- enzyme; and - the addition of expenses from GelTex and Biomatrix, both of which we acquired in December 2000. The increase in research and development expenses for both the three and six month periods ended June 30, 2001 as compared to the same period a year ago is attributable to: - increased spending on Genzyme General's programs to develop Fabrazyme-TM- enzyme for the treatment of Fabry disease; - the addition of spending on Synvisc-Registered Trademark- viscosupplementation product as a result of our acquisition of Biomatrix; - the addition of spending on the C. DIFFICILE colitis, DENSPM, iron chelation, oral mucositis, anti-obesity, and GT102-279 programs as a result of the acquisition of GelTex; and 54 - increased spending on other internal programs. Research and development expenses for the six months ended June 30, 2000 included a one-time charge of $19.5 million representing initial amounts payable to Synpac (North Carolina), Inc. under a license granted to us by Synpac to develop and commercialize a human alpha-glucosidase enzyme replacement therapy for Pompe disease. In connection with our acquisition of GelTex on December 14, 2000, we converted options to purchase GelTex common stock into options to purchase Genzyme General Stock. In accordance with FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation" ("FIN 44"), at the date of acquisition, the intrinsic value for the unvested portion of these options of $10.2 million was allocated to deferred compensation, a component of stockholders' equity. This amount is being amortized to operating expense over the remaining vesting period of one year from the date of acquisition. The expense is being allocated to the appropriate expense categories of our statement of operations based on the functional responsibility of each employee or option holder. For the three and six months ended June 30, 2001, we recorded $2.3 million and $4.9 million of compensation expense related to these options, of which $1.8 million and $4.0 million was charged to research and development expense and $0.5 million and $0.9 million was charged to selling, general and administrative expense. At June 30, 2001, $4.9 million remained in deferred compensation, all of which will be fully amortized by December 14, 2001. AMORTIZATION OF INTANGIBLES The increase in amortization of intangibles for both the three and six month periods ended June 30, 2001 is primarily attributable to intangible assets acquired in connection with the acquisitions of GelTex and Biomatrix in December 2000 and Wyntek in June 2001. PURCHASE OF IN-PROCESS RESEARCH AND DEVELOPMENT WYNTEK In connection with the acquisition of Wyntek, we allocated approximately $8.8 million of the purchase price to IPR&D. Our management assumes responsibility for determining the IPR&D valuation and expects the final valuation will be completed upon closing the transaction. The fair value assigned to purchased IPR&D was estimated by discounting, to present value, the cash flows expected to result from the project once it has reached technological feasibility. A discount rate consistent with the risks of the project was used to estimate the present value of cash flows. In estimating future cash flows, management considered other tangible and intangible assets required for successful exploitation of the technology resulting from the purchased IPR&D project and adjusted future cash flows for a charge reflecting the contribution to value of these assets. The value assigned to purchased IPR&D was the amount attributable to the efforts of Wyntek up to the time of acquisition. This amount was estimated through application of the "stage of completion" calculation by multiplying total estimated revenue for IPR&D by the percentage of completion of the purchased research and development project at the time of acquisition. The nature of the efforts to develop the purchased IPR&D into commercially viable products, principally relates to the completion and/or acceleration of existing development programs, including the mandatory completion of several phases of clinical trials and the costs necessary to manage the projects and trials. Assuming the approval of the product by the FDA, costs related to the wide scale manufacturing, distribution, and marketing of the product are included in the projection. The resulting net cash flows from such project are based on our management's estimates of revenues, cost of sales, research and development expenses, sales and marketing expenses, general and administrative expenses, and the anticipated income tax effect. 55 The discounting of net cash flows back to their present value is based on the weighted average cost of capital, or WACC. The WACC calculation produces the average required rate of return of an investment in an operating enterprise, based on various required rates of return from investments in various areas of that enterprise. The discount rate utilized in discounting the net cash flows from purchased IPR&D was 25%. This discount rate is higher than our WACC due to the inherent uncertainties surrounding the successful development of the purchased IPR&D. The forecast data employed in the analyses was based upon product level forecast information we obtained from numerous internal and external resources. These resources included external market research and internal experts. Our senior management reviewed and challenged the forecast data and related assumptions and utilized the information in analyzing IPR&D. The forecast data and assumptions are inherently uncertain and unpredictable. However, based upon the information available at this time, our management believes the forecast data and assumptions to be reasonable. These assumptions may be incomplete or inaccurate, and no assurance can be given that unanticipated events and circumstances will not occur. Accordingly, actual results may vary from the forecasted results. Any such variance may result in a material adverse effect on our financial condition and results of operations. In the allocation of purchase price to the IPR&D, the concept of alternative future use was specifically considered for the program under development. The acquired IPR&D consists of Wyntek's work to complete the program. There are no alternative uses for the in-process program in the event that the program fails in clinical trials or is otherwise not feasible. The development effort for the acquired IPR&D does not possess an alternative future use for us as defined by generally accepted accounting principles. Consequently, in accordance with generally accepted accounting principles, the amount allocated to IPR&D was charged as an expense in our financial statements for the three and six months ended June 30, 2001. We are amortizing the remaining acquired intangible assets arising from the acquisition on a straight-line basis over their estimated lives, which range from 5 years to 10 years. Below is a brief description of the IPR&D program associated with Wyntek's cardiovascular disease diagnostic product, including an estimation of when management believes we may realize revenues from the sale of this product. Wyntek is currently developing a cardiovascular product to rapidly measure the quantitative levels of cardiac marker proteins. These are the leading markers for the diagnosis of acute myocardial infarction. The product consists of a mobile, stand-alone, quantitative diagnostic device and a reaction strip that detects disease specific marker proteins. The device will be used to read reaction strips at the patient's bedside or in an emergency room setting. Wyntek expects to complete the regulatory review process and file its application for marketing approval in early 2002 and begin selling the product during the second half of 2002. Studies to date have demonstrated the viability of this product but there can be no assurance that the regulatory authorities will approve this product. A discount rate of 25% was used in valuing the projected cash flows. GELTEX AND BIOMATRIX In December 2000, we acquired GelTex, a public company engaged in developing therapeutic products based on polymer technology. We accounted for the acquisition as a purchase and allocated it to Genzyme General. In connection with the purchase of GelTex, we allocated approximately $118.0 million to in-process research and development or IPR&D, which we recorded as a charge to expense in our consolidated statement of operations for the year ended December 31, 2000. In December 2000, we also acquired Biomatrix, a public company engaged in the development and manufacture of viscoelastic biomaterials for use in orthopaedic and other medical applications. We accounted for this acquisition as a purchase and allocated it to Genzyme Biosurgery. In connection with 56 the purchase of Biomatrix, we allocated approximately $82.1 million to IPR&D, which we recorded as a charge to expense in our consolidated statement of operations for the year ended December 31, 2000. As of June 30, 2001, the technological feasibility of both the GelTex and Biomatrix IPR&D projects had not yet been reached and no significant departures from the assumptions included in the valuation analysis had occurred. Substantial additional research and development will be required prior to reaching technological feasibility. In addition, each product needs to successfully complete a series of clinical trials and to receive FDA or other regulatory approval prior to commercialization. We cannot guarantee that these projects will ever reach feasibility or develop into products that can be marketed profitably, nor can we guarantee that we will be able to develop and commercialize these products before our competitors develop and commercialize products for these indications. If these products are not successfully developed and do not become commercially viable, our results of operations could be materially affected. Below is a brief description of the significant GelTex and Biomatrix IPR&D projects, including an estimation of when management believes we may realize revenues from the sales of these products in the respective application:
ESTIMATED COST TO COMPLETE VALUE AT AT ACQUISITION JUNE 30, PROGRAM PROGRAM DESCRIPTION DEVELOPMENT STATUS DATE 2001 - ------- ------------------------------------- ------------------------------- ----------- --------- (IN MILLIONS) GELTEX: Renagel(R) Non-absorbed polymer phosphate binder - Clinical studies scheduled $ 19.7 $ 15.4 phosphate binder for the treatment of hyperphospatemia for completion in 2002, 2003, and 2004 C. DIFFICILE Program to develop a toxin-binding - Phase 2 studies initiated in 37.4 45.0 colitis polymer for the treatment and 2000 prevention of antibiotic induced - U.S. marketing approval for C. DIFFICILE colitis this product is expected by 2006 Oral Mucositis Focuses on the development of a - IND expected to be filed in 17.8 23.1 topical mouth rinse that combines the second quarter of 2002 barrier material and antimicrobial - Product launch expected in polymers to create an anti-infective 2006 mechanism against oral mucositis, a common side effect of radiation therapy and chemotherapy DENSPM Focuses on the development of a - Phase 1 safety study and 3.4 29.0 compound for the treatment of mild to dose-ranging studies moderate psoriasis scheduled for 2001 - Product launch expected in 2006 Iron Chelation Focuses on the prevention and - Expected to file an IND in 15.7 28.9 treatment of transfusional or 2001 hereditary iron overload - Product launch expected in 2006 Anti-Obesity Builds on GelTex's expertise in - Expected to file an IND in 17.8 36.7 non-absorbed polymers and focuses on late 2002 the development of a compound that - Product launch expected in will inhibit lipase and bind fat 2007
57
ESTIMATED COST TO COMPLETE VALUE AT AT ACQUISITION JUNE 30, PROGRAM PROGRAM DESCRIPTION DEVELOPMENT STATUS DATE 2001 - ------- ------------------------------------- ------------------------------- ----------- --------- (IN MILLIONS) GT102-279 Second generation lipid-lowering - Development on hold $ 6.2 N/A(1) compound with attributes of GelTex's WelChol-TM- lipid lowering agent, but requires 50% fewer tablets ------ ------ $118.0 $178.1 ====== ====== - -------------------------- (1) Future development costs will be funded by our collaboration partner. BIOMATRIX: Visco- Use of elastoviscous solutions and - European marketing approval $ 33.8 $ 7.0 supplementation viscoelastic gels in disease expected by the end of 2001. conditions to supplement tissues and U.S. trial scheduled for body fluids, alleviating pain and 2002. Initiation of a next restoring normal function generation Synvisc-Registered Trademark- program expected in the fourth quarter of 2001 with possible U.S. market approval in the second half of 2004 Visco- Use of viscoelastic gels to provide - U.S. clinical studies of 8.6 6.5 augmentation scaffolding for tissue regeneration Hylaform-Registered Trademark- or as an inert elastic filler for expected to start in the tissues of the skin and the fourth quarter of 2001 with subcutaneous and intermuscular market launch expected in the connective tissues second half of 2003 - Hylagel-Registered Trademark- Uro expected to be submitted for FDA approval and approval in Canada and Europe in 2002, with product launch expected in 2003 Visco- Use of viscoelastic gels and - Clinical studies have been $ 39.7 $ 7.3 separation membranes to separate tissues and to initiated in the U.S., decrease formation of adhesions and Germany, France, the United excessive scars after surgery Kingdom and Belgium for Sepragel-TM- Spine (formerly Hylagel-Registered Trademark- Nuro). Completion of patient enrollment is expected by the first quarter of 2002. Patient follow up expected to be completed by the first quarter of 2003 with U.S. marketing approval anticipated in the first half of 2004. European marketing approval expected in the second half of 2003, with submissions for regulatory approvals in the United States and Canada thereafter. - Expected product launch in Europe by the second quarter of 2002 and in the United States by the fourth quarter of 2002 ------ ------ $ 82.1 $ 20.8 ====== ======
58 OTHER INCOME AND EXPENSES
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, INCREASE/ JUNE 30, INCREASE/ --------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE --------- --------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Equity in net loss of unconsolidated affiliates.......................... $(11,796) $(11,313) 4% $(20,811) $(19,446) 7% Gain on affiliate sale of stock....... -- -- N/A -- 20,270 100% Gain (loss) on sale of equity securities.......................... (1,532) 14,165 (111)% (1,532) 14,165 (111)% Minority interest in net loss of subsidiary.......................... 725 1,352 (46)% 1,999 2,208 (9)% Other................................. (133) 5,193 (103)% (3,843) 5,195 (174)% Investment income..................... 12,493 10,631 18% 22,641 20,575 10% Interest expense...................... (10,766) (3,836) 181% (22,136) (7,775) 185% -------- -------- -------- -------- Total other income (expenses)......... $(11,009) $ 16,192 (168)% $(23,682) $ 35,192 (167)% ======== ======== ======== ========
EQUITY IN NET LOSS OF UNCONSOLIDATED AFFILIATES: We record the results of the following joint ventures in equity in net loss of unconsolidated affiliates:
JOINT VENTURE PARTNER EFFECTIVE DATE PRODUCT/INDICATION GENZYME DIVISION - ------------- ------------------------ -------------- ---------------------- ------------------- RenaGel LLC GelTex(1) June 1997 Renagel-Registered Trademark- Genzyme General phosphate binder for the reduction of serum phosphorus in patients with end-stage renal disease BioMarin/ Genzyme BioMarin Pharmaceutical September 1998 Aldurazyme-TM- enzyme Genzyme General LLC Inc. for the treatment of mucopolysaccharidosis-I Pharming/ Genzyme Pharming Group, N.V. October 1998 Human alpha- Genzyme General LLC glucosidase for the treatment of Pompe disease (transgenic product) Genzyme/ Pharming Pharming Group, N.V. June 2000 Human alpha- Genzyme General Alliance LLC glucosidase for the treatment of Pompe disease (produced using CHO cells) Diacrin/Genzyme LLC Diacrin, Inc. October 1996 Products using porcine Genzyme Biosurgery fetal cells for the (until May 1999); treatment of Genzyme General Parkinson's and (after May 1999) Huntington's diseases
- -------------------------- (1) We acquired GelTex in December 2000. We currently own approximately 26% of the common stock of Genzyme Transgenics and record our portion of its results in equity in net loss of unconsolidated affiliates. We record in equity in net loss of unconsolidated affiliates our portion of the results of our joint ventures with BioMarin, Pharming and Diacrin. Included in the three and six months ended June 30, 2001 are losses from Focal, which we acquired in June 2001 and for which there are no similar amounts in the same periods of 2000. Included in the three and six month periods ended June 30, 2000 are losses from RenaGel LLC, in which we and GelTex each own a 50% interest. We acquired GelTex in December 2000. We have included the results of RenaGel LLC in our consolidated financial statements from the date of acquisition. Our equity in the net losses of RenaGel LLC were $4.5 million in the three months ended June 30, 2000 and $6.0 million in the six months ended June 30, 2000. 59 Excluding these losses, our equity in net loss of unconsolidated affiliates increased in both the three and six months ended June 30, 2001 due primarily to increased losses from our joint venture with BioMarin, our joint ventures with Pharming, and our equity position in Genzyme Transgenics, which were offset in part by decreased losses from our joint venture with Diacrin. GAIN ON AFFILIATE SALE OF STOCK During the six months ended June 30, 2000, in accordance with our policy pertaining to affiliate sales of stock, we recognized a gain of $20.3 million due to the issuance by Genzyme Transgenics, an unconsolidated affiliate, of additional shares of its common stock. There were no similar transactions recognized during the three and six months ended June 30, 2001. GAIN (LOSS) ON INVESTMENT IN EQUITY SECURITIES In April 2001, Antigenics, Inc. announced that it had entered into a definitive merger agreement with Aronex Pharmaceuticals, Inc. The merger was completed in July 2001. Under the terms of the merger agreement, we will receive 0.0594 shares of Antigenics common stock for each of our shares of Aronex common stock. As a result of this merger, we recorded a $1.2 million realized loss to reflect the fair market value of our investment in Aronex at June 30, 2001. In the second quarter of 2000, we recorded a realized gain of $5.5 million upon the sale of a portion of our investment in Genzyme Transgenics common stock. We also recognized a realized gain of $7.6 million resulting from the acquisition of Celtrix Pharmaceuticals, Inc. by Insmed Pharmaceuticals, Inc. in which our shares of Celtrix common stock were exchanged on a 1-for-1 basis for shares of Insmed common stock. MINORITY INTEREST IN NET LOSS OF SUBSIDIARY ATIII LLC is our joint venture with Genzyme Transgenics for the development and commercialization of ATIII. We allocate our interest in ATIII LLC to Genzyme General. Due to our combined direct and indirect interest in ATIII LLC, Genzyme General consolidates the results of ATIII LLC and records Genzyme Transgenics' portion of the losses of that joint venture as minority interest. Minority interest increased in the three and six months ended June 30, 2001 due to a change in the funding agreement for the joint venture in March 2001, effective January 1, 2001, which increased Genzyme Transgenics' portion of the losses incurred by ATIII LLC to 50% as compared to 30% for the same periods a year ago. INVESTMENT INCOME Our investment income increased for the three and six months ended June 30, 2001 due primarily to higher average invested cash balances as compared to the three and six months ended June 30, 2000. In May 2001, we completed the private placement of $575.0 million in principal of 3% convertible subordinated debentures due May 2021. Net proceeds from the offering were approximately $562.1 million. We allocated the principal balance of the debentures and the net proceeds from the offering to Genzyme General. A portion of the net proceeds from the private placement of the debentures was used to repay the $150.0 million Genzyme General had drawn under our revolving credit facility in December 2000. INTEREST EXPENSE Our interest expense increased for the three and six months ended June 30, 2001 as compared to the same periods a year ago primarily due to additional interest expense resulting from the $150.0 million of debt drawn on our revolving credit facility in December 2000 as part of the financing of the GelTex acquisition and the private placement of $575.0 million in principal 3% convertible debentures issued in May 2001. A portion of the net proceeds from the private placement of the 60 debentures was used to repay the $150.0 million Genzyme General had drawn under our revolving credit facility in December 2000. TAX PROVISION
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, INCREASE/ JUNE 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA) Benefit from (provision for) income taxes.................... $2,064 $(23,314) (109)% $2,734 $(35,168) (108)% Effective tax rate................ 25% 32% 27% 30%
Our tax rates for both 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. The decrease in our effective tax rate for both the three and six months ended June 30, 2001, as compared to the same periods a year ago, was primarily attributable to increased losses from Genzyme Biosurgery and a charge of $8.8 million for in-process research and development resulting from our acquisition of Wyntek in June 2001, offset in part by an increase in non-deductible amortization of intangibles consisting largely of goodwill resulting from our acquisitions of GelTex and Biomatrix in December 2000. The tax benefit for the three and six months ended June 30, 2001 includes a $2.2 million benefit resulting from the release of excess tax reserves. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE On January 1, 2001, we adopted Statement of Financial Accounting Standards or SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS 137 and SFAS 138. 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 in our consolidated balance sheet and measure those instruments at fair value. Subsequent changes in fair value will be reflected in income, unless the derivative is part of a qualified hedging relationship. In accordance with the transition provisions of SFAS 133, we recorded a cumulative-effect adjustment of $4.2 million, net of tax, in our unaudited, consolidated statement of operations for the six months ended June 30, 2001 to record the fair value of certain common stock warrants held on January 1, 2001. Transition adjustments pertaining to interest rate swaps designated as cash-flow hedges and our foreign currency forward contracts were not significant. For the three months ended June 30, 2001, we recorded a charge of $0.2 million in other expense to reflect the change in the value of certain common stock warrants from April 1, 2001 to June 30, 2001. For the six months ended June 30, 2001, we recorded a charge of $3.8 million in other expense to reflect the change in value of certain common stock warrants from January 1, 2001 to June 30, 2001. We also recorded a charge of $0.5 million in other comprehensive income for the six months ended June 30, 2001 to reflect the change in the value of our interest rate swap contract during the period, net of tax. In the normal course of business, we manage risks associated with foreign exchange rates, interest rates and equity prices through a variety of strategies, including the use of hedging transactions, executed in accordance with our policies. Our hedging transactions include, but are not limited to, the use of various derivative financial instruments. As a matter of policy, we do not use derivative instruments unless there is an underlying exposure. Any change in the value of our derivative instruments would be substantially offset by an opposite change in the value of the underlying hedged items. We do not use derivative instruments for trading or speculative purposes. 61 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION The following discussion summarizes the key factors our management believes necessary for an understanding of Genzyme General's financial statements. The components of Genzyme General's combined statements of operations are described in the following table:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, INCREASE/ JUNE 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA) Total revenues.................. $238,998 $186,694 28% $461,691 $357,320 29% -------- -------- -------- -------- Cost of products and services sold.......................... 58,086 45,995 26% 116,264 87,043 34% Selling, general and administrative................ 66,558 42,972 55% 125,089 81,194 54% Research and development (including research and development related to contracts).................... 42,405 15,391 176% 82,591 58,134 42% Amortization of intangibles..... 18,182 2,011 804% 35,852 3,979 801% Purchase of in-process research and development............... 8,768 -- N/A 8,768 -- N/A -------- -------- -------- -------- Total operating costs and expenses.................... 193,999 106,369 82% 368,564 230,350 60% -------- -------- -------- -------- Operating income................ 44,999 80,325 (44)% 93,127 126,970 (27)% Other income (expenses), net.... (7,478) 14,576 (151)% (15,585) 32,084 (149)% -------- -------- -------- -------- Income before income taxes...... 37,521 94,901 (60)% 77,542 159,054 (51)% Provision for income taxes...... (15,803) (30,911) (49)% (30,679) (49,755) (38)% -------- -------- -------- -------- Division net income before cumulative effect of change in accounting principle.......... 21,718 63,990 (66)% 46,863 109,299 (57)% Cumulative effect of change in accounting principle, net of tax........................... -- -- -- 4,167 -- N/A -------- -------- -------- -------- Division net income............. $ 21,718 $ 63,990 (66)% $ 51,030 $109,299 (53)% ======== ======== ======== ========
REVENUES The components of Genzyme General's total revenues are described in the following table:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, INCREASE/ JUNE 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA) Product revenue................. $219,040 $171,470 28% $421,246 $326,809 29% Service revenue................. 18,305 15,061 22% 36,537 30,181 21% -------- -------- -------- -------- Total product and service revenue..................... 237,345 186,531 27% 457,783 356,990 28% Research and development revenue....................... 1,653 163 914% 3,908 330 1,084% -------- -------- -------- -------- Total revenues................ $238,998 $186,694 28% $461,691 $357,320 29% ======== ======== ======== ========
62 PRODUCT AND SERVICE REVENUES The following table sets forth Genzyme General's product and service revenues on a segment basis:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, INCREASE/ JUNE 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA) Product Revenue: Therapeutics: Cerezyme-Registered Trademark- and Ceredase-Registered Trademark- enzymes................... $141,312 $134,854 5% $280,943 $263,459 7% Renagel-Registered Trademark- phosphate binder.......... 40,408 10,218 295% 69,003 10,218 575% Thyrogen-Registered Trademark- hormone................... 4,420 3,506 26% 8,600 6,867 25% Other therapeutic products.................. 2,083 -- N/A 4,579 1,852 147% -------- -------- -------- -------- Total Therapeutics........ 188,223 148,578 27% 363,125 282,396 29% Diagnostic Products........... 17,790 15,539 14% 34,214 30,777 11% Other......................... 13,027 7,353 77% 23,907 13,636 75% -------- -------- -------- -------- Total product revenue..... 219,040 171,470 28% 421,246 326,809 29% Service Revenue: Other......................... 18,305 15,061 22% 36,537 30,181 21% -------- -------- -------- -------- Total product and service revenue....................... $237,345 $186,531 27% $457,783 $356,990 28% ======== ======== ======== ========
THERAPEUTICS Genzyme General's continued increase in product revenue for both the three and six month periods ended June 30, 2001 as compared to the same periods a year ago, was primarily due to increased sales of Renagel-Registered Trademark- phosphate binder, which is used to reduce serum phosphorus levels in patients with end-stage renal disease on dialysis, and continued growth in sales of Cerezyme-Registered Trademark- enzyme for the treatment of Type I Gaucher disease. Genzyme General began recording revenues from Renagel-Registered Trademark- phosphate binder during the second quarter of 2000 under an amended distribution arrangement with GelTex, which we acquired in December 2000. Prior to this amendment, revenues from Renagel-Registered Trademark- phosphate binder were recorded by RenaGel LLC, our joint venture with GelTex, and were $8.0 million for the three month period ended March 31, 2000. Sales of Renagel-Registered Trademark- phosphate binder in both the three and six months ended June 30, 2001 include sales of capsules and the new 800 mg tablet formulation. Genzyme General launched the tablet formulation in the United States during the third quarter of 2000. In the first quarter of 2001, the higher-than-anticipated demand for the 800 mg tablet formulation and certain production constraints resulted in a temporary shortage of this dosage form of Renagel-Registered Trademark- phosphate binder. Patients taking the 800 mg tablets were shifted to an equivalent dose of 400 mg Renagel-Registered Trademark- tablets or 403 mg Renagel-Registered Trademark- capsules while Genzyme General built an inventory of 800 mg tablets to support our re-launch of this dosage form in June 2001. Despite the temporary shortage of the 800mg tablet formulation, sales of Renagel-Registered Trademark- phosphate binder increased significantly in each of the three and six months ended June 30, 2001 in comparison to the same periods of 2000 due to accelerating adoption of the product by nephrologists, as evidenced by significant increases in both renewal prescriptions and new prescriptions. The steady growth in sales of Cerezyme-Registered Trademark- enzyme in the three and six months ended June 30, 2001 was attributable to Genzyme General's continued identification of new Gaucher disease patients worldwide coupled with significant investment in our global infrastructure that has continued to increase international sales of this product. Additionally, Genzyme General continues to market 63 Ceredase-Registered Trademark- enzyme for the treatment of Gaucher disease, although we have successfully converted virtually all Gaucher disease patients to a treatment regimen using Cerezyme-Registered Trademark- enzyme. 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. Although orphan drug status for Cerezyme-Registered Trademark- enzyme, which provided us with exclusive marketing rights for Cerezyme-Registered Trademark- enzyme in the United States, expired in May 2001, we continue to have patents protecting our method of manufacturing Cerezyme-Registered Trademark- enzyme until 2010 and the composition of Cerezyme-Registered Trademark- enzyme as made by that process until 2013. The expiration of market exclusivity and orphan drug status in May 2001 will likely subject Cerezyme-Registered Trademark- enzyme to increased competition which may decrease the amount of revenue we receive from this product or the growth of that revenue. The following table provides information regarding the change in sales of Genzyme General's Gaucher disease therapies as a percentage of total product revenue during the periods presented:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, INCREASE/ JUNE 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA) Sales of Cerezyme-Registered Trademark- and Ceredase-Registered Trademark- enzymes....................... $141,312 $134,854 5% $280,943 $263,459 7% % of total product revenue...... 65% 79% 67% 81%
Although sales of Genzyme General's Gaucher disease therapies continue to increase, the decline as a percentage of total product revenue is a trend we expect will continue in the second half of 2001. Genzyme General expects that growth in the sales of Renagel-Registered Trademark- phosphate binder will continue to increase. Revenue from sales of Renagel-Registered Trademark- phosphate binder represented approximately 18% of Genzyme General's total product revenue for the three month period ended June 30, 2001 as compared to 6% for the same period a year ago. For the six month period ended June 30, 2001, sales of Renagel-Registered Trademark- phosphate binder represented approximately 16% of Genzyme General's total product revenue as compared to 3% for the same period a year ago. Therapeutics revenue for each period also includes sales of Thyrogen-Registered Trademark- hormone, which is an adjunctive diagnostic tool for well-differentiated thyroid cancer. Revenues for Thyrogen-Registered Trademark- hormone increased for the three months and six months ended June 30, 2001 as compared to the same periods a year ago, due primarily to increased market penetration. Other therapeutics revenue increased for both the three and six months ended June 30, 2001 due primarily to increased sales of Fabrazyme-TM- enzyme in France under an Authorisation Temporaire d'utilisation from the French Medicines Agency. DIAGNOSTIC PRODUCTS Diagnostic Products' revenues increased for the three and six-month periods ended June 30, 2001 as compared to the same periods in 2000, due primarily to increased sales of infectious disease testing products and HDL and LDL cholesterol testing products. Also contributing to the increase for both periods is the addition of sales of point of care rapid tests for pregnancy and infectious diseases acquired through our acquisition of Wyntek, which we acquired on June 1, 2001. Diagnostic Products' revenue also includes royalties on product sales by Techne Corporation's biotechnology group. 64 OTHER PRODUCT AND SERVICE REVENUE The increase in other product revenue for the three and six months ended June 30, 2001 as compared to the same periods in 2000, was primarily attributable to increased sales of lipids and peptides for drug delivery. The increase in other service revenue in each of the three and six months ended June 30, 2001 is due to increased sales of genetic testing services attributable to expanded presence in the prenatal market and a broader test menu in oncology. RESEARCH AND DEVELOPMENT REVENUE The increase in research and development revenue in the three months ended June 30, 2001 is primarily attributable to $1.0 million of additional research and development services Genzyme General performed on behalf of Genzyme Transgenics. For the six months ended June 30, 2001 research and development revenue increased primarily due to $2.2 million of revenue recognized by GelTex and $1.3 million of additional revenue from research and development services we performed on behalf of Genzyme Transgenics. INTERNATIONAL PRODUCT AND SERVICE REVENUE A substantial portion of Genzyme General's revenue was generated outside of the United States, as described in the table below. Most of these revenues were attributable to sales of Cerezyme-Registered Trademark- enzyme. International sales of Cerezyme-Registered Trademark- enzyme increased 4% to $71.4 million in the three-month period ended June 30, 2001 from $68.8 million in the same period last year. International sales of Cerezyme-Registered Trademark- enzyme increased 10% to $149.2 million for the six month period ended June 30, 2001 from $135.8 million for the same period last year. Despite an approximate 6% decline in the average exchange rate of the euro for both the three and six month periods ended June 30, 2001 as compared to a year ago, international sales of Cerezyme-Registered Trademark- enzyme increased for both periods due primarily to the continued identification of new Gaucher disease patients worldwide coupled with significant investment in our global infrastructure. International product and service revenue as a percent of total product and service revenue decreased in both the three and six months ended June 30, 2001 due primarily to increased sales of Renagel-Registered Trademark- phosphate binder in the United States. The following table provides information regarding the change in international product and service sales as a percentage of total product and service revenue during the periods presented:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, INCREASE/ JUNE 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA) International product and service revenue............... $88,349 $79,235 12% $185,467 $157,007 18% % of total product and service revenue....................... 37% 42% 41% 44%
65 MARGINS
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, INCREASE/ JUNE 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA) Product margin.................. $171,571 $134,419 28% $325,883 $257,538 27% % of product revenue............ 78% 78% 77% 79% Service margin.................. 7,688 6,117 26% 15,636 12,409 26% % of service revenue............ 42% 41% 43% 41% Total gross margin.............. $179,259 $140,536 28% $341,519 $269,947 27% % of total product and service revenue....................... 76% 75% 75% 76%
Genzyme General provides a broad range of healthcare products and services. As a result, Genzyme General's gross margin may vary significantly based on the category of product or service. Sales of therapeutic products, including Cerezyme-Registered Trademark- enzyme, result in higher margins than diagnostic products. PRODUCT MARGIN Product margin for the three and six month periods ended June 30, 2001, as compared to the same periods a year ago, increased primarily as a result of increased sales of Renagel-Registered Trademark-( ) phosphate binder and Cerezyme-Registered Trademark- enzyme. This increase was partially offset by charges to cost of products sold of $4.7 million for the three months ended June 30, 2001 and $8.2 million for the six months ended June 30, 2001 relating to the increased basis of the inventory obtained in connection with our acquisition of GelTex in December 2000. Product margin as a percentage of product revenue for the three month period ended June 30, 2001 was unchanged, as compared to the same period a year ago, while decreasing slightly for the six month period ended June 30, 2001, as compared to a year ago. This was primarily attributable to the increased sales of Renagel-Registered Trademark- phosphate binder, a lower margin product. Genzyme General began selling Renagel-Registered Trademark- phosphate binder in April 2000. The lower margin attributable to Renagel-Registered Trademark- phosphate binder was offset in part by increased efficiencies and process improvements in manufacturing Cerezyme-Registered Trademark- enzyme. SERVICE MARGIN Service margin for the three and six month periods ended June 30, 2001 increased in comparison to the same periods a year ago primarily as a result of increased sales of our higher margin DNA and cancer testing services. While this trend continued, service margin as a percentage of service revenue increased only slightly for both the three and six-month periods ended June 30, 2001. This was primarily attributable to service revenue increasing at a rate greater than the rate of increase for cost of services sold for both periods. For the three month period ending June 30, 2001, a service revenue increase of 22% was offset by a 19% increase in the cost of services sold as compared to the same period a year ago. For the six month period ending June 30, 2001, a service revenue increase of 21% was offset by a 18% increase in the cost of services sold as compared to the same period a year ago. OPERATING EXPENSES The increase in selling, general and administrative expenses for both the three and six month periods ended June 30, 2001 as compared to same periods a year ago is related to: - increased staffing to support the growth in several of Genzyme General's product lines; 66 - increased expenditures to support the increased sales of Cerezyme-Registered Trademark- enzyme, drive the growth in sales of Renagel-Registered Trademark- phosphate binder and Thyrogen-Registered Trademark- hormone, and prepare for the commercialization of Fabrazyme-TM- enzyme; and - the addition of expenses from GelTex, which was acquired in December 2000. The increase in research and development expenses for both the three and six month periods ended June 30, 2001 as compared to the same period a year ago is attributable to: - the cost of post-marketing clinical development efforts for of Renagel-Registered Trademark- phosphate binder, which was included in equity in net gain (loss) of unconsolidated affiliates before we purchased GelTex; - the addition of spending on the C. DIFFICILE colitis, DENSPM, iron chelation, oral mucositis, anti-obesity, and GT102-279 programs as a result of our acquisition of GelTex; and - increased spending on Genzyme General's program to develop Fabrazyme-TM- enzyme for the treatment of Fabry disease; and on other internal programs. Research and development expenses for the six months ended June 30, 2000 included a one-time charge of $19.5 million representing initial amounts payable to Synpac (North Carolina), Inc. under a license granted to us by Synpac to develop and commercialize a human alpha-glucosidase enzyme replacement therapy for Pompe disease. In connection with our acquisition of GelTex on December 14, 2000, we converted options to purchase GelTex common stock into options to purchase Genzyme General Stock. In accordance with FIN 44, at the date of acquisition, the intrinsic value for the unvested portion of these options of $10.2 million was allocated to deferred compensation, a component of stockholders' equity. This amount is being amortized to operating expense over the remaining vesting period of one year from the date of acquisition. The expense is being allocated to the appropriate expense categories of Genzyme General's statement of operations based on the functional responsibility of each employee or option holder. For the three months ended June 30, 2001, Genzyme General recorded $2.3 million of compensation expense related to these options, of which $1.8 million was charged to research and development expense and $0.5 million was charged to selling, general and administrative expense. For the six months ended June 30, 2001, Genzyme General recorded $4.9 million of compensation expense related to these options, of which $4.0 million was charged to research and development expense and $0.9 million was charged to selling, general and administrative expense. At June 30, 2001, $4.9 million remained in deferred compensation, a component of division equity, all of which will be fully amortized by December 14, 2001. AMORTIZATION OF INTANGIBLES The increase in amortization of intangibles for both the three and six month periods ended June 30, 2001 is primarily attributable to intangible assets acquired in connection with the acquisition of GelTex in December 2000. PURCHASE OF IN-PROCESS RESEARCH AND DEVELOPMENT WYNTEK In connection with the acquisition of Wyntek, we allocated approximately $8.8 million of the purchase price to IPR&D. Our management assumes responsibility for determining the IPR&D valuation and expects the final valuation will be completed upon closing the transaction. The fair value assigned to purchased IPR&D was estimated by discounting, to present value, the cash flows expected to result from the project once it has reached technological feasibility. A discount rate consistent with the risks of the project was used to estimate the present value of cash flows. In estimating future cash flows, management considered other tangible and intangible assets required for successful exploitation 67 of the technology resulting from the purchased IPR&D project and adjusted future cash flows for a charge reflecting the contribution to value of these assets. The value assigned to purchased IPR&D was the amount attributable to the efforts of Wyntek up to the time of acquisition. This amount was estimated through application of the "stage of completion" calculation by multiplying total estimated revenue for IPR&D by the percentage of completion of the purchased research and development project at the time of acquisition. The nature of the efforts to develop the purchased IPR&D into commercially viable products, principally relates to the completion and/or acceleration of existing development programs, including the mandatory completion of several phases of clinical trials and the costs necessary to manage the projects and trials. Assuming the approval of the product by the FDA, costs related to the wide scale manufacturing, distribution, and marketing of the product are included in the projection. The resulting net cash flows from such project are based on our management's estimates of revenues, cost of sales, research and development expenses, sales and marketing expenses, general and administrative expenses, and the anticipated income tax effect. The discounting of net cash flows back to their present value is based on the weighted average cost of capital, or WACC. The WACC calculation produces the average required rate of return of an investment in an operating enterprise, based on various required rates of return from investments in various areas of that enterprise. The discount rate utilized in discounting the net cash flows from purchased IPR&D was 25%. This discount rate is higher than our WACC due to the inherent uncertainties surrounding the successful development of the purchased IPR&D. The forecast data employed in the analyses was based upon product level forecast information we obtained from numerous internal and external resources. These resources included external market research and internal experts. Our senior management reviewed and challenged the forecast data and related assumptions and utilized the information in analyzing IPR&D. The forecast data and assumptions are inherently uncertain and unpredictable. However, based upon the information available at this time, our management believes the forecast data and assumptions to be reasonable. These assumptions may be incomplete or inaccurate, and no assurance can be given that unanticipated events and circumstances will not occur. Accordingly, actual results may vary from the forecasted results. Any such variance may result in a material adverse effect on our financial condition and results of operations. In the allocation of purchase price to the IPR&D, the concept of alternative future use was specifically considered for the program under development. The acquired IPR&D consists of Wyntek's work to complete the program. There are no alternative uses for the in-process program in the event that the program fails in clinical trials or is otherwise not feasible. The development effort for the acquired IPR&D does not possess an alternative future use for us as defined by generally accepted accounting principles. Consequently, in accordance with generally accepted accounting principles, the amount allocated to IPR&D was charged as an expense in our financial statements for the three and six months ended June 30, 2001. We are amortizing the remaining acquired intangible assets arising from the acquisition on a straight-line basis over their estimated lives, which range from 5 years to 10 years. Below is a brief description of the IPR&D program associated with Wyntek's cardiovascular disease diagnostic product, including an estimation of when management believes we may realize revenues from the sale of this product. Wyntek is currently developing a cardiovascular product to rapidly measure the quantitative levels of cardiac marker proteins. These are the leading markers for the diagnosis of acute myocardial infarction. The product consists of a mobile, stand-alone, quantitative diagnostic device and a reaction strip that detects disease specific marker proteins. The device will be used to read reaction strips at the patient's bedside or in an emergency room setting. Wyntek expects to complete the regulatory review 68 process and file its application for marketing approval in early 2002 and begin selling the product during the second half of 2002. Studies to date have demonstrated the viability of this product but there can be no assurance that the regulatory authorities will approve this product. A discount rate of 25% was used in valuing the projected cash flows. GELTEX In December 2000, in connection with the acquisition of GelTex, Genzyme General allocated approximately $118.0 million of the purchase price to in-process research and development or IPR&D which Genzyme General recorded as a charge to expense in its statement of operations for the year-ended December 31, 2000. As of June 30, 2001, the technological feasibility of the projects had not yet been reached and no significant departures from the assumptions included in the valuation analysis had occurred. Substantial additional research and development will be required prior to reaching technological feasibility. In addition, each product needs to successfully complete a series of clinical trials and to receive FDA or other regulatory approval prior to commercialization. We cannot guarantee that these projects will ever reach feasibility or develop into products that can be marketed profitably, nor can we guarantee that Genzyme General will be able to develop and commercialize these products before our competitors develop and commercialize products for these indications. If these products are not successfully developed and do not become commercially viable, our results of operations could be materially affected. Below is a brief description of the GelTex IPR&D projects, including an estimation of when management believes Genzyme General may realize revenues from the sales of these products in the respective application:
ESTIMATED COST TO COMPLETE VALUE AT AT ACQUISITION JUNE 30, PROGRAM PROGRAM DESCRIPTION DEVELOPMENT STATUS DATE 2001 - ------- ------------------------------------- ----------------------------- ----------- --------- (IN MILLIONS) Renagel(R) Non-absorbed polymer phosphate binder - Clinical studies scheduled $ 19.7 $ 15.4 phosphate binder for the treatment of hyperphospatemia for completion in 2002, 2003, and 2004 C. DIFFICILE Program to develop a toxin-binding - Phase 2 studies initiated 37.4 45.0 colitis polymer for the treatment and in 2000 prevention of antibiotic induced - U.S. marketing approval for C. DIFFICILE colitis this product is expected by 2006 Oral Mucositis Focuses on the development of a - IND expected to be filed in 17.8 23.1 topical mouth rinse that combines the second quarter of 2002 barrier material and antimicrobial - Product launch expected in polymers to create an anti-infective 2006 mechanism against oral mucositis, a common side effect of radiation therapy and chemotherapy DENSPM Focuses on the development of a - Phase 1 safety study and 3.4 29.0 compound for the treatment of mild to dose-ranging studies moderate psoriasis scheduled for 2001 - Product launch expected in 2006
69
ESTIMATED COST TO COMPLETE VALUE AT AT ACQUISITION JUNE 30, PROGRAM PROGRAM DESCRIPTION DEVELOPMENT STATUS DATE 2001 - ------- ------------------------------------- ----------------------------- ----------- --------- (IN MILLIONS) Iron Chelation Focuses on the prevention and - Expected to file an IND in 15.7 28.9 treatment of transfusional or 2001 hereditary iron overload - Product launch expected in 2006 Anti-Obesity Builds on GelTex's expertise in - Expected to file an IND in 17.8 36.7 non-absorbed polymers and focuses on late 2002 the development of a compound that - Product launch expected in will inhibit lipase and bind fat 2007 GT102-279 Second generation lipid-lowering - Development on hold 6.2 N/A(1) compound with attributes of GelTex's WelChol-TM- lipid lowering agent, but requires 50% fewer tablets ------ ------ $118.0 $178.1 ====== ======
- -------------------------- (1) Future development costs will be funded by our collaboration partner. OTHER INCOME AND EXPENSES
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, INCREASE/ JUNE 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA) Equity in net loss of unconsolidated affiliates...... $(11,016) $(11,313) (3)% $(19,495) $(19,446) -- Gain on affiliate sale of stock.......................... -- -- -- -- 20,270 (100)% Gain (loss) on investment in equity securities.............. (1,532) 14,165 (111)% (1,532) 14,165 (111)% Minority interest in net loss of subsidiary..................... 725 1,352 (46)% 1,999 2,208 (9)% Other............................ (171) 5,174 (103)% (3,888) 5,153 (175)% Investment income................ 11,798 8,639 37% 21,011 16,726 26% Interest expense................. (7,282) (3,441) 112% (13,680) (6,992) 96% -------- -------- -------- -------- Total other income (expenses)................. $(7,478) $14,576 (151)% $(15,585) $ 32,084 (149)% ======== ======== ======== ========
EQUITY IN NET LOSS OF UNCONSOLIDATED AFFILIATES Genzyme General records in equity in net loss of unconsolidated affiliates its portion of the results of our joint ventures with BioMarin, Pharming and Diacrin. Included in the three and six month periods ended June 30, 2000 are losses from RenaGel LLC, in which we and GelTex each own a 50% interest. We acquired GelTex in December 2000. We have included the results of RenaGel LLC in our combined financial statements from the date of acquisition. Genzyme General's equity in the net losses of RenaGel LLC were $4.5 million in the three months ended June 30, 2000 and $6.0 million in the six months ended June 30, 2000. Excluding these losses, Genzyme General's equity in net loss of unconsolidated affiliates increased in both the three and six months ended June 30, 2001 due primarily to increased losses from our joint venture with BioMarin, 70 our joint ventures with Pharming, and our equity position in Genzyme Transgenics which were offset in part by decreased losses from our joint venture with Diacrin. GAIN ON AFFILIATE SALE OF STOCK During the six months ended June 30, 2000, in accordance with our policy pertaining to affiliate sales of stock, Genzyme General recognized a gain of $20.3 million due to the issuance by Genzyme Transgenics, an unconsolidated affiliate, of additional shares of Genzyme Transgenics Corporation common stock. There were no similar transactions during the three and six-month periods ended June 30, 2001. GAIN (LOSS) ON INVESTMENT IN EQUITY SECURITIES In April 2001, Antigenics announced that it had entered into a definitive merger agreement with Aronex. The merger was completed in July 2001. Under the terms of the merger agreement, we will receive 0.0594 shares of Antigenics common stock for each of our shares of Aronex common stock. As a result of this merger, we recorded a $1.2 million realized loss to reflect the fair market value of our investment in Aronex at June 30, 2001. In the second quarter of 2000, we recorded a realized gain of $5.5 million upon the sale of a portion of our investment in Genzyme Transgenics common stock. We also recognized a realized gain of $7.6 million resulting from the acquisition of Celtrix Pharmaceuticals, Inc. by Insmed Pharmaceuticals, Inc. in which our shares of Celtrix common stock were exchanged on a one-for-one basis for shares of Insmed common stock. MINORITY INTEREST IN NET LOSS OF SUBSIDIARY Due to our combined direct and indirect interest in ATIII LLC, Genzyme General consolidates the results of ATIII LLC and records Genzyme Transgenics' portion of the losses of that joint venture as minority interest. Minority interest increased in the three and six months ended June 30, 2001 due to a change in the funding agreement for the joint venture in March 2001, effective January 1, 2001, which increased Genzyme Transgenics' portion of the losses incurred by ATIII LLC to 50% as compared to 30% for the same periods a year ago. INVESTMENT INCOME Genzyme General's investment income increased for the three and six months ended June 30, 2001 due primarily to higher average cash balances as compared to the same periods a year ago. In May 2001, we completed the private placement of $575.0 million in principal of 3% convertible subordinated debentures due May 2021. Net proceeds from the offering were approximately $562.1 million. We allocated the principal balance of the debentures and the net proceeds from the offering to Genzyme General. Genzyme General used a portion of the net proceeds from the private placement of the debentures to repay the $150.0 million it had drawn under our revolving credit facility in December 2000. INTEREST EXPENSE Genzyme General's interest expense increased for the three and six months ended June 30, 2001 as compared to the same periods a year ago primarily due to additional interest expense resulting from the $150.0 million of debt drawn on our revolving credit facility in December 2000 as part of the financing of the GelTex acquisition and the private placement of $575.0 million in principal 3% convertible debentures issued in May 2001. Genzyme General used a portion of the net proceeds from the private placement of the debentures to repay the $150.0 million it had drawn under our revolving credit facility in December 2000. 71 TAX PROVISION
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, INCREASE/ JUNE 30, INCREASE/ --------------------- (DECREASE) --------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE --------- --------- ---------- --------- --------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA) Provision for income taxes.... $(15,803) $(30,911) (49)% $(30,679) $(49,755) (38)% Effective tax rate............ 42% 33% 40% 31%
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; and - use of tax credits. The increase in Genzyme General's effective tax rate for the both the three and six month periods ending June 30, 2001 as compared to the same periods a year ago was primarily attributable to an increase in nondeductable amortization of intangibles, consisting largely of goodwill resulting from our December 2000 acquisition of GelTex. The tax benefit for the three and six months ended June 30, 2001 includes a $2.2 million benefit resulting from the release of excess tax reserves. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE On January 1, 2001, we adopted SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS 137 and SFAS 138. 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 in our combined balance sheet and measure those instruments at fair value. Subsequent changes in fair value will be reflected in income, unless the derivative is part of a qualified hedging relationship. In accordance with the transition provisions of SFAS 133, Genzyme General recorded a cumulative-effect adjustment of $4.2 million, net of tax, in its unaudited, combined statement of operations for the six months ended June 30, 2001 to recognize the fair value of certain common stock warrants held on January 1, 2001. Transition adjustments pertaining to interest rate swaps designated as cash-flow hedges and foreign currency forward contracts allocated to Genzyme General were not significant. For the three months ended June 30, 2001, Genzyme General recorded a charge of $0.2 million in other expense to reflect the change in value of certain common stock warrants from April 1, 2001 to June 30, 2001. Genzyme General also recorded a charge of $0.3 million in division equity to reflect the change in value of our interest rate swaps during the three month period, net of tax. For the six months ended June 30, 2001, Genzyme General recorded a charge of $3.8 million in other expense to reflect the change in value of certain common stock warrants from January 1, 2001 to June 30, 2001. Genzyme General also recorded a charge of $0.5 million in division equity for the six months ended June 30, 2001, to reflect the change in value of our interest rate swap contract during the period, net of tax. In the normal course of business, we manage risks associated with foreign exchange rates, interest rates and equity prices through a variety of strategies, including the use of hedging transactions, executed in accordance with our policies. Our hedging transactions include, but are not limited to, the use of various derivative financial instruments. As a matter of policy, we do not use derivative instruments unless there is an underlying exposure. Any change in the value of our derivative 72 instruments would be substantially offset by an opposite change in the value of the underlying hedged items. We do not use derivative instruments for trading or speculative purposes. GENZYME BIOSURGERY A DIVISION OF GENZYME CORPORATION In June 2001, we acquired Focal Inc., a leading developer of synthetic bipolymers used in surgery. We allocated the acquired assets and liabilities to Genzyme Biosurgery. The results of operations of Focal will be included in our results of Genzyme Biosurgery from June 30, 2001, the date of acquisition. In December 2000, we acquired Biomatrix, Inc. We accounted for the acquisition as a purchase. Immediately prior to the acquisition, we combined two of our operating divisions, Genzyme Surgical Products and Genzyme Tissue Repair, to form a new division called Genzyme Biosurgery. We allocated the acquired assets and liabilities of Biomatrix to Genzyme Biosurgery. The combination of Genzyme Surgical Products and Genzyme Tissue Repair to form Genzyme Biosurgery did not result in any adjustments to the book values of the net assets of the divisions because they remained divisions of the same corporation. We present the financial statements of Genzyme Biosurgery as though the divisions had been combined for all periods presented, and include the operations of Biomatrix from the date of acquisition. The components of Genzyme Biosurgery's combined statements of operations are described in the following table:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, INCREASE/ JUNE 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA) Total revenues................... $60,364 $36,256 66% $114,520 $ 71,205 61% -------- -------- -------- -------- Cost of products and services sold........................... 34,942 19,615 78% 66,717 38,677 72% Selling, general and administrative................. 35,297 22,668 56% 65,989 44,807 47% Research and development......... 11,956 8,453 41% 22,675 17,295 31% Amortization of intangibles...... 11,992 1,427 740% 23,313 2,853 717% -------- -------- -------- -------- Total operating costs and expenses....................... 94,187 52,163 81% 178,694 103,632 72% -------- -------- -------- -------- Operating loss................... (33,823) (15,907) 113% (64,174) (32,427) 98% Other income (expenses), net..... (3,785) 1,509 (351)% (8,761) 3,015 (391)% -------- -------- -------- -------- Division net loss................ $(37,608) $(14,398) 161% $(72,935) $(29,412) 148% ======== ======== ======== ========
REVENUES
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, INCREASE/ JUNE 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA) Cardiothoracic................... $17,367 $19,786 (12)% $ 35,656 $ 39,436 (10)% Orthopaedics..................... 26,488 4,577 479% 46,905 9,109 415% Biosurgical specialties.......... 16,508 11,892 39% 31,954 22,638 41% ------- ------- -------- -------- Total product and service revenue.................. 60,363 36,255 66% 114,515 71,183 61% Research and development revenue........................ 1 1 -- 5 22 (77)% ------- ------- -------- -------- Total revenues............. $60,364 $36,256 66% $114,520 $ 71,205 61% ======= ======= ======== ========
73 The decrease in cardiothoracic revenue in the three and six months ended June 30, 2001 when compared to the same periods of 2000 was due to decreased sales of chest drainage systems resulting from competitive pricing pressures in that market as well as the withdrawal from certain commodity suture lines in Europe. The decreases were offset, in part, by the continued growth in the minimally invasive cardiac surgery products and the sales revenue from the FocalSeal-Registered Trademark--L surgical sealant, which was added to the cardiothoracic product category in the third quarter of 2000 pursuant to a distribution and marketing agreement with Focal which, prior to our acquisition of Focal in June 2001, provided us with exclusive distribution rights for this product in North America. The orthopaedics product revenue increase for the three and six months ended June 30, 2001 when compared to the same periods of 2000 was primarily due to sales of Synvisc-Registered Trademark- viscosupplementation product, which product we added to the orthopaedics product category in December 2000 through our acquisition of Biomatrix. The increase in biosurgical specialties product revenue in the three and six months ended June 30, 2001 when compared to the same periods of 2000 was due to increases in sales of Seprafilm-TM- bioresorbable membrane and Sepramesh-TM- biosurgical composite. An increase in sales to original equipment manufacturers and sales generated from Hylaform-Registered Trademark- and skin care products, which were added to the biosurgical specialties product category in December 2000 also contributed to the overall increase in biosurgical specialties product revenue. International revenue as a percentage of total sales for the three months ended June 30, 2001 was 21% as compared to 25% in the same period of 2000. International sales as a percentage of total sales for the six months ended June 30, 2001 was 21% as compared to 26% in the same period of 2000. MARGINS
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, INCREASE/ JUNE 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA) Product margin.................... $22,302 $13,377 67% $42,288 $26,420 60% % of product revenue.............. 41% 45% 41% 45% Service margin.................... $ 3,119 $ 3,263 (4)% $ 5,510 $ 6,086 (9)% % of service revenue.............. 53% 52% 48% 50% Total gross margin................ $25,421 $16,640 53% $47,798 $32,506 47% % of total product and service revenue......................... 42% 46% 42% 46%
Genzyme Biosurgery provides a broad range of healthcare products and services. As a result, Genzyme Biosurgery's gross margins vary significantly depending on the market conditions of each product or service. In December 2000, we acquired Biomatrix and adjusted the acquired inventory to fair value, resulting in an increase to inventory of $11.3 million. This amount was amortized to cost of products sold as the acquired inventory was sold. During the quarter ending June 30, 2001, the remaining acquired inventory was sold and the related $5.3 million of the $11.3 million was charged to cost of products sold. Additionally, a $1.0 million charge related to the underfunding of an acquired retirement plan was included in cost of products sold. Excluding the adjustments described above, product margins increased in the three and six months ended June 30, 2001 as a result of an increase in sales of higher margin products such as Synvisc-Registered Trademark- viscosupplementation product and devices for minimally invasive cardiac surgery. 74 Service margins decreased for the three and six months ended June 30, 2001 as a result of a decrease in Epicel-Registered Trademark- skin grafts service revenue with no reduction in the fixed costs associated with these services. OPERATING EXPENSES The increase in selling, general and administrative expenses for the three months ended June 30, 2001 as compared to the same period in 2000 was due to the additional selling, general and administrative expenses related to the Biomatrix business, which we purchased in December 2000. In addition, $5.5 million in costs associated with the consolidation of European operations and $0.8 million for litigation costs also increased these expenses during the two periods. Genzyme Biosurgery's research and development expenses increased during the three months ended June 30, 2001 as compared to the same period in 2000 due to an increase in spending for orthopaedics development programs, primarily as a result of the addition of the Synvisc-Registered Trademark- viscosupplementation product to the orthopaedics line in December 2000 through our acquisition of Biomatrix. AMORTIZATION OF INTANGIBLES The increase in amortization of intangibles for the three and six months ended June 30, 2001 is primarily attributable to intangible assets acquired since year end in connection with our acquisitions of Biomatrix in December 2000 and the GDP Class A limited partnership interests in January 2001. PURCHASE OF IN-PROCESS RESEARCH AND DEVELOPMENT In December 2000, we acquired Biomatrix, a public company engaged in the development and manufacture of viscoelastic biomaterials for use in orthopaedic and other medical applications. We accounted for this acquisition as a purchase and allocated it to Genzyme Biosurgery. In connection with the purchase of Biomatrix, we allocated approximately $82.1 million to IPR&D, which Genzyme Biosurgery recorded as a charge to expense in its statement of operations for the year ended December 31, 2000. As of June 30, 2001, the technological feasibility of the Biomatrix IPR&D projects had not yet been reached and no significant departures from the assumptions included in the valuation analysis had occurred. Substantial additional research and development will be required prior to reaching technological feasibility. In addition, each product needs to successfully complete a series of clinical trials and to receive FDA or other regulatory approval prior to commercialization. We cannot guarantee that these projects will ever reach feasibility or develop into products that can be marketed profitably, nor can we guarantee that we will be able to develop and commercialize these products before our competitors develop and commercialize products for these indications. If these products are not successfully developed and do not become commercially viable, our results of operations could be materially affected. 75 Below is a brief description of the Biomatrix IPR&D projects, including an estimation of when management believes we may realize revenues from the sales of these products in the respective application:
ESTIMATED COST TO COMPLETE VALUE AT AT ACQUISITION JUNE 30, PROGRAM PROGRAM DESCRIPTION DEVELOPMENT STATUS DATE 2001 - ------- ---------------------------------- -------------------------------- ----------- --------- (IN MILLIONS) Visco- Use of elastoviscous solutions and - European marketing approval $33.8 $ 7.0 supplementation viscoelastic gels in disease expected by the end of 2001. conditions to supplement tissues U.S. trial scheduled for 2002. and body fluids, alleviating pain Initiation of a next and restoring normal function generation Synvisc-Registered Trademark- program expected in the fourth quarter of 2001 with possible U.S market approval in the second half of 2004 Visco- Use of viscoelastic gels to - U.S. clinical studies of 8.6 6.5 augmentation provide scaffolding for tissue Hylaform-Registered Trademark- regeneration or as an inert expected to start in the elastic filler for tissues of the fourth quarter of 2001 with skin and the subcutaneous and market launch expected in the intermuscular connective tissues second half of 2003 - Hylagel-Registered Trademark- Uro expected to be submitted for FDA approval and approval in Canada and Europe in 2002, with product launch expected in 2003 Visco- Use of viscoelastic gels and - Clinical studies have been $39.7 $ 7.3 separation membranes to separate tissues and initiated in the U.S., to decrease formation of adhesions Germany, France, the United and excessive scars after surgery Kingdom and Belgium for Sepragel-TM- Spine (formerly Hylagel-Registered Trademark- Nuro). Completion of patient enrollment is expected by the first quarter of 2002. Patient follow-up expected to be completed by the first quarter of 2003 with U.S. marketing approval anticipated in the first half of 2004. European marketing approval expected in the second half of 2003, with submissions for regulatory approvals in the United States and Canada thereafter - Expected product launch in Europe by the second quarter of 2002 and in the United States by the fourth quarter of 2002 ----- ----- $82.1 $20.8 ===== =====
76 OTHER INCOME AND EXPENSES
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, INCREASE/ JUNE 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA) Equity in net loss of unconsolidated affiliate........ $ (780) $ -- N/A $(1,316) $ -- N/A Other............................. 38 19 100% 45 42 7% Investment income................. 427 1,815 (76)% 939 3,599 (74)% Interest expense.................. (3,470) (325) 968% (8,429) (626) 1,246% ------- ------ ------- ------ Total other income (expenses)... $(3,785) $1,509 (351)% $(8,761) $3,015 (391)% ======= ====== ======= ======
EQUITY IN NET LOSS OF UNCONSOLIDATED AFFILIATES In January 2001, Focal completed the exercise of its option to require us to purchase $5.0 million in Focal common stock at a price of $2.06 per share. After that purchase we held approximately 22% of the outstanding shares of Focal common stock and began accounting for our investment under the equity method of accounting. We allocated our investment in Focal to Genzyme Biosurgery. Genzyme Biosurgery records in equity in net loss of unconsolidated affiliate its portion of the results of Focal. Genzyme Biosurgery's equity in net loss of unconsolidated affiliate increased for the three and six months ended June 30, 2001 when compared to the same period in 2000 because Genzyme Biosurgery did not own an equity interest in Focal in 2000. On June 30, 2001, we acquired the remaining 78% of the outstanding shares in an exchange of shares of Biosurgery Stock for shares of Focal common stock. INVESTMENT INCOME Investment income decreased as a result of lower average cash balances in the first three and six months of 2001 when compared to the first three and six months of 2000. INTEREST EXPENSE Interest expense increased primarily as a result of the $218.0 million of indebtedness outstanding as of June 30, 2001, under the portion of our revolving credit facility that we allocated to Genzyme Biosurgery. In December 2000, Genzyme Biosurgery drew $200.0 million under this facility to finance a portion of the cash component of the Biomatrix merger consideration. 77 GENZYME MOLECULAR ONCOLOGY A DIVISION OF GENZYME CORPORATION The following discussion summarizes the key factors our management believes 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:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, INCREASE/ JUNE 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Total revenues................... $ 1,279 $ 963 33% $ 2,691 $ 3,518 (24)% ------- ------- -------- -------- Cost of revenues................. 485 139 249% 1,029 195 428% Selling, general and administrative................. 1,811 1,788 1% 3,702 2,978 24% Research and development (including research and development related to contracts)..................... 7,568 4,594 65% 13,229 8,652 53% Amortization of intangibles...... -- 2,464 (100)% -- 5,420 (100)% ------- ------- -------- -------- Total operating costs and expenses..................... 9,864 8,985 10% 17,960 17,245 4% ------- ------- -------- -------- Operating loss................... (8,585) (8,022) (7)% (15,269) (13,727) (11)% Other income (expenses), net..... 254 107 137% 664 93 614% ------- ------- -------- -------- Loss before taxes................ (8,331) (7,915) 5% (14,605) (13,634) 7% Tax benefit...................... -- 552 (100)% -- 1,214 (100)% ------- ------- -------- -------- Division net loss................ $(8,331) $(7,363) 13% $(14,605) $(12,420) (18)% ======= ======= ======== ========
REVENUES The components of Genzyme Molecular Oncology's revenues are described in the following table:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, INCREASE/ JUNE 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Licensing revenue................ $ 548 $ 920 (40)% $ 1,212 $ 3,470 (65)% Royalty revenue.................. 28 43 (35)% 73 48 52% Research and development revenue........................ 703 -- N/A 1,406 -- N/A ------- ------ -------- -------- Total revenues................. $ 1,279 $ 963 33% $ 2,691 $ 3,518 (24)% ======= ====== ======== ========
Licensing revenue in the three and six months ended June 30, 2001 included revenue recognized from a technology access fee associated with the cancer antigen discovery agreement that Genzyme Molecular Oncology entered into with Purdue Pharma, L.P. in the fourth quarter of 2000 and from payments received under cancer diagnostic and SAGE-TM- license agreements. Licensing revenue decreased as compared to the same periods of 2000, due to a $2.0 million development milestone payment received in the first quarter of 2000 under a license agreement with Schering-Plough Ltd. for which no similar payment was received in 2001. Research and development revenue in the three and six months ended June 30, 2001 was solely attributable to research performed in connection with Genzyme Molecular Oncology's discovery agreement with Purdue Pharma. 78 COST OF REVENUE Genzyme Molecular Oncology's cost of revenue includes: - work performed on the cancer antigen discovery agreement with Purdue Pharma; and - royalties paid to third parties. Cost of revenue increased in the three and six months ended June 30, 2001 as a result of the work performed under the Purdue Pharma discovery agreement that started in the fourth quarter of 2000. OPERATING EXPENSES Genzyme Molecular Oncology's selling, general and administrative expenses increased for the three and six months ended June 30, 2001 as a result of enhanced business development efforts. Research and development expenses increased for the three and six months ended June 30, 2001 as compared to the same period of last year. The increase was primarily attributable to growth in the number of Genzyme Molecular Oncology's cancer vaccine clinical trials from two to five, additional investment in its dendritic-tumor cell fusion program and increased activity in its antigen discovery 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 fully amortized these intangible assets in June 2000, there were no amortization expenses for the three months or the six months ended June 30, 2001. OTHER INCOME AND EXPENSE Genzyme Molecular Oncology's other income increased in the three months ended June 30, 2001 due to an increase in interest income that is attributable to higher average cash balances. Interest expense decreased in the three and six months ended June 30, 2001, as compared to the same period of 2000, due to the May 2000 repayment of $5.0 million that Genzyme Molecular Oncology borrowed under our revolving credit facility. This amount was outstanding during the first quarter of 2000. TAX BENEFIT As part of the acquisition of PharmaGenics in 1997, Genzyme Molecular Oncology recorded a deferred tax liability of $7.6 million resulting from the difference between the book and tax basis of the acquired completed technology. Amortization of this deferred tax benefit was completed in the second quarter of 2000. B. LIQUIDITY AND CAPITAL RESOURCES GENZYME CORPORATION At June 30, 2001, we had cash, cash equivalents, and short- and long-term investments of $994.2 million, an increase of $354.5 million from December 31, 2000. We generated $62.7 million in cash from our operations for the six months ended June 30, 2001. Our investing activities utilized $334.5 million in cash for the six months ended June 30, 2001. Investing activities used: - $148.8 million for our net investment activity; 79 - $25.7 million as payment for our purchase of all of the GDP Class A limited partnership interests as described below; - $60.0 million to fund the acquisition of Wyntek, net of cash acquired; - $5.0 million of cash to purchase additional shares of Focal common stock; - $72.1 million to fund purchases of property, plant and equipment; and - $22.7 million to fund our investments in unconsolidated affiliates. During the six months ended June 30, 2001, we received $59.1 million of cash from the exercise of stock options and the purchase of shares under our employee stock plans. Our financing activities used $2.0 million to repay bank overdrafts. In January 2001, we purchased all of the outstanding Class A limited partnership interests of GDP for a payment of approximately $25.7 million in cash plus royalties on sales of certain Sepra-TM- products for ten years. We allocate our interest in GDP to Genzyme Biosurgery. As a result of the acquisition, significant control over the activities of GDP passed to us. The acquisition was accounted for as a purchase and the entire purchase price was allocated to the fair value of the intangible assets acquired and goodwill, which will be amortized over eight or ten years depending upon the asset classification. In January 2001, Focal, Inc., a public company and developer of synthetic biopolymers used in surgery, exercised its option to require us to purchase $5.0 million in Focal common stock at a price of $2.06 per share. After that purchase we held approximately 22% of the outstanding shares of Focal common, stock and began accounting for our investment under the equity method of accounting. We allocated this investment to Genzyme Biosurgery. On June 30, 2001, we acquired the remaining 78% of the outstanding shares in an exchange of shares of Biosurgery Stock for shares of Focal common stock. Focal shareholders received 0.1545 of a share of Biosurgery Stock for each share of Focal common stock they held. We issued approximately 2.1 million shares of Biosurgery Stock as merger consideration. We allocated the acquired assets and liabilities to Genzyme Biosurgery and accounted for the acquisition as a purchase. In May 2001, we completed the private placement of $575.0 million in principal of 3% convertible subordinated debentures due May 2021. Net proceeds from the offering were approximately $562.1 million. We have allocated the principal amount of the debentures and the net proceeds from the offering to Genzyme General. We will pay interest on these debentures on May 15 and November 15 of each year using cash allocated to Genzyme General. The first interest payment will be made on November 15, 2001. The debentures are convertible, upon the satisfaction of certain conditions, into shares of Genzyme General Stock at an initial conversion price of $70.30 per share. The conversion price is subject to adjustments. Holders of the debentures may require us to repurchase all or part of their debentures for cash on May 15, 2006, 2011 and 2016, at a price equal to 100% of the principal amount of the debentures plus accrued interest through the date prior to the date of purchase. Additionally, if certain fundamental changes occur, each holder may require us to repurchase, for cash, all or a portion of the holder's debentures. On or after May 20, 2004, we may redeem for cash all or part of the debentures that have not previously been converted or repurchased. Genzyme General used a portion of these proceeds to repay the $150.0 million it had drawn under our revolving credit facility in December 2000 to finance a portion of the cash component of the consideration for the GelTex acquisition. Genzyme General expects to utilize the remaining proceeds from the sale of the debentures for working capital and general corporate purposes. At our annual meeting on May 31, 2001, our shareholders approved an amendment to our charter which increased the total number of authorized shares of Genzyme common stock from 390,000,000 to 690,000,000 and increased the number of such shares designated as Genzyme General Stock from 200,000,000 to 500,000,000. On June 1, 2001, we completed a two-for-one split of Genzyme General 80 Stock by means of a stock dividend paid to Genzyme General division stockholders of record on May 24, 2001. We distributed a total of 97,184,967 shares of Genzyme General Stock to Genzyme General division stockholders in connection with the stock split. All share and per share amounts for Genzyme General Stock have been retroactively revised to reflect the two-for-one stock split. In June 2001, we acquired all of the outstanding capital stock of Wyntek Diagnostics, Inc. for $65.0 million in cash. We allocated the acquisition to Genzyme General and accounted for the acquisition as a purchase. In June 2001, we completed the redemption of our $250.0 million 5 1/4% convertible subordinated notes due 2005. Prior to the redemption date, holders of the notes elected to convert substantially all of the principal of the notes into approximately 12,597,000 shares of Genzyme General Stock, 685,000 shares of Biosurgery Stock and 682,000 shares of Molecular Oncology Stock. On June 15, 2001, the redemption date, we redeemed the remaining notes using cash allocated to Genzyme General. We have access to a $500.0 million revolving credit facility, $150.0 million of which matures in December 2001 and $350.0 million of which matures in December 2003. At December 31, 2000, $368.0 million was outstanding under this facility, $150.0 million of which was allocated to Genzyme General and $218.0 million of which was allocated to Genzyme Biosurgery. In May 2001, Genzyme General repaid the $150.0 million Genzyme General had drawn under this facility in December 2000 to finance a portion of the cash component of the GelTex merger consideration. At June 30, 2001, $18.0 million remained outstanding under the portion of the facility that matures in December 2001 and $200.0 million was outstanding under the portion of the facility that matures in December 2003, all of which was allocated to Genzyme Biosurgery. Borrowings under this facility bear interest at LIBOR plus an applicable margin. At June 30, 2001, $15.0 million of Genzyme General's cash remained available to Genzyme Biosurgery under a $25.0 million interdivisional financing arrangement with Genzyme General. We re-allocated this arrangement to Genzyme Biosurgery from Genzyme Tissue Repair upon the formation of Genzyme Biosurgery in December 2000. Under the terms of this arrangement, Genzyme Biosurgery may draw down funds as needed each quarter in exchange for Biosurgery designated shares based on the fair market value (as defined in our charter) of Biosurgery Stock at the time of the draw. Biosurgery designated shares are shares of Biosurgery Stock that are not issued and outstanding, but which our board of directors may issue, sell or distribute without allocating the proceeds to Genzyme Biosurgery. At June 30, 2001, $15.0 million of Genzyme General's cash remained available to Genzyme Molecular Oncology under a $30.0 million interdivisional financing arrangement with Genzyme General. Under the terms of this arrangement, Genzyme Molecular Oncology may draw down funds as needed each quarter in exchange for Molecular Oncology designated shares based on the fair market value (as defined in our charter) of Molecular Oncology Stock at the time of the draw. 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. Prior to our acquisition of Biomatrix, Biomatrix sold 744,000 shares of its common stock to certain of its employees, directors and consultants in exchange for ten-year, full recourse promissory notes. The notes accrue interest at rates ranging from 5.30% to 7.18% and mature at various dates from May 2007 through September 2009, upon which all outstanding principal and accrued interest becomes payable. As a result of the acquisition, these shares were converted into 532,853 shares of Biosurgery Stock and we recorded $14.7 million of outstanding principal and accrued interest to stockholders' equity because the notes were received in exchange for the issuance of stock. As of June 30, 2001, the outstanding balance of these notes is $10.2 million. 81 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: - $575.0 million in principal under our 3% convertible subordinated debentures due May 15, 2021, which are convertible into shares of Genzyme General Stock; - $218.0 million in principal outstanding under our revolving credit facility with a syndicate of commercial banks; - $21.2 million in principal under our 5% convertible subordinated debentures due August 2003, which are convertible into shares of Genzyme General Stock; and - $10.0 million in principal under our 6.9% convertible subordinated note in favor of UBS Warburg LLC that matures in May 2003 and is convertible into shares of Biosurgery Stock. If we use cash to pay or redeem any of the debt described above, including principal and interest due on it, 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 July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all business combinations be accounted for under the purchase method only and that certain acquired intangible assets in a business combination be recognized as assets apart from goodwill. SFAS No. 142 requires that ratable amortization of goodwill be replaced with periodic tests of the goodwill's impairment and that intangible assets other than goodwill be amortized over their useful lives. SFAS No. 141 is effective for all business combinations initiated after June 30, 2001 and for all business combinations accounted for by the purchase method for which the date of acquisition is after June 30, 2001. The provisions of SFAS No. 142 will be effective for fiscal years beginning after December 15, 2001, and will thus be adopted by us, as required, in fiscal year 2002. The impact of SFAS No. 141 and SFAS No. 142 on our financial statements has not yet been determined. SUBSEQUENT EVENTS INTERDIVISIONAL FINANCING ARRANGEMENT In July 2001, Genzyme Biosurgery drew $12.0 million of cash under the $25.0 million interdivisional financing arrangement with Genzyme General in exchange for an additional reserve of 1,902,949 Biosurgery designated shares. A balance of $3.0 million remains available to Genzyme Biosurgery under this arrangement. 82 INTENDED REDEMPTION OF $21.2 MILLION 5% CONVERTIBLE SUBORDINATED DEBENTURES On July 18, 2001, we sent notices to the holders of our $21.2 million 5% convertible debentures indicating our intention to redeem any of these debentures that remain outstanding on August 30, 2001 at a price equal to 103% of the $21.2 million principal amount, plus accrued interest through the date of redemption. We intend to pay the redemption price in cash. TRANSFER OF GENZYME'S 50% OWNERSHIP INTEREST IN ATIII LLC TO GENZYME TRANSGENICS CORPORATION On July 31, 2001, we transferred our 50% ownership interest in ATIII LLC, our joint venture with Genzyme Transgenics for the development and commercialization of ATIII, to Genzyme Transgenics. In exchange for our interest in the joint venture, we will receive a royalty on worldwide net sales (excluding Asia) of any of its products based on ATIII beginning three years after the first commercial sale of each such product up to a cumulative maximum amount of $30.0 million. ACQUISITION OF GDP CLASS B LIMITED PARTNERSHIP INTERESTS In July 2001, we notified the holders of the two Class B limited partnership interests in GDP that we are exercising our option to buy the Class B limited partnership interests for a payment of $70,000 per interest plus royalties on sales of certain Sepra-TM- products. We will purchase the Class B limited partnership interests on August 31, 2001. We will allocate the purchase of the GDP Class B limited partnership interests to Genzyme Biosurgery. NEUROCELL-TM- JOINT VENTURE REFUND Diacrin/Genzyme LLC, our joint venture with Diacrin, Inc. to develop and commercialize NeuroCell-TM--PD as a treatment for Parkinson's disease, did not initiate a phase 3 clinical trial of NeuroCell-TM--PD by June 30, 2001. Because a phase 3 trial of the product was not initiated by June 30, 2001, Genzyme General had the right to elect to receive a refund of $20.0 million of the $25.0 million Genzyme Biosurgery received from Genzyme General in connection with the transfer to Genzyme General of Genzyme Biosurgery's interest in the joint venture plus accrued interest thereon at a rate of 13.5% per annum. On August 2, 2001, Genzyme General notified Genzyme Biosurgery of its election to receive the refund. Genzyme Biosurgery can pay the refund amount in cash, Biosurgery designated shares or both. The refund is due and payable within 90 days after Genzyme Biosurgery received the notice from Genzyme General. ACQUISITION OF NOVAZYME PHARMACEUTICALS, INC. On August 6, 2001, we entered into a definitive agreement to acquire Novazyme Pharmaceuticals, Inc., for $137.5 million, payable in shares of Genzyme General Stock plus the assumption of all outstanding options and warrants to purchase shares of Novazyme common stock on an as-converted basis. Novazyme is a privately held company that is developing biotherapies for the treatment of lysosomal storage disorders. Novazyme shareholders are also eligible to receive two subsequent payments totaling $87.5 million if we receive U.S. marketing approval for two products using certain of Novazyme's technologies. The contingent payments are also payable in shares of Genzyme General Stock. The acquisition is subject to customary closing conditions. We expect to complete the acquisition in the third quarter of 2001. PHARMING GROUP, N.V. RECEIVERSHIP On August 10, 2001, Pharming Group, N.V., a public company in the Netherlands and our partner for the development of therapies for Pompe disease, announced that it would file for receivership in order to seek protection from its creditors. At June 30, 2001, we have an $8.5 million investment in Pharming common stock and a 7% convertible senior note from Pharming for the principal amount of 83 $10.0 million, plus accrued and unpaid interest of approximately $0.2 million. In addition, we have two joint ventures with Pharming for the development of Pompe disease therapies. At June 30, 2001, Pharming owed the joint ventures an aggregate amount of $1.7 million for its share of program costs, and the joint ventures owed us approximately $6.4 million for reimbursement of program costs incurred by us. At this time, the status of Pharming's receivership and our position as a creditor is not known and we are therefore unable to determine the impact, if any, on the realizable value of amounts due to us. Accordingly, no adjustments have been made to our consolidated financial statements or the combined financial statements of Genzyme General as of June 30, 2001. GENZYME GENERAL A DIVISION OF GENZYME CORPORATION At June 30, 2001, Genzyme General had cash, cash equivalents, and short- and long-term investments of $955.0 million, an increase of $423.6 million from December 31, 2000. Genzyme General generated $103.5 million in cash from its operations for the six months ended June 30, 2001. Genzyme General's investing activities utilized $310.8 million in cash for the six months ended June 30, 2001. Investing activities used: - $156.6 million for Genzyme General's net purchases, sales and maturity of investments; - $69.6 million to fund purchases of plant, property and equipment; - $60.0 million to fund the acquisition of Wyntek, net of cash acquired, as described below; and - $22.7 million to fund Genzyme General's investments in unconsolidated affiliates. During the six months ended June 30, 2001, Genzyme General received $57.9 million in cash from the exercise of stock options and purchase of shares under our employee stock plans. In May 2001, we completed the private placement of $575.0 million in principal of 3% convertible subordinated debentures due May 2021. Net proceeds from the offering were approximately $562.1 million. We have allocated the principal amount of the debentures and the net proceeds from the offering to Genzyme General. We will pay interest on these debentures on May 15 and November 15 each year using cash allocated to Genzyme General. The first interest payment will be made on November 15, 2001. The debentures are convertible, upon the satisfaction of certain conditions, into shares of Genzyme General Stock at an initial conversion price of $70.30 per share. The conversion price is subject to adjustments. Holders of the debentures may require us to repurchase all or part of their debentures for cash on May 15, 2006, 2011 or 2016, at a price equal to 100% of the principal amount of the debentures plus accrued interest through the date prior to the date of purchase. Additionally, if certain fundamental changes occur, each holder may require us to repurchase, for cash, all or a portion of the holder's debentures. On or after May 20, 2004, we may redeem for cash all or part of the debentures that have not previously been converted or repurchased. Genzyme General used a portion of these proceeds to repay the $150.0 million it had drawn under our revolving credit facility in December 2000 to finance a portion of the cash consideration for the GelTex acquisition. Genzyme General expects to utilize the remaining proceeds from the sale of the debentures for working capital and general corporate purposes. In June 2001, we acquired all of the outstanding capital stock of Wyntek Diagnostics, Inc. for $65.0 million in cash. We allocated the acquisition to Genzyme General and accounted for the acquisition as a purchase. In June 2001, we completed the redemption of our $250.0 million in principal 5 1/4% convertible subordinated notes due 2005. Prior to the redemption date, holders of the notes elected to convert 84 substantially all of the principal of the notes into approximately 12,597,000 shares of Genzyme General Stock, 685,000 shares of Biosurgery Stock and 682,000 shares of Molecular Oncology Stock. On June 15, 2001, the redemption date, we redeemed the remaining notes using cash allocated to Genzyme General. Genzyme General, together with our other operating divisions, has access to our $500.0 million revolving credit facility, $150.0 million of which matures in December 2001 and $350.0 million of which matures in December 2003. At December 31, 2000, $368.0 million was outstanding under this facility, $150.0 million of which was allocated to Genzyme General and $218.0 million of which was allocated to Genzyme Biosurgery. In May 2001, Genzyme General repaid the $150.0 million it had drawn under this facility in December 2000 to finance a portion of the cash component of the GelTex merger consideration. At June 30, 2001, $18.0 million remained outstanding under the portion of the facility that matures in December 2001 and $200.0 million was outstanding under the portion of the facility that matures in December 2003, all of which was allocated to Genzyme Biosurgery. Borrowings under this facility bear interest at LIBOR plus an applicable margin. At June 30, 2001, $15.0 million of Genzyme General's cash remained available to Genzyme Biosurgery under a $25.0 million interdivisional financing arrangement with Genzyme General. We re-allocated this arrangement to Genzyme Biosurgery from Genzyme Tissue Repair upon the formation of Genzyme Biosurgery in December 2000. Under the terms of this arrangement, Genzyme Biosurgery may draw down funds as needed each quarter in exchange for Biosurgery designated shares based on the fair market value (as defined in our charter) of Biosurgery Stock at the time of the draw. Biosurgery designated shares are shares of Biosurgery Stock that are not issued and outstanding, but which our board of directors may issue, sell or distribute without allocating the proceeds to Genzyme Biosurgery. At June 30, 2001, $15.0 million of Genzyme General's cash remained available to Genzyme Molecular Oncology under a $30.0 million interdivisional financing arrangement with Genzyme General. Under the terms of this arrangement, Genzyme Molecular Oncology may draw down funds as needed each quarter in exchange for Molecular Oncology designated shares based on the fair market value (as defined in our charter) of Molecular Oncology Stock at the time of the draw. 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. 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: - $575.0 million in principal under our 3% convertible subordinated debentures due May 15, 2021, which are convertible into shares of Genzyme General Stock; and - $21.2 million in principal under our 5% convertible subordinated debentures due August 2003, which are convertible into shares of Genzyme General Stock. 85 If Genzyme General uses cash to pay or redeem any of this debt, including principal and 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 of Genzyme Biosurgery or Genzyme Molecular Oncology affect our consolidated results of operations. To satisfy these and other commitments, Genzyme General may have to obtain additional financing. We cannot guarantee that Genzyme General will be able to obtain any additional financing, extend any existing financing arrangement, or obtain either on favorable terms. SUBSEQUENT EVENTS INTERDIVISIONAL FINANCIAL ARRANGEMENT In July 2001, Genzyme Biosurgery drew $12.0 million of cash under the $25.0 million interdivisional financing arrangement with Genzyme General in exchange for an additional reserve of 1,902,949 Biosurgery designated shares. A balance of $3.0 million remains available to Genzyme Biosurgery under this arrangement. INTENDED REDEMPTION OF $21.2 MILLION 5% CONVERTIBLE SUBORDINATED DEBENTURES On July 18, 2001, we sent notices to the holders of our $21.2 million 5% convertible subordinated debentures indicating our intention to redeem any debentures that remain outstanding on August 30, 2001 at a price equal to 103% of the $21.2 million principal amount, plus accrued interest through the date of redemption. We intend to pay the redemption price in cash. 86 TRANSFER OF GENZYME'S 50% OWNERSHIP INTEREST IN ATIII LLC TO GENZYME TRANSGENICS CORPORATION On July 31, 2001, we transferred our 50% ownership interest in ATIII LLC, our joint venture with Genzyme Transgenics for the development and commercialization of ATIII, to Genzyme Transgenics. In exchange for our interest in the joint venture, we will receive a royalty on worldwide net sales (excluding Asia) of any of its products based on ATIII beginning three years after the first commercial sale of each such product up to a cumulative maximum amount of $30.0 million. NEUROCELL-TM- JOINT VENTURE REFUND Diacrin/Genzyme LLC, our joint venture with Diacrin, Inc. to develop and commercialize NeuroCell-TM--PD as a treatment for Parkinson's disease, did not initiate a phase 3 clinical trial of NeuroCell-TM--PD by June 30, 2001. Because a phase 3 trial of the product was not initiated by June 30, 2001, Genzyme General had the right to elect to receive a refund of $20.0 million of the $25.0 million Genzyme Biosurgery received from Genzyme General in connection with the transfer to Genzyme General of Genzyme Biosurgery's interest in the joint venture plus accrued interest thereon at a rate of 13.5% per annum. On August 2, 2001, Genzyme General notified Genzyme Biosurgery of its election to receive the refund. Genzyme Biosurgery can pay the refund amount in cash, Biosurgery designated shares or both. The refund is due and payable within 90 days after Genzyme Biosurgery received the notice from Genzyme General. ACQUISITION OF NOVAZYME PHARMACEUTICALS, INC. On August 6, 2001, we entered into a definitive agreement to acquire Novazyme Pharmaceuticals, Inc., for $137.5 million, payable in shares of Genzyme General Stock plus the assumption of all outstanding options and warrants to purchase shares of Novazyme common stock on an as-converted basis. Novazyme is a privately held company that is developing biotherapies for the treatment of lysosomal storage disorders. Novazyme shareholders are also eligible to receive two subsequent payments totaling $87.5 million if we receive U.S. marketing approval for two products using certain of Novazyme's technologies. The contingent payments are also payable in shares of Genzyme General Stock. The acquisition is subject to customary closing conditions. We expect to complete the acquisition in the third quarter of 2001. PHARMING GROUP, N.V. RECEIVERSHIP On August 10, 2001, Pharming Group, N.V., a public company in the Netherlands and our partner for the development of therapies for Pompe disease, announced that it would file for receivership in order to seek protection from its creditors. At June 30, 2001, we have an $8.5 million investment in Pharming common stock and a 7% convertible senior note from Pharming for the principal amount of $10.0 million, plus accrued and unpaid interest of approximately $0.2 million. In addition, we have two joint ventures with Pharming for the development of Pompe disease therapies. At June 30, 2001, Pharming owed the joint ventures an aggregate amount of $1.7 million for its share of program costs, and the joint ventures owed us approximately $6.4 million for reimbursement of program costs incurred by us. At this time, the status of Pharming's receivership and our position as a creditor is not known and we are therefore unable to determine the impact, if any, on the realizable value of amounts due to us. Accordingly, no adjustments have been made to our consolidated financial statements or the combined financial statements of Genzyme General as of June 30, 2001. GENZYME BIOSURGERY A DIVISION OF GENZYME CORPORATION At June 30, 2001, Genzyme Biosurgery had cash, cash equivalents, and short- and long-term investments of $23.0 million, a decrease of approximately $55.1 million from December 31, 2000. 87 Genzyme Biosurgery used $26.5 million in cash for operations for the first six months of 2001. This is primarily due to Genzyme Biosurgery's net loss of $72.9 million for the six months ended June 30, 2001. Genzyme Biosurgery's investing activities utilized $31.5 million in cash for the six months ended June 30, 2001. Investing activities used: - $25.7 million as a payment for our purchase of all of the GDP Class A limited partnership interests; - $5.0 million was used to purchase Focal common stock; and - $2.5 million was used to fund capital expenditures. During the six months ended June 30, 2001, Genzyme Biosurgery received $0.8 million in cash from the exercise of stock options and the purchase of shares under our employee stock plans. Genzyme Biosurgery also received $3.2 million from the partial payment of notes receivable from our stockholders. Genzyme Biosurgery's financing activities used $0.7 million to repay bank overdrafts. In January 2001, Focal, Inc., a leading developer of synthetic biopolymers used in surgery, exercised its option to require us to purchase $5.0 million in Focal common stock at a price of $2.06 per share. After that purchase we held approximately 22% of the outstanding shares of Focal common stock and began accounting for our investment under the equity method of accounting. We allocated this investment to Genzyme Biosurgery. On June 30, 2001, we acquired the remaining 78% of the outstanding shares in an exchange of shares of Biosurgery Stock for shares of Focal common stock. Focal shareholders received 0.1545 of a share of Biosurgery Stock for each share of Focal common stock they held. We issued approximately 2.1 million shares of Biosurgery Stock as merger consideration. We allocated the acquired assets and liabilities to Genzyme Biosurgery and accounted for the acquisition as a purchase. In January 2001, we purchased all of the outstanding Class A limited partnership interests of GDP for a payment of approximately $25.7 million in cash plus royalties on sales of certain Sepra-TM- products for ten years. We allocate our interest in GDP to Genzyme Biosurgery. As a result of the acquisition, significant control over the activities of GDP passed to us. The acquisition was accounted for as a purchase and the entire purchase price was allocated to the fair value of the intangible assets acquired and goodwill, which will be amortized over eight or ten years depending upon the asset classification. As discussed further under the caption "Subsequent Events," in July 2001 we exercised our option to purchase the two outstanding GDP Class B limited partnership interests. In connection with our acquisition of Biomatrix, we assumed a 6.9% convertible subordinated note in favor of UBS Warburg LLC that matures in May 2003. At June 30, 2001, $10.0 million of the principal of this note remained outstanding. Genzyme Biosurgery will use a part of its cash flow to satisfy debt service on this note. If all or a portion of the note is not converted at the option of the holder into Biosurgery Stock, at maturity Genzyme Biosurgery's cash reserves will be diminished by the amount necessary to repay the outstanding principal of the note. Prior to our acquisition of Biomatrix, Biomatrix sold 744,000 shares of its common stock to certain of its employees, directors and consultants in exchange for ten-year, full recourse promissory notes. The notes accrue interest at rates ranging from 5.30% to 7.18% and mature at various dates from May 2007 through September 2009, upon which all outstanding principal and accrued interest becomes payable. As a result of the acquisition, these shares were converted into 532,853 shares of Biosurgery Stock and Genzyme Biosurgery recorded $14.7 million of outstanding principal and accrued interest to division equity because the notes were received in exchange for the issuance of stock. As of June 30, 2001, the outstanding balance of these notes is $10.2 million. 88 Genzyme Biosurgery, together with our other operating divisions, has access to our $500.0 million revolving credit facility, $150.0 million of which matures in December 2001 and $350.0 million of which matures in December 2003. At December 31, 2000, $368.0 million was outstanding under this facility, $150.0 million of which was allocated to Genzyme General and $218.0 million of which was allocated to Genzyme Biosurgery. In May 2001, Genzyme General repaid the $150.0 million it had drawn under this facility in December 2000 to finance the cash component of the GelTex merger consideration. At June 30, 2001, $18.0 million remained outstanding under the portion of the facility that matures in December 2001 and $200.0 million was outstanding under the portion of the facility that matures in December 2003, all of which was allocated to Genzyme Biosurgery. Borrowings under this facility bear interest at LIBOR plus an applicable margin. Genzyme Biosurgery will use a large part of its cash flow to make principal and interest payments on this debt. If Genzyme Biosurgery's cash flow from operations is insufficient to meet these obligations, it may need to borrow additional funds to make these payments. At June 30, 2001, $15.0 million of Genzyme General's cash remained available to Genzyme Biosurgery under a $25.0 million interdivisional financing arrangement with Genzyme General. We re-allocated this arrangement to Genzyme Biosurgery from Genzyme Tissue Repair upon the formation of Genzyme Biosurgery in December 2000. Under the terms of this arrangement, Genzyme Biosurgery may draw down funds as needed each quarter in exchange for Biosurgery designated shares based on the fair market value (as defined in our charter) of Biosurgery Stock at the time of the draw. Biosurgery designated shares are shares of Biosurgery Stock that are not issued and outstanding, but which our board of directors may issue, sell or distribute without allocating the proceeds to Genzyme Biosurgery. We believe that Genzyme Biosurgery's cash resources, together with revenues generated from its products and distribution agreements and from the anticipated sale of certain assets, will be sufficient to finance its planned operations and capital requirements through 2001. Genzyme Biosurgery intends to use substantial portions of its available cash for: - research and development; - product development and marketing, including for Synvisc-Registered Trademark- viscosupplementation product; - expanding facilities; and - working capital. Genzyme Biosurgery's cash needs may differ from those planned, however, 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 and maintain licensing arrangements and additional distribution arrangements; - ability to share costs of product development with research and marketing partners; - costs involved in enforcing patent claims and other intellectual property rights; - market acceptance of novel approaches and therapies; - success of its initiatives to reduce expenses and streamline its operations; - development of competitive products; - ability to satisfy regulatory requirements of the FDA and other governmental authorities; and 89 - ability to sell its Snowden-Pencer-Registered Trademark- product lines and its manufacturing facilities in Canada, as described below. Genzyme Biosurgery's cash reserves may be further reduced to pay principal and interest on the following debt: - $218.0 million in principal under our revolving credit facility with a syndicate of commercial banks; - $10.0 million in principal under our 6.9% convertible subordinated note in favor of UBS Warburg LLC that matures in May 2003 and is convertible into shares of Biosurgery Stock. If we use cash to pay or redeem this debt, including principal and interest on it, our cash reserves will be diminished. In February 2001, Genzyme Biosurgery announced its intention to divest the Snowden-Pencer-Registered Trademark- surgical instruments product lines. These product lines include hand-held reusable instruments and endoscopic instruments for general, plastic, gynecological and cardiovascular surgery. In May 2001, Genzyme Biosurgery terminated the production of Synvisc-Registered Trademark- viscosupplementation product in Canada and announced its intention to sell its manufacturing facilities in Pointe-Claire, Quebec, Canada. Genzyme Biosurgery will require significant additional financing to continue operations at anticipated levels. We cannot guarantee that Genzyme Biosurgery will be able to obtain any additional financing, extend any existing financing arrangement, or obtain either on terms that we consider favorable. If Genzyme Biosurgery has insufficient funds or is unable to raise additional funds, it may delay, scale back or eliminate certain of its programs. Genzyme Biosurgery may also have to sell to, or co-develop with third parties, rights to commercialize technologies or products that it would otherwise have sought to commercialize itself. SUBSEQUENT EVENTS INTERDIVISIONAL FINANCING ARRANGEMENT In July 2001, Genzyme Biosurgery drew $12.0 million of cash under the $25.0 million interdivisional financing arrangement with Genzyme General in exchange for an additional reserve of 1,902,949 Biosurgery designated shares. A balance of $3.0 million remains available to Genzyme Biosurgery under this arrangement. ACQUISITION OF GDP CLASS B LIMITED PARTNERSHIP INTERESTS In July 2001, we notified the holders of the two Class B limited partnership interests in GDP that we are exercising our option to buy the Class B limited partnership interests for a payment of $70,000 per interest plus royalties on sales of certain Sepra-TM- products. We will purchase the Class B limited partnership interests on August 31, 2001. We will allocate the purchase of the GDP Class B limited partnership interests to Genzyme Biosurgery. NEUROCELL-TM- JOINT VENTURE REFUND Diacrin/Genzyme LLC, our joint venture with Diacrin, Inc. to develop and commercialize NeuroCell-TM--PD as a treatment for Parkinson's disease, did not initiate a phase 3 clinical trial of NeuroCell-TM--PD by June 30, 2001. Because a phase 3 trial of the product was not initiated by June 30, 2001, Genzyme General had the right to elect to receive a refund of $20.0 million of the $25.0 million Genzyme Biosurgery received from Genzyme General in connection with the transfer to Genzyme General of Genzyme Biosurgery's interest in the joint venture plus accrued interest thereon at a rate of 13.5% per annum. On August 2, 2001, Genzyme General notified Genzyme Biosurgery of its election to receive the refund. Genzyme Biosurgery can pay the refund amount in cash, Biosurgery Stock 90 designated shares or both. The refund is due and payable within 90 days after Genzyme Biosurgery received the notice from Genzyme General. GENZYME MOLECULAR ONCOLOGY A DIVISION OF GENZYME CORPORATION At June 30, 2001, Genzyme Molecular Oncology had cash and cash equivalents of $16.2 million, a decrease of $14.0 million from cash, cash equivalents and short-term investments of $30.2 million at December 31, 2000. Genzyme Molecular Oncology used $14.2 million in cash for operations for the first six months of 2001. This is primarily due to Genzyme Molecular Oncology's net loss of $14.6 million for the six months ended June 30, 2001. Genzyme Molecular Oncology's investing activities in the first six months of 2001 provided $7.8 million from the sales and maturities of investments. During the six months ended June 30, 2001, Genzyme Molecular Oncology received $0.4 million in cash from the exercise of stock options and the purchase of shares under our employee stock plans. Genzyme Molecular Oncology, together with the other operating divisions, has access to Genzyme's $500.0 million revolving credit facility, $150.0 million of which matures in December 2001 and $350.0 million which matures in December 2003. At December 31, 2000, $368.0 million was outstanding under this facility, $150.0 million of which was allocated to Genzyme General and $218.0 million of which was allocated to Genzyme Biosurgery. In May 2001, Genzyme General repaid the $150.0 million it had drawn under this facility in December 2000 to finance the cash component of the GelTex merger consideration. At June 30, 2001, $18.0 million remained outstanding under the portion of the facility that matures in December 2001 and $200.0 million was outstanding under the portion of the facility that matures in December 2003, all of which was allocated to Genzyme Biosurgery. Borrowings under this facility bear interest at LIBOR plus an applicable margin. At June 30, 2001, $15.0 million of Genzyme General's cash remained available to Genzyme Molecular Oncology under a $30.0 million interdivisional financing arrangement with Genzyme General. Under the terms of this arrangement, Genzyme Molecular Oncology may draw down funds as needed each quarter in exchange for Molecular Oncology designated shares based on the fair market value (as defined in our charter) of Molecular Oncology Stock at the time of the draw. 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 the third quarter of 2002: - anticipated revenues generated from license agreements; - committed research funding from collaborators; - the $15.0 million remaining under the interdivisional financing arrangement with Genzyme General; and - amounts available to Genzyme Molecular Oncology under our revolving credit facilities. Genzyme Molecular Oncology plans to spend substantial amounts of funds on, among other things: - research and development; - pre-clinical and clinical testing; - pursuing regulatory approvals; and - working capital. 91 Genzyme Molecular Oncology's cash needs may differ from those planned, however, as a result of many factors, including the: - results of research and development and clinical testing; - achievement of milestones under existing licensing arrangements; - ability to establish and maintain additional strategic collaborations and licensing arrangements; - costs involved in enforcing patent claims and other intellectual property rights; - market acceptance of novel approaches and therapies; - 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 at anticipated levels. It cannot be guaranteed that Genzyme Molecular Oncology will be able to obtain any additional financing, extend any existing financing arrangement, or obtain either on terms that are considered favorable. If Genzyme Molecular Oncology has insufficient funds or is unable to raise additional funds, it may delay, reduce or eliminate certain of its programs. Genzyme Molecular Oncology may also have to sell to, or co-develop with, third parties rights to commercialize technologies or products that it would otherwise have sought to commercialize itself. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to potential loss from financial market risks that may occur as a result of changes in interest rates, equity prices and foreign exchange rates. Our exposure to these risks has not materially changed since December 31, 2000. We incorporate by reference our disclosure related to market risk which is set forth under the heading "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations--Euro-The New European Currency;" "--Market Risk;" "--Interest Rate Risk;" "--Foreign Exchange Risk;" and "--Equity Price Risk" in Exhibit 13.1 to our 2000 Form 10-K. 92 GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, JUNE 30, 2001 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On May 8, 2001, we sold $500.0 million in aggregate principal amount of 3% convertible subordinated debentures due May 15, 2021 in a private placement under Section 4(2) of the Securities Act of 1933 to three institutional purchasers, Credit Suisse First Boston, Goldman, Sachs & Co. and Salomon Smith Barney. We also granted these purchasers a 30-day option to purchase an additional $75.0 million in principal amount of our 3% debentures, which was exercised for the entire $75.0 million in principal amount on May 10, 2001. Our net proceeds from this offering were approximately $562.1 million. Holders of our 3% convertible subordinated debentures may surrender these debentures for conversion into shares of Genzyme General Stock at an initial conversion price (subject to adjustments) of approximately $70.30 per share of Genzyme General Stock if any of the following conditions is satisfied: - if the closing sale price of Genzyme General Stock for at least 20 trading days in the 30 trading day period ending on the trading day prior to the day of surrender is more than 110% of the conversion price per share of Genzyme General Stock at such preceding trading day; - if we have called the debentures for redemption; or - upon the occurrence of specified corporate transactions. The preceding description of our 3% convertible subordinated debentures is qualified in its entirety by reference to the copy of the Indenture dated as of May 8, 2001 pursuant to which these debentures were issued, which is filed as Exhibit 4.1 to our Current Report on Form 8-K filed with the SEC on May 11, 2001 and is incorporated by reference herein. 93 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS I. We held our annual meeting of stockholders on May 31, 2001. The following represents the results of the voting on proposals submitted to the stockholders at the annual meeting for a vote: a. Proposal to elect two directors for a term of office expiring in 2004:
NUMBER OF VOTES --------------------- NOMINEE FOR WITHHELD - ------- ---------- -------- Douglas A. Berthiaume Genzyme General Stock................................ 81,551,621 570,900 Genzyme Biosurgery Stock*............................ 3,739,687 94,464 Genzyme Molecular Oncology Stock*.................... 1,947,746 14,016 ---------- ------- Total................................................ 87,239,054 679,380
NUMBER OF VOTES --------------------- NOMINEE FOR WITHHELD - ------- ---------- -------- Henry E. Blair Genzyme General Stock................................ 81,331,355 791,166 Genzyme Biosurgery Stock*............................ 3,739,700 94,451 Genzyme Molecular Oncology Stock*.................... 1,947,751 14,011 ---------- ------- Total................................................ 87,018,806 899,628
Each nominee received a majority of the votes cast, and therefore has been duly elected as a director of Genzyme. The terms of office for Henri A. Termeer, Constantine E. Anagnostopoulos, Robert J. Carpenter, Charles L. Cooney, Victor J. Dzau and Connie Mack III as directors of Genzyme continued after the annual meeting. b. Proposal to amend our corporate charter to increase the number of authorized shares of our common stock from 390,000,000 to 690,000,000 shares and to increase the number of such shares designated as Genzyme General Stock from 200,000,000 to 500,000,000 shares.
NUMBER OF NUMBER OF NUMBER OF VOTES FOR VOTES AGAINST VOTES ABSTAINING ---------- ------------- ---------------- Genzyme General Stock................. 68,745,727 13,314,684 62,110 Biosurgery Stock*..................... 3,608,782 215,395 9,973 Molecular Oncology Stock*............. 1,888,041 68,642 5,079 ---------- ---------- ------ Total................................. 74,242,550 13,598,721 77,162
The proposal received the affirmative vote of a majority in interest of all shares outstanding, and entitled to vote, and therefore has been adopted. c. Proposal to amend our 1999 Employee Stock Purchase Plan to increase the number of shares of Genzyme General Division Stock authorized for issuance under the plan by 400,000 shares.
NUMBER OF NUMBER OF NUMBER OF NUMBER OF VOTES FOR VOTES AGAINST VOTES ABSTAINING BROKER NON-VOTES ---------- ------------- ---------------- ---------------- Genzyme General Stock....... 62,070,022 1,496,299 117,801 18,438,399 Biosurgery Stock*........... 2,003,090 142,884 13,452 1,674,723 Molecular Oncology Stock*... 814,912 56,640 6,420 1,083,789 ---------- --------- ------- ---------- Total....................... 64,888,024 1,695,823 137,673 21,196,911
The proposal received a majority of the votes cast, and therefore has been adopted.** 94 d. Proposal to amend our 1999 Employee Stock Purchase Plan to increase the number of shares of Biosurgery Stock authorized for issuance under the plan by 100,000 shares.
NUMBER OF NUMBER OF NUMBER OF NUMBER OF VOTES FOR VOTES AGAINST VOTES ABSTAINING BROKER NON-VOTES ---------- ------------- ---------------- ---------------- Genzyme General Stock....... 62,047,785 1,515,165 121,172 18,438,399 Biosurgery Stock*........... 2,002,761 145,448 11,218 1,674,723 Molecular Oncology Stock*... 811,221 59,496 7,255 1,083,789 ---------- --------- ------- ---------- Total....................... 64,861,767 1,720,109 139,645 21,196,911
The proposal received a majority of the votes cast, and therefore has been adopted.** e. Proposal to amend our 1998 Director Stock Option Plan to increase the number of shares of Genzyme General Stock available for issuance under the plan by 125,000 shares.
NUMBER OF NUMBER OF NUMBER OF NUMBER OF VOTES FOR VOTES AGAINST VOTES ABSTAINING BROKER NON-VOTES ---------- ------------- ---------------- ---------------- Genzyme General Stock....... 56,995,892 6,528,523 159,777 18,438,329 Biosurgery Stock*........... 1,788,698 351,722 19,007 1,674,723 Molecular Oncology Stock*... 797,896 71,617 8,459 1,083,789 ---------- --------- ------- ---------- Total....................... 59,582,486 6,951,862 187,243 21,196,841
The proposal received a majority of the votes cast, and therefore has been adopted.** f. Proposal to amend our 1998 Director Stock Option Plan to increase the number of shares of Biosurgery Stock available for issuance under the plan by 200,000 shares.
NUMBER OF NUMBER OF NUMBER OF NUMBER OF VOTES FOR VOTES AGAINST VOTES ABSTAINING BROKER NON-VOTES ---------- ------------- ---------------- ---------------- Genzyme General Stock....... 56,946,059 6,575,881 162,182 18,438,399 Biosurgery Stock*........... 1,765,363 370,496 17,598 1,680,694 Molecular Oncology Stock**................... 796,709 72,336 8,928 1,083,789 ---------- --------- ------- ---------- Total....................... 59,508,131 7,018,713 188,708 21,202,882
The proposal received a majority of the votes cast, and therefore has been adopted.** g. Proposal to amend our 1998 Director Stock Option Plan to increase the number of shares of Molecular Oncology Stock available for issuance under the plan by 150,000 shares.
NUMBER OF NUMBER OF NUMBER OF NUMBER OF VOTES FOR VOTES AGAINST VOTES ABSTAINING BROKER NON-VOTES ---------- ------------- ---------------- ---------------- Genzyme General Stock....... 56,111,016 7,418,485 154,621 18,438,399 Biosurgery Stock*........... 1,771,492 362,627 19,337 1,680,694 Molecular Oncology Stock**................... 797,826 71,506 8,640 1,083,789 ---------- --------- ------- ---------- Total....................... 58,680,334 7,852,618 182,598 21,202,882
The proposal received a majority of the votes cast, and therefore has been adopted.** 95 h. Proposal to approve our 2001 Equity Incentive Plan.
NUMBER OF NUMBER OF NUMBER OF NUMBER OF VOTES FOR VOTES AGAINST VOTES ABSTAINING BROKER NON-VOTES ---------- ------------- ---------------- ---------------- Genzyme General Stock....... 56,003,887 7,498,113 182,122 18,438,399 Biosurgery Stock*........... 1,917,711 215,046 20,699 1,680,694 Molecular Oncology Stock*... 809,237 59,274 9,461 1,083,789 ---------- --------- ------- ---------- Total....................... 58,730,835 7,772,433 212,282 21,202,882
The proposal received a majority of the votes cast, and therefore has been adopted.** - ------------------------ * Represents the actual number of Biosurgery shares and Molecular Oncology shares voted multiplied by 0.14. ** For this purpose, abstentions and broker non-votes are not counted. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits See the Exhibit Index immediately following the signature page to this report on Form 10-Q. (b) Reports on Form 8-K We filed a Current Report on Form 8-K dated April 25, 2001 on April 26, 2001 to announce that we entered into an Agreement and Plan of Merger with Focal, Inc. We filed an amendment to our Current Report dated December 18, 2000 on May 3, 2001 to include the unaudited pro forma combined financial information which describes the pro forma effect of our merger with Biomatrix and our merger with GelTex on the statements of operation for the year ended December 31, 2000 of both Genzyme Corporation and Genzyme Biosurgery, the division to which we allocated the assets, liabilities and operations of Biomatrix. We filed an amendment to our Current Report on Form 8-K dated December 14, 2000 on May 3, 2001 to include the unaudited pro forma combined financial information which describes the pro forma effect of our merger with GelTex and our merger with Biomatrix on the statements of operation for the year ended December 31, 2000 of both Genzyme Corporation and Genzyme General, the division to which we allocated the assets, liabilities and operations of GelTex. We filed a Current Report on Form 8-K dated May 8, 2001 on May 11, 2001 to announce our sale of 3% convertible subordinated debentures in a private placement. We filed a Current Report on Form 8-K dated May 8, 2001 on May 18, 2001 to include (1) the audited financial statements of Wyntek Diagnostics, Inc., a company that we had previously announced our intention to acquire, as of December 31, 2000 and 1999 and for each of the two years in the period ended December 31, 2000, and (2) the unaudited financial statements of Wyntek as of and for the three months ended March 31, 2001 and 2000. We filed a Current Report on Form 8-K dated May 22, 2001 on May 22, 2001 to include (1) the unaudited financial statements of Focal as of December 31, 2000 and 1999 and for each of the three years in the period ended December 31, 2000, (2) the unaudited financial statements of Focal as of and for the three months ended March 31, 2001 and 2000, and (3) the unaudited pro forma combined financial information which describes the pro forma effect of our planned acquisitions of Focal and Wyntek on the unaudited statements of 96 operations for the three months ended March 31, 2001 and the year ended December 31, 2000 and the unaudited balance sheet as of march 31, 2001 of both Genzyme Corporation and Genzyme Biosurgery, the division to which we will allocate the assets, liabilities and operations of Focal. We filed a Current Report on Form 8-K dated June 1, 2001 on June 6, 2001 to announce the completion of our acquisition of Wyntek. We filed a Current Report on Form 8-K dated June 1, 2001 on June 6, 2001 to announce the amendment of our charter to increase (1) the total number of authorized shares of our common stock and (2) the number of authorized shares designated as Genzyme General Stock. 97 GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, JUNE 30, 2001 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GENZYME CORPORATION DATE: August 14, 2001 By: /s/ MICHAEL S. WYZGA ----------------------------------------- Michael S. Wyzga SENIOR VICE PRESIDENT, FINANCE; CHIEF FINANCIAL OFFICER; AND CHIEF ACCOUNTING OFFICER
98 GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, JUNE 30, 2001 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ----------- ------------------------------------------------------------ *3.1 Restated Articles of Organization of Genzyme, as amended. Filed as Exhibit 3 to Genzyme's Current Report on Form 8-K filed on June 6, 2001. *3.2 By-laws of Genzyme, as amended. Filed as Exhibit 3.2 to Genzyme's Form 10-Q for the quarter ended September 30, 1999. *4.1 Indenture, dated as of May 8, 2001, by and between Genzyme and State Street Bank and Trust Company as trustee, including the form of debenture. Filed as Exhibit 4.1 to Genzyme's Current Report on Form 8-K filed on May 11, 2001. *4.2 Registration Rights Agreement, dated as of May 3, 2001, by and among Genzyme, Credit Suisse First Boston Corporation, Goldman Sachs & Co. and Salomon Smith Barney Inc. Filed as Exhibit 4.2 to Genzyme's Current Report on Form 8-K filed on May 11, 2001. 10.1 2001 Equity Incentive Plan. Filed herewith.
- ------------------------ * Indicates an exhibit previously filed with the Securities and Exchange Commission and incorporated herein by reference. Exhibits filed with Forms 10-Q or 8-K were filed under Commission File No. 0-14680. EX-10.1 3 a2056102zex-10_1.txt EXHIBIT 10.1 GENZYME CORPORATION 2001 EQUITY INCENTIVE PLAN 1. PURPOSE. The purpose of the Genzyme Corporation 2001 Equity Incentive Plan (the "Plan") is to attract and retain key employees and consultants of the Company and its Affiliates, to provide an incentive for them to achieve long-range performance goals, and to enable them to participate in the long-range growth of the Company by granting Awards with respect to the Company's Common Stock. Certain capitalized terms used herein are defined in Section 8 below. The Plan constitutes an amendment and restatement of the Company's 1990 Equity Incentive Plan (the "Prior Plan"), which is hereby merged with and into the Plan, and the separate existence of the Prior Plan shall terminate on the effective date of the Plan. The rights and privileges of holders of outstanding options and rights under the Prior Plan shall not be adversely affected by the foregoing action. 2. ADMINISTRATION. The Plan shall be administered by the Committee; provided, that the Board may in any instance perform any of the functions of the Committee hereunder. The Committee shall select the Participants to receive Awards and shall determine the terms and conditions of the Awards. The Committee shall have authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the operation of the Plan as it shall from time to time consider advisable, and to interpret the provisions of the Plan. The Committee's decisions shall be final and binding. To the extent permitted by applicable law, the Committee may delegate to one or more executive officers of the Company the power to make Awards to Participants who are not Reporting Persons or Covered Employees and all determinations under the Plan with respect thereto, provided that the Committee shall fix the maximum amount of such Awards for all such Participants and a maximum for any one Participant. 3. ELIGIBILITY. All employees and consultants of the Company or any Affiliate capable of contributing significantly to the successful performance of the Company, other than a person who has irrevocably elected not to be eligible, are eligible to be Participants in the Plan. Incentive Stock Options may be granted only to persons eligible to receive such Options under the Code. 4. STOCK AVAILABLE FOR AWARDS. (a) AMOUNT. Subject to adjustment under subsection (b), Awards may be made under the Plan for the following shares: GENZYME GENZYME GENZYME MOLECULAR GENERAL BIOSURGERY ONCOLOGY STOCK STOCK STOCK Options outstanding - Prior Plan 6,102,061 1,072,358 1,232,269 Available for grant - Prior Plan 80,099 331,111 224,722 NEW SHARES 2,000,000 1,000,000 400,000 --------- --------- ---------- Total authorized shares 8,182,160 2,403,469 1,856,991 If any Award (including any Award under the Prior Plan) expires or is terminated unexercised or is forfeited or settled in a manner that results in fewer shares outstanding than were awarded, the shares subject to such Award, to the extent of such expiration, termination, forfeiture or decrease, shall again be available for award under the Plan. Common Stock issued through the assumption or substitution of outstanding grants from an acquired company shall not reduce the shares available for Awards under the Plan. Shares issued under the Plan may consist of authorized but unissued shares or treasury shares. (b) ADJUSTMENT. In the event that the Committee determines that any stock dividend, extraordinary cash dividend, re-capitalization, reorganization, merger, consolidation, split-up, spin-off, combination, exchange of shares or other transaction affects the Common Stock such that an adjustment is required in order to preserve the benefits intended to be provided by the Plan, then the Committee (subject in the case of Incentive Stock Options to any limitation required under the Code) shall equitably adjust any or all of (i) the number and kind of shares in respect of which Awards may be made under the Plan, (ii) the number and kind of shares subject to outstanding Awards and (iii) the exercise price with respect to any of the foregoing, provided that the number of shares subject to any Award shall always be a whole number, and if considered appropriate, the Committee may make provision for a cash payment with respect to an outstanding Award. Notwithstanding the foregoing, unless otherwise determined by the Committee, no adjustment will be made for dividends of one series of Common Stock paid on another series of Common Stock. No adjustment to decrease the exercise price of outstanding stock options granted under the plan with respect to a repricing program will be made without shareholder approval. (c) LIMIT ON INDIVIDUAL GRANTS. Subject to adjustment under subsection (b), the maximum number of shares subject to Options that may be granted to any Participant in the aggregate in any calendar year shall not exceed 1,000,000 shares of Genzyme General Stock, 1,000,000 shares of Genzyme Biosurgery Stock, and 1,000,000 shares of Genzyme Molecular Oncology Stock, and the maximum number of shares that may be granted as Restricted Stock or unrestricted stock Awards, with respect to which performance goals apply under Section 6 below, to any Participant in the aggregate in any calendar year shall not exceed 1,000,000 shares of Genzyme General Stock, 1,000,000 shares of Genzyme Biosurgery Stock, and 1,000,000 shares of Genzyme Molecular Oncology Stock. 5. STOCK OPTIONS. (a) GRANT OF OPTIONS. Subject to the provisions of the Plan, the Committee may grant options ("Options") to purchase shares of Common Stock (i) complying with the requirements of Section 422 of the Code or any successor provision and any regulations thereunder ("Incentive Stock Options") and (ii) not intended to comply with such requirements ("Nonstatutory Stock Options"). The Committee shall determine the number of shares subject to each Option and the exercise price therefor, which shall not be less than 100% of the Fair Market Value of the Common Stock on the date of Grant, provided that a Nonstatutory Stock Option granted to a new employee or consultant in connection with the hiring of such person may have a lower exercise price so long as it is not less than 100% of Fair Market Value on the date the person accepts the Company's offer of employment or the date employment commences, whichever is lower. No Options may be granted hereunder more than ten years after the effective date of the Plan. (b) TERMS AND CONDITIONS. Each Option shall be exercisable at such times and subject to terms and conditions as the Committee may specify in the applicable grant or thereafter. The Committee may impose such conditions with respect to the exercise of Options, including conditions relating to applicable federal or state securities laws, as it considers necessary or advisable. (c) PAYMENT. No shares shall be delivered pursuant to any exercise of an Option until payment in full of the exercise price therefor is received by the Company. Such payment may be made in whole or in part in cash or, to the extent permitted by the Committee at or after the grant of the Option, by delivery of a note or other commitment satisfactory to the Committee or shares of Common Stock owned by the optionee (which shares must be owned for at least six months) valued at their Fair Market Value on the date of delivery, or such other lawful consideration, including a payment commitment of a financial or brokerage institution, as the Committee may determine. 6. STOCK AWARDS. (a) GRANT OF RESTRICTED OR UNRESTRICTED STOCK AWARDS. The Committee may grant shares of Common Stock subject to forfeiture ("Restricted Stock") and determine the duration of the period (the "Restricted Period") during which, and the conditions under which, the shares may be forfeited to the Company and the other terms and conditions of such Awards. Shares of Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered, except as permitted by the Committee, during the Restricted Period. Shares of Restricted Stock shall be evidenced in such manner as the Committee may determine. Any certificates issued in respect of shares of Restricted Stock shall be registered in the name of the Participant and unless otherwise determined by the Committee, deposited by the Participant, together with a stock power endorsed in blank, with the Company. At the expiration of the Restricted Period, the Company shall deliver such certificates to the Participant or if the Participant has died, to the Participant's Designated Beneficiary. The Committee also may make Awards of shares of Common Stock that are not subject to restrictions or forfeiture, on such terms and conditions as the Committee may determine from time to time. Shares of Restricted Stock or unrestricted stock may be issued for no cash consideration, such minimum consideration as may be required by applicable law or such other consideration as the Committee may determine. (b) PERFORMANCE GOALS. The Committee may establish performance goals for the granting of Restricted Stock or unrestricted stock Awards or the lapse of risk of forfeiture of Restricted Stock. Such performance goals may be based on one or more of the following criteria selected by the Committee, measured either absolutely or relative to an index, and as applied to the Company or any subsidiary, division or product line thereof: total shareholder return or stock price; earnings per share; net earnings; consolidated pre-tax earnings; revenues; operating income; earnings before interest and taxes; sales or expense targets; cash flow; return on equity; return on net assets employed or earnings per share; value created; operating margin; and strategic business criteria, consisting of one or more objectives based on meeting specified market penetration, geographic business expansion goals, and goals relating to research or product development, acquisitions or divestitures; or such other business criteria as the Committee may determine. 7. GENERAL PROVISIONS APPLICABLE TO AWARDS. (a) DOCUMENTATION. Each Award under the Plan shall be evidenced by a writing delivered to the Participant or agreement executed by the Participant specifying the terms and conditions thereof and containing such other terms and conditions not inconsistent with the provisions of the Plan as the Committee considers necessary or advisable to achieve the purposes of the Plan or to comply with applicable tax and regulatory laws and accounting principles. (b) COMMITTEE DISCRETION. Each type of Award may be made alone, in addition to or in relation to any other Award. The terms of each type of Award need not be identical, and the Committee need not treat Participants uniformly. Except as otherwise provided by the Plan or a particular Award, any determination with respect to an Award may be made by the Committee at the time of grant or at any time thereafter. (c) DIVIDENDS AND CASH AWARDS. In the discretion of the Committee, any Award under the plan may provide the Participant with (i) dividends or dividend equivalents payable (in cash or in the form of Awards under the Plan) currently or deferred with or without interest and (ii) cash payments in lieu of or in addition to an Award. (d) TERMINATION OF SERVICE. The Committee shall determine the effect on an Award of the disability, death, retirement or other termination of service of a Participant and the extent to which, and the period during which, the Participant's legal representative, guardian or Designated Beneficiary may receive payment of an Award or exercise rights thereunder. (e) CHANGE IN CONTROL. In order to preserve a Participant's rights under an Award in the event of a change in control of the Company (as defined by the Committee), the Committee in its discretion may, at the time an Award is made or at any time thereafter, take one or more of the following actions: (i) provide for the acceleration of any time period relating to the exercise or payment of the Award, (ii) provide for payment to the Participant of cash or other property with a Fair Market Value equal to the amount that would have been received upon the exercise or payment of the Award had the Award been exercised or paid upon the change in control, (iii) adjust the terms of the Award in a manner determined by the Committee to reflect the change in control, (iv) cause the Award to be assumed, or new rights substituted therefor, by another entity, or (v) make such other provision as the Committee may consider equitable to Participants and in the best interests of the Company. (f) LOANS. The Committee may authorize the making of loans or cash payments to Participants in connection with the grant or exercise of any Award under the Plan, which loans may be secured by any security, including Common Stock, underlying or related to such Award (provided that the loan shall not exceed the Fair Market Value of the security subject to such Award), and which may be forgiven upon such terms and conditions as the Committee may establish at the time of such loan or at any time thereafter. (g) TRANSFERABILITY. In the discretion of the Committee, any Award may be made transferable upon such terms and conditions and to such extent as the Committee determines, provided that Incentive Stock Options may be transferable only to the extent permitted by the Code. The Committee may in its discretion waive any restriction on transferability. (h) WITHHOLDING TAXES. The Participant shall pay to the Company, or make provision satisfactory to the Committee for payment of, any taxes required by law to be withheld in respect of Awards under the Plan no later than the date of the event creating the tax liability. The Company and its Affiliates may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind due to the Participant hereunder or otherwise. In the Committee's discretion, the minimum tax obligations required by law to be withheld in respect of Awards may be paid in whole or in part in shares of Common Stock, including shares retained from the Award creating the tax obligation, valued at their Fair Market Value on the date of retention or delivery. (i) FOREIGN NATIONALS. Awards may be made to Participants who are foreign nationals or employed outside the United States on such terms and conditions different from those specified in the Plan as the Committee considers necessary or advisable to achieve the purposes of the Plan or to comply with applicable laws. (j) AMENDMENT OF AWARD. The Committee may amend, modify or terminate any outstanding Award, including substituting therefor another Award of the same or a different type, changing the date of exercise or realization and converting an Incentive Stock Option to a Nonstatutory Stock Option, provided that the Participant's consent to such action shall be required (a) if such action would terminate, or reduce the number of shares issuable under an Option, unless any time period relating to the exercise of such Option or the eliminated portion, as the case may be, is accelerated before such termination or reduction, in which case the Committee may provide for the Participant to receive cash or other property equal to the net value that would be received upon exercise of the terminated Option or the eliminated portion, as the case may be, and (b) in any other case, unless the Committee determines that the action, taking into account any related action, would not materially and adversely affect the Participant. No adjustment to decrease the exercise price of outstanding stock options granted under the plan with respect to a repricing program will be made without shareholder approval. 8. CERTAIN DEFINITIONS. "Affiliate" means any business entity in which the Company owns directly or indirectly 50% or more of the total voting power or has a significant financial interest as determined by the Committee. "Award" means any Option or Stock granted under the plan. "Board" means the Board of Directors of the Company. "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor law. "Committee" means one or more committees each comprised of not less than two members of the Board appointed by the Board to administer the Plan or a specified portion thereof. Unless otherwise determined by the Board, if a Committee is authorized to grant Awards to a Reporting Person or a Covered Employee, each member shall be a "non-employee director" within the meaning of Rule 16b-3 under the Exchange Act or an "outside director" within the meaning of Section 162(m) of the Code, respectively. "Common Stock" or "Stock" means the Genzyme General Stock, the Genzyme Biosurgery Stock, the Genzyme Molecular Oncology Stock and any other series of Common Stock, $.01 par value, of the Company. "Company" means Genzyme Corporation. "Covered Employee" means a "covered employee" within the meaning of Section 162(m) of the code. "Designated Beneficiary" means the beneficiary designated by a Participant, in a manner determined by the Committee, to receive amounts due or exercise rights of the Participant in the event of the Participant's death. In the absence of an effective designation by a Participant, "Designated Beneficiary" means the Participant's estate. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor law. "Fair Market Value" means, with respect to Common Stock or any other property, the Fair Market Value of such property as determined by the Committee in good faith or in the manner established by the Committee from time to time. "Genzyme General Stock" means the Genzyme General Division Common Stock. "Genzyme Biosurgery Stock" means the Genzyme Biosurgery Division Common Stock. "Genzyme Molecular Oncology Stock" means the Genzyme Molecular Oncology Division Common Stock. "Participant" means a person selected by the Committee to receive an Award under the Plan. "Reporting Person" means a person subject to Section 16 of the Exchange Act. 9. MISCELLANEOUS. (a) NO RIGHT TO EMPLOYMENT. No person shall have any claim or right to be granted an Award. Neither the adoption, maintenance, nor operation of the Plan nor any Award hereunder shall confer upon any employee or consultant of the Company or of any Affiliate any right with respect to the continuance of his or her employment by or other service with the Company or any such Affiliate nor shall they interfere with the rights of the Company (or Affiliate) to terminate any employee at any time or otherwise change the terms of employment. (b) NO RIGHTS AS STOCKHOLDER. Subject to the provisions of the applicable Award, no Participant or Designated Beneficiary shall have any rights as a stockholder with respect to any shares of Common Stock to be issued under the Plan until he or she becomes the holder thereof. A Participant to whom Common Stock is awarded shall be considered the holder of the Stock at the time of the Award except as otherwise provided in the applicable Award. (c) EFFECTIVE DATE. The Plan shall be effective on the date it is approved by the stockholders. (d) AMENDMENT OF PLAN. The Board may amend, suspend or terminate the Plan or any portion thereof at any time, subject to such stockholder approval as the Board determines to be necessary or advisable to comply with any tax or regulatory requirement. (e) GOVERNING LAW. The provisions of the Plan shall be governed by and interpreted in accordance with the laws of the Commonwealth of Massachusetts. Adopted by the Board of Directors on March 1, 2001 Approved by Stockholders on May 31, 2001 (7/01) -----END PRIVACY-ENHANCED MESSAGE-----