<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
------------------------
AMENDMENT NO. 1 TO
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-14680
GENZYME CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 06-1047163
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION
NO.)
ONE KENDALL SQUARE, CAMBRIDGE, MASSACHUSETTS 02139
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(617) 252-7500
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
The number of shares outstanding of each of the issuer's series of common
stock as of October 31, 1999:
Genzyme General Division Common Stock....................... 84,130,309
Genzyme Molecular Oncology Division Common Stock............ 13,357,763
Genzyme Surgical Products Division Common Stock............. 14,835,161
Genzyme Tissue Repair Division Common Stock................. 25,532,809
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, SEPTEMBER 30, 1999
NOTE REGARDING FORWARD-LOOKING STATEMENTS:
This report contains forward-looking statements regarding our:
- Planned product development activities;
- Projected expenditures;
- Anticipated receipt of regulatory approvals;
- Plans for sales and marketing;
- Projected cash needs;
- Expected financial results;
- Planned acquisition of Cell Genesys, Inc.; and
- Considerations regarding the disposition of Genzyme Molecular Oncology
designated shares.
These statements are based upon the current assumptions of our management
and are only expectations of future results. These statements are also subject
to risks and uncertainties, and our actual results may differ significantly from
those that are described in this report. These risks and uncertainties include:
- Our ability to successfully complete preclinical and clinical development
of our products and services;
- Our ability to manufacture sufficient amounts of our products for
clinical trials and commercialization activities;
- Our ability to obtain timely regulatory approval of our products and
services;
- 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 regarding our products
and services;
- The accuracy of our estimates of the size and characteristics of the
markets to be addressed by our products and services;
- Market acceptance of our products and services;
- Our ability to obtain reimbursement for our products and services from
third party payers;
- Our ability to establish and maintain 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;
- Our ability, as well as the ability our subsidiaries, significant
suppliers, distributors, customers and partners, to be Year 2000
compliant by the end of this year; and
- The likelihood that the regulatory and other approvals required to
complete the Cell Genesys acquisition will be obtained.
We have filed more detailed descriptions of these risks and uncertainties
in some of our recent filings with the SEC. We encourage you to review these
descriptions, which can be found in the following places:
- Exhibit 13.1 to our Annual Report on Form 10-K for the fiscal year ended
December 31, 1998, as amended (our "1998 Form 10-K") under the heading
"Management's Discussion and Analysis of Genzyme Corporation and
Subsidiaries' Financial Condition and Results of Operations -- Factors
Affecting Future Operating Results."
(our "1998 Form 10-K")
<PAGE>
- Exhibit 13.1 to our 1998 Form 10-K under the heading "Management's
Discussion and Analysis of Genzyme General Division's Financial
Condition and Results of Operations -- Factors Affecting Future
Operating Results."
- Exhibit 13.3 to our 1998 Form 10-K under the heading "Management's
Discussion and Analysis of Genzyme Molecular Oncology Division's
Financial Condition and Results of Operations -- Factors Affecting
Future Operating Results."
- Exhibit 99.3 to our current report on Form 8-K filed with SEC on June
11, 1999 under the heading "Risk Factors Relating to Genzyme Surgical
Products Division Common Stock -- Risks Related to Genzyme Surgical
Products."
- Exhibit 13.2 to our 1998 Form 10-K under the heading "Management's
Discussion and Analysis of Genzyme Tissue Repair Division's Financial
Condition and Results of Operations -- Factors Affecting Future
Operating Results."
NOTE REGARDING REFERENCES TO GENZYME DIVISIONS:
Throughout this report, 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"
- Genzyme Tissue Repair Division = "Genzyme Tissue Repair"
We also refer to the series of Genzyme common stock that reflect the value
and track the performance of these divisions by their Nasdaq trading symbols:
- 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"
- Genzyme Tissue Repair Division Common Stock = "Tissue Repair Stock"
"Genzyme" is a registered trademark and service mark of Genzyme
Corporation. All rights reserved.
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, SEPTEMBER 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.......................................... 5
GENZYME CORPORATION AND SUBSIDIARIES
Unaudited, Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 1999 and 1998..... 5
Consolidated Balance Sheets as of September 30,
1999 (unaudited) and December 31, 1998...................... 7
Unaudited, Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1999 and 1998............... 8
Notes to Unaudited, Consolidated Financial Statements......... 9
GENZYME GENERAL
Unaudited, Combined Statements of Operations for the Three
and Nine Months Ended September 30, 1999 and 1998........... 17
Combined Balance Sheets as of September 30, 1999 (unaudited)
and December 31, 1998....................................... 18
Unaudited, Combined Statements of Cash Flows for the Nine
Months Ended September 30, 1999 and 1998.................... 19
Notes to Unaudited, Combined Financial Statements............. 20
GENZYME MOLECULAR ONCOLOGY
Unaudited, Combined Statements of Operations for the Three
and Nine Months Ended September 30, 1999 and 1998........... 24
Combined Balance Sheets as of September 30, 1999 (unaudited)
and December 31, 1998....................................... 25
Unaudited, Combined Statements of Cash Flows for the Nine
Months Ended September 30, 1999 and 1998.................... 26
Notes to Unaudited, Combined Financial Statements............. 27
GENZYME SURGICAL PRODUCTS
Unaudited, Combined Statements of Operations for the Three
and Nine Months Ended September 30, 1999 and 1998........... 28
Combined Balance Sheets as of September 30, 1999 (unaudited)
and December 31, 1998....................................... 29
Unaudited, Combined Statements of Cash Flows for the Nine
Months Ended September 30, 1999 and 1998.................... 30
Notes to Unaudited, Combined Financial Statements............. 31
GENZYME TISSUE REPAIR
Unaudited, Combined Statements of Operations for the Three
and Nine Months Ended September 30, 1999 and 1998........... 34
Combined Balance Sheets as of September 30, 1999 (unaudited)
and December 31, 1998....................................... 35
Unaudited, Combined Statements of Cash Flows for the Nine
Months Ended September 30, 1999 and 1998.................... 36
Notes to Unaudited, Combined Financial Statements............. 37
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 38
ITEM 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 63
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.............................. 64
Signatures......................................................................... 65
</TABLE>
<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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Net product sales............................... $170,215 $152,453 $499,790 $445,630
Net service sales............................. 19,952 18,526 58,481 55,397
Revenue from research and development
contracts.................................. 1,248 2,415 3,572 7,792
-------- -------- -------- --------
Total revenues............................. 191,415 173,394 561,843 508,819
Operating costs and expenses:
Cost of products sold......................... 44,371 71,547 132,757 166,470
Cost of services sold......................... 12,392 12,290 36,894 36,545
Selling, general and administrative........... 58,648 51,781 183,951 160,264
Research and development...................... 35,925 32,351 109,632 84,918
Amortization of intangibles................... 6,128 6,027 18,501 18,092
Charge for in-process technology.............. 5,436 -- 5,436 --
-------- -------- -------- --------
Total operating costs and expenses......... 162,900 173,996 487,171 466,289
-------- -------- -------- --------
Operating income (loss)......................... 28,515 (602) 74,672 42,530
Other income (expenses):
Equity in net loss of unconsolidated
affiliates................................. (10,407) (6,777) (29,507) (18,325)
Gain on affiliate sale of stock............... 1,164 -- 1,770 2,369
Minority interest............................. 843 993 2,573 2,717
Gain on sale of investment.................... -- -- 1,963 --
Gain on sale of product line.................. 518 31,202 8,018 31,202
Charge for impaired investment................ -- -- (5,487) --
Other......................................... 58 235 101 185
Investment income............................. 9,404 7,438 26,692 16,372
Interest expense.............................. (5,922) (6,946) (17,010) (16,068)
-------- -------- -------- --------
Total other income (expenses).............. (4,342) 26,145 (10,887) 18,452
-------- -------- -------- --------
Income before income taxes...................... 24,173 25,543 63,785 60,982
Provision for income taxes...................... (10,395) (10,576) (27,659) (25,135)
-------- -------- -------- --------
Net income...................................... $ 13,778 $ 14,967 $ 36,126 $ 35,847
======== ======== ======== ========
Comprehensive income, net of tax:
Net income.................................... $ 13,778 $ 14,967 $ 36,126 $ 35,847
-------- -------- -------- --------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments.... 6,463 (2,234) (7,349) (1,290)
-------- -------- -------- --------
Unrealized gains (losses) on securities:
Unrealized gains (losses) arising during
the period............................... 18,869 (563) 17,352 (4,192)
Reclassification adjustment for gains
included in net income................... -- -- 1,945 --
-------- -------- -------- --------
Unrealized gains (losses) on securities,
net..................................... 18,869 (563) 19,297 (4,192)
-------- -------- -------- --------
Other comprehensive income (loss)............ 25,332 (1,697) 11,948 (5,482)
-------- -------- -------- --------
Comprehensive income........................... $ 39,110 $ 13,270 $ 48,074 $ 30,355
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, consolidated
financial statements.
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) per share:
Allocated to Genzyme General Stock (Revised-See Note 9):
Genzyme General net income.................................. $ 29,971 $ 40,202 $ 91,389 $ 96,626
Genzyme Surgical Products net loss.......................... - (21,519) (27,523) (40,523)
Tax benefit allocated from Genzyme Molecular Oncology....... 2,016 1,153 6,326 5,238
Tax benefit allocated from Genzyme Surgical Products........ 3,841 7,741 14,191 14,578
Tax benefit allocated from Genzyme Tissue Repair............ 2,359 4,656 9,733 12,452
-------- -------- -------- --------
Net income allocated to Genzyme General Stock............... $ 38,187 $ 32,233 $ 94,116 $ 88,371
======== ======== ======== ========
Net income per share of Genzyme General Stock:
Basic..................................................... $ 0.46 $ 0.41 $ 1.14 $ 1.13
======== ======== ======== ========
Diluted................................................... $ 0.43 $ 0.39 $ 1.09 $ 1.09
======== ======== ======== ========
Weighted average shares outstanding:
Basic..................................................... 83,621 79,032 82,741 78,492
======== ======== ======== ========
Diluted................................................... 94,331 87,882 93,196 83,887
======== ======== ======== ========
Allocated to Molecular Oncology Stock:
Net loss ................................................. $ (7,559) $ (8,080) $(22,777) $(22,067)
======== ======== ======== ========
Net loss per share of Molecular Oncology Stock -- basic
and diluted............................................. $ (0.60) $ (2.06) $ (1.80) $ (5.62)
======== ======== ======== ========
Weighted average shares outstanding....................... 12,682 3,929 12,672 3,929
======== ======== ======== ========
Allocated to Surgical Products Stock (Revised -- See
Note 9):
Net loss.................................................. $(10,953) $(11,833)
======== ========
Net loss per share of Surgical Products Stock -- basic
and diluted............................................. $ (0.74) $ (0.80)
======== ========
Weighted average shares outstanding....................... 14,835 14,835
======== ========
Allocated to Tissue Repair Stock:
Net loss.................................................. $ (6,148) $ (9,438) $(24,146) $(31,213)
======== ======== ======== ========
Net loss per share of Tissue Repair Stock -- basic and
diluted................................................. $ (0.25) $ (0.47) $ (1.05) $ (1.55)
======== ======== ======== ========
Weighted average shares outstanding....................... 24,275 20,289 22,995 20,150
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, consolidated
financial statements.
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 253,763 $ 118,612
Short-term investments.................................... 274,214 175,453
Accounts receivable, net.................................. 154,256 163,042
Inventories............................................... 117,184 109,833
Prepaid expenses and other current assets................. 21,629 31,467
Deferred tax assets -- current............................ 39,688 39,725
---------- ----------
Total current assets................................... 860,734 638,132
Property, plant and equipment, net.......................... 383,541 382,619
Long-term investments....................................... 167,950 281,664
Intangibles, net............................................ 259,451 279,516
Deferred tax assets -- noncurrent........................... 23,526 24,277
Investment in equity securities............................. 77,041 51,977
Other....................................................... 31,979 30,669
---------- ----------
Total assets........................................... $1,804,222 $1,688,854
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 16,675 $ 27,604
Accrued expenses.......................................... 89,818 72,389
Income taxes payable...................................... 26,771 16,543
Payable to joint venture.................................. 3,211 1,181
Deferred revenue.......................................... 1,881 2,731
Current portion of long-term debt and capital lease
obligations............................................ 87,733 100,568
---------- ----------
Total current liabilities.............................. 226,089 221,016
Long-term debt and capital lease obligations................ 18,000 3,087
Convertible subordinated notes and debentures, net.......... 272,399 284,138
Other....................................................... 2,338 8,078
---------- ----------
Total liabilities...................................... 518,826 516,319
Stockholders' equity:
Preferred Stock........................................... -- --
Genzyme General Stock, $0.01 par value.................... 841 814
Molecular Oncology Stock, $0.01 par value................. 127 126
Surgical Products Stock $0.01 par value................... 148 --
Tissue Repair Stock, $0.01 par value...................... 255 209
Treasury Stock -- at cost................................. (901) (901)
Additional paid-in capital -- Genzyme General Stock....... 440,791 593,042
Additional paid-in capital -- Molecular Oncology Stock ... 63,589 63,427
Additional paid-in capital -- Surgical Products Stock..... 543,449 365,785
Additional paid-in capital -- Tissue Repair Stock......... 213,188 174,198
Retained earnings (accumulated deficit)................... 22,328 (13,798)
Accumulated other comprehensive income (loss)............. 1,581 (10,367)
---------- ----------
Total stockholders' equity............................. 1,285,396 1,172,535
---------- ----------
Total liabilities and stockholders' equity............. $1,804,222 $1,688,854
========== ==========
</TABLE>
The accompanying notes are an integral part of these unaudited, consolidated
financial statements.
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 36,126 $ 35,847
Reconciliation of net income to net cash provided by
operating activities:
Depreciation and amortization.......................... 48,706 45,782
Accretion of debt conversion feature................... -- 2,654
Deferred income tax benefit............................ (1,986) (1,986)
Accrued interest/amortization on investments........... 106 (8,671)
Gain on sale of investment............................. (1,963) --
Loss on sale of property, plant and equipment.......... 1,115 --
Provision for bad debts................................ 10,944 4,104
Equity in net loss of unconsolidated affiliates........ 29,507 18,140
Gain on affiliate sale of stock........................ (1,770) (2,369)
Minority interest in net loss of affiliates............ (2,573) (2,717)
Charge for impaired investment......................... 5,487 --
Gain on sale of product line........................... (8,018) (31,202)
Charge for in-process technology....................... 5,436 --
Other.................................................. 509 54
Increase (decrease) in cash from working capital changes:
Accounts receivable.................................. (3,486) (30,070)
Inventories.......................................... (10,752) 29,791
Prepaid expenses and other current assets............ 9,653 (5,643)
Accounts payable, accrued expenses, income taxes
payable and deferred revenue........................ 16,495 21,825
--------- ---------
Net cash provided by operating activities............ 133,536 75,539
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments.................................. (357,248) (384,847)
Sales and maturities of investments....................... 368,162 63,884
Acquisitions of property, plant and equipment............. (35,602) (25,023)
Sale of property, plant and equipment..................... 188 876
Acquisitions, net of acquired cash and assumed
liabilities............................................ (6,500) (8,324)
Proceeds from sale of product line........................ 5,000 24,760
Proceeds from sale of investment.......................... 11,090 --
Investment in unconsolidated affiliates................... (13,700) (22,783)
Investment in joint ventures.............................. (32,507) (11,987)
Repayment of notes receivable............................. 8,360 --
Repayment of loans by affiliates.......................... -- 2,019
Other..................................................... 1,179 868
--------- ---------
Net cash used in investing activities................ (51,578) (360,557)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................... 56,432 34,881
Proceeds from issuance of debt, net....................... -- 243,459
Payments of debt and capital lease obligations............ (3,669) (19,081)
Other..................................................... 3,320 2,124
--------- ---------
Net cash provided by financing activities............ 56,083 261,383
Effect of exchange rate changes on cash..................... (2,890) (438)
--------- ---------
Increase (decrease) in cash and cash equivalents............ 135,151 (24,073)
Cash and cash equivalents at beginning of period............ 118,612 102,406
--------- ---------
Cash and cash equivalents at end of period.................. $ 253,763 $ 78,333
========= =========
Supplemental disclosure of non-cash activity:
Debt Conversions -- Note 3.
</TABLE>
The accompanying notes are an integral part of these unaudited, consolidated
financial statements.
<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 1998 data to conform with our 1999 presentation.
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 1998
Form 10-K. Revenues, expenses, assets and liabilities can vary from quarter to
quarter. Therefore, the results and trends in these interim financial statements
may not be the same as those for future periods.
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVENTORIES (AMOUNTS IN THOUSANDS):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
(Unaudited)
<S> <C> <C>
Raw materials.................. $ 42,904 $ 41,328
Work-in-process................ 47,775 27,474
Finished products.............. 26,505 41,031
-------- --------
Total..................... $117,184 $109,833
======== ========
</TABLE>
3. DEBT CONVERSIONS
We allocate our 6% convertible subordinated note due February 2000 to
Genzyme Tissue Repair. In the first three quarters of 1999, the holder of this
note converted an aggregate of $8,230,000 in principal amount in exchange for a
total of 4,364,861 shares of GZTR Stock. We paid $406,379 of accrued interest to
the holder in connection with these conversions.
4. ACQUISITION OF PEPTIMMUNE, INC.
In July 1999, we acquired Peptimmune, a privately-held company whose lead
development program focuses on a treatment for pemphigus vulgaris. We allocated
this acquisition to Genzyme General. We allocated the aggregate purchase price
of $6.5 million and assumed liabilities of $0.3 million to the tangible and
intangible assets we acquired from Peptimmune based on their respective fair
values (amounts in thousands):
Property, plant & equipment................................. $ 128
Deferred tax asset.......................................... 1,229
In-process technology....................................... 5,436
------
Total.................................................. $6,793
======
The $5.4 million allocated to in-process technology represents the value we
assigned to Peptimmune's programs that are still in the development stage and
for which there is no alternative use. In the third quarter of 1999, we recorded
a one-time charge to operations for the amount of the purchase price allocated
to in-process technology.
5. STRESSGEN JOINT VENTURE
We allocate our interest in StressGen/Genzyme LLC, our joint venture with
StressGen Biotechnologies Corp. and the Canadian Medical Discoveries Fund Inc.,
to Genzyme Molecular Oncology. Because the fund had the right to require
StressGen and Genzyme Molecular Oncology to repurchase the fund's membership
interest in the joint venture, Genzyme Molecular Oncology has been recording 50%
of the losses incurred by the joint venture. In August 1999, the fund exercised
its option to require us and StressGen to repurchase the fund's interest in the
joint venture and we recorded a $1.0 million charge to our statement of
operations in connection with this repurchase. In addition,
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
because our portion of the cumulative losses of the joint venture exceeded our
initial capital contribution, we have recorded current liabilities of $3.2
million for the nine months ended September 30, 1999.
6. INVESTMENT IN BIOMARIN PHARMACEUTICAL INC.
In July 1999, we purchased an additional 769,230 shares of the common stock
of BioMarin Pharmaceutical Inc. for $10.0 million in a private placement
contemporaneous with the closing of BioMarin's initial public offering. We
currently own approximately 6% of the outstanding shares of BioMarin common
stock. We allocate this investment to Genzyme General.
7. GAIN ON SALE OF PRODUCT LINE
In July 1999, we sold our immunochemistry product line to an operating unit
of Sybron Laboratory Products Corp. for $5.0 million in cash. We had allocated
this product line to Genzyme General. In the third quarter of 1999, we recorded
a gain of $0.5 million related to the sale of this product line.
8. TAX PROVISION
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ---------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
-------- -------- -------- -------- -------- --------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Provision for income taxes.. $(10,395) $(10,576) (2)% $(27,659) $(25,135) 10%
Tax rate................... 43% 41% 43% 41%
</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;
- nondeductible amortization of intangibles;
- use of tax credits; and
- share of losses of unconsolidated affiliates.
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. 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 three months ended September 30, 1998 and for the nine months ended
September 30, 1999 and 1998, 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- -----------------------
1998 1999 1998
---------------------- -----------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
GENZYME GENERAL:
PREVIOUSLY REPORTED: (pro forma information
previously reported as historical)
Net income allocated to Genzyme General Stock......... $57,352 $121,639 $128,894
======= ======== ========
Net income per share of Genzyme General Stock:
Basic............................................... $0.68 $1.47 $1.64
===== ===== =====
Diluted............................................. $0.64 $1.38 $1.57
===== ===== =====
AS REVISED:
Net income allocated to Genzyme General Stock......... $32,233 $94,116 $88,371
======= ======= =======
Net income per share of Genzyme General Stock:
Basic............................................... $0.41 $1.14 $1.13
===== ===== =====
Diluted............................................. $0.39 $1.09 $1.09
===== ===== =====
GENZYME SURGICAL PRODUCTS:
PREVIOUSLY REPORTED: (pro forma information
previously reported as historical)
Net loss allocated to Surgical Products Stock......... $(21,519) $(39,356) $(40,523)
======== ======== ========
AS REVISED:
Net loss allocated to Surgical Products Stock......... $(11,833)
========
Net loss per share of Surgical Products Stock --
basic and diluted................................. $(0.80)
======
Weighted average shares outstanding................... 14,835
======
</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 to Surgical Products Stock and
weighted average shares outstanding would have been as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1998
------------------- ---------------------
<S> <C> <C> <C>
GENZYME GENERAL:
Net income allocated to Genzyme General Stock......... $57,352 $121,639 $128,894
======= ======== ========
Weighted average shares outstanding:
Basic............................................... 79,032 82,741 78,492
Diluted............................................. 87,882 93,196 83,887
GENZYME SURGICAL PRODUCTS:
Net loss allocated to Surgical Products Stock......... $(21,519) $(39,356) $(40,523)
======== ========= =========
Weighted average shares outstanding-basic and diluted. 14,800 14,800 14,800
</TABLE>
GENZYME GENERAL STOCK (Revised):
The following table sets forth the computation of basic and diluted
earnings per share of Genzyme General Stock:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ------------------------
1999 1998 1999 1998
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Genzyme General net income............................. $ 29,971 $ 40,202 $ 91,389 $ 96,626
Genzyme Surgical Products net loss..................... - (21,519) (27,523) (40,523)
Tax benefit allocated from Genzyme Molecular Oncology.. 2,016 1,153 6,326 5,238
Tax benefit allocated from Genzyme Surgical Products... 3,841 7,741 14,191 14,578
Tax benefit allocated from Genzyme Tissue Repair....... 2,359 4,656 9,733 12,452
--------- --------- ---------- ----------
Net income allocated to Genzyme General Stock -- basic. 38,187 32,233 94,116 88,371
Effect of dilutive securities (net of tax):
5 1/4% convertible subordinated notes(1):
Interest expense.................................. 2,259 2,009 6,208 2,936
Amortization of debt discount and
offering costs(2)............................... 161 143 443 207
5% convertible subordinated debentures(3):
Interest expense.................................. 183 -- 502 --
Amortization of debt offering costs(4)............ 30 -- 83 --
------- ------- -------- --------
Net income allocated to Genzyme General
Stock -- diluted.................................... $40,820 $34,385 $101,326 $ 91,514
======= ======= ======== ========
Shares used in computing net income per common
share -- basic....................................... 83,621 79,032 82,741 78,492
Effect of dilutive securities:
Employee and director stock options............... 3,743 2,200 3,485 2,261
Warrants.......................................... 24 7 27 7
5 1/4% convertible subordinated notes(1).......... 6,313 6,313 6,313 3,053
5% convertible subordinated debentures(3)......... 630 330 630 74
------- ------- -------- --------
Dilutive potential common shares(5).................. 10,710 8,850 10,455 5,395
------- ------- -------- --------
Shares used in computing net income per common
share -- diluted(5).................................. 94,331 87,882 93,196 83,887
======= ======= ======== ========
Net income per share of Genzyme General Stock:
Basic................................................ $ 0.46 $ 0.41 $ 1.14 $ 1.13
======= ======= ======== ========
Diluted(5)........................................... $ 0.43 $ 0.39 $ 1.09 $ 1.09
======= ======= ======== ========
</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.
(5) We did not include the securities described in the following table in the
computation of Genzyme General's diluted earnings per share for the
three and nine months ended September 30, 1999 and 1998 because these
securities had an exercise price greater than the average market price of
Genzyme General Stock:
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- --------------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
Shares of Genzyme General Stock issuable
for options......................................... 1,680 3,611 1,621 3,767
Shares of Genzyme General Stock issuable
for warrants........................................ -- 80 27 80
----- ----- ----- -----
Total shares with exercise prices greater
than the average market price of Genzyme General
Stock during the period............................. 1,680 3,691 1,648 3,847
===== ===== ===== =====
</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. This additional amortization amounted
to approximately $0.3 million in each of the three months ended September 30,
1999 and 1998 and $0.8 million in each of the nine months ended September 30,
1999 and 1998.
For all periods presented, basic and diluted net loss per 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 NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- ---------------
1999 1998 1999 1998
----- ------ ----- ------
<S> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
Shares of Molecular Oncology Stock issuable for
options......................................... 1,823 1,165 1,752 1,071
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(1)... 728 9,446 728 9,446
----- ------ ----- ------
Total shares excluded from the diluted loss per
Genzyme Molecular Oncology share calculation.... 3,243 11,303 3,172 11,209
===== ====== ===== ======
</TABLE>
(1) Genzyme Molecular Oncology designated shares are authorized shares of
Molecular Oncology Stock that are not issued and outstanding, but which
our board of directors may issue, sell or distribute without allocating the
proceeds to Genzyme Molecular Oncology.
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 September 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, 1998, net loss allocated to Surgical Products
Stock and weighted average shares outstanding would have been as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1998
--------------------- -----------------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Net loss allocated to Surgical Products Stock......... $(21,519) $(39,356) $(40,523)
========= ========= =========
Weighted average shares outstanding-basic and diluted. 14,800 14,800 14,800
</TABLE>
We do not disclose net loss per share for Surgical Products Stock
for the three and nine months ended September 30, 1998 because Surgical
Products Stock was not outstanding prior to June 28, 1999. For the three and
nine months ended September 30, 1999, basic and diluted net loss per Surgical
Products Stock are 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 for the three and nine months ended September 30, 1999
because these securities would have an anti-dilutive effect due to the net
loss allocated to Surgical Products Stock:
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
1999 1998 1999 1998
------ ----- ------ -----
<S> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
Shares of Surgical Products Stock issuable for
options...................................... -- -- -- --
Shares of Surgical Products Stock issuable
upon conversion of the 5 1/4% convertible
subordinated notes........................... 1,130 -- 1,130 --
----- -- ----- --
Total shares excluded from the diluted loss per
Surgical Products Stock share calculation.... 1,130 -- 1,130 --
===== == ===== ==
</TABLE>
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 Stock:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
Shares of Tissue Repair Stock issuable for
options....................................... 4,218 3,223 4,103 3,059
Genzyme Tissue Repair designated shares(1)...... 2,260 782 2,260 782
Shares of Tissue Repair Stock issuable upon
conversion of the 5% convertible subordinated
note.......................................... 3,445 4,199 3,445 4,199
----- ----- ----- -----
Total shares excluded from the diluted loss per
Tissue Repair Stock share calculation......... 9,923 8,204 9,808 8,040
===== ===== ===== =====
</TABLE>
(1) Genzyme Tissue Repair designated shares are authorized shares of Tissue
Repair Stock that are not issued and outstanding, but which our board of
directors may issue, sell or distribute without allocating the proceeds to
Genzyme Tissue Repair.
10. 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(R)
enzyme;
- Diagnostic Products, which provides diagnostic products to niche markets
focusing 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
- Genzyme Tissue Repair, which develops and markets biological products for
orthopedic injuries, such as cartilage repair, and severe burns.
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information concerning the operations in these reportable
segments is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- -----------------------
1999 1998 1999 1998
---------------------- -----------------------
(UNAUDITED, AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
REVENUES:
Genzyme General:
Therapeutics............................................ $123,492 $105,485 $357,756 $297,608
Diagnostic Products..................................... 14,286 16,168 43,933 50,120
Other................................................... 19,364 19,417 59,274 62,897
Eliminations/Adjustments (1)............................ 527 1,155 1,677 3,275
------------ ----------- ----------- -----------
Total Genzyme General................................. 157,669 142,225 462,640 413,900
Genzyme Molecular Oncology............................... 709 1,985 3,455 6,491
Genzyme Surgical Products................................ 27,385 24,904 81,419 76,332
Genzyme Tissue Repair.................................... 5,682 4,464 14,370 12,420
Eliminations/Adjustments (2)............................. (30) (184) (41) (324)
------------ ----------- ----------- -----------
Total ................................................ $191,415 $173,394 $561,843 $508,819
======== ======== ======== ========
NET INCOME:
Net income allocated to Genzyme General Stock:
Division net income (loss) -- Genzyme General:........
Therapeutics.......................................... $ 32,556 $ 23,650 $ 99,337 $ 90,461
Diagnostic Products (3)............................... 1,063 19,399 3,263 19,920
Other................................................. (2,630) (1,871) (3,958) (2,182)
Eliminations/Adjustments (4).......................... (1,018) (976) (7,253) (11,573)
----------- ---------- ----------- ---------
Net income for Genzyme General......................... 29,971 40,202 91,389 96,626
Genzyme Surgical Products net loss (5)................. - (21,519) (27,523) (40,523)
Tax benefits allocated from other Genzyme divisions.... 8,216 13,550 30,250 32,268
----------- ----------- ----------- ----------
Net income allocated to Genzyme General Stock............ 38,187 32,233 94,116 88,371
Net income allocated to Molecular Oncology Stock......... (7,559) (8,080) (22,777) (22,067)
Net income allocated to Surgical Products Stock (6)...... (10,953) - (11,833) -
Net income allocated to Tissue Repair Stock.............. (6,148) (9,438) (24,146) (31,213)
Eliminations/Adjustments (7)............................. 251 252 766 756
----------- ------------ ------------ ---------
Total ................................................ $ 13,778 $ 14,967 $ 36,126 $ 35,847
========= ========= ========= ========
</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) Diagnostic Products' net income for the three and nine months ended
September 30, 1998 includes a $31.2 million gain on the sale of a product
line in 1998.
(4) 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.
(5) 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 series of common stock outstanding
prior to June 1999 and to each series of common stock, including Surgical
Products Stock, thereafter. (See Note 9 above).
(6) In the third quarter of 1998, Genzyme Surgical Products recorded a $10.4
million charge to cost of goods sold to reduce Sepra products inventory to
net realizable value.
(7) 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 tax payer.
There has been no material change in segment assets since December 31,
1998.
11. SUBSEQUENT EVENTS
Cell Genesys:
In October 1999, we entered into an agreement to acquire Cell Genesys,
Inc., a gene therapy company, for approximately $350 million in Genzyme
General Stock. The acquisition, which we expect to complete in the first
quarter of 2000, is subject to:
- Approval by Cell Genesys' shareholders;
- Clearance under federal antitrust laws; and
- Other customary closing conditions.
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with this acquisition, our board of directors has approved
the allocation of Cell Genesys' cancer programs and product candidates and $60.0
million in cash to Genzyme Molecular Oncology. In exchange for those assets,
Genzyme Molecular Oncology will reserve approximately 12.5 million Genzyme
Molecular Oncology designated shares for the benefit of Genzyme General.
New Credit Facility:
In November 1999, our $225.0 million revolving credit facility matured. We
refinanced this 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. When we refinanced the credit facility, $100.0 million
was outstanding. Of this amount, we:
- Repaid the $82.0 million that was allocated to Genzyme General; and
- Refinanced the $18.0 million that was allocated to Genzyme Tissue Repair
under the new credit facility.
Genzyme Transgenics:
In November 1999, we purchased $12.5 million in shares of Series B
convertible preferred stock of Genzyme Transgenics Corporation. We can convert
these shares into shares of Genzyme Transgenics common stock at any time at a
price of $6.30 per share. We will receive an escalating annual dividend of
between 11% and 12% on amounts that we convert into common stock.
Focal:
In October 1999, we entered into an agreement with Focal, Inc. under which
Genzyme Surgical Products will distribute and sell Focal's surgical sealants in
North America for selected indications following FDA approval. In November 1999,
we purchased 810,372 shares of Focal common stock for $5.0 million. We are also
committed, at Focal's option, to make future equity investments of up to $15.0
million subject to certain conditions.
GelTex:
In November 1999, we made a $10.0 milestone payment to GelTex
Pharmaceuticals, Inc. as required under our joint venture agreements.
StressGen:
In August 1999, the Canadian Medical Discoveries Fund exercised its option
to require us and StressGen to repurchase the fund's interest in
StressGen/Genzyme LLC. We repurchased one-half of the fund's interest in the
joint venture in October 1999 for approximately $3.9 million by issuing to the
fund 617,200 shares of Molecular Oncology Stock.
<PAGE>
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED, AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total revenues............................................ $157,669 $142,225 $462,640 $413,900
Operating costs and expenses:
Cost of products and services sold...................... 36,437 54,475 109,328 136,082
Selling, general and administrative..................... 36,388 30,277 114,446 92,736
Research and development................................ 22,884 19,530 68,896 52,039
Amortization of intangibles............................. 1,978 1,879 6,081 5,516
Charge for in-process technology........................ 5,436 -- 5,436 --
-------- -------- -------- --------
Total operating costs and expenses.................... 103,123 106,161 304,187 286,373
-------- -------- -------- --------
Operating income.......................................... 54,546 36,064 158,453 127,527
Other income (expenses):
Equity in net loss of unconsolidated affiliates......... (9,352) (4,919) (24,077) (11,832)
Gain on affiliate sale of stock......................... 1,164 -- 1,770 2,369
Gain on sale of investment in equity securities......... -- -- 1,963 --
Minority interest....................................... 843 993 2,573 2,717
Gain on sale of product line............................ 518 31,202 8,018 31,202
Charge for impaired investment.......................... -- -- (5,487) --
Investment income....................................... 6,970 6,974 23,713 14,660
Interest expense........................................ (5,445) (5,324) (15,631) (10,628)
-------- -------- -------- --------
Total other income (expenses)......................... (5,302) 28,926 (7,158) 28,488
-------- -------- -------- --------
Income before income taxes................................ 49,244 64,990 151,295 156,015
Provision for income taxes................................ (19,273) (24,788) (59,906) (59,389)
-------- -------- -------- --------
Division net income....................................... $29,971 $40,202 $91,389 $96,626
======== ======== ======== ========
Comprehensive income, net of tax:
Division net income....................................... $ 29,971 $ 40,202 $ 91,389 $ 96,626
Other comprehensive income (loss), net of tax: -------- -------- -------- --------
Foreign currency translation adjustments.............. 6,463 (1,134) (7,349) (1,290)
Unrealized (gains) losses on securities: -------- -------- -------- ---------
Unrealized (gains) losses arising during the period... 18,871 (567) 17,982 (4,210)
Reclassification adjustment for losses included in net
income.............................................. -- -- 1,945 --
-------- -------- -------- --------
Unrealized gains (losses) on securities, net............ 18,871 (567) 19,927 (4,210)
-------- -------- -------- --------
Other comprehensive income (loss)......................... 25,334 (1,701) 12,578 (5,500)
-------- -------- -------- --------
Comprehensive income...................................... $ 55,305 $ 38,501 $103,967 $ 91,126
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
<PAGE>
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
COMBINED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 203,636 $ 100,012
Short-term investments.................................... 220,701 174,421
Accounts receivable, net.................................. 131,893 137,615
Inventories............................................... 83,700 85,162
Prepaid expenses and other current assets................. 19,776 27,727
Due from Genzyme Molecular Oncology....................... 3,173 4,773
Due from Genzyme Surgical Products........................ 13,676 --
Due from Genzyme Tissue Repair............................ 966 548
Deferred tax assets -- current............................ 39,688 39,725
---------- ----------
Total current assets................................... 717,209 569,983
Property, plant and equipment, net.......................... 363,436 362,743
Long-term investments....................................... 105,759 281,664
Intangibles, net............................................ 78,503 85,851
Deferred tax assets -- noncurrent........................... 25,401 28,138
Investment in equity securities............................. 77,041 51,977
Other....................................................... 31,672 30,035
---------- ----------
Total assets........................................... $1,399,021 $1,410,391
========== ==========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable.......................................... $ 11,465 $ 22,324
Accrued expenses.......................................... 79,713 65,643
Income taxes payable...................................... 26,771 16,532
Deferred revenue.......................................... 1,251 1,231
Current portion of long-term debt and capital lease
obligations............................................ 83,610 82,568
---------- ----------
Total current liabilities.............................. 202,810 188,298
Long-term debt and capital lease obligations................ -- 3,087
Convertible subordinated notes and debentures, net.......... 272,399 271,559
Other....................................................... 1,852 7,480
---------- ----------
Total liabilities...................................... 477,061 470,424
Division equity............................................. 921,960 939,967
---------- ----------
Total liabilities and division equity.................. $1,399,021 $1,410,391
========== ==========
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
<PAGE>
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED, AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Division net income......................................... $ 91,389 $ 96,626
Reconciliation of division net income to net cash
provided by operating activities:
Depreciation and amortization........................... 33,553 29,801
Accrued interest/amortization on bonds.................. (893) (8,969)
Provision for bad debts................................. 10,683 3,727
Loss on sale of plant and equipment..................... 1,157 --
Equity in net loss of unconsolidated affiliates......... 24,077 11,831
Gain on affiliate sale of stock......................... (1,770) (2,369)
Minority interest in net loss of subsidiaries........... (2,573) (2,717)
Gain on sale of investment in equity securities......... (1,963) --
Charge for impaired investment.......................... 5,487 --
Charge for in-process research and development.......... 5,436 --
Gain on sale of business................................ (8,018) (31,202)
Other................................................... 499 (11)
Increase (decrease) in cash from working capital changes:
Accounts receivable................................... (6,289) (26,661)
Inventories........................................... (1,939) 23,837
Prepaid expenses and other current assets............. 7,839 (4,483)
Due from Genzyme Molecular Oncology................... 1,600 1,433
Due from Genzyme Surgical Products.................... (13,676) --
Due from Genzyme Tissue Repair........................ (418) (140)
Accounts payable, accrued expenses, income taxes
payable and deferred revenue......................... 44,110 51,454
--------- ---------
Net cash provided by operating activities............. 188,291 142,157
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments.................................. (342,087) (382,790)
Sales and maturities of investments....................... 342,010 48,682
Purchase of property, plant and equipment................. (32,598) (39,077)
Sales of property, plant and equipment.................... -- 876
Acquisitions, net of acquired cash and assumed
liabilities............................................. (6,500) (8,324)
Proceeds from sale of product line........................ 5,000 24,760
Proceeds from sale of equity investment................... 11,090 --
Investments in unconsolidated affiliates.................. (13,700) (22,783)
Investments in joint ventures............................. (28,912) (7,004)
Repayment of notes receivable............................. 8,360 --
Repayment of loans by affiliates.......................... -- 2,019
Other..................................................... 915 690
--------- ---------
Net cash used in investing activities................. (56,422) (382,951)
CASH FLOWS FROM FINANCING ACTIVITIES:
Allocated proceeds from issuance of Genzyme General Stock. 55,537 33,000
Proceeds from issuance of debt............................ -- 243,459
Payments of debt and capital lease obligations............ (3,525) (13,927)
Net cash allocated to Genzyme Molecular Oncology.......... -- (5,000)
Net cash allocated to Genzyme Surgical Products........... (50,827) (29,571)
Net cash allocated (to) from Genzyme Tissue Repair........ (29,984) 86
Other..................................................... 3,444 2,485
--------- ---------
Net cash provided by (used in) financing activities... (25,355) 230,532
Effect of exchange rate changes on cash..................... (2,890) (438)
--------- ---------
Increase (decrease) in cash and cash equivalents............ 103,624 (10,700)
Cash and cash equivalents at beginning of period............ 100,012 65,301
--------- ---------
Cash and cash equivalents at end of period.................. $ 203,636 $ 54,601
========= =========
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
<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. These combined financial statements
are prepared using amounts included in our combined 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 notes or other financial
information that is normally required by generally accepted accounting
principles can be condensed or omitted. We have reclassified certain 1998 data
to conform with our 1999 presentation.
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 combined financial
statements, you should also read the financial statements and notes for Genzyme
General included in the current report on Form 8-K that we filed with the SEC on
June 30, 1999. 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 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 financial
position, results of operations and cash flows of Genzyme General as if
Genzyme Surgical Products had existed as a separate division of Genzyme for
all periods presented.
<PAGE>
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. INVENTORIES (AMOUNTS IN THOUSANDS):
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
(UNAUDITED)
Raw materials............. $27,834 $29,497
Work-in-process........... 43,490 23,359
Finished products......... 12,376 32,306
------- -------
Total................ $83,700 $85,162
======= =======
3. ACQUISITION OF PEPTIMMUNE, INC.
In July 1999, we acquired Peptimmune, Inc., a privately-held company whose
lead development program focuses on a treatment for pemphigus vulgaris. We
allocated this acquisition to Genzyme General. We allocated the aggregate
purchase price of $6.5 million and assumed liabilities of $0.3 million to the
tangible and intangible assets we acquired from Peptimmune based on their
respective fair values (amounts in thousands):
Property, plant & equipment................................. $ 128
Deferred tax asset.......................................... 1,229
In-process technology....................................... 5,436
------
Total.................................................. $6,793
======
The $5.4 million allocated to in-process technology represents the value we
assigned to Peptimmune's programs that are still in the development stage and
for which there is no alternative use. In the third quarter
<PAGE>
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
of 1999, Genzyme General recorded a one-time charge to operations for the amount
of the purchase price allocated to in-process technology.
4. INVESTMENT IN BIOMARIN PHARMACEUTICAL INC.
In July 1999, Genzyme General purchased an additional 769,230 shares of the
common stock of BioMarin Pharmaceutical Inc. for $10.0 million in a private
placement contemporaneous with the closing of BioMarin's initial public
offering. We currently own approximately 6% of the outstanding shares of
BioMarin common stock. We allocate this investment to Genzyme General.
5. GAIN ON SALE OF PRODUCT LINE
In July 1999, the Diagnostics business unit of Genzyme General sold its
immunochemistry product line to an operating unit of Sybron Laboratory Products
Corp. for $5.0 million in cash. In the third quarter of 1999, Genzyme General
recorded a gain of $0.5 million related to the sale of this product line.
<PAGE>
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. TAX PROVISION:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
-------- -------- -------- -------- -------- --------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Provision for income taxes.... $(19,273) $(24,788) (22)% $(59,906) $(59,389) 2%
Effective tax rate............ 39% 38% 40% 38%
</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.
7. 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(R)
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
Revenues:
Therapeutics............................ $123,492 $105,485 $357,756 $297,608
Diagnostic Products................... 14,286 16,168 43,933 50,120
Other................................. 19,364 19,417 59,274 62,897
Eliminations/Adjustments(1)........... 527 1,155 1,677 3,275
-------- -------- -------- --------
Total................................... $157,669 $142,225 $462,640 $413,900
======== ======== ======== ========
Division net income:
Therapeutics.......................... $ 32,556 $ 23,650 $ 99,337 $ 90,461
Diagnostic Products(2)................ 1,063 19,399 3,263 19,920
Other................................. (2,630) (1,871) (3,958) (2,182)
Eliminations/Adjustments(1)........... (1,018) (976) (7,253) (11,573)
-------- -------- -------- --------
Total................................... $ 29,971 $ 40,202 $ 91,389 $ 96,626
======== ======== ======== ========
</TABLE>
---------------
(1) Includes primarily amounts related to Genzyme General's corporate research
and development and administrative activities that we do not allocate to a
particular segment of Genzyme General.
(2) Diagnostic Products' net income for the three and nine month periods ended
September 30, 1998 includes a $31.2 million gain on the sale of a product
line in 1998.
There has been no material change in segment assets since December 31,
1998.
8. SUBSEQUENT EVENTS
Information regarding the following events is included in note 11 to our
unaudited, consolidated financial statements:
- our planned acquisition of Cell Genesys;
- the refinancing of our revolving credit facility;
- our milestone payment to Geltex Pharmaceuticals, Inc.; and
- our investment in the convertible preferred stock of Genzyme Transgenics
Corporation.
We incorporate that information into this note by reference.
<PAGE>
GENZYME MOLECULAR ONCOLOGY
A DIVISION OF GENZYME CORPORATION
COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED, AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ --------------------
1999 1998 1999 1998
------- ------- -------- --------
<S> <C> <C> <C> <C>
Total revenues.................................... $ 709 $ 1,985 $ 3,455 $ 6,491
Operating costs and expenses:
Cost of revenues................................ 62 1,211 1,074 3,534
Selling, general and administrative............. 1,168 2,105 4,205 5,260
Research and development........................ 3,815 3,249 12,448 8,772
Amortization of intangibles..................... 2,956 2,956 8,869 9,026
------- ------- -------- --------
Total operating costs and expenses:.......... 8,001 9,521 26,596 26,592
------- ------- -------- --------
Operating loss.................................... (7,292) (7,536) (23,141) (20,101)
Other income (expenses):
Equity in net loss of joint venture............. (1,023) (266) (2,030) (1,244)
Interest income................................. 99 149 416 633
Interest expense................................ (5) (1,089) (8) (3,341)
------- ------- -------- --------
Total other income (expenses)................ (929) (1,206) (1,622) (3,952)
------- ------- -------- --------
Loss before income taxes.......................... (8,221) (8,742) (24,763) (24,053)
Tax benefit....................................... 662 662 1,986 1,986
------- ------- -------- --------
Division net loss................................. $(7,559) $(8,080) $(22,777) $(22,067)
======= ======= ======== ========
Comprehensive loss, net of tax:
Division net loss............................... $(7,559) $(8,080) $(22,777) $(22,067)
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities
arising during the period.................. -- 2 -- 9
------- ------- -------- --------
Comprehensive loss.............................. $(7,559) $(8,078) $(22,777) $(22,058)
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
<PAGE>
GENZYME MOLECULAR ONCOLOGY
A DIVISION OF GENZYME CORPORATION
COMBINED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,685 $10,868
Short-term investments.................................... -- 1,032
Accounts receivable, net.................................. 256 5,931
Other current assets...................................... 36 85
------- -------
Total current assets................................... 1,977 17,916
Equipment, net.............................................. 506 791
Intangibles, net............................................ 8,376 17,245
------- -------
Total assets........................................... $10,859 $35,952
======= =======
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accrued expenses.......................................... $ 1,150 $ 1,273
Due to Genzyme General.................................... 3,173 4,773
Payable to joint venture.................................. 3,281 1,181
Deferred revenue.......................................... 630 1,500
------- -------
Total current liabilities.............................. 8,234 8,727
Deferred tax liability...................................... 1,875 3,861
------- -------
Total liabilities...................................... 10,109 12,588
Division equity............................................. 750 23,364
------- -------
Total liabilities and division equity.................. $10,859 $35,952
======= =======
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
<PAGE>
GENZYME MOLECULAR ONCOLOGY
A DIVISION OF GENZYME CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED, AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Division net loss........................................... $(22,777) $(22,067)
Reconciliation of division net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 9,063 9,336
Deferred tax benefit................................... (1,986) (1,986)
Non-cash compensation expense.......................... 10 85
Accrued interest/amortization of marketable
securities............................................ 10 110
Gain on sale of equipment.............................. (54) --
Accretion of debt conversion feature................... -- 2,118
Equity in loss of joint venture........................ 2,030 1,244
Increase (decrease) in cash from working capital changes:
Accounts receivable.................................. 5,675 (525)
Other current assets................................. 49 264
Due to Genzyme General............................... (1,600) (1,433)
Accrued expenses, payable to joint venture and
deferred revenue.................................... (923) 379
-------- --------
Net cash used in operating activities................ (10,503) (12,475)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments.................................. -- (2,057)
Maturities of investments................................. 1,022 4,588
Acquisitions of equipment................................. (43) (510)
Sale of equipment......................................... 188 --
-------- --------
Net cash provided by investing activities............ 1,167 2,021
CASH FLOWS FROM FINANCING ACTIVITIES:
Allocated proceeds from issuance of Molecular Oncology
Stock.................................................... 155 --
Repayments of debt........................................ -- (5,018)
Net cash allocated from Genzyme General................... -- 5,000
Other..................................................... (2) (10)
-------- --------
Net cash provided by (used in) financing
activities.......................................... 153 (28)
-------- --------
Decrease in cash and cash equivalents....................... (9,183) (10,482)
Cash and cash equivalents at beginning of period............ 10,868 15,010
-------- --------
Cash and cash equivalents at end of period.................. $ 1,685 $ 4,528
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
<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 we consider necessary for the fair presentation of Genzyme Molecular
Oncology's financial position and operating results. Since these are combined
financial statements, you should also read the financial statements and notes
for Genzyme Molecular Oncology included in our 1999 Form 10-K. Revenues,
expenses, assets and liabilities can vary from quarter to quarter. Therefore,
the results and trends in these interim financial statements may not be the
same as those for future periods.
2. STRESSGEN JOINT VENTURE
We allocate our interest in StressGen/Genzyme LLC, our joint venture with
StressGen Biotechnologies Corp. and the Canadian Medical Discoveries Fund Inc.
to Genzyme Molecular Oncology. Because the fund had the right to require
StressGen and Genzyme Molecular Oncology to repurchase the fund's membership
interest in the joint venture, Genzyme Molecular Oncology has been recording 50%
of the losses incurred by the joint venture. In August 1999, the fund exercised
its option to require Genzyme Molecular Oncology and StressGen to repurchase the
fund's interest in the joint venture and Genzyme Molecular Oncology recorded a
$1.0 million charge to its statement of operations in connection with this
repurchase. In addition, because Genzyme Molecular Oncology's portion of the
cumulative losses of the joint venture exceeded its initial capital
contribution, it has recorded current liabilities of $3.2 million for the nine
month period ended September 30, 1999.
3. SUBSEQUENT EVENTS
Information regarding the following events is included in note 11 to our
unaudited, consolidated financial statements:
- Our planned acquisition of Cell Genesys;
- The refinancing of our revolving credit facility; and
- Our repurchase of one-half of the Canadian Medical Discoveries Fund's
interest in the StressGen joint venture.
We incorporate that information into this note by reference.
<PAGE>
GENZYME SURGICAL PRODUCTS
A DIVISION OF GENZYME CORPORATION
COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED, AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total revenues.................................. $ 27,385 $ 24,904 $ 81,419 $ 76,332
Operating costs and expenses:
Cost of products sold......................... 16,798 25,823 50,081 55,805
Selling, general and administrative........... 15,114 13,356 46,893 43,905
Research and development...................... 7,131 6,060 21,716 13,073
Amortization of intangibles................... 1,445 1,444 4,306 4,306
-------- -------- -------- --------
Total operating costs and expenses......... 40,488 46,683 122,996 117,089
-------- -------- -------- --------
Operating loss.................................. (13,103) (21,779) (41,577) (40,757)
Other income (expenses):
Equity in net income (loss) of unconsolidated
affiliates................................. (32) 9 (32) (20)
Other......................................... 58 235 101 185
Investment income............................. 2,125 34 2,188 124
Interest expense.............................. (1) (18) (36) (55)
-------- -------- -------- --------
Total other income (expenses).............. 2,150 260 2,221 234
-------- -------- -------- --------
Division net loss............................... $(10,953) $(21,519) $(39,356) $(40,523)
======== ======== ======== ========
Comprehensive loss, net of tax:
Division net loss............................... $(10,953) $(21,519) $(39,356) $(40,523)
Other comprehensive income (loss), net of tax:
Unrealized losses in securities arising
during the period........................ (2) -- (630) --
-------- -------- -------- --------
Other comprehensive loss...................... (2) -- (630) --
-------- -------- -------- --------
Comprehensive loss............................ $(10,955) $(21,519) $(39,986) $(40,523)
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
<PAGE>
GENZYME SURGICAL PRODUCTS
A DIVISION OF GENZYME CORPORATION
COMBINED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 33,909 $ --
Short-term investments.................................... 53,513 --
Accounts receivable, net.................................. 16,640 15,663
Inventories............................................... 31,089 22,026
Prepaid expenses and other current assets................. 827 1,932
-------- --------
Total current assets................................... 135,978 39,621
Property, plant and equipment, net.......................... 16,996 16,249
Long-term investments....................................... 62,191 --
Intangibles, net............................................ 173,294 177,897
Other....................................................... 187 449
-------- --------
Total assets........................................... $388,646 $234,216
======== ========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable.......................................... $ 4,793 $ 3,925
Accrued expenses.......................................... 5,042 2,982
Due to Genzyme General.................................... 13,676 --
-------- --------
Total current liabilities.............................. 23,511 6,907
Noncurrent liabilities...................................... 221 221
-------- --------
Total liabilities...................................... 23,732 7,128
Division equity............................................. 364,914 227,088
-------- --------
Total liabilities and division equity.................. $388,646 $234,216
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
<PAGE>
GENZYME SURGICAL PRODUCTS
A DIVISION OF GENZYME CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED, AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Division net loss........................................... $(39,356) $(40,523)
Reconciliation of division net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 5,860 5,943
Accrued interest/amortization on bonds................. 989 --
Loss on sale of plant and equipment.................... 12 --
Provision for bad debts................................ 250 120
Equity in net (income) loss of unconsolidated
affiliate............................................. 32 (164)
Increase (decrease) in cash from working capital
changes:
Accounts receivable.................................. (1,227) (1,174)
Inventories.......................................... (9,063) 6,271
Prepaid expenses and other assets.................... 1,105 (845)
Due to Genzyme General............................... 13,676 --
Accounts payable and accrued expenses................ 2,928 2,186
-------- --------
Net cash used in operating activities................ (24,794) (28,186)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments.................................. (15,161) --
Sales and maturities of investments....................... 25,130 --
Purchase of property, plant and equipment................. (2,313) (1,470)
Other..................................................... 230 166
-------- --------
Net cash provided by (used in) investing
activities.......................................... 7,886 (1,304)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of debt and capital lease obligations............ -- (136)
Net cash allocated from Genzyme General................... 50,827 29,571
Other..................................................... (10) (351)
-------- --------
Net cash provided by financing activities............ 50,817 29,084
Increase (decrease) in cash and cash equivalents............ 33,909 (406)
Cash and cash equivalents at beginning of period............ -- 975
-------- --------
Cash and cash equivalents at end of period.................. $ 33,909 $ 569
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
<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 the current report on Form 8-K that we
filed with the SEC on June 11, 1999. 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.
<PAGE>
GENZYME SURGICAL PRODUCTS
A DIVISION OF GENZYME CORPORATION
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. INVENTORIES (AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
(Unaudited)
<S> <C> <C>
Raw materials............... $14,746 $11,567
Work-in-process............. 2,242 1,734
Finished products........... 14,101 8,725
------- -------
Total.................. $31,089 $22,026
======= =======
</TABLE>
3. 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(R)
bioresorbable membrane.
<PAGE>
GENZYME SURGICAL PRODUCTS
A DIVISION OF GENZYME CORPORATION
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Information concerning the operations in these reportable segments is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
Revenues:
Cardiovascular Surgery.................... $19,552 $18,462 $56,985 $55,390
General Surgery........................... 5,811 4,492 17,946 14,263
Other..................................... 2,022 1,950 6,488 6,679
------- ------- ------- -------
Total.................................. $27,385 $24,904 $81,419 $76,332
======= ======= ======= =======
Gross Profit:
Cardiovascular Surgery.................... $ 8,094 $ 8,025 $23,128 $25,052
General Surgery(1)........................ 1,795 (9,766) 6,285 (7,248)
Other..................................... 698 822 1,925 2,723
------- ------- ------- -------
Total.................................. $10,587 $ (919) $31,338 $20,527
======= ======= ======= =======
</TABLE>
---------------
(1) In the third quarter of 1998, Genzyme Surgical Products recorded a $10.4
million charge to cost of goods sold to reduce Sepra products inventory to
net realizable value.
There has been no material change in segment assets since December 31,
1998.
4. SUBSEQUENT EVENTS
Information regarding the following events is included in note 11 to our
unaudited, consolidated financial statements:
- The refinancing of our revolving credit facility; and
- Our distribution agreement with Focal, Inc.
We incorporate that information into this note by reference.
<PAGE>
GENZYME TISSUE REPAIR
A DIVISION OF GENZYME CORPORATION
COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED, AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ --------------------
1999 1998 1999 1998
------- ------- -------- --------
<S> <C> <C> <C> <C>
Total revenues.................................... $ 5,682 $ 4,464 $ 14,370 $ 12,420
Operating costs and expenses:
Cost of services sold........................... 3,558 3,471 9,777 10,481
Selling, general and administrative............. 5,978 6,043 18,407 18,363
Research and development........................ 2,033 2,553 6,004 8,471
------- ------- -------- --------
Total operating costs and expenses:.......... 11,569 12,067 34,188 37,315
------- ------- -------- --------
Operating loss.................................... (5,887) (7,603) (19,818) (24,895)
Other income (expenses):
Equity in net loss of joint venture............. -- (1,601) (3,368) (5,229)
Interest income................................. 210 281 375 955
Interest expense................................ (471) (515) (1,335) (2,044)
------- ------- -------- --------
Total other income (expenses)................ (261) (1,835) (4,328) (6,318)
------- ------- -------- --------
Division net loss................................. $(6,148) $(9,438) $(24,146) $(31,213)
======= ======= ======== ========
Comprehensive loss, net of tax:
Division net loss................................. $(6,148) $(9,438) $(24,146) $(31,213)
Other comprehensive income (loss), net of tax:
Unrealized gains on securities arising during
the period................................. -- 2 -- 9
------- ------- -------- --------
Comprehensive loss.............................. $(6,148) $(9,436) $(24,146) $(31,204)
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
<PAGE>
GENZYME TISSUE REPAIR
A DIVISION OF GENZYME CORPORATION
COMBINED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $14,533 $ 7,732
Accounts receivable, net.................................. 5,467 3,833
Inventories............................................... 2,395 2,645
Other current assets...................................... 990 1,723
------- --------
Total current assets................................... 23,385 15,933
Plant and equipment, net.................................... 2,603 2,836
Other....................................................... 120 185
------- --------
Total assets........................................... $26,108 $ 18,954
======= ========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable.......................................... $ 417 $ 1,355
Accrued expenses.......................................... 3,843 2,491
Due to Genzyme General.................................... 966 548
Current portion of long-term debt......................... 4,123 18,000
------- --------
Total current liabilities.............................. 9,349 22,394
Convertible note, net....................................... -- 12,579
Long-term debt.............................................. 18,000 --
Other....................................................... 265 377
------- --------
Total liabilities...................................... 27,614 35,350
Division equity............................................. (1,506) (16,396)
------- --------
Total liabilities and division equity.................. $26,108 $ 18,954
======= ========
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
<PAGE>
GENZYME TISSUE REPAIR
A DIVISION OF GENZYME CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED, AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Division net loss.......................................... $(24,146) $(31,213)
Reconciliation of division net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 985 1,458
Accretion of debt discount............................. -- 536
Non-cash compensation expense.......................... -- 92
Accrued interest/amortization on bonds................. -- 188
Provision for bad debts................................ 11 257
Equity in net loss of joint venture.................... 3,368 5,229
Other.................................................. -- (113)
Increase (decrease) in cash from working capital changes:
Accounts receivable.................................. (1,645) (1,710)
Inventories.......................................... 250 (317)
Prepaid expenses and other........................... 660 (579)
Due to Genzyme General............................... 418 140
Accounts payable and accrued expenses................ 641 75
-------- --------
Net cash used in operating activities................ (19,458) (25,957)
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales and maturities of investments....................... -- 10,614
Purchase of property, plant and equipment................. (648) (466)
Sale of property, plant and equipment..................... -- 16,500
Investment in unconsolidated affiliates................... (3,595) (4,983)
Other..................................................... 34 12
-------- --------
Net cash provided by (used in) investing
activities.......................................... (4,209) 21,677
CASH FLOWS FROM FINANCING ACTIVITIES:
Allocated proceeds from issuance of Tissue Repair
Stock, net............................................. 740 1,881
Payments of debt and capital lease obligations............ (144) --
Net cash allocated (to) from Genzyme General.............. 29,984 (86)
Other..................................................... (112) --
-------- --------
Net cash provided by financing activities............ 30,468 1,795
-------- --------
Increase (decrease) in cash and cash equivalents............ 6,801 (2,485)
Cash and cash equivalents at beginning of period............ 7,732 21,120
-------- --------
Cash and cash equivalents at end of period.................. $ 14,533 $ 18,635
======== ========
Supplemental disclosure of non-cash activity:
Debt conversions -- Note 3.
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
<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. 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):
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
(Unaudited)
Raw materials................. $ 324 $ 264
Work-in-process............... 2,043 2,381
Finished goods(1)............. 28 --
------ ------
Total.................... $2,395 $2,645
====== ======
---------------
(1) Genzyme Tissue Repair began selling biopsy kits in the third quarter of
1999.
3. DEBT CONVERSIONS
We allocate our 5% convertible subordinated note due February 2000 to
Genzyme Tissue Repair. In the first three quarters of 1999, the holder of
this note converted an aggregate of $8,230,000 in principal amount in
exchange for a total of 4,364,861 shares of Tissue Repair Stock. Genzyme
Tissue Repair paid $406,379 of accrued interest to the holder in connection
with these conversions.
4. 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 Genzyme General
$20.0 million plus accrued interest at an annual rate of 13.5% if the joint
venture does not initiate a Phase III clinical trial of Neurocell-TM- PD by
June 30, 2000. Any required refund may be paid in cash, Genzyme Tissue Repair
designated shares, or a combination of both, at Genzyme Tissue Repair's option.
5. SUBSEQUENT EVENT
Information regarding the refinancing of our revolving credit facility is
included in note 11 to our unaudited, consolidated financial statements. We
incorporate that information into this note by reference.
<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 1998 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 1998 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 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 Allocations" 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.
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Total revenues............ $191,415 $173,394 10% $561,843 $508,819 10%
Cost of products sold..... 44,371 71,547 (38)% 132,757 166,470 (20)%
Cost of services sold..... 12,392 12,290 1% 36,894 36,545 1%
Selling, general and
administrative.......... 58,648 51,781 13% 183,951 160,264 15%
Research and
development............. 35,925 32,351 11% 109,632 84,918 29%
Amortization of
intangibles............. 6,128 6,027 2% 18,501 18,092 2%
Purchase of in-process
research and
development............. 5,436 -- N/A 5,436 -- N/A
-------- -------- -------- --------
Total operating costs
and expenses....... 162,900 173,996 (6)% 487,171 466,289 4%
-------- -------- -------- --------
Operating income (loss)... 28,515 (602) N/A 74,672 42,530 76%
Other income (expenses),
net..................... (4,342) 26,145 (117)% (10,887) 18,452 (159)%
-------- -------- -------- --------
Income before income
taxes................... 24,173 25,543 (5)% 63,785 60,982 5%
Provision for income
taxes................... (10,395) (10,576) (2)% (27,659) (25,135) 10%
-------- -------- -------- --------
Net income................ $ 13,778 $ 14,967 (8)% $ 36,126 $ 35,847 1%
======== ======== ======== ========
REVENUES
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
-------- -------- -------- -------- -------- --------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Product revenue........... $170,215 $152,453 12% $499,790 $445,630 12%
Service revenue........... 19,952 18,526 8% 58,481 55,397 6%
-------- -------- -------- --------
Total product and
service revenue.... 190,167 170,979 11% 558,271 501,027 11%
Research and development
revenue................. 1,248 2,415 (48)% 3,572 7,792 (54)%
-------- -------- -------- --------
Total revenues....... $191,415 $173,394 10% $561,843 $508,819 10%
======== ======== ======== ========
</TABLE>
PRODUCT REVENUE:
<TABLE>
<CAPTION>
THREE MONTHS ENDED INCREASE/ NINE MONTHS ENDED INCREASE/
SEPTEMBER 30, (DECREASE) SEPTEMBER 30, (DECREASE)
------------------- --------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Genzyme General:
Therapeutics:
Cerezyme -Registered Trademark-
/Ceredase -Registered Trademark-
enzyme...................... $121,058 $105,485 15% $351,716 $297,609 18%
Renagel
-Registered Trademark-
Capsules.................... - - -% - - -%
Thyrogen
-Registered Trademark-...... 2,434 - 100% 6,040 - 100%
Other Therapeutic Products.. - - -% - - -%
------- ------- ------- -------
Total Therapeutics....... 123,492 105,485 17% 357,756 297,609 20%
Diagnostic Products......... 14,287 16,168 (12%) 43,933 50,120 (12%)
Other....................... 5,081 5,897 (14%) 16,712 21,570 (23%)
------- ------- ------- -------
Total product revenue --
Genzyme General.......... 142,860 127,550 12% 418,401 369,299 13%
Genzyme Surgical Products:
Cardiovascular Surgery...... 19,552 18,466 6% 56,985 55,392 3%
General Surgery............. 5,811 4,492 29% 17,946 14,263 26%
Other....................... 1,992 1,945 2% 6,458 6,676 (3%)
------- ------- ------- -------
Total product revenue --
Genzyme Surgical Products... 27,355 24,903 10% 81,389 76,331 7%
------- ------- ------- -------
Total product revenue......... $170,215 $152,453 12% $499,790 $445,630 12%
======== ======== ======== ========
</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(R) enzyme, which is a therapy for the
treatment of Gaucher disease. The increase in sales of Cerezyme(R) enzyme is
<PAGE>
attributable to our identification of new Gaucher disease patients throughout
the world. We also sell Ceredase(R) enzyme for the treatment of Gaucher disease,
but we have successfully converted virtually all Gaucher disease patients to a
treatment regimen using Cerezyme(R) enzyme.
The following table provides information regarding the growth in sales
of our Gaucher disease therapies as a percentage of total product revenue for
the periods presented:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
% of total product
revenue................. 71% 69% 70% 67%
</TABLE>
Our results of operations are highly dependent on sales of Cerezyme(R)
enzyme and a reduction in revenue from sales of this product would adversely
affect our results of operations. Revenue from Cerezyme(R) enzyme would be
impacted negatively if competitors developed alternative treatments for Gaucher
disease and the alternative products gained commercial acceptance. We are aware
of companies that have initiated efforts to develop competitive products and
other companies may do so in the future.
Service Revenue:
<TABLE>
<CAPTION>
THREE MONTHS ENDED INCREASE/ NINE MONTHS ENDED INCREASE/
SEPTEMBER 30, (DECREASE) SEPTEMBER 30, (DECREASE)
-------------------- -------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA)
Genzyme General:
Genetic Testing........... $14,270 $13,471 6% $42,696 $41,278 3%
------- ------- ------- -------
Genzyme Molecular Oncology:
Genomics and gene
expression - 591 (100%) 1,500 1,699 (12%)
------- ------- ------- -------
Genzyme Tissue Repair:
Carticel
-Registered Trademark-
Chondrocytes.............. 3,619 2,723 33% 10,359 7,715 34%
Epicel -TM- Skin Grafts... 2,063 1,741 18% 3,926 4,705 (17%)
------- ------- ------- -------
Total service revenue --
Genzyme Tissue Repair..... 5,682 4,464 27% 14,285 12,420 15%
------- ------- ------- -------
Total service revenue...... $19,952 $18,526 8% $58,481 $55,397 6%
======= ======= ======= =======
</TABLE>
We derive service revenue from four principal sources:
- Genetic testing services performed by Genzyme General;
- Genzyme Tissue Repair's Carticel(R) chondrocytes for the treatment of
cartilage damage;
- Genzyme Tissue Repair's Epicel(TM) skin grafts for the treatment of
severe burns; and
- genomics services using Genzyme Molecular Oncology's SAGE(TM) gene
expression technology.
Our service revenue increased during the three month period ended September
30, 1999 as a result of increases in the provision of genetic testing services
as well as increased sales of Carticel(R) chondrocytes and Epicel(TM) skin
grafts. Sales of genomics services decreased during this period.
During the nine month period ended September 30, 1999, increases in revenue
from genetic testing services and Carticel(R) chondrocytes resulted in an
increase in service revenues. Sales of Epicel(TM) skin grafts and genomics
services decreased during this period.
The increase in genetic testing service revenue during both periods is a
result of growth in sales of our DNA and cancer testing services. The increase
in sales of Carticel(R) chondrocytes during both periods is a result of
continued increases in the numbers of patients treated and surgeons trained 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.
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(R) enzyme.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ --------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
International product and
service revenue........... $74,929 $66,592 13% $224,129 $202,308 11%
% of total product and
service revenue........... 39% 39% 40% 40%
</TABLE>
<PAGE>
MARGINS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Product margin............ $125,844 $ 80,906 56% $367,033 $279,160 31%
% of product revenue...... 74% 53% 73% 63%
Service margin............ 7,560 6,236 21% 21,587 18,852 15%
% of service revenue...... 38% 34% 37% 34%
Total gross margin........ $133,404 $ 87,142 53% $388,620 $298,012 30%
% of total product and
service revenue......... 70% 51% 70% 59%
</TABLE>
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(R) enzyme, result in
higher margins than surgical and diagnostic products.
During the third quarter of 1998, we recorded a $25.2 million charge to
cost of products sold. The components of this charge are:
- a $14.8 million charge allocated to Genzyme General to write down excess
inventory used to make Ceredase(R) enzyme. We took this charge following
our determination that, based on the status of our efforts to convert
Gaucher disease patients to a treatment regimen using Cerezyme(R) enzyme,
our existing supply of Ceredase(R) enzyme was sufficient to meet
estimated patient needs.
- a $10.4 million charge allocated to Genzyme Surgical Products to write
down our inventory of Sepra products to net realizable value. The Sepra
products are our line of products and product candidates designed to
limit post-operative adhesions.
Without the effect of this charge, our product margin for the three months ended
September 30, 1998 would have been 70% and our total gross margin during that
period would have been 66%. For the nine months ended September 30, 1998, our
product margin would have been 68% and our total gross margin would have been
65% absent this charge.
Excluding the charge described above, the increases in product margin and
total gross margin during both periods are a result of increased sales of
Cerezyme(R) enzyme.
Our service margin also increased during both periods. These increases are
attributable to:
- an increase in sales of DNA and cancer testing services;
- increased sales of Carticel(R) chondrocytes and, in the three-month
period, Epicel(TM) skin grafts; and
- a reduction in labor, materials and production costs for Carticel(R)
chondrocytes and Epicel(TM) skin grafts.
These increases were offset, however, by reduced margins from our genomics
services business due to lower sales volume.
OPERATING EXPENSES
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;
- an increased reserve for doubtful accounts in Genzyme General's genetic
testing business;
- costs associated with the market introduction of Thyrogen(R) hormone in
January 1999; and
<PAGE>
- an increase in professional service fees in connection with the creation
of Genzyme Surgical Products as a separate division of Genzyme.
The increase in research and development expenses in both periods is a
result of:
- increased costs in connection with the results of ATIII LLC, our joint
venture with Genzyme Transgenics Corporation for the development and
commercialization of transgenic recombinant human antithrombin III; and
- increased spending on our program to develop alpha-galactosidase for the
treatment of Fabry disease.
In the fourth quarter of 1998, we began amortizing a milestone payment that
we made to GelTex Pharmaceuticals, Inc. upon FDA approval of Renagel(R) capsules
for the reduction of serum phosphorus in patients with end-stage renal disease
on hemodialysis. As a result, amortization of intangibles increased slightly
during both periods.
OTHER INCOME AND EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
-------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Equity in net loss of
unconsolidated
affiliates............... $(10,407) $(6,777) 54% $(29,507) $(18,325) 61%
Gain on affiliate sale of
stock.................... 1,164 -- N/A 1,770 2,369 (25)%
Minority interest.......... 843 993 (15)% 2,573 2,717 (5)%
Gain on sale of
investment............... -- -- -- 1,963 -- N/A
Gain on sale of product
line..................... 518 31,202 (98)% 8,018 31,202 (74)%
Charge for impaired
investment............... -- -- -- (5,487) -- N/A
Other...................... 58 235 (75)% 101 185 (45)%
Investment income.......... 9,404 7,438 26% 26,692 16,372 63%
Interest expense........... (5,922) (6,946) (15)% (17,010) (16,068) 6%
-------- ------- ---- -------- -------- ----
Total other income
(expense), net...... $ (4,342) $26,145 (117)% $(10,887) $ 18,452 (159)%
======== ======= ==== ======== ======== ====
</TABLE>
Equity in Net Loss of Unconsolidated Affiliates:
We currently own approximately 36% of the common stock of Genzyme
Transgenics and record in net loss of unconsolidated affiliates our portion of
its results. We also record the results of the following joint ventures in net
loss of unconsolidated affiliates:
<PAGE>
<TABLE>
<CAPTION>
JOINT VENTURE PARTNER(S) EFFECTIVE DATE PRODUCT/INDICATION GENZYME DIVISION
------------- -------------------- -------------- ---------------------- ----------------
<S> <C> <C> <C> <C>
RenaGel LLC GelTex June 1997 Renagel(R) capsules Genzyme General
Pharmaceuticals, for the reduction of
Inc. serum phosphorus in
patients with
end-stage renal
disease on
hemodialysis
BioMarin/ BioMarin September 1998 Alpha-L-iduronidase Genzyme General
Genzyme LLC Pharmaceutical Inc. for the treatment of
mucopolysaccharidosis-I
Pharming/ Pharming Group, N.V. October 1998 Human Genzyme General
Genzyme LLC alpha-glucosidase for
the treatment of Pompe
disease
Diacrin/ Diacrin, Inc. October 1996 Products using porcine Genzyme Tissue
Genzyme LLC fetal cells for the Repair (until
treatment of May 1999);
Parkinson's and Genzyme General
Huntington's diseases (after May 1999)
StressGen/ StressGen July 1997 Stress gene therapies Genzyme
Genzyme LLC Biotechnologies for the treatment of Molecular
Corp.; Canadian cancer Oncology
Medical Discoveries
Fund Inc. (until
October 1999)
</TABLE>
Our equity in net loss of unconsolidated affiliates increased in the three
months ended September 30, 1999 as a result of:
- increased losses from our joint ventures with Pharming and Diacrin;
- the formation of our joint venture with BioMarin; and
- a $1.0 million charge in connection with our repurchase of one-half of
the Canadian Medical Discoveries Fund's interest in the StressGen joint
venture.
These increases were offset in part by decreased losses from Genzyme
Transgenics and RenaGel LLC.
For the nine months ended September 30, 1999, our equity in net loss of
unconsolidated affiliates increased as a result of the factors described above,
except that RenaGel LLC experienced increased losses in this period.
Gain on Affiliate Sale of Stock:
In June 1998, June 1999 and September 1999, we recorded gains on our
investment in Genzyme Transgenics as a result of their issuance of additional
shares of common stock.
Minority Interest:
Due to our combined direct and indirect ownership interest in ATIII LLC,
we consolidate the results of ATIII LLC and record Genzyme Transgenic's
portion of the losses of that joint venture as minority interest. Minority
interest decreased in both periods, notwithstanding increases in ATIII LLC's
losses, because Genzyme Transgenics' portion of those losses decreased.
Gain on Sale of Investment:
We recorded a gain of $2.0 million in January 1999 upon the sale of our
remaining shares of Techne Corporation common stock.
<PAGE>
Gain on Sale of Product Line:
In July 1999, we recorded a gain of $0.5 million in connection with the
sale of our immunochemistry product line to an operating unit of Sybron
Laboratory Products Corp.
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.
In July 1998, we recorded a gain of $31.2 million in connection with the
sale of our research products business to Techne Corporation.
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 sufficent to overcome the presumption that the
current market price was the best indicator of the value of these investments.
Investment Income:
Our investment income for both periods increased because our cash balances
were higher. The increase in cash balances is attributable to our issuance in
June 1998 of $250.0 million in principal amount of 5 1/4% convertible
subordinated notes and increased cash generated from operations.
Interest Expense:
Our interest expense decreased slightly in the three months ended September
30, 1999, but increased 6% in the nine months ended September 30, 1999 primarily
as a result of our issuance of the 5 1/4% convertible subordinated notes.
Tax Provision:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Provision for
income taxes............ $(10,395) $(10,576) (2)% $(27,659) $(25,135) 10%
Tax rate.................. 43% 41% 43% 41%
</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;
- nondeductible amortization of intangibles;
- use of tax credits; and
- share of losses of unconsolidated affiliates.
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 Nine Months Ended
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Earnings allocated to:
Genzyme General Stock................ $38,187 $32,233 $94,116 $88,371
Molecular Oncology Stock............. (7,559) (8,080) (22,777) (22,067)
Surgical Products Stock.............. (10,953) -- (11,833) --
Tissue Repair Stock.................. (6,148) (9,438) (24,146) (31,213)
</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 September 30, 1999, the net loss of Genzyme Surgical Products of
$11.8 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 nine months ended
September 30, 1999 was $11.8 million (or 14%) 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, 1998, net income allocated to
Genzyme General Stock, net loss allocated to Surgical Products Stock and
weighted average shares outstanding would have been as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------------
1998 1999 1998
---- ---- ----
<S> <C> <C> <C>
Genzyme General:
Net income allocated to
Genzyme General Stock ................ $57,352 $121,639 $128,894
======= ======== ========
Weighted average shares outstanding:
Basic.................................. 79,032 82,741 78,492
Diluted................................ 87,882 93,196 83,887
Genzyme Surgical Products:
Net loss allocated to Surgical
Products Stock ....................... $(21,519) $(39,356) $(40,523)
======== ======== ========
Weighted average shares outstanding-basic
and diluted .......................... 14,800 14,800 14,800
</TABLE>
As noted above, the tax benefits associated with the losses of Genzyme
Surgical Products, which amounted to $5.0 million for the period from June
28, 1999 to September 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 Nine Months Ended
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Tax benefits allocated from:
Genzyme Molecular Oncology.......... $ 2,016 $ 1,153 $ 6,326 $ 5,238
Genzyme Surgical Products........... 3,841 7,741 14,191 14,578
Genzyme Tissue Repair............... 2,359 4,656 9,733 12,452
------- -------- ------- ------
Total.......................... $ 8,216 $13,550 $30,250 $32,268
======= ======= ======= =======
Total tax benefits allocated from
other Genzyme divisions
as a % of earnings allocated to
Genzyme General Stock ................. 22% 42% 32% 37%
</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.
GENZYME GENERAL
The components of Genzyme General's combined statements of operations are
described in the following table:
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Total revenues............ $157,669 $142,225 11% $462,640 $413,900 12%
Cost of products and
services sold............. 36,437 54,475 (33)% 109,328 136,082 (20)%
Selling, general and
administrative.......... 36,388 30,277 20% 114,446 92,736 23%
Research and
development............. 22,884 19,530 17% 68,896 52,039 32%
Amortization of
intangibles............. 1,978 1,879 5% 6,081 5,516 10%
Charge for in-process
technology.............. 5,436 -- N/A 5,436 -- N/A
-------- -------- -------- --------
Total operating costs
and expenses....... 103,123 106,161 (3)% 304,187 286,373 6%
-------- -------- -------- --------
Operating income.......... 54,546 36,064 51% 158,453 127,527 24%
Other income (expenses),
net..................... (5,302) 28,926 (118)% (7,158) 28,488 (125)%
-------- -------- -------- --------
Income before income
taxes................... 49,244 64,990 (24)% 151,295 156,015 (3)%
Provision for income
taxes................... (19,273) (24,788) (22)% (59,906) (59,389) 1%
-------- -------- -------- --------
Division net income....... $ 29,971 $ 40,202 (25)% $ 91,389 $ 96,626 (5)%
======== ======== ======== ========
</TABLE>
REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Product revenue........... $142,860 $127,550 12% $418,401 $369,299 13%
Service revenue........... 14,270 13,471 6% 42,696 41,278 3%
-------- -------- -------- --------
Total product and
service revenue.... 157,130 141,021 11% 461,097 410,577 12%
Research and development
revenue................. 539 1,204 (55)% 1,543 3,323 (54)%
-------- -------- -------- --------
Total revenues....... $157,669 $142,225 11% $462,640 $413,900 12%
======== ======== ======== ========
</TABLE>
The following table sets forth Genzyme General's product and service
revenues on a segment basis:
PRODUCT REVENUE:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/
-------------------- (DECREASE) -------------------- (DECREASE)
1999 1998 % CHANGE 1999 1998 % CHANGE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Product revenue:
Therapeutics:
Cerezyme(R)/Ceredase(R) enzyme.. $121,058 $105,485 15% $351,716 $297,609 18%
Renagel(R) Capsules............. - - -% - - -%
Thyrogen(R)..................... 2,434 - 100% 6,040 - 100%
Other therapeutic products...... - - -% - - -%
-------- -------- -------- --------
Total Therapeutics................ 123,492 105,485 17% 357,756 297,609 20%
Diagnostic Products............... 14,287 16,168 (12)% 43,933 50,120 (12)%
Other............................. 5,081 5,897 (14)% 16,712 21,570 (23)%
-------- -------- -------- --------
Total product
revenue -- Genzyme
General....................... $142,860 $127,550 12% $418,401 $369,299 13%
Service revenue:
Other........................... $ 14,270 $ 13,471 6% $ 42,696 $ 41,278 3%
-------- -------- -------- --------
Total product and service
revenue............................ $157,130 $141,021 11% $461,097 $410,577 12%
======== ======== ======== ========
</TABLE>
<PAGE>
Therapeutics:
Genzyme General's increase in product revenue during both periods is
largely due to increased sales of Cerezyme(R) enzyme, which is attributable to
its identification of new Gaucher disease patients throughout the world. Genzyme
General also sells Ceredase(R) enzyme for the treatment of Gaucher disease, but
it has successfully converted virtually all Gaucher disease patients to a
treatment regimen using Cerezyme(R) enzyme. We have provided information
regarding the growth in sales of Genzyme General's Gaucher disease therapies
during both periods in the following table:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
% of total product
revenue................. 85% 83% 84% 81%
</TABLE>
Genzyme General's results of operations are highly dependent on sales of
Cerezyme(R) enzyme and a reduction in revenue from sales of this product would
adversely affect its results of operations. Revenue from Cerezyme(R) enzyme
would be impacted negatively if competitors developed alternative treatments for
Gaucher disease and the alternative products gained commercial acceptance.
Genzyme General is aware of companies that have initiated efforts to develop
competitive products and other companies may do so in the future.
Therapeutics revenue for both periods also include sales of:
- Thyrogen(R) hormone, which is an adjunctive diagnostic tool for well
differentiated thyroid cancer; and
- Lipids and peptides for drug delivery.
Diagnostics:
The decrease in diagnostics revenue for both periods reflect the sale of
the research products business to Techne Corporation in July 1998 and the
immunochemistry product line to an operating unit of Sybron Laboratory Products
in July 1999. Diagnostics revenue include royalties on product sales by Techne's
biotechnology group. Excluding revenue from the businesses that were sold,
during the three months ended September 30, 1999 diagnostics revenue increased
2% over the corresponding period in 1998, and during the nine months ended
September 30, 1999, diagnostics revenues increased 10% over the corresponding
period in 1998.
Revenue from the provision of genetic testing services also increased in
both periods as a result of growth in sales of DNA and cancer testing services.
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(R) enzyme.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ --------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
International product and
service revenue........... $65,963 $59,283 11% $197,011 $178,724 10%
% of total product and
service revenue............. 42% 42% 43% 44%
</TABLE>
<PAGE>
MARGINS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
-------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Product margin............. $115,257 $81,828 41% $335,695 $258,636 30%
% of product revenue....... 81% 64% 80% 70%
Service margin............. 5,436 4,718 15% 16,074 15,859 1%
% of service revenue....... 38% 35% 38% 38%
Total gross margin......... $120,693 $86,546 39% $351,769 $274,495 28%
% of total product and
service revenue.......... 77% 61% 76% 67%
</TABLE>
During the third quarter of 1998, Genzyme General recorded a $14.8 million
charge to cost of products sold to write down excess inventory used to make
Ceredase(R) enzyme. Without the effect of this charge, Genzyme General's product
margin for the three months ended September 30, 1998 would have been 76% and its
total gross margin during that period would have been 72%. For the nine months
ended September 30, 1998, Genzyme General's product margin would have been 74%
and its total gross margin would have been 70% absent this charge.
Excluding the charge described above, the increases in product margin and
total gross margin during both periods are a result of increased sales of
Cerezyme(R) enzyme.
Our service margin also increased during both periods as a result of
increases in sales of DNA and cancer testing services.
OPERATING EXPENSES
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;
- an increased reserve for doubtful accounts in Genzyme General's genetic
testing business; and
- costs associated with the market introduction of Thyrogen(R) hormone in
January 1999.
The increase in research and development expense in both periods is a
result of:
- increased costs in connection with the results of ATIII LLC; and
- increased spending on Genzyme General's program to develop
alpha-galactosidase for the treatment of Fabry disease.
In the fourth quarter of 1998, Genzyme General began amortizing a milestone
payment that it made to GelTex upon FDA approval of Renagel(R) capsules. As a
result, amortization of intangibles increased slightly during both periods.
<PAGE>
Other Income and Expenses
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ --------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Equity in net loss of
unconsolidated
affiliates................ $(9,352) $(4,919) 90% $(24,077) $(11,832) 103%
Gain on affiliate sale
of stock.................... 1,164 -- N/A 1,770 2,369 (25)%
Minority interest........... 843 993 (15)% 2,573 2,717 (5)%
Gain on sale
of investment............. -- -- -- 1,963 -- N/A
Gain on sale of product
line...................... 518 31,202 (98)% 8,018 31,202 (74)%
Charge for impaired
investment................ -- -- -- (5,487) -- N/A
Investment income........... 6,970 6,974 0% 23,713 14,660 62%
Interest expense............ (5,445) (5,324) 2% (15,631) (10,628) 47%
------- ------- -------- --------
Total other income
(expenses), net...... $(5,302) $28,926 (118)% $ (7,158) $ 28,488 (125)%
======= ======= ======== ========
</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 its joint ventures with GelTex
Pharmaceutical, Inc., BioMarin Pharmaceutical, Inc., Pharming Group, N.V. and
Diacrin, Inc. Genzyme General also records a portion of the results of
Genzyme Transgenics in equity in net loss of unconsolidated affiliates.
Genzyme General's equity in net loss of unconsolidated affiliates increased
in the three months ended September 30, 1999 as a result of:
- increased losses from the joint venture with Pharming;
- the formation of our joint venture with BioMarin; and
- the reallocation of the joint venture with Diacrin from Genzyme Tissue
Repair to Genzyme General in May 1999.
These increases were offset in part by decreased losses from Genzyme
Transgenics and RenaGel LLC.
For the nine months ended September 30, 1999, our equity in net loss of
unconsolidated affiliates increased as a result of the factors described above,
except that RenaGel LLC experienced increased losses in this period.
Gain on Affiliate Sale of Stock:
In June 1998, June 1999 and September 1999, Genzyme General recorded gains
on its investment in Genzyme Transgenics as a result of its issuance of
additional shares of common stock.
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 net losses of that joint venture as
minority interest. Minority interest decreased in both periods,
notwithstanding increases in ATIII LLC's losses, because Genzyme Transgenics'
portion of those losses decreased.
Gain on Sale of Investment:
Genzyme General recorded a gain of $2.0 million in January 1999 upon the
sale of its remaining shares of Techne common stock.
<PAGE>
Gain on Sale of Product Line:
In July 1999, Genzyme General recorded a gain of $0.5 million in connection
with the sale of its immunochemistry product line to Sybron Laboratory Products.
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 in 1996. Genzyme General had previously fully
reserved the amount of this note because it considered the repayment of the note
to be uncertain.
In July 1998, Genzyme General recorded a gain of $31.2 million in
connection with the sale of its research products business to Techne.
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.
Investment Income:
For the three months ended September 30, 1999, investment income was
similar to that in the corresponding period in 1998. As a result of the issuance
in June 1998 of $250.0 million in principal amount of 5 1/4% convertible
subordinated notes and increased cash generated from operations, investment
income for the nine months ended September 30, 1999 increased 62% over the same
period in 1998.
Interest Expense:
Genzyme General's interest expense increased slightly in the three months
ended September 30, 1999, but increased 47% in the nine months ended September
30, 1999 primarily as a result of the issuance of the 5 1/4% convertible
subordinated notes.
Tax Provision:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
--------- --------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Provision for income taxes... $(19,273) $(24,788) (22)% $(59,906) $(59,389) 1%
Effective tax rate........... 39% 38% 40% 38%
</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.
<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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ---------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
-------- -------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Total revenues............... $ 709 $ 1,985 (64)% $ 3,455 $ 6,491 (47)%
Cost of revenues............. 62 1,211 (95)% 1,074 3,534 (70)%
Selling, general and
administrative............. 1,168 2,105 (44)% 4,205 5,260 (20)%
Research and development..... 3,815 3,249 17% 12,448 8,772 42%
Amortization of
intangibles................ 2,956 2,956 0% 8,869 9,026 (2)%
-------- -------- -------- --------
Total operating costs
and expenses.......... 8,001 9,521 (16)% 26,596 26,592 0%
Operating loss............... (7,292) (7,536) (3)% (23,141) (20,101) 15%
Other income (expenses),
net........................ (929) (1,206) (23)% (1,622) (3,952) (59)%
--------- ------- -------- ---------
Loss before income taxes..... (8,221) (8,742) (6)% (24,763) (24,053) 3%
Tax benefit.................. 662 662 0% 1,986 1,986 0%
-------- -------- -------- ---------
Division net loss............ $ (7,559) $(8,080) (6)% $(22,777) $(22,067) 3%
======== ======== ======== =========
</TABLE>
REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
----- ------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Service revenue................... $ -- $ 774 N/A $1,511 $2,022 (25)%
Research and development
revenue......................... -- 1,211 N/A 496 3,869 (87)%
Licensing revenue................. 700 -- N/A 1,425 600 138%
Royalty revenue................... 9 -- N/A 23 -- N/A
---- ------ ------ ------
Total revenues............... $709 $1,985 (64)% $3,455 $6,491 (47)%
==== ====== ====== ======
</TABLE>
Service revenue decreased in both periods as a result of a decline in the
provision of genomics services using Genzyme Molecular Oncology's SAGE(TM) gene
expression technology.
Research and development revenue also decreased during both periods. These
decreases are a result of a reduction in work performed by Genzyme Molecular
Oncology on behalf of StressGen/Genzyme LLC and the completion of research and
development work performed on behalf of Schering-Plough Corporation in 1998.
Licensing revenue increased in both periods as a result of the grant by
Genzyme Molecular Oncology of licenses under its rights to the SAGE(TM) gene
expression technology and the MDM2 protein.
COST OF REVENUES
Genzyme Molecular Oncology's cost of revenues includes:
- Work performed on behalf of StressGen/Genzyme LLC;
- Services performed using the SAGE(TM) gene expression technology on
behalf of third parties; and
<PAGE>
- Performance of gene therapy research on behalf of Schering-Plough.
Cost of revenues decreased in both periods as a result of the completion of
the Schering-Plough research project and a reduction in the royalty rate payable
by Genzyme Molecular Oncology for using the SAGE(TM) gene expression technology
on behalf of third parties.
OPERATING EXPENSES
Genzyme Molecular Oncology's selling, general and administrative expenses
decreased in both periods primarily as a result of:
- reduced legal costs associated with the prosecution and maintenance of
its intellectual property portfolio; and
- a one-time charge taken in the third quarter of 1998 to write off costs
incurred in connection with its attempted IPO.
Genzyme Molecular Oncology's research and development expenses increased in
both periods as a result of:
- the initiation of a clinical trial for its melanoma tumor vaccine
product; and
- An increase in the number of research personnel and related expenses
required to support the continued development of its immunotherapy and
antiangiogenesis programs.
Genzyme Molecular Oncology's amortization of intangibles is attributable to
intangible assets acquired in connection with the acquisition of PharmaGenics,
Inc. in June 1997.
OTHER EXPENSES
Genzyme Molecular Oncology's other expenses decreased in both periods
because it had decreased interest expense resulting from the transfer of its
convertible debt to Genzyme General in August 1998. The decrease in interest
expense, however, was offset by a $1.0 million charge taken by Genzyme Molecular
Oncology in the third quarter of 1999 in connection with its repurchase of
one-half of the Canadian Medical Discoveries Fund's interest in the StressGen
joint venture.
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.
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Total revenues.............. $ 27,385 $ 24,904 10% $ 81,419 $ 76,332 7%
Cost of products sold....... 16,798 25,823 (35)% 50,081 55,805 (10)%
Selling, general and
administrative............ 15,114 13,356 13% 46,893 43,905 7%
Research and development.... 7,131 6,060 18% 21,716 13,073 66%
Amortization of
intangibles............... 1,445 1,444 0% 4,306 4,306 0%
-------- -------- -------- --------
Total operating costs and
expenses.................. 40,488 46,683 (13)% 122,996 117,089 5%
-------- -------- -------- --------
Operating loss.............. (13,103) (21,779) (40)% (41,577) (40,757) 2%
Other income (expenses),
net....................... 2,150 260 727% 2,221 234 849%
-------- -------- -------- --------
Division net loss........... $(10,953) $(21,519) (49)% $(39,356) $(40,523) (3)%
======== ======== ======== ========
</TABLE>
REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
------- ------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Cardiovascular surgery
products.................... $19,552 $18,466 6% $56,985 $55,392 3%
General surgery products...... 5,811 4,492 29% 17,946 14,263 26%
Plastics/other surgery
products.................... 2,022 1,946 4% 6,488 6,677 (3)%
------- ------- ------- -------
Total revenues........... $27,385 $24,904 10% $81,419 $76,332 7%
======= ======= ======= =======
</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(R) bioresorbable membrane.
Sales of Sepra Film(R) bioresorbable membrane for the three months ended
September 30, 1999 were $3.0 million compared to $2.2 million in the same period
of last year. Sales of Sepra Film(R) bioresorbable membrane for the nine months
ended September 30, 1999 were $9.4 million compared to $6.4 million in the same
period of last year.
Other surgery product revenue consists of sales of Genzyme Surgical
Products' Snowden-Pencer line of instruments for plastic surgery and products
sold to original equipment manufacturers, including sutures.
International sales as a percentage of total sales for the three months
ended September 30, 1999 were 28% as compared to 26% in the same period of 1998.
International sales as a percentage of total sales for the nine months ended
September 30, 1999 were 29% as compared to 28% for the same period of 1998.
MARGINS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
-------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Gross margins.............. $10,587 $(919) 1,252% $ 31,338 $ 20,527 53%
% of total revenues........ 39% (4)% 38% 27%
</TABLE>
<PAGE>
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.
During the third quarter of 1998, Genzyme Surgical Products recorded a
$10.4 million charge to cost of products sold to write down its inventory of
Sepra products to net realizable value. Without the effect of this charge,
Genzyme Surgical Products' gross margin for the three months ended September 30,
1998 would have been 38% and for the nine months ended September 30, 1998 would
have been 41%.
Excluding the charge described above, gross margins increased slightly in
the three months ended September 30, 1999 as a result of increased sales of
Genzyme Surgical Products' line of products for minimally invasive cardiac
surgery.
Excluding the charge described above, gross margins decreased in the nine
months ended September 30, 1999 as a result of a decrease in fluid management
product margins, offset in part by increased sales of Genzyme Surgical Products'
line of products for minimally invasive cardiac surgery.
OPERATING EXPENSES
Genzyme Surgical Products' selling, general and administrative expenses
increased in both periods as a result of higher fringe benefit expenses and
other costs associated with the creation of Genzyme Surgical Products as a
separate division of Genzyme.
Genzyme Surgical Products' research and development expenses for both
periods in 1998 include a $1.7 million charge taken in the third quarter to
write off costs related to equipment that it used to manufacture the Sepra
products. Excluding this charge, the increase in research and development
costs for both periods is a result of the initiation of several clinical
trials for its products. In the nine month period ended September 30, 1999,
the increase in research and development costs is also attributable to a $2.0
million milestone payment to a collaborator that was recorded in June 1999.
OTHER INCOME AND EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
------- ----- -------- ------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Equity in net income (loss) of
unconsolidated affiliate........ $ (32) $ 9 (456)% $ (32) $(20) 60%
Other............................. 58 235 (75)% 101 185 (45)%
Investment income................. 2,125 34 6,150% 2,188 124 1,665%
Interest expense.................. (1) (18) (94)% (36) (55) (35)%
------ ---- ------ ----
Total other income (expenses),
net........................ $2,150 $260 727% $2,221 $234 849%
====== ==== ====== ====
</TABLE>
The increases in other income and expenses for both periods is primarily
due to an increase in investment income. Investment income increased because
Genzyme Surgical Products had a higher average cash balance as a result of the
allocation of $150.0 million in cash, cash equivalents and investments from
Genzyme General to Genzyme Surgical Products in June 1999.
<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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ --------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Total revenues.............. $ 5,682 $ 4,464 27% $ 14,370 $ 12,420 16%
Cost of services sold....... 3,558 3,471 3% 9,777 10,481 (7)%
Selling, general and
administrative............ 5,978 6,043 (1)% 18,407 18,363 0%
Research and development.... 2,033 2,553 (20)% 6,004 8,471 (29)%
------- ------- -------- --------
Total operating cost and
expenses.................. 11,569 12,067 (4)% 34,188 37,315 (8)%
Operating loss.............. (5,887) (7,603) (23)% (19,818) (24,895) (20)%
Other income (expenses),
net....................... (261) (1,835) (86)% (4,328) (6,318) (31)%
------- ------- -------- --------
Division net loss........... $(6,148) $(9,438) (35)% $(24,146) $(31,213) (23)%
======= ======= ======== ========
</TABLE>
REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
------ ------ -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Carticel(R) chondrocytes...... $3,619 $2,723 33% $10,359 $ 7,715 34%
Epicel(TM) skin grafts........ 2,063 1,741 18% 3,926 4,705 (17)%
Other......................... -- -- 85 -- 100%
------ ------ ------- -------
Total revenues........... $5,682 $4,464 27% $14,370 $12,420 16%
====== ====== ======= =======
</TABLE>
During the three month period ended September 30, 1999, Genzyme Tissue
Repair's service revenue increased as a result of increases in sales of
Carticel(R) chondrocytes and Epicel(TM) skin grafts.
During the nine month period ended September 30, 1999, increases in revenue
from Carticel(R) chondrocytes resulted in an increase in service revenues. Sales
of Epicel(TM) skin grafts decreased during this period.
The increase in sales of Carticel(R) chondrocytes during both periods is a
result of continued increases in the numbers of patients treated and surgeons
trained 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
------- ----- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Total gross margin............... $2,124 $993 114% $4,593 $1,939 137%
% of total revenue............... 37% 22% 32% 16%
</TABLE>
<PAGE>
Genzyme Tissue Repair's gross margins improved in both periods as a result
of:
- Increased sales of Carticel(R) chondrocytes and, in the three-month
period, Epicel(TM) skin grafts;
- Reductions in labor and manufacturing expenses; and
- Decreased material expenses.
OPERATING EXPENSES
Genzyme Tissue Repair's selling, general and administrative expenses
remained flat in both periods. Its 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
------ -------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Equity in net loss of joint
venture...................... $ -- $(1,601) (100)% $(3,368) $(5,229) (36)%
Interest income................ 210 281 (25)% 375 955 (61)%
Interest expense............... (471) (515) (9)% (1,335) (2,044) (35)%
----- ------- ------- -------
Total other income
expenses, net........... $(261) $(1,835) (86)% $(4,328) $(6,318) (31)%
===== ======= ======= =======
</TABLE>
Equity in net loss of joint venture decreased in 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. In the period of 1999
prior to the transfer, Genzyme Tissue Repair provided $3.6 million in funding to
the joint venture and realized a net loss of $3.4 million from the joint
venture.
Interest income decreased in both periods as a result of lower average cash
balances.
In the second quarter of 1998, Genzyme Tissue Repair completed the
accretion of the conversion feature of the 6% convertible subordinated note.
Interest expense decreased in both periods as a result. During the first three
quarters of 1999, the holder of this note converted approximately $8.2 million
in principal amount into shares of GZTR Stock.
B. LIQUIDITY AND CAPITAL RESOURCES
GENZYME CORPORATION
At September 30, 1999, we had cash, cash-equivalents, and short- and
long-term investments of $695.9 million, an increase of $120.2 million from
December 31, 1998.
We generated $133.5 million in cash from our operations in the first nine
months of 1999.
Our investing activities used $51.6 million in cash in the first nine
months of 1999. These activities generated:
- $10.9 million from our investment portfolio;
- $5.0 million from the sale of our immunochemistry product line;
- $11.1 million from the sale of Techne common stock; and
- $8.4 million from the payment of a note issued in connection with our
sale of Genetic Design.
<PAGE>
These activities used:
- $35.6 million to fund capital expenditures;
- $32.5 million to fund our investments in joint ventures;
- $6.5 million to fund our acquisition of Peptimmune;
- $10.0 million to purchase 769,230 shares of common stock of BioMarin;
- $3.4 million to purchase 122,750 shares of Series F preferred stock of
Genovo, Inc.
In the first nine months of 1999, we received $56.4 million in cash from
employee stock plans and used $3.7 million in cash to repay debt and capital
lease obligations.
In February 1997, we issued a 6% convertible subordinated note in a
principal amount of $13.0 million. This note is convertible into shares of
Tissue Repair Stock. In the first three quarters of 1999, the holder of this
note converted an aggregate of $8.2 million in principal into a total of
4,364,861 shares of Tissue Repair Stock. Genzyme Tissue Repair also paid
approximately $406,000 of accrued interest in connection with these
conversions. As of September 30, 1999, $4.1 million in principal on this note
remained outstanding. This amount becomes due in February 2000.
At September 30, 1999, we had $100.0 million outstanding under our
revolving credit facility with a syndicate of commercial banks. Of this amount,
$82.0 million was allocated to Genzyme General and $18.0 million was allocated
to Genzyme Tissue Repair. As described more fully in "Subsequent Events" below,
in November 1999 we refinanced this facility and repaid the $82.0 million that
was allocated to Genzyme General.
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; and
- working capital.
Our cash reserves will be further reduced to pay principal and interest on
the following debt:
- $250.0 million in principal under our 5 1/4% convertible subordinated
notes due June 2005, which are convertible into GENZ Stock, GZMO Stock
and GZSP Stock;
- $21.2 million in principal under our 5% convertible subordinated
debentures due August 2003, which are convertible into GENZ Stock; and
- $4.1 million in principal under our 6% convertible subordinated note due
February 2000, which is convertible into GZTR Stock.
If we use cash to pay or redeem this debt, including the interest due on
it, our cash reserves will be diminished.
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.
GENZYME GENERAL
At September 30, 1999, Genzyme General had cash, cash-equivalents, and
short- and long-term investments of $530.1 million, a decrease of $26.0 million
from December 31, 1998.
<PAGE>
Genzyme General generated $188.3 million in cash from operations in the
first nine months of 1999.
Genzyme General's investing activities used $56.4 million in cash in the
first nine months of 1999. These activities generated:
- $5.0 million from the sale of Genzyme General's immunochemistry product
line;
- $11.1 million from the sale of Techne common stock; and
- $8.4 million from the payment of a note issued in connection with the
sale of Genetic Design.
These activities used:
- $32.6 million to fund capital expenditures;
- $28.9 million to fund Genzyme General's investments in joint ventures;
- $6.5 million to fund the acquisition of Peptimmune;
- $10.0 million to purchase 769,230 shares of common stock of BioMarin;
- $3.4 million to purchase 122,750 shares of Series F preferred stock of
Genovo.
In the first nine months of 1999, we received $55.5 million in cash from
employee stock plans. Genzyme General's financing activities used the following
cash during this period:
- $3.5 million to repay debt and capital lease obligations;
- $50.8 million paid to Genzyme Surgical Products in connection with the
creation of Genzyme Surgical Products as a separate division of Genzyme;
- $25.0 million paid to Genzyme Tissue Repair in exchange for the
reallocation of our ownership interest in Diacrin/Genzyme LLC from
Genzyme Tissue Repair to Genzyme General; and
- $5.0 million in cash paid to Genzyme Tissue Repair under an equity line
of credit.
At September 30, 1999, $82.0 million of funds outstanding under our
revolving credit facility were allocated to Genzyme General. As described more
fully under "Subsequent Events" below, this amount was repaid in November 1999.
In 1998, our board of directors made $30.0 million of Genzyme General's
cash available to Genzyme Molecular Oncology under an equity line of credit.
Under the terms of this equity line, Genzyme Molecular Oncology may draw down
funds as needed each quarter in exchange for Genzyme Molecular Oncology
designated shares. Genzyme Molecular Oncology designated shares are
authorized shares of Molecular Oncology Stock that are not issued and
outstanding, but which our board of directors may issue, sell or distribute
without allocating the proceeds to Genzyme Molecular Oncology. Genzyme
Molecular Oncology has not yet drawn any funds under this equity line. In
addition, our board of directors has also approved the allocation of an
additional $60.0 million in cash from Genzyme General to Genzyme Molecular
Oncology in connection with our acquisition of Cell Genesys, Inc. Additional
disclosure relating to our acquisition of Cell Genesys is included below
under the heading "Subsequent Events."
In 1998, our board of directors also made $50.0 million of Genzyme
General's cash available to Genzyme Tissue Repair under an equity line of
credit. Under the terms of this equity line, Genzyme Tissue Repair may draw
down funds as needed each quarter in exchange for Genzyme Tissue Repair
designated shares. Genzyme Tissue Repair designated shares are authorized
shares of Tissue Repair Stock that are not issued and outstanding, but which
our board of directors may issue, sell or distribute without allocating the
proceeds to Genzyme Tissue Repair. In February 1999, Genzyme Tissue Repair
made a $5.0 million draw under this equity line in exchange for 1,633,399
Genzyme Tissue Repair designated shares. In May 1999, the amount available
under this equity line was reduced by $25.0 million in connection with the
reallocation of our ownership interest in Diacrin/Genzyme LLC from Genzyme
Tissue Repair to Genzyme General.
<PAGE>
In June 1999, Genzyme General transferred $150.0 million in cash, cash
equivalents and investments to Genzyme Surgical Products in connection with
the creation of Genzyme Surgical Products as a separate division of Genzyme.
In exchange for this transfer, approximately 14.8 million shares of Surgical
Products Stock were issued and distributed as a dividend to holders of
Genzyme General Stock.
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; and
- working capital.
Genzyme General's cash reserves will be further reduced to pay principal
and interest on the following debt:
- $21.2 million in principal under our 5% convertible subordinated
debentures due August 2003, which are convertible into shares of
Genzyme General Stock; and
- $250.0 million in principal under our 5 1/4% convertible subordinated
notes due June 2005, 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 Genzyme General will
be able to obtain any additional financing, extend any existing financing
arrangement, or obtain either on favorable terms.
GENZYME MOLECULAR ONCOLOGY
At September 30, 1999, Genzyme Molecular Oncology had cash, cash
equivalents and short-term investments of $1.7 million, a decrease of $10.2
million from December 31, 1998. Substantially all of this decrease is
attributable to operating activities.
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:
- the $30.0 million equity line of credit from Genzyme General;
- revenues generated from the SAGE(TM) gene expression technology; and
- revenues from license agreements.
As described more fully under "Subsequent Events" below, our board of
directors has also approved the allocation of an additional $60.0 million in
cash from Genzyme General to Genzyme Molecular Oncology in connection with our
acquisition of Cell Genesys. Based on current spending plans, including spending
on programs that will be allocated to Genzyme Molecular Oncology when and if the
Cell Genesys acquisition is completed, we believe that Genzyme Molecular
Oncology will have sufficient resources to fund its operations through 2001.
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:
- commercialization of the SAGE(TM) gene expression technology;
- research and development;
- preclinical and clinical testing; and
- pursuing regulatory approvals.
<PAGE>
We cannot guarantee that the efforts underlying these expenditures will be
successful or that Genzyme Molecular Oncology's operations will ever be
profitable. It may be years before it generates any significant revenue from
sales of products or services other than those based on the SAGE(TM) gene
expression technology.
Genzyme Molecular Oncology's cash needs may differ from those planned as a
result of many factors, including the:
- results of research and development and clinical testing;
- achievement of milestones under existing strategic alliances;
- ability to establish and maintain additional strategic alliances and
licensing arrangements;
- enforcement of patent and other intellectual property rights;
- 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 September 30, 1999, Genzyme Surgical Products had cash, cash
equivalents, and short- and long-term investments of $149.6 million. Genzyme
Surgical Products had no cash, cash equivalents, and short- and long-term
investments at December 31, 1998.
Genzyme Surgical Products used $24.8 million in cash for operations in the
first nine months of 1999.
Genzyme Surgical Products' investing activities generated $7.9 million in
cash in the first nine months of 1999. These activities generated $10.0 million
from its investment portfolio and used $2.3 million to fund capital
expenditures.
As a result of the allocation of assets from Genzyme General in connection
with the creation of Genzyme Surgical Products as a separate division of
Genzyme, financing activities generated $50.8 million in the first nine months
of 1999.
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 believes that its cash resources, together with
the revenues generated from its products and distribution agreements, will be
sufficient to finance its planned operations and capital requirements through
2001. Although Genzyme Surgical Products currently has substantial cash
resources, it intends to use substantial portions of its available cash for:
- research and development;
- product development and marketing, including for the Sepra products;
- expanding facilities; and
- working capital.
<PAGE>
In addition, if Genzyme Surgical Products exercises its option to purchase
the limited partnership interests in Genzyme Development Partners, L.P. and uses
cash to pay all or a portion of the purchase price, Genzyme Surgical Products
cash resources will be diminished.
Genzyme Surgical Products' cash needs may differ from those planned as a
result of many factors including the:
- 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;
- 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.
Genzyme Surgical Products may require significant additional financing
to continue operations beyond 2001. We cannot guarantee that we will be able
to obtain any additional financing for Genzyme Surgical Products or find it
on favorable terms. If Genzyme Surgical Products has insufficient funds or is
unable to raise additional funds, it may delay, reduce or eliminate certain
of its programs. Genzyme Surgical Products may also have to give rights to
third parties to commercialize technologies or products that it would
otherwise commercialize itself.
GENZYME TISSUE REPAIR
At September 30, 1999, Genzyme Tissue Repair had cash and cash equivalents
of $14.5 million, an increase of $6.8 million from December 31, 1998.
Genzyme Tissue Repair used $19.5 million in cash for operations in the
first nine months of 1999. This is primarily due to Genzyme Tissue Repair's net
loss of $24.1 million during that period.
In the first nine months of 1999, Genzyme Tissue Repair used $4.2 million
in cash as a result of its investing activities. This amount included $3.6
million used to invest in Diacrin/Genzyme LLC and $0.6 million used to purchase
equipment.
Genzyme Tissue Repair's financing activities generated $30.5 million in
cash in the first nine months of 1999. This included $25.0 million allocated
from Genzyme General in connection with the transfer of our interest in
Genzyme/Diacrin LLC from Genzyme Tissue Repair to Genzyme General and $5.0
million allocated to Genzyme Tissue Repair under its equity line from Genzyme
General.
At September 30, 1999, $18.0 million of funds outstanding under our
revolving credit facility were allocated to Genzyme Tissue Repair. As more fully
described in "Subsequent Events" below, this amount was refinanced in November
1999.
During the first three quarters of 1999, the holder of our 6%
convertible subordinated note due February 2000 converted $8.2 million in
principal amount into 4,364,861 shares of Tissue Repair Stock. Genzyme Tissue
Repair paid approximately $406,000 of accrued interest to the holder in
connection with these conversions. The principal and remaining interest on
this note becomes due in February 2000.
We anticipate that Genzyme Tissue Repair's current cash resources,
together with the $20.0 million that remains available under the
interdivisional financing arrangement from Genzyme General, will be
sufficient to fund its operations through the end of 2000.
In addition, $20.0 million of the cash allocated to Genzyme Tissue Repair
in connection with the transfer to Genzyme General of our interest of the
Diacrin joint venture is subject to the successful achievement of product
<PAGE>
development milestones by the joint venture. Genzyme Tissue Repair may repay
any of this amount to Genzyme General 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 repay
Genzyme General in cash, its cash reserves will be substantially diminished.
Genzyme Tissue Repair's cash needs may differ from those planned as a
result of many 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.
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, scale back 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.
EURO-THE NEW EUROPEAN CURRENCY
On January 1, 1999, a number of European countries adopted the Euro as
their common legal currency. This conversion has had no material effect on our:
- competitive position;
- computer systems;
- ability to conduct our business;
- material contracts;
- derivatives and other financial instruments;
- exchange rate risk; or
- tax rate.
We incorporate by reference our disclosure related to the Euro
conversion, which is 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 1998 Form 10-K, as amended.
YEAR 2000
Many computer systems and other equipment with embedded chips or processors
experience problems handling dates beyond the year 1999. As a result, older
programs may experience operating difficulties that cause date-sensitive
transaction errors or failures unless they are modified or upgraded to
adequately address the problem. The potential impact of the Year 2000 problem
cannot be fully appreciated at this time.
We are conducting a Year 2000 compliance program intended to identify and
minimize our exposure to Year 2000 problems. The compliance program is a
coordinated effort being conducted by each of our divisions, business units and
departments. We are using our own MIS personnel to conduct the program and
have not used any independent verification or validation processes in connection
with the program. Our program involves four phases:
- Conducting an inventory of our Year 2000 issues;
<PAGE>
- prioritizing identified systems, programs and equipment based on
materiality to our operations;
- assessing Year 2000 compliance; and
- resolving Year 2000 issues through upgrades, replacements or repairs.
We have conducted an inventory of our information technology and
non-information technology systems, programs and equipment. We evaluated
systems, programs and equipment based on their importance to our business, risk
of failure, time horizon to failure, and other factors. We then placed these
systems, programs and equipment into one of the following seven categories:
(1) Mission critical;
(2) Mission important;
(3) Process critical;
(4) Process important;
(5) Process convenient;
(6) Reporting; and
(7) Other.
We have completed the first three phases of the program for all of our own
systems, programs and equipment and are currently in the fourth phase of the
compliance program. We have determined that our Year 2000 exposures are
primarily in the following areas:
- information systems;
- financial and administrative applications;
- manufacturing applications and equipment; and
- research and development support systems, programs and equipment.
We have resolved the Year 2000 issues for the systems, programs and
equipment that fall into categories (1) through (4) above. We are also
developing contingency plans with respect to categories (1) through (3). Our
contingency plans include purchasing extra raw materials, making appropriate
staffing arrangements and ordering extra fuel. We plan to resolve Year 2000
issues for systems, programs and equipment in category (5) by the end of 1999,
and for systems, programs and equipment in categories (6) and (7) as time
permits. To date, we have not deferred any significant information technology
projects as a result of our Year 2000 compliance efforts.
We are also in the process of surveying third parties that we consider
critical to our business about their Year 2000 readiness. These third parties
include:
- significant customers;
- suppliers;
- significant research or collaborative partners;
- service providers; and
- distributors.
We substantially completed the survey in the third quarter of 1999. We sent
surveys to over 1,900 businesses and received responses from approximately 77%
of the group. Importantly, we received responses from all of our critical
suppliers and distributors. We are attempting to mitigate our risks with respect
to these parties' Year 2000 compliance. We have identified alternative resources
for our essential operations and are in the process of securing these resources.
We are also stock-piling raw materials and finished goods.
<PAGE>
We may incur significant costs in assessing, resolving and mitigating Year
2000 compliance issues. Each of our departments, business units and divisions
incurs its own costs in connection with readiness efforts. We do not separately
track the internal costs of our Year 2000 compliance efforts, so these costs are
unknown. We estimate, however, that we have spent approximately $1.0 million to
date in replacing, upgrading or repairing systems, programs and equipment.
Although the aggregate additional costs of our Year 2000 program cannot be known
at this time, our management currently expects that the additional costs will be
less than $0.5 million. The actual costs will depend on numerous factors,
including the nature and amount of remediation work to be performed and internal
staff costs. We intend to fund all of our Year 2000 compliance program costs
through operations. These estimates do not include costs incurred in connection
systems, programs or equipment that were replaced or upgraded in the normal
course of business for which the timing was not accelerated due to Year 2000
issues.
We cannot guarantee that our Year 2000 issues will be resolved by the end
of 1999. If we fail to identify and resolve all significant Year 2000 issues in
a timely manner, we could experience interruptions or failures of our normal
business activities or operations, which would have a material adverse effect on
the our business, results of operations and financial condition. Our business,
results of operations and financial condition could also be materially adversely
affected by the failure of third parties that are significant to our business to
be Year 2000 compliant. Any interruptions or failures of our normal business
activities or operations could result in:
- delays in the distribution of finished goods or receipt of raw materials;
- disruptions in manufacturing activities;
- disruptions of clinical programs;
- delays in product development activities; or
- errors or delays in customer order or invoice processing.
Our compliance program is an ongoing process, and the estimated costs and
timetables discussed above are subject to change.
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,
1998.
We incorporate by reference our disclosure related to these risks, 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 1998 Form 10-K, as amended.
SUBSEQUENT EVENTS
CELL GENESYS:
In October 1999, we entered into an agreement to acquire Cell Genesys
for approximately $350 million in Genzyme General Stock. The acquisition,
which we expect to complete in the first quarter of 2000, is subject to:
- approval by Cell Genesys' shareholders;
- clearance under federal antitrust laws; and
- other customary closing conditions.
In connection with this acquisition, our board of directors has approved
the allocation of Cell Genesys' cancer programs and product candidates and
$60.0 million in cash to Genzyme Molecular Oncology. In exchange for those
assets, Genzyme Molecular Oncology will reserve approximately 12.5 million
Genzyme Molecular Oncology designated shares for the benefit of Genzyme
General. We are currently considering how to treat these designated shares.
We may:
- sell the shares to financial or strategic investors with an interest in
<PAGE>
Genzyme Molecular Oncology; or
- sell the shares in a registered public offering.
If we do not sell the shares, we will distribute them as a dividend to
holders of Genzyme General Stock.
We cannot guarantee that the acquisition of Cell Genesys will be
completed or that it will be completed at the anticipated time. In addition,
we have not undertaken any efforts to dispose of the Genzyme Molecular
Oncology designated shares and we cannot guarantee that any disposition or
sale can occur on terms and conditions acceptable to Genzyme General and
Genzyme Molecular Oncology.
NEW CREDIT FACILITY:
In November 1999, our $225.0 million revolving credit facility matured. We
refinanced this 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. When we refinanced the credit facility, $100.0 million
was outstanding. Of this amount, we:
- repaid the $82.0 million that was allocated to Genzyme General; and
- refinanced the $18.0 million that was allocated to Genzyme Tissue Repair
under the new credit facility.
GENZYME TRANSGENICS
In November 1999, we purchased $12.5 million in shares of Series B
convertible preferred stock of Genzyme Transgenics. We can convert these shares
into shares of Genzyme Transgenics common stock at any time at a price of $6.30
per share. We will receive an escalating annual dividend of between 11% and 12%
on amounts that we convert into common stock.
FOCAL, INC.:
In October 1999, we entered into an agreement with Focal, Inc. under which
Genzyme Surgical Products will distribute and sell Focal's surgical sealants in
North America for selected indications following FDA approval. In November 1999,
we purchased 810,372 shares of Focal common stock for $5.0 million. We are also
committed, at Focal's option, to make future equity investments of up to $15.0
million subject to certain conditions.
GELTEX:
In November 1999, we made a $10.0 milestone payment to GelTex as required
under our joint venture agreements.
STRESSGEN:
In August 1999, the Canadian Medical Discoveries Fund exercised its option
to require us and StressGen to repurchase the fund's interest in
StressGen/Genzyme LLC. We repurchased one-half of the fund's interest in the
joint venture in October 1999 for approximately $3.9 million by issuing to the
fund 617,200 shares of Molecular Oncology Stock.
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,
1998.
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 1998 Form 10-K, as amended.
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, SEPTEMBER 30, 1999
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Restated Articles of Organization of Genzyme Corporation, as amended.
Filed as Exhibit 1 to our registration statement on Form 8-A, which we
filed with the SEC on June 18, 1997 (File No. 0-14680). We incorporate
this exhibit by reference into this report.
3.2 By-Laws of Genzyme Corporation, as amended. Filed with this report.
4.1 Series Designation for Genzyme Molecular Oncology Division Common Stock.
Filed as Exhibit 2 to our registration statement on Form 8-A, which we
filed with the SEC on June 18, 1997 (File No. 0-14680). We incorporate
this exhibit by reference into this report.
4.2 Series Designation for Genzyme Surgical Products Division Common Stock.
Filed as Exhibit 2 to our registration statement on Form 8-A, which we
filed with the SEC on June 11, 1999 (File No. 0-14680). We incorporate
this exhibit by reference into this report.
4.3 Series Designation for Series A, Series B, Series C and Series D
Participating Preferred Stock. Filed as Exhibit 2 to Amendment No. 1 of
our registration statement on Form 8-A, which we filed with the SEC on
June 11, 1999 (File No. 0-14680). We incorporate this exhibit by reference
into this report.
4.4 Amended and Restated Renewed Rights Agreement. Filed as Exhibit 4 to
Amendment No. 1 of our registration statement on Form 8-A, which we filed
with the SEC on June 11, 1999 (File No. 0-14680). We incorporate this
exhibit by reference into this report.
27.1 Financial Data Schedule for the nine month period ended
September 30, 1999 (for EDGAR filing purposes only). Filed
with this report.
27.2 Financial Data Schedule for the nine month period ended
September 30, 1998 (for EDGAR filing purposes only). Filed
with this report.
(b) Reports on Form 8-K
On October 21, 1999, we filed a current report on Form 8-K to disclose
under Item 5 that:
- We entered into an agreement to acquire Cell Genesys for approximately
$350 million in Genzyme General Stock; and
- Our board of directors approved the allocation of Cell Genesys' cancer
programs and $60.0 million in cash to Genzyme Molecular Oncology in
exchange for the reservation of approximately 12.5 million Genzyme
Molecular Oncology designated shares.
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, SEPTEMBER 30, 1999
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENZYME CORPORATION
By: /s/ MICHAEL S. WYZGA
------------------------------------
Michael S. Wyzga
Senior Vice President, Finance;
Chief Financial Officer; and
Chief Accounting Officer
DATE: November 15, 1999
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, SEPTEMBER 30, 1999
EXHIBIT INDEX
3.1 Restated Articles of Organization of Genzyme Corporation, as amended.
Filed as Exhibit 1 to our registration statement on Form 8-A, which we
filed with the SEC on June 18, 1997 (File No. 0-14680). We incorporate
this exhibit by reference into this report.
3.2 By-Laws of Genzyme Corporation, as amended. Filed with this report.
4.1 Series Designation for Genzyme Molecular Oncology Division Common Stock.
Filed as Exhibit 2 to our registration statement on Form 8-A, which we
filed with the SEC on June 18, 1997 (File No. 0-14680). We incorporate
this exhibit by reference into this report.
4.2 Series Designation for Genzyme Surgical Products Division Common Stock.
Filed as Exhibit 2 to our registration statement on Form 8-A, which we
filed with the SEC on June 11, 1999 (File No. 0-14680). We incorporate
this exhibit by reference into this report.
4.3 Series Designation for Series A, Series B, Series C and Series D
Participating Preferred Stock. Filed as Exhibit 2 to Amendment No. 1 of
our registration statement on Form 8-A, which we filed with the SEC on
June 11, 1999 (File No. 0-14680). We incorporate this exhibit by reference
into this report.
4.4 Amended and Restated Renewed Rights Agreement. Filed as Exhibit 4 to
Amendment No. 1 of our registration statement on Form 8-A, which we filed
with the SEC on June 11, 1999 (File No. 0-14680). We incorporate this
exhibit by reference into this report.
27.1 Financial Data Schedule for the nine month period ended
September 30, 1999 (for EDGAR filing purposes only). Filed
with this report.
27.2 Financial Data Schedule for the nine month period ended
September 30, 1998 (for EDGAR filing purposes only). Filed
with this report.
