<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
---------
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
_________________________________
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from______________ to ________
0-14680
Commission file number________________________________________
GENZYME CORPORATION
________________________________________________________________________________
(Exact name of registrant as specified in its charter)
Massachusetts 06-1047163
________________________________________________________________________________
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One Kendall Square, Cambridge, Massachusetts 02139
________________________________________________________________________________
(Address of principal executive offices) (zip code)
(617) 252-7500
________________________________________________________________________________
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
------- -------
The number of shares outstanding of each of the issuer's classes of common
stock as of October 31, 1995:
<TABLE>
<CAPTION>
Class Outstanding at October 31, 1995:
----- --------------------------------
<S> <C>
General Division Common Stock,
$0.01 par value ("General Division Stock") 30,964,056
Tissue Repair Division Common Stock,
$0.01 par value ("TR Stock") 12,010,873
</TABLE>
Total number of pages in document - 34
Exhibit index located on page - 29
<PAGE> 2
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, SEPTEMBER 30, 1995
<TABLE>
TABLE OF CONTENTS
<CAPTION>
,
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Unaudited Financial Statements
GENZYME CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 1995 and 1994........... 3
Consolidated Balance Sheets as of September 30,
1995 and December 31, 1994........................................ 5
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1995 and 1994..................... 6
Notes to Unaudited Consolidated Financial Statements.............. 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 9
GENZYME GENERAL DIVISION
Combined Statements of Operations for the
Three and Nine Months Ended September 30, 1995 and 1994........... 12
Combined Balance Sheets as of September 30,
1995 and December 31, 1994........................................ 14
Combined Statements of Cash Flows for the
Nine Months Ended September 30, 1995 and 1994 .................... 15
Notes to Unaudited Combined Financial Statements.................. 16
Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 18
GENZYME TISSUE REPAIR DIVISION
Combined Statements of Operations for
the Three and Nine Months Ended September 30, 1995 and 1994....... 21
Combined Balance Sheets as of September 30,
1995 and December 31, 1994........................................ 22
Combined Statements of Cash Flows for the
Nine Months Ended September 30, 1995 and 1994..................... 23
Notes to Unaudited Combined Financial Statements.................. 24
Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 25
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 27
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K............................. 27
Signatures.............................................................. 28
</TABLE>
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<PAGE> 3
<TABLE>
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
(Dollars in thousands) September 30, September 30,
- --------------------------------------------------------------------------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Net product sales............................ $78,484 $62,514 $223,086 $173,499
Net service sales............................ 11,196 11,181 35,461 38,188
Revenues from research and development
contracts - related parties................ 6,239 5,485 19,166 16,153
------- ------- -------- --------
95,919 79,180 277,713 227,840
Operating costs and expenses:
Cost of products sold........................ 28,919 24,705 85,893 65,530
Cost of services sold........................ 7,576 7,583 23,353 24,600
Selling, general and administrative.......... 27,549 21,328 79,442 64,250
Research and development (including research
and development related to contracts)....... 17,205 13,444 50,931 39,460
------- ------- -------- --------
81,249 67,060 239,619 193,840
------- ------- -------- --------
Operating income............................... 14,670 12,120 38,094 34,000
Other income and (expenses):
Minority interest in net loss of
subsidiaries................................ 742 599 1,608 1,216
Equity in net income (loss) of unconsolidated
affiliate.................................. 535 - (1,207) -
Investment income............................ 1,566 1,529 4,628 7,305
Interest expense............................. (512) (815) (732) (1,658)
------- ------- -------- --------
2,331 1,313 4,297 6,863
------- ------- -------- --------
Income before income taxes..................... 17,001 13,433 42,391 40,863
Provision for income taxes..................... (6,291) (4,427) (15,685) (14,302)
------- ------- -------- --------
Net income..................................... $10,710 $ 9,006 $ 26,706 $ 26,561
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, consolidated
financial statements.
-3-
<PAGE> 4
<TABLE>
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
(In thousands, except per share amounts) September 30, September 30,
- --------------------------------------------------------------------------------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
APPLICABLE TO GENZYME GENERAL DIVISION:
Net income...................................... $13,877 $ 9,631 $ 35,180 $28,333
Allocated tax benefit generated by Genzyme
Tissue Repair Division......................... 2,215 434 5,877 1,231
------- ------- ------- -------
Net income attributable to General
Division Stock............................... $16,092 $10,065 $ 41,057 $29,564
======= ======= ======== =======
Per common and common equivalent share:
Net income (1)................................ $0.53 $0.38 $1.42 $1.13
===== ===== ===== =====
Average shares outstanding.................... 30,279 26,374 28,816 26,117
====== ====== ====== ======
Per common share assuming full dilution:
Net income (1)................................ $0.49 $0.35 $1.30 $1.05
===== ===== ===== =====
Average fully diluted shares outstanding ...... 32,896 28,570 31,671 28,109
====== ====== ====== ======
APPLICABLE TO GENZYME TISSUE REPAIR DIVISION:
Net loss attributable to TR Stock............... $(5,382) $(1,059) $(14,351) $(3,003)
======= ======= ======== =======
Per common share:
Net loss...................................... $(0.59) $(0.32) $(1.62) $(0.91)
====== ====== ====== ======
Average shares outstanding..................... 9,171 3,302 8,871 3,291
===== ===== ===== =====
<FN>
(1) General Division 1994 net income per share is pro forma.
</TABLE>
The accompanying notes are an integral part of these unaudited, consolidated
financial statements.
-4-
<PAGE> 5
<TABLE>
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
(Dollars in thousands) September 30, December 31,
- ----------------------------------------------------------------------------------
1995 1994
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 98,583 $ 63,542
Short-term investments.................................... 8,026 13,073
Accounts receivable, less allowance
for doubtful accounts.................................... 84,094 78,127
Inventories............................................... 46,385 36,840
Prepaid expenses and other current assets................. 12,279 11,074
Deferred tax assets - current............................. 4,072 4,072
-------- --------
Total current assets.................................. 253,439 206,728
Property, plant and equipment, net........................ 321,520 296,802
Other Assets:
Long-term invesments...................................... 57,873 76,845
Note receivable - related party........................... 1,429 3,572
Intangibles, net of accumulated amortization.............. 26,257 29,303
Deferred tax assets - noncurrent.......................... 28,473 28,473
Other noncurrent assets................................... 27,901 16,685
-------- --------
141,933 154,878
-------- --------
$716,892 $658,408
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................................... $ 11,422 $ 21,387
Accrued expenses........................................... 37,340 30,986
Income taxes payable....................................... 3,393 6,523
Deferred revenue........................................... 2,016 2,604
Current portion of long-term debt and
capital lease obligations................................. 888 41,357
-------- --------
Total current liabilities................................ 55,059 102,857
Noncurrent Liabilities:
Long-term debt and capital lease obligations............... 126,258 126,729
Other noncurrent liabilities............................... 8,834 7,548
-------- --------
135,092 134,277
Minority interest in subsidiaries........................... 1,510 2,310
Stockholders' Equity:
General Division Stock, $.01 par value..................... 272 264
TR Stock, $.01 par value................................... 120 87
Treasury Stock - at cost................................... (881) (755)
Additional paid-in capital................................. 540,386 470,826
Accumulated deficit........................................ (12,102) (38,808)
Other equity adjustments................................... (2,564) (12,650)
-------- --------
525,231 418,964
-------- --------
$716,892 $658,408
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, consolidated
financial statements.
-5-
<PAGE> 6
<TABLE>
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
(Dollars in thousands) Nine Months Ended September 30,
---------------------------------------------------------------------------
1995 1994
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income......................................... $ 26,706 $ 26,561
Reconciliation of net income to net
cash from operating activities:
Depreciation and amortization.................... 16,840 12,995
Provision for bad debts.......................... 3,453 3,139
(Gain)/loss on sale of investments............... 110 (1,444)
Accrued interest/amortization on bonds........... 731 (2,327)
Minority interest in net loss of subsidiaries.... (1,608) (1,217)
Equity in net loss of unconsolidated affiliate... 1,208 -
Other ........................................... 1,285 77
Decrease in cash from working capital:
Accounts receivable............................. (8,075) (14,900)
Inventories..................................... (8,842) (7,654)
Prepaid expenses and other current assets....... (1,126) (622)
Accounts payable, accrued expenses
and deferred revenue........................... (7,911) (795)
-------- --------
Net cash from operating activities.............. 22,771 13,813
-------- --------
INVESTING ACTIVITIES:
Investment in unconsolidated affiliate............. (4,000) --
Loans to related parties........................... (1,857) --
Purchases of investments........................... (21,571) (220,295)
Sales and maturities of investments................ 50,029 255,855
Property, plant and equipment...................... (36,013) (85,703)
Other noncurrent assets............................ (563) (2,353)
-------- --------
Net cash from investing activities............... (13,975) (52,496)
-------- --------
FINANCING ACTIVITIES:
Issuance of common stock........................... 68,132 5,691
Issuance of common stock by subsidiaries........... 479,258 258
Issuance of debt................................... 77 21,803
Payments of debt and capital lease obligations..... (41,295) (4,566)
-------- --------
Net cash from financing activities............... 27,393 23,186
-------- --------
Effect of exchange rate changes on cash.............. (1,148) (807)
-------- --------
Decrease in cash and cash equivalents................ 35,041 (16,304)
Cash and cash equivalents, beginning of period....... 63,542 22,975
-------- --------
Cash and cash equivalents, end of period............. $ 98,583 $ 6,671
======== ========
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest......................................... $ 5,879 $ 5,472
Income taxes..................................... 19,260 9,910
Supplemental Disclosure of Non-Cash Transactions:
Additional Investment in unconsolidated affiliate -- Note 6
Acquisition of Minority Interest in IG Laboratories, Inc. -- Note 8
</TABLE>
The accompanying notes are an integral part of these unaudited, consolidated
financial statements.
-6-
<PAGE> 7
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation:
----------------------
These unaudited consolidated financial statements should
be read in conjunction with the Annual Report on Form
10-K/A of Genzyme Corporation ("Genzyme" or the "Company") for
the fiscal year ended December 31, 1994 and the financial
statements and footnotes included therein. Certain information
and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to the
Securities and Exchange Commission rules and regulations.
Certain items in the 1994 financial statements have been
reclassified to conform with the 1995 presentation.
The financial statements for the three and nine months ended
September 30, 1995 and 1994 are unaudited but include, in
the Company's opinion, all adjustments (consisting only of
normally recurring accruals) necessary for a fair presentation of
the results for the periods presented.
2. Accounting Policies:
--------------------
The accounting policies underlying the quarterly financial
statements are those set forth in Note A of the financial
statements included in the Company's Annual Report on Form 10-K/A
for the year ended December 31, 1994.
3. Investments:
------------
As of September 30, 1995, the Company's investment portfolio,
consisting primarily of debt securities classified as available
for sale, was adjusted to market value. As a result, gross
unrealized holding gains of approximately $5,000 and gross
unrealized holding losses totaling approximately $521,000 were
recorded in a separate component of Stockholders' Equity.
As of September 30, 1995, the carrying values of
the Company's investments in Aronex Pharmaceuticals, Inc.
(formerly Argus Pharmaceuticals, Inc.), Celtrix Pharmaceuticals,
Inc. and Univax Biologics, Inc., included in Other noncurrent
assets in the unaudited, consolidated balance sheet, were
adjusted to their respective market values. Gross unrealized
holding gains of approximately $966,000 and gross unrealized
holding losses of approximately $428,000 were recorded in a
separate component of Stockholders' Equity.
4. Inventories:
------------
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
------------------ -----------------
<S> <C> <C>
Raw materials ............ $12,965,000 $14,572,000
Work-in-process .......... 13,904,000 9,247,000
Finished products ........ 19,516,000 13,021,000
----------- -----------
$46,385,000 $36,840,000
=========== ===========
</TABLE>
5. Provision for Income Taxes:
---------------------------
The tax provision for the quarter ended September 30, 1995
varies from the U.S. statutory tax rate because of the provision
for state income taxes, losses of subsidiaries which generate no
current tax benefit, tax credits and taxes on foreign earnings.
The effective tax rate was 37% for the three and nine months
ended September 30, 1995, as compared to 33% and 35%,
respectively, for the corresponding periods in 1994. The
increase was due primarily to the expiration of the Orphan
Drug Credit effective December 31, 1994.
-7-
<PAGE> 8
6. Additional Investments in Unconsolidated Affiliate:
---------------------------------------------------
On July 3, 1995, Genzyme Transgenics Corporation ("GTC")
acquired Biodevelopment Laboratories, Inc. ("BDL"). As part of
the transaction, the Company issued approximately 34,000 shares of
General Division Common Stock to former stockholders of BDL in
exchange for approximately 475,000 shares of newly issued GTC
common stock. In total, GTC issued approximately 1,207,000 shares
in the transaction, resulting in a decrease in the Company's
interest in GTC to 48.2%.
Also as part of the BDL transaction, the Company guaranteed
a $7,500,000 line of credit to GTC from a commercial bank in
return for warrants to purchase 145,000 shares of GTC common stock.
7. Issuance of Stock:
------------------
On September 22, 1995, Genzyme Tissue Repair Division ("GTR")
sold 3,000,000 shares of its common stock to the public for $15.00
per share. Net proceeds from the offering after underwriting
discounts and commissions were $42,360,000.
8. Subsequent Events:
------------------
Acquisition of Minority Interest in IG Laboratories, Inc.:
On October 2, 1995, Genzyme Corporation acquired, using
General Division Stock, the publicly-held minority interest in
IG Laboratories, Inc. ("IG") by issuing .1201 of one share of
General Division Common Stock for each share of IG common stock.
In the aggregate, approximately 385,000 shares of General
Division Stock, valued at approximately $22,754,000 were
issued. The acquisition was accounted for as a purchase. The
excess of the purchase price over the fair market value of the
net assets acquired, was approximately $18,600,000, of which
$10,000,000 allocated to in-process research and development
and charged to operations in the fourth quarter, and $8,600,000
to Goodwill to be amortized over 20 years.
Issuance of Stock:
On October 12, 1995, the General Division sold 2,875,000 shares
of its common stock to the public for $51.25 per share. Net proceeds
from the offering after underwriting discounts and commissions were
$141,450,000.
Submission of Pre-Market Approval Application for Seprafilm[TM]:
On October 30, 1995 the Company submitted a Pre-Market Approval
Application to the U.S. Food and Drug Administration for
approval to market Seprafilm[TM] bioresorbable membrane in the
United States for abdominal and gynecological surgey applications.
The Company also has begun test marketing Seprafilm[TM] in the
Netherlands and expects to launch the product in the European
Community in 1996. The Company believes that substantial
additional funds will be required to commercialize Seprafilm[TM]
in the United States and the European Community.
-8-
<PAGE> 9
GENZYME CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1995
RESULTS OF OPERATIONS
Revenue
-------
Total revenues for the three and nine months ended September
30, 1995 were $95.9 million and $277.7 million, respectively, an
increase of 21% and 22%, respectively, over the corresponding
periods in 1994. Product and service revenues combined were $89.7
million and $258.5 million, respectively, each a 22% increase over
the same period in 1994. Product revenues increased 26% to $78.5
million for the third quarter, and 29% to $223.1 million for the nine
months ended September 30, 1995, reflecting sales increases in the
Therapeutics, Diagnostic Products, and Pharmaceutical businesses of
22%, 26% and 30%, respectively, for the third quarter and 26%, 22%
and 44%, respectively, for the nine months ended September 30, 1995.
The increase in sales of Therapeutic products resulted primarily
from increased shipments of Ceredase(R)/Cerezyme(R) enzyme, for which
the rate of new patient accruals more than offset dosage reductions.
The increase in Diagnostic Products sales resulted from sales
increases across most product lines including a doubling in revenues
from sales of Direct LDL tests. Pharmaceutical sales for the third
quarter increased 30% due primarily from increased sales of
Melatonin. For the nine months ended September 30, 1995,
Pharmaceutical sales increased 44% resulting primarily to a full
nine months of revenue in 1995 for operations acquired in the third
quarter of 1994 and an increase in sales of Melatonin in the third
quarter of 1995. Service revenues for the third quarter increased
slightly to $11.2 million. GTR revenues for the three and nine months
ended September 30, 1995 were $1,435,000 and $3,712,000, respectively.
For the nine months ended September 30, 1995, service revenues declined
7% to $35.5 million, resulting primarily from a decline in identity
testing revenues, a reduction in unit price per test and the
divestiture of two small genetic diagnostic laboratories.
International sales represented approximately 41% of total
product sales for the third quarter and nine months ended
September 30, 1995 compared with approximately 39% and 36%,
respectively, for the corresponding periods in 1994. The increase was
due primarily to increases of 38% and 52%, for the third quarter and
nine months ended September 30, 1995, respectively, in the
international sales of Ceredase(R)/Cerezyme(R) enzyme combined as
well as favorable exchange rates.
Revenues from research and development contracts increased 14% to
$6.2 million for the third quarter and 19% to $19.2 million for the
nine months ended September 30, 1995. Revenues from Neozyme II
Corporation ("Neozyme II") for the third quarter and nine months ended
September 30, 1995 increased 30% to $5.6 million and 37% to $17.3
million, respectively, due primarily to increased activity
relating to collaborations with third parties and to production of
clinical trial materials. In the first nine months of 1994,
consolidation of the operations of GTC provided $2.1 million of
reported revenues from research and development contracts. Beginning
in the fourth quarter of 1994, the Company accounts for GTC using the
equity method of accounting and, accordingly, no longer reports
GTC's revenue from research and development contracts.
Margins and Operating Expenses
------------------------------
Total gross margins for the quarter and nine months ended
September 30, 1995 were 59% and 58%, respectively, as compared to 56%
and 57%, respectively, for the
-9-
<PAGE> 10
same periods in 1994. Genzyme provides a broad range of health care
products and services, resulting in a range of gross margins depending
on the particular market conditions of each product or service.
Product margins for the third quarter were 63% compared to 60% in the
third quarter of 1994. All product lines experienced higher
margins in the quarter due to revenue increases, product mix
and manufacturing efficiencies. For the nine months ended September
30, 1995 and 1994, product margins were 61% and 62%, respectively.
Service margins for the three months ended September 30, 1995 and
1994 were 32%. For the nine months ended September 30, 1995 and
1994, service margins declined to 34% from 36%, respectively, due to a
decline in identity testing revenues.
Selling, general and administrative expenses for the three
and nine months ended September 30, 1995 were $27.5 million and
$79.4 million, respectively, compared to $21.3 million and $64.2
million, respectively, for the same periods in 1994. The increase
was due primarily to increased sales, increased staffing in support
of the growth in several product lines, a full nine months of
expenses for operations acquired in the third quarter of 1994 and
to the operations of BioSurface Technology, Inc. ("BioSurface"),
acquired in December 1994. As a percentage of total revenues, selling,
general and administrative expenses were 29% for the third quarter and
nine months ended September 30, 1995 compared to 27% and 28%,
respectively, for the corresponding periods in 1994.
Research and development expenses for the three and nine months
ended September 30, 1995 were $17.2 million and $50.9 million,
compared to $13.4 million and $39.5 million, respectively, for the
same periods in 1994, due to increased efforts on behalf of Neozyme
II and increased spending on internal programs.
Other Income and Expenses
-------------------------
Other income for the third quarter includes a one-time
gain of approximately $950,000 representing the sale of certain
assets by GTC. Investment income for the quarter and nine months ended
September 30, 1995 totaled $1.6 million and $4.6 million,
respectively, compared with $1.5 million and $7.3 million,
respectively, for the same periods in 1994. Investment income for the
nine month period ended September 30, 1995 included losses on
the sales of securities of approximately $110,000 as compared to
losses of $162,000 and gains of $1.6 million, respectively, on the
sales of securities for the corresponding period in 1994. Excluding
the effect of these realized gains and losses, investment income for the
nine months ended September 30, 1995 decreased 20% due to lower average
cash and investment balances.
Interest expense for the quarter and nine months ended September
30, 1995 was $512,000 and $732,000, respectively, net of capitalized
interest on construction in progress of $2.1 million and $6.9
million, respectively. Interest relating to Genzyme's 6 3/4%
convertible subordinated notes was $1.7 million and $5.1 million,
equal to the amounts incurred in the same periods in 1994. The Company
also incurred interest expense for the three and nine months ended
September 30, 1995 of $0.4 million and $1.2 million, respectively,
related to a $21.5 million mortgage note issued in the third
quarter of 1994, $0.1 million and $0.3 million, respectively, related
to a deferred liability established to acquire the remaining shares
of a Swiss company acquired, in part, in July 1994 and the remainder
related to interest on capitalized leases.
The tax provision for the quarter ended September 30, 1995 varies
from the U.S. statutory tax rate because of the provision for
state income taxes, losses of subsidiaries which generate no current
tax benefit, tax credits and taxes on foreign earnings. The effective
tax rate for the three and nine months ended September 30, 1995 was
37% as compared to 33% and 35%, respectively, for the corresponding
periods in 1994. The increase was due primarily to the expiration of
the Orphan Drug Credit effective December 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
-10-
<PAGE> 11
As of September 30, 1995, Genzyme had cash, cash equivalents and
investments in marketable securities totaling $164.5 million, an
increase of $11.0 million from December 31, 1994. The Company repaid
a $39.0 million term loan in January 1995. In the nine months
ended September 30, 1995, Genzyme spent $36.0 million on
increased manufacturing capacity and invested an additional $4.0
million in GTC, an unconsolidated affiliate. These expenditures were
financed partially by operations, $22.8 million, the public offering
of TR Stock, $42.4 million, and by the issuance of common stock
through exercises of stock options and warrants, $25.0 million.
As of September 30, 1995, the Company had accounts receivable of
$84.1 million, an increase of $6.0 million from December 31, 1994,
due primarily to increased sales. Inventories increased $9.5 million,
or 26%, to $46.4 million as of September 30, 1995 as compared to
December 31, 1994. The increase was due primarily to improved
Ceredase[R] yields and management's efforts to build Ceredase[R]
/Cerezyme[R] enzyme inventories, support of increased business
operations and to exchange rate fluctuations.
In January 1995, the Company renewed its commitment to
continue funding, until March 1, 1996, the development of the
hyaluronic acid-based anti-adhesion products on behalf of the Surgical
Aids Partnership the remaining available funds of which were fully
expended in the first quarter of 1994.
SUBSEQUENT EVENTS
Acquisition of Minority Interest of IG Laboratories, Inc.:
On October 2, 1995, the General Division acquired the publicly-held
minority interest in IG Laboratories, Inc. ("IG") by issuing .1201 of
one share of General Division Stock for each share of IG common
stock. In the aggregate, approximately 385,000 shares of General
Division Stock, valued at approximately $22,754,000, were issued. The
acquisition was accounted for as a purchase. The excess of the
purchase price over the fair market value of the net assets acquired,
was approximately $18,600,000, of which $10,000,000 will be allocated
to in-process research and development and charged to operations in
the fourth quarter and $8,600,000 to Goodwill to be amortized over
20 years.
Issuance of Stock:
On October 12, 1995, the General Division sold 2,875,000 shares
of its common stock to the public for $51.25 per share. Net
proceeds from the offering after underwriting discounts and
commissions were $141,450,000.
Submission of Pre-Market Approval Application for Seprafilm[TM]:
On October 30, 1995 the Company submitted a Pre-Market Approval
Application to the U.S. Food and Drug Administration for approval to
market Seprafilm[TM] bioresorbable membrane in the United States for
abdominal and gynecological surgery applications. The Company also has
begun test marketing Seprafilm[TM] in the Netherlands and expects to
launch the product in the European Community in 1996. The Company
believes that substantial additional funds will be required to
commercialize Seprafilm[TM] in the United States and the European
Community.
-11-
<PAGE> 12
<TABLE>
GENZYME GENERAL DIVISION
COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
(Dollars in thousands) September 30, September 30,
- ---------------------------------------------------------------------------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Net product sales.......................... $77,049 $62,514 $219,374 $173,499
Net service sales.......................... 11,196 11,181 35,461 38,188
Revenues from research and development
contracts - related parties.............. 6,239 5,485 19,166 16,153
------- ------- -------- --------
94,484 79,180 274,001 227,840
Operating costs and expenses:
Cost of products sold...................... 27,569 24,705 82,938 65,530
Cost of services sold...................... 7,576 7,583 23,353 24,600
Selling, general and administrative........ 24,456 21,116 72,056 63,649
Research and development (including
research and development related to
contracts)................................ 14,675 12,597 42,472 37,058
------- ------- -------- --------
74,276 66,001 220,819 190,837
------- ------- -------- --------
Operation income............................. 20,208 13,179 53,182 37,003
Other income and (expenses)
Minority interest in net loss of
subsidiaries.............................. 742 599 1,608 1,216
Equity in net income (loss) of
unconsolidated affiliate.................. 535 - (1,207) -
Investment income.......................... 1,410 1,529 3,891 7,305
Interest expense........................... (512) (815) (732) (1,658)
------- ------- -------- --------
2,175 1,313 3,560 6,863
------- ------- -------- --------
Income before income taxes.................. 22,383 14,492 56,742 43,866
Provision for income taxes.................. (8,506) (4,861) (21,562) (15,533)
------- ------- -------- --------
Net income.................................. 13,877 9,631 35,180 28,333
Allocated tax benefit generated by
Tissue Repair Division.................... 2,215 434 5,877 1,231
------- ------- -------- --------
Net income attributable to Genzyme
General Division Stock.................... $16,092 $10,065 $ 41,057 $ 29,564
======= ======= ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements.
</TABLE>
-12-
<PAGE> 13
<TABLE>
GENZYME GENERAL DIVISION
COMBINED STATEMENTS OF OPERATIONS (CONTINUED)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
(In thousands, except per share amounts) September 30, September 30,
- -----------------------------------------------------------------------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income attributable to Genzyme
General Division Stock............... $16,092 $10,065 $41,057 $29,564
======= ======= ======= =======
Income per General Division Common and
common equivalent share:
Net income (1)...................... $0.53 $0.38 $1.42 $1.13
===== ===== ===== =====
Average shares outstanding........... 30,279 26,374 28,816 26,117
====== ====== ====== ======
Income per General Division Common Share
assuming full dilution:
Net income (1).................... $0.49 $0.35 $1.30 $1.05
===== ===== ===== =====
Average fully diluted shares
outstanding...................... 32,896 28,570 31,671 28,109
====== ====== ====== ======
<FN>
(1) Pro forma for 1994.
The accompanying notes are an integral part of these unaudited, combined financial statements.
</TABLE>
-13-
<PAGE> 14
<TABLE>
GENZYME GENERAL DIVISION
COMBINED BALANCE SHEETS
(Unaudited)
<CAPTION>
(Dollars in thousands) September 30, December 31,
- -------------------------------------------------------------------------------
1995 1994
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.............................. $52,955 $ 46,549
Short-term investments................................. 1,925 7,155
Accounts receivable, less allowance
for doubtful accounts................................ 82,696 76,641
Inventories............................................ 46,155 36,764
Prepaid expenses and other current assets.............. 12,114 10,790
Due from Genzyme Tissue Repair Division................ 545 171
Deferred tax assets - current.......................... 4,072 4,072
------- -------
Total current assets................................ 200,462 182,142
Property, plant and equipment, net.................... 320,435 295,346
Other Assets:
Long-term investments.................................. 55,870 74,948
Note receivable - related party........................ 1,429 3,572
Intangibles, net of accumulated amortization........... 26,257 29,303
Deferred tax assets - noncurrent....................... 28,473 28,473
Other noncurrent assets................................ 27,576 16,360
-------- --------
139,605 152,656
-------- --------
$660,502 $630,144
======== ========
LIABILITIES AND DIVISION EQUITY
Current Liabilities:
Accounts payable....................................... $ 10,167 $ 20,859
Accrued expenses....................................... 35,498 27,766
Income taxes payable................................... 3,393 6,523
Deferred revenue....................................... 2,016 2,604
Current portion of long-term debt and
capital lease obligations............................ 645 41,076
-------- --------
Total current liabilities........................... 51,719 98,828
Noncurrent Liabilities:
Long-term debt and capital lease obligations........... 126,258 126,555
Other noncurrent liabilities........................... 8,101 6,800
-------- --------
134,359 133,355
Minority interest in subsidiaries........................ 1,510 2,310
Division equity.......................................... 472,914 395,651
-------- --------
$660,502 $630,144
======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements.
</TABLE>
-14-
<PAGE> 15
<TABLE>
GENZYME GENERAL DIVISION
COMBINED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
(Dollars in thousands) Nine Months Ended September 30,
- --------------------------------------------------------------------------------
1995 1994
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income......................................... $ 41,057 $ 29,564
Reconciliation of net income to net
cash from operating activities:
Depreciation and amortization................... 16,210 12,995
Provision for bad debts......................... 3,453 3,139
(Gain)/loss on sale of investments.............. 110 (1,444)
Accrued interest/amortization on bonds.......... 841 (2,327)
Minority interest in net loss of subsidiaries... (1,608) (1,217)
Equity in net loss of unconsolidated affiliate.. 1,208 -
Other........................................... 1,285 77
Decrease in cash from working capital:
Accounts receivable.......................... (8,163) (14,900)
Inventories.................................. (8,688) (7,654)
Prepaid expenses and other current assets..... (1,245) (622)
Accounts payable, accrued expenses
and deferred revenue........................ (7,260) (795)
Due from Genzyme Tissue Repair Division....... (374) -
-------- -------
Net cash from operating activities........... 36,826 16,816
-------- -------
INVESTING ACTIVITIES:
Investment in unconsolidated affiliate............. (4,000) -
Loans to related parties ......................... (1,857) -
Purchases of investments.......................... (10,614) (220,295)
Sales and maturities of investments............... 39,035 255,855
Property, plant and equipment..................... (35,754) (85,703)
Other noncurrent assets........................... (563) (2,353)
-------- -------
Net cash from investing activities........ (13,753) (52,496)
-------- -------
FINANCING ACTIVITIES:
Issuance of General Division Common Stock ........ 24,994 5,691
Issuance of Commmon Stock by subsidiaries.......... 479 258
Issuance of debt................................... 77 21,803
Payments of debt and capital lease obligations..... (41,069) (4,566)
Net cash to Genzyme................................ - (3,003)
-------- ---------
Net cash from financing activities........... (15,519) 20,183
-------- ---------
Effect of exchange rate changes on cash............... (1,148) (807)
-------- ---------
Decrease in cash and cash equivalents................. 6,406 (16,304)
Cash and cash equivalents, beginning of period........ 46,549 22,975
-------- ---------
Cash and cash equivalents, end of period.............. $ 52,955 $ 6,671
======== =========
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest....................................... $ 5,846 $ 5,472
Income taxes................................... 19,260 9,910
Supplemental Disclosure of Non-Cash Transactions:
Additional investment in unconsolidated affiliate -- Note 6
Acquisition of Minority Interest of IG Laboratories, Inc. -- Note 7
The accompanying notes are an integral part of these unaudited, combined financial statements.
</TABLE>
-15-
<PAGE> 16
GENZYME GENERAL DIVISION
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
1. Basis of Presentation:
----------------------
These unaudited combined financial statements should be read
in conjunction with the Company's Annual Report on Form 10-K/A
for the fiscal year ended December 31, 1994 and the
financial statements and footnotes for Genzyme General
Division included therein. Certain information and
footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting
principles have been omitted pursuant to the Securities and
Exchange Commission rules and regulations. Certain items in the
1994 financial statements have been reclassified to conform
with the 1995 presentation.
The financial statements for the three and nine months ended
September 30, 1995 and 1994 are unaudited but include, in
the Division's opinion, all adjustments (consisting only of
normally recurring accruals) necessary for a fair presentation of
the results for the periods presented.
2. Accounting Policies:
--------------------
The accounting policies underlying the quarterly financial
statements are those set forth in Note A of the General
Division's financial statements included in the Company's
Annual Report on Form 10-K/A for the year ended December 31,
1994.
3. Investments:
------------
As of September 30, 1995, the General Division's
investment portfolio, consisting primarily of debt securities
classified as available for sale, was adjusted to market
value. As a result, gross unrealized holding gains of
approximately $5,000 and gross unrealized holding losses totaling
approximately $483,000 were recorded as a net decrease to Division
equity.
As of September 30, 1995, the carrying values of the
General Division's investments in Aronex Pharmaceuticals, Inc.
(formerly Argus Pharmaceuticals, Inc.), Celtrix Pharmaceuticals,
Inc. and Univax Biologics, Inc., included in Other noncurrent
assets in the unaudited, combined balance sheet, were adjusted to
their respective market values. Gross unrealized holding
gains of approximately $966,000 and gross unrealized holding
losses of approximately $428,000 were recorded as a net increase
to Division equity.
4. Inventories:
------------
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
------------------ -----------------
<S> <C> <C>
Raw materials ............ $12,863,000 $14,517,000
Work-in-process .......... 13,776,000 9,226,000
Finished products ........ 19,516,000 13,021,000
----------- -----------
$46,155,000 $36,764,000
=========== ===========
</TABLE>
5. Provision for Income Taxes:
---------------------------
The tax provision for the quarter ended September 30, 1995
varies from the U.S. statutory tax rate because of the provision
for state income taxes, losses of subsidiaries which generate no
current tax benefit, tax credits and taxes on foreign earnings.
The effective tax rate was 38% for the three and nine months
ended September 30, 1995 as compared to 34% and 35%,
respectively, for the corresponding periods in 1994. The
increase was due primarily to the expiration of the Orphan
Drug Credit effective December 31, 1994. The allocated tax
benefit generated by GTR of $2.2 million and $5.9 million,
respectively, reduced the General Division's tax rate to 28%
for the quarter and nine months ended September 30, 1995.
-16-
<PAGE> 17
6. Additional Investments in Unconsolidated Affiliate:
---------------------------------------------------
On July 3, 1995, Genxyme Transgenics Corporation ("GTC")
acquired Biodevelopment Laboratories, Inc. ("BDL"). As part of
the transaction, the General Division issued approximately 34,000
shares of General Division Common Stock to former stockholders of
BDL in exchange for approximately 475,000 shares of newly issued
GTC common stock. In total, GTC issued approximately 1,207,000
shares in the transaction, resulting in a decrease in the
Division's interest in GTC to 48.2%.
Also as part of the BDL transaction, the Company guaranteed
a $7,500,000 line of credit to GTC from a commercial bank in
return for warrants to purchase 145,000 shares of GTC common stock.
7. Subsequent Events:
------------------
Acquisition of Minority Interest in IG Laboratories, Inc.:
On October 2, 1995, the Company acquired, using General
Division Stock, the publicly-held minority interest in IG
Laboratories, Inc. ("IG") by issuing .1201 of one share of
General Division Stock for each share of IG common
stock. In the aggregate, approximately 385,000 shares of
General Division Stock, valued at approximately $22,754,000, were
issued. The acquisition was accounted for as a purchase. The
excess of the purchase price over the fair market value of the
net assets acquired, was approximately $18,600,000, of which
$10,000,000 will be allocated to in-process research and
development and charged to operations in the fourth quarter and
$8,600,000 to Goodwill to be amortized over 20 years.
Issuance of Stock:
On October 12, 1995, the General Division sold 2,875,000
shares of its common stock to the public for $51.25 per
share. Net proceeds from the offering after underwriting
discounts and commissions were $141,450,000.
Submission of Pre-Market Approval Application for Seprafilm[TM]:
On October 30, 1995 the Company submitted a Pre-Market
Approval Application to the U.S. Food and Drug Administration
for approval to market Seprafilm[TM] bioresorbable membrane in the
United States for abdominal and gynecological surgery
applications. The Company also has begun test marketing
Seprafilm[TM] in the Netherlands and expects to launch the product
in the European Community in 1996. The Company believes that
substantial additional funds will be required to commercialize
Seprafilm[TM] in the United States and the European Community.
-17-
<PAGE> 18
GENZYME GENERAL DIVISION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1995
The following discussion is a summary of the key factors
affecting the General Division's results of operations, liquidity and
capital resources. This discussion should be read in conjunction with
the financial statements and related notes of Genzyme and
Management's Discussion and Analysis of Financial Condition and Results
of Operations for Genzyme on pages 3 through 11 of this Report.
RESULTS OF OPERATIONS
Revenue
-------
Total revenues for the three and nine months ended September
30, 1995 were $94.5 million and $274.0 million, respectively, compared
to $79.2 million and $227.8 million, respectively, for the
corresponding periods in 1994. Product and service revenues
combined were $88.2 million and $254.8 million, respectively, each
an increase of 20%, over the same period in 1994. Product revenues
increased 23% to $77.0 million for the third quarter, and 26% to
$219.4 million for the nine months ended September 30, 1995, reflecting
sales increases in the Therapeutics, Diagnostic Products, and
Pharmaceutical businesses of 22%, 26% and 30%, respectively, for the
third quarter and 26%, 22% and 44%, respectively, for the nine
months ended September 30, 1995. The increase in sales of
Therapeutic products resulted primarily from increased shipments of
Ceredase(R)/Cerezyme(R) enzyme, for which the rate of new patient
accruals more than offset dosage reductions. The increase in
Diagnostic Products sales resulted from sales increases across most
product lines, including a doubling in revenues from sales of Direct
LDL tests. Pharmaceutical sales for the third quarter increased
30% due primarily to increased sales of Melatonin. For the nine
months ended September 30, 1995, Pharmaceutical sales increased 44%
resulting primarily from a full nine months of revenue in 1995 for
operations acquired in the third quarter of 1994 and an increase
in sales of Melatonin in the third quarter of 1995. Service
revenues for the third quarter increased slightly to $11.2 million
and for the nine months ended September 30, 1995, declined 7% to
$35.5 million, a resulting primarily from a decline in identity testing
revenues, a reduction in unit price per test and the divestiture of two
small genetic diagnostic laboratories.
International product sales represented approximately 41% of
total product sales for the third quarter and nine months ended
September 30, 1995 compared with approximately 39% and 36%,
respectively, for the corresponding periods in 1994. The increase was
due primarily to increases of 38% and 52%, respectively, for the three
and nine months ended September 30, 1995 in the international sales
of Ceredase(R)/Cerezyme(R) enzyme combined as well as favorable
exchange rates.
Revenues from research and development contracts increased 14% to
$6.2 million for the third quarter and 19% to $19.2 million for the
nine months ended September 30, 1995. Revenues from Neozyme II
Corporation ("Neozyme II") for the three and nine months ended
September 30, 1995 increased 30% to $5.6 million and 37% to $17.3
million, respectively, due primarily to increased activity relating
to collaborations with third parties and to production of clinical
trial materials. In the first nine months of 1994, consolidation of the
operations of GTC provided $2.1 million of reported revenues from
research and development contracts. Beginning in the fourth quarter
of 1994, the Division accounts for GTC using the equity method of
accounting and, accordingly, no longer reports GTC's revenue from
research and development contracts.
-18-
<PAGE> 19
Margins and Operating Expenses
------------------------------
Total gross margins for the three and nine months ended September
30, 1995 were 60% and 58%, respectively, compared to 56% and
57%, respectively, for the corresponding periods in 1994. The
General Division provides a broad range of health care products and
services, resulting in a range of gross margins depending on the
particular market conditions of each product or service. Product
margins for the third quarter were 64% compared to 60% for the
third quarter of 1994. All product lines experienced higher margins
in the quarter due to revenue increases, product mix and
manufacturing efficiencies. For the nine months ended September 30,
1995 and 1994, product margins were 62%. Service margins for the three
months ended September 30, 1995 and 1994 were 32%. For the nine
months ended September 30, 1995 and 1994, service margins declined to
34% from 36%, respectively, due to a decline in identity testing
revenues.
Selling, general and administrative expenses for the three
and nine months ended September 30, 1995 were $24.5 million and
$72.1 million, respectively, compared to $21.1 million and $63.6
million for the same periods in 1994. The increase was due
primarily to increased staffing in support of the growth in several
product lines and a full nine months of expenses in 1995 for
operations acquired in the third quarter of 1994. As a percentage of
total revenues, selling, general and administrative expenses for the
three and nine months ended September 30, 1995 were 26%, compared to
27% and 28%, respectively, for the corresponding periods in 1994.
Research and development expenses for the three and nine months
ended September 30, 1995 were $14.7 million and $42.5 million,
respectively, compared to $12.6 million and $37.1 million,
respectively, for the same periods in 1994, due to increased
efforts on behalf of Neozyme II and increased spending on
internal programs.
Other Income and Expenses
-------------------------
Other income for the third quarter includes a one-time
gain of approximately $950,000 representing the sale of certain
assets by GTC. Investment income for the quarter and nine months
ended September 30, 1995 totaled $1.4 million and $3.9 million,
respectively, compared with $1.5 million and $7.3 million,
respectively, for the same periods in 1994. Investment income for the
nine month period ended September 30, 1995 includes losses on
the sales of securities of approximately $110,000, as compared to
losses of $162,000 and gains of $1.6 million, respectively, on the
sales of securities for the corresponding period in 1994. Excluding
the effect of these realized gains and losses, investment income for
the nine months ended September 30, 1995 decreased 32% due to lower
average cash and investment balances.
Interest expense for the quarter and nine months ended September
30, 1995 was $512,000 and $732,000, respectively, net of capitalized
interest on construction in progress of $2.1 million and $6.9
million, respectively. Interest relating to Genzyme's 6 3/4%
convertible subordinated notes was $1.7 million and $5.1 million,
equal to the amounts incurred in the same periods in 1994. The General
Division also incurred interest expense for the three and nine months
ended September 30, 1995 of $0.4 million and $1.2 million,
respectively, related to a $21.5 million mortgage note issued in
the third quarter of 1994, $0.1 million and $0.3 million,
respectively, related to a deferred liability established to acquire
the remaining shares of a Swiss company acquired, in part, in July
1994 and the remainder related to interest on capitalized leases.
The tax provision for the quarter and nine months ended
September 30, 1995 varies from the U.S. statutory tax rate because
of the provision for state income taxes, losses of subsidiaries which
generate no current tax benefit, tax credits and taxes on foreign
earnings. The effective tax rate was 38% for the three and nine
months ended September 30, 1995 as compared to 34% and 35% for the
corresponding periods in 1994. The increase was due primarily to
the expiration of the Orphan Drug Credit effective December 31, 1994.
The allocated tax benefit generated by GTR
-19-
<PAGE> 20
of $2.2 million and $5.9 million, respectively, reduced the General
Division's tax rate to 28% for the quarter and nine months ended
September 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1995, the General Division had cash, cash
equivalents and investments in marketable securities totaling $110.8
million, a decrease of $17.9 million from December 31, 1994. The
General Division repaid a $39.0 million term loan in January 1995.
In the nine months ended September 30, 1995, the General Division
spent $35.8 million on increased manufacturing capacity and invested
an additional $4.0 million in GTC, an unconsolidated affiliate.
These expenditures were financed primarily by operations, $36.8
million, and by the issuance of common stock through exercises of stock
options and warrants, $25.0 million.
As of September 30, 1995, the General Division had accounts
receivable of $82.7 million, an increase of $6.1 million from
December 31, 1994, due primarily to increased sales. Inventories
increased $9.4 million, or 26%, to $46.2 million as of September 30,
1995 from December 31, 1994. The increase was due primarily to
improved Ceredase[R] yields and management's efforts to build
Ceredase[R], Cerezyme[R] enzyme inventories, support of increased
business operations and to exchange rate fluctuations.
In January 1995, the General Division renewed its
commitment to continue funding, until March 1, 1996, the
development of the hyaluronic acid-based anti-adhesion products on
behalf of the Surgical Aids Partnership, the remaining available funds
of which were fully expended in the first quarter of 1994.
SUBSEQUENT EVENTS
Acquisition of Minority Interest of IG Laboratories, Inc.:
On October 2, 1995, the General Division acquired the publicly-
held minority interest in IG Laboratories, Inc. ("IG") by issuing
.1201 of one share of General Division Stock for each share of
IG common stock. In the aggregate, approximately 385,000 shares of
General Division Stock, valued at approximately $22,754,000 were
issued. The acquisition was accounted for as a purchase. The excess
of the purchase price over the fair market value of the net assets
acquired, was approximately $18,600,000, of which $10,000,000 will be
allocated to in-process research and development and charged to
operations in the fourth quarter and $8,600,000 to Goodwill to be
amortized over 20 years.
Issuance of Stock:
On October 12, 1995, the General Division sold 2,875,000 shares
of its common stock to the public for $51.25 per share. Net
proceeds from the offering after underwriting discounts and
commissions were $141,450,000.
Submission of Pre-Market Approval Application of Seprafilm[TM]:
On October 30, 1995 the Company submitted a Pre-Market Approval
Application to the U.S. Food and Drug Administration for approval to
market Seprafilm[TM] bioresorbable membrane in the United States for
abdominal and gynecological surgery applications. The Company also has
begun test marketing Seprafilm[TM] in the Netherlands and expects to
launch the product in the European Community in 1996. The Company
believes that substantial additional funds will be required to
commercialize Seprafilm[TM] in the United States and the European
Community.
-20-
<PAGE> 21
<TABLE>
GENZYME TISSUE REPAIR DIVISION
COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
(In thousands, except per share amounts) September 30, September 30,
- ------------------------------------------------------------------------------------------------
1995 1994 1994 1994
---- ----- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Net service sales.............................. $ 1,435 $ - $ 3,712 $ -
Operating costs and expenses:
Cost of service sold............................ 1,350 - 2,955 -
Selling, general and administrative............. 3,093 212 7,386 601
Reseach and Development......................... 2,530 847 8,459 2,402
------- ------- -------- -------
6,973 1,059 18,800 3,003
------- ------- -------- -------
Operating loss.................................... (5,538) (1,059) (15,088) (3,003)
Investment income................................. 156 - 737 -
------- ------- -------- -------
Net loss.......................................... $(5,382) $(1,059) $(14,351) $(3,003)
======= ======= ======== =======
Per Tissue Repair Division Common share:
Net loss....................................... $ (0.59) $ (0.32) $ (1.62) $ (0.91)
======= ======= ======== =======
Average shares outstanding..................... 9,171 3,302 8,871 3,291
======= ======= ======== =======
The accompanying notes are an integral part of these unaudited, combined financial statements.
</TABLE>
-21-
<PAGE> 22
<TABLE>
GENZYME TISSUE REPAIR DIVISION
COMBINED BALANCE SHEETS
(Unaudited)
<CAPTION>
(Dollars in Thousands) September 30, December 31,
- -----------------------------------------------------------------------------------
1995 1994
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.............................. $45,628 $16,993
Short-term investments................................. 6,101 5,918
Accounts receivable, less allowance
for doubtful accounts................................. 1,398 1,486
Inventories............................................ 230 76
Prepaid expenses and other current assets.............. 165 284
------- -------
Total current assets................................. 53,522 24,757
Property, plant and equipment, net....................... 1,085 1,456
Other Assets:
Long-term investments.................................. 2,003 1,897
Other noncurrent....................................... 325 325
------- -------
2,328 2,222
------- -------
$56,935 $28,435
======= ========
LIABILITIES AND DIVISION EQUITY
Current Liabilities:
Accounts payable....................................... $ 1,255 $ 528
Accrued expenses....................................... 1,842 3,220
Payable to Genzyme General Division.................... 545 171
Current portion of capital lease obligations........... 243 281
------- -------
Total current liabilities............................ 3,885 4,200
Noncurrent Liabilities:
Capital lease obligations.............................. - 174
Other noncurrent liabilities........................... 733 748
------- ------
733 922
Division equity.......................................... 52,317 23,313
------- -------
$56,935 $28,435
======= =======
The accompanying notes are an integral part of these unaudited, combined financial statements.
</TABLE>
-22-
<PAGE> 23
<TABLE>
GENZYME TISSUE REPAIR DIVISION
COMBINED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
(Dollars in Thousands) Nine Months Ended September 30,
- ---------------------------------------------------------------------------
1995 1994
---- -----
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss........................................... $(14,351) $(3,003)
Reconciliation of net loss to net..................
cash from operating activities:
Depreciation and amortization.................... 630 -
Accrued interest/amortization on bonds........... (110) -
Increase (decrease) in cash from working capital:
Accounts receivable........................... 88 -
Inventories................................... (154) -
Prepaid expenses and other current assets..... 119 -
Accounts payable, accrued expenses
and deferred revenue......................... (651) -
Due to Genzyme General Division................ 374 -
-------- -------
Net cash from operating activities............ (14,055) (3,003)
-------- -------
INVESTING ACTIVITIES:
Purchases of investments............................ (10,957) -
Sales and maturities of investments................. 10,994 -
Property, plant and equipment....................... (259) -
-------- -------
Net cash from investing activities............ (222) -
-------- -------
FINANCING ACTIVITIES:
Issuance of TR stock............................... 43,138 -
Payments of capital lease obligations.............. (211) -
Net cash from Genzyme.............................. - 3,003
Other.............................................. (15) -
-------- -------
Net cash from financing activities............ 42,912 3,003
-------- -------
Increase (decrease) in cash and cash
equivalents.......................................... 28,635 -
Cash and cash equivalents, beginning of period........ 16,993 -
-------- -------
Cash and cash equivalents, end of period.............. $ 45,628 $ -
======== =======
Supplemental cash flow information:
Cash paid during the period for interest........... $ 33 $ -
The accompanying notes are an integral part of these unaudited, combined financial statements.
</TABLE>
-23-
<PAGE> 24
GENZYME TISSUE REPAIR DIVISION
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
1. Basis of Presentation:
---------------------
These unaudited combined financial statements should be read
in conjunction with the Company's Annual Report on form 10-K/A
for the fiscal year ended December 31, 1994 and the financial
statements and footnotes for Genzyme Tissue Repair Division
("GTR") included therein. Certain information and footnote
disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have
been omitted pursuant to the Securities and Exchange Commission
rules and regulations. Certain items in the 1994 financial
statements have been reclassified to conform with the 1995
presentation.
The financial statements for the three and nine months ended
September 30, 1995 and 1994 are unaudited but include, in GTR's
opinion, all adjustments (consisting only of normally
recurring accruals) necessary for a fair presentation of the
results for the periods presented.
2. Accounting Policies:
-------------------
The accounting policies underlying the quarterly financial
statements are those set forth in Note A of GTR's financial
statements included in the Company's Annual Report on form
10-K/A for the year ended December 31, 1994.
3. Investments:
-----------
As of September 30, 1995, GTR's investment portfolio,
consisting primarily of debt securities classified as available
for sale, was adjusted to market value. As a result, gross
unrealized holding losses totaling approximately $38,000 were
recorded in a separate component of Division equity.
4. Inventories:
-----------
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
------------------- -----------------
<S> <C> <C>
Raw materials.............. $102,000 $55,000
Work-in-process............ 128,000 21,000
-------- -------
$230,000 $76,000
</TABLE> ======== =======
5. Issuance of Stock:
On September 22, 1995, GTR sold 3,000,000 shares of
common stock to the public for $15.00 per share. Net proceeds
from the offering after underwriting discounts and commissions
were $42,360,000.
-24-
<PAGE> 25
GENZYME TISSUE REPAIR DIVISION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1995
The following discussion is a summary of the key factors
affecting the Tissue Repair Division's results of operations,
liquidity and capital resources. This discussion should be read in
conjunction with the financial statements and related notes of Genzyme
and Management's Discussion and Analysis of Operations for Genzyme on
pages 3 through 11 of this Report.
RESULTS OF OPERATIONS
Revenue
-------
Service revenues for the three and nine months ended September
30, 1995 were $1,435,000 and $3,712,000, respectively. Revenues
consisted primarily of sales of Epicel[SM] skin grafts which are
dependent upon numerous factors, many of which are not in GTR's
control. As a result, GTR expects sales of Epicel[SM] skin grafts to
fluctuate from period to period. Revenues also included $120,000
and $160,000, respectively, for the three and nine months ended
September 30, 1995, from the sales of CARTICEL[SM] service, GTR's
cartilage repair service, which commenced in the first quarter of 1995.
Margins and Operating Expenses
------------------------------
Gross margins for the quarter and nine months ended September 30,
1995 were 6% and 20%, respectively. The lower margins in the
quarter were due to increased scale-up efforts for the CARTICEL[SM]
Service. GTR incurs direct selling, general and administrative
expenses as well as a selling, general and administrative charge,
based on actual amounts incurred, from the General Division for work
performed by the General Division on behalf of GTR.
Selling, general and administrative expenses for the three and
nine months ended September 30, 1995 were $3,093,000 and $7,386,000,
respectively, compared to $212,000 and $601,000, respectively, for the
corresponding periods in 1994. The increase was due to increased
support of GTR by the General Division and as a result of the
acquisition of BioSurface Technology, Inc., ("BioSurface") in the
fourth quarter of 1994.
GTR incurs direct research and development expenses, as well as a
charge, based on actual amounts incurred, for research and development
work performed by the General Division on behalf of GTR. Research and
development expenses for the three and nine months ended September 30,
1995 were $2,530,000 and $8,459,000, respectively, compared to $847,000
and $2,402,000, respectively, for the corresponding periods in 1994.
Research and development expenses related to work performed directly by
GTR were $1,466,000 and $4,956,000, respectively, for the quarter and
nine months ended September 30, 1995. Excluding the effect of GTR direct
efforts, research and development expenses for work performed by the
General Division on behalf of GTR increased 26% and 46%, respectively,
for the quarter and nine months ended September 30, 1995 due primarily
to increased outside clinical trials and manufacturing support related
to the Vianain[R] programs.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1995, GTR had approximately $53.7 million
of cash, cash equivalents and investments in marketable securities,
an increase of $28.9 million from December 31, 1994. The increase was
due primarily to the net proceeds of GTR's public stock offering, $42.4
million, partially offset by GTR's net loss and working capital
requirements, $14.1 million.
-25-
<PAGE> 26
GTR anticipates that available funds plus revenues generated from
the CARTICEL[SM] Service and from sales of Epicel[SM] skin grafts
will be sufficient to fund GTR's operations through the end of 1996.
Significant additional funds will be required to complete
commercialization and clinical testing of GTR's products and services.
There can be no assurance that such funds will be available on
attractive terms, if at all.
-26-
<PAGE> 27
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, SEPTEMBER 30, 1995
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for
Genzyme, the General Division and the Tissue Repair
Division on the pages listed in the Index on Page 2 of
this report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Computation of weighted average shares used in
computing earnings per share amounts. Filed
herewith.
27 Financial Data Schedules for Genzyme General
Division and Genzyme Tissue Repair Division
(EDGAR filing only).
(b) Reports on Form 8-K
On September 21, 1995, the Company filed a current
report on Form 8-K to provide certain pro forma
financial information as of December 31, 1994 for
Genzyme, the General Division, and GTR.
-27-
<PAGE> 28
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, SEPTEMBER 30, 1995
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
GENZYME CORPORATION
DATE: November 14, 1995 By: /s/David J. McLachlan
-----------------------
David J. McLachlan
Duly Authorized Officer and
Chief Financial Officer
-28-
<PAGE> 29
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, SEPTEMBER 30, 1995
<TABLE>
EXHIBIT INDEX
<CAPTION>
Exhibit
No. Description Page No.
------- ----------- --------
<S> <C> <C>
11 Computation of weighted average shares used in
computing earnings per share amounts. Filed herewith. 30
27 Financial Data Schedules for Genzyme General Division
and Genzyme Tissue Repair Division (EDGAR filing only). 33
</TABLE>
-29-
<PAGE> 1
<TABLE>
EXHIBIT 11 - COMPUTATION OF WEIGHTED AVERAGE SHARES
USED IN COMPUTING INCOME PER SHARE AMOUNTS
(Unaudited, in thousands)
<CAPTION>
Three Months Ended
---------------------------------------------
September 30, 1995 September 30, 1994
--------------------- ---------------------
Common Common
and Common Assuming and Common Assuming
Equivalent Full Equivalent Full
Share Dilution Share Dilution
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Applicable to General Division Stock:
Common stock outstanding, beginning of period...... 26,755 26,755 24,412 24,412
Weighted average common stock issued during
the period........................................ 479 851 51 51
Weighted average common stock assuming
exercise of options.............................. 1,747 1,945 603 754
Weighted average common stock assuming
exercise of warrants.............................. 1,298 1,454 1,308 1,462
Weighted average common stock assuming conversion
of 6 3/4% Convertible Subordinated Notes.......... (A) 1,891 (A) 1,891
------ ------ ------ ------
Weighted average number of shares outstanding...... 30,279 32,896 26,374 28,570
====== ====== ====== ======
<CAPTION>
Nine Months Ended
---------------------------------------------
September 30, 1995 September 30, 1994
--------------------- ---------------------
Common Common
and Common Assuming and Common Assuming
Equivalent Full Equivalent Full
Share Dilution Share Dilution
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Applicable to General Division Stock:
Common stock outstanding, beginning of period...... 26,447 26,447 24,292 24,292
Weighted average common stock issued during
the period........................................ 347 1,214 87 87
Weighted average common stock assuming
exercise of options............................... 1,219 1,338 540 590
Weighted average common stock assuming
exercise of warrants.............................. 803 871 1,198 1,249
Weighted average common stock assuming conversion
of 6 3/4% Convertible Subordinated Notes.......... (A) 1,891 (A) 1,891
------ ------ ------ ------
Weighted average number of shares outstanding...... 28,816 31,671 26,117 28,109
====== ====== ====== ======
<FN>
(A) These securities are "other potentially dilutive" securities which effect is included, to the extent such effect is
dilutive, in the determination of weighted average shares assuming full dilution.
</TABLE>
<PAGE> 2
<TABLE>
EXHIBIT 11 - COMPUTATION OF WEIGHTED AVERAGE SHARES
USED IN COMPUTING INCOME PER SHARE AMOUNTS (continued)
(Unaudited, in thousands)
<CAPTION>
Three Months Ended
----------------------------------------------
September 30, 1995 September 30, 1994
--------------------- ---------------------
Common Common
and Common Assuming and Common Assuming
Equivalent Full Equivalent Full
Share Dilution Share Dilution
---------- -------- ---------- --------
<S> <C> <C>
Applicable to TR Stock:
Common stock outstanding, beginning of period............... 8,818 3,296
Weighted average common stock issued during the period...... 353 6
Weighted average common stock assuming
exercise of options........................................ (B) (B)
Weighted average common stock assuming
exercise of warrants....................................... (B) (B)
Weighted average common stock assuming conversion of
6 3/4% Convertible Subordinated Notes...................... (A) (A)
------ ------
Weighted average number of shares outstanding............... 9,171 3,302
====== ======
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------------------------
September 30, 1995 September 30, 1994
--------------------- ---------------------
Common Common
and Common Assuming and Common Assuming
Equivalent Full Equivalent Full
Share Dilution Share Dilution
---------- -------- ---------- --------
<S> <C> <C>
Applicable to TR Stock:
Common stock outstanding, beginning of period............... 8,675 3,279
Weighted average common stock issued during the period...... 196 12
Weighted average common stock assuming
exercise of options........................................ (B) (B)
Weighted average common stock assuming
exercise of warrants....................................... (B) (B)
Weighted average common stock assuming conversion of
6 3/4% Convertible Subordinated Notes...................... (A) (A)
------ ------
Weighted average number of shares outstanding............... 8,871 3,291
====== ======
<FN>
(A) These securities are "other potentially dilutive" securities which effect
is included, to the extent such effect is dilutive, in the determination of
weighted average shares assuming full dilution.
(B) The effect of assumed conversion is antidilutive.
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMBINED
FINANCIAL STATEMENTS OF GENZYME CORPORATION GENERAL DIVISION FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<EXCHANGE-RATE> 1
<CASH> 52,955
<SECURITIES> 1,925
<RECEIVABLES> 89,871
<ALLOWANCES> 7,175
<INVENTORY> 46,155
<CURRENT-ASSETS> 200,462
<PP&E> 382,992
<DEPRECIATION> 62,557
<TOTAL-ASSETS> 660,502
<CURRENT-LIABILITIES> 51,719
<BONDS> 126,903
<COMMON> 272
0
0
<OTHER-SE> 472,642
<TOTAL-LIABILITY-AND-EQUITY> 660,502
<SALES> 254,835
<TOTAL-REVENUES> 274,001
<CGS> 106,291
<TOTAL-COSTS> 204,609
<OTHER-EXPENSES> 1,207
<LOSS-PROVISION> 16,210
<INTEREST-EXPENSE> 732
<INCOME-PRETAX> 56,742
<INCOME-TAX> 15,685
<INCOME-CONTINUING> 41,057
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41,057
<EPS-PRIMARY> 1.42
<EPS-DILUTED> 1.30
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMBINED
FINANCIAL STATEMENTS OF GENZYME CORPORATION TISSUE REPAIR DIVISION FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<EXCHANGE-RATE> 1
<CASH> 45,628
<SECURITIES> 6,101
<RECEIVABLES> 1,723
<ALLOWANCES> 325
<INVENTORY> 230
<CURRENT-ASSETS> 53,522
<PP&E> 1,742
<DEPRECIATION> 657
<TOTAL-ASSETS> 56,935
<CURRENT-LIABILITIES> 3,885
<BONDS> 243
<COMMON> 120
0
0
<OTHER-SE> 52,197
<TOTAL-LIABILITY-AND-EQUITY> 56,935
<SALES> 3,712
<TOTAL-REVENUES> 3,712
<CGS> 2,955
<TOTAL-COSTS> 18,800
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33
<INCOME-PRETAX> (14,351)
<INCOME-TAX> 0
<INCOME-CONTINUING> (14,351)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,351)
<EPS-PRIMARY> (1.62)
<EPS-DILUTED> 0.00
</TABLE>
