10-Q 1 a2174005z10-q.htm 10-Q
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2006
or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-14680

GENZYME CORPORATION
(Exact name of registrant as specified in its charter)

Massachusetts		06-1047163
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
500 Kendall Street, Cambridge, Massachusetts		02142
(Address of principal executive offices)		(Zip Code)

(617) 252-7500
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ý Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

The number of shares of Genzyme Stock outstanding as of October 31, 2006: 262,855,622

NOTE REGARDING REFERENCES TO OUR COMMON STOCK

Throughout this Form 10-Q, the words "we," "us," "our" and "Genzyme" refer to Genzyme Corporation as a whole, and "our board of directors" refers to the board of directors of Genzyme Corporation. Genzyme Corporation has one outstanding series of common stock, which we refer to as "Genzyme Stock."

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-Q contains forward-looking statements, including statements regarding:

•

projected timetables for the preclinical and clinical development of, regulatory submissions and approvals for, and market introduction of, our products and services in various jurisdictions;

•

our plans and our anticipated timing for pursuing additional indications and uses for our products and services;

•

the timing of, and availability of data from, clinical trials;

•

estimates of the potential markets for our products and services;

•

the anticipated drivers for future growth of our products, including Renagel, Myozyme, Hectorol and Thymoglobulin;

•

our assessment of competitors and potential competitors and the anticipated impact of potentially competitive products on our revenues;

•

estimates of the capacity of, and the projected timetable of approvals for, manufacturing and other facilities to support our products and services;

•

potential use, benefit, and dissemination, as well as timing thereof, of data from the Dialysis Clinical Outcomes Revisited, or DCOR, trial;

•

expected continued adoption of Renagel by nephrologists;

•

expected future revenues, operations and expenditures;

•

projected future earnings and earnings per share;

•

our assessment of the outcome, timetables and financial impact of litigation and other governmental proceedings and the potential impact of unasserted claims;

•

the sufficiency of our cash, short-term investments and cash flows from operations;

•

U.S. and foreign income tax audits, including our provision for liabilities and assessment of the impact of settlement of IRS and foreign tax disputes;

•

estimates of the cost to complete and estimated commercialization dates for in-process research and development, or IPR&D, programs;

•

our assessment of the deductibility of goodwill for income tax purposes;

•

our assessment of the impact of recent accounting pronouncements, including:

•: Financial Accounting Standards Board, or FASB, Statement of Financial Accounting Standards No., or FAS, 158, regarding accounting for pension and other postretirement plans;
•: FAS 157, regarding fair value measurements;
•: Securities and Exchange Commission, commonly referred to as the SEC, Staff Accounting Bulletin No., or SAB, 108, regarding consideration of the effects of prior year misstatements when quantifying misstatements in current year financial statements; and

•: FASB Interpretation No., or FIN, 48 regarding accounting for uncertainty in income taxes;

•: sales and marketing plans;
•: our planned acquisition of AnorMED Inc., or AnorMED, and the expected timing and payments related to the acquisition;
•: expected future payments related to our acquisitions, including milestone and royalty payments to Avigen, Inc., or Avigen, Wyeth and the former shareholders of Surgi.B Chirugie et Medicine SAS, or Surgi.B, milestone and contingent payments to Verigen AG, or Verigen, contingent payments to Equal Diagnostics, Inc., or Equal Diagnostics, and employee benefits and leased facilities acquired from Bone Care International, Inc., or Bone Care, and the expected timing of these payments;
•: completion of a post-closing working capital assessment for our acquisition of substantially all of the pathology/oncology testing assets related to the Physician Services and Analytical Services business units of IMPATH, Inc., or IMPATH; and
•: our efforts to reverse the coding decision by the Centers for Medicare and Medicaid Services, or CMS, relating to Synvisc and the future impact of CMS's decision if not reversed.

These statements are subject to risks and uncertainties, and our actual results may differ materially from those that are described in this report. These risks and uncertainties include:

•: our ability to successfully complete preclinical and clinical development of our products and services;
•: our ability to secure regulatory approvals for our products and services and to do so on the anticipated timeframes;
•: the content and timing of submissions to and decisions made by the United States Food and Drug Administration, commonly referred to as the FDA, the European Agency for the Evaluation of Medicinal Products, or EMEA, and other regulatory agencies;
•: our ability to satisfy the post-marketing commitments made as a condition of the marketing approvals of Fabrazyme, Aldurazyme and Myozyme;
•: our ability to manufacture sufficient amounts of our products for development and commercialization activities and to do so in a timely and cost-effective manner;
•: our reliance on third parties to provide us with materials and services in connection with the manufacture of our products;
•: our ability to obtain and maintain adequate patent and other proprietary rights protection for our products and services and successfully enforce our proprietary rights;
•: the scope, validity and enforceability of patents and other proprietary rights held by third parties and their impact on our ability to commercialize our products and services;
•: the accuracy of our estimates of the size and characteristics of the markets to be addressed by our products and services, including growth projections;
•: market acceptance of our products and services in expanded areas of use and new markets;
•: our ability to identify new patients for our products and services;
•: our ability to increase market penetration both outside and within the United States for our products and services;
•: the accuracy of our information regarding the products and resources of our competitors and potential competitors;

•: the availability of reimbursement for our products and services from third party payors, the extent of such coverage and the accuracy of our estimates of the payor mix for our products;
•: how Synvisc's customers and competitors react to the decision by CMS, if not reversed;
•: our ability to effectively manage wholesaler inventories of our products and the levels of compliance with our inventory management programs;
•: our ability to establish and maintain strategic license, collaboration and distribution arrangements and to manage our relationships with licensors, collaborators, distributors and partners;
•: the continued funding and operation of our joint ventures by our partners;
•: our use of cash in business combinations or other strategic initiatives;
•: the resolution of litigation related to the consolidation of our tracking stocks;
•: the initiation of legal proceedings by or against us;
•: the impact of changes in the exchange rate for the Euro and other currencies on our product and service revenues in future periods;
•: our ability to successfully integrate the business we acquired from Bone Care;
•: our ability to complete the planned acquisition of AnorMED on the anticipated terms and timeline, including receipt of sufficient shares in the tender offer and receipt of clearance from the United States Federal Trade Commission, commonly referred to as the FTC, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976;
•: our ability to successfully integrate the business we will acquire from AnorMED if the acquisition is completed;
•: the number of diluted shares considered outstanding, which will depend on business combination activity, our stock price and any further changes in the accounting rules for the calculation of earnings per share;
•: the estimates and input variables used in accounting for stock options and the related stock-based compensation expense;
•: the outcome of our IRS and foreign tax audits; and
•: the possible disruption of our operations due to terrorist activities, armed conflict, or outbreak of diseases such as severe acute respiratory syndrome (SARS) or avian influenza, including as a result of the disruption of operations of regulatory authorities, our subsidiaries, our manufacturing facilities and our customers, suppliers, distributors, couriers, collaborative partners, licensees and clinical trial sites.

We have included more detailed descriptions of these and other risks and uncertainties in Item 2 of this report under the heading "Factors Affecting Future Operating Results." We encourage you to read those descriptions carefully. We caution investors not to place substantial 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.

NOTE REGARDING INCORPORATION BY REFERENCE

The SEC allows us to disclose important information to you by referring you to other documents we have filed with them. The information that we refer you to is "incorporated by reference" into this Form 10-Q. Please read that information.

NOTE REGARDING TRADEMARKS

Genzyme®, Cerezyme®, Fabrazyme®, Thyrogen®, Myozyme®, Renagel®, Thymoglobulin®, Campath®, Clolar®, Synvisc®, Carticel®, Seprafilm®, IMPATH®, MACI®, GlucaMesh®, GlucaTex®, Epicel® and Hectorol® are registered trademarks, and Lymphoglobuline™ and Sepra™ are trademarks, of Genzyme or its subsidiaries. WelChol® is a registered trademark of Sankyo Pharma, Inc. Aldurazyme® is a registered trademark of BioMarin/Genzyme LLC. All rights reserved.

GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, SEPTEMBER 30, 2006
TABLE OF CONTENTS

		PAGE NO.
PART I.	FINANCIAL INFORMATION	6
ITEM 1.	Financial Statements	6
	Unaudited, Consolidated Statements of Operations and Comprehensive Income for the Three and Nine Months Ended September 30, 2006 and 2005	6
	Unaudited, Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005	7
	Unaudited, Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 and 2005	8
	Notes to Unaudited, Consolidated Financial Statements	9
ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	35
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	75
ITEM 4.	Controls and Procedures	76
PART II.	OTHER INFORMATION	77
ITEM 1.	Legal Proceedings	77
ITEM 1A.	Risk Factors	78
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	78
ITEM 6.	Exhibits	78
Signatures		79

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GENZYME CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations and Comprehensive Income

(Unaudited, amounts in thousands, except per share amounts)

				Three Months Ended September 30,						Nine Months Ended September 30,
				2006			2005			2006			2005
Revenues:
	Net product sales			$	734,231		$	633,605		$	2,110,301		$	1,796,165
	Net service sales				71,153			69,845			210,987			194,494
	Research and development revenue				3,190			4,613			11,484			15,492

		Total revenues			808,574			708,063			2,332,772			2,006,151

Operating costs and expenses:
	Cost of products sold				134,140			110,353			388,609			317,655
	Cost of services sold				50,536			42,355			148,350			126,396
	Selling, general and administrative				239,700			202,002			743,849			580,226
	Research and development				162,293			128,000			483,557			364,471
	Amortization of intangibles				50,542			50,847			156,117			132,138
	Purchase of in-process research and development				—			12,700			—			22,200
	Charge for impaired goodwill				219,245			—			219,245			—

		Total operating costs and expenses			856,456			546,257			2,139,727			1,543,086

Operating income (loss)					(47,882	)		161,806			193,045			463,065

Other income (expenses):
	Equity in income (loss) of equity method investments				4,530			940			10,630			(1,195	)
	Minority interest				2,545			3,670			7,741			9,221
	Gains on investments in equity securities, net				128			214			75,037			5,172
	Other				(873	)		(1,021	)		(1,331	)		(828	)
	Investment income				16,760			8,073			39,401			22,235
	Interest expense				(3,772	)		(6,749	)		(12,245	)		(15,023	)

		Total other income (expenses)			19,318			5,127			119,233			19,582

Income (loss) before income taxes					(28,564	)		166,933			312,278			482,647
(Provision for) benefit from income taxes					44,530			(51,279	)		(60,841	)		(147,804	)

Net income				$	15,966		$	115,654		$	251,437		$	334,843

Net income per share:
	Basic			$	0.06		$	0.45		$	0.96		$	1.32

	Diluted			$	0.06		$	0.43		$	0.93		$	1.26

Weighted average shares outstanding:
	Basic				261,541			256,490			260,565			253,499

	Diluted				278,271			274,492			277,130			270,823

Comprehensive income, net of tax:
	Net income			$	15,966		$	115,654		$	251,437		$	334,843

	Other comprehensive income (loss):
		Foreign currency translation adjustments			7,914			(7,792	)		85,647			(106,640	)

		Gain on affiliate sale of stock, net of tax			—			—			—			996

		Other, net of tax			(129	)		119			(406	)		431

		Unrealized gains (losses) on securities, net of tax:
			Unrealized gains (losses) arising during the period, net of tax		7,066			3,236			43,004			(13,179	)
			Reclassification adjustment for (gains) losses included in net income, net of tax		242			281			(45,490	)		(1,451	)

			Unrealized gains (losses) on securities, net of tax		7,308			3,517			(2,486	)		(14,630	)

	Other comprehensive income (loss)				15,093			(4,156	)		82,755			(119,843	)

Comprehensive income				$	31,059		$	111,498		$	334,192		$	215,000

The accompanying notes are an integral part of these unaudited, consolidated financial statements.

GENZYME CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited, amounts in thousands, except par value amounts)

			September 30, 2006			December 31, 2005
ASSETS
Current assets:
	Cash and cash equivalents		$	762,887		$	291,960
	Short-term investments			187,291			193,946
	Accounts receivable, net			696,488			608,326
	Inventories			355,457			297,652
	Prepaid expenses and other current assets			94,274			100,256
	Notes receivable—related party			—			2,416
	Deferred tax assets			173,016			170,443

		Total current assets		2,269,413			1,664,999
Property, plant and equipment, net				1,513,632			1,320,813
Long-term investments				725,421			603,196
Notes receivable—related party				7,349			7,206
Goodwill, net				1,269,705			1,487,567
Other intangible assets, net				1,503,948			1,590,894
Investments in equity securities				71,121			135,930
Other noncurrent assets				64,449			68,260

		Total assets	$	7,425,038		$	6,878,865

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable		$	83,410		$	96,835
	Accrued expenses			432,535			430,032
	Income taxes payable			15,856			2,486
	Deferred revenue and other income			12,858			15,018
	Current portion of long-term debt and capital lease obligations			7,432			5,652

		Total current liabilities		552,091			550,023
Long-term debt and capital lease obligations				121,029			125,652
Convertible notes				690,000			690,000
Deferred revenue—noncurrent				4,774			4,663
Deferred tax liabilities				245,558			335,612
Other noncurrent liabilities				26,753			23,048

		Total liabilities		1,640,205			1,728,998

Commitments and contingencies
Stockholders' equity:
	Preferred stock, $0.01 par value			—			—
	Common stock, $0.01 par value			2,621			2,593
	Additional paid-in capital			4,988,979			4,687,775
	Notes receivable from shareholders			(14,903	)		(14,445	)
	Accumulated earnings			580,893			329,456
	Accumulated other comprehensive income			227,243			144,488

		Total stockholders' equity		5,784,833			5,149,867

		Total liabilities and stockholders' equity	$	7,425,038		$	6,878,865

The accompanying notes are an integral part of these unaudited, consolidated financial statements.

GENZYME CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited, amounts in thousands)

					Nine Months Ended September 30,
					2006			2005
Cash Flows from Operating Activities:
	Net income				$	251,437		$	334,843
	Reconciliation of net income to cash flows from operating activities:
		Depreciation and amortization				246,651			212,676
		Stock-based compensation				160,219			—
		Provision for bad debts				6,329			7,133
		Purchase of in-process research and development				—			22,200
		Charge for impaired goodwill				219,245			—
		Equity in (income) loss of equity method investments				(10,630	)		1,195
		Minority interest				(7,741	)		(9,221	)
		Gains on investments in equity securities, net				(75,037	)		(5,172	)
		Deferred income tax benefit				(92,815	)		(37,244	)
		Tax benefit from employee stock-based compensation				20,751			76,180
		Excess tax benefits from stock-based compensation				(8,979	)		—
		Other				(2,511	)		4,365
		Increase (decrease) in cash from working capital changes (excluding impact of acquired assets and assumed liabilities):
			Accounts receivable			(77,211	)		(78,557	)
			Inventories			(29,092	)		(23,936	)
			Prepaid expenses and other current assets			(1,519	)		(3,874	)
			Income taxes payable			13,545			38,366
			Accounts payable, accrued expenses and deferred revenue			4,290			20,256

				Cash flows from operating activities		616,932			559,210

Cash Flows from Investing Activities:
	Purchases of investments					(750,855	)		(781,512	)
	Sales and maturities of investments					643,594			821,606
	Purchases of equity securities					(6,115	)		(6,771	)
	Proceeds from sales of investments in equity securities					137,806			6,091
	Purchases of property, plant and equipment					(236,917	)		(131,940	)
	Distributions from equity method investments					12,000			1,500
	Purchases of other intangible assets					(18,209	)		—
	Acquisitions, net of acquired cash					—			(687,875	)
	Acquisition of sales and marketing rights					(49,584	)		(151,161	)
	Other					4,662			2,630

				Cash flows from investing activities		(263,618	)		(927,432	)

Cash Flows from Financing Activities:
	Proceeds from issuance of common stock					112,012			296,210
	Excess tax benefits from stock-based compensation					8,979			—
	Proceeds from draws on our 2003 revolving credit facility					—			350,000
	Payments of debt and capital lease obligations					(3,155	)		(452,722	)
	Bank overdraft					(16,285	)		12,689
	Minority interest contributions					8,265			9,154
	Other					2,610			584

				Cash flows from financing activities		112,426			215,915

Effect of exchange rate changes on cash						5,187			(1,965	)

Increase (decrease) in cash and cash equivalents						470,927			(154,272	)
Cash and cash equivalents at beginning of period						291,960			480,198

Cash and cash equivalents at end of period					$	762,887		$	325,926

The accompanying notes are an integral part of these unaudited, consolidated financial statements.

GENZYME CORPORATION AND SUBSIDIARIES

Notes to Unaudited, Consolidated Financial Statements

1. Description of Business

We are a global biotechnology company dedicated to making a major impact on the lives of people with serious diseases. Our broad product and service portfolio is focused on rare disorders, renal diseases, orthopaedics, organ transplant, and diagnostic and predictive testing. We are organized into five financial reporting units, which we also consider to be our reporting segments:

•: Renal, which develops, manufactures and distributes products that treat patients suffering from renal diseases, including chronic renal failure. The unit derives substantially all of its revenue from sales of Renagel (including sales of bulk sevelamer) and Hectorol;
•: Therapeutics, which develops, manufactures and distributes therapeutic products, with an expanding focus on products to treat patients suffering from genetic diseases and other chronic debilitating diseases, including a family of diseases known as lysosomal storage disorders, or LSDs, and other specialty therapeutics, such as Thyrogen. The unit derives substantially all of its revenue from sales of Cerezyme, Fabrazyme, Myozyme and Thyrogen;
•: Transplant, which develops, manufactures and distributes therapeutic products that address pre-transplantation, prevention and treatment of acute rejection in organ transplantation, as well as other auto-immune disorders. The unit derives substantially all of its revenue from sales of Thymoglobulin and Lymphoglobuline;
•: Biosurgery, which develops, manufactures and distributes biotherapeutics and biomaterial products, with an emphasis on products that meet medical needs in the orthopaedics and broader surgical areas. The unit derives substantially all of its revenue from sales of Synvisc, the Sepra line of products, Carticel and MACI; and
•: Diagnostics/Genetics, which develops, manufactures and distributes raw materials and in vitro diagnostics products, and provides testing services for the oncology, prenatal and reproductive markets.

We report the activities of our oncology, bulk pharmaceuticals and cardiovascular business units under the caption "Other." We report our general and administrative operations and corporate science activities under the caption "Corporate."

Effective January 1, 2006, as a result of changes in how we review our business, certain general and administrative expenses, as well as research and development expenses related to our preclinical development programs, which were formerly allocated amongst our reporting segments and Other, are now allocated to Corporate. We have revised our 2005 segment disclosures to conform to our 2006 presentation.

2. Basis of Presentation and Significant Accounting Policies

Basis of Presentation

Our unaudited, consolidated financial statements for each period include the statements of operations and comprehensive income, balance sheets and statements of cash flows for our operations taken as a whole. We have eliminated all intercompany items and transactions in consolidation. We prepare our unaudited, consolidated financial statements following the requirements of the SEC for interim reporting. As permitted under these rules, we condense or omit certain footnotes and other financial information that are normally required by accounting principles generally accepted in the United States.

These financial statements include all normal and recurring adjustments that we consider necessary for the fair presentation of our financial position and operating results. Since these are interim financial statements, you should also read our audited, consolidated financial statements and notes included in our 2005 Form 10-K. Revenues, expenses, assets and liabilities can vary from quarter to quarter. Therefore, the results and trends in these interim financial statements may not be indicative of results for future periods.

Accounting for Stock-Based Compensation

Prior to January 1, 2006, we elected to:

•: account for share-based payment awards under Accounting Principles Board Opinion No., or APB, 25, "Accounting for Stock Issued to Employees," as amended by FAS 148, "Accounting for Stock-Based Compensation—Transition and Disclosures," which we refer to collectively as APB 25; and
•: disclose the pro forma impact of expensing the fair value of our employee and director stock options and purchases made under our employee stock purchase plan, or ESPP, only in the notes to our financial statements.

Effective January 1, 2006, we adopted the provisions of:

•: FAS 123R, "Share-Based Payment, an amendment of FASB Statement Nos. 123 and 95," which requires us to recognize stock-based compensation expense in our financial statements for all share-based payment awards made to employees and directors based upon the grant date fair value of those awards; and
•: SAB 107, "Share-Based Payment," which provides guidance to public companies related to the adoption of FAS 123R.

FAS 123R applies to stock options granted under our employee and director stock option plans and purchases made under our ESPP, and would also apply to any restricted stock or restricted stock units we may grant in the future.

We adopted FAS 123R using the modified prospective transition method, which requires us to apply the standard to new equity awards and to equity awards modified, repurchased or canceled after January 1, 2006, our adoption date. Additionally, compensation expense for the unvested portion of awards granted prior to our adoption date shall be:

•: recognized over the requisite service period, which is generally commensurate with the vesting term; and
•: based on the original grant date fair value of those awards, as calculated in our pro forma disclosures, prior to January 1, 2006, under FAS 123, "Accounting for Stock-Based Compensation," as amended by FAS 148, "Accounting for Stock-Based Compensation—Transition and Disclosures," which we refer to collectively as FAS 123. Changes to the grant date fair value of equity awards granted prior to our adoption date are not permitted under FAS 123R.

The modified prospective transition method does not allow for the restatement of prior periods. Accordingly, our results of operations for the three and nine months ended September 30, 2006 and

future periods will not be comparable to our results of operations prior to January 1, 2006 because our historical results prior to that date do not reflect the impact of expensing the fair value of share-based payment awards.

Prior to January 1, 2006, in the pro forma disclosures regarding stock-based compensation included in the notes to our financial statements, we recognized forfeitures of stock options only as they occurred. Effective January 1, 2006, in accordance with the provisions of FAS 123R, we are now required to estimate an expected forfeiture rate for stock options, which is factored into the determination of our monthly stock-based compensation expense. As a result of the adoption of FAS 123R, we recorded pre-tax stock-based compensation expense totaling $44.6 million, net of estimated forfeitures, in our consolidated statements of operations for the three months ended September 30, 2006, and $160.1 million, net of estimated forfeitures, in our consolidated statements of operations for the nine months ended September 30, 2006. Additional information regarding our stock-based compensation is included in Note 3, "Stock-Based Compensation," to our consolidated financial statements included in this report.

In connection with the adoption of FAS 123R, we were also required to change the classification, in our consolidated statements of cash flows, of any tax benefits realized upon the exercise of stock options in excess of that which is associated with the expense recognized for financial reporting purposes. These amounts are presented as a financing cash inflow rather than as a reduction of income taxes paid in our consolidated statements of cash flows for the nine months ended September 30, 2006.

Recent Accounting Pronouncements

FAS 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106 and 132(R.)" In September 2006, the FASB issued FAS 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106 and 132(R)." FAS 158 requires us to recognize the overfunded or underfunded status of any pension or other postretirement plans we may have as a net asset or a net liability on our statement of financial position and to recognize changes in that funded status in the year in which the changes occur as an adjustment to other comprehensive income in stockholders' equity. Currently, we have defined benefit pension plans for certain of our foreign subsidiaries but do not have any defined benefit postretirement plans for our U.S. business. Under FAS 158, actuarial gains and losses, prior service costs or credits, and any remaining transition assets or obligations that have not been recognized for our foreign defined benefit pension plans under previous accounting standards must be recognized in other comprehensive income, net of tax effects, until they are amortized as a component of net periodic benefit cost. In addition, FAS 158 requires that the measurement date, which is the date at which the benefit obligation and plan assets are measured, be as of our fiscal year end, which is December 31. FAS 158 is effective for our current fiscal year ending December 31, 2006, except for the measurement date provisions, which are effective for us for our fiscal year ending December 31, 2008. Accordingly, we will initially recognize the funded status of our foreign defined benefit pension plans and provide the required disclosures as of December 31, 2006. We are currently evaluating the impact the adoption of FAS 158 will have on our financial position and results of operations. However, had we adopted FAS 158 as of December 31, 2005, we estimate that the after-tax impact would not have been significant. The actual effects of adopting FAS 158 will depend on the funded status of our plans at December 31, 2006, which will depend on several factors, including returns on plan assets in 2006 and discount and exchange rates as of December 31, 2006.

FAS 157, "Fair Value Measurements." In September 2006, the FASB issued FAS 157, "Fair Value Measurements," which provides enhanced guidance for using fair value to measure assets and liabilities. FAS 157 establishes a common definition of fair value, provides a framework for measuring fair value under accounting principles generally accepted in the United States and expands disclosure requirements about fair value measurements. FAS 157 is effective for us as of January 1, 2008. We are currently evaluating the impact, if any, the adoption of FAS 157 will have on our financial position and results of operations.

SAB 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements." In September 2006, the SEC staff issued SAB 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements," to address the diversity in practice regarding the quantification of financial statement misstatements under the two methods most commonly used by preparers and auditors—the income statement, or "roll-over," approach, and the balance sheet, or "iron curtain," approach. Prior to SAB 108, companies might evaluate the materiality of financial statement misstatements using either the income statement approach which focuses on new misstatements added in the current year, or the balance sheet approach which focuses on the cumulative amount of misstatement present in a company's balance sheet. Misstatements that would be material under one approach could be viewed as immaterial under another approach, and not be corrected. The SEC staff believes that reliance on only one of these methods, to the exclusion of the other, does not appropriately quantify all misstatements that could be material to financial statement users. As a result, SAB 108 now requires that companies utilize a dual approach to assessing the quantitative effects of financial misstatements, which includes both an income statement focused assessment and a balance sheet focused assessment. The guidance in SAB 108 is effective for our current fiscal year ending December, 31, 2006. Although restatement of prior years' financial statements is permitted, it is not required if we properly applied our previous approach (income statement or balance sheet) and considered all relevant qualitative factors in our assessment of previous errors. In lieu of the restatement, we will be permitted to report the cumulative effect of adopting SAB 108 as an adjustment to the opening balance of assets and liabilities, with an offsetting adjustment to the opening balance of retained earnings as of January 1, 2006, the year of adoption. In addition, we will be required to disclose the nature and amount of each individual error being corrected in the cumulative effect adjustment, when and how each error being corrected arose, and the fact that the errors had previously been considered immaterial. We do not believe the adoption of SAB 108 will have a material impact on our financial position or results of operations.

FIN 48, "Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109." In July 2006, the FASB issued FIN 48, "Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109," which seeks to reduce the significant diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for us as of January 1, 2007. Upon adoption, the cumulative effect of any changes in net assets resulting from the application of FIN 48 will be recorded as an adjustment to retained earnings. We are currently evaluating the impact, if any, that FIN 48 will have on our financial position and results of operations.

3. Stock-Based Compensation

Equity Plans

The purpose of our equity plans is to attract, retain and motivate our key employees, consultants and directors. Options granted under these plans can be either incentive stock options (ISO) or nonstatutory stock options (NSO), as specified in the individual plans. Shares issued as a result of stock option exercises are funded through the issuance of new shares as opposed to treasury shares. The following table contains information about our equity plans:

			As of September 30, 2006
Plan Name	Group Eligible	Type of Option Granted	Options Reserved for Issuance	Options Outstanding	Options Available for Grant
2004 Equity Incentive Plan(1)	All key employees and consultants	ISO/NSO	23,495,759	13,454,844	10,040,915
2001 Equity Incentive Plan(1)	All key employees and consultants	ISO/NSO	10,377,379	10,263,172	114,207
1997 Equity Incentive Plan(1)	All key employees and consultants, except officers	NSO	12,762,344	12,363,569	398,775
1998 Director Stock Option Plan(2)	Non-employee board members	NSO	970,291	608,931	361,360
Assumed Options(3)			424,794	424,794	—

			48,030,567	37,115,310	10,915,257

(1): The exercise price of option grants may not be less than the fair market value at the date of grant. Option grants have a maximum term of ten years. The compensation committee of our board of directors, or its delegates as applicable, determines the terms and conditions of each option grant, including who, among eligible persons, will receive option grants, the form of payment of the exercise price, the number of shares granted, the vesting schedule and the terms of exercise.
(2): Options are automatically granted on the date of our annual shareholders meeting or at a director's initial appointment to the board, have an exercise price equal to the fair market value of Genzyme Stock on the date of grant, expire ten years after the initial grant date and vest on the date of the next annual shareholders meeting following the date of grant.
(3): Consists of options we assumed through our acquisitions of Biomatrix, Inc., or Biomatrix, GelTex Pharmaceuticals, Inc., or GelTex, Focal, Inc., Novazyme Pharmaceuticals, Inc. and ILEX Oncology, Inc., or ILEX Oncology.

All stock-based awards to non-employees are accounted for at their fair value in accordance with FAS 123R and Emerging Issues Task Force, or EITF, Issue No. 96-18, "Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services."

We account for options granted to our employees and directors under the fair value method of accounting using a Black-Scholes valuation model to measure stock option expense at the date of grant. All stock option grants have an exercise price equal to the fair market value of Genzyme Stock on the date of grant and generally have a 10-year term and vest in increments, generally over four years from the date of grant, although we may grant options with different vesting terms from time to time.

Excluding our directors who are not employees, when an employee at or over the age of 60 with at least five years of service retires, the employees' options automatically become fully vested and will expire three years after the employee's retirement date or on the original expiration date set at the time the options were granted, whichever is earlier. Upon termination of employment, unvested options are cancelled and any unexercised vested options will expire three months after the employee's termination date. We recognize stock-based compensation expense for each grant on a straight-line basis over the employee's or director's requisite service period, generally the vesting period of the award. Additionally, stock-based compensation expense related to stock options includes an estimate for pre-vesting forfeitures. Effective January 1, 2006, in connection with our adoption of FAS 123R, we now recognize stock-based compensation expense immediately for awards granted to retirement eligible employees or over the period from the grant date to the date retirement eligibility is achieved, if that is expected to occur during the nominal vesting period. For stock-based compensation expense recognition purposes only, grants to retirement eligible employees prior to January 1, 2006 are not subject to accelerated vesting and continue to vest over the nominal vesting period.

ESPP

Our 1999 ESPP allows employees to purchase our stock at a discount. Under this plan, the purchase price per share of Genzyme Stock is 85% of the lower of the fair market value of Genzyme Stock at the beginning of an enrollment period or on the purchase date. Employees working at least 20 hours per week may elect to participate in our ESPP during specified open enrollment periods, which occur twice each year shortly before the start of each new enrollment period. New enrollment periods begin on the first trading day of January and July and each enrollment period lasts two years. Employee contributions for each enrollment period are automatically used to purchase stock on behalf of each participating employee on eight pre-determined purchase dates during the two-year enrollment period, which occur once every three months, in January, April, July and October. We place limitations on the total number of shares of stock that employees can purchase under the plan in a given year. As of September 30, 2006, 5,829,391 shares of Genzyme Stock were authorized for purchase under the plan, of which 1,019,221 remain available.

Adoption of FAS 123R

As a result of adopting FAS 123R, for the three months ended September 30, 2006, we recorded pre-tax stock-based compensation expense, net of estimated forfeitures, which were allocated based on

the functional cost center of each employee as follows (amounts in thousands, except per share amounts):

			Three Months Ended September 30, 2006			Nine Months Ended September 30, 2006
Pre-tax stock-based compensation expense, net of estimated forfeitures (1):
	Cost of products and services sold (2)		$	(5,663	)	$	(12,893	)
	Selling, general and administrative			(24,421	)		(96,560	)
	Research and development			(14,556	)		(50,682	)

		Total		(44,640	)		(160,135	)
Less: tax benefit of stock options				14,312			52,237

Stock-based compensation expense, net of tax			$	(30,328	)	$	(107,898	)

Per basic share:			$	(0.12	)	$	(0.41	)

Per diluted share:			$	(0.11	)	$	(0.39	)

(1): In addition, we capitalized the following amounts of stock-based compensation expense to inventory, all of which is attributable to participating employees that support our manufacturing operations (amounts in thousands):

		Three Months Ended September 30, 2006			Nine Months Ended September 30, 2006
Stock-based compensation expense capitalized to inventory		$	3,377		$	11,640

(2): We amortize stock-based compensation expense capitalized to inventory based on inventory turns. For the three and nine months ended September 30, 2006, pre-tax stock-based compensation expense, net of estimated forfeitures, charged to cost of products and services sold includes the amortization of $2.7 million of pre-tax stock-based compensation expense previously capitalized to inventory in the first quarter of 2006.

At September 30, 2006, there was $303.5 million of pre-tax compensation expense, net of estimated forfeitures, related to unvested awards not yet recognized which is expected to be recognized over a weighted average period of 2.6 years.

Pro Forma Information for the Period Prior to Adoption of FAS 123R

Prior to the adoption of FAS 123R, we accounted for stock options granted to employees in accordance with APB 25 and provided the disclosures required under FAS 123 only in the notes to our financial statements. As a result, no stock-based compensation expense was reflected in our net income for the three and nine months ended September 30, 2005 related to our ESPP or stock options, since all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant.

The following table sets forth our historical disclosure of our pro forma net income and net income per share data for the three and nine months ended September 30, 2005, as if compensation expense for our stock-based compensation plans was determined in accordance with FAS 123 based on the individual grant date fair value of the awards (amounts in thousands, except per share amounts):

			Three Months Ended September 30, 2005			Nine Months Ended September 30, 2005
Net income:
	As reported		$	115,654		$	334,843
	Add: employee stock-based compensation included in as reported, net of tax			28			28
	Deduct: pro forma employee stock-based compensation expense, net of tax(1)			(23,704	)		(89,296	)

	Pro forma(1)		$	91,978		$	245,575

Net income per share:
	Basic:
		As reported	$	0.45		$	1.32

		Pro forma(1)	$	0.36		$	0.97

	Diluted:
		As reported	$	0.43		$	1.26

		Pro forma(1)	$	0.34		$	0.93

(1): Under FAS 123, we did not capitalize any stock-based compensation to inventory.

Valuation Assumptions for Stock Option Plans and ESPP

The employee stock-based compensation expense recognized under FAS 123R and presented in the pro forma disclosure required under FAS 123 was determined using the Black-Scholes option valuation model. Option valuation models require the input of subjective assumptions and these assumptions can vary over time. The weighted average assumptions used are as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006		2005
Risk-free interest rate	5	%	4	%	5	%	4	%
Dividend yield	0	%	0	%	0	%	0	%
Expected option life (in years)	4		5		4		5
Volatility-stock options	35	%	48	%	42	%	50	%
Volatility-ESPP	27	%	27	%	27	%	28	%

The risk-free interest rate is based on the U.S. Treasury yield curve in effect on the date of grant. The dividend yield percentage is zero because we do not currently pay dividends nor intend to do so during the expected option life. We used historical data on exercises of our stock options and other factors to estimate the expected option life (in years), or term, of the share-based payments granted. We

determined the volatility rate for our stock options based on the expected term of the equity award granted. We determine separate volatility rates for each enrollment under our ESPP based on the period from the commencement date of each enrollment to each applicable purchase date. Stock option expense in future periods will be based upon the Black-Scholes values determined at the date of each grant or the date of each purchase under our ESPP.

Stock Option Plan Activity

The following table contains information regarding stock option plan activity for the nine months ended September 30, 2006:

	Shares Under Option		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at December 31, 2005	32,345,317		$	47.71
Granted	7,704,536			59.07
Exercised	(2,199,079	)		38.32
Forfeited and cancelled	(735,464	)		63.24

Outstanding at September 30, 2006	37,115,310		$	50.32	7.05	$	678.5 million

Exercisable at September 30, 2006	22,460,499		$	46.22	6.00	$	515.8 million

The following table contains information regarding the pre-tax intrinsic value of our stock options, the estimated fair value of shares vested and the weighted average grant date fair value per share of stock options granted under our stock option plans during the three and nine months ended September 30, 2006 and 2005 (amounts in thousands, except per share amounts):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006		2005
Pre-tax intrinsic value of options exercised	$	26,108	$	93,561	$	62,474	$	230,165
Estimated fair value of shares vested	$	45,751	$	41,526	$	471,322	$	430,324
Weighted average grant date fair value per share of stock options granted under our stock option plans	$	23.09	$	32.53	$	25.07	$	29.67

For the nine months ended September 30, 2006, we:

•: received a total of $112.0 million of cash proceeds and recognized $20.8 million of actual tax benefits from the issuance of stock under our stock option plans and ESPP; and
•: classified $9.0 million of excess tax benefits from stock-based compensation as a financing cash inflow in our statement of cash flows.

ESPP Activity

The following table shows our ESPP activity for the nine months ended September 30, 2006:

Shares Issued	Shares Under ESPP
Available for purchase as of December 31, 2005	1,712,481
Shares purchased by employees	(693,260	)

Available for purchase as of September 30, 2006	1,019,221

4. Net Income Per Share

The following table sets forth our computation of basic and diluted net income per share (amounts in thousands, except per share amounts):

			Three Months Ended September 30,				Nine Months Ended September 30,
			2006		2005		2006		2005
Net income—basic			$	15,966	$	115,654	$	251,437	$	334,843
Effect of dilutive securities:
	Interest expense and debt fees, net of tax, related to our 1.25% convertible senior notes			1,874		1,874		5,622		5,622

Net income—diluted			$	17,840	$	117,528	$	257,059	$	340,465

Shares used in computing net income per common share—basic				261,541		256,490		260,565		253,499

Effect of dilutive securities:
	Shares issuable for the assumed conversion of our 1.25% convertible senior notes			9,686		9,686		9,686		9,686
	Stock options(1)			7,033		8,304		6,868		7,627
	Warrants and stock purchase rights			11		12		11		11

		Dilutive potential common shares		16,730		18,002		16,565		17,324

Shares used in computing net income per common share—diluted(1)				278,271		274,492		277,130		270,823

Net income per share:
	Basic		$	0.06	$	0.45	$	0.96	$	1.32

	Diluted		$	0.06	$	0.43	$	0.93	$	1.26

(1): We did not include the securities described in the following table in the computation of diluted earnings per share for all periods presented because the effect of these securities would have been anti-dilutive (amounts in thousands):

	Three Months Ended September 30,		Nine Months Ended September 30,
	2006	2005	2006	2005
Shares of Genzyme Stock issuable upon exercise of outstanding options	14,278	8,396	11,199	7,104

5. Mergers and Acquisitions

Pending Acquisition of AnorMED

On October 17, 2006, we entered into a support agreement with AnorMED, a chemistry-based biopharmaceutical company based in Langley, British Columbia, Canada, with a focus on the discovery, development and commercialization of new therapeutic products in the areas of hematology, oncology and HIV. Under the support agreement, AnorMED agreed, among other things, to recommend that its shareholders accept our cash tender offer to acquire all of the outstanding shares of AnorMED for $13.50 per share, or an aggregate purchase price of approximately $580 million. The closing of our tender offer is subject to the applicable waiting period required by the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The waiting period is expected to expire at 11:59 p.m. New York, New York, time on November 6, 2006, but could be extended if we receive a request from the FTC for additional information. If the waiting period expires as scheduled, our tender offer will expire at 8:00 a.m. Vancouver, British Columbia time on November 7, 2006.

Acquisition of Surgi.B

In March 2006, through a series of transactions we acquired Surgi.B, a privately-held company based in Beauzelle, France, which owned the exclusive rights to manufacture and sell GlucaMesh and GlucaTex, two beta glucan-coated mesh products for use in the surgical repair of inguinal hernias, for an aggregate up-front cash payment of $5.5 million. We allocated the entire purchase price to license fees, a component of other intangible assets on our consolidated balance sheet, based on their estimated fair values as of March 30, 2006, the date of acquisition. In addition, we are obligated to make certain contingent milestone payments totaling up to approximately $6 million and contingent royalty payments based on future sales of GlucaMesh and GlucaTex. Currently, GlucaMesh is sold only in France.

Acquisition of Gene Therapy Assets from Avigen

In connection with our December 2005 acquisition of certain gene therapy assets from Avigen, we acquired IPR&D related to Avigen's Parkinson's disease program. As of the date this transaction closed, this program had not reached technological feasibility nor had an alternative future use. Accordingly, we allocated to IPR&D and charged to expense in our consolidated statements of operations in December 2005, $7.0 million, representing the portion of the $12.0 million up-front payment to Avigen we attributed to the Parkinson's disease program. In addition, we may be obligated to make up to approximately $38 million of milestone payments based on the development and approval of, and royalty payments based on the sale of, products developed between now and 2020 that rely on the intellectual property we purchased from Avigen.

As of September 30, 2006, we estimated that it will take approximately ten years and an investment of approximately $74 million to complete the development of, obtain approval for and commercialize a product arising from the acquired Parkinson's disease program.

Acquisition of Bone Care

In July 2005, we acquired Bone Care, a publicly-held specialty pharmaceutical company based in Middleton, Wisconsin with a focus on nephrology. We paid gross consideration of $712.3 million in cash. We accounted for the acquisition as a purchase and accordingly, included its results of operations in our consolidated statements of operations from July 1, 2005, the date of acquisition.

In October 2004, Bone Care was one of seven companies, all of which market treatments, therapies or diagnostics for kidney patients, which received a subpoena from the office of the United States Attorney for the Eastern District of New York. The subpoena required Bone Care to provide a wide range of documents related to numerous aspects of its business and operations. The subpoena included specific requests for documents related to testing for parathyroid hormone levels and vitamin D therapies. Bone Care has cooperated, and we continue to cooperate, with the government's investigation. To our knowledge, no civil or criminal proceedings have been initiated against Bone Care or Genzyme at this time, although we cannot predict when or if any proceedings might be initiated. As a result, we have not recorded any contingent liabilities related to this investigation. Any such liabilities that may arise out of this investigation in the future will be recorded as a charge to our consolidated statement of operations in the period in which such liabilities become probable and estimable.

The allocation of the purchase price was corrected in June 2006 to create a $3.6 million reserve for returns of inventory sold by Bone Care prior to the date of acquisition, and to record adjustments totaling $2.5 million to revise the estimated liabilities related to exit activities and deferred taxes.

Exit Activities

In connection with our acquisition of Bone Care, we initiated an integration plan to consolidate and restructure certain functions and operations, including the relocation and termination of certain Bone Care personnel. These costs have been recognized as liabilities assumed in connection with the acquisition of Bone Care in accordance with EITF Issue No. 95-3, "Recognition of Liabilities in Connection with a Purchase Business Combination," and are subject to potential adjustments as certain exit activities are confirmed or refined. The following table summarizes the liabilities established for exit activities related to the acquisition of Bone Care (amounts in thousands):

	Employee Related Benefits			Other Exit Activities			Total Exit Activities
Recorded at acquisition date	$	10,759		$	382		$	11,141
Revision of estimate		80			—			80
Payments in 2005		(9,099	)		—			(9,099	)

Balance at December 31, 2005		1,740			382			2,122
Revision of estimate		(72	)		(382	)		(454	)
Payments in 2006		(1,627	)		—			(1,627	)

Balance at September 30, 2006	$	41		$	—		$	41

We expect to pay employee related benefits to certain former employees of Bone Care through the end of 2006.

Acquisition of Synvisc Sales and Marketing Rights from Wyeth

$94.5 million had been paid as of September 30, 2006. Distribution rights (a component of other intangible assets, net) in our consolidated balance sheet as of September 30, 2006 include a total of $224.8 million for the initial and contingent royalty payments (made or accrued) as of that date. We will make a series of additional contingent royalty and milestone payments to Wyeth based on the volume of Synvisc sales in the covered territories. These contingent royalty and milestone payments could extend out to June 2012, or could total a maximum of $293.7 million, whichever comes first.

In April 2006, we entered into an agreement with Wyeth to reacquire the sales and marketing rights to Synvisc in Turkey and made an initial payment of $6.0 million in cash to Wyeth, which is included in distribution rights (a component of other intangible assets, net) in our consolidated balance sheet as of September 30, 2006. We will make an additional $1.0 million payment on the earlier of December 31, 2007 or the date the registration required by the Turkish Ministry of Health for the promotion, marketing, distribution and sale of Synvisc in Turkey is transferred from Wyeth to us. In addition, we are obligated to make certain contingent milestone payments to Wyeth totaling up to $1.5 million between now and December 31, 2007, and a series of additional contingent royalty payments to Wyeth, both based on the volume of Synvisc sales in Turkey. These contingent royalty payments could extend out to December 31, 2007, or could total a maximum of $3.0 million, whichever comes first.

We determined that the contingent royalty and milestone payments to Wyeth represent contingent purchase price. Accordingly, as contingent royalty and milestone payments are accrued in the future, the amounts will be recorded as additional purchase price for the underlying intangible asset. We calculate amortization expense for these intangible assets based on an economic use model, taking into account our forecasted future sales of Synvisc and the resulting estimated future contingent royalty and milestone payments we will be required to make to Wyeth. We periodically update the estimates used in this amortization calculation based on changes in forecasted sales and resulting estimated contingent royalty and milestone payments.

The reacquired Synvisc distribution rights qualify as an asset rather than an acquired business. As a result, we do not provide pro forma results for our reacquisition of the Synvisc distribution rights.

Acquisition of ILEX Oncology

In connection with our December 2004 acquisition of ILEX Oncology, an oncology drug development company, we acquired IPR&D related to three development projects: Campath (alemtuzumab) for indications other than B-cell chronic lymphocytic leukemia, Clolar and tasidotin hydrochloride. As of the date of our acquisition of ILEX Oncology, none of these projects had reached technological feasibility nor had an alternative future use. Accordingly, we allocated to IPR&D, and charged to expense in our consolidated statements of operations in December 2004, $254.5 million, representing the portion of the purchase price attributable to these projects, of which $96.9 million is attributable to the Campath (alemtuzumab) development projects, $113.4 million is attributable to the Clolar development projects and $44.2 million is related to the tasidotin development projects. In December 2004, after the date of our acquisition of ILEX Oncology, the FDA granted marketing approval for Clolar for the treatment of children with refractory or relapsed acute lymphoblastic leukemia.

As of September 30, 2006, we estimated that it will take approximately three to five years and an investment of approximately $109 million to complete the development of, obtain approval for and

commercialize Campath (alemtuzumab) for multiple sclerosis and other cancer and noncancer indications. We estimated that it will take approximately two to five years and an investment of approximately $60 million to complete the development of, obtain approval for and commercialize Clolar for adult hematologic cancer, solid tumor and pediatric acute leukemia indications. We estimated that it will take approximately five to eight years and an investment of approximately $46 million to complete the development of, obtain approval for and commercialize tasidotin.

Acquisition of Physician Services and Analytical Services Business Units of IMPATH

In May 2004, we acquired substantially all of the pathology/oncology testing assets related to the Physician Services and Analytical Services business units of IMPATH, a national medical testing provider, for total cash consideration of $215.3 million, including acquisition costs. We accounted for the acquisition as a purchase and accordingly, included the results of operations related to the acquired business units in our consolidated statements of operations from May 1, 2004, the date of acquisition. The purchase price is subject to adjustment based upon the completion of a post-closing assessment of the working capital of the acquired business units as of April 30, 2004. We are pursuing resolution of a dispute with IMPATH related to the amount of the purchase price adjustment permitted under the asset purchase agreement. Each side contends that it is entitled to a purchase price adjustment in its favor based on calculations of the working capital of the acquired business units as of the closing date. In July 2006, we agreed with IMPATH to appoint an independent third party to act as arbitrator for the dispute. Arbitration proceedings are currently ongoing.

6. Inventories

		September 30, 2006		December 31, 2005
		(Amounts in thousands)
Raw materials		$	94,867	$	76,466
Work-in-process			104,937		90,629
Finished goods			155,653		130,557

	Total	$	355,457	$	297,652

We capitalize inventory produced for commercial sale, which may result in the capitalization of inventory prior to regulatory approval. If a product is not approved for sale, it would result in the write off of the inventory and a charge to earnings. Our total inventories at September 30, 2006 do not include any inventory for products that have not yet been approved for sale.

7. Goodwill and Other Intangible Assets

Goodwill

The following table contains the change in our goodwill during the nine months ended September 30, 2006 (amounts in thousands):

		As of December 31, 2005		Adjustments		Impairment			As of September 30, 2006
Renal(1)		$	304,492	$	1,097	$	—		$	305,589
Therapeutics			354,709		—		—			354,709
Transplant			128,511		—		—			128,511
Biosurgery			7,585		—		—			7,585
Diagnostics/Genetics(2,3)			245,342		286		(219,245	)		26,383
Other			446,928		—		—			446,928

	Total	$	1,487,567	$	1,383	$	(219,245	)	$	1,269,705

(1): The adjustments to goodwill for Renal include a correction to the purchase accounting for the acquisition of Bone Care. We recorded $1.1 million of adjustments to the Bone Care goodwill in June 2006, primarily due to the creation of a $3.6 million reserve for returns of inventory sold by Bone Care prior to the date of acquisition, offset by $2.5 million of revisions to the estimates of liabilities related to exit activities and deferred taxes.
(2): The adjustments to goodwill primarily include foreign currency revaluation adjustments for goodwill denominated in foreign currencies.
(3): Impairment for Diagnostics/Genetics represents the write off of the goodwill assigned to our Genetics reporting unit in accordance with FAS 142, "Goodwill and Other Intangible Assets."

We are required to perform impairment tests related to our goodwill under FAS 142 annually and whenever events or changes in circumstances suggest that the carrying value of an asset may not be recoverable. We completed the required annual impairment tests for our $1.5 billion of net goodwill in the third quarter of 2006 and determined that the $219.2 million of goodwill assigned to our Genetics reporting unit was potentially impaired. Such goodwill was derived as a result of our acquisitions of substantially all of the pathology/oncology testing assets related to the Physician Services and Analytical Services business units of IMPATH in April 2004, Genetrix, Inc. in February 1996 and the minority share of IG Laboratories, Inc. in October 1995.

We determined the fair value of the net assets of our Genetics reporting unit by discounting, to present value, its estimated future cash flows. Due to the reduction of reimbursement rates for certain test offerings and increased infrastructure costs, the discounted future cash flows of our Genetics reporting unit were negatively impacted causing the fair value of its net assets of our Genetics reporting unit to be lower than the carrying value. As a result, in accordance with the requirements of FAS 142, the goodwill assigned to our Genetics reporting unit was fully impaired and we recorded a pre-tax impairment charge of $219.2 million and $69.8 million of related tax benefits in September 2006. No additional impairment charges were required for the remaining $1.3 billion of goodwill related to our other reporting units.

Other Intangible Assets

The following table contains information about our other intangible assets for the periods presented (amounts in thousands):

		As of September 30, 2006							As of December 31, 2005
		Gross Other Intangible Assets		Accumulated Amortization			Net Other Intangible Assets		Gross Other Intangible Assets		Accumulated Amortization			Net Other Intangible Assets
Technology		$	1,505,140	$	(395,335	)	$	1,109,805	$	1,503,963	$	(307,503	)	$	1,196,460
Patents(1)			194,560		(82,726	)		111,834		183,360		(71,393	)		111,967
Trademarks			60,227		(30,103	)		30,124		60,227		(26,080	)		34,147
License fees(2)			51,750		(19,709	)		32,041		44,777		(16,206	)		28,571
Distribution rights(3)			245,251		(74,197	)		171,054		195,299		(43,108	)		152,191
Customer lists(4)			90,782		(42,710	)		48,072		108,083		(41,861	)		66,222
Other			2,080		(1,062	)		1,018		2,078		(742	)		1,336

	Total	$	2,149,790	$	(645,842	)	$	1,503,948	$	2,097,787	$	(506,893	)	$	1,590,894

(1): Includes an additional $11.2 million of intangible assets resulting from obtaining an exclusive license to a Hectorol-related patent from Wisconsin Alumni Research Foundation in June 2006, which provides us with effective control of the patent.
(2): Includes an additional $6.5 million of intangible assets resulting from our acquisition of all of the rights to GlucaMesh and GlucaTex products used in the surgical repair of hernias from the former shareholders of Surgi.B in March 2006.
(3): Includes an additional $43.9 million of intangible assets resulting from additional payments made or accrued in the first nine months of 2006 in connection with the reacquisition of the Synvisc sales and marketing rights in certain countries from Wyeth in January 2005 and $6.0 million of intangible assets resulting from the subsequent reacquisition of the sales and marketing rights to Synvisc in Turkey from Wyeth in April 2006.
(4): Reflects the write off of $17.3 million of fully amortized customer lists related to our acquisition of SangStat in September 2003, during the first quarter of 2006.

All of our other intangible assets are amortized over their estimated useful lives. Total amortization expense for our other intangible assets was:

•: $50.5 million for the three months ended September 30, 2006;
•: $50.8 million for the three months ended September 30, 2005;
•: $156.1 million for the nine months ended September 30, 2006; and
•: $132.1 million for the nine months ended September 30, 2005.

The estimated future amortization expense for other intangible assets for the remainder of fiscal year 2006, the four succeeding fiscal years and thereafter is as follows (amounts in thousands):

Year ended December 31,	Estimated Amortization Expense(1,2)
2006 (remaining three months)	$	51,877
2007		202,402
2008		203,973
2009		214,634
2010		225,452
Thereafter		800,908

(1): Includes estimated future amortization expense for the Synvisc distribution rights based on the forecasted future sales of Synvisc and the resulting future contingent payments we will be required to make to Wyeth. These contingent payments will be recorded as intangible assets when the payments are accrued.
(2): Includes estimated future amortization expense for the license fees paid for GlucaMesh and GlucaTex based on the forecasted future sales of these products and the resulting future contingent payments we will be required to make to the former shareholders of Surgi.B. These contingent payments will be recorded as intangible assets when the payments are accrued.

8. Investments in Equity Securities

We recorded the following gains on investments in equity securities, net of charges for impaired investments, during the periods presented (amounts in thousands):

		Three Months Ended September 30,				Nine Months Ended September 30,
		2006		2005		2006			2005
Gross gains on investments:
	Cambridge Antibody Technology Group plc (CAT)	$	—	$	—	$	69,359		$	—
	ProQuest Investments II, L.P. (ProQuest)		—		—		1,404			151
	BioMarin Pharmaceutical Inc. (BioMarin)		—		—		6,417			—
	Theravance, Inc. (Theravance)		—		—		—			4,510
	Other		128		214		750			511

	Total		128		214		77,930			5,172
Less: charges for impaired investments			—		—		(2,893	)		—

Gains on investments in equity securities, net		$	128	$	214	$	75,037		$	5,172

Gross Gains on Investments

In May 2006, we recorded a $7.0 million gain on the sale of a portion of our investment in CAT. In June 2006, in connection with the acquisition of CAT by AstraZeneca plc, or AstraZeneca, we recorded a $62.4 million gain on the tender of our remaining investment in CAT, which became unconditional on June 21, 2006.

In March 2006, we recorded a $1.4 million gain related to distributions of net cash proceeds we received in connection with our limited partnership interest in ProQuest. In March and June 2006, ProQuest sold certain of its investments and distributed the net cash proceeds from these sales to its partners.

In January 2006, we recorded a $6.4 million gain in connection with the sale of our entire investment of 2.1 million shares of the common stock of BioMarin.

In April 2005, we sold our entire investment in the common stock of Theravance for $4.5 million in cash. Our investment in Theravance had a zero cost basis and, as a result, we recorded a gain of $4.5 million in April 2005 related to this sale.

Charges for Impaired Investments

We review the carrying value of each of our strategic investments in equity securities on a quarterly basis for potential impairment.

In June 2006, we recorded a $2.2 million impairment charge in connection with our investment in ViaCell, Inc., or ViaCell, and a $0.7 million impairment charge in connection with our investment in Cortical Pty, Ltd., or Cortical, because we considered the decline in value of these investments to be other than temporary. The price of ViaCell's common stock declined between July 2005 and November 2005, primarily due to the FDA's decision to temporarily halt ViaCell's phase 1 clinical trial for CB001, which was being tested for potential use in various cancer treatments. The FDA allowed ViaCell to resume clinical testing of CB001 in December 2005. Although clinical testing has resumed, the market value of ViaCell's common stock has continued to remain below our cost and had been below our cost for the eleven months prior to June 30, 2006. Given the significance and duration of the decline in market value of our investments in ViaCell and Cortical, as of June 30, 2006, we concluded that it was unclear over what period the recovery of the stock price for these investments would take place, and, accordingly, that any evidence suggesting that the investments would recover to at least our historical cost was not sufficient to overcome the presumption that the current market price was the best indicator of the value of these investments.

Unrealized Gains (Losses)

At September 30, 2006, our stockholders' equity includes $23.0 million of unrealized gains and $0.2 million of unrealized losses related to our strategic investments in equity securities.

9. Agreements with and Note Receivable from Dyax Corporation

Agreements with Dyax Corporation

Under the terms of our existing collaboration agreement with Dyax Corporation, or Dyax, for DX-88, expenses incurred by Dyax under its agreement with Avecia Limited, or Avecia, for the manufacture and validation of DX-88 active pharmaceutical ingredient, or DX-88 API, would have been treated as program costs of Dyax-Genzyme LLC, our joint venture with Dyax for the development of DX-88 for hereditary angioedema, and shared equally by us and Dyax. In the third quarter of 2006, we entered into an agreement with Dyax and Dyax-Genzyme LLC under which we agreed that Dyax will assume full responsibility for the first $14.5 million of manufacturing costs incurred under its agreement with Avecia and own the resulting DX-88 API. Costs incurred thereafter under that

agreement will be considered program costs of Dyax-Genzyme LLC and will be shared equally by us and Dyax. Dyax-Genzyme LLC will be required to purchase DX-88 API from Dyax following receipt of marketing approval for DX-88 in the United States or the European Union at Dyax's cost plus an applicable margin.

Note Receivable from Dyax

In August 2006, we amended our $7.0 million secured promissory note receivable from Dyax to extend the maturity date from May 2007 to May 2010, eliminate the existing financial covenants and replace the original collateral on the note with a letter of credit from a major bank for $7.0 million plus 90 days of interest at the Prime Rate plus 2%. As of September 30, 2006, $7.3 million of principal and accrued interest receivable remains due to us from Dyax under this note, which we have recorded as a note receivable-related party in our consolidated balance sheet as of that date.

10. Joint Venture with BioMarin

We formed BioMarin/Genzyme LLC to develop and market Aldurazyme, a recombinant form of the human enzyme alpha-L-iduronidase, used to treat an LSD known as mucopolysaccharidosis I, or MPS I. We record our portion of the income of BioMarin/Genzyme LLC in equity in income (loss) of equity method investments in our consolidated statements of operations. Our portion of BioMarin/Genzyme LLC's net income was:

•: $5.0 million for the three months ended September 30, 2006, as compared to $2.5 million for the same period of 2005; and
•: $13.0 million for the nine months ended September 30, 2006, as compared to $4.2 million for the same period of 2005.

During the nine months ended September 30, 2006, we received $12.0 million of cash distributions from BioMarin/Genzyme LLC.

Condensed financial information for BioMarin/Genzyme LLC is summarized below (amounts in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
Revenue	$	25,029		$	20,122		$	69,891		$	55,201
Gross margin	$	18,883		$	13,794		$	51,674		$	37,165
Operating expenses	$	(9,110	)	$	(8,912	)	$	(26,209	)	$	(29,110	)
Net income	$	9,959		$	4,966		$	25,953		$	8,270

11. Revolving Credit Facility

In December 2003, we entered into a three-year $350.0 million revolving credit facility with Bank of America, N.A., successor-by-merger to Fleet National Bank, as administrative agent and a syndicate of lenders, maturing in December 2006, which we refer to as our 2003 revolving credit facility. On July 14, 2006, we terminated our 2003 revolving credit facility and replaced it with a new five-year $350.0 million senior unsecured revolving credit facility with JPMorgan Chase Bank, N.A., as administrative agent, Bank of America, N.A., as syndication agent, ABN AMRO Bank N.V., Citizens Bank of Massachusetts and Wachovia Bank, National Association, as co-documentation agents, and a syndicate of lenders, which we refer to as our 2006 revolving credit facility. The proceeds of loans under our 2006 revolving credit facility can be used to finance working capital needs and for general corporate purposes. Our 2006 revolving credit facility may be increased at any time by up to an additional $350.0 million in the aggregate, as long as no default or event of default has occurred or is continuing and certain other customary conditions are satisfied. Borrowings under our 2006 revolving credit facility will bear interest as follows:

•: revolving loans denominated in U.S. dollars or a foreign currency (other than Euros) bear interest at a variable rate equal to LIBOR for loans in U.S. dollars and a comparable index rate for foreign currency loans, plus an applicable margin;
•: revolving loans denominated in Euros bear interest at a variable rate equal to the EURIBOR Rate plus an applicable margin;
•: at our option, U.S. dollar swingline loans (demand loans requiring only one day of advance notice, which grant us access to up to $20.0 million of our 2006 revolving credit facility in order to cover possible working capital shortfalls) bear interest at the greater of the Prime Rate and the Federal Funds Effective Rate plus one half of one percent; and
•: multicurrency swingline loans bear interest at a rate equal to the average rate at which overnight deposits in the currency in which such swingline loan is denominated, and approximately equal in principal amount to such swingline loan, are obtainable by the swingline lender for such swingline loan in the interbank market plus an applicable margin.

The applicable margins for LIBOR and multicurrency revolving loans range from 0.180% to 0.675% per annum, and for multicurrency swingline loans from 0.430% to 0.925% per annum, in each case determined by our credit ratings. In addition, we are required to pay a facility fee of between 7 to 20 basis points based on the aggregate commitments under our 2006 revolving credit facility, and in certain circumstances a utilization fee of 10 basis points.

The terms of our 2006 revolving credit facility include various covenants, including financial covenants that require us to meet minimum interest coverage ratios and maximum leverage ratios. As of September 30, 2006 we were in compliance with these covenants.

As of September 30, 2006, no amounts were outstanding under our 2006 revolving credit facility.

12. Other Commitments and Contingencies

Legal Proceedings

We periodically become subject to legal proceedings and claims arising in connection with our business.

Four lawsuits have been filed against us regarding the exchange of all of the outstanding shares of Biosurgery Stock for shares of Genzyme Stock in connection with the elimination of our tracking stocks in July 2003. Each of the lawsuits is a purported class action on behalf of holders of Biosurgery Stock. The first case, filed in Massachusetts Superior Court in May 2003, alleged a breach of the implied covenant of good faith and fair dealing in our charter and a breach of our board of directors' fiduciary duties. The plaintiff in this case sought an injunction to adjust the exchange ratio for the tracking stock exchange. The Court dismissed the complaint in its entirety in November 2003. Upon appeal, the Massachusetts Appeals Court upheld the dismissal by the Superior Court of the fiduciary duty claim, but reversed the earlier decision to dismiss the implied covenant claim. The Massachusetts Supreme Judicial Court (SJC) has granted our petition for further appellate review of the Appeals Court decision reversing the dismissal of the implied covenant claim. Briefing has occurred and we anticipate oral arguments will be made before the SJC by the end of 2006. Two substantially similar cases were filed in Massachusetts Superior Court in August and October 2003. These cases were consolidated in January 2004, and in July 2004, the consolidated case was stayed pending disposition of a fourth case, which was filed in the U.S. District Court for the Southern District of New York in June 2003. The complaint initially alleged violations of federal securities laws, common law fraud, and a breach of the merger agreement with Biomatrix, in addition to the state law claims contained in the other cases. The plaintiffs initially sought an adjustment to the exchange ratio, the rescission of the acquisition of Biomatrix, and unspecified compensatory damages. In December 2005, the plaintiffs in this case filed an amended complaint in which they dropped all of the claims alleged in the initial complaint relating to the initial issuance of Biosurgery Stock and the acquisition of Biomatrix, and narrowed the putative class to include only those individuals who held Biosurgery Stock on May 8, 2003. We filed a motion to dismiss the amended complaint and to oppose the class certification. The Court denied our motion to dismiss the amended complaint and certified this case as a class action on behalf of all shareholders who held Biosurgery Stock on May 8, 2003. We have filed a petition asking the United States Court of Appeals for the Second Circuit to review the class certification decision. Discovery in this action is currently ongoing. We believe each of these cases is without merit and continue to defend against them vigorously.

On March 27, 2003, the Office of Fair Trading, or OFT, in the United Kingdom issued a decision against our wholly-owned subsidiary, Genzyme Limited, finding that Genzyme Limited held a dominant position and abused that dominant position with no objective justification by pricing Cerezyme in a way that excludes other delivery/homecare service providers from the market for the supply of home delivery and homecare services to Gaucher patients being treated with Cerezyme. In conjunction with this decision, the OFT imposed a fine on Genzyme Limited and required modification to its list price for Cerezyme in the United Kingdom. Genzyme Limited appealed this decision to the Competition Appeal Tribunal. On May 6, 2003, the Tribunal issued an order that stayed the OFT's decision, but required Genzyme Limited to provide a homecare distributor a discount of 3% per unit during the appeal process. The Tribunal issued its judgment on Genzyme Limited's appeal on March 11, 2004, rejecting portions of the OFT's decision and upholding others. The Tribunal found that the list price of Cerezyme should not be reduced, but that Genzyme Limited must negotiate a price for Cerezyme that will allow homecare distributors an appropriate margin. The Tribunal also reduced the fine imposed by the OFT for violation of U.K. competition laws. In response to the Tribunal's decision, we recorded an initial liability of approximately $11 million in our 2003 financial statements and additional liabilities totaling approximately $1 million during 2004 and 2005, of which approximately $6 million were paid in 2005. As of December 31, 2005 and September 30, 2006, accrued expenses in our consolidated balance

sheets includes the remaining $6 million of liabilities recorded in connection with the Tribunal's decision. Genzyme Limited and the OFT were unable to negotiate a price for Cerezyme for homecare distributors and, as a result, on September 29, 2005, the Tribunal issued a ruling establishing the discount to be provided by Genzyme Limited to homecare distributors at 7.2%, which approximates the figure used to calculate the initial liability of approximately $11 million we recorded in 2003, and the additional liabilities totaling approximately $1 million we recorded in 2004 and 2005. Genzyme Limited has decided not to appeal this decision. Arising out of the OFT decision, on April 5, 2006, Genzyme Limited received a damage claim from Genzyme Limited's former distributor, Healthcare at Home. Genzyme Limited and Healthcare at Home are in negotiations to arrive at a mutually agreed upon settlement of this damage claim. We do not expect that settlement of this damage claim will have a material impact on our financial condition or results of operations.

We are not able to predict the outcome of the pending legal proceedings listed here, or other legal proceedings, or estimate the amount or range of any reasonably possible loss we might incur if we do not prevail in the final, non-appealable determinations of such matters. Therefore, except for the liabilities recorded in connection with the Tribunal's decision regarding Cerezyme pricing in the United Kingdom, including the Healthcare at Home matter, we have no current accruals for these potential contingencies. We cannot provide you with assurance that the legal proceedings listed here, or other legal proceedings, will not have a material adverse impact on our financial condition or results of operations.

13. (Provision for) Benefit from Income Taxes

	Three Months Ended September 30,					Nine Months Ended September 30,
	2006		2005			2006			2005
	(Amounts in thousands)
(Provision for) benefit from income taxes	$	44,530	$	(51,279	)	$	(60,841	)	$	(147,804	)
Effective tax rate		(156)%		31%			19%			31%

Our effective tax rate for both periods varies from the U.S. statutory tax rate as a result of:

•: our provision for state income taxes;
•: the tax benefits from export sales;
•: the tax benefits from domestic production activities;
•: benefits related to tax credits; and
•: the foreign rate differential.

Our effective tax rate for the three and nine months ended September 30, 2006, was also impacted by:

•: non-deductible stock option expense;
•: a charge for impaired goodwill of $219.2 million recorded in September 2006, of which $29.5 million was not deductible for tax purposes; and

•: a $31.7 million net tax benefit recorded in September 2006 related primarily to the settlement of the 1996 to 1999 U.S. audits and certain foreign audits.

Our effective tax rate for the three months ended September 30, 2005 was impacted by a $12.7 million non-deductible charge for IPR&D recorded in the third quarter of 2005 in connection with our acquisition of Bone Care. Our effective tax rate for the nine months ended September 30, 2005 was impacted by $22.2 million of non-deductible charges for IPR&D, of which $9.5 million was recorded in the first quarter of 2005 in connection with our acquisition of Verigen and $12.7 million was recorded in the third quarter of 2005 related to our acquisition of Bone Care.

We are currently under IRS audits for tax years 2002 to 2003 and in certain state and foreign jurisdictions. We believe that we have provided sufficiently for all audit exposures and assessments. Settlement of these audits or the expiration of the statute of limitations on the assessment of income taxes for any tax year may result in an increase or reduction of future tax provisions. Any such tax or tax benefit would be recorded upon final resolution of the audits or expiration of the applicable statute of limitations.

14. Defined Benefit Pension Plans

We have defined benefit pension plans for certain employees in countries outside the U.S. These plans are funded in accordance with the requirements of the appropriate regulatory bodies governing each plan.

The components of net pension expense for the three and nine months ended September 30, 2006 and 2005 are as follows (amounts in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
Service cost	$	1,108		$	740		$	3,216		$	2,265
Interest cost		862			684			2,505			2,096
Expected return on plan assets		(1,051	)		(792	)		(3,049	)		(2,424	)
Amortization and deferral of actuarial loss		290			208			842			636

Net pension expense	$	1,209		$	840		$	3,514		$	2,573

For the nine months ended September 30, 2006, we contributed $2.3 million to our pension plan in the United Kingdom. We anticipate making approximately $0.8 million of additional contributions to this plan in 2006 to satisfy our annual funding obligation.

15. Segment Information

In accordance with FAS 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 FAS 131, we have five reporting segments as described in Note 1., "Description of Business," to our financial statements included in this report.

Effective January 1, 2006, as a result of changes in how we review our business, certain general and administrative expenses, as well as research and development expenses related to our preclinical

development programs, which were formerly allocated amongst our reporting segments and Other, are now allocated to Corporate. We have revised our 2005 segment disclosures to conform to our 2006 presentation.

We have provided information concerning the operations in these reporting segments in the following table (amounts in thousands):

			Three Months Ended September 30,						Nine Months Ended September 30,
			2006			2005			2006			2005
Revenues:
	Renal(1)		$	160,204		$	121,007		$	446,774		$	321,257
	Therapeutics(1)			388,267			337,811			1,107,262			985,456
	Transplant			39,241			34,124			114,719			100,320
	Biosurgery(1)			93,449			92,802			286,386			260,135
	Diagnostics/Genetics(1)			89,313			84,670			263,316			240,560
	Other(1)			38,090			37,160			114,211			96,953
	Corporate(1)			10			489			104			1,470

		Total	$	808,574		$	708,063		$	2,332,772		$	2,006,151

Income (loss) before income taxes:
	Renal(1)		$	52,243		$	12,392		$	126,313		$	79,645
	Therapeutics(1)			259,137			219,352			741,124			630,847
	Transplant			4,809			3,332			15,160			(1,330	)
	Biosurgery(1)			10,773			15,784			28,021			25,281
	Diagnostics/Genetics(1,2)			(219,187	)		3,403			(218,829	)		3,781
	Other(1)			(12,864	)		(12,312	)		(41,419	)		(36,985	)
	Corporate(1,3,4)			(123,475	)		(75,018	)		(338,092	)		(218,592	)

		Total	$	(28,564	)	$	166,933		$	312,278		$	482,647

(1): The results of operations of acquired companies and assets and the amortization expense related to acquired intangible assets are included in segment results beginning on the date of acquisition. Charges for IPR&D related to these acquisitions are included in segment results in the year of acquisition. Acquisitions completed since January 1, 2005 are:

Acquisition	Date(s) Acquired	Business Segment(s)	IPR&D Charge
Hernia repair assets of Surgi.B	March 29, 2006	Biosurgery	None
Gene therapy assets of Avigen	December 19, 2005	Therapeutics	$7.0 million
Manufacturing operation of Cell Genesys	November 22, 2005	Therapeutics	None
Equal Diagnostics	July 15, 2005	Diagnostics/Genetics	None
Bone Care	July 1, 2005	Renal/Corporate	$12.7 million
Verigen	February 8, 2005	Biosurgery/Corporate	$9.5 million
Synvisc sales and marketing rights from Wyeth	January 6, 2005/April 25, 2006	Biosurgery	None

(2): Includes a charge for impaired goodwill of $219.2 million in September 2006 to write off the goodwill related to our Genetics reporting unit.
(3): Loss before income taxes for Corporate includes our corporate, general and administrative and corporate science activities, as well as gains on investments in equity securities, net, interest income, interest expense and other income and expense items that we do not specifically allocate to a particular reporting segment.
(4): Effective January 1, 2006, we adopted the provisions of FAS 123R using the modified prospective transition method and, therefore, have not restated our prior period results to reflect the impact of adopting this standard. Accordingly, for the three months ended September 30, 2006, we recorded pre-tax stock-based compensation expense of $44.6 million, net of estimated forfeitures, and for the nine months ended September 30, 2006, we recorded pre-tax stock-based compensation expense of $160.1 million, net of estimated forfeitures, in our results of operations, all of which is reported under the caption "Corporate."

Segment Assets

We provide information concerning the assets of our reportable segments in the following table (amounts in thousands):

			September 30, 2006		December 31, 2005
Segment Assets(1):
	Renal		$	1,367,963	$	1,344,117
	Therapeutics			1,022,433		972,504
	Transplant			374,386		369,366
	Biosurgery			476,843		456,634
	Diagnostics/Genetics(2)			254,844		474,751
	Other			721,782		728,773
	Corporate(3)			3,206,787		2,532,720

		Total	$	7,425,038	$	6,878,865

(1): Assets for our five reporting segments and Other include primarily accounts receivable, inventory and certain fixed and intangible assets, including goodwill.
(2): As of September 30, 2006, reflects the write-off of the $219.2 million of goodwill related to our Genetics reporting unit in accordance with FAS 142.
(3): Includes the assets related to our corporate, general and administrative operations, and corporate science activities that we do not allocate to a particular segment, including cash, cash equivalents, short-and long-term investments, deferred tax assets, net property, plant and equipment and investments in equity securities.

Segment assets for Corporate consist of the following (amounts in thousands):

		September 30, 2006		December 31, 2005
Cash, cash equivalents, short- and long-term investments		$	1,675,599	$	1,089,102
Deferred tax assets—current			173,016		170,443
Property, plant & equipment, net			980,072		826,221
Investment in equity securities			71,121		135,930
Other			306,979		311,024

	Total	$	3,206,787	$	2,532,720

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that characterize our business. In particular, we encourage you to review the risks and uncertainties described under "Factors Affecting Future Operating Results" below. These risks and uncertainties could cause actual results to differ materially from those forecasted in forward-looking statements or implied by past results and trends. Forward-looking statements are statements that attempt to project or anticipate future developments in our business; we encourage you to review the examples of forward-looking statements under "Note Regarding Forward-Looking Statements" at the beginning of 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 in light of future developments.

INTRODUCTION

We are a global biotechnology company dedicated to making a major impact on the lives of people with serious diseases. Our broad product and service portfolio is focused on rare disorders, renal disease, orthopaedics, organ transplant, and diagnostic and predictive testing. We are organized into five financial reporting units, which we also consider to be our reporting segments:

•: Renal, which develops, manufactures and distributes products that treat patients suffering from renal diseases, including chronic renal failure. The unit derives substantially all of its revenue from sales of Renagel (including sales of bulk sevelamer) and Hectorol;
•: Therapeutics, which develops, manufactures and distributes therapeutic products, with an expanding focus on products to treat patients suffering from genetic diseases and other chronic debilitating diseases, including a family of diseases known as LSDs, and other specialty therapeutics, such as Thyrogen. The unit derives substantially all of its revenue from sales of Cerezyme, Fabrazyme, Myozyme and Thyrogen;
•: Transplant, which develops, manufactures and distributes therapeutic products that address the pre-transplantation, prevention and treatment of acute rejection in organ transplantation, as well as other auto-immune disorders. The unit derives substantially all of its revenue primarily from sales of Thymoglobulin and Lymphoglobuline;
•: Biosurgery, which develops, manufactures and distributes biotherapeutics and biomaterial products, with an emphasis on products that meet medical needs in the orthopaedics and broader surgical areas. The unit derives substantially all of its revenue from sales of Synvisc, the Sepra line of products, Carticel and MACI; and
•: Diagnostics/Genetics, which develops, manufactures and distributes raw materials and in vitro diagnostic products, and provides testing services for the oncology, prenatal and reproductive markets.

MERGERS AND ACQUISITIONS

Pending Acquisition of AnorMED

On October 17, 2006, we entered into a support agreement with AnorMED, a chemistry-based biopharmaceutical company based in Langley, British Columbia, Canada, with a focus on the discovery, development and commercialization of new therapeutic products in the areas of hematology, oncology and HIV. Under the support agreement, AnorMED agreed, among other things, to recommend that its shareholders accept our cash tender offer to acquire all of the outstanding shares of AnorMED for $13.50 per share, or an aggregate purchase price of approximately $580 million. The closing of our tender offer is subject to the applicable waiting period required by the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The waiting period is expected to expire at 11:59 p.m. New York, New York time on November 6, 2006, but could be extended if we receive a request from the FTC for additional information. If the waiting period expires as scheduled, our tender offer will expire at 8:00 a.m. Vancouver, British Columbia time on November 7, 2006.

Acquisition of Surgi.B

Acquisition of Gene Therapy Assets from Avigen

In December 2005, we acquired certain gene therapy assets from Avigen, a publicly-traded, biopharmaceutical company based in Alameda, California with a focus on unique small molecule therapeutics and biologics to treat serious neurological disorders, in exchange for an up-front cash payment of $12.0 million. We allocated the purchase price to the intangible assets acquired based on their estimated fair values as of December 19, 2005, the date of acquisition. We allocated $5.0 million of the up-front cash payment to technology in other intangible assets on our consolidated balance sheet and recorded a charge of $7.0 million to IPR&D. In addition, we may be obligated to make up to approximately $38 million of milestone payments based on the development and approval of, and royalty payments based on the sale of, products developed between now and 2020 that rely on the intellectual property we purchased from Avigen.

Acquisition of Manufacturing Operation from Cell Genesys

In November 2005, we acquired the San Diego, California manufacturing operation of Cell Genesys, a company focused on the development and commercialization of novel biological therapies for patients with cancer, for $3.2 million in cash which was allocated to property, plant and equipment on our consolidated balance sheet. We included the acquired manufacturing operations in our consolidated statements of operations as of November 22, 2005, the date of acquisition.

Acquisition of Equal Diagnostics

In July 2005, we acquired Equal Diagnostics, a privately-held diagnostics company based in Exton, Pennsylvania, that formerly served as a distributor for our clinical chemistry reagents. We paid $5.0 million in initial cash payments and issued promissory notes to the three former shareholders of

Equal Diagnostics totaling $10.0 million in principal and interest. These notes bear interest at 3.86% and are payable over eight years in equal annual installments commencing on March 31, 2007. In addition to these guaranteed payments, we may be obligated to make additional cash payments of up to an aggregate of approximately $8 million during the period commencing March 31, 2007 and ending March 31, 2014 based upon the gross margin of the acquired business, as defined in the purchase agreement. We accounted for the acquisition as a purchase and accordingly, included its results of operations in our consolidated statements of operations from July 15, 2005, the date of acquisition.

Acquisition of Bone Care

In July 2005, we acquired Bone Care, a publicly-held specialty pharmaceutical company based in Middleton, Wisconsin with a focus on nephrology. We paid gross consideration of $712.3 million in cash. As part of the transaction, we acquired Hectorol, a line of vitamin D2 pro-hormone products used to treat secondary hyperparathyroidism in patients on dialysis and those with chronic kidney disease, or CKD, which we have added to our Renal business. We accounted for the acquisition as a purchase and accordingly, included its results of operations in our consolidated statements of operations from July 1, 2005, the date of acquisition.

Acquisition of Verigen

In February 2005, we acquired Verigen, a private company based in Leverkusen, Germany with a proprietary cell therapy product for cartilage repair (referred to as MACI) that is currently sold in Europe and Australia. We paid $11.8 million in initial cash payments and may be obligated to make additional cash payments of up to an aggregate of approximately $38 million over the next six years, based upon the achievement of development and commercial milestones relating to regulatory approval and commercialization of MACI in the United States, as well as contingent payments on worldwide sales of that product. We accounted for the acquisition as a purchase and accordingly, included its results of operations in our consolidated statements of operations from February 8, 2005, the date of acquisition.

The purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The estimated fair value of the assets acquired and liabilities assumed exceeded the initial payments by $5.7 million resulting in negative goodwill. Pursuant to FAS 142, we recorded as a liability, contingent consideration up to the amount of the negative goodwill. As contingent payments come due, we will apply the payments against the contingent liability. Contingent payments in excess of $5.7 million, if any, will be recorded as goodwill. As of September 30, 2006, we have paid $1.2 million of contingent payments, and the remaining contingent liability is $4.5 million.

Acquisition of Synvisc Sales and Marketing Rights from Wyeth

In January 2005, we consummated an arrangement with Wyeth under which we reacquired the sales and marketing rights to Synvisc in the United States, as well as Germany, Poland, Greece, Portugal and the Czech Republic. In exchange for the sales and marketing rights, we paid initial payments totaling $121.0 million in cash to Wyeth and otherwise incurred $0.3 million of acquisition costs. We have also accrued contingent royalty payments to Wyeth totaling $103.5 million, of which $94.5 million had been paid as of September 30, 2006. Distribution rights (a component of other intangible assets, net) in our consolidated balance sheet as of September 30, 2006 include a total of $224.8 million for the initial and contingent royalty payments (made or accrued) as of that date. We will make a series of additional contingent royalty and milestone payments to Wyeth based on the volume of Synvisc sales in the covered territories. These contingent royalty and milestone payments could extend out to June 2012, or could total a maximum of $293.7 million, whichever comes first.

We determined that the contingent royalty and milestone payments to Wyeth represent contingent purchase price. Accordingly, as contingent royalty and milestone payments are made in the future, the amounts will be recorded as additional purchase price for the underlying intangible asset. We calculate amortization expense for these intangible assets based on an economic use model, taking into account our forecasted future sales of Synvisc and the resulting estimated future contingent royalty and milestone payments we will be required to make. We periodically update the estimates used in this amortization calculation based on changes in forecasted sales and resulting estimated contingent royalty and milestone payments.

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES

Our critical accounting policies and significant estimates are set forth under the heading "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations—Critical Accounting Policies and Significant Judgments and Estimates" in Exhibit 13.1 to our 2005 Form 10-K. Excluding the addition of our policy for accounting for stock-based compensation, there have been no significant changes to our critical accounting policies and significant judgments and estimates since December 31, 2005.

Accounting for Stock-Based Compensation

We estimate the fair value of each stock option grant using the Black-Scholes option pricing model. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs. The key assumptions in the Black-Scholes model are the risk-free interest rate, the dividend yield, the expected option life (in years) and the expected volatility of the price of Genzyme Stock. The risk-free interest rate is based on the U.S. Treasury yield curve in effect on the date of grant. The dividend yield percentage is zero because we do not currently pay dividends nor intend to do so during the expected option life. We use historical data on exercises of our stock options and other factors to estimate the expected option life (in years), or term, of the share-based payments granted. We estimate the expected volatility rate for our stock options based on the expected term of the equity award granted. We determine separate volatility rates for each enrollment under our ESPP based on the period from the commencement date of each enrollment to each applicable purchase date. Changes in these input variables would affect the amount of expense associated with stock-based compensation. The compensation expense recognized for all share-based awards is net of estimated forfeitures. We estimate forfeiture rates based on historical analysis of option forfeitures. If actual forfeitures should vary from estimated forfeitures, adjustments to stock-based compensation expense may be required in future periods.

A. RESULTS OF OPERATIONS

The following discussion summarizes the key factors our management believes are necessary for an understanding of our consolidated financial statements.

REVENUES

The components of our total revenues are described in the following table:

		Three Months Ended September 30,						Nine Months Ended September 30,
		Three Months Ended September 30,				Increase/ (Decrease) % Change		Nine Months Ended September 30,				Increase/ (Decrease) % Change
		2006		2005		Increase/ (Decrease) % Change		2006		2005		Increase/ (Decrease) % Change
		(Amounts in thousands)
Product revenue		$	734,231	$	633,605	16	%	$	2,110,301	$	1,796,165	17	%
Service revenue			71,153		69,845	2	%		210,987		194,494	8	%

	Total product and service revenue		805,384		703,450	14	%		2,321,288		1,990,659	17	%
Research and development revenue			3,190		4,613	(31	)%		11,484		15,492	(26	)%

	Total revenues	$	808,574	$	708,063	14	%	$	2,332,772	$	2,006,151	16	%

Product Revenue

We derive product revenue from sales of:

•

Renal products, including Renagel for the reduction of elevated serum phosphorus levels in end-stage renal disease patients on hemodialysis, bulk sevelamer and Hectorol for the treatment of secondary hyperparathyroidism in patients on dialysis and those with CKD;

•

Therapeutics products, including Cerezyme for the treatment of Gaucher disease, Fabrazyme for the treatment of Fabry disease, Myozyme for the treatment of Pompe disease and Thyrogen, which is an adjunctive diagnostic agent used in the follow-up treatment of patients with well-differentiated thyroid cancer;

•

Transplant products for the treatment of immune-mediated diseases, primarily Thymoglobulin and Lymphoglobuline, each of which induce immunosuppression of certain types of immune cells responsible for acute organ rejection in transplant patients;

•

Biosurgery products, including orthopaedic products, such as Synvisc, and the Sepra line of products, such as Seprafilm;

•

Diagnostic products, including infectious disease and cholesterol testing products; and

•

Other products, including:

•: oncology products, including Campath for the treatment of B-cell chronic lymphocytic leukemia in patients who have been treated with alkylating agents and who have failed fludarabine therapy, and Clolar for the treatment of children with refractory or relapsed acute lymphoblastic leukemia; and
•: bulk pharmaceuticals, including WelChol, which is a mono and adjunctive therapy for the reduction of LDL cholesterol in patients with primary hypercholesterolemia.

The following table sets forth our product revenue on a segment basis:

			Three Months Ended September 30,						Nine Months Ended September 30,
			Three Months Ended September 30,				Increase/ (Decrease) % Change		Nine Months Ended September 30,				Increase/ (Decrease) % Change
			2006		2005		Increase/ (Decrease) % Change		2006		2005		Increase/ (Decrease) % Change
			(Amounts in thousands)
Renal:
	Renagel (including sales of bulk sevelamer)		$	134,722	$	106,869	26	%	$	379,976	$	307,119	24	%
	Hectorol			25,482		14,138	80	%		66,798		14,138	372	%

		Total Renal		160,204		121,007	32	%		446,774		321,257	39	%

Therapeutics:
	Cerezyme			252,227		238,329	6	%		745,225		700,233	6	%
	Fabrazyme			93,170		79,076	18	%		262,714		223,526	18	%
	Thyrogen			22,396		18,503	21	%		69,112		56,917	21	%
	Other Therapeutics			20,474		1,903	976	%		29,211		3,991	632	%

		Total Therapeutics		388,267		337,811	15	%		1,106,262		984,667	12	%

Transplant:
	Thymoglobulin/Lymphoglobuline			37,619		32,434	16	%		110,291		93,231	18	%
	Other Transplant			1,622		1,677	(3	)%		4,428		7,059	(37	)%

		Total Transplant		39,241		34,111	15	%		114,719		100,290	14	%

Biosurgery:
	Synvisc			55,929		57,747	(3	)%		172,782		160,541	8	%
	Sepra products			21,054		17,025	24	%		62,430		50,776	23	%
	Other Biosurgery			7,067		7,647	(8	)%		21,277		20,860	2	%

		Total Biosurgery		84,050		82,419	2	%		256,489		232,177	10	%

Diagnostics/Genetics:
	Diagnostic Products			27,953		25,302	10	%		83,463		74,289	12	%

Other product revenue				34,516		32,955	5	%		102,594		83,485	23	%

		Total product revenues	$	734,231	$	633,605	16	%	$	2,110,301	$	1,796,165	17	%

Renal

Sales of Renagel, including sales of bulk sevelamer, increased 26% to $134.7 million for the three months ended September 30, 2006, as compared to the same period of 2005, primarily due to a $25.8 million increase in sales related to increased customer volume, of which $20.3 million is primarily attributable to increased end-user demand in the United States and Europe, and $5.5 million is attributable to a 9.5% price increase for Renagel, which became effective in December 2005. The 5% increase in the Euro against the U.S. dollar for the three months ended September 30, 2006, as compared to the same period of 2005, did not have a significant impact on Renagel revenue. Sales of Renagel, including sales of bulk sevelamer, were 18% of our total product revenue for the three months ended September 30, 2006, compared to 17% of our total product revenue for the same period of 2005.

Sales of Renagel, including sales of bulk sevelamer, increased 24% to $380.0 million for the nine months ended September 30, 2006, as compared to the same period of 2005, primarily due to a

$67.8 million increase in net sales related to increased customer volume, of which $51.9 million is primarily attributable to increased end-user demand in the United States and Europe, and $15.9 million is attributable to a 9.5% price increase for Renagel, which became effective in December 2005. The 2% decrease in the Euro against the U.S. dollar for the nine months ended September 30, 2006, as compared to the same period of 2005, did not have a significant impact on Renagel revenue. Sales of Renagel, including sales of bulk sevelamer, were 18% of our total product revenue for the nine months ended September 30, 2006, compared to 17% of our total product revenue for the same period of 2005.

Our acquisition of Bone Care on July 1, 2005 expanded our Renal product offerings with the addition of Hectorol, a complimentary product to Renagel used to treat secondary hyperparathyroidism in patients on dialysis and those with CKD. Bone Care's operations are integrated into our Renal business, and our sales representatives are selling Hectorol to nephrologists in the United States. Sales of Hectorol increased 80% to $25.5 million for the three months ended September 30, 2006, as compared to the same period of 2005. The third quarter of 2005 represented the first quarter following the acquisition, therefore revenue in that quarter was affected by the integration of the product and infrastructure. In addition, Hectorol revenue increased $6.6 million for the three months ended September 30, 2006, as compared to the same period of 2005 due to price increases at the end of 2005 and during 2006. Sales of Hectorol increased more than 100% to $66.8 million for the nine months ended September 30, 2006, as compared to the same period of 2005, because we did not own Hectorol until July 1, 2005.

We conducted a 2,100-patient post-marketing study of Renagel called the DCOR trial, which evaluated the ability of Renagel to improve patient morbidity and mortality and compared Renagel to calcium-based phosphate binders with respect to overall morbidity and mortality. We released top-line data from this trial in July 2005 and presented the data at the American Society of Nephrology meeting in November 2005. While the study did not meet its primary end point of a statistically significant reduction in mortality from all causes, in a pre-specified sub-group analysis, Renagel demonstrated a significant reduction in mortality from all causes in patients 65 years of age or older and in patients using Renagel for two years or more. We expect to receive morbidity data from CMS by the end of 2006 and will present such data later this year.

We expect sales of Renagel and Hectorol to continue to increase, driven primarily by growing patient access to our products, including the Medicare Part D program in the United States, and the continued adoption of the products by nephrologists worldwide. We expect adoption rates for Renagel to trend favorably as a result of the DCOR trial and the growing acceptance of the National Kidney Foundation's 2003 Kidney Disease Outcome Quality Initiative, or K/DOQI, Guidelines for Bone Metabolism and Disease in CKD. Renagel and Hectorol compete with several other products and our future sales may be impacted negatively by these products. We discuss these competitors under the heading "Factors Affecting Future Operating Results—Our future success will depend on our ability to effectively develop and market our products and services against those of our competitors" in this report. In addition, our ability to continue to increase sales of Renagel and Hectorol will depend on many other factors, including our ability to optimize dosing and improve patient compliance with dosing of Renagel, the availability of reimbursement from third party payors and the extent of coverage, including under the Medicare Prescription Drug Improvement and Modernization Act, and the accuracy of our estimates of fluctuations in the payor mix. Also our ability to effectively manage wholesaler inventories and the levels of compliance with the inventory management programs we implemented for Renagel and Hectorol with our wholesalers could impact the revenue from our Renal reporting segment that we record from period to period.

Therapeutics

Therapeutics product revenue increased 15% to $388.3 million for the three months ended and 12% to $1.1 billion for the nine months ended September 30, 2006, as compared to the same periods

of 2005, due to continued growth in sales of Cerezyme, Fabrazyme and Thyrogen and the launch of Myozyme in the European Union and United States in the second quarter of 2006.

The 6% growth in sales of Cerezyme to $252.2 million for the three months ended and 6% growth in sales to $745.2 million for the nine months ended September 30, 2006, as compared to the same periods of 2005, is attributable to our continued identification of new Gaucher disease patients, particularly in international markets. Our price for Cerezyme has remained consistent from period to period. Although we expect Cerezyme to continue to be a substantial contributor to revenues in the future, it is a mature product, and as a result, we do not expect that the current new patient growth trend will continue. The 5% increase in the Euro against the U.S. dollar for the three months ended September 30, 2006 and the 2% decrease in the Euro against the U.S. dollar for the nine months ended September 30, 2006, as compared to the same periods of 2005 did not have a significant impact on Cerezyme revenue.

Our results of operations are highly dependent on sales of Cerezyme and a reduction in revenue from sales of this product would adversely affect our results of operations. Sales of Cerezyme were approximately 34% of our total product revenue for the three months ended September 30, 2006, as compared to 38% for the same period of 2005, and 35% of our total product revenue for the nine months ended September 30, 2006, as compared to 39% for the same period of 2005. Revenue from Cerezyme would be impacted negatively if competitors developed alternative treatments for Gaucher disease, and the alternative products gained commercial acceptance, if our marketing activities are restricted, or if coverage, pricing or reimbursement is limited. Although orphan drug status for Cerezyme, which provided us with exclusive marketing rights for Cerezyme in the United States for seven years, expired in May 2001, we continue to have patents protecting our method of manufacturing Cerezyme until 2010 and the composition of Cerezyme as made by that process until 2013. The expiration of market exclusivity and orphan drug status will likely subject Cerezyme to increased competition, which may decrease the amount of revenue we receive from this product or the growth of that revenue. We are aware of companies that have developed or have initiated efforts to develop competitive products, and other companies may do so in the future. We discuss these competitors under the heading "Factors Affecting Future Operating Results—Our future success will depend on our ability to effectively develop and market our products and services against those of our competitors" in this report.

The 18% increase to $93.2 million for the three months ended and the 18% increase to $262.7 million for the nine months ended September 30, 2006 in sales of Fabrazyme, as compared to the same periods of 2005, is primarily attributable to increased patient identification worldwide as Fabrazyme is introduced into new markets. In addition, we recognized $3.4 million in September 2006 upon receiving reimbursement approval for past shipments of Fabrazyme in Canada. The 5% increase in the Euro against the U.S. dollar for the three months ended September 30, 2006 and the 2% decrease in the Euro against the U.S. dollar for the nine months ended September 30, 2006, as compared to the same periods of 2005 did not have a significant impact on Fabrazyme revenue.

Sales of Thyrogen increased 21% to $22.4 million for the three months ended and 21% to $69.1 million for the nine months ended September 30, 2006, as compared to the same periods of 2005, due to worldwide volume growth which impacted sales by $3.5 million in the three month period and $11.0 million in the nine month period. Additionally, a 10% increase in price impacted sales by $1.3 million in the three months ended and $3.6 million in the nine months ended September 30, 2006, as compared to the same periods of 2005. The increase in the Euro against the U.S. dollar during the three months ended September 30, 2006 and the decrease in the Euro against the U.S. dollar for the nine months ended September 30, 2006, as compared to the same periods of 2005 did not have a significant impact on the sales of Thyrogen for the three and nine months ended September 30, 2006.

Other Therapeutics product revenue includes sales of Myozyme, which were $20.4 million for the three months ended and $29.0 million for the nine months ended September 30, 2006. In March 2006, we received marketing authorization for Myozyme in the European Union. We are introducing Myozyme on a country-by-country basis in the European Union, as pricing and reimbursement approvals are obtained. In April 2006, the FDA granted marketing approval for Myozyme. We launched Myozyme in the United States in May 2006. Myozyme has received orphan drug designation in the United States, which provides seven years of market exclusivity. Myozyme sales are expected to continue to increase as patients transition from clinical trials or expanded access programs and as new patients are identified. Marketing applications for Myozyme have been submitted in Japan and Canada and we expect to launch Myozyme in Canada by the end of the year. We also expect to file for approval in several additional countries by the end of the year.

We currently manufacture Myozyme in the United States. In the future, we expect to also produce Myozyme at our new protein manufacturing facility in Geel, Belgium, and at our new fill/finish facility in Waterford, Ireland, to help ensure that we are able to meet the anticipated demand for the product throughout the world.

Transplant

Transplant product revenue increased 15% to $39.2 million for the three months ended and 14% to $114.7 million for the nine months ended September 30, 2006, as compared to the same periods of 2005. The increases are primarily due to a $5.2 million increase for the three month period and a $17.9 million increase for the nine month period in sales of Thymoglobulin as a result of increased utilization of Thymoglobulin in transplant procedures. The increase for the nine months ended was partially offset by a decrease in revenue from a license agreement with Procter & Gamble Pharmaceuticals, Inc., or PGP, a subsidiary of The Procter and Gamble Company. In November 2005, PGP exercised its option to terminate an agreement under which we had granted PGP an exclusive, worldwide license to develop and market RDP58 for the treatment of gastrointestinal and other disorders.

We expect sales of Thymoglobulin to increase, driven primarily by our continued entry into new geographical markets, together with an overall growth in solid organ and living donor renal transplants. Thymoglobulin competes with several other products and our future sales may be impacted negatively by these products. We discuss these competitors under the heading "Factors Affecting Future Operating Results—Our future success will depend on our ability to effectively develop and market our products and services against those of our competitors" in this report.

Biosurgery

Biosurgery product revenue increased 2% to $84.1 million for the three months ended September 30, 2006, as compared to the same period of 2005. The increase is primarily due to a $4.0 million increase in sales of our Sepra products, partially offset by a $1.8 million decrease in sales of Synvisc. Sales of Seprafilm increased by $4.0 million for the three month period, primarily due to an 11% price increase in the United States in the first quarter of 2006, as compared to the same period of 2005. Synvisc sales decreased as a result of increased competition in the viscosupplementation market.

Biosurgery product revenue increased 10% to $256.5 million for the nine months ended September 30, 2006, as compared to the same period of 2005. The increase was partially attributable to a $12.2 million increase in sales of Synvisc, primarily due to an expanded sales and marketing investment. We reacquired the Synvisc sales and marketing rights in certain countries from Wyeth in January 2005. Additionally, there was an $11.7 million increase for the nine month period in sales of our Sepra products. Sales of Seprafilm increased by $9.9 million for the nine month period, primarily due to an 11% price increase in the United States in the first quarter of 2006, as compared to the same

period of 2005. The increased sales of our Sepra products is also attributable to greater penetration into the U.S. market.

We are aware of several products that compete with Synvisc, several companies that have initiated efforts to develop competitive products and several companies that market products designed to relieve the pain of osteoarthritis. These products could have an adverse effect on future sales of Synvisc. We discuss these competitors under the heading "Factors Affecting Future Operating Results—Our future success will depend on our ability to effectively develop and market our products and services against those of our competitors" included in this report. In addition, a substantial portion of our revenue on sales of Synvisc comes from third party payors, including government health administration authorities and private health insurers who may not continue to provide adequate health insurance coverage or reimbursement for Synvisc. Furthermore, governmental regulatory bodies, such as CMS, may from time-to-time make unilateral changes to the reimbursement rates for Synvisc. For example, in October 2006, CMS announced a change to the billing code for viscosupplementation products effective January 2007 that, if unchanged, will result in Medicare reimbursement for Synvisc at a rate that is lower than the price healthcare providers are currently paying for the product. If the CMS billing code decision is left unchanged, our Synvisc revenues will be adversely affected because healthcare providers likely will be less willing to use Synvisc. Although we intend to pursue efforts to have this coding decision reversed, we may not be successful in these efforts. We discuss these risks under the heading "Factors Affecting Future Operating Results—If we fail to obtain adequate levels of reimbursement for our products from third party payors, the commercial potential of our products will be significantly limited" included in this report.

Diagnostics/Genetics

Diagnostics/Genetics product revenue increased 10% to $28.0 million for the three months ended and 12% to $83.5 million for the nine months ended September 30, 2006, as compared to the same periods of 2005. The increases are attributable to a 17%, or $2.6 million, increase in sales for the three month period, and a 21%, or $9.1 million, increase in sales for the nine month period, of clinical chemistry reagents resulting from our acquisition of Equal Diagnostics in July 2005.

Other Product Revenue

Other product revenue increased 5% to $34.5 million for the three months ended September 30, 2006, as compared to the same period of 2005, primarily due to a 103%, or $2.8 million, increase in the sales of Clolar. This increase was partially offset by a 9%, or $2.1 million, decrease in sales of bulk pharmaceuticals, including WelChol, as demand from our U.S. marketing partner, Sankyo Pharma, Inc., decreased in the three months ended September 30, 2006, as compared to the same period of 2005.

Other product revenue increased 23% to $102.6 million for the nine months ended September 30, 2006, as compared to the same period of 2005, primarily due to a 16%, or $9.6 million, increase for the nine month period, in sales of bulk pharmaceuticals, including WelChol. This increase was primarily due to a 28%, or $6.4 million, increase for the nine month period, of bulk sales of and royalties earned on WelChol due to an increased demand from our U.S. marketing partner, Sankyo Pharma, Inc. In addition, sales of Campath increased 28%, or $4.4 million, and sales of Clolar increased 49%, or $4.4 million, due to an increase in the overall demand for these products.

Service Revenue

We derive service revenues primarily from the following principal sources:

•: sales of MACI, a proprietary cell therapy product for cartilage repair in Europe and Australia, Carticel for the treatment of cartilage damage, and Epicel for the treatment of severe burns, all of which are included in our Biosurgery reporting segment; and
•: genetic and pathology/oncology testing services, which are included in our Diagnostics/Genetics reporting segment.

The following table sets forth our service revenue on a segment basis:

		Three Months Ended September 30,						Nine Months Ended September 30,
		Three Months Ended September 30,				Increase/ (Decrease) % Change		Nine Months Ended September 30,				Increase/ (Decrease) % Change
		2006		2005		Increase/ (Decrease) % Change		2006		2005		Increase/ (Decrease) % Change
		(Amounts in thousands)
Biosurgery		$	9,399	$	10,382	(9	)%	$	29,892	$	27,814	7	%
Diagnostics/Genetics			61,360		59,368	3	%		179,853		166,271	8	%
Other and Corporate			394		95	315	%		1,242		409	204	%

	Total service revenue	$	71,153	$	69,845	2	%	$	210,987	$	194,494	8	%

Service revenue attributable to our Biosurgery reporting segment decreased 9% to $9.4 million for the three months ended September 30, 2006, as compared to the same period of 2005, primarily due to the negative impact on service revenue of fewer Carticel sales representatives as a result of unexpected turnover. This was partially offset by an increase in Epicel service revenue due to higher demand for the service during the three months ended September 30, 2006, as compared to the same period of 2005.

Service revenue attributable to our Biosurgery reporting segment increased 7% to $29.9 million for the nine months ended September 30, 2006, as compared to the same period of 2005. The increase for the nine month period is primarily due to a full nine months of MACI sales during 2006. We acquired MACI in the Verigen transaction in February 2005. Epicel service revenue also increased due to higher demand for the service during the nine months ended September 30, 2006, as compared to the same period of 2005.

Service revenue attributable to our Diagnostics/Genetics reporting segment increased 3% to $61.4 million in the three months ended and increased 8% to $179.9 million in the nine months ended September 30, 2006, as compared to the same periods of 2005. These increases were primarily attributable to continued growth in the prenatal screening and diagnosis market.

International Product and Service Revenue

A substantial portion of our revenue was generated outside of the United States. The following table provides information regarding the change in international product and service revenue as a percentage of total product and service revenue during the periods presented:

	Three Months Ended September 30,						Nine Months Ended September 30,
	Three Months Ended September 30,				Increase/ (Decrease) % Change		Nine Months Ended September 30,				Increase/ (Decrease) % Change
	2006		2005		Increase/ (Decrease) % Change		2006		2005		Increase/ (Decrease) % Change
	(Amounts in thousands)
International product and service revenue	$	375,187	$	304,000	23	%	$	1,057,508	$	897,811	18	%
% of total product and service revenue		47%		43%				46%		45%

The 23% increase to $375.2 million for the three months ended and the 18% increase to $1.1 billion for the nine months ended September 30, 2006 in international product and service revenue, as compared to the same periods of 2005, is primarily due to a $64.7 million increase for the three month period and a $147.1 million increase for the nine month period, in the combined international sales of Renagel, Cerezyme, Fabrazyme, Thyrogen, Myozyme, Thymoglobulin, Synvisc and Campath, primarily due to an increase in the number of patients using these products in countries outside of the United States.

The Euro increased 5% against the U.S. dollar during the three months ended September 30, 2006, but decreased 2% against the U.S. dollar for the nine months ended September 30, 2006, as compared to the same periods of 2005. Therefore, total product and service revenue was positively impacted by $8.3 million for the three month period and was negatively impacted by $7.1 million for the nine month period.

International product and service revenue as a percentage of total product and service revenue increased 4% during the three months ended and 1% during the nine months ended September 30, 2006, as compared to the same periods of 2005. This was primarily due to the increase in total revenue outside the United States, as we continue to identify new patients in the international market for our products and services.

Research and Development Revenue

The following table sets forth our research and development revenue on a segment basis:

		Three Months Ended September 30,						Nine Months Ended September 30,
		Three Months Ended September 30,				Increase/ (Decrease) % Change		Nine Months Ended September 30,				Increase/ (Decrease) % Change
		2006		2005		Increase/ (Decrease) % Change		2006		2005		Increase/ (Decrease) % Change
		(Amounts in thousands)
Therapeutics		$	—	$	—	N/A		$	1,000	$	789	27	%
Transplant			—		13	(100	)%		—		30	(100	)%
Biosurgery			—		1	(100	)%		5		144	(97	)%
Other			3,180		4,110	(23	)%		10,376		13,059	(21	)%
Corporate			10		489	(98	)%		103		1,470	(93	)%

	Total research and development revenue	$	3,190	$	4,613	(31	)%	$	11,484	$	15,492	(26	)%

Total research and development revenue decreased $1.4 million for the three months ended and $4.0 million for the nine months ended September 30, 2006, as compared to the same periods of 2005, due to lower revenue recognized in the three and nine month periods by our cardiovascular business as a result of lower spending on MG Biotherapeutics, Inc., our joint venture with Medtronic, Inc. In addition, less revenue was recognized from our collaboration with Kirin Brewery Company Ltd., or Kirin. Revenue from these projects is directly related to spending on the projects. Research and development spending related to the Kirin project decreased in both the three and nine months ended September 30, 2006, as compared to the same periods of 2005.

MARGINS

The components of our total margins are described in the following table:

	Three Months Ended September 30,						Nine Months Ended September 30,
	Three Months Ended September 30,				Increase/ (Decrease) % Change		Nine Months Ended September 30,				Increase/ (Decrease) % Change
	2006		2005		Increase/ (Decrease) % Change		2006		2005		Increase/ (Decrease) % Change
	(Amounts in thousands)
Product margin	$	600,091	$	523,252	15	%	$	1,721,692	$	1,478,510	16	%
% of total product revenue		82%		83%				82%		82%
Service margin	$	20,617	$	27,490	(25	)%	$	62,637	$	68,098	(8	)%
% of total service revenue		29%		39%				30%		35%
Total product and service margin	$	620,708	$	550,742	13	%	$	1,784,329	$	1,546,608	15	%
% of total product and service revenue		77%		78%				77%		78%

Product Margin

Our overall product margin increased $76.8 million, or 15%, for the three months ended and $243.2 million, or 16%, for the nine months ended September 30, 2006, as compared to the same periods of 2005. This is primarily due to:

•: improved margins for Renagel due to increased customer volume and increased utilization of capacity at our global manufacturing facilities;
•: an increase in product margin for Cerezyme, Fabrazyme, Thyrogen, Myozyme and Thymoglobulin due to increased sales and improved unit costs;
•: Hectorol's margin contribution in the three and nine months ended September 30, 2006, due to the acquisition of Bone Care in July 2005; and
•: an increase in product margin for our oncology business due to the increase in global sales of Campath and Clolar.

These increases in product margin were partially offset by stock-based compensation expenses associated with our adoption of FAS 123R of $3.6 million for the three months ended and $5.5 million for the nine months ended September 30, 2006, for which there were no comparable amounts in 2005.

Total product margin as a percentage of product revenue declined slightly in the three months ended September 30, 2006, as compared to the same period of 2005, due to a shift in product mix. Total product margin as a percentage of product revenue for the nine months ended September 30, 2006 was consistent with the same period of 2005.

The amortization of product related intangible assets is included in amortization expense and, as a result, is excluded from cost of products sold and the determination of product margins.

Service Margin

Our overall service margin decreased $6.9 million, or 25%, for the three months ended September 30, 2006, as compared to the same period of 2005. This is primarily due to a $3.5 million decrease in the service margin for our Diagnostics/Genetics reporting segment, which is attributable to higher costs for payroll, chemicals and supplies, and $2.0 million of Corporate stock-based compensation expense recorded in the three months ended September 30, 2006 in connection with the adoption of FAS 123R for which there was no comparable amount in the same period of 2005.

Our overall service margin decreased $5.5 million, or 8%, for the nine months ended September 30, 2006, as compared to the same period of 2005. This is primarily due to additional costs

in Corporate of $7.4 million related to the adoption of FAS 123R in 2006 for which there was no comparable amount in 2005.

Total service margin as a percentage of total service revenue decreased in the three and nine months ended September 30, 2006, as compared to the same periods of 2005, primarily due to the additional costs in Corporate related to the adoption of FAS 123R in 2006. Diagnostics/Genetics service margin as a percentage of total service revenue decreased in the three months ended but remained consistent in the nine months ended September 30, 2006, as compared to the same periods of 2005. The decrease in the three month period is due to higher payroll and costs for chemicals and supplies.

OPERATING EXPENSES

Selling, General and Administrative Expenses

Effective January 1, 2006, as a result of changes in how we review our business, certain general and administrative expenses, which were formerly allocated amongst our reporting segments and Other, are now allocated to Corporate. We have revised our 2005 segment disclosures to conform to our 2006 presentation.

The following table provides information regarding the change in selling, general and administrative expenses, or SG&A, during the periods presented:

	Three Months Ended September 30,						Nine Months Ended September 30,
	Three Months Ended September 30,				Increase/ (Decrease) % Change		Nine Months Ended September 30,				Increase/ (Decrease) % Change
	2006		2005		Increase/ (Decrease) % Change		2006		2005		Increase/ (Decrease) % Change
	(Amounts in thousands)
Selling, general and administrative expenses	$	239,700	$	202,002	19	%	$	743,849	$	580,226	28	%

SG&A increased $37.7 million for the three months ended and increased $163.6 million for the nine months ended September 30, 2006, as compared to the same periods of 2005, primarily due to increases of:

•: $1.8 million for the three month period and $24.1 million for the nine month period for Renal products, primarily due to our acquisition of Bone Care in July 2005 and continued support of international business operations growth;
•: $5.2 million for the three month period and $2.1 million for the nine month period for Therapeutics products, primarily due to expenses incurred to launch Myozyme in the United States and in certain countries in the European Union and to prepare for the launch in additional countries by the end of the year;
•: $1.7 million for the three month period and $13.2 million for the nine month period for Biosurgery products and services, primarily due to additional expenses related to an increased number of employees and an increase in marketing efforts; and
•: $26.6 million for the three month period and $111.5 million for the nine month period for Corporate SG&A primarily due to $24.4 million for the three months ended and $96.6 million for the nine months ended September 30, 2006 of stock-based compensation expenses related to our adoption of FAS 123R and increased spending on legal expenses and information technology. Stock-based compensation expenses decreased significantly in the three months ended September 30, 2006, as compared to the three months ended June 30, 2006, primarily due to charges recorded in May 2006 related to the value of stock options granted to retirement eligible employees, which are now expensed upon award, and the value of 20% of the annual stock option grant in May 2006 that vested upon award for which there were no similar amounts

in the three months ended September 30, 2006. We adopted FAS 123R using the modified prospective transition method, which does not allow for the restatement of prior periods.

SG&A was 30% of total revenue for the three months ended September 30, 2006 and 29% for the same period of 2005. SG&A was 32% of total revenue for the nine months ended September 30, 2006 and 29% for the same period of 2005. The increase in SG&A as a percentage of total revenue in both the three and nine months ended September 30, 2006 is primarily due to the stock-based compensation expenses recorded as a result of adopting FAS 123R in January 2006.

Research and Development Expenses

Effective January 1, 2006, as a result of changes in how we review our business, certain research and development expenses related to our preclinical development portfolios, which were formerly allocated amongst our reporting segments and Other, are now allocated to Corporate. We have revised our 2005 segment disclosures to conform to our 2006 presentation.

The following table provides information regarding the change in research and development expense during the periods presented:

	Three Months Ended September 30,						Nine Months Ended September 30,
	Three Months Ended September 30,				Increase/ (Decrease) % Change		Nine Months Ended September 30,				Increase/ (Decrease) % Change
	2006		2005		Increase/ (Decrease) % Change		2006		2005		Increase/ (Decrease) % Change
	(Amounts in thousands)
Research and development expenses	$	162,293	$	128,000	27	%	$	483,557	$	364,471	33	%

Research and development expenses increased $34.3 million for the three months ended and $119.1 million for the nine months ended September 30, 2006, as compared to the same periods of 2005, primarily due to:

•: a $5.5 million increase for the three month period and a $31.3 million increase for the nine month period in spending on Renal research and development programs, primarily due to our acquisition of Bone Care in July 2005 and to a $5.0 million increase for the three month period and $12.2 million increase for the nine month period in spending on the tolevamer program due to accelerated patient enrollment in clinical studies;
•: a $6.7 million increase for the three month period and a $15.3 million increase for the nine month period in spending on certain Therapeutics research and development programs, including $3.2 million for the three month period and $4.2 million for the nine month period in spending for the Myozyme program due to FDA required post-approval activities and $2.0 million for the three month period and $7.6 million for the nine month period of spending for the Parkinson's disease program we acquired from Avigen;
•: a $2.3 million increase for the three month period and a $9.3 million increase for the nine month period in spending on Biosurgery research and development programs, primarily on next generation orthopaedics products; and
•: a $20.9 million increase for the three month period and a $67.2 million increase for the nine month period in spending on Corporate research and development programs primarily due to stock-based compensation expenses of $14.6 million recorded in the three months ended September 30, 2006 and $50.7 million recorded in the nine months ended September 30, 2006, related to our adoption of FAS 123R. Stock-based compensation expenses decreased significantly in the three months ended September 30, 2006, as compared to the three months ended June 30, 2006, primarily due to charges recorded in May 2006 related to the value of stock options granted to retirement eligible employees, which are now expensed upon award, and the value of 20% of the annual stock option grant in May 2006 that vested upon award for which

there were no similar amounts in the three months ended September 30, 2006. We adopted FAS 123R using the modified prospective transition method, which does not allow for the restatement of prior periods.

These increases were partially offset by decreases in research and development expenses of $7.3 million in spending for the three month period and $18.2 million in spending for the nine month period on certain Therapeutics research and development programs, including:

•: $1.7 million for the three month period and $3.8 million for the nine month period on our Cerezyme program, as patients completed clinical studies during the second quarter of 2006, resulting in a decrease in spending on follow-up monitoring;
•: $1.2 million for the three month period and $4.7 million for the nine month period for our deferitrin (iron chelator) program due to the completion of our phase 1/2 study in 2005; and
•: $2.6 million for the three month period and $3.8 million for the nine month period from the consolidation of Dyax-Genzyme LLC. Spending decreased for DX-88 in both periods due to the completion of clinical trials.

Research and development expenses were 20% of total revenue for the three months ended and 21% of total revenue for the nine months ended September 30, 2006, as compared to 18% of total revenue for both the three and nine months ended September 30, 2005. We are conducting more late-stage trials now than at any point in our history and therefore, our research and development expenses are expected to increase as a percentage of revenue. New products and new product indications are expected to expand and further diversify our portfolio and contribute to our long-term growth.

Amortization of Intangibles

The following table provides information regarding the change in amortization of intangibles expense during the periods presented:

	Three Months Ended September 30,						Nine Months Ended September 30,
	Three Months Ended September 30,				Increase/ (Decrease) % Change		Nine Months Ended September 30,				Increase/ (Decrease) % Change
	2006		2005		Increase/ (Decrease) % Change		2006		2005		Increase/ (Decrease) % Change
	(Amounts in thousands)
Amortization of intangibles	$	50,542	$	50,847	(1	)%	$	156,117	$	132,138	18	%

Amortization of intangibles expense decreased by $0.3 million for the three months ended September 30, 2006, as compared to the same period of 2005. Amortization of intangibles expense increased by $24.0 million for the nine months ended September 30, 2006, as compared to the same period of 2005, primarily due to additional amortization expense attributable to the intangible assets acquired in connection with our acquisitions of Surgi.B in March 2006, Bone Care and Equal Diagnostics in July 2005 and Verigen in February 2005, as well as the reacquisition of Synvisc sales and marketing rights in certain countries from Wyeth in January 2005.

As discussed in Note 5., "Mergers and Acquisitions," to our financial statements included in this report, we calculate amortization expense for the Synvisc sales and marketing rights we reacquired from Wyeth by taking into account forecasted future sales of Synvisc and the resulting estimated future contingent royalty and milestone payments we will be required to make to Wyeth, which will be recorded as intangible assets when the payments are accrued. In addition, we calculate the amortization expense for the license fees paid for GlucaMesh and GlucaTex based on forecasted future sales of these products and the resulting future contingent payments we will be required to make to the former shareholders of Surgi.B, which will be recorded as intangible assets when the payments are accrued. As

a result, we expect amortization of intangibles to fluctuate over the next five years based on these future contingent payments.

Charge for Impaired Goodwill

Purchase of In-Process Research and Development

We have acquired various IPR&D projects in connection with four of our acquisitions since 2004. 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 research is completed, each product candidate acquired from Avigen, Bone Care, Verigen and ILEX Oncology 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 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 adversely affected.

Avigen

Bone Care

In connection with our July 2005 acquisition of Bone Care, we acquired IPR&D related to LR-103, a vitamin D therapeutic candidate that is an active metabolite of Hectorol. In biological models, this product candidate is readily absorbed after oral delivery and circulates through the bloodstream to

tissues which respond to vitamin D hormones. Bone Care conducted early stage research of LR-103 in a variety of indications. As of the date this transaction closed, this program had not reached technological feasibility nor had an alternative future use. Accordingly, we allocated to IPR&D and charged to expense in our consolidated statements of operations in September 2005, $12.7 million, representing the portion of the purchase price attributable to this program.

As of September 30, 2006, we estimated that it will take approximately six years and an investment of approximately $15 million to complete the development of, obtain approval for and commercialize LR-103.

Verigen

In connection with our February 2005 acquisition of Verigen, we acquired IPR&D related to MACI, a proprietary approach to cartilage repair. As of the date of our acquisition of Verigen, MACI, which has received marketing approvals in Europe and Australia, had not reached technological feasibility in the United States due to lack of regulatory approval and did not have an alternative future use. Accordingly, we allocated to IPR&D, and charged to expense in our consolidated statements of operations in March 2005, $9.5 million, representing the portion of the purchase price attributable to this project in the United States.

As of September 30, 2006, we estimated that it will take approximately six to eight years and an incremental investment of approximately $20 million to $35 million to complete the development of, obtain approval for and commercialize MACI in the United States.

ILEX Oncology

As of September 30, 2006, we estimated that it will take approximately three to five years and an investment of approximately $109 million to complete the development of, obtain approval for and commercialize Campath (alemtuzumab) for multiple sclerosis and other cancer and noncancer indications. We estimated that it will take approximately two to five years and an investment of approximately $60 million to complete the development of, obtain approval for and commercialize Clolar for adult hematologic cancer, solid tumor and pediatric acute leukemia indications. We estimated that it will take approximately five to eight years and an investment of approximately $46 million to complete the development of, obtain approval for and commercialize tasidotin.

OTHER INCOME AND EXPENSES

		Three Months Ended September 30,								Nine Months Ended September 30,
		Three Months Ended September 30,						Increase/ (Decrease) % Change		Nine Months Ended September 30,						Increase/ (Decrease) % Change
		2006			2005			Increase/ (Decrease) % Change		2006			2005			Increase/ (Decrease) % Change
		(Amounts in thousands)
Equity in income (loss) of equity method investments		$	4,530		$	940		382	%	$	10,630		$	(1,195	)	990	%
Minority interest			2,545			3,670		(31	)%		7,741			9,221		(16	)%
Gains on investments in equity securities, net			128			214		(40	)%		75,037			5,172		1,351	%
Other			(873	)		(1,021	)	(14	)%		(1,331	)		(828	)	61	%
Investment income			16,760			8,073		108	%		39,401			22,235		77	%
Interest expense			(3,772	)		(6,749	)	(44	)%		(12,245	)		(15,023	)	(18	)%

	Total other income	$	19,318		$	5,127		277	%	$	119,233		$	19,582		509	%

Equity in Income (Loss) of Equity Method Investments

Under this caption, we record our portion of the results of our joint ventures with BioMarin, Diacrin, Inc. and Medtronic, Inc., and our investments in Peptimmune, Inc. and Therapeutic Human Polyclonals, Inc.

Equity in income (loss) of equity method investments increased $3.6 million, or 382%, for the three months ended and $11.8 million, or 990%, for the nine months ended September 30, 2006, as compared to the same periods of 2005, primarily due to increases of $2.5 million for the three months ended and $8.7 million for the nine months ended September 30, 2006 in our portion of the net income of BioMarin/Genzyme LLC attributable to increased sales of Aldurazyme.

Minority Interest

As a result of our application of FIN 46R, "Consolidation of Variable Interest Entities," we have consolidated the results of Dyax-Genzyme LLC and Excigen Inc. Our consolidated balance sheet as of September 30, 2006, includes assets related to Dyax-Genzyme LLC, which are not significant, and substantially all of which are lab equipment net of their associated accumulated depreciation. We have recorded Dyax's portion of this joint venture's losses as minority interest in our consolidated statements of operations. The results of Excigen were not significant.

Gains on Investments in Equity Securities, net

We recorded the following gains on investments in equity securities, net of charges for impaired investments, during the periods presented (amounts in thousands):

			Three Months Ended September 30,				Nine Months Ended September 30,
			2006		2005		2006			2005
Gross gains on investments:
	CAT		$	—	$	—	$	69,359		$	—
	ProQuest			—		—		1,404			151
	BioMarin			—		—		6,417			—
	Theravance			—		—		—			4,510
	Other			128		214		750			511

		Total		128		214		77,930			5,172
Less: charges for impaired investments				—		—		(2,893	)		—

Gains on investments in equity securities, net			$	128	$	214	$	75,037		$	5,172

Gross Gains on Investments

In May 2006, we recorded a $7.0 million gain on the sale of a portion of our investment in CAT. In June 2006, in connection with the acquisition of CAT by AstraZeneca, we recorded a $62.4 million gain on the tender of our remaining investment in CAT, which became unconditional on June 21, 2006.

In January 2006, we recorded a $6.4 million gain in connection with the sale of our entire investment of 2.1 million shares of the common stock of BioMarin.

Charges for Impaired Investments

We review the carrying value of each of our strategic investments in equity securities on a quarterly basis for potential impairment.

In June 2006, we recorded a $2.2 million impairment charge in connection with our investment in ViaCell and a $0.7 million impairment charge in connection with our investment in Cortical because we considered the decline in value of these investments to be other than temporary. The price of ViaCell's common stock declined between July 2005 and November 2005, primarily due to the FDA's decision to temporarily halt ViaCell's phase 1 clinical trial for CB001, which was being tested for potential use in various cancer treatments. The FDA allowed ViaCell to resume clinical testing of CB001 in December 2005. Although clinical testing has resumed, the market of ViaCell's common stock has continued to remain below our cost and had been below our cost for the last eleven months prior to June 30, 2006. Given the significance and duration of the decline in market value of our investments in ViaCell and Cortical, as of June 30, 2006, we concluded that it was unclear over what period the recovery of the stock price for these investments would take place, and, accordingly, that any evidence suggesting that the investments would recover to at least our historical cost was not sufficient to

overcome the presumption that the current market price was the best indicator of the value of these investments.

Unrealized Gains (Losses)

At September 30, 2006, our stockholders' equity includes $23.0 million of unrealized gains and $0.2 million of unrealized losses related to our strategic investments in equity securities.

Investment Income

Our investment income increased 108% to $16.8 million for the three months ended and 77% to $39.4 million for the nine months ended September 30, 2006, as compared to the same period of 2005, primarily due to higher average cash balances and an increase in the average portfolio yield.

Interest Expense

Our interest expense decreased 44% to $3.8 million for the three months ended September 30, 2006, as compared to the same period of 2005, primarily due to reduced interest expense of $1.9 million on our 2003 revolving credit facility and a $0.5 million decrease due to the paydown of our GelTex capital lease in October 2005. Our interest expense decreased 18% to $12.2 million for the nine months ended September 30, 2006, as compared to the same period of 2005, primarily due to reduced interest expense of $2.0 million on our 2003 revolving credit facility and a $1.3 million decrease due to the paydown of our GelTex capital lease, partially offset by a $0.7 million increase in capitalized interest due to increased investment in our manufacturing plants.

(Provision for) Benefit from Income Taxes

	Three Months Ended September 30,							Nine Months Ended September 30,
	Three Months Ended September 30,					Increase/ (Decrease) % Change		Nine Months Ended September 30,						Increase/ (Decrease) % Change
	2006		2005			Increase/ (Decrease) % Change		2006			2005			Increase/ (Decrease) % Change
	(Amounts in thousands)
(Provision for) benefit from income taxes	$	44,530	$	(51,279	)	(187	)%	$	(60,841	)	$	(147,804	)	(59)%
Effective tax rate		(156)%		31%					19%			31%

Our effective tax rate for all periods varies from the U.S. statutory tax rate as a result of:

•: our provision for state income taxes;
•: the tax benefits from export sales;
•: the tax benefits from domestic production activities;
•: benefits related to tax credits; and
•: the foreign rate differential.

Our effective tax rate for the three and nine months ended September 30, 2006, was also impacted by:

•: non-deductible stock option expense;
•: a charge for impaired goodwill of $219.2 million recorded in September 2006, of which $29.5 million was not deductible for tax purposes; and
•: a $31.7 million net tax benefit recorded in September 2006 related primarily to the settlement of the 1996 to 1999 U.S. audits and certain foreign audits.

B. LIQUIDITY AND CAPITAL RESOURCES

We continue to generate cash from operations. At September 30, 2006, we had cash, cash equivalents and short- and long-term investments of $1.7 billion, an increase of $0.6 billion from cash, cash equivalents and short- and long-term investments of $1.1 billion at December 31, 2005.

The following is a summary of our statements of cash flows for the nine months ended September 30, 2006 and 2005.

Cash Flows from Operating Activities

Cash flows from operating activities are as follows (amounts in thousands):

			Nine Months Ended September 30,
			2006			2005
Cash flows from operating activities:
	Net income		$	251,437		$	334,843
	Non-cash charges			455,482			272,112
	Decrease in cash from working capital changes (excluding impact of acquired assets and assumed liabilities)			(89,987	)		(47,745	)

		Cash flows from operating activities	$	616,932		$	559,210

Cash provided by operating activities increased $57.7 million for the nine months ended September 30, 2006, as compared to the same period of 2005, primarily driven by a $100.0 million increase in earnings, excluding non-cash charges, offset in part by a $42.2 million decrease in working capital changes. In connection with our adoption of FAS 123R, we were required to change the classification in our consolidated statements of cash flows of any tax benefits realized upon the exercise of stock options in excess of that which is associated with the expense recognized for financial reporting purposes. For the nine months ended September 30, 2006, $9.0 million of excess tax benefits from stock-based compensation were presented as a financing cash inflow rather than as a reduction of income taxes paid in our consolidated statement of cash flows for which there were no similar amounts in the same period of 2005. We adopted FAS 123R using the modified prospective transition method and as a result, we have not restated our results for the nine months ended September 30, 2005 to reflect the adoption of this standard.

Cash Flows from Investing Activities

Cash flows from investing activities are as follows (amounts in thousands):

			Nine Months Ended September 30,
			2006			2005
Cash flows from investing activities:
	Net sales (purchases) of investments, excluding investments in equity securities		$	(107,261	)	$	40,094
	Net sales (purchases) of investments in equity securities			131,691			(680	)
	Purchases of property, plant and equipment			(236,917	)		(131,940	)
	Distributions from equity method investments			12,000			1,500
	Purchases of intangible assets			(18,209	)		—
	Acquisitions, net of acquired cash			—			(687,875	)
	Acquisition of sales and marketing rights			(49,584	)		(151,161	)
	Other investing activities			4,662			2,630

		Cash flows from investing activities	$	(263,618	)	$	(927,432	)

For the nine months ended September 30, 2006, capital expenditures, net purchases of investments, excluding investments in equity securities, acquisitions and purchases of intangible assets accounted for significant cash outlays for investing activities. For the nine months ended September 30, 2006, we used:

•: $236.9 million in cash to fund the purchase of property, plant and equipment, primarily related to the ongoing expansion of our manufacturing capacity in the Republic of Ireland, the United Kingdom and Belgium, and the construction of a new research and development facility in Framingham, Massachusetts;
•: $107.3 million in cash for the net purchases of investments, excluding our investments in equity securities;
•: $49.6 million in cash for our reacquisition of Synvisc sales and marketing rights from Wyeth; and
•: $18.2 million in cash for purchases of other intangible assets.

These decreases in cash were partially offset by cash provided by:

•: $131.7 million in cash from the net sales of investments in equity securities, of which $24.4 million is attributable to the sale of our entire investment of 2.1 million shares in the common stock of BioMarin in January 2006, $11.4 million is attributable to the sale of a portion of our investment in the common stock of CAT in May 2006 and $99.0 million is attributable to the sale of the remainder of our investment in the common stock of CAT in July 2006; and
•: $12.0 million of cash distributions from our joint venture with BioMarin.

For the nine months ended September 30, 2005, net sales of investments, excluding investments in equity securities, provided $40.1 million in cash and we received a $1.5 million cash distribution from our joint venture with BioMarin. For the same period, acquisitions and capital expenditures accounted for significant cash outlays for investing activities. For the nine months ended September 30, 2005, we used:

•: $687.9 million in cash for the acquisitions of Bone Care, Equal Diagnostics and Verigen, net of acquired cash, and $151.2 million in cash for our reacquisition of the Synvisc sales and marketing rights from Wyeth; and

•: $131.9 million in cash to fund the purchase of property, plant and equipment, primarily related to the ongoing expansion of our manufacturing capacity in the Republic of Ireland, the United Kingdom, Belgium and the United States.

Cash Flows from Financing Activities

Our cash flows from financing activities are as follows (amounts in thousands):

			Nine Months Ended September 30,
			2006			2005
Cash flows from financing activities:
	Proceeds from issuance of common stock		$	112,012		$	296,210
	Excess tax benefits from stock-based compensation			8,979			—
	Proceeds from draws on our 2003 revolving credit facility			—			350,000
	Payments of debt and capital lease obligations			(3,155	)		(452,722	)
	Bank overdraft			(16,285	)		12,689
	Minority interest contributions			8,265			9,154
	Other financing activities			2,610			584

		Cash flows from financing activities	$	112,426		$	215,915

For the nine months ended September 30, 2006, cash flows from financing activities decreased $103.5 million, as compared to the same period of 2005, primarily due to a $184.2 million decrease in cash proceeds from the issuance of common stock and $350.0 million of cash proceeds drawn under our 2003 revolving credit facility in the nine months ended September 30, 2005 for which there were no similar amounts in the same period of 2006. These decreases were offset, in part, by a $449.6 million decrease in cash used for the payment of debt and capital lease obligations. Cash used for the payment of debt and capital lease obligations for the nine months ended September 30, 2005 includes the repayment of $450.0 million in principal drawn under our 2003 revolving credit facility for which there are no similar repayments in the same period of 2006. As described above, in connection with our adoption of FAS 123R effective January 1, 2006, the $9.0 million of excess tax benefits from stock-based compensation are shown as a cash inflow in cash from financing activities for the nine months ended September 30, 2006. Because we adopted FAS 123R using the modified prospective transition method, we have not adjusted the presentation of our statement of cash flows for the nine months ended September 30, 2005, to reflect this change.

Agreements with Dyax

Under the terms of our existing collaboration agreement with Dyax for DX-88, expenses incurred by Dyax under its agreement with Avecia for the manufacture and validation of DX-88 API would have been treated as program costs of Dyax-Genzyme LLC and shared equally by us and Dyax. In the third quarter of 2006, we entered into an agreement with Dyax and Dyax-Genzyme LLC under which we agreed that Dyax will assume full responsibility for the first $14.5 million of manufacturing costs incurred under its agreement with Avecia and own the resulting DX-88 API. Costs incurred thereafter under that agreement will be considered program costs of Dyax-Genzyme LLC and will be shared equally by us and Dyax. Dyax-Genzyme LLC will be required to purchase DX-88 API from Dyax following receipt of marketing approval for DX-88 in the United States or the European Union at Dyax's cost plus an applicable margin.

Note Receivable from Dyax

Revolving Credit Facility

In December 2003, we entered into our 2003 revolving credit facility. On July 14, 2006, we terminated our 2003 revolving credit facility and replaced it with our 2006 revolving credit facility, a new five-year $350.0 million senior unsecured revolving credit facility with JPMorgan Chase Bank, N.A., as administrative agent, Bank of America, N.A., as syndication agent, ABN AMRO Bank N.V., Citizens Bank of Massachusetts and Wachovia Bank, National Association, as co-documentation agents, and a syndicate of lenders. The proceeds of loans under our 2006 revolving credit facility can be used to finance working capital needs and for general corporate purposes. Our 2006 revolving credit facility may be increased at any time by up to an additional $350.0 million in the aggregate, as long as no default or event of default has occurred or is continuing and certain other customary conditions are satisfied. Borrowings under our 2006 revolving credit facility will bear interest as follows:

•: revolving loans denominated in U.S. dollars or a foreign currency (other than Euros) bear interest at a variable rate equal to LIBOR for loans in U.S. dollars and a comparable index rate for foreign currency loans, plus an applicable margin;
•: revolving loans denominated in Euros bear interest at a variable rate equal to the EURIBOR Rate plus an applicable margin;
•: at our option, U.S. dollar swingline loans (demand loans requiring only one day of advance notice, which grant us access to up to $20.0 million of our 2006 revolving credit facility in order to cover possible working capital shortfalls) bear interest at the greater of the Prime Rate and the Federal Funds Effective Rate plus one half of one percent; and
•: multicurrency swingline loans bear interest at a rate equal to the average rate at which overnight deposits in the currency in which such swingline loan is denominated, and approximately equal in principal amount to such swingline loan, are obtainable by the swingline lender for such swingline loan in the interbank market plus an applicable margin.

As of September 30, 2006, no amounts were outstanding under our 2006 revolving credit facility.

Contractual Obligations

The disclosure of payments we have committed to make under our contractual obligations is set forth under the heading "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations—Liquidity and Capital Resources" in

Exhibit 13.1 to our 2005 Form 10-K. Excluding additional contingent payments to Wyeth for the reacquisition of the Synvisc sales and marketing rights, and to the former shareholders of Surgi.B related to our acquisition of the rights to GlucaMesh and GlucaTex, and the refinancing of our $350.0 million revolving credit facility, as described above, as of September 30, 2006 there have been no material changes to our contractual obligations since December 31, 2005.

Financial Position

We believe that our available cash, investments and cash flows from operations will be sufficient to fund our planned operations and capital requirements for the foreseeable future. Although we currently have substantial cash resources and positive cash flow, we have used or intend to use substantial portions of our available cash and may make additional borrowings under our 2006 revolving credit facility for:

•: product development and marketing;
•: business combinations and other strategic business initiatives, including approximately $580 million of cash for our planned acquisition of AnorMED;
•: expanding existing and constructing new facilities;
•: expanding staff; and
•: working capital, including satisfaction of our obligations under capital and operating leases.

Our cash reserves may be further reduced to pay principal and interest on the $690.0 million in principal under our 1.25% convertible senior notes due December 1, 2023. The notes are initially convertible into Genzyme Stock at a conversion price of approximately $71.24 per share. Holders of the notes may require us to repurchase all or any part of the notes for cash, common stock, or a combination, at our option, on December 1, 2008, 2013 or 2018, at a price equal to 100% of the principal amount of the notes plus accrued and unpaid interest through the date prior to the date of repurchase. Additionally, upon a change of control, each holder may require us to repurchase for cash, at 100% of the principal amount of the notes plus accrued interest, all or a portion of the holder's notes. On or after December 1, 2008, we may redeem for cash at 100% of the principal amount of the notes plus accrued interest, all or part of the notes that have not been previously converted or repurchased.

In addition, we have several outstanding legal proceedings. Involvement in investigations and litigation can be expensive and a court may ultimately require that we pay expenses and damages. As a result of legal proceedings, we also may be required to pay fees to a holder of proprietary rights in order to continue certain operations. We have provided you detail on certain pending legal proceedings in the notes to our consolidated financial statements.

To satisfy these and other commitments, we may have to obtain additional financing. We cannot guarantee that we will be able to obtain any additional financing, extend any existing financing arrangement, or obtain either on favorable terms.

Off-Balance Sheet Arrangements

We do not use special purpose entities or other off-balance sheet financing arrangements. We enter into guarantees in the ordinary course of business related to the guarantee of our own performance and the performance of our subsidiaries. In addition, we have joint ventures and certain other arrangements that are focused on research, development, and the commercialization of products. Entities falling within the scope of FIN 46R are included in our consolidated statements of operations if we qualify as the primary beneficiary. Entities not subject to consolidation under FIN 46R are accounted for under the equity method of accounting if our ownership percent exceeds 20% or if we

exercise significant influence over the entity. We account for our portion of the income/losses of these unconsolidated entities in the line item "Equity in income (loss) of equity method investments" in our statements of operations. We also acquire companies in which we agree to pay contingent consideration based on attaining certain thresholds.

Recent Accounting Pronouncement

approach to assessing the quantitative effects of financial misstatements, which includes both an income statement focused assessment and a balance sheet focused assessment. The guidance in SAB 108 is effective for our current fiscal year ending December, 31, 2006. Although restatement of prior years' financial statements is permitted, it is not required if we properly applied our previous approach (income statement or balance sheet) and considered all relevant qualitative factors in our assessment of previous errors. In lieu of the restatement, we will be permitted to report the cumulative effect of adopting SAB 108 as an adjustment to the opening balance of assets and liabilities, with an offsetting adjustment to the opening balance of retained earnings as of January 1, 2006, the year of adoption. In addition, we will be required to disclose the nature and amount of each individual error being corrected in the cumulative effect adjustment, when and how each error being corrected arose, and the fact that the errors had previously been considered immaterial. We do not believe the adoption of SAB 108 will have a material impact on our financial position or results of operations.

FACTORS AFFECTING FUTURE OPERATING RESULTS

Our future operating results could differ materially from the results described in this report due to the risks and uncertainties related to our business, including those discussed below and other factors that we do not currently consider significant or of which we are not aware.

Our financial results are highly dependent on sales of Cerezyme.

We generate a significant portion of our revenue from sales of Cerezyme, our enzyme-replacement product for patients with Gaucher disease. Sales of Cerezyme totaled $745.2 million for the nine months ended September 30, 2006, representing approximately 32% of our consolidated total revenue for the first nine months of 2006. Because our business is highly dependent on Cerezyme, negative trends in revenue from this product could have a significant adverse effect on our operations and cause the value of our securities to decline substantially. We will lose revenue if alternative treatments gain commercial acceptance, if our marketing activities are restricted, or if reimbursement is limited. In addition, the patient population with Gaucher disease is not large. Because a significant percentage of that population already uses Cerezyme, opportunities for future sales growth are constrained. Furthermore, changes in the methods for treating patients with Gaucher disease, including treatment protocols that combine Cerezyme with other therapeutic products or reduce the amount of Cerezyme prescribed, could limit growth, or result in a decline, in Cerezyme sales.

If we fail to increase sales of several products and services, we will not meet our financial goals.

Over the next few years, our success will depend substantially on our ability to increase revenue from many different products and services. The products and services include Cerezyme, Fabrazyme, Aldurazyme, Myozyme, Renagel, Hectorol, Synvisc, Thymoglobulin, Thyrogen, Clolar, Campath and diagnostic testing services. Our ability to increase sales will depend on a number of factors, including:

•: acceptance by the medical community of each product or service;
•: the availability of competing treatments that are deemed more efficacious, more convenient to use, or more cost effective;
•: our ability, and the ability of our collaborators, to efficiently manufacture sufficient quantities of each product to meet demand and to do so in a cost efficient manner;
•: regulation by the U.S. Food and Drug Administration, commonly referred to as the FDA, and the European Agency for the Evaluation of Medical Products, or EMEA, and other regulatory authorities;
•: the scope of the labeling approved by regulatory authorities for each product and competitive products;
•: the effectiveness of our sales force;
•: the availability and extent of coverage, pricing and level of reimbursement from governmental agencies and third party payors; and
•: the size of the patient population for each product or service and our ability to identify new patients.

Part of our growth strategy involves conducting additional clinical trials to support approval of expanded uses of some of our products and pursuing marketing approval for our products in new jurisdictions. For example, we are seeking marketing approval for the use of Synvisc to treat pain associated with osteoarthritis of the hip in the United States and we have begun a phase 3 trial of Clolar in adult acute myelogenous leukemia. The success of this component of our growth strategy will

depend on the outcome of these additional clinical trials, the content and timing of our submissions to regulatory authorities and whether and when those authorities determine to grant approvals.

Because the healthcare industry is extremely competitive and regulatory requirements are rigorous, we spend substantial funds marketing our products and attempting to expand approved uses for them. These expenditures depress near-term profitability, with no assurance that the expenditures will generate future profits that justify the expenditures.

Our future success will depend on our ability to effectively develop and market our products and services against those of our competitors.

The human healthcare products and services industry is extremely competitive. Other organizations, including pharmaceutical, biotechnology, device and diagnostic testing companies, have developed and are developing products and services to compete with our products, services, and product candidates. If healthcare providers, patients or payors prefer these competitive products or services or these competitive products or services have superior safety, efficacy, pricing or reimbursement characteristics, we will have difficulty maintaining or increasing the sales of our products and services.

Renagel competes with two other products approved in the United States for the control of elevated phosphorus levels in patients with chronic kidney failure and on hemodialysis. Nabi Biopharmaceuticals markets PhosLo®, a calcium-based phosphate binder. In October 2006, Nabi agreed to sell PhosLo to a U.S. subsidiary of Fresenius Medical Care. Shire Pharmaceuticals Group plc, or Shire, markets Fosrenol®, a non-calcium based phosphate binder. Nabi Biopharmaceuticals has filed for marketing approval of PhosLo in the European Union. Shire has received marketing approval for Fosrenol in certain European countries and has filed for approval in additional European countries and Canada. Renagel also competes with over-the-counter calcium carbonate products such as TUMS®.

Both the oral and the intravenous formulations of Hectorol face competition. Abbott Laboratories markets intravenous Calcijex® and intravenous Zemplar® in the United States and Europe. More recently it has begun marketing an oral formulation of Zemplar in the United States. Hectorol faces competition from several other vitamin D hormone therapies used to treat hyperparathyroidism and hyperproliferative diseases as well.

UCB S.A. has developed Zavesca®, a small molecule drug for the treatment of Gaucher disease, the disease addressed by Cerezyme. Zavesca has been approved in the United States, European Union and Israel as an oral therapy for use in patients with mild to moderate Type 1 Gaucher disease for whom enzyme replacement therapy is unsuitable. In addition, Shire is conducting a phase 1/2 clinical trial for its gene-activated glucocerebrosidase program, also to treat Gaucher disease. We are also aware of other development efforts aimed at treating Gaucher disease.

Outside the United States, Shire is marketing Replagal™, a competitive enzyme replacement therapy for Fabry disease which is the disease addressed by Fabrazyme. In addition, while Fabrazyme has received orphan drug designation, which provides us with seven years of market exclusivity for the product in the United States, other companies may seek to overcome our market exclusivity and, if successful, compete with Fabrazyme in the United States. We are aware of other development efforts aimed at treating Fabry disease.

Several companies market products that, like Thymoglobulin and Lymphoglobuline, are used for the prevention and treatment of acute rejection in renal transplant. These products include Novartis' Simulect®, Pfizer Inc.'s ATGAM®, Ortho Biotech's Orthoclone OKT®3, Fresenius Biotech GmbH's ATG-Fresenius S® and the Roche Group's Zenapax®. Competition in the acute transplant rejection market largely is driven by product efficacy due to the potential loss of transplanted organs as the result of an acute organ rejection episode.

Current competition for Synvisc includes Supartz, a product manufactured by Seikagaku Kogyo that is sold in the United States by Smith & Nephew Orthopaedics and in Japan by Kaken Pharmaceutical Co. under the name Artz®; Hyalgan®, produced by Fidia Farmaceutici S.p.A. and marketed in the United States by Sanofi-Aventis; Orthovisc®, produced by Anika Therapeutics, Inc., marketed in the United States by Johnson & Johnson and marketed outside the United States through distributors; Euflexxa™, a product manufactured and sold by Ferring Pharmaceuticals and marketed in the United States and Europe; and Durolane®, manufactured and distributed outside the United States by Q-Med AB. Durolane and Euflexxa, the most recently approved products in Europe and the United States, respectively, are produced by bacterial fermentation, as opposed to Synvisc, which is avian-sourced. In addition, the treatment protocol for Durolane is a single injection, as compared to Synvisc's three injection regimen (although it offers a shorter duration of pain relief). Production via bacterial fermentation and treatment with a reduced number of injections may represent competitive advantages for these products. We are aware of various viscosupplementation products on the market or in development, but are unaware of any products that have physical properties of viscosity, elasticity or molecular weight comparable to those of Synvisc. Furthermore, several companies market products that are not viscosupplementation products but which are designed to relieve the pain associated with osteoarthritis. Synvisc will have difficulty competing with any of these products to the extent the competitive products are considered more efficacious, less burdensome to administer or more cost-effective.

The examples above are illustrative. Almost all of our products and services face competition. Furthermore, the field of biotechnology is characterized by significant and rapid technological change. Discoveries by others may make our products or services obsolete. For example, competitors may develop approaches to treating lysosomal storage disorders (LSDs) that are more effective, convenient or less expensive than our products and product candidates. Because a significant portion of our revenue is derived from products that address this class of diseases and a substantial portion of our expenditures is devoted to developing new therapies for this class of diseases, such a development would have a material negative impact on our operations. Furthermore, we are committed to expanding our oncology portfolio. Many pharmaceutical and biotechnology companies are pursuing programs in this area, and these organizations may develop approaches that are superior to ours.

If we fail to obtain adequate levels of reimbursement for our products from third party payors, the commercial potential of our products will be significantly limited.

A substantial portion of our domestic and international revenue comes from payments by third party payors, including government health administration authorities and private health insurers. Governments and other third party payors may not provide adequate insurance coverage or reimbursement for our products and services, which could impair our financial results.

Third party payors are increasingly scrutinizing pharmaceutical budgets and healthcare expenses and are attempting to contain healthcare costs by:

•: challenging the prices charged for healthcare products and services;
•: limiting both the coverage and the amount of reimbursement for new therapeutic products;
•: reducing existing reimbursement rates for commercialized products and services;
•: limiting coverage for treatment of a particular patient to a maximum dollar amount or specified period of time;
•: denying or limiting coverage for products that are approved by the FDA or other governmental regulatory bodies but are considered experimental or investigational by third party payors; and

•: refusing in some cases to provide coverage when an approved product is used for disease indications in a way that has not received FDA or other applicable marketing approval.

Attempts by third party payors to reduce costs in any of these ways could decrease demand for our products. In addition, in certain countries, including countries in the European Union and Canada, the coverage of prescription drugs, the pricing, and the level of reimbursement are subject to governmental control. Therefore, we may be unable to negotiate coverage, pricing and/or reimbursement on terms that are favorable to us. Government health administration authorities may also rely on analyses of the cost-effectiveness of certain therapeutic products in determining whether to provide reimbursement for such products. Our ability to obtain satisfactory pricing and reimbursement may depend in part on whether our products, the cost of some of which is high in comparison to other therapeutic products, are viewed as cost-effective.

Furthermore, governmental regulatory bodies, such as the Centers for Medicare and Medicaid Services (CMS), may from time-to-time also make unilateral changes to reimbursement rates for our products and services. These changes could reduce our revenues by causing healthcare providers to be less willing to use our products and services. Although we actively seek to assure that any initiatives that are undertaken by regulatory agencies involving reimbursement do not have an adverse impact on us, we may not always be successful in these efforts. For example, in October 2006, CMS announced a change to the billing code for viscosupplementation products effective January 2007 that, if unchanged, will result in Medicare reimbursement for Synvisc at a rate that is lower than the price healthcare providers are currently paying for the product. If the CMS billing code decision is left unchanged, our Synvisc revenues will be adversely affected because healthcare providers likely will be less willing to use Synvisc. Although we intend to pursue efforts to have this coding decision reversed, we have no way of knowing whether these efforts will ultimately be successful.

The development of new biotechnology products involves a lengthy and complex process, and we may be unable to commercialize any of the products we are currently developing.

We have multiple products under development and devote considerable resources to research and development, including clinical trials. For example, we are spending considerable resources attempting to develop new treatments for Gaucher disease.

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

•: conduct substantial research and development;
•: undertake preclinical and clinical testing;
•: develop and scale-up manufacturing processes; and
•: pursue regulatory approvals and, in some jurisdictions, pricing approvals.

This process involves a high degree of risk and takes many years. Our product development efforts with respect to a product candidate may fail for many reasons, including:

•: failure of the product candidate in preclinical studies;
•: difficulty enrolling patients in clinical trials, particularly for disease indications with small populations;
•: patients exhibiting adverse reactions to the product candidate or indications of other safety concerns;
•: insufficient clinical trial data to support the effectiveness of the product candidate;
•: our inability to manufacture sufficient quantities of the product candidate for development or commercialization activities in a timely and cost-efficient manner;

•: our failure to obtain the required regulatory approvals for the product candidate or the facilities in which it is manufactured; or
•: changes in the regulatory environment, including pricing and reimbursement, that make development of a new product or indication no longer desirable.

Few research and development projects result in commercial products, and success in preclinical studies or early clinical trials often is not replicated in later studies. We may decide to abandon development of a product or service candidate at any time or we may be required to expend considerable resources repeating clinical trials or conducting additional trials, either of which would increase costs of development and delay any revenue from those product candidates.

Our efforts to expand the approved indications for our products and to gain marketing approval in new jurisdictions also may fail. These expansion efforts are subject to many of the risks associated with completely new products, and, accordingly, we may fail to recoup the investments we make pursuing these expansions.

Guidelines and recommendations published by various organizations can reduce the use of our products.

Professional societies, practice management groups, private health/science foundations, and organizations involved in various diseases may publish guidelines or recommendations to the health care and patient communities from time to time. Recommendations of government agencies or these other groups/organizations may relate to such matters as usage, dosage, route of administration, cost-effectiveness, and use of related therapies. Organizations like these have in the past made recommendations about our products and products of our competitors. Recommendations or guidelines that are followed by patients and healthcare providers could result in decreased use of our products. In addition, the perception by the investment community or shareholders that recommendations or guidelines will result in decreased use of our products could adversely affect prevailing market price for our common stock. Our success also depends on our ability to educate patients and healthcare providers about our products and their uses. If these education efforts are not effective, then we may not be able to increase the sales of our existing products or successfully introduce new products to the market.

We may encounter substantial difficulties managing our growth.

Several risks are inherent to our plans to grow our business. Achieving our goals will require substantial investments in research and development, sales and marketing, and facilities. For example, we have spent considerable resources building and seeking regulatory approvals for our manufacturing plants. We cannot assure you that acquiring these facilities will prove sufficient to meet demand for our products or that we will not have excess capacity at these facilities. In addition, building our facilities is expensive, and our ability to recover these costs will depend on increased revenue from the products produced at the facilities.

We produce relatively small amounts of material for research and development activities and pre-clinical trials. Even if a product candidate receives all necessary approvals for commercialization, we may not be able to successfully scale up production of the product material at a reasonable cost or at all.

If we are able to grow sales of our products, we may have difficulty managing inventory levels. Marketing new therapies is a complicated process, and gauging future demand is difficult. With Renagel, for example, we have encountered problems in the past managing inventory levels at wholesalers. Comparable problems may arise with our other products, particularly during market introduction.

Growth in our business may also contribute to fluctuations in our operating results, which may cause the price of our securities to decline. Our revenue may fluctuate due to many factors, including changes in:

•: wholesaler buying patterns;
•: reimbursement rates;
•: physician prescribing habits;
•: the availability or pricing of competitive products; and
•: currency exchange rates.

We may also experience fluctuations in our quarterly results due to price changes and sales incentives. For example, purchasers of our products, particularly wholesalers, may increase purchase orders in anticipation of a price increase and reduce order levels following the price increase. We occasionally offer sales incentives and promotional discounts on some of our products and services that could have a similar impact. In addition, some of our products, including Synvisc, are subject to seasonal fluctuation in demand.

Our operating results and financial position may be impacted when we attempt to grow through business combination transactions.

We may encounter problems assimilating operations acquired in these transactions. Business combination transactions often entail the assumption of unknown liabilities, the loss of key employees, and the diversion of management attention. Furthermore, in any business combination, including our acquisitions of the Physician Services and Analytical Services business units of IMPATH, Inc., ILEX Oncology, Inc., Bone Care International, Inc., and our planned acquisition of AnorMED Inc., there is a substantial risk that we will fail to realize the benefits we anticipate when we decide to undertake the transaction. We have in the past taken significant charges for impaired goodwill and for impaired assets acquired in business combination transactions. We may be required to take similar charges in the future.

Manufacturing problems may cause product launch delays, inventory shortages, recalls and unanticipated costs.

In order to generate revenue from our approved products, we must be able to produce sufficient quantities of the products. Many of our products are difficult to manufacture. Our products that are biologics, for example, require product characterization steps that are more onerous than those required for most chemical pharmaceuticals. Accordingly, we employ multiple steps to attempt to control the manufacturing processes. Minor deviations in these manufacturing processes could result in unacceptable changes in the products that result in lot failures, product recalls, or product liability.

Certain of the raw materials required in the commercial manufacturing and the formulation of our products are derived from biological sources, including mammalian sources and human plasma. Such raw materials may be subject to contamination or recall. Also, some countries in which we market our products may restrict the use of certain biologically derived substances in the manufacture of drugs. A material shortage, contamination, recall, or restriction of the use of certain biologically derived substances in the manufacture of our products could adversely impact or disrupt our commercial manufacturing of our products or could result in a mandated withdrawal of our products from the market. This too, in turn, could adversely affect our ability to satisfy demand for our products, which could materially and adversely affect our operating results.

In addition, we may only be able to produce certain of our products at a very limited number of facilities and, in some cases, we rely on third parties to formulate and manufacture our products. For

example, we manufacture all of our Cerezyme and a portion of our Fabrazyme products at our facility in Allston, Massachusetts. A number of factors could cause production interruptions at our facilities or the facilities of our third party providers, including equipment malfunctions, labor problems, natural disasters, power outages, terrorist activities, or disruptions in the operations of our suppliers.

Manufacturing is also subject to extensive government regulation. Regulatory authorities must approve the facilities in which human healthcare products are produced. Any third party we use to manufacture, fill/finish or package our products to be sold must also be licensed by the applicable regulatory authorities. As a result, alternative third party providers may not be readily available on a timely basis. In addition, facilities are subject to ongoing inspections and minor changes in manufacturing processes may require additional regulatory approvals, either of which could cause us to incur significant additional costs and lose revenue.

We rely on third parties to provide us with materials and services in connection with the manufacture of our products.

Certain materials necessary for commercial production of our products, including specialty chemicals and components necessary for manufacture, fill/finish and packaging, are provided by unaffiliated third party suppliers. In some cases, such materials are specifically cited in our marketing application with regulatory authorities so that they must be obtained from that specific source unless and until the applicable authority approved another supplier. In addition, there may only be one available source for a particular chemical or component. For example, we acquire polyalylamine (PAA), used in the manufacture of Renagel and WelChol, from Cambrex Charles City, Inc., the only source for this material currently qualified in our FDA drug applications for these products. Our suppliers also may be subject to FDA regulations or the regulations of other governmental agencies outside the United States regarding manufacturing practices. We may be unable to manufacture our products in a timely manner or at all if these third party suppliers were to cease or interrupt production or otherwise fail to supply these materials or products to us for any reason, including due to regulatory requirements or actions, adverse financial developments at or affecting the supplier, or labor shortages or disputes.

We also source some of our manufacturing, fill/finish, packaging and distribution operations to third party contractors. The manufacture of products, fill/finish, packaging and distribution of our products requires successful coordination among these third party providers and Genzyme. Our inability to coordinate these efforts, the lack of capacity available at a third party contractor or any other problems with the operations of these third party contractors could require us to delay shipment of saleable products, recall products previously shipped or could impair our ability to supply products at all. This could increase our costs, cause us to lose revenue or market share and damage our reputation.

If our strategic alliances are unsuccessful, our operating results will be negatively impacted.

Several of our strategic initiatives involve alliances with other biotechnology and pharmaceutical companies, including a joint venture with BioMarin Pharmaceutical Inc. with respect to Aldurazyme. The success of these and similar arrangements is largely dependent on technology and other intellectual property contributed by our strategic partners or the resources, efforts, and skills of our partners. Disputes and difficulties in such relationships are common, often due to conflicting priorities or conflicts of interest. Merger and acquisition activity may exacerbate these conflicts. The benefits of these alliances are reduced or eliminated when strategic partners:

•: terminate the agreements or limit our access to the underlying intellectual property;
•: fail to devote financial or other resources to the alliances and thereby hinder or delay development, manufacturing or commercialization activities;
•: fail to successfully develop, manufacture or commercialize any products; or
•: fail to maintain the financial resources necessary to continue financing their portion of the development, manufacturing, or commercialization costs or their own operations.

Furthermore, payments we make under these arrangements may exacerbate fluctuations in our financial results. In addition, under some of our strategic alliances, we make milestone payments well in advance of commercialization of products with no assurance that we will ever recoup these payments. We also may make equity investments in our strategic partners, as we did with RenaMed Biologics, Inc., or RenaMed, in June 2005. Our strategic equity investments are subject to market fluctuations, access to capital and other business events, such as initial public offerings, the completion of clinical trials and regulatory approvals, which can impact the value of these investments. For example, in October 2006, RenaMed suspended clinical trials of its renal assist device which was developed to treat patients with acute renal failure. As a result, if any of our strategic equity investments decline in value and remain below cost for an extended duration, we may incur financial statement charges related to the decline in value of that investment.

Government regulation imposes significant costs and restrictions on the development and commercialization of our products and services.

Our success will depend on our ability to satisfy regulatory requirements. We may not receive required regulatory approvals on a timely basis or at all. Government agencies heavily regulate the production and sale of healthcare products and the provision of healthcare services. In particular, the FDA and comparable regulatory agencies in foreign jurisdictions must approve human therapeutic and diagnostic products before they are marketed, as well as the facilities in which they are made. This approval process can involve lengthy and detailed laboratory and clinical testing, sampling activities and other costly and time-consuming procedures. Several biotechnology companies have failed to obtain regulatory approvals because regulatory agencies were not satisfied with the structure or conduct of clinical trials. Similar problems could delay or prevent us from obtaining approvals. Furthermore, regulatory authorities, including the FDA, may not agree with our interpretations of our clinical trial data, which could delay, limit or prevent regulatory approvals.

Therapies that have received regulatory approval for commercial sale may continue to face regulatory difficulties. If we fail to comply with applicable regulatory requirements, regulatory authorities could take actions against us, including:

•: issuing warning letters;
•: issuing fines and other civil penalties;
•: suspending regulatory approvals;
•: refusing to approve pending applications or supplements to approved applications;
•: suspending product sales and/or exports;
•: mandating product recalls; and
•: seizing products.

Furthermore, the FDA and comparable foreign regulatory agencies may require post-marketing clinical trials or patient outcome studies. We have agreed with the FDA, for example, to a number of post-marketing commitments as a condition to U.S. marketing approval for Fabrazyme, Aldurazyme and Myozyme. In addition, regulatory agencies subject a marketed therapy, its manufacturer and the manufacturer's facilities to continual review and periodic inspections. The discovery of previously unknown problems with a therapy or the facility used to produce the therapy could prompt a regulatory authority to impose restrictions on us, or could cause us to voluntarily adopt such restrictions, including withdrawal of one or more of our products or services from the market.

We believe some of our products are prescribed by physicians for uses not approved by the FDA or comparable regulatory agencies outside the United States. Although physicians may lawfully

prescribe our products for off-label uses, any promotion by us of off-label uses would be unlawful. Some of our practices intended to make physicians aware of off-label uses of our products without engaging in off-label promotion could nonetheless be construed as off-label promotion. Although we have policies and procedures in place designed to help assure ongoing compliance with regulatory requirements regarding off-label promotion, some non-compliant actions may nonetheless occur. Regulatory authorities could take enforcement action against us if they believe we are promoting, or have promoted, our products for off-label use.

We may incur substantial costs as a result of litigation or other proceedings.

A third party may sue us or one of our strategic collaborators for infringing the third party's patent or other intellectual property rights. Likewise, we or one of our strategic collaborators may sue to enforce intellectual property rights or to determine the scope and validity of third party proprietary rights. If we do not prevail in this type of litigation, we or our strategic collaborators may be required to:

•: pay monetary damages;
•: stop commercial activities relating to the affected products or services;
•: obtain a license in order to continue manufacturing or marketing the affected products or services; or
•: compete in the market with a different product.

We are also currently involved in litigation matters and investigations that do not involve intellectual property claims and may be subject to additional actions in the future. For example, we are currently defending several lawsuits brought in connection with the elimination of our tracking stock in June 2003, some of which claim considerable damages. Also, the federal government, state governments and private payors are investigating and have begun to file actions against numerous pharmaceutical and biotechnology companies, including Genzyme, alleging that the companies have overstated prices in order to inflate reimbursement rates. Domestic and international enforcement authorities also have instituted actions under healthcare "fraud and abuse" laws, including anti-kickback and false claims statutes. Moreover, individuals who use our products or services, including our diagnostic products and genetic testing services, sometimes bring product and professional liability claims against us or our subsidiaries.

We may also become subject to investigations by government authorities in connection with our business activities. For example, we are currently cooperating with an investigation of Bone Care by the United States Attorney for the Eastern District of New York which was initiated in October 2004, when Bone Care received a subpoena requiring it to provide a wide range of documents related to numerous aspects of its business.

We have only limited amounts of insurance, which may not provide coverage to offset a negative judgment or a settlement payment. We may be unable to obtain additional insurance in the future, or we may be unable to do so on acceptable terms. Any additional insurance we do obtain may not provide adequate coverage against any asserted claims.

Regardless of merit or eventual outcome, investigations and litigations can result in:

•: diversion of management's time and attention;
•: expenditure of large amounts of cash on legal fees, expenses, and payment of damages;
•: limitations on our ability to continue some of our operations;
•: decreased demand for our products and services; and

•: injury to our reputation.

Our international sales, clinical activities, manufacturing and other operations are subject to the economic, political, legal and business environments of the countries in which we do business, and our failure to operate successfully or adapt to changes in these environments could cause our international sales and operations to be limited or disrupted.

Our international operations accounted for approximately 46% of our consolidated product and service revenues for the nine months ended September 30, 2006. We expect that international product and service sales will continue to account for a significant percentage of our revenues for the foreseeable future. In addition, we have direct investments in a number of subsidiaries outside of the United States, primarily in the European Union, Latin America and Japan. Our international sales and operations could be limited or disrupted, and the value of our direct investments may be diminished, by any of the following:

•: economic problems that disrupt foreign healthcare payment systems;
•: fluctuations in currency exchange rates;
•: the imposition of governmental controls;
•: less favorable intellectual property or other applicable laws;
•: the inability to obtain any necessary foreign regulatory or pricing approvals of products in a timely manner;
•: the inability to obtain third party reimbursement support for products;
•: product counterfeiting and intellectual property piracy;
•: parallel imports;
•: anti-competitive trade practices;
•: import and export license requirements;
•: political instability;
•: terrorist activities, armed conflict, or outbreak of diseases such as severe acute respiratory syndrome (SARS) or avian influenza;
•: restrictions on direct investments by foreign entities and trade restrictions;
•: changes in tax laws and tariffs;
•: difficulties in staffing and managing international operations; and
•: longer payment cycles.

Our operations and marketing practices are also subject to regulation and scrutiny by the governments of the other countries in which we operate. In addition, the United States Foreign Corrupt Practices Act prohibits U.S. companies and their representatives from offering, promising, authorizing or making payments to foreign officials for the purpose of obtaining or retaining business abroad. Failure to comply with domestic or foreign laws could result in various adverse consequences, including possible delay in approval or refusal to approve a product, recalls, seizures, withdrawal of an approved product from the market, and/or the imposition of civil or criminal sanctions.

A significant portion of our business is conducted in currencies other than our reporting currency, the U.S. dollar. We recognize foreign currency gains or losses arising from our operations in the period in which we incur those gains or losses. As a result, currency fluctuations among the U.S. dollar and

the currencies in which we do business have caused foreign currency transaction gains and losses in the past and will likely do so in the future. Because of the number of currencies involved, the variability of currency exposures and the potential volatility of currency exchange rates, we may suffer significant foreign currency transaction losses in the future due to the effect of exchange rate fluctuations.

We may fail to adequately protect our proprietary technology, which would allow competitors or others to take advantage of our research and development efforts.

Our long-term success largely depends on our ability to market technologically competitive products. If we fail to obtain or maintain adequate intellectual property protection in the United States or abroad, we may not be able to prevent third parties from using our proprietary technologies. Our currently pending or future patent applications may not result in issued patents. Patent applications are confidential for 18 months following their filing, and because third parties may have filed patent applications for technology covered by our pending patent applications without us being aware of those applications, our patent applications may not have priority over patent applications of others. In addition, our issued patents may not contain claims sufficiently broad to protect us against third parties with similar technologies or products, or provide us with any competitive advantage. If a third party initiates litigation regarding our patents, our collaborators' patents, or those patents for which we have license rights, and is successful, a court could declare our patents invalid or unenforceable or limit the scope of coverage of those patents. Governmental patent offices and courts have not consistently treated the breadth of claims allowed in biotechnology patents. If patent offices or the courts begin to allow or interpret claims more broadly, the incidence and cost of patent interference proceedings and the risk of infringement litigation will likely increase. On the other hand, if patent offices or the courts begin to allow or interpret claims more narrowly, the value of our proprietary rights may be reduced. Any changes in, or unexpected interpretations of, the patent laws may adversely affect our ability to enforce our patent position.

We also rely upon trade secrets, proprietary know-how, and continuing technological innovation to remain competitive. We attempt to protect this information with security measures, including the use of confidentiality agreements with employees, consultants, and corporate collaborators. These individuals may breach these agreements and any remedies available to us may be insufficient to compensate for our damages. Furthermore, our trade secrets, know-how and other technology may otherwise become known or be independently discovered by our competitors.

We may be required to license technology from competitors or others in order to develop and commercialize some of our products and services, and it is uncertain whether these licenses would be available.

Third party patents may cover some of the products or services that we or our strategic partners are developing or producing. A patent is entitled to a presumption of validity, and, accordingly, we face significant hurdles in any challenge to a patent. In addition, even if we are successful in challenging the validity of a patent, the challenge itself may be expensive and require significant management attention.

To the extent valid third party patent rights cover our products or services, we or our strategic collaborators would be required to seek licenses from the holders of these patents in order to manufacture, use, or sell these products and services, and payments under them would reduce our profits from these products and services. We may not be able to obtain these licenses on acceptable terms, or at all. If we fail to obtain a required license or are unable to alter the design of our technology to fall outside the scope of a third party patent, we may be unable to market some of our products and services, which would limit our profitability.

Importation of products from Canada and other countries into the United States may lower the prices we receive for our products.

In the United States and abroad, many of our products are subject to competition from lower-priced versions of our products and competing products from other countries where government price controls or other market dynamics result in lower prices for such products. Our products that require a prescription in the United States may be available to consumers in markets such as Canada, Mexico, Taiwan and the Middle East without a prescription, which may cause consumers to further seek out these products in these lower priced markets. The ability of patients and other customers to obtain these lower priced imports has grown significantly as a result of the Internet, an expansion of pharmacies in Canada and elsewhere that target American purchasers, the increase in U.S.-based businesses affiliated with Canadian pharmacies marketing to American purchasers, and other factors. Most of these foreign imports are illegal under current United States law. However, the volume of imports continues to rise due to the limited enforcement resources of the FDA and the United States Customs Service, and there is increased political pressure to permit such imports as a mechanism for expanding access to lower priced medicines. The importation of lower-priced versions of our products into the United States and other markets adversely affects our profitability. This impact could become more significant in the future.

Legislative or regulatory changes may adversely impact our business.

The United States government and other governments have shown significant interest in pursuing healthcare reform. Any government-adopted reform measures could adversely impact:

•: the pricing of healthcare products in the United States or internationally; and
•: the amount of reimbursement available from governmental agencies or other third party payors.

New laws, regulations and judicial decisions, or new interpretations of existing laws, regulations and decisions, that relate to healthcare availability, methods of delivery or payment for products and services, or sales, marketing or pricing may cause our revenue to decline, and we may need to revise our research and development programs.

We may require significant additional financing, which may not be available to us on favorable terms, if at all.

As of September 30, 2006, we had $1.7 billion in cash, cash equivalents and short- and long-term investments, excluding investments in equity securities.

We intend to use substantial portions of our available cash for:

•: product development and marketing;
•: business combinations and other strategic business initiatives including our planned acquisition of AnorMED;
•: expanding existing and constructing additional facilities;
•: expanding staff; and
•: working capital, including satisfaction of our obligations under capital and operating leases.

We may further reduce available cash reserves to fund the approximately $580 million in cash required for our planned acquisition of AnorMED and to pay principal and interest on outstanding debt, including our $690.0 million in principal of 1.25% convertible senior notes.

To satisfy our cash requirements, we may have to obtain additional financing. We may be unable to obtain any additional financing or extend any existing financing arrangements at all or on terms that we or our investors consider favorable.

Our level of indebtedness may harm our financial condition and results of operations.

At September 30, 2006, we had $700.2 million of outstanding indebtedness, excluding capital leases. We may incur additional indebtedness in the future. Our level of indebtedness will have several important effects on our future operations, including:

•: increasing our vulnerability to adverse changes in general economic and industry conditions; and
•: limiting our ability to obtain additional financing for capital expenditures, acquisitions and general corporate and other purposes.

Our ability to make payments and interest on our indebtedness depends upon our future operating and financial performance.

ITEM 3. QUANTITATIVE AND QUALITATIVE ANALYSIS OF MARKET RISK

Market Risk

We are exposed to potential loss from exposure to market risks represented principally by changes in equity prices, interest rates and foreign exchange rates. At September 30, 2006, we held various derivative contracts in the form of foreign exchange forward contracts. The derivatives contain no leverage or option features. We also held a number of other financial instruments, including investments in marketable securities, and have issued various debt securities. We do not hold derivatives or other financial instruments for trading purposes.

Equity Price Risk

We hold investments in a limited number of U.S. and European equity securities. We estimated the potential loss in fair value due to a 10% decrease in equity prices of each security held at September 30, 2006 to be $4.5 million, as compared to $11.6 million at December 31, 2005. This estimate assumes no change in foreign exchange rates from quarter-end spot rates and excludes any potential risk associated with securities that do not have readily determinable market value.

Interest Rate Risk

We are exposed to potential loss due to changes in interest rates. The principal interest rate exposure is to changes in U.S. interest rates. Instruments with interest rate risk include short- and long-term investments in fixed income securities. Other exposures to interest rate risk include fixed rate convertible debt and fixed rate debt. To estimate the potential loss due to changes in interest rates, we performed a sensitivity analysis using the instantaneous adverse change in interest rates of 100 basis points across the yield curve.

We used the following assumptions in preparing the sensitivity analysis for our convertible notes:

•: convertible notes that are "in-the-money" at year end are considered equity securities and are excluded;
•: convertible notes that are "out-of-the-money" at year end are analyzed by taking into account both fixed income and equity components; and
•: notes will mature on the first available date.

On this basis, we estimate the potential loss in fair value that would result from a hypothetical 1% (100 basis point) increase in interest rates to be $1.7 million as of September 30, 2006, as compared to $5.9 million as of December 31, 2005. The decrease is primarily due to decreases in interest rate sensitivity on our fixed income investment portfolio, our $690.0 million in principal of 1.25%

convertible notes, and the capital lease for our corporate headquarters in Cambridge, Massachusetts, which has a remaining principal balance of $118.0 million at September 30, 2006.

Foreign Exchange Risk

As a result of our worldwide operations, we may face exposure to adverse movements in foreign currency exchange rates, primarily to the Euro, British pound and Japanese yen. These exposures are reflected in market risk sensitive instruments, including foreign currency receivables and payables, foreign exchange forward contracts and foreign equity holdings.

As of September 30, 2006, we estimate the potential loss in fair value of our foreign currency contracts that would result from a hypothetical 10% adverse change in exchange rates to be $7.0 million, as compared to $2.9 million as of December 31, 2005.

We incorporate by reference our disclosure related to market risk which is set forth under the heading "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations—Market Risk," "—Interest Rate Risk," "—Foreign Exchange Risk" and "—Equity Price Risk" in Exhibit 13.1 to our 2005 Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES

At the direction of our Chief Executive Officer and Chief Financial Officer, we evaluated our disclosure controls and procedures and internal control over financial reporting and concluded that (1) our disclosure controls and procedures were effective as of September 30, 2006, and (2) no change in internal control over financial reporting occurred during the quarter ended September 30, 2006 that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Legal Proceedings

We periodically become subject to legal proceedings and claims arising in connection with our business.

Four lawsuits have been filed against us regarding the exchange of all of the outstanding shares of Biosurgery Stock for shares of Genzyme Stock in connection with the elimination of our tracking stocks in July 2003. Each of the lawsuits is a purported class action on behalf of holders of Biosurgery Stock. The first case, filed in Massachusetts Superior Court in May 2003, alleged a breach of the implied covenant of good faith and fair dealing in our charter and a breach of our board of directors' fiduciary duties. The plaintiff in this case sought an injunction to adjust the exchange ratio for the tracking stock exchange. The Court dismissed the complaint in its entirety in November 2003. Upon appeal, the Massachusetts Appeals Court upheld the dismissal by the Superior Court of the fiduciary duty claim, but reversed the earlier decision to dismiss the implied covenant claim. The SJC has granted our petition for further appellate review of the Appeals Court decision reversing the dismissal of the implied covenant claim. Briefing has occurred and we anticipate oral arguments will be made before the SJC by the end of 2006. Two substantially similar cases were filed in Massachusetts Superior Court in August and October 2003. These cases were consolidated in January 2004, and in July 2004, the consolidated case was stayed pending disposition of a fourth case, which was filed in the U.S. District Court for the Southern District of New York in June 2003. The complaint initially alleged violations of federal securities laws, common law fraud, and a breach of the merger agreement with Biomatrix, in addition to the state law claims contained in the other cases. The plaintiffs initially sought an adjustment to the exchange ratio, the rescission of the acquisition of Biomatrix, and unspecified compensatory damages. In December 2005, the plaintiffs in this case filed an amended complaint in which they dropped all of the claims alleged in the initial complaint relating to the initial issuance of Biosurgery Stock and the acquisition of Biomatrix, and narrowed the putative class to include only those individuals who held Biosurgery Stock on May 8, 2003. We filed a motion to dismiss the amended complaint and to oppose the class certification. The Court denied our motion to dismiss the amended complaint and certified this case as a class action on behalf of all shareholders who held Biosurgery Stock on May 8, 2003. We have filed a petition asking the United States Court of Appeals for the Second Circuit to review the class certification decision. Discovery in this action is currently ongoing. We believe each of these cases is without merit and continue to defend against them vigorously.

On March 27, 2003, the OFT, in the United Kingdom issued a decision against our wholly-owned subsidiary, Genzyme Limited, finding that Genzyme Limited held a dominant position and abused that dominant position with no objective justification by pricing Cerezyme in a way that excludes other delivery/homecare service providers from the market for the supply of home delivery and homecare services to Gaucher patients being treated with Cerezyme. In conjunction with this decision, the OFT imposed a fine on Genzyme Limited and required modification to its list price for Cerezyme in the United Kingdom. Genzyme Limited appealed this decision to the Competition Appeal Tribunal. On May 6, 2003, the Tribunal issued an order that stayed the OFT's decision, but required Genzyme Limited to provide a homecare distributor a discount of 3% per unit during the appeal process. The Tribunal issued its judgment on Genzyme Limited's appeal on March 11, 2004, rejecting portions of the OFT's decision and upholding others. The Tribunal found that the list price of Cerezyme should not be reduced, but that Genzyme Limited must negotiate a price for Cerezyme that will allow homecare distributors an appropriate margin. The Tribunal also reduced the fine imposed by the OFT for violation of U.K. competition laws. In response to the Tribunal's decision, we recorded an initial liability of approximately $11 million in our 2003 financial statements and additional liabilities totaling approximately $1 million during 2004 and 2005, of which approximately $6 million were paid in 2005.

As of December 31, 2005 and September 30, 2006, accrued expenses in our consolidated balance sheets includes the remaining $6 million of liabilities recorded in connection with the Tribunal's decision. Genzyme Limited and the OFT were unable to negotiate a price for Cerezyme for homecare distributors and, as a result, on September 29, 2005, the Tribunal issued a ruling establishing the discount to be provided by Genzyme Limited to homecare distributors at 7.2%, which approximates the figure used to calculate the initial liability of approximately $11 million we recorded in 2003, and the additional liabilities totaling approximately $1 million we recorded in 2004 and 2005. Genzyme Limited has decided not to appeal this decision. Arising out of the OFT decision, on April 5, 2006, Genzyme Limited received a damage claim from Genzyme Limited's former distributor, Healthcare at Home. Genzyme Limited and Healthcare at Home are in negotiations to arrive at a mutually agreed upon settlement of this damage claim. We do not expect that settlement of this damage claim will have a material impact on our financial condition or results of operations.

ITEM 1A. RISK FACTORS

We incorporate by reference our disclosure related to risk factors which is set forth 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 Part I., Item 2. of this Quarterly Report on Form 10-Q.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides information with respect to purchases we made of our common stock during the third quarter of our 2006 fiscal year. We purchased these shares from employees who sold them to us to satisfy payments due for stock option exercises:

		Total Number of Shares (or units) Purchased	Average Price Paid per Share (or Unit)		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet be Purchased Under the Plans or Programs
July 1-31, 2006		405	$	62.41	—	—
August 1-31, 2006		—		—	—	—
September 1-30, 2006		—		—	—	—

	Total	405	$	62.41	—	—

ITEM 6. EXHIBITS

(a): Exhibits

See the Exhibit Index following the signature page to this report on Form 10-Q.

GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, SEPTEMBER 30, 2006

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	GENZYME CORPORATION
	By:	/s/ MICHAEL S. WYZGA Michael S. Wyzga Executive Vice President, Finance, Chief Financial Officer, and Chief Accounting Officer (Duly Authorized Officer and Chief Accounting Officer)
DATE: November 3, 2006

GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, SEPTEMBER 30, 2006

EXHIBIT INDEX

Exhibit No.		Description
*3.1		Restated Articles of Organization of Genzyme, as amended. Filed as Exhibit 3.1 to Genzyme's Form 10-Q for the quarter ended June 30, 2006.
*3.2		By-laws of Genzyme, as amended. Filed as Exhibit 3.1 to Genzyme's Form 8-K filed July 1, 2004.
**10.1		Supply Agreement dated as of January 24, 2006 by Cambrex Charles City, Inc. and Genzyme.
31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
32.1		Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith.
32.2		Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith.

*: Indicates exhibit previously filed with the SEC and incorporated herein by reference. Exhibits filed with Forms 10-Q or 8-K were filed under Commission File No. 0-14680.
**: Confidential treatment has been requested for the deleted portions of Exhibit 10.1

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GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, SEPTEMBER 30, 2006 TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GENZYME CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations and Comprehensive Income (Unaudited, amounts in thousands, except per share amounts)
GENZYME CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited, amounts in thousands, except par value amounts)
GENZYME CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited, amounts in thousands)
GENZYME CORPORATION AND SUBSIDIARIES Notes to Unaudited, Consolidated Financial Statements

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FACTORS AFFECTING FUTURE OPERATING RESULTS

ITEM 3. QUANTITATIVE AND QUALITATIVE ANALYSIS OF MARKET RISK

ITEM 4. CONTROLS AND PROCEDURES

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 1A. RISK FACTORS

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ITEM 6. EXHIBITS

GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, SEPTEMBER 30, 2006 SIGNATURES
GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, SEPTEMBER 30, 2006 EXHIBIT INDEX