EX-13.4 11 a2073695zex-13_4.htm EXHIBIT 13.4
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EXHIBIT 13.4

FINANCIAL STATEMENTS
GENZYME MOLECULAR ONCOLOGY
A DIVISION OF GENZYME CORPORATION

		Page No.
Combined Selected Financial Data		GMO-2
Management's Discussion and Analysis of Genzyme Molecular Oncology's Financial Condition and Results of Operations		GMO-4
Combined Statements of Operations—For the Years Ended December 31, 2001, 2000 and 1999		GMO-15
Combined Balance Sheets—December 31, 2001 and 2000		GMO-16
Combined Statements of Cash Flows—For the Years Ended December 31, 2001, 2000 and 1999		GMO-17
Notes to Combined Financial Statements		GMO-18
Report of Independent Accountants		GMO-32

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GENZYME MOLECULAR ONCOLOGY
A DIVISION OF GENZYME CORPORATION

COMBINED SELECTED FINANCIAL DATA

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

Genzyme Molecular Oncology is our operating division that is developing a new generation of cancer products focused on cancer vaccines and angiogenesis inhibitors through the integration of its genomics, gene and cell therapy, small molecule drug discovery and protein therapeutic capabilities.

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

•: factors the assets and liabilities and income or losses attributable to Genzyme Molecular Oncology into the determination of the amount available to pay dividends on Molecular Oncology Stock; and
•: requires us to exchange, redeem or distribute a dividend to the holders of Molecular Oncology Stock if all or substantially all of the assets allocated to Genzyme Molecular Oncology are sold to a third party. A dividend or redemption payment must equal in value the net after-tax proceeds from the sale. An exchange must be for Genzyme General Stock at a 10% premium to the 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 Molecular Oncology Stock is defined in our charter as the net income or loss of Genzyme Molecular Oncology determined in accordance with generally accepted accounting principles and as adjusted for tax benefits allocated to or from Genzyme Molecular Oncology in accordance with our management and accounting policies. Our charter also requires that all of our income and expenses be allocated among our 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 a new series of common stock or change our earnings allocation methodology. However, at the present time, we have no plans to do so. Because the earnings allocated to Molecular Oncology Stock are based on the income or losses attributable to Genzyme Molecular Oncology, we include financial statements and management's discussion and analysis of Genzyme Molecular Oncology to aid investors in evaluating its performance.

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GENZYME MOLECULAR ONCOLOGY
A DIVISION OF GENZYME CORPORATION

COMBINED SELECTED FINANCIAL DATA

COMBINED STATEMENTS OF OPERATIONS DATA

		For the Years Ended December 31,
		2001			2000			1999			1998			1997
		(Amounts in thousands)
Revenues:
Service revenue		$	700		$	—		$	1,920		$	2,229		$	467
Service revenue—related party			—			—			50			466			—
Research and development revenue—related party			—			—			496			2,177			315
Research and development revenue			3,412			584			—			3,256			—
Licensing revenue			2,302			4,936			2,125			11,275			—
Royalty revenue			148			151			28			4			—

	Total revenues		6,562			5,671			4,619			19,407			782

Operating costs and expenses:
Cost of service revenues			273			—			620			1,374			50
Cost of research and development and licensing revenues			2,803			826			698			4,073			287
Selling, general and administrative			7,552			5,851			5,529			7,155			2,118
Research and development			26,540			18,908			15,997			12,743			5,341
Amortization of intangibles			—			5,420			11,825			11,983			5,127
Purchase of in-process research and development (1)			—			—			—			—			7,000

	Total operating costs and expenses		37,168			31,005			34,669			37,328			19,923

Operating loss			(30,606	)		(25,334	)		(30,050	)		(17,921	)		(19,141	)

Other income (expenses):
Equity in net loss of unconsolidated affiliate (2)			—			—			(1,870	)		(1,647	)		(258	)
Interest income			945			1,211			469			782			392
Interest expense			(57	)		(187	)		(28	)		(2,968	)		(1,663	)

	Total other income (expenses)		888			1,024			(1,429	)		(3,833	)		(1,529	)

Loss before income taxes			(29,718	)		(24,310	)		(31,479	)		(21,754	)		(20,670	)
Tax benefit			—			1,214			2,647			2,647			1,092

Division net loss		$	(29,718	)	$	(23,096	)	$	(28,832	)	$	(19,107	)	$	(19,578	)

COMBINED BALANCE SHEET DATA

	December 31,
	2001		2000		1999			1998		1997
	(Amounts in thousands)
Cash and investments	$	41,135	$	30,151	$	3,587		$	11,900	$	21,229
Working capital		28,807		22,100		(5,889	)		9,189		11,953
Total assets		42,419		30,752		9,692			35,952		53,801
Long-term debt and convertible debt		—		—		—			—		24,606
Division equity		26,813		19,526		(1,215	)		23,364		13,466

(1): A $7.0 million charge for the purchase of in-process research and development was incurred in connection with the acquisition of PharmaGenics, Inc. in 1997.
(2): StressGen/Genzyme LLC was dissolved in 1999.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF GENZYME MOLECULAR ONCOLOGY'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 Molecular Oncology and Genzyme Corporation included in this annual report. You should consider carefully each of these risks and uncertainties in evaluating the financial condition and results of operations of Genzyme Molecular Oncology and Genzyme. We 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 Molecular Oncology in accordance with generally accepted accounting principles. We present financial information and accounting policies specific to Genzyme Molecular Oncology in the accompanying combined financial statements. We present financial information and accounting policies relevant to the corporation and its operating divisions taken as a whole in our consolidated financial statements. You should, therefore, read our consolidated financial statements in conjunction with the combined financial statements of Genzyme Molecular Oncology. Note A., "Summary of Significant Accounting Policies," to our consolidated financial statements contains a summary of our accounting policies.

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

•: factors the assets and liabilities and income or losses attributable to Genzyme Molecular Oncology into the determination of the amount available to pay dividends on Molecular Oncology Stock; and
•: requires us to exchange, redeem or distribute a dividend to the holders of Molecular Oncology Stock if all or substantially all of the assets allocated to Genzyme Molecular Oncology are sold to a third party. A dividend or redemption payment must equal in value the net after-tax proceeds from the sale. An exchange must be for Genzyme General Stock at a 10% premium to the average market price of Molecular Oncology 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 Molecular Oncology Stock is defined in our charter as the net income or loss of Genzyme Molecular Oncology determined in accordance with generally accepted accounting principles and as adjusted for tax benefits allocated to or from Genzyme Molecular Oncology in accordance with our management and accounting policies. Our charter also requires that all of our income and expenses be allocated among our 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 a new series of tracking stock or change our earnings allocation methodology. However, at the present time,

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we have no plans to do so. Because the earnings allocated to Molecular Oncology Stock are based on the income or losses attributable to Genzyme Molecular Oncology, we include financial statements and management's discussion and analysis of Genzyme Molecular Oncology to aid investors in evaluating its performance.

While Molecular Oncology Stock is designed to reflect Genzyme Molecular Oncology's performance, it is common stock of Genzyme Corporation and not Genzyme Molecular Oncology; Genzyme Molecular Oncology is a division, not a company or legal entity, and therefore does not and cannot issue stock. Consequently, holders of Molecular Oncology Stock have no specific rights to assets allocated to Genzyme Molecular Oncology. Genzyme Corporation continues to hold title to all of the assets allocated to Genzyme Molecular Oncology and is responsible for all of its liabilities, regardless of what we deem for financial statement presentation purposes as allocated to Genzyme Molecular Oncology. Holders of Molecular Oncology Stock, as common stockholders, are therefore subject to the risks of investing in the businesses, assets and liabilities of Genzyme as a whole. For instance, the assets allocated to Genzyme Molecular Oncology are subject to company-wide claims of creditors, product liability plaintiffs and stockholder litigation. Also, in the event of a Genzyme liquidation, insolvency or similar event, holders of Molecular Oncology Stock and other tracking stockholders would only have the rights of common stockholders in the combined assets of Genzyme.

Our charter requires us to manage and account for transactions between Genzyme Molecular Oncology and our other divisions and with third parties, and any resulting re-allocations of assets and liabilities, by applying consistently across divisions a detailed set of policies established by our board of directors. We publicly disclose our divisional management and accounting policies, which 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.

CRITICAL ACCOUNTING POLICIES

The preparation of the combined financial statements of Genzyme Molecular Oncology 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 our financial statements. 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 Molecular Oncology's combined financial statements:

•: Policies Relating to Tracking Stocks; and
•: Revenue Recognition.

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 Molecular Oncology and states that going forward the division will also include all business, products or programs, developed by or acquired for the division, as determined by our board of directors. We then manage and account for transactions between Genzyme Molecular Oncology and our other divisions and with third parties, and any resulting re-allocations of assets and liabilities, by applying consistently across divisions a detailed set of policies established by our board of directors. We publicly disclose our 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,

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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 Molecular Oncology.

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 Molecular Oncology 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 Molecular Oncology. Consistent with our policy, we have allocated the tax benefits generated by Genzyme Molecular Oncology to Genzyme General without any compensating payments or allocations to Genzyme Molecular Oncology.

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 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.

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Revenue Recognition

Genzyme Molecular Oncology recognizes revenue from service sales when it has finished providing the service. Genzyme Molecular Oncology recognizes revenue from research and development contracts over the term of the applicable contract and as it incurs costs related to that contract. It recognizes non-refundable up-front license fees over the related performance period or at the time it has no remaining performance obligations.

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

Genzyme Molecular Oncology does not recognize revenue unless collectibility is reasonably assured. It 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 Molecular Oncology's customers were to deteriorate and result in an impairment of their ability to make payments, additional allowances may be required.

Results of Operations

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

Revenues

		2001		2000		1999		01/00 Increase/ (Decrease) % Change	00/99 Increase/ (Decrease) % Change
		(Amounts in thousands, except percentage data)
Service revenue		$	700	$	—	$	1,970	N/A	(100)%
Research and development revenue			3,412		584		496	484 %	18 %
Licensing revenue			2,302		4,936		2,125	(53)%	132 %
Royalty revenue			148		151		28	(2)%	439 %

	Total revenues	$	6,562	$	5,671	$	4,619	16 %	23 %

2001 As Compared to 2000

Genzyme Molecular Oncology's service revenue is comprised of amounts received under an agreement with a pharmaceutical company around an improvement to the SAGE technology. This was Genzyme Molecular Oncology's first agreement related to the improved technology, so no such revenues were recorded in 2000.

Research and development revenue in 2001 is attributable to research performed on behalf of Purdue Pharma, L.P. under the cancer antigen discovery agreement that was initiated in October 2000 and on behalf of Kirin Brewery Co., Ltd. under a collaboration agreement around the tumor endothelial marker (TEM) program that was initiated in November 2001. Research and development revenue increased in 2001 as compared to 2000 as a result of the performance of a full year of research under the Purdue agreement and the commencement of work under the Kirin agreement.

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Licensing revenue in 2001 consisted primarily of technology access fees Genzyme Molecular Oncology received from Purdue and Kirin upon entry into those collaborations. Because Genzyme Molecular Oncology is amortizing these fees over the course of the associated research programs, it recognized one-third of the technology access fee it received from Purdue and approximately 6% of the fee it received from Kirin during 2001. Genzyme Molecular Oncology also recognized licensing revenue in 2001 from licenses of rights to the SAGE technology and under its diagnostic patent estate. Because Genzyme Molecular Oncology transferred its in vitro cancer diagnostic assets to Genzyme General in December 2001, it will not be receiving license revenue under that patent estate in the future.

Licensing revenue decreased in 2001 compared to 2000, notwithstanding the fact that Genzyme Molecular Oncology recognized a larger portion of the Purdue technology access fee, as a result of a $2.0 million milestone payment it received from Schering-Plough Ltd. in 2000.

Royalty revenue consists of royalties received under licenses to the SAGE technology and under Genzyme Molecular Oncology's diagnostic assets. Because Genzyme Molecular Oncology transferred its in vitro cancer diagnostic assets to Genzyme General in December 2001, it will not be receiving royalty revenue generated by those assets in the future.

2000 As Compared to 1999

As a result of a planned shift in the focus of Genzyme Molecular Oncology's SAGE business in late 1999 from one in which it provided services for third parties to one in which it granted licenses to practice the technology, it did not record service revenues in 2000.

Research and development revenue in 2000 is attributable to research performed on behalf of Purdue, with 1999 amounts attributable to work performed on behalf of StressGen/Genzyme LLC, Genzyme Molecular Oncology's joint venture with StressGen Biotechnologies Corporation to develop stress gene therapies for cancer. This joint venture was dissolved in December 1999.

Licensing revenue in 2000 consisted primarily of a portion of the technology access fee Genzyme Molecular Oncology received from Purdue and the $2.0 million milestone payment it received from Schering-Plough. The increase in licensing revenue over 1999 is primarily attributable to that milestone payment.

Cost of Revenues

Genzyme Molecular Oncology's cost of revenues for all periods presented includes:

•: costs associated with work performed under funded research and development agreements, including those with Purdue, Kirin and the StressGen joint venture;
•: costs associated with the performance of services using the SAGE technology on behalf of third parties; and
•: royalties payable to third parties, most notably The Johns Hopkins University for technology that Genzyme Molecular Oncology has licensed from them.

2001 As Compared to 2000

Cost of revenues increased in 2001 as compared to 2000 primarily as a result of the performance of a full year of work under the Purdue agreement as well as the initiation of the Kirin collaboration.

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2000 As Compared to 1999

Cost of revenues decreased in 2000 as compared to 1999, notwithstanding the initiation of the Purdue collaboration in October 2000, primarily as a result of the dissolution of the StressGen joint venture and the change in focus of Genzyme Molecular Oncology's SAGE business.

SG&A and R&D Expenses

2001 As Compared to 2000

Genzyme Molecular Oncology's selling, general and administrative expenses increased as a result of enhanced business development efforts and increased expenses related to information technology, legal, accounting and general management services.

Genzyme Molecular Oncology's research and development expense increased as a result of:

•: expansion of preclinical and clinical efforts in its antigen-specific and patient-specific cancer vaccine programs;
•: enhanced support for its antigen discovery program, particularly for its strategic collaboration with Purdue; and
•: increased spending in support of its antiangiogenesis program, including the initiation of its strategic collaboration with Kirin.

2000 As Compared to 1999

Genzyme Molecular Oncology's selling, general and administrative expense increased primarily as a result of increased professional service fees, combined with $0.4 million in audit and legal fees related to the registration of a public stock offering that was subsequently withdrawn.

Genzyme Molecular Oncology's research and development expense increased as a result of:

•: research and development expenses directed toward its antigen discovery, immunotherapy and antiangiogenesis programs;
•: the initiation of three additional clinical trials in its immunotherapy program; and
•: an increase in the number of research personnel and related expenses required to support the continued development of its cancer vaccine and antiangiogenesis programs.

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 Molecular Oncology:

Program		Program Description or Indication		Development Status at December 31, 2001		Year of Expected Product Launch
Dendritic/tumor cell fusion vaccines		Multiple cancer indications		Phase 1/2 trials in process		2007 to 2009
Melan-A/MART-1 and gp100 antigen-specific cancer vaccines		Melanoma		Phase 1/2 trials in process		2006 to 2008

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

Costs incurred for the year ended December 31, 2000		$6.4
Costs incurred for the year ended December 31, 2001		$12.6
Cumulative costs incurred as of December 31, 2001		$28.3
Estimated costs to complete as of December 31, 2001		$125.0 to $175.0

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.

Amortization of Intangibles

Genzyme Molecular Oncology's amortization of intangibles is attributable to intangible assets acquired in connection with the acquisition of PharmaGenics, Inc. in June 1997. These assets were fully amortized by the end of the second quarter of 2000.

Other Income and Expenses

2001 As Compared to 2000

Genzyme Molecular Oncology's other income decreased in 2001 due to a decrease in interest income that is attributable to lower average cash balances during most of the year. Interest expense decreased in 2001 in comparison to 2000 due to the repayment, in May 2000, of $5.0 million that Genzyme Molecular Oncology borrowed under our revolving credit facility in 1999. This amount was outstanding during the first quarter of 2000.

2000 As Compared to 1999

Genzyme Molecular Oncology's other income increased in 2000 due to the absence of any expenses from the StressGen joint venture that was dissolved in December 1999 and an increase in interest income due to higher average cash balances. Interest expense increased in 2000 due to $5.0 million that was borrowed under our revolving credit facility at the end of 1999. This amount was repaid in May 2000.

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Liquidity and Capital Resources

At December 31, 2001, Genzyme Molecular Oncology had cash and cash equivalents of $41.1 million, an increase of $18.9 million from cash, cash equivalents and short-term investments of $22.2 million at December 31, 2000.

In 2001, Genzyme Molecular Oncology's operating activities used $26.0 million of cash. This is primarily due to Genzyme Molecular Oncology's division net loss of $29.7 million for the year ended December 31, 2001, offset in part by the net changes in working capital.

In 2001, Genzyme Molecular Oncology's investing activities provided $7.9 million from the sales and maturities of investments.

During the year ended December 31, 2001, Genzyme Molecular Oncology received $1.0 million of allocated proceeds from the issuance of Molecular Oncology Stock attributable to the exercise of stock options and shares issued under our stock purchase program.

At December 31, 2001, Genzyme Molecular Oncology, together with our other operating divisions, has access to our $350.0 million revolving credit facility that matures in December 2003, of which $116.0 million remained available for borrowing. Borrowings under this facility bear interest at LIBOR plus an applicable margin. The terms of our revolving credit facility include various covenants, including 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.

Our board of directors has made $30.0 million of Genzyme General's cash available to Genzyme Molecular Oncology. Under this arrangement, Genzyme Molecular Oncology is able to draw down funds as needed in exchange for designated shares based on the fair market value (as defined in our charter) of Molecular Oncology Stock at the time of the draw. Genzyme Molecular Oncology has made the following draws during the past three fiscal years:

•: In 1999—none;
•: In 2000—$15.0 million in exchange for a reserve of approximately 0.7 million Molecular Oncology designated shares;
•: In 2001—$4.0 million in exchange for an additional reserve of approximately 0.3 million Molecular Oncology designated shares.

At December 31, 2001, $11.0 million remained available to Genzyme Molecular Oncology under this arrangement.

In December 2001, we reallocated certain intellectual property rights and licenses related to in vitro cancer diagnostics from Genzyme Molecular Oncology to Genzyme General. In exchange for the reallocation, Genzyme General paid to Genzyme Molecular Oncology $32.0 million in cash and undertook the obligation to pay Genzyme Molecular Oncology an additional $1.0 million if a specified milestone is met. As a result of this reallocation, royalty revenue under license agreements in the field of in vitro cancer diagnostics that previously had been allocated to Genzyme Molecular Oncology will be allocated to Genzyme General going forward. Management does not believe that the reallocation of these assets and the associated revenues will have a material impact on Genzyme Molecular Oncology's financial position or liquidity.

Genzyme Molecular Oncology has research and development obligations of approximately $1.8 million in 2002 under agreements associated with the significant research and development programs identified above.

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We anticipate that Genzyme Molecular Oncology's current cash resources, together with amounts available from the following sources, will be sufficient to fund its operations through the third quarter of 2004:

•: committed research funding from collaborators;
•: the $11.0 million remaining under the interdivisional financing arrangement with Genzyme General; and
•: amounts available to Genzyme Molecular Oncology under our revolving credit facility.

Genzyme Molecular Oncology plans to spend substantial amounts of funds on, among other things:

•: research and development;
•: preclinical and clinical testing;
•: pursuing regulatory approvals; and
•: working capital.

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

•: results of research and development and clinical testing;
•: achievement of milestones under existing licensing arrangements;
•: ability to establish and maintain additional strategic collaborations and licensing arrangements;
•: costs involved in enforcing patent claims and other intellectual property rights;
•: market acceptance of novel approaches and therapies;
•: development of competing products and services; and
•: ability to satisfy regulatory requirements of the FDA and other government authorities.

Genzyme Molecular Oncology may require significant additional financing to continue operations at anticipated levels. We cannot guarantee that Genzyme Molecular Oncology will be able to obtain any additional financing, extend any existing financing arrangement, or obtain either on terms that we consider favorable. If Genzyme Molecular Oncology has insufficient funds or is unable to raise additional funds, it may delay, reduce or eliminate certain of its programs. Genzyme Molecular Oncology may also have to sell or give to third parties rights to commercialize technologies or products that it would otherwise have sought to commercialize itself.

New Accounting Pronouncements and Market Risk

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

Factors Affecting Future Operating Results

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

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Genzyme Molecular Oncology may never be able to successfully develop or commercialize any of its cancer therapies.

Genzyme Molecular Oncology does not have any cancer therapies on the market and its only therapies in clinical development are at an early stage. Before commercializing any cancer therapies, Genzyme Molecular Oncology will need to conduct substantial additional research and development, including, in some cases, the replication of studies performed by third parties, undertake preclinical and clinical testing and obtain regulatory approvals. This process involves a high degree of uncertainty and may take several years. Its product development efforts may fail for many reasons, including: the product fails in preclinical studies; clinical trials may not support the safety or effectiveness of the product; or we fail to obtain the required regulatory approvals. We cannot guarantee that Genzyme Molecular Oncology will successfully develop any particular product or that any product it successfully develops will gain market acceptance.

Genzyme Molecular Oncology anticipates future losses and may never become profitable.

Genzyme Molecular Oncology has not generated significant revenues to date and does not expect to do so for several years. As of December 31, 2001, Genzyme Molecular Oncology had an accumulated deficit of approximately $121.8 million. We expect Genzyme Molecular Oncology to have significant operating losses for the next several years. Genzyme Molecular Oncology plans to spend substantial amounts of money on, among other things: research and development; preclinical and clinical testing; and pursuing regulatory approvals. We cannot guarantee that the efforts underlying these expenditures will be successful or that Genzyme Molecular Oncology's operations will ever be profitable.

Genzyme Molecular Oncology may not receive significant payments from collaborators due to unsuccessful results in existing collaborations or a failure to enter into future collaborations.

Genzyme Molecular Oncology's strategy to develop and commercialize some of its products and services includes entering into various arrangements with academic and corporate collaborators and licensees. It depends on the success of these parties in performing research, preclinical and clinical testing and marketing. These arrangements may require Genzyme Molecular Oncology to transfer important rights to its corporate collaborators and licensees. These collaborators and licensees could choose not to devote resources to these arrangements or, under certain circumstances, may terminate them early. In addition, these collaborators and licensees, outside of their arrangements with Genzyme Molecular Oncology, may develop technologies or products that are competitive with those that Genzyme Molecular Oncology is developing. As a result, we cannot guarantee that Genzyme Molecular Oncology will receive revenues from these relationships or that any of its strategic collaborations will continue or not terminate early. In addition, we cannot guarantee that Genzyme Molecular Oncology will be able to enter into collaborations in the future.

Genzyme Molecular Oncology may be required to license technology from competitors in order to develop and commercialize some of its products and services, and it is uncertain whether these licenses will be available.

Third party patent rights and pending patent applications filed by third parties, if issued, may cover some of the products Genzyme Molecular Oncology is developing or testing. As a result, Genzyme Molecular Oncology may be required to obtain licenses from the holders of these patents in order to use or sell certain products and services. We cannot guarantee that these licenses will be made available on acceptable terms or at all. If these licenses are not available, Genzyme Molecular Oncology's ability to commercialize its products and services may be impaired.

In its cancer vaccine program, Genzyme Molecular Oncology is in the process of evaluating the therapeutic administration of peptide products and genes that encode specific tumor antigens, including

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MART-1 and gp100. Genzyme Molecular Oncology is aware of two issued U.S. patents directed to the gene that encodes MART-1. While it has obtained rights under one of these patents, Genzyme Molecular Oncology is still in the process of evaluating the scope and validity of the other to determine whether it needs to obtain a license. Genzyme Molecular Oncology is also evaluating an issued U.S. patent covering the gene that encodes gp100 and three published Patent Cooperation Treaty applications by three different applicants that may cover antigens derived from gp100. Genzyme Molecular Oncology is in the process of evaluating the scope and validity of these patents and patent applications to determine whether it needs to obtain licenses.

Genzyme Molecular Oncology may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights.

If Genzyme Molecular Oncology or one of its strategic collaborators initiates litigation to enforce Genzyme Molecular Oncology's patent or license rights, or is required to defend these rights in response to third party claims, its business or financial position may be negatively affected. Genzyme Molecular Oncology has licensed its p53 gene therapy rights to Schering-Plough. These patent rights are the subject of an interference proceeding in the U.S. and an opposition proceeding in Europe. Adverse determinations in these proceedings may negatively affect Genzyme Molecular Oncology's ability to receive future milestones and product royalties under its agreement with Schering-Plough.

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

The 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 Molecular Oncology 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 Molecular Oncology's gene therapy products.

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

•: greater government regulation;
•: 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 Molecular Oncology may develop.

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GENZYME MOLECULAR ONCOLOGY
A DIVISION OF GENZYME CORPORATION

COMBINED STATEMENTS OF OPERATIONS

		For the Years Ended December 31,
		2001			2000			1999
		(Amounts in thousands, except per share amounts)
Revenues:
Service revenue		$	700		$	—		$	1,920
Service revenue—related party			—			—			50
Research and development revenue			3,412			584			—
Research and development revenue—related party			—			—			496
Licensing revenue			2,302			4,936			2,125
Royalty revenue			148			151			28

	Total revenues		6,562			5,671			4,619
Operating costs and expenses:
Cost of service revenues			273			—			620
Cost of research and development and licensing revenue			2,803			826			698
Selling, general and administrative			7,552			5,851			5,529
Research and development			26,540			18,908			15,997
Amortization of intangibles			—			5,420			11,825

Total operating costs and expenses			37,168			31,005			34,669

Operating loss			(30,606	)		(25,334	)		(30,050	)
Other income (expenses):
Equity in net loss of unconsolidated affiliate			—			—			(1,870	)
Interest income			945			1,211			469
Interest expense			(57	)		(187	)		(28	)

	Total other income (expenses)		888			1,024			(1,429	)

Loss before income taxes			(29,718	)		(24,310	)		(31,479	)
Tax benefit			—			1,214			2,647

Division net loss		$	(29,718	)	$	(23,096	)	$	(28,832	)

Comprehensive loss, net of tax:
Division net loss		$	(29,718	)	$	(23,096	)	$	(28,832	)
Foreign currency translation adjustments			(1	)		—			—

	Comprehensive loss	$	(29,719	)	$	(23,096	)	$	(28,832	)

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

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GENZYME MOLECULAR ONCOLOGY
A DIVISION OF GENZYME CORPORATION

COMBINED BALANCE SHEETS

		December 31,
		2001		2000
		(Amounts in thousands)
ASSETS
Current assets:
Cash and cash equivalents		$	41,135	$	22,209
Short term investments			—		7,942
Accounts receivable, net			463		231
Prepaid expenses and other current assets			702		126

	Total current assets		42,300		30,508
Equipment, net			119		244

	Total assets	$	42,419	$	30,752

LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accrued expenses		$	1,400	$	1,540
Due to Genzyme General			7,086		4,660
Deferred revenue—current portion			5,007		2,208

	Total current liabilities		13,493		8,408
Deferred tax liability			—		—
Deferred revenue—long term portion			2,113		2,818

	Total liabilities		15,606		11,226
Commitment and contingencies (Note I)
Division equity			26,813		19,526

	Total liabilities and division equity	$	42,419	$	30,752

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

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GENZYME MOLECULAR ONCOLOGY
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				$	(29,718	)	$	(23,096	)	$	(28,832	)
	Reconciliation of division net loss to net cash used in operating activities:
	Depreciation and amortization				125			5,572			12,057
	Provision for bad debts				113			—			256
	Equity in net loss of unconsolidated affiliate				—			—			1,870
	Gain on sale of equipment				—			—			(54	)
	Deferred income tax benefit				—			(1,214	)		(2,647	)
	Other				6			(142	)		20
	Increase (decrease) in cash from working capital:
		Accounts receivable			(345	)		(231	)		5,675
		Prepaid and other current assets			(576	)		92			(75	)
		Accrued expenses, deferred revenue and other			1,954			5,665			(1,927	)
		Due to Genzyme General			2,426			938			(980	)

			Net cash used in operating activities		(26,015	)		(12,416	)		(14,637	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments					—			(30,175	)		—
Sales and maturities of investments					7,942			22,383			1,022
Purchase of equipment					—			—			(43	)
Sale of equipment					—			—			188
Final distribution from joint venture					—			—			881

			Net cash provided by (used in) investing activities		7,942			(7,792	)		2,048

CASH FLOWS FROM FINANCING ACTIVITIES:
Allocated proceeds from issuance of Molecular Oncology Stock					959			28,830			308
Allocated proceeds from issuance of debt					—			—			5,000
Repayments of debts					—			(5,000	)		—
Net cash allocated from Genzyme General					36,040			15,000			—

			Net cash provided by financing activities		36,999			38,830			5,308

Increase (decrease) in cash and cash equivalents					18,926			18,622			(7,281	)
Cash and cash equivalents at beginning of period					22,209			3,587			10,868

Cash and cash equivalents at end of period				$	41,135		$	22,209		$	3,587

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

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GENZYME MOLECULAR ONCOLOGY

A DIVISION OF GENZYME CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS

NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business

Basis of Presentation

The combined financial statements of Genzyme Molecular Oncology for each period include the balance sheets, results of operations and cash flows of the businesses we allocate to Genzyme Molecular Oncology. We also allocate a portion of our corporate operations to Genzyme Molecular Oncology using methods described in our allocation policy below. These combined financial statements are prepared using amounts included in our consolidated financial statements included in this annual report. We have reclassified certain 2000 and 1999 data to conform with the 2001 presentation. We prepare the financial statements of Genzyme Molecular Oncology in accordance with generally accepted accounting principles. We present financial information and accounting policies specific to Genzyme Molecular Oncology in the accompanying combined financial statements. We present financial information and accounting policies relevant to the corporation and its operating divisions taken as a whole in our consolidated financial statements. You should read our consolidated financial statements in conjunction with the financial statements of Genzyme Molecular Oncology. Note A., "Summary of Significant Accounting Policies," to our consolidated financial statements contains a summary of our accounting policies. We incorporate that information into this note by reference.

Tracking Stock

•: factors the assets and liabilities and income or losses attributable to Genzyme Molecular Oncology into the determination of the amount available to pay dividends on Molecular Oncology Stock; and
•: requires us to exchange, redeem or distribute a dividend to the holders of Molecular Oncology Stock if all or substantially all of the assets allocated to Genzyme Molecular Oncology are sold to a third party. A dividend or redemption payment must equal in value the net after-tax proceeds from the sale. An exchange must be for Genzyme General Stock at a 10% premium to the average market price of Molecular Oncology Stock calculated over a ten day period beginning on the first business day following the announcement of the sale.

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policies. Our charter also requires that all of our income and expenses be allocated among its 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 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 Molecular Oncology Stock are based on the income or losses attributable to Genzyme Molecular Oncology, we include financial statements and management's discussion and analysis of Genzyme Molecular Oncology to aid investors in evaluating its performance.

While Molecular Oncology Stock is designed to reflect Genzyme Molecular Oncology's performance, it is common stock of Genzyme Corporation and not Genzyme Molecular Oncology; Genzyme Molecular Oncology is a division, not a company or legal entity, and therefore does not and cannot issue stock. Consequently, holders of Molecular Oncology Stock have no specific rights to assets allocated to Genzyme Molecular Oncology. Genzyme Corporation continues to hold title to all of the assets allocated to Genzyme Molecular Oncology and is responsible for all of its liabilities, regardless of what we deem for financial statement presentation purposes as allocated to Genzyme Molecular Oncology. Holders of Molecular Oncology Stock, as common stockholders, are therefore subject to the risks of investing in the businesses, assets and liabilities of Genzyme as a whole. For instance, the assets allocated to each division are subject to company-wide claims of creditors, product liability plaintiffs and stockholder litigation. Also, in the event of a Genzyme liquidation, insolvency or similar event, holders of Molecular Oncology Stock and other tracking stockholders would only have the rights of common stockholders in the combined assets of Genzyme.

Allocation Policy

Our charter sets forth what operations and assets were initially allocated to Genzyme Molecular Oncology and states that going forward the division will also include all businesses, products or programs, developed by or acquired for the division, as determined by our board of directors. We then manage and account for transactions between Genzyme Molecular Oncology and our other divisions and with third parties, and any resulting re-allocations of assets and liabilities, by applying consistently across divisions a detailed set of policies established by our board of directors.

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 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;

GMO-19

•: 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 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, a division's results of operations may not be indicative of what would have been realized if the division was a stand-alone entity.

Revenue Recognition

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.

GMO-20

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 our consolidated financial statements. We present earnings per share data only in our consolidated financial statements 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.

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, except in the case of certain enumerated key programs allocated to Genzyme Molecular Oncology, which may not be transferred out of Genzyme Molecular Oncology without a class vote of Molecular Oncology Stock unless such program has application outside of oncology, in which case it may be transferred out only for the non-oncology applications. 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;

GMO-21

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

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

•: the similarity of market opportunity;
•: the comparability of the medical needs addressed;
•: the similarity of the regulatory, reimbursement and competitive environment;
•: the stage of product or program development; and
•: the risk profile of successfully commercializing the product or program.

We customarily use the comparable transaction model to corroborate valuations derived under the risk-adjusted discounted cash flow model. When determining the fair value of a program under development using either model, our board of directors also takes into account the following criteria:

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

One division may compensate another division for a reallocation with cash or other consideration having a value equal to the fair market value of the reallocated assets. In the case of a reallocation of assets from Genzyme General to Genzyme Molecular Oncology, our board of directors may elect instead to account for the reallocation as an increase in Molecular Oncology designated shares in accordance with the provisions of our charter. Molecular Oncology designated shares are authorized but unissued shares of Molecular Oncology Stock that our board of directors may from time to time issue, sell or otherwise distribute without allocating the proceeds to Genzyme Molecular Oncology. No gain or loss is recognized as a result of these transfers.

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

Other 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. The division providing these products and services does not recognize revenue on any of these transactions unless it provides them to unrelated third parties in the ordinary course of business. These transactions are subject to the conditions described below:

•: 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 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 interdivision transactions are performed on terms and conditions obtainable in arm's length transactions with third parties.
•: Our board of directors must approve interdivision 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.

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•: All material interdivision 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 Molecular Oncology owed Genzyme General approximately $7.1 million in connection with these services. On December 31, 2000, approximately $4.7 million was owed to Genzyme General.

Tax Allocations

We file a consolidated tax return and allocate income taxes to Genzyme Molecular Oncology based upon the financial statement income, taxable income, credits and other amounts properly allocable to 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 provision. As of the end of any fiscal quarter, however, if Genzyme Molecular Oncology cannot use any projected annual tax benefit attributable to it to offset or reduce its current or deferred income tax expense, we may allocate the tax benefit to the other divisions in proportion to their taxable income without any compensating payment or allocation.

Access to Technology and Know-How

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

NOTE C. ACCOUNTS RECEIVABLE

Genzyme Molecular Oncology's trade receivables primarily represent amounts due from third party collaborators. Genzyme Molecular Oncology performs credit evaluations of its customers on an on-going basis and generally does not require collateral. Genzyme Molecular Oncology states accounts receivable at fair value after reflecting an allowance for doubtful accounts. This allowance was $0.4 million at December 31, 2001 and $0.3 million at December 31, 2000.

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NOTE D. EQUIPMENT

	December 31,
	2001			2000
	(Amounts in thousands)
Equipment	$	824		$	824
Furniture and fixtures		13			13

		837			837
Less accumulated depreciation		(718	)		(593	)

Equipment, net	$	119		$	244

Genzyme Molecular Oncology's depreciation expense was $125,000 in 2001, $152,000 in 2000 and $232,000 in 1999.

NOTE E. RESEARCH AND DEVELOPMENT AGREEMENTS

Kirin

In November 2001, we entered into a collaboration with Kirin Brewery Co., Ltd. of Japan to develop and commercialize fully human monoclonal antibodies to be used as therapies in the areas of antiangiogenesis and vascular targeted cancer drug delivery. Product candidates will be generated using Genzyme Molecular Oncology's portfolio of proprietary tumor endothelial markers as targets. Upon entering into the agreement, we received a $2 million up-front fee, along with committed funding to fully support a research program for two years. Because Genzyme Molecular Oncology is amortizing the up-front fee over the course of the research program, it recognized approximately 6% of the fee as licensing revenue in 2001. Genzyme Molecular Oncology will receive milestone payments from Kirin upon satisfaction of certain research milestones during the two-year research period.

Purdue Pharma

In October 2000, we entered into an arrangement with Purdue Pharma L.P. relating to the discovery and development of cancer antigens. Under this arrangement, we received approximately $12.0 million in cash, in the form of an up-front fee, research funding and an equity investment, and will receive approximately $9.0 million in committed research funding over the course of a research period expiring in 2003. The equity portion of this arrangement provided for two affiliates of Purdue Pharma to purchase an aggregate of 532,066 shares of Molecular Oncology Stock at a premium to the market price for those shares. We allocate our antigen discovery program to Genzyme Molecular Oncology.

NOTE F. INVESTMENTS IN MARKETABLE SECURITIES

Cash and cash equivalents for Genzyme Molecular Oncology as of December 31, 2001 include approximately $40 million of investments in money market funds with contractual maturities within one year.

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NOTE G. INVESTMENT IN STRESSGEN/GENZYME LLC

In July 1997, together with StressGen Biotechnologies Corp. and the Canadian Medical Discoveries Fund, Inc., or CMDF, we established StressGen/Genzyme LLC, a joint venture to develop stress gene therapies for the treatment of cancer. Because CMDF had the right to require StressGen and Genzyme Molecular Oncology to purchase its membership interest in the joint venture, Genzyme Molecular Oncology recorded 50% of the net operating losses of the joint venture. In 1999, CMDF exercised its put right and StressGen and Genzyme Molecular Oncology were required to purchase its membership interest in the joint venture at an aggregate price of $10.0 million (Canadian). As a result, Genzyme Molecular Oncology was obligated to repurchase one-half of the CMDF's interest in the joint venture for approximately $3.9 million ($5.0 million Canadian). To record the exercise of the put option, Genzyme Molecular Oncology recorded:

•: a $1.9 million increase to its liability related to the joint venture;
•: a $0.9 million increase to its investment in the joint venture to reflect its 50% interest in the net assets of the joint venture; and
•: a $1.0 million charge to equity in net loss of unconsolidated affiliate because, at that time, it was expected that the joint venture would be dissolved and the joint venture interest would have no value beyond the cash it held.

Genzyme Molecular Oncology dissolved StressGen/Genzyme LLC in December 1999 and in connection with the dissolution the joint venture received a cash distribution of $0.9 million, which was equal to Genzyme Molecular Oncology's investment in the joint venture at that time. Genzyme Molecular Oncology does not present summary financial information for StressGen/Genzyme LLC because the impact of its activities are not considered to be material to their operations for the year ended December 31, 1999.

NOTE H. LONG-TERM DEBT INSTRUMENTS

Genzyme Molecular Oncology, together with our other operating divisions, has access to our revolving credit facility. At December 31, 2001 and 2000, no amounts borrowed under this facility were allocated to Genzyme Molecular Oncology. At December 31, 2001, $234.0 million was outstanding under our $350.0 million revolving credit facility that matures in December 2003, all of which was allocated to Genzyme Biosurgery. Borrowings under this facility bear interest at LIBOR plus an applicable margin.

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NOTE I. DIVISION EQUITY

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

	December 31,
	2001			2000			1999
	(Amounts in thousands)
Balance at beginning of period	$	19,526		$	(1,215	)	$	23,364
Division net loss		(29,718	)		(23,096	)		(28,832	)
Allocated proceeds from issuance of Molecular Oncology Stock under stock plans		959			1,833			308
Allocation of cash from Genzyme General for Molecular Oncology designated shares (1)		4,040			15,000			—
Allocation of cash from Genzyme General in exchange for the re-allocation of diagnostic assets from Genzyme Molecular Oncology to Genzyme General		32,000			—			—
Allocated proceeds from sale of Molecular Oncology Stock		—			27,001			—
Allocated stock compensation expense		5			3			10
Allocated value of Molecular Oncology Stock issued upon repurchase of joint venture interest		—			—			3,935
Allocated equity adjustments		1			—			—

Balance at end of period	$	26,813		$	19,526		$	(1,215	)

(1): Molecular Oncology designated shares are shares of Molecular Oncology Stock that are not issued and outstanding, but which our board of directors may issue, sell or distribute without allocating the proceeds to Genzyme Molecular Oncology. As of December 31, 2001, there were approximately 1.7 million Molecular Oncology designated shares.

Offering of Molecular Oncology Stock

In July 2000, we sold approximately 1.6 million shares of Molecular Oncology Stock to a limited number of purchasers at a price of $12.91 per share. We received approximately $20.8 million in net proceeds from the offering, which we allocated to Genzyme Molecular Oncology. The proceeds of this offering will be used primarily to fund Genzyme Molecular Oncology's research, preclinical and clinical development programs, and for its working capital and general corporate purposes.

Stock Compensation Plans

We apply APB Opinion No. 25 and related interpretations in accounting for our five stock-based compensation plans: the 1990 Equity Incentive Plan, the 1997 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 and shares purchased under the provisions of these plans for options granted to employees with an exercise price greater than or equal to fair market value.

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

		December 31,
		2001			2000			1999
		(Amounts in thousands)
Division net loss:
	As reported	$	(29,718	)	$	(23,096	)	$	(28,832	)
	Pro forma		(34,512	)		(26,023	)		(29,973	)

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 $30.0 million of Genzyme General's cash available to Genzyme Molecular Oncology. Under this arrangement, Genzyme Molecular Oncology 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 Molecular Oncology Stock at the time of the draw. Genzyme Molecular Oncology has made the following draws during the past three fiscal years:

•: In 1999—none;
•: In 2000—$15.0 million in exchange for a reserve of approximately 0.7 million Molecular Oncology designated shares;
•: In 2001—$4.0 million in exchange for an additional reserve of approximately 0.3 million Molecular Oncology designated shares.

At December 31, 2001, $11.0 million remained available to Genzyme Molecular Oncology under this arrangement.

Asset Reallocation

NOTE J. COMMITMENTS AND CONTINGENCIES

We periodically become subject to legal proceedings and claims arising in connection with our business. We do not believe that there were any asserted claims against us as of December 31, 2001

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which, if adversely decided, would have a material adverse effect on Genzyme Molecular Oncology's results of operations, financial condition, or liquidity.

NOTE K. INCOME TAXES

There was no provision for income taxes due to Genzyme Molecular Oncology's continuing operating losses. As part of the acquisition of PharmaGenics, Genzyme Molecular Oncology recorded a deferred tax liability of $7.6 million resulting from the difference between the book and tax basis of the completed technology computed at a 38% incremental tax rate. This amount was amortized over three years consistent with the life of the completed technology. Genzyme Molecular Oncology recorded deferred tax benefits of $1.2 million in 2000 and $2.6 million in 1999. Amortization of this deferred tax benefit was completed in 2000.

The following summarizes Genzyme Molecular Oncology's benefit from income taxes:

		December 31,
		2001		2000			1999
		(Amounts in thousands)
Deferred:
	Federal	$	—	$	(1,118	)	$	(2,438	)
	State		—		(96	)		(209	)

Total income tax benefit		$	—	$	(1,214	)	$	(2,647	)

The differences between the effective tax rates and the U.S. federal statutory tax rates were as follows:

	2001		2000		1999
Tax provision (benefit) at U.S. statutory rate	(35.0	)%	(35.0	)%	(35.0	)%
State income taxes, net of federal benefit	(1.8	)	(0.9	)	(1.1	)
Tax credits	(3.2	)	(3.1	)	(2.5	)
Nondeductible amortization	—		3.2		5.4
Deductions subject to deferred tax valuation allowance	40.0		30.8		24.8

Effective tax rate—expense	0.0	%	(5.0	)%	(8.4	)%

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The components of net deferred tax assets were as follows:

		December 31,
		2001			2000
		(Amounts in thousands)
Deferred tax assets:
Net operating loss carryforwards		$	31,108		$	21,162
Reserves and other			269			437
Tax credits			4,411			2,956

Gross deferred tax asset			35,788			24,555
Valuation allowance			(35,788	)		(24,555	)

	Net deferred tax assets	$	—		$	—

As a result of uncertainty surrounding our ability to realize certain tax benefits that primarily relate to operating loss carryforwards, we placed valuation allowances of $35.8 million in 2001 and $24.6 million in 2000 against otherwise recognizable deferred tax assets.

NOTE L. BENEFIT PLANS

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

NOTE M. SIGNIFICANT CUSTOMERS

Genzyme Molecular Oncology has three significant customers. The following table describes the revenue for each customer in comparison to total revenue:

	2001		% of Total Revenue		2000		% of Total Revenue		1999		% of Total Revenue
	(Amounts in thousands, except percentage data)
Customer A	$	4,692	71	%	$	908	16	%		—	—
Customer B	$	700	11	%	$	1,280	23	%	$	2,800	61	%
Customer C	$	—	—	%	$	2,000	35	%		—	—

The portion of Genzyme Molecular Oncology's revenues related to work performed on behalf of StressGen/Genzyme LLC was $0.5 million, or 11% of total revenues in 1999. In 2001 and 2000, no revenues were earned from this joint venture due to its dissolution in December 1999.

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NOTE N. QUARTERLY RESULTS (UNAUDITED)

	1^st Quarter 2001			2^nd Quarter 2001			3^rd Quarter 2001			4^th Quarter 2001
	(Amounts in thousands, except percentage data)
Net revenue	$	1,412		$	1,279		$	1,224		$	2,647
Gross profit		868			794			556			1,268
Division net loss		(6,274	)		(8,331	)		(7,494	)		(7,619	)

	1^st Quarter 2000			2^nd Quarter 2000			3^rd Quarter 2000			4^th Quarter 2000
	(Amounts in thousands, except percentage data)
Net revenue	$	2,555		$	963		$	635		$	1,518
Gross profit		2,499			824			531			991
Division net loss		(5,057	)		(7,915	)		(5,504	)		(4,620	)

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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 Molecular Oncology (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 Molecular Oncology is a division of Genzyme Corporation; accordingly, the combined financial statements of Genzyme Molecular Oncology should be read in conjunction with the audited consolidated financial statements of Genzyme Corporation and Subsidiaries.

Boston, Massachusetts
February 14, 2002

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