<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, 1998
------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to ____________________
Commission file number 0-14680
-------
GENZYME CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 06-1047163
- --------------------------------------------------------------------------------
(State or other jurisdiction of (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, 1998:
<TABLE>
<CAPTION>
Series
------
<S> <C>
Genzyme General Division Common Stock
("GGD Stock") 80,673,385
Genzyme Tissue Repair Division Common Stock
("GTR Stock") 20,500,150
Genzyme Molecular Oncology Division Common Stock
("GMO Stock") 3,929,207
</TABLE>
<PAGE> 2
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, SEPTEMBER 30, 1998
NOTE REGARDING FORWARD-LOOKING STATEMENTS:
This Quarterly Report on Form 10-Q for Genzyme Corporation ("Genzyme" or the
"Company") contains forward-looking statements concerning, among other things,
the Company's future revenues, operations and expenditures. All such
forward-looking statements are necessarily only estimates of future results and
the actual results may differ materially from these projections due to a number
of factors, including (i) the Company's ability to successfully complete
preclinical and clinical development and obtain timely regulatory approval and
patent and other proprietary rights protection of its products and services,
(ii) the content and timing of decisions made by the U.S. Food and Drug
Administration (the "FDA") regarding the indications for which the Company's
products may be approved, (iii) the accuracy of the Company's estimates of the
size and characteristics of markets to be addressed by the Company's products
and services, (iv) market acceptance of the Company's products and services, (v)
the Company's ability to obtain reimbursement for its products from third-party
payers, where appropriate, (vi) the accuracy of the Company's information
concerning the products and resources of competitors and potential competitors
and (vii) the risks and uncertainties described under the heading "Factors
Affecting Future Operating Results" in the sections entitled (a) "Management's
Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial
Condition and Results of Operations" and "Management's Discussion and Analysis
of Genzyme General's Financial Condition and Results of Operations" in the
Genzyme General Annual Report for the fiscal year ended December 31, 1997 (the
"1997 Genzyme General Annual Report"), (b) "Management's Discussion and Analysis
of Genzyme Tissue Repair's Financial Condition and Results of Operations" in the
Genzyme Tissue Repair Annual Report for the fiscal year ended December 31, 1997
(the "1997 GTR Annual Report") and (c) "Management's Discussion and Analysis of
Genzyme Molecular Oncology's Financial Condition and Results of Operations" in
the Genzyme Molecular Oncology Annual Report for the fiscal year ended December
31, 1997 (the "1997 GMO Annual Report"). The 1997 Genzyme General Annual Report,
the 1997 GTR Annual Report and the 1997 GMO Annual Report were filed as Exhibits
13.1, 13.2 and 13.3, respectively, to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997, as amended on Form 10-K/A (the
"1997 Genzyme 10-K/A").
<PAGE> 3
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, SEPTEMBER 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
GENZYME GENERAL
Unaudited, Combined Statements of Operations for the Three and Nine Months Ended September 30, 1998 and 1997.......... 4
Unaudited, Combined Balance Sheets as of September 30, 1998 and December 31, 1997..................................... 5
Unaudited, Combined Statements of Cash Flows for the Three and Nine Months Ended September 30, 1998 and 1997.......... 6
Notes to Unaudited, Combined Financial Statements..................................................................... 7
GENZYME TISSUE REPAIR
Unaudited, Combined Statements of Operations for the Three and Nine Months Ended September 30, 1998 and 1997.......... 11
Unaudited, Combined Balance Sheets as of September 30, 1998 and December 31, 1997..................................... 12
Unaudited, Combined Statements of Cash Flows for the Three and Nine Months Ended September 30, 1998 and 1997.......... 13
Notes to Unaudited, Combined Financial Statements..................................................................... 14
GENZYME MOLECULAR ONCOLOGY
Unaudited, Combined Statements of Operations for the Three and Nine Months Ended September 30, 1998 and 1997.......... 16
Unaudited, Combined Balance Sheets as of September 30, 1998 and December 31, 1997..................................... 17
Unaudited, Combined Statements of Cash Flows for the Three and Nine Months Ended September 30, 1998 and 1997.......... 18
Notes to Unaudited, Combined Financial Statements..................................................................... 19
GENZYME CORPORATION AND SUBSIDIARIES
Unaudited, Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 1998 and 1997...... 21
Unaudited, Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997................................. 23
Unaudited, Consolidated Statements of Cash Flows for the Three and Nine Months Ended September 30, 1998 and 1997...... 24
Notes to Unaudited, Consolidated Financial Statements................................................................. 25
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 30
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.................................................... 41
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds..................................................................... 42
ITEM 6. Exhibits and Reports on Form 8-K ............................................................................. 42
Signatures.............................................................................................................. 43
</TABLE>
<PAGE> 4
GENZYME GENERAL
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -------------------------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues................................................ $167,129 $148,841 $490,232 $441,061
Operating costs and expenses:
Cost of products and services sold........................ 80,298 51,245 191,887 161,550
Selling, general and administrative....................... 43,633 43,717 136,641 125,390
Research and development.................................. 25,590 18,484 65,112 54,784
Amortization of intangibles............................... 3,323 3,127 9,822 9,487
-------- -------- -------- --------
Total operating costs and expenses.................. 152,844 116,573 403,462 351,211
-------- -------- -------- --------
Operating income.............................................. 14,285 32,268 86,770 89,850
Other income (expenses):
Equity in net loss of unconsolidated affiliates........... (4,675) (1,744) (11,667) (2,597)
Gain on affiliate sale of stock........................... -- -- 2,369 --
Minority interest......................................... 993 -- 2,717 --
Gain on sale of product line.............................. 31,202 -- 31,202 --
Investment income......................................... 7,008 2,401 14,784 7,313
Interest expense.......................................... (5,342) (2,006) (10,683) (6,006)
-------- -------- -------- --------
Total other income (expenses)....................... 29,186 (1,349) 28,722 (1,290)
-------- -------- -------- --------
Income before income taxes.................................... 43,471 30,919 115,492 88,560
Provision for income taxes.................................... (17,047) (11,922) (44,811) (34,081)
-------- -------- -------- --------
Net income.................................................... 26,424 18,997 70,681 54,479
Tax benefit allocated from Genzyme Tissue Repair.............. 4,656 4,240 12,452 13,078
Tax benefit allocated from Genzyme Molecular Oncology......... 1,153 1,120 5,238 1,321
-------- -------- -------- --------
Net income attributable to GGD stock ......................... $ 32,233 $ 24,357 $ 88,371 $ 68,878
======== ======== ======== ========
Per Genzyme General common share:
Net income per Genzyme General common share - basic......... $0.41 $0.32 $1.13 $0.90
===== ===== ===== =====
Weighted average shares outstanding........................... 79,032 76,836 78,492 76,183
====== ====== ====== ======
Net income per Genzyme General common and common
equivalent share - diluted ............................... $0.40 $0.31 $1.09 $0.88
===== ===== ===== =====
Adjusted weighted average shares outstanding.................. 81,239 79,446 80,760 78,604
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these unaudited,
combined financial statements.
-4-
<PAGE> 5
GENZYME GENERAL
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
(UNAUDITED, AMOUNTS IN THOUSANDS) 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 55,170 $ 66,276
Short-term investments........................................... 132,224 35,294
Accounts receivable, net......................................... 142,878 116,056
Inventories...................................................... 103,442 137,708
Prepaid expenses and other current assets........................ 22,340 15,941
Due from Genzyme Tissue Repair................................... 1,353 1,213
Due from Genzyme Molecular Oncology.............................. 3,219 5,434
Deferred tax assets - current.................................... 28,005 27,601
---------- ----------
Total current assets.......................................... 488,631 405,523
Property, plant and equipment, net.................................. 379,615 365,337
Long-term investments............................................... 340,934 91,627
Intangibles, net.................................................... 242,781 243,071
Deferred tax assets - noncurrent.................................... 36,029 35,988
Investment in equity securities..................................... 53,573 30,047
Other noncurrent assets............................................. 33,817 31,463
---------- ----------
Total assets................................................... $1,575,380 $1,203,056
========== ==========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable................................................. $ 15,697 $ 18,409
Accrued expenses................................................. 76,255 66,865
Income taxes payable............................................. 29,691 11,157
Current portion of long-term debt and capital lease obligations.. 20,963 887
---------- ----------
Total current liabilities...................................... 142,606 97,318
Long-term debt and capital lease obligations........................ 85,117 117,978
Convertible subordinated debentures and notes....................... 270,175 --
Other............................................................... 10,568 6,884
---------- ----------
Total liabilities.............................................. 508,466 222,180
Division equity..................................................... 1,066,914 980,876
---------- ----------
Total liabilities and division equity........................... $1,575,380 $1,203,056
========== ==========
</TABLE>
The accompanying notes are an integral part of these unaudited,
combined financial statements.
-5-
<PAGE> 6
GENZYME GENERAL
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
(UNAUDITED, AMOUNTS IN THOUSANDS) SEPTEMBER 30,
- ---------------------------------------------------------------------------------------------
1998 1997
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ................................................... $ 70,681 $ 54,479
Reconciliation of net income to net cash provided
by operating activities:
Depreciation and amortization ............................. 35,744 27,113
Non-cash compensation expense ............................. 33 --
Accrued interest/amortization on bonds .................... (8,969) 889
Provision for bad debts ................................... 3,847 5,052
Equity in net loss of unconsolidated affiliates, net ...... 11,667 2,597
Gain on affiliate sale of stock ........................... (2,369) --
Minority interest in net loss of subsidiaries ............. (2,717) --
Gain on sale of product line .............................. (31,202) --
Other ..................................................... (43) 453
Increase (decrease) in cash from working capital changes:
Accounts receivable .................................... (27,835) (10,843)
Inventories ............................................ 30,108 (22,242)
Prepaid expenses and other current assets .............. (5,328) (2,585)
Accounts payable, accrued expenses, income taxes
payable and deferred revenue ......................... 39,061 6,502
Due from Genzyme Tissue Repair ......................... (140) 329
Due from Genzyme Molecular Oncology .................... 1,433 (311)
--------- ---------
Net cash provided by operating activities .............. 113,971 61,433
INVESTING ACTIVITIES:
Purchases of investments ..................................... (382,790) (25,424)
Sales and maturities of investments .......................... 48,682 59,245
Acquisitions of property, plant and equipment ................ (40,547) (24,961)
Sales of property, plant and equipment ....................... 876 --
Proceeds from sale of product line ........................... 24,760 --
Acquisitions, net of acquired cash and assumed liabilities ... (8,324) --
Investment in unconsolidated affiliates ...................... (22,783) --
Investment in joint ventures ................................. (7,004) (3,044)
Repayment of loans by affiliates ............................. 2,019 --
Other ........................................................ 856 (30,313)
--------- ---------
Net cash used in investing activities .................. (384,255) (24,497)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock ....................... 33,000 117,604
Proceeds from issuance of debt ............................... 243,459 --
Payments of debt and capital lease obligations ............... (14,063) (100,881)
Net cash allocated to Genzyme Tissue Repair .................. 86 (14,899)
Net cash allocated to Genzyme Molecular Oncology ............. (5,000) (5,000)
Other ........................................................ 2,134 --
--------- ---------
Net cash (used in) provided by financing activities .... 259,616 (3,176)
Effect of exchange rate changes on cash .......................... (438) (2,393)
--------- ---------
Increase (decrease) in cash and cash equivalents ................. (11,106) 31,367
Cash and cash equivalents at beginning of period ................. 66,276 77,220
--------- ---------
Cash and cash equivalents at end of period ....................... $ 55,170 $ 108,587
========= =========
Supplemental cash flow information
GMO Debt Exchange -- Note 8
Sale of Research Products Business Assets -- Note 11
Other Charges -- Note 13
</TABLE>
The accompanying notes are an integral part of these unaudited,
combined financial statements.
-6-
<PAGE> 7
GENZYME GENERAL
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
These unaudited, combined financial statements should be read in
conjunction with the 1997 Genzyme 10-K/A and the financial statements and
footnotes for both Genzyme General Division ("Genzyme General") and
Genzyme. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted according to the
rules and regulations of the Securities and Exchange Commission. Certain
items in the 1997 financial statements have been reclassified to conform
with the 1998 presentation.
The financial statements for the three and nine months ended September
30, 1998 and 1997 are unaudited but include, in management's opinion, all
adjustments (consisting only of normally recurring accruals) necessary
for a fair presentation of the results for the periods presented.
2. FINANCIAL INFORMATION
Financial information specific to Genzyme General is presented in these
Genzyme General unaudited, combined financial statements. Accounting
policies and financial information relevant to Genzyme General, Genzyme
Tissue Repair Division ("GTR" or "Genzyme Tissue Repair") and Genzyme
Molecular Oncology Division ("GMO" or "Genzyme Molecular Oncology"),
collectively, are presented in Genzyme Corporation and Subsidiaries'
Unaudited, Consolidated Financial Statements (the "Unaudited,
Consolidated Financial Statements").
3. NEW ACCOUNTING PRONOUNCEMENTS
See Note 2., "New Accounting Pronouncements," to the Unaudited,
Consolidated Financial Statements, which is incorporated herein by
reference.
4. INVENTORIES (IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Raw materials................... $ 52,282 $ 48,149
Work-in-process................. 19,941 30,264
Finished products............... 31,219 59,295
-------- --------
Total.............. $103,442 $137,708
======== ========
</TABLE>
5. GTR EQUITY LINE OF CREDIT
In June 1998, the Board of Directors of Genzyme (the "Genzyme Board")
increased the amount of the equity line of credit available from Genzyme
General to GTR (the "GTR Equity Line") from $13.0 million to $50.0
million. Under the terms of the GTR Equity Line, GTR may draw down funds
as needed on a quarterly basis in exchange for shares of GTR Stock that
are not outstanding but are issuable from time to time for the benefit of
Genzyme General or its stockholders ("GTR Designated Shares").
6. GMO EQUITY LINE OF CREDIT
In March 1997, the Genzyme Board approved the allocation of up to $25.0
million in cash from Genzyme General to GMO (the "GMO Equity Line"),
subject to a dollar-for-dollar reduction by the proceeds of outside
financing received by GMO. As a result of the issuance of $20.0 million
6% debentures that are convertible into shares of GMO Stock and are due
August 29, 2002 (the "GMO Debentures"), the amount available under the
GMO Equity Line was reduced to $5.0 million. In September 1998, GMO made
a draw of the remaining $5.0 million available under the GMO Equity Line,
thus reducing the amount available under the GMO Equity Line to zero. As
a result, GMO has reserved for future issuance approximately 714,000
shares of GMO Stock that are not outstanding but are issuable from time
to time for the benefit of Genzyme General or its stockholders ("GMO
Designated Shares").
In August 1998, the Genzyme Board approved an additional allocation by
Genzyme General, separate from the GMO Equity Line, of up to $30.0
million in cash to GMO in exchange for an increase in the number of GMO
Designated Shares. GMO has not yet drawn any funds under this
arrangement.
-7-
<PAGE> 8
GENZYME GENERAL
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS
7. MINORITY INTEREST
The minority interest of $993,000 and $2,717,000 for the three and nine
months ended September 30, 1998, respectively, relate to the portion of
the results of operations of ATIII LLC, the joint venture between Genzyme
and Genzyme Transgenics Corporation ("GTC"), that is allocable to GTC.
There were no corresponding amounts in the prior periods.
8. GMO DEBT EXCHANGE
Effective August 1998, all of the holders of the GMO Debentures exercised
their option to exchange their GMO Debentures, plus accrued interest of
$1.2 million, for $21.2 million 5% debentures that are convertible into
shares of GGD Stock and are due August 29, 2003 (the "GGD Debentures").
Approximately 3,029,000 GMO Designated Shares were reserved in connection
with this exchange. Most of these GMO Designated Shares will be included
in those shares that will be distributed to Genzyme General shareholders
in November 1998 (the "GMO Dividend").
In September 1998, the Genzyme Board approved the exchange of a
Subordinated Convertible Promissory Note due from GMO to Genzyme General
in the principal amount of $2,450,000, plus accrued interest of $246,080,
for approximately 386,000 GMO Designated Shares. Most of these GMO
Designated Shares are also included as part of the GMO Dividend.
9. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Genzyme General:
Net income attributable to GGD Stock-basic and diluted $32,233 $24,357 $88,371 $68,878
======= ======= ======= =======
Shares used in net income per common share-basic ..... 79,032 76,836 78,492 76,183
Effect of dilutive securities:
Employee and director stock options ............ 2,200 2,602 2,261 2,414
Warrants ....................................... 7 8 7 7
------- ------- ------- -------
Dilutive potential common shares ..................... 2,207 2,610 2,268 2,421
------- ------- ------- -------
Shares used in net income per common share-diluted ... 81,239 79,446 80,760 78,604
======= ======= ======= =======
Net income per common share - basic .................. $ 0.41 $ 0.32 $ 1.13 $ 0.90
======= ======= ======= =======
Net income per common share - diluted ................ $ 0.40 $ 0.31 $ 1.09 $ 0.88
======= ======= ======= =======
</TABLE>
Certain securities were not included in the computation of Genzyme
General's diluted earnings per share for the three and nine months ended
September 30, 1998 and 1997. For the three months ended September 30,
1998 and 1997, such securities include: (i) options to purchase 3,611,495
and 2,412,468 shares of GGD Stock, respectively, outstanding during the
periods then ended but with exercise prices greater than the average
market price of GGD Stock during each respective period; and (ii)
warrants to purchase 80,000 shares of GGD Stock with an exercise price
greater than the average market price of GGD Stock during each respective
period. For the three months ended September 30, 1998, the following
securities were not included in the calculation because inclusion of such
shares would have an anti-dilutive effect on Genzyme General's net income
per share: (i) 6,313,131 shares of GGD Stock reserved in May 1998 for
issuance upon conversion of the Company's $250.0 million Convertible
Subordinated Notes due June 1, 2005 (the "GGD Notes"); and (ii) 787,060
shares of GGD Stock reserved in August 1998 for issuance upon conversion
of the GGD Debentures.
For the nine months ended September 30, 1998 and 1997, such securities
include: (i) options to purchase 3,767,051 and 3,893,335 shares of GGD
Stock, respectively, outstanding during the periods then ended but with
exercise prices greater than the average market price of GGD Stock during
each respective period; and (ii) warrants to purchase 80,000 shares of
GGD Stock with an exercise price greater than the average market price
of GGD Stock during each respective period. For the nine months ended
September 30, 1998, the following securities were not included in
-8-
<PAGE> 9
GENZYME GENERAL
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS
9. NET INCOME PER SHARE (CONTINUED)
the calculation because inclusion of such shares would have an
anti-dilutive effect on Genzyme General's net income per share: (i)
6,313,131 shares of GGD Stock reserved in May 1998 for issuance upon
conversion of the GGD Notes; and (ii) 787,060 shares of GGD Stock
reserved in August 1998 for issuance upon conversion of the GGD
Debentures.
10. COMPREHENSIVE INCOME
Effective January 1, 1998, Genzyme General adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 establishes standards for reporting and displaying
comprehensive income and its components in a set of financial statements.
SFAS 130 requires that all items recognized under accounting standards as
components of comprehensive earnings be reported on one of the following:
a statement of income and comprehensive income or a statement of
stockholders' equity. Components of comprehensive income are net income
and all other nonowner changes in equity such as the change in the
cumulative translation adjustment. Presentation of comprehensive income
for earlier periods is provided for comparative purposes. Genzyme
presents such information related to Genzyme General in its statement of
stockholders' equity on an annual basis and in a footnote in its
quarterly reports. Comprehensive income for Genzyme General for the three
and nine months ended September 30, 1998 and 1997 is as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Genzyme General (net of tax):
Net income .......................... $ 32,233 $ 24,357 $ 88,371 $ 68,878
Cumulative translation adjustment ... 8,853 (2,420) 8,697 (11,174)
Unrealized gain (loss) on investments (10,556) 8,039 (14,201) 6,099
-------- -------- -------- --------
Comprehensive income ................ $ 30,530 $ 29,976 $ 82,867 $ 63,803
======== ======== ======== ========
</TABLE>
11. SALE OF RESEARCH PRODUCTS BUSINESS ASSETS
On July 1, 1998, Genzyme General completed the sale of substantially all
of the assets of its research products business to TECHNE Corp. and its
wholly-owned subsidiary, Research and Diagnostic Systems, Inc. (together,
"TECHNE"). The full disclosure related to the sale of the research
product business assets is included in Note 8., "Sale of Research
Products Business Assets", to the Unaudited, Consolidated Financial
Statements, which is incorporated herein by reference.
12. BIOMARIN/GENZYME LLC AND PHARMING GROUP N.V.
See Note 9., "BioMarin/Genzyme LLC and Pharming Group N.V.," to the
Unaudited, Consolidated Financial Statements, which is incorporated
herein by reference.
13. OTHER CHARGES
In the third quarter of 1998, Genzyme General recorded $26.9 million of
charges associated with its Therapeutics and Surgical Products business
units. The conversion of U.S. patients with Gaucher's disease from
Ceredase[R] enzyme to Cerezyme[R] enzyme is scheduled for completion by
the end of 1998, and a complete conversion of patients worldwide is
scheduled for mid-1999. Based on its successful progress in converting
patients from Ceredase[R] enzyme to Cerezyme[R] enzyme, Genzyme General
has determined that its existing supply of finished goods of Ceredase[R]
enzyme is sufficient to meet patient needs. As a result, in the third
quarter of 1998, Genzyme General recorded a $14.8 million charge to cost
of products sold for the remaining inventory used to make Ceredase[R]
enzyme.
In addition, during the third quarter of 1998, Genzyme General reviewed
its requirements to support its existing and new hyaluronic acid-based
products designed to limit postoperative adhesions (the "Sepra
Products"). As a result, in the third quarter of 1998, Genzyme General
recorded a $10.4 million charge to cost of products sold to reduce Sepra
Products inventory amounts to net realizable value. In addition, during
the third quarter, the Company wrote-off certain costs related to
equipment used to manufacture Sepra Products totaling $1.7 million.
-9-
<PAGE> 10
14. SUBSEQUENT EVENTS
See Note 11., "Subsequent Events," to the Unaudited, Consolidated
Financial Statements, which is incorporated herein by reference.
-10-
<PAGE> 11
GENZYME TISSUE REPAIR
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) SEPTEMBER 30, SEPTEMBER 30,
- -----------------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Net service sales ............................................. $ 4,464 $ 3,077 $ 12,420 $ 7,718
Operating costs and expenses:
Cost of services sold ......................................... 3,471 2,975 10,481 8,966
Selling, general and administrative ........................... 6,043 6,390 18,363 19,048
Research and development ...................................... 2,553 2,664 8,471 7,660
------- -------- -------- --------
Total operating costs and expenses .......................... 12,067 12,029 37,315 35,674
------- -------- -------- --------
Operating loss ................................................... (7,603) (8,952) (24,895) (27,956)
Other income (expenses):
Equity in loss of joint venture ............................... (1,601) (1,529) (5,229) (4,945)
Interest income ............................................... 281 251 955 649
Interest expense .............................................. (515) (801) (2,044) (2,039)
------- -------- -------- --------
Total other income (expenses) ............................... (1,835) (2,079) (6,318) (6,335)
------- -------- -------- --------
Net loss attributable to GTR Stock ............................... $(9,438) $(11,031) $(31,213) $(34,291)
======= ======== ======== ========
Basic and diluted net loss per Genzyme Tissue Repair common share:
Net loss ...................................................... $ (0.47) $ (0.72) $ (1.55) $ (2.47)
======= ======== ======== ========
Weighted average shares outstanding .............................. 20,289 15,220 20,150 13,879
======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited,
combined financial statements.
-11-
<PAGE> 12
GENZYME TISSUE REPAIR
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited, amounts in thousands) September 30, December 31,
- ------------------------------------------------------------------------------
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................... $18,635 $21,120
Short-term investments ....................... -- 10,795
Accounts receivable, net ..................... 3,674 2,221
Inventories .................................. 2,290 1,973
Prepaid expenses and other current assets .... 1,311 732
------- -------
Total current assets ....................... 25,910 36,841
Property, plant and equipment, net .............. 2,884 19,524
Other ........................................... 195 453
------- -------
Total assets ............................... $28,989 $56,818
======= =======
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable ............................. $ 953 $ 1,378
Accrued expenses ............................. 2,827 2,816
Due to Genzyme General ....................... 1,353 1,213
------- -------
Total current liabilities .................. 5,133 5,407
Long-term debt .................................. 18,000 18,000
Convertible note, net ........................... 13,845 12,681
Other ........................................... 415 527
------- -------
Total liabilities .......................... 37,393 36,615
Division equity ................................. (8,404) 20,203
------- -------
Total liabilities and division equity ...... $28,989 $56,818
======= =======
</TABLE>
The accompanying notes are an integral part of these unaudited,
combined financial statements.
-12-
<PAGE> 13
GENZYME TISSUE REPAIR
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
(UNAUDITED, AMOUNTS IN THOUSANDS) SEPTEMBER 30,
- ----------------------------------------------------------------------------------------------------
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ........................................................... $(31,213) $(34,291)
Reconciliation of net loss to net cash used by operating activities:
Depreciation and amortization .................................... 1,458 1,739
Non-cash compensation expense .................................... 92 183
Loss on disposal of property, plant and equipment ................ -- 24
Provision for bad debts .......................................... 257 330
Accretion of debt discount ....................................... 536 711
Accrued interest/amortization on bonds ........................... 188 --
Equity in net loss of joint venture .............................. 5,229 4,945
Other ............................................................ (113) --
Increase (decrease) in cash from working capital:
Accounts receivable ............................................ (1,710) (919)
Inventories .................................................... (317) 449
Prepaid expenses and other ..................................... (579) 116
Accounts payable and accrued expenses .......................... 75 110
Due to Genzyme General ......................................... 140 (329)
-------- --------
Net cash used by operating activities ........................ (25,957) (26,932)
INVESTING ACTIVITIES:
Investment in joint venture ........................................ (4,983) (5,066)
Sales and maturities of investments ................................ 10,614 --
Purchase of property, plant and equipment .......................... (466) (120)
Sale of property, plant and equipment .............................. 16,500 349
Other .............................................................. 12 (264)
-------- --------
Net cash provided (used) by investing activities ............. 21,677 (5,101)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net ........................ 1,881 1,829
Proceeds from issuance of convertible note ......................... -- 13,000
Net cash allocated (to) from Genzyme General ....................... (86) 14,899
-------- --------
Net cash provided by financing activities .................... 1,795 29,728
-------- --------
Decrease in cash and cash equivalents ................................. (2,485) (2,305)
Cash and cash equivalents at beginning of period ...................... 21,120 16,230
-------- --------
Cash and cash equivalents at end of period ............................ $ 18,635 $ 13,925
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited,
combined financial statements.
-13-
<PAGE> 14
GENZYME TISSUE REPAIR
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
These unaudited, combined financial statements should be read in
conjunction with the 1997 Genzyme 10-K/A and the financial statements and
footnotes for both GTR and Genzyme. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted according to the rules and regulations of the
Securities and Exchange Commission.
The financial statements for the three and nine months ended September
30, 1998 and 1997 are unaudited but include, in management's opinion, all
adjustments (consisting only of normally recurring accruals) necessary
for a fair presentation of the results for the periods presented.
2. FINANCIAL INFORMATION
Financial information specific to GTR is presented in these GTR
unaudited, combined financial statements. Accounting policies and
financial information relevant to Genzyme General, GTR and GMO,
collectively, are presented in the Unaudited, Consolidated Financial
Statements.
3. NEW ACCOUNTING PRONOUNCEMENTS
See Note 2., "New Accounting Pronouncements," to the Unaudited,
Consolidated Financial Statements, which is incorporated herein by
reference.
4. INVENTORIES (In thousands)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Raw materials................... $ 268 $ 243
Work-in-process................. 2,022 1,730
------ ------
Total................. $2,290 $1,973
====== ======
</TABLE>
5. TRANSFER OF FACILITY
In June 1998, the Genzyme Board approved the transfer of one of GTR's
manufacturing facilities, including land, building and equipment, to
Genzyme General for cash of approximately $16.5 million. GTR recognized a
gain of approximately $0.7 million from this transfer, which was charged
to division equity in June 1998.
6. GTR EQUITY LINE OF CREDIT
In June 1998, the Genzyme Board increased the amount of the GTR Equity
Line from $13.0 million to $50.0 million. Under the terms of the GTR
Equity Line, GTR may draw down funds as needed on a quarterly basis in
exchange for GTR Designated Shares.
7. NET INCOME (LOSS) PER SHARE
See Note 6., "Net Income (Loss) Per Share," to the Unaudited,
Consolidated Financial Statements, which is incorporated herein by
reference.
-14-
<PAGE> 15
GENZYME TISSUE REPAIR
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS
7. COMPREHENSIVE INCOME
Effective January 1, 1998, GTR adopted SFAS 130, which establishes
standards for reporting and displaying comprehensive income and its
components in a set of financial statements. SFAS 130 requires that all
items recognized under accounting standards as components of
comprehensive earnings be reported on one of the following: a statement
of income and comprehensive income or a statement of stockholders'
equity. Components of comprehensive income are net income and all other
non-owner changes in equity such as the change in the cumulative
translation adjustment. Presentation of comprehensive income for earlier
periods is provided for comparative purposes. Genzyme presents such
information related to GTR in its statement of stockholders' equity on an
annual basis and in a footnote in its quarterly reports. Comprehensive
loss for GTR for the three and nine months ended September 30, 1998 and
1997 is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- --------------------
1998 1997 1998 1997
------- -------- -------- --------
<S> <C> <C> <C> <C>
Genzyme Tissue Repair (net of tax):
Net loss .............................. $(9,438) $(11,031) $(31,213) $(34,291)
Unrealized gain (loss) on investments.. 2 -- 9 --
------- -------- -------- --------
Comprehensive loss .................... $(9,436) $(11,031) $(31,204) $(34,291)
======= ======== ======== ========
</TABLE>
8. SUBSEQUENT EVENT
See Note 11., "Subsequent Events" to the Unaudited, Consolidated
Financial Statements, which is incorporated herein by reference.
-15-
<PAGE> 16
GENZYME MOLECULAR ONCOLOGY
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) SEPTEMBER 30, SEPTEMBER 30,
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
------- ------- -------- --------
<S> <C> <C> <C> <C>
Total revenues ............................................ $ 1,985 $ 176 $ 6,491 $ 176
Operating costs and expenses:
Cost of revenue ........................................ 1,211 106 3,534 106
Selling, general and administrative .................... 2,105 537 5,260 812
Research and development ............................... 3,249 1,622 8,772 3,171
Amortization of intangibles ............................ 2,956 1,768 9,026 1,996
Charge for in-process technology ....................... -- -- -- 7,000
------- ------- -------- --------
Total operating costs and expenses ................... 9,521 4,033 26,592 13,085
------- ------- -------- --------
Operating loss ............................................ (7,536) (3,857) (20,101) (12,909)
Other income (expenses):
Equity in loss of joint venture ........................ (266) (128) (1,244) (128)
Interest income ........................................ 149 172 633 172
Interest expense ....................................... (1,089) (481) (3,341) (498)
------- ------- -------- --------
Total other income (expenses) ........................ (1,206) (437) (3,952) (454)
------- ------- -------- --------
Loss before income taxes .................................. (8,742) (4,294) (24,053) (13,363)
Tax benefit ............................................... 662 380 1,986 430
------- ------- -------- ---------
Net loss attributable to GMO Stock ........................ $(8,080) $(3,914) $(22,067) $(12,933)
======= ======= ======== ========
Basic and diluted net loss per Genzyme Molecular Oncology
common share:
Net loss ............................................... $ (2.06) $ (1.00) $ (5.62)
======= ======= ========
Weighted average shares outstanding ....................... 3,929 3,929 3,929
======= ======= ========
Pro forma basic and diluted net loss per Genzyme Molecular
Oncology common share:
Pro forma net loss ..................................... $ (3.29)
========
Pro forma shares outstanding .............................. 3,929
========
</TABLE>
The accompanying notes are an integral part of these unaudited,
combined financial statements.
-16-
<PAGE> 17
GENZYME MOLECULAR ONCOLOGY
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED, AMOUNTS IN THOUSANDS) SEPTEMBER 30, DECEMBER 31,
- --------------------------------------------------------------------------------
1998 1997
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................ $ 4,528 $15,010
Short-term investments ........................... 3,586 5,170
Other ............................................ 1,448 823
------- -------
Total current assets ........................... 9,562 21,003
Equipment, net ...................................... 820 487
Long-term investments ............................... -- 1,049
Intangibles, net .................................... 20,201 30,688
Investment in joint venture ......................... -- 574
------- -------
Total assets ................................... $30,583 $53,801
======= =======
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accrued expenses ................................. $ 421 $ 2,015
Due to Genzyme General ........................... 3,219 5,434
Deferred revenue ................................. 830 1,583
Other ............................................ -- 18
------- -------
Total current liabilities ...................... 4,470 9,050
Long-term debt ...................................... -- 5,000
Convertible debentures, net ......................... -- 17,024
Note payable to Genzyme General ..................... -- 2,582
Deferred tax liability .............................. 4,522 6,509
Other ............................................... 849 170
------- -------
Total liabilities .............................. 9,841 40,335
Division equity ..................................... 20,742 13,466
------- -------
Total liabilities and division equity .......... $30,583 $53,801
======= =======
</TABLE>
The accompanying notes are an integral part of these unaudited,
combined financial statements.
- 17 -
<PAGE> 18
GENZYME MOLECULAR ONCOLOGY
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
(UNAUDITED, AMOUNTS IN THOUSANDS) SEPTEMBER 30,
- -----------------------------------------------------------------------------------
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ................................................ $(22,067) $(12,933)
Reconciliation of net loss to net cash used by
operating activities:
Depreciation and amortization ......................... 9,336 2,022
Charge for in-process technology ...................... -- 7,000
Deferred tax benefit .................................. (1,986) (430)
Accretion of debt conversion feature .................. 2,118 251
Equity in loss of joint venture ....................... 1,244 128
Accrued interest/amortization of marketable securities 110 --
Non-cash compensation expense ......................... 85 --
Increase (decrease) in cash from working capital:
Other current assets ................................ (261) (298)
Accrued expenses, deferred revenue and other ........ 379 (214)
Due to Genzyme General .............................. (1,433) 311
-------- --------
Net cash used by operating activities ................. (12,475) (4,163)
INVESTING ACTIVITIES:
Acquisition of PharmaGenics, Inc., net of acquired cash . -- 9
Investment in unconsolidated affiliate .................. -- (724)
Purchases of investments ................................ (2,057) --
Maturities of investments ............................... 4,588 --
Acquisitions of equipment ............................... (510) --
Other .................................................. -- 41
-------- --------
Net cash provided (used) by investing activities ...... 2,021 (674)
FINANCING ACTIVITIES:
Allocation of debt from Genzyme General ................. -- 5,000
Cash allocated from Genzyme General ..................... 5,000 --
Proceeds from issuance of warrants ...................... -- 724
Proceeds from issuance of convertible debentures, net ... -- 19,150
Repayments of debt and leases ........................... (5,018) --
Parent company investment, Genzyme General .............. -- 1,394
Other ................................................... (10) --
-------- --------
Net cash provided (used) by financing activities ...... (28) 26,268
-------- --------
Increase (decrease) in cash and cash equivalents ........... (10,482) 21,431
Cash and cash equivalents at beginning of period ........... 15,010 --
-------- --------
Cash and cash equivalents at end of period ................. $ 4,528 $ 21,431
======== ========
Supplemental cash flow information
GMO Debt Exchange - Note 6
</TABLE>
The accompanying notes are an integral part of these unaudited,
combined financial statements.
-18-
<PAGE> 19
] GENZYME MOLECULAR ONCOLOGY
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
These unaudited, combined financial statements should be read in
conjunction with the 1997 Genzyme 10-K/A and the financial statements and
footnotes for both GMO and Genzyme. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted according to the rules and regulations of the
Securities and Exchange Commission. Certain items in the 1997 financial
statements have been reclassified to conform with the 1998 presentation.
The financial statements for the three and nine months ended
September 30, 1998 and 1997 are unaudited but include, in management's
opinion, all adjustments (consisting only of normally recurring accruals)
necessary for a fair presentation of the results for the periods
presented.
2. FINANCIAL INFORMATION
Financial information specific to GMO is presented in these GMO
unaudited, combined financial statements. Accounting policies and
financial information relevant to Genzyme General, GTR and GMO,
collectively, are presented in the Unaudited, Consolidated Financial
Statements.
3. NEW ACCOUNTING PRONOUNCEMENTS
See Note 2., "New Accounting Pronouncements," to the Unaudited,
Consolidated Financial Statements, which is incorporated herein
by reference.
4. GMO EQUITY LINE OF CREDIT
In March 1997, the Genzyme Board approved the allocation of up to $25.0
million in cash from Genzyme General to GMO under the GMO Equity Line,
subject to a dollar-for-dollar reduction by the proceeds of outside
financing received by GMO. As a result of the issuance of the GMO
Debentures in August 1997, the amount available under the GMO Equity Line
was reduced to $5.0 million. In September 1998, GMO made a draw of the
remaining $5.0 million available under the GMO Equity Line, thus reducing
the amount available under the GMO Equity Line to zero. As a result, GMO
has reserved for future issuance approximately 714,000 GMO Designated
Shares in connection with this draw.
In August 1998, the Genzyme Board approved an additional allocation by
Genzyme General, separate from the GMO Equity Line, of up to $30.0
million in cash to GMO in exchange for an increase in the number of GMO
Designated Shares. GMO has not yet drawn any funds under this
arrangement.
5. DUE TO JOINT VENTURE
According to the funding commitment provided in the Collaboration
Agreement related to StressGen/Genzyme LLC, the joint venture between
GMO, StressGen Biotechnologies Corporation ("StressGen") and the Canadian
Medical Discoveries Fund, Inc. ("CMDF"), Genzyme and StressGen are
obligated to fund the operations of StressGen/Genzyme LLC in equal
portions after the initial $10.0 million (Canadian) of funding of
StressGen/Genzyme LLC has been expended. As of September 30, 1998, GMO's
portion of the cumulative losses of StressGen/Genzyme LLC exceeded its
initial capital contribution of $0.7 million and GMO has recorded $0.8
million of a noncurrent liability due to the joint venture.
6. GMO DEBT EXCHANGE
Effective August 1998, all of the holders of the GMO Debentures exercised
their option to exchange their GMO Debentures, plus accrued interest of
$1.2 million, into the GGD Debentures. Approximately 3,029,000 GMO
Designated Shares were reserved in connection with the exchange. Most of
these GMO Designated Shares will be distributed as part of the GMO
Dividend.
In September 1998, the Genzyme Board approved the exchange of a
Subordinated Convertible Promissory Note due from GMO to Genzyme General
in the principal amount of $2,450,000, plus accrued interest of $246,080,
for approximately 386,000 GMO Designated Shares. Most of these GMO
Designated Shares are also included as part of the GMO Dividend.
7. REGISTRATION STATEMENT
In April 1998, Genzyme filed with the Securities and Exchange Commission
an amended registration statement on Form S-3 covering the initial public
offering of 3,450,000 shares of GMO Stock (including 450,000 shares
issuable upon exercise of the underwriters' over-allotment option). In
September 1998, Genzyme withdrew the registration statement because it no
longer intends to conduct the offering of shares of GMO Stock
contemplated in the registration statement. GMO recorded a $0.6 million
charge for previously capitalized costs in connection with this offering.
-19-
<PAGE> 20
GENZYME MOLECULAR ONCOLOGY
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS
8. NET LOSS PER SHARE
See Note 6., "Net Income (Loss) Per Share," to the Unaudited,
Consolidated Financial Statements, which is incorporated herein by
reference.
9. COMPREHENSIVE INCOME
Effective January 1, 1998, GMO adopted SFAS 130, which establishes
standards for reporting and displaying comprehensive income and its
components in a set of financial statements. SFAS 130 requires that all
items recognized under accounting standards as components of
comprehensive earnings be reported on one of the following: a statement
of income and comprehensive income or a statement of stockholders'
equity. Components of comprehensive income are net income and all other
non-owner changes in equity such as the change in the cumulative
translation adjustment. Presentation of comprehensive income for earlier
periods is provided for comparative purposes. Genzyme presents such
information related to GMO in its statement of stockholders' equity on an
annual basis and in a footnote in its quarterly reports. Comprehensive
loss for GMO for the three and nine months ended September 30, 1998 and
1997 is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ --------------------
1998 1997 1998 1997
------- ------- -------- --------
<S> <C> <C> <C> <C>
Genzyme Molecular Oncology
(net of tax):
Net loss ............................ $(8,080) $(3,914) $(22,067) $(12,933)
Unrealized gain (loss) on investments 1 -- 9 --
------- ------- -------- --------
Comprehensive loss .................. $(8,079) $(3,914) $(22,058) $(12,933)
======= ======= ======== ========
</TABLE>
10. SUBSEQUENT EVENTS
See Note 11., "Subsequent Events," to the Unaudited,
Consolidated Financial Statements, which is incorporated herein
by reference.
-20-
<PAGE> 21
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ------------------------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------- ------------------------
<S> <C> <C> <C> <C>
Revenues:
Net product sales ..................................... $152,453 $132,098 $445,630 $391,890
Net service sales ..................................... 18,526 16,694 55,397 50,386
Revenue from research and development contracts ....... 2,415 3,302 7,792 6,679
-------- -------- -------- --------
Total revenues .................................... 173,394 152,094 508,819 448,955
Operating costs and expenses:
Cost of products sold ................................. 71,547 42,516 166,470 134,526
Cost of services sold ................................. 12,290 11,725 36,545 36,011
Selling, general and administrative ................... 51,781 50,644 160,264 145,017
Research and development .............................. 32,351 22,855 84,918 64,539
Amortization of intangibles ........................... 6,027 4,750 18,092 11,338
Charge for in-process technology ...................... -- -- -- 7,000
-------- -------- -------- --------
Total operating costs and expenses .................. 173,996 132,490 466,289 398,431
-------- -------- -------- --------
Operating income (loss) ................................... (602) 19,604 42,530 50,524
Other income (expenses):
Equity in net loss of unconsolidated affiliates ....... (6,542) (3,401) (18,140) (7,670)
Gain on affiliate sale of stock ....................... -- -- 2,369 --
Minority interest ..................................... 993 -- 2,717 --
Gain on sale of product line .......................... 31,202 -- 31,202 --
Investment income ..................................... 7,438 2,824 16,372 8,134
Interest expense ...................................... (6,946) (3,288) (16,068) (8,543)
-------- -------- -------- --------
Total other income (expenses) ....................... 26,145 (3,865) 18,452 (8,079)
-------- -------- -------- --------
Income before income taxes ................................ 25,543 15,739 60,982 42,445
Provision for income taxes ................................ (10,576) (6,182) (25,135) (19,252)
-------- -------- -------- --------
Net income ................................................ $ 14,967 $ 9,557 $ 35,847 $ 23,193
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited,
consolidated financial statements.
-21-
<PAGE> 22
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- -----------------------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------ -----------------------
<S> <C> <C> <C> <C>
Attributable to Genzyme General:
Net income ...................................................... $26,424 $ 18,997 $ 70,681 $ 54,479
Tax benefit allocated from Genzyme Tissue Repair ................ 4,656 4,240 12,452 13,078
Tax benefit allocated from Genzyme Molecular Oncology ........... 1,153 1,120 5,238 1,321
------- -------- -------- --------
Net income attributable to GGD Stock ............................ $32,233 $ 24,357 $ 88,371 $ 68,878
======= ======== ======== ========
Per Genzyme General common share - basic:
Net income .................................................... $ 0.41 $ 0.32 $ 1.13 $ 0.90
======= ======== ======== ========
Weighted average shares outstanding ............................. 79,032 76,836 78,492 76,183
======= ======== ======== ========
Per Genzyme General common and common equivalent share - diluted:
Net income .................................................... $ 0.40 $ 0.31 $ 1.09 $ 0.88
======= ======== ======== ========
Adjusted weighted average shares outstanding .................... 81,239 79,446 80,760 78,604
======= ======== ======== ========
Attributable to Genzyme Tissue Repair:
Net loss ........................................................ $(9,438) $(11,031) $(31,213) $(34,291)
======= ======== ======== ========
Per GTR basic and diluted common share:
Net loss ...................................................... $ (0.47) $ (0.72) $ (1.55) $ (2.47)
======= ======== ======== ========
Weighted average shares outstanding ............................. 20,289 15,220 20,150 13,879
======= ======== ======== ========
Attributable to Genzyme Molecular Oncology:
Net loss ........................................................ $(8,080) $ (3,914) $(22,067) $(12,933)
======= ======== ======== ========
Per GMO basic and diluted common share:
Net loss ...................................................... $ (2.06) $ (1.00) $ (5.62)
======== ======== ========
Weighted average shares outstanding ............................. 3,929 3,929 3,929
======== ======== ========
Pro forma per GMO basic and diluted common share:
Pro forma net loss ............................................ $ (3.29)
========
Pro forma weighted average shares outstanding ................... 3,929
========
</TABLE>
The accompanying notes are an integral part of these unaudited,
consolidated financial statements.
-22-
<PAGE> 23
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED, AMOUNTS IN THOUSANDS) SEPTEMBER 30, DECEMBER 31,
- -------------------------------------------------------------------------------------------
1998 1997
------------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................... $ 78,333 $ 102,406
Short-term investments ...................................... 135,810 51,259
Accounts receivable, net .................................... 147,194 118,277
Inventories ................................................. 105,732 139,681
Prepaid expenses and other current assets ................... 24,457 17,361
Deferred tax assets - current ............................... 28,005 27,601
---------- ----------
Total current assets ...................................... 519,531 456,585
Property, plant and equipment, net ............................. 383,319 385,348
Long-term investments .......................................... 340,934 92,676
Intangibles, net of accumulated amortization ................... 261,254 271,275
Deferred tax assets - noncurrent ............................... 31,507 29,479
Investment in equity securities ................................ 53,573 30,047
Other .......................................................... 34,012 30,043
---------- ----------
Total assets ............................................... $1,624,130 $1,295,453
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................ $ 16,650 $ 19,787
Accrued expenses ............................................ 79,503 72,103
Income taxes payable ........................................ 29,702 11,168
Deferred revenue ............................................ 830 1,800
Current portion of long-term debt and capital
lease obligations.......................................... 20,963 905
---------- ----------
Total current liabilities ................................. 147,648 105,763
Long-term debt and capital lease obligations ................... 103,117 140,978
Convertible subordinated debentures and notes .................. 284,020 29,298
Other .......................................................... 11,832 7,364
---------- ----------
Total liabilities .......................................... 546,617 283,403
Stockholders' equity:
Preferred Stock ............................................. -- --
Genzyme General Division Common Stock, $.01 par value ....... 798 777
Genzyme Tissue Repair Division Common Stock, $.01 par value . 205 199
Genzyme Molecular Oncology Division Common Stock, $.01
par value.................................................. 39 39
Treasury Stock - at cost .................................... (901) (901)
Additional paid-in capital - Genzyme General ................ 898,489 895,340
Additional paid-in capital - Genzyme Tissue Repair .......... 173,021 170,430
Additional paid-in capital - Genzyme Molecular Oncology ..... 63,852 34,517
Accumulated deficit ......................................... (40,499) (76,346)
Foreign currency translation adjustments .................... (3,752) (12,449)
Unrealized net gains (losses) on investments ................ (13,739) 444
---------- ----------
Total stockholders' equity ................................. 1,077,513 1,012,050
---------- ----------
Total liabilities and stockholders' equity ................. $1,624,130 $1,295,453
========== ==========
</TABLE>
The accompanying notes are an integral part of these unaudited,
consolidated financial statements.
-23-
<PAGE> 24
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED, AMOUNTS IN THOUSANDS) FOR THE NINE MONTHS ENDED SEPTEMBER 30,
- ------------------------------------------------------------------------------------------------------
1998 1997
---------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income .................................................. $ 35,847 $ 23,193
Reconciliation of net income to net
cash provided by operating activities:
Depreciation and amortization ............................ 45,782 30,299
Non-cash compensation expense ............................ 210 --
Accrued interest/amortization on bonds ................... (8,671) 889
Provision for bad debts .................................. 4,104 5,382
Deferred income tax benefit .............................. (1,986) --
Equity in net loss of unconsolidated affiliates .......... 18,140 7,670
Gain on affiliate sale of stock .......................... (2,369) --
Minority interest in net loss of affiliates .............. (2,717) --
Accretion of debt conversion feature ..................... 2,654 962
Purchase of in-process research and development .......... -- 7,000
Gain on sale of product line ............................. (31,202) --
Other .................................................... (156) 660
Increase (decrease) in cash from working capital changes:
Accounts receivable ................................... (29,545) (11,762)
Inventories ........................................... 29,791 (21,793)
Prepaid expenses and other current assets ............. (6,168) (2,767)
Accounts payable, accrued expenses, income taxes
payable and deferred revenue......................... 21,825 (8,001)
--------- ---------
Net cash provided by operating activities ............. 75,539 31,732
INVESTING ACTIVITIES:
Purchases of investments .................................... (384,847) (25,424)
Sales and maturities of investments ......................... 63,884 59,245
Acquisitions of property, plant and equipment ............... (25,023) (25,081)
Sale of property, plant and equipment ....................... 876 349
Acquisitions, net of acquired cash and assumed liabilities .. (8,324) 9
Proceeds from sale of product line .......................... 24,760 --
Investment in unconsolidated affiliates ..................... (22,783) --
Investment in joint ventures ................................ (11,987) (8,834)
Repayment of loans by affiliates ............................ 2,019 --
Other ....................................................... 868 (30,536)
--------- ---------
Net cash used by investing activities ................. (360,557) (30,272)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock ...................... 34,881 120,157
Proceeds from issuance of debt, net ......................... 243,459 32,150
Payments of debt and capital lease obligations .............. (19,081) (100,881)
Other ....................................................... 2,124 --
--------- ---------
Net cash provided by financing activities ............. 261,383 51,426
Effect of exchange rate changes on cash ....................... (438) (2,393)
--------- ---------
Increase (decrease) in cash and cash equivalents .............. (24,073) 50,493
Cash and cash equivalents at beginning of period .............. 102,406 93,450
--------- ---------
Cash and cash equivalents at end of period .................... $ 78,333 $ 143,943
========= =========
Supplemental cash flow information
GMO Debt Exchange - Note 4
Sale of Research Products Business Assets - Note 8
Other Charges - Note 10
</TABLE>
The accompanying notes are an integral part of these unaudited, consolidated
financial statements.
-24-
<PAGE> 25
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 1997 Genzyme 10-K/A and the financial statements and
footnotes for Genzyme. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
according to the rules and regulations of the Securities and Exchange
Commission. Certain items in the 1997 financial statements have been
reclassified to conform to the 1998 presentation.
The financial statements for the three and nine months ended September
30, 1998 and 1997 are unaudited but include, in management's opinion, all
adjustments (consisting only of normally recurring accruals) necessary
for a fair presentation of the results for the periods presented.
2. NEW ACCOUNTING PRONOUNCEMENTS
In April 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of
Position 98-5, "Accounting for the Costs of Start-Up Activities" ("SOP
98-5"). SOP 98-5 requires all costs of start-up activities (as defined by
SOP 98-5) to be expensed as incurred. Genzyme has determined that
adoption of SOP 98-5 will not have a material impact on its consolidated
financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as "derivatives"), and for hedging activities. SFAS 133
requires companies to recognize all derivatives as either assets or
liabilities, with the instruments measured at fair value. The accounting
for changes in fair value or in gains or losses depends on the intended
use of the derivative and its resulting designation. SFAS 133 is
effective for all fiscal quarters of fiscal years beginning after June
15, 1999. Genzyme will adopt SFAS 133 by January 1, 2000. Genzyme is
evaluating SFAS 133 to determine its impact on its consolidated financial
statements.
3. INVENTORIES (IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Raw materials.................. $ 52,550 $ 48,392
Work-in-process................ 21,963 31,994
Finished products.............. 31,219 59,295
-------- --------
Total............... $105,732 $139,681
======== ========
</TABLE>
4. GMO DEBT EXCHANGE
Effective August 1998, all of the holders of the GMO Debentures exercised
their option to exchange their GMO Debentures, plus accrued interest of
$1.2 million, into the GGD Debentures. Approximately 3,029,000 GMO
Designated Shares were reserved in connection with this exchange. Most of
these GMO Designated Shares will be distributed as part of the GMO
Dividend.
In September 1998, the Genzyme Board approved the exchange of a
Subordinated Convertible Promissory Note due from GMO to Genzyme General
in the amount of $2,450,000, plus accrued interest of $246,080, for
approximately 386,000 GMO Designated Shares. Most of these GMO Designated
Shares are also included as part of the GMO Dividend.
5. REGISTRATION STATEMENT
In April 1998, Genzyme filed with the Securities and Exchange Commission
an amended registration statement on Form S-3 covering the initial public
offering of 3,450,000 shares of GMO Stock (including 450,000 shares
issuable upon exercise of the underwriters' over-allotment option). In
September 1998, Genzyme withdrew the registration statement because it no
longer intends to conduct the offering of shares of common stock
contemplated in the registration statement. GMO recorded a $0.6 million
charge for previously capitalized costs in connection with this offering.
-25-
<PAGE> 26
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS
6. NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Genzyme General:
Net income attributable to GGD Stock-basic
and diluted......................................... $32,233 $24,357 $88,371 $68,878
======= ======= ======= =======
Shares used in net income per common share-basic ..... 79,032 76,836 78,492 76,183
Effect of dilutive securities:
Employee and director stock options ................ 2,200 2,602 2,261 2,414
Warrants ........................................... 7 8 7 7
------- ------- ------- -------
Dilutive potential common shares ..................... 2,207 2,610 2,268 2,421
------- ------- ------- -------
Shares used in net income per common share-diluted ... 81,239 79,446 80,760 78,604
======= ======= ======= =======
Net income per common share - basic .................. $ 0.41 $ 0.32 $ 1.13 $ 0.90
======= ======= ======= =======
Net income per common share - diluted ................ $ 0.40 $ 0.31 $ 1.09 $ 0.88
======= ======= ======= =======
</TABLE>
Certain securities were not included in the computation of Genzyme
General's diluted earnings per share for the three and nine months ended
September 30, 1998 and 1997. For the three months ended September 30,
1998 and 1997, such securities include: (i) options to purchase 3,611,495
and 2,412,468 shares of GGD Stock, respectively, outstanding during the
periods then ended but with exercise prices greater than the average
market price of GGD Stock during each respective period; and (ii)
warrants to purchase 80,000 shares of GGD Stock with an exercise price
greater than the average market price of GGD Stock during each respective
period. For the three months ended September 30, 1998 the following
securities were not included in the calculation because inclusion of such
shares would have an anti-dilutive effect on Genzyme General's net income
per share: (i) 6,313,131 shares of GGD Stock reserved in May 1998 for
issuance upon conversion of the GGD Notes; and (ii) 787,060 shares of GGD
Stock reserved in August 1998 for issuance upon conversion of the GGD
Debentures.
For the nine months ended September 30, 1998 and 1997, such securities
include: (i) options to purchase 3,767,051 and 3,893,335 shares of GGD
Stock, respectively, outstanding during the periods then ended but with
exercise prices greater than the average market price of GGD Stock during
each respective period; and (ii) warrants to purchase 80,000 shares of
GGD Stock with an exercise price greater than the average market price of
GGD Stock during each respective period. For the nine months ended
September 30, 1998, the following securities were not included in the
calculation because inclusion of such shares would have an anti-dilutive
effect on Genzyme General's net income per share: (i) 6,313,131 shares of
GGD Stock reserved in May 1998 for issuance upon conversion of the GGD
Notes; and (ii) 787,060 shares of GGD Stock reserved in August 1998 for
issuance upon conversion of the GGD Debentures.
-26-
<PAGE> 27
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS
6. NET INCOME (LOSS) PER SHARE (CONTINUED)
GTR:
Basic net loss per GTR common share is the same as diluted net loss per
GTR common share for each of the three and nine months ended September
30, 1998 and 1997. Certain securities were not included in the
computation of GTR's diluted earnings per share for each of these
periods because they would have an anti-dilutive effect due to GTR's
net loss for the relevant period. For the three months ended September
30, 1998 and 1997, these securities include: (i) options to purchase
3,223,186 and 2,383,982 shares, respectively, of GTR Stock; (ii)
781,638 and 893,803 GTR Designated Shares, respectively; and (iii)
4,199,438 shares of GTR Stock reserved for issuance upon conversion of
the GTR Note. For the nine months ended September 30, 1998 and 1997,
these securities include: (i) options to purchase 3,059,491 and
2,420,408 shares, respectively, of GTR Stock; (ii) 781,638 and 893,803
GTR Designated Shares, respectively; and (iii) 4,199,438 shares of GTR
Stock reserved for issuance upon conversion of the GTR Note.
GMO:
Historical loss per share information is presented for GMO for the
three and nine months ended September 30, 1998 and the three months
ended September 30, 1997, but is omitted for the nine months ended
September 30, 1997 as there were no shares of GMO Stock outstanding
prior to June 18, 1997. Pro forma net loss per share is disclosed for
GMO for the nine months ended September 30, 1997. The pro forma shares
outstanding represent the shares issued to effect the merger of
PharmaGenics with and into Genzyme in June 1997.
Basic net loss per GMO common share is the same as diluted net loss per
GMO common share for the three and nine months ended September 30,
1998, and for the three months ended September 30, 1997. Pro forma
basic net loss per GMO common share is the same as pro forma diluted
net loss per GMO common share for the nine months ended September 30,
1997. Certain securities were not included in the computation of GMO's
diluted or pro forma diluted earnings per share for each of these
periods because they would have an anti-dilutive effect due to GMO's
net loss for the relevant period. For the three months ended September
30, 1998 and 1997 these securities include: (i) options to purchase
1,164,665 and 20,944 shares, respectively, of GMO Stock; (ii) warrants
to purchase 9,563 shares of GMO Stock at $8.04 per share; and (iii)
8,730,231 to be distributed as part of the GMO Dividend which will be
included in loss per share in future periods, and 6,000,000,
respectively, GMO Designated Shares. For the three months ended
September 30, 1997 these securities include 3,475,915 shares of GMO
Stock reserved for issuance upon conversion of the GMO Debentures and a
Subordinated Convertible Promissory Note due from GMO to Genzyme
General. For the three months ended September 30, 1998 these securities
include 1,398,312 GMO Designated Shares. For the nine months ended
September 30, 1998 and 1997, these securities include: (i) options to
purchase 1,070,573 and 7,753 shares, respectively, of GMO Stock; (ii)
warrants to purchase 9,563 shares of GMO Stock at $8.04 per share; and
(iii) 8,730,231 to be distributed as part of the GMO Dividend which
will be included in loss per share in future periods, and 6,000,000,
respectively, GMO Designated Shares. For the nine months ended
September 30, 1997 these securities include 3,475,915 shares of GMO
Stock reserved for issuance upon conversion of the GMO Debentures and a
Subordinated Convertible Promissory Note due to Genzyme General. For
the nine months ended September 30, 1998 these securities include
1,398,312 GMO Designated Shares.
7. COMPREHENSIVE INCOME
Effective January 1, 1998, Genzyme adopted SFAS 130, which establishes
standards for reporting and displaying comprehensive income and its
components in a set of financial statements. SFAS 130 requires that all
items recognized under accounting standards as components of
comprehensive earnings be reported on one of the following: a statement
of income and comprehensive income, a statement of comprehensive income
or a statement of stockholders' equity. Components of comprehensive
income are net income and all other non-owner changes in equity such as
the change in the cumulative translation adjustment. Presentation of
comprehensive income for earlier periods is provided for comparative
purposes. Genzyme presents such information in its statement of
stockholders' equity on an annual basis and in a footnote in its
quarterly reports. Comprehensive income for the three and nine months
ended September 30, 1998 and 1997, is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Consolidated (net of tax):
Net income ............................ $ 14,967 $ 9,557 $ 35,847 $ 23,193
Cumulative translation adjustment ..... 8,853 (2,420) 8,697 (11,174)
Unrealized gain (loss) on investments . (10,553) 8,039 (14,183) 6,099
-------- -------- -------- --------
Comprehensive income .................. $ 13,267 $ 15,176 $ 30,361 $ 18,118
======== ======== ======== ========
</TABLE>
-27-
<PAGE> 28
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS
7. COMPREHENSIVE INCOME (CONTINUED):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -----------------------
1998 1997 1998 1997
------- -------- -------- --------
<S> <C> <C> <C> <C>
GENZYME GENERAL (net of tax):
Net income ............................ $32,233 $ 24,357 $ 88,371 $ 68,878
Cumulative translation adjustment ..... 8,853 (2,420) 8,697 (11,174)
Unrealized gain (loss) on investments.. (10,556) 8,039 (14,201) 6,099
------- -------- -------- --------
Comprehensive income .................. $30,530 $ 29,976 $ 82,867 $ 63,803
======= ======== ======== ========
GENZYME TISSUE REPAIR (net of tax):
Net loss .............................. $(9,438) $(11,031) $(31,213) $(34,291)
Unrealized gain (loss) on investments.. 2 -- 9 --
------- -------- -------- --------
Comprehensive loss .................... $(9,436) $(11,031) $(31,204) $(34,291)
======= ======== ======== ========
GENZYME MOLECULAR ONCOLOGY (net of tax):
Net loss .............................. $(8,080) $ (3,914) $(22,067) $(12,933)
Unrealized gain (loss) on investments . 1 -- 9 --
------- -------- -------- --------
Comprehensive loss .................... $(8,079) $ (3,914) $(22,058) $(12,933)
======= ======== ======== ========
</TABLE>
8. SALE OF RESEARCH PRODUCTS BUSINESS ASSETS
On July 1, 1998, Genzyme completed the sale of substantially all of the
assets of its research products business to TECHNE. The purchase price
consisted of $24.8 million in cash, approximately 987,000 shares of
TECHNE common stock, and royalties on TECHNE's biotechnology group sales
for the next five years. Royalty income will be recorded as earned. In
the third quarter of 1998, Genzyme recorded a gain of $31.2 million
related to the sale of the research products business assets.
9. BIOMARIN/GENZYME LLC AND PHARMING GROUP N.V.
In September 1998, Genzyme formed a joint venture with BioMarin
Pharmaceuticals Inc. ("BioMarin"), a privately held biopharmaceutical
company, for the development and commercialization of
alpha-L-iduronidase, a recombinant enzyme to treat a group of lysosomal
storage disorders known as mucopoly saccharidosis I ("MPS I"). Funding
for the joint venture will be provided equally by Genzyme and BioMarin.
BioMarin contributed the underlying technology around alpha-L-iduronidase
to BioMarin/Genzyme LLC, which has rights to commercialize any
pharmaceutical compositions of alpha-L-iduronidase worldwide. Pursuant to
the terms of the collaboration agreement, Genzyme will pay BioMarin a
$12.1 million milestone payment upon receipt of approval from the FDA of
a Biologics License Application ("BLA") for alpha-L-iduronidase to treat
MPS I. In September 1998, Genzyme also made an $8.0 million equity
investment in BioMarin and will purchase an additional $10.0 million of
BioMarin stock in a private placement concurrent with BioMarin's initial
public offering at the price to the public in that offering. The
investment is accounted for under the cost method of accounting.
On July 17, 1998, Genzyme made an equity investment in Pharming Group
N.V. ("Pharming") of approximately $14.0 million at NLG 33.33 per share
for a total of 852,307 shares of Pharming common stock. The investment is
accounted for under the cost method of accounting.
10. OTHER CHARGES
In the third quarter of 1998, Genzyme General recorded $26.9 million of
charges associated with its Therapeutics and Surgical Products business
units. The conversion of U.S. patients with Gaucher's disease from
Ceredase[R] enzyme to Cerezyme[R] enzyme is scheduled for completion by
the end of 1998, and a complete conversion of patients worldwide is
scheduled for mid-1999. Based on its successful progress in converting
patients from Ceredase[R] enzyme to Cerezyme[R] enzyme, Genzyme has
determined that its existing supply of finished goods of Ceredase[R]
enzyme is sufficient to meet patient needs. As a result, in the third
quarter of 1998, Genzyme recorded a $14.8 million charge to cost of
products sold for the remaining inventory used to make Ceredase[R]
enzyme.
In addition, during the third quarter of 1998, Genzyme reviewed its
requirements to support its Sepra Products. As a result, in the third
quarter of 1998, Genzyme recorded a $10.4 million charge to cost of
products sold to reduce Sepra Products inventory amounts to net
realizable value. In addition, during the third quarter, the Company
wrote-off certain costs related to equipment used to manufacture the
Sepra Products totaling $1.7 million.
-28-
<PAGE> 29
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS
11. SUBSEQUENT EVENTS
Effective October 9, 1998, Genzyme General and Pharming formed a joint
venture ("Pharming/Genzyme LLC") to develop and commercialize worldwide
the human enzyme alpha-glucosidase ("hAG") as a treatment for Pompe's
disease. Under the terms of the agreement, Genzyme General will fund the
first $14.0 million of development costs including certain costs incurred
by Pharming on behalf of the joint venture between June 1, 1998 and
October 9, 1998. Pharming/Genzyme LLC development costs in excess of
$14.0 million will be funded equally by Genzyme General and Pharming.
Genzyme General will make a $7.0 million milestone payment to Pharming
upon receipt of FDA approval of a BLA for hAG for the treatment of
Pompe's disease.
In October 1998, GMO licensed its p53 gene therapy patent rights to
Schering-Plough Corporation. Under the terms of the licensing agreement,
GMO received a $5.0 million up-front payment. GMO could receive
additional patent, product development and sales milestones fees, in
addition to royalties on product sales, associated with Schering-Plough's
development and commercialization of a p53 gene therapy product.
On November 2, 1998, Genzyme General and GelTex Pharmaceuticals, Inc.
("GelTex") announced that the FDA granted marketing approval for
RenaGel[R] capsules for the reduction of serum phosphorus in patients
with end-stage renal disease. Genzyme made a $15.0 million payment to
GelTex in connection with the receipt of FDA approval of the NDA for
RenaGel[R] capsules, and is required to make an additional $10.0 million
payment to GelTex on the first anniversary of FDA approval.
In February 1997, Genzyme issued a $13.0 million note convertible into
shares of GTR Stock (the "GTR Note"). The GTR Note bears interest at the
rate of 5% per year. On November 2, 1998, the holder of the GTR Note
converted $600,000 of the principal amount of the GTR Note in exchange
for 223,405 shares of GTR Stock. GTR paid $1.1 million of accrued
interest to the holder of the GTR Note in connection with this
conversion.
On November 16, 1998, Genzyme will distribute 0.10805 share of GMO Stock
for each share of GGD Stock owned on November 2, 1998, and GMO Stock will
begin trading on the Nasdaq National Market under the ticker symbol
"GZMO". On November 16, 1998, Genzyme will also release from escrow GMO
shares held by former PharmaGenics, Inc. ("PharmaGenics") shareholders.
Approximately 8,730,000 GMO Designated Shares will be distributed and
approximately 3,929,000 shares of GMO Stock will be released from escrow.
-29-
<PAGE> 30
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998
The following discussion is a summary of the key factors management considers
necessary in reviewing the Company's results of operations, liquidity and
capital resources.
GENZYME CORPORATION AND SUBSIDIARIES
Since the operating results of Genzyme and its subsidiaries reflect the combined
operations of Genzyme General, GTR and GMO, this discussion summarizes the key
factors management considers necessary in reviewing Genzyme's consolidated
results of operations. Detailed discussion and analysis of each division's
results of operations are provided below under separate headings.
RESULTS OF OPERATIONS
GENZYME CORPORATION
REVENUES
Total revenues for the three and nine months ended September 30, 1998 increased
14% and 13% to $173.4 million and $508.8 million, respectively, from $152.1
million and $449.0 million, respectively, in the corresponding periods of 1997.
Product revenues consist solely of sales by Genzyme General. Product revenues
for the three months ended September 30, 1998 increased 15% to $152.5 million
from $132.1 million in the comparable period of 1997. For the nine months ended
September 30, 1998, product revenues increased 14% to $445.6 million from $391.9
million in the same period of 1997. The increase during both periods was
primarily due to the increased sales of Cerezyme[R] enzyme. Sales of Cerezyme[R]
enzyme and Ceredase[R] enzyme increased 23% for each of the three and nine
months ended September 30, 1998 to $105.5 million and $297.6 million,
respectively, from $87.4 million and $247.8 million, respectively, in the
corresponding periods in 1997 due to strong international sales and the market
launch of Cerezyme[R] enzyme in Japan. Cerezyme[R] enzyme sales accounted for
86% of the combined revenues for the two products during the third quarter of
1998.
Service revenues consist primarily of genetic testing services performed by
Genzyme General, sales of GTR's Carticel[TM] autologous cultured chondrocyte
("Carticel[TM] AuCC") and Epicel[TM] services as well as sales of GMO's SAGE[TM]
differential gene expression technology ("SAGE[TM]") services. For the three
months ended September 30, 1998, service revenues increased 11% to $18.5 million
from $16.7 million for the corresponding period of 1997. Service revenues were
$55.4 million for the nine months ended September 30, 1998, an increase of 10%
over service revenues of $50.4 million for the nine months ended September 30,
1997. Service revenues increased for the three and nine months ended September
30, 1998 due primarily to increased sales of both GTR's Carticel[TM] AuCC and
Epicel[TM] services and increased sales of GMO's SAGE[TM] services in each
period, offset in part by slight reductions in genetic testing service revenue
in each period. GMO added $0.6 million and $1.7 million of service revenue in
the three and nine months ended September 30, 1998, respectively, as compared to
$0.1 million in the corresponding periods of 1997.
International sales as a percentage of total product and service sales for the
three and nine months ended September 30, 1998 increased to 39% and 40%,
respectively, from 36% an 37%, respectively, in the corresponding periods of
1997. The increases in international sales in these periods are due primarily to
increases in the international sales of Cerezyme[R] enzyme of 29% in each of the
three and nine months ended September 30, 1998, as well as increased European
sales of Carticel[TM] AuCC.
MARGINS AND OPERATING EXPENSE
Gross margins for the quarters ended September 30, 1998 and 1997 were 51% and
64%, respectively, and for the nine months ended September 30, 1998 and 1997
were 59% and 61%, respectively. The decline in gross margins is due primarily to
a decrease in Genzyme General's product margins, due to charges recorded by
Genzyme General in the third quarter of 1998 of $14.8 million for the write-down
of excess Ceredase[R] enzyme inventory and $10.4 million to write-down Sepra
Products inventory amounts to net realizable value, offset in part by an
increase in the service margins of GTR and GMO. Without the $25.2 million of
charges, Genzyme's gross margins for the three months ended September 30, 1998
would have been 66%.
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 three and nine months ended
September 30, 1998 were 53% and 63%, respectively, as compared to 68% and 66%,
respectively, for the corresponding periods of 1997. Product margins declined in
both the three and nine months ended September 30, 1998. Without the $25.2
million of charges, Genzyme's gross margins for the nine months ended September
30, 1998 would have been 65%. This increase is due to increased sales of
Cerezyme[R] enzyme.
Service margins for both the three and nine months ended September 30, 1998 were
34%, as compared to 30% for the three months ended September 30, 1997 and 29%
for the nine months ended September 30, 1997. The increase in service margins
for the three and nine month periods ended September 30, 1998 resulted primarily
from increased service margins for GTR attributable to higher sales volume and
related efficiencies in the manufacturing process of Carticel[TM] AuCC, the
continued consolidation of facilities and services relating to Genzyme General's
genetic testing services and increased service margins for GMO. GMO's service
margins increased in the three and nine months ended September 30, 1998 due to
higher sales volume compared to the corresponding periods of 1997.
-30-
<PAGE> 31
Selling, general and administrative ("SG&A") expenses and amortization of
intangibles for the three months ended September 30, 1998 were $57.8 million as
compared to $55.4 million for the same period in 1997, an increase of 4%. SG&A
expenses and amortization of intangibles for the nine months ended September 30,
1998 increased 14% to $178.4 million from $156.4 million in the corresponding
period of 1997. The increase for both periods was due primarily to increased
staffing in support of the growth in several product lines and an increase in
GMO's amortization of intangibles, offset in part by decreased marketing for
Carticel[TM] AuCC. Amortization of intangibles for GMO commenced in June 1997.
Research and development expenses for the three months ended September 30, 1998
were $32.3 million compared to $22.8 million for the three months ended
September 30, 1997, an increase of 42%, due primarily to additional research and
development expenses resulting from (i) the consolidation of the results of
ATIII LLC, the joint venture between Genzyme and GTC for the development and
commercialization of transgenic recombinant human antithrombin III ("ATIII"),
for which there were no comparable amounts in the corresponding period of 1997,
and (ii) increased spending on GMO's SAGE[TM] services and its gene therapy and
drug discovery programs. For the nine months ended September 30, 1998, research
and development expenses were $84.9 million compared to $64.5 million for the
same period of 1997, an increase of 32%, due primarily to additional research
and development expenses from the consolidation of the results of ATIII LLC for
which there were no comparable amounts in the same period of 1997, increased
spending on GMO's SAGE[TM] services, gene therapy and drug discovery programs
and increases in GTR's research and development spending.
OTHER INCOME AND EXPENSES
Other income and expenses for the three months ended September 30, 1998 was a
net other income of $26.1 million compared to a net expense of $3.9 million in
the three months ended September 30, 1997. The increase is primarily due to the
a gain of $31.2 million on the sale of substantially all of the assets of
Genzyme's research products business to TECHNE in July 1998 (the "TECHNE Sale"),
offset in part by losses from unconsolidated affiliates. Equity in net loss of
Genzyme's unconsolidated affiliates increased from $3.4 million for the three
months ended September 30, 1997 to $6.5 million for the three months ended
September 30, 1998. The change is primarily due to: (i) increased losses from
GTC; (ii) Genzyme's portion of the losses resulting from Genzyme's joint venture
with GelTex for the development and commercialization of RenaGel[R] non-absorbed
phosphate binder ("RenaGel LLC"), which was established on June 17, 1997; (iii)
Genzyme's portion of the losses resulting from Pharming/Genzyme LLC, Genzyme's
joint venture with Pharming for the development and commercialization of hAG as
a treatment for Pompe's disease which became effective on October 9, 1998; (iv)
Genzyme's portion of the losses resulting from Diacrin/Genzyme LLC, Genzyme's
joint venture with Diacrin, Inc. for the development and commercialization of
products and processes using porcine fetal cells for the treatment of
Parkinson's and Huntington's diseases in humans which was established on October
1, 1996; and (v) Genzyme's portion of the losses resulting from BioMarin/Genzyme
LLC, Genzyme's joint venture with BioMarin for the development and
commercialization of alpha-L-iduronidase for the treatment of MPS I, which was
established on September 14, 1998. For the three months ended September 30,
1998, Genzyme recorded minority interest of $1.0 million, representing GTC's
portion of the results of ATIII LLC for the period then ended. There was no
comparable amount in the corresponding period of last year.
Other income and expenses for the nine months ended September 30, 1998 was a net
other income of $18.4 million compared to a net expense of $8.1 million in the
nine months ended September 30, 1997. The increase is primarily due to the
TECHNE Sale, offset in part by increased losses from unconsolidated affiliates.
Equity in net loss of Genzyme's unconsolidated affiliates increased from $7.7
million for the nine months ended September 30, 1997 to $18.1 million for the
nine months ended September 30, 1998. The change is primarily due to increased
losses from GTC, Genzyme's portion of the losses of RenaGel LLC,
Pharming/Genzyme LLC, Diacrin/Genzyme LLC and BioMarin/Genzyme LLC. These losses
were offset in part by a gain of $2.4 million on Genzyme's investment in GTC due
to issuance by GTC of shares of its common stock, which was recorded in June
1998. For the nine months ended September 30, 1998, Genzyme recorded minority
interest in the results of ATIII LLC of $2.7 million, representing GTC's portion
of the losses of the joint venture for the first nine months of 1998. There was
no comparable amount in the corresponding period of last year.
Interest income for the three months ended September 30, 1998 increased to $7.4
million from $2.8 million in the corresponding period of 1997 due to higher
average cash balances resulting primarily from the proceeds from the issuance
of the GGD Notes in May 1998. Interest expense for the three months ended
September 30, 1998 increased to $6.9 million from $3.3 million in the same
period of 1997 due to additional interest expense recorded as a result of the
issuance of the GGD Notes in May 1998.
Interest income for the nine months ended September 30, 1998 increased to $16.4
million from $8.1 million in the same period of 1997 due to higher average cash
balances resulting primarily from the proceeds from the issuance of the GGD
Notes in May 1998. Interest expense for the nine months ended September 30,
1998 increased to $16.1 million from $8.5 million in the corresponding period
of 1997 due to additional interest expense recorded as a result of the issuance
of the GGD Notes in May 1998 and interest related to the GMO Debentures issued
in August 1997.
The tax provisions for the three and nine months ended September 30, 1998 and
1997 vary from the U.S. statutory tax rate because of the provision for state
income taxes, nondeductible interest, the use of a foreign sales corporation to
effect overseas sales, nondeductible amortization of intangibles, tax credits
and Genzyme's share of the losses of unconsolidated subsidiaries. The effective
tax rate was 41.4% and 41.2%, respectively, for the three and nine months ended
September 30, 1998 compared to 39.3% and 45.4%, respectively, for the
corresponding periods in 1997.
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GENZYME GENERAL
REVENUES
Total revenues for the three and nine months ended September 30, 1998 increased
12% and 11% to $167.1 million and $490.2 million, respectively, from $148.8
million and $441.1 million, respectively, in the corresponding periods of 1997.
Product revenues for the three and nine months ended September 30, 1998
increased 15% and 14% to $152.5 million and $445.6 million, respectively, from
$132.1 million and $391.9 million, respectively, in the comparable periods of
1997.
Revenues for the Therapeutics business unit consisted primarily of sales of
Cerezyme[R] enzyme and Ceredase[R] enzyme. Therapeutics sales increased 23% for
each of the three and nine months ended September 30, 1998 to $107.4 million and
$305.5 million, respectively, from $87.4 million and $247.8 million,
respectively, in the corresponding periods of 1997. The increases are due to
strong international sales and the market launch of Cerezyme[R] enzyme in Japan.
Cerezyme[R] enzyme sales accounted for 86% of the combined revenues for the two
products during the third quarter of 1998. This percentage will increase as the
patient conversion process is completed. It is expected that the conversion
process will be complete by mid-1999. Combined revenues for Cerezyme[R] enzyme
and Ceredase[R] enzyme for the three and nine months ended September 30, 1998
were $105.5 million and $297.6 million, respectively, as compared to $85.6
million and $242.3 million, respectively, for the same periods of 1997. Genzyme
General's results of operations are highly dependent on these products, which
together represented 69% and 67% of product sales for the three and nine months
ended September 30, 1998, respectively, compared to 65% and 62%, respectively,
in the corresponding periods of last year.
Revenues for the Surgical Products business unit increased 11% to $27.2 million
in the three months ended September 30, 1998 from $24.6 million in the
corresponding period of last year due primarily to increased sales of
Seprafilm[R] bioresorbable membrane and increased sales from instrumentation and
sutures, offset in part by a slight decrease in sales of fluid management
products. For the nine months ended September 30, 1998 and 1997, Surgical
Products' revenues were $81.7 million and $81.6 million, respectively. Revenues
were substantially the same for these periods despite stronger sales of
Seprafilm[R] bioresorbable membrane, due primarily to a 12% reduction in sales
of fluid management products.
Revenues for the Diagnostics business unit decreased 3% to $29.6 million from
$30.4 million in the same period of last year due primarily to the sale of the
research products business on July 1, 1998, offset in part by a growth in sales
of cardiovascular products. For the nine months ended September 30, 1998, the
Diagnostics business unit's revenues declined to $91.4 million from $92.7
million in the corresponding period of 1997 despite stronger sales of
cardiovascular products due primarily to the sale of the research products
business and a reduction in genetic testing revenues.
International sales as a percentage of total product and service sales for the
three and nine months ended September 30, 1998 increased to 40% and 41%,
respectively, from 37% for both of the corresponding periods of 1997. The
increase in international sales for the three and nine months ended September
30, 1998 is due primarily to increases in the international sales of Cerezyme[R]
enzyme.
MARGINS AND OPERATING EXPENSES
Genzyme General 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. Gross margins for the quarters ended
September 30, 1998 and 1997 were 52% and 65%, respectively, and 61% and 63% for
the nine months ended September 30, 1998 and 1997, respectively. The decrease in
gross margins in the third quarter is due primarily to a decline in product
margins in each period.
Product margins for the three and nine months ended September 30, 1998 were 53%
and 63%, respectively, as compared to 68% and 66%, respectively, for the same
periods of 1997. Product margins declined in both periods despite increased
sales volume of Cerezyme[R] enzyme primarily as a result of charges recorded by
Genzyme General in the third quarter of 1998 of $25.2 million associated with
the write-down of inventories in the Therapeutics and Surgical Products business
units. The conversion of U.S. patients with Gaucher disease from Ceredase[R] to
Cerezyme[R] is scheduled for completion by the end of 1998, and a complete
conversion of patients worldwide is scheduled for mid-1999. Based on its
successful progress in converting patients from Ceredase[R] to Cerezyme[R],
Genzyme General has determined that its existing supply of finished goods of
Ceredase[R] is sufficient to meet patient needs. As a result, in the third
quarter of 1998, Genzyme General recorded a $14.8 million charge to cost of
products sold primarily for the remaining inventory used to make Ceredase[R]. In
addition, during the third quarter of 1998, Genzyme General reviewed its
requirements to support the Sepra Products. As a result, in the third quarter of
1998, Genzyme General recorded a $10.4 million charge to cost of products sold
to reduce Sepra Products inventory amounts to net realizable value.
Without these other charges, product margins would have been 70% and 68% for the
three and nine months ended September 30, 1998, respectively. Product margins,
without other charges increased in both periods due to increased sales of
Cerezyme [R] enzyme.
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<PAGE> 33
Genetic testing service margins for the three and nine months ended
September 30, 1998 were 35% and 38%, respectively, compared to 36% and 37%,
respectively, in the same periods of 1997.
SG&A expenses and amortization of intangibles for the three months ended
September 30, 1998 increased slightly to $47.0 million from $46.8 million for
the same period in 1997. SG&A expenses and amortization of intangibles for the
nine months ended September 30, 1998 increased 9% to $146.5 million from $134.9
million in the corresponding period of 1997. The increase for both periods was
due primarily to increased staffing in support of the growth in several product
lines.
Research and development expenses for the three months ended September 30, 1998
were $25.6 million compared to $18.5 million for the three months ended
September 30, 1997, an increase of 38%, due primarily to a $2.5 million increase
in Genzyme General's research and development spending and $2.9 million of
additional research and development expenses resulting from the consolidation of
the results of ATIII LLC and for which there were no comparable amounts in the
same period of 1997. In addition, during the third quarter of 1998, Genzyme
wrote-off certain costs related to equipment used to manufacture Sepra Products
totaling $1.7 million. For the nine months ended September 30, 1998, research
and development expenses were $65.1 million compared to $54.8 million for the
same period of 1997, an increase of 19%, due primarily to $7.7 million of
research and development expenses resulting from the consolidation of the
results of ATIII LLC and a $1.7 million charge to research and development
expense for certain costs related to equipment used to manufacture Sepra
Products for which there were no comparable amounts in the corresponding
period of 1997. For the nine months ended September 30, 1998 Genzyme General's
research and development spending increased $0.9 million.
OTHER INCOME AND EXPENSES
Other income and expenses for the three months ended September 30, 1998 was a
net other income of approximately $29.2 million compared to net other expense of
approximately $1.3 million in the three months ended September 30, 1997. The
increase is primarily due to a $31.2 million gain on the sale of substantially
all of the assets of the research products business in the third quarter of 1998
and increased interest income due to higher average cash balances, offset in
part by increased losses from unconsolidated affiliates and increased interest
expense resulting from the issuance in May 1998 of the GGD Notes. Equity in net
loss of Genzyme's unconsolidated affiliates increased from $1.7 million in the
three months ended September 30, 1997 to $4.7 million for the three months ended
September 30, 1998. The change is primarily due to increased losses from GTC and
Genzyme's portion of the losses of RenaGel LLC, Pharming/Genzyme LLC and
BioMarin/Genzyme LLC. For the three months ended September 30, 1998, Genzyme
recorded minority interest of $1.0 million, representing GTC's portion of the
results of ATIII LLC for the period then ended.
Interest income for the three months ended September 30, 1998 increased to $7.0
million from $2.4 million in the corresponding period of 1997 due to higher
average cash balances resulting primarily from the proceeds from the issuance of
the GGD Notes in May 1998. Interest expense for the three months ended September
30, 1998 increased to $5.3 million from $2.0 million in the same period of 1997
due to additional interest expense recorded as a result of the issuance of the
GGD Notes in May 1998.
Other income and expenses for the nine months ended September 30, 1998 was a net
other income of approximately $28.7 million compared to a net other expense of
approximately $1.3 million in the nine months ended September 30, 1997. The
change is primarily due to a $31.2 million gain on the sale of substantially all
of the assets of the research products business in the third quarter of 1998 and
increased interest income due to higher average cash balances, offset in part by
increased losses from unconsolidated affiliates and increased interest expense.
Equity in net loss of Genzyme's unconsolidated affiliates increased from $2.6
million for the nine months ended September 30, 1997 to $11.7 million for the
nine months ended September 30, 1998. The change is primarily due to increased
losses from GTC and Genzyme's portion of the losses of RenaGel LLC,
Pharming/Genzyme LLC and BioMarin/Genzyme LLC. These losses were offset by a
$2.4 million gain on Genzyme General's investment in GTC, due to issuance by GTC
of shares of its common stock, which was recorded in the nine months ended
September 30, 1998. For the nine months ended September 30, 1998, Genzyme
recorded minority interest of $2.7 million, representing GTC's portion of the
results of ATIII LLC for the period then ended.
Interest income for the nine months ended September 30, 1998 increased to $14.8
million from $7.3 million in the same period of 1997 due to higher average cash
balances resulting primarily from the proceeds from the issuance of the GGD
Notes
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<PAGE> 34
in May 1998. Interest expense for the nine months ended September 30, 1998
increased to $10.7 million from $6.0 million in the corresponding period of 1997
due to additional interest expense recorded as a result of the issuance of the
GGD Notes in May 1998.
The tax provisions for the three and nine months ended September 30, 1998 vary
from the U.S. statutory tax rate because of the provision for state income
taxes, the use of a foreign sales corporation to effect overseas sales,
nondeductible amortization of intangibles, tax credits and Genzyme General's
share of the losses of unconsolidated subsidiaries. The effective tax rate for
the three months ended September 30, 1998 was 39.2%, a slight increase from
38.6% for the same period of 1997. For the three months ended September 30,
1998, tax benefits allocated from GTR and GMO of $4.7 million and $1.2 million,
respectively, reduced Genzyme General's tax rate to 25.9% and in the
corresponding period of 1997, tax benefits allocated from GTR and GMO of $4.2
million and $1.1 million, respectively, reduced Genzyme General's tax rate to
21.2%. The effective tax rate for the nine months ended September 30, 1998 was
38.8% as compared to 38.5% in the same period of 1997. For the nine months ended
September 30, 1998, tax benefits allocated from GTR and GMO of $5.2 million and
$12.5 million, respectively, reduced Genzyme General's tax rate to 23.5% and in
the corresponding period of 1997, tax benefits allocated from GTR and GMO of
$13.1 million and $1.3 million, respectively, reduced Genzyme General's tax rate
to 22.2%.
GENZYME TISSUE REPAIR
REVENUES
Service revenues for the three and nine months ended September 30, 1998 were
$4.5 million and $12.4 million, respectively, representing increases of 45% and
61% over the same periods in 1997. Sales of Carticel(TM) AuCC were $2.7 million
and $7.7 million for the three and nine months ended September 30, 1998 as
compared to $1.7 million and $4.4 million for the three and nine months ended
September 30, 1997, representing increases of 60% and 75%, respectively. The
growth in Carticel(TM) AuCC sales is primarily attributable to increased market
penetration and the number of orthopedic surgeons trained in the technique as
well as an increase in reimbursement and policy coverage by insurance companies.
Sales of the Epicel(TM) service increased 27% and 42%, respectively, to $1.7
million and $4.7 million in the three and nine months ended September 30, 1998,
respectively, from $1.4 million and $3.3 million in the same periods of 1997, in
each case due to an improvement in marketing and reimbursement efforts.
MARGINS AND OPERATING EXPENSES
GTR's gross margins for the three and nine months ended September 30, 1998 were
22% and 16%, respectively, as compared to the three months ended September 30,
1997 when the gross margin was 3% and the nine months ended September 30, 1997
when the cost of services sold exceeded revenues by 16%. These improvements in
service margins are primarily attributable to the higher sales volumes and
efficiencies gained in the manufacturing process for Carticel(TM) AuCC. GTR
management is currently implementing a cost reduction program. This program is
expected to begin to reduce operating expenses in the fourth quarter of 1998.
SG&A expenses were $6.0 million and $18.4 million for the three and nine months
ended September 30, 1998, respectively, as compared to $6.4 million and $19.0
million in the comparable periods of last year, representing decreases of 5% and
4%, respectively. The decreases are attributable to decreased marketing for
Carticel(TM) AuCC. GTR incurs direct SG&A charges as well as an SG&A charge from
Genzyme General for SG&A work performed by Genzyme General on behalf of GTR
based on actual amounts incurred. In the three and nine months ended September
30, 1998, $1.6 million and $4.9 million, respectively, of SG&A services were
provided by Genzyme General as compared to $1.8 million and $5.7 million for the
same periods of 1997. These changes were due to decreases in expenses incurred
in connection with the marketing of Carticel(TM) AuCC and the costs incurred in
the first quarter of 1997 related to the submission of the BLA for Carticel(TM)
AuCC with the FDA.
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<PAGE> 35
Research and development expenses for the three and nine months ended September
30, 1998 were $2.6 million and $8.5 million, respectively, compared to $2.7
million and $7.7 million in the comparable periods of 1997 representing a 4%
decrease for the three months ended September 30, 1998 and an 11% increase for
the nine months ended September 30, 1998. The increase in the nine months ended
September 30, 1998 was primarily due to spending on Carticel(TM) AuCC. In the
three and nine months ended September 30, 1998, $2.0 million and $6.5 million,
respectively, of research and development services were provided to GTR by
Genzyme General, compared to $2.0 million and $5.4 million in the same periods
of 1997, due to increased support for the various Carticel(TM) programs.
OTHER INCOME AND EXPENSES
Interest income was $0.3 million for both the three months ended September 30,
1998 and September 30, 1997 and $1.0 million for the nine months ended September
30, 1998 compared to $0.6 million for the same period of 1997, an increase of
47%. The increase was due primarily to higher average cash balances resulting
from the public offering of GTR Stock in November 1997.
Interest expense was $0.5 million and $2.0 million for the three and nine months
ended September 30, 1998, respectively, as compared to $0.8 million and $2.0
million for the same periods of 1997. The decrease in interest expense in the
three months ended September 30, 1998 as compared to the three months ended
September 30, 1997, was the result of the completion, in the second quarter of
1998, of the accretion of the conversion feature related to the March 1997
addition of $13.0 million of debt from the GTR Note.
On October 1, 1996, Diacrin/Genzyme LLC was established as a joint venture
between GTR and Diacrin, Inc. to develop and commercialize products and
processes using porcine fetal cells for the treatment of Parkinson's disease and
Huntington's disease in humans. Under the terms of the joint venture agreement,
GTR provided 100% of the initial $10.0 million of the funding requirements and
will provide 75% of the next $40.0 million of funding requirements for products
to be developed by the joint venture. Thereafter, all costs will be shared
equally by the two parties. In the three and nine months ending September 30,
1998, GTR provided $1.6 million and $5.0 million, respectively, of funding to,
and realized net losses of $1.6 million and $5.2 million, respectively, from the
joint venture as compared to funding of $1.0 million and $5.1 million,
respectively, and net losses of $1.5 million and $4.9 million, respectively, for
the corresponding periods in 1997.
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<PAGE> 36
GENZYME MOLECULAR ONCOLOGY
REVENUES
GMO recorded service revenues of $0.8 million and $2.0 million for the three and
nine months ended September 30, 1998, respectively, as compared to $0.1 million
for both the three and nine months ended September 30, 1997. Service revenues
consisted of SAGE(TM) service contracts with third parties. GMO also recorded
research and development revenues of $1.2 million and $4.5 million in the three
and nine months ended September 30, 1998, respectively, as compared to $0.1
million in both the three and nine months ended September 30, 1997. These
revenues consisted of gene therapy research and development contracts with
strategic partners and work performed on behalf of StressGen/Genzyme LLC.
MARGINS AND OPERATING EXPENSES
For the three and nine months ended September 30, 1998, GMO recorded cost of
revenues of $1.2 million and $3.5 million, respectively, as compared to $0.1
million in both the three and nine months ended September 30, 1997. Cost of
revenues consisted of work performed related to the development of gene
therapies on behalf of StressGen/Genzyme LLC, as well as development efforts
attributable to gene therapy and SAGE(TM) contracts with third parties.
GMO recorded $2.1 million and $5.3 million of SG&A expenses in the three and
nine months ended September 30, 1998, respectively, as compared to $0.5 million
and $0.8 million in the comparable periods in 1997. The increases from 1997 are
due primarily to increased administrative support corresponding with the growth
of GMO's business in the areas of gene therapy and drug discovery and increased
legal fees related to patents. The increases are also attributable to GMO's
write off of capitalized costs of $0.6 million in connection with a registration
statement on Form S-3 which was withdrawn in September 1998.
Research and development expenses incurred by GMO in the three and nine months
ended September 30, 1998 were $3.2 million and $8.8 million, respectively,
compared to $1.6 million and $3.2 million in the same periods of 1997. The
increases in research and development costs relate to increases in research
personnel and other costs associated with the continued development of GMO's
drug discovery, gene therapy and SAGE(TM) programs.
GMO's amortization of intangibles for the three and nine months ended September
30, 1998 were $3.0 million and $9.0 million, respectively, as compared to $1.8
million and $2.0 million during the same periods in 1997. Amortization of
intangibles is attributable to certain intangible assets acquired in connection
with the acquisition of PharmaGenics on June 18, 1997.
In the second quarter of 1997, GMO recorded a $7.0 million charge resulting from
the value assigned to PharmaGenics programs which were still in the
developmental stage and for which there was no alternative use. There were no
similar amounts in 1998.
OTHER INCOME AND EXPENSES
Interest income and interest expense were $0.1 million and $1.1 million,
respectively, for the three months ended September 30, 1998, and were $0.6
million and $3.3 million, respectively, for the nine months ended September 30,
1998. GMO's interest income and interest expense for both the three and nine
months ended September 30, 1997, were $0.2 million and $0.5 million,
respectively. The interest income results from higher average cash balances due
to the issuance of the GMO Debentures. The interest expense consists of interest
and the related accretion of the conversion feature of the GMO Debentures.
On July 31, 1997, StressGen/Genzyme LLC was established as a joint venture among
Genzyme, StressGen and CMDF to develop stress gene therapies for the treatment
of cancer. GMO recorded an equity in the loss of StressGen/Genzyme LLC of $0.3
million and $1.2 million in the three and nine months ended September 30, 1998,
respectively as compared to $0.1 million for both the three and nine months
ended September 30, 1997.
GMO recorded a tax benefit of $0.7 million and $2.0 million for the three and
nine months ended September 30, 1998, respectively, and $0.4 million for both
the three and nine months ended September 30, 1997. This tax benefit is the
result of the amortization of the deferred tax liability established upon the
acquisition of PharmaGenics.
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<PAGE> 37
LIQUIDITY AND CAPITAL RESOURCES
GENZYME CORPORATION AND SUBSIDIARIES
As of September 30, 1998, Genzyme had cash, cash equivalents, and short- and
long-term investments of $555.1 million, an increase of $308.7 million from
December 31, 1997. Operating and financing activities provided $75.5 million and
$261.4 million of cash, respectively, investing activities used $360.6 million
and fluctuations in exchange rates caused a reduction in cash of $0.4 million.
In the nine months ended September 30, 1998, financing activities provided $34.9
million of cash proceeds from the exercise of stock options and $243.5 million
from the issuance of the GGD Notes, net of the initial purchasers' discount and
offering costs of approximately $6.5 million, and used $19.1 million for the
repayment of debt and capital lease obligations.
Genzyme has a $225.0 million revolving credit facility with a syndicate of
commercial banks (the "Revolving Credit Facility"). At September 30, 1998,
$100.0 million was outstanding under the Revolving Credit Facility, of which
$82.0 million was allocated to Genzyme General and $18.0 million was allocated
to GTR. In the nine months ended September 30, 1998, investing activities
provided $24.8 million of cash from the sale of the primary assets of the
research products business $2.0 million of cash from the repayment of loans by
affiliates and $0.9 million from the sale of property, plant and equipment.
Investing activities used $321.0 million for purchases of investments, net of
sales and maturities; $25.0 million of cash to fund capital expenditures; $22.8
million of cash to fund additional equity investments in unconsolidated
affiliates; $12.0 million of cash to fund Genzyme's investments in joint
ventures; and $8.3 million of cash to fund acquisitions for the Diagnostics
business unit's genetic testing services group.
In May 1998, Genzyme completed the private placement of the GGD Notes resulting
in net proceeds (after giving effect to the initial purchasers' discount and
offering costs) to Genzyme of $243.5 million. The GGD Notes bear interest at
5.25% per annum and interest is payable semi-annually on June 1 and December 1
of each year, commencing on December 1, 1998. As a result of the GMO Dividend,
holders of the GGD Notes will also be entitled to receive 0.10805 shares of GMO
Stock for each share of GGD Stock issued upon conversion. The GGD Notes are
convertible, at any time at or before maturity (unless previously redeemed) into
shares of GGD Stock at a conversion price of $39.60 per share, subject to
adjustment in certain events. Following the GMO Dividend, holders of the GGD
Notes will also be entitled to receive .10805 share of GMO Stock for each share
of GGD Stock issued upon conversion. The GGD Notes may not be redeemed prior to
June 10, 2001 and are redeemable, subject to certain subordination provisions,
on such date and thereafter at the option of Genzyme, as a whole or from time to
time in part, at the following prices (expressed as percentages of the principal
amount) plus accrued interest to, but not including, the redemption date:
102.63% if redeemed on or before May 31, 2002; 101.75% if redeemed between June
1, 2002 and May 31, 2003; 100.88% if redeemed between June 1, 2003 and May 31,
2004; and 100% if redeemed on or after June 1, 2004.
GENZYME GENERAL
As of September 30, 1998, Genzyme General had cash, cash equivalents, and
short- and long-term investments of $528.3 million, an increase of $335.1
million from December 31, 1997. Operating and financing activities provided
$114.0 million and $259.6 million of cash, respectively, investing activities
used $384.3 million and fluctuations in exchange rates caused a reduction in
cash of $0.4 million. In the nine months ended September 30, 1998, financing
activities provided $33.0 million of cash proceeds from the exercise of stock
options and $243.5 million from the issuance of the GGD Notes, net of the
initial purchasers' discount and offering costs of approximately $6.5 million,
and used $14.1 million for the repayment of debt and capital lease obligations.
At September 30, 1998, $82.0 million of funds allocated to Genzyme General
under the Revolving Credit Facility remained outstanding. In the nine months
ended September 30, 1998, investing activities provided $24.8 million of cash
from the sale of the primary assets of the research products business, $2.0
million of cash from the repayment of loans by affiliates and $0.9 million from
the sale of property, plant and equipment. Investing activities used $334.1
million for purchases of investments, net of sales and maturities; $40.5
million of cash to fund capital expenditures; $22.8 million of cash to fund
additional equity investments in unconsolidated affiliates; and $7.0 million of
cash to fund investments in joint ventures.
In June 1998, the Genzyme Board increased the GTR Equity Line from $13.0 million
to $50.0 million. Under the terms of the GTR Equity Line, GTR may draw down
funds as needed on a quarterly basis in exchange for an increase in the number
of GTR Designated Shares. GTR has drawn approximately $7.0 million under this
equity line to date and 727,455 GTR Designated Shares have been reserved for
issuance.
-37-
<PAGE> 38
In March 1997, the Genzyme Board approved the allocation of up to $25.0 million
in cash from Genzyme General to GMO under the GMO Equity Line, subject to a
dollar-for-dollar reduction by the proceeds of outside financing received by
GMO. As a result of the issuance of the GMO Debentures, the amount available
under the GMO Equity Line was reduced to $5.0 million. In September 1998, GMO
made a draw of the remaining $5.0 million under the GMO Equity Line, thus
reducing the amount available under the GMO Equity Line to zero. As a result,
GMO has reserved for future issuance approximately 714,000 GMO Designated
Shares.
In August 1998, the Genzyme Board approved an additional allocation by Genzyme
General, separate from the GMO Equity Line, of up to $30.0 million in cash to
GMO in exchange for an increase in the number of GMO Designated Shares. GMO has
not yet drawn any funds under this arrangement. Once GMO Stock becomes publicly
traded on November 16, 1998, the rate of exchange will be determined by dividing
the size of the draw by the average market value of one share of GMO Stock
during the 20 trading days prior to the date the funds are drawn.
Effective August 1998, all of the holders of the GMO Debentures exercised their
option to exchange the GMO Debentures, plus accrued interest of $1.2 million,
into the GGD Debenture. Approximately 3,029,000 GMO Designated Shares were
reserved in connection with this exchange. Most of these GMO Designated Shares
will be distributed as part of the GMO Dividend.
In September 1998, the Genzyme Board approved the exchange of a Subordinated
Convertible Promissory Note due from GMO to Genzyme General in the amount of
$2,450,000, plus accrued interest of $246,080, for approximately 386,000 GMO
Designated Shares. Most of these shares will also be distributed to Genzyme
General shareholders as part of the GMO Dividend.
Management of Genzyme General believes that its available cash, investments and
cash flow from product and service sales will be sufficient to finance its
planned operations and capital requirements for the foreseeable future. Although
Genzyme General currently has substantial cash resources, it has committed to
utilize a portion of its resources for certain purposes, such as (i) making
certain payments to third parties in connection with strategic collaborations,
(ii) continuing the development of the Sepra Products, (iii) expanding its
facilities and (iv) continued marketing of Carticel[TM] AuCC and the
development, production and marketing of other products through GTR. Genzyme
General's cash resources will also be diminished upon repayment of amounts
borrowed, plus accrued interest, under the Revolving Credit Facility. Pursuant
to the terms of the GGD Debentures and the GGD Notes, the holders will, in some
circumstances, receive cash from Genzyme. To the extent cash is used to pay such
principal and interest, Genzyme General's cash resources will be diminished. On
November 2, 1998, Genzyme announced that the FDA granted marketing approval for
Renagel[R] capsules. Under the terms of the joint venture agreement, Genzyme
has paid GelTex a $15.0 million milestone payment and will pay an additional
$10.0 million milestone payment on the first anniversary of FDA approval. As a
result of these commitments and contingencies, Genzyme may have to obtain
additional financing. There can be no assurance that such financing will be
available on favorable terms, if at all.
GENZYME TISSUE REPAIR
As of September 30, 1998, GTR had cash, cash equivalents and short-term
investments of $18.6 million, a decline of $13.3 million from December 31, 1997.
In the nine months ended September 30, 1998, GTR used $26.0 million of cash for
operations. Investing activities provided $21.7 million of cash which consisted
of $16.5 million from the transfer of property to Genzyme General and $10.6
million from the sale and maturity of investments, offset by $5.0 million used
to fund GTR's investment in Diacrin/Genzyme LLC. Financing activities provided
$1.8 million of cash which included $1.9 million of cash proceeds from employee
stock plans.
As of September 30, 1998, $18.0 million of funds allocated to GTR in December
1996 under the Revolving Credit Facility remained outstanding.
Management of GTR believes its available cash resources, together with amounts
available under a line of credit from Genzyme General and cash amounts provided
by Carticel(TM) AuCC and the Epicel(TM) services will be sufficient to fund
planned operations until 2000. In June 1998, the Genzyme Board increased the GTR
Equity Line from $13.0 million to $50.0 million. Under the terms of the GTR
Equity Line, GTR may draw down funds as needed on a quarterly basis in exchange
for GTR Designated Shares. The rate of exchange will be determined by dividing
the draw down amount by the average market value of a share of GTR Stock during
the 20 trading days prior to the date the funding is drawn down. Management of
GTR does not anticipate that it will need to draw down funds from the GTR Equity
Line until 1999. GTR may need to raise significant additional capital in order
to continue operations at current levels beyond 2000. GTR's plans to raise
additional capital include the consideration of the sale of additional equity
securities, additional borrowings and strategic alliances with third parties to
fund further development and marketing of existing programs. If these
initiatives are not successful, GTR may be required to delay, scale-back or
eliminate certain of its programs, or to license third parties to commercialize
technologies or products that GTR would otherwise undertake itself.
-38-
<PAGE> 39
GENZYME MOLECULAR ONCOLOGY
As of September 30, 1998, GMO had cash, cash equivalents, and short- and
long-term investments of $8.1 million, a decrease of $13.1 million from
December 31, 1997. GMO used $12.5 million for operations during the nine months
ended September 30, 1998.
In September 1998, Genzyme withdrew an amended registration statement on Form
S-3 that it had filed with the Securities and Exchange Commission in April 1998,
covering the initial public offering of 3,450,000 shares of GMO Stock. GMO
recorded a $0.6 million charge for previously capitalized costs in connection
with this offering. On November 16, 1998 Genzyme will distribute 0.10805 share
of GMO Stock for each share of GGD Stock owned on November 2, 1998, and GMO
Stock will begin trading on November 16, 1998 on the Nasdaq National Market
under the ticker symbol "GZMO". On November 16, 1998 Genzyme will also release
from escrow shares of GMO Stock held by former PharmaGenics shareholders.
Approximately 8,730,000 GMO Designated Shares will be distributed and
approximately 3,929,000 shares of GMO Stock will be released from escrow.
In August 1998, the holders of the GMO Debentures exercised their exchange
option and exchanged the GMO Debentures, plus accrued interest of $1.2 million,
for the GGD Debentures. In September 1998, the Genzyme Board approved the
exchange of a Subordinated Convertible Promissory Note due from GMO to Genzyme
General in the amount of $2,450,000, plus accrued interest of $246,080, for
approximately 386,000 GMO Designated Shares. In September 1998, GMO made a draw
of the remaining $5.0 million available under the GMO Equity Line. In August
1998, the Genzyme Board approved an additional allocation by Genzyme General of
up to $30.0 million in cash to GMO in exchange for an increase in the number of
GMO Designated Shares. This is in addition to the GMO Equity Line. GMO has not
yet drawn any funds under this arrangement.
Management of GMO currently believes that existing cash balances, revenues
generated from SAGE(TM) agreements, committed research funding from
collaborators and cash available for allocation to GMO from Genzyme General
pursuant to a $30.0 million equity line of credit from Genzyme General will
enable GMO to maintain its current and planned operations through 2000.
Substantial additional funds will be required to complete development and
commercialization of GMO's products and services (other than SAGE(TM) services).
In addition, GMO's cash requirements may vary materially from those now planned
as a result of numerous factors, including progress of GMO's research and
development programs, achievement of milestones under strategic alliance
arrangements , the ability of GMO to establish and maintain additional strategic
alliances and licensing agreements, the progress of development efforts of GMO's
strategic partners, competing technological and market developments, the costs
involved in enforcing patent claims and other intellectual property rights and
the cost and timing of regulatory approvals. Insufficient funds may require GMO
to delay, scale back or eliminate certain of its programs or to license third
parties to commercialize technologies or products that GMO would otherwise
undertake itself.
YEAR 2000 COMPLIANCE
Many computer systems and other equipment with embedded chips or processors
experience problems handling dates beyond the year 1999. As a result, older
programs may experience operating difficulties that cause date-sensitive
transaction errors or failures unless they are modified or upgraded to
adequately address the problem. The potential impact of the Year 2000 problem
cannot be fully appreciated at this time.
The Company has implemented a Year 2000 compliance program intended to identify
and minimize exposure to Year 2000 problems. This program involves four phases:
(a) conducting an inventory of the Company's Year 2000 issues; (b) prioritizing
identified systems, programs and equipment based on materiality to the Company's
operations; (c) assessing Year 2000 compliance; and (d) resolving Year 2000
issues through upgrades, replacements or repairs. The Company places each
identified system or piece of equipment in one of seven categories: (i) mission
critical, (ii) mission important, (iii) process critical, (iv) process
important, (v) process convenient, (vi) reporting and (vii) other. The
compliance program is being conducted by each division, business unit and
department within the Company and is generally being coordinated by an employee
who is dedicated to this program.
The Company is completing the first two phases of the compliance program. Its
Year 2000 exposures are primarily in the areas of information systems, financial
and administrative applications, manufacturing applications and equipment, and
research and development support systems and equipment. The Company is also
currently assessing compliance of identified systems and equipment. Completion
of the first three phases is scheduled for the end of the first quarter of 1999
for all systems and equipment deemed critical or important under the Company's
operations categories (i)-(iii), and the Company plans to resolve the Year 2000
issues for such systems and equipment by mid 1999. The Company is also
developing contingency plans with respect to categories (i) and (ii). The
Company plans to resolve Year 2000 issues for systems and equipment in
categories (iv) and (v) by the end of the third quarter of 1999, and for systems
and requirements in categories (vi) and (vii) as time permits.
-39-
<PAGE> 40
Concurrently with the conduct of the Company's internal compliance program, the
Company is also in the process of surveying certain third parties with whom the
Company conducts business about their Year 2000 readiness. These third parties
include significant customers, suppliers, research or collaborative partners,
service providers and distributors considered to be critical to the Company's
business. The Company will attempt to mitigate its risks with respect to such
third parties' Year 2000 compliance. This may involve efforts such as
identifying and securing alternative resources and developing joint contingency
plans with critical suppliers.
The Company may incur significant costs in assessing, resolving and mitigating
Year 2000 compliance issues. Each department, business unit and division of the
Company incurs its own costs in connection with readiness efforts. The Company
does not separately track the internal costs of its Year 2000 compliance efforts
and therefore these costs are unknown. The Company estimates that to date it has
spent approximately $0.5 million in replacing, upgrading or repairing systems or
equipment. Although the aggregate additional costs of the Company's Year 2000
program cannot be known at this time, it is currently expected to be less than
$1.5 million. The actual costs will depend on numerous factors, including
without limitation, the costs of replacing, upgrading or repairing systems,
software and equipment, internal staff costs, and consulting fees and expenses.
All costs are expected to be funded through operations.
There can be no assurance that the Company's Year 2000 issues will be resolved
by the end of 1999. Failure to identify and resolve all significant Year 2000
issues in a timely manner could result in interruptions in, or failures of,
certain normal business activities or operations that may have a material
adverse effect on the Company's business, results of operations and financial
condition. The Company's compliance program is an ongoing process, and the
estimated costs and timetables discussed above are subject to change. The
failure of third parties that are significant to the Company's business to be
Year 2000 compliant could also have a material adverse effect on the Company's
business, results of operations and financial condition.
EURO-THE NEW EUROPEAN CURRENCY
On January 1, 1999, eleven of the fifteen member countries of the European Union
are scheduled to establish fixed conversion rates between their existing
sovereign currencies and the Euro. The participating countries have agreed to
adopt the Euro as their common legal currency on that date. The Euro will then
trade on currency exchanges and be available for non-cash transactions. The
participating countries will issue sovereign debt exclusively in Euros, and will
redenominate outstanding sovereign debt. At that time, the participating
countries will no longer control their own monetary policies by directing
independent interest rates for the legacy currencies. Instead, the authority to
direct monetary policy, including money supply and official interest rates for
the Euro will be exercised by the new European Central Bank.
Following the introduction of the Euro, the legacy currencies are scheduled to
remain legal tender in the participating countries as denominations of the Euro
between January 1, 1999 and January 1, 2002. During this transition period,
public and private parties may pay for goods and services using either the Euro
or the participating country's legacy currency on a "no compulsion, no
prohibition" basis. However, conversion rates no longer will be computed
directly from one legacy currency to another. Instead, a triangular process will
apply whereby an amount denominated in one legacy currency will first be
converted into the Euro. The resultant Euro-denominated amount will then be
converted into the second legacy currency.
The Company is addressing the business implications of conversion to the Euro,
including (i) technical adaptation of information technology and other systems
to accommodate Euro-denominated transactions, (ii) long term competitive
implications of the conversions, (iii) the effect on market risk with respect to
currency exchange, derivatives and other financial instruments, (iv) tax issues
and (v) whether any contracts between the Company and its suppliers,
distributors and other partners require amendment. At this time, management is
in the process of evaluating the impact of this conversion on the Company.
NEW ACCOUNTING PRONOUNCEMENTS
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued SOP 98-5. SOP 98-5 requires all
costs of start-up activities (as defined by SOP 98-5) to be expensed as
incurred. Genzyme has not assessed the impact of SOP 98-5 on its consolidated
financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS 133. SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. SFAS 133
requires companies to recognize all derivatives as either assets or liabilities,
with the instruments measured at fair value. The accounting for changes in fair
value, gains or losses, depends on the intended use of the derivative and its
resulting designation. The statement is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. Genzyme will adopt SFAS 133 by
January 1, 2000. Genzyme is evaluating SFAS 133 to determine its impact on its
consolidated financial statements.
-40-
<PAGE> 41
SUBSEQUENT EVENTS
Effective October 9, 1998, Genzyme and Pharming formed Pharming/Genzyme LLC, a
joint venture to develop and commercialize worldwide hAG as a treatment for
Pompe's disease. Under the terms of the agreement, Genzyme General will fund the
first $14.0 million of development costs. Pharming/Genzyme LLC development costs
including certain costs incurred by Pharming on behalf of the joint venture
between June 1, 1998 and October 9, 1998 in excess of $14.0 million will be
funded equally by Genzyme General and Pharming. Genzyme General will make a
$7.0 million milestone payment to Pharming upon receipt of FDA approval of a BLA
for hAG for the treatment of Pompe's disease.
In October 1998, GMO licensed its p53 gene therapy patent rights to
Schering-Plough Corporation. Under terms of the licensing agreement, GMO
received a $5.0 million up-front payment. There could be additional patent,
product development and sales milestone fees, in addition to royalties on
product sales, associated with Schering-Plough's development and
commercialization of a p53 gene therapy product.
On November 2, 1998, Genzyme General and GelTex announced that the FDA granted
marketing approval for RenaGel(R) capsules for the reduction of serum phosphorus
in patients with end-stage renal disease. Genzyme made a $15.0 million
payment to GelTex in connection with the receipt of FDA approval of RenaGel(R)
capsules, and is required to make an additional $10.0 million payment to GelTex
on the first anniversary of FDA approval.
In February 1997, Genzyme issued a $13.0 million note convertible into shares of
GTR Stock (the "GTR Note"). The GTR Note bears interest at the rate of 5% per
year. On November 2, 1998, the holder of the GTR Note converted $600,000 of the
principal amount of the GTR Note in exchange for 223,405 shares of GTR Stock.
GTR paid $1.1 million of interest expense to the holder in connection with this
conversion.
On November 16, 1998, Genzyme will distribute 0.10805 share of GMO Stock for
each share of GGD Stock owned on November 2, 1998, and GMO Stock will begin
trading on the Nasdaq National Market under the ticker symbol "GZMO". On
November 16, 1998, Genzyme will also release from escrow shares of GMO stock
Oncology shares held by former PharmaGenics shareholders. Approximately
8,370,000 GMO Designated Shares will be distributed and approximately 3,929,000
shares of GMO Stock will be released from escrow.
ITEM 3. QUANTITATIVE AND QUALITATIVE ANALYSIS OF MARKET RISK
Not applicable.
- 41 -
<PAGE> 42
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, SEPTEMBER 30, 1998
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In August 1998, all of the holders of the GMO Debentures exercised their
exchange option and converted the GMO Debentures, plus accrued interest of
$1.2 million, for the GGD Debentures. The GGD Debentures have an aggregate
principal amount of $21.2 million, bear interest at 5% and mature on August 29,
2003. The GGD Debentures are convertible into shares of GGD Stock at a
conversion price of $33.67 per share, subject to adjustment for certain events.
The conversion price will be adjusted to reflect the distribution of GMO
Designated Shares on November 16, 1998.
Genzyme believes the issuance of the GGD Debentures in exchange for the GMO
Debentures was exempt from registration under Section 3(a)(9) of the Securities
Act for securities exchanged with existing shareholders where no remuneration
is paid for soliciting the exchange and qualifies as a transaction by an issuer
not involving a public offering within the meaning of Section 4(2) of the
Securities Act based on the number and nature of the holders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Genzyme General Division Convertible Debenture dated August 29,
1998. Filed as Exhibit 4.15 to Genzyme's Registration Statement on
Form S-3 (File No. 333-64901) and incorporated herein by reference.
4.2 Registration Rights Agreement dated as of August 29, 1997 by and
between Genzyme and the entities listed on the signature pages
thereto. Filed as Exhibit 10.8 to Genzyme's Form 10-Q for the quarter
ended September 30, 1997, and incorporated herein by reference.
27.1 Financial Data Schedules for Genzyme for the nine months
ended September 30, 1998 (for EDGAR filing purposes only). Filed
herewith.
27.2 Financial Data Schedules for Genzyme for the nine months
ended September 30, 1997 (for EDGAR filing purposes only). Filed
herewith.
(b) Report on Form 8-K
On October 27, 1998, Genzyme filed a Current Report on Form 8-K to
announce that on October 15, 1998 its Board of Directors declared a
tax-free dividend of shares of GMO Stock payable on November 16, 1998
to Genzyme General shareholders of record on November 2, 1998. Genzyme
General stockholders will receive 0.10805 share of GMO Stock for each
share of GGD Stock owned, and cash will be paid for fractional shares
at the rate of $7.00 per share. In addition, Genzyme announced that on
November 16, 1998, it will release from escrow approximately 3.9
million shares of GMO Stock that were issued to the former shareholders
of PharmaGenics in June 1997 when Genzyme acquired PharmaGenics and
formed GMO. Beginning November 16, 1998, GMO Stock will be listed on
the Nasdaq National Market under the symbol "GZMO".
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<PAGE> 43
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, SEPTEMBER 30, 1998
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 16, 1998 By: /s/ David J. McLachlan
-----------------------------------
David J. McLachlan
Duly Authorized Officer and
Executive Vice President, Finance;
Chief Financial Officer
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<PAGE> 44
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, SEPTEMBER 30, 1998
EXHIBIT INDEX
4.1 Genzyme General Division Convertible Debenture dated August 29, 1998.
Filed as Exhibit 4.15 to Genzyme's Registration Statement on Form S-3
(file No. 333-64901) and incorporated herein by reference.
4.2 Registration Rights Agreement dated as of August 29, 1997 by and
between Genzyme and the entities listed on the signature pages
thereto. Filed as Exhibit 10.8 to Genzyme's Form 10-Q for the
quarter ended September 30, 1997, and incorporated herein by reference.
27.1 Financial Data Schedules for Genzyme for the nine months ended
September 30, 1998 (for EDGAR filing purposes only). Filed herewith.
27.2 Financial Data Schedules for Genzyme for the nine months ended
September 30, 1997 (for EDGAR filing purposes only). Filed herewith.
-44-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
UNAUDITED FINANCIAL STATEMENTS OF GENZYME CORPORATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B)
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 78,333
<SECURITIES> 135,810
<RECEIVABLES> 147,194
<ALLOWANCES> 18,605
<INVENTORY> 105,732
<CURRENT-ASSETS> 519,531
<PP&E> 523,853
<DEPRECIATION> 140,534
<TOTAL-ASSETS> 1,624,130
<CURRENT-LIABILITIES> 147,648
<BONDS> 0
0
0
<COMMON> 1,042
<OTHER-SE> 1,076,471
<TOTAL-LIABILITY-AND-EQUITY> 1,624,130
<SALES> 445,630
<TOTAL-REVENUES> 508,819
<CGS> 166,470
<TOTAL-COSTS> 203,015
<OTHER-EXPENSES> 274,596
<LOSS-PROVISION> 4,101
<INTEREST-EXPENSE> 16,068
<INCOME-PRETAX> 60,982
<INCOME-TAX> 25,135
<INCOME-CONTINUING> 35,847
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,847
<EPS-PRIMARY> 1.13<F1>
<EPS-DILUTED> 1.09
<FN>
<F1>The earning per share figures presented on this schedule represent EPS data for
net income attributable to Genzyme General Division Common Stock ("GGD Stock").
Genzyme Corporation reports earnings based on its three tracking stocks, GGD
Stock, Genzyme Tissue Repair Division Common Stock ("GTR Stock") and Genzyme
Molecular Oncology Division Common Stock ("GMO Stock"). Therefore, consolidated
earnings per share data is not applicable. For the nine months ended September
30, 1998, Genzyme General had net income of $88,371 and net income per share of
GGD Stock - basic and diluted of $1.13 and $1.09, respectively. Net loss for
GTR for the nine months ended September 30, 1998, was $(31,213) or $(1.55) per
share of GTR Stock - basic and diluted. Net loss for GMO for the nine months
ended September 30, 1998, was $(22,067) or $(5.62) per share of GMO Stock -
basic and diluted.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
UNAUDITED FINANCIAL STATEMENTS OF GENZYME CORPORATION FOR THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 143,943
<SECURITIES> 33,494
<RECEIVABLES> 119,328
<ALLOWANCES> 0
<INVENTORY> 146,932
<CURRENT-ASSETS> 478,273
<PP&E> 507,117
<DEPRECIATION> 118,118
<TOTAL-ASSETS> 1,274,656
<CURRENT-LIABILITIES> 111,018
<BONDS> 0
0
0
<COMMON> 973
<OTHER-SE> 985,374
<TOTAL-LIABILITY-AND-EQUITY> 1,274,656
<SALES> 391,890
<TOTAL-REVENUES> 448,955
<CGS> 134,526
<TOTAL-COSTS> 170,537
<OTHER-EXPENSES> 230,182
<LOSS-PROVISION> 5,382
<INTEREST-EXPENSE> 8,543
<INCOME-PRETAX> 42,445
<INCOME-TAX> 19,252
<INCOME-CONTINUING> 23,193
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,193
<EPS-PRIMARY> 0.90<F1><F2><F3>
<EPS-DILUTED> 0.88
<FN>
<F1>Genzyme Corporation has one class of common stock which currently consists of
three series of common stock - Genzyme General Division Common Stock ("GGD
Stock"), Genzyme Tissue Repair Division Common Stock ("GTR Stock") and Genzyme
Molecular Oncology Division Common Stock ("GMO Stock"). Earnings (loss) per
share is reported separately for each series of common stock. Net income per
share for GGD Stock has been restated to conform to SFAS 128. Primary and fully
diluted net income per share of GGD Stock for the three and nine months ended
September 30, 1997 was historically reported as $0.30 and $0.87 per share.
<F2>Net loss attributable to GTR Stock for the three and nine months ended
September 30, 1997, computed to conform to SFAS 128 is the same as net loss per
share of GTR Stock for the relevant periods as computed under APB 15 as the
inclusion of certain potentially dilutive shares in the dilutive loss per share
calculation for each such period would have been anti-dilutive. Net loss
attributable to GTR Stock for the three and nine months ended September 30, 1997
was $(0.72) and $(2.47) per share, respectively.
<F3>Net loss attributable to GMO Stock for the three months ended September 30,
1997, computed to conform to SFAS 128 is the same as net loss per share of GMO
Stock for the relevant periods as computed under APB 15 as the inclusion of
certain potentially dilutive shares in the dilutive loss per share calculation
for each such period would have been anti-dilutive. Net loss attributable to
GMO for the three months ended September 30, 1997 was $(1.00) per share. Pro
forma net loss attributable to GMO Stock for the nine months ended September 30,
1997, computed to conform to SFAS 128 is the same as pro forma net loss per
share of GMO Stock for the relevant periods as computed under APB 15 as the
inclusion of certain potentially dilutive shares in the pro forma dilutive loss
per share calculation for each such period would have been anti-dilutive. Pro
forma net loss attributable to GMO for the nine months ended September 30, 1997
was $(3.29) per share.
</FN>
</TABLE>
