EX-13.3 10 a2073695zex-13_3.htm EXHIBIT 13.3
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EXHIBIT 13.3

FINANCIAL STATEMENTS
GENZYME BIOSURGERY
A DIVISION OF GENZYME CORPORATION

		Page No.
Combined Selected Financial Data		GBS-2
Management's Discussion and Analysis of Genzyme Biosurgery's Financial Condition and Results of Operations		GBS-6
Combined Statements of Operations—For the Years Ended December 31, 2001, 2000, and 1999		GBS-30
Combined Balance Sheets—December 31, 2001 and 2000		GBS-31
Combined Statements of Cash Flows—For the Years Ended December 31, 2001, 2000 and 1999		GBS-32
Notes to Combined Financial Statements		GBS-33
Report of Independent Accountants		GBS-55

GBS-1

GENZYME BIOSURGERY
A DIVISION OF GENZYME CORPORATION

COMBINED SELECTED FINANCIAL DATA

These selected financial data have been derived from the audited combined financial statements of Genzyme Biosurgery. You should read the following information in conjunction with the audited financial statements and related notes of Genzyme Biosurgery and Genzyme contained elsewhere in this annual report. These selected financial data may not be indicative of Genzyme Biosurgery's future financial condition due to the risks and uncertainties described under the caption "Management's Discussion and Analysis of Genzyme Biosurgery's Financial Condition and Results of Operations—Factors Affecting Future Operating Results" below.

Genzyme Biosurgery is our operating division that develops and markets implantable biotherapeutic products, biomaterials and medical devices to improve or replace surgery, with an emphasis on the orthopaedic and cardiothoracic markets.

A series of our common stock, Genzyme Biosurgery Division common stock, which we refer to as "Biosurgery Stock" is designed to reflect the value and track the financial performance of this division. Biosurgery Stock is common stock of Genzyme Corporation, not of Genzyme Biosurgery; Genzyme Biosurgery is a division, not a company or legal entity, and therefore does not and cannot issue stock. The chief mechanisms intended to cause Biosurgery Stock to "track" the performance of Genzyme Biosurgery are provisions in our charter governing dividends and distributions. Under these provisions, our charter:

•: factors the assets and liabilities and income or losses attributable to Genzyme Biosurgery into the determination of the amount available to pay dividends on Biosurgery Stock; and
•: requires us to exchange, redeem or distribute a dividend to the holders of Biosurgery Stock if all or substantially all of the assets allocated to Genzyme Biosurgery 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 10% premium to the average market price of the exchanged stock calculated over a ten day period beginning on the first business day 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 Biosurgery Stock is defined in our charter as the net income or loss of Genzyme Biosurgery determined in accordance with generally accepted accounting principles and as adjusted for tax benefits allocated to or from Genzyme Biosurgery in accordance with our management and accounting policies. Our charter also requires that all of our income and expenses be allocated among the divisions in a reasonable and consistent manner. Our board of directors, however, retains considerable discretion in interpreting and changing the methods of allocating earnings to each series of common stock without shareholder approval. As market or competitive conditions warrant, we may create new series of tracking stock or change our earnings allocation methodology. However, at the present time, we have no plans to do so. Because the earnings allocated to Biosurgery Stock are based on the income or losses attributable to Genzyme Biosurgery, we include financial statements and management's discussion and analysis of Genzyme Biosurgery to aid investors in evaluating its performance. The following combined selected financial data reflects the results of operations and financial position of Genzyme Biosurgery and should be read in conjunction with the combined financial statements of Genzyme Biosurgery and accompanying notes.

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associated with Snowden-Pencer products, and is subleasing from us a manufacturing facility that we lease in Tucker, Georgia. The assets sold had a carrying value of approximately $41.0 million at the time of the sale. We recorded a loss of $25.0 million in connection with this sale.

On June 30, 2001, we acquired the remaining outstanding shares of Focal Inc. common stock that we had not previously acquired. Focal shareholders received 0.1545 of a share of Biosurgery Stock for each share of Focal common stock they held. We issued approximately 2.1 million shares of Biosurgery Stock as consideration, valued at approximately $9.5 million. 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 accounted for the acquisition as a purchase and allocated it to Genzyme Biosurgery. Accordingly, the results of operations of Focal are included in our consolidated financial statements and in the combined financial statements of Genzyme Biosurgery from the date of acquisition.

In January 2001, we acquired the outstanding Class A limited partnership interests in Genzyme Development Partners, L.P. (GDP), a limited partnership engaged in developing, producing and commercializing Sepra products, for an aggregate of $25.7 million plus royalties on sales of certain Sepra products for ten years. In August 2001, we purchased the remaining outstanding GDP partnership interests, consisting of two Class B interests, for an aggregate of $180,000 plus additional royalties on sales of certain Sepra products for ten years. We accounted for the acquisitions as purchases and allocated them to Genzyme Biosurgery. Accordingly, the results of operations of GDP are included in our consolidated financial statements and the combined financial statements of Genzyme Biosurgery from January 9, 2001, the date of acquisition of the Class A interests.

On December 18, 2000, we acquired Biomatrix, Inc., a publicly-held company engaged in the development and, manufacture of viscoelastic biomaterials for use in orthopaedic and other medical applications for an aggregate purchase price of $482.4 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.

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COMBINED STATEMENTS OF OPERATIONS DATA (1)

			For the Years Ended December 31,
			2001			2000			1999			1998			1997
			(Amounts in thousands)
Revenues:
	Net product sales		$	211,523		$	121,870		$	111,951		$	103,958		$	100,835
	Net service sales			23,614			23,321			20,305			17,008			10,856
	Revenues from research and development contracts			5			23			97			109			—

		Total revenues		235,142			145,214			132,353			121,075			111,691

Operating costs and expenses:
	Cost of products sold (2)			113,250			69,489			67,212			72,274			59,802
	Cost of services sold			12,733			12,298			13,237			13,438			11,788
	Selling, general and administrative			122,020			92,238			87,841			81,876			79,632
	Research and development			47,159			37,000			36,075			29,050			22,132
	Amortization of intangibles			46,828			7,096			5,750			5,748			5,647
	Purchase of in-process research and development (3)			—			82,143			—			—			—
	Charge for impaired asset (4)			—			4,321			—			—			—

		Total operating costs and expenses		341,990			304,585			210,115			202,386			179,001

Operating loss				(106,848	)		(159,371	)		(77,762	)		(81,311	)		(67,310	)

Other income (expenses):
	Equity in net loss of unconsolidated affiliates (5,6)			(1,316	)		—			(3,403	)		(7,680	)		(6,797	)
	Loss on investments in equity securities (7)			—			(7,300	)		—			—			—
	Loss on sale of product line (8)			(24,999	)		—			—			—			—
	Other			124			(15	)		138			60			236
	Investment income			1,753			5,833			4,808			1,320			1,077
	Interest expense			(13,884	)		(1,364	)		(1,858	)		(2,631	)		(2,930	)

		Total other income (expenses)		(38,322	)		(2,846	)		(315	)		(8,931	)		(8,414	)

Division net loss			$	(145,170	)	$	(162,217	)	$	(78,077	)	$	(90,242	)	$	(75,724	)

COMBINED BALANCE SHEET DATA (1)(9)

	December 31,
	2001		2000		1999		1998		1997
	(Amounts in thousands)
Cash and investments	$	38,623	$	78,163	$	135,498	$	7,732	$	32,890
Working capital		59,800		98,819		110,577		26,253		65,902
Total assets		704,671		811,600		390,572		253,170		299,792
Long-term debt, capital lease obligations and convertible debt		245,629		229,453		18,000		12,579		31,089
Division equity		394,454		511,106		350,463		210,692		255,172

There were no cash dividends paid.

GBS-4

(1): We formed Genzyme Biosurgery as a separate division of Genzyme on December 18, 2000 by combining two of our divisions, Genzyme Surgical Products and Genzyme Tissue Repair and simultaneously acquiring Biomatrix, Inc. These data reflect the financial position, results of operations and cash flows attributable to Genzyme Biosurgery as if it had been accounted for as a separate division of the corporation for all periods presented as it relates to Genzyme Surgical Products and Genzyme Tissue Repair. The results of operations of Biomatrix are included in Genzyme Biosurgery's results from the date of acquisition, December 18, 2000.
(2): Cost of products sold for 1998 includes a $10.4 million charge to write-down our Sepra products inventory to net realizable value.
(3): Charges for in-process research and development were incurred in connection with the acquisition of Biomatrix in 2000.
(4): Represents a charge to write off abandoned equipment at our Springfield Mills manufacturing facility in the United Kingdom.
(5): Operations of Diacrin/Genzyme LLC, our joint venture with Diacrin, Inc., commenced in October 1996. In May 1999, we reallocated our ownership interest in the joint venture from Genzyme Biosurgery to Genzyme General.
(6): In January 2001, Focal, Inc. 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 recorded our portion of the results of Focal in equity in net loss of unconsolidated affiliate. We allocated this investment to Genzyme Biosurgery. On June 30, 2001, we acquired the remaining 78% of the outstanding shares of Focal common stock and have included Focal's results in Genzyme Biosurgery's results of operations since that date. We allocated the acquired assets and liabilities to Genzyme Biosurgery and accounted for the acquisition as a purchase.
(7): Represents a charge for the write-down of our investment in Focal common stock because we considered its decline in fair value to be other than temporary.
(8): Represents the loss from the sale of the Snowden-Pencer line of surgical instruments in the fourth quarter of 2001.
(9): 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 products.

GBS-5

MANAGEMENT'S DISCUSSION AND ANALYSIS OF GENZYME BIOSURGERY'S FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

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 under the caption "Factors Affecting Future Operating Results" for Genzyme Biosurgery and Genzyme included in this annual report. You should consider carefully each of these risks and uncertainties in evaluating the financial condition and results of operations of Genzyme Biosurgery and Genzyme. We caution investors not to place undue reliance on the forward-looking statements contained in this report. These statements, like all statements in this report, speak only as of the date of this report (unless another date is indicated) and we undertake no obligation to update or revise the statements except as required by law.

We prepare the combined financial statements of Genzyme Biosurgery in accordance with generally accepted accounting principles. We present financial information and accounting policies specific to Genzyme Biosurgery in the accompanying combined financial statements. We present financial information and accounting policies relevant to the corporation and its operating divisions taken as a whole in our consolidated financial statements. You should read our consolidated financial statements in conjunction with the combined financial statements of Genzyme Biosurgery. Note A., "Summary of Significant Accounting Policies," to our consolidated financial statements contains our accounting policies.

Genzyme Biosurgery Division common stock, which we refer to as "Biosurgery Stock," is a series of our common stock that is designed to reflect the value and track the performance of Genzyme Biosurgery. The chief mechanisms intended to cause Biosurgery Stock to "track" the financial performance of Genzyme Biosurgery are provisions in our charter governing dividends and distributions. Under these provisions, our charter:

•: factors the assets and liabilities and income or losses attributable to Genzyme Biosurgery into the determination of the amount available to pay dividends on Biosurgery Stock; and
•: requires us to exchange, redeem or distribute a dividend to the holders of Biosurgery Stock if all or substantially all of the assets allocated to Genzyme Biosurgery 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 Biosurgery Stock calculated over a ten day period beginning on the first business day 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 Biosurgery Stock is defined in our charter as the net income or loss of Genzyme Biosurgery determined in accordance with generally accepted accounting principles and as adjusted for tax benefits allocated to or from Genzyme Biosurgery in accordance with our management and accounting policies. Our charter also requires that all income and expenses of Genzyme be allocated among the divisions in a reasonable and consistent manner. Our board of directors, however, retains considerable discretion in interpreting and changing the methods of allocating earnings to Biosurgery Stock without shareholder approval. As market or competitive conditions warrant, we may create a new series of tracking stock or change our earnings allocation methodology. However, at the present time, we have no plans to do so. Because the earnings allocated to Biosurgery Stock are based on the income or losses attributable to Genzyme

GBS-6

Biosurgery, we provide financial statements and management's discussion and analysis of Genzyme Biosurgery to aid investors in evaluating its performance.

While Biosurgery Stock is designed to reflect Genzyme Biosurgery's performance, it is common stock of Genzyme Corporation and not Genzyme Biosurgery; Genzyme Biosurgery is a division, not a company or legal entity, and therefore does not and cannot issue stock. Consequently, holders of Biosurgery Stock have no specific rights to assets allocated to Genzyme Biosurgery. Genzyme Corporation continues to hold title to all of the assets allocated to Genzyme Biosurgery and is responsible for all of its liabilities, regardless of what we deem for financial statement presentation purposes as allocated to Genzyme Biosurgery. Holders of Biosurgery 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 Genzyme Biosurgery 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 Biosurgery Stock and other tracking stockholders would only have the rights of common stockholders in the combined assets of Genzyme.

Our charter requires us to manage and account for transactions between Genzyme Biosurgery and our other divisions and with third parties, and any resulting reallocations of assets and liabilities, by applying consistently across divisions a detailed set of policies established by our board of directors. We publicly disclose our divisional management and accounting policies, which are filed as Exhibit 99.1 to this annual report. Our charter requires that all of our assets and liabilities be allocated among our divisions. Our board of directors, however, retains considerable discretion in determining the types, magnitudes and extent of allocations to each series of common stock without shareholder approval.

Disposition

In November 2001, we sold the Snowden-Pencer line of surgical instruments, consisting of reusable surgical instruments for open and endoscopic surgery, including general, plastic, gynecological and open cardiovascular surgery, for $15.9 million in net cash. The purchaser acquired all of the assets directly associated with Snowden-Pencer products, and is subleasing from us a manufacturing facility that we lease in Tucker, Georgia. The assets sold had a net carrying value of approximately $41.0 million at the time of the sale. We recorded a loss of $25.0 million in connection with this sale.

Acquisitions

In January 2001, Focal, Inc. 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. On June 30, 2001, we acquired the remaining 78% of the outstanding shares of Focal common stock not previously acquired. Focal shareholders received 0.1545 of a share of Biosurgery Stock for each share of Focal common stock they held. We issued approximately 2.1 million shares of Biosurgery Stock as consideration, valued at approximately $9.5 million. 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 accounted for the acquisition as a purchase and allocated it to Genzyme Biosurgery. Accordingly, the results of operations of Focal are included in our consolidated financial statements and in the combined financial statements of Genzyme Biosurgery from the date of acquisition.

GBS-7

royalties on sales of certain Sepra products for ten years. We accounted for the acquisitions as purchases and allocated them to Genzyme Biosurgery. Accordingly, the results of operations of GDP are included in our consolidated financial statements and the combined financial statements of Genzyme Biosurgery from January 9, 2001, the date of acquisition of the Class A interests.

In December 2000, we acquired Biomatrix, Inc., a public company engaged in the development and commercialization of viscoelastic products made of biological polymers called hylans for use in therapeutic medical applications and skin care for an aggregate purchase price of $482.4 million. We accounted for the acquisition as a purchase. Immediately prior to the acquisition, we combined two of our operating divisions, Genzyme Surgical Products and Genzyme Tissue Repair, to form a new division called Genzyme Biosurgery. We allocated the acquired assets and liabilities of Biomatrix to Genzyme Biosurgery. The combination of Genzyme Surgical Products and Genzyme Tissue Repair to form Genzyme Biosurgery did not result in any adjustments to the book values of the net assets of the divisions because they remained divisions of the same corporation. We present the financial statements of Genzyme Biosurgery as though the divisions had been combined for all periods presented, and include the operations of Biomatrix from December 18, 2000, the date of acquisition.

In connection with the formation of Genzyme Biosurgery, we created Genzyme Biosurgery Stock. Genzyme Biosurgery Stock is designed to track the performance of our Genzyme Biosurgery division. We converted each outstanding share of Surgical Products Stock into 0.6060 of a share of Biosurgery Stock, and each outstanding share of Tissue Repair Stock into 0.3352 of a share of Biosurgery Stock. We converted all outstanding options to purchase Surgical Products Stock and Tissue Repair Stock into options to purchase Biosurgery Stock at the applicable conversion rate.

CRITICAL ACCOUNTING POLICIES

The preparation of the combined financial statements of Genzyme Biosurgery under generally accepted accounting principles requires us to make certain estimates and judgments that affect reported amounts of assets, liabilities, revenues, expenses, and disclosure of contingent assets and liabilities in these financial statements. Our actual results could differ from these estimates under different assumptions and conditions.

We believe that the following critical accounting policies affect the more significant judgments and estimates used in the preparation of Genzyme Biosurgery's combined financial statements:

•: Policies Relating to Tracking Stocks;
•: Revenue Recognition;
•: Inventories;
•: Long-Lived Assets; and
•: Asset Impairments.

Policies Relating to Tracking Stocks

Allocation of Revenue, Expenses, Assets, and Liabilities

Our charter sets forth which operations and assets were initially allocated to Genzyme Biosurgery and states that going forward the division will also include all business, products or programs, developed by or acquired for the division, as determined by our board of directors. We then manage and account for transactions between Genzyme Biosurgery and our other divisions and with third parties, and any resulting reallocations of assets and liabilities, by applying consistently across divisions a detailed set of policies established by our board of directors. We publicly disclose our management and accounting policies, which are filed as Exhibit 99.1 to this annual report. Our charter requires that

GBS-8

all of our assets and liabilities be allocated among our divisions. Our board of directors, however, retains considerable discretion in determining the types, magnitude and extent of allocations to each series of common stock without shareholder approval.

Allocations to our divisions are based on one of the following methodologies:

•: specific identification—assets that are dedicated to the production of goods of a division or which solely benefit a division are allocated to that division. Liabilities incurred as a result of the performance of services for the benefit of a division or in connection with the expenses incurred in activities which directly benefit a division are allocated to that division. Such specifically identified assets and liabilities include cash, investments, accounts receivable, inventories, property and equipment, intangible assets, accounts payable, accrued expenses and deferred revenue. Revenues from the licensing of a division's products or services to third parties and the related costs are allocated to that division;
•: actual usage—expenses are charged to the division for whose benefit such expenses are incurred. Research and development, sales and marketing and direct general and administrative services are charged to the divisions for which the service is performed on a cost basis. Such charges are generally based on direct labor hours;
•: proportionate usage—costs incurred which benefit more than one division are allocated based on management's estimate of the proportionate benefit each division receives. Such costs include facilities, legal, finance, human resources, executive and investor relations; or
•: board directed—programs and products, both internally developed and acquired, are allocated to divisions by the board of directors. The board also allocates long-term debt and strategic investments.

Any future changes that our board of directors may make to the methods for allocating revenue, expenses, assets, and liabilities among our divisions could materially change the results of operations or the financial condition of Genzyme Biosurgery.

Income Tax Allocation Policy

If at the end of any fiscal quarter, a division cannot use any projected annual tax benefit attributable to it to offset or reduce its current or deferred income tax expense, we may allocate the tax benefit to other divisions in proportion to their taxable income without any compensating payments or allocation to the division generating the benefit. Genzyme Biosurgery has not yet generated taxable income, and thus has not had the ability to use any projected annual tax benefits. Genzyme General has generated taxable income, providing it with the ability to utilize the tax benefits generated by Genzyme Biosurgery. Consistent with our policy, we have allocated the tax benefits generated by Genzyme Biosurgery to Genzyme General without any compensating payments or allocations to Genzyme Biosurgery.

We anticipate that the losses of Genzyme Biosurgery will decline in the future. As these losses decline, the tax benefits allocated to other profitable divisions will also decline. In addition, if our board of directors decided to change our tax allocation policy, it could reduce the tax benefits allocated to any division that is profitable at the time the change becomes effective, and reduce the earnings allocated to the associated series of tracking stock.

Deferred tax assets and liabilities can arise from purchase accounting that relate to a division that does not satisfy the realizability criteria of SFAS No. 109, "Accounting for Income Taxes." Such deferred tax assets and liabilities are allocated to the division to which the acquisition was allocated. As a result, the periodic changes in the deferred tax assets and liabilities do not result in a tax expense or benefit to that division. However, the change in the deferred tax asset or liability is added to division

GBS-9

net income for purposes of determining net income allocated to a tracking stock. If our board of directors modified the policy for allocating changes in these assets and liabilities, the income attributable to each series of tracking stock could be materially different.

Revenue Recognition

Genzyme Biosurgery recognizes revenue from product sales when persuasive evidence of an arrangement exists, the product has been shipped, and title and risk of loss have passed to the customer. Genzyme Biosurgery recognizes revenue from service sales when we have finished providing the service. Genzyme Biosurgery recognizes revenue from research and development contracts over the term of the applicable contract and as we incur costs related to that contract. Genzyme Biosurgery recognizes non-refundable up-front license fees over the related performance period or at the time it has no remaining performance obligations.

Genzyme Biosurgery receives royalties related to the manufacture, sale or use of its products or technologies under license arrangements with third parties. For those arrangements where royalties are reasonably estimable, Genzyme Biosurgery recognizes revenue based on estimates of royalties earned during the applicable period and adjusts for differences between the estimated and actual royalties in the following quarter. Historically, these adjustments have not been material. For those arrangements where royalties are not reasonably estimable, Genzyme Biosurgery recognizes revenue upon receipt of royalty statements from the licensee.

The timing of product shipments and receipts can have a significant impact the amount of revenue recognized in a period. Also, some of Genzyme Biosurgery's products are sold through distributors. Revenue could be adversely affected if distributor inventories increased to an excessive level. If this were to happen we could experience reduced purchases in subsequent periods, or product returns from the distribution channel due to overstocking, low end-user demand, or expiration.

Allowances are recorded for product returns, and for any applicable third party contractual allowances, rebates, or discounts. These allowances are recorded as reductions of revenue. These allowances require Genzyme Biosurgery to make significant judgments and estimates, which could require adjustments in the future. Such adjustments could have a material effect on Genzyme Biosurgery's reported revenues.

Genzyme Biosurgery does not recognize revenue unless collectibility is reasonably assured. Genzyme Biosurgery maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of Genzyme Biosurgery's customers were to deteriorate and result in an impairment of their ability to make payments, additional allowances may be required.

Inventories

Genzyme Biosurgery values inventories at cost or, if lower, fair value. It determines cost using the first-in, first-out method. Genzyme Biosurgery analyzes inventory levels quarterly and writes down inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable value, and inventory in excess of expected requirements. Inventory with a life in excess of its shelf life is disposed of and the related costs are written off. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

Genzyme Biosurgery capitalizes inventory produced for commercial sale, which may result in the capitalization of inventory that has not been approved for sale. If a product is not approved for sale, it would result in the write-off of the inventory and a charge to earnings.

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Long-Lived Assets

In the ordinary course of our business, Genzyme Biosurgery incurs substantial costs to purchase and construct property, plant and equipment. The treatment of costs to purchase or construct such assets depends on the nature of the costs and the stage of construction. Costs incurred in the initial design and evaluation phase, such as the cost of performing feasibility studies and evaluating alternatives, are charged to expense. Qualifying costs incurred in the committed project planning and design phase, and in the construction and installation phase, are capitalized as part of the cost of the asset. Genzyme Biosurgery stops capitalizing costs when an asset is substantially complete and ready for its intended use. Determining the appropriate period during which to capitalize costs, and assessing whether particular costs qualify for capitalization, requires Genzyme Biosurgery to make significant judgments. These judgments can have a material impact on its reported results.

For products Genzyme Biosurgery expects to be commercialized, it capitalizes the cost of validating new equipment for the underlying manufacturing process. Genzyme Biosurgery begins capitalization when Genzyme Biosurgery considers the product to have demonstrated technological feasibility, and ends capitalization when the asset is substantially complete and ready for its intended use. Costs capitalized include incremental labor and direct material, and incremental fixed overhead and interest. Determining whether to capitalize validation costs requires judgment, and can have a significant impact on Genzyme Biosurgery's reported results. Also, if Genzyme Biosurgery were unable able to successfully validate the manufacturing process for any future product, it would have to write-off to current operating expense any validation costs that had been capitalized during the unsuccessful validation process. To date, all of Genzyme Biosurgery's manufacturing process validation efforts have been successful.

Genzyme Biosurgery generally depreciates plant and equipment using the straight-line method over its estimated economic life, which ranges from 3 to 10 years. Determining the economic lives of plant and equipment requires it to make significant judgments that can materially impact Genzyme Biosurgery's operating results. For certain specialized manufacturing plant and equipment, Genzyme Biosurgery uses the units-of-production depreciation method. The units-of-production method requires Genzyme Biosurgery to make significant judgments and estimates, including estimates of the number of units that will be produced using the assets. There can be no assurance that Genzyme Biosurgery's estimates are accurate. If these estimates require adjustment, it could have a material impact on Genzyme Biosurgery's reported results.

In accounting for acquisitions, Genzyme Biosurgery allocates the purchase price to the fair value of the acquired tangible and intangible assets, including acquired in-process research and development (IPR&D). This requires Genzyme Biosurgery to make several significant judgments and estimates. For example, it generally estimates the value of acquired intangible assets and IPR&D using a discounted cash flow model, which requires it to make assumptions and estimates about, among other things:

•: the time and investment that will be required to develop products and technologies;
•: the ability to develop and commercialize products before its competitors develop and commercialize products for the same indications;
•: revenues that will be derived from the products; and
•: appropriate discount rates to use in the analysis.

Use of different estimates and judgments could yield materially different results in this analysis, and could result in materially different asset values and IPR&D charges.

As of December 31, 2001, there were approximately $525.2 million of intangible assets on Genzyme Biosurgery's balance sheet. Genzyme Biosurgery amortizes acquired intangible assets using the straight-line method over their estimated economic lives, which range from 1.5 to 40 years.

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Determining the economic lives of acquired intangible assets requires Genzyme Biosurgery to make significant judgment and estimates, and can materially impact its operating results.

Asset Impairments

Genzyme Biosurgery periodically evaluates long-lived assets for potential impairment under SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of." Genzyme Biosurgery performs these evaluations whenever events or changes in circumstance suggest that the carrying value of an asset or group of assets is not recoverable. Indicators of potential impairment include:

•: a significant change in the manner in which an asset is used;
•: a significant decrease in the market value of an asset;
•: a significant adverse change in its business or industry; and
•: a current period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the asset.

If Genzyme Biosurgery believes an indicator of potential impairment exists, it tests to determine whether the impairment recognition criterion of SFAS No. 121 has been met. In evaluating long-lived assets for potential impairment, Genzyme Biosurgery makes several significant estimates and judgments, including:

•: determining the appropriate grouping of assets at the lowest level for which cash flows are available;
•: estimating future cash flows associated with the asset or group of assets; and
•: determining an appropriate discount rate to use in the analysis.

Use of different estimates and judgments could yield significantly different results in this analysis, and could result in materially different asset impairment charges.

Effective January 1, 2002, Genzyme Biosurgery adopted SFAS No. 142, "Goodwill and Other Intangible Assets," which requires that ratable amortization of goodwill and certain intangible assets be replaced with periodic tests of goodwill's impairment and that other intangible assets be amortized over their useful lives. Unlike SFAS No. 121, goodwill impairment tests performed under SFAS No. 142 do not involve an initial test comparing the projected undiscounted cash flows to the carrying amount of the goodwill. Instead, SFAS No. 142 requires that goodwill be tested using a two-step process. The first step compares the fair value of the reporting unit with the unit's carrying value, including goodwill. When the carrying value of the reporting unit is greater than fair value, the unit's goodwill may be impaired, and the second step must be completed to measure the amount of the goodwill impairment charge, if any. In the second step, the implied fair value of the reporting unit's goodwill is compared with the carrying amount of the unit's goodwill. If the carrying amount is greater than the implied fair value, the carrying value of the goodwill must be written down to its implied fair value.

Genzyme Biosurgery will perform transitional impairment tests under SFAS No. 142 in 2002 for the $236.6 million of goodwill recorded as of December 31, 2001. For all of its acquisitions, various analysis, assumptions, and estimates were made at the time of acquisition specifically regarding product development, market conditions, and cash flows that were used to determine the valuation of goodwill and intangibles. The possibility exists that those estimates could prove to be inaccurate, which could result in an impairment of goodwill. Also, because the goodwill impairment test required by SFAS No. 142 is different than the test Genzyme Biosurgery had been required to perform under SFAS 121, transitional impairment tests performed under SFAS No. 142 may yield different results than previous tests performed under SFAS No. 121. This charge would be recorded as an expense to the income

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statement at the time of impairment. Genzyme Biosurgery anticipates that our goodwill impairment test in 2002 will result in an impairment loss recognition of between $80.0 million and $90.0 million related mainly to our cardiothoracic reporting unit. This charge will be reflected in our statement of operations in 2002.

Results of Operations

The following discussion summarizes the key factors our management believes are necessary for an understanding of Genzyme Biosurgery's financial statements.

Revenues

			2001		2000		1999		01/00 Increase/(Decrease) % Change		00/99 Increase/(Decrease) % Change
			(Amounts in thousands, except percentage data)
Product revenue:
	Cardiothoracic		$	69,118	$	76,406	$	77,936	(10	%)	(2%	)
	Orthopaedics			83,373		4,159		—	1,905	%	N/A
	Biosurgical specialties			59,032		41,305		34,015	43	%	21%

		Total product revenue		211,523		121,870		111,951	74	%	9%

Service revenue:
	Orthopaedics			18,417		18,229		15,213	1	%	20%
	Biosurgical specialties			5,197		5,092		5,092	2	%	— %

		Total service revenue		23,614		23,321		20,305	1	%	15%

Research and development revenue:
	Biosurgical specialties			5		23		97	(78	%)	(76%	)

		Total research and development revenue		5		23		97	(78	%)	(76%	)

		Total revenues	$	235,142	$	145,214	$	132,353	62	%	10%

2001 As Compared to 2000

Cardiothoracic products include fluid management (chest drainage) systems, surgical closures, biomaterials, and instruments for conventional and minimally invasive cardiac surgery. The decrease in cardiothoracic product revenue in 2001 as compared to 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 was offset, in part, by the continued growth in sales of minimally invasive cardiac surgery products and sales revenue from FocalSeal-L surgical sealant. We added FocalSeal-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 in 2001 as compared to 2000 due to the sales of Synvisc 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 2001 as compared to 2000 was due primarily to increases in sales of Seprafilm bioresorbable membrane and Sepramesh biosurgical composite. An increase in sales of products sold to original equipment manufacturers and sales

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generated from Hylaform biomaterial and other 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. The increase in sales was partially offset by a decrease in sales of instruments for plastic surgery due to the sale of our Snowden-Pencer line of surgical instruments during the fourth quarter of 2001.

International revenue as a percentage of total revenue in 2001 was 20% as compared to 25% in 2000. International revenue as a percentage of total revenue decreased during the year due primarily to the addition of sales of Synvisc viscosupplementation product, which is sold predominantly in the United States. In addition, the average exchange rate for the Euro declined 3% during the period.

2000 As Compared to 1999

The decrease in cardiothoracic product revenue in 2000 as compared to 1999 was due to the competitive pricing pressures in the chest drainage market. These factors were offset, in part, by the continued growth in minimally invasive cardiothoracic products and the revenue generated from FocalSeal-L, which was added to the cardiothoracic product line in the third quarter of 2000.

The increase in orthopaedics revenue was due to the continued growth in sales of Carticel chondrocytes and the sales of Synvisc viscosupplementation product, which was added to the orthopaedic line in 2000 as a result of the acquisition of Biomatrix. The increase in sales of Carticel chondrocytes was a result of continued increases in the number of patients treated and surgeons trained as well as an increase in the number of insurance reimbursement approvals.

Biosurgical specialties product revenue increased as a result of continued revenue growth in sales of Seprafilm bioresorbable membrane and Sepramesh biosurgical composite. An increase in revenues from Genzyme Biosurgery's Snowden-Pencer line of instruments for general and plastic surgery and products sold to original equipment manufacturers, including sutures, also contributed to the overall increase in biosurgical specialties product revenue.

International revenues as a percentage of total revenues in 2000 were 25% as compared to 28% in 1999. This decrease was primarily due to a 13% decline in the average exchange rate of the Euro for the year ended December 31, 2000 as compared to the year ended December 31, 1999.

Margins

		2001			2000			1999			01/00 Increase/(Decrease) % Change		00/99 Increase/(Decrease) % Change
		(Amounts in thousands, except percentage data)
Product margin		$	98,273		$	52,381		$	44,739		88	%	17%
	% of product revenue		46	%		43	%		40	%
Service margin		$	10,881		$	11,023		$	7,068		(1	%)	56%
	% of service revenue		46	%		47	%		35	%
Total gross margin		$	109,154		$	63,404		$	51,807		72	%	22%
	% of total product and service revenue		46	%		44	%		39	%

2001 As Compared to 2000

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

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Genzyme Biosurgery recorded charges to cost of products sold in 2001 of $11.3 million relating to the increased basis of the inventory obtained in connection with our acquisition of Biomatrix in December 2000, and $1.4 million relating to the increased basis of the inventory obtained in connection with our acquisition of Focal in June 2001. Additionally, Genzyme Biosurgery included a $0.8 million charge related to the underfunding of an acquired retirement plan in cost of products sold in 2001. Excluding the adjustments described above, product margins increased in 2001 as compared to 2000, as a result of an increase in sales of higher margin products such as Synvisc viscosupplementation product and devices for minimally invasive cardiac surgery.

Service margins for services allocated to Genzyme Biosurgery decreased in 2001 as compared to 2000 due primarily to a significant decline in the volume of Epicel skin graft services due to an increase in discounts and cancellations. This decrease is partially offset by the increase in service margin for Carticel chondrocytes due to higher average sales prices resulting from a price increase and continued controlled spending efforts.

2000 As Compared to 1999

Product margin increased in 2000 as compared to 1999 due to sales of higher margin products such as instruments for minimally invasive cardiac surgery. Service margin also increased in 2000 as compared to 1999 as a result of cost reduction initiatives and increased sales of Carticel chondrocytes.

Operating Expenses

2001 As Compared to 2000

The increase in selling, general and administrative expenses in 2001 as compared to 2000 was primarily due to the addition of expenses related to the Biomatrix business, which we acquired in December 2000, and an increase in patent litigation costs, which were $4.1 million. In addition, Genzyme Biosurgery recorded $7.2 million in costs associated with the consolidation of European operations.

Genzyme Biosurgery's research and development expenses increased in 2001 as compared to 2000 due to increased spending on the orthopaedics and cardiothoracic development programs. The increase in spending was primarily a result of the addition of Synvisc viscosupplementation product to the orthopaedics line in December 2000 and FocalSeal-L surgical sealant to the cardiothoracic line in June 2001.

2000 As Compared to 1999

Genzyme Biosurgery's selling, general and administrative expenses increased in 2000 as compared to 1999 due to increased spending on the marketing of the cardiothoracic products, including the launch of three new products for the cardiothoracic market, and corporate branding efforts associated with the creation of Genzyme Biosurgery. The increase was offset, in part, by efforts to streamline operations relating to the provision of Carticel chondrocytes and Epicel skin grafts.

Research and development expenses were maintained at a consistent level for 2000 when compared to 1999.

Amortization of Intangibles

The increase in amortization of intangibles for the year ended December 31, 2001 is primarily attributable to intangible assets acquired in connection with our acquisitions of:

•: Biomatrix in December 2000;
•: Genzyme Development Partners, L.P. limited partnership interests in 2001; and

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•: Focal in June 2001.

Purchase of In-Process Research and Development

In connection with our acquisition of Biomatrix, we allocated approximately $82.1 million to IPR&D, which Genzyme Biosurgery recorded as a charge to expense in its combined statement of operations for the year ended December 31, 2000. As of December 31, 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.

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

Program	Program Description or Indication	Development Status at December 31, 2001	Value at Acquisition Date (in millions)		Estimated Cost to Complete (in millions)	Year of Expected Product Launch
Visco-supplementation	Use of elastoviscous solutions and viscoelastic gels in disease conditions to supplement tissues and body fluids, alleviating pain and restoring normal function.	• Preclinical for knee indications • Presubmission in Europe for hip indications	$	33.8	(1)	2002 to 2006
Visco-augmentation and Visco-separation	Use of viscoelastic gels to provide scaffolding for tissue regeneration and to separate tissues and decrease formation of adhesions and excessive scars after surgery.	• Preclinical—gynecological and pelvic indications • Phase 2—spine indications • Phase 3—abdominal indications		48.3	(1)	2003 to 2006

			$	82.1

(1): Costs to complete are not estimable due to the early stage of these programs.

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

Charge for Impaired Assets

In 2000, we recorded a $4.3 million charge for abandoned equipment at our Springfield Mills manufacturing facility located in the United Kingdom. The write-off of equipment was related to the

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Sepra product line and did not have other alternative uses. We allocated this charge to Genzyme Biosurgery.

Other Income and Expenses

		2001			2000			1999			01/00 Increase/(Decrease) % Change		00/99 Increase/(Decrease) % Change
		(Amounts in thousands, except percentage data)
Equity in net loss of unconsolidated affiliates		$	(1,316	)	$	—		$	(3,403	)	N/A		(100%	)
Loss on investments in equity securities			—			(7,300	)		—		(100	%)	N/A
Loss on sale of product line			(24,999	)		—			—		N/A		— %
Other			124			(15	)		138		(927	%)	(111%	)
Investment income			1,753			5,833			4,808		(70	%)	21%
Interest expense			(13,884	)		(1,364	)		(1,858	)	918	%	(27%	)

	Total other income (expenses)	$	(38,322	)	$	(2,846	)	$	(315	)	1,247	%	803%

2001 As Compared to 2000

Equity in Net Loss of Unconsolidated Affiliate

In January 2001, Focal 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 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 in 2001 when compared to 2000 because Genzyme Biosurgery did not account for our interest in Focal under the equity method of accounting 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, at which time we began accounting for Focal as a wholly-owned subsidiary.

Loss on Investments in Equity Securities

In 2000, Genzyme Biosurgery recorded a $7.3 million charge for the write-down of Genzyme Biosurgery's investment in the common stock of Focal, because we considered the decline in the value of this investment to be other than temporary. Genzyme Biosurgery had no similar charge in 2001.

Loss on Sale of Product Line

In November 2001, we sold the Snowden-Pencer line of surgical instruments, consisting of reusable surgical instruments for open and endoscopic surgery, including general, plastic, gynecological and open cardiovascular surgery for $16.0 million in cash. The purchaser acquired all of the assets directly associated with Snowden-Pencer products, and is subleasing from us a manufacturing facility that we lease in Tucker, Georgia. The assets sold had a carrying value of approximately $41.0 million at the time of the sale. Genzyme Biosurgery recorded a loss of $25.0 million in connection with this sale.

Investment Income

Investment income decreased in 2001 when compared to 2000 as a result of lower average cash balances.

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Interest Expense

Interest expense increased primarily as a result of the $234.0 million of debt outstanding as of December 31, 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. In November 2001, we drew $17.0 million under this facility and allocated the proceeds to Genzyme Biosurgery. We repaid $1.0 million of these borrowings in December 2001 using cash allocated to Genzyme Biosurgery.

2000 As Compared to 1999

Equity in Net Loss of Unconsolidated Affiliate

The decrease in equity in net loss of unconsolidated affiliate in 2000 as compared to 1999 is due to the reallocation of Genzyme's ownership interest in Diacrin/Genzyme LLC from Genzyme Biosurgery to Genzyme General in May 1999.

Loss on Investments in Equity Securities

Genzyme Biosurgery recorded a $7.3 million charge in 2000 in connection with the write-down of Genzyme Biosurgery's investment in the common stock of Focal, Inc., because we considered the decline in the value of this investment to be other than temporary. Genzyme Biosurgery had no similar charge in 1999.

Investment Income

Investment income increased in 2000 when compared to 1999 as Genzyme Biosurgery had a higher average cash balance during 2000.

Research and Development Programs

Before we can commercialize our development-stage products, we will need to:

•: conduct substantial research and development;
•: undertake preclinical and clinical testing; and
•: pursue regulatory approvals.

This process is risky, expensive, and may take several years. We cannot guarantee that we will be able to successfully develop any product, or that we would be able to recover our development costs upon commercialization of a product that we successfully develop.

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Below is a brief description of our significant research and development programs that have been allocated to Genzyme Biosurgery:

Program	Program Description or Indication	Development Status at December 31, 2001	Year of Expected Product Launch
HIF-1 a	Angiogenic gene therapy to treat coronary artery disease and peripheral arterial disease	Phase 1 clinical trials ongoing	2008
Cardiac Cell Therapy	Tissue regeneration therapy to treat congestive heart failure	Preclinical; IND expected to be filed in 2002	2010
Synvisc (Hylan G-F20)(1)	Next stage viscosupplementation products to treat osteoarthritis of the knee, hip and other joints	• Preclinical for knee indications • Pre-submission in Europe for hip indications	2002 through 2006
Sepra technologies(1)	Next stage products to prevent surgical adhesions for various indications	• Preclinical – gynecological and pelvic indications • Phase 2 – spine indications • Phase 3 – abdominal indications	2003 through 2006

The aggregate actual and estimated research and development expense for the above programs is as follows (in millions):

Costs incurred for the year ended December 31, 2000		$14.3
Costs incurred for the year ended December 31, 2001		$19.8
Cumulative costs incurred as of December 31, 2001		$70.3
Estimated costs to complete as of December 31, 2001(2)		$135.0 to $150.0

(1): Includes programs acquired in connection with the December 2000 acquisition of Biomatrix, Inc.
(2): Excludes estimated costs to complete cardiac cell therapy, Synvisc and certain Sepra product applications due to the early stage of these programs.

Our current estimates of the time and investment required to develop these products may change depending on the approach we take to pursue them, the results of preclinical and clinical studies, and the content and timing of decisions made by the FDA and other regulatory authorities. We cannot provide assurance that any of these programs will ever result in products that can be marketed profitably. In addition, we cannot guarantee that we will be able to develop and commercialize products before our competitors develop and commercialize products for the same indication. If certain of our development-stage programs do not result in commercially viable products, our results of operations could be materially affected.

Liquidity and Capital Resources

At December 31, 2001, Genzyme Biosurgery had cash and cash equivalents of $38.6 million, a decrease of approximately $39.5 million from December 31, 2000.

Genzyme Biosurgery's operating activities used $44.1 million of cash for 2001. Operating activities were impacted by Genzyme Biosurgery's division net loss of $145.2 million offset primarily by:

•: $60.9 million of depreciation and amortization, of which $14.1 million resulted from the depreciation of the property, plant and equipment and $46.8 million resulted from the amortization of intangible assets, including intangible assets acquired in connection with our acquisitions of Biomatrix and Focal; and

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•: $13.0 million attributable to the net change in working capital.

Genzyme Biosurgery's investing activities in 2001 utilized $27.3 million in cash in 2001.

Investing activities used:

•: $12.9 million of cash to fund capital expenditures;
•: $23.8 million of cash, net of $2.3 million of cash acquired in connection with our acquisition of Focal, to fund acquisitions, of which $25.9 million was used to purchase all of the GDP Class A and Class B limited partnership interests as described below; and
•: $5.0 million of cash to purchase Focal common stock.

Investing activities generated $15.9 million of net cash from the disposition of the Snowden-Pencer line.

During 2001, Genzyme Biosurgery received $1.6 million in cash from the exercise of stock options and the purchase of shares under the employee stock plans. We also received $2.8 million from the partial payment of notes receivable from our stockholders. Our financing activities used $0.4 million of cash to repay bank overdrafts.

In November 2001, Genzyme Biosurgery sold the Snowden-Pencer line of surgical instruments, consisting of reusable surgical instruments for open and endoscopic surgery, including general, plastic, gynecological and open cardiovascular surgery for $15.9 million in net cash. The purchaser, Snowden-Pencer, Inc. acquired all of the assets directly associated with Snowden-Pencer products, and is subleasing from us a manufacturing facility that we lease in Tucker, Georgia. The assets sold had a net carrying value of approximately $41.0 million at the time of the sale. Genzyme Biosurgery recorded a loss of $25.0 million in connection with this sale.

In January 2001, we acquired the outstanding Class A limited partnership interests of GDP for an aggregate of $25.7 million in cash plus royalties on sales of certain Sepra products for ten years. In August 2001, we purchased the remaining outstanding GDP partnership interests, consisting of two Class B interests, for an aggregate of $180,000 plus royalties on sales of certain Sepra products for ten years. We accounted for the acquisitions as purchases and allocated them to Genzyme Biosurgery. Accordingly, the results of operations of GDP are included in our consolidated financial statements and the combined financial statements of Genzyme Biosurgery from January 9, 2001, the date of acquisition of the Class A interests.

Genzyme Biosurgery, together with our other operating divisions, has access to our $350.0 million revolving credit facility, all of which matures in December 2003. Prior to November 2001, this was a $500.0 million credit facility, $150.0 million of which matured in December 2001 and $350.0 million of which matures in December 2003. At December 31, 2000 $18.0 million was outstanding under the portion of the facility that matured in December 2001, all of which was allocated to Genzyme Biosurgery and $350.0 million was outstanding under the portion of the facility maturing in December 2003, $150.0 million of which was allocated to Genzyme General and $200.0 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. In September 2001, we decided to rollover the $18.0 million outstanding under the portion of the facility that matured in December 2001 into the portion of the facility that matures in December 2003. In November 2001, we drew an additional $17.0 million under this facility and allocated the borrowings to Genzyme Biosurgery. We repaid $1.0 million of this amount in 2001. We allowed the $150.0 million portion of the credit facility to expire without renewal at its December 12, 2001 maturity date. At December 31, 2001 $234.0 million remained outstanding under this facility, all of which was allocated to Genzyme Biosurgery. Borrowings under this facility bear interest at LIBOR plus an applicable margin. The terms of our revolving credit facility include various covenants including

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financial covenants, which require us to meet minimum liquidity and interest coverage ratios and to meet maximum leverage ratios. We currently are in compliance with these covenants and do not anticipate falling out of compliance. 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.

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 December 31, 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 approximately 1.9 million 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 December 31, 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 to us. 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 notes were received in exchange for the issuance of stock. As of December 31, 2001, the outstanding balance of these notes was $10.2 million, all of which was allocated to Genzyme Biosurgery.

Diacrin/Genzyme LLC, our joint venture with Diacrin, Inc. did not initiate a Phase 3 clinical trial of NeuroCell-PD for Parkinson's disease by June 30, 2001. Because a Phase 3 trial of the product candidate 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 was due and payable within 90 days after Genzyme Biosurgery received the notice from Genzyme General. Genzyme General and Genzyme Biosurgery agreed to extend Genzyme Biosurgery's deadline to refund the $20.0 million to Genzyme General to February 1, 2002.

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As of December 31, 2001, we were committed to make the following payments under contractual obligations using cash allocated to Genzyme Biosurgery:

	Payments Due by Period
Contractual Obligations	Total		2002		2003		2004		2005		2006		After 2006
	(Amounts in millions)
Long-term debt	$	244.0	$	—	$	244.0	$	—	$	—	$	—	$	—
Capital lease obligations		1.6		0.9		0.7		—		—		—		—
Operating leases		20.9		4.6		4.6		3.5		2.8		2.8		2.6
Unconditional purchase obligations		—		—		—		—		—		—		—
Research and development agreements		1.4		1.4		—		—		—		—		—
Other contractual obligations		27.1		27.1		—		—		—		—		—

Total contractual cash obligations	$	295.0	$	34.0	$	249.3	$	3.5	$	2.8	$	2.8	$	2.6

We believe that Genzyme Biosurgery's cash resources, together with the revenues generated from its products and distribution agreements, will be sufficient to finance its planned operations and capital requirements through the fourth quarter of 2002. Genzyme Biosurgery intends to use substantial portions of its available cash for:

•: research and development;
•: product development and marketing, including for Synvisc viscosupplementation product;
•: expanding manufacturing capacity;
•: expanding facilities; and
•: working capital.

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

•: results of research and development efforts;
•: ability to establish and maintain strategic alliances;
•: ability to enter into licensing arrangements and additional distribution arrangements;
•: 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; and
•: ability to satisfy regulatory requirements of the FDA and other governmental authorities.

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 arrangements, or obtain either on terms 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.

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New Accounting Pronouncements and Market, Interest Rate, Foreign Exchange and Equity Price Risk

See "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations" included in this annual report.

Factors Affecting Future Operating Results

The future operating results of Genzyme Biosurgery could differ materially from the results described above due to the risks and uncertainties described below and under the heading "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations—Factors Affecting Future Operating Results" included in this annual report.

A failure to increase sales of Synvisc viscosupplementation product could have a negative effect on the price of Biosurgery Stock.

Genzyme Biosurgery expects to generate a substantial portion of its product revenues from sales of Synvisc viscosupplementation product. Net product sales of Synvisc viscosupplementation product totaled $83.3 million for the year ended December 31, 2001, representing approximately 35% of Genzyme Biosurgery's total revenues for that year and $0.1 million for the 13-day period beginning December 18, 2000 (date of Genzyme Biosurgery's inception) to December 31, 2000, representing approximately 0.08% of Genzyme Biosurgery's total revenues for that year.

Failure to achieve sales growth for Synvisc viscosupplementation product may cause the value of Biosurgery Stock to decline. Revenues from Synvisc viscosupplementation product could be impacted negatively if competitive treatments for the symptoms of osteoarthritis of the knee are deemed more efficacious, more convenient to use or cost effective. Products competitive to Synvisc viscosupplementation product are currently being sold. Some companies are developing competitive products, and other companies may do so in the future.

The commercial success of Synvisc viscosupplementation product also will depend on many other factors, including:

•: The availability of third-party reimbursement.

An important factor to achieving sales growth for Synvisc viscosupplementation product is the availability of reimbursement from third party payors, including managed care organizations, private health insurers and government healthcare administrative authorities. Genzyme Biosurgery has been generally successful in obtaining and maintaining broad coverage and adequate reimbursement in the United States for Synvisc viscosupplementation product. Medicare carriers in all 50 states provide benefits for Synvisc viscosupplementation product. Approximately 90% of commercial insurers also cover the product. Genzyme Biosurgery is working to expand existing coverage to plans that do not provide benefits for Synvisc viscosupplementation product and in situations where coverage policies may be limited in scope. Outside the United States, reimbursement is often provided by government healthcare administrative authorities. Reimbursement is not offered by any such authority outside the United States. Genzyme Biosurgery continues to seek coverage for Synvisc viscosupplementation product from such authorities, particularly in Canada, Europe and Australia. To manage and reduce healthcare costs, third party payors increasingly seek opportunities to contain healthcare costs. These efforts include challenging the price of healthcare products, limiting coverage and the level of coverage that will be provided, and shifting reimbursable costs to other parties through copayment, coinsurance and other risk sharing arrangements. We cannot guarantee that any third-party payor that currently provides reimbursement for Synvisc viscosupplementation product will continue to provide coverage or reimbursement at

GBS-23

adequate levels, or that additional third-party payors will begin to provide coverage or reimbursement at adequate levels.

•: Continued relations with marketing partners.

Genzyme Biosurgery has entered into several distribution agreements for marketing and distributing Synvisc viscosupplementation product. Genzyme Biosurgery has in the past and may in the future periodically reacquire distribution rights in some territories if partners fail to perform under agreements relating to these territories. Genzyme Biosurgery may not be able to maintain or replace these marketing partners. In this event, there may be disruptions in sales associated with restructuring Genzyme Biosurgery's distribution arrangements.

The future commercial success of Synvisc viscosupplementation product, as well as the other marketed products allocated to Genzyme Biosurgery, is highly uncertain. For additional details concerning the risks associated with commercializing novel biotechnology products, you should review the factors described under the heading "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations—Factors Affecting Future Operating Results" included in this annual report.

The commercial success of Carticel chondrocytes is uncertain.

Carticel cartilage repair service involves a proprietary process for growing autologous chondrocytes (a patient's own cartilage cells) to replace those that are damaged or lost. Revenues from Carticel chondrocytes services total $18.4 million for the year ended December 31, 2001, representing approximately 8% of Genzyme Biosurgery's total revenue for that year. The commercial success of Carticel chondrocytes will depend on many factors, including the following:

•: Positive results from post-marketing studies.

If three ongoing post-marketing studies do not demonstrate that treatment with Carticel chondrocytes is superior to the alternatives studied, the FDA may suspend or withdraw its approval of Carticel chondrocytes.

•: FDA approval of related device.

Genzyme Biosurgery has developed a device to improve the procedure for implanting Carticel chondrocytes and has filed for marketing approval with the FDA. We cannot guarantee that the FDA will approve this device, that this device will improve the procedure for implanting Carticel chondrocytes, or that this device will gain commercial acceptance.

•: The availability of third-party reimbursement.

Since the FDA approved Carticel chondrocytes, we have seen a substantial increase in the number of third party payors who cover it. Some third-party payers, however, do not cover Carticel chondrocytes. We cannot guarantee that any third-party payers will continue to cover it or that additional third-party payers will begin to provide reimbursement.

Although FDA approval is a crucial factor in insurance plans deciding to cover new treatments, a number of major insurance plans also base such decisions on their own or third-party evaluations of treatments. One independent association that conducts evaluations is the Blue Cross Blue Shield Association. The Blue Cross Blue Shield Association's Technology Assessment Committee has issued an evaluation indicating that Carticel chondrocytes do not meet all of its published criteria for new treatments. We

GBS-24

believe that Carticel chondrocytes do meet these criteria and are discussing the evaluation with the Blue Cross Blue Shield Association. While individual Blue Cross Blue Shield plans representing more than 50% of Blue Cross Blue Shield policyholders have provided policy coverage for Carticel chondrocytes without a favorable evaluation by the Blue Cross Blue Shield Association, many Blue Cross Blue Shield plans have delayed approving coverage for Carticel chondrocytes under their policies as a result of this unfavorable evaluation. Since these remaining plans represent a significant percentage of insured lives in the Untied States, this evaluation has continued to restrict our access to a substantial portion of the market for Carticel chondrocytes. Some payors that cover Carticel chondrocytes as a matter of medical policy may nonetheless fail to provide separate or adequate reimbursement. Thus, providers who elect to use Carticel chondrocytes for patients who are insured by these payors are forced to absorb most or all of the cost.

•: The success of competitive products.

The process we use to grow a patient's cartilage cells is not patentable, and we do not yet have significant patent protection covering the other processes used in providing Carticel chondrocytes. Consequently, we cannot prevent a competitor from developing the ability to grow cartilage cells and from offering a product or service that is similar or superior to Carticel chondrocytes. If a competitor were to develop such ability and obtain FDA approval for a competitive product or service, Genzyme Biosurgery's results of operations would be negatively impacted. We are aware of at least three other companies that have competitive cell-based therapies for cartilage repair in the European market. Further, at least three other companies are engaged in research on cultured cartilage cell products. Also, several pharmaceutical and biotechnology companies are developing alternative treatments for knee cartilage damage. One or more of these companies may develop products or services superior to Carticel chondrocytes.

•: Market acceptance by orthopaedic surgeons.

We are marketing Carticel chondrocytes to orthopaedic surgeons. We cannot guarantee that we will train enough surgeons who incorporate Carticel chondrocytes into their practice to make it commercially successful.

•: Fluctuating revenues due to seasonal factors.

We expect that the revenues from the sale of the Carticel chondrocytes will fluctuate based on our success in penetrating the market, the availability of competitive procedures and the availability of third-party reimbursement. We cannot predict the timing or magnitude of these fluctuations. Furthermore, we expect that revenues from Carticel chondrocytes will be lower in the summer months because fewer operations are typically performed during those months.

•: Reliance on key collaborators.

Carticel chondrocytes were developed based on the work of a group of Swedish physicians. Individuals who are familiar with the know-how underlying Carticel chondrocytes through their association with these physicians may disclose the information to our competitors. This event could have an adverse effect on Genzyme Biosurgery's results of operations.

Genzyme Biosurgery maintains consulting and sponsored research arrangements with the University of Gothenburg in Sweden and certain physicians, including the two physicians who lead the group that developed Carticel chondrocytes. The purpose of these

GBS-25

arrangements is to conduct additional research on Carticel chondrocytes. The arrangements prohibit members of the research team from disclosing any information proprietary to Genzyme Biosurgery and require all inventions conceived or reduced to practice during the course of such research shall be Genzyme Biosurgery's property.

Genzyme Biosurgery has and will continue to devote significant resources to develop novel products and treatments that may not be commercially successful.

Genzyme Biosurgery has devoted a significant amount of money to developing products that will represent alternatives to traditional surgical procedures or treatments. These products will likely require several years of aggressive and costly marketing before they might become widely accepted by the surgical community. Genzyme Biosurgery expects to develop products that are designed to enable surgeons to perform minimally invasive cardiovascular surgery. The medical conditions that can be treated with minimally invasive cardiovascular surgery are currently being treated with widely accepted surgical procedures such as coronary artery bypass grafting and catheter-based treatments, including balloon angioplasty, atherectomy and coronary stenting. To date, minimally invasive cardiovascular surgery has been performed on a limited basis and its further adoption by the surgical community will partly depend on Genzyme Biosurgery's ability to educate cardiothoracic surgeons about its effectiveness and to facilitate the training of cardiothoracic surgeons in minimally invasive cardiovascular surgery techniques.

Similarly, until recently surgeons have not used products designed to reduce the incidence and extent of postoperative adhesions. Since 1996, when Seprafilm adhesion barrier was introduced, market acceptance of anti-adhesion products has been slow. To increase sales of the Sepra products, Genzyme Biosurgery has had to educate surgeons and hospital administrators about the problems of, and costs associated with, adhesions and the benefits of preventing adhesions. Genzyme Biosurgery also has had to, and continues to have to, train surgeons on the proper handling and use of these products.

We cannot guarantee that Genzyme Biosurgery's continued efforts in educating and training the surgical community will result in the widespread adoption of minimally invasive cardiovascular surgery and anti-adhesion products or that surgeons adopting these procedures and products will use Genzyme Biosurgery's products.

Adverse events in the field of gene therapy may negatively affect regulatory approval or public perception of Genzyme Biosurgery's gene therapy products.

The death of a patient undergoing gene therapy using an adenoviral vector to deliver a therapeutic gene has been widely publicized. Although this patient was not part of a Genzyme Biosurgery clinical trial, deaths and any other adverse events in the field of gene therapy that may occur in the future may result in greater governmental regulation and potential regulatory delays relating to the testing or approval of Genzyme Biosurgery's gene therapy products.

The commercial success of any gene therapy products that Genzyme Biosurgery develops will depend in part on public acceptance of the use of gene therapies for the prevention or treatment of human diseases. Public attitudes may be influenced by claims that gene therapy is unsafe, and gene therapy may not gain the acceptance of the public or the medical community. Negative public reaction to gene therapy could result in:

•: greater government regulation;
•: stricter clinical trial oversight;
•: tighter commercial product labeling requirements of gene therapies; and
•: a decrease in the demand for any gene therapy product that Genzyme Biosurgery may develop.

GBS-26

Because Genzyme Biosurgery has significant fixed payments, it will need to devote a substantial portion of its cash flow to make the payments and may need to borrow money in the future to make debt payments and operate its business.

As of December 31, 2001, we had allocated to Genzyme Biosurgery approximately $234.0 million borrowed under our corporate credit facility. 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, we may need to borrow additional funds on behalf of Genzyme Biosurgery to make these payments. We cannot guarantee that such additional financing will be available or available on favorable terms.

In addition to amounts borrowed under the credit facility, significant cash obligations allocated to Genzyme Biosurgery include the following:

•: Genzyme General.

Genzyme Biosurgery is obligated to pay back to Genzyme General $20.0 million of the $25.0 million, plus accrued interest of 13.5% per annum, Genzyme Biosurgery received from Genzyme General in connection with the transfer to Genzyme General of Genzyme Biosurgery's interest in Diacrin/Genzyme LLC. The refund obligation arose because Diacrin/Genzyme LLC, our joint venture with Diacrin, Inc., failed to initiate a phase 3 trial of NeuroCell-PD for Parkinson's disease by June 30, 2001. This refund is due by February 1, 2002.

•: UBS Warburg LLC.

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 December 31, 2001, $10.0 million principal amount of this note remained outstanding, all of which we allocated to Genzyme Biosurgery. 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.

Genzyme Biosurgery anticipates future losses and may never become profitable.

Genzyme Biosurgery expects to have operating losses before amortization of intangibles through at least the second quarter of 2002 as it continues to spend substantial amounts of money on, among other things, conducting research, development, regulatory and commercialization activities to support its expanded product lines. This strategy involves risks, which include supporting higher levels of operating expenses, attracting and retaining employees, and dealing with other management difficulties that arise from rapid growth and operating loss. If Genzyme Biosurgery cannot increase revenues and/or reduce operating expenses effectively, it may not become profitable.

If Genzyme Biosurgery fails to obtain capital necessary to fund its operations, it will be unable to fund development programs and complete clinical trials.

We anticipate that Genzyme Biosurgery's current cash resources, together with revenues generated from product and service sales, will be sufficient to fund its operations through at least the fourth quarter of 2002.

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

•: results of research and development efforts;

GBS-27

•: 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;
•: achievement of milestones under strategic alliances;
•: 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; and
•: ability to satisfy regulatory requirements of the FDA and other government authorities.

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 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.

Changes in Genzyme Biosurgery's manufacturing capabilities could significantly reduce its ability to deliver its products.

Genzyme Biosurgery is engaged in the production of a wide variety of products and services. Genzyme Biosurgery's manufacturing processes are highly complex and are regulated by the government. It is possible that Genzyme Biosurgery will have problems maintaining or expanding its facilities in the future. These problems could cause delays in production or delivery. Any significant disruption in Genzyme Biosurgery's manufacturing operations or in its ability to manufacture products cost effectively could have an adverse effect on its business, results of operations and financial condition.

Competition from other medical device and technology companies could hurt Genzyme Biosurgery's performance.

The human health care products and services industry is extremely competitive. Major medical device and technology companies compete or may compete with Genzyme Biosurgery. These include such companies as:

•: Atrium Medical Corporation and Sherwood-Davis & Geck, a division of Tyco International, Ltd., in the cardiovascular fluid management market;
•: Ethicon Inc., a Johnson & Johnson company, and U.S. Surgical Corporation, a division of Tyco, in the cardiovascular closure market;
•: CardioThoracic Systems, Inc., Medtronic, Inc., U.S. Surgical, Guidant Corporation, Baxter Healthcare Corporation and Ethicon in the minimally invasive cardiovascular surgery market;
•: Ethicon, Lifecore Biomedical, Inc., Life Medical Sciences, Inc. and Gliatech, Inc. in the anti-adhesion market; and

GBS-28

•: Fidia S.p.A., Q-Med AB, Sanofi and OrthoLogic Corp., Anika Therapeutics, Inc., Zimmer, Inc., and Seikagiku Corporation, Bio-Technology General Corp. and Smith & Nephew in the viscosupplementation product market.

These competitors may have superior research and development, marketing and production capabilities. Some competitors also may have greater financial resources than Genzyme Biosurgery. The division is likely to incur significant costs developing and marketing new products without any guarantee that they will be competitively successful in one or more markets. The future success of Genzyme Biosurgery will depend on its ability to effectively develop and market its products against those of its competitors.

The trend toward consolidation in the surgical devices industry may adversely affect Genzyme Biosurgery's ability to market successfully its products to some significant purchasers.

The current trend among hospitals and other significant consumers of surgical devices is to combine into larger purchasing groups to increase their purchasing power and thus reduce their purchase price for surgical devices. Partly in response to this development, surgical device manufacturers have been consolidating to be able to offer more comprehensive product lines to these larger purchasing groups. In order to market successfully its products to larger purchasing groups, Genzyme Biosurgery may have to expand its product lines or enter into joint marketing or distribution agreements with other manufacturers of surgical devices. We cannot guarantee that Genzyme Biosurgery will be able to employ either of these initiatives or that, when employed, these initiatives will increase the marketability of its products.

We face litigation that could have a material adverse effect on Genzyme Biosurgery's business, financial condition and results of operations.

We encourage you to read the material under the heading "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations—Factors Affecting Future Operating Results—In connection with our acquisition of Biomatrix, we assumed litigation faced by Biomatrix" included in this annual report. That material describes a securities lawsuit filed against Biomatrix prior to our acquisition of Biomatrix.

Subsequent Event

On February 1, 2002, Genzyme Biosurgery paid to Genzyme General $27.1 million, representing $20.0 million of the $25.0 million, plus accrued interest of 13.5% per annum, Genzyme Biosurgery received from Genzyme General in connection with the transfer to Genzyme General of Genzyme Biosurgery's interest in Diacrin/Genzyme LLC. The refund obligation arose because Diacrin/Genzyme LLC, our joint venture with Diacrin, Inc., failed to initiate a phase 3 trial of NeuroCell-PD for Parkinson's disease by June 30, 2001.

GBS-29

GENZYME BIOSURGERY
A DIVISION OF GENZYME CORPORATION

COMBINED STATEMENTS OF OPERATIONS

				For the Years Ended December 31,
				2001			2000			1999
				(Amounts in thousands)
Revenues:
	Net product sales			$	211,523		$	121,870		$	111,951
	Net service sales				23,614			23,321			20,305
	Revenues from research and development contracts				5			23			97

		Total revenues			235,142			145,214			132,353

Operating costs and expenses:
	Cost of products sold				113,250			69,489			67,212
	Cost of services sold				12,733			12,298			13,237
	Selling, general and administrative				122,020			92,238			87,841
	Research and development				47,159			37,000			36,075
	Amortization of intangibles				46,828			7,096			5,750
	Purchase of in-process research and development				—			82,143			—
	Charge for impaired asset				—			4,321			—

		Total operating costs and expenses			341,990			304,585			210,115

Operating loss					(106,848	)		(159,371	)		(77,762	)
Other income (expenses):
	Equity in net loss of unconsolidated affiliates				(1,316	)		—			(3,403	)
	Loss on investments in equity securities				—			(7,300	)		—
	Loss on sale of product line				(24,999	)		—			—
	Other				124			(15	)		138
	Investment income				1,753			5,833			4,808
	Interest expense				(13,884	)		(1,364	)		(1,858	)

		Total other expenses			(38,322	)		(2,846	)		(315	)

Division net loss				$	(145,170	)	$	(162,217	)	$	(78,077	)

Comprehensive loss, net of tax:
	Division net loss			$	(145,170	)	$	(162,217	)	$	(78,077	)

	Other comprehensive income (loss), net of tax:
		Foreign currency translation adjustments			979			(332	)		—
		Unrealized gains (losses) on securities:
			Unrealized gains (losses) arising during the period		97			(5,558	)		(1,839	)
			Reclassification adjustment for losses included in division net loss		—			7,300			—

			Unrealized gains (losses) on securities, net		97			1,742			(1,839	)

	Other comprehensive income (loss)				1,076			1,410			(1,839	)

Comprehensive loss				$	(144,094	)	$	(160,807	)	$	(79,916	)

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

GBS-30

GENZYME BIOSURGERY
A DIVISION OF GENZYME CORPORATION

COMBINED BALANCE SHEETS

			December 31,
			2001		2000
			(Amounts in thousands)
ASSETS
Current assets:
	Cash and cash equivalents		$	38,623	$	78,163
	Accounts receivable, net			38,293		38,952
	Inventories			43,545		61,574
	Prepaid expenses and other current assets			2,734		9,543

		Total current assets		123,195		188,232
Property, plant and equipment, net				53,794		57,409
Intangibles, net				525,178		562,635
Investment in equity securities				—		1,603
Other noncurrent assets				2,504		1,721

		Total assets	$	704,671	$	811,600
LIABILITIES AND DIVISION EQUITY
Current liabilities:
	Accounts payable		$	7,835	$	6,074
	Accrued expenses			25,142		46,245
	Due to Genzyme General			29,513		18,645
	Current portion of long-term debt and capital lease obligations			905		18,449

		Total current liabilities		63,395		89,413
Long-term debt and capital lease obligations				234,724		201,004
Convertible notes				10,000		10,000
Other noncurrent liabilities				2,098		77

		Total liabilities		310,217		300,494
Commitments and contingencies (See Notes J, L and N)
Division equity (Note M)				394,454		511,106

		Total liabilities and division equity	$	704,671	$	811,600

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

GBS-31

GENZYME BIOSURGERY
A DIVISION OF GENZYME CORPORATION

COMBINED STATEMENTS OF CASH FLOWS

					For the Years Ended December 31,
					2001			2000			1999
					(Amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
	Division net loss				$	(145,170	)	$	(162,217	)	$	(78,077	)
	Reconciliation of division net loss to net cash used in operating activities:
		Depreciation and amortization				60,931			11,622			9,367
		Non-cash compensation expense				66			—			—
		Provision for bad debt				701			1,359			559
		Charges for in-process research and development				—			82,143			—
		Equity in net loss of unconsolidated affiliates				1,316			—			3,403
		Loss on sale of product line				24,999			—			—
		Accrued interest/amortization of marketable securities				—			2,294			—
		Loss on investments in equity securities				—			7,300			—
		Other				25			443			1,305
		Increase (decrease) in cash from working capital changes:
			Accounts receivable			(361	)		(6,904	)		(5,898	)
			Inventories			13,097			(7,561	)		(8,233	)
			Prepaid expenses and other current assets			6,502			(1,178	)		2,365
			Accounts payable and accrued expenses			(17,118	)		6,975			2,558
			Due to Genzyme General			10,868			10,906			6,541

				Net cash used in operating activities		(44,144	)		(54,818	)		(66,110	)
CASH FLOWS FROM INVESTING ACTIVITIES:
	Purchases of investments					—			(96,456	)		(15,161	)
	Sales and maturities of investments					—			198,593			36,878
	Purchase of equity securities					(5,000	)		(5,000	)		(4,000	)
	Purchase of property, plant and equipment					(12,874	)		(2,850	)		(4,771	)
	Sale of property, plant and equipment					1,047			26			—
	Proceeds from sale of product line					15,862			—			—
	Acquisitions, net of cash acquired					(23,805	)		(196,284	)		—
	Purchase of technology rights					—			(75	)		(1,400	)
	Investment in unconsolidated affiliate					—			—			(3,594	)
	Other					(2,554	)		(11,479	)		471

				Net cash provided by (used in) investing activities		(27,324	)		(113,525	)		8,423
CASH FLOWS FROM FINANCING ACTIVITIES:
	Allocated proceeds from issuance of Biosurgery Stock					1,562			299			—
	Allocated proceeds from issuance of Surgical Products Stock					—			910			—
	Allocated proceeds from issuance of Tissue Repair Stock					—			797			462
	Proceeds from issuance of debt					17,000			200,000			—
	Payments of debt and capital lease obligations					(1,765	)		—			(96	)
	Net cash allocated from Genzyme General					11,993			9,910			79,451
	Bank overdraft					443			2,783			2,405
	Payments of notes receivable from stockholders					2,841			—			—
	Other					81			(54	)		(221	)

				Net cash provided by financing activities		32,155			214,645			82,001
Effect of exchange rate changes on cash						(227	)		(185	)		—

Increase (decrease) in cash and cash equivalents						(39,540	)		46,117			24,314
Cash and cash equivalents at beginning of period						78,163			32,046			7,732

Cash and cash equivalents at end of period					$	38,623		$	78,163		$	32,046

Supplemental disclosures of cash flows:
Cash paid during the year for:
	Interest				$	11,916		$	1,620		$	1,629
Supplemental disclosures of non-cash transactions:
Other Charges—Note C
Acquisitions and disposition—Notes D, E
In conjunction with the acquisitions of Focal, Biomatrix and GDP, liabilities were assumed as follows:
	Fair value of assets acquired				$	33,506		$	375,732
	Goodwill					9,779			112,262
	Acquired in-process research and development					—			82,143
	Deferred compensation					—			66
	Issuance of common stock and options					(9,801	)		(217,895	)
	Net cash paid for acquisition and acquisition costs					(24,223	)		(208,371	)
	Existing equity investment					(5,488	)		—
	Liabilities for exit activities and integration					—			(6,716	)
	Net deferred tax liability assumed					—			(106,122	)

	Net liabilities assumed				$	3,773		$	31,099

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

GBS-32

GENZYME BIOSURGERY
A DIVISION OF GENZYME CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS

NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business

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 $482.4 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 acquisiton.

In connection with the formation of Genzyme Biosurgery, we created Genzyme Biosurgery Stock. Biosurgery Stock is designed to track the performance of our Genzyme Biosurgery division. We converted each outstanding share of Surgical Products Stock into 0.6060 of a share of Biosurgery Stock, and each outstanding share of Tissue Repair Stock into 0.3352 of a share of Biosurgery Stock. We converted all outstanding options to purchase Surgical Products Stock and Tissue Repair Stock into options to purchase Biosurgery Stock at the applicable conversion rate.

Basis of Presentation

The combined financial statements of Genzyme Biosurgery for each period include the balance sheets, results 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 below. These combined financial statements are prepared using amounts included in our consolidated financial statements included in this annual report. We have reclassified certain 2000 and 1999 data to conform with the 2001 presentation.

Tracking Stock

Genzyme Biosurgery Division common stock, which we refer to as "Biosurgery Stock," is a series of our common stock that is designed to reflect the value and track the performance of Genzyme

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Biosurgery. The chief mechanisms intended to cause Biosurgery Stock to "track" the financial performance of Genzyme Biosurgery are provisions in our charter governing dividends and distributions. Under these provisions, our charter:

•: factors the assets and liabilities and income or losses attributable to Genzyme Biosurgery into the determination of the amount available to pay dividends on Biosurgery Stock; and
•: requires us to exchange, redeem or distribute a dividend to the holders of Biosurgery Stock if all or substantially all of the assets allocated to Genzyme Biosurgery 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 Biosurgery Stock calculated over a ten day period beginning on the first business day following the announcement of the sale.

To determine earnings per share, we allocate Genzyme's earnings to each series of our common stock based on the earnings attributable to that series of stock. The earnings attributable to Biosurgery Stock are defined in our charter as the net income or loss of Genzyme Biosurgery determined in accordance with generally accepted accounting principles and as adjusted for tax benefits allocated to or from Genzyme Biosurgery in accordance with our management and accounting policies. Our charter also requires that all income and expenses of Genzyme be allocated among the divisions in a reasonable and consistent manner. Our board of directors, however, retains considerable discretion in interpreting and changing the methods of allocating earnings to each series of common stock without shareholder approval. As market or competitive conditions warrant, we may create new series of tracking stock or change our earnings allocation methodology. However, at the present time, we have no plans to do so. Because the earnings allocated to Biosurgery Stock are based on the income or losses attributable to Genzyme Biosurgery, we include financial statements and management's discussion and analysis of Genzyme Biosurgery to aid investors in evaluating its performance.

While Biosurgery Stock is designed to reflect Genzyme Biosurgery's performance, it is common stock of Genzyme Corporation and not Genzyme Biosurgery; Genzyme Biosurgery is a division, not a company or legal entity, and therefore does not and cannot issue stock. Consequently, holders of Biosurgery Stock have no specific rights to assets allocated to Genzyme Biosurgery. Genzyme Corporation continues to hold title to all of the assets allocated to Genzyme Biosurgery and is responsible for all of its liabilities, regardless of what we deem for financial statement presentation purposes as allocated to Genzyme Biosurgery. Holders of Biosurgery 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 Genzyme liquidation, insolvency or similar event, holders of Biosurgery Stock and other tracking stockholders would only have the rights of common stockholders in the combined assets of Genzyme.

Allocation Policy

Our charter sets forth what operations and assets are initially allocated to Genzyme Biosurgery and states that going forward the division will also include all businesses, products or programs, developed by or acquired for the division, as determined by our board of directors. We then manage and account for transactions between Genzyme Biosurgery and our other divisions and with third

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parties, and any resulting reallocations of assets and liabilities, by applying consistently across divisions a detailed set of policies established by our board of directors. We publicly disclose our divisional management and accounting policies, which are filed as Exhibit 99.1 to this annual report. Our charter requires that all of our assets and liabilities be allocated among our divisions. Our board of directors, however, retains considerable discretion in determining the types, magnitude and extent of allocations to each series of common stock without shareholder approval.

Allocations to our divisions are based on one of the following methodologies:

•: specific identification—assets that are dedicated to the production of goods of a division or which solely benefit a division are allocated to that division. Liabilities incurred as a result of the performance of services for the benefit of a division or in connection with the expenses incurred in activities which directly benefit a division are allocated to the division. Such specifically identified assets and liabilities include cash, investments, accounts receivable, inventories, property and equipment, intangible assets, accounts payable, accrued expenses and deferred revenue. Revenues from the licensing of a division's products or services to third parties and the related costs are allocated to a division;
•: actual usage—expenses are charged to the division for whose benefit such expenses are incurred. Research and development, sales and marketing and direct general and administrative services are charged to the divisions for which the services are performed on a cost basis. Such charges are generally based upon direct labor hours;
•: proportionate usage—costs incurred which benefit more than one division are allocated based upon management's estimate of the proportionate benefit each division receives. Such costs include facilities, legal, finance, human resources, executive and investor relations; or
•: board directed—programs and products, both internally developed and acquired, are allocated to divisions by the board of directors. The board of directors also allocates long-term debt and strategic investments.

Note B., "Policies Governing the Relationship of Genzyme's Operating Divisions," further describes our policies concerning interdivisional transactions and income tax allocations.

We believe that the divisional allocations are reasonable and have been consistently applied. However, the division's results of operations may not be indicative of what would have been realized if the division was a stand-alone entity.

Translation of Foreign Currencies

We translate the financial statements of foreign subsidiaries allocated to Genzyme Biosurgery from local currency into U.S. dollars and record translation adjustments for these subsidiaries to division equity. Genzyme Biosurgery records gains and losses on foreign currency transactions in its results of operations.

We include exchange gains and losses on intercompany balances which are long-term in nature in division equity. Gains and losses on all other transactions are included in results of operations.

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Revenue Recognition

We recognize revenue from product sales when persuasive evidence of an arrangement exists, the product has been shipped, and title and risk of loss have passed to the customer. Allowances are recorded for product returns, and for any applicable third party contractual allowances, rebates, or discounts. These allowances are recorded as reductions of revenue. Outbound shipping charges to customers are included in revenues.

We recognize revenue from service sales when we have finished providing the service. Revenue from research and development contracts is recognized over the term of the applicable contract and as we incur costs related to that contract. Advance payments received in excess of amounts earned are classified as deferred revenue until earned. We recognize non-refundable up-front license fees over the related performance period or at the time we have no remaining performance obligations.

Revenue from milestone payments for which we have no continuing performance obligations is recognized upon achievement of the related milestone. When we have continuing performance obligations, we recognize milestone payments as revenue upon the achievement of the milestone only if all of the following conditions are met:

•: the milestone payments are non-refundable;
•: achievement of the milestone was not reasonably assured at the inception of the arrangement;
•: there is a substantial effort involved in achieving the milestone; and
•: the amount of the milestone is reasonable in relation to the level of effort associated with achievement of the milestone.

If any of these conditions are not met, the milestone payments are deferred and recognized as revenue over the term of the arrangement as we complete our performance obligations.

We receive royalties related to the manufacture, sale or use of our products or technologies under license arrangements with third parties. For those arrangements where royalties are reasonably estimable, we recognize revenue based on estimates of royalties earned during the applicable period and adjust for differences between the estimated and actual royalties in the following quarter. Historically, such adjustments have not been material. For those arrangements where royalties are not reasonably estimable, we recognize royalties upon receipt of royalty statements from the licensee.

We do not recognize revenue under any circumstances unless collectibility is reasonably assured. We believe our revenue recognition policies are in compliance with Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements."

Net Income (Loss) Per Share

Earnings per share is calculated for each series of Genzyme stock using the two-class method, as further described in the notes to the consolidated financial statements. We present earnings per share data only in the consolidated financial statements of Genzyme because Genzyme Corporation is the issuer of the securities. Our divisions do not and cannot issue securities because they are not companies or legal entities.

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NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS

Because each of our operating divisions is a part of a single company, our board of directors has adopted policies to address issues that may arise among divisions and to govern the management of, and the relationships between each division. With some exceptions that are mentioned specifically in this note, our board of directors may modify or rescind these policies, or adopt additional policies, in its sole discretion without stockholder approval, subject only to our board of directors' fiduciary duty to stockholders. Generally accepted accounting principles require that any change in policy be preferable (in accordance with these principles) to the previous policy.

Interdivisional Asset Transfers

Our board of directors may at any time reallocate any program, product or other asset from one division to any other division. We account for interdivisional asset transfers at book value. The consideration paid for an asset transfer generally must be fair value as determined by our board of directors. The difference between the consideration paid and the book value of the assets transferred is recorded in division equity. Our board of directors determines fair value using either a risk-adjusted discounted cash flow model or a comparable transaction model.

The risk-adjusted discounted cash flow model estimates fair value by taking the discounted value of all the cash inflows and outflows related to a program or product over a specified period of time, generally the economic life of the project, adjusted for the probabilities of certain outcomes occurring or not occurring. In performing this analysis, we consider various factors that could affect the success or failure of the program including:

•: the duration, cost and probability of success of each phase of development;
•: the current and potential size of the market and barriers to entry into the market;
•: the maximum number of patients likely to be treated with the product and the speed with which that maximum number will be reached;
•: reimbursement policies and pricing limitations;
•: current and potential competitors;
•: the net proceeds received by us upon the sale of the program or product; and
•: the costs of manufacturing and marketing the product or program.

The comparable transaction model estimates fair value through comparison to valuations established for other transactions within the biotechnology and biosurgical areas involving similar programs and products having similar terms and structure. In identifying comparable transactions, we consider, among other factors, the following:

•: the similarity of market opportunity;
•: the comparability of the medical needs addressed;
•: the similarity of the regulatory, reimbursement and competitive environment;
•: the stage of products or program development; and

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•: the risk profile of successfully commercializing the product or program.

We customarily use the comparable transaction model to corroborate valuations derived under the risk-adjusted discounted cash flow model.

When determining the fair value of a program under development using either model, our board of directors also takes into account the following criteria in the case of a program under development:

•: the commercial potential of the program;
•: the phase of clinical development of the program;
•: the expenses associated with realizing any income from the program and the likelihood and time of the realization; and
•: other matters that our board of directors and its financial advisors, if any, deem relevant.

One division may compensate another division for a reallocation with cash or other consideration having a value equal to the fair market value of the reallocated assets. In the case of a reallocation of assets from Genzyme General to Genzyme Biosurgery, our board of directors may elect instead to account for the reallocation as an increase in Biosurgery designated shares in accordance with the provisions of our charter. 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. No gain or loss is recognized as a result of these transfers.

Our policy regarding transfers of assets between divisions may not be changed by our board of directors without the approval of the holders of Biosurgery Stock voting as a separate class unless the policy change does not affect Genzyme Biosurgery.

Other Interdivisional Transactions

Our divisions may engage in transactions directly with one or more other divisions or jointly with one or more other divisions and one or more third parties. These transactions may include agreements by one division to provide products and services for use by another division, license agreements and joint ventures or other collaborative arrangements involving more than one division to develop new products and services jointly and with third parties. These transactions are subject to the following conditions:

•: We charge research and development (including clinical and regulatory support), distribution, sales, marketing, and general and administrative services (including allocated space) performed by one division for another division to the division for which the services are performed on a cost basis. We charge direct costs to the division for which we incur them. We allocate direct labor and indirect costs in reasonable and consistent manners based on the use by a division of relevant services.
•: We charge the manufacturing of goods and performance of services by one division exclusively for another division to the division for which it is performed on a cost basis. To perform this calculation, we determine gross fixed assets for the facility used at the beginning of each fiscal year and apply our short-term borrowing rate. We allocate direct labor and indirect costs in

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reasonable and consistent manners based on the benefit received by a division of related goods and services.

•: Other than transactions involving research and development, manufacturing, distribution, sales, marketing, general and administrative services, which are addressed above, all interdivisional transactions are performed on terms and conditions obtainable in arm's length transactions with third parties. Divisions performing services for other divisions do not recognize revenue for the services they perform.
•: Our board of directors must approve interdivisional transactions that are performed on terms and conditions other than as described above and are material to one or more of the participating divisions. In giving its approval, our board of directors must determine that the transaction is fair and reasonable to each participating division and to holders of the common stock representing each participating division.
•: Divisions may make loans to other divisions. Any loan of $1.0 million or less matures within 18 months and accrues interest at the best borrowing rate available to the corporation for a loan of like type and duration. Our board of directors must approve any loan in excess of $1.0 million. In giving its approval, our board of directors must determine that the material terms of the loan, including the interest rate and maturity date, are fair and reasonable to each participating division and to holders of the common stock representing each such division.
•: All material interdivisional transactions are set forth in a written agreement that is signed by an authorized member of the management team of each division involved in the transaction.

On December 31, 2001, Genzyme Biosurgery owed Genzyme General approximately $29.5 million in connection with these services. On December 31, 2000, approximately $18.6 million was owed.

Tax Allocations

We file a consolidated tax return and allocate income taxes to each division based upon the financial statement income, taxable income, credits and other amounts properly allocable to it under generally accepted accounting principles as if it were a separate taxpayer. We assess the realizability of our deferred tax assets at the division level. As a result, our consolidated tax provision may not equal the sum of the divisions' tax provisions. As of the end of any fiscal quarter, however, if Genzyme Biosurgery cannot use any projected annual tax benefit attributable to it to offset or reduce its current or deferred income tax expense, we may allocate the tax benefit to the other divisions in proportion to their taxable income without any compensating payment or allocation.

Access to Technology and Know-How

Genzyme Biosurgery has unrestricted access to all technology and know-how owned or controlled by Genzyme Corporation that may be useful in its business, subject to any obligations or limitations that apply to the corporation generally.

NOTE C. OTHER CHARGES

In 2000, Genzyme Biosurgery recorded a $4.3 million charge for the write-off of abandoned equipment at our Springfield Mills manufacturing facility located in the United Kingdom. The write-off of equipment related to the Sepra product line and did not have other alternative uses.

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NOTE D. DISPOSITION

In November 2001, we sold the Snowden-Pencer line of surgical instruments, consisting of reusable surgical instruments for open and endoscopic surgery, including general, plastic, gynecological and open cardiovascular surgery for $15.9 million in net cash, which was allocated to Genzyme Biosurgery. The purchaser acquired all of the assets directly associated with Snowden-Pencer products, and is subleasing from us a manufacturing facility that we lease in Tucker, Georgia. The assets sold had a net carrying value of approximately $41.0 million at the time of the sale. Genzyme Biosurgery recorded a loss of $25.0 million in connection with this sale.

NOTE E. ACQUISITIONS

Focal

In January 2001, Focal, a public company and developer of synthetic biopolymers used in surgery, exercised its option to require us to purchase $5.0 million in Focal common stock at a price of $2.06 per share. After that purchase we held approximately 22% of the outstanding shares of Focal common stock and began accounting for our investment under the equity method of accounting. We allocated this investment to Genzyme Biosurgery. On June 30, 2001, we acquired the remaining 78% of the outstanding shares in an exchange of shares of Biosurgery Stock for shares of Focal common stock. Focal shareholders received 0.1545 of a share of Biosurgery Stock for each share of Focal common stock they held. We issued approximately 2.1 million shares of Biosurgery Stock as merger consideration. We 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. Accordingly, we included the results of operations of Focal in our consolidated financial statements and the combined financial statements of Genzyme Biosurgery from June 30, 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 (dollars 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		1,568
Intangible assets (to be amortized over 3 to 12 years)		7,909
Goodwill		1,365
Assumed liabilities		(3,773	)
Note receivable from stockholders		535

Allocated purchase price	$	15,938

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Genzyme Development Partners, L.P.

In January 2001, we acquired the outstanding Class A limited partnership interests in GDP for an aggregate of $25.7 million in cash plus royalties on sales of certain Sepra products for ten years. In August 2001, we purchased the remaining outstanding GDP partnership interests, consisting of two Class B interests, for an aggregate of $180,000 plus royalties on sales of certain Sepra products for ten years. We accounted for the acquisitions as purchases and allocated them to Genzyme Biosurgery. Accordingly, we include the results of operations of GDP in our consolidated financial statements and the combined financial statements of Genzyme Biosurgery from January 9, 2001, the date of acquisition.

We allocated the purchase prices to the fair value of the intangible assets acquired as follows (amounts in thousands):

		Total
Patents (to be amortized over 8 years)		$	5,909
Trademarks (to be amortized over 10 years)			2,755
Technology (to be amortized over 10 years)			8,827
Goodwill			8,414

	Total	$	25,905

Biomatrix

In December 2000, we completed the acquisition of Biomatrix, a public company engaged in the development and manufacturing of viscoelastic biomaterials for use in orthopaedic and other medical applications. Concurrently with the acquisition, we created Genzyme Biosurgery as a new division. We reallocated the businesses of two of our operating divisions—Genzyme Surgical Products and Genzyme Tissue Repair—to Genzyme Biosurgery and allocated the acquired businesses of Biomatrix to Genzyme Biosurgery. As a result of this transaction, we amended our charter to create Biosurgery Stock and eliminated Surgical Products and Tissue Repair Stock. Each outstanding share of, and option to purchase, Surgical Product 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, or 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.

We accounted for the acquisition as a purchase and 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.

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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 (in thousands):

Cash paid		$	252,421
Issuance of 17.5 million shares of Biosurgery Stock.			206,522
Issuance of options and warrants to purchase 1.7 million shares of Biosurgery Stock			11,373
Acquisition costs			12,087

	Total purchase price.	$	482,403

Cash and cash equivalents		$	56,137
Current assets			37,639
Property, plant & equipment			39,504
Intangible assets (to be amortized straight-line over 1.5 to 11 years)			284,854
Goodwill			114,759
In-process research and development			82,143
Deferred tax asset			922
Deferred compensation			66
Assumed liabilities			(31,347	)
Liabilities for exit activities and integration			(8,216	)
Notes receivable from stockholders			14,760
Deferred tax liability			(108,818	)

	Allocated purchase price	$	482,403

The approximately 17.5 million shares of Biosurgery Stock issued in exchange for all of the outstanding shares of Biomatrix common stock were valued using the combined five day average closing prices of Surgical Products Stock and Tissue Repair Stock, divided by the applicable exchange ratio. Options and warrants to purchase approximately 1.7 million shares of Biosurgery Stock, issued in exchange for options and warrants to purchase Biomatrix common stock were valued at $11.4 million using the Black-Scholes model. The intrinsic value of the portion of the unvested options related to the future service period was de minimis.

Prior to the acquisition, 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 division equity because the notes were received in exchange for the issuance of stock.

At the date of acquisition, we began to implement plans for certain exit and integration activities, including workforce reductions and the closure of Biomatrix's Canadian facility. Accordingly, we recorded liabilities of $6.7 million for severance and related integration costs and assigned to Biomatrix's Canadian facility a value equal to the amount we estimated we would obtain upon disposal

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or sale. In 2001, we recorded adjustments to and charges against the restructuring reserve as follows (amounts in thousands):

Liabilities for exit activities and integration recorded at acquisition	$	6,716
Payments in 2000		(746	)

Balance at December 31, 2000		5,970

Additional reserve recorded in 2001		1,500
Payments in 2001		(5,891	)

Balance at December 31, 2001	$	1,579

In October 2001, we completed the sale of the Canadian facility for net proceeds of $1.0 million, which we allocated to Genzyme Biosurgery. We adjusted the allocated fair value of the Canadian facility to equate to the proceeds of the disposal.

As of December 31, 2001, a total of $6.6 million of costs had been charged against the accrual for exit activity and integration costs. We expect to complete this restructuring in 2002.

In connection with the purchase of Biomatrix, we allocated approximately $82.1 million of the purchase price to IPR&D. Although management ultimately is responsible for determining the fair value of the acquired IPR&D, we 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 cash flows expected to result from each project once it has reached technological feasibility. A 38% discount rate was used which is consistent with the risks of each project. In estimating future cash flows, management considered other tangible and intangible assets, including core technology, required for successful exploitation of the technology resulting from each 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 research and development was the amount attributable to the efforts of Biomatrix up to the time of acquisition. This amount was estimated through application of the "stage of completion" calculation, which calculation involves multiplying total estimated revenue for IPR&D by the percentage of completion of each purchased research and development project at the time of acquisition.

The significant assumptions underlying the valuations included potential revenues, costs of completion, the timing of product approvals and the selection of appropriate probability of success and discount rate. None of Biomatrix's IPR&D projects had reached technological feasibility at the date of acquisition nor did they have any alternative future use. Consequently, in accordance with generally accepted accounting principles, the amount allocated to IPR&D was charged as an expense in our consolidated financial statements and in the combined financial statements of Genzyme Biosurgery for the year ended December 31, 2000. Genzyme Biosurgery is amortizing the remaining acquired intangible assets arising from the acquisition on a straight-line basis over their estimated lives, which range from 1.5 years to 11 years. As of December 31, 2001, the technological feasibility of the acquired projects had not been reached and no significant departures from the assumptions included in the valuation analysis had occurred.

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

Unaudited Pro Forma Financial Summary

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 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 charge of $82.1 million related to our Biomatrix acquisition, are not reflected in the following unaudited pro forma financial summary:

	For the Years Ended December 31,
	2001			2000
	(Amounts in thousands)
Total revenues	$	235,289		$	221,103
Division net loss		(155,724	)		(144,159	)

NOTE F. ACCOUNTS RECEIVABLE AND INTANGIBLE ASSETS

Genzyme Biosurgery's trade receivables primarily represent amounts due from distributors and healthcare service providers. Genzyme Biosurgery performs credit evaluations of its customers on an ongoing basis and generally does not require collateral. Genzyme Biosurgery states accounts receivable at fair value after reflecting an allowance for doubtful accounts. This allowance was $1.9 million at December 31, 2001 and $2.4 million at December 31, 2000.

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The following table contains information on Genzyme Biosurgery's intangible assets for the periods presented:

	December 31, 2001			Weighted Average Estimated Useful Life (Years)	December 31, 2000			Weighted Average Estimated Useful Life (Years)
	(Amounts in thousands, except useful life data)
Goodwill	$	236,621		25	$	242,109		27
Tradenames		85,228		22		94,624		25
Distribution agreements		13,950		8		13,950		8
Patents		173,379		11		75,196		11
Technology		79,423		11		159,624		11
Other		5,011		4		4,622		7

		593,612				590,125
Less accumulated amortization		(68,434	)			(27,490	)

Intangible assets, net	$	525,178			$	562,635

NOTE G. INVENTORIES

		December 31,
		2001		2000
		(Amounts in thousands)
Raw materials		$	13,301	$	21,270
Work-in-process			11,517		25,640
Finished products			18,727		14,664

	Total	$	43,545	$	61,574

NOTE H. PROPERTY, PLANT AND EQUIPMENT

	December 31,
	2001			2000
	(Amounts in thousands)
Plant and equipment	$	32,221		$	22,506
Land and buildings		38,891			40,039
Leasehold improvements		2,720			3,083
Furniture and fixtures		7,001			7,023
Construction-in-progress		1,112			564

		81,945			73,215
Less accumulated depreciation		(28,151	)		(15,806	)

Property, plant and equipment, net	$	53,794		$	57,409

Genzyme Biosurgery's depreciation expense was $14.1 million in 2001, $4.3 million in 2000, and $3.6 million in 1999.

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NOTE I. INVESTMENTS

Investments in marketable securities consisted of the following:

		December 31,
		2001				2000
		Cost		Market Value		Cost		Market Value
		(Amounts in thousands)
Cash equivalents:(1)
	Money market fund (2)	$	33,838	$	33,838	$	74,035	$	74,035

	Investment in equity securities (3)	$	—	$	—	$	1,603	$	1,603

(1): Cash equivalents are included as part of cash and cash equivalents on our balance sheets.
(2): Genzyme Biosurgery's investments in money market funds have contractual maturities within one year.
(3): In 2000, we determined that our investment in the common stock of Focal, Inc., which we allocated to Genzyme Biosurgery, was permanently impaired. As a result, we recorded a charge to operations of $7.3 million in 2000, which we allocated to Genzyme Biosurgery.

Genzyme Biosurgery records gross unrealized holding gains and losses in division equity. Genzyme Biosurgery did not record any such amounts in 2001 and 2000.

Note I., "Investments," to our consolidated financial statements contains information regarding Genzyme Biosurgery's equity investment in Focal. We incorporate that information into this note by reference.

NOTE J. NEUROCELL JOINT VENTURE REFUND

Diacrin/Genzyme LLC, our joint venture with Diacrin, Inc. did not initiate a Phase 3 clinical trial of NeuroCell-PD for Parkinson's disease 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 was due and payable within 90 days after Genzyme Biosurgery received the notice from Genzyme General. Genzyme General and Genzyme Biosurgery agreed to extend Genzyme Biosurgery's deadline to refund the $20.0 million to February 1, 2002. The repayment will be recorded as a reduction to Genzyme Biosurgery's division equity.

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NOTE K. ACCRUED EXPENSES

	December 31,
	2001		2000
	(Amounts in thousands)
Compensation	$	11,507	$	12,180
Bank overdrafts		2,330		2,783
Royalties		4,522		3,200
Restructuring costs		2,160		5,970
Acquisition related costs		—		8,897
Other		4,623		13,215

Total	$	25,142	$	46,245

NOTE L. LONG-TERM DEBT AND LEASES

Our long-term debt and capital lease obligations consist of the following:

	December 31,
	2001			2000
	(Amounts in thousands)
Revolving credit facility maturing in December 2003	$	234,000		$	200,000
Revolving credit facility maturing in December 2001		—			18,000
6.9% convertible subordinated note due in May 2003		10,000			10,000
Capital leases		1,629			1,453

		245,629			229,453
Less current portion		(905	)		(18,449	)

	$	244,724		$	211,004

Note K., "Long-Term Debt and Leases," to our consolidated financial statements contains information regarding our:

•: revolving credit facility;
•: 6.9% convertible subordinated note; and
•: capital leases resulting from the acquisition of Biomatrix.

We incorporate that information into this note by reference.

Operating Leases

Genzyme Biosurgery leases facilities and personal property under operating leases with terms in excess of one year. Genzyme Biosurgery's total expense under operating leases was (amounts in millions):

2001		2000		1999
$3.3		$2.7		$1.9

Over the next five years, Genzyme Biosurgery will be required to repay the following amounts under operating leases (amounts in millions):

2002		2003		2004		2005		2006		After 2006
$4.6		$4.6		$3.5		$2.8		$0.5		$2.4

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NOTE M. DIVISION EQUITY

The following table contains the components of division equity for Genzyme Biosurgery for the periods presented:

	December 31,
	2001			2000			1999
	(Amounts in thousands)
Balance at beginning of period	$	511,106		$	350,463		$	210,692
Division net loss		(145,170	)		(162,217	)		(78,077	)
Allocated tax benefits		18,189			448			—
Allocation of proceeds from issuance of Tissue Repair Stock under stock plans		—			798			461
Allocation of proceeds from issuance of Surgical Products Stock under stock plans		—			910			—
Allocation of proceeds from issuance of Biosurgery Stock under stock plans		1,555			298			—
Allocation of cash from Genzyme General to Genzyme Biosurgery for Biosurgery designated shares (1)		12,000			—			—
Allocation of cash from Genzyme General to Genzyme Surgical Products for Surgical Products designated shares (1)		—			—			176,706
Allocation of cash from Genzyme General to Genzyme Tissue Repair for Tissue Repair designated shares (1)		—			9,910			5,001
Allocated value of Biosurgery Stock issued upon acquisition of Biomatrix		—			217,895			—
Allocated value of Biosurgery Stock issued upon acquisition of Focal		9,801			—			—
Tax benefit related to acquisition		1,774			107,044			—
Amortization of deferred tax benefit		(18,189	)		—			—
Notes receivable from stockholders		(535	)		(14,760	)		—
Payment of notes receivable from stockholders		2,841			—			—
Allocated stock compensation expense		66			—			—
Payment from Genzyme General for transfer of research program		—			—			100
Payment from Genzyme General for transfer of interest in joint venture		—			—			25,000
Conversion of 5¹/4% convertible notes		7			—			—
Allocated value of Tissue Repair Stock issued upon conversion of convertible debt		—			—			12,483
Issuance of Tissue Repair Stock in connection with research programs		—			289			—
Allocated equity adjustments		1,009			28			(1,903	)

Balance at end of period	$	394,454		$	511,106		$	350,463

(1): Designated shares are shares of our common stock that are not issued and outstanding, but which our board of directors may issue, sell or distribute without allocating the proceeds to the division

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corresponding to that series of stock. As of December 31, 2001, there were approximately 3.2 million Biosurgery designated shares.

As a result of recording a deferred tax liability related to the purchase of Biomatrix, Genzyme Biosurgery released a corresponding deferred tax asset valuation allowance totaling $107.0 million. This reversal was recorded to division equity.

Stock Compensation Plans

We apply APB Opinion 25 and related interpretations in accounting for our five stock-based compensation plans: the 1990 Equity Incentive Plan, the 1997 Equity Incentive Plan, the 2001 Equity Incentive Plan and the 1998 Director Stock Option Plan (each of which are stock option plans), the 1990 Employee Stock Purchase Plan and the 1999 Employee Stock Purchase Plan. We do not recognize compensation expense for options granted under the provisions of these plans for options granted to employees with fixed terms and an exercise price greater than or equal to fair market value at the date of grant.

The following table sets forth division net loss data for Genzyme Biosurgery as if compensation expense for our stock-based compensation plans was determined in accordance with SFAS 123 based on the fair value at the grant dates of the awards. The resulting compensation expense would be allocated to Genzyme Biosurgery in accordance with our allocation policies:

		December 31,
		2001			2000			1999
		(Amounts in thousands)
Net loss:
	As reported	$	(145,170	)	$	(162,217	)	$	(78,077	)
	Pro forma		(154,290	)		(166,623	)		(83,875	)

Note L., "Stockholders' Equity," to our consolidated financial statements contains information regarding the assumptions we made in calculating pro forma compensation expense in accordance with SFAS 123.

Interdivisional Financing Arrangement

Our board of directors has made $25.0 million of Genzyme General's cash available to Genzyme Biosurgery. Under this arrangement, Genzyme Biosurgery is able to draw down funds as needed each quarter in exchange for designated shares based on the fair market value (as defined in our charter) of Biosurgery Stock at the time of the draw. Genzyme Biosurgery has made the following draws during the past three fiscal years:

•: In 1999—none;
•: In 2000—two draws aggregating $10.0 million in exchange for a reserve of approximately 1.7 million Tissue Repair designated shares, which were converted into approximately 0.6 million Biosurgery designated shares.

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•: In 2001—$12.0 million in exchange for an additional reserve of approximately 1.9 million Biosurgery designated shares.

At December 31, 2001, $3.0 million remained available to Genzyme Biosurgery under this arrangement.

NOTE N. COMMITMENTS AND CONTINGENCIES

We periodically become subject to legal proceedings and claims arising in connection with our business. We do not believe that there were any asserted claims against us as of December 31, 2001 which, if adversely decided, would have a material adverse effect on Genzyme Biosurgery's results of operations, financial condition or liquidity.

NOTE O. INCOME TAXES

Genzyme Biosurgery's provisions for income taxes were at rates other than the U.S. federal statutory tax rate for the following reasons:

	2001		2000		1999
Tax provision (benefit) at U.S. statutory rate	(35.0	)%	(35.0	)%	(35.0	)%
State taxes, net	(1.3	)%	(1.0	)%	(1.2	)%
Benefit of tax credits	0.0	%	0.0	%	0.0	%
Nondeductible amortization	3.2	%	0.9	%	1.4	%
Other, net	0.3	%	0.2	%	0.2	%
Charge for purchase of in-process research and development	0.0	%	17.7	%	0.0	%
Write-off of non-deductible goodwill	3.6	%	0.0	%	0.0	%
Deductions subject to deferred tax valuation	29.2	%	17.2	%	34.6	%

Effective tax rate	0.0	%	0.0	%	0.0	%

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The components of net deferred tax assets are described in the following table:

		December 31,
		2001			2000
		(Amounts in thousands)
Deferred tax assets:
	Net operating loss carryforwards	$	151,970		$	125,386
	Tax credits		2,414			2,366
	Inventory		9,611			10,300
	Reserves and other		4,431			3,971

Gross deferred tax asset			168,426			142,023
Valuation allowance			(73,733	)		(34,104	)

Net deferred tax asset		$	94,693		$	107,919
Deferred tax liabilities:
	Intangible amortization	$	(92,430	)	$	(105,770	)
	Depreciable assets		(2,263	)		(2,149	)

Net deferred tax liabilities		$	—		$	—

We had valuation allowances of $73.7 million in 2001 and $34.1 million in 2000 against otherwise recognizable deferred tax assets, primarily consisting of operating loss carryforwards, and capital losses from the purchase of in-process research and development as the realizability of these assets was not sufficiently assured.

As Genzyme Biosurgery recognizes these deferred tax assets in accordance with generally accepted accounting principles, the benefits of those assets are reflected in its tax provision. However, the benefit of these deferred tax assets has previously been allocated to Genzyme General in accordance with our management and accounting policies, and will be reflected as a reduction of Genzyme Biosurgery's net loss to determine net loss attributable to Biosurgery Stock.

NOTE P. BENEFIT PLANS

Note P., "Benefit Plans", to our consolidated financial statements contains information regarding our 401(k) and other pension plans. We incorporate that information into this note by reference.

NOTE Q. SEGMENT INFORMATION

In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", we present segment information in a manner consistent with the method we use to report this information to our management. Applying SFAS 131, 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;

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•: Orthopaedics, which includes Synvisc viscosupplementation product and Carticel chondrocytes; and
•: Biosurgical Specialties, which includes Sepra products and Epicel skin grafts.

We have provided information concerning the operations in these reportable segments in the following table:

		December 31,
		2001		2000		1999
		(Amounts in thousands)
Revenues(1):
	Cardiothoracic(2)	$	69,118	$	76,406	$	77,936
	Orthopaedics		101,790		22,388		15,213
	Biosurgical Specialties		64,229		46,397		39,107
	Other(3)		5		23		97

Total		$	235,142	$	145,214	$	132,353

Gross Profit(1):
	Cardiothoracic(2)	$	21,945	$	30,536	$	33,360
	Orthopaedics		71,214		9,998		5,693
	Biosurgical Specialties		15,995		22,870		12,754
	Other(3)		5		23		97

Total		$	109,159	$	63,427	$	51,904

(1): In December 2000, we acquired Biomatrix. The results of operations of Biomatrix are included in the results of Genzyme Biosurgery from the date of acquisition.
(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.

Segment Assets

We do not allocate assets within Genzyme Biosurgery for purposes of segment information. Total assets for Genzyme Biosurgery at December 31, 2001 of $704.7 million include:

•: $25.9 million of 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;
•: $19.2 million of assets resulting from the acquisition of Focal, including $1.4 million of goodwill and $7.9 million of other intangible assets; and

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•: $532.1 million of assets resulting from the acquisition of Biomatrix, including $114.0 million of goodwill and $284.9 million of other intangible assets.

The following table contains revenue information by geographic area:

			December 31,
			2001		2000		1999
			(Amounts in thousands)
Revenues:
	U.S.		$	187,966	$	109,132	$	95,124
	Europe			34,987		24,554		28,234
	Other			12,189		11,528		8,995

		Total	$	235,142	$	145,214	$	132,353

All long-lived assets are in the United States.

Genzyme Biosurgery markets its products directly to physicians and hospitals. Genzyme Biosurgery also markets its products through distributors and had the following sales to three unaffiliated distributors:

				December 31,
				2001		2000		1999
				(Amounts in thousands)
Revenues:
	Cardiothoracic
		Distributor A		$	10,060	$	17,579	$	20,188
		Distributor B			5,096		9,888		10,031

			Total		15,156		27,467		30,219

	Orthopaedics
		Distributor C			68,990		—		—

	Total			$	84,146	$	27,467	$	30,219

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NOTE R. QUARTERLY RESULTS (UNAUDITED)

	1^stQuarter 2001			2^ndQuarter 2001			3^rdQuarter 2001			4^thQuarter 2001
	(Amounts in thousands)
Net revenue	$	54,156		$	60,364		$	63,219		$	57,403
Gross profit		22,381			25,422			32,943			28,413
Division net loss		(35,327	)		(37,608	)		(21,525	)		(50,710	)

	1^stQuarter 2000			2^ndQuarter 2000			3^rdQuarter 2000			4^thQuarter 2000
	(Amounts in thousands)
Net revenue	$	34,949		$	36,256		$	34,607		$	39,402
Gross profit		15,887			16,641			13,165			17,734
Division net loss		(15,014	)		(14,398	)		(19,524	)		(113,281	)

NOTE S. SUBSEQUENT EVENT

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REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of Genzyme Corporation:

In our opinion, the accompanying combined balance sheets and the related combined statements of operations and of cash flows present fairly, in all material respects, the financial position of Genzyme Biosurgery (as described in Note A) at December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As more fully described in Note A to these financial statements, Genzyme Biosurgery is a division of Genzyme Corporation; accordingly, the combined financial statements of Genzyme Biosurgery should be read in conjunction with the audited consolidated financial statements of Genzyme Corporation and Subsidiaries.

Boston, Massachusetts
February 14, 2002

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