10-Q 1 a2061919z10-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 SEPTEMBER 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 OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) ONE KENDALL SQUARE, CAMBRIDGE, MASSACHUSETTS 02139 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(617) 252-7500 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / The number of shares outstanding of each of the issuer's series of common stock as of October 31, 2001: Genzyme General Division Common Stock....................... 212,188,951 Genzyme Biosurgery Division Common Stock.................... 39,479,457 Genzyme Molecular Oncology Division Common Stock............ 16,722,572
-------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 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- surgical product lines and the expected timing of the transaction; - planned completion of our acquisition of certain assets of Pharming N.V. and the expected timing of the transaction; - potential additional payments in connection with the acquisition of Novazyme Pharmaceuticals, Inc.; - 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 and successfully enforce our proprietary rights; - 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; - the accuracy of our information regarding the products and resources of our competitors and potential competitors; - the content and timing of submissions to and decisions made by the Food and Drug Administration, commonly referred to as the FDA, and other regulatory agencies; - 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; - our ability to satisfy the FDA's request for additional data and information in connection with our Biologics License Application submission for Fabrazyme-TM- enzyme; - our ability to obtain reimbursement for our products and services from third-party payors, and the extent of such coverage; - 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 establish and maintain strategic license, collaboration and distribution arrangements; i - the continued funding of our joint ventures by our partners; - 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 success of our Fabrazyme-TM- and Thyrogen-Registered Trademark- product launches in Europe; - our ability to successfully negotiate purchase and sale agreements for our Snowden-Pencer-Registered Trademark- surgical product lines; - the impact of Pharming Group N.V.'s receivership on the realizable value of amounts due to us arising out of our joint ventures with Pharming and on our Pompe disease research and development activities; - our ability to complete our acquisition of certain assets of Pharming N.V. and to prevail in any appeal related to that acquisition; - the ability to successfully develop and receive FDA approval for products for the treatment of lysosomal storage disorders that employ certain of Novazyme's technologies, and the timing thereof; - the possible disruption of our operations due to terrorist activities and armed conflict, including as a result of the disruption of operations of our subsidiaries and our customers, suppliers, distributors, couriers, collaborative partners, licensees and clinical trial sites; and - the operational integration and other risks associated with acquisitions. 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 for the fiscal year ended December 31, 2000, as amended (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. ii NOTE REGARDING INCORPORATION BY REFERENCE The Securities and Exchange Commission, commonly referred to as the SEC, 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. iii GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, SEPTEMBER 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 Nine Months Ended September 30, 2001 and 2000.................................................... 1 Consolidated Balance Sheets as of September 30, 2001 (unaudited) and December 31, 2000....................... 4 Unaudited, Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2001 and 2000........... 5 Notes to Unaudited, Consolidated Financial Statements..... 6 GENZYME GENERAL Unaudited, Combined Statements of Operations for the Three and Nine Months Ended September 30, 2001 and 2000....... 26 Combined Balance Sheets as of September 30, 2001 (unaudited) and December 31, 2000....................... 27 Unaudited, Combined Statements of Cash Flows for the Nine Months Ended September 30, 2001 and 2000................ 28 Notes to Unaudited, Combined Financial Statements......... 29 GENZYME BIOSURGERY Unaudited, Combined Statements of Operations for the Three and Nine Months Ended September 30, 2001 and 2000....... 42 Combined Balance Sheets as of September 30, 2001 (unaudited) and December 31, 2000....................... 43 Unaudited, Combined Statements of Cash Flows for the Nine Months Ended September 30, 2001 and 2000................ 44 Notes to Unaudited, Combined Financial Statements......... 45 GENZYME MOLECULAR ONCOLOGY Unaudited, Combined Statements of Operations for the Three and Nine Months Ended September 30, 2001 and 2000....... 50 Combined Balance Sheets as of September 30, 2001 (unaudited) and December 31, 2000....................... 51 Unaudited, Combined Statements of Cash Flows for the Nine Months Ended September 30, 2001 and 2000................ 52 Notes to Unaudited, Combined Financial Statements......... 53 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 54 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk............................................... 105 PART II. OTHER INFORMATION ITEM 2. Changes in Securities and Use of Proceeds........... 106 ITEM 6. Exhibits and Reports on Form 8-K.................... 106 Signatures.................................................. 107
iv PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- -------------------- 2001 2000 2001 2000 --------- -------- --------- -------- Revenues: Net product sales......................................... $ 291,959 $206,645 $ 816,262 $592,505 Net service sales......................................... 23,988 19,967 71,983 62,280 Revenues from research and development contracts: Related parties......................................... 1,043 -- 2,726 -- Other................................................... 2,505 747 7,426 4,617 --------- -------- --------- -------- Total revenues........................................ 319,495 227,359 898,397 659,402 --------- -------- --------- -------- Operating costs and expenses: Cost of products sold..................................... 75,462 63,729 231,594 165,631 Cost of services sold..................................... 14,041 12,068 40,890 35,886 Selling, general and administrative....................... 122,030 66,379 316,810 195,358 Research and development (including research and development related to contracts)....................... 69,127 39,678 188,651 123,954 Amortization of intangibles............................... 30,950 3,409 90,115 15,191 Purchase of in-process research and development........... 86,800 -- 95,568 -- --------- -------- --------- -------- Total operating costs and expenses.................... 398,410 185,263 963,628 536,020 --------- -------- --------- -------- Operating income (loss)..................................... (78,915) 42,096 (65,231) 123,382 --------- -------- --------- -------- Other income (expenses): Equity in net loss of unconsolidated affiliates........... (8,110) (11,420) (28,921) (30,866) Gain on affiliate sale of stock........................... 212 2,419 212 22,689 Gain (loss) on investments in equity securities........... (24,464) 8,544 (25,996) 22,709 Minority interest in net loss of subsidiary............... 260 977 2,259 3,185 Other..................................................... (1,192) (10) (5,035) 5,185 Investment income......................................... 13,718 12,758 36,359 33,333 Interest expense.......................................... (8,739) (5,010) (30,875) (12,785) --------- -------- --------- -------- Total other income (expenses)......................... (28,315) 8,258 (51,997) 43,450 --------- -------- --------- -------- Income (loss) before income taxes........................... (107,230) 50,354 (117,228) 166,832 Benefit from (provision for) income taxes................... 4,554 (15,933) 7,288 (51,101) --------- -------- --------- -------- Net income (loss) before cumulative effect of change in accounting principle...................................... (102,676) 34,421 (109,940) 115,731 Cumulative effect of change in accounting principle, net of tax....................................................... -- -- 4,167 -- --------- -------- --------- -------- Net income (loss)........................................... $(102,676) $ 34,421 $(105,773) $115,731 ========= ======== ========= ======== Comprehensive income (loss), net of tax: Net income (loss)......................................... $(102,676) $ 34,421 $(105,773) $115,731 --------- -------- --------- -------- Other comprehensive income (loss), net of tax: Foreign currency translation adjustments................ 17,267 (10,273) (577) (20,628) Unrealized loss on derivatives, net of tax.............. (1,444) -- (1,733) -- Unrealized gains (losses) on securities: Unrealized gains (losses) arising during the period... (8,675) 44,223 (9,661) 48,597 Reclassification adjustment for (gains) losses included in net income.............................. 15,535 -- 16,507 (5,501) --------- -------- --------- -------- Unrealized gains on securities, net................... 6,860 44,223 6,846 43,096 --------- -------- --------- -------- Other comprehensive income................................ 22,683 33,950 4,536 22,468 --------- -------- --------- -------- Comprehensive income (loss)................................. $ (79,993) $ 68,371 $(101,237) $138,199 ========= ======== ========= ========
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 NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 2001 2000 2001 2000 -------- -------- -------- -------- NET INCOME (LOSS) PER SHARE: ALLOCATED TO GENZYME GENERAL STOCK: Net income (loss) before cumulative effect of change in accounting principle.................. $(81,706) $ 50,973 $(34,843) $160,272 Cumulative effect of change in accounting principle, net of tax........................... -- -- 4,167 -- -------- -------- -------- -------- Genzyme General net income (loss)................. (81,706) 50,973 (30,676) 160,272 Tax benefit allocated from Genzyme Biosurgery..... 2,918 6,455 20,661 16,291 Tax benefit allocated from Genzyme Molecular Oncology........................................ 2,687 2,021 9,367 5,558 -------- -------- -------- -------- Net income (loss) allocated to Genzyme General Stock........................................... $(76,101) $ 59,449 $ (648) $182,121 ======== ======== ======== ======== Net income (loss) per share of Genzyme General Stock: Basic: Net income (loss) per share before cumulative effect of change in accounting principle...... $ (0.37) $ 0.34 $ (0.02) $ 1.07 Per share cumulative effect of change in accounting principle, net of tax.............. -- -- 0.02 -- -------- -------- -------- -------- Net income (loss) per share allocated to Genzyme General Stock................................. $ (0.37) $ 0.34 $ 0.00 $ 1.07 ======== ======== ======== ======== Diluted: Net income (loss) per share before cumulative effect of change in accounting principle...... $ (0.37) $ 0.32 $ (0.02) $ 0.99 Per share cumulative effect of change in accounting principle, net of tax.............. -- -- 0.02 -- -------- -------- -------- -------- Net income (loss) per share allocated to Genzyme General Stock................................. $ (0.37) $ 0.32 $ 0.00 $ 0.99 ======== ======== ======== ======== Weighted average shares outstanding: Basic............................................. 208,350 172,759 198,841 170,553 ======== ======== ======== ======== Diluted........................................... 208,350 194,148 198,841 191,229 ======== ======== ======== ======== ALLOCATED TO BIOSURGERY STOCK: Net loss.......................................... $(21,525) $(94,460) Allocated tax benefit............................. 2,444 11,434 -------- -------- Net loss allocated to Biosurgery Stock............ $(19,081) $(83,026) ======== ======== Net loss per share of Biosurgery Stock--basic and diluted......................................... $ (0.48) $ (2.22) ======== ======== Weighted average shares outstanding............... 39,376 37,479 ======== ======== ALLOCATED TO MOLECULAR ONCOLOGY STOCK: Net loss.......................................... $ (7,494) $ (5,504) $(22,099) $(17,924) ======== ======== ======== ======== Net loss per share of Molecular Oncology Stock--basic and diluted........................ $ (0.45) $ (0.37) $ (1.36) $ (1.28) ======== ======== ======== ======== Weighted average shares outstanding............... 16,679 14,884 16,225 14,002 ======== ======== ======== ========
The accompanying notes are an integral part of these unaudited, consolidated financial statements. 2 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED) (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 2001 2000 2001 2000 -------- -------- -------- -------- NET INCOME (LOSS) PER SHARE (CONTINUED): ALLOCATED TO SURGICAL PRODUCTS STOCK: Net loss......................................... $(13,936) $(34,346) ======== ======== Net loss per share of Surgical Products Stock--basic and diluted....................... $ (0.93) $ (2.30) ======== ======== Weighted average shares outstanding.............. 14,959 14,907 ======== ======== ALLOCATED TO TISSUE REPAIR STOCK: Net loss......................................... $ (5,588) $(14,590) ======== ======== Net loss per share of Tissue Repair Stock--basic and diluted.................................... $ (0.19) $ (0.51) ======== ======== Weighted average shares outstanding.............. 28,795 28,664 ======== ========
The accompanying notes are an integral part of these unaudited, consolidated financial statements. 3 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------- ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 223,420 $ 236,213 Short-term investments.................................... 113,582 104,586 Accounts receivable, net.................................. 239,276 205,094 Inventories............................................... 173,952 170,341 Prepaid expenses and other current assets................. 37,477 37,681 Deferred tax assets--current.............................. 47,074 46,836 ---------- ---------- Total current assets.................................... 834,781 800,751 Property, plant and equipment, net.......................... 595,028 504,412 Long-term investments....................................... 746,583 298,841 Notes receivable-related party.............................. -- 10,350 Intangibles, net............................................ 1,561,037 1,539,782 Investments in equity securities............................ 78,279 121,251 Other noncurrent assets..................................... 47,563 42,713 ---------- ---------- Total assets............................................ $3,863,271 $3,318,100 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 41,119 $ 26,165 Accrued expenses.......................................... 147,298 139,683 Income taxes payable...................................... 51,502 46,745 Deferred revenue.......................................... 3,667 8,609 Current portion of long-term debt and capital lease obligations............................................. 8,135 19,897 ---------- ---------- Total current liabilities............................... 251,721 241,099 Long-term debt and capital lease obligations................ 244,037 381,560 Convertible notes and debentures............................ 585,000 283,680 Deferred tax liabilities.................................... 168,723 230,384 Other noncurrent liabilities................................ 25,456 6,236 ---------- ---------- Total liabilities....................................... 1,274,937 1,142,959 ---------- ---------- Stockholders' equity: Genzyme General Stock, $0.01 par value.................... 2,119 956 Biosurgery Stock, $0.01 par value......................... 395 364 Molecular Oncology Stock, $0.01 par value................. 167 159 Treasury Stock--Genzyme General--at cost.................. (901) (901) Additional paid-in capital-Genzyme General Stock.......... 1,747,042 1,269,284 Additional paid-in capital-Biosurgery Stock............... 846,368 823,353 Additional paid-in capital-Molecular Oncology Stock....... 116,204 111,484 Deferred compensation..................................... (5,132) (9,943) Notes receivable from stockholders........................ (11,836) (14,760) Accumulated deficit....................................... (111,511) (5,738) Accumulated other comprehensive income.................... 5,419 883 ---------- ---------- Total stockholders' equity.............................. 2,588,334 2,175,141 ---------- ---------- Total liabilities and stockholders' equity.............. $3,863,271 $3,318,100 ========== ==========
The accompanying notes are an integral part of these unaudited, consolidated financial statements. 4 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED, AMOUNTS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, --------------------- 2001 2000 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)......................................... $(105,773) $ 115,731 Reconciliation of net income (loss) to net cash provided by operating activities: Depreciation and amortization........................... 125,203 45,374 Non-cash compensation expense........................... 7,375 -- Provision for bad debts................................. 2,246 5,574 Note received from a collaborator....................... -- (10,175) Write-off of note received from a collaborator.......... 10,159 -- Charges for in-process research and development......... 95,568 -- Equity in net loss of unconsolidated affiliates......... 28,921 30,866 Gain on affiliate sale of stock......................... (212) (22,689) (Gain) loss on investments in equity securities......... 25,996 (22,709) Minority interest in net loss of subsidiary............. (2,259) (3,185) Deferred income tax expense (benefit)................... (17,165) 4,668 Other................................................... (2,564) 2,224 Increase (decrease) in cash from working capital changes: Accounts receivable................................... (36,104) (30,053) Inventories........................................... 10,551 (15,185) Prepaid expenses and other current assets............. (1,800) (1,970) Accounts payable, accrued expenses, income taxes payable and deferred revenue........................ 30,453 19,109 --------- --------- Net cash provided by operating activities............. 170,595 117,580 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments.................................. (750,075) (498,916) Sales and maturities of investments....................... 314,233 433,150 Purchases of equity securities............................ (8,318) (5,000) Proceeds from sale of investments in equity securities.... 36 15,773 Purchases of property, plant and equipment................ (123,229) (52,263) Acquisitions, net of acquired cash........................ (78,379) (342) Investments in unconsolidated affiliates.................. (31,298) (19,639) Other..................................................... 5,679 (1,521) --------- --------- Net cash used in investing activities................. (671,351) (128,758) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock.................... 74,488 104,122 Payments of notes receivable from stockholders............ 2,896 -- Proceeds from issuance of debt............................ 562,062 -- Payments of debt and capital lease obligations............ (155,128) (5,000) Bank overdraft............................................ 2,111 -- Other..................................................... 3,237 1,276 --------- --------- Net cash provided by financing activities............. 489,666 100,398 --------- --------- Effect of exchange rate changes on cash..................... (1,703) (3,808) --------- --------- Increase (decrease) in cash and cash equivalents............ (12,793) 85,412 Cash and cash equivalents at beginning of period............ 236,213 130,156 --------- --------- Cash and cash equivalents at end of period.................. $ 223,420 $ 215,568 ========= =========
The accompanying notes are an integral part of these unaudited, consolidated financial statements. 5 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, we condense or omit certain footnotes and other financial information normally required by generally accepted accounting principles. 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 results for future periods. 2. NEW ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards, or SFAS, No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 141 requires that all business combinations be accounted for under the purchase method and that certain acquired intangible assets in a business combination be recognized as assets apart from goodwill. SFAS 142 requires that ratable amortization of goodwill and certain intangible assets be replaced with periodic tests of the goodwill's impairment and that other intangible assets be amortized over their useful lives. SFAS 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 142 will be effective for fiscal years beginning after December 15, 2001, and will thus be adopted by us in fiscal year 2002. However, for goodwill and intangible assets acquired after June 30, 2001, certain provisions of SFAS 142 will be effective from the date of acquisition. For the nine months ended September 30, 2001, we had approximately $37.6 million of goodwill amortization, however, the full impact of SFAS 141 and SFAS 142 on our financial statements has not been determined. 3. ACQUISITIONS AND DISPOSITION CLASS A AND CLASS B 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. In August 2001, we purchased the two outstanding GDP Class B limited partnership interests for a payment of $70,000 per Class B limited partnership interest plus $40,000 of related costs and undertook the obligation to pay additional royalties over ten years on sales of certain Sepra-TM- products. We allocated the acquired limited partnership interests of GDP to Genzyme Biosurgery and accounted for the acquisitions as purchases. Accordingly, we included the results of operations of GDP in our consolidated financial statements and the combined financial statements of Genzyme Biosurgery from January 9, 2001. 6 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. ACQUISITIONS AND DISPOSITION (CONTINUED) We allocated the purchase prices to the fair value of the intangible assets acquired as follows (amounts in thousands):
CLASS A CLASS B LIMITED LIMITED PARTNERSHIP PARTNERSHIP INTERESTS INTERESTS TOTAL ----------- ----------- -------- Patents (to be amortized over 8 years)........ $ 5,909 $ -- $ 5,909 Trademarks (to be amortized over 10 years).... 2,755 -- 2,755 Technology (to be amortized over 10 years).... 8,827 -- 8,827 Goodwill (to be amortized over 10 years)...... 8,234 180 8,414 ------- ---- ------- Total....................................... $25,725 $180 $25,905 ======= ==== =======
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, we included the results of operations of Wyntek in our consolidated financial statements and the combined financial statements of Genzyme General from June 1, 2001, 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 Other 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 assumed responsibility for determining the IPR&D valuation and engaged an independent third-party appraisal company to assist in the valuation of the intangible assets acquired. We estimated the fair value assigned to purchased IPR&D by discounting, to present value, the cash flows expected to result from the project once it has reached technological feasibility. We applied a discount rate of 25% to estimate 7 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. ACQUISITIONS AND DISPOSITION (CONTINUED) the present value of these cash flows, which was consistent with the risks of the project. 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. In the allocation of purchase price to 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 nine months ended September 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 revenue 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. We expect to complete the regulatory review process and file an 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. 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 2,086,151 shares of Biosurgery Stock as merger consideration. We also assumed all of the outstanding options to purchase Focal common stock and exchanged them for options to purchase Biosurgery Stock on an as-converted basis. We allocated the acquired assets and liabilities to Genzyme Biosurgery and accounted for the acquisition as a purchase. 8 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. ACQUISITIONS AND DISPOSITION (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): Issuance of 2,086,151 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 Other 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).................... 1,115 Assumed liabilities......................................... (3,773) Notes receivable from stockholders.......................... 367 ------- Allocated purchase price.................................. $15,938 =======
ATIII LLC In July 2001, we transferred our 50% ownership interest in ATIII LLC, our joint venture with Genzyme Transgenics Corporation 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 Genzyme Transgenics' 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. Prior to the transfer, we consolidated the results of ATIII LLC because we had control of ATIII LLC through our combined, direct and indirect ownership interest in the joint venture. NOVAZYME PHARMACEUTICALS, INC. In September 2001, we acquired all of the outstanding capital stock of Novazyme Pharmaceuticals, Inc., a privately-held developer of biotherapies for the treatment of lysosomal storage disorders, or LSDs, for an initial payment of 2,562,182 shares of Genzyme General Stock. Novazyme shareholders received 0.5714 of a share of Genzyme General Stock for each share of Novazyme common stock they held. We will be obligated to make two additional payments totaling $87.5 million, payable in shares of Genzyme General Stock, if we receive U.S. marketing approval for two products for the treatment of LSDs that employ certain of Novazyme's technologies. In connection with the merger, we also assumed all of the outstanding options, warrants and rights to purchase Novazyme common stock and exchanged them for options, warrants and rights to purchase Genzyme General Stock, on an as-converted basis. We allocated the acquisition to Genzyme General and accounted for the acquisition as a purchase. Accordingly, the results of operations of Novazyme are included in our consolidated financial statements and the combined financial statements of Genzyme General from September 26, 2001, the date of acquisition. 9 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. ACQUISITIONS AND DISPOSITION (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): Issuance of 2,562,182 shares of Genzyme General Stock....... $110,584 Issuance of options to purchase 158,840 shares of Genzyme General Stock............................................. 6,274 Issuance of warrants to purchase 25,338 shares of Genzyme General Stock............................................. 894 Issuance of rights to purchase 66,846 shares of Genzyme General Stock............................................. 1,839 Acquisition costs........................................... 951 -------- Total purchase price...................................... $120,542 ======== Cash and cash equivalents................................... $ 5,194 Other current assets........................................ 63 Property, plant and equipment............................... 4,475 Goodwill.................................................... 17,336 In-process research and development......................... 86,800 Deferred tax asset.......................................... 8,161 Other assets................................................ 62 Assumed liabilities......................................... (2,795) Liabilities for exit activities and integration............. (1,740) Deferred tax liability...................................... (960) Deferred compensation....................................... 2,630 Notes receivable from stockholders.......................... 1,316 -------- Allocated purchase price.................................. $120,542 ========
Because our acquisition of Novazyme was completed after June 30, 2001, the provisions of SFAS 141 and certain provisions of SFAS 142 apply from the date of acquisition. Accordingly, we will not ratably amortize the goodwill resulting from the acquisition of Novazyme. Instead we will test the goodwill's impairment on a periodic basis in accordance with the provisions of SFAS 142. The 2,562,182 shares of Genzyme General Stock that we issued to Novazyme's shareholders were valued at $110.6 million using the average trading price of Genzyme General Stock for the 4 day trading period ending September 26, 2001, the date of acquisition. Options, warrants and rights to purchase shares of Genzyme General Stock were valued at $9.0 million using the Black-Scholes model. In accordance with Financial Accounting Standards Board Interpretation No. 44, which is referred to as FIN 44, at the acquisition date we allocated the $2.6 million intrinsic value of the portion of the unvested options related to the future service period to deferred compensation in stockholders equity. We are amortizing the unvested portion to operating expense over the remaining vesting period of approximately 22 months. In connection with our acquisition of Novazyme, we acquired a technology platform that we believe can be leveraged in the development of treatments for various LSDs. As of the acquisition date, the technology platform had not achieved technological feasibility and would require significant further development to complete. Accordingly, we have allocated to IPR&D and charged to expense $86.8 million, representing the portion of the purchase price attributable to the technology platform. Our management assumes responsibility for determining the IPR&D valuation and engaged an independent third-party appraisal company to assist in the valuation of the intangible assets acquired. 10 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. ACQUISITIONS AND DISPOSITION (CONTINUED) The fair value assigned to purchased IPR&D was estimated by discounting, to present value, the probability-adjusted net cash flows expected to result once the technology has reached technological feasibility and is utilized in the treatment of certain LSDs. A discount rate of 16% was applied to estimate the present value of these cash flows and is consistent with the overall risks of the platform technology. In estimating future cash flows, management considered other tangible and intangible assets required for successful exploitation of the technology and adjusted the future cash flows to reflect the contribution of value from these assets. In the allocation of purchase price to the IPR&D, the concept of alternative future use was specifically considered. The platform technology is specific to LSDs and there is currently no alternative use for the technology in the event that it fails as a platform for enzyme replacement therapy for the treatment of LSDs. UNAUDITED PRO FORMA FINANCIAL SUMMARY 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. In December 2000, we also acquired Biomatrix, Inc., a public company engaged in the development and manufacture of viscoelastic and viscosupplementation 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 GelTex, Biomatrix, Wyntek, Focal and Novazyme 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 related to these acquisitions, such as the acquired IPR&D charges of $118.0 million resulting from the acquisition of GelTex, $82.1 million resulting from the acquisition of 11 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. ACQUISITIONS AND DISPOSITION (CONTINUED) Biomatrix, $8.8 million resulting from the acquisition of Wyntek and $86.8 million resulting from the acquisition of Novazyme, are not reflected in the following pro forma financial summary:
FOR THE NINE MONTHS ENDED SEPTEMBER 30, ----------------------- 2001 2000 ---------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Total revenues.............................................. $906,957 $778,085 Income (loss) before extraordinary items and cumulative effect of change in accounting principle.................. (39,818) 20,754 Net income (loss)........................................... (35,651) 20,754 Net income allocated to Genzyme General Stock: Net income allocated to Genzyme General Stock before cumulative effect of change in accounting principle..... $ 75,861 $121,008 Cumulative effect of change in accounting principle, net of tax.................................................. 4,167 -- -------- -------- Net income allocated to Genzyme General Stock............. $ 80,028 $121,008 ======== ======== Net income per share allocated to Genzyme General Stock: Basic: Net income per share before cumulative effect of change in accounting principle............................... $ 0.38 $ 0.64 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 $ 0.64 ======== ======== Diluted: Net income per share before cumulative effect of change in accounting principle............................... $ 0.36 $ 0.60 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 $ 0.60 ======== ======== Net loss allocated to Biosurgery Stock...................... $(93,580) $(82,799) ======== ======== Net loss per share allocated to Biosurgery Stock--basic and diluted................................................... $ (2.41) $ (2.15) ======== ========
4. INVENTORIES (AMOUNTS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 2001 2000 -------------- ------------- (UNAUDITED) Raw materials....................................... $ 53,102 $ 51,545 Work-in-process..................................... 90,206 73,520 Finished products................................... 30,644 45,276 -------- -------- Total............................................. $173,952 $170,341 ======== ========
12 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. PHARMING GROUP, N.V. RECEIVERSHIP AND OUR ACQUISITION OF CERTAIN ASSETS On August 10, 2001, Pharming Group, N.V., a public company in the Netherlands and our partner in two joint ventures for the development of therapies for Pompe disease, and certain of its subsidiaries filed for receivership in order to seek protection from creditors. In the quarter ended September 30, 2001, we recorded pre-tax charges of $23.4 million related to the Pharming Group receivership, including $10.2 million for the write-off of the principal and accrued interest due to us under the 7% convertible senior note issued to us by Pharming Group, $8.5 million for the write-down of our equity investment in Pharming Group because we consider the decline in value of this investment to be other than temporary, and $4.7 million for the net amount owed by Pharming Group to the CHO-cell product joint venture we previously formed with Pharming Group that we believe is uncollectable. As a result of Pharming Group's failure to make payments to fund our joint venture for the development of a CHO-cell product for Pompe disease under a strategic alliance agreement, we terminated this agreement in August and have assumed full operational and financial responsibility for the development of the CHO-cell product. Our joint venture with Pharming Group covering a transgenic product for Pompe disease remains in place. We do not intend to commercialize this product, but are obligated to fund its production for the nine patients participating in a clinical trial extension until those patients can be transitioned to a CHO-cell product. We expect to complete transition of these patients to the CHO-cell product by the end of 2003. In September 2001, we recorded a pre-tax charge of $17.2 million, of which $16.8 million was charged to selling, general and administrative expenses representing our obligation to fund the continued production of transgenic human alpha-glucosidase enzyme through 2003. On September 18, 2001, we signed a conditional agreement to acquire certain assets of Pharming N.V., the Belgian subsidiary of Pharming Group N.V., including manufacturing facilities in Geel, Belgium. The conditional agreement is subject to the approval of the Commercial Court in Turnhout, Belgium, the Province of Antwerp, Belgium, and our board of directors, as well as to the receipt of a favorable soil attestation for the land. If all of the conditions are satisfied, we expect to complete the purchase by mid-November. 6. 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 repurchase. Additionally, if certain fundamental changes occur, each holder may require us to repurchase, for cash, all or a portion of the holder's debentures. On or after May 20, 2004, we may redeem for cash all or part of the debentures that have not previously been converted or repurchased. Genzyme General used a portion of these proceeds to repay the $150.0 million we had drawn under our revolving credit facility in December 2000 and allocated to Genzyme General to finance a portion of the cash component of the consideration for the GelTex acquisition. We expect to utilize the 13 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. PRIVATE PLACEMENT OF $575.0 MILLION 3% CONVERTIBLE SUBORDINATED DEBENTURES (CONTINUED) remaining proceeds from the sale of the debentures for Genzyme General's working capital and general corporate purposes. 7. REDEMPTION OF $250.0 MILLION 5 1/4% CONVERTIBLE SUBORDINATED NOTES In June 2001, we completed the redemption of our $250.0 million in principal of 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. 8. REDEMPTION OF $21.2 MILLION 5% CONVERTIBLE SUBORDINATED DEBENTURES In August 2001, we completed the redemption of our $21.2 million in principal of 5% convertible subordinated debentures due 2003. Prior to the redemption date, the holders of the debentures elected to convert all of the principal of the debentures into approximately 1,305,000 shares of Genzyme General Stock. We paid approximately $3.2 million in cash for the accrued interest on the debentures through the date of conversion using cash allocated to Genzyme General. 9. INTERDIVISIONAL FINANCING ARRANGEMENTS In July 2001, Genzyme Biosurgery drew down $12.0 million of the $15.0 million still available to it under the $25.0 million interdivisional financing arrangement with Genzyme General in exchange for an additional reserve of 1,902,949 Biosurgery designated shares. Genzyme Biosurgery used $8.5 million of the proceeds to pay a portion of the amounts it owes to Genzyme General. 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 September 30, 2001, $3.0 million remained available to Genzyme Biosurgery under this arrangement. In August 2001, Genzyme Molecular Oncology drew down $4.0 million of the $15.0 million still available to it under the $30.0 million interdivisional financing arrangement with Genzyme General in exchange for an additional reserve of 333,333 Molecular Oncology designated shares. 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. At September 30, 2001, $11.0 million remained available to Genzyme Molecular Oncology under this arrangement. 10. 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 14 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. NEUROCELL-TM- JOINT VENTURE REFUND (CONTINUED) 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 Biosurgery received notification from Genzyme General 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. 11. GAIN (LOSS) ON INVESTMENTS IN EQUITY SECURITIES In the quarter ended September 30, 2001, we recorded charges of $11.8 million in connection with our investment in the ordinary shares of Cambridge Antibody Technology Group plc and $4.5 million in connection with our investment in the common stock of Targeted Genetics Corporation, because we considered the decline in the value of these investments to be other than temporary. Given the significance and duration of the declines as of the end of the quarter, we concluded that it was unclear over what period the recovery of the stock price for each of these investments would take place and that, accordingly, any evidence suggesting that the investments would recover to at least our purchase price was not sufficient to overcome the presumption that the current market price was the best indicator of the value of each of these investments. In August 2001, Pharming Group filed for receivership in order to seek protection from its creditors. In the quarter ended September 30, 2001, we recorded a charge of $8.5 million, representing an at cost write-off of our investment in Pharming common stock. 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 received 0.0594 of a share of Antigenics common stock for each share of Aronex common stock that we held. As a result of this merger, we recorded a $1.2 million charge to reflect the fair market value of our investment in Aronex at June 30, 2001. In the third quarter of 2000, we recorded a realized gain of $10.9 million upon the sale of a portion of our investment in Genzyme Transgenics common stock. 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 that was offset by the reversal of a $1.9 million valuation allowance related to previously recognized capital losses. 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. 12. DERIVATIVE FINANCIAL INSTRUMENTS On January 1, 2001, we adopted Statement of Financial Accounting Standards, or SFAS, 133, "Accounting for Derivative Instruments and Hedging Activities." 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, 15 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) 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, we recorded a cumulative-effect adjustment of $4.2 million, net of tax, in our unaudited, consolidated statement of operations for the nine months ended September 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 September 30, 2001, we recorded a pre-tax charge of $1.2 million in other expense to reflect the change in value of certain common stock warrants from July 1, 2001 to September 30, 2001. For the nine months ended September 30, 2001, we recorded a pre-tax charge of $5.0 million in other expense to reflect the change in value of certain common stock warrants from January 1, 2001 to September 30, 2001. We also recorded a charge of $1.7 million in other comprehensive income for the nine months ended September 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. 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. 13. TAX BENEFIT (PROVISION)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ---------------------- (DECREASE) ---------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Benefit from (provision for) income taxes............................. $4,554 $(15,933) (129)% $7,288 $(51,101) (114)% Effective tax rate.................. 4% 32% 6% 31%
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 charges for IPR&D; - nondeductible amortization of intangibles; and - use of tax credits. The decrease in our effective tax rate for both the three and nine months ended September 30, 2001, as compared to the same periods a year ago, was primarily attributable to nondeductible charges for IPR&D resulting from our acquisitions of Wyntek in June 2001 and Novazyme in September 2001 and nondeductible amortization of intangibles consisting largely of goodwill resulting from our acquisitions of GelTex and Biomatrix in December 2000. The tax benefit for the nine months ended September 30, 2001 includes a $2.2 million benefit resulting from the release of excess tax reserves. 16 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. TAX BENEFIT (PROVISION) (CONTINUED) We calculate earnings per share for each series of common 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. 14. NET INCOME (LOSS) PER SHARE We calculate the income tax provision of each division as if that division were a separate taxpayer, which includes assessing realizability of deferred tax assets at the division level. Our management and accounting policies provide that if, as of the end of any fiscal quarter, a division cannot use any projected annual tax benefit attributable to it to offset or reduce its current or deferred income tax expense, we may allocate the tax benefit to other divisions in proportion to their taxable income without compensating payment or allocation to the division generating the benefit. The tax benefits allocated to Genzyme General, which are included in earnings attributable to Genzyme General Stock, were:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------- ---------------------- 2001 2000 2001 2000 -------- -------- -------- -------- (UNAUDITED, AMOUNTS IN THOUSANDS) Tax benefits allocated from: Genzyme Biosurgery.................. $2,918 $6,455 $20,661 $16,291 Genzyme Molecular Oncology.......... 2,687 2,021 9,367 5,558 ------ ------ ------- ------- Total............................. $5,605 $8,476 $30,028 $21,849 ====== ====== ======= =======
In the three and nine months ended September 30, 2001, we allocated $2.4 million and $11.4 million of tax benefits to Genzyme Biosurgery that resulted from our acquisition of Biomatrix in December 2000, for which there are no similar amounts in the same periods of last year. 17 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. NET INCOME (LOSS) PER SHARE (CONTINUED) 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 September 30, 2001, the total tax benefits previously allocated to Genzyme General were (in thousands): Genzyme Biosurgery.......................................... $189,380 Genzyme Molecular Oncology.................................. 33,891
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 holders of Genzyme General Stock of record on May 24, 2001. We distributed a total of 97,184,967 shares of Genzyme General Stock to holders of Genzyme General Stock in connection with the stock split. All share and per share amounts for 18 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. NET INCOME (LOSS) PER SHARE (CONTINUED) Genzyme General Stock have been retroactively revised for all periods presented to reflect the two-for-one split.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 2001 2000 2001 2000 -------- -------- -------- -------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Genzyme General net income (loss) before cumulative effect of change in accounting principle............... $(81,706) $ 50,973 $(34,843) $160,272 Cumulative effect of change in accounting principle, net of tax(1).............................................. -- -- 4,167 -- -------- -------- -------- -------- Genzyme General net income (loss)........................ (81,706) 50,973 (30,676) 160,272 Tax benefit allocated from Genzyme Biosurgery............ 2,918 6,455 20,661 16,291 Tax benefit allocated from Genzyme Molecular Oncology.... 2,687 2,021 9,367 5,558 -------- -------- -------- -------- Net income (loss) allocated to Genzyme General Stock--basic........................................... (76,101) 59,449 (648) 182,121 Effect of dilutive securities, net of tax(2): 5 1/4% convertible subordinated notes: Interest expense................................... -- 2,285 -- 6,643 Amortization of purchasers' discount and offering costs(3)......................................... -- 161 -- 472 5% convertible subordinated debentures: Interest expense................................... -- 181 -- 531 Amortization of debt offering costs(4)............. -- 30 -- 90 -------- -------- -------- -------- Net income (loss) allocated to Genzyme General Stock--diluted......................................... $(76,101) $ 62,106 $ (648) $189,857 ======== ======== ======== ======== Shares used in computing net income (loss) per common share--basic........................................... 208,350 172,759 198,841 170,553 Effect of dilutive securities(2,6): Stock options(5)..................................... -- 7,503 -- 6,790 5 1/4% convertible subordinated notes................ -- 12,626 -- 12,626 5% convertible subordinated debentures............... -- 1,260 -- 1,260 -------- -------- -------- -------- Dilutive potential common shares................... -- 21,389 -- 20,676 -------- -------- -------- -------- Shares used in computing net income (loss) per share-- diluted(2,6)........................................... 208,350 194,148 198,841 191,229 ======== ======== ======== ======== Net income (loss) per share of Genzyme General Stock: Basic: Net income (loss) per share before cumulative effect of change in accounting principle.................. $ (0.37) $ 0.34 $ (0.02) $ 1.07 Per share cumulative effect of change in accounting principle, net of tax(1)........................... -- -- 0.02 -- -------- -------- -------- -------- Net income (loss) per share allocated to Genzyme General Stock...................................... $ (0.37) $ 0.34 $ 0.00 $ 1.07 ======== ======== ======== ========
19 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. NET INCOME (LOSS) PER SHARE (CONTINUED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 2001 2000 2001 2000 -------- -------- -------- -------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Diluted(2): Net income (loss) per share before cumulative effect of change in accounting principle.................. $ (0.37) $ 0.32 $ (0.02) $ 0.99 Per share cumulative effect of change in accounting principle, net of tax(1)........................... -- -- 0.02 -- -------- -------- -------- -------- Net income (loss) per share allocated to Genzyme General Stock...................................... $ (0.37) $ 0.32 $ 0.00 $ 0.99 ======== ======== ======== ========
------------------------ (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 loss per share allocated to Genzyme General Stock on a diluted basis and weighted average shares-diluted for the three and nine months ended September 30, 2001 excludes the dilutive effect of shares issuable for options, warrants and stock purchase rights as the effect in each period would be anti-dilutive. The shares excluded from the calculation are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ----------------- 2001 2001 ------------------ ----------------- (UNAUDITED, AMOUNTS IN THOUSANDS) Shares of Genzyme General Stock issuable for options............................. 5,161 3,671 Shares of Genzyme General Stock issuable for warrants............................ 9 9 Shares of Genzyme General Stock issuable upon the exercise of stock purchase rights.................................. 35 35 ------ ------ Total................................... 5,205 3,715 ====== ======
(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 had been amortizing the debt offering costs of approximately $0.9 million over the term of the 5% convertible subordinated debentures, until they were converted in the third quarter of 2001. 20 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. NET INCOME (LOSS) PER SHARE (CONTINUED) (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 NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ----------------- 2000 2000 ------------------ ----------------- (UNAUDITED, AMOUNTS IN THOUSANDS) Shares of Genzyme General Stock issuable for options............................. 50 2,210 ===== =====
(6) We did not include the potentially dilutive effect of the assumed conversion of the $575.0 million in principal of 3% convertible subordinated debentures allocated to Genzyme General in the computation of Genzyme General's dilutive earnings per share for the three and nine months ended September 30, 2001 because the conditions for conversion had not been met. The debentures are convertible into shares of Genzyme General Stock at an initial conversion price of $70.30 per share, which was greater than the average market price of Genzyme General Stock for the three and nine months ended September 30, 2001. The following table describes the weighted average shares that would have been included in the computation of Genzyme General's diluted earnings per share if the conditions for conversion had been met and the average market price of Genzyme General Stock during each period was greater than or equal to $70.30 per share:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ----------------- 2001 2001 ------------------ ----------------- (UNAUDITED, AMOUNTS IN THOUSANDS) Shares of Genzyme General Stock issuable upon conversion of the 3% convertible subordinated debentures allocated to Genzyme General......................... 8,179 4,194 ===== =====
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 21 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. NET INCOME (LOSS) PER SHARE (CONTINUED) 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 NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ----------------- 2001 2001 ------------------ ----------------- (UNAUDITED, AMOUNTS IN THOUSANDS) Shares of Biosurgery Stock issuable for options................................................. 4,103 5,130 Warrants to purchase Biosurgery Stock..................... 8 8 Biosurgery designated shares reserved for options......... 95 95 Biosurgery designated shares.............................. 3,104 3,104 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...................... 7,668 8,695 ===== =====
MOLECULAR ONCOLOGY STOCK For all periods presented, basic and diluted net loss per share of Molecular Oncology Stock are the same. We did not include the securities described in the following table in the computation of Molecular Oncology Stock diluted net loss per share for each period because these securities would have an anti-dilutive effect due to the net loss allocated to Molecular Oncology Stock.
THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 2001 2000 2001 2000 -------- -------- -------- -------- (UNAUDITED, AMOUNTS IN THOUSANDS) Shares of Molecular Oncology Stock issuable for options..... 1,639 1,083 1,306 783 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........................ 1,651 1,318 1,651 1,318 ----- ----- ----- ----- Total shares excluded from the calculation of diluted net loss per share of Molecular Oncology Stock................ 3,290 3,093 2,957 2,793 ===== ===== ===== =====
15. 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 LSDs 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; 22 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. SEGMENT REPORTING (CONTINUED) - 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. We have provided information concerning the operations in these reportable segments in the following table:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- -------------------- 2001 2000 2001 2000 --------- -------- --------- -------- (UNAUDITED, AMOUNTS IN THOUSANDS) Revenues: Genzyme General: Therapeutics(1,2).............. $ 205,345 $153,840 $ 570,675 $436,220 Diagnostic products(3)......... 20,572 15,824 54,786 46,601 Other.......................... 28,126 22,343 88,590 66,191 Eliminations/Adjustments(4).... 1,009 158 2,692 473 --------- -------- --------- -------- Total Genzyme General........ 255,052 192,165 716,743 549,485 Genzyme Biosurgery(5)............ 63,219 34,607 177,739 105,812 Genzyme Molecular Oncology....... 1,224 635 3,915 4,153 Elimination/Adjustments.......... -- (48) -- (48) --------- -------- --------- -------- Total........................ $ 319,495 $227,359 $ 898,397 $659,402 ========= ======== ========= ======== Net income (loss): Genzyme General: Therapeutics(1,2).............. $ (30,537) $ 43,050 $ 41,495 $126,565 Diagnostic products(3)......... 832 865 (3,263) 2,395 Other.......................... 975 (260) 5,847 (1,056) Eliminations/Adjustments(4).... (52,976) 7,318 (78,922) 32,368 --------- -------- --------- -------- Net income (loss) for Genzyme General before cumulative effect of change in accounting principle...................... (81,706) 50,973 (34,843) 160,272 Cumulative effect of change in accounting principle, net of tax(6)......................... -- -- 4,167 -- --------- -------- --------- -------- Net income (loss) for Genzyme General........................ (81,706) 50,973 (30,676) 160,272 Genzyme Biosurgery(5)............ (21,525) (19,524) (94,460) (48,936) Genzyme Molecular Oncology....... (7,494) (5,504) (22,099) (17,924) Eliminations/Adjustments(7)...... 8,049 8,476 41,462 22,319 --------- -------- --------- -------- Total........................ $(102,676) $ 34,421 $(105,773) $115,731 ========= ======== ========= ========
------------------------ (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 nine months ended September 30, 2001. 23 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. SEGMENT REPORTING (CONTINUED) (2) In September 2001, we acquired Novazyme and allocated the acquisition to Genzyme General. The results of operations of Novazyme are included in our Therapeutics segment from September 26, 2001, the date of acquisition. (3) 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. (4) 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 amount for the nine months ended September 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. (5) In December 2000, we acquired Biomatrix and allocated the acquisition to Genzyme Biosurgery. The operations of Biomatrix are included in our Genzyme Biosurgery segment for the three and nine months ended September 30, 2001. On June 30, 2001, we acquired Focal and allocated the acquisition to Genzyme Biosurgery. The results of operations of Focal are included in the results of our Genzyme Biosurgery segment from the date of acquisition. (6) 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 held on January 1, 2001. (7) Includes income tax benefits that have not been recognized in the tax provisions of the divisions. SEGMENT ASSETS (AMOUNTS IN THOUSANDS):
SEPTEMBER 30, DECEMBER 31, 2001 2000 -------------- ------------- (UNAUDITED) Genzyme General(1): Therapeutics(2)................................... $1,381,118 $1,341,656 Diagnostic products(3)............................ 171,509 89,236 Other............................................. 82,909 77,153 Eliminations/Adjustments(4)....................... 1,496,192 991,008 ---------- ---------- Total Genzyme General........................... 3,131,728 2,499,053 Genzyme Biosurgery(5)............................... 775,344 811,600 Genzyme Molecular Oncology.......................... 12,105 30,752 Eliminations/Adjustments(6)......................... (55,906) (23,305) ---------- ---------- Total........................................... $3,863,271 $3,318,100 ========== ==========
------------------------ (1) Segment assets for Genzyme General primarily include accounts receivable, inventory and certain fixed and intangible assets. (2) Segment assets for Therapeutics as of September 30, 2001 include $27.1 million of additional assets resulting from the acquisition of Novazyme in September 2001, including $17.3 million of goodwill. (3) Segment assets for Diagnostic products as of September 30, 2001 include $71.1 million of additional assets resulting from the acquisition of Wyntek in June 2001, including $19.9 million of goodwill and $39.4 million of other intangible assets. 24 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. SEGMENT REPORTING (CONTINUED) (4) 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 September 30, 2001 include the allocation of 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 we had drawn under our revolving credit facility in December 2000 and allocated to Genzyme General to finance a portion of the cash component of the consideration for the GelTex merger. (5) Segment assets for Genzyme Biosurgery at September 30, 2001 include: - $25.9 million of additional assets resulting from the acquisition of the Class A and Class B limited partnership interests of GDP, including $8.4 million of goodwill and $17.5 million of other intangible assets; and - $19.3 million of additional assets resulting from the acquisition of Focal, Inc., including $7.9 million of intangible assets. (6) Represents the elimination of inter-divisional balances. 16. SUBSEQUENT EVENTS ACQUISITION OF CERTAIN ASSETS OF PHARMING N.V. We have satisfied all of the conditions to closing on our acquisition of certain assets of Pharming N.V. that are set forth in the conditional agreement, including receipt of approvals from the Commercial Court in Turnhout, Belgium, the Province of Antwerp, Belgium and our board of directors, as well as a favorable soil attestation for the land. We anticipate completing the acquisition by mid-November and will allocate the purchase to Genzyme General. As part of the purchase price for this acquisition, we have agreed to pay approximately 6.5 million euros to trade creditors of Pharming N.V. We have also agreed to assume certain liabilities related to governmental grants and the lease for the land on which the manufacturing facilities in Geel, Belgium sit. Pharming Group has publicly announced its intention to appeal the decision of the Commercial Court in Turnhout, Belgium. NEUROCELL-TM- JOINT VENTURE REFUND Genzyme General and Genzyme Biosurgery have agreed to extend Genzyme Biosurgery's deadline to refund $20.0 million to Genzyme General in connection with the Diacrin/Genzyme LLC joint venture. This refund obligation arose because a Phase 3 clinical trial for NeuroCell-TM--PD was not initiated by June 30, 2001. The deadline has been extended to February 1, 2002. Genzyme Biosurgery has agreed to pay the refund and accrued interest in cash. FABRAZYME-TM- BIOLOGICS LICENSE APPLICATION On October 22, 2001, we received a complete response letter from the FDA related to our application to market Fabrazyme-TM- enzyme, an investigational enzyme replacement therapy for Fabry disease, in the U.S. The letter specifies additional data and information the FDA requires to complete its review of our Biologics License Application for Fabrazyme-TM- enzyme. We submitted our BLA for Fabrazyme-TM- enzyme to the FDA in June 2000 and the application was accepted for review by the FDA under an accelerated approval mechanism. We received an initial complete response letter from the FDA in December 2000 and submitted our response to that letter in April 2001. 25 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION COMBINED STATEMENTS OF OPERATIONS (UNAUDITED, AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------- ---------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Revenues: Net product sales......................................... $234,875 $176,891 $656,121 $503,700 Net service sales......................................... 17,853 15,115 54,390 45,296 Revenues from research and development contracts: Related parties......................................... 1,043 -- 2,726 245 Other................................................... 1,281 159 3,506 244 -------- -------- -------- -------- Total revenues........................................ 255,052 192,165 716,743 549,485 -------- -------- -------- -------- Operating costs and expenses: Cost of products sold..................................... 48,334 45,190 143,697 114,461 Cost of services sold..................................... 10,893 9,165 31,794 26,937 Selling, general and administrative....................... 92,386 41,780 217,475 122,974 Research and development (including research and development related to contracts)....................... 49,726 25,567 132,317 83,701 Amortization of intangibles............................... 19,221 1,983 55,073 5,962 Purchase of in-process research and development........... 86,800 -- 95,568 -- -------- -------- -------- -------- Total operating costs and expenses.................... 307,360 123,685 675,924 354,035 -------- -------- -------- -------- Operating income (loss)..................................... (52,308) 68,480 40,819 195,450 -------- -------- -------- -------- Other income (expenses): Equity in net loss of unconsolidated affiliates........... (8,110) (11,420) (27,605) (30,866) Gain on affiliate sale of stock........................... 212 2,419 212 22,689 Gain (loss) on investments in equity securities........... (24,464) 8,544 (25,996) 22,709 Minority interest in net loss of subsidiary............... 260 977 2,259 3,185 Other..................................................... (1,227) (43) (5,115) 5,110 Investment income......................................... 13,125 11,072 34,136 27,798 Interest expense.......................................... (5,699) (4,647) (19,379) (11,639) -------- -------- -------- -------- Total other income (expenses)......................... (25,903) 6,902 (41,488) 38,986 -------- -------- -------- -------- Income (loss) before income taxes........................... (78,211) 75,382 (669) 234,436 Provision for income taxes.................................. (3,495) (24,409) (34,174) (74,164) -------- -------- -------- -------- Division net income (loss) before cumulative effect of change in accounting principle............................ (81,706) 50,973 (34,843) 160,272 Cumulative effect of change in accounting principle, net of tax....................................................... -- -- 4,167 -- -------- -------- -------- -------- Division net income (loss).................................. $(81,706) $ 50,973 $(30,676) $160,272 ======== ======== ======== ======== Comprehensive income (loss), net of tax: Division net income (loss)................................ $(81,706) $ 50,973 $(30,676) $160,272 -------- -------- -------- -------- Other comprehensive income (loss), net of tax: Foreign currency translation adjustments................ 18,201 (10,340) 554 (20,737) Unrealized loss on derivatives, net of tax.............. (1,444) -- (1,733) -- Unrealized gains (losses) on securities: Unrealized gains (losses) arising during the period... (8,675) 44,394 (9,758) 51,179 Reclassification adjustment for (gains) losses included in division net income (loss).............. 15,535 -- 16,507 (5,501) -------- -------- -------- -------- Unrealized gains on securities, net..................... 6,860 44,394 6,749 45,678 -------- -------- -------- -------- Other comprehensive income................................ 23,617 34,054 5,570 24,941 -------- -------- -------- -------- Comprehensive income (loss)................................. $(58,089) $ 85,027 $(25,106) $185,213 ======== ======== ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. 26 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION COMBINED BALANCE SHEETS (AMOUNTS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------- ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 170,710 $ 135,841 Short-term investments.................................... 113,582 96,644 Accounts receivable, net.................................. 194,538 165,911 Inventories............................................... 116,712 108,767 Prepaid expenses and other current assets................. 26,954 28,012 Due from Genzyme Biosurgery............................... 50,497 18,645 Due from Genzyme Molecular Oncology....................... 5,409 4,660 Deferred tax assets--current.............................. 47,074 46,836 ---------- ---------- Total current assets.................................... 725,476 605,316 Property, plant and equipment, net.......................... 537,702 446,759 Long-term investments....................................... 746,583 298,841 Notes receivable-related party.............................. -- 10,350 Intangibles, net............................................ 998,457 977,147 Investments in equity securities............................ 78,279 119,648 Other noncurrent assets..................................... 45,231 40,992 ---------- ---------- Total assets............................................ $3,131,728 $2,499,053 ========== ========== LIABILITIES AND DIVISION EQUITY Current liabilities: Accounts payable.......................................... $ 29,077 $ 20,091 Accrued expenses.......................................... 112,417 98,201 Income taxes payable...................................... 43,913 40,442 Deferred revenue.......................................... 1,958 6,401 Current portion of long-term debt and capital lease obligations............................................. 7,171 1,448 ---------- ---------- Total current liabilities............................... 194,536 166,583 Long-term debt and capital lease obligations................ 25,110 180,556 Convertible notes and debentures............................ 575,000 273,680 Deferred tax liability...................................... 74,387 124,613 Other noncurrent liabilities................................ 23,827 3,341 ---------- ---------- Total liabilities....................................... 892,860 748,773 ---------- ---------- Division equity............................................. 2,238,868 1,750,280 ---------- ---------- Total liabilities and division equity................... $3,131,728 $2,499,053 ========== ==========
The accompanying notes are an integral part of these unaudited, combined financial statements. 27 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED, AMOUNTS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------ 2001 2000 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Division net income (loss)................................ $ (30,676) $ 160,272 Reconciliation of division net income (loss) to net cash provided by operating activities: Depreciation and amortization........................... 77,828 32,834 Non-cash compensation expense........................... 7,375 -- Provision for bad debts................................. 1,784 5,303 Notes received from a collaborator...................... -- (10,175) Write-off of notes received from a collaborator......... 10,159 -- Charges for in-process research and development......... 95,568 -- Equity in net loss of unconsolidated affiliates......... 27,605 30,866 Gain on affiliate sale of stock......................... (212) (22,689) (Gain) loss on investments in equity securities......... 25,996 (22,709) Minority interest in net loss of subsidiary............. (2,259) (3,185) Deferred income tax expense (benefit)................... (17,165) 5,882 Other................................................... (3,241) 722 Increase (decrease) in cash from working capital changes: Accounts receivable................................... (30,106) (28,776) Inventories........................................... 1,029 (7,813) Prepaid expenses and other current assets............. (891) (813) Due from Genzyme Biosurgery........................... (31,852) (3,544) Due from Genzyme Molecular Oncology................... (749) (295) Accounts payable, accrued expenses, income taxes payable and deferred revenue........................ 76,445 35,600 --------- --------- Net cash provided by operating activities........... 206,638 171,480 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments.................................. (750,075) (389,549) Sales and maturities of investments....................... 306,441 298,344 Purchases of equity securities............................ (3,318) -- Proceeds from sale of investments in equity securities.... 36 15,773 Purchase of property, plant and equipment................. (113,078) (49,973) Acquisitions, net of acquired cash........................ (54,832) (342) Investments in unconsolidated affiliates.................. (31,298) (19,639) Other..................................................... 5,962 3,161 --------- --------- Net cash used in investing activities............... (640,162) (142,225) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Allocated proceeds from issuance of Genzyme General Stock................................................... 72,584 80,064 Allocated proceeds from issuance of debt.................. 562,062 -- Payments of debt.......................................... (154,625) -- Net cash allocated to Genzyme Biosurgery.................. (11,993) (9,910) Net cash allocated to Genzyme Molecular Oncology.......... (4,040) (15,000) Bank overdraft............................................ 1,434 -- Other..................................................... 3,974 1,276 --------- --------- Net cash provided by financing activities........... 469,396 56,430 --------- --------- Effect of exchange rate changes on cash..................... (1,003) (3,892) --------- --------- Increase in cash and cash equivalents....................... 34,869 81,793 Cash and cash equivalents at beginning of period............ 135,841 94,523 --------- --------- Cash and cash equivalents at end of period.................. $ 170,710 $ 176,316 ========= =========
The accompanying notes are an integral part of these unaudited, combined financial statements. 28 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, we condense or omit certain footnotes and other financial information that are normally required by generally accepted accounting principles. 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. NEW ACCOUNTING PRONOUNCEMENTS We have included the impact that recently issued accounting standards will have on our financial statements in Note 2, "New Accounting Pronouncements," to our unaudited, consolidated financial statements, which we incorporate by reference into this note. 3. ACQUISITIONS AND DISPOSITION WYNTEK DIAGNOSTICS, INC. In June 2001, we acquired all of the outstanding capital stock of privately-held Wyntek 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, we included the results of operations of Wyntek in our consolidated financial statements and the combined financial statements of Genzyme General from June 1, 2001, the date of acquisition. 29 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 3. ACQUISITIONS AND DISPOSITION (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 Other 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 IPR&D. Our management assumed responsibility for determining the IPR&D valuation and engaged an independent third-party appraisal company to assist in the valuation of the intangible assets acquired. We estimated the fair value assigned to purchased IPR&D by discounting, to present value, the cash flows expected to result from the project once it has reached technological feasibility. We applied a discount rate of 25% to estimate the present value of these cash flows, which was consistent with the risks of the project. 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. In the allocation of purchase price to 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 nine months ended September 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 30 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 3. ACQUISITIONS AND DISPOSITION (CONTINUED) 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. We expect to complete the regulatory review process and file an 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. ATIII LLC In July 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 Genzyme Transgenics' 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. Prior to the transfer, we consolidated the results of ATIII LLC because we had control of ATIII LLC through our combined, direct and indirect ownership interest in the joint venture. NOVAZYME PHARMACEUTICALS, INC. In September 2001, we acquired all of the outstanding capital stock of Novazyme, a privately-held developer of biotherapies for the treatment of lysosomal storage disorders, or LSDs, for an initial payment of 2,562,182 shares of Genzyme General Stock. Novazyme shareholders received 0.5714 of a share of Genzyme General Stock for each share of Novazyme common stock they held. We will be obligated to make two additional payments totaling $87.5 million, payable in shares of Genzyme General Stock, if we receive U.S. marketing approval for two products for the treatment of LSDs that employ certain of Novazyme's technologies. In connection with the merger, we also assumed all of the outstanding options, warrants and rights to purchase Novazyme common stock and exchanged them for options, warrants and rights to purchase Genzyme General Stock, on an as-converted basis. We allocated the acquisition to Genzyme General and accounted for the acquisition as a purchase. Accordingly, the results of operations of Novazyme are included in our consolidated financial statements and the combined financial statements of Genzyme General from September 26, 2001, the date of acquisition. 31 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 3. ACQUISITIONS AND DISPOSITION (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): Issuance of 2,562,182 shares of Genzyme General Stock....... $110,584 Issuance of options to purchase 158,840 shares of Genzyme General Stock..................................................... 6,274 Issuance of warrants to purchase 25,338 shares of Genzyme General Stock............................................. 894 Issuance of rights to purchase 66,846 shares of Genzyme General Stock............................................. 1,839 Acquisition costs........................................... 951 -------- Total purchase price...................................... $120,542 ======== Cash and cash equivalents................................... $ 5,194 Other current assets........................................ 63 Property, plant and equipment............................... 4,475 Goodwill.................................................... 17,336 In-process research and development......................... 86,800 Deferred tax asset.......................................... 8,161 Other assets................................................ 62 Assumed liabilities......................................... (2,795) Liabilities for exit activities and integration............. (1,740) Deferred tax liability...................................... (960) Deferred compensation....................................... 2,630 Notes receivable from stockholders.......................... 1,316 -------- Allocated purchase price.................................. $120,542 ========
Because our acquisition of Novazyme was completed after June 30, 2001, the provisions of SFAS 141 and certain provisions of SFAS 142 apply from the date of acquisition. Accordingly, we will not ratably amortize the goodwill resulting from the acquisition of Novazyme. Instead, we will test the goodwill's impairment on a periodic basis in accordance with the provisions of SFAS 142. 32 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 3. ACQUISITIONS AND DISPOSITION (CONTINUED) The 2,562,182 shares of Genzyme General Stock that we issued to Novazyme's shareholders were valued at $110.6 million using the average trading price of Genzyme General Stock for the 4 day trading period ending on September 26, 2001, the date of acquisition. Options, warrants and rights to purchase shares of Genzyme General Stock were valued at $9.0 million using the Black-Scholes model. In accordance with FIN 44, at the date of acquisition we allocated the $2.6 million intrinsic value of the portion of the unvested options related to the future service period to deferred compensation in division equity. We are amortizing the unvested portion to operating expense over the remaining vesting period of approximately 22 months. In connection with our acquisition of Novazyme, we acquired a technology platform that we believe can be leveraged in the development of treatments for various LSDs. As of the acquisition date, the technology platform had not achieved technological feasibility and would require significant further development to complete. Accordingly, we have allocated to IPR&D and charged to expense $86.8 million, representing the portion of the purchase price attributable to the technology platform. Our management assumes responsibility for determining the IPR&D valuation and engaged an independent third-party appraisal company to assist in the valuation of the intangible assets acquired. The fair value assigned to purchased IPR&D was estimated by discounting, to present value, the probability-adjusted net cash flows expected to result once the technology has reached technological feasibility and is utilized in the treatment of certain LSDs. A discount rate of 16% was applied to estimate the present value of these cash flows and is consistent with the overall risks of the platform technology. In estimating future cash flows, management considered other tangible and intangible assets required for successful exploitation of the technology and adjusted the future cash flows to reflect the contribution of value from these assets. In the allocation of purchase price to IPR&D, the concept of alternative future use was specifically considered. The platform technology is specific to LSDs and there is currently no alternative use for the technology in the event that it fails as a platform for enzyme replacement therapy for the treatment of LSDs. 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, Wyntek and Novazyme 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 related to these acquisitions, such as acquired IPR&D charges of $118.0 million resulting from the acquisition of GelTex, $8.8 million resulting from 33 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 3. ACQUISITIONS AND DISPOSITION (CONTINUED) the acquisition of Wyntek and $86.8 million resulting from the acquisition of Novazyme, are not reflected in the following pro forma financial summary:
FOR THE NINE MONTHS ENDED SEPTEMBER 30, ---------------------- 2001 2000 -------- -------- (UNAUDITED, AMOUNTS IN THOUSANDS) Total revenues....................................... $725,156 $601,419 Income before extraordinary items and cumulative effect of change in accounting principle, net of tax................................................ 41,990 96,975 Division net income.................................. 46,157 96,975
4. INVENTORIES (AMOUNTS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------- ------------ (UNAUDITED) Raw materials....................................... $ 36,218 $ 30,275 Work-in-process..................................... 59,936 47,880 Finished products................................... 20,558 30,612 -------- -------- Total............................................. $116,712 $108,767 ======== ========
5. PHARMING GROUP, N.V. RECEIVERSHIP AND OUR ACQUISITION OF CERTAIN ASSETS On August 10, 2001, Pharming Group, N.V., a public company in the Netherlands and our partner in two joint ventures for the development of therapies for Pompe disease, and certain of its subsidiaries filed for receivership in order to seek protection from creditors. In the quarter ended September 30, 2001, we recorded pre-tax charges of $23.4 million related to the Pharming Group receivership, including $10.2 million for the write-off of the principal and accrued interest due to us under the 7% convertible senior note issued to us by Pharming Group, $8.5 million for the write-down of our equity investment in Pharming Group because we consider the decline in value of this investment to be other than temporary, and $4.7 million for the net amount owed by Pharming Group to the CHO-cell product joint venture we previously formed with Pharming Group that we believe is uncollectable. As a result of Pharming Group's failure to make payments to fund our joint venture for the development of a CHO-cell product for Pompe disease under a strategic alliance agreement, we terminated this agreement in August and have assumed full operational and financial responsibility for the development of the CHO-cell product. Our joint venture with Pharming Group covering a transgenic product for Pompe disease remains in place. We do not intend to commercialize this product, but are obligated to fund its production for the nine patients participating in a clinical trial extension until those patients can be transitioned to a CHO-cell product. We expect to complete transition of these patients to the CHO-cell product by the end of 2003. In September 2001, we recorded a pre-tax charge of $17.2 million, of which, $16.8 million was charged to selling, general and administrative expenses representing our obligation to fund the continued production of transgenic human alpha-glucosidase enzyme through 2003. 34 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 5. PHARMING GROUP, N.V. RECEIVERSHIP AND OUR ACQUISITION OF CERTAIN ASSETS (CONTINUED) On September 18, 2001, we signed a conditional agreement to acquire certain assets of Pharming N.V., the Belgian subsidiary of Pharming Group N.V., including manufacturing facilities in Geel, Belgium. The conditional agreement is subject to the approval of the Commercial Court in Turnhout, Belgium, the Province of Antwerp, Belgium, and our board of directors, as well as to the receipt of a favorable soil attestation for the land. If all of the conditions are satisfied, we expect to complete the purchase by mid-November. 6. 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 balance 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 repurchase. Additionally, if certain fundamental changes occur, each holder may require us to repurchase, for cash, all or a portion of the holder's debentures. On or after May 20, 2004, we may redeem for cash all or part of the debentures that have not previously been converted or repurchased. Genzyme General used a portion of these proceeds to repay the $150.0 million we had drawn under our revolving credit facility in December 2000 and allocated to Genzyme General 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. 7. REDEMPTION OF $250.0 MILLION 5 1/4% CONVERTIBLE SUBORDINATED NOTES In June 2001, we completed the redemption of our $250.0 million in principal of 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. 8. REDEMPTION OF $21.2 MILLION 5% CONVERTIBLE SUBORDINATED DEBENTURES In August 2001, we completed the redemption of our $21.2 million in principal of 5% convertible subordinated debentures due 2003. Prior to the redemption date, the holders of the debentures elected to convert all of the principal of the debentures into approximately 1,305,000 shares of Genzyme General Stock. We paid approximately $3.2 million in cash for the accrued interest on the debentures through the date of conversion using cash allocated to Genzyme General. 35 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 9. INTERDIVISIONAL FINANCING ARRANGEMENT In July 2001, Genzyme Biosurgery drew down $12.0 million of the $15.0 million still available to it under the $25.0 million interdivisional financing arrangement with Genzyme General in exchange for an additional reserve of 1,902,949 Biosurgery designated shares. Genzyme Biosurgery used $8.5 million of the proceeds to pay a portion of the amounts it owes to Genzyme General. 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 September 30, 2001, $3.0 million remained available to Genzyme Biosurgery under this arrangement. In August 2001, Genzyme Molecular Oncology drew down $4.0 million of the $15.0 million still available to it under the $30.0 million interdivisional financing arrangement with Genzyme General in exchange for an additional reserve of 333,333 Molecular Oncology designated shares. 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. At September 30, 2001, $11.0 million remained available to Genzyme Molecular Oncology under this arrangement. 10. 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 Biosurgery received notification from Genzyme General 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. 11. GAIN (LOSS) ON INVESTMENTS IN EQUITY SECURITIES In the quarter ended September 30, 2001, Genzyme General recorded charges of $11.8 million in connection with our investment in the ordinary shares of Cambridge Antibody Technology Group plc and $4.5 million in connection with our investment in the common stock of Targeted Genetics Corporation, because we considered the decline in the value of these investments to be other than temporary. Given the significance and duration of the declines as of the end of the quarter, we concluded that it was unclear over what period the recovery of the stock price for each of these investments would take place and that, accordingly, any evidence suggesting that the investments would recover to at least our purchase price was not sufficient to overcome the presumption that the current market price was the best indicator of the value of each of these investments. 36 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 11. GAIN (LOSS) ON INVESTMENTS IN EQUITY SECURITIES (CONTINUED) In August 2001, Pharming Group filed for receivership in order to seek protection from its creditors. In the quarter ended September 30, 2001, Genzyme General recorded a charge of $8.5 million, representing an at cost write-off of our investment in Pharming common stock. 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 received 0.0594 of a share of Antigenics common stock for each share of Aronex common stock that we held. As a result of this merger, Genzyme General recorded a $1.2 million charge to reflect the fair market value of our investment in Aronex at June 30, 2001. In the third quarter of 2000, Genzyme General recorded a realized gain of $10.9 million upon the sale of a portion of our investment in Genzyme Transgenics common stock. In the second quarter of 2000, Genzyme General recorded a realized gain of $5.5 million upon the sale of a portion of our investment in Genzyme Transgenics common stock that was offset by the reversal of a $1.9 million valuation allowance related to previously recognized capital losses. Genzyme General 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. 12. DERIVATIVE FINANCIAL INSTRUMENTS On January 1, 2001, we adopted SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." 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 nine months ended September 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 September 30, 2001, Genzyme General recorded a pre-tax charge of $1.2 million in other expense to reflect the change in value of certain common stock warrants from July 1, 2001 to September 30, 2001. For the nine months ended September 30, 2001, Genzyme General recorded a pre-tax charge of $5.0 million in other expense to reflect the change in value of certain common stock warrants from January 1, 2001 to September 30, 2001. Genzyme General also recorded a charge of $1.7 million in division equity for the nine months ended September 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. 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 37 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 12. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) 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. 13. TAX PROVISION
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Provision for income taxes........... $(3,495) $(24,409) (86)% $(34,174) $(74,164) (54)% Effective tax rate................... (4)% 32 % (5,108)% 32 %
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 charges for IPR&D; - nondeductible amortization of intangibles; and - use of tax credits. The decrease in Genzyme General's effective tax rate for both the three and nine month periods ended September 30, 2001, as compared to the same periods a year ago, was primarily attributable to nondeductible charges for IPR&D resulting from our acquisitions of Wyntek in June 2001 and Novazyme in September 2001 and nondeductible amortization of intangibles consisting largely of goodwill resulting from our acquisition of GelTex in December 2000. The tax provision for the nine months ended September 30, 2001 also includes a $2.2 million benefit resulting from our release of excess tax reserves. 14. 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. 38 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 14. SEGMENT REPORTING (CONTINUED) We have provided information concerning the operations in these reportable segments in the following table:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 2001 2000 2001 2000 -------- -------- -------- -------- (UNAUDITED, AMOUNTS IN THOUSANDS) Revenues: Therapeutics(1,2)................................. $205,345 $153,840 $570,675 $436,220 Diagnostic products(3)............................ 20,572 15,824 54,786 46,601 Other............................................. 28,126 22,343 88,590 66,191 Eliminations/Adjustments(4)....................... 1,009 158 2,692 473 -------- -------- -------- -------- Total........................................... $255,052 $192,165 $716,743 $549,485 ======== ======== ======== ======== Division net income: Therapeutics(1,2)................................. $(30,537) $ 43,050 $ 41,495 $126,565 Diagnostic products(3)............................ 832 865 (3,263) 2,395 Other............................................. 975 (260) 5,847 (1,056) Eliminations/Adjustments(4)....................... (52,976) 7,318 (78,922) 32,368 -------- -------- -------- -------- Division net income (loss) before cumulative effect of change in accounting principle........ (81,706) 50,973 (34,843) 160,272 Cumulative effect of change in accounting principle, net of tax (5)....................... -- -- 4,167 -- -------- -------- -------- -------- Division net income (loss)...................... $(81,706) $ 50,973 $(30,676) $160,272 ======== ======== ======== ========
------------------------ (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 nine months ended September 30, 2001. (2) In September 2001, we acquired Novazyme and allocated the acquisition to Genzyme General. The results of operations of Novazyme are included in our Therapeutics segment from September 26, 2001, the date of acquisition. (3) 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. (4) 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 amount for the nine months ended September 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. (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 held on January 1, 2001. 39 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 14. SEGMENT REPORTING (CONTINUED) SEGMENT ASSETS (AMOUNTS IN THOUSANDS)(1):
SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------- ------------ (UNAUDITED) Therapeutics(2)..................................... $1,381,118 $1,341,656 Diagnostic products(3).............................. 171,509 89,236 Other............................................... 82,909 77,153 Eliminations/Adjustments(4)......................... 1,496,192 991,008 ---------- ---------- Total........................................... $3,131,728 $2,499,053 ========== ==========
------------------------ (1) Segment assets for Genzyme General primarily include accounts receivable, inventory and certain fixed and intangible assets. (2) Segment assets for Therapeutics as of September 30, 2001 include $27.1 million of additional assets resulting from the acquisition of Novazyme in September 2001, including $17.3 million of goodwill. (3) Segment assets for Diagnostic products as of September 30, 2001 include $71.1 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. (4) 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 September 30, 2001 include the allocation of 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 we had drawn under our revolving credit facility and allocated to Genzyme General in December 2000 to finance a portion of the cash component of the consideration for the GelTex merger. 15. SUBSEQUENT EVENTS ACQUISITION OF CERTAIN ASSETS OF PHARMING N.V. We have satisfied all of the conditions to closing on our acquisition of certain assets of Pharming N.V. that are set forth in the conditional agreement, including receipt of approvals from the Commercial Court in Turnhout, Belgium, the Province of Antwerp, Belgium and our board of directors, as well as a favorable soil attestation for the land. We anticipate completing the acquisition by mid-November and will allocate the purchase to Genzyme General. As part of the purchase price for this acquisition, we have agreed to pay approximately 6.5 million euros to trade creditors of Pharming N.V. We have also agreed to assume certain liabilities related to governmental grants and the lease for the land on which the manufacturing facilities in Geel, Belgium sit. Pharming Group has publicly announced its intention to appeal the decision of the Commercial Court in Turnhout, Belgium. NEUROCELL-TM- JOINT VENTURE REFUND Genzyme General and Genzyme Biosurgery have agreed to extend Genzyme Biosurgery's deadline to refund $20.0 million to Genzyme General in connection with the Diacrin/Genzyme LLC joint 40 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 15. SUBSEQUENT EVENTS (CONTINUED) venture. This refund obligation arose because a Phase 3 clinical trial for NeuroCell-TM--PD was not initiated by June 30, 2001. The deadline has been extended to February 1, 2002. Genzyme Biosurgery has agreed to pay the refund and accrued interest in cash. FABRAZYME-TM- BIOLOGICS LICENSE APPLICATION On October 22, 2001, we received a complete response letter from the FDA related to our application to market Fabrazyme-TM- enzyme, an investigational enzyme replacement therapy for Fabry disease, in the U.S. The letter specifies additional data and information the FDA requires to complete its review of our Biologics License Application for Fabrazyme-TM- enzyme. We submitted our BLA for Fabrazyme-TM- enzyme to the FDA in June 2000 and the application was accepted for review by the FDA under an accelerated approval mechanism. We received an initial complete response letter from the FDA in December 2000 and submitted our response to that letter in April 2001. 41 GENZYME BIOSURGERY A DIVISION OF GENZYME CORPORATION COMBINED STATEMENTS OF OPERATIONS (UNAUDITED, AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Revenues: Net product sales.................................. $ 57,084 $ 29,754 $160,141 $ 88,805 Net service sales.................................. 6,135 4,852 17,593 16,984 Revenues from research and development contracts... -- 1 5 23 -------- -------- -------- -------- Total revenues................................... 63,219 34,607 177,739 105,812 -------- -------- -------- -------- Operating costs and expenses: Cost of products sold.............................. 27,128 18,539 87,897 51,170 Cost of services sold.............................. 3,148 2,903 9,096 8,949 Selling, general and administrative................ 27,827 23,288 93,816 68,095 Research and development........................... 12,352 8,935 35,027 26,230 Amortization of intangibles........................ 11,729 1,426 35,042 4,279 -------- -------- -------- -------- Total operating costs and expenses............... 82,184 55,091 260,878 158,723 -------- -------- -------- -------- Operating loss....................................... (18,965) (20,484) (83,139) (52,911) -------- -------- -------- -------- Other income (expenses): Equity in net loss of unconsolidated affiliate..... -- -- (1,316) -- Other.............................................. 35 33 80 75 Investment income.................................. 431 1,274 1,370 4,873 Interest expense................................... (3,026) (347) (11,455) (973) -------- -------- -------- -------- Total other income (expenses).................... (2,560) 960 (11,321) 3,975 -------- -------- -------- -------- Division net loss.................................... $(21,525) $(19,524) $(94,460) $(48,936) ======== ======== ======== ======== Comprehensive loss, net of tax: Division net loss.................................. $(21,525) $(19,524) $(94,460) $(48,936) -------- -------- -------- -------- Other comprehensive income (loss), net of tax: Foreign currency translation adjustments......... (934) 67 (1,131) 109 Unrealized gains (losses) on securities: Unrealized gains (losses) arising during the period......................................... -- (268) 97 (4,050) -------- -------- -------- -------- Unrealized gains (losses) on securities, net... -- (268) 97 (4,050) -------- -------- -------- -------- Other comprehensive loss........................... (934) (201) (1,034) (3,941) -------- -------- -------- -------- Comprehensive loss................................... $(22,459) $(19,725) $(95,494) $(52,877) ======== ======== ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. 42 GENZYME BIOSURGERY A DIVISION OF GENZYME CORPORATION COMBINED BALANCE SHEETS (AMOUNTS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------- ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 41,553 $ 78,163 Accounts receivable, net.................................. 44,448 38,952 Inventories............................................... 57,240 61,574 Prepaid expenses and other current assets................. 10,015 9,543 -------- -------- Total current assets.................................... 153,256 188,232 Property, plant and equipment, net.......................... 57,176 57,409 Intangibles, net............................................ 562,580 562,635 Investment in equity securities............................. -- 1,603 Other noncurrent assets..................................... 2,332 1,721 -------- -------- Total assets............................................ $775,344 $811,600 ======== ======== LIABILITIES AND DIVISION EQUITY Current liabilities: Accounts payable.......................................... $ 12,042 $ 6,074 Accrued expenses.......................................... 41,267 46,245 Due to Genzyme General.................................... 50,497 18,645 Current portion of long-term debt and capital lease obligations............................................. 964 18,449 -------- -------- Total current liabilities............................... 104,770 89,413 Long-term debt and capital lease obligations................ 218,927 201,004 Convertible notes........................................... 10,000 10,000 Other noncurrent liabilities................................ -- 77 -------- -------- Total liabilities....................................... 333,697 300,494 Division equity............................................. 441,647 511,106 -------- -------- Total liabilities and division equity................... $775,344 $811,600 ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. 43 GENZYME BIOSURGERY A DIVISION OF GENZYME CORPORATION COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED, AMOUNTS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, ------------------- 2001 2000 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Division net loss......................................... $(94,460) $(48,936) Reconciliation of division net loss to net cash used in operating activities: Depreciation and amortization........................... 47,281 7,474 Provision for bad debts................................. 462 271 Equity in net loss of unconsolidated affiliate.......... 1,316 -- Other................................................... 524 1,793 Increase (decrease) in cash from working capital changes: Accounts receivable................................... (5,939) (1,135) Inventories........................................... 9,522 (7,372) Prepaid expenses and other current assets............. (527) (1,104) Accounts payable, accrued expenses and income taxes payable............................................. (2,505) 4,234 Due to Genzyme General................................ 31,852 3,544 -------- -------- Net cash used in operating activities............... (12,474) (41,231) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments.................................. -- (84,084) Sales and maturities of investments....................... -- 125,084 Purchase of equity securities............................. (5,000) (5,000) Purchases of property, plant and equipment................ (10,151) (2,290) Acquisitions, net of acquired cash........................ (23,547) (4,405) Other..................................................... (283) (277) -------- -------- Net cash provided by (used in) investing activities........................................ (38,981) 29,028 -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Allocated proceeds from issuance of Biosurgery Stock...... 1,219 1,652 Payments of capital lease obligations..................... (503) -- Payments of notes receivable from stockholders............ 2,896 -- Net cash allocated from Genzyme General................... 11,993 9,910 Bank overdraft............................................ 677 -- Other..................................................... (737) -- -------- -------- Net cash provided by financing activities........... 15,545 11,562 Effect of exchange rate changes on cash..................... (700) 84 -------- -------- Decrease in cash and cash equivalents....................... (36,610) (557) Cash and cash equivalents at beginning of period............ 78,163 32,046 -------- -------- Cash and cash equivalents at end of period.................. $ 41,553 $ 31,489 ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. 44 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 are prepared using amounts included in our unaudited, consolidated financial statements included in this Form 10-Q. We prepared these unaudited, combined financial statements for Genzyme Biosurgery following the requirements of the SEC for interim reporting. As permitted under those rules, we condense or omit certain footnotes and other financial information normally required by generally accepted accounting principles. 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. and 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. NEW ACCOUNTING PRONOUNCEMENTS We have included the impact that recently issued accounting standards will have on our financial statements in Note 2., "New Accounting Pronouncements," to our unaudited, consolidated financial statements, which we incorporate by reference into this note. 3. ACQUISITIONS CLASS A AND CLASS B LIMITED PARTNERSHIP INTERESTS OF GENZYME DEVELOPMENT PARTNERS, L.P. 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 payable over ten years on sales of certain Sepra-TM- products. In August 2001, we purchased the two outstanding GDP Class B limited partnership interests for a payment of $70,000 per Class B limited partnership interest plus $40,000 of related costs and undertook the obligation to pay additional royalties over ten years on sales of certain Sepra-TM- products. We allocated the acquired limited partnership interests of GDP to Genzyme Biosurgery and accounted for the acquisitions as purchases. Accordingly, we included the results of operations of GDP in our consolidated financial statements and the combined financial statements of Genzyme Biosurgery from January 9, 2001. 45 GENZYME BIOSURGERY A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 3. ACQUISITIONS (CONTINUED) We allocated the purchase prices to the fair value of the intangible assets acquired as follows (amounts in thousands):
CLASS A CLASS B LIMITED LIMITED PARTNERSHIP PARTNERSHIP INTERESTS INTERESTS TOTAL ----------- ----------- -------- Patents (to be amortized over 8 years)........... $ 5,909 $ -- $ 5,909 Trademarks (to be amortized over 10 years)....... 2,755 -- 2,755 Technology (to be amortized over 10 years)....... 8,827 -- 8,827 Goodwill (to be amortized over 10 years)......... 8,234 180 8,414 ------- ---- ------- Total.......................................... $25,725 $180 $25,905 ======= ==== =======
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 2,086,151 shares of Biosurgery Stock as merger consideration. We also assumed all of the outstanding options to purchase Focal common stock and exchanged them for options to purchase Biosurgery Stock on an as-converted basis. 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 2,086,151 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 Other 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).................... 1,115 Assumed liabilities......................................... (3,773) Notes receivable from stockholders.......................... 367 ------- Allocated purchase price.................................. $15,938 =======
46 GENZYME BIOSURGERY A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 3. ACQUISITIONS (CONTINUED) UNAUDITED PRO FORMA FINANCIAL SUMMARY In December 2000, we acquired Biomatrix, a public company engaged in the development and manufacture of viscoelastic and viscosupplementation 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 Biomatrix 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 acquisition been consummated at that date, or of the future operations of the combined entities. Material nonrecurring charges related to these acquisitions, such as the acquired IPR&D of $82.1 million resulting from the acquisition of Biomatrix, are not reflected in the following pro forma financial summary:
FOR THE NINE MONTHS ENDED SEPTEMBER 30, --------------------- 2001 2000 --------- --------- (UNAUDITED, AMOUNTS IN THOUSANDS) Total revenues........................................ $ 177,886 $ 172,561 Division net loss..................................... (105,014) (94,233)
4. INVENTORIES (AMOUNTS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 2001 2000 -------------- ------------- (UNAUDITED) Raw materials....................................... $16,884 $21,271 Work-in-process..................................... 30,270 25,640 Finished products................................... 10,086 14,663 ------- ------- Total........................................... $57,240 $61,574 ======= =======
5. INTERDIVISIONAL FINANCING ARRANGEMENT In July 2001, Genzyme Biosurgery drew down $12.0 million of the $15.0 million still available to it under the $25.0 million interdivisional financing arrangement with Genzyme General in exchange for an additional reserve of 1,902,949 Biosurgery designated shares. Genzyme Biosurgery used $8.5 million of the proceeds to pay a portion of the amounts it owes to Genzyme General. 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 September 30, 2001, $3.0 million remained available to Genzyme Biosurgery under this arrangement. 47 GENZYME BIOSURGERY A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 6. 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 Biosurgery received notification from Genzyme General 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. 7. 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 Synvisc-Registered Trademark- viscosupplementation product and Carticel-Registered Trademark- chondrocytes; and - Biosurgical Specialties, which includes the Sepra-TM- products, derived supplementation products, instruments for general and plastic surgery, and Epicel-Registered Trademark- skin grafts. We have provided information concerning the operations in these reportable segments in the following table:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 2001 2000 2001 2000 -------- -------- -------- -------- (UNAUDITED, AMOUNTS IN THOUSANDS) Revenues(1): Cardiothoracic(2)................... $16,386 $18,804 $ 52,042 $ 58,240 Orthopaedics........................ 29,656 4,021 76,561 13,130 Biosurgical specialties............. 17,177 11,781 49,131 34,419 Other(3)............................ -- 1 5 23 ------- ------- -------- -------- Total............................. $63,219 $34,607 $177,739 $105,812 ======= ======= ======== ======== Gross Profit(1): Cardiothoracic(2)................... $ 4,937 $ 6,809 $ 17,392 $ 23,529 Orthopaedics........................ 20,982 3,638 53,928 11,519 Biosurgical specialties............. 7,024 2,717 9,422 10,622 Other(3)............................ -- 1 4 23 ------- ------- -------- -------- Total............................. $32,943 $13,165 $ 80,746 $ 45,693 ======= ======= ======== ========
------------------------ (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 nine months ended September 30, 2001. 48 GENZYME BIOSURGERY A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 7. SEGMENT REPORTING (CONTINUED) (2) On June 30, 2001, we acquired Focal and allocated the acquisition to Genzyme Biosurgery's Cardiothoracic segment. The results of operations of Focal are included in the results of Genzyme Biosurgery from the date of acquisition. (3) 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 September 30, 2001 of $775.3 million include: - $25.9 million of additional assets resulting from the acquisition of the Class A and Class B limited partnership interests of GDP, including $8.4 million of goodwill and $17.5 million of other intangible assets; and - $19.3 million of additional assets resulting from the acquisition of Focal, including $7.9 million of intangible assets. 8. SUBSEQUENT EVENTS NEUROCELL-TM- JOINT VENTURE REFUND Genzyme General and Genzyme Biosurgery have agreed to extend Genzyme Biosurgery's deadline to refund $20.0 million to Genzyme General in connection with the Diacrin/Genzyme LLC joint venture. This refund obligation arose because a Phase 3 clinical trial for NeuroCell-TM--PD was not initiated by June 30, 2001. The deadline has been extended to February 1, 2002. Genzyme Biosurgery has agreed to pay the refund and accrued interest in cash. 49 GENZYME MOLECULAR ONCOLOGY A DIVISION OF GENZYME CORPORATION COMBINED STATEMENTS OF OPERATIONS (UNAUDITED, AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Revenues: Licensing revenue.................................... $ 484 $ 576 $ 1,696 $ 4,046 Royalty revenue...................................... 36 59 109 107 Research and development revenue..................... 704 -- 2,110 -- ------- ------- -------- -------- Total revenues..................................... 1,224 635 3,915 4,153 ------- ------- -------- -------- Operating costs and expenses: Cost of revenues..................................... 668 104 1,697 299 Selling, general and administrative.................. 1,817 1,311 5,519 4,289 Research and development............................. 6,381 5,120 19,610 13,772 Amortization of intangibles.......................... -- -- -- 5,420 ------- ------- -------- -------- Total operating costs and expenses................. 8,866 6,535 26,826 23,780 ------- ------- -------- -------- Operating loss......................................... (7,642) (5,900) (22,911) (19,627) ------- ------- -------- -------- Other income (expenses): Interest income...................................... 162 412 853 662 Interest expense..................................... (14) (16) (41) (173) ------- ------- -------- -------- Total other income (expenses)...................... 148 396 812 489 ------- ------- -------- -------- Loss before income taxes............................... (7,494) (5,504) (22,099) (19,138) Tax benefit............................................ -- -- -- 1,214 ------- ------- -------- -------- Division net loss...................................... $(7,494) $(5,504) $(22,099) $(17,924) ======= ======= ======== ======== Comprehensive loss, net of tax: Division net loss.................................... $(7,494) $(5,504) $(22,099) $(17,924) Other comprehensive loss, net of tax: Unrealized gains (losses) on securities arising during the period................................ -- -- -- -- ------- ------- -------- -------- Comprehensive loss..................................... $(7,494) $(5,504) $(22,099) $(17,924) ======= ======= ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. 50 GENZYME MOLECULAR ONCOLOGY A DIVISION OF GENZYME CORPORATION COMBINED BALANCE SHEETS (AMOUNTS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 2001 2000 -------------- ------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $11,157 $22,209 Short-term investments.................................... -- 7,942 Accounts receivable, net.................................. 290 231 Prepaid expenses and other current assets................. 508 126 ------- ------- Total current assets.................................... 11,955 30,508 Equipment, net.............................................. 150 244 ------- ------- Total assets............................................ $12,105 $30,752 ======= ======= LIABILITIES AND DIVISION EQUITY Current liabilities: Accrued expenses.......................................... $ 1,203 $ 1,540 Due to Genzyme General.................................... 5,409 4,660 Deferred revenue--current portion......................... 1,709 2,208 ------- ------- Total current liabilities............................... 8,321 8,408 Deferred revenue--long-term portion......................... 1,629 2,818 ------- ------- Total liabilities....................................... 9,950 11,226 Division equity............................................. 2,155 19,526 ------- ------- Total liabilities and division equity................... $12,105 $30,752 ======= =======
The accompanying notes are an integral part of these unaudited, combined financial statements. 51 GENZYME MOLECULAR ONCOLOGY A DIVISION OF GENZYME CORPORATION COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED, AMOUNTS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, ------------------- 2001 2000 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Division net loss......................................... $(22,099) $(17,924) Reconciliation of division net loss to net cash used in operating activities: Depreciation and amortization........................... 94 5,536 Deferred income tax benefit............................. -- (1,214) Other................................................... 153 (291) Increase (decrease) in cash from working capital changes: Accounts receivable................................... (59) (142) Prepaid expenses and other current assets............. (382) (53) Accrued expenses, deferred revenue and other.......... (2,025) 1,124 Due to Genzyme General................................ 749 295 -------- -------- Net cash used in operating activities............... (23,569) (12,669) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments.................................. -- (25,283) Sales and maturities of investments....................... 7,792 9,722 -------- -------- Net cash provided by (used in) investing activities........................................ 7,792 (15,561) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Allocated proceeds from issuance of Molecular Oncology Stock................................................... 685 22,406 Repayment of debt......................................... -- (5,000) Net cash allocated from Genzyme General................... 4,040 15,000 -------- -------- Net cash provided by financing activities........... 4,725 32,406 -------- -------- Increase (decrease) in cash and cash equivalents............ (11,052) 4,176 Cash and cash equivalents at beginning of period............ 22,209 3,587 -------- -------- Cash and cash equivalents at end of period.................. $ 11,157 $ 7,763 ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. 52 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, we condense or omit certain footnotes and other financial information that are normally required by generally accepted accounting principles. 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 2., "New Accounting Pronouncements," to our unaudited, consolidated financial statements, which we incorporate by reference into this note. 3. INTERDIVISIONAL FINANCING ARRANGEMENT In August 2001, Genzyme Molecular Oncology drew down $4.0 million of the $15.0 million still available to it under the $30.0 million interdivisional financing arrangement with Genzyme General in exchange for an additional reserve of 333,333 Molecular Oncology designated shares. 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. At September 30, 2001, $11.0 million remained available to Genzyme Molecular Oncology under this arrangement. 53 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. 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 consistent manner. However, subject to its fiduciary duties, our board of directors can, at its discretion, 54 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. As market or competitive conditions warrant, we may create a new series of tracking stock or change our earnings allocation methodology. At the present time we have no plans to do so. 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 September 2001, we acquired all of the outstanding capital stock of Novazyme Pharmaceuticals, Inc., a privately-held developer of biotherapies for the treatment of lysosomal storage disorders, or LSDs, for an initial payment of 2,562,182 shares of Genzyme General Stock. Novazyme shareholders received 0.5714 of a share of Genzyme General Stock for each share of Novazyme common stock they held. We will be obligated to make two additional payments totaling $87.5 million, payable in shares of Genzyme General Stock, if we receive U.S. marketing approval for two products for the treatment of LSDs that employ certain of Novazyme's technologies. In connection with the merger, we also assumed all of the outstanding options, warrants and rights to purchase Novazyme common stock on an as-converted basis. We allocated the acquisition to Genzyme General and accounted for the acquisition as a purchase. Accordingly, the results of operations of Novazyme are included in our consolidated financial statements and the combined financial statements of Genzyme General from September 26, 2001, the date of acquisition. In June 2001, we acquired the remaining 78% of Focal, Inc., a public company and developer of synthetic biopolymers used in surgery, that we did not already own for a payment of 2,086,151 shares of Biosurgery Stock. We allocated the acquired assets and liabilities to Genzyme Biosurgery and accounted for the acquisition as a purchase. Accordingly, the results of operations of Focal are included in our consolidated financial statements and the combined financial statements of Genzyme Biosurgery from June 30, 2001, the date of acquisition. 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 55 and accounted for the acquisition as a purchase. Accordingly, we include the results of operations of Wyntek in our consolidated financial statements and the combined financial statements of Genzyme General from June 1, 2001, the date of acquisition. In December 2000, we acquired Biomatrix, Inc., a public company that develops, manufactures, markets and sells a series of proprietary viscoelastic and viscosupplementation products based on hyaluronan technology that are used in therapeutic medical applications and skin care for an aggregate purchase price of $426.2 million. We accounted for the acquisition as a purchase and allocated it to Genzyme Biosurgery. Accordingly, the results of operations of Biomatrix are included in our consolidated financial statements and the combined financial statements of Genzyme Biosurgery from December 18, 2000, the date of acquisition. In December 2000, we acquired GelTex Pharmaceuticals, Inc., a public company engaged in developing therapeutic products based on polymer technology for an aggregate purchase price of approximately $1 billion, which we paid primarily in shares of Genzyme General Stock. 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 December 14, 2001, 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. A. RESULTS OF OPERATIONS GENZYME CORPORATION The components of our consolidated statements of operations are described in the following table:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ -------------------- (DECREASE) -------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE --------- -------- ---------- --------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Total revenues....................... $ 319,495 $227,359 41% $ 898,397 $659,402 36% --------- -------- --------- -------- Cost of products and services sold... 89,503 75,797 18% 272,484 201,517 35% Selling, general and administrative..................... 122,030 66,379 84% 316,810 195,358 62% Research and development (including research and development related to contracts)......................... 69,127 39,678 74% 188,651 123,954 52% Amortization of intangibles.......... 30,950 3,409 808% 90,115 15,191 493% Purchase of in-process research and development........................ 86,800 -- N/A 95,568 -- N/A --------- -------- --------- -------- Total operating costs and expenses..................... 398,410 185,263 115% 963,628 536,020 80% --------- -------- --------- -------- Operating income (loss).............. (78,915) 42,096 (287)% (65,231) 123,382 (153)% Other income (expenses), net......... (28,315) 8,258 (443)% (51,997) 43,450 (220)% --------- -------- --------- -------- Income (loss) before income taxes.... (107,230) 50,354 (313)% (117,228) 166,832 (170)% Benefit from (provision for) income taxes.............................. 4,554 (15,933) (129)% 7,288 (51,101) (114)% --------- -------- --------- -------- Net income (loss) before cumulative effect of change in accounting principle.......................... (102,676) 34,421 (398)% (109,940) 115,731 (195)% Cumulative effect of change in accounting principle, net of tax... -- -- N/A 4,167 -- N/A --------- -------- --------- -------- Net income (loss).................... $(102,676) $ 34,421 (398)% $(105,773) $115,731 (191)% ========= ======== ========= ========
56 REVENUES The components of our revenues are described in the following table:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Product revenue.......................... $291,959 $206,645 41% $816,262 $592,505 38% Service revenue.......................... 23,988 19,967 20% 71,983 62,280 16% -------- -------- -------- -------- Total product and service revenue...... 315,947 226,612 39% 888,245 654,785 36% Research and development revenue......... 3,548 747 375% 10,152 4,617 120% -------- -------- -------- -------- Total revenues..................... $319,495 $227,359 41% $898,397 $659,402 36% ======== ======== ======== ========
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 NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 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.......................... $143,048 $136,744 5% $423,991 $400,203 6% Renagel-Registered Trademark- phosphate binder................. 52,356 13,814 279% 121,359 24,032 405% Other therapeutic products......... 6,718 3,282 105% 17,834 12,001 49% -------- -------- -------- -------- Total Therapeutics............... 202,122 153,840 31% 563,184 436,236 29% Diagnostic products.................. 20,572 15,824 30% 54,786 46,601 18% Other................................ 12,181 7,227 69% 38,151 20,863 83% -------- -------- -------- -------- Total product revenue-- Genzyme General.............. 234,875 176,891 33% 656,121 503,700 30% -------- -------- -------- -------- Genzyme Biosurgery: Cardiothoracic....................... 16,386 18,804 (13)% 52,042 58,240 (11)% Orthopaedics......................... 25,492 -- N/A 63,269 -- N/A Biosurgical specialties.............. 15,206 10,950 39% 44,830 30,565 47% -------- -------- -------- -------- Total product revenue-- Genzyme Biosurgery........... 57,084 29,754 92% 160,141 88,805 80% -------- -------- -------- -------- Total product revenues......... $291,959 $206,645 41% $816,262 $592,505 38% ======== ======== ======== ========
57 Product revenue continued to increase in both the three and nine month periods ended September 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 nine months ended September 30, 2001 include sales of capsules and the 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 temporary shortage of the 800 mg tablet formulation, sales of Renagel-Registered Trademark- phosphate binder increased significantly in each of the three and nine months ended September 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 nine months ended September 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 our results of operations. Revenue from Cerezyme-Registered Trademark- enzyme would be impacted negatively if competitors developed alternative treatments for Gaucher disease and the alternative products gained commercial acceptance. We are aware of companies that have initiated efforts to develop competitive products, including one company that recently has applied for marketing approval for its product in the U.S. Other companies may attempt to develop competitive products 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 NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 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..... $143,048 $136,744 5% $423,991 $400,203 6% % of total product revenue................... 49% 66% 52% 68%
58 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 future. We expect 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 our total product revenue for the three month period ended September 30, 2001 as compared to 7% for the same period a year ago. For the nine month period ended September 30, 2001, sales of Renagel-Registered Trademark- phosphate binder represented approximately 15% of our total product revenue as compared to 4% for the same period a year ago. Other therapeutics revenue for each period includes sales of Thyrogen-Registered Trademark- hormone, which is an adjunctive diagnostic tool for well-differentiated thyroid cancer. Revenue for Thyrogen-Registered Trademark- hormone increased for the three and nine months ended September 30, 2001, as compared to the same periods a year ago, due primarily to increased market penetration. Other therapeutics revenue also increased due to increased sales of Fabrazyme-TM- enzyme in France under an Authorisation Temporaire d'utilisation from the French Medicines Agency. Diagnostic products revenue increased for the three and nine month periods ended September 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 diagnostic tests for pregnancy and infectious diseases that we obtained through our acquisition of Wyntek, which we acquired in June 2001. Diagnostic products revenue also includes royalties on product sales by Techne Corporation's biotechnology group. The increase in other product revenue for the three and nine months ended September 30, 2001, as compared to the same periods in 2000, was primarily attributable to increased sales of lipids and peptides for drug delivery. The decrease in cardiothoracic revenue for the three and nine months ended September 30, 2001, as 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 our withdrawal from certain commodity suture lines in Europe. The decrease in each period was offset, in part, by the continued growth in sales of 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 nine months ended September 30, 2001 as compared to the same periods of 2000 due primarily to the sales of Synvisc-Registered Trademark- viscosupplementation product, which 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 nine months ended September 30, 2001, as compared to the same periods of 2000, was due primarily 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. 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. 59 The following table sets forth our service revenues on a segment basis:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Genzyme General..................... $17,853 $15,115 18% $54,390 $45,296 20% Genzyme Biosurgery.................. 6,135 4,852 26% 17,593 16,984 4% ------- ------- ------- ------- Total service revenues............ $23,988 $19,967 20% $71,983 $62,280 16% ======= ======= ======= =======
The increase in service revenue in each of the three and nine months ended September 30, 2001 is due to increased sales by Genzyme General of genetic testing services attributable to expanded presence in the prenatal market and a broader test menu in oncology, as well as increased sales by Genzyme Biosurgery of Carticel-Registered Trademark- chondrocytes services and Epicel-Registered Trademark- skin graft services in each period. RESEARCH AND DEVELOPMENT REVENUE The following table sets forth our research and development revenues on a segment basis:
THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Genzyme General................................ $2,324 $159 1,362% $ 6,232 $ 489 1,174% Genzyme Biosurgery............................. -- 1 (100)% 5 23 (78)% Genzyme Molecular Oncology..................... 1,224 587 109% 3,915 4,105 (5)% ------ ---- ------- ------ Total research and development revenues........ $3,548 $747 375% $10,152 $4,617 120% ====== ==== ======= ======
The increase in research and development revenue in the three months ended September 30, 2001 is primarily attributable to $1.3 million of revenue recognized by Genzyme General in connection with our collaboration agreements for the development of a second-generation lipid-altering product for which there were no similar amounts in the same period of 2000 and $1.0 million of additional research and development services performed on behalf of Genzyme Transgenics. For the nine months ended September 30, 2001 research and development revenue increased primarily due to $3.5 million of revenue recognized by Genzyme General in connection with our collaboration agreements for the development of a second-generation lipid-altering product and $3.3 million recognized by Genzyme Molecular Oncology under our development agreement with Purdue Pharma L.P., for which there are no similar amounts in the same period of 2000. In addition, in the nine months ended September 30, 2001, we recorded $2.7 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 nine months ended September 30, 2001 were offset in part by a $2.0 million development milestone payment received under a license agreement with Schering-Plough Ltd. in the nine months ended September 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. International sales of Cerezyme-Registered Trademark- enzyme increased 9% to $73.8 million in the three month period ended September 30, 2001 from $67.7 million in the same period last year. International sales of 60 Cerezyme-Registered Trademark- enzyme increased 10% to $223.0 million for the nine month period ended September 30, 2001 from $203.5 million for the same period last year. Despite an approximate 1% decline in the average exchange rate of the euro for the three month period ended September 30, 2001, as compared to a year ago, and an approximate 5% decline in the average exchange rate of the euro for the nine month period ended September 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 nine months ended September 30, 2001 due primarily to increased sales of Renagel-Registered Trademark- phosphate binder and Synvisc-Registered Trademark- viscosupplementation product 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 NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) International product and service revenue............................. $105,638 $89,297 18% $315,417 $264,484 19% % of total product and service revenue............................. 33% 39% 36% 40%
MARGINS
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Product margin: Genzyme General........................ $186,541 $131,701 42% $512,424 $389,239 32% % of total product revenue............. 64% 64% 63% 66% Genzyme Biosurgery..................... 29,956 11,215 167% 72,244 37,635 92% % of total product revenue............. 10% 5% 9% 6% Total product margin................... $216,497 $142,916 51% $584,668 $426,874 37% % of total product revenue............. 74% 69% 72% 72% Service margin: Genzyme General........................ $ 6,960 $ 5,950 17% $ 22,596 $ 18,359 23% % of total service revenue............. 29% 30% 31% 29% Genzyme Biosurgery..................... 2,987 1,949 53% 8,497 8,035 6% % of total service revenue............. 12% 10% 12% 13% Total service margin................... $ 9,947 $ 7,899 26% $ 31,093 $ 26,394 18% % of total service revenue............. 41% 40% 43% 42% Total gross margin: Genzyme General........................ $193,501 $137,651 41% $535,020 $407,598 31% % of total product and service revenue.............................. 61% 61% 60% 62% Genzyme Biosurgery..................... 32,943 13,164 150% 80,741 45,670 77% % of total product and service revenue.............................. 10% 6% 9% 7% Total gross margin..................... $226,444 $150,815 50% $615,761 $453,268 36% % of total product and service revenue.............................. 72% 67% 69% 69%
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. 61 PRODUCT MARGIN Product margin for products allocated to Genzyme General increased for the three and nine month periods ended September 30, 2001, as compared to the same periods a year ago, 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 $8.2 million for the nine months ended September 30, 2001 relating to the increased basis of the inventory obtained in connection with our acquisition of GelTex in December 2000 and the growth in sales of Renagel-Registered Trademark- phosphate binder, a lower margin product. Product margin for products allocated to Genzyme General as a percentage of total product revenue for the three months ended September 30, 2001 was consistent with the same period a year ago due primarily to a 41% increase in our total product revenue which largely offset the 42% increase in Genzyme General's product margin for the period. Product margin for products allocated to Genzyme General as a percentage of product revenue for the nine month period ended September 30, 2001 decreased, as compared to the same periods a year ago due primarily to a 36% increase in our total product revenue which offset the 32% increase in Genzyme General's product margin for the period. We expect that in the future margins for products allocated to Genzyme General as a percentage of total product revenue will trend slightly lower, primarily due to the lower margins normally attributable to Renagel-Registered Trademark- phosphate binder, combined with our building of additional manufacturing capacity in both the United Kingdom and Ireland as we experience a product mix shift as sales of diagnostic products and services continue to increase. Product margin for products allocated to Genzyme Biosurgery increased for the three and nine months ended September 30, 2001 due to increased sales of higher margin products such as Synvisc-Registered Trademark- viscosupplementation product and devices for minimally invasive cardiac surgery. This increase was partially offset by charges to cost of products sold of $11.3 million for the nine months ended September 30, 2001 relating to the increased basis of the inventory obtained in connection with our acquisition of Biomatrix in December 2000. SERVICE MARGIN Service margin for services allocated to Genzyme General for the three and nine months ended September 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 margin for services allocated to Genzyme Biosurgery increased for the three months ended September 30, 2001 as compared to the same period a year ago due primarily to growth in sales of Epicel-Registered Trademark- skin graft services for the treatment of severe burns. Service margins for services allocated to Genzyme Biosurgery increased for the nine months ended September 30, 2001 in comparison to the same period last year due primarily to increased sales of Epicel-Registered Trademark- skin graft services and a reduction in manufacturing personnel. OPERATING EXPENSES The increase in selling, general and administrative expenses for the three and nine months ended September 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, to drive the growth in sales of Renagel-Registered Trademark- phosphate binder and Thyrogen-Registered Trademark- hormone, and to prepare for the commercialization of Fabrazyme-TM- enzyme; and - the addition of expenses from GelTex, Biomatrix, Wyntek and Focal. 62 Selling, general and administrative expenses for the three and nine months ended September 30, 2001 included $27.0 million of charges resulting from Pharming Group, N.V.'s decision to file for and operate under a court supervised receivership. Included was a write-off of the $10.2 million in principal and accrued interest due to us under the 7% senior convertible note issued to us by Pharming Group and a charge of $16.8 million representing our obligation to fund the continued production of transgenic human alpha-glucosidase enzyme through 2003. As a result of Pharming Group's failure to make payments to fund our joint venture for the development of a CHO-cell product for Pompe disease under a strategic alliance agreement, we terminated this agreement in August and have assumed full operational and financial responsibility for the development of the CHO-cell product. Our joint venture with Pharming Group covering a transgenic product for Pompe disease remains in place. We do not intend to commercialize this product, but have committed to fund its production for the nine patients participating in a clinical trial extension until those patients can be transitioned to a CHO-cell product. The increase in research and development expenses for both the three and nine month periods ended September 30, 2001 as compared to the same period a year ago is attributable to: - the cost of post-marketing clinical development efforts for Renagel-Registered Trademark- phosphate binder, which was included in equity in net 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; - increased spending on Genzyme General's program to develop Fabrazyme-TM- enzyme for the treatment of Fabry disease; and - increased spending on other internal programs. Research and development expenses for the three and nine months ended September 30, 2001, reflects a charge of $4.7 million, representing the net amount owed by Pharming Group to the CHO-cell product joint venture we previously formed with Pharming Group that we believe is uncollectable. Research and development expenses for the nine months ended September 30, 2000 included a 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 which was offset in part by a $10.3 million research and development reimbursement from Pharming Group. In connection with our acquisition of GelTex on December 14, 2000, we converted options to purchase shares of GelTex common stock into options to purchase shares of Genzyme General Stock. In accordance with FIN 44, at the date of acquisition we allocated the intrinsic value for the unvested portion of these options of $10.2 million to deferred compensation, a component of stockholders' equity. We are amortizing this amount to operating expense over the remaining vesting period of one year from the date of acquisition. We are allocating the expense to the appropriate expense categories of our statements of operations based on the functional responsibility of each employee or option holder. For the three months ended September 30, 2001, we recorded $2.4 million of compensation expense related to these options, of which $1.9 million was charged to research and development expense and $0.5 million was charged to selling, general and administrative expense. For the nine months ended September 30, 2001, we recorded $7.3 million of compensation expense related to these options, of which $6.0 million was charged to research and development expense and $1.3 million was charged to selling, general and administrative expense. At September 30, 2001, $2.4 million remained in deferred compensation, all of which we will fully amortize by December 31, 2001. In connection with our acquisition of Novazyme on September 26, 2001, we converted options, warrants and rights to purchase shares of Novazyme common stock into options, warrants and rights to purchase shares of Genzyme General Stock. In accordance with FIN 44, at the date of acquisition we 63 allocated the $2.6 million intrinsic value of the portion of the unvested options related to the future service period to deferred compensation. We are amortizing this amount to operating expense over the remaining vesting period of 22 months from the date of acquisition. We are allocating the expense to the appropriate expense categories of our consolidated statements of operations based on the functional responsibility of each option holder. AMORTIZATION OF INTANGIBLES The increase in amortization of intangibles for both the three and nine month periods ended September 30, 2001 is primarily attributable to intangible assets acquired in connection with the acquisitions of GelTex and Biomatrix in December 2000, the GDP Class A limited partnership interests in January 2001, Wyntek in June 2001 and the GDP Class B limited partnership interests in August 2001. PURCHASE OF IN-PROCESS RESEARCH AND DEVELOPMENT NOVAZYME In connection with our acquisition of Novazyme, we acquired a technology platform that we believe can be leveraged in the development of treatments for various LSDs. As of the acquisition date, the technology platform had not achieved technological feasibility and would require significant further development to complete. Accordingly, we have allocated to IPR&D and charged to expense $86.8 million, representing the portion of the purchase price attributable to the technology platform. Our management assumes responsibility for determining the IPR&D valuation and engaged an independent third-party appraisal company to assist in the valuation of the intangible assets acquired. The fair value assigned to purchased IPR&D was estimated by discounting, to present value, the probability-adjusted net cash flows expected to result once the technology has reached technological feasibility and is utilized in the treatment of certain LSDs. A discount rate of 16% was applied to estimate the present value of these cash flows and is consistent with the overall risks of the platform technology. In estimating future cash flows, management considered other tangible and intangible assets required for successful exploitation of the technology and adjusted the future cash flows to reflect the contribution of value from these assets. In the allocation of purchase price to the IPR&D, the concept of alternative future use was specifically considered. The platform technology is specific to LSDs and there is currently no alternative use for the technology in the event that it fails as a platform for enzyme replacement therapy for the treatment of LSDs. We currently estimate that it will take approximately three years and an investment of approximately $75 million-$100 million to complete the development of, obtain approval for and commercialize the first product based on this technology platform. However, our current estimates of the time and investment required to develop the technology platform may change depending on the different applications of the technology we may choose to pursue. We cannot guarantee that any projects based on these technology platforms will ever reach feasibility or develop into products that we can profitably market. In addition, we cannot give you any assurances that we will be able to develop and commercialize products based on these technology platforms before our competitors develop and commercialize products for the same indications. If we do not successfully develop and commercialize products based on these technology platforms, our results of operations could be materially affected. WYNTEK In connection with our 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 engaged an independent third-party appraisal company to assist in the valuation of the intangible assets acquired. We estimated the fair value assigned to purchased IPR&D by discounting, to 64 present value, the cash flows expected to result from the project once it has reached technological feasibility. We applied a discount rate of 25% to estimate the present value of these cash flows, which is consistent with the risks of the project. 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. In the allocation of purchase price to 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 nine months ended September 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 currently is 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 intended use of the device is to read reaction strips at the patient's bedside or in an emergency room setting. We expect to complete the regulatory review process and file an 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. 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 acquisition of GelTex, we allocated approximately $118.0 million of the purchase price to 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 and viscosupplementation 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 we recorded as a charge to expense in our consolidated statement of operations for the year ended December 31, 2000. As of September 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 any products reaching technological feasibility. In addition, each product needs to successfully complete a series of clinical trials and 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. 65 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 VALUE AT COMPLETE AT ACQUISITION SEPTEMBER 30, PROGRAM PROGRAM DESCRIPTION DEVELOPMENT STATUS DATE 2001 --------------------- ----------------------------- ----------------------------- ----------- -------------- (IN MILLIONS) GELTEX: Renagel-Registered Trademark- Non-absorbed polymer - Clinical studies scheduled $ 19.7 $ 13.2 phosphate binder phosphate binder for the for completion in 2002, 2003 treatment of hyperphospatemia and 2004 C. DIFFICILE colitis Program to develop a toxin- - Phase 2 studies initiated 37.4 31.1 binding polymer for the in 2000 treatment and prevention of - U.S. marketing approval for antibiotic induced C. this product is expected by DIFFICILE colitis 2006 Oral Mucositis Focuses on the development of - IND expected to be filed in 17.8 22.3 a topical mouth rinse that the fourth quarter of 2002 combines barrier material and - Product launch expected in antimicrobial polymers to 2006 create an anti-infective mechanism against oral mucositis, a common side effect of radiation therapy and chemotherapy DENSPM Focuses on the development of - Phase 1 safety study and 3.4 28.9 a compound for the treatment dose-ranging studies of mild to moderate psoriasis scheduled for the fourth quarter of 2001 - No further development planned Iron Chelation Focuses on the prevention and - Expected to file an IND in 15.7 27.8 treatment of transfusional or the fourth quarter of 2001 hereditary iron overload - Product launch expected in 2006 Anti-Obesity Builds on GelTex's expertise - Expected to file an IND in 17.8 35.9 in non-absorbed polymers and late 2002 focuses on the development of - Product launch expected in a compound that will inhibit 2007 lipase and bind fat GT102-279 Second generation lipid- - Development on hold 6.2 N/A(1) lowering compound with attributes of GelTex's Welchol-TM- lipid lowering agent ------ ------ $118.0 $159.2 ====== ======
-------------------------- (1) Future development costs will be funded by our collaboration partner. 66
ESTIMATED COST TO VALUE AT COMPLETE AT ACQUISITION SEPTEMBER 30, PROGRAM PROGRAM DESCRIPTION DEVELOPMENT STATUS DATE 2001 --------------------- ----------------------------- ----------------------------- ----------- ------------- (IN MILLIONS) BIOMATRIX: Visco-supplement- Use of elastoviscous - European marketing approval $33.8 $ 6.7 ation solutions and viscoelastic for gels in disease conditions to Synvisc-Registered Trademark- supplement tissues and body for use in the hip expected fluids, alleviating pain and by the end of 2001. U.S. restoring normal function trial scheduled for 2002. Initiation of a next 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-augmentation Use of viscoelastic gels to - U.S. clinical studies of 8.6 6.2 provide scaffolding for Hylaform-Registered Trademark- tissue regeneration or as an expected to start in the inert elastic filler for fourth quarter of 2001 with tissues of the skin and the market launch expected in subcutaneous and the second half of 2003 intermuscular connective tissues - We expect to engage a development partner for Hylagel-Registered Trademark- Uro in 2002 Visco-separation Use of viscoelastic gels and - Clinical studies have been 39.7 6.6 membranes to separate tissues initiated in the U.S., and to decrease formation of Germany, France, the United adhesions and excessive scars Kingdom and Belgium for after surgery 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 U.S., Canada and Europe thereafter - Expected product launch in Europe by the second quarter of 2002 and in the U.S. by the fourth quarter of 2002 ----- ----- $82.1 $$19.5 ===== =====
67 OTHER INCOME AND EXPENSES
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Equity in net loss of unconsolidated affiliates...... $ (8,110) $(11,420) (29)% $(28,921) $(30,866) (6)% Gain on affiliate sale of stock.......................... 212 2,419 (91)% 212 22,689 (99)% Gain (loss) on investments in equity securities.............. (24,464) 8,544 (386)% (25,996) 22,709 (214)% Minority interest in net loss of subsidiary..................... 260 977 (73)% 2,259 3,185 (29)% Other............................ (1,192) (10) 11,820% (5,035) 5,185 (197)% Investment income................ 13,718 12,758 8% 36,359 33,333 9% Interest expense................. (8,739) (5,010) 74% (30,875) (12,785) 141% -------- -------- -------- -------- Total other income (expenses).... $(28,315) $ 8,258 (443)% $(51,997) $ 43,450 (220)% ======== ======== ======== ========
EQUITY IN NET LOSS OF UNCONSOLIDATED AFFILIATES We have recorded 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 LLC BioMarin Pharmaceutical September 1998 Aldurazyme-TM- enzyme for Genzyme General Inc. the treatment of mucopolysaccharidosis-I Pharming/ Genzyme LLC Pharming Group, N.V.(2,3) October 1998 Human alpha-glucosidase Genzyme General for the treatment of Pompe disease (transgenic product) Genzyme/ Pharming Pharming Group, N.V.(2,4) June 2000 Human alpha-glucosidase Genzyme General Alliance LLC 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 Parkinson's Genzyme General and Huntington's diseases (after May 1999)
-------------------------- (1) We acquired GelTex and the remaining 50% interest in RenaGel LLC in December 2000. RenaGel LLC was merged into GelTex effective October 1, 2001. (2) Since August 2001, Pharming Group, N.V. has been operating under court ordered receivership. (3) In August 2001, we agreed to fund 100% of the costs to produce transgenic human alpha-glucosidase enzyme and related clinical trial costs through 2003. We consolidate the results of Pharming/Genzyme LLC effective August 2001. (4) In August 2001, we terminated our strategic alliance agreement with Pharming Group, N.V. and certain of its subsidiaries for the development of a CHO-cell product for Pompe disease and have assumed full operational and financial responsibility for the development of the CHO-cell product. 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. 68 We have recorded in equity in net loss of unconsolidated affiliates our portion of the results of our joint ventures with BioMarin, Pharming Group and Diacrin. Included in the nine months ended September 30, 2001 are losses from Focal, which we acquired in June 2001, for which there was no similar amounts in the same period of 2000. Included in the three and nine month periods ended September 30, 2000 are losses from RenaGel LLC, in which we and GelTex each owned a 50% interest. We acquired GelTex, including its 50% interest in RenaGel LLC, in December 2000. In connection with the merger, we allocated our 50% interest in RenaGel LLC to GelTex. We have consolidated the results of RenaGel LLC in our consolidated financial statements from the date of acquisition. RenaGel LLC was merged into GelTex effective October 1, 2001. Prior to our acquisition of the remaining 50% interest in RenaGel LLC, we included our proportionate share of the results of RenaGel LLC in equity in net loss of unconsolidated affiliates. Our equity in the net losses of RenaGel LLC was $4.1 million in the three months ended September 30, 2000 and $10.1 million in the nine months ended September 30, 2000. Excluding these losses, our equity in net loss of unconsolidated affiliates increased in both the three and nine months ended September 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. Also included in the three and nine month periods ended September 30, 2001 are losses from Genzyme/Pharming Alliance LLC, which was the vehicle for our joint venture with Pharming Group for the development of a CHO-cell derived product for the treatment of Pompe disease. We terminated our strategic alliance agreement with Pharming covering this joint venture in August 2001. As a result, we have included 100% of the losses of Genzyme/Pharming Alliance LLC since August 23, 2001. GAIN ON AFFILIATE SALE OF STOCK During the nine months ended September 30, 2000, in accordance with our policy pertaining to affiliate sales of stock, we recognized gains of $22.7 million due to the issuance by Genzyme Transgenics, an unconsolidated affiliate, of additional shares of Genzyme Transgenics common stock. GAIN (LOSS) ON INVESTMENTS IN EQUITY SECURITIES In the quarter ended September 30, 2001, we recorded charges of $11.8 million in connection with our investment in the ordinary shares of Cambridge Antibody Technology Group plc and $4.5 million in connection with our investment in the common stock of Targeted Genetics Corporation, because we considered the decline in the value of these investments to be other than temporary. Given the significance and duration of the declines as of the end of the quarter, we concluded that it was unclear over what period the recovery of the stock price for each of these investments would take place and that, accordingly, any evidence suggesting that the investments would recover to at least our purchase price was not sufficient to overcome the presumption that the current market price was the best indicator of the value of each of these investments. In August 2001, Pharming Group filed for receivership in order to seek protection from its creditors. In the quarter ended September 30, 2001, we recorded a charge of $8.5 million, representing an at cost write-off of our investment in Pharming common stock. 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 received 0.0594 of a share of Antigenics common stock for each share of Aronex common stock that we held. As a result of this merger, we recorded a $1.2 million charge to reflect the fair market value of our investment in Aronex at June 30, 2001. In the third quarter of 2000, we recorded a realized gain of $10.9 million upon the sale of a portion of our investment in Genzyme Transgenics common stock. In the second quarter of 2000, we 69 recorded a realized gain of $5.5 million upon the sale of a portion of our investment in Genzyme Transgenics common stock that was offset by the reversal of a $1.9 million valuation allowance related to previously recognized capital losses. 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 (until July 2001) and indirect interest in ATIII LLC, our joint venture with Genzyme Transgenics for the development and commercialization of ATIII, we consolidated the results of ATIII LLC and recorded Genzyme Transgenics' portion of the losses of that joint venture as minority interest. Minority interest increased in the three and nine months ended September 30, 2001 due to a change in the funding agreement for the joint venture in March 2001, retroactive to January 1, 2001, which increased Genzyme Transgenics's portion of the losses incurred by ATIII LLC to 50% until July 2001 and 100% thereafter as compared to 26% for the same periods a year ago. In July 2001, we transferred our 50% ownership interest in ATIII LLC to Genzyme Transgenics. In exchange for our interest in the joint venture, we will receive a royalty on worldwide net sales (excluding Asia) of 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. INVESTMENT INCOME Our investment income increased for the three and nine months ended September 30, 2001, as compared to the same periods a year ago, due primarily to higher average invested cash balances. In May 2001, we completed the private placement of $575.0 million in principal of 3% convertible subordinated debentures due 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 we had drawn under our revolving credit facility in December 2000 and allocated to Genzyme General. INTEREST EXPENSE Our interest expense increased for the three and nine months ended September 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 of 3% convertible debentures issued in May 2001. TAX PROVISION
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Benefit from (provision for) income taxes.............................. $4,554 $(15,933) (129)% $7,288 $(51,101) (114)% Effective tax rate................... 4% 32% 6% 31%
70 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 charges for IPR&D; - nondeductible amortization of intangibles; and - use of tax credits. The decrease in our effective tax rate for both the three and nine months ended September 30, 2001, as compared to the same periods a year ago, was primarily attributable to nondeductible charges for IPR&D resulting from our acquisitions of Wyntek in June 2001 and Novazyme in September 2001 and nondeductible amortization of intangibles consisting largely of goodwill resulting from our acquisitions of GelTex and Biomatrix in December 2000. The tax benefit for the nine months ended September 30, 2001 includes a $2.2 million benefit resulting from our 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." 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. 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 statements of operations for the nine months ended September 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 September 30, 2001, we recorded a pre-tax charge of $1.2 million in other expense to reflect the change in value of certain common stock warrants from July 1, 2001 to September 30, 2001. For the nine months ended September 30, 2001, we recorded a pre-tax charge of $5.0 million in other expense to reflect the change in value of certain common stock warrants from January 1, 2001 to September 30, 2001. We also recorded a charge of $1.7 million in other comprehensive income for the nine months ended September 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. 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. 71 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION The following discussion summarizes key factors our management believes necessary for an understanding of Genzyme General's financial statements. In September 2001, we acquired all of the outstanding capital stock of Novazyme, a privately-held developer of biotherapies for the treatment of lysosomal storage disorders, or LSDs, for an initial payment of 2,562,182 shares of Genzyme General Stock. Novazyme shareholders received 0.5714 of a share of Genzyme General Stock for each share of Novazyme common stock they held. We will be obligated to make two additional payments totaling $87.5 million, payable in shares of Genzyme General Stock, if we receive U.S. marketing approval for two products for the treatment of LSDs that employ certain of Novazyme's technologies. In connection with the merger, we also assumed all of the outstanding options, warrants and rights to purchase Novazyme common stock on an as-converted basis. We allocated the acquisition to Genzyme General and accounted for the acquisition as a purchase. Accordingly, the results of operations of Novazyme are included in the combined financial statements of Genzyme General from September 26, 2001, the date of acquisition. In June 2001, we acquired all of the outstanding capital stock of privately-held Wyntek 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 the combined financial statements of Genzyme General from June 1, 2001, the date of acquisition. In December 2000, we acquired GelTex, a public company engaged in developing therapeutic products based on polymer technology, for an aggregate purchase price of approximately $1 billion, which we paid primarily in shares of Genzyme General Stock. We accounted for the acquisition as a purchase and allocated it to Genzyme General. Accordingly, the results of operations of GelTex are included in the combined financial statements of Genzyme General from December 14, 2000, the date of acquisition. As part of the acquisition of GelTex, we acquired GelTex's interest in RenaGel LLC, our joint venture with GelTex. Our consolidated financial statements and the combined financial statements of 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. 72 The components of Genzyme General's combined statements of operations are described in the following table:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Total revenues.................. $255,052 $192,165 33% $716,743 $549,485 30% -------- -------- -------- -------- Cost of products and services sold.......................... 59,227 54,355 9% 175,491 141,398 24% Selling, general and administrative................ 92,386 41,780 121% 217,475 122,974 77% Research and development (including research and development related to contracts).................... 49,726 25,567 94% 132,317 83,701 58% Amortization of intangibles..... 19,221 1,983 869% 55,073 5,962 824% Purchase of in-process research and development............... 86,800 -- N/A 95,568 -- N/A -------- -------- -------- -------- Total operating costs and expenses.................. 307,360 123,685 149% 675,924 354,035 91% -------- -------- -------- -------- Operating income (loss)......... (52,308) 68,480 (176)% 40,819 195,450 (79)% Other income (expenses), net.... (25,903) 6,902 (475)% (41,488) 38,986 (206)% -------- -------- -------- -------- Income (loss) before income taxes......................... (78,211) 75,382 (204)% (669) 234,436 (100)% Provision for income taxes...... (3,495) (24,409) (86)% (34,174) (74,164) (54)% -------- -------- -------- -------- Division net income (loss) before cumulative effect of change in accounting principle..................... (81,706) 50,973 (260)% (34,843) 160,272 (122)% Cumulative effect of change in accounting principle, net of tax........................... -- -- -- 4,167 -- N/A -------- -------- -------- -------- Division net income (loss)...... $(81,706) $ 50,973 (260)% $(30,676) $160,272 (119)% ======== ======== ======== ========
REVENUES The components of Genzyme General's total revenues are described in the following table:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Product revenue................. $234,875 $176,891 33% $656,121 $503,700 30% Service revenue................. 17,853 15,115 18% 54,390 45,296 20% -------- -------- -------- -------- Total product and service revenue................... 252,728 192,006 32% 710,511 548,996 29% Research and development revenue....................... 2,324 159 1,362% 6,232 489 1,174% -------- -------- -------- -------- Total revenues.............. $255,052 $192,165 33% $716,743 $549,485 30% ======== ======== ======== ========
73 PRODUCT AND SERVICE REVENUE The following table sets forth Genzyme General's product and service revenue on a segment basis:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 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................... $143,048 $136,744 5% $423,991 $400,203 6% Renagel-Registered Trademark- phosphate binder.......... 52,356 13,814 279% 121,359 24,032 405% Other therapeutic products.................. 6,718 3,282 105% 17,834 12,001 49% -------- -------- -------- -------- Total Therapeutics........ 202,122 153,840 31% 563,184 436,236 29% Diagnostic products........... 20,572 15,824 30% 54,786 46,601 18% Other......................... 12,181 7,227 69% 38,151 20,863 83% -------- -------- -------- -------- Total product revenue....... 234,875 176,891 33% 656,121 503,700 30% Service revenue: Other......................... 17,853 15,115 18% 54,390 45,296 20% -------- -------- -------- -------- Total product and service revenue....................... $252,728 $192,006 32% $710,511 $548,996 29% ======== ======== ======== ========
THERAPEUTICS Genzyme General's continued increase in product revenue for both the three and nine month periods ended September 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 nine months ended September 30, 2001 include sales of capsules and the 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 800 mg tablet formulation, sales of Renagel-Registered Trademark- phosphate binder increased significantly in each of the three and nine months ended September 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 nine months ended September 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 74 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. 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, including one company that recently has applied for marketing approval for its product in the U.S. Other companies may attempt to develop competitive products 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 NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 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....................... $143,048 $136,744 5% $423,991 $400,203 6% % of total product revenue...... 61% 77% 65% 79%
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 future. 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 22% of Genzyme General's total product revenue for the three month period ended September 30, 2001, as compared to 8% for the same period a year ago. For the nine-month period ended September 30, 2001, sales of Renagel-Registered Trademark- phosphate binder represented approximately 18% of Genzyme General's total product revenue as compared to 5% for the same period a year ago Other therapeutics revenue for each period includes sales of Thyrogen-Registered Trademark- hormone, which is an adjunctive diagnostic tool for well-differentiated thyroid cancer. Revenue for Thyrogen-Registered Trademark- hormone increased for the three months and nine months ended September 30, 2001, as compared to the same periods a year ago, due primarily to increased market penetration. Other therapeutics revenue also increased due 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 nine-month periods ended September 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 diagnostic tests for pregnancy and infectious diseases that we obtained through our acquisition of Wyntek, which we acquired in June 2001. Diagnostic product revenue also includes royalties on product sales by Techne Corporation's biotechnology group. 75 OTHER PRODUCT AND SERVICE REVENUE The increase in other product revenue for the three and nine months ended September 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 service revenue in each of the three and nine months ended September 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 September 30, 2001 was primarily attributable to $1.3 million of revenue recognized by Genzyme General in connection with our collaboration agreements for the development of a second-generation lipid-altering product, for which there were no similar amounts in the same period of 2000, and $1.0 million of additional research and development services Genzyme General performed on behalf of Genzyme Transgenics. For the nine months ended September 30, 2001, research and development revenue increased primarily due to $3.5 million of revenue recognized by Genzyme General in connection with our collaboration agreements for the development of a second-generation lipid-altering product for which there were no similar amounts in the same period of 2000 and $2.7 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. Most of these revenues were attributable to sales of Cerezyme-Registered Trademark- enzyme. International sales of Cerezyme-Registered Trademark- enzyme increased 9% to $73.8 million in the three month period ended September 30, 2001 from $67.7 million in the same period last year. International sales of Cerezyme-Registered Trademark- enzyme increased 10% to $223.0 million for the nine month period ended September 30, 2001 from $203.5 million for the same period last year. Despite an approximate 1% decline in the average exchange rate of the euro for the three month period ended September 30, 2001, as compared to a year ago, and an approximate 5% decline in the average exchange rate of the euro for the nine month period ended September 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 nine months ended September 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 NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) International product and service revenue......................... $94,555 $80,585 17% $280,022 $237,592 18% % of total product and service revenue......................... 37% 42% 39% 43%
76 MARGINS
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Product margin....................... $186,541 $131,701 42% $512,424 $389,239 32% % of product revenue................. 79% 74% 78% 77% Service margin....................... 6,960 5,950 17% 22,596 18,359 23% % of service revenue................. 39% 39% 42% 41% Total gross margin................... $193,501 $137,651 41% $535,020 $407,598 31% % of total product and service revenue............................ 77% 72% 75% 74%
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 nine month periods ended September 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 $8.2 million for the nine months ended September 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 increased for the three and nine month periods ended September 30, 2001, as compared to the same periods a year ago. The increase for the three months ended September 30, 2001 as compared to the same period a year ago was primarily attributable to a 33% increase in product revenue, driven by increased sales of both Cerezyme-Registered Trademark- enzyme and Renagel-Registered Trademark- phosphate binder, partially offset by a 7% increase in the cost of products sold for the same period. The increase for the nine months ended September 30, 2001 as compared to the same period a year ago was primarily attributable to a 30% increase in product revenue, driven by increased sales of both Cerezyme-Registered Trademark- enzyme and Renagel-Registered Trademark- phosphate binder, partially offset by a 26% increase in the cost of products sold for the same period. We expect that in the future Genzyme General's product margin as a percentage of product revenue will trend slightly lower, primarily due to the lower margins normally attributable to Renagel-Registered Trademark- phosphate binder, combined with our building of additional manufacturing capacity in both the United Kingdom and Ireland and as we experience a product mix shift as sales of diagnostics products and services continue to increase. SERVICE MARGIN Service margin for the three and nine month periods ended September 30, 2001 increased, as compared to the same periods a year ago, primarily due to increased sales of higher margin DNA and cancer testing services. While this trend continued, service margin as a percentage of service revenue was unchanged for the three month period ending September 30, 2001, as compared to the same period a year ago, and increased only slightly for the nine month period ended September 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 of 2001. For the three month period ending September 30, 2001, a service revenue increase of 18% was offset by a 19% increase in the cost of services sold as compared to the same period a year ago. For the nine month period ending September 30, 2001, a service revenue increase of 20% was offset by a 18% increase in the cost of services sold as compared to the same period a year ago. 77 OPERATING EXPENSES The increase in selling, general and administrative expenses for both the three and nine month periods ended September 30, 2001, as compared to the same periods a year ago, is related 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, to drive the growth in sales of Renagel-Registered Trademark- phosphate binder and Thyrogen-Registered Trademark- hormone, and to prepare for the commercialization of Fabrazyme-TM- enzyme; and - the addition of expenses from GelTex and Wyntek. Selling, general and administrative expenses for the three and nine months ended September 30, 2001 included $27.0 million of charges resulting from Pharming Group, N.V.'s decision to file for and operate under a court supervised receivership. Included was a write-off of the $10.2 million in principal and accrued interest due to us under the 7% senior convertible note issued to us by Pharming Group and a charge of $16.8 million representing our obligation to fund the continued production of transgenic human alpha-glucosidase enzyme through 2003. As a result of Pharming Group's failure to make payments to fund our joint venture for the development of a CHO-cell product for Pompe disease under a strategic alliance agreement, we terminated this agreement in August and have assumed full operational and financial responsibility for the development of the CHO-cell product. Our joint venture with Pharming Group covering a transgenic product for Pompe disease remains in place. We do not intend to commercialize this product, but have committed to fund its production for the nine patients participating in a clinical trial extension until those patients can be transitioned to a CHO-cell product. The increase in research and development expenses for both the three and nine month periods ended September 30, 2001, as compared to the same periods a year ago, is attributable to: - the cost of post-marketing clinical development efforts for Renagel-Registered Trademark- phosphate binder, which was included in equity in net 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; - increased spending on Genzyme General's program to develop Fabrazyme-TM- enzyme for the treatment of Fabry disease; and - increased spending on other internal programs. Research and development expenses for the three and nine months ended September 30, 2001, reflects a charge of $4.7 million, representing the net amount owed by Pharming Group to the CHO-cell product joint venture we previously formed with Pharming Group that we believe is uncollectable. Research and development expenses for the nine months ended September 30, 2000 included a 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, which was offset in part by a $10.3 million research and development reimbursement from Pharming Group. In connection with our acquisition of GelTex on December 14, 2000, we converted options to purchase shares of GelTex common stock into options to purchase shares of Genzyme General Stock. In accordance with FIN 44, at the date of acquisition we allocated the intrinsic value for the unvested portion of these options of $10.2 million to deferred compensation, a component of division equity. We are amortizing this amount to operating expense over the remaining vesting period of one year from the date of acquisition. We are allocating the expense to the appropriate expense categories of Genzyme General's statements of operations based on the functional responsibility of each employee or 78 option holder. For the three months ended September 30, 2001, Genzyme General recorded $2.4 million of compensation expense related to these options, of which $1.9 million was charged to research and development expense and $0.5 million was charged to selling, general and administrative expense. For the nine months ended September 30, 2001, Genzyme General recorded $7.3 million of compensation expense related to these options, of which $6.0 million was charged to research and development expense and $1.3 million was charged to selling, general and administrative expense. At September 30, 2001, $2.4 million remained in deferred compensation, all of which we will fully amortize by December 31, 2001. In connection with our acquisition of Novazyme on September 26, 2001, we converted options, warrants and rights to purchase shares of Novazyme common stock into options, warrants and rights to purchase shares of Genzyme General Stock. In accordance with FIN 44, at the date of acquisition we allocated the $2.6 million intrinsic value of the portion of the unvested options related to the future service period to deferred compensation. We are amortizing this amount to operating expense over the remaining vesting period of 22 months from the date of acquisition. We are allocating the expense to the appropriate expense categories of Genzyme General's combined statements of operations based on the functional responsibility of each option holder. AMORTIZATION OF INTANGIBLES The increase in amortization of intangibles for both the three and nine month periods ended September 30, 2001 is primarily attributable to intangible assets acquired in connection with the acquisition of GelTex in December 2000 and Wyntek in June 2001. PURCHASE OF IN-PROCESS RESEARCH AND DEVELOPMENT NOVAZYME In connection with our acquisition of Novazyme, we acquired a technology platform that we believe can be leveraged in the development of treatments for various LSDs. As of the acquisition date, the technology platform had not achieved technological feasibility and would require significant further development to complete. Accordingly, we have allocated to IPR&D and charged to expense $86.8 million, representing the portion of the purchase price attributable to the technology platform. Our management assumes responsibility for determining the IPR&D valuation and engaged an independent third-party appraisal company to assist in the valuation of the intangible assets acquired. The fair value assigned to purchased IPR&D was estimated by discounting, to present value, the probability-adjusted net cash flows expected to result once the technology has reached technological feasibility and is utilized in the treatment of certain LSDs. A discount rate of 16% was applied to estimate the present value of these cash flows and is consistent with the overall risks of the platform technology. In estimating future cash flows, management considered other tangible and intangible assets required for successful exploitation of the technology and adjusted the future cash flows to reflect the contribution of value from these assets. In the allocation of purchase price to the IPR&D, the concept of alternative future use was specifically considered. The platform technology is specific to LSDs and there is currently no alternative use for the technology in the event that it fails as a platform for enzyme replacement therapy for the treatment of LSDs. We currently estimate that it will take approximately three years and an investment of approximately $75 million-$100 million to complete the development of, obtain approval for and commercialize the first product based on this technology platform. However, our current estimates of the time and investment required to develop the technology platform may change depending on the different applications of the technology we may choose to pursue. We cannot guarantee that any projects based on these technology platforms will ever reach feasibility or develop into products that we can profitably market. In addition, we cannot give you any assurances that we will be able to develop and commercialize products based on these technology 79 platforms before our competitors develop and commercialize products for the same indications. If we do not successfully develop and commercialize products based on these technology platforms, our results of operations could be materially affected. WYNTEK In connection with our 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 engaged an independent third-party appraisal company to assist in the valuation of the intangible assets acquired. We estimated the fair value assigned to purchased IPR&D by discounting, to present value, the cash flows expected to result from the project once it has reached technological feasibility. We applied a discount rate of 25% to estimate the present value of these cash flows, which is consistent with the risks of the project. 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. In the allocation of purchase price to 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 nine months ended September 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 currently is 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 intended use of the device is to read reaction strips at the patient's bedside or in an emergency room setting. We expect to complete the regulatory review process and file an 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. GELTEX In December 2000, in connection with the acquisition of GelTex, we allocated approximately $118.0 million of the purchase price to IPR&D, which Genzyme General recorded as a charge to expense in its combined statement of operations for the year ended December 31, 2000. As of September 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 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 80 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 VALUE AT COMPLETE AT ACQUISITION SEPTEMBER 30, PROGRAM PROGRAM DESCRIPTION DEVELOPMENT STATUS DATE 2001 --------------------- ----------------------------- ----------------------------- ----------- ------------- (IN MILLIONS) Renagel-Registered Trademark- Non-absorbed polymer - Clinical studies scheduled $ 19.7 $ 13.2 phosphate binder phosphate binder for the for completion in 2002, 2003 treatment of hyperphospatemia and 2004 C. DIFFICILE colitis Program to develop a toxin- - Phase 2 studies initiated 37.4 31.1 binding polymer for the in 2000 treatment and prevention of - U.S. marketing approval for antibiotic induced C. this product is expected by DIFFICILE colitis 2006 Oral Mucositis Focuses on the development of - IND expected to be filed in 17.8 22.3 a topical mouth rinse that the fourth quarter of 2002 combines barrier material and - Product launch expected in antimicrobial polymers to 2006 create an anti-infective mechanism against oral mucositis, a common side effect of radiation therapy and chemotherapy DENSPM Focuses on the development of - Phase 1 safety study and 3.4 28.9 a compound for the treatment dose-ranging studies of mild to moderate psoriasis scheduled for the fourth quarter of 2001 - No further development planned Iron Chelation Focuses on the prevention and - Expected to file an IND in 15.7 27.8 treatment of transfusional or the fourth quarter of 2001 hereditary iron overload - Product launch expected in 2006 Anti-Obesity Builds on GelTex's expertise - Expected to file an IND in 17.8 35.9 in non-absorbed polymers and late 2002 focuses on the development of - Product launch expected in a compound that will inhibit 2007 lipase and bind fat GT102-279 Second generation lipid- - Development on hold 6.2 N/A(1) lowering compound with attributes of GelTex's WelChol-TM- lipid lowering agent ------ -------- $118.0 $ 159.2 ====== ========
-------------------------- (1) Future development costs will be funded by our collaboration partner. 81 OTHER INCOME AND EXPENSES
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Equity in net loss of unconsolidated affiliates...... $ (8,110) $(11,420) (29)% $(27,605) $(30,866) (11)% Gain on affiliate sale of stock.......................... 212 2,419 (91)% 212 22,689 (99)% Gain (loss) on investments in equity securities.............. (24,464) 8,544 (386)% (25,996) 22,709 (214)% Minority interest in net loss of subsidiary..................... 260 977 (73)% 2,259 3,185 (29)% Other............................ (1,227) (43) 2,753% (5,115) 5,110 (200)% Investment income................ 13,125 11,072 19% 34,136 27,798 23% Interest expense................. (5,699) (4,647) 23% (19,379) (11,639) 67% -------- -------- -------- -------- Total other income (expenses)................. $(25,903) $ 6,902 (475)% $(41,488) $ 38,986 (206)% ======== ======== ======== ========
EQUITY IN NET LOSS OF UNCONSOLIDATED AFFILIATES Genzyme General recorded in equity in net loss of unconsolidated affiliates its portion of the results of our joint ventures with BioMarin, Pharming Group and Diacrin. Included in the three and nine month periods ended September 30, 2000 are losses from RenaGel LLC, in which we and GelTex each owned a 50% interest. We acquired GelTex, including its 50% interest in RenaGel LLC, in December 2000. In connection with the merger, we allocated our 50% interest in RenaGel LLC to GelTex. We have consolidated the results of RenaGel LLC in Genzyme General's combined financial statements from the date of acquisition. RenaGel LLC was merged into GelTex effective October 1, 2001. Prior to our acquisition of the remaining 50% interest in RenaGel LLC, we included our proportionate share of the results of RenaGel LLC in equity in net loss of unconsolidated affiliates. Genzyme General's equity in the net losses of RenaGel LLC was $4.1 million in the three months ended September 30, 2000 and $10.1 million in the nine months ended September 30, 2000. Excluding these losses, Genzyme General's equity in net loss of unconsolidated affiliates increased in both the three and nine months ended September 30, 2001, due primarily to increased losses from our joint venture with BioMarin, our joint ventures with Pharming Group (one of which we terminated in August 2001), and our equity position in Genzyme Transgenics, which were offset in part by decreased losses from our joint venture with Diacrin. Also included in the three and nine month periods ended September 30, 2001 are losses from Genzyme/Pharming Alliance LLC, which was the vehicle for our joint venture with Pharming Group for the development of a CHO-cell derived product for the treatment of Pompe disease. We terminated our strategic alliance agreement with Pharming covering this joint venture in August 2001. As a result, we have included 100% of the losses of Genzyme/ Pharming Alliance LLC since August 23, 2001. GAIN ON AFFILIATE SALE OF STOCK During the nine months ended September 30, 2000, in accordance with our policy pertaining to affiliate sales of stock, Genzyme General recognized gains of $22.7 million due to the issuance by Genzyme Transgenics, an unconsolidated affiliate, of additional shares of Genzyme Transgenics Corporation common stock. 82 GAIN (LOSS) ON INVESTMENTS IN EQUITY SECURITIES In the quarter ended September 30, 2001, Genzyme General recorded charges of $11.8 million in connection with our investment in the ordinary shares of Cambridge Antibody Technology Group plc and $4.5 million in connection with our investment in the common stock of Targeted Genetics, because we considered the decline in the value of these investments to be other than temporary. Given the significance and duration of the declines as of the end of the quarter, we concluded that it was unclear over what period the recovery of the stock price for each of these investments would take place and that, accordingly, any evidence suggesting that the investments would recover to at least our purchase price was not sufficient to overcome the presumption that the current market price was the best indicator of the value of each of these investments. In August 2001, Pharming Group announced that it would file for receivership in order to seek protection from its creditors. In the quarter ended September 30, 2001, Genzyme General recorded a charge of $8.5 million, representing an at cost write-off of our investment in Pharming common stock. 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 received 0.0594 of a share of Antigenics common stock for each share of Aronex common stock that we held. As a result of this merger, Genzyme General recorded a $1.2 million charge to reflect the fair market value of our investment in Aronex at June 30, 2001. In the third quarter of 2000, Genzyme General recorded a realized gain of $10.9 million upon the sale of a portion of our investment in Genzyme Transgenics common stock. In the second quarter of 2000, Genzyme General recorded a realized gain of $5.5 million upon the sale of a portion of our investment in Genzyme Transgenics common stock that was offset by the reversal of a $1.9 million valuation allowance related to previously recognized capital losses. Genzyme General 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 (until July 2001) and indirect interest in ATIII LLC, our joint venture with Genzyme Transgenics for the development and commercialization of ATIII, Genzyme General consolidated the results of ATIII LLC and recorded Genzyme Transgenics' portion of the losses of that joint venture as minority interest. Minority interest increased in the three and nine months ended September 30, 2001 due to a change in the funding agreement for the joint venture in March 2001, retroactive to January 1, 2001, which increased Genzyme Transgenics's portion of the losses incurred by ATIII LLC to 50% until July 2001 and 100% thereafter as compared to 26% for the same periods a year ago. In July 2001, we transferred our 50% ownership interest in ATIII LLC to Genzyme Transgenics. In exchange for our interest in the joint venture, we will receive a royalty on worldwide net sales (excluding Asia) 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. INVESTMENT INCOME Genzyme General's investment income increased for the three and nine months ended September 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 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 83 placement of the debentures to repay the $150.0 million we had drawn under our revolving credit facility in December 2000 and allocated to Genzyme General. INTEREST EXPENSE Genzyme General's interest expense increased for the three and nine months ended September 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 of 3% convertible debentures issued in May 2001. TAX PROVISION
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ -------------------- (DECREASE) ---------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE --------- -------- ---------- ---------- --------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Provision for income taxes..................... $(3,495) $(24,409) (86)% $(34,174) $(74,164) (54)% Effective tax rate.......... (4)% 32% (5,108)% 32%
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 charges for IPR&D; - nondeductible amortization of intangibles; and - use of tax credits. The decrease in Genzyme General's effective tax rate for both the three and nine month periods ended September 30, 2001, as compared to the same periods a year ago, was primarily attributable to nondeductible charges for IPR&D resulting from our acquisitions of Wyntek in June 2001 and Novazyme in September 2001 and nondeductible amortization of intangibles consisting largely of goodwill resulting from our acquisition of GelTex in December 2000. The tax benefit for the nine months ended September 30, 2001 includes a $2.2 million benefit resulting from our 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." 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 statements of operations for the nine months ended September 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 September 30, 2001, Genzyme General recorded a pre-tax charge of $1.2 million in other expense to reflect the change in value of certain 84 common stock warrants from July 1, 2001 to September 30, 2001. For the nine months ended September 30, 2001, Genzyme General recorded a pre-tax charge of $5.0 million in other expense to reflect the change in value of certain common stock warrants from January 1, 2001 to September 30, 2001. Genzyme General also recorded a charge of $1.7 million in division equity for the nine months ended September 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. 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. 85 GENZYME BIOSURGERY A DIVISION OF GENZYME CORPORATION The following discussion summarizes key factors our management believes necessary for an understanding of Genzyme Biosurgery's financial statements. In June 2001, we acquired the remaining 78% of Focal, Inc., a public company and developer of synthetic biopolymers used in surgery, that we did not already own for a payment of 2,086,151 shares of Biosurgery Stock. We allocated the acquired assets and liabilities to Genzyme Biosurgery and accounted for the acquisition as a purchase. Accordingly, the results of operations of Focal are included in the results of Genzyme Biosurgery from June 30, 2001, the date of acquisition. In December 2000, we acquired Biomatrix, Inc., a public company that develops, manufactures, markets and sells a series of proprietary viscoelastic and viscosupplementation products based on hyaluronan technology that are used in therapeutic medical applications and skin care for an aggregate purchase price of $426.2 million. We accounted for the acquisition as a purchase and allocated it to Genzyme Biosurgery. 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 December 18, 2000, the date of acquisition. The components of Genzyme Biosurgery's combined statements of operations are described in the following table:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA) Total revenues....................... $ 63,219 $ 34,607 83% $177,739 $105,812 68% -------- -------- -------- -------- Cost of products and services sold... 30,276 21,442 41% 96,993 60,119 61% Selling, general and administrative..................... 27,827 23,288 19% 93,816 68,095 38% Research and development............. 12,352 8,935 38% 35,027 26,230 34% Amortization of intangibles.......... 11,729 1,426 723% 35,042 4,279 719% -------- -------- -------- -------- Total operating costs and expenses........................... 82,184 55,091 49% 260,878 158,723 64% -------- -------- -------- -------- Operating loss....................... (18,965) (20,484) (7)% (83,139) (52,911) 57% Other income (expenses), net......... (2,560) 960 (367)% (11,321) 3,975 (385)% -------- -------- -------- -------- Division net loss.................... $(21,525) $(19,524) 10% $(94,460) $(48,936) 93% ======== ======== ======== ========
86 REVENUES
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ---------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Product revenue: Cardiothoracic..................... $16,386 $18,804 (13)% $ 52,042 $ 58,240 (11)% Orthopaedics....................... 25,492 -- N/A 63,269 -- N/A Biosurgical specialties............ 15,206 10,950 39% 44,830 30,565 47% ------- ------- -------- -------- Total product revenue............ 57,084 29,754 92% 160,141 88,805 80% ------- ------- -------- -------- Service revenue: Orthopaedics....................... 4,164 4,021 4% 13,292 13,130 1% Biosurgical specialties............ 1,971 831 137% 4,301 3,854 12% ------- ------- -------- -------- Total service revenue............ 6,135 4,852 26% 17,593 16,984 4% ------- ------- -------- -------- Research and development revenue: Biosurgical specialties............ -- 1 (100)% 5 23 (78)% ------- ------- -------- -------- Total research and development revenue........................ -- 1 (100)% 5 23 (78)% ------- ------- -------- -------- Total revenues................... $63,219 $34,607 83% $177,739 $105,812 68% ======= ======= ======== ========
The decrease in cardiothoracic revenue for the three and nine months ended September 30, 2001 as 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 our withdrawal from certain commodity suture lines in Europe. The decrease in each period was offset, in part, by the continued growth in sales of minimally invasive cardiac surgery products and the 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 nine months ended September 30, 2001, as compared to the same periods of 2000, due primarily to sales of Synvisc-Registered Trademark- viscosupplementation product, which 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 nine months ended September 30, 2001, as compared to the same periods of 2000, was due primarily 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 revenue for the three months ended September 30, 2001 was 18%, as compared to 25% in the same period of 2000. International revenue as a percentage of total revenue for the nine months ended September 30, 2001 was 20%, as compared to 25% in the same period of 2000. International product and service revenue as a percent of total product and service revenue decreased in both the three and nine months ended September 30, 2001 due primarily to the addition of sales of Synvisc-Registered Trademark- viscosupplementation product, which is sold predominantly in the United States. In addition, the average exchange rate for the euro declined 1% for the three months ended September 30, 2001 and 5% for the nine months ended September 30, 2001, as compared to the same periods a year ago. 87 MARGINS
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Product margin...................... $29,956 $11,215 167% $72,244 $37,635 92% % of product revenue.............. 52% 38% 45% 42% Service margin...................... $ 2,987 $ 1,949 53% $ 8,497 $ 8,035 6% % of service revenue.............. 49% 40% 48% 47% Total gross margin.................. $32,943 $13,164 150% $80,741 $45,670 77% % of total product and service revenue......................... 52% 38% 45% 43%
Genzyme Biosurgery provides a broad range of healthcare products and services. As a result, Genzyme Biosurgery's gross margins vary significantly depending on the category of product or service. Genzyme Biosurgery recorded a charge to cost of products sold of $11.3 million for the nine months ended September 30, 2001 relating to the increased basis of the inventory obtained in connection with our acquisition of Biomatrix in December 2000. Additionally, Genzyme Biosurgery included a $1.0 million charge related to the underfunding of an acquired retirement plan in cost of products sold. Excluding the adjustments described above, product margins increased in the three and nine months ended September 30, 2001, as compared to the same periods in 2000, 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 in each period of 2001. Service margins for services allocated to Genzyme Biosurgery increased for the three months ended September 30, 2001, as compared to the same period a year ago, due primarily to growth in sales of Epicel-Registered Trademark- skin graft services for the treatment of severe burns. Service margins for services allocated to Genzyme Biosurgery increased for the nine months ended September 30, 2001, in comparison to the same period last year, due primarily to sales of Epicel-Registered Trademark- skin graft services and a reduction in manufacturing personnel. OPERATING EXPENSES The increase in selling, general and administrative expenses for the three and nine months ended September 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 and an increase in patent litigation costs which were $1.0 million for the three months ended September 30, 2001 and $2.2 million for the nine months ended September 30, 2001. In addition, for the nine months ended September 30, 2001, Genzyme Biosurgery recorded $5.5 million in costs associated with the consolidation of European operations. Genzyme Biosurgery's research and development expenses increased during the three and nine months ended September 30, 2001 as compared to the same period in 2000 due to an increase in spending for orthopaedics development programs. This increase in spending was primarily 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 nine months ended September 30, 2001 was primarily attributable to intangible assets acquired since year end in connection with our acquisitions of Biomatrix in December 2000, the GDP Class A limited partnership interests in January 2001, and Class B limited partnership interests in August 2001. 88 PURCHASE OF IN-PROCESS RESEARCH AND DEVELOPMENT In December 2000, we acquired Biomatrix, a public company engaged in the development and manufacture of viscoelastic and viscosupplementation 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 acquisition of Biomatrix, we allocated approximately $82.1 million to IPR&D, which Genzyme Biosurgery recorded as a charge to expense in its combined statement of operations for the year ended December 31, 2000. As of September 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 the projects reaching technological feasibility. In addition, each product needs to successfully complete a series of clinical trials and 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. 89 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 VALUE AT COMPLETE AT ACQUISITION SEPTEMBER 30, PROGRAM PROGRAM DESCRIPTION DEVELOPMENT STATUS DATE 2001 --------------------- ----------------------------- ----------------------------- ----------- ------------- (IN MILLIONS) Visco- Use of elastoviscous - European marketing approval $33.8 $ 6.7 supplementation solutions and viscoelastic for gels in disease conditions to Synvisc-Registered Trademark- supplement tissues and body for use in the hip expected fluids, alleviating pain and by the end of 2001. U.S. restoring normal function trial scheduled for 2002. Initiation of a next generation Synvisc-Registered Trademark- program expected in fourth quarter of 2001 with possible U.S. market approval in the second half of 2004. Visco-augmentation Use of viscoelastic gels to - U.S. clinical studies of 8.6 6.2 provide scaffolding for Hylaform-Registered Trademark- tissue regeneration or as an expected to start in the inert elastic filler for fourth quarter of 2001 with tissues of the skin and the market launch expected in subcutaneous and the second half of 2003 intermuscular connective tissues - We expect to engage a development partner for Hylagel-Registered Trademark- Uro in 2002 Visco-separation Use of viscoelastic gels and - Clinical studies have been 39.7 6.6 membranes to separate tissues initiated in the U.S., and to decrease formation of Germany, France, the United adhesions and excessive scars Kingdom and Belgium for after surgery. 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 first half of 2004. European marketing approval expected in the second half of 2003, with submissions for regulatory approvals in the U.S., Canada and Europe thereafter - Expected product launch in Europe by the second quarter of 2002 and in the U.S. by the fourth quarter of 2002. ----- ----- $82.1 $19.5 ===== =====
90 OTHER INCOME AND EXPENSES
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ---------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Equity in net loss of unconsolidated affiliate.......................... $ -- $ -- N/A $ (1,316) $ -- N/A Other................................ 35 33 6% 80 75 7% Investment income.................... 431 1,274 (66)% 1,370 4,873 (72)% Interest expense..................... (3,026) (347) 772% (11,455) (973) 1,077% ------- ------ -------- ------ Total other income (expenses)...... $(2,560) $ 960 (367)% $(11,321) $3,975 (385)% ======= ====== ======== ======
EQUITY IN NET LOSS OF UNCONSOLIDATED AFFILIATE 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 recorded 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 nine months ended September 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 in the three and nine months ended September 30, 2001 when compared to the same periods of 2000 as a result of lower average cash balances. INTEREST EXPENSE Interest expense increased primarily as a result of the $218.0 million of indebtedness outstanding as of September 30, 2001, under the portion of our revolving credit facility that we allocated to Genzyme Biosurgery. In December, 2000, we drew $200.0 million under this facility and allocated the proceeds to Genzyme Biosurgery to finance a portion of the cash component of the Biomatrix merger consideration. 91 GENZYME MOLECULAR ONCOLOGY A DIVISION OF GENZYME CORPORATION The following discussion summarizes 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 NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ---------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Total revenues..................... $ 1,224 $ 635 93% $ 3,915 $ 4,153 (6)% ------- ------- -------- -------- Cost of revenues................... 668 104 542% 1,697 299 468% Selling, general and administrative................... 1,817 1,311 39% 5,519 4,289 29% Research and development........... 6,381 5,120 25% 19,610 13,772 42% Amortization of intangibles........ -- -- N/A -- 5,420 (100)% ------- ------- -------- -------- Total operating costs and expenses..................... 8,866 6,535 36% 26,826 23,780 13% ------- ------- -------- -------- Operating loss..................... (7,642) (5,900) 30% (22,911) (19,627) 17% Other income (expenses), net....... 148 396 (63)% 812 489 66% ------- ------- -------- -------- Loss before taxes.................. (7,494) (5,504) 36% (22,099) (19,138) 15% Tax benefit........................ -- -- N/A -- 1,214 (100)% ------- ------- -------- -------- Division net loss.................. $(7,494) $(5,504) 36% $(22,099) $(17,924) 23% ======= ======= ======== ========
REVENUES The components of Genzyme Molecular Oncology's revenues are described in the following table:
THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Licensing revenue......................... $ 484 $576 (16)% $1,696 $4,046 (58)% Royalty revenue........................... 36 59 (39)% 109 107 2% Research and development revenue.......... 704 -- N/A 2,110 -- N/A ------ ---- ------ ------ Total revenues........................ $1,224 $635 93% $3,915 $4,153 (6)% ====== ==== ====== ======
Licensing revenue in the three and nine months ended September 30, 2001 included revenue recognized from a technology access fee associated with the cancer antigen discovery agreement with Purdue Pharma, L.P. that began 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 nine month periods ended September 30, 2001 was solely attributable to research performed on behalf of the cancer antigen discovery agreement with Purdue Pharma. 92 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 nine months ended September 30, 2001 primarily as a result of the work performed under the Purdue Pharma cancer antigen discovery agreement that began in the fourth quarter of 2000. OPERATING EXPENSES Genzyme Molecular Oncology's selling, general and administrative expenses increased for the three and nine months ended September 30, 2001 as compared to the same periods a year ago as a result of enhanced business development efforts and increased expenses related to information technology, legal, accounting and general management services. Research and development expenses increased for the three and nine months ended September 30, 2001 as compared to the same periods 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 and anti-angiogenesis programs. AMORTIZATION OF INTANGIBLES Genzyme Molecular Oncology's amortization of intangibles was attributable to intangible assets acquired in connection with the acquisition of PharmaGenics, Inc. in June 1997. These assets were fully amortized by the end of the second quarter of 2000. OTHER INCOME AND EXPENSE Genzyme Molecular Oncology's other income decreased in the three months ended September 30, 2001 due to a decrease in interest income that is attributable to lower average cash balances. Interest expense was relatively level for the three month periods ended September 30, 2001 and 2000. Other income increased for the nine months ended September 30, 2001, as compared to the same period of 2000, due to an increase in interest income that is attributable to higher average cash balances. Interest expense decreased in the nine months ended September 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. 93 B. LIQUIDITY AND CAPITAL RESOURCES GENZYME CORPORATION At September 30, 2001, we had cash, cash equivalents, and short- and long-term investments of $1.1 billion, an increase of $443.9 million from December 31, 2000. Our operating activities generated $170.6 million of cash for the nine months ended September 30, 2001. Operating activities were impacted by a net loss of $105.8 million offset primarily by: - $125.2 million of depreciation and amortization, of which $35.1 million resulted from the depreciation of property, plant and equipment and $90.1 million resulted from the amortization of intangible assets, including intangible assets acquired in connection with our acquisitions of GelTex, Biomatrix, Wyntek and Focal; - $95.6 million of charges for IPR&D, of which $86.8 million was attributable to our acquisition of Novazyme and $8.8 million was attributable to our acquisition of Wyntek; - $28.9 million from the equity in net losses of unconsolidated affiliates; and - $26.0 million from the loss on investments in equity securities. Our investing activities utilized $671.4 million in cash for the nine months ended September 30, 2001. Investing activities used: - $435.8 million for our net purchases of investments; - $123.2 million to fund purchases of property, plant and equipment of which, $43.0 million resulted from our manufacturing capacity expansion in both Ireland and the United Kingdom, $8.8 million resulted from an initial payment towards our acquisition of a large-scale manufacturing facility in Ireland, $12.4 million resulted from our manufacturing capacity expansion in the United States and $11.1 million representing an aggregate of other manufacturing relocations, expansions and rehabilitations world-wide; - $23.5 million as payment for our purchase of all of the GDP Class A and Class B limited partnership interests, net of $2.3 million of cash acquired in connection with our acquisition of Focal; - $54.8 million to fund the acquisition of Wyntek, net of cash acquired and net of $5.2 million of cash acquired in connection with our acquisition of Novazyme; - $5.0 million of cash to purchase additional shares of Focal common stock; and - $31.3 million to fund our investments in unconsolidated affiliates. During the nine months ended September 30, 2001, we received $74.5 million of cash from the exercise of stock options and the purchase of shares under our employee stock plans. Our financing activities used $2.1 million of cash 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 payable over ten years on sales of certain Sepra-TM- products. In August 2001, we purchased the two outstanding GDP Class B limited partnership interests for a payment of $70,000 per Class B limited partnership interest plus $40,000 of related costs and undertook the obligation to pay additional royalties over ten years on sales of certain Sepra-TM- products. We allocated the acquired limited partnership interests of GDP to Genzyme Biosurgery and accounted for the acquisitions as purchases. We allocated the purchase prices to the fair value of the intangible assets acquired and goodwill, which we will amortize over eight or ten years depending upon the asset classification. 94 In June 2001, we acquired all of the outstanding capital stock of Wyntek for $65.0 million in cash. We allocated the acquisition to Genzyme General and accounted for the acquisition as a purchase. 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 September 30, 2001, $218.0 million remained 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. 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 or 2016, at a price equal to 100% of the principal amount of the debentures plus accrued interest through the date prior to the date of repurchase. Additionally, if certain fundamental changes occur, each holder may require us to repurchase, for cash, all or a portion of the holder's debentures. On or after May 20, 2004, we may redeem for cash all or part of the debentures that have not previously been converted or repurchased. Genzyme General used a portion of these proceeds to repay the $150.0 million we had drawn under our revolving credit facility in December 2000 and allocated to Genzyme General 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 August 2001, we completed the redemption of our $21.2 million in principal of 5% convertible subordinated debentures due 2003. Prior to the redemption date, the holders of the debentures elected to convert all of the principal of the debentures into approximately 1,305,000 shares of Genzyme General Stock. We paid approximately $3.2 million in cash for the accrued interest on the debentures through the date of conversion using cash allocated to Genzyme General. In July 2001, Genzyme Biosurgery drew down $12.0 million of the $15.0 million still available to it under the $25.0 million interdivisional financing arrangement with Genzyme General in exchange for an additional reserve of 1,902,949 Biosurgery designated shares. Genzyme Biosurgery used $8.5 million of the proceeds to pay a portion of the amounts it owes to Genzyme General. 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 September 30, 2001, $3.0 million remained available to Genzyme Biosurgery under this arrangement. In August 2001, Genzyme Molecular Oncology drew down $4.0 million of the $15.0 million still available to it under the $30.0 million interdivisional financing arrangement with Genzyme General in exchange for an additional reserve of 333,333 Molecular Oncology designated shares. 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 95 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. At September 30, 2001, $11.0 million remained available to Genzyme Molecular Oncology under this arrangement. 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 September 30, 2001, the outstanding balance of these notes was $10.2 million. 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 Biosurgery received notification from Genzyme General 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. 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; 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. 96 NEW ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards, or SFAS, 141, "Business Combinations" and SFAS 142, "Goodwill and Other Intangible Assets." SFAS 141 requires that all business combinations be accounted for under the purchase method and that certain acquired intangible assets in a business combination be recognized as assets apart from goodwill. SFAS 142 requires that ratable amortization of goodwill and certain intangible assets be replaced with periodic tests of the goodwill's impairment and that other intangible assets be amortized over their useful lives. SFAS 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 142 will be effective for fiscal years beginning after December 15, 2001, and will thus be adopted by us in fiscal year 2002. However, for goodwill and intangible assets acquired after June 30, 2001, certain provisions of SFAS 142 will be effective from the date of acquisition. For the nine months ended September 30, 2001, we had approximately $37.6 million of goodwill amortization, however, the full impact of SFAS 141 and SFAS 142 on our financial statements has not been determined. SUBSEQUENT EVENTS ACQUISITION OF CERTAIN ASSETS OF PHARMING N.V. We have satisfied all of the conditions to closing on our acquisition of certain assets of Pharming N.V. that are set forth in the conditional agreement, including receipt of approvals from the Commercial Court in Turnhout, Belgium, the Province of Antwerp, Belgium and our board of directors, as well as a favorable soil attestation for the land. We anticipate completing the acquisition by mid-November and will allocate the purchase to Genzyme General. As part of the purchase price for this acquisition, we have agreed to pay approximately 6.5 million euros to trade creditors of Pharming N.V. We have also agreed to assume certain liabilities related to governmental grants and the lease for the land on which the manufacturing facilities in Geel, Belgium sit. Pharming Group has publicly announced its intention to appeal the decision of the Commercial Court in Turnhout, Belgium. NEUROCELL-TM- JOINT VENTURE REFUND Genzyme General and Genzyme Biosurgery have agreed to extend Genzyme Biosurgery's deadline to refund $20.0 million to Genzyme General in connection with the Diacrin/Genzyme LLC joint venture. This refund obligation arose because a Phase 3 clinical trial for NeuroCell-TM--PD was not initiated by June 30, 2001. The deadline has been extended to February 1, 2002. Genzyme Biosurgery has agreed to pay the refund and accrued interest in cash. FABRAZYME-TM- BIOLOGICS LICENSE APPLICATION On October 22, 2001, we received a complete response letter from the FDA related to our application to market Fabrazyme-TM- enzyme, an investigational enzyme replacement therapy for Fabry disease, in the U.S. The letter specifies additional data and information the FDA requires to complete its review of our Biologics License Application for Fabrazyme-TM- enzyme. We submitted our BLA for Fabrazyme-TM- enzyme to the FDA in June 2000 and the application was accepted for review under an accelerated approval mechanism. We received an initial complete response letter from the FDA in December 2000 and submitted our response to that letter in April 2001. 97 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION At September 30, 2001, Genzyme General had cash, cash equivalents, and short- and long-term investments of $1.0 billion, an increase of $499.5 million from December 31, 2000. Genzyme General's operating activities generated $206.6 million of cash for the nine months ended September 30, 2001. Operating activities were impacted by Genzyme General's division net loss of $30.7 million, which was offset primarily by: - $77.8 million of depreciation and amortization, of which $22.7 million resulted from the depreciation of property, plant and equipment and $55.1 million resulted from the amortization of intangible assets, including intangible assets acquired in connection with our acquisitions of GelTex and Wyntek; - $95.6 million of charges for IPR&D, of which $86.8 million was attributable to our acquisition of Novazyme and $8.8 million was attributable to our acquisition of Wyntek; - $27.6 million from the equity in net losses of unconsolidated affiliates; - $26.0 million from the loss on investments in equity securities; and - $13.9 million attributable to the net change in working capital. Genzyme General's investing activities utilized $640.2 million in cash for the nine months ended September 30, 2001. Investing activities used: - $443.6 million for Genzyme General's net purchases of investments; - $113.1 million to fund purchases of property, plant and equipment, of which, $43.0 million resulted from our manufacturing capacity expansion in both Ireland and the United Kingdom, $8.8 million resulted from an initial payment towards our acquisition of a large-scale manufacturing facility in Ireland, $12.4 million resulted from our manufacturing capacity expansion in the United States and $11.1 million representing an aggregate of other manufacturing relocations, expansions and rehabilitations world-wide; - $54.8 million to fund the acquisition of Wyntek, net of cash acquired and net of $5.2 million of cash acquired in connection with our acquisition of Novazyme; and - $31.3 million to fund Genzyme General's investments in unconsolidated affiliates. During the nine months ended September 30, 2001, Genzyme General received $72.6 million in cash from the exercise of stock options and purchase of shares under our employee stock plans. Our financing activities used $1.4 million of cash to repay bank overdrafts. In June 2001, we acquired all of the outstanding capital stock of Wyntek for $65.0 million in cash. We allocated the acquisition to Genzyme General and accounted for the acquisition as a purchase. 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 September 30, 2001, $218.0 million remained 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. 98 In May 2001, we completed the private placement of $575.0 million in principal of 3% convertible subordinated debentures due 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 repurchase. Additionally, if certain fundamental changes occur, each holder may require us to repurchase, for cash, all or a portion of the holder's debentures. On or after May 20, 2004, we may redeem for cash all or part of the debentures that have not previously been converted or repurchased. Genzyme General used a portion of these proceeds to repay the $150.0 million we had drawn under our revolving credit facility in December 2000 and allocated to Genzyme General 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 August 2001, we completed the redemption of our $21.2 million in principal of 5% convertible subordinated debentures due 2003. Prior to the redemption date, the holders of the debentures elected to convert all of the principal of the debentures into approximately 1,305,000 shares of Genzyme General Stock. We paid approximately $3.2 million in cash for the accrued interest on the debentures through the date of conversion using cash allocated to Genzyme General. In July 2001, Genzyme Biosurgery drew down $12.0 million of the $15.0 million still available to it under the $25.0 million interdivisional financing arrangement with Genzyme General in exchange for an additional reserve of 1,902,949 Biosurgery designated shares. Genzyme Biosurgery used $8.5 million of the proceeds to pay a portion of the amounts it owes to Genzyme General. 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 September 30, 2001, $3.0 million remained available to Genzyme Biosurgery under this arrangement. In August 2001, Genzyme Molecular Oncology drew down $4.0 million of the $15.0 million still available to it under the $30.0 million interdivisional financing arrangement with Genzyme General in exchange for an additional reserve of 333,333 Molecular Oncology designated shares. 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. At September 30, 2001, $11.0 million remained available to Genzyme Molecular Oncology under this arrangement. 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 Biosurgery received notification from Genzyme 99 General 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. 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 $575.0 million in principal under our 3% convertible subordinated debentures due May 15, 2021, which are convertible into shares of Genzyme General Stock. 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 ACQUISITION OF CERTAIN ASSETS OF PHARMING N.V. We have satisfied all of the conditions to closing on our acquisition of certain assets of Pharming N.V. that are set forth in the conditional agreement, including receipt of approvals from the Commercial Court in Turnhout, Belgium, the Province of Antwerp, Belgium and our board of directors, as well as a favorable soil attestation for the land. We anticipate completing the acquisition by mid-November and will allocate the purchase to Genzyme General. As part of the purchase price for this acquisition, we have agreed to pay approximately 6.5 million euros to trade creditors of Pharming N.V. We have also agreed to assume certain liabilities related to governmental grants and the lease for the land on which the manufacturing facilities in Geel, Belgium sit. Pharming Group has publicly announced its intention to appeal the decision of the Commercial Court in Turnhout, Belgium. NEUROCELL-TM- JOINT VENTURE REFUND Genzyme General and Genzyme Biosurgery have agreed to extend Genzyme Biosurgery's deadline to refund $20.0 million to Genzyme General in connection with the Diacrin/Genzyme LLC joint venture. This refund obligation arose because a Phase 3 clinical trial for NeuroCell-TM--PD was not initiated by June 30, 2001. The deadline has been extended to February 1, 2002. Genzyme Biosurgery has agreed to pay the refund and accrued interest in cash. FABRAZYME-TM- BIOLOGICS LICENSE APPLICATION On October 22, 2001, we received a complete response letter from the FDA related to our application to market Fabrazyme-TM- enzyme, an investigational enzyme replacement therapy for Fabry disease, in the U.S. The letter specifies additional data and information the FDA requires to complete its review of our Biologics License Application for Fabrazyme-TM- enzyme. We submitted our BLA for Fabrazyme-TM- enzyme to the FDA in June 2000 and the application was accepted for review by the FDA under an accelerated approval mechanism. We received an initial complete response letter from the FDA in December 2000 and submitted our response to that letter in April 2001. 100 GENZYME BIOSURGERY A DIVISION OF GENZYME CORPORATION At September 30, 2001, Genzyme Biosurgery had cash, and cash equivalents, of $41.6 million, a decrease of approximately $36.6 million from December 31, 2000. Genzyme Biosurgery's operating activities used $12.5 million of cash for the nine months ended September 30, 2001. Operating activities were impacted by Genzyme Biosurgery's division net loss of $94.5 million offset primarily by: - $47.3 million of depreciation and amortization, of which, $12.3 million resulted from the depreciation of property, plant and equipment and $35.0 million resulted from the amortization of intangible assets, including intangible assets acquired in connection with our acquisitions of Biomatrix and Focal; and - $32.4 million attributable to the net change in working capital. Genzyme Biosurgery's investing activities utilized $39.0 million in cash for the nine months ended September 30, 2001. Investing activities used: - $10.2 million of cash to fund capital expenditures; - $23.5 million of cash as a payment for our purchase of all of the GDP Class A and Class B limited partnership interests as described below, net of $2.3 million of cash acquired in connection with our acquisition of Focal; and - $5.0 million of cash to purchase Focal common stock. During the nine months ended September 30, 2001, we received $1.2 million in cash from the exercise of stock options and the purchase of shares under our employee stock plans. We also received $2.9 million from the partial payment of notes receivable from our stockholders, see below for more information. Our financing activities used $0.7 million of cash 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 payable over ten years on sales of certain Sepra-TM- products. In August 2001, we purchased the two outstanding GDP Class B limited partnership interests for a payment of $70,000 per Class B limited partnership interest plus $40,000 of related costs, and undertook the obligation to pay additional royalties over ten years on sales of certain Sepra-TM- products. We allocated the acquired limited partnership interests of our GDP to Genzyme Biosurgery and accounted for the acquisitions as purchases. We allocated the purchase prices to the fair value of the intangible assets acquired and goodwill, which we will amortize over eight or ten years depending upon the asset classification. 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 September 30, 2001, $218.0 million remained 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. 101 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 September 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. In July 2001, Genzyme Biosurgery drew down $12.0 million of the $15.0 million still available to it under the $25.0 million interdivisional financing arrangement with Genzyme General in exchange for an additional reserve of 1,902,949 Biosurgery designated shares. Genzyme Biosurgery used $8.5 million of the proceeds to pay a portion of the amounts it owes to Genzyme General. 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 September 30, 2001, $3.0 million remained available to Genzyme Biosurgery under this arrangement. 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 September 30, 2001, the outstanding balance of these notes was $10.2 million. 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 Biosurgery received notification from Genzyme General of its election to receive the refund. Genzyme Biosurgery can pay the refund amount in cash, Biosurgery Stock designated shares or both. The refund is due and payable 90 days after Genzyme Biosurgery received the notice from Genzyme General. 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; 102 - 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 - ability to sell its Snowden-Pencer-Registered Trademark- product lines. Genzyme Biosurgery's cash reserves may be further reduced to pay principal and interest on the following debt: - $218.0 million in principal outstanding under our revolving credit facility with a syndicate of commercial banks; 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 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. 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 EVENT NEUROCELL-TM- JOINT VENTURE REFUND Genzyme General and Genzyme Biosurgery have agreed to extend Genzyme Biosurgery's deadline to refund $20.0 million to Genzyme General in connection with the Diacrin/Genzyme LLC joint venture. This refund obligation arose because a Phase 3 clinical trial for NeuroCell-TM--PD was not initiated by June 30, 2001. The deadline has been extended to February 1, 2002. Genzyme Biosurgery has agreed to pay the refund and accrued interest in cash. 103 GENZYME MOLECULAR ONCOLOGY A DIVISION OF GENZYME CORPORATION At September 30, 2001, Genzyme Molecular Oncology had cash and cash equivalents of $11.2 million, a decrease of $19.0 million from cash, cash equivalents and short-term investments of $30.2 million at December 31, 2000. Genzyme Molecular Oncology's operating activities used $23.6 million of cash for the first nine months of 2001. This is primarily due to Genzyme Molecular Oncology's division net loss of $22.1 million for the nine months ended September 30, 2001. Genzyme Molecular Oncology's investing activities in the first nine months of 2001 provided $7.8 million from the sales and maturities of investments. During the nine months ended September 30, 2001, Genzyme Molecular Oncology received $0.7 million in cash from the exercise of stock options and the purchase of shares under our employee stock plans. Genzyme Molecular Oncology, 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 September 30, 2001, $150.0 million was available under the portion of the facility that matures in December 2001, and $132.0 million was available under the portion of the facility that matures in December 2003. None of the $218.0 million currently outstanding under these facilities is allocated to Genzyme Molecular Oncology. Borrowings under this facility bear interest at LIBOR plus a margin. In August 2001, Genzyme Molecular Oncology drew down $4.0 million of the $15.0 million still available to it under the $30.0 million interdivisional financing arrangement with Genzyme General in exchange for an additional reserve of 333,333 Molecular Oncology designated shares. 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. At September 30, 2001, $11.0 million remained available to Genzyme Molecular Oncology under this arrangement. We anticipate that Genzyme Molecular Oncology's current cash resources, together with amounts available from the following sources, will be sufficient to fund its operations through the third quarter of 2002. - anticipated revenues generated from license agreements; - committed research funding from collaborators; - the $11.0 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. 104 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. 105 PART II ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On September 26, 2001, we completed the acquisition of Novazyme Pharmaceuticals, Inc., a privately-held Delaware corporation. The acquisition was structured as a merger of a wholly-owned subsidiary of ours with and into Novazyme pursuant to an Agreement and Plan of Merger dated as of August 6, 2001 among us, Rodeo Merger Corp. and Novazyme. Under the terms of the merger agreement, we made an initial payment of 2,562,182 shares of Genzyme General Stock to Novazyme shareholders, based on an exchange ratio of 0.5714 of a share of Genzyme General Stock for each share of Novazyme common stock held at the effective time of the merger (the "Initial Merger Consideration"), with cash being paid in lieu of issuing any fractional shares of Genzyme General Stock. The shares of Genzyme General Stock constituting the Initial Merger Consideration were issued in a private placement under Section 4(2) of the Securities Act of 1933. In connection with the acquisition, we delivered to all Novazyme shareholders an information statement describing the proposed acquisition and the companies involved. The Novazyme stock was held primarily by accredited investors. The Novazyme stockholders that were not accredited investors represented to us that they were either sophisticated or represented by a sophisticated investor representative. Novazyme shareholders are also eligible to receive two subsequent payments totaling $87.5 million, payable in shares of Genzyme General Stock, if we receive U.S. marketing approval for the first two products employing certain Novazyme technology within specified dates. 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 June 30, 2001 on July 12, 2001 to announce the completion of our acquisition of Focal, Inc. We filed a Current Report on Form 8-K dated August 6, 2001 on August 22, 2001 to announce that we had entered into an Agreement and Plan of Merger with Novazyme Pharmaceuticals, Inc. We filed a Current Report on Form 8-K dated June 1, 2001 on August 28, 2001 to include the unaudited pro forma combined financial information which describes the pro forma effect of our acquisitions of Focal, Inc. and Wyntek Diagnostics, Inc. on the unaudited financial statements of operations of Genzyme Corporation, Genzyme General, the division to which we allocated the assets, liabilities and operations of Wyntek, and Genzyme Biosurgery, the division to which we allocated the assets, liabilities and operations of Focal, for the six months ended June 30, 2001. We filed a Current Report on Form 8-K dated September 7, 2001 on September 7, 2001 to include (1) the audited financial statements of Novazyme as of December 31, 2000 and 1999 and for the year ended December 31, 2000 and the periods from inception (April 16, 1999) to December 31, 1999 and 2000, including the report of independent public accountants dated February 26, 2001 and (2) the unaudited financial statements of Novazyme as of June 30, 2001 and December 31, 2000 and for the six months ended June 30, 2001 and 2000 and the period from inception (April 16, 1999) to June 30, 2001. We filed a Current Report on Form 8-K dated September 20, 2001 on September 20, 2001 to include the unaudited pro forma combined financial information which describes the pro forma effect of our acquisition of Novazyme on the unaudited statements of operations for the six months ended June 30, 2001 and the year ended December 31, 2000 and the unaudited balance sheet as of June 30, 2001 of both Genzyme Corporation and Genzyme General, the division to which we allocated the assets, liabilities and operations of Novazyme. 106 GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, SEPTEMBER 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: November 9, 2001 By: /s/ MICHAEL S. WYZGA ------------------------------------------ Michael S. Wyzga SENIOR VICE PRESIDENT, FINANCE, CHIEF FINANCIAL OFFICER; AND CHIEF ACCOUNTING OFFICER
107 GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, SEPTEMBER 30, 2001 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ----------- ------------------------------------------------------------ *2 Agreement and Plan of Merger, dated as of August 6, 2001, among Genzyme, Rodeo Merger Corp. and Novazyme Pharmaceuticals, Inc. Filed as Exhibit 2.1 to Genzyme's Current Report on Form 8-K filed on August 22, 2001. *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 Warrant to purchase common stock issued by Novazyme Pharmaceuticals, Inc. (f/k/a Targeted Therapy, Inc.). Filed herewith. 4.2 Securities Purchase Agreement, dated as of April 17, 2001 and amended on September 26, 2001, by and among Novazyme Pharmaceuticals, Inc. and several purchasers. Filed herewith. 10.1 Contract for Sale, dated June 25, 2001, for the premises located at the Industrial Development Authority Industrial Park, Waterford County, Dublin, Ireland, (comprised in folio 4141L County Waterford) by and between Luxottica Ireland Limited and Genzyme Ireland Limited (f/n/a Gosfend Limited). Filed herewith. 10.2 Lease, dated September 3, 1990, for the land located at the Industrial Development Authority Industrial Park, Waterford Country, Dublin, Ireland (comprised in folio 4917 & 324IF County Waterford) by and between the Industrial Development Authority and Bausch & Lomb Ireland. Filed herewith 10.3 Deed of Transfer, dated July 2, 2001, between Luxottica Ireland Limited and Genzyme Ireland Limited, related to the Lease dated September 3, 1990 for the premises located at the Industrial Development Authority Industrial Park, Waterford, Dublin, Ireland (comprised in folio 4141L County Waterford). Filed herewith. 10.4 Contract for Sale, dated August 2, 2001, for the land located at the Industrial Development Authority Industrial Park, Waterford County, Dublin, Ireland (comprised in folio 4917 County of Waterford) by the Industrial Development Agency (Ireland) and Genzyme Ireland Limited. Filed herewith. 10.5 Lease, dated August 24, 2001, for the land located at the Industrial Development Authority Industrial Park, Waterford County, Dublin, Ireland (comprised in folio 4917 County of Waterford) by the Industrial Development Agency (Ireland) and Genzyme Ireland Limited. Filed herewith.
------------------------ * Indicates an exhibit previously filed with the Securities and Exchange Commission and incorporated herein by reference. Exhibits filed with Forms 8-K and 10-Q of Genzyme Corporation were filed under Commission File No. 0-14680.