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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, 1998 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 Identification No.)
incorporation or organization)
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
------------------- -------------------
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 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K 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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NOTE REGARDING FORWARD-LOOKING STATEMENTS:
This Annual Report on Form 10-K for Genzyme Development Partners, L.P. (the
"Partnership") contains forward-looking statements, including 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 adequate 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 ("FDA") and other agencies regarding the Partnership's
products and 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) funding
of the Partnership's general and administrative expenses and 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 in this Form 10-K.
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PART I
ITEM 1. BUSINESS
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 incidence and severity of postoperative
adhesions. 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. Studies have shown that over
90% of patients develop adhesions after abdominal and pelvic 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.
Genzyme Corporation ("Genzyme"), on behalf of Genzyme Ventures II, a
joint venture between the Partnership and Genzyme formed to manufacture and
market the Partnership's products (the "Joint Venture"), launched Seprafilm(R)
Bioresorbable Membrane broadly in the United States during the fourth quarter of
1996 after receipt of approval from the FDA in August 1996 to market the
Seprafilm(R) product in any open abdominal or pelvic surgery. The Partnership is
entitled to receive a royalty on European sales of the Sepra Products under
certain conditions. The Partnership does not share in proceeds from sales of
Sepra Products outside of North America and Europe. See "Business - Relationship
with Genzyme."
Genzyme has no remaining contractual obligation to fund additional
development of the Sepra Products. However, Genzyme currently intends to
continue funding development of the Sepra Products during 1999 at a level
consistent with prior years and the 1999 budget for the program. In addition,
Genzyme currently intends to fund any administrative expenses in excess of the
Partnership's available cash in 1999. See "Business - Relationship with
Genzyme."
Seprafilm(R) is a registered trademark of Genzyme, Sepracoat(TM),
Sepragel(TM) and Sepramesh(TM) are trademarks of Genzyme.
Sepra Products Portfolio
Seprafilm(R) Bioresorbable Membrane
Seprafilm(R) Bioresorbable Membrane is a solid formulation of modified
hyaluronic acid ("HA") that is used to separate and protect tissues and organs
that have been damaged during surgery. It is the only product approved by the
FDA that is clinically proven to reduce the incidence, extent and severity of
postsurgical adhesions in the abdomen and pelvis. To build further clinical
evidence of the efficacy of Seprafilm(R) Bioresorbable Membrane, Genzyme has
initiated a 25-center, 1,700-patient clinical trial to test the ability of the
Seprafilm(R) product to reduce the incidence of bowel obstructions. The study
will track patient outcomes for two years after surgery. Seprafilm(R)
Bioresorbable Membrane received European CE Mark approval for use in reducing
the incidence of adhesions following cardiac surgery in the first quarter of
1999.
Seprafilm(R) II Adhesion Barrier
Seprafilm(R) II Adhesion Barrier is a modified form of Seprafilm(R)
Bioresorbable Membrane designed to have increased plasticity and, thus, improved
handling and overall ease of use. Seprafilm(R) II Adhesion Barrier is currently
marketed in Europe for use in open and laproscopic surgery to reduce the
incidence of postoperative abdominal and pelvic adhesions. In the United States,
the FDA has mandated clinical efficacy trials for the use of the Seprafilm(R) II
product. Genzyme intends to initiate a clinical trial in abdominal surgery in
the second quarter of 1999.
Genzyme is also developing Seprafilm(R) II Adhesion Barrier for use in
open-heart surgery. Genzyme plans to initiate a clinical trial of the
Seprafilm(R) II product in infants undergoing multi-stage procedures for repair
of congenital heart defects beginning in the second quarter of 1999. Genzyme
plans to use the Seprafilm(R) II product at the first operation and evaluate
adhesion formation at the second operation, which is generally scheduled four to
six months later. While proof of adhesion reduction necessitates using a
pediatric model, Genzyme is working with the FDA to develop a clinical strategy
that may allow for approval of use in both adult and pediatric cardiac surgery.
Sepracoat(TM) Coating Solution
Sepracoat(TM) Coating Solution is a liquid formulation of HA. Genzyme
currently markets the Sepracoat(TM) product in Europe. Genzyme ceased
development of Sepracoat(TM) Coating Solution for the U.S. market as a result of
the recommendation of an advisory panel to the FDA in 1997 that Genzyme not be
granted approval to market Sepracoat(TM) Coating Solution for the reduction of
adhesions in abdominal and pelvic surgery. Genzyme is conducting pilot studies
of the Sepracoat(TM) product to determine whether it helps restore bowel
function more quickly after colorectal surgery. Genzyme also plans to initiate
a pilot clinical trial in the second quarter of 1999 to determine whether
Sepracoat(TM) Coating Solution helps prevent atrial fibrillation when applied
during cardiac surgery.
Sepragel(TM) Bioresorbable Gel
Sepragel(TM) Bioresorbable Gel is a gel-based anti-adhesion product
intended to be used in laparoscopic procedures and on tissue surfaces in open
surgery that
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are inaccessible to Seprafilm(R) Bioresorbable Membrane. Genzyme expects to
initiate clinical trials of an alternative formulation of the Sepragel(TM)
product in the fourth quarter of 1999.
The Sepramesh(TM) Product
Genzyme is developing the Sepramesh(TM) product, a mesh product that is
coated with sodium hyaluronate foam for use in hernia repairs and other soft
tissue repairs such as bladder neck suspensions. Because this product would be
similar to current mesh products on the market, Genzyme believes that the FDA is
not likely to require clinical trials of the product. Genzyme expects to receive
FDA 510(k) marketing clearance for the Sepramesh(TM) product in late 1999.
Seprafilm(R) Applicator
Genzyme is developing a device that will help deliver Seprafilm(R) II
Adhesion Barrier into areas of the body that are difficult to reach. Genzyme
plans to conduct clinical trials designed to test the Seprafilm(R) II product
and the Seprafilm(R) applicator in laparoscopic procedures.
New Sepra Indications
Genzyme believes that its antiadhesion technologies will have many
applications beyond general and gynecological surgery. Genzyme is currently
investigating its antiadhesion products for possible use in sinus,
cardiovascular and orthopedic surgery.
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
worldwide market requirements for this starting material during the foreseeable
future. Seprafilm(R) Bioresorbable Membrane is produced at Genzyme's
manufacturing facilities in Framingham, Massachusetts. Genzyme engaged a third
party to provide the final finishing and sterile filling for Sepracoat(TM)
Coating Solution on a commercial scale for European sales. During 1995,
validation runs required for the Seprafilm(R) Bioresorbable Membrane and
Sepracoat(TM) Coating Solution Pre-Market Approval applications ("PMA") were
completed by Genzyme and the contractor and Genzyme's Seprafilm(R) 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(R)
Bioresorbable Membrane and Sepracoat(TM) Coating Solution.
Marketing
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 a sales force to accelerate market
introduction of the Sepra Products in the United States and Europe. Genzyme's
surgical products sales force markets products directly to cardiovascular,
general and gynecologic surgeons and hospital purchasing departments throughout
the United States and Europe. Colorectal surgery is the most significant market
for Seprafilm(R) Bioresorbable Membrane because postsurgical adhesions
frequently cause complications after these types of procedures. Therefore, the
primary customers are the 1,000 board-certified colorectal surgeons in the
United States. To improve market coverage and efficiency while minimizing costs,
Genzyme has entered into an agreement with Fresenius AG under which Fresenius
will distribute and market the Sepra Products in Germany, Austria, Switzerland
and Luxembourg. Genzyme established a similar collaboration with Kaken
Pharmaceutical Co., Ltd. to market Seprafilm(R) Bioresorbable Membrane in Japan.
In addition to the use of a specialized sales force and strategic distribution
and marketing agreements, substantial additional efforts to educate surgeons and
hospital administrators as to the desirability of reducing the incidence and
extent of postoperative adhesions and the benefits of anti-adhesion products
will be required in order for the Sepra Products to penetrate target markets and
gain broad market acceptance. There can be no assurance that Genzyme's
commercialization strategy for the Sepra Products will be successful.
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, safety 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
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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. The summaries below are qualified in their entirety by the
actual agreements, which are included as exhibits to this Annual Report on Form
10-K.
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 both within the Field of Activity and within the Territory. The licenses to
Genzyme to use all such patent and technology rights (i) outside of the Field of
Activity and (ii) in the Field of Activity but 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 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 is also entitled to
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, the
Partnership recorded royalty revenue of approximately $145,000, $51,000 and
$23,000 in 1998, 1997 and 1996, respectively, based on net revenues from sales
of Sepra Products in Europe, which began in late 1995.
Development Agreement
The Partnership entered into a 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 $1.5 million 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. The Available Funds were expended in the first quarter of 1994. 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 Sepra Product. Genzyme delivered such an undertaking to the
Partnership annually from when the Partnership's Available Funds were expended
in March 1994 until February 1996. Seprafilm(R) Bioresorbable Membrane received
FDA approval in August 1996. As of March 1, 1997, Genzyme was no longer
obligated to fund additional development of the Sepra Products. Genzyme intends
to continue such funding during 1999 at a level consistent with prior years and
the 1999 budget for the program as well as the Partnership's general and
administrative expenses in excess of the Partnership's available cash in 1999.
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(R) Bioresorbable Membrane,
the Joint Venture made its first commercial sale of the Seprafilm(R) product in
August 1996 (the "Business Commencement Date"). Genzyme has contributed $1.5
million to the Partnership. The Partnership has contributed to the Joint Venture
the use of its technology and $1.7 million 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 Joint Venture 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.
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The original Joint Venture Agreement called 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 $5.6 million to the
Partnership, (b) the next $8.4 million 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 million, 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.
Marketing and Distribution Agreement
In connection with negotiating the Amended and Restated Joint Venture
Agreement, the Joint Venture and Genzyme entered into an exclusive marketing
and distribution agreement (the "Marketing and Distribution Agreement") whereby
Genzyme acts 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 sells 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 that would be applicable if
Genzyme provided such services in its capacity as a venturer rather than as a
distributor.
Tax Indemnification Agreement
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 common
stock (valued at a 5% discount from the market value of such stock) or a
combination of the two, and quarterly royalty payments for a period of ten years
after the buy-out date equal to 10% of product sales in the Territory (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 in the Territory 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 August 31, 2000, but such
commencement date may be accelerated to the last day of the first month in which
the Partnership has received distributions from the Joint Venture in an
aggregate amount of at least $5.5 million. The Partnership has received no such
distributions from the Joint Venture as of December 31, 1998, and none are
anticipated for 1999.
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, through the exclusive license from Genzyme, has rights
to issued United States patents and pending United States patent applications
covering modified HA compositions. The Partnership, also through the exclusive
license from Genzyme, also has rights to issued United States
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patents and pending United States patent applications that cover methods for
using native HA solutions to coat body tissues prior to surgical manipulation.
Various formulations and uses of HA have been the subject of numerous
issued United States patents, one of which was previously unsuccessfully
asserted against Genzyme. 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.
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 investigational device
exemption ("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.
A device (other than a Class III device) which is proved to be
substantially equivalent to a device marketed prior to May 28, 1976, when
government regulations for devices were first introduced, can be marketed after
approval of a 510(k) application rather than the filing of an IDE and a PMA. The
510(k) application must contain a description of the device, its methods of
manufacture and quality control procedures and the results of testing to
demonstrate that the device is substantially equivalent to the device already
marketed.
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(R) Bioresorbable Membrane
in Canada was obtained in this manner.
Research and Development Costs
During its fiscal year ended December 31, 1998, the Partnership spent
approximately $8.4 million on research and development activities, all of which
was funded by Genzyme.
Employees
The Partnership does not have any employees. The Partnership's business
is conducted under various agreements with Genzyme. See Note C to the Genzyme
Development Partners, L.P. Financial Statements set forth under Item 8 of this
Form 10-K.
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 767 holders of record of Class A
Partnership interests and 1 holder of Class B Partnership interests as of March
1, 1999.
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.
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<TABLE>
<CAPTION>
ITEM 6. SELECTED FINANCIAL DATA
FOR THE YEARS ENDED DECEMBER 31,
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(DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Royalty revenues................................ $ 145 $ 51 $ 23 $ - $ -
Costs and expenses:
Research and development (1).................. - - - - 980
Management fee................................ - - - - 115
Amortization of organization and
start-up costs............................... - - - - 76
Administrative expenses....................... 93 154 404 124 81
--------- --------- --------- --------- --------
Total operating costs and expenses........ 93 154 404 124 1,252
--------- --------- --------- --------- --------
Operating income (loss)......................... 52 (103) (381) (124) (1,252)
Other income (expenses):
Equity in net loss of joint venture........... (592) (908) (200) - -
Investment income............................. 3 25 29 38 24
--------- --------- --------- --------- --------
Total other income (expenses)............. (589) (883) (171) 38 24
--------- --------- --------- --------- --------
Net loss........................................ $ (537) $ (986) $ (552) $ (86) $ (1,228)
========= ========= ========= ========= ========
Net loss per partnership unit:
Limited partners -- based on 737 units (2)...... $ 0 $ 0 $ (461) $ (116) $ (1,650)
========== ========= ========= ========= ========
General partner -- based on 1 unit.............. $(537,000) $(986,000) $(212,000) $ (860) $(12,280)
========= ========= ========= ========= ========
There were no cash dividends paid.
DECEMBER 31,
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(DOLLARS IN THOUSANDS) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
Working capital................................... $(219) $ (274) $(196) $349 $420
Total assets...................................... 187 631 159 466 618
Partners' capital (deficit)....................... (219) 318 (196) 349 420
</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. Since that time, Genzyme spent
approximately $8.4 million on the Partnership's development programs in 1998,
$7.3 million in 1997, $6.0 million in 1996, $6.4 million in 1995 and $6.5
million in 1994. Genzyme currently intends to fund the programs through 1999 at
a level consistent with prior years and the 1999 budget for the programs.
(2) The Limited Partners had no book basis in their respective capital accounts
as of December 31, 1996, and therefore no losses were allocated to the Limited
Partners in 1998 and 1997 for financial statement purposes.
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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 Genzyme Development Partners, L.P. (the
"Partnership") 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 risk and uncertainties described under
the caption "Factors Affecting Future Operating Results." Partners and potential
investors should carefully consider these risks and uncertainties in evaluating
the Partnership's financial condition and results of operations.
RESULTS OF OPERATIONS The net loss for the year ended December 31, 1998 was
$537,000 compared to losses of $986,000 and $552,000 for 1997 and 1996,
respectively. In August 1996, Genzyme received marketing approval for the
Partnership's first product, Seprafilm(R) Bioresorbable Membrane, and commenced
commercial sales of Seprafilm(R) Bioresorbable Membrane in the U.S. on behalf of
Genzyme Ventures II (the "Joint Venture") a joint venture between the
Partnership and Genzyme. Of the losses recorded for the years ended December 31,
1998 and December 31, 1997, $592,000 and $908,000, respectively, were the result
of the Partnership's share of the losses from the Joint Venture that were
allocated to the Partnership pursuant to the Amended and Restated Joint Venture
Agreement. The decrease in the loss for the year ended December 31, 1998 is
because the Partnership could be allocated no greater than $592,000 of the loss
of the Joint Venture, the capital balance of the Partnership was $592,000 at the
beginning of the year, and the Partnership made no capital contributions in
1998. In 1996, the net loss was due primarily to administrative expenses of
$404,000 and losses from the Joint Venture of $200,000. The loss from the Joint
Venture in 1996 was limited to the Partnership's basis in the Joint Venture,
which was $200,000. As of December 31, 1998, the Partnership's basis in the
Joint Venture was zero, and therefore, no additional losses from the Joint
Venture will be allocated to the Partnership unless the Partnership makes
additional contributions to the Joint Venture.
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
products (the "Sepra Products") intended to be used to limit the incidence and
severity of postoperative adhesions, under certain conditions. In 1998, 1997 and
1996, the Partnership earned $145,000, $51,000 and $23,000, respectively, of
royalty revenue based on European sales of the Sepra Products by Genzyme which
began in late 1995. The increase in 1998 was primarily due to increased
shipments of Sepra Products in Europe.
For the years ended December 31, 1998, 1997 and 1996, investment income earned
by the Partnership amounted to $3,000, $25,000 and $29,000, respectively.
No research and development expenses were paid to Genzyme during 1998, 1997 or
1996. 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 $6.7
million on the Partnership's development programs in 1998 as compared to $7.3
million in 1997 and $6.0 million in 1996. Genzyme currently intends to fund the
programs through 1999 at a level consistent with prior years and the 1999 budget
for the programs.
Administrative expenses were $93,000, $154,000 and $404,000 in 1998, 1997 and
1996, respectively. Administrative expenses in 1998 consisted primarily of
professional service expenses. Administrative expenses in 1997 and 1996
consisted primarily of legal fees. Of the $304,000 in legal costs incurred in
1996, $154,000 is attributable to legal costs incurred in evaluating and
responding to Genzyme's offer to purchase substantially all the assets of the
Partnership, which was subsequently withdrawn. Legal expenses have declined
primarily due to the absence of any pending legal issues involving the
Partnership. Genzyme currently intends to fund any administrative expenses in
excess of the Partnership's available cash in 1999.
FINANCIAL CONDITION
As of December 31, 1998, the Partnership had $97,000 in cash and cash
equivalents compared to $22,000 as of December 31, 1997. 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(R) Bioresorbable
Membrane in August 1996. Seprafilm(R) Bioresorbable Membrane is the first Sepra
Product to obtain FDA marketing approval and was launched in the United States
during the fourth quarter of 1996. Seprafilm(R) Bioresorbable Membrane is being
marketed in the United States and Canada by Genzyme on behalf of the Joint
Venture. On May 5, 1997, the General and Plastic Surgery Devices Panel of the
FDA's Medical Devices Advisory Committee recommended that Genzyme not be granted
approval to market Sepracoat(TM) Coating Solution for the reduction of adhesions
in abdominal and pelvic surgery. Genzyme subsequently withdrew the pre-market
approval application for the Sepracoat(TM) product. In December 1997, Genzyme
decided to discontinue development of Sepracoat(TM) product for the United
States market but markets Sepracoat(TM) Coating Solution in Europe.
9
<PAGE> 10
In 1997, Genzyme contributed $1.5 million of cash to the Partnership. The
Partnership has contributed its technology and $1.7 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.
Pursuant to the terms of the Amended and Restated Joint Venture Agreement, 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 a 60% and 40% share,
respectively, of the profits of the Joint Venture. The first $200,000 of the
Joint Venture's losses were allocated to the Partnership and thereafter losses
are allocated 40% to the Partnership and 60% to Genzyme except to the extent
that any losses allocable to the Partnership would result in the allocation
of such loss to the General Partner of the Partnership as a result of the
Partnership's Limited Partners' capital account balance having been previously
reduced to zero. In such an event, 100% of the losses, in excess of the first
$200,000, are allocated to Genzyme.
In 1996, the Partnership's capital account was reduced to zero after the
allocation of $200,000 of the Joint Venture losses to the Partnership and,
accordingly, 100% of the Joint Venture losses in excess of $200,000 were
allocated to Genzyme. As a result of the Partnership's capital contribution of
$1.5 million in cash to the Joint Venture in 1997, the Partnership was allocated
40% of the Joint Venture losses during 1997. In 1998, the Partnership made no
additional capital contributions to the Joint Venture and after the allocation
of $592,000 in losses, the Partnership's capital account was reduced to zero
resulting in the allocation of 100% of the losses in excess of $592,000 to
Genzyme.
The Joint Venture's revenues from sales of the Sepra Products during 1998 were
$5.6 million as compared to $3.2 million in 1997 and $0.4 million in 1996. For
the years ended December 31, 1998, 1997 and 1996, the Joint Venture incurred net
losses of $4.8 million, $2.3 million and $2.5 million, respectively, primarily
attributable to costs associated with the introduction, selling and marketing of
Seprafilm(R) Bioresorbable Membrane to the healthcare marketplace. In 1998, 1997
and 1996, the Limited Partners' shares of the Partnership's losses exceeded the
remaining Limited Partners' capital and, accordingly, approximately $532,000,
$976,000 and $207,000, respectively, of the Partnership's losses which would
have been attributable to the Limited Partners were re-allocated to 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 the Sepra Products. 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 currently intends to continue to provide
such funding through 1999. Genzyme currently intends to fund administrative
expenses in excess of the Partnership's available cash through 1999. Genzyme is
not obligated to provide such funding after 1999. If Genzyme stops funding the
Partnership, there can be no assurances that the Partnership will be able to
obtain any additional financing or find it on favorable terms. If the
Partnership has insufficient funds or is unable to raise additional funds, it
may delay, reduce or eliminate all or certain of its programs.
UNCERTAINTIES INHERENT IN THE DEVELOPMENT OF BIOTECHNOLOGY PRODUCTS
Genzyme and the Partnership will need to conduct substantial research and
development, undertake preclinical and clinical testing and pursue regulatory
approvals of many of the Sepra Products before they can be commercialized. There
can be no assurances that these efforts will be successful. Clinical trials may
not support the efficacy or safety of products. Problems may be encountered in
clinical trials that may lead to the delay or suspension of the trials.
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 and other regulatory
authorities, 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. There can be no assurances that
Genzyme will be able to successfully commercialize each of the Sepra Products.
FDA APPROVAL
Most of the Sepra Products will require additional FDA approval prior to
marketing in the United States. There can be no assurance that such approval
will be obtained or 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. In January 1998, Genzyme discontinued development of Sepracoat(TM)
Coating Solution for the U.S. market after an FDA advisory committee recommended
against approval of the product. Genzyme may stop developing one or more of the
Sepra Products if there is insufficient demand or if it encounters regulatory or
developmental problems.
10
<PAGE> 11
MARKET ACCEPTANCE
The successful commercialization of the Sepra Products will require that
surgeons become convinced of the efficacy of the Sepra Products and the benefits
of anti-adhesion products 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. Competitors in the United States and elsewhere are
numerous and include major pharmaceutical, chemical and biotechnology companies,
many of which have substantially greater capital resources, marketing
experience, research and development staffs and facilities than the Partnership.
These companies may succeed in developing products that are more effective than
any that have been or may be developed by the Partnership and may also be more
successful than Genzyme and the Joint Venture in producing and marketing these
products.
YEAR 2000
Many computer systems and other equipment with embedded chips or processors may
experience problems handling dates beyond the year 1999, and therefore, will
need to be modified or replaced prior to the year 2000 in order to remain
functional. The Partnership relies upon Genzyme to provide general and
administrative and other services, and the Joint Venture relies upon Genzyme to
perform manufacturing, marketing and sales services, pursuant to certain
agreements between Genzyme, the Partnership and the Joint Venture that involve
the use of Genzyme's computer systems and equipment.
Genzyme has implemented a Year 2000 compliance program to identify and minimize
the Year 2000 problems. This program involves four phases: (a) conducting an
inventory of Genzyme's Year 2000 issues; (b) prioritizing identified systems,
programs and equipment based on materiality to Genzyme's operations; (c)
assessing Year 2000 compliance; and (d) resolving Year 2000 issues through
upgrades, replacements or repairs. Genzyme places each identified system or
piece of equipment in one of seven categories: (i) mission critical, (ii)
mission important, (iii) process critical, (iv) process important, (v) process
convenient, (vi) reporting and (vii) other. The compliance program is a
coordinated effort that is being conducted by each division, business unit and
department within Genzyme.
Genzyme is in the fourth phase of the compliance program for its own systems,
programs and equipment. Its Year 2000 exposures are primarily in the areas of
information systems, financial and administration applications, manufacturing
applications and equipment, and research and development support systems and
equipment. Genzyme is also currently assessing compliance of identified systems
and equipment. The first three phases have been substantially completed for
systems programs and equipment deemed critical or important under Genzyme's
operations categories (i) - (iii), and Genzyme plans to resolve Year 2000 issues
for such systems, programs and equipment by mid 1999. Genzyme is also developing
contingency plans with respect to categories (i) and (ii). Genzyme plans to
resolve Year 2000 issues for systems, programs and equipment in categories (iv)
and (v) by the end of the fourth quarter of 1999, and for systems, programs and
equipment in categories (vi) and (vii) as time permits.
Concurrently with the conduct of Genzyme's internal compliance program, Genzyme
is also in the process of surveying certain third parties with whom Genzyme
conduct business about their Year 2000 readiness. These third parties include
significant customers, suppliers, research or collaborative partners, service
providers and distributors, considered to be critical to Genzyme's business.
Genzyme expects to complete the survey by the end of the third quarter of 1999,
and has received responses from more than half of the third parties surveyed.
Genzyme will attempt to mitigate its risks with respect to such third parties'
Year 2000 compliance. This may involve efforts such as identifying and securing
alternative resources, stock-piling raw materials and developing joint
contingency plans with critical suppliers and distributors. The failure of third
parties that are significant to either Genzyme's or the Partnership's business
to be Year 2000 compliant could have a material adverse effect on the
Partnership's operations.
Genzyme expects to implement successfully the systems and programming changes
necessary to address Year 2000 issues, and the Partnership does not believe that
the cost of such actions taken by Genzyme will have a material effect on the
Partnership's results of operations or financial condition. There can be no
assurance that Genzyme will resolve its Year 2000 issues by the end of 1999 or
that there will not be a delay in, or increased costs associated with, the
implementation of such changes. Genzyme's inability to implement such changes
could result in interruptions in, or failure of, certain normal business
activities or operations of Genzyme that may have an adverse effect on future
results of operations of the Partnership. Genzyme compliance program is an
ongoing process, and the estimated timetables for the program discussed above
are subject to change.
EURO-THE NEW EUROPEAN CURRENCY
On January 1, 1999, eleven of the fifteen member countries of the European Union
established fixed conversion rates between their existing sovereign currencies
and the Euro and adopted the Euro as their common legal currency. The Euro
trades on currency exchanges and is available for non-cash transactions. These
participating countries now issue sovereign debt exclusively in Euros, and have
redenominated their outstanding sovereign debt. These countries no longer
control their own monetary policies by directing independent interest rates for
their legacy currencies. Instead, the authority to direct monetary policy,
including money supply and official interest rates for the Euro, is exercised by
the new European Central Bank.
The legacy currencies of these 11 countries are scheduled to remain legal tender
in those countries as denominations of the Euro until January 1, 2002. Until
that date, public and private parties may pay for goods and services using
either the Euro or the participating country's legacy currency on a "no
compulsion, no prohibition" basis.
All of the Partnership's revenues to date have been royalties derived from
Genzyme's sale of Sepra Products for use in the Field of Activity in Europe.
Genzyme has formed committees to address the business implications of the Euro
conversion, to communicate information about the conversion throughout the
organization, create global coordination among functional areas and address
specific accounting, treasury and tax issues relating to the Euro. Genzyme's
management believes that the Euro conversion will not affect any of Genzyme's
outstanding derivatives and forward contracts, or any of its other material
commercial contracts. Similarly, Genzyme's management does not foresee any
increased currency exchange rate risk as a result of the Euro conversion.
Genzyme is assessing whether there are any long term competitive implications
of the Euro conversion. While no material risks have been identified to date,
individual European governments may pressure Genzyme to have consistent European
pricing, and individual customers and distributors in Europe may choose to begin
purchasing products in the country where the Euro price is lowest.
Because the Internal Revenue Service has not yet issued final regulations
regarding the Euro, no assessment can be made as to the tax consequences of the
conversion at this time. If the temporary regulations currently in place are
adopted in their entirety, Genzyme's management believes that there will be no
material tax consequences of the conversion to Genzyme or the Partnership.
Because Genzyme's existing accounting and finance software is currently able to
use Euro-based accounts, its management believes that the cost of upgrading
software and other information systems for the conversion will be immaterial.
11
<PAGE> 12
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") 133. SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. SFAS 133 requires entities to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in fair value, gains or
losses, depends on the intended use of the derivative and its resulting
designation. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Partnership will adopt SFAS 133 by January 1,
2000. SFAS 133 is not expected to significantly impact the financial statements
of the Partnership.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
12
<PAGE> 13
ITEM 8. FINANCIAL STATEMENTS
<TABLE>
PAGE NO.
--------
<S> <C>
Report of Independent Accountants............................................................................... 14
Statements of Operations - For the Years Ended December 31, 1998, 1997 and 1996................................. 15
Balance Sheets - December 31, 1998 and 1997..................................................................... 16
Statements of Cash Flows - For the Years Ended December 31, 1998, 1997 and 1996................................. 17
Statements of Changes in Partners' Capital (Deficit) - For the Years Ended December 31, 1998, 1997 and 1996..... 18
Notes to Financial Statements................................................................................... 19
All schedules are omitted since the required information is inapplicable or has
been presented in the financial statements and related notes.
</TABLE>
<PAGE> 14
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Genzyme Development Corporation II and Partners of
Genzyme Development Partners, L.P.:
In our opinion, the accompanying balance sheets and the related statements of
operations, of changes in partners' capital (deficit) and of cash flows present
fairly, in all material respects, the financial position of Genzyme Development
Partners, L.P. (the "Partnership"), at December 31, 1998 and 1997, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
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 through advances since 1994
and has committed to fund research, development, general and administrative
expenses in 1999.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 11, 1999
14
<PAGE> 15
GENZYME DEVELOPMENT PARTNERS, L.P.
STATEMENTS OF OPERATIONS
(In thousands, except per unit data)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Royalty revenue from Genzyme Corporation (Note C)............. $ 145 $ 51 $ 23
Costs and expenses:
Administrative expenses.................................... 93 154 404
--------- --------- ---------
Operating income (loss)....................................... 52 (103) (381)
Other income (expenses):
Equity in net loss of joint venture (Note C)............... (592) (908) (200)
Investment income.......................................... 3 25 29
--------- --------- ---------
Total other income (expenses).......................... (589) (883) (171)
--------- --------- ---------
Net loss...................................................... $ (537) $ (986) $ (552)
========= ========= =========
Net loss attributable to each partnership unit:
Limited Partners -- based on 737 units..................... $ 0 $ 0 $ (461)
========= ========= =========
General Partner -- based on 1 unit......................... $(537,000) $(986,000) $(212,000)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
15
<PAGE> 16
GENZYME DEVELOPMENT PARTNERS, L.P.
BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---- ----
ASSETS
<S> <C> <C>
Cash and cash equivalents....................................................... $ 97 $ 22
Royalty receivable from Genzyme (Note C)........................................ 90 17
Investment in Joint Venture (Note C)............................................ - 592
----- ------
Total assets................................................................ $ 187 $ 631
===== ======
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Accrued expenses................................................................ $ 61 $ 79
Payable to Genzyme Corporation (Note C)......................................... 345 234
----- ------
Total liabilities............................................................ 406 313
----- ------
Commitments and contingencies (Note C)..........................................
Partners' capital (deficit) (including accumulated deficit of $34,370):
General partner............................................................ (192) 345
Class A limited partners................................................... - -
Class B limited partners................................................... - -
----- ------
(192) 345
Less: unpaid partners' capital............................................. (27) (27)
----- ------
Total partners' capital (deficit)...................................... (219) 318
----- ------
Total liabilities and partners' capital (deficit)...................... $ 187 $ 631
===== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
16
<PAGE> 17
GENZYME DEVELOPMENT PARTNERS, L.P.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
----- ------- -----
Cash Flow from Operating Activities:
<S> <C> <C> <C>
Net loss......................................................... $(537) $ (986) $(552)
Reconciliation of net loss to net cash provided (used) by
operating activities:
Equity in net loss of joint venture.......................... 592 908 200
Increase (decrease) in cash from working capital:
Royalties receivable from Genzyme Corporation............... (73) (9) (8)
Payable to Genzyme Corporation and accrued expenses......... 93 (42) 238
----- ------- -----
Net cash provided (used) by operating activities................. 75 (129) (122)
Cash Flow from Investing Activities:
Investment in joint venture................................... - (1,500) (200)
Cash Flow from Financing Activities:
Capital contributed by Genzyme................................ - 1,500 -
Proceeds from issuance of partnership units................... - - 7
----- ------- -----
Net cash provided by financing activities........................ - 1,500 7
Increase (decrease) in cash and cash equivalents................... 75 (129) (315)
Cash and cash equivalents at beginning of period................... 22 151 466
----- ------- -----
Cash and cash equivalents at end of period......................... $ 97 $ 22 $ 151
===== ======= =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
17
<PAGE> 18
GENZYME DEVELOPMENT PARTNERS, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(In thousands)
<TABLE>
<CAPTION>
General Class A Class B Unpaid Total
Partner's Limited Limited Partners' Partners'
Capital Partners' Partners' Capital Capital
(Deficit) Capital Capital (Deficit) (Deficit)
--------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
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)
Capital paid during 1997........................ 1,500 - - - 1,500
Net Loss........................................ (986) - - - (986)
------ ------ ------- ------ ------
Balance at December 31, 1997................. $ 345 $ - $ - (27) 318
Net Loss........................................ (537) $ - - - (537)
------ ------ ------- ------ ------
Balance at December 31, 1998................. $ (192) $ - $ - $ (27) $ (219)
====== ====== ======= ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE> 19
GENZYME DEVELOPMENT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
NOTE A - ORGANIZATION
The Partnership was formed in September 1989 with the objective to develop,
produce and derive income from the sale of the Sepra Products. The Sepra
Products are based on hyaluronic acid ("HA"), a naturally occurring biopolymer
with unique physical properties. In August 1996, Genzyme received marketing
approval from the FDA for the Partnership's first product, Seprafilm(R)
Bioresorbable Membrane, and commenced commercial sales of Seprafilm(R)
Bioresorbable Membrane in the U.S. on behalf of the Joint Venture.
The Partnership has entered into agreements (described in Note C) with Genzyme
for the development of the Sepra Products and for their manufacture and
marketing.
The General Partner of the Partnership is Genzyme Development Corporation II
("GDC II" or the "General Partner"), 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 subject to certain anti-dilution adjustments. 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 in excess of their capital contributions to the
Partnership are allocated to the General Partner. In 1998, 1997 and 1996,
approximately $532,000, $976,000 and $207,000, respectively, of losses allocable
to the Limited Partners, but in excess of their capital contribution, were
re-allocated to 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 which $97,000 remained as of December 31,
1998, 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(R)
Bioresorbable Membrane. Genzyme funded these activities from 1994 through 1998,
and currently intends to continue such funding through December 31, 1999.
Genzyme also currently intends to fund administrative expenses in excess of the
Partnership's cash.
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 $93.0 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
reporting period. Actual results could differ from those estimates.
19
<PAGE> 20
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.
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.
REVENUE RECOGNITION
The Partnership records royalty revenue upon the sale of the Sepra Products by
Genzyme to third parties.
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, the ability to obtain and maintain
adequate protection of proprietary technology, the ability to obtain
reimbursement for its products, healthcare cost containment initiatives, product
liability, market acceptance of new products and compliance with applicable
governmental regulations.
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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS 133. SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. SFAS 133
requires companies to recognize all derivatives as either assets or liabilities,
with the instruments measured at fair value. The accounting for changes in fair
value, gains or losses, depends on the intended use of the derivative and its
resulting designation. The statement is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. The Partnership will adopt SFAS 133
by January 1, 2000. SFAS 133 is not expected to significantly impact the
financial statements of the Partnership.
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 the Sepra Products for
the Partnership to be used as surgical aids to limit the incidence and severity
of postoperative adhesions. 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
programs beyond the available Partnership funds but has done so after the
available Partnership funds were expended in the first quarter of 1994. Genzyme
spent approximately $8.4 million, $7.3 million and $6.0 million on the
Partnership's development programs in 1998, 1997 and 1996, respectively, and
currently intends to fund the programs through 1999 on a level consistent with
previous years and the 1999 budget for the program.
20
<PAGE> 21
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 Sepra 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.
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 Sepra Products, payable to the extent necessary for the
Partnership to pay projected distributions not otherwise funded through sales in
the Territory.
JOINT VENTURE AGREEMENT
In March 1997, the Partnership and Genzyme 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 holds the inventory of the Sepra
Products and sells it to the Joint Venture upon the sales by Genzyme to third
parties. 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 $25.0 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, 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, the Partnership and Genzyme will receive a 40% and 60% share,
respectively, of the profits of the Joint Venture. The first $200,000 of the
Joint Venture's losses were allocated to the Partnership and thereafter losses
are allocated 40% to the Partnership and 60% to Genzyme except to the extent
that any losses allocable to the Partnership would result in the allocation of
such loss to the General Partner of the Partnership as a result of the
Partnership's Limited Partners' capital account balance having been previously
reduced to zero. In such an event, 100% of the losses, in excess of the first
$200,000, are allocated to Genzyme.
In 1997, Genzyme contributed $1.5 million to the Partnership. The Partnership
has contributed its technology and $1.7 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(R) Bioresorbable Membrane on August 17, 1996
(commencement of operations). The allocation of the Joint Venture's losses for
the years ending December 31, 1998 and 1997 and for the period from August 17,
1996 through December 31, 1996 are pursuant to the terms of the Amended and
Restated Joint Venture Agreement, which were retroactive to August 17, 1996.
21
<PAGE> 22
Condensed financial information and allocation of the losses of the Joint
Venture are summarized below:
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
AUGUST 17, 1996
(COMMENCEMENT
FOR THE FOR THE OF OPERATIONS)
YEAR ENDED YEAR ENDED TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
(DOLLARS IN THOUSANDS) 1998 1997 1996
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues................................... $ 5,598 $ 3,210 $ 435
Operating expenses......................... (10,393) (5,479) (2,914)
Gross profit............................... 3,155 2,342 201
Net loss................................... (4,775) (2,269) (2,479)
Allocated to GDP........................... $ (592) $ (908) $ (200)
Allocated to Genzyme....................... $ (4,183) $(1,361) $(2,279)
DECEMBER 31,
----------------------------------
(DOLLARS IN THOUSANDS) 1998 1997
----------------------------------------------------------------------------------------------
Joint Venturer's capital - Genzyme.................. $ 20 $1,108
Joint Venturer's capital - GDP...................... $ - $ 592
</TABLE>
MARKETING AND DISTRIBUTION 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
sells 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 that would be applicable if
Genzyme provided such services in its capacity as a venturer rather than as a
distributor.
TAX INDEMNIFICATION AGREEMENT
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 August
31, 2000, but such commencement date may be accelerated to the last day of the
month in which the aggregate Joint Venture distributions to the Partnership are
equal to at least $5.5 million. 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 thereof.
Additionally, the Limited Partners will receive quarterly royalty payments for a
period of ten years after the buyout date.
22
<PAGE> 23
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:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Henri A. Termeer.......................... 53 President and director since September 1989
W. Gerald Austen, M.D..................... 69 Director since February 1990
David J. McLachlan........................ 60 Treasurer since June 1990
Earl M. Collier, Jr....................... 52 Director since September 1997
Stelios Papadopoulos, Ph.D................ 51 Director since November 1998
</TABLE>
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. Dr. Papadopoulos 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 a member 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 Chairman 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
has served as Executive Vice President, Finance of Genzyme since September 1996.
Mr. McLachlan served as Senior Vice President, Finance of Genzyme from December
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
Chief Financial Officer 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.
Mr. Collier has served as a director of the General Partner since September
1997. He joined Genzyme in January 1997 as Senior Vice President, Health Systems
and has served as Executive Vice President since July 1997. Mr. Collier is
responsible for Genzyme's Surgical Products business unit. Prior to joining
Genzyme, Mr. Collier was President of Vitas HealthCare Corporation (formerly
Hospice Care Incorporated), a provider of health care services, from October
1991 until August 1995. Prior to that, Mr. Collier was a partner in the
Washington, D.C. law firm Hogan & Hartson, which he joined in 1981.
Dr. Papadopoulos has served as a director of the General Partner since November
1998. He is an investment banker at PaineWebber Inc., focusing on the
biotechnology and pharmaceutical sectors and Chairman of PaineWebber Development
Corp., a PaineWebber subsidiary. He joined PaineWebber in April 1987. In
addition, Dr. Papadopoulos is an Adjunct Associate Professor of Cell Biology at
New York University Medical Center. He is also a director of Diacrin, Inc.
23
<PAGE> 24
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.
("SEC"). 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 1998 the executive officers and directors of the
General Partner complied with all applicable Section 16(a) filing requirements,
except that Dr. Papadopoulos filed a Form 3 with the SEC on December 10, 1998
that was due on November 30, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The directors and officers of the General Partner other than Dr. Austen and Dr.
Papadopoulos, who are paid $2,500 for each meeting of the Board of Directors,
do not receive any compensation or benefits from the Partnership.
24
<PAGE> 25
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 five percent of any class of Partnership
interests as of February 28, 1999. No directors or officers of the Partnership
own any securities of the Partnership.
<TABLE>
<S> <C> <C> <C>
Name and Address Amount and Nature Percentage
Title of Class of Beneficial Owner of 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
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Termeer, Mr. McLachlan and Mr. Collier 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
Annual Report.
2. Financial Statement Schedules
None.
3. Exhibits
The exhibits are listed below under Part IV, Item 14(c) of
this Annual report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
December 31, 1998.
(c) Exhibits
25
<PAGE> 26
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 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.
10.6 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.
10.7 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.
10.8 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.
10.9 Amended and Restated Joint Venture Agreement between Genzyme
Corporation and Genzyme Development Partners, L.P. Filed as
Exhibit 10.1 to Genzyme Development Partners, L.P.'s Report on
Form 10-Q as of March 31, 1997, File No. 0-18554 and incorporated
herein by reference.
10.10 Tax Indemnification Agreement between Genzyme Corporation and
Genzyme Development Partners, L.P. Filed as Exhibit 10.2 to
Genzyme Development Partners, L.P. Report on Form 10-Q as of
March 31, 1997, File No. 0-18554 and incorporated herein by
reference.
10.11 Marketing and Distribution Agreement between Genzyme Corporation
and Genzyme Ventures II. Filed as Exhibit 10.3 to Genzyme
Development Partners, L.P. Report on Form 10-Q as of March 31,
1997, File No. 0-18554 and incorporated herein by reference.
27 Financial Data Schedule for Genzyme Development Partners, L.P.
Filed herewith.
99 Financial Statements of Genzyme Ventures II for the years ended
December 31, 1998 and 1997 and for the period from August 17,
1996 (commencement of operations) to December 31, 1996. Filed
herewith.
26
<PAGE> 27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
GENZYME DEVELOPMENT PARTNERS, L.P.
By: GENZYME DEVELOPMENT CORPORATION, II
General Partner
Date: March 31, 1999 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 on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Henri A. Termeer Director and Principal March 31, 1999
- ---------------------------------------- Executive Officer
Henri A. Termeer
/s/ David J. McLachlan Principal Financial and March 31, 1999
- ---------------------------------------- Accounting Officer
David J. McLachlan
/s/ W. Gerald Austen Director March 31, 1999
- ----------------------------------------
W. Gerald Austen
/s/ Earl M. Collier, Jr. Director March 31, 1999
- ----------------------------------------
Earl M. Collier, Jr.
/s/ Stelios Papadopoulos Director March 31, 1999
- ----------------------------------------
Stelios Papadopoulos
</TABLE>
27
<PAGE> 28
EXHIBIT INDEX
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 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.
10.6 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.
10.7 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.
10.8 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.
10.9 Amended and Restated Joint Venture Agreement between Genzyme
Corporation and Genzyme Development Partners, L.P. Filed as
Exhibit 10.1 to Genzyme Development Partners, L.P.'s Report on
Form 10-Q as of March 31, 1997, File No. 0-18554 and incorporated
herein by reference.
10.10 Tax Indemnification Agreement between Genzyme Corporation and
Genzyme Development Partners, L.P. Filed as Exhibit 10.2 to
Genzyme Development Partners, L.P. Report on Form 10-Q as of
March 31, 1997, File No. 0-18554 and incorporated herein by
reference.
10.11 Marketing and Distribution Agreement between Genzyme Corporation
and Genzyme Ventures II. Filed as Exhibit 10.3 to Genzyme
Development Partners, L.P. Report on Form 10-Q as of March 31,
1997, File No. 0-18554 and incorporated herein by reference.
27 Financial Data Schedule for Genzyme Development Partners, L.P.
Filed herewith.
99 Financial Statements of Genzyme Ventures II for the years ended
December 31, 1998 and 1997 and for the period from August 17,
1996 (commencement of operations) to December 31, 1996. Filed
herewith.
28
<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 1998 FOR GENZYME DEVELOPMENT PARTNERS, L.P.
</LEGEND>
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 97
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 187
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 187
<CURRENT-LIABILITIES> 406
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (219)
<TOTAL-LIABILITY-AND-EQUITY> 187
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 93
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (537)
<INCOME-TAX> 0
<INCOME-CONTINUING> (537)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (537)<F1>
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Genzyme Development Partners, L.P. is a Delaware limited partnership. Net
earnings or loss is reported per Partnership Unit instead of per share. For
the year ended December 31, 1998, the Partnership's net loss was allocated $0
per limited partnership unit (737 units in total) and $537,000 to the General
Partner (1 unit).
</FN>
</TABLE>
<PAGE> 1
Exhibit 99
Report of Independent Accountants
To the Venturers of Genzyme Ventures II:
In our opinion, the accompanying balance sheets and the related statements of
operations, of changes in venturers' capital (deficit) and of cash flows present
fairly, in all material respects, the financial position of Genzyme Ventures II
(the "Joint Venture"), at December 31, 1998 and 1997, and the results of its
operations and its cash flows for the years ending December 31, 1998 and 1997,
and the period from August 17, 1996 (commencement of operations) to December 31,
1996, in conformity with generally accepted accounting principles. 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 audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 11, 1999
<PAGE> 2
GENZYME VENTURES II
STATEMENTS OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
For the
Period from
August 17, 1996
(commencement
For the For the of operations)
year ended year ended to
December 31, December 31, December 31,
1998 1997 1996
-------------- ------------ --------------
<S> <C> <C> <C>
Net product sales......................................... $ 5,598 $ 3,210 $ 435
Operating costs and expenses:
Cost of products sold.................................. (2,443) (868) (234)
Selling and marketing expenses......................... (7,950) (4,611) (2,680)
-------- -------- ---------
Total operating costs and expenses.................. (10,393) (5,479) (2,914)
-------- -------- ---------
Other income:
Investment income...................................... 20 - -
-------- -------- ---------
Total other income.................................. 20 - -
-------- -------- ---------
Net loss.................................................. $ (4,775) $ (2,269) $ (2,479)
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 3
GENZYME VENTURES II
BALANCE SHEETS
<TABLE>
(Amounts in thousands) DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------
1998 1997
---- ----
ASSETS
<S> <C> <C>
Cash ........................................................................... $ 20 $ 1,700
========= =======
LIABILITIES AND VENTURERS' CAPITAL
Commitments and contingencies (Note D)..........................................
Venturers' capital:
Genzyme Corporation.......................................................... 20 1,108
Genzyme Development Partners, L.P............................................ - 592
--------- -------
Total Venturers' capital........................................................ 20 1,700
Total liabilities and Venturers' capital........................................ $ 20 $ 1,700
========= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
GENZYME VENTURES II
STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
FOR THE PERIOD FROM
AUGUST 17, 1996
(COMMENCEMENT OF
FOR THE YEARS ENDED DECEMBER 31, OPERATIONS) TO
1998 1997 DECEMBER 31, 1996
---- ---- --------------------
Cash Flow from Operating Activities:
<S> <C> <C> <C>
Net loss......................................................... $ (4,775) $ (2,269) $(2,479)
Reconciliation of net loss to net cash used by
operating activities:
Increase in Payable to Genzyme Corporation.................. -- -- 2,279
--------- -------- -------
Net cash used in operating activities..................... (4,775) (2,269) (200)
Cash Flow from Financing Activities:
Capital contributed by Genzyme Corporation.................... 3,095 2,469 --
Capital contributed by Genzyme Development Partners, L.P...... - 1,500 200
--------- -------- -------
Net cash provided by financing activities....................... 3,095 3,969 200
--------- -------- -------
Increase (decrease) in cash....................................... (1,680) 1,700 --
Cash at beginning of period....................................... 1,700 -- --
--------- -------- -------
Cash at end of period............................................. $ 20 $ 1,700 $ --
========= ======== =======
</TABLE>
Supplemental disclosure of non-cash transaction:
Conversion of accounts payable to Genzyme Corporation to Capital - Note D
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
GENZYME VENTURES II
STATEMENT OF CHANGES IN VENTURERS' CAPITAL (DEFICIT)
(In thousands)
<TABLE>
<CAPTION>
GENZYME
DEVELOPMENT
GENZYME PARTNERS, TOTAL
CORPORATION L.P. VENTURERS'
CAPITAL CAPITAL CAPITAL (DEFICIT)
----------- ----------- -----------------
<S> <C> <C> <C>
Balance at August 17, 1996
(commencement of operations)................... $ - $ - $ -
Capital contribution (Note D)................... - 200 200
Net loss........................................ (2,279) (200) (2,479)
-------- ------ --------
Balance at December 31, 1996............... (2,279) - (2,279)
-------- ------ --------
Capital contributions (Note D).................. 4,748 1,500 6,248
Net loss........................................ (1,361) (908) (2,269)
-------- ------ --------
Balance at December 31, 1997............... $ 1,108 592 $ 1,700
-------- ------ --------
Capital contribution (Note D)................... 3,095 - 3,095
Net loss........................................ (4,183) (592) (4,775)
-------- ------ --------
Balance at December 31, 1998............... $ 20 - $ 20
======== ====== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<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 Products" or the "Products") in the United States and Canada for human
surgical procedures, other than in ophthalmic surgery. The Sepra Products are
intended to be used to limit the incidence and severity of postoperative
adhesions.
GDP has contributed its technology and $1.7 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 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 from the U.S. Food and Drug Administration
("FDA") for GDP's first product, Seprafilm(R) Bioresorbable Membrane, and
commenced commercial sales of Seprafilm(R) Bioresorbable Membrane in the U.S. on
behalf of the Joint Venture on August 17, 1996 (commencement of operations).
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
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 is organized as a pass-through entity; accordingly, the
financial statements do not include a provision for income taxes. Taxes, if any,
are the liability of GDP and Genzyme, as venturers.
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, the ability to obtain and maintain adequate
protection of proprietary technology, the ability to obtain reimbursement for
its products, health care cost containment initiatives, product liability,
market acceptance of the Products and compliance with the government
regulations, including those of the U.S. Department of Health and Human Services
and the FDA. In addition, the Joint Venture is dependent upon Genzyme's ability
to produce and market the Products.
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.
6
<PAGE> 7
GENZYME VENTURES II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE C. JOINT VENTURE AGREEMENT BETWEEN GDP AND GENZYME CORPORATION
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 manufactures the Joint Venture's requirements for
Sepra Products and, acting as sole distributor for the Joint Venture, purchases
product from the Joint Venture for resale to third parties. Upon receipt of an
order from a third party, Genzyme sells the product to the Joint Venture for an
amount equal to the actual costs of materials and direct labor plus a fixed
amount of overhead. The Joint Venture then resells the product to Genzyme for
an amount equal to Genzyme's price to the end-user less a distributor's
discount (subject to a minimum price). Because the Joint Venture resells the
product to Genzyme immediately after purchasing it, inventory is not
recorded on the Joint Venture's books.
Genzyme charges the Joint Venture for selling and marketing expenses to the
extent such expenses exceed Genzyme's distributors discount. In 1998 and 1997,
Genzyme charged $2.4 million and $4.6 million of marketing expenses to the Joint
Venture, and charged $5.5 million of selling expenses to the Joint Venture in
1998. Selling expenses related to the Sepra Products were not charged to the
Joint Venture in 1997 but were charged to the Joint Venture in 1998. Genzyme has
agreed that it will not seek to recover any selling expenses incurred prior to
1997 from the Joint Venture. 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 $25.0 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 Ventures'
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 a 60% and 40% share, respectively, in the profits of the
Joint Venture. The first $200,000 of the Joint Venture's losses were allocated
to GDP and thereafter losses are allocated 40% to GDP and 60% to Genzyme except
to the extent that any losses allocable to GDP would result in the allocation of
such loss to Genzyme Development Corporation II as the General Partner of GDP as
a result of the GDP Limited Partners' capital account balance having been
previously reduced to zero. In such an event, 100% of the losses, in excess of
the first $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 $1.7 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(R) Bioresorbable Membrane on August 17, 1996
(commencement of operations).
The allocation of the Joint Venturer's losses for the years ending December 31,
1998 and 1997 and losses for the period from August 17, 1996 (commencement of
operations) through December 31, 1996 are pursuant to the terms of the Amended
and Restated Joint Venture Agreement, which is retroactive to August 17, 1996.
Allocation of Joint Venture losses is summarized as follows (amounts in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Joint Venture net loss.................. $(4,775) $(2,269) $(2,479)
Allocated to GDP........................ $ (592) $ (908) $ (200)
Allocated to Genzyme.................... $(4,183) $(1,361) $(2,279)
</TABLE>
NOTE D. JOINT VENTURE CAPITAL
In 1997, Genzyme contributed $1.5 million of cash to GDP. In 1997 and 1996, GDP
contributed $1.5 million and $200,000 of cash, respectively, to the Joint
Venture and agreed 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.
Genzyme funded the operating losses of the Joint Venture in 1998, 1997 and 1996.
In 1998 and 1997, Genzyme converted its receivables from the Joint Venture of
$3.1 million and $2.3 million, respectively, to capital.
7
