<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM 10-Q
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-14680
------------------------
GENZYME CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
MASSACHUSETTS 06-1047163
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
<S> <C>
ONE KENDALL SQUARE, CAMBRIDGE, MASSACHUSETTS 02139
(Address of principal executive offices) (zip code)
</TABLE>
(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 series of common
stock as of July 31, 2000:
<TABLE>
<S> <C>
Genzyme General Division Common Stock 86,328,455
Genzyme Molecular Oncology Division Common Stock 15,281,405
Genzyme Surgical Products Division Common Stock 14,957,403
Genzyme Tissue Repair Division Common Stock 28,785,846
</TABLE>
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--------------------------------------------------------------------------------
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, JUNE 30, 2000
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements, including
statements regarding our:
- planned creation of a new division and a new publicly traded stock;
- planned acquisition of Biomatrix, Inc. and related financing expectations;
- expected allocation of the new series of stock and composition of the
merger consideration;
- expected timing of the acquisition;
- expected future revenues, operations and expenditures; and
- projected cash needs.
These statements are based upon the current assumptions of our management and
are only expectations of future results. These statements are subject to risks
and uncertainties, and our actual results may differ significantly from those
that are described in this report on Form 10-Q. These risks and uncertainties
include:
- our ability to successfully complete preclinical and clinical development
of our products and services;
- our ability to manufacture sufficient amounts of our products for
development and commercialization activities;
- our ability to obtain and maintain adequate patent and other proprietary
rights protection of our products and services;
- the content and timing of decisions made by the United States Food and
Drug Administration and other regulatory agencies;
- the accuracy of our estimates of the size and characteristics of the
markets to be addressed by our products and services;
- market acceptance of our products and services;
- our ability to obtain reimbursement for our products and services from
third-party payors;
- our ability to establish and maintain licenses, strategic collaborations
and distribution arrangements;
- the continued funding of our joint ventures;
- the accuracy of our information regarding the products and resources of
our competitors and potential competitors;
- the likelihood that the stockholder approvals required to create a new
division and to complete the Biomatrix acquisition will be obtained and
the closing conditions for the merger will be satisfied or waived;
- conditions in financial markets relevant to the proposed merger and
recapitalization; and
- the operational integration of the other risks generally associated with
mergers and recapitalizations.
i
<PAGE>
For a further description of these risks and other uncertainties, we
encourage you to carefully read Exhibit 99.2, "Factors Affecting Future
Operating Results," to our Annual Report on Form 10-K for the fiscal year ended
December 31, 1999, as amended (our "1999 Form 10-K").
NOTE REGARDING REFERENCES TO GENZYME DIVISIONS AND SERIES OF STOCK
Throughout this Form 10-Q, the words "we," "us," "our" and "Genzyme" refer
to Genzyme Corporation and all of its operating divisions taken as a whole, and
"our board of directors" refers to the board of directors of Genzyme
Corporation. In addition, we refer to our four operating divisions as follows:
- Genzyme General Division = "Genzyme General;"
- Genzyme Molecular Oncology Division = "Genzyme Molecular Oncology;"
- Genzyme Surgical Products Division = "Genzyme Surgical Products;" and
- Genzyme Tissue Repair Division = "Genzyme Tissue Repair."
We currently have four designated series of common stock. Each of these
series is intended to reflect the value and track the performance of one of our
divisions. We refer to each series of common stock as follows:
- Genzyme General Division Common Stock = "Genzyme General Stock;"
- Genzyme Molecular Oncology Division Common Stock = "Molecular Oncology
Stock;"
- Genzyme Surgical Products Division Common Stock = "Surgical Products
Stock;" and
- Genzyme Tissue Repair Division Common Stock = "Tissue Repair Stock."
Holders of Genzyme General Stock, Molecular Oncology Stock, Surgical
Products Stock and Tissue Repair Stock are stockholders of Genzyme Corporation
and are subject to all of the risks and uncertainties of Genzyme Corporation
described in Exhibit 99.2 to our 1999 Form 10-K.
NOTE REGARDING INCORPORATION BY REFERENCE
The Securities and Exchange Commission ("SEC") allows us to disclose
important information to you by referring you to other documents we have filed
with the SEC. The information that we refer you to is "incorporated by
reference" into this Form 10-Q. Please read that information.
NOTE REGARDING TRADEMARKS
GENZYME-REGISTERED TRADEMARK-, CEREZYME-REGISTERED TRADEMARK-,
CEREDASE-REGISTERED TRADEMARK-, THYROGEN-REGISTERED TRADEMARK-, SEPRA
FILM-REGISTERED TRADEMARK-, CARTICEL-REGISTERED TRADEMARK- and
SNOWDEN-PENCER-REGISTERED TRADEMARK- are registered trademarks of Genzyme.
FABRAZYME-TM-, SAGE-TM-, and EPICEL-TM- are trademarks of Genzyme. GENZYME-SM-
is a service mark of Genzyme. RENAGEL-REGISTERED TRADEMARK- is a registered
trademark of GelTex Pharmaceuticals, Inc. NEUROCELL-TM--PD is a trademark of
Diacrin, Inc. ALDURAZYME-TM- is a trademark of BioMarin/Genzyme LLC. POMPASE-TM-
is a trademark of Synpac (North Carolina), Inc.
ii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
GENZYME CORPORATION AND SUBSIDIARIES
Unaudited, Consolidated Statements of Operations for the Three and
Six Months Ended June 30, 2000 and 1999........................... 1
Consolidated Balance Sheets as of June 30, 2000 (unaudited) and
December 31, 1999................................................. 3
Unaudited, Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2000 and 1999...................................... 4
Notes to Unaudited, Consolidated Financial Statements.............. 5
GENZYME GENERAL
Unaudited, Combined Statements of Operations for the Three and Six
Months Ended June 30, 2000 and 1999............................... 15
Combined Balance Sheets as of June 30, 2000 (unaudited) and
December 31, 1999................................................. 16
Unaudited, Combined Statements of Cash Flows for the Six Months
Ended June 30, 2000 and 1999...................................... 17
Notes to Unaudited, Combined Financial Statements.................. 18
GENZYME MOLECULAR ONCOLOGY
Unaudited, Combined Statements of Operations for the Three and Six
Months Ended June 30, 2000 and 1999............................... 22
Combined Balance Sheets as of June 30, 2000 (unaudited) and
December 31, 1999................................................. 23
Unaudited, Combined Statements of Cash Flows for the Six Months
Ended June 30, 2000 and 1999...................................... 24
Notes to Unaudited, Combined Financial Statements.................. 25
GENZYME SURGICAL PRODUCTS
Unaudited, Combined Statements of Operations for the Three and Six
Months Ended June 30, 2000 and 1999............................... 26
Combined Balance Sheets as of June 30, 2000 (unaudited) and
December 31, 1999................................................. 27
Unaudited, Combined Statements of Cash Flows for the Six Months
Ended June 30, 2000 and 1999...................................... 28
Notes to Unaudited, Combined Financial Statements.................. 29
GENZYME TISSUE REPAIR
Unaudited, Combined Statements of Operations for the Three and Six
Months Ended June 30, 2000 and 1999............................... 32
Combined Balance Sheets as of June 30, 2000 (unaudited) and
December 31, 1999................................................. 33
Unaudited, Combined Statements of Cash Flows for the Six Months
Ended June 30, 2000 and 1999...................................... 34
Notes to Unaudited, Combined Financial Statements.................. 35
Management's Discussion and Analysis of Financial Condition
ITEM 2. and Results of Operations................................. 37
ITEM 3. Quantitative and Qualitative Analysis of Market Risk........ 70
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings........................................... 71
ITEM 4. Submission of Matters to a Vote of Security Holders......... 71
ITEM 6. Exhibits and Reports on Form 8-K............................ 73
Signatures............................................................. 74
</TABLE>
iii
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2000 1999 2000 1999
--------- -------- --------- --------
(REVISED) (REVISED)
<S> <C> <C> <C> <C>
Revenues:
Net product sales......................................... $201,439 $165,873 $385,860 $329,575
Net service sales......................................... 21,347 19,799 42,313 38,529
Revenues from research and development contracts.......... 1,127 1,012 3,870 2,324
-------- -------- -------- --------
Total revenues.......................................... 223,913 186,684 432,043 370,428
-------- -------- -------- --------
Operating costs and expenses:
Cost of products sold..................................... 53,643 44,575 101,902 88,386
Cost of services sold..................................... 11,967 12,414 23,818 24,502
Selling, general and administrative....................... 67,428 66,358 128,979 125,303
Research and development (including research and
development related to contracts)....................... 28,577 40,873 84,276 73,707
Amortization of intangibles............................... 5,684 6,166 11,782 12,373
-------- -------- -------- --------
Total operating costs and expenses...................... 167,299 170,386 350,757 324,271
-------- -------- -------- --------
Operating income............................................ 56,614 16,298 81,286 46,157
-------- -------- -------- --------
Other income (expense):
Equity in net loss of unconsolidated affiiliates.......... (11,313) (8,962) (19,446) (19,100)
Minority interest......................................... 1,352 864 2,208 1,730
Investment income......................................... 10,631 9,102 20,575 17,288
Interest expense.......................................... (3,836) (5,590) (7,775) (11,088)
Gain on affiliate sale of stock........................... -- -- 20,270 606
Gain on sale of product line.............................. -- 7,500 -- 7,500
Gain on sale of equity securities......................... 14,165 -- 14,165 1,963
Charge for impaired investment............................ -- (5,487) -- (5,487)
Other..................................................... 5,193 (3) 5,195 43
-------- -------- -------- --------
Total other income (expense)............................ 16,192 (2,576) 35,192 (6,545)
-------- -------- -------- --------
Income before income taxes.................................. 72,806 13,722 116,478 39,612
Provision for income taxes.................................. (23,314) (7,431) (35,168) (17,264)
-------- -------- -------- --------
Net income.................................................. $ 49,492 $ 6,291 $ 81,310 $ 22,348
======== ======== ======== ========
Comprehensive income, net of tax:
Net income................................................ $ 49,492 $ 6,291 $ 81,310 $ 22,348
-------- -------- -------- --------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments................ (132) (4,986) (10,355) (13,812)
-------- -------- -------- --------
Unrealized gains (losses) on securities:
Unrealized gains (losses) arising during the period... (47,925) 792 4,374 (1,517)
Reclassification adjustment for losses included in net
income.............................................. (5,501) 3,169 (5,501) 1,945
-------- -------- -------- --------
Unrealized gains (losses) on securities, net.......... (53,426) 3,961 (1,127) 428
-------- -------- -------- --------
Other comprehensive income (loss)......................... (53,558) (1,025) (11,482) (13,384)
-------- -------- -------- --------
Comprehensive income (loss)................................. $ (4,066) $ 5,266 $ 69,828 $ 8,964
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, consolidated
financial statements.
1
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2000 1999 2000 1999
--------- -------- --------- --------
(REVISED) (REVISED)
<S> <C> <C> <C> <C>
NET INCOME (LOSS) PER SHARE:
ALLOCATED TO GENZYME GENERAL STOCK (REVISED--SEE
NOTE 11):
Genzyme General net income.............................. $ 63,990 $ 27,913 $109,299 $ 61,418
Genzyme Surgical Products net loss...................... -- (16,778) -- (27,523)
Tax benefit allocated from Genzyme Molecular Oncology... 2,441 2,376 3,537 4,310
Tax benefit allocated from Genzyme Surgical Products.... 3,236 6,525 6,656 10,350
Tax benefit allocated from Genzyme Tissue Repair........ 1,368 3,412 3,180 7,374
-------- -------- -------- --------
Net income allocated to Genzyme General Stock........... $ 71,035 $ 23,448 $122,672 $ 55,929
======== ======== ======== ========
Net income per share of Genzyme General Stock:
Basic................................................. $ 0.84 $ 0.28 $ 1.45 $ 0.68
======== ======== ======== ========
Diluted............................................... $ 0.77 $ 0.28 $ 1.35 $ 0.65
======== ======== ======== ========
Weighted average shares outstanding:
Basic................................................. 84,948 82,644 84,725 82,301
======== ======== ======== ========
Diluted............................................... 95,044 92,683 94,885 92,629
======== ======== ======== ========
ALLOCATED TO MOLECULAR ONCOLOGY STOCK:
Net loss................................................ $ (7,363) $ (8,158) $(12,420) $(15,218)
======== ======== ======== ========
Net loss per share of Molecular Oncology Stock--basic
and diluted........................................... $ (0.54) $ (0.64) $ (0.92) $ (1.20)
======== ======== ======== ========
Weighted average shares outstanding..................... 13,626 12,676 13,561 12,667
======== ======== ======== ========
ALLOCATED TO SURGICAL PRODUCTS STOCK (REVISED--SEE
NOTE 11):
Net loss................................................ $(10,367) $ (880) $(20,410) $ (880)
======== ======== ======== ========
Net loss per share of Surgical Products Stock--basic and
diluted............................................... $ (0.70) $ (0.06) $ (1.37) $ (0.06)
======== ======== ======== ========
Weighted average shares outstanding..................... 14,905 14,800 14,880 14,800
======== ======== ======== ========
ALLOCATED TO TISSUE REPAIR STOCK:
Net loss................................................ $ (4,031) $ (8,382) $ (9,002) $(17,998)
======== ======== ======== ========
Net loss per share of Tissue Repair Stock--basic and
diluted............................................... $ (0.14) $ (0.37) $ (0.31) $ (0.81)
======== ======== ======== ========
Weighted average shares outstanding..................... 28,666 22,764 28,598 22,355
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, consolidated
financial statements.
2
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
(REVISED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 178,730 $ 130,156
Short-term investments.................................... 182,877 255,846
Accounts receivable, net.................................. 180,947 166,803
Inventories............................................... 127,347 117,269
Prepaid expenses and other current assets................. 25,720 18,918
Deferred tax assets--current.............................. 40,776 41,195
---------- ----------
Total current assets.................................... 736,397 730,187
Property, plant and equipment, net.......................... 396,048 383,181
Long-term investments....................................... 332,603 266,988
Notes receivable-related party.............................. 10,000 6,603
Intangibles, net............................................ 241,077 253,153
Deferred tax assets--noncurrent............................. 14,690 18,631
Investment in equity securities............................. 108,732 97,859
Other noncurrent assets..................................... 55,518 30,680
---------- ----------
Total assets............................................ $1,895,065 $1,787,282
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 22,087 $ 27,853
Accrued expenses.......................................... 71,674 73,359
Income taxes payable...................................... 43,609 27,946
Deferred revenue.......................................... 4,619 3,700
Current portion of long-term debt and capital lease
obligations............................................. 992 5,080
---------- ----------
Total current liabilities............................... 142,981 137,938
Long-term debt and capital lease obligations................ 18,283 18,000
Convertible notes and debentures, net....................... 273,150 272,622
Other noncurrent liabilities................................ 2,889 2,330
---------- ----------
Total liabilities....................................... 437,303 430,890
Stockholders' equity:
Genzyme General Stock, $0.01 par value.................... 854 842
Molecular Oncology Stock, $0.01 par value................. 137 134
Surgical Products Stock, $0.01 par value.................. 150 148
Tissue Repair Stock, $0.01 par value...................... 288 285
Treasury stock--Genzyme General--at cost.................. (901) (901)
Additional paid-in capital--Genzyme General Stock......... 478,455 469,776
Additional paid-in capital--Molecular Oncology Stock...... 84,036 67,672
Additional paid-in capital--Surgical Products Stock....... 542,966 542,343
Additional paid-in capital--Tissue Repair Stock........... 222,959 217,103
Retained earnings......................................... 138,512 57,202
Accumulated other comprehensive income (loss)............. (9,694) 1,788
---------- ----------
Total stockholders' equity.............................. 1,457,762 1,356,392
---------- ----------
Total liabilities and stockholders' equity.............. $1,895,065 $1,787,282
========== ==========
</TABLE>
The accompanying notes are an integral part of these unaudited, consolidated
financial statements.
3
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
2000 1999
--------- ---------
(REVISED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 81,310 $ 22,348
Reconciliation of net income to net cash provided by
operating activities:
Depreciation and amortization........................... 32,838 37,033
Provision for bad debts................................. 4,311 8,300
Note received from collaborator......................... (10,000) --
Minority interest in net loss of subsidiary............. (2,208) (1,730)
Equity in net loss of unconsolidated affiliates......... 19,446 19,100
Gain on affiliate sale of stock......................... (20,270) (606)
Gain on sale of product line............................ -- (7,500)
Gain on sale of equity securities....................... (14,165) (1,963)
Charge for impaired investment.......................... -- 5,487
Deferred income tax expense (benefit), net.............. 4,668 (1,324)
Other................................................... (253) (550)
Increase (decrease) in cash from working capital
changes:
Accounts receivable................................... (21,718) (9,277)
Inventories........................................... (12,507) (4,095)
Prepaid expenses and other current assets............. (3,764) 3,622
Accounts payable, accrued expenses, income taxes
payable and deferred revenue........................ 12,274 9,668
--------- ---------
Net cash provided by operating activities........... 69,962 78,513
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments.................................. (322,868) (320,388)
Sales and maturities of investments....................... 330,971 269,029
Proceeds from sale of equity securities................... 837 11,090
Purchase of equity securities............................. (5,000) --
Purchase of property, plant and equipment................. (35,859) (30,410)
Investment in unconsolidated affiliates................... (12,856) (22,269)
Other..................................................... (1,607) 9,141
--------- ---------
Net cash used in investing activities............... (46,382) (83,807)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................... 30,965 31,472
Payments of debt and capital lease obligations............ (5,000) (791)
Other..................................................... 2,054 3,934
--------- ---------
Net cash provided by financing activities........... 28,019 34,615
--------- ---------
Effect of exchange rate changes on cash..................... (3,025) (1,864)
--------- ---------
Increase in cash and cash equivalents....................... 48,574 27,457
Cash and cash equivalents at beginning of period............ 130,156 118,612
--------- ---------
Cash and cash equivalents at end of period.................. $ 178,730 $ 146,069
========= =========
</TABLE>
The accompanying notes are an integral part of these unaudited, consolidated
financial statements.
4
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Our unaudited consolidated financial statements for each period include the
balance sheets, results of operations and cash flows of each of our divisions
and corporate operations taken as a whole. We eliminate all significant
intracompany items and transactions in consolidation. We prepared the unaudited,
consolidated financial statements for Genzyme following the requirements of the
SEC for interim reporting. As permitted under those rules, certain footnotes or
other financial information that are normally required by generally accepted
accounting principles can be condensed or omitted. We have reclassified certain
1999 data to conform with our 2000 presentation.
On June 1, 2000, Celtrix Pharmaceuticals, Inc. was acquired by Insmed Inc.
upon which our shares of Celtrix common stock were exchanged on a 1-for-1 basis
for shares of Insmed common stock. On the date of the exchange, we recognized
the unrealized gain of $7.6 million, net of tax, as a credit to stockholders'
equity. We should have recognized this gain as a realized gain and recorded such
gain in income. Accordingly, we have revised our financial statements for the
three and six months ended June 30, 2000 to reclassify the $7.6 million gain,
net of tax, from an unrealized gain to a realized gain. The impact of this
revision on the three and six months ended June 30, 2000 is as follows:
<TABLE>
<CAPTION>
PREVIOUSLY REPORTED REVISED
----------------------------- -----------------------------
3 MONTHS 6 MONTHS 3 MONTHS 6 MONTHS
------------- ------------- ------------- -------------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gain on sale of equity securities..... $ 6,592 $ 6,592 $ 14,165 $ 14,165
Income before income taxes............ 65,233 108,905 72,806 116,478
Provision for income taxes............ (20,699) (32,553) (23,314) (35,168)
Net income............................ 44,534 76,352 49,492 81,310
Net income allocated to Genzyme
General Stock....................... 66,077 117,714 71,035 122,672
Net income per share of Genzyme
General Stock:
Basic............................... $ 0.78 $ 1.39 $ 0.84 $ 1.45
Diluted............................. $ 0.72 $ 1.29 $ 0.77 $ 1.35
</TABLE>
These financial statements include all normal and recurring adjustments that
we consider necessary for the fair presentation of our financial position and
operating results. Since these are interim financial statements, you should also
read the financial statements and notes included in our 1999 Form 10-K, as
amended. Revenues, expenses, assets and liabilities can vary from quarter to
quarter. Therefore, the results and trends in these interim financial statements
may not be the same as those for future periods.
2. INVENTORIES (AMOUNTS IN THOUSANDS):
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
(UNAUDITED)
<S> <C> <C>
Raw materials................................... $ 49,555 $ 39,958
Work-in-process................................. 41,748 44,559
Finished products............................... 36,044 32,752
-------- --------
Total......................................... $127,347 $117,269
======== ========
</TABLE>
5
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENT IN FOCAL, INC.
In April 2000, Focal, Inc. exercised its first option under the stock
purchase agreement between Genzyme and Focal. As required by the terms of this
agreement, we purchased $5.0 million of Focal common stock at a price of $8.14
per share. We have allocated these shares to Genzyme Surgical Products. We are
committed, at Focal's option, to make future additional equity investments of up
to $10.0 million subject to certain conditions.
4. REGISTRATION STATEMENTS
In March 2000, we filed with the SEC a prospectus pursuant to Rule 424 of
the Securities Act of 1933, as amended, covering the offering of 3,000,000
shares of Molecular Oncology Stock (plus 450,000 shares issuable upon exercise
of the underwriter's over-allotment option). In April 2000, in light of market
volatility and market conditions at the time, we terminated the offering of
shares of Molecular Oncology Stock contemplated by the prospectus.
Pursuant to a prospectus filed under Rule 424 of the Securities Act of 1933,
as amended, in July 2000, we sold 1,607,400 shares of Molecular Oncology Stock
to a limited number of purchasers at a price of $12.91 per share. We received
approximately $20.7 million of net proceeds from the offering which we allocated
to Genzyme Molecular Oncology. The proceeds of this offering will be used
primarily to fund Genzyme Molecular Oncology's research, preclinical and
clinical development programs, and for its working capital and general corporate
purposes.
5. INTERDIVISIONAL FINANCING ARRANGEMENTS
GENZYME MOLECULAR ONCOLOGY
In April 2000, Genzyme Molecular Oncology drew $15.0 million of cash under
its interdivisional financing arrangement with Genzyme General in exchange for
676,254 Genzyme Molecular Oncology designated shares. As required by our
charter, the number of Genzyme Molecular Oncology designated shares was
determined using the average closing price of Molecular Oncology Stock for the
20 trading days beginning on the 30th trading day before the draw. As of
June 30, 2000 $15 million remained available to Genzyme Molecular Oncology under
this arrangement.
GENZYME TISSUE REPAIR
In March 2000, Genzyme Tissue Repair made a $5.0 million draw under its
interdivisional financing arrangement with Genzyme General in exchange for
765,169 Genzyme Tissue Repair designated shares. As required by our charter, the
number of Genzyme Tissue Repair designated shares was determined using the
average closing price of Tissue Repair Stock for the 20 trading days beginning
on the 30th trading day before the draw. As of June 30, 2000 $15 million
remained available to Genzyme Tissue Repair under this arrangement.
6. LICENSE AND STRATEGIC ALLIANCE AGREEMENTS
In March 2000, Genzyme General recorded $19.5 million as research and
development expense, representing the initial amounts payable to Synpac (North
Carolina), Inc. under a license granted by Synpac to Genzyme to develop and
commercialize Pompase-TM- enzyme replacement therapy for Pompe disease, which is
produced using a Chinese hamster ovary cell line. In connection with this
license, Genzyme General will pay Synpac certain amounts upon the achievement of
certain development and commercialization milestones. Genzyme General will also
pay Synpac royalties for a specified period of time based on certain percentages
of sales.
6
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LICENSE AND STRATEGIC ALLIANCE AGREEMENTS (CONTINUED)
In June 2000, Genzyme and Pharming Group N.V. entered into a strategic
alliance agreement to share in the development and funding for the
commercialization of Pompase-TM- enzyme replacement therapy. Upon execution of
the definitive agreement, Pharming paid Genzyme cash of $250,000 and issued to
Genzyme a $10.0 million 7% Convertible Senior Note due June 1, 2004 (the
"Pharming Note"). This consideration was a reimbursement for 50% of the amounts
Genzyme previously paid to Synpac for product development and technology fees
and expenses. Accordingly, Genzyme recorded the $10.3 million as a reduction to
research and development expense during the three months ended June 30, 2000.
The Pharming Note is convertible at any time at Genzyme's option into fully
paid and nonassessable Ordinary Shares of Pharming. We have allocated our
interest in the Pharming Note to Genzyme General and have classified the
Pharming Note as a long-term, related party note receivable as of June 30, 2000.
7. GAIN ON AFFILIATE SALE OF STOCK
In February 2000, Genzyme Transgenics Corporation, an unconsolidated
affiliate, completed an offering of 3.5 million shares of Genzyme Transgenics
common stock, resulting in net proceeds to Genzyme Transgenics of $75.2 million
(after the exercise of the underwriter's overallotment option). In accordance
with our policy pertaining to affiliate sales of stock, we recognized a gain of
$20.3 million and recorded a net deferred tax expense of $3.9 million for the
three months ended March 31, 2000. The deferred tax expense is net of a
$3.4 million credit for the reversal of a valuation allowance on a deferred tax
asset. As a result of the issuance of the additional shares by Genzyme
Transgenics, our ownership interest in Genzyme Transgenics decreased from 33% to
28%.
8. GAIN ON SALE OF EQUITY SECURITIES
In June 2000, Genzyme General recorded a gain of $5.5 million upon the sale
of a portion of its investment in Genzyme Transgenics common stock. The tax
effect of this gain was fully offset by the reversal of a $1.9 million valuation
allowance related to previously recognized capital losses.
9. SETTLEMENT OF LAWSUIT
In April 2000, we received net proceeds of approximately $5.1 million in
connection with the settlement of a lawsuit, which we recorded as other income
in our unaudited, consolidated statements of operations for the three and six
months ended June 30, 2000. The lawsuit, initiated in 1993, pertained to an
accidental spill of Ceredase-Registered Trademark- enzyme at a fill facility
operated by a contractor to Genzyme. We allocated the net proceeds of the
settlement of this lawsuit to Genzyme General.
10. TAX PROVISION
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, INCREASE/ JUNE 30, INCREASE/
-------------------- (DECREASE) -------------------- (DECREASE)
2000 1999 % CHANGE 2000 1999 % CHANGE
--------- -------- ---------- --------- -------- ----------
(REVISED) (REVISED)
(UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Provision for income taxes........ $23,314 $7,431 214% $35,168 $17,264 104%
Tax rate.......................... 32% 54% 30% 44%
</TABLE>
Our tax rates for both periods vary from the U.S. statutory tax rate as a
result of our:
- provision for state income taxes;
- use of a foreign sales corporation;
7
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. TAX PROVISION (CONTINUED)
- nondeductible amortization of intangibles;
- use of tax credits; and
- share of losses of unconsolidated affiliates.
In the three months ended June 30, 2000 we reversed a $1.9 million valuation
allowance, which reduced our tax rate for the period by 2.9%. In the six months
ended June 30, 2000, we reversed valuation allowances totaling $5.3 million,
which reduced our tax rate for the period by 4.9%.
11. NET INCOME (LOSS) PER SHARE
REVISION
We had previously reported income (loss) allocated to Genzyme General Stock
and Surgical Products Stock, and earnings per share of Genzyme General Stock for
the three and six months ended June 30, 1999, as adjusted to retroactively
reflect the changes in earnings allocations resulting from the June 1999
creation and distribution of Surgical Products Stock. The allocation of
Genzyme's historical earnings has been revised to reflect an allocation of
Genzyme's earnings to each series of common stock outstanding in periods prior
to June 1999 and to each series of common stock, including Surgical Products
Stock, thereafter. The impact of these revisions are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1999
--------------------------- -------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
GENZYME GENERAL:
PREVIOUSLY REPORTED (PRO FORMA INFORMATION
PREVIOUSLY REPORTED AS HISTORICAL):
Net income allocated to Genzyme General Stock... $ 40,226 $ 83,452
======== ========
Net income per share of Genzyme General Stock:
Basic......................................... $ 0.49 $ 1.01
======== ========
Diluted....................................... $ 0.46 $ 0.95
======== ========
AS REVISED:
Net income allocated to Genzyme General Stock... $ 23,448 $ 55,929
======== ========
Net income per share of Genzyme General Stock:
Basic......................................... $ 0.28 $ 0.68
======== ========
Diluted....................................... $ 0.28 $ 0.65
======== ========
GENZYME SURGICAL PRODUCTS:
PREVIOUSLY REPORTED (PRO FORMA INFORMATION
PREVIOUSLY REPORTED AS HISTORICAL):
Net loss allocated to Surgical Products Stock... $(17,658) $(28,403)
======== ========
AS REVISED:
Net loss allocated to Surgical Products Stock... $ (880) $ (880)
======== ========
Net loss per share of Surgical Products
Stock--basic and diluted...................... $ (0.06) $ (0.06)
======== ========
Weighted average shares outstanding............. 14,800 14,800
======== ========
</TABLE>
If the shares of Surgical Products Stock initially issued on June 28, 1999
were assumed to be outstanding since January 1, 1998, net income allocated to
Genzyme General Stock, net loss allocated
8
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. NET INCOME (LOSS) PER SHARE (CONTINUED)
to Surgical Products Stock and weighted average shares outstanding would have
been as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1999
------------------ ----------------
<S> <C> <C>
Genzyme General:
Net income allocated to Genzyme General Stock............ $ 40,226 $ 83,452
======== ========
Weighted average shares outstanding:
Basic.................................................. 82,644 82,301
Diluted................................................ 92,683 92,629
Genzyme Surgical Products:
Net loss allocated to Surgical Products Stock............ $(17,658) $(28,403)
======== ========
Weighted average shares outstanding-basic and diluted.... 14,800 14,800
</TABLE>
9
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. NET INCOME (LOSS) PER SHARE (CONTINUED)
GENZYME GENERAL STOCK (REVISED):
The following table sets forth our computation of basic and diluted earnings
per share of Genzyme General Stock:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2000 1999 2000 1999
--------- -------- --------- --------
(REVISED) (REVISED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Genzyme General net income......................... $63,990 $27,913 $109,299 $61,418
Genzyme Surgical Products net loss................. -- (16,778) -- (27,523)
Tax benefit allocated from Genzyme Molecular
Oncology......................................... 2,441 2,376 3,537 4,310
Tax benefit allocated from Genzyme Surgical
Products......................................... 3,236 6,525 6,656 10,350
Tax benefit allocated from Genzyme Tissue Repair... 1,368 3,412 3,180 7,374
------- ------- -------- -------
Net income allocated to Genzyme General
Stock--basic..................................... 71,035 23,448 122,672 55,929
Effect of dilutive securities (net of tax):
5 1/4% convertible subordinated notes (1)
Interest expense............................. 2,250 1,903 4,358 3,949
Amortization of debt discount and offering
costs (2).................................. 161 136 311 282
5% convertible subordinated debentures (3)
Interest expense............................. 179 154 350 319
Amortization of debt offering costs (4)...... 30 25 60 53
------- ------- -------- -------
Net income allocated to Genzyme General Stock--
diluted.......................................... $73,655 $25,666 $127,751 $60,532
======= ======= ======== =======
Shares used in computing net income per common
share--basic..................................... 84,948 82,644 84,725 82,301
------- ------- -------- -------
Effect of dilutive securities:
Employee and director stock options............ 3,153 3,071 3,217 3,356
Warrants....................................... -- 25 -- 29
5 1/4% convertible subordinated notes (1)...... 6,313 6,313 6,313 6,313
5% convertible subordinated debentures (3)..... 630 630 630 630
------- ------- -------- -------
Dilutive potential common shares (5)............. 10,096 10,039 10,160 10,328
------- ------- -------- -------
Shares used in computing net income per common
share--diluted (5)............................... 95,044 92,683 94,885 92,629
======= ======= ======== =======
Net income per share of Genzyme General Stock:
Basic.......................................... $ 0.84 $ 0.28 $ 1.45 $ 0.68
======= ======= ======== =======
Diluted (5).................................... $ 0.77 $ 0.28 $ 1.35 $ 0.65
======= ======= ======== =======
</TABLE>
------------------------
(1) We issued these notes in May 1998.
(2) We are amortizing the debt discount and offering costs of approximately
$7.0 million over the term of these notes, which mature in June 2005.
(3) We issued these debentures in August 1998.
(4) We are amortizing the debt offering costs of approximately $0.9 million over
the term of these debentures, which mature in August 2003.
10
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. NET INCOME (LOSS) PER SHARE (CONTINUED)
(5) We did not include the securities described in the following table in the
computation of Genzyme General's diluted earnings per share because these
securities had an exercise price greater than the average market price of
Genzyme General Stock:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Total shares of Genzyme General Stock issuable for
options............................................. 3,615 1,801 3,290 1,591
===== ===== ===== =====
</TABLE>
MOLECULAR ONCOLOGY STOCK:
In accounting for the acquisition of PharmaGenics, Inc. in June 1997,
Genzyme Molecular Oncology recorded a valuation allowance against a $2.9 million
tax asset related to acquired net operating losses due to the application of our
policy of accounting for income taxes at the divisional level as if each
division were a separate taxpayer. As a result, Genzyme Molecular Oncology
recorded an additional $2.9 million of goodwill that was not recorded at the
consolidated level. The amortization of this goodwill increases the loss of
Genzyme Molecular Oncology and, therefore, the loss allocated to Molecular
Oncology Stock.
For all periods presented, basic and diluted net loss per share of Molecular
Oncology Stock are the same. We did not include the securities described in the
following table in the computation of Molecular Oncology Stock diluted net loss
per share for each period because these securities would have an anti-dilutive
effect due to the net loss allocated to Molecular Oncology Stock:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Shares of Molecular Oncology Stock issuable for
options (1)......................................... 566 2 619 2
Warrants to purchase Molecular Oncology Stock......... 10 10 10 10
Shares of Molecular Oncology Stock issuable upon
conversion of the 5 1/4% convertible subordinated
notes............................................... 682 682 682 682
Genzyme Molecular Oncology designated shares (2)...... 1,318 728 1,318 728
----- ----- ----- -----
Total shares excluded from the diluted loss per
Genzyme Molecular Oncology share calculation........ 2,576 1,422 2,629 1,422
===== ===== ===== =====
</TABLE>
------------------------
(1) Excludes the following securities that had an exercise price greater than
the average market price of Molecular Oncology Stock during each respective
period:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Shares with exercise prices greater than the average
market price Molecular Oncology Stock during the
period.............................................. 25 1,678 14 1,577
== ===== == =====
</TABLE>
(2) Genzyme Molecular Oncology designated shares are authorized shares of
Molecular Oncology Stock that are not issued and outstanding, but which our
board may issue, sell, or distribute without allocating the proceeds to
Genzyme Molecular Oncology.
11
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. NET INCOME (LOSS) PER SHARE (CONTINUED)
SURGICAL PRODUCTS STOCK (REVISED):
We created Genzyme Surgical Products on June 28, 1999. Prior to this date,
the operations of Genzyme Surgical Products were included in the operations
allocated to Genzyme General and, therefore, in the net income allocated to
Genzyme General Stock. Net loss per share data of Surgical Products Stock is
calculated using the net loss allocated to Genzyme Surgical Products for the
period June 28, 1999 through June 30, 1999 and weighted average shares
outstanding during the same period. If the shares of Surgical Products Stock
initially issued on June 28, 1999 were assumed to be outstanding since January
1, 1999, net loss allocated to Surgical Products Stock and weighted average
shares outstanding would have been as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1999
------------------ ----------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Net loss allocated to Surgical Products Stock............ $(17,658) $(28,403)
======== ========
Weighted average shares outstanding-basic and diluted.... 14,800 14,800
</TABLE>
Basic and diluted net loss per share of Surgical Products Stock is the same.
We did not include the securities described in the following table in the
computation of Surgical Products Stock diluted net loss per share for each
period because these securities would have an anti-dilutive effect due to the
net loss allocated to Surgical Products Stock:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
2000 2000
------------------ ----------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Shares of Surgical Products Stock issuable for options
(1)...................................................... 350 451
Shares of Surgical Products Stock issuable upon conversion
of the 5 1/4% convertible subordinated notes............. 1,130 1,130
Genzyme Surgical Products designated shares (2)............ 35 --
----- -----
Total shares excluded from the diluted loss per Surgical
Products Stock share calculation......................... 1,515 1,581
===== =====
</TABLE>
------------------------
(1) Excludes the following securities that had an exercise price greater than
the average market price of Surgical Products Stock during each respective
period:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
2000 2000
------------------ ----------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Shares with exercise prices greater than the average market
price Surgical Products Stock during the period.......... 37 24
===== =====
</TABLE>
(2) Genzyme Surgical Products designated shares are authorized shares of
Surgical Products Stock that are not issued and outstanding, but which our
board may issue, sell, or distribute without allocating the proceeds to
Genzyme Surgical Products.
12
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. NET INCOME (LOSS) PER SHARE (CONTINUED)
TISSUE REPAIR STOCK:
For all periods presented, basic and diluted net loss per share of Tissue
Repair Stock is the same. We did not include the securities described in the
following table in the computation of Tissue Repair Stock diluted net loss per
share for each period because these securities would have an anti-dilutive
effect due to the net loss allocated to Tissue Repair:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Shares of Tissue Repair Stock issuable for options
(1)................................................. 209 4 271 3
Shares of Tissue Repair Stock issuable upon conversion
of 5% convertible subordinated note (2)............. -- 4,418 -- 4,418
Genzyme Tissue Repair designated shares (3)........... 2,959 2,289 2,959 2,289
----- ------ ----- ------
Total shares excluded from the diluted loss per Tissue
Repair Stock share calculation...................... 3,168 6,711 3,230 6,710
===== ====== ===== ======
</TABLE>
------------------------
(1) Excludes the following securities that had an exercise price greater than
the average market price of Tissue Repair Stock during each respective
period:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Shares with exercise prices greater than the average
market price Tissue Repair Stock during the
period.............................................. 2,636 3,832 2,560 3,773
===== ===== ===== =====
</TABLE>
(2) The conversion of Genzyme Tissue Repair's 5% convertible subordinated note
was completed in the fourth quarter of 1999.
(3) Genzyme Tissue Repair designated shares are authorized shares of Tissue
Repair Stock that are not issued and outstanding, but which our board may
issue, sell, or distribute without allocating the proceeds to Genzyme Tissue
Repair.
12. SEGMENT REPORTING
We present segment information in a manner consistent with the method we use
to report this information to our management. We have five reportable segments:
- Therapeutics, which develops, manufactures and distributes human
therapeutic products for significant unmet medical needs. The business
derives substantially all of its revenue from sales of
Cerezyme-Registered Trademark- enzyme;
- Diagnostic Products, which provides diagnostic products to niche markets
with a focus on IN VITRO diagnostics;
- Genzyme Molecular Oncology, which is developing cancer products, with a
focus on therapeutic vaccines and angiogenesis inhibitors;
- Genzyme Surgical Products, which develops, manufactures and markets
surgical products for cardiovascular surgery and general surgery; and
13
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SEGMENT REPORTING (CONTINUED)
- Genzyme Tissue Repair, which develops and markets biological products for
orthopedic injuries, such as cartilage repair, and severe burns.
Information concerning the operations in these reportable segments is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ---------------------
2000 1999 2000 1999
---------- ---------- --------- ---------
(REVISED) (REVISED)
(UNAUDITED, AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Genzyme General:
Therapeutics............................................ $148,578 $119,223 $282,380 $234,264
Diagnostic Products..................................... 15,539 14,955 30,777 29,646
Other................................................... 22,425 19,456 43,847 39,914
Eliminations/Adjustments (1)............................ 152 571 316 1,147
-------- -------- -------- --------
Total Genzyme General................................. 186,694 154,205 357,320 304,971
Genzyme Molecular Oncology.............................. 963 1,133 3,518 2,746
Genzyme Surgical Products............................... 29,969 26,681 59,051 54,034
Genzyme Tissue Repair................................... 6,287 4,665 12,154 8,688
Eliminations/Adjustments (2)............................ -- -- -- (11)
-------- -------- -------- --------
Total................................................. $223,913 $186,684 $432,043 $370,428
======== ======== ======== ========
Net income (loss):
Net income (loss) allocated to Genzyme General Stock:
Division net income (loss)--Genzyme General:
Therapeutics.......................................... $ 54,252 $ 32,910 $ 83,515 $ 66,781
Diagnostic Products................................... 815 1,071 1,530 2,200
Other................................................. (625) 187 (796) (1,851)
Eliminations/Adjustments (3).......................... 9,548 (6,255) 25,050 (5,712)
-------- -------- -------- --------
Net income for Genzyme General.......................... 63,990 27,913 109,299 61,418
Genzyme Surgical Products net loss (4).................. -- (16,778) -- (27,523)
Tax benefits allocated from other Genzyme divisions..... 7,045 12,313 13,373 22,034
-------- -------- -------- --------
Net income allocated to Genzyme General Stock............. 71,035 23,448 122,672 55,929
Net loss allocated to Molecular Oncology Stock............ (7,363) (8,158) (12,420) (15,218)
Net loss allocated to Surgical Products Stock............. (10,367) (880) (20,410) (880)
Net loss allocated to Tissue Repair Stock................. (4,031) (8,382) (9,002) (17,998)
Eliminations/Adjustments (5).............................. 218 263 470 515
-------- -------- -------- --------
Total................................................. $ 49,492 $ 6,291 $ 81,310 $ 22,348
======== ======== ======== ========
</TABLE>
------------------------------
(1) Includes primarily amounts related to Genzyme General's corporate research
and development and administrative activities that we do not specifically
allocate to a particular segment of Genzyme General.
(2) Represents the elimination of inter-divisional revenues.
(3) Includes primarily amounts related to Genzyme General's corporate research
and development and administrative activities that we do not specifically
allocate to a particular segment of Genzyme General. The six months ended
June 30, 2000 also includes a gain of $20.3 million relating to a public
offering of common shares by Genzyme Transgenics. (See Note 7 above.)
(4) Represents losses incurred by Genzyme Surgical Products prior to June 28,
1999. The allocation of Genzyme's earnings has been revised to reflect an
allocation of Genzyme's earnings to each common stock actually outstanding
prior to June 1999 and to each series of common stock, including Surgical
Products Stock, thereafter. (See Note 11 above.)
(5) Consists primarily of a difference in amortization due to $2.9 million of
additional goodwill associated with the PharmaGenics Inc. acquisition
carried at the Genzyme Molecular Oncology level as compared to amounts
carried at the consolidated level and other adjustments related to our
corporate activities that we do not specifically allocate to a particular
segment. The difference in the amortization results from the application of
our policy to account for income taxes at the divisional level as if each
division were a separate taxpayer.
There has been no material change in segment assets since December 31, 1999.
14
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. ACQUISITION OF BIOMATRIX, INC. AND FORMATION OF GENZYME BIOSURGERY
In March 2000, we entered into an agreement to acquire Biomatrix, Inc. Upon
the effectiveness of our Registration Statement on Form S-4 and completion of
the merger, we will form a new operating division called Genzyme Biosurgery and
create a new series of common stock that is intended to reflect its value and
track its performance. We refer to this stock as "Biosurgery Stock." In
connection with the merger, and upon Genzyme shareholder approval, the assets
and liabilities allocated to Genzyme Surgical Products and Genzyme Tissue Repair
will be re-allocated to Genzyme Biosurgery and shares of Surgical Products Stock
and Tissue Repair Stock will be exchanged for Biosurgery Stock. We will account
for the acquisition of Biomatrix as a purchase.
Biomatrix stockholders will receive $37.00 in cash, one share of Biosurgery
Stock or a combination of cash and stock for each share of Biomatrix common
stock they hold. The merger agreement provides that we will pay cash for up to
28.38% of the outstanding shares of Biomatrix common stock that receive merger
consideration, or up to approximately $245.0 million.
Holders of Surgical Products Stock will receive 0.6060 share of Biosurgery
Stock in exchange for each share of Surgical Products Stock they hold and
holders of Tissue Repair Stock will receive 0.3352 share of Biosurgery Stock in
exchange for each share of Tissue Repair Stock they hold.
For more information about the merger and the merger consideration, we
encourage you to carefully read the Pre-Effective Amendment No. 1 to our
Registration Statement on Form S-4 filed with the SEC on July 3, 2000.
14. NEW ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an interpretation of Accounting Principles Board Opinion No. 25"
("FIN-44"). FIN-44 will be effective on July 1, 2000, but certain conclusions in
FIN-44 cover specific events that occurred after either December 15, 1998 or
January 12, 2000.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB 101") which summarizes the staff's
view in applying generally accepted accounting principles to selected revenue
recognition issues. SAB 101 will be effective in the fourth quarter of 2000.
We are currently evaluating the guidance provided in FIN-44 and SAB 101 and
do not expect their application to have a material effect on our financial
statements.
15
<PAGE>
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED, AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2000 1999 2000 1999
--------- -------- --------- --------
(REVISED) (REVISED)
<S> <C> <C> <C> <C>
Revenues:
Net product sales......................................... $171,470 $139,192 $326,809 $275,541
Net service sales......................................... 15,061 14,534 30,181 28,426
Revenues from research and development contracts:
Related parties......................................... 114 432 245 912
Other................................................... 49 47 85 92
-------- -------- -------- --------
Total revenues........................................ 186,694 154,205 357,320 304,971
-------- -------- -------- --------
Operating costs and expenses:
Cost of products sold..................................... 37,051 27,136 69,271 55,103
Cost of services sold..................................... 8,944 9,033 17,772 17,788
Selling, general and administrative....................... 42,972 42,333 81,194 78,058
Research and development (including research and
development related to contracts)....................... 15,391 24,947 58,134 46,012
Amortization of intangibles............................... 2,011 2,017 3,979 4,103
-------- -------- -------- --------
Total operating costs and expenses...................... 106,369 105,466 230,350 201,064
-------- -------- -------- --------
Operating income............................................ 80,325 48,739 126,970 103,907
-------- -------- -------- --------
Other income (expenses):
Equity in net loss of unconsolidated affiliates........... (11,313) (6,969) (19,446) (14,725)
Minority interest......................................... 1,352 864 2,208 1,730
Investment income......................................... 8,639 8,820 16,726 16,743
Interest expense.......................................... (3,441) (5,137) (6,992) (10,186)
Gain on affiliate sale of stock........................... -- -- 20,270 606
Gain on sale of product line.............................. -- 7,500 -- 7,500
Gain on sale of equity securities......................... 14,165 -- 14,165 1,963
Charge for impaired investment............................ -- (5,487) -- (5,487)
Other..................................................... 5,174 -- 5,153 --
-------- -------- -------- --------
Total other income (expenses)........................... 14,576 (409) 32,084 (1,856)
-------- -------- -------- --------
Income before income taxes.................................. 94,901 48,330 159,054 102,051
Provision for income taxes.................................. (30,911) (20,417) (49,755) (40,633)
-------- -------- -------- --------
Division net income......................................... $ 63,990 $ 27,913 $109,299 $ 61,418
======== ======== ======== ========
Comprehensive income, net of tax:
Division net income....................................... $ 63,990 $ 27,913 $109,299 $ 61,418
-------- -------- -------- --------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments................ (174) (4,986) (10,397) (13,812)
-------- -------- -------- --------
Unrealized gains (losses) on securities:
Unrealized gains (losses) arising during the period... (43,424) 1,420 6,785 (889)
Reclassification adjustment for (gains) losses
included in division net income..................... (5,501) 3,169 (5,501) 1,945
-------- -------- -------- --------
Unrealized gains (losses) on securities, net............ (48,925) 4,589 1,284 1,056
-------- -------- -------- --------
Other comprehensive loss.................................. (49,099) (397) (9,113) (12,756)
-------- -------- -------- --------
Comprehensive income........................................ $ 14,891 $ 27,516 $100,186 $ 48,662
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
16
<PAGE>
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
COMBINED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
(REVISED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 154,474 $ 94,523
Short-term investments.................................... 118,650 214,240
Accounts receivable, net.................................. 153,783 141,949
Inventories............................................... 86,138 84,384
Prepaid expenses and other current assets................. 24,200 17,632
Due from Genzyme Molecular Oncology....................... 4,104 3,793
Due from Genzyme Surgical Products........................ 8,368 6,406
Due from Genzyme Tissue Repair............................ 214 683
Deferred tax assets--current.............................. 40,776 41,195
---------- ----------
Total current assets.................................... 590,707 604,805
Property, plant and equipment, net.......................... 375,449 362,548
Long-term investments....................................... 312,853 205,142
Notes receivable- related party............................. 10,000 6,603
Intangibles, net............................................ 71,177 75,370
Deferred tax assets--noncurrent............................. 13,319 19,844
Investment in equity securities............................. 104,458 94,719
Other....................................................... 51,639 30,552
---------- ----------
Total assets............................................ $1,529,602 $1,399,583
========== ==========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable.......................................... $ 16,278 $ 23,229
Accrued expenses.......................................... 59,124 62,514
Income taxes payable...................................... 43,609 27,946
Deferred revenue.......................................... 3,880 3,475
Current portion of long-term debt and capital lease
obligations............................................. 887 80
---------- ----------
Total current liabilities............................... 123,778 117,244
Long-term debt and capital lease obligations................ 73 --
Convertible subordinated notes and debentures............... 273,150 272,622
Other....................................................... 2,737 2,103
---------- ----------
Total liabilities....................................... 399,738 391,969
Division equity............................................. 1,129,864 1,007,614
---------- ----------
Total liabilities and division equity....................... $1,529,602 $1,399,583
========== ==========
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
17
<PAGE>
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED, AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
2000 1999
--------- ---------
(REVISED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Division net income....................................... $ 109,299 $ 61,418
Reconciliation of division net income to net cash provided
by operating activities:
Depreciation and amortization........................... 22,844 26,829
Provision for bad debts................................. 4,124 8,125
Notes received from a collaborator...................... (10,000) --
Equity in net loss of unconsolidated affiliates......... 19,446 14,725
Minority interest in net loss of subsidiary............. (2,208) (1,730)
Gain on affiliate sale of stock......................... (20,270) (606)
Gain on sale of product line............................ -- (7,500)
Gain on sale of equity securities....................... (14,165) (1,963)
Charge for impaired investment.......................... -- 5,487
Deferred income tax expense............................. 5,882 --
Other................................................... (1,148) (493)
Increase (decrease) in cash from working capital
changes:
Accounts receivable................................... (19,219) (13,671)
Inventories........................................... (4,183) 3,795
Prepaid expenses and other current assets............. (3,529) 1,585
Due from other Genzyme divisions...................... (1,824) (6,580)
Accounts payable, accrued expenses, income taxes
payable and deferred revenue......................... 22,260 27,620
--------- ---------
Net cash provided by operating activities............. 107,309 117,041
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments.................................. (239,134) (320,388)
Sales and maturities of investments....................... 228,343 268,007
Proceeds from sale of equity securities................... 837 11,090
Purchase of property, plant and equipment................. (34,187) (28,157)
Investments in unconsolidated affiliates.................. (12,856) (18,675)
Other..................................................... 2,210 8,966
--------- ---------
Net cash used in investing activities................. (54,787) (79,157)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Allocated proceeds from issuance of Genzyme General
Stock................................................... 28,346 31,251
Payments of debt and capital lease obligations............ -- (643)
Net cash allocated to Genzyme Molecular Oncology.......... (15,000) --
Net cash allocated to Genzyme Surgical Products........... -- (53,163)
Net cash allocated to Genzyme Tissue Repair............... (4,940) (29,984)
Other..................................................... 2,054 3,934
--------- ---------
Net cash provided by (used in) financing activities... 10,460 (48,605)
--------- ---------
Effect of exchange rate changes on cash..................... (3,031) (1,864)
--------- ---------
Increase (decrease) in cash and cash equivalents............ 59,951 (12,585)
Cash and cash equivalents at beginning of period............ 94,523 100,012
--------- ---------
Cash and cash equivalents at end of period.................. $ 154,474 $ 87,427
========= =========
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
18
<PAGE>
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The combined financial statements of Genzyme General for each period include
the balance sheets, results of operations and cash flows of the businesses we
allocate to Genzyme General. We also allocate a portion of our corporate
operations to Genzyme General using methods described in our allocation policy
below. These combined financial statements are prepared using amounts included
in our consolidated financial statements included in this Form 10-Q. We prepared
the unaudited, combined financial statements for Genzyme General following the
requirements of the SEC for interim reporting. As permitted under those rules,
certain footnotes or other financial information that are normally required by
generally accepted accounting principles can be condensed or omitted. We have
reclassified certain 1999 data to conform with our 2000 presentation.
On June 1, 2000, Celtrix Pharmaceuticals, Inc. was acquired by Insmed Inc.
upon which our shares of Celtrix common stock were exchanged on a 1-for-1 basis
for shares of Insmed common stock. On the date of the exchange, we recognized
the unrealized gain of $7.6 million, net of tax, as a credit to division equity.
We should have recognized this gain as a realized gain and recorded such gain in
income. Accordingly, we have revised our financial statements for the three and
six months ended June 30, 2000 to reclassify the $7.6 million gain, net of tax,
from an unrealized gain to a realized gain. The impact of this revision on the
three and six months ended June 30, 2000 is as follows:
<TABLE>
<CAPTION>
PREVIOUSLY REPORTED REVISED
----------------------------- -----------------------------
3 MONTHS 6 MONTHS 3 MONTHS 6 MONTHS
------------- ------------- ------------- -------------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gain on sale of equity securities..... $ 6,592 $ 6,592 $ 14,165 $ 14,165
Income before income taxes............ 87,328 151,481 94,901 159,054
Provision for income taxes............ (28,303) (47,147) (30,911) (49,755)
Division net income................... 59,025 104,334 63,990 109,299
</TABLE>
These financial statements include all normal and recurring adjustments that
we consider necessary for the fair presentation of Genzyme General's financial
position and operating results. Since these are interim financial statements,
you should also read the financial statements and notes for Genzyme General
included in our 1999 Form 10-K, as amended. Revenues, expenses, assets and
liabilities can vary from quarter to quarter. Therefore, the results and trends
in these interim financial statements may not be the same as those for future
periods.
We established Genzyme Surgical Products as a separate division of Genzyme
in June 1999. The business of Genzyme Surgical Products previously operated as a
business unit of Genzyme General. These unaudited, combined financial statements
reflect the allocated financial position, results of operations and cash flows
of Genzyme General as if Genzyme Surgical Products had been accounted for as a
separate division of Genzyme for all periods presented.
19
<PAGE>
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. INVENTORIES (AMOUNTS IN THOUSANDS):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
Raw materials........................................ $28,522 $24,057
Work-in-process...................................... 37,666 40,592
Finished products.................................... 19,950 19,735
------- -------
Total............................................ $86,138 $84,384
======= =======
</TABLE>
3. INTERDIVISIONAL FINANCING ARRANGEMENTS
GENZYME MOLECULAR ONCOLOGY
In April 2000, Genzyme Molecular Oncology drew $15.0 million of cash under
its interdivisional financing arrangement with Genzyme General in exchange for
676,254 Genzyme Molecular Oncology designated shares. As required by our
charter, the number of Genzyme Molecular Oncology designated shares was
determined using the average closing price of Molecular Oncology Stock for the
20 trading days beginning on the 30th trading day before the draw. As of June
30, 2000 $15 million remained available to Genzyme Molecular Oncology under this
arrangement.
GENZYME TISSUE REPAIR
In March 2000, Genzyme Tissue Repair made a $5.0 million draw under its
interdivisional financing arrangement with Genzyme General in exchange for
765,169 Genzyme Tissue Repair designated shares. As required by our charter, the
number of Genzyme Tissue Repair designated shares was determined by using the
average closing price of Tissue Repair Stock for the 20 trading days beginning
on the 30th trading day before the draw. As of June 30, 2000 $15 million
remained available to Genzyme Tissue Repair under this arrangement.
4. LICENSE AND STRATEGIC ALLIANCE AGREEMENTS
In March 2000, Genzyme General recorded $19.5 million as research and
development expense, representing the initial amounts payable to Synpac (North
Carolina), Inc. under a license granted by Synpac to Genzyme to develop and
commercialize Pompase(TM) enzyme replacement therapy for Pompe disease, which is
produced using a Chinese hamster ovary cell line. In connection with this
license, Genzyme General will pay Synpac certain amounts upon the achievement of
certain development and commercialization milestones. Genzyme General will also
pay Synpac royalties for a specified period of time based on certain percentages
of sales.
In June 2000, Genzyme and Pharming Group N.V. entered into a strategic
alliance agreement to share in the development and funding for the
commercialization of Pompase(TM) enzyme replacement therapy. Upon execution of
the definitive agreement, Pharming paid Genzyme cash of $250,000 and issued to
Genzyme a $10.0 million 7% Convertible Senior Note due June 1, 2004 (the
"Pharming Note"). This consideration was a reimbursement for 50% of the amounts
Genzyme previously paid to Synpac for product development and technology fees
and expenses. Accordingly, Genzyme recorded the $10.3 million as a reduction to
research and development expense during the three months ended June 30, 2000.
The Pharming Note is convertible at any time at Genzyme's option into fully
paid and nonassessable Ordinary Shares of Pharming. We have allocated our
interest in the Pharming Note to
20
<PAGE>
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. LICENSE AND STRATEGIC ALLIANCE AGREEMENTS (CONTINUED)
Genzyme General and have classified the Pharming Note as a long-term, related
party note receivable as of June 30, 2000.
5. GAIN ON AFFILIATE SALE OF STOCK
In February 2000, Genzyme Transgenics Corporation, an unconsolidated
affiliate, completed an offering of 3.5 million shares of Genzyme Transgenics
common stock, resulting in net proceeds to Genzyme Transgenics of $75.2 million
(after the exercise of the underwriter's overallotment option). In accordance
with our policy pertaining to affiliate sales of stock, we recognized a gain of
$20.3 million and recorded a net deferred tax expense of $3.9 million for the
three months ended March 31, 2000. The deferred tax expense is net of a
$3.4 million credit for the reversal of a valuation allowance on a deferred tax
asset. As a result of the issuance of the additional shares by Genzyme
Transgenics, our ownership interest in Genzyme Transgenics decreased from 33% to
28%.
6. GAIN ON SALE OF EQUITY SECURITIES
In June 2000, we recorded a gain of $5.5 million upon the sale of a portion
of its investment in Genzyme Transgenics common stock. The tax effect of this
gain was fully offset by the reversal of a $1.9 million valuation allowance
related to previously recognized capital losses.
7. SETTLEMENT OF LAWSUIT
In April 2000, we received net proceeds of approximately $5.1 million in
connection with the settlement of a lawsuit. We allocated these proceeds to
Genzyme General and recorded them as other income in Genzyme General's
unaudited, combined statements of operations for the three and six months ended
June 30, 2000. The lawsuit, initiated in 1993, pertained to an accidental spill
of Ceredase-Registered Trademark- enzyme at a fill facility operated by a
contractor to Genzyme General.
8. TAX PROVISION
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, INCREASE/ JUNE 30, INCREASE/
-------------------- (DECREASE) -------------------- (DECREASE)
2000 1999 % CHANGE 2000 1999 % CHANGE
--------- -------- ---------- --------- -------- ----------
(REVISED) (REVISED)
(UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Provision for income taxes....... $ 30,911 $ 20,417 51% $ 49,755 $ 40,633 22%
Effective tax rate............... 33% 42% 31% 40%
</TABLE>
Genzyme General's tax rates for both periods vary from the U.S. statutory
tax rate as a result of its:
- provision for state income taxes;
- use of a foreign sales corporation;
- nondeductible amortization of intangibles;
- use of tax credits; and
- share of losses of unconsolidated affiliates.
In the three months ended June 30, 2000 we reversed a $1.9 million valuation
allowance, which reduced our tax rate for the period by 2.2%. In the six months
ended June 30, 2000, we reversed valuation allowances totaling $5.3 million,
which reduced our tax rate for the period by 3.5%.
21
<PAGE>
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED)
9. SEGMENT REPORTING
We present segment information in a manner consistent with the method we use
to report this information to our management. Genzyme General has two reportable
segments:
- Therapeutics, which develops, manufactures and distributes human
therapeutic products for significant unmet medical needs. The business
derives substantially all of its revenue from sales of
Cerezyme-Registered Trademark- enzyme; and
- Diagnostic Products, which provides diagnostic products to niche markets
with a focus on IN VITRO diagnostics.
Information concerning the operations in these reportable segments is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2000 1999 2000 1999
--------- -------- --------- --------
(UNAUDITED, AMOUNTS IN THOUSANDS)
(REVISED) (REVISED)
<S> <C> <C> <C> <C>
Revenues:
Therapeutics...................... $148,578 $119,223 $282,380 $234,264
Diagnostic Products............... 15,539 14,955 30,777 29,646
Other............................. 22,425 19,456 43,847 39,914
Eliminations/Adjustments(1)....... 152 571 316 1,147
-------- -------- -------- --------
Total........................... $186,694 $154,205 $357,320 $304,971
======== ======== ======== ========
Division net income:
Therapeutics...................... $ 54,252 $ 32,910 $ 83,515 $ 66,781
Diagnostic Products............... 815 1,071 1,530 2,200
Other............................. (625) 187 (796) (1,851)
Eliminations/Adjustments(1)....... 9,548 (6,255) 25,050 (5,712)
-------- -------- -------- --------
Total........................... $ 63,990 $ 27,913 $109,299 $ 61,418
======== ======== ======== ========
</TABLE>
------------------------
(1) Includes primarily amounts related to Genzyme General's corporate research
and development and administrative activities that we do not specifically
allocate to a particular segment of Genzyme General. Division net income for
the six months ended June 30, 2000 also includes a gain of $20.3 million
relating to a public offering of common shares by Genzyme Transgenics. (See
Note 5 above.)
There has been no material change in segment assets since December 31, 1999.
10. NEW ACCOUNTING PRONOUNCEMENTS
We have included information regarding the impact that recently issued
accounting standards will have on our financial statements in Note 16., "New
Accounting Pronouncements," to our unaudited, consolidated financial statements,
which we incorporate by reference into this note.
22
<PAGE>
GENZYME MOLECULAR ONCOLOGY
A DIVISION OF GENZYME CORPORATION
COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED, AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Royalty and licensing revenue................... $ 963 $ 335 $ 3,518 $ 739
Revenue from research and development
contracts--related party...................... -- 198 -- 496
Service revenue................................. -- 600 -- 1,500
Service revenue--related party.................. -- -- -- 11
------- ------- -------- --------
Total revenues................................ 963 1,133 3,518 2,746
------- ------- -------- --------
Operating costs and expenses:
Cost of research and development, royalty and
licensing revenue............................. 139 212 195 506
Cost of service revenues........................ -- 160 -- 506
Selling, general and administrative............. 1,788 1,418 2,978 3,037
Research and development........................ 4,594 4,728 8,652 8,633
Amortization of intangibles..................... 2,464 2,957 5,420 5,913
------- ------- -------- --------
Total operating costs and expenses:........... 8,985 9,475 17,245 18,595
------- ------- -------- --------
Operating loss.................................... (8,022) (8,342) (13,727) (15,849)
------- ------- -------- --------
Other income (expenses):
Equity in net loss of joint venture............. -- (632) -- (1,007)
Investment income............................... 177 154 250 317
Interest expense................................ (70) -- (157) (3)
------- ------- -------- --------
Total other income (expenses)................. 107 (478) 93 (693)
------- ------- -------- --------
Loss before income taxes.......................... (7,915) (8,820) (13,634) (16,542)
Tax benefit....................................... 552 662 1,214 1,324
------- ------- -------- --------
Division net loss................................. $(7,363) $(8,158) $(12,420) $(15,218)
======= ======= ======== ========
Comprehensive loss, net of tax:
Division net loss............................... $(7,363) $(8,158) $(12,420) $(15,218)
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities
arising during the period................... -- -- -- --
------- ------- -------- --------
Comprehensive loss................................ $(7,363) $(8,158) $(12,420) $(15,218)
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
23
<PAGE>
GENZYME MOLECULAR ONCOLOGY
A DIVISION OF GENZYME CORPORATION
COMBINED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $1,085 $3,587
Short term investments.................................... 6,876 --
Accounts receivable....................................... 139 --
Prepaid expenses and other current assets................. 12 218
------ ------
Total current assets.................................... 8,112 3,805
Equipment, net.............................................. 705 467
Intangibles, net............................................ -- 5,420
------ ------
Total assets............................................ $8,817 $9,692
====== ======
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accrued expenses.......................................... $ 927 $ 676
Due to Genzyme General.................................... 4,104 3,793
Deferred revenue.......................................... 739 225
Current portion of long-term debt and capital lease
obligation.............................................. 105 5,000
------ ------
Total current liabilities............................... 5,875 9,694
Deferred tax liability.................................... -- 1,213
Long-term debt and capital lease obligations.............. 210 --
------ ------
Total liabilities....................................... 6,085 10,907
Division equity............................................. 2,732 (1,215)
------ ------
Total liabilities and division equity................... $8,817 $9,692
====== ======
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
24
<PAGE>
GENZYME MOLECULAR ONCOLOGY
A DIVISION OF GENZYME CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED, AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Division net loss......................................... $(12,420) $(15,218)
Reconciliation of division net loss to net cash used in
operating activities:
Depreciation and amortization........................... 5,499 6,059
Equity in net loss of joint venture..................... -- 1,007
Deferred tax benefit.................................... (1,214) (1,324)
Other................................................... (86) 18
Increase (decrease) in cash from working capital
changes:
Accounts receivable................................... (139) 5,675
Prepaid expenses and other current assets............. 206 (172)
Accrued expenses and deferred revenue................. 765 (468)
Due to Genzyme General................................ 311 (110)
-------- --------
Net cash used in operating activities............... (7,078) (4,533)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments.................................. (6,790) --
Sales and maturities of investments....................... -- 1,022
Acquisitions of equipment................................. -- (43)
-------- --------
Net cash provided by (used in) investing
activities........................................ (6,790) 979
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Allocated proceeds from issuance of Molecular Oncology
Stock................................................... 1,366 --
Repayments of debt........................................ (5,000) --
Net cash allocated from Genzyme General................... 15,000 --
-------- --------
Net cash provided by financing activities........... 11,366 --
-------- --------
Decrease in cash and cash equivalents....................... (2,502) (3,554)
Cash and cash equivalents at beginning of period............ 3,587 10,868
-------- --------
Cash and cash equivalents at end of period.................. $ 1,085 $ 7,314
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
25
<PAGE>
GENZYME MOLECULAR ONCOLOGY
A DIVISION OF GENZYME CORPORATION
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The combined financial statements of Genzyme Molecular Oncology for each
period include the balance sheets, results of operations and cash flows of the
businesses we allocate to Genzyme Molecular Oncology. We also allocate a portion
of our corporate operations to Genzyme Molecular Oncology using methods
described in our allocation policy below. These combined financial statements
are prepared using amounts included in our consolidated financial statements
included in this Form 10-Q. We prepared the unaudited, combined financial
statements for Genzyme Molecular Oncology following the requirements of the SEC
for interim reporting. As permitted under those rules, certain footnotes or
other financial information that are normally required by generally accepted
accounting principles can be condensed or omitted. We have reclassified certain
1999 data to conform to our 2000 presentation.
These financial statements include all normal and recurring adjustments that
are considered necessary for the fair presentation of Genzyme Molecular
Oncology's financial position and operating results. Since these are interim
financial statements, you should also read the financial statements and notes
for Genzyme Molecular Oncology included in our 1999 Form 10-K, as amended.
Revenues, expenses, assets and liabilities can vary from quarter to quarter.
Therefore, the results and trends in these interim financial statements may not
be the same as those for future periods.
2. REGISTRATION STATEMENTS
In March 2000, we filed with the SEC a prospectus pursuant to Rule 424 of
the Securities Act of 1933, as amended, covering the offering of 3,000,000
shares of Molecular Oncology Stock (plus 450,000 shares issuable upon exercise
of the underwriter's over-allotment option). The proceeds of the offering were
to be allocated to Genzyme Molecular Oncology. In April 2000, in light of market
volatility and market conditions at the time, we terminated the offering of
shares of Molecular Oncology Stock contemplated by the prospectus.
Pursuant to a prospectus filed under Rule 424 of the Securities Act of 1933,
as amended, in July 2000, we sold 1,607,400 shares of Molecular Oncology Stock
to a limited number of purchasers at a price of $12.91 per share. We received
approximately $20.7 million of net proceeds from the offering which we allocated
to Genzyme Molecular Oncology. The proceeds of this offering will be used
primarily to fund Genzyme Molecular Oncology's research, preclinical and
clinical development programs, and for its working capital and general corporate
purposes.
3. INTERDIVISIONAL FINANCING ARRANGEMENT
In April 2000, Genzyme Molecular Oncology drew $15.0 million of cash under
its interdivisional financing arrangement with Genzyme General in exchange for
676,254 Genzyme Molecular Oncology designated shares. As required by our
charter, the number of Genzyme Molecular Oncology designated shares was
determined using the average closing price of the Molecular Oncology Stock for
the 20 trading days beginning on the 30th trading day before the draw. These
funds will be used primarily to fund research, preclinical and clinical
development programs, and for working capital and general corporate purposes. As
of June 30, 2000, $15 million remained available to Genzyme Molecular Oncology
under this arrangement.
4. NEW ACCOUNTING PRONOUNCEMENTS
We have included information regarding the impact that recently issued
accounting standards will have on our financial statements in Note 16., "New
Accounting Pronouncements," to our unaudited, consolidated financial statements,
which we incorporate by reference into this note.
26
<PAGE>
GENZYME SURGICAL PRODUCTS
A DIVISION OF GENZYME CORPORATION
COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED, AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total revenues....................................... $ 29,969 $ 26,681 $ 59,051 $ 54,034
-------- -------- -------- --------
Operating costs and expenses:
Cost of products sold.............................. 16,592 17,439 32,631 33,283
Selling, general and administrative................ 17,042 16,492 33,442 31,779
Research and development........................... 7,001 8,983 13,972 14,585
Amortization of intangibles........................ 1,427 1,444 2,853 2,861
-------- -------- -------- --------
Total operating costs and expenses............... 42,062 44,358 82,898 82,508
-------- -------- -------- --------
Operating loss....................................... (12,093) (17,677) (23,847) (28,474)
-------- -------- -------- --------
Other income (expenses):
Investment income.................................. 1,709 56 3,391 63
Interest expense................................... (2) (34) (1) (35)
Other.............................................. 19 (3) 47 43
-------- -------- -------- --------
Total other income (expenses).................... 1,726 19 3,437 71
-------- -------- -------- --------
Division net loss.................................... $(10,367) $(17,658) $(20,410) $(28,403)
======== ======== ======== ========
Comprehensive loss, net of tax:
Division net loss.................................. $(10,367) $(17,658) $(20,410) $(28,403)
-------- -------- -------- --------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments......... 31 -- 31 --
Unrealized losses on securities arising during
the period..................................... (7,060) (628) (3,782) (628)
-------- -------- -------- --------
Other comprehensive loss........................... (7,029) (628) (3,751) (628)
-------- -------- -------- --------
Comprehensive loss................................... $(17,396) $(18,286) $(24,161) $(29,031)
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
27
<PAGE>
GENZYME SURGICAL PRODUCTS
A DIVISION OF GENZYME CORPORATION
COMBINED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 18,789 $ 22,673
Short-term investments.................................... 57,351 41,606
Accounts receivable, net.................................. 21,230 19,886
Inventories............................................... 38,869 30,491
Prepaid expenses and other current assets................. 1,124 815
-------- --------
Total current assets.................................... 137,363 115,471
Property, plant and equipment, net.......................... 17,795 17,621
Long-term investments....................................... 19,750 61,846
Intangibles, net............................................ 169,900 172,833
Deferred tax assets-noncurrent.............................. 1,371 --
Investment in equity securities............................. 4,274 3,140
Other....................................................... 3,778 13
-------- --------
Total assets............................................ $354,231 $370,924
======== ========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable.......................................... $ 5,360 $ 3,562
Accrued expenses.......................................... 8,750 7,038
Due to Genzyme General.................................... 8,368 6,406
-------- --------
Total current liabilities............................... 22,478 17,006
Division equity............................................. 331,753 353,918
-------- --------
Total liabilities and division equity................... $354,231 $370,924
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
28
<PAGE>
GENZYME SURGICAL PRODUCTS
A DIVISION OF GENZYME CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED, AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Division net loss......................................... $(20,410) $(28,403)
Reconciliation of division net loss to net cash used in
operating activities:
Depreciation and amortization........................... 4,450 3,967
Provision for bad debts................................. 150 175
Other................................................... 766 --
Increase (decrease) in cash from working capital
changes:
Accounts receivable................................... (1,494) (1,073)
Inventories........................................... (8,378) (7,877)
Prepaid expenses and other current assets............. (309) 1,470
Accounts payable and accrued expenses................. 3,512 5,045
Due to Genzyme General................................ 1,962 1,043
-------- --------
Net cash used in operating activities............... (19,751) (25,653)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments.................................. (76,944) --
Sales and maturities of investments....................... 102,628 --
Purchase of equity securities............................. (5,000) --
Purchase of plant and equipment........................... (1,642) (1,646)
Other..................................................... (3,830) 141
-------- --------
Net cash provided by (used in) investing
activities........................................ 15,212 (1,505)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Allocated proceeds from issuance of Surgical Products
Stock................................................... 625 --
Net cash allocated from Genzyme General................... -- 53,163
-------- --------
Net cash provided by financing activities........... 625 53,163
Effect of exchange rate changes on cash..................... 30 --
-------- --------
Increase (decrease) in cash and cash equivalents............ (3,884) 26,005
Cash and cash equivalents at beginning of period............ 22,673 --
-------- --------
Cash and cash equivalents at end of period.................. $ 18,789 $ 26,005
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
29
<PAGE>
GENZYME SURGICAL PRODUCTS
A DIVISION OF GENZYME CORPORATION
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
We established Genzyme Surgical Products as a separate division of Genzyme
in June 1999. The business of Genzyme Surgical Products previously operated as a
business unit of Genzyme General. These unaudited, combined financial statements
reflect the allocated financial position, results of operations and cash flows
of Genzyme Surgical Products as if it had been separately accounted for as a
separate division of Genzyme for all periods presented.
The combined financial statements of Genzyme Surgical Products for each
period include the balance sheets, results of operations and cash flows of the
businesses we allocate to Genzyme Surgical Products. We also allocate a portion
of our corporate operations to Genzyme Surgical Products using methods described
in our allocation policy below. These combined financial statements are prepared
using amounts included in our consolidated financial statements included in this
Form 10-Q. We prepared the unaudited, combined financial statements for Genzyme
Surgical Products following the requirements of the SEC for interim reporting.
As permitted under those rules, certain footnotes or other financial information
that are normally required by generally accepted accounting principles can be
condensed or omitted. We have reclassified certain 1999 data to conform to our
2000 presentation.
These financial statements include all normal and recurring adjustments that
we consider necessary for the fair presentation of Genzyme Surgical Products'
financial position and operating results. Since these are interim financial
statements, you should also read the financial statements and notes for Genzyme
Surgical Products included in our 1999 Form 10-K, as amended. Revenues,
expenses, assets and liabilities can vary from quarter to quarter. Therefore,
the results and trends in these interim financial statements may not be the same
as those for future periods.
2. INVENTORIES (AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
Raw materials........................................ $20,506 $15,473
Work-in-process...................................... 2,321 2,029
Finished products.................................... 16,042 12,989
------- -------
Total.............................................. $38,869 $30,491
======= =======
</TABLE>
3. INVESTMENT IN FOCAL, INC.
In April 2000, Focal, Inc. exercised its first option under the stock
purchase agreement between Genzyme and Focal. As required by the terms of this
agreement, Genzyme purchased $5.0 million of Focal common stock at a price of
$8.14 per share. We have allocated these shares to Genzyme Surgical Products. We
are committed, at Focal's option, to make future additional equity investments
of up to $10.0 million subject to certain conditions.
30
<PAGE>
GENZYME SURGICAL PRODUCTS
A DIVISION OF GENZYME CORPORATION
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. SEGMENT INFORMATION
We present segment information in a manner consistent with the method we use
to report this information to our management. Genzyme Surgical Products has two
reportable segments:
- Cardiovascular Surgery, which includes chest drainage systems, instruments
and closures used in coronary artery bypass, valve replacement, and other
cardiothoracic surgeries; and
- General Surgery, which includes surgical instruments and Sepra
Film-Registered Trademark- bioresorbable membrane.
Information concerning the operations in these reportable segments is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
(UNAUDITED, AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Cardiovascular Surgery................ $19,786 $18,047 $39,436 $37,433
General Surgery....................... 7,372 6,238 14,361 12,135
Other................................. 2,811 2,396 5,254 4,466
------- ------- ------- -------
Total............................... $29,969 $26,681 $59,051 $54,034
======= ======= ======= =======
Gross Profit:
Cardiovascular Surgery................ $ 8,332 $ 6,556 $16,720 $15,025
General Surgery....................... 2,966 2,046 6,529 4,449
Other................................. 2,079 640 3,171 1,277
------- ------- ------- -------
Total............................... $13,377 $ 9,242 $26,420 $20,751
======= ======= ======= =======
</TABLE>
The Other category includes amounts attributable to our products for plastic
surgery.
There has been no material change in segment assets since December 31, 1999.
31
<PAGE>
GENZYME SURGICAL PRODUCTS
A DIVISION OF GENZYME CORPORATION
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED)
5. ACQUISITION OF BIOMATRIX, INC. AND FORMATION OF GENZYME BIOSURGERY
In March 2000, we entered into an agreement to acquire Biomatrix, Inc. Upon
the effectiveness of our Registration Statement on Form S-4 and completion of
the merger, we will form a new operating division called Genzyme Biosurgery and
create a new series of common stock that is intended to reflect its value and
track its performance. We refer to this stock as "Biosurgery Stock." In
connection with the merger, and upon Genzyme shareholder approval, the assets
and liabilities allocated to Genzyme Surgical Products and Genzyme Tissue Repair
will be re-allocated to Genzyme Biosurgery and shares of Surgical Products Stock
and Tissue Repair Stock will be exchanged for Biosurgery Stock. We will account
for the acquisition of Biomatrix as a purchase.
Biomatrix stockholders will receive $37.00 in cash, one share of Biosurgery
Stock or a combination of cash and stock for each share of Biomatrix common
stock they hold. The merger agreement provides that we will pay cash for up to
28.38% of the outstanding shares of Biomatrix common stock that receive merger
consideration, or up to approximately $245.0 million.
Holders of Surgical Products Stock will receive 0.6060 share of Biosurgery
Stock in exchange for each share of Surgical Products Stock they hold and
holders of Tissue Repair Stock will receive 0.3352 share of Biosurgery Stock in
exchange for each share of Tissue Repair Stock they hold.
For more information about the merger and the merger consideration, we
encourage you to carefully read the Pre-Effective Amendment No. 1 to our
Registration Statement on Form S-4 filed with the SEC on July 3, 2000.
6. NEW ACCOUNTING PRONOUNCEMENTS
We have included information regarding the impact that recently issued
accounting standards will have on our financial statements in Note 16., "New
Accounting Pronouncements," to our unaudited, consolidated financial statements,
which we incorporate by reference into this note.
32
<PAGE>
GENZYME TISSUE REPAIR
A DIVISION OF GENZYME CORPORATION
COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED, AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total revenues.......................................... $ 6,287 $ 4,665 $12,154 $ 8,688
------- ------- ------- --------
Operating costs and expenses:
Cost of services sold................................. 3,023 3,221 6,046 6,219
Selling, general and administrative................... 5,626 6,115 11,365 12,429
Research and development.............................. 1,452 2,003 3,323 3,971
------- ------- ------- --------
Total operating costs and expenses.................. 10,101 11,339 20,734 22,619
------- ------- ------- --------
Operating loss.......................................... (3,814) (6,674) (8,580) (13,931)
------- ------- ------- --------
Other income (expenses):
Equity in net loss of joint venture................... -- (1,361) -- (3,368)
Investment income..................................... 106 72 208 165
Interest expense...................................... (323) (419) (625) (864)
Other................................................. -- -- (5) --
------- ------- ------- --------
Total other income (expenses)....................... (217) (1,708) (422) (4,067)
------- ------- ------- --------
Division net loss....................................... $(4,031) $(8,382) $(9,002) $(17,998)
======= ======= ======= ========
Comprehensive loss, net of tax:
Division net loss..................................... $(4,031) $(8,382) $(9,002) $(17,998)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments............ 11 -- 11 --
------- ------- ------- --------
Other comprehensive income............................ 11 -- 11 --
------- ------- ------- --------
Comprehensive loss...................................... $(4,020) $(8,382) $(8,991) $(17,998)
======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
33
<PAGE>
GENZYME TISSUE REPAIR
A DIVISION OF GENZYME CORPORATION
COMBINED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,382 $ 9,373
Accounts receivable, net.................................. 5,795 4,968
Inventories............................................... 2,340 2,394
Other current assets...................................... 384 253
------- -------
Total current assets.................................... 12,901 16,988
Property, plant and equipment, net.......................... 2,099 2,545
Other....................................................... 101 115
------- -------
Total assets............................................ $15,101 $19,648
======= =======
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable.......................................... $ 449 $ 1,062
Accrued expenses.......................................... 2,873 3,131
Due to Genzyme General.................................... 214 683
------- -------
Total current liabilities............................... 3,536 4,876
Long-term debt.............................................. 18,000 18,000
Other....................................................... 152 227
------- -------
Total liabilities....................................... 21,688 23,103
Division equity............................................. (6,587) (3,455)
------- -------
Total liabilities and division equity................... $15,101 $19,648
======= =======
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
34
<PAGE>
GENZYME TISSUE REPAIR
A DIVISION OF GENZYME CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED, AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Division net loss......................................... $ (9,002) $(17,998)
Reconciliation of division net loss to net cash used in
operating activities:
Depreciation and amortization........................... 515 682
Provision for bad debts................................. 37 --
Equity in net loss of joint venture..................... -- 3,368
Other................................................... 215 (75)
Increase (decrease) in cash from working capital
changes:
Accounts receivable................................... (866) (208)
Inventories........................................... 54 (13)
Other current assets.................................. (132) 739
Accounts payable and accrued expenses................. (890) (484)
Due to Genzyme General................................ (449) 5,647
-------- --------
Net cash used in operating activities............... (10,518) (8,342)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in joint venture............................... -- (3,594)
Purchase of plant and equipment........................... (30) (564)
Other..................................................... 13 34
-------- --------
Net cash used in investing activities............... (17) (4,124)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Allocated proceeds from issuance of Tissue Repair Stock,
net..................................................... 628 221
Payments of debt and capital lease obligations............ -- (148)
Cash allocated from Genzyme General....................... 4,940 29,984
-------- --------
Net cash provided by financing activities........... 5,568 30,057
-------- --------
Effect of exchange rates on cash............................ (24) --
-------- --------
Increase (decrease) in cash and cash equivalents............ (4,991) 17,591
Cash and cash equivalents at beginning of period............ 9,373 7,732
-------- --------
Cash and cash equivalents at end of period.................. $ 4,382 $ 25,323
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
35
<PAGE>
GENZYME TISSUE REPAIR
A DIVISION OF GENZYME CORPORATION
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The combined financial statements of Genzyme Tissue Repair for each period
include the balance sheets, results of operations and cash flows of the
businesses we allocate to Genzyme Tissue Repair. We also allocate a portion of
our corporate operations to Genzyme Tissue Repair using methods described in our
allocation policy below. These combined financial statements are prepared using
amounts included in our consolidated financial statements included in this Form
10-Q. We prepared the unaudited, combined financial statements for Genzyme
Tissue Repair following the requirements of the SEC for interim reporting. As
permitted under those rules, certain footnotes or other financial information
that are normally required by generally accepted accounting principles can be
condensed or omitted. We have reclassified certain 1999 data to conform to our
2000 presentation.
These financial statements include all normal and recurring adjustments that
we consider necessary for the fair presentation of Genzyme Tissue Repair's
financial position and operating results. Since these are interim financial
statements, you should also read the financial statements and notes for Genzyme
Tissue Repair included in our 1999 Form 10-K, as amended. Revenues, expenses,
assets and liabilities can vary from quarter to quarter. Therefore, the results
and trends in these interim statements may not be the same as those for future
periods.
2. INVENTORIES (AMOUNTS IN THOUSANDS):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
Raw materials........................................ $ 527 $ 428
Work-in-process...................................... 1,761 1,938
Finished goods....................................... 52 28
------ ------
Total.............................................. $2,340 $2,394
====== ======
</TABLE>
3. DIACRIN JOINT VENTURE
In May 1999, we re-allocated our ownership interest in Diacrin/Genzyme LLC,
our joint venture with Diacrin, Inc., to develop and commercialize products
using porcine fetal cells for the treatment of Parkinson's and Huntington's
diseases, from Genzyme Tissue Repair to Genzyme General in exchange for
$25.0 million in cash. In connection with the re-allocation, it was agreed that
Genzyme Tissue Repair would be required to pay to Genzyme General $20.0 million
plus accrued interest at an annual rate of 13.5% if the joint venture had not
initiated a phase 3 clinical trial of NeuroCell-TM--PD by June 30, 2000. In
June 2000, our board of directors extended the milestone timeline to initiate a
phase 3 clinical trial of NeuroCell-TM--PD from June 30, 2000 to December 31,
2000. The milestone date and related financial obligation were extended to allow
additional time to review data from the current blinded phase 2 clinical trial.
If the milestone is not met, any required refund may be paid to Genzyme General
in cash, Genzyme Tissue Repair designated shares, or a combination of both, at
Genzyme Tissue Repair's option.
36
<PAGE>
GENZYME TISSUE REPAIR
A DIVISION OF GENZYME CORPORATION
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. INTERDIVISIONAL FINANCING ARRANGEMENT
In March 2000, Genzyme Tissue Repair made a $5.0 million draw under its
interdivisional financing arrangement with Genzyme General in exchange for
765,169 Genzyme Tissue Repair designated shares. As required by our charter, the
number of Genzyme Tissue Repair designated shares was determined by using the
average closing price of the Tissue Repair Stock for the 20 trading days
beginning on the 30th trading day before the draw. The funds will be used for
Genzyme Tissue Repair's operating needs. As of June 30, 2000 $15 million
remained available to Genzyme Tissue Repair under this arrangement.
5. ACQUISITION OF BIOMATRIX, INC. AND FORMATION OF GENZYME BIOSURGERY
In March 2000, we entered into an agreement to acquire Biomatrix, Inc. Upon
the effectiveness of our Registration Statement on Form S-4 and completion of
the merger, we will form a new operating division called Genzyme Biosurgery and
create a new series of common stock that is intended to reflect its value and
track its performance. We refer to this stock as "Biosurgery Stock." In
connection with the merger, and upon Genzyme Shareholder approval, the assets
and liabilities allocated to Genzyme Surgical Products and Genzyme Tissue Repair
will be re-allocated to Genzyme Biosurgery and shares of Surgical Products Stock
and Tissue Repair Stock will be exchanged for Biosurgery Stock. We will account
for the acquisition of Biomatrix as a purchase.
Biomatrix stockholders will receive $37.00 in cash, one share of Biosurgery
Stock or a combination of cash and stock for each share of Biomatrix common
stock they hold. The merger agreement provides that we will pay cash for up to
28.38% of the outstanding shares of Biomatrix common stock that receive merger
consideration, or up to approximately $245.0 million.
Holders of Surgical Products Stock will receive 0.6060 share of Biosurgery
Stock in exchange for each share of Surgical Products Stock they hold and
holders of Tissue Repair Stock will receive 0.3352 share of Biosurgery Stock in
exchange for each share of Tissue Repair Stock they hold.
For more information about the merger and the merger consideration, we
encourage you to carefully read the Pre-Effective Amendment No. 1 to our
Registration Statement on Form S-4 filed with the SEC on July 3, 2000.
6. NEW ACCOUNTING PRONOUNCEMENTS
We have included information regarding the impact that recently issued
accounting standards will have on our financial statements in Note 16., "New
Accounting Pronouncements," to our unaudited, consolidated financial statements,
which we incorporate by reference into this note.
37
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion contains forward-looking statements. These forward-looking
statements represent the expectations of our management as of the filing date of
this report. Actual results could differ materially from those anticipated by
the forward-looking statements due to the risks and uncertainties described in
Exhibit 99.2, "Factors Affecting Future Operating Results," to our 1999
Form 10-K. You should consider carefully each of these risks and uncertainties
in evaluating our financial condition and results of operations.
We are a biotechnology company that develops innovative products and
services for significant unmet medical needs. We have four operating divisions:
- Genzyme General, which develops and markets:
- therapeutic products, with an expanding focus on products to treat
patients suffering from lysosomal storage disorders and other specialty
therapeutics;
- diagnostic products, with a focus on IN VITRO diagnostics; and
- other products and services, such as genetic testing services and
lipids and peptides for drug delivery.
- Genzyme Molecular Oncology, which is developing cancer products, with a
focus on therapeutic vaccines and angiogenesis inhibitors;
- Genzyme Surgical Products, which develops, manufactures and markets
surgical products for cardiovascular surgery and general surgery; and
- Genzyme Tissue Repair, which develops and markets biological products for
orthopedic injuries, such as cartilage damage, and severe burns.
In June 1997, we formed Genzyme Molecular Oncology as a separate division of
Genzyme by acquiring PharmaGenics, Inc. and combining it with several of our
ongoing programs in the field of oncology.
In June 1999, we established Genzyme Surgical Products. The business of
Genzyme Surgical Products previously operated as a business unit of Genzyme
General. The discussion that follows reflects the results of operations as if
Genzyme Surgical Products had existed as a separate division of Genzyme for all
periods presented.
The greater segregation of assets, liabilities and earnings (losses)
resulting from the creation of Genzyme Molecular Oncology and Genzyme Surgical
Products is a trend that we do not expect to continue. As discussed below,
Genzyme Surgical Products and Genzyme Tissue Repair will be combined into
Genzyme Biosurgery upon the completion of the Biomatrix acquisition, reducing
the segregation of assets among our divisions and reducing the series of common
stock outstanding. As market or competitive conditions warrant, we may create
new series of tracking stock or change our earnings allocation methodology.
However, at the present time, we have no plans to do so.
We prepare the financial statements of Genzyme in accordance with generally
accepted accounting principles. We present financial information and accounting
policies specific to Genzyme in Exhibit 99.1 to our 1999 Form 10-K.
We have four series of common stock--Genzyme General Stock, Molecular
Oncology Stock, Surgical Products Stock and Tissue Repair Stock--which we refer
to as "tracking stock." Unlike typical common stock, each of our tracking stocks
is designed to track the financial performance of a specific subset of our
business operations and its allocated assets, rather than operations and assets
of our entire company. The chief mechanisms intended to cause each tracking
stock to "track" the financial
38
<PAGE>
performance of each division are provisions in our charter governing dividends
and distributions. Under these provisions, our charter:
- factors the assets and liabilities and income or losses attributable to a
division into the determination of the amount available to pay dividends
on the associated tracking stock; and
- requires us to exchange, redeem or distribute a dividend to the holders of
Molecular Oncology Stock, Surgical Products Stock, or Tissue Repair Stock
if all or substantially all of the assets allocated to those corresponding
divisions are sold to a third party (a dividend or redemption payment must
equal in value the net after-tax proceeds from the sale; an exchange must
be for Genzyme General Stock at a 10% premium to the exchanged stock's
average market price following the announcement of the sale.)
To determine earnings per share, we allocate Genzyme's earnings to each
series of our common stock based on the earnings attributable to that series of
stock. The earnings attributable to each series of stock is defined in our
charter as the net income or loss of the corresponding division determined in
accordance with generally accepted accounting principles and as adjusted for tax
benefits allocated to or from the division in accordance with our management and
accounting policies. Our charter also requires that all income and expenses of
Genzyme be allocated among the divisions in a reasonable and consistent manner.
However, subject to fiduciary duties, our board of directors can, at its
discretion, change the methods of allocating earnings to each series of common
stock. We intend to allocate earnings using our current methods for the
foreseeable future. See "Earnings Allocation" below.
Because the earnings allocated to each series of stock are based on the
income or losses attributable to each corresponding division, we include
financial statements and management's discussion and analysis of Genzyme
Corporation and of each division to aid investors in evaluating Genzyme's
performance and the performance of each of its divisions.
While each tracking stock is designed to reflect a division's performance,
it is common stock of Genzyme Corporation and not of a division; each division
is not a company or legal entity, and therefore does not and cannot issue stock.
Consequently, holders of a series of tracking stock have no specific rights to
assets allocated to the corresponding division. Genzyme Corporation continues to
hold title to all of the assets allocated to each division and is responsible
for all of its liabilities, regardless of what we deem for financial statement
presentation purposes as allocated to any division. Holders of each tracking
stock, as common stockholders, are therefore subject to the risks of investing
in the businesses, assets and liabilities of Genzyme as a whole. For instance,
the assets allocated to each division are subject to company-wide claims of
creditors, product liability plaintiffs and stockholder litigation. Also, in the
event of a Genzyme liquidation, insolvency or similar event, holders of each
tracking stock would only have the rights of common stockholders in the combined
assets of Genzyme.
We provide separate financial statements for each of our divisions as well
as consolidated financial statements that include the consolidated results of
each of our divisions and our corporate operations taken as a whole. You should
read this discussion and analysis of our financial position and results of
operations in conjunction with those unaudited, consolidated financial
statements and related notes, which are included in this report.
In March 2000, we entered into an agreement to acquire Biomatrix, Inc. Upon
completion of the acquisition, we will form a new operating division, and the
assets and liabilities allocated to Genzyme Surgical Products and Genzyme Tissue
Repair will be re-allocated to that new division. For more information you
should read the section entitled "Liquidity and Capital Resources" below.
39
<PAGE>
A. RESULTS OF OPERATIONS
GENZYME CORPORATION
The components of our consolidated statements of operations are described in
the following table:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, INCREASE/ JUNE 30, INCREASE/
-------------------- (DECREASE) -------------------- (DECREASE)
2000 1999 % CHANGE 2000 1999 % CHANGE
--------- -------- ---------- --------- -------- ----------
(REVISED) (REVISED)
(UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Total revenues.................. $223,913 $186,684 20% $432,043 $370,428 17%
-------- -------- -------- --------
Cost of products and services
sold.......................... 65,610 56,989 15% 125,720 112,888 11%
Selling, general and
administrative................ 67,428 66,358 2% 128,979 125,303 3%
Research and development
(including research and
development related to
contracts).................... 28,577 40,873 (30)% 84,276 73,707 14%
Amortization of intangibles..... 5,684 6,166 (8)% 11,782 12,373 (5)%
-------- -------- -------- --------
Total operating costs and
expenses.................. 167,299 170,386 (2)% 350,757 324,271 8%
-------- -------- -------- --------
Operating income................ 56,614 16,298 247% 81,286 46,157 76%
Other income (expense), net..... 16,192 (2,576) 729% 35,192 (6,545) 638%
-------- -------- -------- --------
Income before income taxes...... 72,806 13,722 431% 116,478 39,612 194%
Provision for income taxes...... (23,314) (7,431) 214% (35,168) (17,264) 104%
-------- -------- -------- --------
Net income...................... $ 49,492 $ 6,291 687% $ 81,310 $ 22,348 264%
======== ======== ======== ========
</TABLE>
REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, INCREASE/ JUNE 30, INCREASE/
------------------- (DECREASE) ------------------- (DECREASE)
2000 1999 % CHANGE 2000 1999 % CHANGE
-------- -------- ---------- -------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Product revenue................. $201,439 $165,873 21% $385,860 $329,575 17%
Service revenue................. 21,347 19,799 8% 42,313 38,529 10%
-------- -------- -------- --------
Total product and service
revenue................... 222,786 185,672 20% 428,173 368,104 16%
Research and development
revenue....................... 1,127 1,012 11% 3,870 2,324 67%
-------- -------- -------- --------
Total revenues.............. $223,913 $186,684 20% $432,043 $370,428 17%
======== ======== ======== ========
</TABLE>
40
<PAGE>
PRODUCT REVENUE:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, INCREASE/ JUNE 30, INCREASE/
------------------- (DECREASE) ------------------- (DECREASE)
2000 1999 % CHANGE 2000 1999 % CHANGE
-------- -------- ---------- -------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Genzyme General:
Therapeutics:
Cerezyme-Registered Trademark-/Ceredase-Registered Trademark-
enzyme............................ $134,854 $116,904 15% $263,460 $230,658 14%
Renagel-Registered Trademark-
Capsules.......................... 10,218 -- 100% 10,218 -- 100%
Thyrogen-Registered Trademark-
hormone........................... 3,506 2,319 51% 6,867 3,606 90%
Other therapeutic products.......... -- -- -- 1,835 -- 100%
-------- -------- -------- --------
Total Therapeutics................ 148,578 119,223 25% 282,380 234,264 21%
Diagnostic Products................... 15,539 14,955 4% 30,777 29,646 4%
Other................................. 7,353 5,014 47% 13,652 11,631 17%
-------- -------- -------- --------
Total product revenue--Genzyme
General........................... 171,470 139,192 23% 326,809 275,541 19%
Genzyme Surgical Products:
Cardiovascular...................... 19,786 18,047 10% 39,436 37,433 5%
General Surgery..................... 7,372 6,238 18% 14,361 12,135 18%
Other............................... 2,811 2,396 17% 5,254 4,466 18%
-------- -------- -------- --------
Total product revenue--Genzyme
Surgical Products................. 29,969 26,681 12% 59,051 54,034 9%
-------- -------- -------- --------
Total product revenue................... $201,439 $165,873 21% $385,860 $329,575 17%
======== ======== ======== ========
</TABLE>
We derive product revenue from sales by Genzyme General of therapeutic and
diagnostic products and sales by Genzyme Surgical Products of cardiovascular and
general surgery products. Our increase in product revenue during both periods is
largely due to increased sales of Cerezyme-Registered Trademark- enzyme, which
is a therapy for the treatment of Gaucher disease. The increase in sales of
Cerezyme-Registered Trademark- enzyme is attributable to our identification of
new Gaucher disease patients throughout the world and strong international
sales. We also sell Ceredase-Registered Trademark- enzyme for the treatment of
Gaucher disease, but we have successfully converted virtually all Gaucher
disease patients to a treatment regimen using Cerezyme-Registered Trademark-
enzyme.
Our results of operations are highly dependent on sales of
Cerezyme-Registered Trademark- enzyme, and a reduction in revenue from sales of
this product would adversely affect our results of operations.
The following table provides information regarding the growth in sales of
our Gaucher disease therapies as a percentage of total product revenue during
both periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
% of total product revenue.......................... 67% 70% 68% 70%
</TABLE>
Genzyme General began recording revenues from Renagel-Registered Trademark-
Capsules (sevelamer hydrochloride) during the second quarter of 2000 under an
amended distribution arrangement with its joint venture partner, GelTex
Pharmaceuticals, Inc. Revenues from Renagel-Registered Trademark- Capsules were
previously recorded by the joint venture. Renagel-Registered Trademark- Capsules
are used to reduce serum phosphorus levels in patients with end-stage renal
disease on dialysis.
41
<PAGE>
Sales of Thyrogen-Registered Trademark- hormone, which is an adjunctive
diagnostic tool for well differentiated thyroid cancer, increased in the three
and six months ended June 30, 2000 due to increased market penetration. We
commenced commercial sales of Thyrogen-Registered Trademark- hormone in January
1999.
Diagnostics revenues within Genzyme General increased during both periods
due primarily to increased sales of HDL and LDL cholesterol testing products,
despite the sale of our bioreagent and ELISA product lines in July 1999.
Diagnostics' product revenue includes royalties on product sales by Techne
Corporation's biotechnology group.
Genzyme Surgical Products cardiovascular surgery products include chest
drainage and fluid management systems, surgical closures, biomaterials, and
instruments for conventional and minimally invasive cardiac surgery. The
increase in cardiovascular surgery products revenues for both periods is
primarily attributable to increased sales of instruments for minimally invasive
cardiac surgery. Additionally, a slight increase in sales of fluid management
products contributed to the overall increase in cardiovascular surgery products
revenue growth.
Genzyme Surgical Products also experienced an increase in general surgery
products revenue for both periods, which is due primarily to an increase in
sales of Sepra Film-Registered Trademark- bioresorbable membrane. Sales of Sepra
products for the three months ended June 30, 2000 were $4.3 million compared to
$3.5 million in the same period in 1999. Sales of Sepra products for the six
months ended June 30, 2000 were $8.2 million compared to $6.4 million in the
same period of 1999. An increase in general surgery instrument sales also
contributed to the overall increase in general surgery product revenue.
SERVICE REVENUE:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, INCREASE/ JUNE 30, INCREASE/
------------------- (DECREASE) ------------------- (DECREASE)
2000 1999 % CHANGE 2000 1999 % CHANGE
-------- -------- ---------- -------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Genzyme General:
Genetic testing......................... $15,061 $14,534 4% $30,181 $28,426 6%
------- ------- ------- -------
Genzyme Molecular Oncology:
Genomics and gene expression............ -- 600 (100)% -- 1,500 (100)%
------- ------- ------- -------
Genzyme Tissue Repair:
Carticel-Registered Trademark-
Chondrocytes.......................... 4,577 3,798 21% 9,109 6,740 35%
Epicel-TM- Skin Grafts.................. 1,709 867 97% 3,023 1,863 62%
------- ------- ------- -------
Total service revenue
Genzyme Tissue Repair............... 6,286 4,665 35% 12,132 8,603 41%
------- ------- ------- -------
Total service revenue..................... $21,347 $19,799 8% $42,313 $38,529 10%
======= ======= ======= =======
</TABLE>
Our service revenues increased during both periods as a result of increases
in sales of Carticel-Registered Trademark- chondrocytes for the treatment of
cartilage damage and Epicel-TM- skin grafts for the treatment of severe burns as
well as increased revenue from genetic testing. The increase in genetic testing
service revenue during both periods is a result of growth in sales of our DNA
and cancer testing services. These increases were partially offset by a decrease
in genomics service revenue for both periods as a result of lower sales volume.
42
<PAGE>
RESEARCH AND DEVELOPMENT REVENUE:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, INCREASE/ JUNE 30, INCREASE/
------------------- (DECREASE) ------------------- (DECREASE)
2000 1999 % CHANGE 2000 1999 % CHANGE
-------- -------- ---------- -------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Genzyme General.......................... $ 163 $ 479 (66)% $ 330 $1,004 (67)%
Genzyme Molecular Oncology............... 963 533 81% 3,518 1,235 185%
Genzyme Tissue Repair.................... 1 -- 100% 22 85 (74)%
------ ------ ------ ------
Total research and development revenue... $1,127 $1,012 11% $3,870 $2,324 67%
====== ====== ====== ======
</TABLE>
Our research and development revenue increased during both periods due to an
increase in licensing revenue. Genzyme Molecular Oncology recognized licensing
revenue in the first six months of 2000 as a result of a $2.0 million
development milestone payment received in connection with the advancement by
Schering-Plough Corporation of the p53 tumor suppressor gene in ovarian cancer
clinical trials.
The increase in research and development revenue was partially offset by a
decrease in revenue related to StressGen/Genzyme LLC, our joint venture with
StressGen Biotechnologies Corporation and the Canadian Medical Discoveries
Fund, Inc. to develop stress gene therapies for the treatment of cancer. This
joint venture was dissolved at the end of 1999. The research and development
revenues for both periods of 1999 included work performed by Genzyme Molecular
Oncology on behalf of the joint venture for which there was no comparable amount
in the same periods of 2000.
INTERNATIONAL PRODUCT AND SERVICE SALES:
A substantial portion of our revenue is generated outside of the United
States, as described in the following table. Most of these revenues are
attributable to sales of Cerezyme-Registered Trademark- enzyme.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, INCREASE/ JUNE 30, INCREASE/
------------------- (DECREASE) ------------------- (DECREASE)
2000 1999 % CHANGE 2000 1999 % CHANGE
-------- -------- ---------- -------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Total international product and
service revenue................. $88,410 $76,864 15% $175,187 $149,200 17%
% of total product and service
revenue......................... 40% 41% 41% 41%
</TABLE>
MARGINS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, INCREASE/ JUNE 30, INCREASE/
------------------- (DECREASE) ------------------- (DECREASE)
2000 1999 % CHANGE 2000 1999 % CHANGE
-------- -------- ---------- -------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Product margin.................. $147,796 $121,298 22% $283,958 $241,189 18%
% of product revenue............ 73% 73% 74% 73%
Service margin.................. 9,380 7,385 27% 18,495 14,027 32%
% of service revenue............ 44% 37% 44% 36%
Total gross margin.............. $157,176 $128,683 22% $302,453 $255,216 19%
% of total product and service
revenue....................... 71% 69% 71% 69%
</TABLE>
43
<PAGE>
We provide a broad range of health care products and services. As a result,
our gross margins vary significantly based on the category of product or
service. Sales of therapeutic products, including Cerezyme-Registered Trademark-
enzyme, result in higher margins than sales of surgical and diagnostic products.
Our service margin increased during both periods. These increases are
attributable to:
- an increase in sales of DNA and cancer testing services;
- increased sales of Carticel-Registered Trademark- chondrocytes and
Epicel-TM- skin grafts; and
- a reduction in labor, materials and production costs for
Carticel-Registered Trademark- chondrocytes and Epicel-TM- skin grafts.
The increases were partially offset, however, by reduced margins from our
genomics services business due to lower sales volume.
OPERATING EXPENSE
The increase in selling, general and administrative expenses in both periods
is related to:
- increased staffing to support the growth in several of Genzyme General's
product lines;
- increased expenditures to support the increased sales of
Cerezyme-Registered Trademark- enzyme and Thyrogen-Registered Trademark-
hormone; and
- increased spending for marketing of Genzyme Surgical Products'
cardiovascular products, primarily the minimally invasive cardiac surgery
instrument line.
The increase in selling general and administrative expenses were partially
offset in both periods by the following:
- efforts by Genzyme Tissue Repair to streamline its operations; and
- continued expense control efforts at Genzyme Molecular Oncology.
The decrease in research and development expense for the second quarter of
2000 as compared to the second quarter of 1999 is a result of a $10.3 million
research and development reimbursement from Pharming Group N.V. representing
Pharming's share of amounts we previously paid to Synpac (North Carolina), Inc.
for rights to Pompase-TM- enzyme replacement therapy for Pompe disease.
The increase in research and development expense for the six months ended
June 30, 2000 as compared to the same period last year is a result of the
following:
- a charge of $19.5 million during the first quarter of 2000 for the initial
amounts paid to Synpac under a license agreement granted by Synpac to
Genzyme to develop and commercialize Pompase-TM- enzyme replacement
therapy for Pompe disease, which is produced using a Chinese hamster ovary
cell line, offset in part by a $10.3 million research and development
reimbursement received from Pharming as described above;
- increased spending on our program to develop Fabrazyme-TM- enzyme for the
treatment of Fabry disease;
- increased costs in connection with the operations of ATIII LLC, a joint
venture with Genzyme Transgenics whose results we consolidate;
- increased spending in our cell and gene therapy programs;
- increased clinical trial costs for our melanoma and breast cancer tumor
vaccine programs;
- an increase in the number of research personnel and related expenses
required to support our immunotherapy and antiangiogenesis programs; and
- the termination of our TGF-beta and other research and development
programs allocated to Genzyme Tissue Repair.
44
<PAGE>
AMORTIZATION OF INTANGIBLES
Our amortization of intangibles is attributable primarily to intangible
assets acquired in connection with the acquisition of PharmaGenics, Inc. in June
1997. These assets were fully amortized by the end of the second quarter of
2000.
OTHER INCOME AND EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, INCREASE/ JUNE 30, INCREASE/
-------------------- (DECREASE) -------------------- (DECREASE)
2000 1999 % CHANGE 2000 1999 % CHANGE
--------- -------- ---------- --------- -------- ----------
(REVISED) (REVISED)
(UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Equity in net loss of
unconsolidated affiliates........ $(11,313) $(8,962) 26% $(19,446) $(19,100) 2%
Minority interest.................. 1,352 864 56% 2,208 1,730 28%
Investment income.................. 10,631 9,102 17% 20,575 17,288 19%
Interest expense................... (3,836) (5,590) (31)% (7,775) (11,088) (30)%
Gain on affiliate sale of stock.... -- -- N/A 20,270 606 3,245%
Gain on sale of product line....... -- 7,500 (100)% -- 7,500 (100)%
Gain on sale of equity
securities....................... 14,165 -- 100% 14,165 1,963 236%
Charge for impaired investment..... -- (5,487) (100)% -- (5,487) (100)%
Other.............................. 5,193 (3) N/A 5,195 43 N/A
-------- ------- -------- --------
Total other income (expenses).... $ 16,192 $(2,576) 729% $ 35,192 $ (6,545) 638%
======== ======= ======== ========
</TABLE>
EQUITY IN NET LOSS OF UNCONSOLIDATED AFFILIATES:
We currently own approximately 28% of the common stock of Genzyme
Transgenics. We record in net loss of unconsolidated affiliates our portion of
their results. We also record the results of the following joint ventures and
strategic alliances in net loss of unconsolidated affiliates:
<TABLE>
<CAPTION>
JOINT VENTURE/
STRATEGIC ALLIANCE PARTNER(S) EFFECTIVE DATE PRODUCT/INDICATION GENZYME DIVISION
------------------ ---------------------- -------------- ----------------------- -----------------------
<S> <C> <C> <C> <C>
RenaGel LLC GelTex June 1997 Renagel-Registered Trademark- Genzyme General
Pharmaceuticals, Inc. Capsules for the
reduction of serum
phosphorus in patients
with end-stage renal
disease on hemodialysis
BioMarin/ BioMarin September 1998 Alpha-L-iduronidase for Genzyme General
Genzyme LLC Pharmaceutical Inc. the treatment of
mucopolysaccharidosis-I
Pharming/ Pharming Group N.V. October 1998 Transgenically- Genzyme General
Genzyme LLC produced human alpha-
glucosidase for the
treatment of Pompe
disease
Genzyme/ Pharming Group N.V. June 2000 Pompase-TM- enzyme Genzyme General
Pharming replacement therapy for
Alliance LLC Pompe disease
Diacrin/ Diacrin, Inc. October 1996 Products using porcine Genzyme Tissue Repair
Genzyme LLC fetal cells for the (until May 1999);
treatment of Genzyme General (after
Parkinson's and May 1999)
Huntington's diseases
StressGen/ StressGen July 1997 Stress gene therapies Genzyme Molecular
Genzyme LLC Biotechnologies Ltd.; for the treatment of Oncology
Canadian Medical cancer
Discoveries Fund, Inc.
(until October 1999)
</TABLE>
45
<PAGE>
Our equity in net loss of unconsolidated affiliates increased in both
periods as a result of:
- increased losses from RenaGel LLC;
- increased losses from BioMarin/Genzyme LLC;
- increased losses from Diacrin/Genzyme LLC; and
- increased losses from Genzyme Transgenics.
These increases were offset in part by decreased losses from
Pharming/Genzyme LLC and the absence of losses from StressGen/Genzyme LLC, which
was dissolved in the fourth quarter of 1999.
MINORITY INTEREST:
Due to our combined direct and indirect ownership interest in ATIII LLC, we
consolidate the results of ATIII LLC and record Genzyme Transgenics' portion of
the losses of that joint venture as minority interest. Minority interest for
both periods increased due to increased losses incurred by ATIII LLC.
INVESTMENT INCOME:
Investment income increased during both periods due to higher average cash
and investment balances.
INTEREST EXPENSE:
Our interest expense decreased during both periods as a result of our
repayment in November 1999 of $82.0 million outstanding under our revolving
credit facility.
GAIN ON AFFILIATE SALE OF STOCK:
In February 2000, Genzyme Transgenics, an unconsolidated affiliate,
completed an offering of 3.5 million shares of Genzyme Transgenics common stock,
resulting in net proceeds to Genzyme Transgenics of $75.2 million (after the
exercise of the underwriter's overallotment option). In accordance with our
policy pertaining to affiliate sales of stock, we recognized a gain of
$20.3 million and recorded a net deferred tax expense of $3.9 million for the
three months ended March 31, 2000. The deferred tax expense is net of a
$3.4 million credit for the elimination of a valuation allowance on deferred tax
assets. As a result of the issuance of the additional shares by Genzyme
Transgenics, our ownership interest in Genzyme Transgenics decreased from 33% to
28%.
GAIN ON SALE OF PRODUCT LINE OR BUSINESS:
In June 1999, we recorded a gain of $7.5 million representing the payment of
a note receivable that we received as partial consideration for the sale of
Genetic Design, Inc. in 1996. We had previously fully reserved the amount of
this note because we considered the repayment of the note to be uncertain.
GAIN ON SALE OF EQUITY SECURITIES:
In June 2000, we recorded a gain of $5.5 million upon the sale of a portion
of our investment in Genzyme Transgenics common stock. The tax effect of this
gain was fully offset by the reversal of a $1.9 million valuation allowance
related to previously recognized capital losses.
On June 1, 2000, Celtrix Pharmaceuticals, Inc. was acquired by Insmed Inc.
upon which our shares of Celtrix common stock were exchanged on a 1-for-1 basis
for shares of Insmed common stock. On the date of the exchange, we recognized
the unrealized gain of $7.6 million, net of tax, as a credit to
46
<PAGE>
stockholders' equity. We should have recognized this gain as a realized gain and
recorded such gain in income. Accordingly, we have revised our financial
statements for the three and six months ended June 30, 2000 to reclassify the
$7.6 million gain, net of tax, from an unrealized gain to a realized gain. The
impact of this revision on the three and six months ended June 30, 2000 is as
follows:
<TABLE>
<CAPTION>
PREVIOUSLY REPORTED REVISED
----------------------------- -----------------------------
3 MONTHS 6 MONTHS 3 MONTHS 6 MONTHS
------------- ------------- ------------- -------------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gain on sale of equity securities..... $ 6,592 $ 6,592 $ 14,165 $ 14,165
Income before income taxes............ 65,233 108,905 72,806 116,478
Provision for income taxes............ (20,699) (32,553) (23,314) (35,168)
Net income............................ 44,534 76,352 49,492 81,310
Net income allocated to Genzyme
General Stock....................... 66,077 117,714 71,035 122,672
Net income per share of Genzyme
General Stock:
Basic............................... $ 0.78 $ 1.39 $ 0.84 $ 1.45
Diluted............................. $ 0.72 $ 1.29 $ 0.77 $ 1.35
</TABLE>
CHARGE FOR IMPAIRED INVESTMENT:
In June 1999, we recorded a $5.5 million charge in connection with a
strategic investment in a collaborator's common stock because we considered the
decline in the value of that stock to be other than temporary. In connection
with this assessment, we concluded that substantial evidence existed that the
value of the investment would recover to at least its cost. This included
continued positive progress in the issuer's scientific programs, ongoing
activity in our collaborations with the issuer, and a lack of any substantial
company-specific adverse events causing the declines in value. However, given
the significance and duration of the decline as of the end of the applicable
quarter, we concluded that it was unclear over what period such price recovery
would take place and that, accordingly, the positive evidence suggesting that
the investment would recover to at least our purchase price was not sufficient
to overcome the presumption that the current market price was the best indicator
of the value of these investments.
OTHER:
In April, 2000, we received net proceeds of approximately $5.1 million in
connection with the settlement of a lawsuit. The lawsuit, initiated in 1993,
pertained to an accidental spill of Ceredase-Registered Trademark- enzyme at a
fill facility operated by a contractor to Genzyme. We allocated the net proceeds
from the settlement of this lawsuit to Genzyme General.
TAX PROVISION
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS ENDED
JUNE 30, INCREASE/ JUNE 30, INCREASE/
-------------------- (DECREASE) -------------------- (DECREASE)
2000 1999 % CHANGE 2000 1999 % CHANGE
--------- -------- ---------- --------- -------- ----------
(REVISED) (REVISED)
(UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Provision for income taxes........... $23,314 $7,431 214% $35,168 $17,264 104%
Tax rate............................. 32% 54% 30% 44%
</TABLE>
Our tax rates for both periods vary from the U.S. statutory tax rate as a
result of our:
- provision for state income taxes;
47
<PAGE>
- use of a foreign sales corporation;
- nondeductible amortization of intangibles;
- use of tax credits; and
- share of losses of unconsolidated affiliates.
In the three months ended June 30, 2000 we reversed a $1.9 million valuation
allowance, which reduced our tax rate for the period by 2.9%. In the six months
ended June 30, 2000, we reversed valuation allowances totaling $5.3 million,
which reduced our tax rate for the period by 4.9%.
EARNINGS ALLOCATIONS
Genzyme allocates its earnings to each of our series of common stock based
on the earnings attributable to that series of stock. The earnings attributable
to each series of stock is defined in our charter as the net income or loss of
the corresponding division determined in accordance with generally accepted
accounting principles and as adjusted for tax benefits allocated to or from the
division in accordance with our management and accounting policies. The earnings
allocated to each series of common stock are indicated in the table below (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ---------------------
2000 1999 2000 1999
(REVISED) (REVISED)
<S> <C> <C> <C> <C>
Earnings allocated to:
Genzyme General Stock............................ $ 71,035 $ 23,448 $ 122,672 $ 55,929
Molecular Oncology Stock......................... (7,363) (8,158) (12,420) (15,218)
Surgical Products Stock.......................... (10,367) (880) (20,410) (880)
Tissue Repair Stock.............................. (4,031) (8,382) (9,002) (17,998)
</TABLE>
In connection with the creation of Genzyme Surgical Products as a separate
division and the distribution of Surgical Products Stock on June 28, 1999, we
modified the way that we allocate income and losses to our series of stock.
Through June 27, 1999, the operations of Genzyme Surgical Products were
included in Genzyme General, and the losses of Genzyme Surgical Products were
allocated to Genzyme General Stock. Since June 28, 1999, the losses of Genzyme
Surgical Products were no longer included in the determination of income
allocated to Genzyme General Stock. This change in the methodology of allocating
income or losses has resulted in an increase in the income allocated to Genzyme
General Stock that is not due to operational changes or new business. Subsequent
to the creation of Genzyme Surgical Products, pursuant to the Company's
management and accounting policies, tax benefits generated by Genzyme Surgical
Products continued to be allocated to Genzyme General Stock.
From January 1, 1999 through June 27, 1999, the net loss of Genzyme Surgical
Products of $27.5 million was allocated to Genzyme General Stock. From June 28,
1999 through June 30, 1999, the net loss of Genzyme Surgical Products of $0.9
million was allocated to Surgical Products Stock and excluded from income
allocated to Genzyme General Stock. As a result of this change in allocation
methodology, income allocated to Genzyme General Stock for the six months ended
June 30, 1999 was $0.9 million (or 1%) higher than what would have been
allocated had Genzyme Surgical Products remained a part of Genzyme General.
If the shares of Surgical Products Stock initially issued on June 28, 1999
were assumed to be outstanding since January 1, 1999, net income allocated to
Genzyme General Stock, net loss allocated
48
<PAGE>
to Surgical Products Stock and weighted average shares outstanding would have
been as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1999
------------------ ----------------
<S> <C> <C>
Genzyme General:
Net income allocated to Genzyme General Stock............ $ 40,226 $ 83,452
======== ========
Weighted average shares outstanding:
Basic.................................................. 82,644 82,301
Diluted................................................ 92,683 92,629
Genzyme Surgical Products:
Net loss allocated to Surgical Products Stock............ $(17,658) $(28,403)
======== ========
Weighted average shares outstanding-basic and diluted.... 14,800 14,800
</TABLE>
As noted above, the tax benefits associated with the losses of Genzyme
Surgical Products which amounted to $0.3 million for the period from June 28,
1999 to June 30, 1999, continued to be allocated to Genzyme General Stock. Our
management and accounting policies provide that, if as of the end of any fiscal
quarter, a division can not use any projected annual tax benefit attributable to
it to offset or reduce its current or deferred income tax expense, we may
allocate the tax benefit to other divisions in proportion to their taxable
income without any compensating payments or allocation to the division
generating the benefit. Tax benefits allocated to Genzyme General, which are
included in earnings attributable to Genzyme General Stock, are as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2000 1999 2000 1999
(REVISED) (REVISED)
<S> <C> <C> <C> <C>
Tax benefits allocated from:
Genzyme Molecular Oncology............................ $2,441 $ 2,376 $ 3,537 $ 4,310
Genzyme Surgical Products............................. 3,236 6,525 6,656 10,350
Genzyme Tissue Repair................................. 1,368 3,412 3,180 7,374
------ ------- ------- -------
Total............................................... $7,045 $12,313 $13,373 $22,034
====== ======= ======= =======
Total tax benefits allocated from other Genzyme
divisions as a % of earnings allocated to Genzyme
General Stock......................................... 11% 44% 12% 36%
</TABLE>
The amount of tax benefits allocated to Genzyme General fluctuate based on
the results of Genzyme Molecular Oncology, Genzyme Surgical Products and Genzyme
Tissue Repair. If the losses of those divisions decline, as they are expected
to, then the tax benefits allocated to Genzyme General will also decline.
49
<PAGE>
GENZYME GENERAL
The components of Genzyme General's combined statements of operations are
described in the following table:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, INCREASE/ JUNE 30, INCREASE/
-------------------- (DECREASE) -------------------- (DECREASE)
2000 1999 % CHANGE 2000 1999 % CHANGE
--------- -------- ---------- --------- -------- ----------
(REVISED) (REVISED)
(UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Total revenues.................. $186,694 $154,205 21% $357,320 $304,971 17%
Cost of products and services
sold.......................... 45,995 36,169 27% 87,043 72,891 19%
Selling, general and
administrative................ 42,972 42,333 2% 81,194 78,058 4%
Research and development........ 15,391 24,947 (38)% 58,134 46,012 26%
Amortization of intangibles..... 2,011 2,017 0% 3,979 4,103 (3)%
-------- -------- -------- --------
Total operating costs and
expenses................ 106,369 105,466 1% 230,350 201,064 15%
-------- -------- -------- --------
Operating income................ 80,325 48,739 65% 126,970 103,907 22%
Other income (expense), net..... 14,576 (409) 3,664% 32,084 (1,856) 1,829%
-------- -------- -------- --------
Income before income taxes...... 94,901 48,330 96% 159,054 102,051 59%
Provision for income taxes...... (30,911) (20,417) 51% (49,755) (40,633) 22%
-------- -------- -------- --------
Division net income............. $ 63,990 $ 27,913 129% $109,299 $ 61,418 78%
======== ======== ======== ========
</TABLE>
REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, INCREASE/ JUNE 30, INCREASE/
------------------- (DECREASE) ------------------- (DECREASE)
2000 1999 % CHANGE 2000 1999 % CHANGE
-------- -------- ---------- -------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Product revenue................. $171,470 $139,192 23% $326,809 $275,541 19%
Service revenue................. 15,061 14,534 4% 30,181 28,426 6%
-------- -------- -------- --------
Total product and service
revenue................. 186,531 153,726 21% 356,990 303,967 17%
Research and development
revenue....................... 163 479 (66)% 330 1,004 (67)%
-------- -------- -------- --------
Total revenues............ $186,694 $154,205 21% $357,320 $304,971 17%
======== ======== ======== ========
</TABLE>
50
<PAGE>
The following table sets forth product and service revenues on a segment
basis:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, INCREASE/ JUNE 30, INCREASE/
------------------- (DECREASE) ------------------- (DECREASE)
2000 1999 % CHANGE 2000 1999 % CHANGE
-------- -------- ---------- -------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Product revenue:
Therapeutics:
Cerezyme-Registered Trademark-/Ceredase-Registered Trademark-
enzyme.................... $134,854 $116,904 15% $263,460 $230,658 14%
Renagel-Registered Trademark-
Capsules.................. 10,218 -- 100% 10,218 -- 100%
Thyrogen-Registered Trademark-
hormone................... 3,506 2,319 51% 6,867 3,606 90%
Other therapeutic
products.................. -- -- -- 1,835 -- 100%
-------- -------- -------- --------
Total Therapeutics........ 148,578 119,223 25% 282,380 234,264 21%
Diagnostic Products......... 15,539 14,955 4% 30,777 29,646 4%
Other....................... 7,353 5,014 47% 13,652 11,631 17%
-------- -------- -------- --------
Total product revenue..... 171,470 139,192 23% 326,809 275,541 19%
Service revenue:
Other....................... 15,061 14,534 4% 30,181 28,426 6%
-------- -------- -------- --------
Total product and service
revenue....................... $186,531 $153,726 21% $356,990 $303,967 17%
======== ======== ======== ========
</TABLE>
THERAPEUTICS:
Genzyme General's increase in product revenue during both periods is largely
due to increased sales of Cerezyme-Registered Trademark- enzyme, which is
attributable to its identification of new Gaucher disease patients throughout
the world and strong international sales. Genzyme General also sells
Ceredase-Registered Trademark- enzyme for the treatment of Gaucher disease, but
it has successfully converted virtually all Gaucher disease patients to a
treatment regimen using Cerezyme-Registered Trademark- enzyme.
Genzyme General's results of operations are highly dependent on sales of
Cerezyme-Registered Trademark- enzyme and a reduction in revenue from sales of
this product would adversely affect its results of operations.
The following table provides information regarding the growth in sales of
Genzyme General's Gaucher disease therapies as a percentage of total revenue
during both periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
% of total product revenue.......................... 79% 84% 81% 84%
</TABLE>
Genzyme General began recording revenues from Renagel-Registered Trademark-
Capsules (sevelamer hydrochloride) during the second quarter of 2000 under an
amended distribution arrangement with its joint venture partner, GelTex
Pharmaceuticals, Inc. Revenues from Renagel-Registered Trademark- Capsules were
previously recorded by the joint venture. Renagel-Registered Trademark- Capsules
are used to reduce serum phosphorus levels in patients with end-stage renal
disease on dialysis.
Therapeutics revenues for both periods also include sales of
Thyrogen-Registered Trademark- hormone, which is an adjunctive diagnostic tool
for well differentiated thyroid cancer. Sales of Thyrogen-Registered Trademark-
hormone increased in the three and six months ended June 30, 2000 due to
increased market penetration. We commenced commercial sales of
Thyrogen-Registered Trademark- hormone in January 1999.
51
<PAGE>
DIAGNOSTIC PRODUCTS:
Diagnostic Products' revenues increased during both periods due primarily to
increased sales of HDL and LDL cholesterol testing products, despite the sale of
our bioreagent and ELISA product lines, in July 1999. Product revenue for
Diagnostic Products includes royalties on product sales by Techne Corporation's
biotechnology group.
Diagnostics' service revenue increased during the period as a result of
growth in sales of our DNA and cancer testing services.
OTHER:
Other revenue for both periods includes
- product revenue from sale of lipids and peptides for drug delivery; and
- genetic testing service revenue.
INTERNATIONAL PRODUCT AND SERVICE SALES:
A substantial portion of Genzyme General's revenue is generated outside of
the United States, as described in the following table. Most of these revenues
are attributable to sales of Cerezyme-Registered Trademark- enzyme.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, INCREASE/ JUNE 30, INCREASE/
------------------- (DECREASE) ------------------- (DECREASE)
2000 1999 % CHANGE 2000 1999 % CHANGE
-------- -------- ---------- -------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
International product and service
revenue......................... $79,235 $67,592 17% $157,007 $131,048 20%
% of total product and service
revenue......................... 42% 44% 44% 43%
</TABLE>
MARGINS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, INCREASE/ JUNE 30, INCREASE/
------------------- (DECREASE) ------------------- (DECREASE)
2000 1999 % CHANGE 2000 1999 % CHANGE
-------- -------- ---------- -------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Product margin.................. $134,419 $112,056 20% $257,538 $220,438 17%
% of product revenue............ 78% 81% 79% 80%
Service margin.................. 6,117 5,501 11% 12,409 10,638 17%
% of service revenue............ 41% 38% 41% 37%
Total gross margin.............. $140,536 $117,557 20% $269,947 $231,076 17%
% of total product and service
revenue....................... 75% 76% 76% 76%
</TABLE>
Genzyme General provides a broad range of healthcare products and services.
As a result, Genzyme General's gross margin varies significantly based on the
category of product or service. Sales of therapeutic products, including
Cerezyme-Registered Trademark- enzyme, result in higher margins than sales of
diagnostic products.
Our service margin increased during both periods as a result of increases in
sales of DNA and cancer testing services.
52
<PAGE>
OPERATING EXPENSE
The increase in selling, general and administrative expenses in both periods
is related to:
- increased staffing to support the growth in several of Genzyme General's
product lines; and
- increased expenditures to support the increased sales of
Cerezyme-Registered Trademark- enzyme and Thyrogen-Registered Trademark-
hormone.
The decrease in research and development expense for the second quarter of
2000 as compared to the second quarter of 1999 is a result of a $10.3 million
research and development reimbursement from Pharming Group N.V. representing
Pharming's share of amounts Genzyme General previously paid to Synpac (North
Carolina), Inc. for rights to Pompase-TM- enzyme replacement therapy for Pompe
disease, which is produced using a Chinese hamster ovary cell line.
The increase in research and development expense for the six months ended
June 30, 2000 as compared to the same period last year is a result of the
following:
- a charge of $19.5 million during the first quarter of 2000 for the initial
amounts payable to Synpac under a license agreement granted by Synpac to
Genzyme to develop and commercialize Pompase-TM- enzyme replacement
therapy for Pompe disease, offset by a $10.3 million research and
development reimbursement from Pharming as described above;
- increased spending on our program to develop Fabrazyme-TM- enzyme for the
treatment of Fabry disease;
- increased costs in connection with the operations of ATIII LLC, a joint
venture with Genzyme Transgenics Corporation, whose results we
consolidate; and
- increased spending in our cell and gene therapy programs.
OTHER INCOME AND EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, INCREASE/ JUNE 30, INCREASE/
-------------------- (DECREASE) -------------------- (DECREASE)
2000 1999 % CHANGE 2000 1999 % CHANGE
--------- -------- ---------- --------- -------- ----------
(REVISED) (REVISED)
(UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Equity in net loss of
unconsolidated affiliates.......
$(11,313) $(6,969) 62% $(19,446) $(14,725) 32%
Minority interest................. 1,352 864 56% 2,208 1,730 28%
Investment income................. 8,639 8,820 (2)% 16,726 16,743 0%
Interest expense.................. (3,441) (5,137) (33)% (6,992) (10,186) (31)%
Gain on affiliate sale of stock... -- -- -- 20,270 606 3,245%
Gain on sale of product line...... -- 7,500 (100)% -- 7,500 (100)%
Gain on sale of equity
securities...................... 14,165 -- 100% 14,165 1,963 622%
Charge for impaired investment.... -- (5,487) (100)% -- (5,487) (100)%
Other............................. 5,174 -- 100% 5,153 -- 100%
-------- ------- -------- --------
Total other income
(expenses)................ $ 14,576 $ (409) 3,664% $ 32,084 $ (1,856) 1,829%
======== ======= ======== ========
</TABLE>
EQUITY IN NET LOSS OF UNCONSOLIDATED AFFILIATES:
Genzyme General records in equity in net loss of unconsolidated affiliates
its portion of the results of our joint ventures and strategic alliances with
GelTex, BioMarin Pharmaceutical Inc., Pharming and Diacrin, Inc. Genzyme General
also records a portion of the results of Genzyme Transgenics in equity in net
loss of unconsolidated affiliates.
53
<PAGE>
Genzyme General's equity in net loss of unconsolidated affiliates increased
in both periods as a result of:
- increased losses from RenaGel LLC, our joint venture with GelTex;
- increased losses from our joint venture with BioMarin to develop and
commercialize Aldurazyme-TM- enzyme for the treatment of
mucopolysaccharidosis-I;
- the reallocation of our joint venture with Diacrin from Genzyme Tissue
Repair to Genzyme General in May 1999; and
- increased losses from Genzyme Transgenics.
These increases were offset in part by decreased losses from
Pharming/Genzyme LLC.
MINORITY INTEREST:
Due to our combined direct and indirect ownership interest in ATIII LLC,
Genzyme General consolidates the results of ATIII LLC and records Genzyme
Transgenics' portion of the losses of that joint venture as minority interest.
Minority interest for both periods increased due to increased losses incurred by
ATIII LLC.
GAIN ON SALE OF PRODUCT LINE OR BUSINESS:
In June 1999, Genzyme General recorded a gain of $7.5 million representing
the payment of a note receivable that it received as partial consideration for
the sale of Genetic Design, Inc. in 1996. Genzyme General had previously fully
reserved the amount of this note because it considered the repayment of the note
to be uncertain.
GAIN ON AFFILIATE SALE OF STOCK:
In February 2000, Genzyme Transgenics, an unconsolidated affiliate,
completed an offering of 3.5 million shares of Genzyme Transgenics common stock,
resulting in net proceeds to Genzyme Transgenics of $75.2 million (after the
exercise of the underwriter's overallotment option). In accordance with our
policy pertaining to affiliate sales of stock, we recognized a gain of
$20.3 million and recorded a net deferred tax expense of $3.9 million for the
three months ended March 31, 2000. The deferred tax expense is net of a
$3.4 million credit for the reversal of the valuation allowance on a deferred
tax asset. As a result of the issuance of the additional shares by Genzyme
Transgenics, our ownership interest in Genzyme Transgenics decreased from 33% to
28%.
INVESTMENT INCOME:
For the three months ended June 30, 2000, investment income decreased
slightly as compared to the same period of 1999 due to slightly lower average
cash and investment balances, and the allocation of $150.0 million of cash and
investments from Genzyme General to Genzyme Surgical Products in June 1999. For
the six months ended June 30, 2000, investment income was not significantly
different from the same period of 1999.
INTEREST EXPENSE:
Genzyme General's interest expense decreased during both periods as a result
of our repayment in November 1999 of $82.0 million outstanding under our
revolving credit facility, which had been allocated to Genzyme General.
54
<PAGE>
GAIN ON SALE OF EQUITY SECURITIES:
In June 2000, we recorded a gain of $5.5 million upon the sale of a portion
of our investment in Genzyme Transgenics common stock. The tax effect of this
gain was fully offset by the reversal of a $1.9 million valuation allowance
related to previously recognized capital losses.
On June 1, 2000, Celtrix Pharmaceuticals, Inc. was acquired by Insmed Inc.
upon which our shares of Celtrix common stock were exchanged on a 1-for-1 basis
for shares of Insmed common stock. On the date of the exchange, we recognized
the unrealized gain of $7.6 million, net of tax, as a credit to division equity.
We should have recognized this gain as a realized gain and recorded such gain in
income. Accordingly, we have revised our financial statements for the three and
six months ended June 30, 2000 to reclassify the $7.6 million gain, net of tax,
from an unrealized gain to a realized gain. The impact of this revision on the
three and six months ended June 30, 2000 is as follows:
<TABLE>
<CAPTION>
PREVIOUSLY REPORTED REVISED
----------------------------- -----------------------------
3 MONTHS 6 MONTHS 3 MONTHS 6 MONTHS
------------- ------------- ------------- -------------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gain on sale of equity securities..... $ 6,592 $ 6,592 $ 14,165 $ 14,165
Income before income taxes............ 87,328 151,481 94,901 159,054
Provision for income taxes............ (28,303) (47,147) (30,911) (49,755)
Division net income................... 59,025 104,334 63,990 109,299
</TABLE>
CHARGE FOR IMPAIRED INVESTMENT:
In June 1999, Genzyme General recorded a $5.5 million charge in connection
with a strategic investment in a collaborator's common stock because it
considered the decline in the value of that stock to be other than temporary. In
connection with this assessment, we concluded that substantial evidence existed
that the value of the investment would recover to at least its cost. This
included continued positive progress in the issuer's scientific programs,
ongoing activity in our collaborations with the issuer, and a lack of any
substantial company-specific adverse events causing the declines in value.
However, given the significance and duration of the decline as of the end of the
applicable quarter, we concluded that it was unclear over what period such price
recovery would take place and that, accordingly, the positive evidence
suggesting that the investment would recover to at least our purchase price was
not sufficient to overcome the presumption that the current market price was the
best indicator of the value of these investments.
OTHER:
In April, 2000, Genzyme General received net proceeds of approximately
$5.1 million in connection with the settlement of a lawsuit. The lawsuit,
initiated in 1993, pertained to an accidental spill of
Ceredase-Registered Trademark- enzyme at a fill facility operated by a
contractor to Genzyme General.
TAX PROVISION:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, INCREASE/ JUNE 30, INCREASE/
-------------------- (DECREASE) -------------------- (DECREASE)
2000 1999 % CHANGE 2000 1999 % CHANGE
--------- -------- ---------- --------- -------- ----------
(REVISED) (REVISED)
(UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Provision for income tax........ $ 30,911 $ 20,417 51% $ 49,755 $ 40,633 22%
Effective tax rate.............. 33% 42% 31% 40%
</TABLE>
55
<PAGE>
Genzyme General's tax rates for both periods vary from the U.S. statutory
tax rate as a result of its:
- provision for state income taxes;
- use of a foreign sales corporation;
- nondeductible amortization of intangibles;
- use of tax credits; and
- share of losses of unconsolidated affiliates.
In the three months ended June 30, 2000 we reversed a $1.9 million valuation
allowance, which reduced our tax rate for the period by 2.2%. In the six months
ended June 30, 2000, we reversed valuation allowances totaling $5.3 million,
which reduced our tax rate for the period by 3.5%.
56
<PAGE>
GENZYME MOLECULAR ONCOLOGY
The components of Genzyme Molecular Oncology's combined statements of
operations are described in the following table:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS ENDED
JUNE 30, INCREASE/ JUNE 30, INCREASE/
------------------- (DECREASE) ------------------- (DECREASE)
2000 1999 % CHANGE 2000 1999 % CHANGE
-------- -------- ---------- -------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Total revenues..................... $ 963 $ 1,133 (15)% $ 3,518 $ 2,746 28%
Cost of revenues................... 139 372 (63)% 195 1,012 (81)%
Selling, general and
administrative................... 1,788 1,418 26% 2,978 3,037 (2)%
Research and development........... 4,594 4,728 (3)% 8,652 8,633 0%
Amortization of intangibles........ 2,464 2,957 (17)% 5,420 5,913 (8)%
------- ------- -------- --------
Total operating costs and
expenses..................... 8,985 9,475 (5)% 17,245 18,595 (7)%
------- ------- -------- --------
Operating loss..................... (8,022) (8,342) (4)% (13,727) (15,849) (13)%
Other income (expenses), net....... 107 (478) 122% 93 (693) 113%
------- ------- -------- --------
Loss before income taxes........... (7,915) (8,820) (10)% (13,634) (16,542) (18)%
Tax benefit........................ 552 662 (17)% 1,214 1,324 (8)%
------- ------- -------- --------
Division net loss.................. $(7,363) $(8,158) (10)% $(12,420) $(15,218) (18)%
======= ======= ======== ========
</TABLE>
REVENUES
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS ENDED
JUNE 30, INCREASE/ JUNE 30, INCREASE/
------------------- (DECREASE) ------------------- (DECREASE)
2000 1999 % CHANGE 2000 1999 % CHANGE
-------- -------- ---------- -------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Royalty and licensing revenue...... $ 963 $ 335 187% $ 3,518 $ 739 376%
Research and development revenue... -- 198 (100)% -- 496 (100)%
Service revenue.................... -- 600 (100)% -- 1,511 (100)%
------- ------- -------- --------
Total revenues............... $ 963 $ 1,133 (15)% $ 3,518 $ 2,746 28%
======= ======= ======== ========
</TABLE>
Royalty and licensing revenue increased during the three and six month
periods ended June 30, 2000 as a result of a license of diagnostic rights
granted to Affymetrix, Inc. combined with an increase in SAGE-TM- gene
expression technology. Additionally, for the six month period ended June 30,
2000, royalty and licensing revenue increased due to a $2.0 million development
milestone payment received in the first quarter of 2000 from Schering-Plough
Corporation.
Our research and development revenue decreased during both periods as a
result of the dissolution of StressGen/Genzyme LLC in December 1999.
Service revenue decreased for both periods as a result of a planned shift in
genomics business focus from providing services to providing licenses of
SAGE-TM- gene expression technology to third parties.
COST OF REVENUES
Genzyme Molecular Oncology's cost of revenue includes:
- services performed using the SAGE-TM- gene expression technology on behalf
of third parties;
57
<PAGE>
- royalties paid to third parties; and
- work performed on behalf of Stress Gen/Genzyme LLC in the three and six
months ended June 30, 1999. There are no similar costs for work performed
on behalf of the joint venture in the same periods of 2000 because the
joint venture was dissolved in the fourth quarter of 1999.
Cost of revenue decreased for both periods as a result of the dissolution of
StressGen/Genzyme LLC in December 1999 and a planned business reduction of
genomics services provided by Genzyme Molecular Oncology.
OPERATING EXPENSES
Genzyme Molecular Oncology's selling, general and administrative expenses
increased for the three months ended June 30, 2000 as a result of an increase in
audit and legal fees related to the registration of a secondary offering which
was subsequently withdrawn. This was offset in the six month period ended
June 30, 2000 by continued expense control efforts.
The majority of Genzyme Molecular Oncology's research and development
expenses were directed toward its immunotherapy and anti-angiogenesis programs.
Research and development expenses were relatively stable in both periods.
AMORTIZATION OF INTANGIBLES
Genzyme Molecular Oncology's amortization of intangibles is attributable to
intangible assets acquired in connection with the acquisition of
PharmaGenics, Inc. in June 1997. These assets were fully amortized by the end of
the second quarter of 2000.
OTHER INCOME AND EXPENSES
Genzyme Molecular Oncology's other expenses decreased as a result of the
dissolution of StressGen/Genzyme LLC in December 1999.
GENZYME SURGICAL PRODUCTS
In June 1999, we established Genzyme Surgical Products as a separate
division of Genzyme. The business of Genzyme Surgical Products had previously
been accounted for as a business unit of Genzyme General. The products and
assets allocated to Genzyme Surgical Products consist primarily of:
- the products and assets we acquired upon the purchase of Deknatel Snowden
Pencer, Inc. in 1996;
- the Sepra products (our line of products and product candidates designed
to limit post-operative adhesions); and
- our research and development programs in biomaterials and gene and cell
therapy for cardiovascular disease.
Genzyme General transferred $150.0 million in cash, cash equivalents,
investments and certain other assets, to Genzyme Surgical Products in connection
with the creation of Genzyme Surgical Products as a separate division of
Genzyme. The following discussion reflects the results of operations of Genzyme
Surgical Products as if it had been accounted for as a separate division of
Genzyme for all periods presented.
58
<PAGE>
The components of Genzyme Surgical Products' combined statements of
operations are described in the following table:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, INCREASE/ JUNE 30, INCREASE/
------------------- (DECREASE) ------------------- (DECREASE)
2000 1999 % CHANGE 2000 1999 % CHANGE
-------- -------- ---------- -------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Total revenues................... $ 29,969 $ 26,681 12% $ 59,051 $ 54,034 9%
Cost of products sold............ 16,592 17,439 (5)% 32,631 33,283 (2)%
Selling, general and
administrative................. 17,042 16,492 3% 33,442 31,779 5%
Research and development......... 7,001 8,983 (22)% 13,972 14,585 (4)%
Amortization of intangibles...... 1,427 1,444 (1)% 2,853 2,861 0%
-------- -------- -------- --------
Total operating costs and
expenses................. 42,062 44,358 (5)% 82,898 82,508 0%
-------- -------- -------- --------
Operating loss................... (12,093) (17,677) (32)% (23,847) (28,474) (16)%
Other income, net................ 1,726 19 8,984% 3,437 71 4,741%
-------- -------- -------- --------
Division net loss................ $(10,367) $(17,658) (41)% $(20,410) $(28,403) (28)%
======== ======== ======== ========
</TABLE>
REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, INCREASE/ JUNE 30, INCREASE/
------------------- (DECREASE) ------------------- (DECREASE)
2000 1999 % CHANGE 2000 1999 % CHANGE
-------- -------- ---------- -------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Cardiovascular surgery products..... $19,786 $18,047 10% $39,436 $37,433 5%
General surgery products............ 7,372 6,238 18% 14,361 12,135 18%
Other products...................... 2,811 2,396 17% 5,254 4,466 18%
------- ------- ------- -------
Total revenues.................... $29,969 $26,681 12% $59,051 $54,034 9%
======= ======= ======= =======
</TABLE>
Cardiovascular surgery products include chest drainage and fluid management
systems, surgical closures, biomaterials, and instruments for conventional and
minimally invasive cardiac surgery. The increase in cardiovascular surgery
product revenues for both periods is primarily attributable to increased sales
of instruments for minimally invasive cardiac surgery.
The increase in general surgery products revenue for both periods is due
primarily to the increase in sales of Sepra Film-Registered Trademark-
bioresorbable membrane. Sales of Sepra products for the three months ended
June 30, 2000 were $4.3 million compared to $3.5 million in the same periods in
1999. Sales of Sepra products for the six months ended June 30, 2000 were
$8.2 million compared to $6.4 million in the same periods in 1999. An increase
in general surgery instrument sales also contributed to the overall increase in
general surgery product revenue.
Other surgery product revenues consist of sales of Genzyme Surgical
Products' Snowden-Pencer-Registered Trademark- line of instruments for plastic
surgery and products sold to original equipment manufacturers, including
sutures. The increase in other surgery product revenues for both periods is
primarily due to an increase in products sold to original equipment
manufacturers.
International revenue as a percentage of total sales for all periods
presented was 30%.
59
<PAGE>
MARGINS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS ENDED
JUNE 30, INCREASE/ JUNE 30, INCREASE/
------------------- (DECREASE) ------------------- (DECREASE)
2000 1999 % CHANGE 2000 1999 % CHANGE
-------- -------- ---------- -------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Gross margins........................ $13,377 $9,242 45% $26,420 $20,751 27%
% of total revenues.................. 45% 35% 45% 38%
</TABLE>
Genzyme Surgical Products sells a broad range of products. As a result,
Genzyme Surgical Products' gross margins may vary significantly depending on the
particular market conditions of each product line.
Gross margins increased for both periods as a result of an increase in sales
volume, cost reduction initiatives and increased sales of higher margin
products, such as devices for minimally invasive cardiac surgery.
OPERATING EXPENSES
Genzyme Surgical Products' selling, general and administrative expenses
increased in both periods as a result of increased spending for marketing of the
cardiovascular products, particularly the minimally invasive cardiac surgery
instrument line.
Genzyme Surgical Products' research and development expenses decreased in
both periods as a result of a $2.0 million milestone payment to a collaborator
that was recorded in the second quarter of 1999 for which there was no
corresponding amount in 2000. This was partially offset by an increase in
research and development expenses for Genzyme Surgical Products' cell and gene
therapy programs as well as an increase in research and development spending for
surgical instruments and devices during the six months ended June 30, 2000
compared to the same period in 1999.
OTHER INCOME AND EXPENSES
The increase in other income and expenses is primarily due to an increase in
investment income. Investment income increased because Genzyme Surgical Products
had a higher average cash balance during the three and six months ended
June 30, 2000 as a result of the allocation in June 1999 of $150.0 million in
cash and investments from Genzyme General to Genzyme Surgical Products.
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<PAGE>
GENZYME TISSUE REPAIR
The components of Genzyme Tissue Repair's combined statements of operations
are described in the following table:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS ENDED
JUNE 30, INCREASE/ JUNE 30, INCREASE/
------------------- (DECREASE) ------------------- (DECREASE)
2000 1999 % CHANGE 2000 1999 % CHANGE
-------- -------- ---------- -------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Total revenues...................... $ 6,287 $ 4,665 35% $12,154 $ 8,688 40%
Cost of services sold............... 3,023 3,221 (6)% 6,046 6,219 (3)%
Selling, general and
administrative.................... 5,626 6,115 (8)% 11,365 12,429 (9)%
Research and development............ 1,452 2,003 (28)% 3,323 3,971 (16)%
------- ------- ------- --------
Total operating costs and
expenses........................ 10,101 11,339 (11)% 20,734 22,619 (8)%
Operating loss...................... (3,814) (6,674) (43)% (8,580) (13,931) (38)%
Other expenses, net................. (217) (1,708) (87)% (422) (4,067) (90)%
------- ------- ------- --------
Division net loss................... $(4,031) $(8,382) (52)% $(9,002) $(17,998) (50)%
======= ======= ======= ========
</TABLE>
REVENUES
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS ENDED
JUNE 30, INCREASE/ JUNE 30, INCREASE/
------------------- (DECREASE) ------------------- (DECREASE)
2000 1999 % CHANGE 2000 1999 % CHANGE
-------- -------- ---------- -------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Carticel(-Registered Trademark-)
chondrocytes......................... $4,577 $3,798 21% $ 9,109 $6,740 35%
Epicel-TM- skin grafts................. 1,709 867 97% 3,023 1,863 62%
Other.................................. 1 -- 100% 22 85 (74)%
------ ------ ------- ------
Total revenues....................... $6,287 $4,665 35% $12,154 $8,688 40%
====== ====== ======= ======
</TABLE>
Genzyme Tissue Repair's service revenue increased for the three and six
months ending June 30, 2000 as compared to the same periods of 1999 as a result
of increases in sales of Carticel-Registered Trademark- chondrocytes and
Epicel-TM- skin grafts.
The increase in sales of Carticel-Registered Trademark- chondrocytes during
both periods is a result of continued increases in the numbers of patients
treated as well as an increase in the number of insurance reimbursement
approvals. Revenue from Epicel-TM- skin grafts varies widely from quarter to
quarter depending on the number of patients requiring severe burn care.
MARGINS:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS ENDED
JUNE 30, INCREASE/ JUNE 30, INCREASE/
------------------- (DECREASE) ------------------- (DECREASE)
2000 1999 % CHANGE 2000 1999 % CHANGE
-------- -------- ---------- -------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Total gross margin...................... $3,264 $1,444 126% $6,108 $2,469 147%
% of total revenue...................... 52% 31% 50% 28%
</TABLE>
Genzyme Tissue Repair's gross margins improved in both periods as a result
of:
- increased sales of Carticel(-Registered Trademark-) chondrocytes and
Epicel-TM- skin grafts;
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<PAGE>
- a reduction in fixed costs, materials and production costs for
Carticel(-Registered Trademark-) chondrocytes and Epicel-TM- skin grafts;
and
- continued expense control efforts.
OPERATING EXPENSES
Genzyme Tissue Repair's selling, general and administrative expenses
decreased in both the three and six months ended June 30, 2000 as compared to
the same periods of 1999 as a result of its efforts to streamline its
operations. Genzyme Tissue Repair's research and development expenses decreased
in both periods due to the termination of its TGF-beta and other research and
development programs.
OTHER INCOME AND EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS ENDED
JUNE 30, INCREASE/ JUNE 30, INCREASE/
------------------- (DECREASE) ------------------- (DECREASE)
2000 1999 % CHANGE 2000 1999 % CHANGE
-------- -------- ---------- -------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Equity in net loss of joint venture..... $ -- $(1,361) (100)% $ -- $(3,368) (100)%
Investment income....................... 106 72 47% 208 165 26%
Interest expense........................ (323) (419) (23)% (625) (864) (28)%
Other................................... -- -- N/A (5) -- 100 %
----- ------- ----- -------
Total other income (expenses)......... $(217) $(1,708) (87)% $(422) $(4,067) (90)%
===== ======= ===== =======
</TABLE>
Equity in net loss of joint venture decreased during both periods as a
result of the reallocation of Genzyme's ownership interest in Diacrin/Genzyme
LLC from Genzyme Tissue Repair to Genzyme General in May 1999.
Investment income increased in both periods as a result of higher average
cash balances.
Interest expense decreased in the three and six months ended June 30, 2000
as compared to the same periods of 1999 as a result of the completion of the
conversion of Genzyme Tissue Repair's 5% convertible subordinated note in the
fourth quarter of 1999.
62
<PAGE>
B. LIQUIDITY AND CAPITAL RESOURCES
GENZYME CORPORATION
At June 30, 2000, we had cash, cash-equivalents, and short- and long-term
investments of $694.2 million, an increase of $41.2 million from December 31,
1999.
We generated $70.0 million in cash from operations for the six months ended
June 30, 2000.
Our investing activities utilized net cash of $46.4 million in the first six
months of 2000 due to the following:
- net sales and maturities of investments provided $8.1 million of cash;
- $35.9 million was used to fund capital expenditures;
- $12.9 million was used to fund our investments in unconsolidated
affiliates; and
- $5.0 million was used for the purchase of Focal, Inc. common stock as
required upon the exercise by Focal of its first option under the stock
purchase agreement between Genzyme and Focal. We are required, at Focal's
option, to make future additional equity investments of up to
$10.0 million subject to certain conditions.
During the six months ended June 30, 2000, we received $31.0 million in cash
from exercises of stock options and the issuance of stock under our employee
stock purchase plan and made long-term debt repayments of $5.0 million.
In June 2000, Genzyme and Pharming Group N.V. entered into a strategic
alliance agreement to share in the development and funding for the
commercialization of Pompase(TM) enzyme replacement therapy. Upon execution of
the definitive agreement, Pharming paid Genzyme cash of $250,000 and issued to
Genzyme a $10.0 million 7% Convertible Senior Note due June 1, 2004 (the
"Pharming Note"). This consideration was a reimbursement for 50% of the amounts
Genzyme previously paid to Synpac for product development and technology fees
and expenses. Accordingly, Genzyme recorded the $10.3 million as a reduction to
research and development expense during the three months ended June 30, 2000.
The Pharming Note is convertible at any time at Genzyme's option into fully
paid and nonassessable Ordinary Shares of Pharming. We have allocated our
interest in the Pharming Note to Genzyme General and have classified the
Pharming Note as a long-term, related party note receivable as of June 30, 2000.
In November 1999, we refinanced our $225.0 million revolving credit facility
with a $50.0 million revolving credit facility that matures in November 2000 and
a $100.0 million revolving credit facility that matures in November 2002. At
June 30, 2000, $18.0 million was outstanding under the credit facility that
matures in November 2000. We have allocated the $18.0 million of borrowings to
Genzyme Tissue Repair. We expect to expand our existing credit facilities and
borrow approximately $200 million of cash to finance the cash portion of the
Biomatrix merger consideration. We will allocate the $200 million of borrowings
to Genzyme Biosurgery in connection with its formation as a separate division of
Genzyme as discussed below.
In April 2000, Genzyme Molecular Oncology drew $15.0 million of cash under
its interdivisional financing arrangement with Genzyme General in exchange for
676,254 Genzyme Molecular Oncology designated shares. As required by our
charter, the number of Genzyme Molecular Oncology designated shares was
determined using the average closing price of Molecular Oncology Stock for the
20 trading days beginning on the 30th trading day before the draw. As of
June 30, 2000 $15 million remained available to Genzyme Molecular Oncology under
this arrangement.
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<PAGE>
In March 2000, Genzyme Tissue Repair made a $5.0 million draw under its
interdivisional financing arrangement with Genzyme General in exchange for
765,169 Genzyme Tissue Repair designated shares. As required by our charter, the
number of Genzyme Tissue Repair designated shares was determined using the
average closing price of Tissue Repair Stock for the 20 trading days beginning
on the 30th trading day before the draw. As of June 30, 2000 $15 million
remained available to Genzyme Tissue Repair under this arrangement.
In March 2000, we filed with the SEC a prospectus pursuant to Rule 424 of
the Securities Act of 1933, as amended, covering the offering of 3,000,000
shares of Molecular Oncology Stock (plus 450,000 shares issuable upon exercise
of the underwriters over-allotment option). In April 2000, in light of market
volatility and current market conditions at the time, we terminated the offering
of shares of Molecular Oncology Stock contemplated by the prospectus. Pursuant
to a prospectus filed under Rule 424 of the Securities Act of 1933, in
July 2000, we sold 1,607,400 shares of Molecular Oncology Stock to a limited
number of purchasers at a price of $12.91 per share. We received approximately
$20.7 million of net proceeds from the offering which we allocated to Genzyme
Molecular Oncology. The proceeds of this offering will be used primarily to fund
Genzyme Molecular Oncology's research, preclinical and clinical development
programs, and for its working capital and general corporate purposes.
We believe that our available cash, investments and cash flow from
operations will be sufficient to fund our planned operations and capital
requirements for the foreseeable future. Although we currently have substantial
cash resources and positive cash flow, we intend to use substantial portions of
our available cash for:
- product development and marketing;
- expanding facilities;
- working capital; and
- strategic business initiatives.
Our cash reserves will be further reduced to pay principal and interest on
the following debt:
- $21.2 million in principal under the 5% convertible subordinated
debentures, which are convertible into Genzyme General Stock; and
- $250.0 million in principal under the 5 1/4% convertible subordinated
notes, which are convertible into shares of Genzyme General Stock,
Molecular Oncology Stock and Surgical Products Stock.
If we use cash to pay or redeem this debt, including the interest due on it, our
cash reserves will be diminished.
In March 2000, we entered into an agreement to acquire Biomatrix, Inc. Upon
the effectiveness of our Registration Statement on Form S-4 and completion of
the merger, we will form a new operating division called Genzyme Biosurgery and
create a new series of common stock that is intended to reflect its value and
track its performance. We refer to this stock as "Biosurgery Stock." In
connection with the merger, and upon Genzyme shareholder approval, the assets
and liabilities allocated to Genzyme Surgical Products and Genzyme Tissue Repair
will be re-allocated to Genzyme Biosurgery and shares of Surgical Products Stock
and Tissue Repair Stock will be exchanged for Biosurgery Stock. We will account
for the acquisition of Biomatrix as a purchase.
Biomatrix stockholders will receive $37.00 in cash, one share of Biosurgery
Stock or a combination of cash and stock for each share of Biomatrix common
stock they hold. The merger agreement provides that we will pay cash for up to
28.38% of the outstanding shares of Biomatrix common stock that receive merger
consideration, or up to approximately $245.0 million.
64
<PAGE>
Holders of Surgical Products Stock will receive 0.6060 share of Biosurgery
Stock in exchange for each share of Surgical Products Stock they hold and
holders of Tissue Repair Stock will receive 0.3352 share of Biosurgery Stock in
exchange for each share of Tissue Repair Stock they hold.
For more information about the merger and the merger consideration, we
encourage you to carefully read the Pre-Effective Amendment No. 1 to our
Registration Statement on Form S-4 filed with the SEC on July 3, 2000.
The acquisition is subject to:
- approval by Biomatrix's shareholders;
- approval by our shareholders, including separate approval by the holders
of shares of Surgical Products Stock and Tissue Repair Stock; and
- clearance under federal anti-trust laws; and
- other customary closing conditions.
To satisfy these and other commitments, we may have to obtain additional
financing. We cannot guarantee that we will be able to obtain any additional
financing, extend any existing financing arrangement, or obtain either on
favorable terms.
EURO-THE NEW EUROPEAN CURRENCY
Since December 31, 1999, there have been no material changes related to our
outstanding derivatives and forward contracts, or any other material contracts
as a result of the euro conversion, nor have there been any material changes in
our competitive position as a result of the conversion. We incorporate our
disclosure related to the euro conversion set forth under the heading
"Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries'
Financial Condition and Results of Operations--Euro--the New European Currency"
in Exhibit 13.1 to our 1999 Form 10-K by reference into this discussion.
YEAR 2000
There have been no material changes in our Year 2000 compliance program or
our potential Year 2000 exposures since December 31, 1999. We incorporate our
disclosure related to our Year 2000 compliance program and potential Year 2000
exposure set forth under the heading "Management's Discussion and Analysis of
Genzyme Corporation and Subsidiaries' Financial Condition and Results of
Operations--Year 2000" in Exhibit 13.1 to our 1999 Form 10-K by reference into
this discussion.
MARKET RISK
There have been no material changes in our market risk since December 31,
1999. We incorporate our disclosure related to our market risk set forth under
the heading "Management's Discussion and Analysis of Genzyme Corporation and
Subsidiaries' Financial Condition and Results of Operations--Market Risk" in
Exhibit 13.1 to our 1999 Form 10-K by reference into this discussion.
NEW ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an interpretation of Accounting Principles Board Opinion No. 25"
("FIN-44"). FIN-44 will be effective on July 1, 2000, but certain conclusions in
FIN-44 cover specific events that occurred after either December 15, 1998 or
January 12, 2000.
65
<PAGE>
In December 1999, the SEC issued Staff Accounting Bulletin No. 101. "Revenue
Recognition in Financial Statements" ("SAB 101") which summarizes the staff's
view in applying generally accepted accounting principles to selected revenue
recognition issues. SAB 101 will be effective in the fourth quarter of 2000.
We are currently evaluating the guidance provided in FIN-44 and SAB 101 and
do not expect their application to have a material effect on our financial
statements.
SUBSEQUENT EVENT
On July 25, 2000, Genzyme filed a lawsuit against Transkaryotic Therapies
Inc. in the United States District court in Wilmington, Delaware for patent
infringement by the manufacture and use of Replagal-TM-, Transkaryotic
Therapies' replacement therapy for Fabry disease. The suit alleges infringement
of U.S. patent No. 5,356,804, which is exclusively licensed to Genzyme by Mount
Sinai School of Medicine. The patent is directed to methods of making
alpha-galactosidase in mammalian cells, as well as the genetically-engineered
cells themselves.
GENZYME GENERAL
At June 30, 2000, Genzyme General had cash, cash-equivalents, and short- and
long-term investments of $586.0 million, an increase of $72.1 million from
December 31, 1999.
Genzyme General generated $107.3 million in cash from operations for the six
months ended June 30, 2000.
Genzyme General's investing activities utilized $54.8 million for the six
months ended June 30, 2000 due to the following:
- net sales and maturities of investments used $10.8 million of cash;
- $34.2 million of cash was used to fund capital expenditures; and
- $12.9 million of cash was used to fund Genzyme General's investments in
joint ventures.
During the six months ended June 30, 2000, Genzyme General was allocated
$28.3 million in cash from exercises of options to purchase shares of Genzyme
General Stock and the issuance of Genzyme General Stock under our employee stock
purchase plan.
In June 2000, Genzyme and Pharming Group N.V. entered into a strategic
alliance agreement to share in the development and funding for the
commercialization of Pompase(TM) enzyme replacement therapy. Upon execution of
the definitive agreement, Pharming paid Genzyme cash of $250,000 and issued to
Genzyme a $10.0 million 7% Convertible Senior Note due June 1, 2004 (the
"Pharming Note"). This consideration was a reimbursement for 50% of the amounts
Genzyme previously paid to Synpac for product development and technology fees
and expenses. Accordingly, Genzyme recorded the $10.3 million as a reduction to
research and development expense during the three months ended June 30, 2000.
The Pharming Note is convertible at any time at Genzyme's option into fully
paid and nonassessable Ordinary Shares of Pharming. We have allocated our
interest in the Pharming Note to Genzyme General and have classified the
Pharming Note as a long-term, related party note receivable as of June 30, 2000.
Genzyme General, together with our other operating divisions, has access to
Genzyme's revolving credit facilities. At June 30, 2000, $50.0 million was
available under a facility that matures in November 2000 and $77.0 million was
available under a facility that matures in November 2002. We expect to expand
our existing credit facilities and borrow approximately $200 million of cash to
finance the cash portion of the Biomatrix merger consideration. We will allocate
the $200 million of borrowings
66
<PAGE>
to Genzyme Biosurgery in connection with its formation as a separate division of
Genzyme. We have included information about the proposed acquisition of
Biomatrix, Inc. and proposed formation of Genzyme Biosurgery as a new division
of Genzyme under the heading "Liquidity and Capital Resources--Genzyme
Corporation," which we incorporate into this discussion by reference.
At December 31, 1999, $30.0 million of Genzyme General's cash was available
to Genzyme Molecular Oncology under its interdivisional financing arrangement
with Genzyme General. In April 2000, Genzyme Molecular Oncology drew
$15.0 million of cash under this arrangement in exchange for 676,254 Genzyme
Molecular Oncology designated shares. As of June 30, 2000, $15 million was
available to Genzyme Molecular Oncology under this arrangement. For information
regarding the determination of the amount of Genzyme Molecular Oncology
designated shares authorized in connection with each draw under this arrangement
you should read the section entitled "Liquidity and Capital Resources--Genzyme
Corporation" above.
At December 31, 1999, $20.0 million of Genzyme General's cash was available
to Genzyme Tissue Repair under its interdivisional financing arrangement with
Genzyme General. In March 2000, Genzyme Tissue Repair made a $5.0 million draw
under this arrangement in exchange for 765,169 Genzyme Tissue Repair designated
shares. As of June 30, 2000, $15 million was available to Genzyme Tissue Repair
under this arrangement. For information regarding the determination of the
amount of Genzyme Tissue Repair designated shares authorized in connection with
each draw under this arrangement you should read the section entitled "Liquidity
and Capital Resources--Genzyme Corporation" above.
We believe that Genzyme General's available cash, investments and cash flow
from operations will be sufficient to fund its planned operations and capital
requirements for the foreseeable future. Although Genzyme General currently has
substantial cash resources and positive cash flow, it intends to use substantial
portions of its available cash for:
- product development and marketing;
- expanding facilities;
- working capital; and
- strategic business initiatives.
Genzyme General's cash reserves will be further reduced to pay principal and
interest on the following debt that has been allocated to Genzyme General:
- $21.2 million in principal under the 5% convertible subordinated
debentures, which are convertible into shares of Genzyme General Stock;
and
- $250.0 in principal under the 5 1/4% convertible subordinated notes, which
are convertible into shares of Genzyme General Stock.
If Genzyme General uses cash to pay or redeem this debt, including the interest
due on it, its cash reserves will be diminished. In addition, Genzyme General's
cash resources will be reduced to the extent that the liabilities of Genzyme
Molecular Oncology, Genzyme Surgical Products or Genzyme Tissue Repair affect
our consolidated results of operations.
To satisfy these and other commitments, we may have to obtain additional
financing for Genzyme General. We cannot guarantee that we will be able to
obtain any additional financing, extend any existing financing arrangement, or
obtain either on favorable terms.
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<PAGE>
GENZYME MOLECULAR ONCOLOGY
At June 30, 2000, Genzyme Molecular Oncology had cash, cash equivalents and
short-term investments of $8.0 million, an increase of $4.4 million from
December 31, 1999.
During 2000, Genzyme Molecular Oncology used $7.1 million in cash for
operations. This is primarily due to Genzyme Molecular Oncology's net loss for
the six months ended June 30, 2000.
Genzyme Molecular Oncology's investing activities in the first half of 2000
used $6.8 million in cash to purchase investments.
Financing activities provided cash of $11.4 million. This is primarily from
the $15.0 million draw in April 2000 from funds available to Genzyme Molecular
Oncology from Genzyme General discussed below and the allocation of cash
proceeds of $1.4 million from exercises of options to purchase shares of
Molecular Oncology Stock and the issuance of Molecular Oncology Stock under our
employee stock purchase plan. Offsetting these two items was a payment of
$5.0 million to repay funds borrowed in 1999 under the revolving credit
facility.
Genzyme Molecular Oncology, together with our other operating divisions, has
access to Genzyme's revolving credit facilities. At June 30, 2000,
$50.0 million was available under a facility that matures in November 2000 and
$77.0 million was available under a facility that matures in November 2002. We
expect to expand our existing credit facilities and borrow approximately
$200 million of cash to finance the cash portion of the Biomatrix merger
consideration. We will allocate the $200 million of borrowings to Genzyme
Biosurgery in connection with its formation as a separate division of Genzyme.
We have included information about the proposed acquisition of Biomatrix, Inc.
and proposed formation of Genzyme Biosurgery as a new division of Genzyme under
the heading "Liquidity and Capital Resources--Genzyme Corporation," which we
incorporate into this discussion by reference.
At December 31, 1999, $30.0 million of Genzyme General's cash was available
to Genzyme Molecular Oncology under its interdivisional financing arrangement
with Genzyme General. In April 2000, Genzyme Molecular Oncology drew
$15.0 million of cash under this arrangement in exchange for 676,254 Genzyme
Molecular Oncology designated shares. As of June 30, 2000 $15 million was
available to Genzyme Molecular Oncology under this arrangement. These funds will
be used primarily to fund research, preclinical and clinical development
programs, and for working capital and general corporate purposes. For
information regarding the determination of the amount of Genzyme Molecular
Oncology designated shares authorized in connection with each draw under this
arrangement you should read the section entitled "Liquidity and Capital
Resources--Genzyme Corporation" above.
In March 2000, we filed with the SEC a prospectus pursuant to Rule 424 of
the Securities Act of 1933, as amended, covering the offering of 3,000,000
shares of Molecular Oncology Stock (plus 450,000 shares issuable upon exercise
of the underwriter's over-allotment option). In April 2000, in light of market
volatility and current market conditions at the time, we terminated the offering
of shares of Molecular Oncology Stock contemplated by the prospectus. Pursuant
to a prospectus filed under Rule 424 of the Securities Act of 1933, as amended,
in July 2000, we sold 1,607,400 shares of Molecular Oncology Stock to a limited
number of purchasers at a price of $12.91 per share. We received approximately
$20.7 million of net proceeds from the offering which we allocated to Genzyme
Molecular Oncology. The proceeds of this offering will be used primarily to fund
Genzyme Molecular Oncology's research, preclinical and clinical development
programs, and for its working capital and general corporate purposes.
We anticipate that Genzyme Molecular Oncology's current cash resources,
together with amounts available from the following sources, will be sufficient
to fund its operations through 2000:
- $20.8 million of gross proceeds from the July 2000 private offering of
Molecular Oncology Stock;
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<PAGE>
- the $15.0 million remaining under the interdivisional financing
arrangement with Genzyme General;
- our revolving credit facilities;
- revenues generated from the SAGE-TM- gene expression technology; and
- revenues from license agreements.
We expect Genzyme Molecular Oncology to have significant operating losses
for the next several years. Genzyme Molecular Oncology plans to spend
substantial amounts of funds on, among other things:
- research and development;
- pre-clinical and clinical testing; and
- pursuing regulatory approvals.
Genzyme Molecular Oncology's cash needs may differ from those planned as a
result of many factors, including the:
- ability to become profitable;
- results of research and development and clinical testing;
- achievement of milestones under existing licensing arrangements;
- ability to establish and maintain additional strategic alliances and
licensing arrangements;
- enforcement of patent and other intellectual property rights;
- market acceptance of novel approaches and therapies;
- development of competitive products and services; and
- ability to satisfy regulatory requirements of the FDA and other government
authorities.
Genzyme Molecular Oncology may require significant additional financing to
continue operations. We cannot guarantee that we will be able to obtain any
additional financing for Genzyme Molecular Oncology or find it on favorable
terms. If Genzyme Molecular Oncology has insufficient funds or is unable to
raise additional funds, it may delay, reduce or eliminate certain of its
programs. Genzyme Molecular Oncology may also have to give rights to third
parties to attempt to commercialize technologies or products that it would
otherwise commercialize itself.
GENZYME SURGICAL PRODUCTS
At June 30, 2000, Genzyme Surgical Products had cash, cash equivalents, and
short- and long-term investments of $95.9 million, a decrease of $30.2 million
from December 31, 1999.
Genzyme Surgical Products used $19.8 million in cash for operations in the
first six months of 2000. This is primarily due to Genzyme Surgical Products'
net loss of $20.4 million for the six months ended June 30, 2000.
In June 1999, we allocated $150.0 million in cash, cash equivalents,
investments and certain other assets from Genzyme General to Genzyme Surgical
Products in connection with the creation of Genzyme Surgical Products as a
separate division of Genzyme.
Genzyme Surgical Products' investing activities provided $15.2 million of
cash due to the following:
- net sales and maturities of investments provided $25.7 million of cash;
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<PAGE>
- $5.0 million of cash was used to purchase Focal, Inc. common stock as
described below; and
- $1.6 million of cash was used to fund capital expenditures.
In April 2000, Focal, Inc. exercised its first option under the stock
purchase agreement between Genzyme and Focal. As required by the terms of this
agreement, Genzyme purchased $5.0 million of Focal common stock, at a price of
$8.14 per share. We have allocated these shares to Genzyme Surgical Products. We
are committed, at Focal's option, to make additional future equity investments
of up to $10.0 million subject to certain conditions.
Genzyme Surgical Products, together with our other operating divisions, has
access to our revolving credit facilities. At June 30, 2000, $50.0 million was
available under a facility that matures in November 2000 and $77.0 million was
available under a facility that matures in November 2002. We expect to expand
our existing credit facilities and borrow approximately $200 million of cash to
finance the cash portion of the Biomatrix merger consideration. We will allocate
the $200 million of borrowings to Genzyme Biosurgery in connection with its
formation as a separate division of Genzyme as discussed below.
In March 2000, we entered into an agreement to acquire Biomatrix, Inc. Upon
the effectiveness of our Registration Statement on Form S-4 and completion of
the merger, we will form a new operating division called Genzyme Biosurgery and
create a new series of common stock that is intended to reflect its value and
track its performance. We refer to this stock as "Biosurgery Stock." In
connection with the merger, and upon Genzyme shareholder approval, the assets
and liabilities allocated to Genzyme Surgical Products and Genzyme Tissue Repair
will be re-allocated to Genzyme Biosurgery and shares of Surgical Products Stock
and Tissue Repair Stock will be exchanged for Biosurgery Stock. We will account
for the acquisition of Biomatrix as a purchase.
Biomatrix stockholders will receive $37.00 in cash, one share of Biosurgery
Stock or a combination of cash and stock for each share of Biomatrix common
stock they hold. The merger agreement provides that we will pay cash for up to
28.38% of the outstanding shares of Biomatrix common stock that receive merger
consideration, or up to approximately $245.0 million.
Holders of Surgical Products Stock will receive 0.6060 share of Biosurgery
Stock in exchange for each share of Surgical Products Stock they hold and
holders of Tissue Repair Stock will receive 0.3352 share of Biosurgery Stock in
exchange for each share of Tissue Repair Stock they hold. To the extent that
Genzyme Surgical Products uses cash to complete the acquisition, its cash
reserves will be diminished.
For more information about the merger and the merger consideration, we
encourage you to carefully read the Pre-Effective Amendment No. 1 to our
Registration Statement on Form S-4 filed with the SEC on July 3, 2000.
We anticipate that Genzyme Surgical Products' current cash resources,
together with revenues generated from its products and distribution agreements,
will be sufficient to fund its operations through 2001. However, its cash needs
may differ from those planned because of many factors, including:
- the ability to become profitable;
- results of research and development efforts;
- the ability to establish and maintain strategic collaborations and
licensing arrangements for research and development programs;
- the achievement of milestones under strategic collaborations;
- the ability to establish and maintain additional distribution
arrangements;
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<PAGE>
- the enforcement of patent and other intellectual property rights;
- market acceptance of novel approaches and therapies;
- the development of competitive products; and
- the ability to satisfy regulatory requirements of the FDA and other
governmental authorities.
In addition, if we exercise our option to purchase the limited partnership
interests in Genzyme Development Partners, L.P. and use cash to pay all or a
portion of the approximately $26.0 million advance payment to the limited
partners, our cash resources will be diminished. The option will be exercisable
during the 90-day period beginning on August 31, 2000. Genzyme Development
Partners is a Delaware limited partnership that was formed in 1989 to develop,
produce and derive income from the sale of Sepra products. Its general partner
is a wholly-owned subsidiary of Genzyme.
GENZYME TISSUE REPAIR
At June 30, 2000, Genzyme Tissue Repair had cash and cash equivalents of
$4.4 million, a decrease of $5.0 million from December 31, 1999.
During the first six months of 2000, Genzyme Tissue Repair used
$10.5 million of cash for operations. This is primarily due to Genzyme Tissue
Repair's net loss of $9.0 million during the period.
Financing activities provided Genzyme Tissue Repair with $5.6 million of
cash. This includes $5.0 million drawn by Genzyme Tissue Repair from funds
available from Genzyme General under an interdivisional financing arrangement
discussed below and the allocation of $0.6 million of cash from the exercise of
options to purchase shares of Tissue Repair Stock and the issuance of Tissue
Repair Stock under an employee stock plan.
Genzyme Tissue Repair, together with our other operating divisions, has
access to our revolving credit facilities. At June 30, 2000, $50.0 million was
available under a facility that matures in November 2000 and $77.0 million was
available under a facility that matures in November 2002. At June 30, 2000,
$18.0 million of funds outstanding under our revolving credit facility, that
matures in November 2000, were allocated to Genzyme Tissue Repair. We expect to
expand our existing credit facilities and borrow approximately $200 million of
cash to finance the cash portion of the Biomatrix merger consideration. We will
allocate the $200 million of borrowings to Genzyme Biosurgery in connection with
its formation as a separate division of Genzyme as discussed below.
At December 31, 1999, $20.0 million of Genzyme General's cash was available
to Genzyme Tissue Repair under its interdivisional financing arrangement with
Genzyme General. In March 2000, Genzyme Tissue Repair made a $5.0 million draw
under this arrangement in exchange for 765,169 Genzyme Tissue Repair designated
shares. As of June 30, 2000, $15 million was available to Genzyme Tissue Repair
under this arrangement. For information regarding the determination of the
amount of Genzyme Tissue Repair designated shares authorized in connection with
each draw under this arrangement you should read the section entitled "Liquidity
and Capital Resources--Genzyme Corporation" above.
In March 2000, we entered into an agreement to acquire Biomatrix, Inc. Upon
the effectiveness of our Registration Statement on Form S-4 and completion of
the merger, we will form a new operating division called Genzyme Biosurgery and
create a new series of common stock that is intended to reflect its value and
track its performance. We refer to this stock as "Biosurgery Stock." In
connection with the merger and upon Genzyme Shareholder approval, the assets and
liabilities allocated to Genzyme Surgical Products and Genzyme Tissue Repair
will be re-allocated to Genzyme Biosurgery and shares of Surgical Products Stock
and Tissue Repair Stock will be exchanged for Biosurgery Stock. We will account
for the acquisition of Biomatrix as a purchase.
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<PAGE>
Biomatrix stockholders will receive $37.00 in cash, one share of Biosurgery
Stock or a combination of cash and stock for each share of Biomatrix common
stock they hold. The merger agreement provides that we will pay cash for up to
28.38% of the outstanding shares of Biomatrix common stock that receive merger
consideration, or up to approximately $245.0 million.
Holders of Surgical Products Stock will receive 0.6060 share of Biosurgery
Stock in exchange for each share of Surgical Products Stock they hold and
holders of Tissue Repair Stock will receive 0.3352 share of Biosurgery Stock in
exchange for each share of Tissue Repair Stock they hold.
We anticipate that Genzyme Tissue Repair's current cash resources, together
with the $15.0 million that remains available under the interdivisional
financing arrangement from Genzyme General, will be sufficient to fund its
operations through the end of 2000.
Genzyme Tissue Repair's cash needs may differ from those planned as a result
of various factors, including the:
- ability to become profitable;
- ability to satisfy regulatory requirements of the FDA and other government
agencies;
- results of research and development and clinical testing;
- enforcement of patent and other intellectual property rights; and
- development of competitive products and services.
In addition, in 1999, Genzyme Tissue Repair received $25.0 million in cash
from Genzyme General in connection with the re-allocation of our interest in our
joint venture with Diacrin, Inc. from Genzyme Tissue Repair to Genzyme General.
In connection with the re-allocation, it was agreed that Genzyme Tissue Repair
would be required to pay to Genzyme General $20.0 million plus accrued interest
at an annual interest rate of 13.5%. In June 2000, our board of directors
extended the milestone timeline to initiate a Phase 3 clinical trial of
NeuroCell-TM--PD from June 30, 2000 to December 31, 2000. The milestone date and
the related financial obligation were extended to allow additional time to
review data from the current blinded phase 2 clinical trial. If a phase 3
clinical trial is initiated by December 31, 2000 but NeuroCell-TM--PD does not
receive marketing approval by June 30, 2004, Genzyme Tissue Repair will be
required to pay Genzyme General $15.0 million plus accrued interest at an annual
rate of 13.5%. Genzyme Tissue Repair may repay these amounts in cash, Genzyme
Tissue Repair designated shares, or a combination of both, at its option. If
these milestones are not achieved, and Genzyme Tissue Repair elects to pay
Genzyme General in Genzyme Tissue Repair designated shares, this would
substantially dilute the rights of the holders of Tissue Repair Stock and could
significantly affect the market price of Tissue Repair Stock.
Genzyme Tissue Repair will require substantial additional funds in order to
continue operations at current levels beyond 2000. We cannot guarantee that we
will be able to obtain any additional financing for Genzyme Tissue Repair or
find it on favorable terms. If Genzyme Tissue Repair has insufficient funds or
is unable to raise additional funds, it may be required to delay, reduce or
eliminate certain of its programs. Genzyme Tissue Repair may also have to give
rights to third parties to commercialize technologies or products that it would
otherwise commercialize itself.
ITEM 3. QUANTITATIVE AND QUALITATIVE ANALYSIS OF MARKET RISK.
We are exposed to potential loss from financial market risks that may occur
as a result of changes in interest rates, equity prices and foreign exchange
rates. Our exposure to these risks has not materially changed since December 31,
1999.
We incorporate our disclosure related to market risk which is set forth
under the heading "Management's Discussion and Analysis of Genzyme Corporation
and Subsidiaries' Financial Condition and Results of Operations--Market Risk" in
Exhibit 13.1 to our 1999 Form 10-K by reference into this discussion.
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GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, JUNE 30, 2000
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In April 2000, Genzyme General received net proceeds of approximately $5.1
million in connection with a settlement of a lawsuit. The lawsuit, initiated in
1993 in the U.S. District Court for the District of Boston, Massachusetts,
pertained to an accidental spill of Ceredese-Registered Trademark- enzyme at a
fill facility operated by a contractor to Genzyme General.
On July 25, 2000, Genzyme filed a lawsuit for the purpose of seeking
injunctive relief and damages against Transkaryotic Therapies Inc. in the U.S.
District Court in Wilmington, Delaware for patent infringement by the
manufacture and use of Replagal-TM-, Transkaryotic Therapies' replacement
therapy for Fabry disease. The suit alleges infringement of U.S. patent
No. 5,356,804, which is exclusively licensed to Genzyme by Mount Sinai School of
Medicine. The patent is directed to methods of making alpha-galactosidase in
mammalian cells, as well as the genetically-engineered cells themselves.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
I. We held an annual meeting of our stockholders on May 25, 2000, which we
adjourned and re-convened on June 20, 2000. We have described below the results
of the voting on proposals submitted to our stockholders for a vote at the
annual meeting:
a. Proposal to elect one director for a term of office expiring in 2003:
<TABLE>
<CAPTION>
NUMBER OF VOTES
----------------------
NOMINEE FOR WITHHELD
------- ---------- ---------
<S> <C> <C>
Henri A. Termeer
Genzyme General Stock............................... 73,721,283 1,642,212
Molecular Oncology Stock*........................... 1,003,382 11,655
Surgical Products Stock**........................... 8,046,937 215,869
Tissue Repair Stock***.............................. 1,637,353 15,154
---------- ---------
Total............................................... 84,408,955 1,884,890
</TABLE>
Mr. Termeer received a majority of the votes cast and, therefore, has
been duly elected as a director of Genzyme. The terms in office of the
following directors continued after the meeting:
- Constantine E. Anagnostopoulos, Ph.D.;
- Douglas A. Berthiaume;
- Henry E. Blair;
- Robert J. Carpenter; and
- Charles L. Cooney, Ph.D.
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<PAGE>
b. Proposal to amend our 1990 Equity Incentive Plan to add 175,000 shares
of Surgical Products Stock to be made available for issuance under the
plan.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF NUMBER OF VOTES NUMBER OF BROKER
VOTES FOR VOTES AGAINST ABSTAINING NON-VOTES****
---------- ------------- --------------- ----------------
<S> <C> <C> <C> <C>
Genzyme General Stock.. 51,124,488 23,986,098 252,907 --
Molecular Oncology
Stock*............... 937,341 74,141 3,554 --
Surgical Products
Stock**.............. 7,414,911 820,424 27,469 --
Tissue Repair
Stock***............. 1,362,570 281,410 8,526 --
---------- ---------- ------- ---
Total.................. 60,839,310 25,162,073 292,456
</TABLE>
The proposal received the affirmative vote of a majority in interest of
the stock present, or represented, and entitled to vote and, therefore,
has been adopted.
c. Proposal to amend our charter to modify the terms of the Molecular
Oncology Stock, Surgical Products Stock and Tissue Repair Stock.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF NUMBER OF VOTES NUMBER OF BROKER
VOTES FOR VOTES AGAINST ABSTAINING NON-VOTES
---------- ------------- --------------- ----------------
<S> <C> <C> <C> <C>
Genzyme General Stock.. 55,668,021 316,909 261,347 19,559,370
Molecular Oncology
Stock*............... 588,527 21,196 7,762 441,200
Surgical Products
Stock**.............. 5,492,636 400,837 43,945 2,876,226
Tissue Repair
Stock***............. 860,237 36,739 13,231 755,058
---------- ------- ------- ----------
Total.................. 62,609,421 775,681 326,285 23,631,854
</TABLE>
The proposal received the affirmative vote of a majority in interest of
all shares outstanding and entitled to vote and, therefore, has been
adopted.
d. Votes of holders of shares of Molecular Oncology Stock on the proposal
to amend our charter to modify the terms of the Molecular Oncology Stock.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF NUMBER OF VOTES NUMBER OF BROKER
VOTES FOR VOTES AGAINST ABSTAINING NON-VOTES
--------- ------------- --------------- ----------------
<S> <C> <C> <C> <C>
Molecular Oncology
Stock................. 7,356,596 264,953 97,036 5,515,003
</TABLE>
The proposal received the affirmative vote of a majority in interest of
all shares of Molecular Oncology Stock outstanding and entitled to vote
and, therefore, has been adopted for Molecular Oncology Stock.
e. Votes of holders of shares of Surgical Products Stock on the proposal to
amend our charter to modify the terms of the Surgical Products Stock.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF NUMBER OF VOTES NUMBER OF BROKER
VOTES FOR VOTES AGAINST ABSTAINING NON-VOTES
--------- ------------- --------------- ----------------
<S> <C> <C> <C> <C>
Surgical Products
Stock................. 9,004,322 657,111 72,041 4,715,125
</TABLE>
The proposal received the affirmative vote of a majority in interest of
all shares of Surgical Products Stock outstanding and entitled to vote
and, therefore, has been adopted for Surgical Products Stock.
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<PAGE>
f. Votes of holders of shares of Tissue Repair Stock on the proposal to
amend our charter to modify the terms of the Tissue Repair Stock.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF NUMBER OF VOTES NUMBER OF BROKER
VOTES FOR VOTES AGAINST ABSTAINING NON-VOTES
---------- ------------- --------------- ----------------
<S> <C> <C> <C> <C>
Tissue Repair Stock.... 14,337,287 612,329 220,532 12,584,310
</TABLE>
The proposal received the affirmative vote of a majority in interest of
all shares of Tissue Repair Stock outstanding and entitled to vote and,
therefore, has been adopted for Tissue Repair Stock.
-------------------------------
* Represents the actual number of shares of Molecular Oncology Stock
voted multiplied by .08.
** Represents the actual number of shares of Surgical Products Stock
voted multiplied by .61.
*** Represents the actual number of shares of Tissue Repair Stock voted
multiplied by .06.
****For this purpose, abstentions and broker non-votes are not counted.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<S> <C>
3.1 Restated Articles of Organization of Genzyme. Filed as
Exhibit 1 to Genzyme's Current Report on Form 8-K filed on
June 30, 2000 (File No. 0-14680), and incorporated herein by
reference.
10.1 Amended and Restated Collaboration Agreement dated as of
April 1, 2000 by and between Genzyme, GelTex
Pharmaceuticals, Inc. and RenaGel LLC. Filed as Exhibit 10.1
to GelTex's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000 (File No. 0-26872) and incorporated
herein by reference.
10.2 Amended and Restated Operating Agreement of RenaGel LLC
dated as of April 1, 2000 by and between Genzyme, GelTex
Pharmaceuticals, Inc. and RenaGel, Inc. Filed as
Exhibit 10.2 to GelTex's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2000 (File No. 0-26872) and
incorporated herein by reference.
27 Financial Data Schedule for Genzyme for the six months ended
June 30, 2000 (for EDGAR filing purposes only). Filed
herewith.
</TABLE>
(b) Reports on Form 8-K
We filed a Current Report on Form 8-K, dated June 30, 2000, to report upon
the filing with the Secretary of the Commonwealth of Massachusetts and the
effectiveness of an amendment to our corporate charter modifying the terms of
three of the four series of our common stock.
We filed a Current Report on Form 8-K, dated July 14, 2000, for the purpose
of filing an opinion of counsel with respect to the validity of 1,464,100 shares
of Molecular Oncology Stock being offering pursuant to a Registration Statement
on Form S-3.
We filed a Current Report on Form 8-K, dated July 17, 2000, for the purpose
of filing an updated opinion of counsel with respect to the validity of
1,607,400 shares of Molecular Oncology Stock being offered pursuant to a
Registration Statement on Form S-3.
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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.
<TABLE>
<S> <C> <C>
GENZYME CORPORATION
DATE: August 14, 2000 By: /s/ MICHAEL S. WYZGA
-----------------------------------------
Michael S. Wyzga
SENIOR VICE PRESIDENT FINANCE,
CHIEF FINANCIAL OFFICER,
CORPORATE CONTROLLER AND CHIEF ACCOUNTING
OFFICER
</TABLE>
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EXHIBIT INDEX
<TABLE>
<S> <C>
3.1 Restated Articles of Organization of Genzyme. Filed as
Exhibit 1 to Genzyme's Current Report on Form 8-K filed on
June 30, 2000 (File No. 0-14680), and incorporated herein by
reference.
10.1 Amended and Restated Collaboration Agreement dated as of
April 1, 2000 by and between Genzyme, GelTex
Pharmaceuticals, Inc. and RenaGel LLC. Filed as
Exhibit 10.1 to GelTex's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2000 (File No. 0-26872) and
incorporated herein by reference.
10.2 Amended and Restated Operating Agreement of RenaGel LLC
dated as of April 1, 2000 by and between Genzyme, GelTex
Pharmaceuticals, Inc. and RenaGel, Inc. Filed as
Exhibit 10.2 to GelTex's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2000 (File No. 0-26872) and
incorporated herein by reference.
27 Financial Data Schedule for Genzyme for the six months ended
June 30, 2000 (for EDGAR filing purposes only). Filed
herewith.
</TABLE>
