UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) | ||
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended | ||
Or | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to |
Commission File No. 0-14680
GENZYME CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts (State or other jurisdiction of incorporation or organization) | 06-1047163 (I.R.S. Employer Identification No.) | |
500 Kendall Street Cambridge, Massachusetts (Address of principal executive offices) | 02142 (Zip Code) | |
(617) 252-7500 (Registrant's telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No ý
Number of shares of Genzyme Stock outstanding as of April 30,July 31, 2009: 269,764,111270,308,386
NOTE REGARDING REFERENCES TO GENZYME
Throughout this Form 10-Q, the words "we," "us," "our" and "Genzyme" refer to Genzyme Corporation as a whole, and "our board of directors" refers to the board of directors of Genzyme Corporation.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements. These forward-looking statements include, among others, statements regarding:
These statements are subject to risks and uncertainties, and our actual results may differ materially from those that are described in this report. These risks and uncertainties include:
We refer to more detailed descriptions of these and other risks and uncertainties under the heading "Risk Factors" in Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations in Part I, Item 2 of this Form 10-Q. We encourage you to read those descriptions carefully. We caution investors not to place substantial reliance on the forward-looking statements contained in this Form 10-Q. These statements, like all statements in this Form 10-Q, speak only as of the date of this report (unless another date is indicated), and we undertake no obligation to update or revise the statements in light of future developments.
NOTE REGARDING INCORPORATION BY REFERENCE
The United States Securities and Exchange Commission, commonly referred to as the SEC, allows us to disclose important information to you by referring you to other documents we have filed with them. The information that we refer you to is "incorporated by reference" into this Form 10-Q. Please read that information.
NOTE REGARDING TRADEMARKS
Genzyme®, Cerezyme®, Ceredase®, Fabrazyme®, Thyrogen®, Myozyme®, Renagel®, Renvela®, Campath®, Clolar®, Evoltra®, Mozobil®, Thymoglobulin®, Cholestagel®, Synvisc®, Seprafilm®, Carticel®, Epicel®, MACI®, and Hectorol® are registered trademarks, and Cholestagel™, Evoltra™, Lumizyme™, and Synvisc-One™ are trademarks, of Genzyme or its subsidiaries. WelChol® is a registered trademark of Sankyo Pharma, Inc. Aldurazyme® is a registered trademark of BioMarin/Genzyme LLC. Elaprase® is a registered trademark of Shire Human Genetic Therapies, Inc. Prochymal® and Chondrogen® are registered trademarks of Osiris Therapeutics, Inc. Fludara® and Leukine® are registered trademarks of Bayer Schering Pharma AG.A.G., and licensed to Genzyme. All other trademarks referred to in this Form 10-Q are the property of their respective owners. All rights reserved.
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, MARCH 31,JUNE 30, 2009
TABLE OF CONTENTS
| | PAGE NO. | ||||
---|---|---|---|---|---|---|
PART I. | FINANCIAL INFORMATION | |||||
ITEM 1. | Financial Statements | |||||
Unaudited, Consolidated Statements of Operations for the Three and Six Months Ended | ||||||
| 7 | |||||
Unaudited, Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008 | 8 | |||||
Unaudited, Consolidated Statements of Cash Flows for the | ||||||
Notes to Unaudited, Consolidated Financial Statements | ||||||
ITEM 2. | Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations | |||||
ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk | |||||
ITEM 4. | Controls and Procedures | |||||
PART II. | OTHER INFORMATION | |||||
ITEM 1. | Legal Proceedings | |||||
ITEM 1A. | Risk Factors | |||||
ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |||||
ITEM 4. | Submission of Matters to a Vote of Security Holders | 85 | ||||
ITEM 6. | Exhibits | |||||
Signatures |
GENZYME CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited, amounts in thousands, except per share amounts)
| | Three Months Ended March 31, | | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2009 | 2008 | | 2009 | 2008 | 2009 | 2008 | ||||||||||||||||
Revenues: | Revenues: | Revenues: | ||||||||||||||||||||||
Net product sales | $ | 1,037,244 | $ | 1,006,268 | Net product sales | $ | 1,115,425 | $ | 1,071,801 | $ | 2,152,669 | $ | 2,078,069 | |||||||||||
Net service sales | 101,499 | 85,864 | Net service sales | 105,693 | 90,622 | 207,192 | 176,486 | |||||||||||||||||
Research and development revenue | 10,128 | 7,929 | Research and development revenue | 7,392 | 8,711 | 17,520 | 16,640 | |||||||||||||||||
Total revenues | 1,148,871 | 1,100,061 | Total revenues | 1,228,510 | 1,171,134 | 2,377,381 | 2,271,195 | |||||||||||||||||
Operating costs and expenses: | Operating costs and expenses: | Operating costs and expenses: | ||||||||||||||||||||||
Cost of products sold | 235,562 | 216,739 | Cost of products sold | 288,899 | 241,343 | 524,461 | 458,082 | |||||||||||||||||
Cost of services sold | 60,250 | 55,574 | Cost of services sold | 61,624 | 58,987 | 121,874 | 114,561 | |||||||||||||||||
Selling, general and administrative | 317,961 | 318,386 | Selling, general and administrative | 354,128 | 347,305 | 672,089 | 665,691 | |||||||||||||||||
Research and development | 206,925 | 262,797 | Research and development | 210,522 | 381,861 | 417,447 | 644,658 | |||||||||||||||||
Amortization of intangibles | 57,598 | 55,658 | Amortization of intangibles | 63,945 | 55,605 | 121,543 | 111,263 | |||||||||||||||||
Contingent consideration expense | 9,090 | — | 9,090 | — | ||||||||||||||||||||
Total operating costs and expenses | 878,296 | 909,154 | ||||||||||||||||||||||
Total operating costs and expenses | 988,208 | 1,085,101 | 1,866,504 | 1,994,255 | ||||||||||||||||||||
Operating income | Operating income | 270,575 | 190,907 | Operating income | 240,302 | 86,033 | 510,877 | 276,940 | ||||||||||||||||
Other income (expenses): | Other income (expenses): | Other income (expenses): | ||||||||||||||||||||||
Gains (losses) on investments in equity securities, net | (105 | ) | 9,153 | (681 | ) | 9,928 | ||||||||||||||||||
Gains (losses) on investments in equity securities, net | (576 | ) | 775 | Gain on acquisition of business | 24,159 | — | 24,159 | — | ||||||||||||||||
Other | (979 | ) | 491 | Other | (2,056 | ) | 582 | (3,035 | ) | 1,073 | ||||||||||||||
Investment income | 5,350 | 14,870 | Investment income | 4,144 | 13,352 | 9,494 | 28,222 | |||||||||||||||||
Interest expense | — | (1,655 | ) | Interest expense | — | (1,149 | ) | — | (2,804 | ) | ||||||||||||||
Total other income | 3,795 | 14,481 | Total other income (expenses) | 26,142 | 21,938 | 29,937 | 36,419 | |||||||||||||||||
Income before income taxes | Income before income taxes | 274,370 | 205,388 | Income before income taxes | 266,444 | 107,971 | 540,814 | 313,359 | ||||||||||||||||
Provision for income taxes | Provision for income taxes | (78,884 | ) | (60,117 | ) | Provision for income taxes | (78,870 | ) | (38,407 | ) | (157,754 | ) | (98,524 | ) | ||||||||||
Net income | Net income | $ | 195,486 | $ | 145,271 | Net income | $ | 187,574 | $ | 69,564 | $ | 383,060 | $ | 214,835 | ||||||||||
Net income per share: | Net income per share: | Net income per share: | ||||||||||||||||||||||
Basic | $ | 0.72 | $ | 0.54 | Basic | $ | 0.69 | $ | 0.26 | $ | 1.42 | $ | 0.80 | |||||||||||
Diluted | $ | 0.70 | $ | 0.52 | Diluted | $ | 0.68 | $ | 0.25 | $ | 1.39 | $ | 0.77 | |||||||||||
Weighted average shares outstanding: | Weighted average shares outstanding: | Weighted average shares outstanding: | ||||||||||||||||||||||
Basic | 270,854 | 267,276 | Basic | 269,958 | 266,904 | 270,406 | 267,127 | |||||||||||||||||
Diluted | 277,628 | 285,208 | Diluted | 274,852 | 284,262 | 276,225 | 285,028 | |||||||||||||||||
The accompanying notes are an integral part of these unaudited, consolidated financial statements.
GENZYME CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited, amounts in thousands, except par value amounts)
| | March 31, 2009 | December 31, 2008 | | June 30, 2009 | December 31, 2008 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
ASSETS | ASSETS | ASSETS | ||||||||||||||||
Current assets: | Current assets: | Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 643,438 | $ | 572,106 | Cash and cash equivalents | $ | 731,930 | $ | 572,106 | |||||||||
Short-term investments | 58,808 | 57,507 | Short-term investments | 74,504 | 57,507 | |||||||||||||
Accounts receivable, net | 1,055,896 | 1,036,940 | Accounts receivable, net | 1,138,828 | 1,036,940 | |||||||||||||
Inventories | 438,905 | 453,437 | Inventories | 586,686 | 453,437 | |||||||||||||
Prepaid expenses and other current assets | 150,709 | 208,040 | Prepaid expenses and other current assets | 138,763 | 208,040 | |||||||||||||
Deferred tax assets | 187,101 | 188,105 | Due from Bayer | 74,647 | — | |||||||||||||
Deferred tax assets | 187,954 | 188,105 | ||||||||||||||||
Total current assets | 2,534,857 | 2,516,135 | ||||||||||||||||
Total current assets | 2,933,312 | 2,516,135 | ||||||||||||||||
Property, plant and equipment, net | Property, plant and equipment, net | 2,354,299 | 2,306,567 | Property, plant and equipment, net | 2,550,269 | 2,306,567 | ||||||||||||
Long-term investments | Long-term investments | 279,524 | 344,078 | Long-term investments | 242,949 | 344,078 | ||||||||||||
Goodwill | Goodwill | 1,400,625 | 1,401,074 | Goodwill | 1,402,073 | 1,401,074 | ||||||||||||
Other intangible assets, net | Other intangible assets, net | 1,597,925 | 1,654,698 | Other intangible assets, net | 2,438,124 | 1,654,698 | ||||||||||||
Deferred tax assets—noncurrent | 304,620 | 269,237 | ||||||||||||||||
Deferred tax assets-noncurrent | Deferred tax assets-noncurrent | 362,043 | 269,237 | |||||||||||||||
Investments in equity securities | Investments in equity securities | 53,413 | 83,325 | Investments in equity securities | 67,386 | 83,325 | ||||||||||||
Other noncurrent assets | Other noncurrent assets | 94,643 | 96,162 | Other noncurrent assets | 98,930 | 96,162 | ||||||||||||
Total assets | $ | 8,619,906 | $ | 8,671,276 | Total assets | $ | 10,095,086 | $ | 8,671,276 | |||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | LIABILITIES AND STOCKHOLDERS' EQUITY | LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||
Current liabilities: | Current liabilities: | Current liabilities: | ||||||||||||||||
Accounts payable | $ | 126,850 | $ | 127,869 | Accounts payable | $ | 160,271 | $ | 127,869 | |||||||||
Accrued expenses | 682,645 | 765,386 | Accrued expenses | 714,974 | 765,386 | |||||||||||||
Deferred revenue | 18,035 | 13,462 | Deferred revenue | 20,710 | 13,462 | |||||||||||||
Current portion of long-term debt and capital lease obligations | 7,792 | 7,566 | Current portion of contingent consideration obligations | 212,196 | — | |||||||||||||
Current portion of long-term debt and capital lease obligations | 7,850 | 7,566 | ||||||||||||||||
Total current liabilities | 835,322 | 914,283 | ||||||||||||||||
Total current liabilities | 1,116,001 | 914,283 | ||||||||||||||||
Long-term debt and capital lease obligations | Long-term debt and capital lease obligations | 121,508 | 124,341 | Long-term debt and capital lease obligations | 119,850 | 124,341 | ||||||||||||
Deferred revenue—noncurrent | 12,704 | 13,175 | ||||||||||||||||
Deferred revenue-noncurrent | Deferred revenue-noncurrent | 12,237 | 13,175 | |||||||||||||||
Long-term contingent consideration obligations | Long-term contingent consideration obligations | 760,994 | — | |||||||||||||||
Other noncurrent liabilities | Other noncurrent liabilities | 310,131 | 313,484 | Other noncurrent liabilities | 305,535 | 313,484 | ||||||||||||
Total liabilities | 1,279,665 | 1,365,283 | Total liabilities | 2,314,617 | 1,365,283 | |||||||||||||
Commitments and contingencies | Commitments and contingencies | Commitments and contingencies | ||||||||||||||||
Stockholders' equity: | Stockholders' equity: | Stockholders' equity: | ||||||||||||||||
Preferred stock, $0.01 par value | — | — | Preferred stock, $0.01 par value | — | — | |||||||||||||
Common stock, $0.01 par value | 2,696 | 2,707 | Common stock, $0.01 par value | 2,701 | 2,707 | |||||||||||||
Additional paid-in capital | 5,759,004 | 5,779,279 | Additional paid-in capital | 5,848,179 | 5,779,279 | |||||||||||||
Accumulated earnings | 1,443,282 | 1,247,796 | Accumulated earnings | 1,630,856 | 1,247,796 | |||||||||||||
Accumulated other comprehensive income | 135,259 | 276,211 | Accumulated other comprehensive income | 298,733 | 276,211 | |||||||||||||
Total stockholders' equity | 7,340,241 | 7,305,993 | Total stockholders' equity | 7,780,469 | 7,305,993 | |||||||||||||
Total liabilities and stockholders' equity | $ | 8,619,906 | $ | 8,671,276 | Total liabilities and stockholders' equity | $ | 10,095,086 | $ | 8,671,276 | |||||||||
The accompanying notes are an integral part of these unaudited, consolidated financial statements.
GENZYME CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited, amounts in thousands)
| | Three Months Ended March 31, | | Six Months Ended June 30, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2009 | 2008 | | 2009 | 2008 | ||||||||||||||||
Cash Flows from Operating Activities: | Cash Flows from Operating Activities: | Cash Flows from Operating Activities: | ||||||||||||||||||||
Net income | $ | 383,060 | $ | 214,835 | ||||||||||||||||||
Net income | $ | 195,486 | $ | 145,271 | Reconciliation of net income to cash flows from operating activities: | |||||||||||||||||
Reconciliation of net income to cash flows from operating activities: | Depreciation and amortization | 208,515 | 183,119 | |||||||||||||||||||
Depreciation and amortization | 98,958 | 91,039 | Stock-based compensation | 109,831 | 96,952 | |||||||||||||||||
Stock-based compensation | 44,560 | 42,346 | Provision for bad debts | 10,808 | 5,844 | |||||||||||||||||
Provision for bad debts | 5,762 | 2,862 | Contingent consideration expense | 9,090 | — | |||||||||||||||||
Equity in income of equity method investments | — | (188 | ) | Gain on acquisition of business | (24,159 | ) | — | |||||||||||||||
(Gains) losses on investments in equity securities, net | 576 | (775 | ) | (Gains) losses on investments in equity securities, net | 681 | (9,928 | ) | |||||||||||||||
Deferred income tax benefit | (24,376 | ) | (24,712 | ) | Deferred income tax benefit | (50,632 | ) | (172,813 | ) | |||||||||||||
Tax benefit from employee stock-based compensation | 6,549 | 17,599 | Tax benefit from employee stock-based compensation | 9,239 | 25,645 | |||||||||||||||||
Excess tax benefits from stock-based compensation | (3,492 | ) | (5,790 | ) | Excess tax benefits from stock-based compensation | (4,424 | ) | (8,647 | ) | |||||||||||||
Other | 2,238 | 1,770 | Other | 4,068 | 1,987 | |||||||||||||||||
Increase (decrease) in cash from working capital changes (excluding impact of acquired assets and assumed liabilities): | Increase (decrease) in cash from working capital changes (excluding impact of acquired assets and assumed liabilities): | |||||||||||||||||||||
Accounts receivable | (59,210 | ) | (57,928 | ) | Accounts receivable | (106,901 | ) | (98,174 | ) | |||||||||||||
Inventories | 818 | (1,239 | ) | Inventories | 21,795 | (4,812 | ) | |||||||||||||||
Prepaid expenses and other current assets | (22,659 | ) | (6,326 | ) | Prepaid expenses and other current assets | (903 | ) | (15,295 | ) | |||||||||||||
Income taxes payable | 85,792 | 9,229 | Income taxes payable | 32,958 | 13,288 | |||||||||||||||||
Accounts payable, accrued expenses and deferred revenue | (73,227 | ) | (53,625 | ) | Accounts payable, accrued expenses and deferred revenue | (2,680 | ) | (52,692 | ) | |||||||||||||
Cash flows from operating activities | 257,775 | 159,533 | Cash flows from operating activities | 600,346 | 179,309 | |||||||||||||||||
Cash Flows from Investing Activities: | Cash Flows from Investing Activities: | Cash Flows from Investing Activities: | ||||||||||||||||||||
Purchases of investments | (13,292 | ) | (146,862 | ) | Purchases of investments | (64,394 | ) | (289,129 | ) | |||||||||||||
Sales and maturities of investments | 75,058 | 180,037 | Sales and maturities of investments | 150,739 | 319,758 | |||||||||||||||||
Purchases of equity securities | (4,870 | ) | (80,699 | ) | Purchases of equity securities | (7,363 | ) | (81,472 | ) | |||||||||||||
Proceeds from sales of investments in equity securities | 1,264 | 1,148 | Proceeds from sales of investments in equity securities | 1,473 | 16,169 | |||||||||||||||||
Purchases of property, plant and equipment | (161,561 | ) | (121,967 | ) | Purchases of property, plant and equipment | (318,324 | ) | (251,785 | ) | |||||||||||||
Distributions from equity method investments | — | 6,595 | Distributions from equity method investments | — | 6,595 | |||||||||||||||||
Purchases of other intangible assets | (8,056 | ) | (7,046 | ) | Acquisitions | (117,073 | ) | — | ||||||||||||||
Other | (47 | ) | 3,107 | Purchases of other intangible assets | (18,345 | ) | (75,400 | ) | ||||||||||||||
Other | (5,198 | ) | 2,571 | |||||||||||||||||||
Cash flows from investing activities | (111,504 | ) | (165,687 | ) | ||||||||||||||||||
Cash flows from investing activities | (378,485 | ) | (352,693 | ) | ||||||||||||||||||
Cash Flows from Financing Activities: | Cash Flows from Financing Activities: | Cash Flows from Financing Activities: | ||||||||||||||||||||
Proceeds from issuance of common stock | 34,526 | 90,243 | Proceeds from the issuance of our common stock | 53,508 | 127,008 | |||||||||||||||||
Repurchases of our common stock | (107,134 | ) | (73,218 | ) | Repurchases of our common stock | (107,134 | ) | (143,012 | ) | |||||||||||||
Excess tax benefits from stock-based compensation | 3,492 | 5,790 | Excess tax benefits from stock-based compensation | 4,424 | 8,647 | |||||||||||||||||
Payments of debt and capital lease obligations | (2,653 | ) | (2,554 | ) | Payments of debt and capital lease obligations | (4,305 | ) | (3,886 | ) | |||||||||||||
Increase (decrease) in bank overdrafts | (3,392 | ) | 18,549 | Increase (decrease) in bank overdrafts | (14,303 | ) | 29,309 | |||||||||||||||
Other | 1,995 | 959 | Other | 3,660 | 2,804 | |||||||||||||||||
Cash flows from financing activities | (73,166 | ) | 39,769 | Cash flows from financing activities | (64,150 | ) | 20,870 | |||||||||||||||
Effect of exchange rate changes on cash | Effect of exchange rate changes on cash | (1,773 | ) | (17,829 | ) | Effect of exchange rate changes on cash | 2,113 | (20,811 | ) | |||||||||||||
Increase in cash and cash equivalents | 71,332 | 15,786 | ||||||||||||||||||||
Increase (decrease) in cash and cash equivalents | Increase (decrease) in cash and cash equivalents | 159,824 | (173,325 | ) | ||||||||||||||||||
Cash and cash equivalents at beginning of period | Cash and cash equivalents at beginning of period | 572,106 | 867,012 | Cash and cash equivalents at beginning of period | 572,106 | 867,012 | ||||||||||||||||
Cash and cash equivalents at end of period | Cash and cash equivalents at end of period | $ | 643,438 | $ | 882,798 | Cash and cash equivalents at end of period | $ | 731,930 | $ | 693,687 | ||||||||||||
Supplemental disclosures of non-cash transactions: | Supplemental disclosures of non-cash transactions: | |||||||||||||||||||||
Strategic Transactions—Note 6. |
The accompanying notes are an integral part of these unaudited, consolidated financial statements.
GENZYME CORPORATION AND SUBSIDIARIES
Notes to Unaudited, Consolidated Financial Statements
1. Description of Business
We are a global biotechnology company dedicated to making a major impact on the lives of people with serious diseases. Our broad product and service portfolio is focused on rare disorders, renal disease, orthopaedics, cancer, transplant and immune disease, and diagnostic and predictive testing.
In the fourth quarter of 2008, we changed our segment reporting structure to better reflect the way we manage and measure the performance of our businesses. Under the new reporting structure, we are organized into four financial reporting units, which we also consider to be our reporting segments:
Our transplant business unit, which develops, manufactures and distributes therapeutic products that address pre-transplantation, prevention and treatment of graft rejection in organ transplantation and other hematologic and auto-immune disorders, and our genetics business unit, which provides testing services for the oncology, prenatal and reproductive markets, were formerly reported as separate reporting segments. Effective as of the fourth quarter of 2008, we include our transplant and genetics business units under the caption "Other." We also report the activities of our MS, diagnostic products, bulk pharmaceuticals and immune mediated disease business units under the caption "Other." These operating segments did not meet the quantitative threshold for separate segment reporting. We have revised our 2008 segment disclosures to conform to our 2009 presentation.
We report our corporate, general and administrative operations and corporate science activities under the caption "Corporate."
GENZYME CORPORATION AND SUBSIDIARIES
Notes to Unaudited, Consolidated Financial Statements (Continued)
2. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
Our unaudited, consolidated financial statements for each period include the statements of operations, balance sheets and statements of cash flows for our operations taken as a whole. We have eliminated all intercompany items and transactions in consolidation. We have reclassified certain 2008 data to conform to our 2009 presentation. We prepare our unaudited, consolidated financial statements following the requirements of the SEC for interim reporting. As
GENZYME CORPORATION AND SUBSIDIARIES
Notes to Unaudited, Consolidated Financial Statements (Continued)
2. Basis of Presentation and Significant Accounting Policies (Continued)
permitted under these rules, we condense or omit certain footnotes and other financial information that are normally required by accounting principles generally accepted in the United States.
These financial statements include all normal and recurring adjustments that we consider necessary for the fair presentation of our financial position and results of operations. Since these are interim financial statements, you should also read our audited, consolidated financial statements and notes included in Exhibit 13 to our 2008 Form 10-K. Revenues, expenses, assets and liabilities can vary from quarter to quarter. Therefore, the results and trends in these interim financial statements may not be indicative of results for future periods. The balance sheet data as of December 31, 2008 that is included in this Form 10-Q was derived from our audited financial statements.
Our unaudited, consolidated financial statements for each period include the accounts of our wholly owned and majority owned subsidiaries. As a result of our adoption of Financial Accounting Standards Board, or FASB, Interpretation No., or FIN, 46R, "Consolidation of Variable Interest Entities," we also consolidate certain variable interest entities for which we are the primary beneficiary. For consolidated subsidiaries in which we have less than a 100% ownership interest, we record the minority interest expense in "Other" in our consolidated statements of operations for(representing the ownership interest of the minority owner whichowner) because the amount was immaterial for all periods presented. We use the equity method of accounting to account for our investments in entities in which we have a substantial ownership interest (20% to 50%) which do not fall in the scope of FIN 46R, or over which we exercise significant influence. Our consolidated net income includes our share of the earnings or losses of these entities.
Any material subsequent events have been considered for disclosure through the filing date of this Form 10-Q.
Recent Accounting Pronouncements
Periodically, accounting pronouncements and related information on the adoption, interpretation and application of accounting principles generally accepted in the United States are issued or amended by the various U.S. financial accounting regulatory groups. The following table provides a description of the types of accounting pronouncements that are frequently issued or amended:
Accounting Regulatory Group | Type of Pronouncement Issued or Amended | |
---|---|---|
Accounting Principles Board | APB Opinion No., or APB | |
FASB | FASB Statement of Financial Accounting Standards No., or FAS | |
FASB Statement of Position No., or FSP | ||
Emerging Issues Task Force Issue No., or EITF |
GENZYME CORPORATION AND SUBSIDIARIES
Notes to Unaudited, Consolidated Financial Statements (Continued)
2. Basis of Presentation and Significant Accounting Policies (Continued)
The following table shows recently issued accounting pronouncements and our position for adoption:
Pronouncements | Relevant Requirements | Issued Date/ Our Effective Dates | Status | |||
---|---|---|---|---|---|---|
| Issued | |||||
FAS 166, "Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140." | Improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance and cash flows; and a transferor's continuing involvement, if any, in transferred financial assets. | Issued June 2009. Effective for the first annual reporting period that begins after November 15, 2009. | We do not expect the adoption of this pronouncement to have any affect on our consolidated financial statements. | |||
FAS 167, "Amendments to FASB Interpretation No. 46(R)." | Improves financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. | Issued June 2009. Effective for the first annual reporting period that begins after November 15, 2009. | We are evaluating the impact this pronouncement will have, if any, on our consolidated financial statements. | |||
FAS 168, "The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162." | Establishes the FASB Accounting Standards Codification (Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). | Issued June 2009 to replace FAS 162, "The Hierarchy of Generally Accepted Accounting Principles." Effective for financial statements issued for interim and annual periods | We do not expect the adoption of this pronouncement to have a material impact on our consolidated financial statements. |
GENZYME CORPORATION AND SUBSIDIARIES
Notes to Unaudited, Consolidated Financial Statements (Continued)
2. Basis of Presentation and Significant Accounting Policies (Continued)
Pronouncements | Relevant Requirements | Issued Date/ Our Effective Dates | Status | |||
---|---|---|---|---|---|---|
| ||||||
| ||||||
|
GENZYME CORPORATION AND SUBSIDIARIES
Notes to Unaudited, Consolidated Financial Statements (Continued)
2. Basis of Presentation and Significant Accounting Policies (Continued)
| ||||||
FSP FAS 107-1 and APB 28-1, | Amends guidance on disclosures about fair value and interim financial reporting to require disclosure about fair value of financial instruments whenever summarized financial information is issued for interim reporting periods. | Issued April 2009. Effective for periods ending after June 15, 2009. | ||||
| Amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of | Issued April 2009. Effective for periods ending after June 15, 2009. | ||||
| The adoption of this pronouncement did not have a material impact on our consolidated financial statements for the | |||||
| Provides guidelines for making fair value measurements more consistent with the principles presented in FAS 157,"Fair Value Measurements," as well as additional authoritative guidance in determining whether a market is active or inactive, and whether a transaction is distressed. Applicable to all assets and liabilities (i.e. financial and nonfinancial) and will require enhanced disclosures. | Issued April 2009. Effective for periods ending after June 15, 2009. | The adoption of this pronouncement |
GENZYME CORPORATION AND SUBSIDIARIES
Notes to Unaudited, Consolidated Financial Statements (Continued)
3. Fair Value Measurements
A significant number of our financial instruments are carried at fair value. These assets and liabilities include:
Fair Value Measurement—Definition and Hierarchy
FAS 157 provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. FAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (i.e., the "exit price") in an orderly transaction between market participants at the measurement date. In determining fair value, FAS 157 permits the use of
GENZYME CORPORATION AND SUBSIDIARIES
Notes to Unaudited, Consolidated Financial Statements (Continued)
3. Fair Value Measurements (Continued)
various valuation approaches, including market, income and cost approaches. FAS 157 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available.
The fair value hierarchy is broken down into three levels based on the reliability of inputs. We have categorized our fixed income, equity securities, derivatives and equity securitiescontingent consideration obligations within the hierarchy as follows:
Valuation Techniques
Fair value is a market-based measure considered from the perspective of a market participant who would buy the asset or assume the liability rather than our own specific measure. All of our fixed income securities are priced using a variety of daily data sources, largely readily-available market data and broker quotes. To validate these prices, we compare the fair values of our fixed income investments using market data from observable and corroborated sources. We also perform the fair value calculations for our derivatives and equity securities using market data from observable and corroborated sources. We determine the fair value of the contingent consideration obligations based on a probability-weighted income approach. The measurement is based on significant inputs not observable in the market. In periods of market inactivity, the observability of prices and inputs may be reduced for certain instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2 or from Level 2 to Level 3.
GENZYME CORPORATION AND SUBSIDIARIES
Notes to Unaudited, Consolidated Financial Statements (Continued)
3. Fair Value Measurements (Continued)
The following tables set forth our financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31,June 30, 2009 and December 31, 2008 (amounts in thousands):
Description | Description | Balance as of March 31, 2009 | Level 1 | Level 2 | Level 3 | Description | Balance as of June 30, 2009 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Fixed income investments(1): | Cash equivalents: | Money market funds/other | $ | 374,771 | $ | 374,771 | $ | — | $ | — | Cash equivalents: | Money market funds/other | $ | 548,247 | $ | 548,247 | $ | — | $ | — | ||||||||||||||
Short-term investments: | U.S. Treasury notes | 7,508 | 7,508 | — | — | Short-term investments: | U.S. Treasury notes | 7,357 | 7,357 | — | — | |||||||||||||||||||||||
U.S. agency notes | 7,081 | — | 7,081 | — | U.S. agency notes | 13,463 | — | 13,463 | — | |||||||||||||||||||||||||
Corporate notes—global | 44,219 | — | 44,219 | — | Corporate notes—global | 50,601 | — | 50,601 | — | |||||||||||||||||||||||||
Commercial paper | 3,083 | — | 3,083 | — | ||||||||||||||||||||||||||||||
Total | 58,808 | 7,508 | 51,300 | — | ||||||||||||||||||||||||||||||
Total | 74,504 | 7,357 | 67,147 | — | ||||||||||||||||||||||||||||||
Long-term investments: | U.S. Treasury notes | 55,493 | 55,493 | — | — | |||||||||||||||||||||||||||||
Non U.S. Governmental notes | 7,290 | — | 7,290 | — | Long-term investments: | U.S. Treasury notes | 48,672 | 48,672 | — | — | ||||||||||||||||||||||||
U.S. agency notes | 108,039 | — | 108,039 | — | Non U.S. Governmental notes | 7,409 | — | 7,409 | — | |||||||||||||||||||||||||
Corporate notes—global | 108,702 | — | 108,702 | — | U.S. agency notes | 91,038 | — | 91,038 | — | |||||||||||||||||||||||||
Corporate notes—global | 95,830 | — | 95,830 | — | ||||||||||||||||||||||||||||||
Total | 279,524 | 55,493 | 224,031 | — | ||||||||||||||||||||||||||||||
Total | 242,949 | 48,672 | 194,277 | — | ||||||||||||||||||||||||||||||
Total fixed income investments | 713,103 | 437,772 | 275,331 | — | ||||||||||||||||||||||||||||||
Total fixed income investments | 865,700 | 604,276 | 261,424 | — | ||||||||||||||||||||||||||||||
Derivatives: | Foreign exchange forward contracts(2) | 2,237 | — | 2,237 | — | |||||||||||||||||||||||||||||
Equity holdings(1): | Publicly-traded equity securities | 27,619 | 27,619 | — | — | Publicly-traded equity securities | 39,182 | 39,182 | — | — | ||||||||||||||||||||||||
�� | ||||||||||||||||||||||||||||||||||
Derivatives: | Foreign exchange forward contracts | (468 | ) | — | (468 | ) | — | |||||||||||||||||||||||||||
Contingent liabilities: | Contingent consideration obligations(2) | (973,190 | ) | — | — | (973,190 | ) | |||||||||||||||||||||||||||
Total assets (liabilities) at fair value | Total assets (liabilities) at fair value | $ | 742,959 | $ | 465,391 | $ | 277,568 | $ | — | Total assets (liabilities) at fair value | $ | (68,776 | ) | $ | 643,458 | $ | 260,956 | $ | (973,190 | ) | ||||||||||||||
GENZYME CORPORATION AND SUBSIDIARIES
Notes to Unaudited, Consolidated Financial Statements (Continued)
3. Fair Value Measurements (Continued)
Description | Description | Balance as of December 31, 2008 | Level 1 | Level 2 | Level 3 | Description | Balance as of December 31, 2008 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Fixed income investments(1): | Cash equivalents: | Money market funds/other | $ | 357,680 | $ | 357,680 | $ | — | $ | — | Cash equivalents: | Money market funds/other | $ | 357,680 | $ | 357,680 | $ | — | $ | — | ||||||||||||||
Short-term investments: | U.S. Treasury notes | 7,505 | 7,505 | — | — | Short-term investments: | U.S. Treasury notes | 7,505 | 7,505 | — | — | |||||||||||||||||||||||
U.S. agency notes | 10,328 | — | 10,328 | — | U.S. agency notes | 10,328 | — | 10,328 | — | |||||||||||||||||||||||||
Corporate notes—global | 39,674 | — | 39,674 | — | Corporate notes—global | 39,674 | — | 39,674 | — | |||||||||||||||||||||||||
Total | 57,507 | 7,505 | 50,002 | — | Total | 57,507 | 7,505 | 50,002 | — | |||||||||||||||||||||||||
Long-term investments: | U.S. Treasury notes | 75,040 | 75,040 | — | — | Long-term investments: | U.S. Treasury notes | 75,040 | 75,040 | — | — | |||||||||||||||||||||||
Non U.S. Governmental notes | 7,322 | — | 7,322 | — | Non U.S. Governmental notes | 7,322 | — | 7,322 | — | |||||||||||||||||||||||||
U.S. agency notes | 121,707 | — | 121,707 | — | U.S. agency notes | 121,707 | — | 121,707 | — | |||||||||||||||||||||||||
Corporate notes—global | 140,009 | — | 140,009 | — | Corporate notes—global | 140,009 | — | 140,009 | — | |||||||||||||||||||||||||
Total | 344,078 | 75,040 | 269,038 | — | Total | 344,078 | 75,040 | 269,038 | — | |||||||||||||||||||||||||
Total fixed income investments | 759,265 | 440,225 | 319,040 | — | Total fixed income investments | 759,265 | 440,225 | 319,040 | — | |||||||||||||||||||||||||
Equity holdings(1): | Publicly-traded equity securities | 56,596 | 56,596 | — | — | |||||||||||||||||||||||||||||
Derivatives: | Foreign exchange forward contracts(2) | (1,434 | ) | — | (1,434 | ) | — | Foreign exchange forward contracts | (1,434 | ) | — | (1,434 | ) | — | ||||||||||||||||||||
Equity holdings(1): | Publicly-traded equity securities | 56,596 | 56,596 | — | — | |||||||||||||||||||||||||||||
Total assets (liabilities) at fair value | Total assets (liabilities) at fair value | $ | 814,427 | $ | 496,821 | $ | 317,606 | $ | — | Total assets (liabilities) at fair value | $ | 814,427 | $ | 496,821 | $ | 317,606 | $ | — | ||||||||||||||||
Changes in the fair value of the our foreign exchange forward contracts are recordedLevel 3 contingent consideration obligations during the six months ended June 30, 2009 were as follows (amounts in unrealized foreign exchange gains and losses, a component of selling, general and administrative expenses, or SG&A, in our consolidated statements of operations.thousands):
Contingent consideration obligations related to acquisition from Bayer in May 2009 | $ | (964,100 | ) | |
Payments | — | |||
Contingent consideration expense | (9,090 | ) | ||
Fair value at June 30, 2009 | $ | (973,190 | ) | |
The carrying amounts reflected in our consolidated balance sheets for cash, accounts receivable, prepaid expenses and other current assets, accounts payable, and accrued expenses, current portion of contingent consideration obligations and current portion of long-term debt and capital lease obligations approximate fair value due to their short-term maturities.
GENZYME CORPORATION AND SUBSIDIARIES
Notes to Unaudited, Consolidated Financial Statements (Continued)
3. Fair Value Measurements (Continued)
Derivative Instruments
As a result of our worldwide operations, we may face exposure to potential adverse movements in foreign currency exchange rates. Exposures to currency fluctuations that result from sales of our products in foreign markets are partially offset by the impact of currency fluctuations on our international expenses. We may also use derivatives, primarily foreign exchange forward contracts for which we do not seekapply hedge accounting treatment under FAS 133, "Accounting for Derivative Instruments and Hedging Activities," or FAS 133, to further reduce our exposure to changes in
GENZYME CORPORATION AND SUBSIDIARIES
Notes to Unaudited, Consolidated Financial Statements (Continued)
3. Fair Value Measurements (Continued)
exchange rates, primarily to offset the earnings effect from short-term foreign currency assets and liabilities. We account for such derivatives at market value with the resulting gains and losses reflected within SG&A expense in our consolidated statements of operations. We do not have any derivatives designated as hedging instruments under FAS 133 and we do not use derivative instruments for trading or speculative purposes.
Foreign Exchange Forward Contracts
Generally, we enter into foreign exchange forward contracts with maturities of not more than 15 months. All foreign exchange forward contracts in effect as of March 31,June 30, 2009 and December 31, 2008 had maturities of 1 to 2 months. We report these contracts on a net basis. Net asset derivatives are included in prepaid expenses and other current assets and net liability derivatives are included in accrued expenses in our consolidated balance sheets.
In accordance with the provisions of FAS 161, "Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133," the following table summarizes the balance sheet locationclassification of the fair value of these derivatives on both a gross and a net basis as of March 31,June 30, 2009 and December 31, 2008 (amounts in thousands):
| Foreign Exchange Forward Contracts | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | As Reported | ||||||||||
| Gross | Net | |||||||||||
| Asset Derivatives | Liability Derivatives | Asset Derivatives | Liability Derivatives | |||||||||
Period | Prepaid expenses and other current assets | Accrued expenses | Prepaid expenses and other current assets | Accrued expenses | |||||||||
March 31, 2009 | $ | 2,657 | $ | 420 | $ | 2,237 | $ | — | |||||
December 31, 2008 | $ | 2,758 | $ | 4,192 | $ | — | $ | 1,434 |
| Foreign Exchange Forward Contracts | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | As Reported | ||||||||||
| Gross | Net | |||||||||||
| Asset Derivatives | Liability Derivatives | Asset Derivatives | Liability Derivatives | |||||||||
As of: | Prepaid expenses and other current assets | Accrued expenses | Prepaid expenses and other current assets | Accrued expenses | |||||||||
June 30, 2009 | $ | 87 | $ | 555 | $ | — | $ | 468 | |||||
December 31, 2008 | $ | 2,758 | $ | 4,192 | $ | — | $ | 1,434 |
Total foreign exchange (gains) and losses included in SG&A in our consolidated statements of operations includes unrealized and realized (gains) and losses related to both our foreign exchange forward contracts and our foreign currency assets and liabilities. The net impact of our overall unrealized and realized foreign exchange (gains) and losses for both the three and six months ended March 31,June 30, 2009 and 2008 was not significant.
In accordance with the provisions of FAS 161, the following table summarizes only the effect of the unrealized and realized (gains) and losses related to our foreign exchange forward contracts on our consolidated statements of operations for the three months ended March 31, 2009 and 2008 (amounts in thousands):
| Three Months Ended March 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2009 | 2008 | |||||||||
Derivative Instrument | Statement of Operations Location | Net (Gains) Losses Recorded | Statement of Operations Location | Net (Gains) Losses Recorded | |||||||
Foreign exchange forward contracts | SG&A | $ | (10,830 | ) | SG&A | $ | 35,897 |
GENZYME CORPORATION AND SUBSIDIARIES
Notes to Unaudited, Consolidated Financial Statements (Continued)
3. Fair Value Measurements (Continued)
statements of operations for the three and six months ended June 30, 2009 and 2008 (amounts in thousands):
| | Net Loss Reported | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
| Statement of Operations Location | ||||||||||||||
Derivative Instrument | 2009 | 2008 | 2009 | 2008 | |||||||||||
Foreign exchange forward contracts | SG&A | $ | 18,728 | $ | 4,296 | $ | 7,898 | $ | 40,193 |
4. Net Income Per Share
The following table sets forth our computation of basic and diluted net income per common share (amounts in thousands, except per share amounts):
| | Three Months Ended March 31, | | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2009 | 2008 | | 2009 | 2008 | 2009 | 2008 | ||||||||||||||||
Net income—basic | Net income—basic | $ | 195,486 | $ | 145,271 | Net income—basic | $ | 187,574 | $ | 69,564 | $ | 383,060 | $ | 214,835 | ||||||||||
Effect of dilutive securities: | Effect of dilutive securities: | Effect of dilutive securities: | ||||||||||||||||||||||
Interest expense and debt fee amortization, net of tax, related to our 1.25% convertible senior notes(1) | — | 1,886 | Interest expense and debt fee amortization, net of tax, related to our 1.25% convertible senior notes(1) | — | 1,886 | — | 3,772 | |||||||||||||||||
Net income—diluted | Net income—diluted | $ | 195,486 | $ | 147,157 | Net income—diluted | $ | 187,574 | $ | 71,450 | $ | 383,060 | $ | 218,607 | ||||||||||
Shares used in computing net income per common share—basic | Shares used in computing net income per common share—basic | 270,854 | 267,276 | Shares used in computing net income per common share—basic | 269,958 | 266,904 | 270,406 | 267,127 | ||||||||||||||||
Effect of dilutive securities: | Effect of dilutive securities: | Effect of dilutive securities: | ||||||||||||||||||||||
Shares issuable upon the assumed conversion of our 1.25% convertible senior notes(1) | — | 9,686 | Shares issuable upon the assumed conversion of our 1.25% convertible senior notes(1) | — | 9,686 | — | 9,686 | |||||||||||||||||
Stock options(2) | 5,553 | 7,791 | Stock options(2) | 3,555 | 7,123 | 4,554 | 7,712 | |||||||||||||||||
Restricted stock units | 1,138 | 443 | Restricted stock units | 1,303 | 538 | 1,221 | 491 | |||||||||||||||||
Other | 83 | 12 | Other | 36 | 11 | 44 | 12 | |||||||||||||||||
Dilutive potential common shares | 6,774 | 17,932 | Dilutive potential common shares | 4,894 | 17,358 | 5,819 | 17,901 | |||||||||||||||||
Shares used in computing net income per common share—diluted(1,2) | Shares used in computing net income per common share—diluted(1,2) | 277,628 | 285,208 | Shares used in computing net income per common share—diluted(1,2) | 274,852 | 284,262 | 276,225 | 285,028 | ||||||||||||||||
Net income per common share: | Net income per common share: | Net income per common share: | ||||||||||||||||||||||
Basic | $ | 0.72 | $ | 0.54 | Basic | $ | 0.69 | $ | 0.26 | $ | 1.42 | $ | 0.80 | |||||||||||
Diluted | $ | 0.70 | $ | 0.52 | Diluted | $ | 0.68 | $ | 0.25 | $ | 1.39 | $ | 0.77 | |||||||||||
GENZYME CORPORATION AND SUBSIDIARIES
Notes to Unaudited, Consolidated Financial Statements (Continued)
4. Net Income Per Share (Continued)
the three and six months ended March 31,June 30, 2009, because we redeemed these notes, primarily for cash, on December 1, 2008.
| Three Months Ended March 31, | ||||||
---|---|---|---|---|---|---|---|
| 2009 | 2008 | |||||
Shares issuable upon exercise of outstanding options | 8,650 | 1,982 |
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2009 | 2008 | 2009 | 2008 | |||||||||
Shares issuable upon exercise of outstanding options | 19,732 | 4,258 | 14,191 | 3,120 |
GENZYME CORPORATION AND SUBSIDIARIES
Notes to Unaudited, Consolidated Financial Statements (Continued)
5. Comprehensive Income
The components of comprehensive income for the periods presented are as follows (amounts in thousands):
| | Three Months Ended March 31, | | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2009 | 2008 | | 2009 | 2008 | 2009 | 2008 | ||||||||||||||||
Comprehensive income, net of tax: | Comprehensive income, net of tax: | Comprehensive income, net of tax: | ||||||||||||||||||||||
Net income | Net income | $ | 195,486 | $ | 145,271 | Net income | $ | 187,574 | $ | 69,564 | $ | 383,060 | $ | 214,835 | ||||||||||
Other comprehensive income (loss): | Other comprehensive income (loss): | Other comprehensive income (loss): | ||||||||||||||||||||||
Foreign currency translation adjustments | (120,148 | ) | 109,654 | Foreign currency translation adjustments | 153,780 | (3,981 | ) | 33,632 | 105,673 | |||||||||||||||
Pension liability adjustments, net of tax(1) | — | 78 | Pension liability adjustments, net of tax(1) | — | (7 | ) | — | 71 | ||||||||||||||||
Unrealized gains (losses) on securities, net of tax: | Unrealized gains (losses) on securities, net of tax: | |||||||||||||||||||||||
Unrealized gains (losses) arising during the period, net of tax | (20,607 | ) | 3,905 | Unrealized gains (losses) arising during the period, net of tax | 9,657 | 806 | (10,950 | ) | 4,711 | |||||||||||||||
Reclassification adjustment for gains included in net income, net of tax | (197 | ) | (270 | ) | Reclassification adjustment of (gains) losses included in net income, net of tax | 37 | (5,628 | ) | (160 | ) | (5,898 | ) | ||||||||||||
Unrealized gains (losses) on securities, net of tax(2) | (20,804 | ) | 3,635 | Unrealized gains (losses) on securities, net of tax(2) | 9,694 | (4,822 | ) | (11,110 | ) | (1,187 | ) | |||||||||||||
Other comprehensive income (loss) | (140,952 | ) | 113,367 | Other comprehensive income (loss) | 163,474 | (8,810 | ) | 22,522 | 104,557 | |||||||||||||||
Comprehensive income | Comprehensive income | $ | 54,534 | $ | 258,638 | Comprehensive income | $ | 351,048 | $ | 60,754 | $ | 405,582 | $ | 319,392 | ||||||||||
GENZYME CORPORATION AND SUBSIDIARIES
Notes to Unaudited, Consolidated Financial Statements (Continued)
6. Strategic Transactions
We account for business combinations completed prior to January 1, 2009 in accordance with FAS 141 and business combinations completed on or after January 1, 2009 in accordance with FAS 141R. FAS 141R modifies the criteria that must be met to qualify as a business combination and prescribes new accounting requirements that differ significantly from FAS 141. Among various other requirements and differences, the following table illustrates how we account for specific elements of our business combinations under FAS 141 and FAS 141R:
Element | Prior to January 1, 2009, FAS 141 | On or after January 1, 2009, FAS 141R | ||||||
---|---|---|---|---|---|---|---|---|
Transaction costs | • | Capitalized as cost of acquisition | • | Expensed as incurred | ||||
| • | Capitalized as cost of acquisition if certain criteria were met | • | Expensed as incurred at or subsequent to acquisition date | ||||
| • | Measured at fair value and expensed on acquisition date, or capitalized as an intangible asset if certain criteria were met | • | Measured at fair value and capitalized as an intangible asset and tested for impairment until completion of program | ||||
• | Amortized from date of completion over estimated useful life | |||||||
Contingent consideration | • |
| • | Measured at fair value and recorded on acquisition date | ||||
• | Capitalized as cost of acquisition when contingency was resolved | • | Re-measured in subsequent periods with an adjustment to earnings | |||||
• | No subsequent re-measurement | |||||||
Negative goodwill (excess of the value of acquired assets over consideration transferred) | • | Offset other long-lived intangibles acquired | • | Recognized as a gain in our consolidated statements of operations | ||||
Changes in deferred tax assets and valuation allowances | • | Recorded as adjustments to goodwill | • | Recorded as tax expense | ||||
Adjustments to acquisition accounting | • | Recorded in the current period financial statements | • | Recorded as adjustments to prior period financial statements |
Pending Acquisition from Bayer
On March 30, 2009, we entered into an agreement with Bayer to exclusively in-license and acquire:
GENZYME CORPORATION AND SUBSIDIARIES
Notes to Unaudited, Consolidated Financial Statements (Continued)
6. Strategic Transactions (Continued)
Strategic Alliance with Osiris Therapeutics, Inc.
In October 2008, we entered into a strategic alliance with Osiris Therapeutics, Inc., or Osiris, whereby we obtained an exclusive license to develop and commercialize Prochymal and Chondrogen, mesenchymal stem cell products, outside of the United States and Canada. Osiris will commercialize Prochymal and Chondrogen in the United States and Canada. We paid Osiris a nonrefundable upfront payment of $75.0 million in November 2008 and an additional $55.0 million nonrefundable upfront license fee in July 2009, both of which were recorded as charges to research and development expense in our consolidated statement of operations in the fourth quarter of 2008. The results of these programs are included under the category "Other" in our segment disclosures. The full description of our strategic alliance with Osiris is provided in Note C., "Mergers, Acquisitions and Strategic Transactions—Strategic Alliance with Osiris," to our consolidated financial statements included in Exhibit 13 to our 2008 Form 10-K.
Acquisition from Bayer
On May 29, 2009, we completed a transaction with Bayer to:
The agreement also provides an opportunity to employ certain members of Bayer's commercial and manufacturing teams for all three products. Prior to this agreement,transaction, we shared with Bayer the development and certain commercial rights to alemtuzumab for the treatment of MS and Campath for oncology.and received two-thirds of Campath net profits on U.S. sales and a royalty on foreign sales. Under theour new agreement,arrangement with Bayer, prior to regulatory approval of alemtuzumab as a treatment for MS, we will have primary responsibility for its development while Bayer will continue to fund that development at current levels.levels and will participate on the development steering committee. We will have worldwide commercialization rights, with Bayer retaining an option to co-promote the product as a treatment for MS. In exchange for the above, Bayer is eligible to receive the following contingent purchase price payments:
GENZYME CORPORATION AND SUBSIDIARIES
Notes to Unaudited, Consolidated Financial Statements (Continued)
6. Strategic Transactions (Continued)
The agreement also includes our purchase of We will utilize Bayer for certain transition services and purchase commercial supply of Fludara and Leukine from Bayer. We have employed certain members of Bayer's commercial teams for all three products and have an opportunity to employ certain members of Bayer's manufacturing team if we acquire the Leukine facility. The transaction will behas been accounted for as a business combination under FAS 141R and is expected to close in the second quarter of 2009, after the satisfaction of closing conditions, including receipt of clearance from the U.S. Federal Trade Commission, or FTC, and Department of Justice, or DOJ. The transaction will be included in our results of operations beginning on May 29, 2009, the date of acquisition. The results for Campath, for oncology, Fludara and Leukine will beare included in our Hematologic Oncology reporting segment and the resultsdevelopment costs of alemtuzumab for the treatment of MS will beare included in our MS business unit, which is reported under the caption "Other." The fair value of the consideration and acquired assets at the date of acquisition consisted of the following (amounts in thousands):
Cash, net of refundable cash deposits | $ | 42,425 | ||||
Contingent consideration obligations | 964,100 | |||||
Total fair value of total consideration | $ | 1,006,525 | ||||
Inventory | $ | 136,400 | ||||
Developed technology: | ||||||
Fludara (to be amortized over 5 years) | 182,100 | |||||
Campath (to be amortized over 10 years) | 71,000 | |||||
Leukine (to be amortized over 12 years) | 8,272 | |||||
IPR&D—alemtuzumab for MS | 632,912 | |||||
Total fair value of assets acquired | 1,030,684 | |||||
Gain on acquisition of business | $ | 24,159 | ||||
At closing, we paid a total of $117.1 million to Bayer, of which $74.6 million is refundable and a majority of which was received in July 2009. The remaining non-refundable amount of $42.4 million represents a payment for acquired inventory. The contingent consideration obligations are net of the continued funding expected to be received from Bayer for the development of alemtuzumab for MS. We determined the fair value of the contingent consideration obligations based on a probability-weighted income approach derived from revenue estimates and probability assessment with respect to regulatory approval of alemtuzumab for MS. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in FAS 157. The resultant probability-weighted cash flows were then discounted using discount rates of 11% for Campath, Fludara and Leukine and 13% for alemtuzumab for MS.
Of the $964.1 million total contingent consideration obligations recorded as of the acquisition date, $529.1 million related to Campath, Fludara and Leukine, and $435.0 million related to alemtuzumab for MS. Each period we revalue the contingent consideration obligations to their then fair value and record increases in the fair value as contingent consideration expense and decreases in the fair value as a reduction of contingent consideration expense. Increases or decreases in the fair value of the contingent consideration obligations can result from changes in discount periods and rates, changes in the timing and amount of revenue estimates and changes in probability adjustments with respect to regulatory approval of alemtuzumab for MS. As of June 30, 2009, the fair value of the contingent consideration obligations was $973.2 million. Accordingly, we recorded contingent consideration
GENZYME CORPORATION AND SUBSIDIARIES
Notes to Unaudited, Consolidated Financial Statements (Continued)
6. Strategic Transactions (Continued)
expense of $9.1 million in our consolidated statements of operations for the three and six months ended June 30, 2009. As of June 30, 2009, we have not made any contingent consideration payments to, or received any research and development funding from, Bayer or adjusted any of the assumptions used in determining the fair value of the contingent consideration obligations.
At the date of acquisition, alemtuzumab for MS had not reached technological feasibility nor had an alternative future use and is therefore considered to be IPR&D. In accordance with FAS 141R, we recorded the fair value of the purchase price attributable to IPR&D as an indefinite-lived intangible asset. We will test the asset annually for impairment, or earlier if conditions warrant. Amortization of this asset will begin upon regulatory approval based on the then estimated useful life of the asset.
The fair value assigned to purchased IPR&D was estimated by discounting, to present value, the cash flows expected to result from the project once it has reached technological feasibility. We used a discount rate of 16% and cash flows that have been probability-adjusted to reflect the risks of advancement through the product approval process, which we believe are appropriate and representative of market participant assumptions. In estimating future cash flows, we also considered other tangible and intangible assets required for successful exploitation of the technology resulting from the purchased IPR&D project and adjusted future cash flows for a charge reflecting the contribution to value these assets.
The fair value of the identifiable assets acquired in this transaction of $1.03 billion exceeded the fair value of the purchase price of $1.01 billion. As a result, in accordance with FAS 141R, we recognized a gain on acquisition of business of $24.2 million in our consolidated statements of operations for the three and six months ended June 30, 2009. The fair value of the consideration and assets remain subject to potential adjustments.
SG&A in our consolidated statements of operations for the three and six months ended June 30, 2009 includes $4.0 million of acquisition-related costs, primarily legal fees, associated with the Bayer transaction.
Purchase of Intellectual Property from EXACT Sciences Corporation
On January 27, 2009, we purchased certain intellectual property in the fields of prenatal testing and reproductive health from EXACT Sciences Corporation, or EXACT Sciences, for our diagnostic testing services business and 3,000,000 shares of EXACT Sciences common stock. We paid EXACT Sciences total cash consideration of $22.7 million. Of this amount, we allocated $4.5 million to the acquired shares of EXACT Sciences common stock based on the fair value of the stock on the date of acquisition, which we recorded as an increase to other noncurrent assetsinvestments in equity securities in our consolidated balance sheet as of March 31, 2009. As the purchased assets did not qualify as a business combination under FAS 141R and have not reached technological feasibility nor have alternative future use, we allocated
GENZYME CORPORATION AND SUBSIDIARIES
Notes to Unaudited, Consolidated Financial Statements (Continued)
6. Strategic Transactions (Continued)
the remaining $18.2 million to the acquired intellectual property, which we recorded as a charge to research and development expenses in our consolidated statement of operations for the three months ended March 31, 2009. We will pay EXACT Sciences an additional $1.9 million by July 2010, contingent upon the non-occurrenceunless such amount is required to satisfy certain of certain events.EXACT Sciences' indemnification obligations.
Purchase of In-Process Research and Development
Prior to January 1, 2009, we expensed IPR&D acquired through a business combination which had not yet reached technological feasibility and had no alternative future use.was expensed on the acquisition date in our consolidated financial statements. In accordance with our adoption of
GENZYME CORPORATION AND SUBSIDIARIES
Notes to Unaudited, Consolidated Financial Statements (Continued)
6. Strategic Transactions (Continued)
FAS 141R, all IPR&D we acquire through business combinations on or after January 1, 2009 will be capitalized as an intangible asset on our consolidated balance sheets and periodically tested for impairment.
We did not complete any business combination acquisitions in the year ended December 31, 2008 or during the three months ended March 31, 2009. In connection with two business combinations we completed between January 1, 2006 and December 31, 2007, we acquired various IPR&D projects. The following table sets forth the significant IPR&D projects for the companies and assets we acquired between January 1, 2006 and December 31, 2007June 30, 2009 (amounts in millions):
Company/Assets Acquired | Purchase Price | IPR&D | Programs Acquired | Discount Rate Used in Estimating Cash Flows | Year of Expected Launch | Purchase Price | IPR&D | Programs Acquired | Discount Rate Used in Estimating Cash Flows | Year of Expected Launch | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Bayer (2009) | $ | 1,006.5 | $ | 415.6 | alemtuzumab for MS—US | 16 | % | 2012 | ||||||||||||||||||||||
217.3 | alemtuzumab for MS—ex-US | 16 | % | 2013 | ||||||||||||||||||||||||||
$ | 632.9 | (1) | ||||||||||||||||||||||||||||
Bioenvision (2007) | $ | 349.9 | $ | 125.5 | Evoltra (clofarabine)(1) | 17 | % | 2009-2013 | $ | 349.9 | $ | 125.5 | (2) | Clolar/Evoltra (clofarabine)(3) | 17 | % | 2009-2013 | |||||||||||||
AnorMED (2006) | $ | 589.2 | $ | 526.8 | Mozobil (stem cell transplant)(2) | 15 | % | 2009-2014 | $ | 589.2 | $ | 526.8 | Mozobil (stem cell transplant)(4) | 15 | % | 2009-2014 | ||||||||||||||
26.1 | AMD070 (HIV)(3) | 15 | % | — | 26.1 | AMD070(5) | 15 | % | — | |||||||||||||||||||||
$ | 552.9 | $ | 552.9 | (2) | ||||||||||||||||||||||||||
Pro Forma Financial Summary (Unaudited)
The following pro forma financial summary is presented as if the acquisition from Bayer was completed as of January 1, 2009 and 2008. The pro forma combined results are not necessarily indicative of the actual results that would have occurred had the acquisition been consummated on that date, or of the future operations of the combined entities. Material nonrecurring charges related to this acquisition, such as a gain on acquisition of business of $24.2 million, are included in the pro forma
GENZYME CORPORATION AND SUBSIDIARIES
Notes to Unaudited, Consolidated Financial Statements (Continued)
6. Strategic Transactions (Continued)
financial summaries for the three and six months ended June 30, 2009 and 2008 (amounts in thousands, except per share amounts):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2009 | 2008 | 2009 | 2008 | ||||||||||
Total revenues | $ | 1,280,470 | $ | 1,239,487 | $ | 2,477,530 | $ | 2,409,448 | ||||||
Net income | $ | 158,488 | $ | 25,295 | $ | 307,138 | $ | 139,305 | ||||||
Net income per share: | ||||||||||||||
Basic | $ | 0.59 | $ | 0.09 | $ | 1.14 | $ | 0.52 | ||||||
Diluted | $ | 0.58 | $ | 0.09 | $ | 1.11 | $ | 0.50 | ||||||
Weighted average shares outstanding: | ||||||||||||||
Basic | 269,958 | 266,904 | 270,406 | 267,127 | ||||||||||
Diluted | 274,852 | 274,576 | 276,225 | 285,028 | ||||||||||
7. Inventories
| | March 31, 2009 | December 31, 2008 | | June 30, 2009 | December 31, 2008 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (Amounts in thousands) | | (Amounts in thousands) | ||||||||||||
Raw materials | Raw materials | $ | 93,711 | $ | 96,986 | Raw materials | $ | 109,211 | $ | 96,986 | ||||||
Work-in-process | Work-in-process | 156,807 | 141,094 | Work-in-process | 256,870 | 141,094 | ||||||||||
Finished goods | Finished goods | 188,387 | 215,357 | Finished goods | 220,605 | 215,357 | ||||||||||
Total | $ | 438,905 | $ | 453,437 | Total | $ | 586,686 | $ | 453,437 | |||||||
In May 2009, in connection with our acquisition of the worldwide rights to the oncology products Campath, Fludara and Leukine from Bayer, we acquired a total of $136.4 million of inventory, including $15.3 million of Campath inventory, $22.9 million of Fludara inventory and $98.2 million of Leukine inventory.
In June 2009, we announced that we had interrupted production of Cerezyme and Fabrazyme, and shipments of Cerezyme, at our Allston facility to sanitize the facility after identifying a virus, Vesivirus 2117, in a bioreactor used for Cerezyme production. We recorded charges totaling $14.2 million to cost of products sold in our consolidated statements of operations for the three and six months ended June 30, 2009 for the initial costs related to the remediation of this facility, including the sanitization of the facility, idle capacity and overhead expenses while production at the plant was suspended and the write off of certain production materials.
When we suspended production at Allston, we had significant Cerezyme work-in-process material. We have decided not to process approximately 80% of this work-in-process material because the material either had expired or we were not sufficiently assured that the material was not contaminated with Vesivirus 2117 and, accordingly, have incurred a write off of $8.4 million for the second quarter of 2009. At the end of the business day on Friday, August 7, 2009, the FDA communicated to us steps it recommends we take prior to forward processing any Cerezyme work-in-process. The steps
GENZYME CORPORATION AND SUBSIDIARIES
Notes to Unaudited, Consolidated Financial Statements (Continued)
7. Inventories (Continued)
recommended by the FDA were consistent with the steps that we independently had planned to implement. The remaining Cerezyme work-in-process material expires in June 2010. If we decide not to process this remaining material or if we process the material and the FDA or another regulatory authority does not allow us to release it, we will incur a write off of approximately $2.7 million for the inventory value of this remaining material. In addition, we have two lots of finished Cerezyme product in inventory. If the FDA or another regulatory authority does not allow us to release both of these finished lots, we will incur an additional write off of $3.1 million.
We capitalize inventory produced for commercial sale, which may result in the capitalization of inventory prior to regulatory approval. If a product is not approved for sale, it would result in the write off of the inventory and a charge to earnings. Our total inventories at March 31,June 30, 2009 included
GENZYME CORPORATION AND SUBSIDIARIES
Notes to Unaudited, Consolidated Financial Statements (Continued)
7. Inventories (Continued)
$3.3 $3.6 million of Campath for oncology inventory, produced at our manufacturing facility in Belgium that has not yet been approved for sale because the facility has not yet received approval to manufacture Campath.
8. Goodwill and Other Intangible Assets
Goodwill
The following table contains the change in our goodwill during the threesix months ended March 31,June 30, 2009 (amounts in thousands):
| As of December 31, 2008 | Adjustments | As of March 31, 2009 | As of December 31, 2008 | Adjustments | As of June 30, 2009 | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Genetic Diseases | $ | 339,563 | $ | — | $ | 339,563 | $ | 339,563 | $ | — | $ | 339,563 | ||||||||
Cardiometabolic and Renal | 319,882 | — | 319,882 | 319,882 | — | 319,882 | ||||||||||||||
Biosurgery | 7,585 | — | 7,585 | 7,585 | — | 7,585 | ||||||||||||||
Hematologic Oncology | 322,078 | — | 322,078 | 322,078 | — | 322,078 | ||||||||||||||
Other | 411,966 | (449 | ) | 411,517 | 411,966 | 999 | 412,965 | |||||||||||||
Goodwill | $ | 1,401,074 | $ | (449 | ) | $ | 1,400,625 | $ | 1,401,074 | $ | 999 | $ | 1,402,073 | |||||||
GENZYME CORPORATION AND SUBSIDIARIES
Notes to Unaudited, Consolidated Financial Statements (Continued)
8. Goodwill and Other primarily include foreign currency revaluation adjustments for goodwill denominated in foreign currency.
Other Intangible Assets
The following table contains information about our other intangible assets for the periods presented (amounts in thousands):
| As of March 31, 2009 | As of December 31, 2008 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Gross Other Intangible Assets | Accumulated Amortization | Net Other Intangible Assets | Gross Other Intangible Assets | Accumulated Amortization | Net Other Intangible Assets | ||||||||||||||
Technology | $ | 1,918,793 | $ | (731,369 | ) | $ | 1,187,424 | $ | 1,919,074 | $ | (692,235 | ) | $ | 1,226,839 | ||||||
Patents | 194,560 | (125,914 | ) | 68,646 | 194,560 | (121,763 | ) | 72,797 | ||||||||||||
Trademarks | 60,544 | (43,542 | ) | 17,002 | 60,556 | (42,194 | ) | 18,362 | ||||||||||||
License fees | 98,136 | (41,557 | ) | 56,579 | 98,123 | (39,824 | ) | 58,299 | ||||||||||||
Distribution rights(1) | 406,447 | (184,625 | ) | 221,822 | 399,768 | (170,892 | ) | 228,876 | ||||||||||||
Customer lists | 82,810 | (36,358 | ) | 46,452 | 83,729 | (34,271 | ) | 49,458 | ||||||||||||
Other | 2,039 | (2,039 | ) | — | 2,039 | (1,972 | ) | 67 | ||||||||||||
Total | $ | 2,763,329 | $ | (1,165,404 | ) | $ | 1,597,925 | $ | 2,757,849 | $ | (1,103,151 | ) | $ | 1,654,698 | ||||||
| As of June 30, 2009 | As of December 31, 2008 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Gross Other Intangible Assets | Accumulated Amortization | Net Other Intangible Assets | Gross Other Intangible Assets | Accumulated Amortization | Net Other Intangible Assets | ||||||||||||||
Finite-lived other intangible assets: | ||||||||||||||||||||
Technology(1) | $ | 2,180,455 | $ | (774,865 | ) | $ | 1,405,590 | $ | 1,919,074 | $ | (692,235 | ) | $ | 1,226,839 | ||||||
Distribution rights(2) | 416,968 | (198,730 | ) | 218,238 | 399,768 | (170,892 | ) | 228,876 | ||||||||||||
Patents | 188,651 | (124,156 | ) | 64,495 | 194,560 | (121,763 | ) | 72,797 | ||||||||||||
License fees | 98,660 | (43,517 | ) | 55,143 | 98,123 | (39,824 | ) | 58,299 | ||||||||||||
Customer lists | 84,843 | (38,767 | ) | 46,076 | 83,729 | (34,271 | ) | 49,458 | ||||||||||||
Trademarks | 60,573 | (44,903 | ) | 15,670 | 60,556 | (42,194 | ) | 18,362 | ||||||||||||
Other | — | — | — | 2,039 | (1,972 | ) | 67 | |||||||||||||
Total finite-lived other intangible assets | 3,030,150 | (1,224,938 | ) | 1,805,212 | 2,757,849 | (1,103,151 | ) | 1,654,698 | ||||||||||||
Indefinite-lived other intangible assets: | ||||||||||||||||||||
IPR&D(3) | 632,912 | — | 632,912 | — | — | — | ||||||||||||||
Total other intangible assets | $ | 3,663,062 | $ | (1,224,938 | ) | $ | 2,438,124 | $ | 2,757,849 | $ | (1,103,151 | ) | $ | 1,654,698 | ||||||
GENZYME CORPORATION AND SUBSIDIARIES
Notes to Unaudited, Consolidated Financial Statements (Continued)
8. Goodwill and Other Intangible Assets (Continued)
payments could extend out to June 2012, or could total a maximum of $293.7 million, whichever comes first. To date, $253.5 million of the $293.7 million has been paid.
All of our finite-lived other intangible assets are amortized over their estimated useful lives. Total
As of June 30, 2009, the estimated future amortization expense for our other intangible assets was:
The estimated future amortization expense forfinite-lived other intangible assets for the remainder of fiscal year 2009, the four succeeding fiscal years and thereafter is as follows (amounts in thousands):
Year Ended December 31, | Estimated Amortization Expense(1,2) | Estimated Amortization Expense(1,2) | ||||||
---|---|---|---|---|---|---|---|---|
2009 (remaining nine months) | $ | 171,605 | ||||||
2009 (remaining six months) | $ | 152,274 | ||||||
2010 | 242,519 | 320,412 | ||||||
2011 | 256,064 | 299,923 | ||||||
2012 | 195,694 | 226,557 | ||||||
2013 | 125,437 | 147,463 | ||||||
Thereafter | 448,183 | 492,286 |
9. Investments in Equity Securities
In the second quarter of 2008, we recorded a $10.3 million gain resulting from the liquidation of our investment in the common stock of Sirtris Pharmaceuticals, Inc., or Sirtris, for net cash proceeds of $14.8 million.
At June 30, 2009, our stockholders' equity includes $11.7 million of unrealized gains and $7.4 million of unrealized losses related to our strategic investments in equity securities.
GENZYME CORPORATION AND SUBSIDIARIES
Notes to Unaudited, Consolidated Financial Statements (Continued)
10. Revolving Credit Facility
As of March 31,June 30, 2009, we had approximately $12 million of outstanding standby letters of credit and no amounts were outstandingborrowings, resulting in approximately $338 million of available credit under our five-year $350.0 million senior unsecured revolving credit facility, which matures July 14, 2011. The terms of this credit facility include various covenants, including financial covenants that require us to meet minimum interest coverage ratios and maximum leverage ratios. As of March 31,June 30, 2009, we were in compliance with these covenants.
10.11. Stockholders' Equity
Stock Repurchase
In May 2007, our board of directors authorized a stock repurchase program to repurchase up to an aggregate maximum amount of $1.5$1.50 billion or 20,000,000 shares of our outstanding common stock over a three year period that began in June 2007. The repurchases are being made from time to time and
GENZYME CORPORATION AND SUBSIDIARIES
Notes to Unaudited, Consolidated Financial Statements (Continued)
10. Stockholders' Equity (Continued)
can be effectuated through open market purchases, privately negotiated transactions, transactions structured through investment banking institutions, or by other means, subject to management's discretion and as permitted by securities laws and other legal requirements. The manner of the purchase, the amount that we spend and the number of shares we ultimately purchase will varybe based on a range of factors, including share price. The program does not obligate us to acquire any particular amount of common stock and the program may be suspended at any time at our discretion.
During the threesix months ended March 31,June 30, 2009, we repurchased 2,000,000 shares of our common stock under this program forat an average price of $53.55 per share for a total of $107.1 million in cash, including fees. Since June 2007, when we first began repurchasing shares of our common stock under this program, we have repurchased a cumulative total of 7,500,000 shares of our common stock at an average price of $64.21 per share for a total of $481.7 million in cash, including fees. We recorded the repurchases in our consolidated balance sheets as a reduction to our common stock account for the par value of the repurchased shares and as a reduction to our additional paid-in capital account.
GENZYME CORPORATION AND SUBSIDIARIES
Notes to Unaudited, Consolidated Financial Statements (Continued)
11. Stockholders' Equity (Continued)
Stock-Based Compensation Expense, Net of Estimated Forfeitures
We allocated pre-tax stock-based compensation expense, net of estimated forfeitures, based on the functional cost center of each employee as follows (amounts in thousands, except per share amounts):
| | Three Months Ended March 31, | | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2009 | 2008 | | 2009 | 2008 | 2009 | 2008 | ||||||||||||||||
Pre-tax stock-based compensation expense, net of estimated forfeitures charged to: | ||||||||||||||||||||||||
Pre-tax stock-based compensation expense, net of estimated forfeitures, charged to: | Pre-tax stock-based compensation expense, net of estimated forfeitures, charged to: | |||||||||||||||||||||||
Cost of products and services sold(1) | $ | (7,234 | ) | $ | (6,514 | ) | Cost of products and services sold(1) | $ | (7,570 | ) | $ | (6,311 | ) | $ | (14,804 | ) | $ | (12,825 | ) | |||||
Selling, general and administrative expense | (23,836 | ) | (22,889 | ) | Selling, general and administrative expense | (37,817 | ) | (31,904 | ) | (61,653 | ) | (54,793 | ) | |||||||||||
Research and development expense | (13,536 | ) | (12,585 | ) | Research and development expense | (19,780 | ) | (16,092 | ) | (33,316 | ) | (28,677 | ) | |||||||||||
Total | (44,606 | ) | (41,988 | ) | Total | (65,167 | ) | (54,307 | ) | (109,773 | ) | (96,295 | ) | |||||||||||
Less: tax benefit from stock options | Less: tax benefit from stock options | 12,589 | 12,537 | Less: tax benefit from stock options | 15,144 | 16,834 | 27,733 | 29,371 | ||||||||||||||||
Total stock-based compensation expense, net of tax | $ | (32,017 | ) | $ | (29,451 | ) | Total stock-based compensation expense, net of tax | $ | (50,023 | ) | $ | (37,473 | ) | $ | (82,040 | ) | $ | (66,924 | ) | |||||
Effect per common share: | Effect per common share: | Effect per common share: | ||||||||||||||||||||||
Basic | $ | (0.12 | ) | $ | (0.12 | ) | Basic | $ | (0.19 | ) | $ | (0.14 | ) | $ | (0.30 | ) | $ | (0.26 | ) | |||||
Diluted | $ | (0.12 | ) | $ | (0.10 | ) | Diluted | $ | (0.18 | ) | $ | (0.13 | ) | $ | (0.30 | ) | $ | (0.23 | ) | |||||
| Three Months Ended March 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2009 | 2008 | ||||||
Stock-based compensation expense capitalized to inventory | $ | 3,412 | $ | 3,121 |
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2009 | 2008 | 2009 | 2008 | ||||||||||
Stock-based compensation expense capitalized to inventory | $ | 5,729 | $ | 3,875 | $ | 9,141 | $ | 6,996 |
We amortize stock-based compensation expense capitalized to inventory based on inventory turns.
GENZYME CORPORATION AND SUBSIDIARIES
Notes to Unaudited, Consolidated Financial Statements (Continued)
10. Stockholders' Equity (Continued)
At March 31,June 30, 2009, there was $211.9$320.4 million of pre-tax stock-based compensation expense, net of estimated forfeitures, related to unvested awards not yet recognized which is expected to be recognized over a weighted average period of 1.82.3 years.
11.12. Commitments and Contingencies
Legal Proceedings
On July 29, 2009 and August 3, 2009, two purported securities class action lawsuits were filed in the U.S. District Court for the District of Massachusetts against us and our President and Chief Executive Officer. The lawsuits were filed on behalf of those who purchased our common stock during the period from June 26, 2008 through July 21, 2009 and allege violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Each of the suits is premised upon allegations that we made materially false and misleading statements and omissions by
GENZYME CORPORATION AND SUBSIDIARIES
Notes to Unaudited, Consolidated Financial Statements (Continued)
12. Commitments and Contingencies (Continued)
failing to disclose instances of viral contamination at two of our manufacturing facilities and our receipt of a list of inspection observations from the FDA related to one of the facilities, which detailed observations of practices that the FDA considered to be deviations from "Good Manufacturing Practices," or GMP. The plaintiffs seek unspecified damages and reimbursement of costs, including attorneys' and experts' fees. We intend to defend these lawsuits vigorously. We are not able to predict the outcome of these lawsuits or estimate the amount or range of any possible loss we might incur if we do not prevail in final, non-appealable determinations of these matters. Therefore, we have not accrued any amounts in connection with these contingencies.
In April 2005, Church & Dwight Co., Inc., or Church & Dwight, filed a suit in U.S. District Court for the District of New Jersey against Abbott Laboratories, or Abbott, claiming that certain over-the-counter pregnancy tests distributed by Abbott between 1999 and 2003 infringed upon patents owned by Church & Dwight. During part of this period, a portion of the test kits distributed by Abbott were manufactured by Wyntek Diagnostics, Inc., or Wyntek, which had agreed to indemnify Abbott for patent infringement related costs and damages for these products. In 2002, we acquired Wyntek and assumed the obligations under this agreement. In June 2008, the court issued a ruling awarding Church & Dwight approximately $29 million in damages based on a jury finding of willful infringement by Abbott. This award has been entered as a final ruling and Abbott has filed an appeal. Because multiple parties, including Abbott, manufactured infringing product for Abbott during this period, any responsibility that we may have for indemnifying Abbott is only for a portion of its costs and damages related to this case. We currently are disputing with Abbott the percentage of infringing product that was supplied by us and may in the future assert additional claims that, if successful, would reduce or relieve us of any liability.
Through June 30, 2003, we had three outstanding series of common stock, which we referred to as tracking stocks: Genzyme General Stock (which we now refer to as Genzyme Stock); Biosurgery Stock; and Molecular Oncology Stock. On August 6, 2007, we reached an agreement in principle to settle for $64.0 million the lawsuits related to our 2003 exchange of Genzyme Stock for Biosurgery Stock. We recorded a liability for the settlement payment of $64.0 million as a charge to SG&A in our consolidated statementstatements of operations for the quarterly periodthree months ended June 30, 2007. We paid the settlement in August 2007. The court approved the settlement in October 2007. We have submitted claims to our insurers for reimbursement of portions of the expenses incurred in connection with these cases; the insurer has purported to denyinsurers have denied coverage, and therefore, we have not recorded a receivable for any potential recovery from our insurer.insurers. We are vigorously pursuing our rights with respect to insurance coverage. To the extent we are successful, we will record the recovery in our consolidated statements of operations.
We periodically become subject to legal proceedings and claims arising in connection with our business. Although we cannot predict the outcome of these additional proceedings and claims, we do not believe the ultimate resolution of any of these existing matters would have a material adverse effectaffect on our consolidated financial position or results of operations.
GENZYME CORPORATION AND SUBSIDIARIES
Notes to Unaudited, Consolidated Financial Statements (Continued)
12.13. Provision for Income Taxes
| Three Months Ended March 31, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | ||||||||||||||
| (Amounts in thousands) | (Amounts in thousands) | ||||||||||||||||||
Provision for income taxes | $ | 78,884 | $ | 60,117 | $ | 78,870 | $ | 38,407 | $ | 157,754 | $ | 98,524 | ||||||||
Effective tax rate | 29 | % | 29 | % | 30 | % | 36 | % | 29 | % | 31 | % |
Our effective tax rate for bothall periods presented varies from the U.S. statutory tax rate as a result of:
In addition, our provision for income taxes for both the three and six months ended June 30, 2009 includes $5.3 million of income tax benefits resulting from the reversal of a portion of our U.S. tax reserves due to a remeasurement, in accordance with the provisions of FIN 48, "Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109," based on new information discovered during the second quarter of 2009.
We are currently under IRS audit for the tax years 2006 to 2007. We believe that we have provided sufficiently for all audit exposures. We expect to settle the 2006 to 2007 IRS audit within the next twelve months and do not expect that the settlement will have a material impact on our financial position or results of operations. Settlement of these audits or the expiration of the statute of limitations on the assessment of income taxes for any tax year may result in a reduction of future tax provisions. Any such benefit would be recorded upon final resolution of the audit or expiration of the applicable statute of limitations.
13.14. Segment Information
In accordance with FAS 131, "Disclosures about Segments of an Enterprise and Related Information," we present segment information in a manner consistent with the method we use to report this information to our management. Applying FAS 131, in the fourth quarter of 2008, we changed our segment reporting structure to better reflect the way we manage and measure the performance of our businesses. Under the new reporting structure, we are organized into four reporting segments as described above in Note 1., "Description of Business," to these consolidated financial statements. We have revised our 2008 segment disclosures to conform to our 2009 presentation.
GENZYME CORPORATION AND SUBSIDIARIES
Notes to Unaudited, Consolidated Financial Statements (Continued)
13.14. Segment Information (Continued)
We have provided information concerning the operations of these reportable segments in the following tables (amounts in thousands):
| | Three Months Ended March 31, | | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2009 | 2008 | | 2009 | 2008 | 2009 | 2008 | ||||||||||||||||
Revenues: | Revenues: | Revenues: | ||||||||||||||||||||||
Genetic Diseases | $ | 537,050 | $ | 534,889 | Genetic Diseases | $ | 568,153 | $ | 572,461 | $ | 1,105,203 | $ | 1,107,350 | |||||||||||
Cardiometabolic and Renal | 242,962 | 231,838 | Cardiometabolic and Renal | 248,000 | 239,285 | 490,962 | 471,123 | |||||||||||||||||
Biosurgery | 119,522 | 111,662 | Biosurgery | 139,327 | 131,215 | 258,849 | 242,877 | |||||||||||||||||
Hematologic Oncology | 35,907 | 23,880 | Hematologic Oncology(1) | 55,930 | 28,346 | 91,837 | 52,226 | |||||||||||||||||
Other | 212,976 | 197,409 | Other | 216,546 | 199,370 | 429,522 | 396,779 | |||||||||||||||||
Corporate | 454 | 383 | Corporate | 554 | 457 | 1,008 | 840 | |||||||||||||||||
Total | 1,148,871 | 1,100,061 | Total | $ | 1,228,510 | $ | 1,171,134 | $ | 2,377,381 | $ | 2,271,195 | |||||||||||||
Income (loss) before income taxes: | Income (loss) before income taxes: | Income (loss) before income taxes: | ||||||||||||||||||||||
Genetic Diseases | 351,974 | 356,721 | Genetic Diseases | $ | 332,967 | $ | 366,456 | $ | 684,941 | $ | 723,177 | |||||||||||||
Cardiometabolic and Renal(1) | 102,218 | 28,831 | Cardiometabolic and Renal(2) | 106,711 | (78,981 | ) | 208,929 | (50,150 | ) | |||||||||||||||
Biosurgery | 28,333 | 18,787 | Biosurgery | 33,750 | 28,670 | 62,083 | 47,457 | |||||||||||||||||
Hematologic Oncology | (13,642 | ) | (25,961 | ) | Hematologic Oncology(1) | (29,752 | ) | (26,606 | ) | (43,394 | ) | (52,567 | ) | |||||||||||
Other(2) | (6,922 | ) | 5,177 | Other(3) | 29,702 | (4,642 | ) | 22,780 | 535 | |||||||||||||||
Corporate(3) | (187,591 | ) | (178,167 | ) | Corporate(4) | (206,934 | ) | (176,926 | ) | (394,525 | ) | (355,093 | ) | |||||||||||
Total | $ | 274,370 | $ | 205,388 | Total | $ | 266,444 | $ | 107,971 | $ | 540,814 | $ | 313,359 | |||||||||||
GENZYME CORPORATION AND SUBSIDIARIES
Notes to Unaudited, Consolidated Financial Statements (Continued)
13.14. Segment Information (Continued)
Segment Assets
We provide information concerning the assets of our reportable segments in the following table (amounts in thousands):
| March 31, 2009 | December 31, 2008 | |||||||
---|---|---|---|---|---|---|---|---|---|
Segment Assets(1): | |||||||||
Genetic Diseases | $ | 1,632,942 | $ | 1,520,586 | |||||
Cardiometabolic and Renal | 1,307,437 | 1,366,970 | |||||||
Biosurgery | 491,390 | 497,813 | |||||||
Hematologic Oncology | 669,892 | 700,563 | |||||||
Other | 1,131,758 | 1,097,169 | |||||||
Corporate(2) | 3,386,487 | 3,488,175 | |||||||
Total | $ | 8,619,906 | $ | 8,671,276 | |||||
| June 30, 2009 | December 31, 2008 | |||||||
---|---|---|---|---|---|---|---|---|---|
Segment Assets(1): | |||||||||
Genetic Diseases | $ | 1,670,943 | $ | 1,520,586 | |||||
Cardiometabolic and Renal | 1,326,750 | 1,366,970 | |||||||
Biosurgery | 500,895 | 497,813 | |||||||
Hematologic Oncology(2) | 1,126,895 | 700,563 | |||||||
Other(2) | 1,788,066 | 1,097,169 | |||||||
Corporate(3) | 3,681,537 | 3,488,175 | |||||||
Total | $ | 10,095,086 | $ | 8,671,276 | |||||
| Amount | Business Segment | ||||
---|---|---|---|---|---|---|
Inventory | $ | 136.4 | Hematologic Oncology | |||
Developed technology | 261.4 | Hematologic Oncology | ||||
IPR&D | 632.9 | Other | ||||
Total | $ | 1,030.7 | ||||
| | March 31, 2009 | December 31, 2008 | | June 30, 2009 | December 31, 2008 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Cash, cash equivalents, short- and long-term investments in debt securities | Cash, cash equivalents, short- and long-term investments in debt securities | $ | 981,770 | $ | 973,691 | Cash, cash equivalents, short- and long-term investments in debt securities | $ | 1,049,383 | $ | 973,691 | ||||||
Deferred tax assets, net | Deferred tax assets, net | 491,720 | 457,342 | Deferred tax assets, net | 549,997 | 457,342 | ||||||||||
Property, plant & equipment, net | Property, plant & equipment, net | 1,484,134 | 1,524,442 | Property, plant & equipment, net | 1,622,764 | 1,524,442 | ||||||||||
Investments in equity securities | Investments in equity securities | 53,413 | 83,325 | Investments in equity securities | 67,386 | 83,325 | ||||||||||
Other | Other | 375,450 | 449,375 | Other | 392,007 | 449,375 | ||||||||||
Total | $ | 3,386,487 | $ | 3,488,175 | Total | $ | 3,681,537 | $ | 3,488,175 | |||||||
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF GENZYME CORPORATION AND SUBSIDIARIES' FINANCIAL CONDITION AND RESULTS OF OPERATIONS
When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that characterize our business. In particular, we encourage you to review the risks and uncertainties described under the heading "Risk Factors" below. These risks and uncertainties could cause actual results to differ materially from those forecasted in forward-looking statements or implied by past results and trends. Forward-looking statements are statements that attempt to project or anticipate future developments in our business; we encourage you to review the examples of forward-lookingforward looking statements under "Note Regarding Forward-Looking Statements" at the beginning of this report. These statements, like all statements in this report, speak only as of the date of this report (unless another date is indicated), and we undertake no obligation to update or revise the statements in light of future developments.
Note: All references to increases or decreases for the three months ended June 30, 2009 are as compared to the three months ended June 30, 2008. All references to increases or decreases for the six months ended June 30, 2009 are as compared to the six months ended June 30, 2008, unless otherwise noted.
INTRODUCTION
We are a global biotechnology company dedicated to making a major impact on the lives of people with serious diseases. Our broad product and service portfolio is focused on rare disorders, renal disease, orthopaedics, cancer, transplant and immune disease, and diagnostic and predictive testing.
In the fourth quarter of 2008, we changed our segment reporting structure to better reflect the way we manage and measure the performance of our businesses. Under the new reporting structure, we are organized into four financial reporting units, which we also consider to be our reporting segments:
Our transplant business unit, which develops, manufactures and distributes therapeutic products that address pre-transplantation, prevention and treatment of graft rejection in organ transplantation and other hematologic and auto-immune disorders, and our genetics business unit, which provides
testing services for the oncology, prenatal and reproductive markets, were formerly reported as separate reporting segments. Effective as of the fourth quarter of 2008, we include our transplant and genetics business units under the caption "Other." We also report the activities of our MS, diagnostic products, bulk pharmaceuticals and immune mediated disease business units under the caption "Other." These operating segments did not meet the quantitative threshold for separate segment reporting. We have revised our 2008 segment disclosures to conform to our 2009 presentation.
We report our corporate, general and administrative operations and corporate science activities under the caption "Corporate."
Update to Second Quarter Earnings Release
On July 22, 2009, we issued a press release containing our results of operations and financial condition for the three month period ended June 30, 2009, which we furnished as an exhibit under Form 8-K prior to hosting a conference call to discuss our second quarter financial results. Subsequent to July 22, 2009, two events occurred which have caused us to update our second quarter financial results in this Form 10-Q. Specifically, we:
STRATEGIC TRANSACTIONS
Pending Strategic Alliance with Osiris
In October 2008, we entered into a strategic alliance with Osiris whereby we obtained an exclusive license to develop and commercialize Prochymal and Chondrogen, mesenchymal stem cell products, outside of the United States and Canada. Osiris will commercialize Prochymal and Chondrogen in the United States and Canada. We paid Osiris a nonrefundable upfront payment of $75.0 million in November 2008 and an additional $55.0 million nonrefundable upfront license fee in July 2009, both of which were recorded as charges to research and development expense in our consolidated statement of operations in the fourth quarter of 2008. The results of these programs are included under the category "Other" in our segment disclosures. The full description of our strategic alliance with Osiris is provided in Note C., "Mergers, Acquisitions and Strategic Transactions—Strategic Alliance with Osiris," to our consolidated financial statements included in Exhibit 13 to our 2008 Form 10-K.
Acquisition from Bayer
On March 30,May 29, 2009, we entered into an agreement withpaid $42.4 million of net cash to Bayer to exclusively in-licensefor inventory and acquire:recorded contingent consideration obligations totaling $964.1 million to:
Of the $964.1 million total contingent consideration obligations recorded as of the acquisition date, $529.1 million related to Campath, Fludara and Leukine, and $435.0 million related to alemtuzumab for MS. The agreement also provides an opportunitycontingent consideration obligations are net of the continued funding expected to employ certain membersbe received from Bayer for the development of Bayer's commercial and manufacturing teamsalemtuzumab for all three products.MS.
Prior to this agreement,transaction, we shared with Bayer the development and certain commercial rights to alemtuzumab for the treatment of MS and Campath for oncology.and received two-thirds of Campath net profits on U.S. sales and a royalty on foreign sales. Under theour new agreement,arrangement with Bayer, prior to regulatory approval of alemtuzumab as a treatment for MS, we will have primary responsibility for its development while Bayer will continue to fund that development at current levels.levels and will participate on the development steering committee. We will have worldwide commercialization rights, with Bayer retaining an option to co-promote the product as a treatment for MS. In exchange for the above, Bayer is eligible to receive the following contingent purchase price payments:
The agreement also includes our purchase of We will utilize Bayer for certain transition services and purchase commercial supply of Fludara and Leukine from Bayer. We have employed certain members of Bayer's commercial teams for all three products and have an opportunity to employ certain members of Bayer's manufacturing team if we acquire the Leukine facility. The transaction will behas been accounted for as a business combination under FAS 141R and is expected to close in the second quarter of 2009, after the satisfaction of closing conditions, including receipt of clearance from the FTC and DOJ. The transaction will be included in our results of operations beginning on May 29, 2009, the date of acquisition. The results for Campath, for oncology, Fludara and Leukine will beare included in our Hematologic Oncology reporting segment and the results fordevelopment costs of alemtuzumab for the treatment of MS will beare included in our MS business unit, which is reported under the caption "Other."
Each period we revalue the contingent consideration obligations to their then fair value and record increases in the fair value as contingent consideration expense and decreases in the fair value as a reduction of contingent consideration expense. Increases or decreases in the fair value of the contingent consideration obligations can result from changes in discount periods and rates, changes in the timing and amount of revenue estimates and changes in probability adjustments with respect to regulatory approval of alemtuzumab for MS. As of June 30, 2009, the fair value of the contingent consideration obligations was $973.2 million. Accordingly, we recorded contingent consideration expense of $9.1 million in our consolidated statements of operations for the three and six months ended June 30, 2009. As of June 30, 2009, we have not made any contingent consideration payments to, or received
any research and development funding from, Bayer or adjusted any of the assumptions used in determining the fair value of the contingent consideration obligations.
The fair value of the identifiable assets acquired in this transaction of $1.03 billion exceeded the fair value of the purchase price of $1.01 billion. As a result, in accordance with FAS 141R, we recognized a gain on acquisition of business of $24.2 million in our consolidated statements of operations for the three and six months ended June 30, 2009. The fair value of the consideration and assets remain subject to potential adjustments.
Purchase of Intellectual Property from EXACT Sciences
On January 27, 2009, we purchased certain intellectual property in the fields of prenatal testing and reproductive health from EXACT Sciences for our diagnostic testing services business and
3,000,000 shares of EXACT Sciences common stock. We paid EXACT Sciences total cash consideration of $22.7 million. Of this amount, we allocated $4.5 million to the acquired shares of EXACT Sciences common stock based on the fair value of the stock on the date of acquisition, which we recorded as an increase to other noncurrent assetsinvestments in equity securities in our consolidated balance sheet as of March 31, 2009. As the purchased assets did not qualify as a business combination under FAS 141R and have not reached technological feasibility nor have alternative future use, we allocated the remaining $18.2 million to the acquired intellectual property, which we recorded as a charge to research and development expenses in our consolidated statement of operations for the three months ended March 31, 2009. We will pay EXACT Sciences an additional $1.9 million by July 2010, contingent upon the non-occurrenceunless such amount is required to satisfy certain of certain events.EXACT Sciences' indemnification obligations.
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES
Our critical accounting policies and significant judgments and estimates are set forth under the heading "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations—Critical Accounting Policies and Significant Judgments and Estimates" in Exhibit 13 to our 2008 Form 10-K. ThereExcluding the addition of our policy for contingent consideration expense, there have been no significant changes to our critical accounting policies or significant judgments and estimates since December 31, 2008. Additional information regarding our provisions and estimates for our product sales allowances, sales allowance reserves and accruals, and distributor fees and IPR&D and our policy for accounting for contingent consideration expense are included below.
Revenue Recognition
Product Sales Allowances
Sales of many biotechnology products in the United States are subject to increased pricing pressure from managed care groups, institutions, government agencies and other groups seeking discounts. We and other biotechnology companies in the U.S. market are also required to provide statutorily defined rebates and discounts to various U.S. government agencies in order to participate in the Medicaid program and other government-funded programs. In most international markets, we operate in an environment where governments may and have mandated cost-containment programs, placed restrictions on physician prescription levels and patient reimbursements, emphasized greater use of generic drugs and enacted across-the-board price cuts as methods to control costs. The sensitivity of our estimates can vary by program, type of customer and geographic location. Estimates associated with Medicaid and other government allowances may become subject to adjustment in a subsequent period.
We record product sales net of the following significant categories of product sales allowances:
Our provisions for product sales allowances reduced gross product sales as follows (amounts in thousands):
| | Three Months Ended March 31, | | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | |||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Increase/ (Decrease) % Change | | Increase/ (Decrease) | Increase/ (Decrease) % Change | Increase/ (Decrease) | Increase/ (Decrease) % Change | ||||||||||||||||||||||||||||||||
| | 2009 | 2008 | | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||||||||||||
Product sales allowances: | Product sales allowances: | Product sales allowances: | |||||||||||||||||||||||||||||||||||||
Contractual adjustments | $ | 136,180 | $ | 102,002 | 34 | % | Contractual adjustments | $ | 149,049 | $ | 107,012 | $ | 42,037 | 39 | % | $ | 285,229 | $ | 209,014 | $ | 76,215 | 36 | % | ||||||||||||||||
Discounts | 6,275 | 5,505 | 14 | % | Discounts | 6,764 | 5,503 | 1,261 | 23 | % | 13,040 | 11,008 | 2,032 | 18 | % | ||||||||||||||||||||||||
Sales returns | 6,523 | 6,751 | (3)% | Sales returns | 9,375 | 4,917 | 4,458 | 91 | % | 15,898 | 11,668 | 4,230 | 36 | % | |||||||||||||||||||||||||
Total product sales allowances | $ | 148,978 | $ | 114,258 | 30 | % | Total product sales allowances | $ | 165,188 | $ | 117,432 | $ | 47,756 | 41 | % | $ | 314,167 | $ | 231,690 | $ | 82,477 | 36 | % | ||||||||||||||||
Total gross product sales | Total gross product sales | $ | 1,186,222 | $ | 1,120,525 | 6 | % | Total gross product sales | $ | 1,280,614 | $ | 1,189,234 | $ | 91,380 | 8 | % | $ | 2,466,836 | $ | 2,309,759 | $ | 157,077 | 7 | % | |||||||||||||||
Total product sales allowances as a percent of total gross product sales | Total product sales allowances as a percent of total gross product sales | 13 | % | 10 | % | Total product sales allowances as a percent of total gross product sales | 13 | % | 10 | % | 13 | % | 10 | % |
Total product sales allowances increased $34.7 million, or 30%, infor the three and six months ended June 30, 2009 as compared to 2008, primarily due to the impact of price increases implemented after the firstsecond quarter of 2008, primarily for our Cardiometabolic and Renal reporting segment, increased sales returns reserves for Hectorol based on our recent experience with returns for the product and changes in our overall product mix.
Total estimated product sales allowance reserves and accruals in our consolidated balance sheets increased 4%approximately 3% to approximately $219$217 million as of March 31,June 30, 2009, as compared to approximately $210 million as of December 31, 2008, primarily due to changes in the timing of certain payments. Our actual results have not differed materially from amounts recorded. The annual variation has been less than 0.5% of total product sales for each of the last three years.
Distributor Fees
EITF Issue No. 01-9, "Accounting for Consideration given by a Vendor to a Customer (including a Reseller of a Vendor's Products)" specifies that cash consideration (including a sales incentive) given by a vendor to a customer is presumed to be a reduction of the selling prices of the vendor's products or services and, therefore, should be characterized as a reduction of revenue. We include such fees in contractual adjustments, which are recorded as a reduction to product sales. That presumption is overcome and the consideration should be characterized as a cost incurred if, and to the extent that, both of the following conditions are met:
We record service fees paid to our distributors as a charge to SG&A, a component of operating expenses, only if the criteria set forth above are met. The following table sets forth the distributor fees recorded as a reduction to product sales and charged to SG&A (amounts in thousands):
| Three Months Ended March 31, | ||||||||
---|---|---|---|---|---|---|---|---|---|
| 2009 | 2008 | |||||||
Distributor fees: | |||||||||
Included in contractual adjustments and recorded as a reduction to product sales | $ | 3,479 | $ | 4,696 | |||||
Charged to SG&A | 3,547 | 2,951 | |||||||
Total distributor fees | $ | 7,026 | $ | 7,647 | |||||
| Three Months Ended June 30, | | | Six Months Ended June 30, | | | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Increase/ (Decrease) | Increase/ (Decrease) % Change | Increase/ (Decrease) | Increase/ (Decrease) % Change | |||||||||||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||||
Distributor fees: | |||||||||||||||||||||||||||
Included in contractual adjustments and recorded as a reduction to product sales | $ | 3,534 | $ | 1,590 | $ | 1,944 | >100 | % | $ | 7,013 | $ | 6,286 | $ | 727 | 12 | % | |||||||||||
Charged to SG&A | 3,481 | 3,569 | (88 | ) | (2 | )% | 7,028 | 6,520 | 508 | 8 | % | ||||||||||||||||
Total distributor fees | $ | 7,015 | $ | 5,159 | $ | 1,856 | 36 | % | $ | 14,041 | $ | 12,806 | $ | 1,235 | 10 | % | |||||||||||
In-Process Research and Development
IPR&D represents the fair value assigned to incomplete technologies that we acquire, which at the time of acquisition have not reached technological feasibility and have no alternative future use. A technology is considered to have an alternative future use if it is probable that the acquirer will use the asset in its incomplete state as it exists at the acquisition date, in another research and development project that has not yet commenced, and economic benefit is anticipated from that use.
Substantial additional research and development will be required before any of our acquired programs reach technological feasibility. In addition, once research is completed, each underlying product candidate will need to complete a series of clinical trials and receive regulatory approvals prior to commercialization. Management assumes responsibility for determining the valuation of the acquired IPR&D programs. The fair value assigned to IPR&D for each acquisition is estimated by discounting, to present value, the future cash flows expected from the programs since the date of our acquisition. Accordingly, such cash flows reflect our estimates of revenues, costs of sales, operating expenses and income taxes from the acquired IPR&D programs based on the following factors:
The discount rates used are commensurate with the uncertainties associated with the economic estimates described above. The resulting discounted future cash flows are then probability-adjusted to reflect the different stages of development, the time and resources needed to complete the development of the product and the risks of advancement through the product approval process. In estimating the future cash flows, we also consider the tangible and intangible assets required for successful exploitation of the technology resulting from the purchased IPR&D programs and adjust future cash flows for a charge reflecting the contribution to value of these assets. Such contributory tangible and intangible assets may include, but are not limited to, working capital, fixed assets, assembled workforce, customer relationships, patents, trademarks, and core technology.
Use of different estimates and judgments could yield materially different results in our analysis and could result in materially different asset values or expense. There can be no assurance that we will be able to successfully develop and complete the acquired IPR&D programs and profitably commercialize the underlying product candidates at all or before our competitors develop and commercialize products for the same indications.indications, or at all. Moreover, if certain of the acquired IPR&D programs fail, are abandoned during development, or do not receive regulatory approval, then we may not realize the value we have estimated and recorded in our financial statements on the acquisition date, and we may also not recover the research and development investment made since the acquisition date to further develop that program. If such circumstances were to occur, our future operating results could be materially adversely impacted.
Prior to January 1, 2009, IPR&D acquired through a business combination was expensed. In accordance with the adoption of FAS 141R, IPR&D acquired through business combinations on or after January 1, 2009 will be capitalized as an intangible asset on the balance sheet and periodically tested for impairment. Amortization of such capitalized IPR&D will commence upon the successful completion of the program and continue for the then estimated useful life of the asset.
None of the incomplete technology programs we have acquired through our business combinations prior to January 1, 2009 havehad reached technological feasibility nor had an alternative future use and, therefore, the fair value of those programs was expensed on the acquisition date and classified in our consolidated statements of operations within the line item Purchase of In-Process Research and Development. We did not complete any business combinations on or after January 1,In May 2009, we acquired the worldwide rights to the oncology products Campath, Fludara and therefore did not capitalize any IPR&D during the three months ended March 31, 2009.
FAS 141R has no impact on the accountingLeukine and classificationalemtuzumab for incomplete technology programs acquired outside ofMS. The transaction was accounted for as a business combination. As such, nonrefundable fees paidAt the date of acquisition, alemtuzumab for the acquisition or licensing of products that haveMS had not received regulatory approval and have no future alternative use are classified in our consolidated statements of operations within the line item Research and Development. However, if a technology acquired outside of a business combination is determined to havereached technological feasibility nor had an alternative future use and is therefore considered to be IPR&D. Accordingly, we capitalized the $632.9 million fair value of the IPR&D for alemtuzumab for MS, which is included in Other intangible assets, net in our consolidated balance sheet as of June 30, 2009. Of this amount, $415.6 million is related to the development of the product for sale in the United States and $217.3 million is related to the development of the product for sales outside of the United States. Amortization of these capitalized IPR&D assets will commence upon our receipt of the necessary approvals to sell alemtuzumab for MS in each area. We currently anticipate receiving approval for alemtuzumab for MS in the United States in 2012 and outside of the United States starting in 2013.
We will test our capitalized IPR&D assets annually for potential impairment, or earlier if conditions warrant.
Contingent Consideration Expense
In accordance with FAS 141R, each period we revalue the contingent consideration obligations associated with certain acquisitions to their then fair value and record increases in the fair value as contingent consideration expense and record decreases in the fair value as a reduction of contingent consideration expense. Increases or decreases in the fair value of the program would be recordedcontingent consideration obligations can result from changes in assumed discount periods and rates, changes in the assumed timing and amount of revenue estimates and changes in assumed probability adjustments with respect to regulatory approval. Significant judgment is employed in determining the appropriateness of these assumptions as an intangible asset on our consolidated balance sheet.of the acquisition date and for each subsequent period. Accordingly, future business and economic conditions, as well as changes in any of the assumptions described above, can materially impact the amount of contingent consideration expense we record in any given period.
RESULTS OF OPERATIONS
The following discussion summarizes the key factors our management believes are necessary for an understanding of our consolidated financial statements.
REVENUES
The components of our total revenues are described in the following table (amounts in thousands):
| | Three Months Ended March 31, | | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | |||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Increase/ (Decrease) % Change | | Increase/ (Decrease) | Increase/ (Decrease) % Change | Increase/ (Decrease) | Increase/ (Decrease) % Change | ||||||||||||||||||||||||||||||
| | 2009 | 2008 | | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||||||||||
Product revenue | Product revenue | $ | 1,037,244 | $ | 1,006,268 | 3 | % | Product revenue | $ | 1,115,425 | $ | 1,071,801 | $ | 43,624 | 4 | % | $ | 2,152,669 | $ | 2,078,069 | $ | 74,600 | 4 | % | |||||||||||||
Service revenue | Service revenue | 101,499 | 85,864 | 18 | % | Service revenue | 105,693 | 90,622 | 15,071 | 17 | % | 207,192 | 176,486 | 30,706 | 17 | % | |||||||||||||||||||||
Total product and service revenue | 1,138,743 | 1,092,132 | 4 | % | Total product and service revenue | 1,221,118 | 1,162,423 | 58,695 | 5 | % | 2,359,861 | 2,254,555 | 105,306 | 5 | % | ||||||||||||||||||||||
Research and development revenue | Research and development revenue | 10,128 | 7,929 | 28 | % | Research and development revenue | 7,392 | 8,711 | (1,319 | ) | (15 | )% | 17,520 | 16,640 | 880 | 5 | % | ||||||||||||||||||||
Total revenues | $ | 1,148,871 | $ | 1,100,061 | 4 | % | Total revenues | $ | 1,228,510 | $ | 1,171,134 | $ | 57,376 | 5 | % | $ | 2,377,381 | $ | 2,271,195 | $ | 106,186 | 5 | % | ||||||||||||||
Product Revenue
We derive product revenue from sales of:
The following table sets forth our product revenue on a reporting segment basis (amounts in thousands):
| Three Months Ended March 31, | | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| Increase/ (Decrease) % Change | |||||||||||
| 2009 | 2008 | ||||||||||
Genetic Diseases: | ||||||||||||
Cerezyme | $ | 295,970 | $ | 304,303 | (3 | )% | ||||||
Fabrazyme | 122,201 | 116,475 | 5 | % | ||||||||
Myozyme | 67,392 | 67,324 | — | |||||||||
Aldurazyme | 36,837 | 36,839 | — | |||||||||
Other Genetic Diseases | 14,625 | 9,772 | 50 | % | ||||||||
Total Genetic Diseases | 537,025 | 534,713 | — | |||||||||
Cardiometabolic and Renal: | ||||||||||||
Renagel/Renvela (including sales of bulk sevelamer) | 170,599 | 168,694 | 1 | % | ||||||||
Hectorol | 33,030 | 29,076 | 14 | % | ||||||||
Thyrogen | 38,826 | 33,785 | 15 | % | ||||||||
Other Cardiometabolic and Renal | 482 | 237 | >100 | % | ||||||||
Total Cardiometabolic and Renal | 242,937 | 231,792 | 5 | % | ||||||||
Biosurgery: | ||||||||||||
Synvisc/Synvisc-One | 63,171 | 56,142 | 13 | % | ||||||||
Sepra products | 34,304 | 30,604 | 12 | % | ||||||||
Other Biosurgery | 11,653 | 13,581 | (14 | )% | ||||||||
Total Biosurgery | 109,128 | 100,327 | 9 | % | ||||||||
Hematologic Oncology | 33,978 | 22,281 | 52 | % | ||||||||
Other product revenue | 114,176 | 117,155 | (3 | )% | ||||||||
Total product revenue | $ | 1,037,244 | $ | 1,006,268 | 3 | % | ||||||
| Three Months Ended June 30, | | | Six Months Ended June 30, | | | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Increase/ (Decrease) | Increase/ (Decrease) % Change | Increase/ (Decrease) | Increase/ (Decrease) % Change | ||||||||||||||||||||||
| 2009 | 2008 | 2009 | 2008 | ||||||||||||||||||||||
Genetic Diseases | $ | 568,153 | $ | 572,294 | $ | (4,141 | ) | (1 | )% | $ | 1,105,178 | $ | 1,107,007 | $ | (1,829 | ) | — | |||||||||
Cardiometabolic and Renal | 247,949 | 239,199 | 8,750 | 4 | % | 490,886 | 470,991 | 19,895 | 4 | % | ||||||||||||||||
Biosurgery | 127,113 | 119,099 | 8,014 | 7 | % | 236,241 | 219,426 | 16,815 | 8 | % | ||||||||||||||||
Hematologic Oncology | 54,786 | 26,019 | 28,767 | >100 | % | 88,764 | 48,300 | 40,464 | 84 | % | ||||||||||||||||
Other product revenue | 117,424 | 115,190 | 2,234 | 2 | % | 231,600 | 232,345 | (745 | ) | — | ||||||||||||||||
Total product revenue | $ | 1,115,425 | $ | 1,071,801 | $ | 43,624 | 4 | % | $ | 2,152,669 | $ | 2,078,069 | $ | 74,600 | 4 | % | ||||||||||
Genetic Diseases
| Three Months Ended June 30, | | | Six Months Ended June 30, | | | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Increase/ (Decrease) | Increase/ (Decrease) % Change | Increase/ (Decrease) | Increase/ (Decrease) % Change | ||||||||||||||||||||||
| 2009 | 2008 | 2009 | 2008 | ||||||||||||||||||||||
| (Amounts in thousands) | |||||||||||||||||||||||||
Cerezyme | $ | 298,087 | $ | 319,360 | $ | (21,273 | ) | (7 | )% | $ | 594,057 | $ | 623,663 | $ | (29,606 | ) | (5 | )% | ||||||||
Fabrazyme | 134,302 | 126,608 | 7,694 | 6 | % | 256,503 | 243,083 | 13,420 | 6 | % | ||||||||||||||||
Myozyme | 79,273 | 77,222 | 2,051 | 3 | % | 146,665 | 144,546 | 2,119 | 1 | % | ||||||||||||||||
Aldurazyme | 39,190 | 38,667 | 523 | 1 | % | 76,027 | 75,506 | 521 | 1 | % | ||||||||||||||||
Other Genetic Diseases | 17,301 | 10,437 | 6,864 | 66 | % | 31,926 | 20,209 | 11,717 | 58 | % | ||||||||||||||||
Total Genetic Diseases | $ | 568,153 | $ | 572,294 | $ | (4,141 | ) | (1 | )% | $ | 1,105,178 | $ | 1,107,007 | $ | (1,829 | ) | — | |||||||||
Genetic Diseases product revenue remained substantially unchangeddecreased slightly for the three and six months ended March 31,June 30, 2009 as compared to the same period of 2008, primarily due to unfavorable exchange rate fluctuations, which offset continued growth in sales volume for Cerezyme, Fabrazyme, Myozyme, Aldurazyme and Elaprase. Elaprase was developed by Shire Human Genetic Therapies Inc., or Shire. WeShire and we have the rights to commercialize the product in Japan and other Asia PacificAsia-Pacific countries under an agreement with Shire. We launched Elaprase in Japan in the fourth quarter of 2007. Sales of Elaprase are included in Other Genetic Diseases product revenue.
The 3% decreasedecreases in Cerezyme revenue to $296.0 million for the three and six months ended March 31,June 30, 2009 as compared to the same period of 2008, isare primarily due to the weakening of foreign currencies against the U.S. dollar, which adversely impacted revenue by $22.6$21.9 million for the three months ended March 31,June 30, 2009 as compared toand by $44.5 million for the same period of 2008. This decrease wassix months ended June 30, 2009. These decreases were offset, in part, by increases in sales volume due to continued identification of Gaucher disease patients, particularly in international markets. Although we expect Cerezyme to continue to be a substantial contributor to revenues in the future, it is a mature product and, as a result, we expect that the current new patient growth trend will continue at a modest pace going forward.
Our results of operations are dependent on sales of Cerezyme and a reduction in revenue from sales of this product would adversely affect our results of operations. Sales of Cerezyme were
approximately 26% of our total The increases in Fabrazyme revenue for the three and six months ended March 31,June 30, 2009 as compared to 28% for the same period in 2008. Revenue from Cerezyme would be impacted negatively if competitors developed alternative treatments for Gaucher disease which gained commercial acceptance, if our marketing activities are restricted, or if coverage, pricing or reimbursement is limited.
The 5% increase in Fabrazyme revenue to $122.2 million for the three months ended March 31, 2009, as compared to the same period of 2008, is primarily attributable to increased patient identification worldwide as Fabrazyme is introduced into new markets. The increaseincreases in the sales volume of Fabrazyme waswere offset, in part, by decreases of $6.8$8.2 million for the three months ended June 30, 2009 and $14.9 million for the six months ended June 30, 2009 attributable to the weakening of foreign currencies against the U.S. dollar.
On June 16, 2009, we announced that we had interrupted production of Cerezyme and Fabrazyme, and shipments of Cerezyme, at our Allston facility after identifying a virus, Vesivirus 2117, in a bioreactor used for Cerezyme production. The virus we identified impairs the viability of cells used in the manufacturing process and is not known to cause infection in humans. We have completed sanitization of the facility. The first new releases of Cerezyme and Fabrazyme are expected before the end of 2009. Cerezyme and Fabrazyme inventories are not sufficient to avoid shortages during the period of suspended production and recovery. We are working closely with treating physicians, other health care providers, patient communities and regulatory officials worldwide to support patients with Gaucher and Fabry diseases during the period of supply constraint, with the goal of conserving supply for the most vulnerable patients.
The temporary suspension of production at our Allston facility has and will continue to adversely affect our Cerezyme and Fabrazyme revenues for 2009. Our results of operations are dependent on sales of Cerezyme and any reduction in revenue from sales of this product adversely affects our results of operations. Sales of MyozymeCerezyme were virtually the sameapproximately 24% of our total revenue for the three months ended March 31,June 30, 2009 and approximately 25% of our total revenue for the six months ended June 30, 2009, as compared to the same period of 2008. Although sales of Myozyme increasedapproximately 27% for the three months ended March 31,June 30, 2008 and approximately 27% for the six months ended June 30, 2008. The Cerezyme supply constraints caused Cerezyme revenue to be approximately $13 million lower than anticipated for both the three and six months ended June 30, 2009. We expect Cerezyme revenue for the second half of 2009 to be significantly adversely affected by the supply constraint and, therefore, expect that total Cerezyme revenue for 2009 will be significantly lower than in 2008.
When we suspended production at Allston, we had significant Cerezyme work-in-process material. We have decided not to process approximately 80% of this work-in-process material because the material either had expired or we were not sufficiently assured that the material was not contaminated with Vesivirus 2117 and, accordingly, have incurred a write off of $8.4 million for the second quarter of 2009. At the end of the business day on Friday, August 7, 2009, the FDA communicated to us steps it recommends we take prior to forward processing any Cerezyme work-in-process. The steps recommended by the FDA were consistent with the steps that we independently had planned to implement. The remaining Cerezyme work-in-process material expires in June 2010. If we decide not to process this remaining material or if we process the material and the FDA or another regulatory authority does not allow us to release it, we will incur a write off of approximately $2.7 million for the inventory value of this remaining material. In addition, we have two lots of finished Cerezyme product in inventory. If the FDA or another regulatory authority does not allow us to release both of these finished lots, we will incur an additional write off of $3.1 million.
We are constructing additional manufacturing capacity for Cerezyme and Fabrazyme in Framingham, Massachusetts to support the growth of these two products. The plant, which will include four 2000L bioreactors, is expected to be mechanically complete by the end of 2009 and FDA approval for commercial production is anticipated in mid-2011 for Fabrazyme and in 2012 for Cerezyme.
Sales of Myozyme increased slightly for the three and six months ended June 30, 2009 due to the identification of new patients and expanded supply following European approval in February 2009 of product produced at our Belgium facility at the 4000L scale in February 2009, the growth in sales of Myozyme was adversely affected by the product not yet being approved for promotion in the U.S. market and by a global supply management program under which adult Pompe disease patients temporarily adjusted their infusion schedules in order to preserve constrained product supply for infants and children.scale. Sales of Myozyme were also adversely impacted by decreases of $9.1 million for the three months ended March 31,June 30, 2009 as compared to and $17.9 million for
the same period of 2008, by decreases of $8.8 millionsix months ended June 30, 2009 attributable to the weakening of foreign currencies against the U.S. dollar.
We currently manufacturehave approval to sell Myozyme (alglucosidase alfa) in the United Statesthat is manufactured using a 160L scale process at our manufacturing facility in Framingham, Massachusetts and using the 2000L scale process at our manufacturing facility in Allston, Massachusetts. We have approval to sell Myozyme manufactured using the 160L scale process in the United States and Canada. Myozyme produced using the 2000L scale process has been approved for sale in more than 40 countries outside of the United States. The product produced using the 160L scale process is reserved for infants and children because the smaller scale produces a limited supply of FDA-approved product for the U.S. market. Myozyme produced using a 2000L scale process has been approved for sale in many countries outside of the United States. In Europe we also had approval to sell Myozyme produced using a 2000L scale process and recently received approval for a 4000L scale process.
In October 2007,May 2008, we submitted a supplemental biologics license application, or BLA, to the FDA seeking approval of alglucosidase alfa produced using the 2000L scale process, to help meet the demand for the product in the U.S. market. In April 2008, the FDA concluded that alglucosidase alfa produced using the 160L scale process and using the 2000L scale process should be classified as two different products because of analytical differences observed as part of the comparability efforts supporting the manufacturing change. As a result, the FDA required us to submit a separate BLA to gain U.S. approval for alglucosidase alfa produced using the 2000L scale process, which we submitted in May 2008.refer to as Lumizyme. In October 2008, the Endocrinologic and Metabolic Drugs Advisory Committee affirmed by a vote of 16 to 1 that our Late Onset Treatment Study established the clinical effectiveness of alglucosidase alfa produced using the 2000L scale process for the treatment of patients with late-onset Pompe disease. After the product is approved, it will be marketed as Lumizyme in the United States, while the currently FDA-approved product produced using the 160L scale process will continue to be marketed as Myozyme.
In September and October 2008, FDA officials conducted a Good Manufacturing Practices, or GMP, inspection of licensed therapeutic drug products, bulk drug substances and drug components manufactured at our Allston, Massachusetts facility. We manufacture Cerezyme, Fabrazyme and Myozyme and perform fill/finish for Aldurazyme and Thyrogen at this facility. After this inspection, the FDA officials issued a list of inspection observations known as a Form FDA 483, or 483, which detailed observations considered by the FDA to be significant deviations from GMP compliance, including observations relating to our procedures designed to prevent microbiological contamination of sterile drug products; controls for in-process monitoring during bulk drug substance manufacturing, including our controls for bioburden monitoring; and maintenance of equipment and computer systems
validation. We responded to the 483 on October 31, 2008 with a plan and timeline to address the inspectional observations. We also provided a progress update to the FDA on February 23, 2009. On February 27, 2009, we received a warning letter from the FDA that requested supplemental information in order to fully evaluate the adequacy of our corrective actions with respect to nine of the FDA's sixteen observations in the 483. We submitted an initial response to the FDA on March 6, 2009 with a plan and timeline for providing this supplemental information and have been providing regular updates to the FDA on our progress against this plan. We believe that we have addressed all the measures required to respond to the FDA warning letter. We are awaiting the FDA's re-inspection of the Allston facility. Failure to correct the deviations cited in an FDA warning letter can result in further regulatory action, including suspension of our license to manufacture products at this facility, or lead to a delay in the approval of new products.
Also on February 27, 2009, we received a complete response letter, or CR Letter, from the FDA regarding our 2000L application. In the CR Letter, the FDA outlined items that need to be addressed before our application could be approved. These items included finalizing agreement with the FDA on the design of a post-approval verification study to demonstrate the clinical benefit of Lumizyme, as required under the FDA's accelerated approval process, as well as a Risk Evaluation and Mitigation Strategy, or REMS, for the product; finalizing label discussions with the FDA; and providing the FDA with information regarding specific chemistry, manufacturing and controls questions and with a safety update. In May 2009, we submitted documentation to address the items in the CR Letter. The submission included the REMS, the final label, and clinical data requested by the FDA from our Pompe Registry. The FDA has agreed that our Pompe Registry data can fulfill the requirements for a verification study to demonstrate the clinical benefit of Lumizyme.
In addition, the FDA's CR Letter stated that before the FDA would approve Lumizyme, we would need to resolve issues identified in the warning lettera Warning Letter related to our Allston manufacturing facility. We havefacility that we received final comments fromin February 2009, on the agency regardingsame day as the REMS forCR Letter. An FDA inspector inspected the product,plant in May 2009 as a follow up to the verification study, andWarning Letter. At the label.
Theend of July 2009, the FDA has informed us that we can submitit will re-inspect our Allston facility to verify that all corrective and preventative actions identified in the February Warning Letter have been implemented. The FDA indicated that all promised actions had not been either fully or adequately implemented at the time of the May inspection, such as identifying measures to prevent column rouging; inspection and preventative maintenance, or PM, of remaining chromatography columns; revision of PM scheduled inspection to every six months for Chromaflow columns and an annual inspection for all other column types; revision of column packing records to include internal inspection; development of on the job training for preventative maintenance and division of maintenance responsibility; and implementation of the revised transfer/transport procedures for cryoshippers. In addition, recent remediation of the Allston facility in response to the CR Letter beforeVesivirus 2117 contamination employed cleaning procedures using sodium hypochlorite and vaporized hydrogen peroxide treatment of columns. The cleaning validation will be reviewed during the next inspection along with our investigation and other remediation efforts related to the identification of the virus at our Allston facility. We will work with the FDA to schedule the re-inspection ofas soon as possible.
In order to provide more capacity in our Allston facility for Cerezyme and Fabrazyme, we have transitioned all Myozyme/Lumizyme production to our 4000L Belgium facility and are no longer manufacturing the product at the 2000L scale. FDA approval of the 4000L process will be necessary to expand supply and support an increase in connection withU.S. sales. We will begin to transition U.S. patients in the warning letter. In addition,Myozyme Temporary Access Program from the product produced at the 2000L scale to that produced at the 4000L scale and will provide 4000L data to the FDA has agreed that we can compile and submit existing registry data as part of our response to the CR Letter instead of conducting a separate post-marketing verification study. We are preparing the requested registry data and expect to submit our response to the CR Letter by the middle of May 2009. Because our submission will include clinical data, we believe that the FDA will classify our response as a Class 2 resubmission with a six-month review periodsupport this transition. The FDA's target action date under the Prescription Drug User Fee Act, or PDUFA. However, given our ongoing dialogue with the FDA, we believe that we could receive approval before the PDUFA, date.
for Lumizyme is November 14, 2009. We are also in discussion with the FDA regarding the submission ofexpect to submit a supplemental BLA for the 4000L scale product.process upon approval of Lumizyme. We have met withanticipate a four-month FDA review of the supplemental BLA, and if the FDA to review comparability data and are working collaboratively to determineacts by the most expeditious path toward approval.
In February 2009, we receivedPDUFA date, a potential approval from the European Commission to market Myozyme produced at our manufacturing facility in Belgium using a 4000L scale process. During January and February 2009, there was widespread adult patient compliance with our request to adjust infusion schedules to preserve product supply for infants and children. With the approval of Myozyme produced using the 4000L scale process, adult patients who adjusted their infusion schedules were able to resume their regular schedules and new patients will be able to initiate therapy outsideproduct by the end of the United States.March 2010.
We expect Myozyme sales in Europe to accelerate starting in the second quarter of 2009 and to continue to increase throughout the second half of 2009. During the second half of 2009, we also plan to begin preparingWe have begun preparations to add a third 4000L bioreactor to our Belgium facility to help support Myozyme's growth over the longer term. We anticipate that this bioreactor will be approved for commercial production in the middle of 2011.mid-2011.
Aldurazyme revenue remained substantially unchangedincreased slightly for the three and six months ended March 31,June 30, 2009 as compared to the same period of 2008. Aldurazyme revenue increased for the three months ended March 31, 2009, as compared to the same period of 2008, due to increased patient identification
worldwide as Aldurazyme was introduced into new markets. The weakening of foreign currencies against the U.S. dollar adversely impacted Aldurazyme revenue by $3.6 million for the three months ended March 31,June 30, 2009 as compared toand $7.2 million for the same period of 2008.six months ended June 30, 2009.
Other Genetic Diseases product revenue increased for the three and six months ended March 31,June 30, 2009 as compared to the same period of 2008, primarily due to increasedan increase in sales of Elaprase, driven by the identification of new patients and the strengthening of the Japanese yen against the U.S. dollar, which favorablypositively impacted revenue by $1.1 million.$0.7 million for the three months ended June 30, 2009 and $1.8 million for the six months ended June 30, 2009.
Cardiometabolic and Renal
| Three Months Ended June 30, | | | Six Months Ended June 30, | | | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Increase/ (Decrease) | Increase/ (Decrease) % Change | Increase/ (Decrease) | Increase/ (Decrease) % Change | ||||||||||||||||||||||
| 2009 | 2008 | 2009 | 2008 | ||||||||||||||||||||||
| (Amounts in thousands) | |||||||||||||||||||||||||
Renagel/Renvela (including sales of bulk sevelamer) | $ | 175,398 | $ | 168,567 | $ | 6,831 | 4 | % | $ | 345,997 | $ | 337,261 | $ | 8,736 | 3 | % | ||||||||||
Hectorol | 28,981 | 30,852 | (1,871 | ) | (6 | )% | 62,011 | 59,928 | 2,083 | 3 | % | |||||||||||||||
Thyrogen | 42,860 | 39,448 | 3,412 | 9 | % | 81,686 | 73,233 | 8,453 | 12 | % | ||||||||||||||||
Other Cardiometabolic and Renal | 710 | 332 | 378 | >100 | % | 1,192 | 569 | 623 | >100 | % | ||||||||||||||||
Total Cardiometabolic and Renal | $ | 247,949 | $ | 239,199 | $ | 8,750 | 4 | % | $ | 490,886 | $ | 470,991 | $ | 19,895 | 4 | % | ||||||||||
In October 2007, the FDA granted marketing approval for Renvela, a second generation buffered form of Renagel.Renagel, for the control of serum phosphorus in patients with CKD on dialysis. In March 2008, we launched Renvela for dialysis patientstablets in the United States. We are currently pursuing regulatory approvals for Renvela in Europe, Latin America and other international markets.
Sales of Renagel/Renvela, including sales of bulk sevelamer, increased 1% to $170.6 million for the three and six months ended March 31,June 30, 2009 as compareddue to the same period of 2008, primarily due toincreased end-user demand and Renagel price increases in the United States after the firstsecond quarter of 2008, offset in part by price decreases outside of the United States which adversely impacted revenue. The weakening of foreign currencies against the U.S. dollar adversely impacted Renagel revenue by $12.9$11.3 million for the three months ended June 30, 2009 and $24.2 million for the six months ended June 30, 2009 and had no impact on sales of Renvela. Sales
In June 2009, the European Commission approved Renvela for the control of Renagel/Renvela, including sales of bulk sevelamer, were 15% of our total revenues forserum phosphorus in patients with CKD. The approval includes patients not on dialysis with serum phosphorus levels³1.78 mmol/L (5.5mg/dL) and covers both the three months ended March 31, 2009tablet and 2008.powder formulations.
In October 2007, an FDA advisory committee voted to recommend that the agency extend the indications for phosphate binders to include patients with hyperphosphatemia who have not progressed to dialysis. In June 2008, we and two other companies submitted a position paper to the FDA regarding the expanded use of phosphate binders. We received written responses frombinders and we have been in discussions with the FDA and we are inregarding the processtreatment of responding to the agency.hyperphosphatemic CKD patients not on dialysis. There is no PDUFA date associated with this expanded label process; however,process and we anticipate that this indication could be added to Renvela's label in the United States by the middle of 2009. In March 2009, the European Medicines Agency's Committee for Human Medicinal Products, or CHMP, adopted a positive opinioncannot provide an anticipated timeframe for the marketing authorization of Renvela for use in patients with CKD, including patients notFDA's decision on dialysis. Our filing in Europe includes both powder and tablet formulations of Renvela. The European Commission generally follows the advice of the CHMP, but is not obligated to do so. A decision from the European Commission is expected at the end of May 2009. In addition, we have filed forthis indication. We expect FDA approval of a powder formformulation of Renvela. While Renagel will remain availableRenvela for a periodCKD patients on dialysis during the second half of time, our goal is to transition patients in the United States to Renvela by the fourth quarter2009.
Sales of Hectorol increased 14% to $33.0 milliondecreased for the three months ended March 31,June 30, 2009 as compared to the same period of 2008, primarily due to Hectorol price increasesan increase in the secondreturns reserve for Hectorol based on our recent experience with returns for the product, offset in part by an increase in revenue due to a price increase in the fourth quarter of 2008. Sales of Hectorol increased for the six months ended June 30, 2009 primarily due to a price increase in the fourth quarter of 2008. We implemented a 9% price increase in June 2009, which did not have a significant impact on Hectorol revenue for the three and fourth quarters of 2008.six months ended June 30, 2009.
We expect sales of Renagel/Renvela and Hectorol to continue to increase. Adoption rates for Renagel/Renvela are expected to trend favorably as a result of the introduction of Renvela globally, including in Europe for hyperphosphatemic patients who are not on dialysis and in a powder formulation, the potential label expansion in the United States to include hyperphosphatemic patients who are not on dialysis, and the introduction of a powder formulation expected in the first half of 2009. Adoption rates for Hectorol areUnited States expected to trend favorably as a result of growth in the CKD market and the launch of a 1mg capsule form of Hectorol in the second half of 2009.
Renagel/Renvela and Hectorol compete with several other marketed products and our future sales may be impacted negatively by these products. Renagel, Renvela and Hectorol are also subjects of Abbreviated New Drug Applications, or ANDAs, containing "Paragraph IV certifications," which is the filing a generic drug manufacturer uses to challenge the applicability of one or more Orange
Book-listed patents in order to seek U.S. regulatory approval to market a generic version of a drug prior to the expiration date of those patents. See "Some of our products may face competition from lower cost generic or follow-on products" under the heading "Risk Factors" below. If any of the ANDA filers or any other generic drug manufacturer were to receive approval to sell a generic version of Renagel/Renvela or Hectorol, our revenues from those products would be adversely affected.
In addition, our ability to continue to increasemaintain sales of Renagel/Renvela and Hectorol will depend on many other factors, including ourthe ability of health care providers to optimize dosingimprove patients' compliance with their prescribed doses and improve patient compliance, the availability of coverage and reimbursement from third-party payorsunder patients' health insurance and the extent of coverage,prescription drug plans, including under the Medicare Part D program.program in the United States. Also, the accuracy of our estimates of fluctuations in the payor mix and our ability to effectively manage wholesaler inventories and the levels of compliance with the inventory management programs we implemented for Renagel/Renvela and Hectorol with our wholesalers could impact the revenue from our Cardiometabolic and Renal reporting segment that we record from period to period.
Sales of Thyrogen increased 15% to $38.8 million for the three and six months ended March 31,June 30, 2009 as compared to the same period of 2008 primarily due to a 15% price increase for Thyrogen, which we implemented in the United States in April 2008. In addition, worldwide volume growth, driven by a significant increase in the use of the product in thyroid remnant ablation procedures, positively impacted Thyrogen revenue.procedures. The weakening of foreign currencies against the U.S. dollar adversely impacted Thyrogen revenue by $2.4$2.6 million for the three months ended March 31,June 30, 2009 as compared toand $5.1 million for the same period of 2008.six months ended June 30, 2009.
Biosurgery
| Three Months Ended June 30, | | | Six Months Ended June 30, | | | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Increase/ (Decrease) | Increase/ (Decrease) % Change | Increase/ (Decrease) | Increase/ (Decrease) % Change | ||||||||||||||||||||||
| 2009 | 2008 | 2009 | 2008 | ||||||||||||||||||||||
| (Amounts in thousands) | |||||||||||||||||||||||||
Synvisc/Synvisc-One | $ | 82,417 | $ | 70,927 | $ | 11,490 | 16 | % | $ | 145,588 | $ | 127,069 | $ | 18,519 | 15 | % | ||||||||||
Sepra products | 36,038 | 34,780 | 1,258 | 4 | % | 70,342 | 65,384 | 4,958 | 8 | % | ||||||||||||||||
Other Biosurgery | 8,658 | 13,392 | (4,734 | ) | (35 | )% | 20,311 | 26,973 | (6,662 | ) | (25 | )% | ||||||||||||||
Total Biosurgery | $ | 127,113 | $ | 119,099 | $ | 8,014 | 7 | % | $ | 236,241 | $ | 219,426 | $ | 16,815 | 8 | % | ||||||||||
Biosurgery product revenue increased 9% to $109.1 million for the three and six months ended March 31, 2009, as compared to the same period of 2008. The combined revenues ofJune 30, 2009. Revenue from Synvisc/Synvisc-One increased 13% to $63.2 million for the three and six months ended March 31,June 30, 2009 as compared to the same period of 2008, primarily due to an expanded sales and marketing investment and the initiation of direct sales of the products in Latin America and the addition of Synvisc-One sales in the United States. We received approval to market Synvisc-One, a single injection regimen, in the European Union in December 2007. In February 2009, we received marketing approval for Synvisc-One in the United States.States in February 2009.
SeprafilmSepra products revenue increased $4.9 million for the three and six months ended March 31,June 30, 2009 as compared to the same period of 2008, primarily due to greater penetration of the productSeprafilm into the United States, Japan and Europe and the expanded use of Seprafilm in C-sections and gynecological procedures.
The weakening of foreign currencies against the U.S. dollar adversely impacted Biosurgery product revenue by $1.3 million for the three months ended March 31, 2009, as compared to the same period of 2008.
Other Biosurgery product revenue decreased 14% to $11.7 million for the three and six months ended March 31,June 30, 2009 as compared to the same period of 2008, primarily due to a decrease in milestone revenue associated with the development and commercialization of dermal filler products with Mentor Corporation.
The weakening of foreign currencies against the U.S. dollar adversely impacted Biosurgery product revenue by $1.9 million for the three months ended June 30, 2009 and $3.2 million for the six months ended June 30, 2009.
Hematologic Oncology
| Three Months Ended June 30, | | | Six Months Ended June 30, | | | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Increase/ (Decrease) | Increase/ (Decrease) % Change | Increase/ (Decrease) | Increase/ (Decrease) % Change | |||||||||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||
| (Amounts in thousands) | ||||||||||||||||||||||||
Hematologic Oncology | $ | 54,786 | $ | 26,019 | $ | 28,767 | >100 | % | $ | 88,764 | $ | 48,300 | $ | 40,464 | 84 | % | |||||||||
Hematologic Oncology product revenue increased 52% to $34.0 million for the three and six months ended March 31,June 30, 2009 as compared to the same period of 2008, primarily due to the addition of sales of Mozobil in the United States, and increased demand for Clolar in the United States.States, and the addition of sales of Fludara and Leukine in the second quarter of 2009. The weakening of foreign currencies against the U.S. dollar adversely impacted Hematologic Oncology product revenue by $1.1 million for the three months ended June 30, 2009 and $2.2 million for the six months ended June 30, 2009.
We are developing the intravenous formulation of clofarabine for new indications, including first-line and relapsed or refractory adult acute myeloid leukemia, or AML. In November 2008, we filed
a supplemental New Drug Application, or NDA, with the FDA for the use of Clolar to treat previously untreated adults age 60 years or older with AML who have at least one unfavorable prognostic factor. FDA action is expected in the second half of 2009. We have discussed our adult AML development plans with the European Medicines Agency's Committee for Human Medicinal Products, or CHMP, in Europe, and based on the CHMP's feedback, await the availability of additional data before seeking approval for this indication in Europe. We are also developing an oral formulation of clofarabine and have initiated clinical trials for the treatment of myelodysplastic syndrome, or MDS. Clofarabine has been granted orphan drug status for the treatment of ALL and AML in both the United States and the European Union.
Mozobil was approved in the United States by the FDA in December 2008 to preparefor stem cell mobilization in patients with non-Hodgkin's lymphoma and multiple myeloma for autologous stem cell transplants. We have also filed for approvalOn July 31, 2009, the European Commission approved our marketing authorization application for Mozobil in Europe. In Europe, Mozobil is indicated to enhance stem cell mobilization in preparation for autologous stem cell transplants in patients with lymphoma and expect approval in the second half of 2009.multiple myeloma whose cells mobilize poorly.
Other Product Revenue
| Three Months Ended June 30, | | | Six Months Ended June 30, | | | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Increase/ (Decrease) | Increase/ (Decrease) % Change | Increase/ (Decrease) | Increase/ (Decrease) % Change | ||||||||||||||||||||||
| 2009 | 2008 | 2009 | 2008 | ||||||||||||||||||||||
| (Amounts in thousands) | |||||||||||||||||||||||||
| ||||||||||||||||||||||||||
Total Other product revenue | $ | 117,424 | $ | 115,190 | $ | 2,234 | 2 | % | $ | 231,600 | $ | 232,345 | $ | (745 | ) | — | ||||||||||
Other product revenue decreased 3% to $114.2 millionincreased for the three months ended March 31,June 30, 2009 as compared to the same period of 2008, primarily due to decreased demand for diagnostic products, WelChol and liquid crystals.
The decreases in Other product revenue were offset by a 15%an increase in sales of transplant products to $52.7 million for the three months ended March 31, 2009, as compared to the same period of 2008, primarily due to an increase in Thymoglobulin sales, partially offset by a decrease in demand for the three months ended March 31, 2009, as compared to the same period of 2008, due to a shortage in supply in the first quarter of 2008.pharmaceutical products. Sales of Thymoglobulin increased $7.3by $8.4 million for the three months ended March 31,June 30, 2009 as compared to the same period of 2008, primarily due to an increase in sales volume resulting from increased utilization of Thymoglobulin in transplant procedures worldwide. The weakening of foreign currencies against the U.S. dollar adversely impacted Thymoglobulin product revenue by $2.3 millionworldwide and a constraint in supply for the three months ended March 31,June 30, 2008.
Other product revenue decreased for the six months ended June 30, 2009 as comparedprimarily due to a decrease in demand for pharmaceutical products, partially offset by an increase in sales of transplant products primarily due to an increase in Thymoglobulin sales. Sales of Thymoglobulin increased by $15.7 million for the same periodsix months ended June 30, 2009 primarily due to an increase in sales volume resulting from increased utilization of Thymoglobulin in transplant procedures worldwide and a constraint in supply for the six months ended June 30, 2008.
Service Revenue
We derive service revenues primarily from the following sources:
The following table sets forth our service revenue on a segment basis (amounts in thousands):
| | Three Months Ended March 31, | | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | |||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Increase/ (Decrease) % Change | | Increase/ (Decrease) | Increase/ (Decrease) % Change | Increase/ (Decrease) | Increase/ (Decrease) % Change | ||||||||||||||||||||||||||||||
| | 2009 | 2008 | | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||||||||||
Genetic Diseases | Genetic Diseases | $ | 25 | $ | 176 | (86 | )% | Genetic Diseases | $ | — | $ | 167 | $ | (167 | ) | (100 | )% | $ | 25 | $ | 343 | $ | (318 | ) | (93 | )% | |||||||||||
Cardiometabolic and Renal | Cardiometabolic and Renal | 12 | 14 | (14 | )% | Cardiometabolic and Renal | 43 | 1 | 42 | >100 | % | 55 | 15 | 40 | >100 | % | |||||||||||||||||||||
Biosurgery | Biosurgery | 9,832 | 10,732 | (8 | )% | Biosurgery | 11,344 | 11,298 | 46 | — | 21,176 | 22,030 | (854 | ) | (4 | )% | |||||||||||||||||||||
Hematologic Oncology | Hematologic Oncology | 445 | 410 | 9 | % | Hematologic Oncology | 292 | 424 | (132 | ) | (31 | )% | 737 | 834 | (97 | ) | (12 | )% | |||||||||||||||||||
Other | 91,185 | 74,532 | 22 | % | |||||||||||||||||||||||||||||||||
Other service revenue | Other service revenue | 94,014 | 78,732 | 15,282 | 19 | % | 185,199 | 153,264 | 31,935 | 21 | % | ||||||||||||||||||||||||||
Total service revenue | $ | 101,499 | $ | 85,864 | 18 | % | Total service revenue | $ | 105,693 | $ | 90,622 | $ | 15,071 | 17 | % | $ | 207,192 | $ | 176,486 | $ | 30,706 | 17 | % | ||||||||||||||
Service revenue attributable to our Biosurgery reporting segment decreased 8% to $9.8 million for the three months ended March 31, 2009, as compared to the same period of 2008. The decrease is primarily due to a decrease in the demand for MACI.
Other service revenue increased 22% to $91.2 million for the three and six months ended March 31,June 30, 2009 as compared to the same period of 2008. The increase was primarily attributabledue to continued growth in sales of genetic testing and prenatal screening services as well as growth in thehigher demand for certain testing services for patients diagnosed with cancer.
International Product and Service Revenue
A substantial portion of our revenue is generated outside of the United States. The following table provides information regarding the change in international product and service revenue as a percentage of total product and service revenue during the periods presented (amounts in thousands):
| Three Months Ended March 31, | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | |||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Increase/ (Decrease) % Change | Increase/ (Decrease) | Increase/ (Decrease) % Change | Increase/ (Decrease) | Increase/ (Decrease) % Change | ||||||||||||||||||||||||||||||
| 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||||||||||
International product and service revenue | $ | 551,111 | $ | 564,127 | (2 | )% | $ | 606,988 | $ | 623,237 | $ | (16,249 | ) | (3 | )% | $ | 1,158,100 | $ | 1,187,364 | $ | (29,264 | ) | (2 | )% | |||||||||||
% of total product and service revenue | 48 | % | 52 | % | 50 | % | 54 | % | 49 | % | 53 | % |
The 2% decrease to $551.1 million in internationalInternational product and service revenue decreased for the three and six months ended March 31,June 30, 2009 as compared to the same period of 2008, is primarily due to the weakening of foreign currencies against the U.S. dollar, which adversely impacted total product and service revenue by $65.7 million for the three months ended March 31,June 30, 2009 as compared toand by $131.4 million for the same period of 2008. This decrease wassix months ended June 30, 2009. These decreases were offset in part by growth in the international sales volume of Renagel, Cerezyme, Fabrazyme, Myozyme, Aldurazyme, Elaprase, Synvisc, Campath, Clolar/Evoltra, Thymoglobulin and Thymoglobulin.
Tablethe addition of Contentssales of Fludara.
Research and Development Revenue
The following table sets forth our research and development revenue on a segment basis (amounts in thousands):
| | Three Months Ended March 31, | | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | |||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Increase/ (Decrease) % Change | | Increase/ (Decrease) | Increase/ (Decrease) % Change | Increase/ (Decrease) | Increase/ (Decrease) % Change | ||||||||||||||||||||||||||||||
| | 2009 | 2008 | | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||||||||||
Cardiometabolic and Renal | Cardiometabolic and Renal | $ | 13 | $ | 32 | (59 | )% | Cardiometabolic and Renal | $ | 8 | $ | 85 | $ | (77 | ) | (91 | )% | $ | 21 | $ | 117 | $ | (96 | ) | (82 | )% | |||||||||||
Biosurgery | Biosurgery | 562 | 603 | (7 | )% | Biosurgery | 870 | 818 | 52 | 6 | % | 1,432 | 1,421 | 11 | 1 | % | |||||||||||||||||||||
Hematologic Oncology | Hematologic Oncology | 1,484 | 1,189 | 25 | % | Hematologic Oncology | 852 | 1,903 | (1,051 | ) | (55 | )% | 2,336 | 3,092 | (756 | ) | (24 | )% | |||||||||||||||||||
Other | 7,573 | 5,722 | 32 | % | |||||||||||||||||||||||||||||||||
Other research and development revenue | Other research and development revenue | 5,165 | 5,463 | (298 | ) | (5 | )% | 12,738 | 11,185 | 1,553 | 14 | % | |||||||||||||||||||||||||
Corporate | Corporate | 496 | 383 | 30 | % | Corporate | 497 | 442 | 55 | 12 | % | 993 | 825 | 168 | 20 | % | |||||||||||||||||||||
Total research and development revenue | $ | 10,128 | $ | 7,929 | 28 | % | Total research and development revenue | $ | 7,392 | $ | 8,711 | $ | (1,319 | ) | (15 | )% | $ | 17,520 | $ | 16,640 | $ | 880 | 5 | % | |||||||||||||
Total research and development revenue increased $2.2 milliondecreased for the three months ended March 31,June 30, 2009 as compared to the same period of 2008, primarily due to increasesa decrease in revenue recognized by our Hematologic Oncology reporting segment and Other research and development revenue. Hematologic Oncology research and development revenue decreased due to our acquisition from Bayer and termination of the Campath profit share arrangement. Other research and development revenue increaseddecreased for the three months ended June 30, 2009 primarily due to our increase in spending foracquisition from Bayer. As of May 29, 2009, the developmenteffective date of alemtuzumab under our collaboration with Bayer, and Bayer's reimbursement of a portion of these development expenses, particularly in the MS development program. Effective as of the date our pending acquisition from Bayer, closes, we will ceaseceased recognizing research and development revenue for Bayer's reimbursement of a portion of the development costs for alemtuzumab for the treatment of MS. In accordance with the provisions of FAS 141R, the fair value of the research and development costs to be reimbursed by Bayer will beis accounted for as an offset to the contingent consideration paidobligations for alemtuzumab for MS.
Total research and development revenue increased for the six months ended June 30, 2009 primarily due to an increase in Other research and development revenue resulting from an increase in spending for the development of alemtuzumab for MS under our collaboration with Bayer, and Bayer's reimbursement of a portion of these development expenses, particularly in the transaction.MS development program prior to May 29, 2009, the effective date of our acquisition from Bayer.
GROSS PROFIT AND MARGINS
The components of our total margins are described in the following table (amounts in thousands):
| Three Months Ended March 31, | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | |||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Increase/ (Decrease) % Change | Increase/ (Decrease) | Increase/ (Decrease) % Change | Increase/ (Decrease) | Increase/ (Decrease) % Change | ||||||||||||||||||||||||||||||
| 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||||||||||
Gross product profit | $ | 801,682 | $ | 789,529 | 2 | % | $ | 826,526 | $ | 830,458 | $ | (3,932 | ) | — | $ | 1,628,208 | $ | 1,619,987 | $ | 8,221 | 1 | % | |||||||||||||
Product margin | 77 | % | 78 | % | 74 | % | 77 | % | 76 | % | 78 | % | |||||||||||||||||||||||
Gross service profit | $ | 41,249 | $ | 30,290 | 36 | % | $ | 44,069 | $ | 31,635 | $ | 12,434 | 39 | % | $ | 85,318 | $ | 61,925 | $ | 23,393 | 38 | % | |||||||||||||
Service margin | 41 | % | 35 | % | 42 | % | 35 | % | 41 | % | 35 | % | |||||||||||||||||||||||
Total gross product and service profit | $ | 842,931 | $ | 819,819 | 3 | % | $ | 870,595 | $ | 862,093 | $ | 8,502 | 1 | % | $ | 1,713,526 | $ | 1,681,912 | $ | 31,614 | 2 | % | |||||||||||||
Total product and service margin | 74 | % | 75 | % | 71 | % | 74 | % | 73 | % | 75 | % |
Gross Product Profit and Product Margin
Our overall gross product profit increased $12.2 million, or 2%,decreased for the three months ended March 31,June 30, 2009 as comparedprimarily due to $14.2 million of charges for the initial costs related to the same periodremediation of 2008,our Allston facility, including the sanitization of the facility, idle capacity and overhead expenses while production at the plant was suspended and the write off of certain production materials, and $8.4 million of charges for the write off of 80% of the Cerezyme work-in-process material in inventory when production at the facility was suspended.
Our overall gross product profit increased for the six months ended June 30, 2009 primarily due to:
These increases were offset, in part, by the $14.2 million of charges for the initial costs related to the remediation of our Allston facility and the $8.4 million of charges for the write off of the Cerezyme work-in-process material recorded in June 2009.
Product margin decreased for the three and six months ended March 31,June 30, 2009 as compared to the three months ended March 31, 2008, primarily due to:
For purposes of this discussion, the amortization of product related intangible assets is included in amortization expense and, as a result, is excluded from cost of products sold and the determination of product margins described above.
Gross Service Profit and Service Margin
Our overall gross service profit increased $11.0 million, or 36%, for the three and six months ended March 31,June 30, 2009 as compared to the same period of 2008. The increase was primarily attributabledue to increases in Carticel revenue and revenue from our genetic testing and prenatal screening services due toin the launcharea of our Spinal Muscular Atrophy test in February 2008.molecular diagnostics.
Total service margin increased by 6% for the three and six months ended March 31,June 30, 2009 as comparedprimarily due to the same period of 2008, due to increasesincrease in Carticel revenue and geneticfrom our molecular diagnostics testing revenue.which is a higher margin product.
OPERATING EXPENSES
Selling, General and Administrative Expenses
The following table provides information regarding the change in SG&A during the periods presented (amounts in thousands):
| Three Months Ended March 31, | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | |||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Increase/ (Decrease) % Change | Increase/ (Decrease) | Increase/ (Decrease) % Change | Increase/ (Decrease) | Increase/ (Decrease) % Change | ||||||||||||||||||||||||||||||
| 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||||||||||
Selling, general and administrative expenses | $ | 317,961 | $ | 318,386 | (0 | )% | $ | 354,128 | $ | 347,305 | $ | 6,823 | 2 | % | $ | 672,089 | $ | 665,691 | $ | 6,398 | 1 | % | |||||||||||||
% of total revenue | 28 | % | 29 | % | 29 | % | 30 | % | 28 | % | 29 | % |
SG&A decreased slightlyincreased for the three and six months ended March 31,June 30, 2009 as compared to the same period of 2008,primarily due to a decrease of $15.0 million attributable to the weakening of foreign currencies against the U.S. dollar, offset in part by spending increases of:
These increases were partially offset by decreases of $15.7 million for the three months ended June 30, 2009 and $30.7 million for the six months ended June 30, 2009 attributable to the weakening of foreign currencies against the U.S. dollar.
Research and Development Expenses
The following table provides information regarding the change in research and development expenses during the periods presented (amounts in thousands):
| Three Months Ended March 31, | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | |||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Increase/ (Decrease) % Change | Increase/ (Decrease) | Increase/ (Decrease) % Change | Increase/ (Decrease) | Increase/ (Decrease) % Change | ||||||||||||||||||||||||||||||
| 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||||||||||
Research and development expenses | $ | 206,925 | $ | 262,797 | (21 | )% | $ | 210,522 | $ | 381,861 | $ | (171,339 | ) | (45 | )% | $ | 417,447 | $ | 644,658 | $ | (227,211 | ) | (35 | )% | |||||||||||
% of total revenue | 18 | % | 24 | % | 17 | % | 33 | % | 18 | % | 28 | % |
Research and development expenses decreased $55.9for the three and six months ended June 30, 2009 including a decrease of $5.3 million including decreasesfor the three months ended June 30, 2009 and a decrease of $4.9$10.2 million for the six months ended June 30, 2009 due to the weakening of foreign currencies against the U.S. dollar, for the three months ended March 31, 2009, as compared to the same period of 2008, as well as:
These decreases were partially offset by spending increases of:
Amortization of Intangibles
The following table provides information regarding the change in amortization of intangibles expense during the periods presented (amounts in thousands):
| Three Months Ended March 31, | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | |||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Increase/ (Decrease) % Change | Increase/ (Decrease) | Increase/ (Decrease) % Change | Increase/ (Decrease) | Increase/ (Decrease) % Change | ||||||||||||||||||||||||||||||
| 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||||||||||
Amortization of intangibles | $ | 57,598 | $ | 55,658 | 3 | % | $ | 63,945 | $ | 55,605 | $ | 8,340 | 15 | % | $ | 121,543 | $ | 111,263 | $ | 10,280 | 9 | % | |||||||||||||
% of total revenue | 5 | % | 5 | % | 5 | % | 5 | % | 5 | % | 5 | % |
Amortization of intangibles expense increased $1.9 million for the three and six months ended March 31,June 30, 2009 as comparedprimarily due to the same periodacquisition of 2008, primarily duethe worldwide marketing and distribution rights to the oncology
products Campath, Fludara and Leukine from Bayer and to additional amortization expense for the Synvisc sales and marketing rights we reacquired from Wyeth.
As discussed in Note 8., "Goodwill and Other Intangible Assets," to our consolidated financial statements included in this report, we calculate amortization expense for the Synvisc sales and marketing rights we reacquired from Wyeth and the Myozyme patent and technology rights pursuant to a licensing agreement with Synpac by taking into account forecasted future sales of the products, and the resulting estimated future contingent payments we will be required to make. As a result, we expect amortization of intangibles expense to fluctuate over the next five years based on these future contingent payments.
Contingent Consideration Expense
The following table provides information regarding the change in contingent consideration expense during the periods presented (amounts in thousands):
| Three Months Ended June 30, | | | Six Months Ended June 30, | | | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Increase/ (Decrease) | Increase/ (Decrease) % Change | Increase/ (Decrease) | Increase/ (Decrease) % Change | |||||||||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||
Contingent consideration expense | $ | 9,090 | $ | — | $ | 9,090 | N/A | $ | 9,090 | $ | — | $ | 9,090 | N/A | |||||||||||
% of total revenue | 1 | % | — | — | — |
Table During the three months ended June 30, 2009, in accordance with FAS 141R, we recorded contingent consideration obligations totaling $964.1 million for the estimated acquisition date fair value of Contentsthe contingent royalty and milestone payments due to Bayer based on future sales and the successful achievement of certain sales volumes for Campath, Fludara and Leukine and for alemtuzumab for MS.
Any change in the fair value of the contingent consideration obligations subsequent to the acquisition date, including changes from events after the acquisition date, such as changes in our estimates of the sales volume for these products, will be recognized in earnings in the period the estimated fair value changes. The fair value estimates are based on the probability weighted sales volumes to be achieved for Campath, Fludara, Leukine and for alemtuzumab for MS over the earn-out period for each product. A change in the fair value of the acquisition-related contingent consideration obligations could have a material affect on our statement of operations and financial position in the period of the change in estimate.
As of June 30, 2009, the fair value of the contingent consideration obligations was $973.2 million. Accordingly, we recorded contingent consideration expenses totaling $9.1 million in our consolidated statements of operations for the three and six months ended June 30, 2009 to reflect the increase in the fair value, of which $4.3 million was related to Campath, Fludara and Leukine, and $4.8 million was related to alemtuzumab for MS.
Purchase of In-Process Research and Development
Prior to January 1, 2009, we expensed IPR&D acquired through a business combination which had not yet reached technological feasibility and had no alternative future use.was expensed on the acquisition date in our consolidated financial statements. In accordance with our adoption of FAS 141R, all IPR&D we acquire through business combinations on or after January 1, 2009 will be capitalized as an intangible asset on our consolidated balance sheets and periodically tested for impairment.
We didAs a result of our acquisition from Bayer in May 2009, alemtuzumab for MS had not complete any business combination acquisitions inreached technological feasibility nor had an alternative future use and is therefore considered to be IPR&D. In accordance with FAS 141R, we recorded the year ended December 31, 2008 or duringfair value of the three months ended March 31, 2009. In connection with two business combinations we completed between January 1, 2006 and December 31, 2007, we acquired variouspurchase price attributable to IPR&D projects.as an indefinite-lived intangible asset on our consolidated balance sheet. We will test the asset annually for
impairment, or earlier if conditions warrant. Amortization of this asset will begin upon regulatory approval based on the then estimated useful life of the asset.
Management assumes responsibility for determining the IPR&D valuation. The fair value assigned to purchased IPR&D was estimated by discounting, to present value, the cash flows expected to result from the project once it has reached technological feasibility. We used a discount rate of 16% and cash flows that have been probability-adjusted to reflect the risks of advancement through the product approval process, which we believe are appropriate and representative of a market participant assumption. In estimating future cash flows, we also considered other tangible and intangible assets required for successful exploitation of the technology resulting from the purchased IPR&D project and adjusted future cash flows for a charge reflecting the contribution to value of these assets.
The following table sets forth the significant IPR&D projects for the companies and assets we acquired between January 1, 2006 and December 31, 2007June 30, 2009 (amounts in millions):
Company/Assets Acquired | Purchase Price | IPR&D | Programs Acquired | Discount Rate Used in Estimating Cash Flows | Year of Expected Launch | Estimated Cost to Complete | Purchase Price | IPR&D | Programs Acquired | Discount Rate Used in Estimating Cash Flows | Year of Expected Launch | Estimated Cost to Complete | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Bayer (2009) | $ | 1,006.5 | $ | 415.6 | alemtuzumab for MS—US | 16 | % | 2012 | $ | 349.5 | ||||||||||||||||||||||||||
217.3 | alemtuzumab for MS—ex-US | 16 | % | 2013 | $ | 176.9 | ||||||||||||||||||||||||||||||
$ | 632.9 | (1) | ||||||||||||||||||||||||||||||||||
Bioenvision (2007) | $ | 349.9 | $ | 125.5 | Evoltra (clofarabine)(1) | 17 | % | 2009-2013 | $ | 49.4 | $ | 349.9 | $ | 125.5 | (2) | Clolar/Evoltra (clofarabine)(3) | 17 | % | 2009-2013 | $ | 36.6 | |||||||||||||||
AnorMED (2006) | $ | 589.2 | $ | 526.8 | Mozobil (stem cell transplant)(2) | 15 | % | 2009-2014 | $ | 101.9 | $ | 589.2 | $ | 526.8 | Mozobil (stem cell transplant)(4) | 15 | % | 2009-2014 | $ | 26.6 | ||||||||||||||||
26.1 | AMD070 (HIV)(3) | 15 | % | — | — | 26.1 | AMD070(5) | 15 | % | — | $ | — | ||||||||||||||||||||||||
$ | 552.9 | $ | 552.9 | (2) | ||||||||||||||||||||||||||||||||
OTHER INCOME AND EXPENSES
| | Three Months Ended March 31, | | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | |||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Increase/ (Decrease) % Change | | Increase/ (Decrease) | Increase/ (Decrease) % Change | Increase/ (Decrease) | Increase/ (Decrease) % Change | ||||||||||||||||||||||||||||||
| | 2009 | 2008 | | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||||||||||
| | (Amounts in thousands) | | | (Amounts in thousands) | ||||||||||||||||||||||||||||||||
Gains (losses) on investments in equity securities, net | Gains (losses) on investments in equity securities, net | $ | (576 | ) | $ | 775 | >(100 | )% | Gains (losses) on investments in equity securities, net | $ | (105 | ) | $ | 9,153 | $ | (9,258 | ) | >(100 | )% | $ | (681 | ) | $ | 9,928 | $ | (10,609 | ) | >(100 | )% | ||||||||
Gain on acquisition of business | Gain on acquisition of business | 24,159 | — | 24,159 | N/A | 24,159 | — | 24,159 | N/A | ||||||||||||||||||||||||||||
Other | Other | (979 | ) | 491 | >(100 | )% | Other | (2,056 | ) | 582 | (2,638 | ) | >(100 | )% | (3,035 | ) | 1,073 | (4,108 | ) | >(100 | )% | ||||||||||||||||
Investment income | Investment income | 5,350 | 14,870 | (64 | )% | Investment income | 4,144 | 13,352 | (9,208 | ) | (69 | )% | 9,494 | 28,222 | (18,728 | ) | (66 | )% | |||||||||||||||||||
Interest expense | Interest expense | — | (1,655 | ) | 100 | % | Interest expense | — | (1,149 | ) | 1,149 | 100 | % | — | (2,804 | ) | 2,804 | 100 | % | ||||||||||||||||||
Total other income | $ | 3,795 | $ | 14,481 | (74 | )% | Total other income (expenses) | $ | 26,142 | $ | 21,938 | $ | 4,204 | 19 | % | $ | 29,937 | $ | 36,419 | $ | (6,482 | ) | (18 | )% | |||||||||||||
Gains (Losses) on Investments in Equity Securities, Net
In the second quarter of 2008, we recorded a $10.3 million gain resulting from the liquidation of our investment in the common stock of Sirtris for net cash proceeds of $14.8 million.
At June 30, 2009, our stockholders' equity includes $11.7 million of unrealized gains and $7.4 million of unrealized losses related to our strategic investments in equity securities.
Gain on Acquisition of Business
We recorded a gain on acquisition of business of $24.2 million for the three and six months ended June 30, 2009 related to our acquisition of the worldwide rights to the oncology products Campath, Fludara and Leukine and alemtuzumab for MS from Bayer. The fair value of the identifiable assets acquired of $1.03 billion exceeded the fair value of the purchase price for the transaction of $1.01 billion.
Investment Income
Our investment income decreased 64% to $5.4 million for the three and six months ended March 31,June 30, 2009 as compared to $14.9 million for the same period of 2008, primarily due to a decrease in our average portfolio yield and lower average cash and investment balances.
Interest Expense
Our interest expense decreased to zero for the three and six months ended March 31,June 30, 2009 as compared to $1.7 million for the same period of 2008, primarily due to the redemption of our $690.0 million in principal of our 1.25% convertible senior notes on December 1, 2008, offset by a decrease in capitalized interest.2008.
Provision for Income TaxesPROVISION FOR INCOME TAXES
Three Months Ended June 30, | | | Six Months Ended June 30, | | | |||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Three Months Ended March 31, | Increase/ (Decrease) | Increase/ (Decrease) % Change | Increase/ (Decrease) | Increase/ (Decrease) % Change | |||||||||||||||||||||||||||
| 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | ||||||||||||||||||||||||||
| (Amounts in thousands) | (Amounts in thousands) | ||||||||||||||||||||||||||||||
Provision for income taxes | $ | 78,884 | $ | 60,117 | $ | 78,870 | $ | 38,407 | $ | 40,463 | >100 | % | $ | 157,754 | $ | 98,524 | $ | 59,230 | 60 | % | ||||||||||||
Effective tax rate | 29 | % | 29 | % | 30 | % | 36 | % | 29 | % | 31 | % |
Our effective tax rate for bothall periods presented varies from the U.S. statutory tax rate as a result of:
In addition, our provision for income taxes for both the three and six months ended June 30, 2009 includes $5.3 million of income tax benefits resulting from the reversal of a portion of our U.S. tax reserves due to a remeasurement, in accordance with the provisions of FIN 48, based on new information discovered during the second quarter of 2009.
We are currently under IRS audit for the tax years 2006 andto 2007. We believe that we have provided sufficiently for all audit exposures. We expect to settle the 2006 to 2007 IRS audit within the next
twelve months and do not expect that the settlement will have a material impact on our financial position or results of operations. Settlement of these audits or the expiration of the statute of limitations on the assessment of income taxes for any tax year may result in a reduction of future tax provisions. Any such benefit would be recorded upon final resolution of the audit or expiration of the applicable statute of limitations.
On May 4, 2009, U.S. President Barack Obama proposed significant changes to the U.S. international tax laws that would limit U.S. deductions for expenses related to un-repatriated foreign-source income and modify the U.S foreign tax credit and "check-the-box" rules. We cannot determine whether these proposals will be enacted into law or what, if any, changes may be made to such proposals prior to their being enacted into law. If the U.S. tax laws change in a manner that increases our tax obligation, our results of operations could suffer.
LIQUIDITY AND CAPITAL RESOURCES
We continue to generate cash from operations. We had cash, cash equivalents and short- andshort-and long-term investments of $981.8 million$1.05 billion at March 31,June 30, 2009 and $973.7 million at December 31, 2008.
The following is a summary of our statements of cash flows for the threesix months ended March 31,June 30, 2009 and 2008:
Cash Flows from Operating Activities
Cash flows from operating activities are as follows (amounts in thousands):
| | Three Months Ended March 31, | | Six Months Ended June 30, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2009 | 2008 | | 2009 | 2008 | ||||||||||
Cash flows from operating activities: | Cash flows from operating activities: | Cash flows from operating activities: | ||||||||||||||
Net income | Net income | $ | 195,486 | $ | 145,271 | Net income | $ | 383,060 | $ | 214,835 | ||||||
Non-cash charges, net | Non-cash charges, net | 130,775 | 124,151 | Non-cash charges, net | 273,017 | 122,159 | ||||||||||
Decrease in cash from working capital changes (excluding impact of acquired assets and assumed liabilities) | Decrease in cash from working capital changes (excluding impact of acquired assets and assumed liabilities) | (68,486 | ) | (109,889 | ) | Decrease in cash from working capital changes (excluding impact of acquired assets and assumed liabilities) | (55,731 | ) | (157,685 | ) | ||||||
Cash flows from operating activities | $ | 257,775 | $ | 159,533 | Cash flows from operating activities | $ | 600,346 | $ | 179,309 | |||||||
Cash provided by operating activities increased by $98.2 million for the threesix months ended March 31,June 30, 2009, as compared to the same period of 2008, primarily driven by a $50.2$168.2 million increase in net income as a result of a $69.9$244.9 million charge to research and development expense in the six months ended June 30, 2008 for the license fee we paid to Isis in February 2008,exchange for the exclusive worldwide rights to mipomersen, compared to an $18.2 million charge to research and development in the six months ended June 30, 2009 for the intellectual property we acquired from EXACT Sciences in January 2009. Operating activities were also impacted by a $41.4$102.0 million decreaseincrease in cash used for working capital offset, in part, by anand a $150.9 million increase of $6.6 million in non-cash charges, net. The increase in non-cash charges, net, for the threesix months ended March 31,June 30, 2009, as compared to the same period of 2008, is primarily attributable to to:
These increases were offset, in part, by a $24.2 million gain on acquisition of business recorded in June 2009 related to our acquisition of the worldwide rights to Campath, Fludara, Leukine and alemtuzumab for MS from Bayer.
Cash Flows from Investing Activities
Cash flows from investing activities are as follows (amounts in thousands):
| | Three Months Ended March 31, | | Six Months Ended June 30, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2009 | 2008 | | 2009 | 2008 | ||||||||||
Cash flows from investing activities: | Cash flows from investing activities: | Cash flows from investing activities: | ||||||||||||||
Net sales of investments, excluding investments in equity securities | Net sales of investments, excluding investments in equity securities | $ | 61,766 | $ | 33,175 | Net sales of investments, excluding investments in equity securities | $ | 86,345 | $ | 30,629 | ||||||
Net purchases of investments in equity securities | Net purchases of investments in equity securities | (3,606 | ) | (79,551 | ) | Net purchases of investments in equity securities | (5,890 | ) | (65,303 | ) | ||||||
Purchases of property, plant and equipment | Purchases of property, plant and equipment | (161,561 | ) | (121,967 | ) | Purchases of property, plant and equipment | (318,324 | ) | (251,785 | ) | ||||||
Distributions from equity method investments | Distributions from equity method investments | — | 6,595 | Distributions from equity method investments | — | 6,595 | ||||||||||
Acquisitions, net of acquired cash | Acquisitions, net of acquired cash | (117,073 | ) | — | ||||||||||||
Purchases of other intangible assets | Purchases of other intangible assets | (8,056 | ) | (7,046 | ) | Purchases of other intangible assets | (18,345 | ) | (75,400 | ) | ||||||
Other investing activities | Other investing activities | (47 | ) | 3,107 | Other investing activities | (5,198 | ) | 2,571 | ||||||||
Cash flows from investing activities | $ | (111,504 | ) | $ | (165,687 | ) | Cash flows from investing activities | $ | (378,485 | ) | $ | (352,693 | ) | |||
For the threesix months ended March 31,June 30, 2009, net purchases of capital expenditures accounted for significant cash outlays for investing activities. During the threesix months ended March 31,June 30, 2009, we used $161.6$318.3 million in cash to fund the purchase of property, plant and equipment, primarily related to the ongoing expansion of our manufacturing capacity in the Republic of Ireland, France and France,Belgium, planned improvements at our facility in Allston Massachusettsfacility and capitalized costs of an internally developed enterprise software systems.
This cash outlay was partially offset by an increasesystem. In addition, we used $117.1 million in connection with our acquisition of the net saleworldwide rights to Campath, Fludara, Leukine and alemtuzumab for MS from Bayer, of investmentswhich $74.6 million is refundable and a decreasemajority of which was received in the purchase of equity securities.July 2009. The remaining $42.4 million represents a payment for inventory.
For the threesix months ended March 31,June 30, 2008, net purchases of investments in equity securities included $80.1investing activities used:
Cash Flows from Financing Activities
Cash flows from financing activities are as follows (amounts in thousands):
| | Three Months Ended March 31, | | Six Months Ended June 30, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2009 | 2008 | | 2009 | 2008 | ||||||||||
Cash flows from financing activities: | Cash flows from financing activities: | Cash flows from financing activities: | ||||||||||||||
Proceeds from issuance of common stock | $ | 34,526 | $ | 90,243 | ||||||||||||
Repurchases of common stock | (107,134 | ) | (73,218 | ) | ||||||||||||
Proceeds from the issuance of our common stock | Proceeds from the issuance of our common stock | $ | 53,508 | $ | 127,008 | |||||||||||
Repurchases of our common stock | Repurchases of our common stock | (107,134 | ) | (143,012 | ) | |||||||||||
Excess tax benefits from stock-based compensation | Excess tax benefits from stock-based compensation | 3,492 | 5,790 | Excess tax benefits from stock-based compensation | 4,424 | 8,647 | ||||||||||
Payments of debt and capital lease obligations | Payments of debt and capital lease obligations | (2,653 | ) | (2,554 | ) | Payments of debt and capital lease obligations | (4,305 | ) | (3,886 | ) | ||||||
Increase (decrease) in bank overdrafts | Increase (decrease) in bank overdrafts | (3,392 | ) | 18,549 | Increase (decrease) in bank overdrafts | (14,303 | ) | 29,309 | ||||||||
Other financing activities | Other financing activities | 1,995 | 959 | Other financing activities | 3,660 | 2,804 | ||||||||||
Cash flows from financing activities | $ | (73,166 | ) | $ | 39,769 | Cash flows from financing activities | $ | (64,150 | ) | $ | 20,870 | |||||
Cash provided by financing activities decreased $112.9by $85.0 million for the threesix months ended March 31,June 30, 2009, as compared to the same period of 2008, primarily driven by a $55.7$73.5 million decrease in proceeds from the issuance of our common stock due to fewer stock option exercises, andoffset by a $33.9$35.9 million increasedecrease in thecash used to repurchase shares of our common stock.stock under the stock repurchase program described below.
In May 2007, our board of directors authorized a stock repurchase program to repurchase up to an aggregate maximum amount of $1.5$1.50 billion or 20,000,000 shares of our outstanding common stock over a three year period that began in June 2007. The repurchases are being made from time to time and can be effectuated through open market purchases, privately negotiated transactions, transactions structured through investment banking institutions, or by other means, subject to management's discretion and as permitted by securities laws and other legal requirements. During the threesix months ended March 31,June 30, 2009, we repurchased 2,000,000 shares of our common stock under this program at an average price of $53.55 per share for a total of $107.1 million in cash, including fees. Since June 2007, when we first began repurchasing shares of our common stock under this program, we have repurchased a cumulative total of 7,500,000 shares of our common stock at an average price of $64.21 per share for a total of $481.7 million in cash, including fees.
Revolving Credit Facility
As of March 31,June 30, 2009, we had approximately $12 million of outstanding standby letters of credit and no amounts were outstandingborrowings, resulting in approximately $338 million of available credit under our five-year $350.0 million senior unsecured revolving credit facility, which matures July 14, 2011. The terms of this credit facility include various covenants, including financial covenants that require us to meet minimum interest coverage ratios and maximum leverage ratios. As of March 31,June 30, 2009, we were in compliance with these covenants.
Contractual Obligations
The disclosureAs of paymentsJune 30, 2009, we havehad committed to make the following payments under our contractual obligations is set forth under the heading "Management's Discussion(amounts in millions):
| Payments Due by Period | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Contractual Obligations | Total | July 1, 2009 through December 31, 2009 | 2010 | 2011 | 2012 | 2013 | After 2013 | ||||||||||||||||
Long-term debt obligations(1) | $ | 23.6 | $ | 0.2 | $ | 1.6 | $ | 1.6 | $ | 1.7 | $ | 1.8 | $ | 16.7 | |||||||||
Capital lease obligations(1) | 157.5 | 7.8 | 15.5 | 15.5 | 15.5 | 16.8 | 86.4 | ||||||||||||||||
Operating leases(1) | 267.0 | 33.8 | 53.8 | 39.1 | 29.1 | 16.5 | 94.7 | ||||||||||||||||
Contingent payments(2) | 1,951.2 | 143.7 | 236.8 | 148.5 | 97.5 | 287.8 | 1,036.9 | ||||||||||||||||
Interest obligations(3) | 9.4 | 0.5 | 1.1 | 1.1 | 1.0 | 0.9 | 4.8 | ||||||||||||||||
Defined pension benefit plans payments | 20.0 | 0.6 | 1.2 | 1.3 | 1.5 | 1.7 | 13.7 | ||||||||||||||||
Unconditional purchase obligations | 191.0 | 29.7 | 56.4 | 56.4 | 48.5 | — | — | ||||||||||||||||
Capital commitments(4) | 716.9 | 317.2 | 264.4 | 78.8 | 56.5 | — | — | ||||||||||||||||
Total contractual obligations | $ | 3,336.6 | $ | 533.5 | $ | 630.8 | $ | 342.3 | $ | 251.3 | $ | 325.5 | $ | 1,253.2 | |||||||||
MS. For the period from July 1, 2009 through December 31, 2009, therealso includes a $55.0 million upfront license fee paid to Osiris in July 2009.
From time to time, as a result of mergers, acquisitions or license arrangements, we may enter into agreements under which we may be obligated to make contingent payments upon the occurrence of certain events, and/or royalties on sales of acquired products or distribution rights. The actual amounts for and the timing of contingent payments may depend on numerous factors outside of our control, including the success of our preclinical and clinical development efforts with respect to the products being developed under these agreements, the content and timing of decisions made by the United States Patent and Trademark Office, the FDA and other regulatory authorities, the existence and scope of third party intellectual property, the reimbursement and competitive landscape around these products, the volume of sales or gross margin of a product in a specified territory and other factors described under the heading "Risk Factors" below. Because we cannot predict with certainty the amount or specific timing of contingent payments, we have been no material changes toincluded amounts for contingent payments that we believe are probable of being paid in our contractual obligations sincetable. See Note 6., "Strategic Transactions," to our consolidated financial statements included in this Form 10-Q for additional information on our transaction with Bayer.
Contingent payments also excludes any liabilities pertaining to uncertain tax positions as we cannot make a reliable estimate of the period of cash settlement with the respective taxing authorities. Other noncurrent liabilities in our consolidated balance sheets includes approximately $35 million as of June 30, 2009 and approximately $40 million as of December 31, 2008.2008 of long-term liabilities associated with uncertain tax positions.
Location | Cost to Complete at June 30, 2009 | ||||
---|---|---|---|---|---|
Framingham, Massachusetts, U.S (approximately 47% for software development). | $ | 277.5 | |||
Westborough, Massachusetts, U.S. (primarily software development) | 110.6 | ||||
Lyon, France | 48.0 | ||||
Geel, Belgium | 37.4 | ||||
Waterford, Ireland | 59.3 | ||||
Allston, Massachusetts, U.S. | 122.0 | ||||
Ridgefield, New Jersey, U.S. | 5.8 | ||||
Haverhill, United Kingdom | 7.5 | ||||
Other | 48.8 | ||||
Total estimated cost to complete | $ | 716.9 | |||
Financial Position
We believe that our available cash, investments and cash flows from operations will be sufficient to fund our planned operations and capital requirements for the foreseeable future. Although we currently
have substantial cash resources and positive cash flow, we have used or intend to use substantial portions of our available cash and may make additional borrowings for:
�� In addition, we have several outstanding legal proceedings. Involvement in investigations and litigation can be expensive and a court may ultimately require that we pay expenses and damages. As a result of legal proceedings, we also may be required to pay fees to a holder of proprietary rights in order to continue certain operations.
Recently, the general economic, global capital and credit market conditions in the United States and other parts of the world have deteriorated significantly and have adversely affected access to capital and increased the cost of capital. However, we continue to believe that our available cash, investments and cash flow from operations, together with our revolving credit facility and other available debt financing, will be adequate to meet our operating, investing and financing needs in the foreseeable future. We currently do not rely on short-term borrowing to fund our operations and, as a result, we do not believe that existing global capital and credit market conditions will have a significant impact on our near-term liquidity. We are closely monitoring our liquidity as well as the condition of these markets. If these conditions continue or become worse, our future cost of debt and equity capital and our future access to capital markets could be adversely affected. We cannot guarantee that we willmay not be able to obtain any additional financing in the future or extend any existing financing arrangements on favorable terms, or at all.
Off-Balance Sheet Arrangements
We do not use special purpose entities or other off-balance sheet financing arrangements. We enter into guarantees in the ordinary course of business related to the guarantee of our own performance and the performance of our subsidiaries. In addition, we have joint ventures and certain other arrangements that are focused on research, development, and the commercialization of products. Entities falling within the scope of FIN 46R are included in our consolidated statements of operations if we qualify as the primary beneficiary. Entities not subject to consolidation under FIN 46R are accounted for under the equity method of accounting if our ownership percent exceeds 20% or if we exercise significant influence over the entity. We account for our portion of the results of these entities in the line item "Equity in income of equity method investments""Other" in our consolidated statements of operations.operations because the amounts are not material for all periods presented. We also acquire companies in which we agree to pay contingent consideration based on attaining certain thresholds.
Recent Accounting Pronouncements
The following table shows recently issued accounting pronouncements and our position for adoption:
Pronouncements | Relevant Requirements | Issued Date/ Our Effective Dates | Status | |||
---|---|---|---|---|---|---|
Issued | ||||||
FAS | Issued | |||||
FAS | Issued | We are evaluating the impact this pronouncement will have, if any, on our consolidated financial statements. | ||||
FAS 168, "The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162." | Establishes the FASB Accounting Standards Codification (Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). | Issued June 2009 to replace FAS 162, "The Hierarchy of Generally Accepted Accounting Principles." Effective for financial statements issued for interim and annual periods ending after September 15, 2009. | We do not expect the adoption of this pronouncement |
Pronouncements | Relevant Requirements | Issued Date/ Our Effective Dates | Status | |||
---|---|---|---|---|---|---|
FSP FAS 107-1 and APB 28-1, | Amends guidance on disclosures about fair value and interim financial reporting to require disclosure about fair value of financial instruments whenever summarized financial information is issued for interim reporting periods. | Issued April 2009. Effective for periods ending after June 15, 2009. | ||||
FSP FAS 115-2, FAS 124-2, and EITF 99-20-2, | Amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments in the financial statements. | Issued April 2009. Effective for periods ending after June 15, 2009. | ||||
The adoption of this pronouncement did not have a material impact on our consolidated financial statements for the |
FSP FAS 157-4, | Provides guidelines for making fair value measurements more consistent with the principles presented in FAS 157, as well as additional authoritative guidance in determining whether a market is active or inactive, and whether a transaction is distressed. Applicable to all assets and liabilities (i.e. financial and nonfinancial) and will require enhanced disclosures. | Issued April 2009. Effective for periods ending after June 15, 2009. |
Our future operating results could differ materially from the results described in this report due to the risks and uncertainties related to our business, including those discussed below. In addition, these factors represent risks and uncertainties that could cause actual results to differ materially from those implied by forward-looking statements. We refer you to our "Cautionary Note Regarding Forward-Looking Statements," which identifies forward-looking statements in this report. The risks described below are not the only risks we face. Additional risk and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business, financial condition or results of operations.
Manufacturing problems may cause product launch delays, inventory shortages, recalls and unanticipated costs and create opportunities for our competitors.
In order to generate revenue from our approved products, we must be able to produce sufficient quantities of the products to satisfy demand. Many of our products are difficult to manufacture. Our products that are biologics, for example, require processing steps that are more difficult than those required for most chemical pharmaceuticals. Accordingly, we employ multiple steps to attempt to control the manufacturing processes. Problems with these manufacturing processes, even minor deviations from the normal process, could result in product defects or manufacturing failures that result in lot failures, product recalls, product liability claims and insufficient inventory. In the past, we have had to write off and incur other charges and expenses for products that failed to meet internal or external specifications, including Thymoglobulin, or for products that experience terminated production runs, including Myozyme produced at the 4000L scale. We also have had to write off work-in-process materials and incur other charges and expenses associated with a viral contamination at two of our facilities, which are described below. Similar charges could occur in the future.
Certain of the raw materials required in the commercial manufacturing and the formulation of our products are derived from biological sources, including mammalian sources and human plasma. Such raw materials may be difficult to procure and subject to contamination or recall. Also, some countries in which we market our products may restrict the use of certain biologically derived substances in the manufacture of drugs. A material shortage, contamination, recall, or restriction on the use of certain biologically derived substances in the manufacture of our products could adversely impact or disrupt our commercial manufacturing of our products or could result in a withdrawal of our products from markets. This too, in turn, could adversely affect our ability to satisfy demand for our products, which could materially and adversely affect our operating results.
In addition, we may only be able to produce some of our products at a very limited number of facilities. For example, we manufacture all of our bulk Cerezyme and most of our bulk Fabrazyme products at our Allston facility and in 2009 transitioned all of our larger scale bulk Myozyme production to our Belgium facility. In some cases, we contract out the manufacturing of our products to third parties, of which there are only a limited number capable of executing the manufacturing processes we require. A number of factors could cause production interruptions at our facilities or the facilities of our third party providers, including equipment malfunctions, facility contamination, labor problems, raw material shortages or contamination, natural disasters, power outages, terrorist activities, or disruptions in the operations of our suppliers.
In June 2009, we announced that we had detected a virus, Vesivirus 2117, that impairs cell growth in one of the bioreactors used at our Allston facility to produce Cerezyme. We believe the virus was likely introduced through a raw material used in the manufacturing process. We temporarily interrupted bulk production at the plant to sanitize the facility, which affected production of Cerezyme and Fabrazyme. Cerezyme and Fabrazyme inventories were not sufficient to meet global demand during the period of suspended production and restoration of operations. In 2009, we confirmed that Vesivirus
2117 was the cause of declines in cell productivity in one previous instance in 2008 at our Allston facility and one previous instance in 2008 at our Belgium facility. We were able to detect the virus in 2009 at our Allston facility using a highly specific assay we had developed after standard tests were unable to identify the cause of the productivity declines that occurred in 2008. We intend to add steps to increase the robustness of our raw materials screening, process monitoring for viruses and viral removal processes, some of which steps could be subject to regulatory approval. However, given the nature of biologics manufacturing, contamination issues could occur in the future from time to time at our facilities and some of these issues could materially and adversely affect our operating results.
In connection with sanitizing our Allston facility and resuming production there, we were required to dismantle, reassemble and test all of our equipment in a short period of time. In addition, we are restarting production at Allston in more bioreactors and more quickly than is customary when we start production at a facility. The steps in successfully producing our biologic products are highly complex and in the normal course are subject to equipment failures and other production difficulties. If we experience such difficulties, we may not be able to produce new Cerezyme and Fabrazyme within our expected timeframes or in the expected quantities.
The supply constraint also may provide opportunities for our competitors. Outside of the United States, Fabrazyme competes with Replagal, a product marketed by Shire plc. Shire has announced that the company is in talks with the FDA to bring Replagal to the United States. With respect to Cerezyme, the FDA has approved a treatment IND for Shire's enzyme replacement therapy in development for the treatment of Gaucher disease and has granted its NDA "fast track" designation. Shire has announced that it has begun its rolling NDA submission in the United States. We believe that Shire is in discussions with at least one other regulatory authority outside the United States about treating patients with this therapy on an accelerated basis. Similarly, Protalix Biotherapeutics, Inc. has announced that, at the FDA's request, it submitted a treatment IND for its enzyme therapy in development for the treatment of Gaucher disease. Both the Shire and Protalix therapies are in phase 3 development. We have submitted a treatment IND for Genz-112638, which is also in phase 3 development for Gaucher disease. If any of these treatment protocols are accepted by the FDA, physicians could treat Gaucher disease patients with the therapies ahead of commercial availability in the United States. In addition, Zavesca is currently approved in the United States for patients with Gaucher disease for whom enzyme replacement therapy is unsuitable. If Fabry patients decide to use Replagal or Gaucher patients decide to use one of our competitors' developmental therapies or Zavesca during the period of supply constraint, there is a risk that they may not switch back to Genzyme's products once inventories have stabilized, which would result in the loss of additional revenue for Genzyme. In addition, treatment guidelines and dose conservation for the products present the risk that physicians and patients do not resume regular treatment levels after the supply constraint has ended.
In addition, holders of exclusivity for orphan drugs are expected to assure the availability of sufficient quantities of their orphan drugs to meet the needs of patients. Failure to do so could result in the withdrawal of marketing exclusivity for the drug. As a result of the Fabrazyme supply constraint, we received a request from the FDA's Office of Orphan Products Development in July 2009 to provide a detailed explanation of the measures being taken to assure the availability of sufficient quantities of Fabrazyme within a reasonable time to meet the needs of patients. We also received the same request from the FDA in July 2009 with respect to Myozyme because of the limited supply of product produced using the 160L scale process in the United States. We have responded to the FDA's requests, but have not received any determination from the agency for either product. Fabrazyme currently has marketing exclusivity in the United States until April 2010 and Myozyme has exclusivity in the United States until April 2013, in each case due to its orphan drug status. We believe that orphan drug exclusivity is only one factor in the commercial success of our products. For example, these products may be protected by patents and other means. However, if the FDA were to withdraw exclusive
approval for Fabrazyme or Myozyme, our competitors could have an opportunity to receive marketing approval in the United States for their products earlier than the current exclusivity expiration dates for Fabrazyme and Myozyme.
If the FDA believes that we have repeatedly violated GMP requirements, it could pursue enforcement action against us.
In a Form FDA 483 issued in October 2008 and in a follow up Warning Letter issued in February 2009, the FDA has detailed observations from its 2008 inspection of our Allston facility considered to be significant deviations from GMP compliance. As a follow up to the February Warning Letter, the FDA conducted an inspection of the Allston plant in May 2009. At the end of July 2009, the FDA informed us that its May inspection at Allston found all promised actions had not yet been fully implemented and that some actions were inadequate. In that same letter, the FDA informed us that it will re-inspect our Allston facility to verify that all corrective and preventative actions have been implemented and to evaluate our compliance. During that re-inspection, the FDA will also review our Vesivirus 2117 contamination investigation and follow-up actions.
We have been in discussions with the FDA about releasing Cerezyme material that was being processed at the time of suspension of production due to viral contamination at our Allston facility. We have written off approximately 80% of this Cerezyme work-in-process inventory. At the end of the business day on Friday, August 7, 2009, the FDA communicated to us steps it recommends we take prior to forward processing any Cerezyme work-in-process. The steps recommended by the FDA were consistent with the steps that we independently had planned to implement. The FDA also stated that any further processing of the Cerezyme work-in-process is at our own risk. The remaining Cerezyme work-in-process material expires in June 2010. If we decide to process the material, the FDA may not agree with our decision and could determine that processing of the material was not in compliance with GMP. In such case, the FDA could prevent us from releasing the material, require us to re-sanitize the Allston facility and/or pursue an enforcement action, including seeking a consent decree, if the FDA determines that we do not have adequate control over the manufacturing of our products due to our manufacturing issues.
FDA consent decrees often include reimbursements to the government for inspection costs, due dates for specific actions, and penalties for noncompliance. In connection with a consent decree, the FDA may dictate which products we can produce and the quantities of those products. The FDA may also appoint a third party to oversee our manufacturing operations under a consent decree. Consent decrees usually remain in effect for five years or more. If a consent decree were imposed, we would incur substantial additional expenses and may not be able to produce some or all of our products.
The development of new biotechnology products involves a lengthy and complex process, and we may be unable to commercialize any of the products we are currently developing.
We have numerous products under development and devote considerable resources to research and development, including clinical trials.
Before we can commercialize our product candidates, we need to:
This process involves a high degree of risk and takes many years. Our product development efforts with respect to a product candidate may fail for many reasons, including:
Few research and development projects result in commercial products, and success in preclinical studies or early clinical trials often is not replicated in later studies. For example, in our phase 3 trial known as the Polymer Alternative for CDAD Treatment (PACT) study, tolevamer did not meet its primary endpoint. In our pivotal study of hylastan for treatment of patients with osteoarthritis of the knee, hylastan did not meet its primary endpoint. We may decide to abandon development of a product or service candidate at any time, or we may be required to expend considerable resources repeating clinical trials or conducting additional trials, either of which would increase costs of development and delay any revenue from those programs.
In addition, a regulatory authority may deny or delay an approval because it was not satisfied with the structure or conduct of clinical trials or due to its assessment of the data we supply. A regulatory authority, for instance, may not believe that we have adequately addressed negative safety signals. Clinical data are subject to varied interpretations, and regulatory authorities may disagree with our assessments of data. In any such case, a regulatory authority could insist that we provide additional data, which could substantially delay or even prevent commercialization efforts, particularly if we are required to conduct additional pre-approval clinical studies.
We are also developing new products, such as mipomersen, Prochymal and ataluren, through strategic alliances and collaborations. If we are unable to manage these external opportunities successfully or if the product development process is unsuccessful, we will not be able to grow our business in the way that we currently expect.
If we fail to increase sales of several existing products and services or to commercialize new products and services in our pipeline, we will not meet our financial goals.
Over the next few years, our success will depend substantially on our ability to increase revenue from our existing products and services. These products and services include Renagel/Renvela, Synvisc, Synvisc/Synvisc-One, Fabrazyme, Myozyme, Aldurazyme, Hectorol, Thymoglobulin, Thyrogen, Clolar/Evoltra, Campath, Fludara, Leukine, Mozobil and diagnostic testing services.
Our ability to increase sales will dependdepends on a number of factors, including:
We expect regulatory action regarding several of our existing products in the coming months. Regulatory authorities denying or delaying these approvals would adversely impact our projected revenue and income growth. For example, we have encountered delays in receiving marketing approval in the United States for alglucosidase alfa produced using a 2000L scale process, which has adversely impacted our revenues and earnings, and we could face additional delays or supply constraints with this product or other products.
Part of our growth strategy involves conducting additional clinical trials to support approval of expanded uses of some of our products, including Clolar/Evoltra and alemtuzumab for multiple sclerosis,MS, pursuing marketing approval for our products in new jurisdictions and developing next generation products, such as Genz-112638 and our advanced phosphate binder. The success of this component of our growth strategy will depend on the outcome of these additional clinical trials, the content and timing of our submissions to regulatory authorities and whether and when those authorities determine to grant approvals. Because the healthcare industry is extremely competitive and regulatory requirements are rigorous, we spend substantial funds marketing our products and attempting to expand approved uses for them. These expenditures depress near-term profitability with no assurance that the expenditures will generate future profits that justify the expenditures.
Our growth strategy also depends on developing new products, such as mipomersen, Prochymal and ataluren, through entry into strategic alliances and collaborations. If we are unable to manage these external growth opportunities successfully or if the product development process is unsuccessful, we will not be able to grow our business in the way that we currently expect.
Our future success will depend on our ability to effectively develop and market our products and services against those of our competitors.
The human healthcare products and services industry is extremely competitive. Other organizations, including pharmaceutical, biotechnology, device and diagnostic testing companies, and
generic and biosimilar manufacturers, have developed and are developing products and services to compete with our products, services, and product candidates. If healthcare providers, patients or payors prefer these competitive products or services or these competitive products or services have superior safety, efficacy, pricing or reimbursement characteristics, we will have difficulty maintaining or increasing the sales of our products and services. As described under the heading "Manufacturing problems may cause product launch delays, inventory shortages, recalls and unanticipated costs and create opportunities for our competitors", the virus at our Allston facility and associated production interruption, as well as the delay in our receipt of FDA approval of alglucosidase alfa produced at the 2000L scale, has provided new opportunities for our competitors that we did not anticipate.
Zavesca® is currently the only other marketed product aimed at treating Gaucher disease, the disease addressed by Cerezyme. Zavesca is a small molecule oral therapy that has been approved in the United States, European Union, Israel and six other countries for use in patients with mild to moderate
Type 1 Gaucher disease for whom enzyme replacement therapy is unsuitable. Zavesca has been sold in the European Union since 2003 and in the United States since 2004. In addition, we are aware of two companies each conducting a phase 3 clinical trial and one company conducting a phase 2 clinical trial to investigate alternative treatments for Gaucher disease.
Replagal® is a competitive enzyme replacement therapy for Fabry disease, the disease addressed by Fabrazyme, that is approved for sale outside of the United States. In addition, while Fabrazyme has received orphan drug designation, which provides us with seven years of market exclusivity for the product in the United States, other companies may seek to overcome our market exclusivity and, if successful, compete with Fabrazyme in the United States. This market exclusivity expires in April 2010. We are aware of a company that initiated a phase 3 clinical trial in June 2009 of an oral chaperone medication to treat Fabry disease.
Myozyme has marketing exclusivity in the United States until 2013 and in the European Union until 2016 due to its orphan drug status, although companies may seek to overcome the associated marketing exclusivity.
Renagel/Renvela competes with several other products for the control of elevated phosphorus levels in patients with chronic kidney failure on hemodialysis.hemodialysis, including PhosLo®, a prescription calcium acetate preparation sold by Fresenius Medical Care, is marketed in the United States.States and Fosrenol®, a prescription lanthanum carbonate sold by Shire, is marketed in the United States, Europe, Canada and Latin America. A generic formulation of PhosLo was launched in the United States in October 2008. Renagel/Renvela also competes with over-the-counter calcium carbonate products such as TUMS® and metal-based options such as aluminum and magnesium.
UCB S.A. has developed Zavesca®, a small molecule drug for the treatment of Gaucher disease, the disease addressed by Cerezyme. Zavesca, sold by Actelion Ltd., has been approved in the United States, European Union and Israel as an oral therapy for use in patients with mild to moderate Type 1 Gaucher disease for whom enzyme replacement therapy is unsuitable. In addition, Shire reported top-line data from a phase 1/2 clinical trial for its gene-activated glucocerebrosidase program to treat Gaucher disease and has completed enrollment in a phase 3 trial initiated in July 2007. Protalix Biotherapeutics Ltd. initiated a phase 3 trial for a plant-derived enzyme replacement therapy to treat Gaucher disease in the third quarter of 2007 and has completed enrollment in the trial. Amicus Therapeutics, Inc., or Amicus, is conducting a phase 2 trial for an oral chaperone medication to treat Gaucher disease and has completed enrollment. We are also aware of other development efforts aimed at treating Gaucher disease.
Outside the United States, Shire is marketing Replagal®, a competitive enzyme replacement therapy for Fabry disease which is the disease addressed by Fabrazyme. In addition, while Fabrazyme has received orphan drug designation, which provides us with seven years of market exclusivity for the product in the United States, other companies may seek to overcome our market exclusivity and, if successful, compete with Fabrazyme in the United States. Amicus has completed phase 2 trials for an oral chaperone medication to treat Fabry disease and is in discussions with the FDA regarding the conduct of a phase 3 clinical trial, which it plans to initiate in the second quarter of 2009. We are aware of other development efforts aimed at treating Fabry disease.
Myozyme has marketing exclusivity in the United States until 2013 and in the European Union until 2016 due to its orphan drug status, although companies may seek to overcome the associated marketing exclusivity. Amicus has completed two phase 1 clinical studies for a small molecule treatment for Pompe disease and initiated a phase 2 clinical trial in June 2008. In February 2009, Amicus announced that the company had suspended enrollment for its phase 2 clinical trial and that it had received verbal notice from the FDA that the trial is on clinical hold.
Current competition for Synvisc and Synvisc-One includes: Supartz®, a product manufactured by Seikagaku Corporation that is sold in the United States by Smith & Nephew Orthopaedics and in Japan by Kaken Pharmaceutical Co. under the name/ Artz®; Hyalgan®, produced by Fidia Farmaceutici S.p.A. and marketed in the United States by sanofi-aventis;; Orthovisc®, produced by Anika Therapeutics, Inc., and marketed in the United States by Johnson & Johnson and marketed outside the United States through distributors; Anika's; Euflexxa™; Monovisc™, which is marketed in Europe; Euflexxa™, a product manufacturedEurope and sold by Ferring Pharmaceuticals and marketed by Ferring in the United States and Europe;Turkey; and Durolane®, manufactured by Q-Med ABwhich is marketed in Europe and distributed outside the United States by Smith & Nephew Orthopedics.Canada. Durolane and Euflexxa are produced by bacterial fermentation, which may provide these products a competitive advantage over avian-sourced Synvisc and Synvisc-One. We are aware of various viscosupplementation products on the market or in development, but are unaware of any products that have physical properties of viscosity, elasticity or
molecular weight comparable to those of Synvisc and Synvisc-One. Furthermore, several companies market products that are not viscosupplementation products but which are designed to relieve the pain associated with osteoarthritis. Synvisc and Synvisc-One will have difficulty competing with any of these products to the extent the competitive products have a similar safety profile and are considered more efficacious, less burdensome to administer or more cost-effective.
Competition for Campath for patients with relapsed or refractory B-CLL includes:includes single agent and combination chemotherapy regimens; rituximab,Rituxan®/MabThera®, which is marketed as Rituxan® by Biogen Idec, Inc.globally; and Genentech, Inc. in the United States and as MabThera® by Roche outside of the United States; and bendamustine,Treanda®, which is marketed as Treanda® by Cephalon, Inc. in the United States. There are also other therapies under clinical study for the treatment of B-CLL, including ofatumumab, lumiliximab and lenalidomide. Competition for Clolar/Evoltra for the treatment of pediatric patients 1 to 21 years old with relapsed or refractory ALL after at least two prior regimens includes:includes cytarabine and mitoxantrone, which are available as generics with no significant commercial promotion;promotion, and Arranon® (nelarabine), which is marketed by GlaxoSmithKline and indicated for the treatment of patients with T-cell ALL whose disease has not responded to or has relapsed following treatment with at least two chemotherapy regimens. T-cell ALL is estimated to represent less than 20% of pediatric ALL patients. ThereIn addition, there are a limited number of anti-cancer agents in clinical trials for the treatment of relapsed pediatric ALL patients, including epratuzamab, which is being developed by Immunomedics, Inc.patients.
The examples above are illustrative and not exhaustive. Almost all of our products and services face competition. Furthermore, the field of biotechnology is characterized by significant and rapid technological change. Discoveries by others may make our products or services obsolete. For example, competitors may develop approaches to treating LSDs that are more effective, convenient or less expensive than our products and product candidates. Because a significant portion of our revenue is derived from products that address this class of diseases and a substantial portion of our expenditures
is devoted to developing new therapies for this class of diseases, such a development would have a material negative impact on our results of operations.
If we fail to obtain and maintain adequate levels of reimbursement for our products and services from third party payors, the commercial potential of our products and services will be significantly limited.
A substantial portion of our domestic and international revenue comes from payments by third party payors, including government health administration authorities and private health insurers. Governments and other third party payors may not provide adequate insurance coverage or reimbursement for our products and services, which could impair our financial results.
Third party payors are increasingly scrutinizing pharmaceutical budgets and healthcare expenses and are attempting to contain healthcare costs by:
Efforts by third party payors to reduce costs could decrease demand for our products and services. In addition, in certain countries, including countries in the European Union and Canada, the coverage of prescription drugs, pricing and levels of reimbursement are subject to governmental control. Therefore, we may be unable to negotiate coverage, pricing and/or reimbursement on terms that are favorable to us. Moreover, certain countries reference the prices in other countries where our products are marketed. Thus, inability to secure adequate prices in a particular country may also impair our ability to maintain or obtain acceptable prices in existing and potential new markets. Government health administration authorities may also rely on analyses of the cost-effectiveness of certain therapeutic products in determining whether to provide reimbursement for such products. Our ability to obtain satisfactory pricing and reimbursement may depend in part on whether our products, the cost of some of which is high in comparison to other therapeutic products, are viewed as cost-effective.
Furthermore, governmental regulatory bodies, such as the Centers for Medicare and Medicaid Services (CMS), in the United States, may from time-to-time make unilateral changes to reimbursement rates for our products and services. These changes could reduce our revenue by causing healthcare providers to be less willing to use our products and services. Although we actively seek to assure that any initiatives that are undertaken by regulatory agencies involving reimbursement for our products and services do not have an adverse impact on us, we may not always be successful in these efforts.
The development of new biotechnology products involves a lengthy and complex process, and we may be unable to commercialize any of the products we are currently developing.
We have numerous products under development and devote considerable resources to research and development, including clinical trials.
Before we can commercialize our product candidates, we will need to:
This process involves a high degree of risk and takes many years. Our product development efforts with respect to a product candidate may fail for many reasons, including:
The American Recovery and Reinvestment Act of 2009 provided significant funding for a new indication no longer desirable.
Few research and development projects result in commercial products, and success in preclinicalthe federal government to conduct comparative effectiveness research. Although the U.S. Congress indicated that these studies or early clinical trials often is not replicated in later studies. For example, in our phase 3 trial known asare intended to improve the Polymer Alternative for CDAD Treatment (PACT) study, tolevamer did not meet itsquality of health care, outcomes of such studies could
primary endpoint. In our pivotal studyinfluence reimbursement decisions. If, for example, any of hylastan for treatment of patients with osteoarthritis of the knee, hylastan did not meet its primary endpoint. We may decide to abandon development of a product or service candidate at any time or we may be required to expend considerable resources repeating clinical trials or conducting additional trials, either of which would increase costs of development and delay any revenue from those programs.
Our efforts to expand the approved indications for our products gain marketing approval in new jurisdictions and develop next generation products also may fail. These expansion efforts are subjector services were determined to many of the risks associated with completely new products and, accordingly, we may fail to recoup the investments we make pursuing these strategies.
Our financial results are dependent on sales of Cerezyme.
Sales of Cerezyme, our enzyme-replacement productbe less cost-effective than alternatives, reimbursement for patients with Gaucher disease, totaled $296.0 million for the three months ended March 31, 2009, representing approximately 26% of our total revenue. Because our business is dependent on Cerezyme, negative trends in revenue from this product could have an adverse effect on our results of operations and cause the value of our common stock to decline. We will lose revenue if alternative treatments gain commercial acceptance, if our marketing activities are restricted, or if coverage, pricing or reimbursement is limited. In addition, the patient population with Gaucher disease is not large. Because a significant percentage of that population already uses Cerezyme, opportunities for future sales growth are constrained. Furthermore, changes in the methods for treating patients with Gaucher disease, including treatment protocols that combine Cerezyme with other therapeuticthose products or reduce the amount of Cerezyme prescribed,services could limit growth, or result in a decline, in Cerezyme sales.be affected.
We may encounter substantial difficulties managing our growth.
Several risks are inherent to our plans to grow our business. Achieving our goals will require substantial investments in research and development, sales and marketing, and facilities. For example, we have spentare spending considerable resources building and seeking regulatory approvals for our manufacturing facilities. We cannot assure you that theseThese facilities willmay not prove sufficient to meet demand for our products or that we willmay not have excess capacity at these facilities. In addition, buildingFor example, we have been operating with lower than usual inventories for Cerezyme and Fabrazyme because we had allocated capacity for Myozyme production at the Allston plant to meet Myozyme's worldwide growth. When we interrupted production of Cerezyme and Fabrazyme at the facility in June 2009 in order to sanitize the facility after identifying a virus in a bioreactor used to produce Cerezyme, inventories of Cerezyme and Fabrazyme were not sufficient to avoid product shortages during the period of suspended production and recovery.
Building our facilities is expensive, and our ability to recover these costs will depend on increased revenue from the products produced at the facilities. In addition, to maintain product supply and to adequately prepare to launch a number of our late-stage product candidates, we must successfully implement a number of manufacturing projects on schedule, operate our facilities at appropriate production capacity, optimize manufacturing asset utilization, continue our use of third-party contract manufacturers and maintain a state of regulatory compliance.
We produce relatively small amounts of material for research and development activities and pre-clinical trials. Even if a product candidate receives all necessary approvals for commercialization, we may not be able to successfully scale-up production of the product material at a reasonable cost or at all and we may not receive additional approvals in sufficient time to meet product demand. For example, the FDA has concluded that alglucosidase alfa produced in our 2000 liter2000L bioreactors is a different product than alglucosidase alfa produced in our 160 liter bioreactors and therefore required us to submit a separate BLA for the 2000 liter2000L product. This delay in receipt of FDA approval has had an adverse effect on our revenuesrevenue and earnings, and will continue to have an adverse effect until we receive regulatory approval.FDA approval of alglucosidase alfa produced in our 4000L bioreactors.
If we are able to increase sales of our products, we may have difficulty managing inventory levels. Marketing new therapies is a complicated process, and gauging future demand is difficult. With Renagel, for example, we have encountered problems in the past managing inventory levels at wholesalers. Comparable problems may arise with any of our products, particularly during market introduction.
Growth in our business may also contribute to fluctuations in our operating results, which may cause the price of our securities to decline. Our revenue may fluctuate due to many factors, including changes in:
We may also experience fluctuations in our quarterly results due to price changes and sales incentives. For example, purchasers of our products, particularly wholesalers, may increase purchase orders in anticipation of a price increase and reduce order levels following the price increase. We occasionally offer sales incentives and promotional discounts on some of our products and services that could have a similar impact. In addition, some of our products, including Synvisc,Synvisc/Synvisc-One are subject to seasonal fluctuation in demand.
Our operating results and financial position may be negatively impacted when we attempt to grow through business combination transactions.
We may encounter problems assimilating operations acquired in business combination transactions. These transactions often entail the assumption of unknown liabilities, the loss of key employees, and the diversion of management attention. Furthermore, in any business combination there is a substantial risk that we will fail to realize the benefits we anticipated when we decided to undertake the transaction. We have in the past taken significant charges for impaired goodwill and for impaired assets acquired in business combination transactions. We may be required to take similar charges in the future. We enter into most such transactions with an expectation that an acquired business will enhance the long-term strength of our business. These transactions, however, often depress our earnings in the near-term and the expected long-term benefits may never be realized. Business combination transactions also either deplete cash resources, require us to issue substantial equity, and/or require us to incur significant debt.
Manufacturing problems may cause product launch delays, inventory shortages, recalls and unanticipated costs.
In order to generate revenue from our approved products, we must be able to produce sufficient quantities of the products to satisfy demand. Many of our products are difficult to manufacture. Our products that are biologics, for example, require product characterization steps that are more onerous than those required for most chemical pharmaceuticals. Accordingly, we employ multiple steps to attempt to control the manufacturing processes. Problems with these manufacturing processes, even minor deviations, could result in product defects or manufacturing failures that result in lot failures, product recalls, product liability claims and insufficient inventory. In the past, we have had to write down and incur other charges and expenses for products that failed to meet internal or external specifications, including Thymoglobulin, or for products that experience terminated production runs, including Myozyme produced at the 4000L scale. Similar charges could occur in the future.
Certain of the raw materials required in the commercial manufacturing and the formulation of our products are derived from biological sources, including mammalian sources and human plasma. Such raw materials may be difficult to procure and subject to contamination or recall. Also, some countries in which we market our products may restrict the use of certain biologically derived substances in the manufacture of drugs. A material shortage, contamination, recall, or restriction on the use of certain biologically derived substances in the manufacture of our products could adversely impact or disrupt our commercial manufacturing of our products or could result in a withdrawal of our products from
markets. This too,Our activities, products and services are subject to significant government regulations and approvals, which are often costly and could result in turn,adverse consequences to our business if we fail to comply with the regulations or maintain the approvals.
Products that have received regulatory approval for commercial sale are subject to extensive continuing regulations relating to, among other things, testing, manufacturing, quality control, labeling and promotion. Failure to comply with applicable regulatory requirements could adversely affectresult in regulatory authorities taking actions such as:
Furthermore, the FDA, the EMEA and comparable foreign regulatory agencies may require post-marketing clinical trials or patient outcome studies. We have agreed with the FDA, for example, to satisfy demanda number of post-marketing commitments as a condition to U.S. marketing approval for our products, which could materiallyFabrazyme, Aldurazyme, Myozyme, Clolar and adversely affect our operating results.Mozobil.
In addition, we may only be ableregulatory agencies subject a marketed therapy, its manufacturer and the manufacturer's facilities to continual review and periodic inspections. The discovery of previously unknown problems with a therapy or the facility or process used to produce somethe therapy could prompt a regulatory authority to impose restrictions on us or delay approvals for new products or could cause us to voluntarily adopt restrictions, including withdrawal of one or more of our products ator services from the market. In connection with a very limited number of facilities and, in some cases, we rely on third parties to formulate and manufacture our products. For example, we manufacture all of our Cerezyme and a portion of our Fabrazyme and Myozyme products at ourperiodic facility in Allston, Massachusetts. A number of factors could cause production interruptions at our facilities or the facilities of our third party providers, including equipment malfunctions, labor problems, raw material shortages, natural disasters, power outages, terrorist activities, or disruptions in the operations of our suppliers.
Manufacturing is also subject to extensive government regulation. Regulatory authorities must approve the facilities in which human healthcare products are produced and those facilities are subject to ongoing inspections. For example,inspection, we received a warning letterWarning Letter from the FDA in September 2007 that addressed certain of our manufacturing procedures inat our Thymoglobulin production facility in Lyon.Lyon, France. The FDA has accepted our response to that warning letter.Warning Letter. In February 2009, we received a warning letterWarning Letter from the FDA related to inspectional observations by the FDA at our Allston Massachusetts facility considered to be significant deviations from compliance with "Good Manufacturing Practices." We submittedGMP. An FDA inspector inspected the plant in May 2009 as a responsefollow up to the FDA's warningWarning Letter. At the end of July 2009, the FDA informed us that it will re-inspect our Allston facility to verify that all corrective and preventative actions identified in the February Warning Letter have been implemented. In its July letter, in March 2009. In addition, changes in manufacturing processes may require additional regulatory approvals. Obtaining and maintaining these regulatory approvals could causethe FDA indicated that all promised actions had not been either fully or adequately implemented at the time of the May inspection. During the re-inspection, the FDA will also review our remediation efforts related to the identification of a virus at our Allston facility that required us to incur significant additional coststemporarily halt production there. If the FDA were to identify issues during its re-inspection, the FDA could be prompted to delay Lumizyme approval or impose restrictions on our production of Cerezyme and lose revenue.Fabrazyme at the facility.
In recent years, several states, including California, Vermont, Maine, Minnesota, Massachusetts, New Mexico and West Virginia, in addition becauseto the District of Columbia, have enacted legislation requiring biotechnology and pharmaceutical companies to establish marketing compliance programs and file periodic reports on sales, marketing, and other activities. Similar legislation is being considered in other states. Many of these requirements are new and uncertain, and available guidance is limited. We could face enforcement action and fines and other penalties and could receive adverse publicity, all of
which could harm our manufacturing processes are highly complexbusiness, if it is alleged that we have failed to fully comply with such laws and are subject to lengthy regulatory approval processes, alternative qualified production capacity may not be available on a timely basis or at all if we cannot produce sufficient commercial requirements of bulk product to meet demand.related regulations.
We rely on third parties to provide us with materials and services in connection with the manufacture of our products and the performance of our services.
Some materials necessary for commercial production of our products, including specialty chemicals and components necessary for manufacture, fill-finish and packaging, are provided by unaffiliated third party suppliers. In some cases, such materials are specifically cited in our marketing applications with regulatory authorities so that they must be obtained from that specific source unless and until the applicable authority approves another supplier. In addition, there may only be one available source for a particular chemical or component. For example, we acquire polyalylamine (PAA), used in the manufacture of Renagel, Renvela, Cholestagel and WelChol, from Cambrex Charles City, Inc., and N925, which is necessary to manufacture our LSD products, from Invitrogen Corporation. These suppliers are the only sources for these materials currently qualified in our FDA drug applications for these products. Our suppliers also may be subject to FDA regulations or the regulations of other governmental agencies outside the United States regarding manufacturing practices. We may be unable to manufacture our products or to perform our services in a timely manner or at all if these third party suppliers were to cease or interrupt production or otherwise fail to supply sufficient quantities of these materials or products to us for any reason, including due to regulatory requirements or actions, adverse financial developments at or affecting the supplier, labor shortages or disputes, or contamination of materials or equipment. For example, we believe that a virus that we detected in one of our bioreactors used at our Allston facility to produce Cerezyme was likely introduced through a raw material used in the manufacturing process.
We also source some of our manufacturing, fill-finish, packaging and distribution operations to third party contractors. The manufacture of products, fill-finish, packaging and distribution of ourthose products requires successful coordination among these third party providers and us. Our inability to coordinate these efforts, the inability of a third party contractor to secure sufficient source materials, the lack of capacity available at a third party contractor or any other problems with the operations of a third party contractor could require us to delay shipment of saleable products, to recall products previously shipped or impair our ability to supply products at all. This could increase our costs, cause
us to lose revenue or market share and damage our reputation. Furthermore, any third party we use to manufacture, fill-finish or package our products to be sold must also be licensed by the applicable regulatory authorities. As a result, alternative third party providers may not be readily available on a timely basis.basis or at all.
Our financial results are dependent on sales of Cerezyme.
Sales of Cerezyme, our enzyme-replacement product for patients with Gaucher disease, totaled $594.1 million for the six months ended June 30, 2009, representing approximately 25% of our total revenue. Because our business is dependent on Cerezyme, negative trends in revenue from this product could have an adverse effect on our results of operations and cause the value of our common stock to decline. In June 2009, we temporarily suspended production of Cerezyme at our Allston facility after identifying a virus in a bioreactor used for producing Cerezyme, which has resulted in a period of supply constraint for the product. As a result of the supply constraint, the FDA has asked companies developing certain alternative treatments for Gaucher disease to submit treatment protocols. If the treatment protocols are approved, physicians could treat Gaucher patients with these therapies ahead of commercial availability in the United States. There is a risk that if patients decide to use one of these developmental therapies, they may not switch back to Cerezyme when our inventories of the product have stabilized. In addition, treatment guidelines developed for Cerezyme during the supply constraint recommend missing doses or infusing less product. There is a risk that physicians and patients do not resume regular treatment levels after the supply constraint has ended. In addition, we
will lose revenue if alternative treatments gain commercial acceptance, if our marketing activities are restricted, or if coverage, pricing or reimbursement is limited. The patient population with Gaucher disease is not large. Because a significant percentage of that population already uses Cerezyme, opportunities for future sales growth are constrained. Furthermore, changes in the methods for treating patients with Gaucher disease, including treatment protocols that combine Cerezyme with other therapeutic products or reduce the amount of Cerezyme prescribed, could limit growth, or result in a decline, in Cerezyme sales.
Our operating results and financial position may be negatively impacted when we attempt to grow through business combination transactions.
We may encounter problems assimilating operations acquired in business combination transactions. These transactions often entail the assumption of unknown liabilities, the loss of key employees, and the diversion of management attention. Furthermore, in any business combination there is a substantial risk that we will fail to realize the benefits we anticipate when we decide to undertake the transaction. We have in the past taken significant charges for impaired goodwill and for impaired assets acquired in business combination transactions. We may be required to take similar charges in the future. We enter into most such transactions with an expectation that the acquired assets will enhance the long-term strength of our business. These transactions, however, often depress our earnings in the near-term and the expected long-term benefits may never be realized. Business combination transactions also either deplete cash resources, require us to issue substantial equity, or require us to incur significant debt.
If our strategic alliances are unsuccessful, our operating results will be adversely impacted.
Several of our strategic initiatives involve alliances with other biotechnology and pharmaceutical companies. The success of these arrangements is largely dependent on technology and other intellectual property contributed by our strategic partners or the resources, efforts, and skills of our partners. Disputes and difficulties in such relationships are common, often due to conflicting priorities or conflicts of interest. Merger and acquisition activity may exacerbate these conflicts. The benefits of these alliances are reduced or eliminated when strategic partners:
Furthermore, payments we make under these arrangements may exacerbate fluctuations in our financial results. In addition, under some of our strategic alliances, we make upfront and milestone payments well in advance of commercialization of products with no assurance that we will ever recoup these payments. We also may make equity investments in our strategic partners, as we did with EXACT Sciences in January 2009 and Isis in February 2008. Our strategic equity investments are subject to market fluctuations, access to capital and other business events, such as initial public offerings, the completion of clinical trials and regulatory approvals, which can impact the value of these investments. If any of our strategic equity investments decline in value and remain below cost for an extended duration, we may be required to write off our investment.
Our international sales and operating expenses are subject to fluctuations in currency exchange rates.
A significant portion of our business is conducted in currencies other than our reporting currency, the U.S. dollar. We recognize foreign currency gains or losses arising from our operations in the period in which we incur those gains or losses. As a result, currency fluctuations among the U.S. dollar and the currencies in which we do business have caused foreign currency translation gains and losses in the past and will likely do so in the future. Because of the number of currencies involved, the variability of currency exposures and the potential volatility of currency exchange rates, we may suffer significant foreign currency translation losses in the future due to the effect of exchange rate fluctuations.
In 2008, the change in foreign exchange rates had a net favorable impact on our revenues;revenue; however, this trend changed during the fourth quarter of 2008 and adversely impacted our revenue during the first quarterhalf of 2009. Although we cannot predict with certainty future changes in foreign exchange rates or their effect on our results, we do not expect the change in foreign exchange rates to have a positive impact on our revenuesrevenue for the remainder of 2009.
Government regulation imposes significant costs and restrictions on the development and commercialization of our products and services.
Government agencies heavily regulate the production and sale of healthcare products and the provision of healthcare services. Our success will depend on our ability to satisfy regulatory requirements. In particular, the FDA, the EMEA and comparable regulatory agencies in foreign jurisdictions must approve human therapeutic and diagnostic products before they are marketed, as well as the facilities in which they are made. This approval process can involve lengthy and detailed laboratory and clinical testing, sampling activities and other costly and time-consuming procedures. We may not receive required regulatory approvals on a timely basis or at all.
Therapies that have received regulatory approval for commercial sale may continue to face regulatory difficulties. Failure to comply with applicable regulatory requirements results in regulatory authorities taking actions such as:
Furthermore, the FDA, the EMEA and comparable foreign regulatory agencies may require post-marketing clinical trials or patient outcome studies. We have agreed with the FDA, for example, to a number of post-marketing commitments as a condition to U.S. marketing approval for Fabrazyme, Aldurazyme, Myozyme, Clolar and Mozobil. In addition, regulatory agencies subject a marketed therapy, its manufacturer and the manufacturer's facilities to continual review and periodic inspections. The discovery of previously unknown problems with a therapy or the facility or process used to produce
the therapy could prompt a regulatory authority to impose restrictions on us, or could cause us to voluntarily adopt such restrictions, including withdrawal of one or more of our products or services from the market.
If regulatory authorities fail to approve pending applications in a timely matter, our results of operations will suffer.
We expect regulatory action on several matters during the next 12 months. For example, we anticipate regulatory action on our marketing application for alglucosidase alfa produced at the 2000L scale in the United States; our marketing application for Mozobil in Europe; the expansion of labeling for clofarabine in the United States and Europe to include the treatment of adults with AML; our marketing application for Renvela in Europe and a label expansion of Renvela in the United States to include the treatment of CKD patients not on dialysis.
Regulatory authorities denying or delaying these approvals would adversely impact our projected revenue and income growth. A regulatory authority may deny or delay an approval because it was not satisfied with the structure or conduct of clinical trials or due to its assessment of the data we supply. A regulatory authority, for instance, may not believe that we have adequately established a product's risk-benefit profile or adequately addressed negative safety signals. Clinical data are subject to varied interpretations, and regulatory authorities may disagree with our assessments of our data. In any such case, a regulatory authority could insist that we provide additional data, which could substantially delay or even prevent commercialization efforts, particularly if we are required to conduct additional pre-approval clinical studies. In addition, the FDA has failed to act on pending marketing applications by the response dates prescribed in the Prescription Drug User Fee Act. We have encountered delays in marketing in the United States for alglucosidase alfa produced at the 2000L scale, which has adversely impacted our financial results and resulted in a very tight product supply, and we could face additional delays with this product or other products.
The current credit and financial market conditions may exacerbate certain risk affecting our business.
Sales of our products and services are dependent, in part, on the availability and extent of reimbursement from third party payers, including governments and private insurance plans. As a result of the current volatility in the financial markets, third-party payers may delay payment or be unable to satisfy their reimbursement obligations. A reduction in the availability or extent of reimbursement could negatively affect our product and service sales and revenue.
In addition, we rely upon third parties for certain aspects of our business, including collaboration partners, wholesale distributors for our products, contract clinical trial providers, contract manufacturers, and third-party suppliers. Because of the recent tightening of global credit and the volatility in the financial markets, there may be a delay or disruption in the performance or satisfaction of commitments to us by these third parties, which could adversely affect our business.
We may incur substantial costs as a result of litigation or other proceedings.
We are or may become a party to litigation or other proceedings in the ordinary course of our business. A third party may sue us or one of our strategic collaborators for infringing the third party's patent or other intellectual property rights. Likewise, we or one of our strategic collaborators may sue to enforce intellectual property rights or to determine the scope and validity of third party proprietary rights. If we do not prevail in this type of litigation, we or our strategic collaborators may be required to:
We have initiated patent infringement litigation against several generic manufacturers and we are the subject of two purported securities class action lawsuits, described under the heading "Legal Proceedings" in Part II, Item 1 of this report. We are also currently involved in other litigation matters and investigations that do not involve intellectual property claims and may be subject to additional actions in the future. For example, the federal government, state governments and private payors are investigating and have filed actions against numerous pharmaceutical and biotechnology companies, including Genzyme, alleging that the companies have overstated prices in order to inflate reimbursement rates. Domestic and international enforcement authorities also have instituted actions under healthcare "fraud and abuse" laws, including
anti-kickback and false claims statutes. Moreover, individuals who use our products or services, including our diagnostic products and genetic testing services, sometimes bring product and professional liability claims, and third parties with whom we do business sometimes bring breach of contract claims against us or our subsidiaries.
Some of our products are prescribed by healthcare providers for uses not approved by the FDA, the EMEA or comparable regulatory agencies. Although healthcare providers may lawfully prescribe our products for off-label uses, any promotion by us of off-label uses would be unlawful. Some of our practices intended to make healthcare providers aware of off-label uses of our products without engaging in off-label promotion could nonetheless be construed as off-label promotion. Although we have policies and procedures in place designed to help assure ongoing compliance with regulatory requirements regarding off-label promotion, some non-compliant actions may nonetheless occur. Regulatory authorities could take enforcement action against us if they believe we are promoting, or have promoted, our products for off-label use.
We have only limited amounts of insurance, which may not provide coverage to offset a negative judgment or a settlement payment. We may be unable to obtain additional insurance in the future, or we may be unable to do so on favorable terms. Our insurers may dispute our claims for coverage. For example, we have submitted claims to our insurers for reimbursement of portions of the expenses incurred in connection with the litigation and settlement related to the consolidation of our tracking stock and are seeking coverage for the settlement. The insurers have purported to deny coverage. Any additional insurance we do obtain may not provide adequate coverage against any asserted claims.
Regardless of merit or eventual outcome, investigations and litigation can result in:
Our international sales, clinical activities, manufacturing and other operations are subject to the economic, political, legal and business environments of the countries in which we do business, and our failure to operate successfully or adapt to changes in these environments could cause our international sales and operations to be limited or disrupted.
Our international operations accounted for approximately 48%49% of our consolidated product and service revenuesrevenue for the threesix months ended March 31,June 30, 2009. We expect that international product and service sales will continue to account for a significant percentage of our revenuesrevenue for the foreseeable future. In addition, we have direct investments in a number of subsidiaries outside of the United States.
Our international sales and operations could be limited or disrupted, and the value of our direct investments may be diminished, by any of the following:
Our operations and marketing practices are also subject to regulation and scrutiny by the governments of the countries in which we operate. In addition, the United States Foreign Corrupt Practices Act and similar anti-bribery laws in other jurisdictions generally prohibit companies and their representatives from offering, promising, authorizing or making payments to foreign officials for the purpose of obtaining or retaining business. We operate in many parts of the world that have experienced governmental corruption to some degree. Although we have policies and procedures designed to help ensure that we, our employees and our agents comply with the FCPA and other anti-bribery laws, there is no assurance that such policies and procedures willmay not protect us against liability under the FCPA or other laws for actions taken by our employees, agents and intermediaries with respect to our business. Failure to comply with domestic or foreign laws could result in various adverse consequences, including possible delay in the approval or refusal to approve a product, recalls, seizures, withdrawal of an approved product from the market, and/or the imposition of civil or criminal sanctions.
We may fail to adequately protect our proprietary technology, which would allow competitors or others to take advantage of our research and development efforts.
Our long-term success largely depends on our ability to market technologically competitive products. If we fail to obtain or maintain adequate intellectual property protection in the United States or abroad, we may not be able to prevent third parties from using our proprietary technologies. Our currently pending or future patent applications may not result in issued patents. Patent applications are typically confidential for 18 months following their earliest filing, and because third parties may have filed patent applications for technology covered by our pending patent applications without us being aware of those applications, our patent applications may not have priority over patent applications of others. In addition, our issued patents may not contain claims sufficiently broad to protect us against
third parties with similar technologies or products, or provide us with any competitive advantage. If a third party initiates litigation regarding our patents, our collaborators' patents, or those patents for which we have license rights, and is successful, a court could declare our patents invalid or unenforceable or limit the scope of coverage of those patents. Governmental patent offices and courts have not always been consistent in their interpretation of the scope and patentability of the subject matter claimed in biotechnology patents. Any changes in, or unexpected interpretations of, the patent laws may adversely affect our ability to enforce our patent position.
We also rely upon trade secrets, proprietary know-how, and continuing technological innovation to remain competitive. We attempt to protect this information with security measures, including the use of confidentiality agreements with employees, consultants, and collaborators. These individuals may breach these agreements and any remedies available to us may be insufficient to compensate for our damages. Furthermore, our trade secrets, know-how and other technology may otherwise become known or be independently discovered by our competitors.
Some of our products may face competition from lower cost generic or follow-on products.
Some of our drug products, for example Renagel, Renvela, Hectorol, Clolar and Mozobil, are approved under the provisions of the United States Food, Drug and Cosmetic Act that render them susceptible to potential competition from generic manufacturers via the Abbreviated New Drug Application (ANDA) procedure. Generic manufacturers pursuing ANDA approval are not required to conduct costly and time-consuming clinical trials to establish the safety and efficacy of their products; rather, they are permitted to rely on the innovator's data regarding safety and efficacy. Thus, generic manufacturers can sell their products at prices much lower than those charged by the innovative pharmaceutical or biotechnology companies who have incurred substantial expenses associated with the research and development of the drug product.
The ANDA procedure includes provisions allowing generic manufacturers to challenge the effectiveness of the innovator's patent protection long prior to the generic manufacturer actually commercializing their products—the so-calledproduct by submitting a "Paragraph IV" certification procedure.in which the applicant claims that the innovator's patent is invalid or will not be infringed by the manufacture, use, or sale of the generic product. A patent owner who receives a Paragraph IV certification may choose to sue the generic applicant for patent infringement. If such patent infringement lawsuit is made within a statutory 45-day period, then a 30-month stay of FDA approval for the ANDA is triggered. In recent years, generic manufacturers have used Paragraph IV certifications extensively to challenge the applicability of patents listed in the FDA's Approved Drug Products List with Therapeutic Equivalence Evaluations, commonly referred to as the Orange Book-listed patentsBook, on a wide array of innovative pharmaceuticals, and wepharmaceuticals. We expect this trend to continue and to implicate drug products with even relatively modest revenues.
Renagel, Renvela and Hectorol are subjects of ANDAs containing Paragraph IV certifications. Renagel is the subject of threefour ANDAs and Renvela is the subject of two ANDAs containing Paragraph IV certifications. One of the ANDAs containsThe first-filed Renagel ANDA contained a Paragraph IV certification that relates only to one of our Orange Book-listed patents, namely our patent that expires in 2020 and covers features of our tablet dosage form. This patent expires in 2020, and the ANDA applicant alleged that its proposed product would not infringe that patent. We reviewed the Paragraph IV certification and did not initiate patent infringement litigation. The other twoThree applicants have filed ANDA applications containcontaining Paragraph IV certifications challenging additional aspects of the Renagel and Renvela patent estate, including patents that expire in 2014 and 2013. Specifically, oneWe have initiated patent litigation against these three ANDA applicant seeks to marketapplicants. See "Legal Proceedings" in Part II, Item 1 of this Form 10-Q. If we are unsuccessful in these lawsuits, a generic manufacturer may launch its generic product prior to the expiration of all of our Orange Book-listed patents while the other seeks to market its generic product only after the expiration of our Orange Book-listed patents that expire in 2013. We have initiated patent litigation against these latter two ANDA applicants.
Renvela is the subject of two ANDAs containing Paragraph IV certifications. One of the ANDA applicants seeks to market a generic sevelamer carbonate product prior to the expiration of all of our Orange Book-listed patents. We are evaluating this ANDA applicationcovering Renagel and associated legal issues in advance of our May 2009 deadline to initiate patent litigation and trigger the statutory 30-month stay
of FDA approval for the ANDA. The other ANDA applicant seeks to market its generic product only after the expiration of our Orange Book-listed patents that expire in 2013. We initiated patent litigation against this ANDA applicant.Renvela.
Our Hectorol injection product is the subject of twofive ANDAs containing Paragraph IV certifications. InWe have initiated patent litigation against four of the first-filed ANDA the applicant submitted a Paragraph IV certification alleging the invalidity ofapplicants and are pursuing claims with respect to our patent related to the use of Hectorol to treat hyperparathyroidism secondary to end-stage renal disease, (which patentwhich expires in 2014), and alleging non-infringement2014 (the "2014 patent"). See "Legal Proceedings" in Part II, Item 1 of our patent covering our highly purified form of Hectorol (which patent expires in 2021). We initiated patent infringement litigation in February 2008. We have since granted to this Form 10-Q. The fifth ANDA applicant a covenant not to sue on the Orange Book-listed patent that expires in July 2021. We continue, however, to pursue our claims related to the Orange Book-listed patent that expires in February 2014. A trial on the merits is scheduled for April 2010. The ANDA applicant also has submitted a Paragraphparagraph IV certification alleging the invalidity ofwith respect to only one patent, our patent that claims specific aspects of our Hectorol vial formulation.formulation and expires in 2023. We reviewed the Paragraph IV certification related to our vial formulation and did not initiate patent infringement litigation. InIf we are unsuccessful in our patent infringement lawsuits against the second ANDA application for our Hectorol injectionfilers, a generic manufacturer may launch its generic product prior to the applicant's Paragraph IV certification alleged that eachexpiration of our Orange Book-listedOrange-Book listed patents is either invalid or will not be infringed by the applicant's generic product. We initiated patent infringement litigation in April 2009 against this ANDA applicant.covering Hectorol.
Other of our products, including Cerezyme, Fabrazyme, Aldurazyme, Myozyme, Campath and CampathLeukine (so-called "biotech drugs") are not currently considered susceptible to an abbreviated approval procedure, either due to current United States law or FDA practice in approving biologic products. However, the United States Congress has been exploring since 2007 legislation that would establish a procedure for the FDA to accept ANDA-like abbreviated applications for the approval of "follow-on," "biosimilar" or "comparable" biotech drugs. Congress continues to be interested in the issue and the
new U.S. presidential administration has also expressed an interest in passing legislation regarding biosimilars. Such legislation has already been adopted in the European Union.
If an ANDA filersfiler or any other generic manufacturer were to receive approval to sell a generic or follow-on version of one of our products, that product would become subject to increased competition and our revenuesrevenue for that product would be adversely affected.
Guidelines, recommendations and studies published by various organizations can reduce the use of our products.
Professional societies, practice management groups, private health/science foundations, and organizations involved in various diseases may publish guidelines, recommendations or studies to the healthcare and patient communities from time to time. Recommendations of government agencies or these other groups/organizations may relate to such matters as usage, dosage, route of administration, cost-effectiveness, and use of related therapies. Organizations like these have in the past made recommendations about our products and products of our competitors. Recommendations, guidelines or studies that are followed by patients and healthcare providers could result in decreased use of our products. The perception by the investment community or stockholders that recommendations, guidelines or studies will result in decreased use of our products could adversely affect prevailing market price for our common stock. In addition, our success also depends on our ability to educate patients and healthcare providers about our products and their uses. If these education efforts are not effective, then we may not be able to increase the sales of our existing products or successfully introduce new products to the market.
We may be required to license patents from competitors or others in order to develop and commercialize some of our products and services, and it is uncertain whether these licenses would be available.
Third party patents may cover some of the products or services that we or our strategic partners are developing or producing. A patent is entitled to a presumption of validity, and accordingly, we face significant hurdles in any challenge to a patent. In addition, even if we are successful in challenging the validity of a patent, the challenge itself may be expensive and require significant management attention.
To the extent valid third party patent rights cover our products or services, we or our strategic collaborators would be required to seek licenses from the holders of these patents in order to manufacture, use or sell these products and services, and payments under them would reduce our profits from these products and services. We may not be able to obtain these licenses on favorable terms, or at all. If we fail to obtain a required license or are unable to alter the design of our technology to fall outside the scope of a third party patent, we may be unable to market some of our products and services, which would limit our profitability.
Legislative or regulatory changes may adversely impact our business.
The United States government and other governments have shown significant interest in pursuing healthcare reform. Any government-adopted reform measures could adversely impact:
New laws, regulations and judicial decisions, or new interpretations of existing laws, regulations and decisions, that relate to healthcare availability, methods of delivery or payment for products and services, or sales, marketing or pricing may cause our revenue to decline, and we may need to revise our research and development programs. In addition, such changes could cause our stock price to decline or experience periods of volatility. The pricing and reimbursement environment for our products may change in the future and become more challenging due to among other reasons, policies advanced by the new presidential administration in the United States, new healthcare legislation or fiscal challenges faced by government health administration authorities. For example, the Centers for Medicare & Medicaid Services and the U.S. House of Representatives have proposed that Medicare payment for phosphate binders and vitamin D analogs be bundled into the packaged composite rate paid by Medicare to dialysis clinics as reimbursement for most of the dialysis-related services provided to Medicare patients. If these product classes are bundled into the composite rate as proposed, separate Medicare reimbursement will no longer be available for Renagel/Renvela or Hectorol. It is too early to project the impact bundling may have on sales of Renagel/Renvela and Hectorol.
On September 27, 2007, the Food and Drug Administration Amendments Act of 2007 was enacted, giving the FDA enhanced post-market authority, including the authority to require post-marketing studies and clinical trials, labeling changes based on new safety information, and compliance with risk evaluations and mitigation strategies approved by the FDA. The FDA's exercise of its new authority could result in delays or increased costs during the period of product development, clinical trials and regulatory review and approval, increased costs to assure compliance with new post-approval regulatory requirements, and potential restrictions on the sale and/or distribution of approved products.
If our strategic alliances are unsuccessful, our operating results will be adversely impacted.
Several of our strategic initiatives involve alliances with other biotechnology and pharmaceutical companies. The success of these arrangements is largely dependent on technology and other intellectual property contributed by our strategic partners or the resources, efforts, and skills of our partners. Disputes and difficulties in such relationships are common, often due to conflicting priorities or conflicts of interest. Merger and acquisition activity may exacerbate these conflicts. The benefits of these alliances are reduced or eliminated when strategic partners:
Furthermore, payments we make under these arrangements may exacerbate fluctuations in our financial results. In addition, under some of our strategic alliances, we make upfront and milestone payments well in advance of commercialization of products with no assurance that we will ever recoup these payments. We also may make equity investments in our strategic partners, as we did with EXACT Sciences in January 2009 and Isis in February 2008. Our strategic equity investments are subject to market fluctuations, access to capital and other business events, such as initial public offerings, the completion of clinical trials and regulatory approvals, which can impact the value of these investments. If any of our strategic equity investments decline in value and remain below cost for an extended duration, we may be required to write off our investment.
Our investments in marketable securities are subject to market, interest and credit risk that may reduce their value.
We maintain a significant portfolio of investments in marketable securities. Our earnings may be adversely affected by changes in the value of this portfolio. In particular, the value of our investments may be adversely affected by increases in interest rates, downgrades in the corporate bonds included in the portfolio, instability in the global financial markets that reduces the liquidity of securities included in the portfolio, and by other factors which may result in other than temporary declines in value of the investments. Each of these events may cause us to record charges to reduce the carrying value of our investment portfolio or sell investments for less than our acquisition cost. We attempt to mitigate these risks with the assistance of our investment advisors by investing in high quality securities and continuously monitoring the overall risk profile of our portfolio.
Importation of products may lower the prices we receive for our products.
In the United States and abroad, many of our products are subject to competition from lower-priced versions of our products and competing products from other countries where government price controls or other market dynamics result in lower prices for such products. Our products that require a prescription in the United States may be available to consumers in markets such as Canada, Mexico, Taiwan and the Middle East without a prescription, which may cause consumers to seek out these products in these lower priced markets. The ability of patients and other customers to obtain these lower priced imports has grown significantly as a result of the Internet, an expansion of pharmacies in Canada and elsewhere that target American purchasers, an increase in U.S.-based businesses affiliated with these Canadian pharmacies and other factors. Most of these foreign imports are illegal under current United States law. However, the volume of imports continues to rise due to the limited enforcement resources of the FDA and the United States Customs Service, and there is increased political pressure to permit such imports as a mechanism for expanding access to lower-priced medicines. The importation of lower-priced versions of our products into the United States and other markets adversely affects our profitability. This impact could become more significant in the future.
Our investments in marketable securities are subject to market, interest and credit risk that may reduce their value.
We maintain a significant portfolio of investments in marketable securities. Our earnings may be adversely affected by changes in the value of this portfolio. In particular, the value of our investments
may be adversely affected by increases in interest rates, downgrades in the corporate bonds included in the portfolio, instability in the global financial markets that reduces the liquidity of securities included in the portfolio, and by other factors which may result in other than temporary declines in value of the investments. Each of these events may cause us to record charges to reduce the carrying value of our investment portfolio or sell investments for less than our acquisition cost.
We may require significant additional financing, which may not be available to us on favorable terms, if at all.
As of March 31,June 30, 2009, we had $981.8 million$1.05 billion in cash, cash equivalents and short- and long-term investments, excluding our investments in equity securities.
We intend to use substantial portions of our available cash for:
In addition, we have several outstanding legal proceedings. Involvement in investigations and litigation can be expensive and a court may ultimately require that we pay expenses and damages. As a result of legal proceedings, we may also be required to pay fees to a holder of proprietary rights in order to continue certain operations.
Recently, the general economic, global capital and credit market conditions in the United States and other parts of the world have deteriorated significantly and have adversely affected access to capital and increased the cost of capital. However, we continue to believe that our available cash, investments and cash flow from operations, together with our revolving credit facility and other available debt financing, will be adequate to meet our operating, investing and financing needs in the foreseeable future. We currently do not rely on short-term borrowing to fund our operations and, as a result, we do not believe that existing global capital and credit market conditions will have a significant impact on our near-term liquidity. We are closely monitoring our liquidity as well as the condition of these markets. If these conditions continue or become worse, our future cost of debt and equity capital and our future access to capital markets could be adversely affected. We cannot guarantee that we willmay not be able to obtain any additional financing in the future or extend any existing financing arrangements on favorable terms, or at all.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
We are exposed to potential loss from exposure to market risks represented principally by changes in foreign exchange rates, interest rates and equity prices. At March 31,June 30, 2009, we held derivative contracts in the form of foreign exchange forward contracts. We also held a number of other financial instruments, including investments in marketable securities and we had debt securities outstanding.derivative contracts in the
form of foreign exchange forward contracts. We do not hold derivatives or other financial instruments for speculative purposes.
Equity Price Risk
We hold investments in a limited number of U.S. and European equity securities. We estimated the potential loss in fair value due to a 10% decrease in the equity prices of each marketable security held at March 31, 2009 to be $2.8 million, as compared to $5.7 million at December 31, 2008. This estimate assumes no change in foreign exchange rates from quarter-end spot rates and excludes any potential risk associated with securities that do not have a readily determinable market value.
Interest Rate Risk
We are exposed to potential loss due to changes in interest rates. Our principal interest rate exposure is to changes in U.S. interest rates. Instruments with interest rate risk include short- and long-term investments in fixed income securities and a fixed rate capital lease. To estimate the potential loss due to changes in interest rates, we performed a sensitivity analysis using the instantaneous adverse change in interest rates of 100 basis points across the yield curve.
On this basis, we estimate the potential loss in net fair value of our interest-bearing instruments to be $7.3 million as of March 31, 2009, as compared to $6.2 million as of December 31, 2008. The increase is primarily a result of a decrease in the amount and duration of the fixed income investment portfolio, which provides less of an offset to the increase in the fair value of our capital lease.
Foreign Exchange Risk
As a result of our worldwide operations, we may face exposure to potential adverse movements in foreign currency exchange rates. Exposures to currency fluctuations that result from sales of our products in foreign markets are partially offset by the impact of currency fluctuations on our international expenses. We use foreign exchange forward contracts to further reduce our exposure to changes in exchange rates, primarily to offset the earnings effect from foreign currency assets and liabilities. We also hold a limited amount of foreign currency denominated equity securities.
As of March 31,June 30, 2009, we estimate the potential loss in fair value of our foreign exchange forward contracts and foreign equity holdings that would result from a hypothetical 10% adverse change in exchange rates to be $25.4$27.4 million, as compared to $26.9 million as of December 31, 2008. The change from the prior period is due to a decrease in our net foreign exchange forward contracts. Since the contracts hedge mainly transactional exchange exposures, any changes in the fair values of the contracts would be offset by changes in the underlying values of the hedged items.
Interest Rate Risk
We are exposed to potential loss due to changes in interest rates, principally changes in U.S. interest rates. Instruments with interest rate risk include short- and long-term investments in fixed income securities and a fixed rate capital lease. To estimate the potential loss due to changes in interest rates, we performed a sensitivity analysis using the instantaneous adverse change in interest rates of 100 basis points across the yield curve.
On this basis, we estimate the potential loss in net fair value to be $7.0 million as of June 30, 2009, as compared to $6.2 million as of December 31, 2008. The increase is primarily a result of a decrease in the amount and duration of the fixed income investment portfolio, which provides less of an offset to the increase in the fair value of our capital lease.
Equity Price Risk
We hold investments in a limited number of U.S. and European equity securities. We estimate the potential loss in fair value due to a 10% decrease in the equity prices of marketable securities held at June 30, 2009 to be $3.9 million, as compared to $5.7 million at December 31, 2008. This estimate assumes no change in foreign exchange rates from quarter-end spot rates and excludes any potential risk associated with securities that do not have a readily determinable market value.
ITEM 4. CONTROLS AND PROCEDURES
As of March 31,June 30, 2009, we evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31,June 30, 2009.
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended March 31,June 30, 2009, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Renagel and Renvela Patent Litigation
Beginning in January 2009, we received notices from Lupin Ltd. and Lupin Pharmaceuticals, collectively Lupin, and Impax Laboratories, Inc., or Impax, that each had submitted to the FDA abbreviated new drug applications, or ANDAs, containing Paragraph IV certifications seeking approval to market generic versions of Renagel (sevelamer hydrochloride) and Renvela (sevelamer carbonate).
Lupin is seeking to market generic 400 mg and 800 mg sevelamer hydrochloride tablets and generic 800 mg sevelamer carbonate tablets prior to the expiration of all of our Orange Book-listed patents protecting Renagel and Renvela. On March 6, 2009, we filed a complaint against Lupin in the U.S. District Court for the District of Maryland. In the complaint, we allege that Lupin's proposed sevelamer hydrochloride products infringe U.S. Patent Nos. 5,496,545, 6,509,013, and 7,014,846, which expire in 2013, and U.S. Patent No. 5,667,775, which expires in 2014 (the "'775 Patent"). Lupin filed an answer and counterclaim, alleging that our asserted patents are invalid and/or not infringed by Lupin's proposed generic sevelamer hydrochloride products. On May 14, 2009, we filed a complaint against Lupin in the same court alleging that Lupin's proposed sevelamer carbonate product infringes U.S. Patent Nos. 5,496,545, 6,509,013, 6,858,203 and 7,014,846 and 7,459,151, which expire in 2013, and the '775 Patent.
Impax is seeking to market generic 400 mg and 800 mg sevelamer hydrochloride tablets and generic 800 mg sevelamer carbonate tablets after the expiration of the patents protecting Renagel and Renvela that expire in 2013. We periodically becomefiled complaints against Impax in the U.S. District Court for the District of Maryland for patent infringement with respect to Renagel on March 13, 2009 and with respect to Renvela on April 3, 2009. In both complaints, we allege that Impax's proposed sevelamer products infringe the '775 patent. Impax filed an answer and counterclaim with respect to both suits. In its counterclaim, Impax alleges that the '775 Patent and U.S. Patent No. 6,773,780 (which expires in October 2020) are invalid and/or not infringed by Impax's proposed generic sevelamer products.
In May 2009, we received notice that Sandoz, Inc., or Sandoz, had submitted to the FDA an ANDA containing a Paragraph IV certification seeking approval to market generic 400 mg and 800 mg sevelamer hydrochloride tablets after the expiration of the patents protecting Renagel that expire in 2013. On July 2, 2009, we filed a complaint against Sandoz in the U.S. District Court for the District of Maryland alleging that Sandoz's proposed generic products infringe the '775 patent.
Hectorol Patent Litigation
In January 2008, we received notice that Pentech Pharmaceuticals, Inc., or Pentech, had submitted to the FDA an ANDA containing a Paragraph IV certification seeking approval to market a generic version of our Hectorol injection product prior to the expiration of the following Orange Book-listed patents: U.S. Patent No. 6,903,083, which expires in 2021 (the "'083 Patent") and U.S. Patent No. 5,602,116, which expires in 2014 (the "'116 Patent"). On February 21, 2008, we and our wholly-owned subsidiary Bone Care International, LLC, or Bone Care, filed a lawsuit in U.S. District Court for the Northern District of Illinois. In the complaint, we alleged that Pentech's proposed product infringed both patents. On April 10, 2009, we granted Pentech a covenant not to sue on the '083 Patent. We continue, however, to pursue our claims related to the '116 Patent. After we filed the lawsuit, Pentech assigned all interest in its ANDA to Cobrek Pharmaceuticals, Inc., or Cobrek. On June 13, 2009, we filed an amended complaint to add Cobrek as a defendant. A trial on the merits is scheduled for April 2010 with respect to the '116 Patent.
In March 2009, we received notice that Eagle Pharmaceuticals, Inc., or Eagle, had submitted to the FDA an ANDA containing a Paragraph IV certification seeking approval to market a generic version of
our Hectorol injection product prior to the expiration of our Orange Book-listed patents protecting the product. On April 23, 2009, we and Bone Care filed a complaint against Eagle in the U.S. District Court for the District of Delaware alleging that Eagle's proposed product infringes the '116 Patent. Eagle filed an answer and counterclaim alleging that the '116 Patent is invalid and/or not infringed and seeking declaratory judgment that two other patents related to Hectorol are invalid and/or not infringed by Eagle's proposed generic product.
In June 2009, we received notice that Sandoz had submitted to the FDA an ANDA containing a Paragraph IV certification seeking approval to market a generic version of our Hectorol injection product prior to the expiration of our Orange Book-listed patents covering the product. On July 16, 2009, we and Bone Care filed a complaint against Sandoz in the U.S. District Court for the District of Delaware alleging that Sandoz's proposed product infringes the '116 Patent.
In June 2009 we also received notice that Roxane Laboratories, Inc., or Roxane, had submitted to the FDA an ANDA containing a Paragraph IV certification seeking approval to market a generic version of our Hectorol capsule products prior to the expiration of our Orange Book-listed patents covering these products. On July 31, 2009, we filed a complaint against Roxane in the U.S. District Court for the District of Delaware alleging that Roxane's proposed products infringe the '116 Patent.
Federal Securities Litigation
On July 29, 2009 and August 3, 2009, two purported securities class action lawsuits were filed in the U.S. District Court for the District of Massachusetts against us and our President and Chief Executive Officer. The lawsuits were filed on behalf of those who purchased our common stock during the period from June 26, 2008 through July 21, 2009 and allege violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Each of the lawsuits is premised upon allegations that we made materially false and misleading statements and omissions by failing to disclose instances of viral contamination at two of our manufacturing facilities and our receipt of a list of inspection observations from the FDA related to one of the facilities, which detailed observations of practices that the FDA considered to be deviations from GMP. The plaintiffs seek unspecified damages and reimbursement of costs, including attorneys' and experts' fees. We intend to defend these lawsuits vigorously.
We also are subject to other legal proceedings and claims arising in connection with our business. Although we cannot predict the outcome of these additional proceedings and claims, we do not believe that the ultimate resolution of any of these existing matters would have a material adverse effect on our consolidated financial position or results of operations.
We incorporate by reference our disclosure related to risk factors which is set forth under the heading "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial
Condition and Results of Operations—Risk Factors" in Part I., Item 2. of this Quarterly Report on Form 10-Q.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information about our repurchases of our equity securities during the quarter ended March 31,June 30, 2009:
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
January 1, 2009-January 31, 2009 | — | — | — | $ | 1,125,521,738 | |||||||||
February 1, 2009-February 28, 2009 | — | — | — | $ | 1,125,521,738 | |||||||||
March 1, 2009-March 31, 2009 | 2,000,000 | $ | 53.55 | 2,000,000 | $ | 1,018,427,338 | ||||||||
Total | 2,000,000 | (1) | $ | 53.55 | (2) | 2,000,000 | ||||||||
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
April 1, 2009-April 30, 2009 | — | — | — | $ | 1,018,427,338 | |||||||||
May 1, 2009-May 31, 2009 | — | — | — | $ | 1,018,427,338 | |||||||||
June 1, 2009-June 30, 2009 | — | — | — | $ | 1,018,427,338 | |||||||||
Total | — | (1) | $ | — | — | |||||||||
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our annual meeting of shareholders on May 21, 2009. We have set forth below the results of the voting on proposals submitted to our shareholders for $107.1 milliona vote at the annual meeting. Abstentions and broker non-votes were counted for determining a quorum, but were not treated as votes cast on any of cash, including fees.
a. A proposal to reelect eight directors, each for repurchasesa one-year term:
| Number of Votes | | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Number of Broker Non-Votes | ||||||||||||
Nominee | For | Against | Abstain | ||||||||||
Douglas A. Berthiaume | 219,927,913 | 8,101,223 | 640,098 | 513,569 | |||||||||
Gail K. Boudreaux | 220,648,278 | 7,450,908 | 570,054 | 513,563 | |||||||||
Robert J. Carpenter | 225,653,097 | 2,382,741 | 633,395 | 513,570 | |||||||||
Charles L. Cooney | 225,649,427 | 2,388,023 | 631,786 | 513,567 | |||||||||
Victor J. Dzau | 223,600,643 | 4,430,772 | 637,823 | 513,565 | |||||||||
Senator Connie Mack | 223,686,743 | 4,253,118 | 729,375 | 513,567 | |||||||||
Richard F. Syron | 216,418,332 | 11,608,086 | 642,818 | 513,567 | |||||||||
Henri A. Termeer | 223,464,667 | 4,595,404 | 609,167 | 513,565 |
The number of ourvotes cast in favor of each nominee exceeded the number of votes cast against each nominee and therefore each was reelected as a director of Genzyme.
b. A proposal to amend the 2004 Equity Incentive Plan by increasing the number of shares of common stock made duringavailable for issuance under the first quarterplan by 2,500,000 shares;
Number of Votes for | Number of Votes Against | Number of Votes Abstaining | Number of Broker Non-Votes | |||||||
---|---|---|---|---|---|---|---|---|---|---|
185,289,483 | 25,215,257 | 289,492 | 18,388,571 |
The number of fiscal 2009.
c. A proposal to approve the 2009 Employee Stock Purchase Plan;
Number of Votes for | Number of Votes Against | Number of Votes Abstaining | Number of Broker Non-Votes | |||||||
---|---|---|---|---|---|---|---|---|---|---|
201,479,765 | 9,041,954 | 273,312 | 18,387,772 |
The number of votes cast in favor of the proposal exceeded the number of votes cast against it, and therefore the proposal was adopted.
d. A proposal to ratify the audit committee's selection of PricewaterhouseCoopers, LLP as our independent auditors for 2009;
Number of Votes for | Number of Votes Against | Number of Votes Abstaining | Number of Broker Non-Votes | |||||||
---|---|---|---|---|---|---|---|---|---|---|
225,851,662 | 2,578,146 | 239,427 | 513,568 |
The number of votes cast in favor of the proposal exceeded the number of votes cast against it, and therefore the proposal was adopted.
See the Exhibit Index following the signature page to this report on Form 10-Q.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrantregistrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
GENZYME CORPORATION | ||||
Dated: | By: | /s/ MICHAEL S. WYZGA Michael S. Wyzga Executive Vice President, Finance, Chief Financial Officer |
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, MARCH 31,JUNE 30, 2009
EXHIBIT NO. | DESCRIPTION | ||
---|---|---|---|
*3.1 | Restated Articles of Organization of Genzyme, as amended. Filed as Exhibit 3.1 to Genzyme's Form 10-Q for the quarter ended June 30, 2006. | ||
*3.2 | By-laws of Genzyme, as amended. Filed as Exhibit 3.1 to Genzyme's Form 8-K filed May 25, 2007. | ||
*10.1 | 2004 Equity Incentive Plan, as amended. Filed as Appendix B to Genzyme's Proxy Statement on Schedule 14A for the 2009 Annual Meeting of Shareholders filed April 13, 2009. | ||
31.1 | Certification of the Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. | ||
31.2 | Certification of the Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. | ||
32.1 | Certification of the Chief Executive Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith. | ||
32.2 | Certification of the Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith. |