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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1996 Commission File No. 0-18554
GENZYME DEVELOPMENT PARTNERS, L.P.
(Exact name of Registrant as specified in its charter)
DELAWARE 04-3065192
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE KENDALL SQUARE
CAMBRIDGE, MASSACHUSETTS 02139-1562
(Address of principal executive offices) (Zip Code)
(617) 252-7500
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Class A Limited Partnership Interests
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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 twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (17 CFR ss. 229.405) is not contained herein, and will not
be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
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DOCUMENTS INCORPORATED BY REFERENCE
NONE
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NOTE REGARDING FORWARD-LOOKING STATEMENTS:
This Annual Report on Form 10-K for Genzyme Development Partners, L.P. (the
"Partnership") contains forward-looking statements concerning the Partnership's
expected future revenues, operations, and expenditures, estimates of the
potential markets for the Partnership's products, assessments of competitors and
potential competitors, projected timetables for the preclinical and clinical
development, regulatory approval and market introduction of the Partnership's
products and estimates of the capacity of manufacturing and other facilities to
support such products. These forward looking statements represent the
expectations of the General Partner as of the filing date of this Form 10-K. The
Partnership's actual results could differ materially from those anticipated by
the forward looking statements due to a number of factors, including (i) the
Partnership's ability to complete successfully preclinical and clinical
development and obtain timely regulatory approval and patent and other
proprietary rights protection for its products, (ii) the content and timing of
decisions made by the U.S. Food and Drug Administration and other agencies
regarding the indications for which the Partnership's products may be approved,
(iii) the actual size and characteristics of markets to be addressed by the
Partnership's products, (iv) market acceptance of the Partnership's products,
(v) the Partnership's ability to obtain reimbursement for its products, (vi) the
accuracy of the Partnership's information concerning the products and resources
of competitors and potential competitors, (vii) continued funding of the
Partnership's research and development programs by Genzyme Corporation, and
(viii) the risks and uncertainties described under the caption "Factors
Affecting Future Operating Results" under Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations.
PART I
ITEM 1. BUSINESS
GENERAL
Genzyme Development Partners, L.P. (the "Partnership") was formed in 1989
to develop, produce and derive income from the sale in the United States and
Canada of products (the "Sepra Products") to be used during surgical procedures
primarily to limit the formation of postoperative adhesions. The Sepra Products
are based on hyaluronic acid ("HA"), a biopolymer produced naturally by the body
to lubricate and protect tissue.
During surgery, tissues and organs are unavoidably damaged, both directly
as a result of cutting, suturing and cauterization and indirectly as a result of
handling and drying due to exposure. At the site of such damage, tissues or
organs that normally should remain separated often become connected by fibrous
scar tissues called adhesions. The formation of adhesions generally occurs
within the first few days following surgery. Postoperative adhesions can cause
significant complications such as bowel obstruction following abdominal surgery,
infertility and pain following gynecological surgery and restricted limb motion
following musculoskeletal surgery. Adhesions also can increase the complexity,
duration and risk of subsequent surgery.
The programs to develop the Partnership's Sepra Products achieved a number
of significant milestones in 1996. During the third quarter of 1996, the Food
and Drug Administration (the "FDA") granted approval to market Seprafilm(TM) in
any open abdominal or pelvic surgery. Genzyme Corporation ("Genzyme"), on behalf
of the joint venture between the Partnership and Genzyme formed to manufacture
and market the Partnership's products (the "Joint Venture"), launched
Seprafilm(TM) broadly in the United States during the fourth quarter through the
Deknatel Snowden Pencer, Inc. ("DSP") sales force. DSP is a surgical products
company acquired by Genzyme in July 1996. Genzyme also launched Seprafilm(TM) in
Europe during the second quarter following test marketing of the product in the
Netherlands late in 1995. The Partnership is entitled to receive a royalty on
European sales of the Sepra Products under certain conditions. In February 1997,
the FDA notified Genzyme that an advisory panel meeting will be held on May 5,
1997 to review the Pre-Market Approval Application ("PMA") for Sepracoat(TM). In
addition, during the third quarter, Genzyme received an Investigational Device
Exemption ("IDE") from the FDA for Sepragel(TM) and commenced Phase I/II
studies of the product for use in abdominal and gynecological procedures.
See "Business -- Sepra Products
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Portfolio" and "Business -- Relationship with Genzyme."
The research and development program for the Sepra Products is conducted by
Genzyme under the terms of a development agreement between the Partnership and
Genzyme (the "Development Agreement"). Funding for the Development Agreement was
initially provided from proceeds of the offering of limited partnership
interests through which the Partnership was originally capitalized in 1989. By
the first quarter of 1994, however, all of the funds of the Partnership
available to fund the Development Agreement had been spent. Since that time,
Genzyme committed to provide funding for continuation of the research and
development of the Sepra Products on an annual basis. Until receipt of marketing
approval from the FDA for the first Sepra Product, Genzyme was required to make
such an annual funding commitment and provide such funding in order to preserve
its option (described below) to purchase the limited partnership interests in
the Partnership. Seprafilm(TM) received FDA approval in August 1996. As of March
1, 1997, Genzyme is no longer obligated to fund additional development of the
Sepra Products, and its failure to make any further funding commitment to the
Partnership would not affect its option to purchase the limited partnership
interests. However, Genzyme will continue funding development of the
Sepra Products during 1997 at a level consistent with prior years and the 1997
budget for the program. See "Business -- Relationship with Genzyme."
On January 30, 1996, Genzyme made a proposal to a special committee (the
"Special Committee") of the Board of Directors of Genzyme Development
Corporation II, a wholly-owned subsidiary of Genzyme and the general partner of
the Partnership (the "General Partner"), to purchase substantially all of the
assets of the Partnership for approximately $93 million payable in shares of
Genzyme General Division Common Stock. Negotiations between Genzyme and the
Special Committee did not result in a definitive agreement, however, and, in May
1996, Genzyme withdrew its offer. The withdrawal of the offer did not affect the
respective rights and obligations of the parties under any of the existing
agreements between the parties. See "Business -- Relationship with Genzyme."
SEPRA PRODUCTS PORTFOLIO
The Partnership's development efforts are focused on the following HA-based
products: Seprafilm(TM), Sepracoat(TM), Sepragel(TM). The Partnership has
suspended development of its other HA-based product, HAL-S(TM) synovial fluid
replacement.
Seprafilm(TM)
Seprafilm(TM) is a solid formulation of modified HA that is used to
separate and protect tissues and organs that have been damaged during surgery.
During the third quarter of 1996, the FDA granted approval to market
Seprafilm(TM) in any open abdominal or pelvic surgery. Genzyme, on behalf of the
Joint Venture, launched a broad U.S. marketing effort for Seprafilm(TM) during
the fourth quarter through the DSP sales force. DSP's U.S. sales force is
targeting the top 1,000 hospitals that do 80 percent of the targeted procedures
for Seprafilm(TM), the chiefs of surgery at key institutions and because of
their familiarity with the Product, the Seprafilm(TM) clinical investigator
groups and their associates. Genzyme has also received approval in Canada to
market Seprafilm(TM) on behalf of the Joint Venture and has received
authorization from the FDA to export the product to Canada. Test marketing in
Canada began during 1996.
Revenues from the sale of Seprafilm(TM) during 1996 were not material. For
the year ended December 31, 1996, the Joint Venture incurred net losses of
$2,479,000, primarily attributable to costs associated with the introduction of
Seprafilm(TM) to the healthcare marketplace. As of the end of February 1997, in
the United States, 476 hospitals had purchased Seprafilm(TM), an increase of 37
percent from the end of December, and the reorder rate had increased to 39
percent.
In February 1996, Seprafilm(TM) was granted the Approval of Conformity
Certificate (the "CE Mark") in accordance with the European Medical Devices
Directive. The CE Mark signifies that a product meets quality standards
necessary for marketing in the 18 countries of the European Union and the
European Economic Area. Genzyme launched Seprafilm(TM) in Europe during the
second quarter of 1996.
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Sepracoat(TM)
Sepracoat(TM) is a liquid formulation of HA designed to coat tissues and
organs during surgery and thereby reduce adhesions from indirect surgical
trauma. In January 1996, Genzyme filed a PMA to market Sepracoat(TM) for use in
abdominal, pelvic and cardiothoracic surgical procedures. In February 1997, the
FDA notified Genzyme that an advisory panel will review the PMA on May 5, 1997
and make a recommendation to the FDA regarding approval of the PMA. The panel's
recommendation will be considered in the FDA's final review of the PMA, but is
not binding on the FDA. Sepracoat(TM) was also granted the CE Mark in 1996 and
Genzyme initiated marketing efforts for Sepracoat(TM) in Europe during the
fourth quarter of 1996. Sepracoat(TM) is being marketed in Denmark, France,
Germany, Italy, the Netherlands, Sweden and the United Kingdom as a
complementary product to Seprafilm(TM).
Sepragel(TM)
Sepragel(TM) is a gel form of modified HA and, like Seprafilm(TM), is
intended to be used to separate and protect tissues and organs and thereby
reduce adhesion formation resulting from direct surgical trauma. Sepragel(TM) is
intended to be used in laparoscopic procedures and on tissue surfaces in open
surgery that are inaccessible to Seprafilm(TM). During the third quarter of
1996, Genzyme received an IDE from the FDA for Sepragel(TM) and commenced
Phase I/II studies for use in abdominal and gynecological procedures.
HAL-S(TM)
HAL-S(TM) is a liquid formulation of HA intended to be used during
arthroscopic surgery to maintain normal joint function and reduce pain and
inflammation following surgery. A clinical trial of HAL-S(TM) synovial fluid
replacement was completed in November 1995. The study evaluated patients
undergoing arthroscopic surgery for repair of meniscal tears. The data from the
study showed some improvement in the rehabilitation rate of patients who
received HAL-S(TM). In light of the relatively modest improvement and small
potential market size, however, further development of HAL-S(TM) has been
suspended.
MANUFACTURING
On behalf of the Joint Venture and for its own use, Genzyme manufactures
the starting material from which the Sepra Products are produced. Genzyme
manufactures the material at its facilities in the U.K. and ships the material
to the United States for finishing, testing, packaging and labeling. Genzyme
believes that its U.K. facilities have adequate capacity to meet its world-wide
market requirements for this starting material during the foreseeable future.
Seprafilm(TM) is produced at Genzyme's manufacturing facilities in Framingham,
Massachusetts. Genzyme has entered into a contract with a third party to provide
the final finishing and sterile filling for Sepracoat(TM) on a commercial scale.
During 1995, validation runs required for the Seprafilm(TM) and Sepracoat(TM)
PMAs were completed by Genzyme and the contractor and Genzyme's Seprafilm(TM)
facilities were inspected by the FDA. Genzyme's manufacturing plants in the
U.S. and the U.K., together with those of the third party contractor, have been
approved by the FDA and received ISO 9000 certification in 1996 to manufacture
Seprafilm(TM) and Sepracoat(TM).
MARKETING
The Partnership believes that the initial market opportunity for
Seprafilm(TM) in the U.S. comprises an estimated 3.1 million procedures
annually, consisting of 1.8 million abdominal operations and 1.3 million
gynecological
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operations. It is estimated that the Canadian market is roughly one-tenth the
size of the U.S. market. The Partnership and Genzyme believe that the number of
open abdominal and open pelvic procedures that carry a risk of postoperative
adhesion-related complications in Europe is approximately 2 million surgeries
per year.
The Sepra Products will be purchased primarily by hospitals as surgical
supplies. Accordingly, the Partnership and Genzyme believe that successful
initial market penetration and subsequent maintenance of market share for the
Sepra Products require a specialized hospital-based sales force. On behalf of
the Joint Venture, Genzyme has deployed the DSP sales force to accelerate market
introduction of the Seprafilm(TM) and Sepracoat(TM) products in the United
States and Europe. The DSP sales force consists of 110 representatives, 60 of
which are located in the United States, who market products directly to
cardiovascular, general and gynecologic surgeons and hospital purchasing
departments throughout the United States and Europe. Genzyme plans to increase
the number of DSP sales representatives in the United States to 100 by the end
of 1997. Substantial additional efforts to educate surgeons and hospital
administrators as to the benefits of these products will be required in order
for the products to penetrate target markets and gain broad market acceptance.
There can be no assurance that Genzyme will be successful in its efforts to
implement a commercialization strategy for the Sepra Products.
COMPETITION
The Sepra Products face, and will continue to face significant competition
both from other HA-based products and from non-HA-based products intended to
reduce adhesions resulting from surgical trauma. The Partnership and Genzyme
believe that the principal factor that will affect competition among products is
acceptance by surgeons, which depends, in large part, upon product performance
and price.
There are several companies that produce HA using two principal processes:
extraction from natural sources and fermentation. Although several companies are
pursuing fermentation as a method of producing HA, the Partnership and Genzyme
believe that Genzyme's proprietary fermentation production process and its
ability to create chemically modified forms of HA give it a competitive
advantage in the marketing of HA-based products for surgery.
Potential competitors of the Partnership include companies with financial,
manufacturing and marketing resources that are significantly greater than those
of the Partnership and Genzyme. Such companies may have, due to their size and
experience, a competitive advantage over the Partnership and Genzyme in the form
of greater potential funding for research and development and established drug
manufacturing capabilities and distribution channels. In addition, the products
of these potential competitors may exhibit better product performance.
RELATIONSHIP WITH GENZYME
In connection with the Partnership's unit offering in November 1989, the
Partnership entered into certain agreements with Genzyme which are summarized
below.
Cross License Agreement. Genzyme granted to the Partnership an exclusive,
royalty-free license (with the right to grant sublicenses) within the United
States and Canada (the "Territory") to use all patent and technology rights
owned or controlled by Genzyme or acquired by Genzyme necessary or materially
useful to engage in the manufacture, sale, or other disposition of the Sepra
Products for use in human clinical trials or human surgical procedures, other
than in ophthalmic surgery (the "Field of Activity").
The Partnership granted back to Genzyme an exclusive license to use all
patent and technology rights developed under or otherwise acquired during the
term of the Development Agreement (described below) for all purposes other than
use within the Field of Activity and within the Territory. The licenses to
Genzyme to use all such patent and technology rights outside of the Field of
Activity and in the Field of Activity outside the Territory and Europe are
royalty-free. The license to Genzyme to use such patents and technology rights
in the Field of Activity within Europe is royalty-bearing. Accordingly, until
the earlier of: (i) the date on which
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Genzyme exercises its rights under the Partnership Purchase Option
Agreement (described below) and (ii) December 31, 2019, the Partnership will
receive a royalty of 6% of net revenues recognized from the sale of Sepra
Products for use in the Field of Activity in Europe to the extent necessary to
allow the Partnership to pay certain projected distributions to its partners in
any year. The Partnership will also receive a royalty of 5% of all net revenues
received by Genzyme and its affiliates from the sale of non-HA-based competitive
products (defined in the Cross License Agreement) in the Field of Activity and
in the Territory. Pursuant to the European royalty provision in the Cross
License Agreement, Genzyme made royalty payments of approximately $23,000 to the
Partnership in 1996, based on net revenues from sales of Seprafilm(TM) in
Europe.
Development Agreement. The Partnership entered into the Development
Agreement with Genzyme to perform research, experimentation and development to
produce products for use in the Field of Activity. For these services, the
Partnership paid Genzyme in 1989 a non-refundable fee of $1,500,000 and also
reimbursed Genzyme for its expenditures under the Development Agreement plus a
fee equal to 10% of such expenditures, subject to a maximum expenditure of the
capital contributions to the Partnership of the General Partner and the Limited
Partners and the interest earned on such funds less the costs related to the
offering of the Partnership units and certain other commitments and expenditures
(the "Available Funds").
The Development Agreement was scheduled to terminate upon Genzyme's
expenditure of the Available Funds prior to receipt by the Partnership of FDA
approval of any Sepra Product unless Genzyme, on that occasion and annually
thereafter until receipt of such approval, contributed to the Partnership
amounts sufficient to fund the development program for the following twelve
month period. In January 1994, the Development Agreement was amended to provide
that, in lieu of contributing the necessary funds to the Partnership, Genzyme
could deliver to the Partnership an annual undertaking to continue the
development program at no expense to the Partnership for each succeeding
twelve-month period until FDA approval of any Product. Genzyme has delivered
such an undertaking to the Partnership annually since the Partnership's
Available Funds were expended in March 1994. In February 1996 Genzyme committed
to provide funding to the Partnership through February 28, 1997. Seprafilm(TM)
received FDA approval in August 1996. As of March 1, 1997, Genzyme was no longer
obligated to fund additional development of the Sepra Products. However,
Genzyme will continue such funding during 1997 at a level consistent with prior
years and the 1997 budget for the program.
Joint Venture Agreement. The Partnership and Genzyme formed the Joint
Venture in September 1989 for the purpose of manufacturing and marketing the
Sepra Products in the Field of Activity in the Territory. The Joint Venture was
not expected to engage in active business until receipt of FDA marketing
approval for a Sepra Product. Following the receipt of such approval for
Seprafilm(TM), the Joint Venture made its first commercial sale of Seprafilm(TM)
in August 1996 (the "Business Commencement Date"). The Partnership has
contributed to the Joint Venture the use of its technology and $200,000 in cash,
and Genzyme has contributed its agreement to manufacture and market the Sepra
Products, to make non-interest bearing loans to the Joint Venture in the amount
of any working capital deficiency, to make capital contributions to the extent
deemed necessary by the two venturers in connection with the business of the
Joint Venture and to allow the use of such trademarks, tradenames and logos as
the venturers shall determine to be necessary and advisable for manufacturing
and marketing the Sepra Products within the Field of Activity. The Joint Venture
purchases the products from Genzyme at cost, pursuant to a formula in the Joint
Venture Agreement.
The Joint Venture Agreement calls for the Partnership and Genzyme to
determine, following the Business Commencement Date, the allocation of profits
and losses between the parties and the level of reimbursement to Genzyme for
providing general and administrative services to the Joint Venture.
In March 1997, the Partnership and Genzyme amended and restated the Joint
Venture Agreement (as so amended and restated, the "Amended and Restated Joint
Venture Agreement") to address the matters that the original Joint Venture
Agreement provided were to be agreed upon on or about the time of first
commercial sale and to address certain other matters. The Amended and Restated
Joint Venture Agreement is retroactive to August 17, 1996, the date of first
commercial sale, and provides that:
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(1) losses generated by the Joint Venture are allocated (a) the first
$200,000 to the Partnership and then (b) 40% to the Partnership and 60% to
Genzyme, provided however, that to the extent a loss allocated to the
Partnership would, pursuant to the terms of the Partnership Agreement, be
allocated to the General Partner rather than the limited partners, such loss is
allocated 100% to Genzyme; and
(2) profits are allocated (a) the first $5,600,000 to the Partnership, (b)
the next $8,400,000 to Genzyme and (c) thereafter, 40% to the Partnership and
60% to Genzyme.
The Amended and Restated Joint Venture Agreement also provides that Genzyme
will receive no reimbursement for the general and administrative services it
provides to the Joint Venture until the first year in which the Joint Venture
generates revenues in excess of $25,000,000, at which time, Genzyme will receive
a quarterly commission equal to 10% of the Joint Venture's revenues for such
quarter. In connection with arriving at agreement on the foregoing matters, the
parties also agreed to amend the Joint Venture Agreement to provide the
Partnership with enhanced oversight mechanisms, including an audit right, and to
eliminate Genzyme's unilateral right to withdraw from the Joint Venture.
The Joint Venture will be dissolved (a) upon Genzyme's purchase of all of
the limited partnership interests, (b) if Genzyme does not exercise its option
to purchase the limited partnership interests (as described below) (i) upon the
sale, license or other disposition of all or a substantial part of its
technology by the Partnership or (ii) upon 90 days' notice by either venturer at
any time after the expiration of a one-year period commencing after Genzyme's
option to purchase the limited partnership interests expires, whichever shall
first occur (c) by operation of law, (d) upon the bankruptcy, retirement,
withdrawal or dissolution of Genzyme, (e) upon the mutual consent of Genzyme and
the Partnership, or (f) upon the election by the Partnership if Genzyme shall
fail to establish to the satisfaction of the Partnership that it is capable of
and has undertaken to manufacture the Joint Venture's requirements for the Sepra
Products for a specified period.
Marketing and Distribution Agreement and Tax Indemnification Agreement. In
connection with negotiating the Amended and Restated Joint Venture Agreement,
the Joint Venture entered into an exclusive marketing and distribution agreement
(the "Marketing and Distribution Agreement") with Genzyme, whereby Genzyme will
act as sole distributor of the Sepra Products for the Joint Venture. The Joint
Venture agreed to sell Sepra Products to Genzyme at the price at which Genzyme
is selling the applicable products to the end-user less a distributor's discount
(subject to a minimum purchase price) and also agreed to reimburse Genzyme for
certain costs incurred in connection with market introduction of the Sepra
Products. The economic terms of the Marketing and Distribution Agreement are
intended to be substantially similar to those applicable if Genzyme provided
such services in its capacity as a venturer rather than as a distributor. At the
request of a special committee of directors of the General Partner consisting of
the two directors who are not affiliated with Genzyme, Genzyme also entered into
a tax indemnification agreement (the "Tax Indemnification Agreement") with the
Partnership in which Genzyme agreed, subject to certain limitations, to
indemnify the limited partners against loss of the benefits of certain research
and development deductions certain limited partners have taken (net of potential
tax savings due to any resultant higher tax basis in the limited partnership
interests). The Tax Indemnification Agreement can be waived by the Partnership
in connection with a purchase of the Partnership by Genzyme.
Partnership Purchase Option Agreement. Under the terms of the Partnership
Purchase Option Agreement, Genzyme has an irrevocable option to purchase all of
the limited partnership interests in the Partnership for an advance payment
(subject to recoupment by Genzyme out of royalty payments in subsequent years)
per limited partnership interest equal to, at Genzyme's option, $35,000 in cash,
an equivalent amount in Genzyme General Division Common Stock (valued at a 5%
discount from the market value of such stock) or a combination of the foregoing,
and quarterly royalty payments for a period of ten years after the buy-out date
equal to 10% of product sales in the United States and Canada (and 6% of such
sales in Europe, but only to the extent necessary to meet certain projections
made in connection with the Partnership's unit offering) and 5% of any revenues
derived by Genzyme from sales
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in the United States and Canada of non-HA-based competing products (and 3% of
such sales in Europe, but only to the extent necessary to meet the projections
referred to above).
Genzyme's option to purchase the limited partnership interests is
exercisable during the 90-day period commencing on the last day of the forty-
eighth month after the first commercial sale of a Sepra Product by the Joint
Venture, but such commencement date will be accelerated to the later of: (i) two
years after first commercial sale of any Sepra Product or (ii) the date on which
the Partnership has received distributions from the Joint Venture equal to at
least 15% of the total capital contributions of the limited partners. The
Purchase Option Agreement provided that Genzyme's option would terminate if all
funds available under the Development Agreement had been spent before receipt of
FDA marketing approval for a Sepra Product was obtained, unless Genzyme funded
or obtained funds for continuation of the research and development programs for
the next twelve month period. All of the funds available to fund the Development
Agreement were depleted in March 1994. Genzyme began providing funding for the
Partnership's programs at that time and has committed to continue such funding
through 1997.
Genzyme Offer. Genzyme notified the General Partner in November 1995 that
it was interested in exploring the possibility of an acquisition of the
Partnership. In response to such notice, the Board of Directors of the General
Partner established the Special Committee, which consisted of W. Gerald Austen
and Peter Reikes, neither of whom is affiliated with Genzyme. On January 30,
1996, Genzyme made a proposal to the Special Committee offering to purchase
substantially all of the assets of the Partnership for approximately $93
million, payable in shares of Genzyme General Division Common Stock. Genzyme
withdrew its offer in May 1996 because after over a month of discussions between
Genzyme and its representatives and the Special Committee and its legal and
financial advisors, the parties remained considerably far apart on the terms for
a transaction. The withdrawal of the offer did not affect the respective rights
and obligations of the parties under any of the existing agreements between the
parties.
PATENTS AND PROPRIETARY TECHNOLOGY
Genzyme has granted to the Partnership an exclusive license to all Genzyme
patents and know-how necessary or materially useful in the manufacture, use and
sale of the Sepra Products in the United States and Canada for use in the Field
of Activity and an exclusive sublicense to all third party licenses held by
Genzyme for use in the Field of Activity and the Territory. The Partnership has
the exclusive right to sell the Sepra Products in the Territory through the
Joint Venture.
The Partnership, through the exclusive license from Genzyme, has rights to
three issued United States patents and four pending United States patent
applications that cover methods for using native hyaluronic acid solutions to
coat body tissues prior to surgical manipulation. This technology is used in
Sepracoat(TM). The Partnership, also through the exclusive license from Genzyme,
has rights to three issued United States patents and three pending United States
patent applications covering modified hyaluronic acid compositions. This
technology is used in Seprafilm(TM) and Sepragel(TM).
Various formulations and uses of HA have been the subject of numerous
issued United States patents. One such patent was upheld after re-examination by
the United States Patent Office and has been asserted against a producer of HA
for ophthalmic applications. That litigation was settled with the payment of
damages and the issuance of a license subject to the payment of royalties. That
patent also was asserted against Genzyme and other defendants but not against
the Partnership. That litigation was settled in December 1992 without any
payment by Genzyme. The patent at issue in this litigation expired in February
1996.
There can be no assurance that any other patent will not be asserted
against the Partnership or Genzyme or that additional patents concerning HA will
not be allowed or issued in the future which would require the Partnership to
obtain licenses thereunder to make, use or sell the Sepra Products. Nor can
there be any assurance as to the availability and cost of such licenses.
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GOVERNMENT REGULATION
The Sepra Products require FDA approval prior to marketing in the United
States. The Sepra Products are regulated as Class III "devices" in the United
States since they are tissue protective agents which function as physical
barriers.
Products that are classified as Class III "devices" must receive formal FDA
premarket approval before they can be sold commercially in the United States.
The first stage of obtaining formal FDA premarket approval for this class of
device is submission of an application for an IDE. The IDE permits clinical
evaluation of products on human subjects under controlled experimental
conditions by designated qualified medical institutions. The second stage of
obtaining formal FDA premarket approval is the filing of a PMA. The PMA, which
is submitted after clinical evaluations are completed under the IDE, requires a
comprehensive report of all data and information obtained by the applicant
throughout development and testing. The FDA will grant formal premarket approval
if it finds that the safety and effectiveness of the product have been
sufficiently demonstrated and that the product complies with all applicable
performance and manufacturing standards. The FDA may require further clinical
evaluation of the product, or it may grant marketing approval but restrict the
number of devices distributed or require additional patient follow-up for an
indefinite period of time.
The data submitted to the FDA for the Sepra Products also should be
sufficient to obtain marketing approval of the Sepra Products from the
appropriate regulatory authorities in Canada after appropriate submission and
review in that country. Approval to market Seprafilm(TM) in Canada was obtained
in this manner.
RESEARCH AND DEVELOPMENT COSTS
During its fiscal year ended December 31, 1994, the Partnership spent
$980,000 on research and development activities, all of which was paid to
Genzyme under the Development Agreement. The available research and development
funds in the Partnership were spent by the end of the first quarter of 1994.
ITEM 2. PROPERTIES
The Partnership itself does not own or lease any properties. The
Partnership's business is conducted at the facilities of the General Partner, at
One Kendall Square in Cambridge, Massachusetts. Under the Development Agreement,
Genzyme utilizes portions of its facilities in Framingham and Cambridge,
Massachusetts and in Haverhill, England to conduct the research and development
activities of the Partnership.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
No public or other market exists or is expected to develop for ownership
interests in the Partnership. Partnership interests are not transferable without
the consent of the General Partner and satisfaction of certain other conditions
contained in Article 8 of the Agreement of Limited Partnership (the "Partnership
Agreement"). There were approximately 766 holders of record of Class A
Partnership interests and 1 holder of Class B Partnership interests as of March
1, 1997.
There have been no cash distributions to the partners to date. Any
distributions in the future will be made by the General Partner to the partners
as soon as practicable after the end of each fiscal quarter, in proportion to
the partners' respective adjusted capital contributions, subject to certain
limitations as provided in the Partnership Agreement.
- 9 -
<PAGE> 10
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------------------------
(Dollars in thousands, except per unit data) 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Interest income ......................... $ 29 $ 38 $ 24 $ 152 $ 277
Royalty revenues ........................ 23 -- -- -- --
--------- --------- --------- --------- ---------
52 38 24 152 277
Costs and expenses:
Research and development ................ -- -- 980 7,458 7,307
Management fee .......................... -- -- 115 731 637
Interest expense ........................ -- -- -- -- 146
Amortization of organization
and start-up costs .................... -- -- 76 114 114
Administrative expenses ................. 404 124 81 229 77
--------- --------- --------- --------- ---------
404 124 1,252 8,532 8,281
--------- --------- --------- --------- ---------
Operating loss .......................... (352) (86) (1,228) (8,380) (8,004)
Equity in net loss of joint venture ..... (200) -- -- -- --
--------- --------- --------- --------- ---------
Net loss ................................ $ (552) $ (86) $ (1,228) $ (8,380) $ (8,004)
========= ========= ========= ========= =========
Net loss per partnership unit:
Limited partners -- based on 737 units .. $ (461) $ (116) $ (1,650) $ (11,257) $ (10,752)
========= ========= ========= ========= =========
General partner -- based on 1 unit ...... $(212,000) $ (860) $ (12,280) $ (83,800) $ (80,040)
========= ========= ========= ========= =========
</TABLE>
Dividends - none
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------
1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital ......................... $ (196) $ 349 $ 420 $ 1,572 $ 9,843
Total assets ............................ 159 466 618 1,983 10,084
Partners' capital ....................... (196) 349 420 1,648 10,033
</TABLE>
(1) Genzyme has funded the Partnership's research and development activities
since the first quarter of 1994, when all of the Partnership's funds available
for research and development were depleted. Genzyme spent approximately $6.0
million on the Partnership's development programs in 1996 as compared to $6.4
million in 1995 and $6.5 million in 1994. Genzyme will fund the programs through
1997 at a level consistent with prior years and the 1997 budget for the program.
- 10 -
<PAGE> 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following discussion is a summary of what the General Partner considers
to be the key factors affecting the Partnership's results of operations,
liquidity and capital resources. Forward-looking statements contained in the
following discussion represent the expectations of the General Partner as of the
filing date of this Form 10-K. The Partnership's actual results could differ
materially from those anticipated by the forward looking statements due to the
risks and uncertainties described under the caption "Factors Affecting Future
Operating Results." Partners and potential investors should consider carefully
these risks and uncertainties in evaluating the Partnership's financial
condition and results of operations.
RESULTS OF OPERATIONS
During the first quarter of 1994, all of the funds of the Partnership
available to fund development of the Partnership's products were spent. The net
loss for the year ended December 31, 1996 was $552,000 compared to losses of
$86,000 and $1.2 million for 1995 and 1994, respectively. Losses in 1996 and
1995 were attributable primarily to administrative expenses. The losses in 1994
are primarily attributable to research and development expenses plus a
management fee paid to Genzyme.
The only source of revenue in 1995 and 1994 was the interest earned on
Partnership capital contributions. For the years ended December 31, 1996, 1995
and 1994, interest earned by the Partnership amounted to $29,000, $38,000 and
$24,000, respectively.
Under the terms of the Cross License Agreement, the Partnership is entitled
to receive a royalty of 6% of net revenues recognized from European sales of the
Sepra Products under certain conditions. In 1996, the Partnership earned $23,000
of royalty revenue based on European sales of Seprafilm(TM) by Genzyme which
began in late 1995.
No research and development expenses were paid to Genzyme during 1996 or
1995 as compared to $1.1 million in 1994. Genzyme has funded the Partnership's
research and development activities since the first quarter of 1994, when all of
the Partnership's funds available for research and development were depleted.
Genzyme spent approximately $6.0 million on the Partnership's development
programs in 1996 as compared to $6.4 million in 1995 and $6.5 million in 1994.
Genzyme will fund the programs through 1997 at a level consistent with prior
years and the 1997 budget for the program.
Administrative expenses were $404,000, $124,000 and $81,000 in 1996, 1995
and 1994, respectively, and consisted primarily of administrative fees. Of the
$304,000 in legal costs incurred in 1996, $154,000 is attributable to legal
costs incurred in connection with Genzyme's offer to purchase substantially all
the assets of the Partnership which was subsequently withdrawn, $50,000 is
related to the Partnership's participation in amending and restating the joint
venture agreement with Genzyme and $100,000 represents fees for patent defense.
Amortization of organization and start-up costs that were written off over five
years from the Partnership's date of formation was completed in 1994 and,
therefore, there were no such costs in 1996 and 1995 compared to amortization
expenses of $76,000 in 1994.
FINANCIAL CONDITION
As of December 31, 1996, the Partnership had $151,000 in cash and cash
equivalents. All of such funds are reserved for general and administrative
expenses.
The Partnership's future profitability is entirely dependent upon the Joint
Venture's sales of the Sepra Products. The Joint Venture commenced operations
following receipt of FDA marketing approval of Seprafilm(TM) in August
- 11 -
<PAGE> 12
1996. Seprafilm(TM) is the first Sepra Product to obtain FDA marketing approval
and was launched in the United States during the fourth quarter of 1996.
Seprafilm(TM) is being marketed in the United States and Canada by Genzyme on
behalf of the Joint Venture.
The Partnership has contributed to the Joint Venture the use of its
technology and $200,000 in cash. Genzyme has contributed its agreement to
manufacture and market the Sepra Products, to make non-interest bearing loans to
the Joint Venture in the amount of any working capital deficiency and to make
capital contributions to the extent deemed necessary by the two venturers in
connection with the business of the Joint Venture.
The Partnership will receive the first $5.6 million in profits generated by
the Joint Venture, Genzyme will receive the next $8.4 million in profits and,
thereafter, Genzyme and the Partnership will receive 60% and 40%, respectively,
of the profits of the Joint Venture. The first $200,000 in losses will be
allocated to the Partnership and thereafter, Genzyme and the Partnership will be
allocated 60% and 40%, respectively, of the losses of the Joint Venture,
provided however, that to the extent a loss allocated to the Partnership would,
pursuant to the terms of the Partnership Agreement, be allocated to the General
Partner rather than the limited partners, such loss is allocated 100% to
Genzyme.
Revenues from the sale of Seprafilm(TM) during 1996 were not material. For
the year ended December 31, 1996, the Joint Venture incurred net losses of
$2,479,000, primarily attributable to costs associated with the introduction of
Seprafilm(TM) to the healthcare marketplace. The losses were allocated
$2,279,000 directly to Genzyme as a partner in the Joint Venture and $200,000 to
the Partnership.
In 1996, the limited partners' shares of the Partnership's losses exceeded
the remaining limited partners' capital and accordingly, approximately $206,000
of the Partnership's losses which would have been attributable to the limited
partners were re-allocated to Genzyme as the General Partner pursuant to the
terms of the Partnership Agreement.
FACTORS AFFECTING FUTURE OPERATING RESULTS
Requirements for Additional Funding.
Substantial additional funds will be required to complete the development
and clinical testing of Sepracoat(TM) and Sepragel(TM). Genzyme has funded the
research and development program for the Sepra Products on an annual basis since
the first quarter of 1994 when all of the funds of the Partnership available
to develop its products were depleted. Genzyme will continue to provide such
funding through 1997. Genzyme is not obligated to provide such funding during
1997 or to continue funding after 1997.
No Assurance of Commercial Success.
Successful commercialization of the Sepra Products will depend on many
factors, including the breadth of labeling claims allowed by the FDA, the
response of surgeons to the data from clinical trials, market acceptance of the
Sepra Products, Genzyme and the Joint Venture's ability to supply sufficient
product to meet market demand, the degree to which third party reimbursement is
available, and the number and relative efficacy of competitive products that may
subsequently enter the market.
FDA Approval.
Sepracoat(TM) and Sepragel(TM) will require additional FDA approval prior
to marketing in the United States. There can be no assurance that the FDA will
allow the labeling claims made for the Sepra Products or permit the marketing of
these products for a broad range of applications.
- 12 -
<PAGE> 13
Market Acceptance.
The successful commercialization of the Sepra Products will require that
surgeons become convinced of the efficacy of the products in reducing the
formation of postoperative adhesions and incorporate the products as standard
surgical practice in procedures where adhesions are a potential postoperative
complication. Substantial additional efforts to educate surgeons and hospital
administrators as to the benefits of these products will be required, however,
in order for the products to penetrate target markets and gain broad market
acceptance. There can be no assurance that the Sepra Products will gain such
acceptance.
Competition.
The Sepra Products will face significant competition both from other
HA-based products and from non-HA-based products intended to reduce adhesions
resulting from surgical trauma.
- 13 -
<PAGE> 14
ITEM 8. FINANCIAL STATEMENTS
10-K
Page No.
--------
Report of Independent Accountants.................................... 15
Balance Sheets - December 31, 1996 and 1995.......................... 16
Statements of Operations - For the Years Ended December 31, 1996,
1995 and 1994, and Cumulative from September 7, 1989
(date of formation) to December 31, 1996............................ 17
Statements of Cash Flows - For the Years Ended December 31, 1996,
1995 and 1994, and Cumulative from September 7, 1989
(date of formation) to December 31, 1996............................ 18
Statements of Changes in Partners' Capital - For the Period
from September 7, 1989 (date of formation) to December 31, 1996...... 19
Notes to Financial Statements......................................... 20
All schedules are omitted since the required information is inapplicable or has
been presented in the financial statements and related notes.
14
<PAGE> 15
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Genzyme Development Partners, L.P.:
We have audited the financial statements of Genzyme Development Partners,
L.P. (the "Partnership") (a development stage enterprise) listed on the index in
Item 8 of this Form 10-K. These financial statements are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described in Note A to the financial statements, the Partnership
expended all available research and development funds in 1994. Genzyme
Corporation, however, has funded the research on behalf of the Partnership since
1994 and has committed to fund such research in 1997.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Genzyme Development
Partners, L.P., (a development stage enterprise) as of December 31, 1996 and
1995 and the results of its operations, its changes in partners' capital
(deficit) and its cash flows for each of the three years in the period ended
December 31, 1996 and cumulative from September 7, 1989 (date of formation)
to December 31, 1996 in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
March 31, 1997
15
<PAGE> 16
GENZYME DEVELOPMENT PARTNERS, L.P.
(A Development Stage Enterprise)
BALANCE SHEETS
(In thousands)
December 31,
------------
1996 1995
---- ----
ASSETS
Cash and cash equivalents ................................... $ 151 $ 466
Royalties receivable from Genzyme (Note C)................... 8 --
Investment in joint venture (Note C) ........................ -- --
----- -----
Total assets ............................................. $ 159 $ 466
===== =====
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Accounts payable to Genzyme (Note C) ........................ $ 245 $ 101
Accrued expenses ............................................ 110 16
----- -----
Total liabilities ........................................ 355 117
----- -----
Commitments and contingencies (Note C) ...................... -- --
Partners' capital (deficit) (including deficit accumulated
during the development stage of $32,847):
General partner ........................................ (169) 43
Class A limited partners ............................... -- 340
Class B limited partners ............................... -- --
----- -----
(169) 383
Less: unpaid partners' capital ......................... (27) (34)
----- -----
Total partners' capital (deficit)................... (196) 349
----- -----
Total liabilities and partners' capital (deficit)... $ 159 $ 466
===== =====
The accompanying notes are an integral part of the financial statements.
16
<PAGE> 17
GENZYME DEVELOPMENT PARTNERS, L.P.
(A Development Stage Enterprise)
STATEMENTS OF OPERATIONS
(In thousands, except per unit data)
<TABLE>
<CAPTION>
Cumulative From
September 7,
For the Years 1989 (Date of
Ended December 31, Formation)
---------------------------- to
1996 1995 1994 December 31, 1996
---- ---- ---- -----------------
<S> <C> <C> <C> <C>
Interest income ............... $ 29 $ 38 $ 24 $ 1,258
Royalty revenue ............... 23 -- -- 23
--------- --------- --------- ---------
52 38 24 1,281
Operating costs and
expenses (Note C):
Retainer Fee ............... -- -- -- 1,500
Research and development
expenses ................ -- -- 980 27,060
Management Fee ............. -- -- 115 2,613
Interest expense ........... -- -- -- 933
Amortization of organization
and start-up costs ....... -- -- 76 570
Administrative expenses..... 404 124 81 1,252
--------- --------- --------- ---------
404 124 1,252 33,928
--------- --------- --------- ---------
Operating loss ................ (352) (86) (1,228) (32,647)
Equity in net loss of
joint venture .............. (200) -- -- (200)
--------- --------- --------- ---------
Net loss ...................... $ (552) $ (86) $ (1,228) $ (32,847)
========= ========= ========= =========
Net loss per partnership unit:
Limited Partners -- based
on 737 units............. $ (461) $ (116) $ (1,650) $ (43,842)
========= ========= ========= =========
General Partner -- based
on 1 unit ............... $(212,000) $ (860) $ (12,280) $(534,950)
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
17
<PAGE> 18
GENZYME DEVELOPMENT PARTNERS, L.P.
(A Development Stage Enterprise)
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Cumulative
From
September 7,
1989
(Date of
For the Years Ended December 31, Formation)
--------------------------------- to December 31,
1996 1995 1994 1996
---- ---- ---- --------------
<S> <C> <C> <C> <C>
Cash Flow for Operating
Activities:
Net loss ..................... $ (552) $ (86) $ (1,228) $(32,847)
Reconciliation of net loss to
net cash used by
operating activities:
Amortization of
organization and
start-up costs ............. -- -- 76 570
Organization and
start-up costs ........... -- -- -- (570)
Equity in net loss
of joint venture .......... 200 -- -- 200
Increase (decrease) in cash
from working capital:
Royalties receivable from
Genzyme Corporation ..... (8) -- -- (8)
Accounts payable and
accrued expenses .......... 238 (81) 137 355
Prepaid expenses .......... -- -- 37 --
-------- -------- -------- --------
Net cash used by
operating activities ...... (122) (167) (978) (32,300)
Cash Flow for
Investing Activities:
Purchases of short-term
investments .............. -- -- -- (45,220)
Sales of short-term
investments .............. -- -- -- 45,220
Investment in joint
venture .................. (200) -- -- (200)
-------- -------- -------- --------
Net cash used by
investing activities........ (200) -- -- (200)
Cash Flow from
Financing Activities:
Proceeds from issuance
of partnership units .... 7 15 -- 32,651
Issuance of note
payable - bank ........... -- -- -- 4,100
Payments on note
payable - bank ........... -- -- -- (4,100)
-------- -------- -------- --------
Net cash provided
by financing activities .... 7 15 -- 32,651
-------- -------- -------- --------
Increase (decrease) in
cash and cash equivalents ... (315) (152) (978) 151
Cash and cash equivalents
at beginning of period ...... 466 618 1,596 --
-------- -------- -------- --------
Cash and cash equivalents
at end of period ............ $ 151 $ (466) $ 618 $ 151
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
18
<PAGE> 19
GENZYME DEVELOPMENT PARTNERS, L.P.
(A Development Stage Enterprise)
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(In thousands)
<TABLE>
<CAPTION>
General Class A Class B Total
Partners' Limited Limited Unpaid Partners'
Capital Partners' Partners' Partners' Capital
(Deficit) Capital Capital Capital (Deficit)
--------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
Initial capital contribution .. $ 366 $ 36,080 $ 100 $(28,620) $ 7,926
Offering costs (Note B) ....... -- (3,856) (12) -- (3,868)
Net Loss ...................... (22) (2,166) (6) -- (2,194)
-------- -------- -------- --------- --------
Balance at December 31, 1989 344 30,058 82 (28,620) 1,864
Capital paid during 1990 ...... -- -- -- 8,336 8,336
Net Loss ...................... (60) (5,950) (16) -- (6,026)
-------- -------- -------- --------- --------
Balance at December 31, 1990 284 24,108 66 (20,284) 4,174
Capital paid during 1991 ...... -- -- -- 9,719 9,719
Net Loss ...................... (64) (6,296) (17) -- (6,377)
-------- -------- -------- --------- --------
Balance at December 31, 1991 220 17,812 49 (10,565) 7,516
Capital paid during 1992 ...... -- -- -- 10,521 10,521
Net Loss ...................... (80) (7,903) (21) -- (8,004)
-------- -------- -------- --------- --------
Balance at December 31, 1992 140 9,909 28 (44) 10,033
Capital refunded during 1993 .. -- -- -- (5) (5)
Net Loss ...................... (84) (8,271) (25) -- (8,380)
-------- -------- -------- --------- --------
Balance at December 31, 1993 56 1,638 3 (49) 1,648
Net Loss ...................... (12) (1,213) (3) -- (1,228)
-------- -------- -------- --------- --------
Balance at December 31, 1994 44 425 -- (49) 420
Capital paid during 1995 ...... -- -- -- 15 15
Net Loss ...................... (1) (85) -- -- (86)
-------- -------- -------- --------- --------
Balance at December 31, 1995 43 340 -- (34) 349
Capital paid during 1996 ...... -- -- -- 7 7
Net Loss ...................... (212) (340) -- -- (552)
-------- -------- -------- --------- --------
Balance at December 31, 1996 $ (169) $ -- $ -- $ (27) $ (196)
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
19
<PAGE> 20
GENZYME DEVELOPMENT PARTNERS, L.P.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
NOTE A - ORGANIZATION
Genzyme Development Partners, L.P. (the "Partnership"), a Delaware limited
partnership was formed in September 1989 with the objective to develop, produce
and derive income from the sale of products (the "Products" or the "Sepra
Products") intended to be used to limit the incidence and severity of
postoperative adhesions and, in arthroscopic procedures of the joints, as a
synovial fluid replacement. These Products are based on hyaluronic acid ("HA"),
a naturally occurring biopolymer with unique physical properties. In August
1996, Genzyme received marketing approval for the Partnership's first product,
Seprafilm (TM), and commenced commercial sales of Seprafilm(TM) in the U.S. on
behalf of a joint venture (the "Joint Venture" between Genzyme and the
Partnership.
The Partnership has entered into agreements (described in Note C) with Genzyme
Corporation ("Genzyme") for the development of these Products and for their
manufacture and marketing.
The General Partner of the Partnership is Genzyme Development Corporation II, a
wholly-owned subsidiary of Genzyme. The Partnership sold 735 Class A Limited
Partnership interests and two Class B Limited Partnership interests for $50,000
per interest less discounts for certain interests. Each interest was sold with
warrants to purchase 5,200 shares of Genzyme common stock. Effective December
1994, the stockholders of Genzyme approved the Genzyme Stock Proposal as
described in Genzyme's Prospectus/Proxy Statement dated November 10, 1994 to
redesignate Genzyme's Common Stock as General Division Common Stock on a two
- -for-one basis and to authorize a second class of common stock, designated as
Tissue Repair Division Common Stock. Each warrant when exercised granted the
holder two shares of General Division common stock and .135 of one share of
Tissue Repair common stock. The warrants expired in October 1996.
Profits and losses of the Partnership are generally allocated 99% to the
Limited Partners and 1% to the General Partner. After the Class A Limited
Partners have received distributions aggregating 100% of their capital
contribution to the Partnership, the Class B Limited Partner will be entitled to
receive 5% of profits and losses allocated to the Class A Limited Partners.
Losses allocable to the Limited Partners which excess of their capital
contributions to the Partnership are allocated to the General Partner. In 1996,
approximately $206,000 of losses allocable to the Limited Partners, but in
excess of their capital contribution were re-allocated to Genzyme as the
General Partner pursuant to the terms of the Partnership Agreement.
The Partnership has incurred net losses since inception and substantially all
funding, except for a cash reserve of $0.2 million for general and
administrative expenses, was spent by the end of the first quarter of 1994. The
General Partner believes that substantial additional funds will be required to
complete the development and clinical testing and commercialization of the
remaining Sepra Products other than Seprafilm(TM). Genzyme is not obligated to
provide such funding. However, Genzyme funded these activities in 1994, 1995 and
1996 and has committed to continue such funding at a level consistent with
prior years and the budget program through December 31, 1997.
On January 30, 1996, Genzyme made a proposal to a special committee of the Board
of Directors of the General Partner, offering to purchase substantially all of
the assets of the Partnership for approximately $93 million payable in shares of
Genzyme General Division Common Stock. Negotiations between Genzyme and the
special committee did not result in a definitive agreement, however, and in May
1996, Genzyme withdrew its offer. The withdrawal of the offer did not affect
the respective rights and obligations of the parties under any of the existing
agreements between the parties.
NOTE B - ACCOUNTING POLICIES
Accounting Method
The financial statements have been prepared under the accrual method of
accounting in conformity with generally accepted accounting principles.
Fiscal Year End
The General Partner has determined that the fiscal year end of the
Partnership is December 31.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates.
20
<PAGE> 21
GENZYME DEVELOPMENT PARTNERS, L.P.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
NOTE B - ACCOUNTING POLICIES (continued)
Investment in Joint Venture
As described in Note C, the Partnership and Genzyme formed a joint venture in
September 1989 that began to engage in business activities on
August 17, 1996 commencement of operations. The Partnership accounts for
its investment in the joint venture under the equity method and, therefore,
reflects its share of the joint venture's losses in its statement of
operations.
Offering Costs
Offering costs included selling commissions and related expenses
(approximately $3,300,000) for selling the Limited Partnership units, legal
fees (approximately $350,000) for providing legal opinions and preparing
agreements and documents relating to the offering of Partnership units and
various other fees and expenses relating to the offering.
Organization and Start-up Costs
Costs incurred in connection with the formation of the Partnership, which
consist principally of legal fees incurred in preparing various agreements
between the Partnership and Genzyme, were capitalized and amortized over a
five-year period beginning with the date of formation of the Partnership and
ending in 1994.
Cash and Cash Equivalents
Cash equivalents, consisting of non-government money market funds with
initial maturities of three months or less, are valued at cost plus accrued
interest which approximates market value.
Research and Development Expenses
Research and development charges are expensed as incurred.
Income Taxes
The Partnership's financial statements do not include a provision for income
taxes. Taxes, if any, are the liability of the Limited Partners and the
General Partner. Research and development expenditures have been reported as
Internal Revenue Code Section 174 deductions on the Partnership's federal
income tax return. There is, however, a possibility that the Internal Revenue
Service may contend that such amounts should be treated as capitalized costs
of obtaining and developing rights to the technology.
Uncertainties
The Partnership is subject to risks common to companies in the biotechnology
industry, including but not limited to, development by the Partnership or its
competitors of new technological innovations, protection of proprietary
technology, and compliance with FDA government regulations.
NOTE C - AGREEMENTS WITH GENZYME CORPORATION
The Partnership has entered into the following agreements with Genzyme:
Development Agreement
The Development Agreement calls for Genzyme to develop products for the
Partnership, to be used as surgical aids (the "Products") to limit the
incidence and severity of postoperative adhesions and, in arthroscopic
procedures, as a synovial fluid replacement. The Partnership was required to
reimburse Genzyme for all direct costs, a reasonable allocation of indirect
costs as they relate to the development effort and a ten percent (10%)
management fee, up to the available Partnership funds. A non-refundable
retainer fee of $1.5 million was paid by the Partnership to Genzyme when the
Partnership commenced. The General Partner has the authority to terminate the
research program at any time if it is deemed to be unfeasible or
uneconomical. Genzyme has no obligation to fund the program beyond the
available Partnership funds but has done so after the available Partnership
funds were expended in the first quarter of 1994 and has committed to provide
such funding through 1997. Genzyme spent approximately $6.0 million, $6.4
million and $6.5 million on the Partnership's development programs in 1996,
1995 and 1994, respectively, and has committed to fund the programs through
1997 on a level consistent with previous years and the 1997 budget for the
program.
Cross License Agreement
Under the Cross License Agreement, Genzyme granted the Partnership an
exclusive, royalty free license to use all patent and technology rights owned
or controlled by Genzyme to engage in the development and manufacture of the
Products. The Partnership granted to Genzyme an exclusive license to use all
patent rights and technology rights for all purposes other than use within
the Field of Activity and within the Territory.
21
<PAGE> 22
GENZYME DEVELOPMENT PARTNERS, L.P.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
NOTE C - AGREEMENTS WITH GENZYME CORPORATION (continued)
The Partnership will receive a 5% royalty on sales of non-HA based
competitive products by Genzyme within the United States and Canada.
The Partnership also granted Genzyme an exclusive license to manufacture and
market the products in Europe in exchange for a royalty of 6% of net revenues
of European sales of the Products, payable to the extent necessary for the
Partnership to pay projected distributions not otherwise funded through sales
in the Territory.
Joint Venture Agreement
The Partnership and Genzyme formed the Joint Venture in September 1989 for
the purpose of manufacturing and marketing the Sepra Products in the United
States and Canada. The Joint Venture was not expected to engage in active
business until receipt of FDA marketing approval for a Sepra Product.
Following the receipt of such approval for Seprafilm(TM), the Joint Venture
made its first commercial sale of Seprafilm(TM) in August 1996 (the "Business
Commencement Date"). The Partnership has contributed to the Joint Venture the
use of its technology and $200,000, and Genzyme has contributed its agreement
to manufacture and market the Sepra Products, to make non-interest bearing
loans to the Joint Venture in the amount of any working capital deficiency,
to make capital contributions to the extent deemed necessary by the two
venturers in connection with the business of the Joint Venture and to allow
the use of such trademarks, tradenames and logos as the venturers shall
determine to be necessary and advisable for manufacturing and marketing the
Sepra Products within the Field of Activity. The Joint Venture purchases the
products from Genzyme at cost, pursuant to a formula in the Joint Venture
Agreement.
The Joint Venture Agreement calls for the Partnership and Genzyme to
determine, following the Business Commencement Date, the allocation of
profits and losses between the parties and the level of reimbursement to
Genzyme for providing general and administrative services to the Joint
Venture.
In March 1997, the Partnership and Genzyme amended and restated the Joint
Venture Agreement (as so amended and restated, the "Amended and Restated
Joint Venture Agreement") to address the matters that the original Joint
Venture Agreement provided were to be agreed upon on or about the time of
first commercial sale and to address certain other matters. The Amended and
Restated Joint Venture Agreement is retroactive to August 17, 1996, the date
of first commercial sale, and provides that:
(1) losses generated by the Joint Venture are allocated (a) the first
$200,000 to the Partnership and then (b) 40% to the Partnership and 60% to
Genzyme, provided however, that to the extent a loss allocated to the
Partnership would, pursuant to the terms of the Partnership Agreement, be
allocated to the General Partner rather than the limited partners, such loss
is allocated 100% to Genzyme; and
(2) profits are allocated (a) the first $5,600,000 to the Partnership, (b)
the next $8,400,000 to Genzyme and (c) thereafter, 40% to the Partnership and
60% to Genzyme.
The Amended and Restated Joint Venture Agreement also provides that Genzyme
will receive no reimbursement for the general and administrative services it
provides to the Joint Venture until the first year in which the Joint Venture
generates revenues in excess of $25,000,000, at which time, Genzyme will
receive a quarterly commission equal to 10% of the Joint Venture's revenues
for such quarter. In connection with arriving at agreement on the foregoing
matters, the parties also agreed to amend the Joint Venture Agreement to
provide the Partnership with enhanced oversight mechanisms, including an
audit right, and to eliminate Genzyme's unilateral right to withdraw from the
Joint Venture.
The Joint Venture will be dissolved (a) upon Genzyme's purchase of all of the
limited partnership interests, (b) if Genzyme does not exercise its option to
purchase the limited partnership interests (as described below) (i) upon the
sale, license or other disposition of all or a substantial part of its
technology by the Partnership or (ii) upon 90 days' notice by either venturer
at any time after the expiration of a one-year period commencing after
Genzyme's option to purchase the limited partnership interests expires,
whichever shall first occur (c) by operation of law, (d) upon the bankruptcy,
retirement, withdrawal or dissolution of Genzyme, (e) upon the mutual consent
of Genzyme and the Partnership, or (f) upon the election by the Partnership
if Genzyme shall fail to establish to the satisfaction of the Partnership
that it is capable of and has undertaken to manufacture the Joint Venture's
requirements for the Sepra Products for a specified period.
22
<PAGE> 23
Condensed financial information of the Joint Venture is summarized below:
<TABLE>
<CAPTION>
Period from
August 17, 1996
(commencement
of operations)
through December 31,
(Dollars in thousands) 1996
- -------------------------------------------------------------------------------
<S> <C>
Revenue .................................................. $ 435
Operating expenses ....................................... (2,914)
Net loss ................................................. (2,479)
December 31,
(Dollars in thousands) 1996
- -------------------------------------------------------------------------------
Payable to Genzyme, net .................................. $ 2,279
Joint venturer's capital(deficit)-Genzyme ................ (2,279)
Joint venturer's capital-GDP ............................. --
</TABLE>
Marketing and Distribution Agreement and Tax Indemnification Agreement.
In connection with negotiating the Amended and Restated Joint Venture
Agreement, the Joint Venture entered into an exclusive marketing and
distribution agreement (the "Marketing and Distribution Agreement") with
Genzyme, whereby Genzyme will act as sole distributor of the Sepra Products
for the Joint Venture. The Joint Venture agreed to sell Sepra Products to
Genzyme at the price at which Genzyme is selling the applicable products to
the end-user less a distributor's discount (subject to a minimum purchase
price) and also agreed to reimburse Genzyme for certain costs incurred in
connection with market introduction of the Sepra Products. The economic terms
of the Marketing and Distribution Agreement are intended to be substantially
similar to those applicable if Genzyme provided such services in its capacity
as a venturer rather than as a distributor. At the request of a special
committee of directors of the General Partner consisting of the two directors
who are not affiliated with Genzyme, Genzyme also entered into a tax
indemnification agreement (the "Tax Indemnification Agreement") with the
Partnership in which Genzyme agreed, subject to certain limitations, to
indemnify the limited partners against loss of the benefits of certain
research and development deductions certain limited partners have taken (net
of potential tax savings due to any resultant higher tax basis in the limited
partnership interests). The Tax Indemnification Agreement can be waived by
the Partnership in connection with a purchase of the Partnership by Genzyme.
Partnership Purchase Option Agreement
The Partnership Purchase Option Agreement grants Genzyme the option to
purchase the limited partnership interests during the 90-day period
commencing on the last day of the forty-eighth month after the first
commercial sale of a Product by the Joint Venture, but such commencement date
will be accelerated to the later of two years after the first commercial sale
of a Product by the Joint Venture or after aggregate Joint Venture
distributions to the Partnership are equal to at least fifteen percent of the
total capital contribution of the limited partners. If Genzyme exercises the
Partnership Purchase Option Agreement, each Limited Partner will receive
approximately $35,000 per partnership unit, in cash, Genzyme common stock or
any combination of the two. Additionally, the Limited Partners will receive
quarterly royalty payments for a period of ten years after the buyout date.
23
<PAGE> 24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Exclusive management and control of the business of the Partnership is
vested in the General Partner. Accordingly, the following information pertains
to the directors and executive officers of the General Partner:
Name Age Position
---- --- --------
Henri A. Termeer............. 51 President and director since September
1989
W. Gerald Austen, M.D.......... 67 Director since February 1990
David J. McLachlan........... 58 Treasurer since June 1990
Alan E. Walts................ 37 Director since September 1993
Peter N. Reikes.............. 37 Director since February 1996
Directors of the General Partner are elected annually by Genzyme, its sole
stockholder, and each officer's term of office extends until the meeting of the
Board of Directors following the next annual meeting of stockholders and until a
successor is elected and qualified.
Pursuant to a voting agreement between Genzyme and PaineWebber R&D Partners
II, L.P., (the "Fund"), the holder of 15% of the Class A Limited Partnership
Interests, Genzyme has agreed to nominate and vote its shares for the election
of directors such that at least half of the directors of the General Partner
consist of persons designated by the Fund. Mr. Reikes and Dr. Austen are the
directors designated by the Fund. Directors designated by the Fund may not be
removed without the written approval of the Fund. No mechanism has been provided
to resolve a deadlock on the Board of Directors.
Mr. Termeer has served as President and a director of the General Partner
since September 1989. Mr. Termeer has been President of Genzyme since October
1983, Chief Executive Officer of Genzyme since December 1985 and Chairman of the
Board of Genzyme since May 1988. For ten years prior to joining Genzyme, Mr.
Termeer worked for Baxter Travenol Laboratories, Inc., a manufacturer of human
health care products. Mr. Termeer is Chairman of the Board of Directors of
Genzyme Transgenics Corporation and, until its acquisition by Genzyme in
December 1996, was Chairman of the Board of Neozyme II Corporation. Mr.
Termeer is also a director of Abiomed, Inc., AutoImmune Inc., Diacrin, Inc.
and GelTex Pharmaceuticals., Inc., and a trustee of Hambrecht & Quist
Healthcare Investors and Hambrecht & Quist Life Sciences Investors.
Dr. Austen has served as a director of the General Partner since February
1990. Dr. Austen currently is Surgeon-in-Chief at Massachusetts General
Hospital, a position he has held since 1969 and is also President and Chief
Executive Officer of the Massachusetts General Physicians Organization. In
addition, Dr. Austen is the Edward D. Churchill Professor of Surgery at the
Harvard Medical School. Dr. Austen is also a director of Abiomed, Inc.
Mr. McLachlan has served as Treasurer of the General Partner since June
1990. He served as Executive Vice President, Finance since September 1996. Mr.
McLachlan served as Senior Vice President, Finance from 1989 to September 1996
and has held the position of Chief Financial Officer since 1989. Prior to
joining Genzyme, he served for more than five years as Vice President of
Finance for Adams-Russell Electronics, Inc., a defense electronics
manufacturer, and Adams-Russell Co., Inc., a cable television company.
Mr. McLachlan is a director of HearX, Ltd., a company providing products
and services to the hearing impaired.
Dr. Walts has served as a director of the General Partner since September
1993 and has been employed by Genzyme since July 1986. Since September 1996 he
has been President of Genzyme's Pharmaceuticals Division and from May 1993, he
served as Vice President and General Manager of Genzyme's Pharmaceuticals
Division. Prior to that, he held various positions in Genzyme's research and
development organization, including Program Manager of the Partnership's
development program.
24
<PAGE> 25
Mr. Reikes has served as a director of the General Partner since February
1996. He is a Managing Director of the Health Care Group within the Investment
Banking Division of PaineWebber Incorporated. Mr. Reikes joined PaineWebber in
1985. Mr. Reikes is a director of the corporate general partners of Alkermes
Clinical Partners, L.P., Cephalon Clinical Partners, L.P., Gensia Clinical
Partners, L.P. and Repligen Clinical Partners, L.P.
EXCHANGE ACT SECTION 16(a) BENEFICIAL OWNERSHIP COMPLIANCE
The executive officers and directors of the General Partner are required
under Section 16(a) of the Exchange Act to file reports of ownership of
Partnership securities and changes in ownership with the Securities and Exchange
Commission. Copies of those reports must be furnished to the Company.
Based solely on a review of the copies of reports furnished to the
Partnership and written representations that no other reports were required, the
General Partner believes that during 1996 the executive officers and directors
of the General Partner complied with all applicable Section 16(a) filing
requirements, except that Mr. Reikes reported on March 4, 1997 a Form 3 which
was due in February 1996.
ITEM 11. EXECUTIVE COMPENSATION
The directors and officers of the General Partner other than Dr. Austen,
who is paid $2,500 for each meeting of the Board of Directors, do not receive
any compensation or benefits from the Partnership.
25
<PAGE> 26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of the Partnership's securities by persons known to the Partnership to be
beneficial owners of more than 5% of any class of Partnership interests. No
directors or officers of the Partnership own any securities of the Partnership.
Title Amount and Nature of Percentage
of Class Beneficial Owner Beneficial Ownership of Class
-------- ---------------- -------------------- ----------
General Partner Genzyme Development One General 100.0%
Interest Corporation II Partner Interest
One Kendall Square
Cambridge, MA 02139
Class B Limited PaineWebber Development Two Class B 100.0%
Partnership Interest Corporation Limited Partner
1285 Avenue of the Americas Interests
New York, NY 10019
Class A Limited PaineWebber R&D 111 Class A 15.1%
Partnership Interest Partners II, L.P. Limited Partner
1285 Avenue of the Americas Interests
New York, NY 10019
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Termeer and Mr. McLachlan are executive officers of Genzyme. The
Partnership is a party to certain agreements with Genzyme, the contents
of which are summarized in Part I, Item 1 of this report under the caption
"Relationship with Genzyme".
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The financial statements are listed under Item 8 of this Report.
2. Financial Statements Schedules
None.
3. Exhibits
The exhibits are listed below under Part IV, Item 14(c) of this
report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
December 31, 1996.
(c) Exhibits
26
<PAGE> 27
Exhibit No. Description
- ----------- -----------
3 Agreement of Limited Partnership dated as of September 13, 1989
between Genzyme Development Corporation II, as General Partner,
and each of the Limited Partners named therein. Filed as Exhibit
10(aa) to the Registration Statement of Genzyme Corporation on
Form S-4, File No. 33-32343, and incorporated herein by
reference.
10.1 Cross License Agreement dated as of September 13, 1989 between
Genzyme Corporation and Genzyme Development Partners, L.P. Filed
as Exhibit 10(bb) to Genzyme's Registration Statement on Form
S-4, File No. 33-32343, and incorporated herein by reference.
10.2 Development Agreement dated as of September 13, 1989 between
Genzyme Corporation and Genzyme Development Partners, L.P. Filed
as Exhibit 10(cc) to Genzyme's Registration Statement on Form
S-4, File No. 33-32343, and incorporated herein by reference.
10.3 Partnership Purchase Option Agreement dated as of September 13,
1989 between Genzyme Corporation, Genzyme Development Corporation
II, Genzyme Development Partners, L.P., each Class A Limited
Partner and the Class B Limited Partner. Filed as Exhibit 10(dd)
to Genzyme's Registration Statement on Form S-4, File No.
33-32343, and incorporated herein by reference.
10.4 Partnership Purchase Agreement, undated and unexecuted, between
Genzyme Corporation, Genzyme Development Corporation II, Genzyme
Development Partners, L.P., each Class A Limited Partner and the
Class B Limited Partner, as the case may be. Filed as Exhibit
10(ee) to Genzyme's Registration Statement on Form S-4, File No.
33-32343, and incorporated herein by reference.
10.5 Joint Venture Agreement dated as of September 13, 1989 between
Genzyme Corporation and Genzyme Development Partners, L.P. Filed
as Exhibit 10(ff) to Genzyme's Registration Statement on Form
S-4, File No. 33-32343, and incorporated herein by reference.
10.6 Amendment No. 1 to Development Agreement dated January 4, 1994
between Genzyme Corporation and Genzyme Development Partners,
L.P. Filed as Exhibit 10.14 to Genzyme's Form 10-K for 1993, File
No. 0-14680, and incorporated herein by reference.
10.7 Notice dated January 4, 1994 from Genzyme Corporation to Genzyme
Development Partners, L.P. Filed as Exhibit 10.15 to Genzyme
Corporation's Form 10-K for 1993, File No. 0-14680, and
incorporated herein by reference.
10.8 Notice dated January 13, 1995 from Genzyme Corporation to Genzyme
Development Partners, L.P. Filed as Exhibit 10.16 to Genzyme
Corporation's Form 10-K for 1994, File No. 0-14680, and
incorporated herein by reference.
10.9 Notice dated February 22, 1996 from Genzyme Corporation to
Genzyme Development Partners, L.P. Filed as Exhibit 10.17 to
Genzyme Corporation's Form 10-K for 1995, File No. 0-14680, and
incorporated herein by reference.
99 Financial statements of Genzyme Ventures II for the year ended
December 31, 1996. Filed herewith.
27.1 Financial Data Schedule. Filed herewith.
27
<PAGE> 28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned.
GENZYME DEVELOPMENT PARTNERS L.P.
By: GENZYME DEVELOPMENT CORPORATION II,
General Partner
Date: March 31, 1997 By:/s/ David J. McLachlan
----------------------
David J. McLachlan
Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the date indicated.
Signature Title Date
- --------- ----- ----
/s/ Henri A. Termeer Director and Principal March 31, 1997
- ------------------------- Executive Officer
Henri A. Termeer
/s/ David J. McLachlan Principal Financial and March 31, 1997
- ------------------------- Accounting Officer
David J. McLachlan
/s/ W. Gerald Austen Director March 31, 1997
- -------------------------
W. Gerald Austen
/s/ Peter N. Reikes Director March 31, 1997
- -------------------------
Peter N. Reikes
/s/ Alan E. Walts Director March 31, 1997
- -------------------------
Alan E. Walts
28
<PAGE> 29
Exhibit Index
Exhibit Page
No. Description No.
--- ----------- ---
3 Agreement of Limited Partnership dated as of September
13, 1989 between Genzyme Development Corporation II, as
General Partner, and each of the Limited Partners named
therein. Filed as Exhibit 10(aa) to the Registration
Statement of Genzyme Corporation on Form S-4, File No.
33-32343, and incorporated herein by reference.
10.1 Cross License Agreement dated as of September 13, 1989
between Genzyme Corporation and Genzyme Development
Partners, L.P. Filed as Exhibit 10(bb) to Genzyme's
Registration Statement on Form S-4, File No. 33-32343,
and incorporated herein by reference.
10.2 Development Agreement dated as of September 13, 1989
between Genzyme Corporation and Genzyme Development
Partners, L.P. Filed as Exhibit 10(cc) to Genzyme's
Registration Statement on Form S-4, File No. 33-32343,
and incorporated herein by reference.
10.3 Partnership Purchase Option Agreement dated as of
September 13, 1989 between Genzyme Corporation, Genzyme
Development Corporation II, Genzyme Development
Partners, L.P., each Class A Limited Partner and the
Class B Limited Partner. Filed as Exhibit 10(dd) to
Genzyme's Registration Statement on Form S-4, File No.
33-32343, and incorporated herein by reference.
10.4 Partnership Purchase Agreement, undated and unexecuted,
between Genzyme Corporation, Genzyme Development
Corporation II, Genzyme Development Partners, L.P.,
each Class A Limited Partner and the Class B Limited
Partner, as the case may be. Filed as Exhibit 10(ee) to
Genzyme's Registration Statement on Form S-4, File No.
33-32343, and incorporated herein by reference.
10.5 Joint Venture Agreement dated as of September 13, 1989
between Genzyme Corporation and Genzyme Development
Partners, L.P. Filed as Exhibit 10(ff) to Genzyme's
Registration Statement on Form S-4, File No. 33-32343,
and incorporated herein by reference.
10.6 Amendment No. 1 to Development Agreement dated January
4, 1994 between Genzyme Corporation and Genzyme
Development Partners, L.P. Filed as Exhibit 10.14 to
Genzyme's Form 10-K for 1993, File No. 0-14680, and
incorporated herein by reference.
10.7 Notice dated January 4, 1994 from Genzyme Corporation
to Genzyme Development Partners, L.P. Filed as Exhibit
10.15 to Genzyme Corporation's Form 10-K for 1993, File
No. 0-14680, and incorporated herein by reference.
10.8 Notice dated January 13, 1995 from Genzyme Corporation
to Genzyme Development Partners, L.P. Filed as Exhibit
10.16 to Genzyme Corporation's Form 10-K for 1994, File
No. 0-14680, and incorporated herein by reference.
10.9 Notice dated February 22, 1996 from Genzyme Corporation
to Genzyme Development Partners, L.P. Filed as Exhibit
10.17 to Genzyme Corporation's Form 10-K for 1995, File
No. 0-14680, and incorporated herein by reference.
99 Financial Statements of Genzyme Ventures II
for the year ended December 31, 1996. Filed herewith.
27.1 Financial Data Schedule. Filed herewith.
29
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Genzyme Development Partners, L.P. and is qualified in
its entirety by reference to such financial statements as included in the Annual
Report on Form 10-K for 1996 for Genzyme Development Partners, L.P.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 151
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 159
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 159
<CURRENT-LIABILITIES> 355
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (196)
<TOTAL-LIABILITY-AND-EQUITY> 159
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 404
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (552)
<INCOME-TAX> 0
<INCOME-CONTINUING> (552)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (522)
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0
<FN>
<F1>Genzyme Development Partners, L.P. is a Delaware limited Partnership. Net
earnings or loss are reported per partnership unit instead of per share. For
the year ended December 31, 1996, the Partnership's net loss was allocated $461
per limited partnership unit (737 units in total) and $212,000 to the General
Partner (1 unit).
</FN>
</TABLE>
<PAGE> 1
Exhibit 99
REPORT OF INDEPENDENT ACCOUNTANTS
To the Venturers of Genzyme Ventures II:
We have audited the balance sheet of Genzyme Ventures II (the "Joint
Venture") as of December 31, 1996 and the statements of operations, cash flows
and venturers' capital (deficit) for the period from August 17, 1996
(commencement of operations) to December 31, 1996. These financial statements
are the responsibility of the Joint Venture's management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Joint Venture, as
of December 31, 1996 and the results of its operations, its changes in
Venturers' capital (deficit) and its cash flows for the period from August 17,
1996 (commencement of operations) to December 31, 1996 in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
March 31, 1997
30
<PAGE> 2
GENZYME VENTURES II
<TABLE>
BALANCE SHEET
(In thousands)
<CAPTION>
December 31,
1996
------------
<S> <C>
ASSETS
Cash ............................................................. $ 0
=======
LIABILITIES AND VENTURERS' CAPITAL (DEFICIT)
Accounts payable to Genzyme (Note D) ............................. $ 2,279
Commitments and contingencies (Note D) ........................... --
Venturers' capital:
Genzyme Corporation.......................................... (2,279)
Genzyme Development Partners, L.P. .......................... --
-------
Total Venturers' capital (deficit) ............................... (2,279)
-------
Total liabilities and Venturers' capital (deficit) ............... $ 0
=======
</TABLE>
The accompanying notes are an integral part of the financial statements.
31
<PAGE> 3
GENZYME VENTURES II
STATEMENT OF OPERATIONS
(In thousands)
Period from
August 17, 1996
(commencement
of operations)
to
December 31,
1996
------------
Net product sales ..................... $ 435
Operating costs and expenses:
Cost of products sold ............... (234)
Selling and marketing expenses....... (2,680)
-------
(2,914)
-------
Net loss .............................. $(2,479)
=======
The accompanying notes are an integral part of the financial statements.
32
<PAGE> 4
GENZYME VENTURES II
STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the
Period from
August 17, 1996
(commencement of
operations)
to
December 31,
1996
-------------
<S> <C>
Cash Flow for Operating Activities:
Net loss ...................................................... $(2,479)
Reconciliation of net loss to net cash used by
operating activities:
Increase in payable to Genzyme Corporation .................... 2,279
-------
Net cash used by operating activities ........................ (200)
Cash Flow from Financing Activities:
Capital contributed by GDP .................................. 200
-------
Net cash provided by financing activities ..................... 200
-------
Increase (decrease) in cash ..................................... --
Cash at beginning of period ..................................... --
-------
Cash at end of period ........................................... $ --
=======
</TABLE>
The accompanying notes are an integral part of the financial statements.
33
<PAGE> 5
GENZYME VENTURES II
<TABLE>
STATEMENT OF CHANGES IN VENTURERS' CAPITAL (DEFICIT)
(In thousands)
<CAPTION>
Genzyme
Development
Partners, Genzyme Total
L.P. Corporation Venturers'
Capital Capital Capital (Deficit)
------- ------- -----------------
<S> <C> <C> <C>
Balance as of August 17, 1996
(commencement of operations) ........ $ -- $ -- $ --
Capital contribution.................. 200 -- 200
Net Loss.............................. (200) (2,279) (2,479)
---- ------- -------
Balance at December 31, 1996....... $ -- $(2,279) $(2,279)
==== ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
34
<PAGE> 6
GENZYME VENTURES II
NOTES TO FINANCIAL STATEMENTS
NOTE A - ORGANIZATION
Genzyme Development Partners, L.P. ("GDP") and Genzyme Corporation ("Genzyme")
formed a joint venture, Genzyme Ventures II (the "Joint Venture"), under
the terms and provisions of the Delaware Uniform Partnership Act, in September
1989 for the purpose of manufacturing and marketing GDP's surgical products (the
"Sepra(TM) Products" or the "Products") in the United States and Canada for use
in human clinical trials or human surgical procedures, other than in ophthalmic
surgery. These Products are intended to be used to limit the incidence and
severity of postoperative adhesions and, in arthroscopic procedures of the
joints, as a synovial fluid replacement and are based on hyaluronic acid
("HA"), a naturally occurring biopolymer with unique physical properties.
GDP has contributed its technology and $0.2 million to the Joint Venture
Genzyme has contributed its agreement to manufacture and market the Surgical
Products, to make non-interest bearing loans to the Joint Venture in the
amount of any working capital deficiency, to make capital contributions to the
extent deemed necessary by GDP and Genzyme in connection with the business of
the Joint Venture and to allow the use of such trademarks, tradenames and
logos as GDP and Genzyme shall determine to be necessary and advisable for
manufacturing and marketing the Products within the United States and Canada. In
August 1996, Genzyme received marketing approval for GDP's first product,
Seprafilm (TM), and commenced commercial sales of Seprafilm(TM) in the U.S. on
behalf of the Joint Venture on August 17, 1996 (commencement of operations).
NOTE B - JOINT VENTURE ACCOUNTING POLICIES
Accounting Method
The financial statements have been prepared under the accrual method of
accounting in conformity with generally accepted accounting principles.
Fiscal Year End
GDP and Genzyme, as joint venturers, have determined that the fiscal year
end of the Joint Venture is December 31.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates.
Revenue Recognition
Revenues and corresponding cost of sales from product sales are recognized
when goods are shipped by Genzyme to the end customer as per the Amended and
Restated Joint Venture Agreement (See Note C).
Income Taxes
The Joint Venture's financial statements do not include a provision for
income taxes. Taxes, if any, are the liability of GDP and Genzyme, as
partners.
Uncertainties
The Joint Venture is subject to risks common to companies in the
biotechnology industry, including but not limited to, development by its
competitors of new technological innovations, protection of proprietary
technology, health care cost containment initiatives, product liability and
compliance with the government regulations, including those of the U.S.
Department of Health and Human Services and the U.S. Food and Drug
Administration. In addition, the Joint Venture is dependent upon Genzyme's
ability to produce and market the Products.
35
<PAGE> 7
NOTE C - JOINT VENTURE AGREEMENT BETWEEN GDP AND GENZYME CORPORATION
GDP and Genzyme formed a joint venture, Genzyme Ventures II in September 1989
for the purpose of manufacturing and marketing the Sepra Products in the United
States and Canada for use in human clinical trials or human surgical procedures,
other than in ophthalmic surgery. In March 1997, Genzyme and GDP reached
agreement concerning the operation of and allocations of profits and losses from
the Joint Venture. Under the terms of these agreements, Genzyme purchases
product from the Joint Venture for resale by Genzyme as sole distributor for the
Joint Venture. Genzyme purchases the products from the Joint Venture at
Genzyme's price to the end-user less a distributor's discount (subject to a
minimum price) and receives reimbursement for certain costs incurred in
connection with the market introduction of the Sepra Products. Genzyme is not
entitled to reimbursement for general and administrative services it provides to
the Joint Venture until the first year in which the Joint Venture generates more
than $25 million in revenues, at which time Genzyme will receive a quarterly
commission for general and administrative services in an amount equal to 10% of
the Joint Venture's gross revenues. Pursuant to the terms of the Amended and
Restated Joint Venture Agreement GDP will receive the first $5.6 million in
profits generated by the Joint Venture, Genzyme will receive the next $8.4
million in profits and, thereafter, Genzyme and GDP will receive 60% and 40%
share, respectively, in the profits of the Joint Venture. The first $200,000 of
the Joint Venture's losses are allocated to GDP and thereafter losses are
allocated 40% to GDP's 60% to Genzyme except to the extent that any issues
allocable to GDP would result in the allocation of such loss to Genzyme as the
General Partner of GDP. In such an event, 100% of the losses, in excess of
$200,000 are allocated to Genzyme. These financial statements reflect the terms
of the Amended and Restated Joint Venture Agreement.
GDP has contributed its technology and $0.2 million to the Joint Venture
and Genzyme has contributed its agreement to manufacture and market the Sepra
Products, to make non-interest bearing loans to the Joint Venture in the amount
of any working capital deficiency, to make capital contributions to the extent
deemed necessary by the two venturers in connection with the business of the
Joint Venture and to allow the use of such trademarks, tradenames and logos as
the venturers shall determine to be necessary and advisable for manufacturing
and marketing the Sepra Products within the United States and Canada. The Joint
Venture began to engage in active business after receipt of FDA marketing
approval for Seprafilm(TM) on August 17, 1996 (commencement of operations). For
the period from August 17, 1996 (commencement of operations) to December 31,
1996, the Joint Venture earned revenues of $0.4 million from the sale of Sepra
Products and incurred net losses of $2.5 million, primarily attributable to
costs associated with the introduction of the Sepra Products to the healthcare
marketplace. For the period from August 17, 1996 (commencement of operations)
to December 31, 1996, pursuant to the terms of the Amended and Restated Joint
Venture Agreement which is retroactive to August 17, 1996, $200,000 of the
Joint Venture's losses have been allocated to GDP and the remaining $2,279,000
of losses have been allocated to Genzyme.
NOTE D - JOINT VENTURE CAPITAL
In 1996, GDP contributed $200,000 to the Joint Venture and Genzyme funded the
operating losses of the Joint Venture.
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