FORM 10-Q
þ | 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 fromto | ||
ITEM 1. Unaudited, Consolidated Statements of Operations for the Three and Nine Months Ended Unaudited, Consolidated Balance Sheets as of Unaudited, Consolidated Statements of Cash Flows for the Notes to Unaudited, Consolidated Financial Statements Quantitative and Qualitative Disclosures About Market Risk Unregistered Sales of Equity Securities and Use of Proceeds Revenues: Net product revenue Net service revenue Research and development revenue Total revenues Operating costs and expenses: Cost of products sold Cost of services sold Selling, general and administrative Research and development Amortization of intangibles Contingent consideration expense Total operating costs and expenses Operating income (loss) Other income (expenses): Equity in loss of equity method investments Other Investment income Total other income Income (loss) before income taxes Benefit from (provision for) income taxes Net income (loss) Net income (loss) per share: Basic Diluted Weighted average shares outstanding: Basic Diluted The accompanying notes are an integral part of these unaudited, consolidated financial statements. ASSETS Current assets: Cash and cash equivalents Short-term investments Accounts receivable, net Inventories Other current assets Deferred tax assets Total current assets Property, plant and equipment, net Long-term investments Goodwill Other intangible assets, net Deferred tax assets-noncurrent Investments in equity securities Other noncurrent assets Total assets LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable Accrued expenses Deferred revenue Current portion of contingent consideration obligations Current portion of long-term debt and capital lease obligations Total current liabilities Long-term debt and capital lease obligations Deferred revenue-noncurrent Long-term contingent consideration obligations Other noncurrent liabilities Total liabilities Commitments and contingencies Stockholders' equity: Preferred stock, $0.01 par value Common stock, $0.01 par value Additional paid-in capital Accumulated earnings Accumulated other comprehensive income Total stockholders' equity Total liabilities and stockholders' equity The accompanying notes are an integral part of these unaudited, consolidated financial statements. Cash Flows from Operating Activities: Net income (loss) Reconciliation of net income (loss) to cash flows from operating activities: Depreciation and amortization Stock-based compensation Provision for bad debts Contingent consideration expense Equity in loss of equity method investments Deferred income tax benefit Tax benefit from employee stock-based compensation Excess tax benefit from stock-based compensation Other Increase (decrease) in cash from working capital changes (excluding impact of acquired assets and assumed liabilities): Accounts receivable Inventories Other current assets Accounts payable, accrued expenses and deferred revenue Cash flows from operating activities Cash Flows from Investing Activities: Purchases of investments Sales and maturities of investments Purchases of equity securities Proceeds from sales of investments in equity securities Purchases of property, plant and equipment Investments in equity method investment Purchases of other intangible assets Other Cash flows from investing activities Cash Flows from Financing Activities: Proceeds from issuance of common stock Repurchases of our common stock Excess tax benefits from stock-based compensation Payments of debt and capital lease obligations Decrease in bank overdrafts Payment of contingent consideration obligation Other Cash flows from financing activities Effect of exchange rate changes on cash Increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Supplemental disclosures of non-cash transactions: Strategic Transactions—Note 6. Goodwill and Other Intangible Assets—Note 8. The accompanying notes are an integral part of these unaudited, consolidated financial statements. “Corporate.” our consolidated statements of operations have been recast to reflect the presentation of discontinued operations. Renagel, Renvela and oral Hectorol, and our product Leukine, but be insignificantly impacted for our other products. 2006. For accounts receivable established between 2007 and 2009, the government of Greece will issue non-interest bearing bonds, expected to be exchange tradable, with maturities ranging from one to three years. We recorded a charge of $7.2 million to bad debt expense, a component of selling, general and administrative expenses, or SG&A, in our consolidated statements of operations for the second quarter of 2010, to write down the accounts receivable balances held by our subsidiary in Greece to present value using a 10% risk adjusted discount rate. ASU Number ASU Number Requires new disclosures and clarifies some existing disclosure requirements about fair value measurements, Issued January 2010. Effective for the first interim or annual reporting period beginning after December 15, 2009, except for the additional information in the roll forward of Level 3 investments. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim reporting periods within those fiscal years. We adopted the applicable provisions of this update, except for the additional information in the roll forward of Level 3 investments (as previously noted), in the first quarter of 2010. Besides a change in disclosure, the adoption of this update does not have a material impact on our consolidated financial statements. Update provides amendments to Subtopic 815-15, Issued March 2010. Effective at the beginning of each reporting We Update provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research and development transactions. Issued April 2010. Effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early adoption is permitted. We will adopt the provisions of this update beginning January 1, 2011. We are currently assessing the impact the provisions of this update will have, if any, on our consolidated financial statements. 16 17 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. During the Fixed income investments(1): Cash equivalents: Short-term investments: Long-term investments: Total fixed income investments Equity holdings(1): Publicly-traded equity securities Derivatives: Foreign exchange forward contracts Contingent liabilities(2): Contingent consideration obligations Total assets (liabilities) at fair value Fixed income investments(1): Cash equivalents: Short-term investments: Long-term investments: Total fixed income investments Equity holdings(1): Publicly-traded equity securities Derivatives: Foreign exchange forward contracts Contingent liabilities(2): Contingent consideration obligations Total assets (liabilities) at fair value Changes in the fair value of our Level 3 contingent consideration obligations during the Balance as of December 31, 2009 Payments Contingent consideration expense(1) Effect of foreign currency adjustments Fair value at March 31, 2010 our 2015 Notes March 31, 2010 December 31, 2009 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 were as follows (amounts in thousands): Foreign exchange forward contracts Net income (loss)—basic and diluted Shares used in computing net income (loss) per common share—basic Effect of dilutive securities(1): Stock options(2) Restricted stock units Other Dilutive potential common shares Shares used in computing net income (loss) per common share—diluted(1,2) Net income (loss) per common share: Basic Diluted Shares issuable upon exercise of outstanding options Net income (loss) Other comprehensive income (loss): Foreign currency translation adjustments Pension liability adjustments, net of tax(1) Unrealized gains (losses) on securities, net of tax: Unrealized gains (losses) arising during the period, net of tax Reclassification adjustment of gains included in net income (loss), net of tax Unrealized gains (losses) on securities, net of tax(2) Other comprehensive loss Comprehensive income (loss) Purchase of In-Process Research and Development
(State or other jurisdiction of
incorporation or organization) 06-1047163
(I.R.S. Employer Identification No.)
Cambridge, Massachusetts
(Address of principal executive offices)
02142
(Zip Code)(617) 252-7500(Registrant's telephone number, including area code)
(617) 252-7500ýþ No oýþ No o"large“large accelerated filer," "accelerated filer"” “accelerated filer” and "smaller“smaller reporting company"company” in Rule 12b-2 of the Exchange Act.ýþ Accelerated filero Non-accelerated filero Smaller reporting company o (Do not check if a smaller reporting company) Smaller reporting companyoýþApril 30,October 29, 2010: 266,868,620258,991,017"we," "us," "our"“we,” “us,” “our” and "Genzyme"“Genzyme” refer to Genzyme Corporation as a whole, and "our“our board” or “our board of directors"directors” refers to the board of directors of Genzyme Corporation.• our expectations regarding the ability of patients to increaseand/or return to normal dosing of Fabrazyme and Cerezyme based on anticipated availability of those products; • our expectations regarding the duration and amount of the continuing supply allocations of Cerezyme and Fabrazyme and our assessment of the factors that will influence those allocations; • our plans to increase bulk and fill-finish manufacturing capacity for Cerezyme, Fabrazyme and Myozyme/Lumizyme and the expected timing of receipt of regulatory approvals; • our assessment of the potential impact on our future revenues of healthcare reform legislation, including, in the United States, changes to Medicaid rebates for our products, our expected exposure to fees assessed on branded prescription drug manufacturers and possible adjustments in future periods to our estimates associated with government allowances; • our plans and expected timing for continued remediation efforts at our Allston, Massachusetts manufacturing facility, which we refer to as our Allston facility; • our expectations for sales of Renagel/Renvela and Hectorol and the anticipated factors affecting the future growth of these products, including the delay of the bundled payment system for Renagel/Renvela until 2014 and our continued evaluation of reimbursement of Hectorol under the bundled payment system; • our expectation that remediation at our Haverhill, England manufacturing facility is substantially complete and that remaining costs associated with the remediation will not be significant; • our expectations related to accounts receivable for sales to government-owned or supported healthcare facilities in Greece; • the anticipated sale of our genetic testing, diagnostic products and pharmaceutical intermediates business units and related timeframes for these transactions; • the anticipated scope and timing of our workforce reduction plan and the amount and timing of related costs; • our plans to repurchase an additional $1.0 billion of our common stock; • our assessment of competitors and potential competitors and the anticipated impact of potentially competitive products and services, including the switch by our patients to competitor’s products and generic competition, on our revenues; • our assessment of the financial impact of legal proceedings and claims on our financial position and results of operations; • the sufficiency of our cash, investments and cash flows from operations and our expected uses of cash; • our provision for potential tax audit exposures and our expectations regarding our unrecognized tax benefits; • the protection afforded by our patent rights;
2•our expectations regarding the terms of a consent decree being negotiated with the United States Food and Drug Administration, or FDA, including the potential impact on Thyrogen supply, and when those negotiations are expected to be completed;•our expectations regarding the duration and amount of the continuing supply allocations of Cerezyme and Fabrazyme and our assessment of the factors that will influence those allocations;•our plans to increase bulk and fill-finish manufacturing capacity for Cerezyme, Fabrazyme and Myozyme and the expected timing of receipt of regulatory approvals;•our assessment of the potential impact on our future revenues of healthcare reform legislation recently enacted in the United States;•our expectations regarding Myozyme/Lumizyme revenues;•our expectations for sales of Renagel/Renvela and Hectorol and the anticipated factors affecting the future growth of these products, including the proposed rule to establish a bundled payment system to reimburse dialysis providers;•our expectations that production interruption at our Haverhill, England manufacturing facility will not result in a supply constraint for Renagel/Renvela, and the expected timing of new sevelamer carbonate production;•our expectations regarding timing of regulatory approval for a new Leukine manufacturing facility;•our assessment of competitors and potential competitors and the anticipated impact of potentially competitive products and services, including generic competition, on our revenues;•our estimates of the cost to complete our research and development programs for companies and assets that we have acquired;•our assessment of the financial impact of legal proceedings and claims on our financial position and results of operations;•the sufficiency of our cash, investments and cash flows from operations and our expected uses of cash;•our provision for potential tax audit exposures and our expectations regarding our unrecognized tax benefits;•the protection afforded by our patent rights; and•our expectations regarding the amortization of intangible assets related to our expected future contingent payments due to Bayer Schering Pharma A.G., or Bayer, Synpac (North Carolina), Inc., or Synpac, and Wyeth.• our expectations regarding the application of certain accounting pronouncements and their effect on our disclosures; and • our expectations regarding the amortization of intangible assets related to our expected future contingent payments due to Bayer Schering Pharma A.G., or Bayer, Synpac (North Carolina), Inc., or Synpac, and Wyeth Pharmaceuticals (which is now a part of Pfizer Inc. and referred to as Pfizer). • the possibility that current reduced supply allocations of Fabrazyme and Cerezyme need to last longer than expected or need to be more severe than expected because third-party oversight under the consent decree we agreed to with the United States Food and Drug Administration, or FDA, results in delays in product releases, our demand forecasts and estimates are inaccurate, productivity of the new Fabrazyme working cell bank does not result in expected increased productivity as compared to the prior working cell bankand/or we experience any additional disruptions in our manufacturing processes or timeline; • the possibility that we or a third-party service provider may encounter manufacturing problems due to variety of reasons, including equipment failures, viral or bacterial contamination, cell growth at lower than expected levels, fill-finish issues, disruptions in utility services to manufacturing facilities, human error or regulatory issues; • our ability to maintain regulatory approvals for our products, services and manufacturing facilities and processes, including our Allston facility, and to obtain approval for proposed changes to enhance our manufacturing processes and new manufacturing capacity, including our new manufacturing facility in Framingham, Massachusetts for Fabrazyme and Cerezyme or an additional bioreactor for the production of Myozyme/Lumizyme in our Geel, Belgium facility, which we refer to as our Geel facility, all in the anticipated time frames; • our ability to successfully transition fill-finish operations for Cerezyme, Fabrazyme, Myozyme and Thyrogen out of our Allston facility and to our Waterford, Ireland plant and to Hospira, Inc., or Hospira, a third-party contract manufacturer, on the planned timelines because of delays in regulatory approval, manufacturing problems experienced by us or Hospira or for any other reason; • our ability to manufacture sufficient amounts of our products and maintain sufficient inventories, and to do so in a timely and cost-effective manner and the related risk that we may experience supply constraints as a result of manufacturing problems or inventory shortages; • potential future product recalls, write offs of inventory or quality holds, including as a result of product inventories failing to meet quality specifications or being subject to continuing quality review; • the extent to which Gaucher and Fabry disease patients switch to competitors’ products in place of Cerezyme or Fabrazyme or continue to reduce or limit their doses of our products even after product supply stabilizes; • the possibility that we are not able to repurchase an additional $1.0 billion under our common stock repurchase plan or that the repurchase is delayed; • the possibility that the sale of our genetic testing business to Laboratory Corporation of America Holdings, or Labcorp, may be delayed or may not be completed on the terms expected or at all due to the risks attendant to such transactions, including delays in obtaining regulatory approvals, the timing of which is determined by government authorities; • the possibility that we will not be able to complete transactions involving our diagnostic products and pharmaceutical intermediates business units on the expected timeframes or at all, including as a result of uncertainty among potential purchasers created by acquisition efforts ofSanofi-Aventis, or Sanofi; • the possibility that we are not able to achieve anticipated levels of efficiencies and cost savings or otherwise fully effect the multi-year plan to increase shareholder value that we have begun to implement;
3•the possibility that the final terms of the consent decree differ from the terms described in this report, that the negotiations with the FDA around the consent decree take longer than anticipated, or that we are unable to reach agreement with the FDA on final terms;•the possibility that we are not able to repurchase some or all of the $2.0 billion of our common stock or complete strategic transactions involving our genetic testing, diagnostic products and pharmaceutical intermediates business units in the expected timeframes or at all, or that we are not able to complete a debt financing in the expected timeframe or in the anticipated amount, or at all, due to an unfavorable credit rating, unfavorable financing terms, unfavorable credit markets generally or any other reason;•the possibility that current reduced supply allocations of Fabrazyme and Cerezyme need to last longer than expected or need to be more severe than expected because we are unable to finish work-in-process material that was in production when operations at our Allston, Massachusetts manufacturing facility, which we refer to as our Allston facility, were interrupted, third party oversight under a consent decree results in delays in product releases, our demand forecasts and estimates are inaccurate, and/or productivity of the new Fabrazyme working cell bank does not increase or we do not receive regulatory approval;•the possibility that we may encounter additional manufacturing problems due to any reason, including equipment failures, viral or bacterial contamination, cell growth at lower than expected levels, fill-finish issues, power outages, human error or regulatory issues;•our ability to maintain regulatory approvals for our products, services and manufacturing facilities and processes, including our Allston facility, and to obtain approvals in the anticipated timeframes, including FDA approval of alglucosidase alfa produced at the 4000L scale and approval for new manufacturing capacity and proposed changes to enhance our manufacturing processes;•our ability to successfully transition fill-finish operations out of our Allston facility and to our Waterford, Ireland plant and a contract manufacturer on the planned timelines because of delays in regulatory approval or for any other reason;•the possibility that we may be unable to produce new sevelamer hydrochloride and/or new sevelamer carbonate at our Haverhill, England facility in the expected time frames due to production problems or regulatory issues;•the extent to which Gaucher and Fabry disease patients switch to competitors' products in place of Cerezyme or Fabrazyme or continue to reduce their doses of our products even after product supply stabilizes;•the possibility that we may experience supply constraints for Thyrogen, and the extent of those constraints, if the FDA requires us to cease fill-finishing this product at Allston and we are not able to transfer fill-finish activities to a contract manufacturer on the planned timelines because of delays in regulatory approval or for any other reason;•our ability to manufacture sufficient amounts of our products and maintain sufficient inventories, and to do so in a timely and cost-effective manner;•the availability of reimbursement for our products and services from third party payors, the extent of such coverage and the accuracy of our estimates of the payor mix for our products;•competition from lower cost generic or biosimilar products;•the impact of legislative or regulatory changes, including implementation of the healthcare reform legislation recently enacted in the United States and the possibility that additional proposals to reduce healthcare costs may be adopted in the United States or elsewhere;•our ability and the ability of our collaboration partners to successfully complete preclinical and clinical development of new products and services within the anticipated timeframes and for anticipated indications;•regulatory authorities' views regarding the safety, efficacy and risk-benefit profiles of our new or current products and our manufacturing processes;•our ability to expand the use of current and next generation products in existing and new indications;•potential future write offs of inventory or product recalls;•our ability to obtain and maintain adequate patent and other proprietary rights protection for our products and services and successfully enforce these proprietary rights;•our reliance on third parties to provide us with materials and services in connection with the manufacture of our products;•our ability to continue to generate cash from operations and to effectively use our cash resources to grow our business;•our ability to establish and maintain strategic license, collaboration and distribution arrangements and to successfully manage our relationships with licensors, collaborators, distributors and partners;•the impact of changes in the exchange rates for foreign currencies on our product and service revenues in future periods;•the outcome of legal proceedings by or against us;•the possibility that our integration of the products and development programs acquired from Bayer may be more costly or time consuming than expected;•the outcome of our Internal Revenue Service, or IRS, and foreign tax audits;•general economic conditions; and•the possible disruption of our operations due to terrorist activities, armed conflict, severe climate change, natural disasters or outbreak of diseases, including as a result of the disruption of operations of regulatory authorities or our subsidiaries, manufacturing facilities, customers, suppliers, distributors, couriers, collaborative partners, licensees or clinical trial sites.• the availability of reimbursement for our products and services from third-party payors, the extent of such coverage and the accuracy of our estimates of the payor mix for our products; • competition from lower cost generic or biosimilar products; • the impact of legislative or regulatory changes, including implementation of the healthcare reform legislation recently enacted in the United States and the possibility that additional proposals to reduce healthcare costs may be adopted in the United States or elsewhere; • our ability and the ability of our collaboration partners to successfully complete preclinical and clinical development of new products and services within the anticipated timeframes and for anticipated indications; • regulatory authorities’ views regarding the safety, efficacy and risk-benefit profiles of our new or current products and our manufacturing processes; • our ability to expand the use of current and next generation products in existing and new indications; • our ability to obtain and maintain adequate patent and other proprietary rights protection for our products and services and successfully enforce these proprietary rights; • our reliance on third parties to provide us with materials and services in connection with the manufacture of our products; • our ability to continue to generate cash from operations and to effectively use our cash resources to grow our business; • our ability to establish and maintain strategic license, collaboration, manufacturing and distribution arrangements and to successfully manage our relationships with licensors, collaborators, manufacturers, distributors and partners; • the impact of changes in the exchange rates for foreign currencies on our product and service revenues in future periods; • the outcome of legal proceedings by or against us; • the possibility that our integration of the products and development programs acquired from Bayer may be more costly or time consuming than expected; • the outcome of our Internal Revenue Service, or IRS, and foreign tax audits; • acquisition efforts by Sanofi diverting attention of employees, requiring expenditure of substantial time and resources, and disrupting our business activities, and increasing the volatility of our stock price; • general economic conditions; and • the possible disruption of our operations due to terrorist activities, armed conflict, severe climate change, natural disasters or outbreak of diseases, including as a result of the disruption of operations of regulatory authorities or our subsidiaries, manufacturing facilities, customers, suppliers, utility providers, distributors, couriers, collaborative partners, licensees or clinical trial sites. "Risk Factors"“Risk Factors” in Management'sManagement’s Discussion and Analysis of Genzyme Corporation and Subsidiaries'Subsidiaries’ Financial Condition and Results of Operations in Part I., Item 2. of thisForm 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 thisForm 10-Q. These statements, like all statements in thisForm 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.
4"incorporated“incorporated by reference"reference” into thisForm 10-Q. Please read that information. Genzyme®Cerezyme®Cerezyme®, Fabrazyme®Fabrazyme®, Thyrogen®Thyrogen®, Myozyme®Myozyme®, Renagel®Lumizyme®, Renvela®Renagel®, Campath®Renvela®, Clolar®Campath®, Evoltra®Clolar®, Mozobil®Evoltra®, Thymoglobulin®Mozobil®, Cholestagel®Thymoglobulin®, Synvisc®Cholestagel®, Synvisc-One®Synvisc®, Sepra®,Seprafilm®Synvisc-One®, Carticel®Sepra®, Epicel®Seprafilm®, MACI®Carticel®, Epicel®, MACI®, Hectorol® and Hectorol®Jonexa® are registered trademarks, and Lumizyme™ and Jonexa™ are trademarks of Genzyme or its subsidiaries. Welchol®Welchol® is a registered trademark of Sankyo Pharma, Inc. Aldurazyme®Aldurazyme® is a registered trademark of BioMarin/Genzyme LLC. Elaprase®Elaprase® is a registered trademark of Shire Human Genetic Therapies, Inc. Prochymal®Prochymal® and Chondrogen®Chondrogen® are registered trademarks of Osiris Therapeutics, Inc. Fludara®Fludara® and Leukine®Leukine® are registered trademarks licensed to Genzyme. All other trademarks referred to in thisForm 10-Q are the property of their respective owners. All rights reserved.
5 MARCH 31, SEPTEMBER 30, 2010PAGE NO.PART I. Page No. PART I. FINANCIAL INFORMATION
FINANCIAL INFORMATION7 Financial Statements
Financial Statements7 March 31,September 30, 2010 and 20097 7March 31,September 30, 2010 and December 31, 20098 8ThreeNine Months Ended March 31,September 30, 2010 and 20099 910 ITEM 2. 10ITEM 2.Management'sManagement’s Discussion and Analysis of Genzyme Corporation and Subsidiaries'Subsidiaries’ Financial Condition and Results of Operations52 ITEM 3. 37ITEM 3.104 ITEM 4. 83Controls and Procedures104 ITEM 4. PART II. Controls and Procedures 83OTHER INFORMATION105 PART II. ITEM 1. OTHER INFORMATION 84Legal Proceedings105 ITEM 1. ITEM 1A. Legal Proceedings 84Risk Factors110 ITEM 1A. ITEM 2. Risk Factors 85ITEM 2.110 ITEM 6. 85Exhibits110 Signatures ITEM 6.Exhibits 85111 SignaturesEX-31.1EX-31.2 EX-32.1 86EX-32.2EX-101 INSTANCE DOCUMENT EX-101 SCHEMA DOCUMENT EX-101 CALCULATION LINKBASE DOCUMENT EX-101 LABELS LINKBASE DOCUMENT EX-101 PRESENTATION LINKBASE DOCUMENT EX-101 DEFINITION LINKBASE DOCUMENT ITEM 1. FINANCIAL STATEMENTS Three Months Ended Nine Months Ended September 30, September 30, 2010 2009 2010 2009 Revenues: Net product sales $ 991,547 $ 911,894 $ 2,862,179 $ 2,987,428 Net service sales 9,608 10,480 32,170 32,658 Research and development revenue 645 1,392 2,506 18,912 Total revenues 1,001,800 923,766 2,896,855 3,038,998 Operating costs and expenses: Cost of products sold 301,866 271,966 833,959 752,371 Cost of services sold 7,407 7,916 22,515 21,841 Selling, general and administrative 337,883 323,513 1,203,918 904,024 Research and development 207,051 215,925 645,187 608,935 Amortization of intangibles 61,761 68,078 194,327 183,270 Contingent consideration expense (3,134 ) 28,197 69,436 37,287 Total operating costs and expenses 912,834 915,595 2,969,342 2,507,728 Operating income (loss) 88,966 8,171 (72,487 ) 531,270 Other income (expenses): Equity in loss of equity method investments (643 ) — (2,210 ) — Gains (losses) on investments in equity securities, net 4,648 (651 ) (26,750 ) (1,332 ) Gain on acquisition of business — — — 24,159 Other (385 ) 614 (643 ) (2,347 ) Investment income 2,403 4,543 8,787 14,038 Interest expense (3,358 ) — (3,358 ) — Total other income (expenses) 2,665 4,506 (24,174 ) 34,518 Income (loss) from continuing operations before income taxes 91,631 12,677 (96,661 ) 565,788 Benefit from (provision for) income taxes (17,385 ) 965 58,493 (160,305 ) Income (loss) from continuing operations, net of tax 74,246 13,642 (38,168 ) 405,483 Income (loss) from discontinued operations, net of tax (5,292 ) 2,353 (11,599 ) (6,428 ) Net income (loss) $ 68,954 $ 15,995 $ (49,767 ) $ 399,055 Net income (loss) per share-basic: Income (loss) from continuing operations, net of tax $ 0.29 $ 0.05 $ (0.15 ) $ 1.50 Income (loss) from discontinued operations, net of tax (0.02 ) 0.01 (0.04 ) (0.02 ) Net income (loss) $ 0.27 $ 0.06 $ (0.19 ) $ 1.48 Net income (loss) per share-diluted: Income (loss) from continuing operations, net of tax $ 0.28 $ 0.05 $ (0.15 ) $ 1.47 Income (loss) from discontinued operations, net of tax (0.02 ) 0.01 (0.04 ) (0.02 ) Net income (loss) $ 0.26 $ 0.06 $ (0.19 ) $ 1.45 Weighted average shares outstanding: Basic 255,359 268,957 262,293 269,923 Diluted 263,786 273,741 262,293 275,375 Three Months Ended
March 31, 2010 2009 $ 971,625 $ 1,037,244 101,915 101,499 933 10,128 1,074,473 1,148,871 279,739 235,562 65,872 60,250 553,310 317,961 220,930 206,925 70,984 57,598 62,549 — 1,253,384 878,296 (178,911 ) 270,575 (697 ) — (439 ) (1,555 ) 3,300 5,350 2,164 3,795 (176,747 ) 274,370 61,799 (78,884 ) $ (114,948 ) $ 195,486 $ (0.43 ) $ 0.72 $ (0.43 ) $ 0.70 266,251 270,854 266,251 277,628 September 30, December 31, 2010 2009 Current assets: Cash and cash equivalents $ 899,165 $ 742,246 Short-term investments 101,961 163,630 Accounts receivable, net 935,194 793,556 Inventories 596,730 549,293 Assets held for sale 148,746 170,367 Other current assets 224,397 205,284 Deferred tax assets 184,662 178,427 Total current assets 3,090,855 2,802,803 Property, plant and equipment, net 2,866,947 2,627,231 Long-term investments 165,385 143,824 Goodwill 1,360,978 1,360,978 Other intangible assets, net 1,859,412 2,264,148 Deferred tax assets-noncurrent 590,763 376,815 Investments in equity securities 64,961 74,438 Assets held for sale-noncurrent 293,504 274,039 Other noncurrent assets 126,316 136,448 Total assets $ 10,419,121 $ 10,060,724 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 172,050 $ 174,880 Accrued expenses 966,603 657,833 Deferred revenue 38,867 23,930 Current portion of contingent consideration obligations 162,863 161,365 Current portion of long-term debt and capital lease obligations 7,420 6,916 Liabilities held for sale 63,593 55,206 Total current liabilities 1,411,396 1,080,130 Long-term debt and capital lease obligations 1,100,777 111,836 Deferred revenue-noncurrent 21,643 13,385 Long-term contingent consideration obligations 803,500 853,871 Liabilities held for sale-noncurrent — 4,598 Other noncurrent liabilities 80,568 313,252 Total liabilities 3,417,884 2,377,072 Commitments and contingencies Stockholders’ equity: Preferred stock, $0.01 par value — — Common stock, $0.01 par value 2,573 2,657 Additional paid-in capital 5,354,075 5,688,741 Share purchase contract (200,000 ) — Accumulated earnings 1,620,329 1,670,096 Accumulated other comprehensive income 224,260 322,158 Total stockholders’ equity 7,001,237 7,683,652 Total liabilities and stockholders’ equity $ 10,419,121 $ 10,060,724 March 31,
2010 December 31,
2009 $ 643,337 $ 742,246 162,011 163,630 904,102 899,731 608,642 608,022 310,626 210,747 181,318 178,427 2,810,036 2,802,803 2,824,099 2,809,349 156,351 143,824 1,404,153 1,403,363 2,032,449 2,313,262 401,370 376,815 79,881 74,438 146,456 136,870 $ 9,854,795 $ 10,060,724 $ 175,764 $ 189,629 870,460 696,223 32,585 24,747 158,493 161,365 8,407 8,166 1,245,709 1,080,130 113,389 116,434 12,870 13,385 875,184 853,871 80,415 313,252 2,327,567 2,377,072 — — 2,665 2,657 5,770,283 5,688,741 1,555,148 1,670,096 199,132 322,158 7,527,228 7,683,652 $ 9,854,795 $ 10,060,724 Nine Months Ended September 30, 2010 2009 Net income (loss) $ (49,767 ) $ 399,055 Reconciliation of net income (loss) to cash flows from operating activities: Depreciation and amortization 371,010 329,359 Stock-based compensation 142,054 156,141 Provision for bad debts 16,495 14,700 Contingent consideration expense 69,436 37,287 Equity in loss of equity method investments 2,210 — Gain on acquisition of business — (24,159 ) Losses on investments in equity securities, net 26,750 1,332 Deferred income tax benefit (95,550 ) (74,949 ) Tax benefit from employee stock-based compensation 47,982 10,956 Excess tax benefit from stock-based compensation 15,481 (3,309 ) Other 4,141 8,517 Increase (decrease) in cash from working capital changes (excluding impact of acquired assets and assumed liabilities): Accounts receivable (162,618 ) 53,044 Inventories (61,806 ) 20,539 Other current assets (77,762 ) (12,301 ) Accounts payable, accrued expenses and deferred revenue 315,890 40,369 Cash flows from operating activities 563,946 956,581 Purchases of investments (305,784 ) (244,208 ) Sales and maturities of investments 341,089 336,918 Purchases of equity securities (4,724 ) (7,548 ) Proceeds from sales of investments in equity securities 14,208 2,365 Purchases of property, plant and equipment (497,932 ) (480,436 ) Investments in equity method investment (2,915 ) — Acquisitions — (57,238 ) Purchases of other intangible assets (6,340 ) (29,838 ) Other (9,441 ) (7,096 ) Cash flows from investing activities (471,839 ) (487,081 ) Proceeds from issuance of common stock 274,469 76,125 Repurchases of our common stock (800,000 ) (413,874 ) Payments under share purchase contract (200,000 ) — Excess tax benefits from stock-based compensation (15,481 ) 3,309 Proceeds from issuance of debt, net 994,368 — Payments of debt and capital lease obligations (6,245 ) (5,908 ) Decrease in bank overdrafts (43,373 ) (17,552 ) Payment of contingent consideration obligation (100,168 ) — Other (2,283 ) (5,237 ) Cash flows from financing activities 101,287 (363,137 ) Effect of exchange rate changes on cash (36,475 ) 1,090 Increase (decrease) in cash and cash equivalents 156,919 107,453 Cash and cash equivalents at beginning of period 742,246 572,106 Cash and cash equivalents at end of period $ 899,165 $ 679,559 Supplemental disclosures of non-cash transactions: Strategic Transactions — Note 7 Goodwill and Other Intangible Assets — Note 9 Long-Term Debt — Note 12 Three Months Ended
March 31, 2010 2009 $ (114,948 ) $ 195,486 122,688 98,958 47,671 44,560 2,449 5,762 62,549 — 697 — (32,679 ) (24,376 ) 3,624 6,549 480 (3,492 ) 2,663 2,814 (31,463 ) (59,210 ) (28,225 ) 818 (48,640 ) (22,659 ) 139,598 12,565 126,464 257,775 (120,119 ) (13,292 ) 105,796 75,058 (3,302 ) (4,870 ) 3,077 1,264 (152,220 ) (161,561 ) (1,466 ) — (5,885 ) (8,056 ) (10,547 ) (47 ) (184,666 ) (111,504 ) 30,075 34,526 — (107,134 ) (480 ) 3,492 (3,092 ) (2,653 ) (20,728 ) (3,392 ) (31,600 ) — 116 1,995 (25,709 ) (73,166 ) (14,998 ) (1,773 ) (98,909 ) 71,332 742,246 572,106 $ 643,337 $ 643,438 1. Description of Business •Personalized Genetic Health, which develops, manufactures and distributes therapeutic products with a focus on products to treat patients suffering from genetic diseases and other chronic debilitating diseases, including a family of diseases known as lysosomal storage disorders, or LSDs, and cardiovascular disease. The unit derives substantially all of its revenue from sales of Cerezyme, Fabrazyme, Myozyme, Aldurazyme and Elaprase and royalties earned on sales of Welchol;•Renal and Endocrinology, which develops, manufactures and distributes products that treat patients suffering from renal diseases, including chronic renal failure, and endocrine and immune-mediated diseases. The unit derives substantially all of its revenue from sales of Renagel/Renvela (including sales of bulk sevelamer), Hectorol and Thyrogen;•Biosurgery, which develops, manufactures and distributes biotherapeutics and biomaterial-based products, with an emphasis on products that meet medical needs in the orthopaedics and broader surgical areas. The unit derives substantially all of its revenue from sales of Synvisc/Synvisc-One and the Sepra line of products;•Hematology and Oncology, which develops, manufactures and distributes products for the treatment of cancer, the mobilization of hematopoietic stem cells and the treatment of transplant rejection and other hematologic and auto-immune disorders. The unit derives substantially all of its revenue from sales of Mozobil, Thymoglobulin, Clolar, Campath, Fludara and Leukine; and•Multiple Sclerosis, which is developing a product for the treatment of MS.• Personalized Genetic Health, which develops, manufactures and distributes therapeutic products with a focus on products to treat patients suffering from genetic diseases and other chronic debilitating diseases, including a family of diseases known as lysosomal storage disorders, or LSDs, and cardiovascular disease. The unit derives substantially all of its revenue from sales of Cerezyme, Fabrazyme, Myozyme/Lumizyme, Aldurazyme and Elaprase and royalties earned on sales of Welchol; • Renal and Endocrinology, which develops, manufactures and distributes products that treat patients suffering from renal diseases, including chronic renal failure, and endocrine and immune-mediated diseases. The unit derives substantially all of its revenue from sales of Renagel/Renvela (including sales of bulk sevelamer), Hectorol and Thyrogen; • Biosurgery, which develops, manufactures and distributes biotherapeutics and biomaterial-based products, with an emphasis on products that meet medical needs in the orthopaedics and broader surgical areas. The unit derives substantially all of its revenue from sales of Synvisc/Synvisc-One and the Sepra line of products; • Hematology and Oncology, which develops, manufactures and distributes products for the treatment of cancer, the mobilization of hematopoietic stem cells and the treatment of transplant rejection and other hematologic and auto-immune disorders. The unit derives substantially all of its revenue from sales of Mozobil, Thymoglobulin, Clolar, Campath, Fludara and Leukine; and • Multiple Sclerosis, which is developing products, including alemtuzumab, for the treatment of MS and other auto-immune disorders. •our former Genetic Diseases reporting segment is now referred to as "Personalized Genetic Health," or "PGH," and now includes our cardiovascular business unit, which previously was reported under the caption "Cardiometabolic and Renal," and our Welchol product line, which previously was reported as part of our bulk pharmaceuticals business unit under the caption "Other;"•our former Cardiometabolic and Renal reporting segment is now referred to as "Renal and Endocrinology" and now includes our immune-mediated diseases business unit, which previously was reported under the caption "Other," but no longer includes our cardiovascular business unit; andGENZYME CORPORATION AND SUBSIDIARIESNotes to Unaudited, Consolidated Financial Statements (Continued)1. Description of Business (Continued)•our former Hematologic Oncology segment is now referred to as "Hematology and Oncology" and now includes our transplant business unit, which previously was reported under the caption "Other," but no longer includes our MS business unit, which is now reported as a separate reporting segment called "Multiple Sclerosis."• our former Genetic Diseases reporting segment is now referred to as “Personalized Genetic Health,” or “PGH,” and now includes our cardiovascular business unit, which previously was reported under the caption “Cardiometabolic and Renal,” and our Welchol product line, which previously was reported as part of our pharmaceutical intermediates business unit under the caption “Other;” • our former Cardiometabolic and Renal reporting segment is now referred to as “Renal and Endocrinology” and now includes the assets that formerly comprised our immune-mediated diseases business unit, which previously was reported under the caption “Other,” but no longer includes our cardiovascular business unit; and • our former Hematologic Oncology segment is now referred to as “Hematology and Oncology” and now includes our transplant business unit, which previously was reported under the caption “Other,” but no longer includes our MS business unit, which is now reported as a separate reporting segment called “Multiple Sclerosis.” "Other"“Other”: our genetic testing business unit, which provides testing services for the oncology, prenatal and reproductive markets; and our
10"Corporate." On 6, 2010, we announced that weour plan to pursue strategic alternatives for our genetic testing, diagnostic products and pharmaceutical intermediates business units. Options could include divestiture, spin-out or management buy-out. In 2009,On September 13, 2010, we entered into an agreement with Labcorp to sell our genetic testing business unit had revenueto Labcorp for $925.0 million in cash, subject to a working capital adjustment. Completion of approximately $371 millionthe transaction is subject to customary closing conditions, including expiration or termination of an applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and revenueis expected to occur in the fourth quarter of 2010. Transactions for our diagnostic products and pharmaceutical intermediates business units are targeted for the end of 2010.was approximately $167 million. We expect thesefor which we have entered into an agreement to sell, and positions within our diagnostic products and pharmaceutical intermediates business units, for which similar transactions are targeted by the end of 2010. The workforce reduction plan is being implemented to be completedreduce costs and increase efficiencies as part of a larger plan to increase shareholder value announced in May 2010.
112. Basis of Presentation and Significant Accounting Policies and Significant Accounting PoliciesBasis of PresentationPart II., Item 8.Exhibit 99 to our 2009 Form 10-K.8-K filed with the SEC on June 14, 2010. 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, 2009 that is included in thisForm 10-Q was derived from our audited financial statements but does not include all disclosures required by U.S. GAAP.All intercompany accountsFrom January 1, 2008 to December 31, 2009, we consolidated the results of BioMarin/Genzyme LLC, an entity we formed with BioMarin Pharmaceutical Inc., or BioMarin, in 1998, because we determined that we were the primary beneficiary of BioMarin/Genzyme LLC. Upon consolidation of the entity, we recorded the assets and transactionsliabilities of BioMarin/Genzyme LLC in our consolidated balance sheets at fair value. Effective January 1, 2010, in accordance with new guidance we adopted for consolidating variable interest entities, we no longer consolidate the results of BioMarin/Genzyme LLC because we determined that the entity does not have a primary beneficiary under the new guidance. As a result, we deconsolidated BioMarin/Genzyme LLC and no longer record the assets and liabilities in our consolidated balance sheets. Instead, effective January 1, 2010, we began to record our portion of BioMarin/Genzyme LLC’s results in equity in loss of equity method investments in our consolidated statements of operations.eliminatedclassified as held for sale in consolidation.Tablethe accompanying consolidated balance sheets and depreciation and amortization of Contentsthe applicable assets ceased as of such date. In addition, as no significant involvement or continuing cash flows are expected from, or to be provided to, the genetic testing and diagnostic products businesses following the consummation of a sale transaction, both businesses have been reported as discontinued operations in our consolidated statements of operations.
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GENZYME CORPORATION AND SUBSIDIARIES2. BasisPresentationassets held for sale and Significant Accounting Policies (Continued)Recognition—Recognition — Recent Healthcare Reform Legislation•an increase in the minimum Medicaid rebate to states participating in the Medicaid program from 15.1% to 23.1% on our branded prescription drugs and an increase of 17.1% for our drugs that are approved exclusively for pediatric patients;•the extension of the Medicaid rebate to managed care organizations that dispense drugs to Medicaid beneficiaries;•the expansion of the 340(B) Public Health Services, or PHS, drug pricing program, which provides outpatient drugs at reduced rates, to include additional hospitals and healthcare centers (this provision, however, does not apply to orphan drugs); and•a requirement that the Medicaid rebate for a drug that is a "line extension" of a preexisting oral solid dosage form of the drug be linked in certain respects to the Medicaid rebate for the preexisting oral solid dosage form, such that the Medicaid rebate for most line extension drugs will be higher than it would have been absent the new law, especially if the preexisting oral solid dosage form has a history of significant price increases.These provisions did not have a significant impact on our results of operations or financial position for the first quarter of 2010.• an increase in the minimum Medicaid rebate to states participating in the Medicaid program from 15.1% to 23.1% on branded prescription drugs and an increase from 15.1% to 17.1% for drugs that are approved exclusively for pediatric patients; • the extension of the Medicaid rebate to managed care organizations that dispense drugs to Medicaid beneficiaries; • the expansion of the 340(B) Public Health Services, or PHS, drug pricing program, which provides outpatient drugs at reduced rates, to include additional hospitals and healthcare centers (this provision, however, does not apply to orphan drugs); and • a requirement that the Medicaid rebate for a drug that is a “line extension” of a preexisting oral solid dosage form of the drug be linked in certain respects to the Medicaid rebate for the preexisting oral solid dosage form, such that the Medicaid rebate for most line extension drugs will be higher than it would have been absent the new law, especially if the preexisting oral solid dosage form has a history of significant price increases. consequently, theour injected/infused drugs, and such that Medicaid rebaterebates are expected to increase for some of our oral drugs, in particular those that offer discounted pricing to customers."donut“donut hole."” Also beginning in 2011, clinical laboratory fee schedule payments will be reduced by 1.75% over a period of five years and we will be required to pay our share of a new fee assessed on all branded prescription drug manufacturers and importers. This fee will be calculated based upon each organization'sorganization’s percentage share of total branded prescription drug sales to U.S. government programs (such as Medicare and Medicaid, the Department of Veterans Affairs, or VA, the Department of Defense, or DOD, and the TriCare retail pharmacy discount programs) made during the previous year. Sales of orphan drugs, however, are not included in the fee calculation. Final guidance relating to how we will be required to account for this fee is still pending, however, it is expected that the fee will be classified as either a reduction to net sales or an operating expense. The aggregated industry wide fee is expected to total approximately $28 billion through 2019, ranging from $2.5 billion to $4.1 billion annually. Beginning in 2013, a 2.3% excise tax will be imposed on sales of all medical devices except retail purchases by the public intended for individual use.Contentsreserves, held by our subsidiary in Greece related to sales to government-owned or supported healthcare facilities in Greece of approximately $65 million as of September 30, 2010 and approximately $57 million as of December 31, 2009. Payment of these accounts is subject to significant delays due to government funding and reimbursement practices. We believe that this is an industry-wide issue for suppliers to these facilities. In May 2010, the government of
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GENZYME CORPORATION AND SUBSIDIARIES2. BasisPresentationits debt to international pharmaceutical companies, which calls for immediate payment of accounts receivable balances that were established in 2005 and Significant Accounting Policies (Continued)•time vesting stock options; and•performance and market vesting awards, tied to the achievement of pre-established performance and market goals over a three-year performance period.• time vesting stock options; and • performance and market vesting awards, tied to the achievement of pre-established performance and market goals over a three-year performance period. executive'sexecutive’s grant consists of time vesting stock options with the remainder in PSUs. Grants under our former long-term incentive program were comprised of time vesting stock options and time vesting RSUs.• stock option grants are estimated as of the date of grant using a Black-Scholes option valuation model. The estimated fair values of the stock options, including the effect of estimated forfeitures, are then expensed over the options’ vesting periods; • time vesting RSUs are based on the market value of our stock on the date of grant. Compensation expense for time vesting RSUs is recognized over the applicable service period, adjusted for the effect of estimated forfeitures; and • PSUs subject to the cash flow return on investment performance metric, which includes both performance and service conditions, are estimated based on the market value of our stock on the date of grant. PSUs subject to the relative total shareholder return, or R-TSR performance metric, which includes both market and service conditions, are estimated using a lattice model with a Monte Carlo simulation. Compensation expense associated with our PSUs is initially based upon the number of shares expected to vest after assessing the probability that certain performance criteria will be met and the associated targeted payout level that is forecasted will be achieved, net of estimated forfeitures.
14•stock option grants are estimated as of the date of grant using a Black-Scholes option valuation model. The estimated fair values of the stock options, including the effect of estimated forfeitures, are then expensed over the options' vesting periods;•time vesting RSUs are based on the market value of our stock on the date of grant. Compensation expense for time vesting RSUs is recognized over the applicable service period, adjusted for the effect of estimated forfeitures; and•PSUs with both performance and service conditions are estimated based on the market value of our stock on the date of grant. The fair values of our PSUs with both market and service conditions are estimated as of the date of grant using a lattice model with a Monte Carlo simulation. Compensation expense associated with our PSUs is initially based upon the number of shares expected to vest after assessing the probability that certain performance criteria will be met and the associated targeted payout level that is forecasted will be achieved, net of estimated forfeitures. Compensation expense for our PSUs is recognized over the applicable performance period, adjusted for the effect of estimated forfeitures.
GENZYME CORPORATION AND SUBSIDIARIES2. Basis of Presentation and Significant Accounting Policies (Continued)Compensation expense for our PSUs is recognized over the applicable performance period, adjusted for the effect of estimated forfeitures. Codification™Codificationtm, or ASC, are communicated through Accounting Standards Updates, or ASUs. The following table shows FASB ASUs recently issued that could affect our disclosures and our position for adoption:ASU NumberRelevant Requirements of ASUIssued Date/Our Effective DatesStatusof ASU Dates Status "Multiple-Deliverable “Multiple-Deliverable Revenue Arrangements—Arrangements — a consensus of the FASB Emerging Issues Task Force."” Establishes the accounting and reporting guidance for arrangements under which a vendor will perform multiple revenue-generating activities. Specifically, the provisions of this update address how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting. Issued October 2009. Effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. We will adopt the provisions of this update for the first quarter of 2011. We are currently assessing the impact the provisions of this update will have, if any, on our consolidated financial statements. 2009-17 "Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities." Consists of amendments to ASC 810, "Consolidation," which change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting should be consolidated. This is based on, among other things, an entity's purpose and design and a company's ability to direct the activities of the entity that most significantly impact the entity's economic performance. Issued December 2009. Effective for the first interim or annual reporting period after December 15, 2009. We adopted the provisions of this update in the first quarter of 2010. The provisions of this update did not have any impact on our consolidated financial statements, other than for our interest in BioMarin/Genzyme LLC, as discussed in Note 9., "Investment in BioMarin/Genzyme LLC," below.
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GENZYME CORPORATION AND SUBSIDIARIES2. Basis of Presentation and Significant Accounting Policies (Continued)ASU NumberRelevant Requirements of ASUIssued Date/Our Effective DatesStatusof ASU Dates Status "Improving “Improving Disclosures about Fair Value Measurements."” codified within ASC 820, "Fair Value Measurements and Disclosures," including significant transfers into and out of Level 1 and Level 2 investments of the fair value hierarchy. Also requires additional information in the roll forward of Level 3 investments including presentation of purchases, sales, issuances, and settlements on a gross basis. Further clarification for existing disclosure requirements provides for the disaggregation of assets and liabilities presented, and the enhancement of disclosures around inputs and valuation techniques. During the three months ended March 31, 2010, noneNone of our instruments were reclassified between Level 1, Level 2 or Level 3. "Scope “Scope Exception Related to Embedded Credit Derivatives."” "“Derivatives and Hedging—Hedging — Embedded Derivatives, "”to clarify the scope exception for embedded credit derivative features related to the transfer of credit risk in the form of subordination of one financial instrument to another. entity'sentity’s first fiscal quarter beginning after June 15, 2010. Early adoption is permitted at the beginning of each reporting entity'sentity’s first fiscal quarter beginning after issuance of this update. will adopthave adopted the provisions of this update forin the third quarter of 2010. We are currently assessing theThe adoption of these provisions does not have a material impact the provisions of this update will have, if any, on our consolidated financial statements. "Milestone “Milestone Method of Revenue Recognition—Recognition — a consensus of the FASB Emerging Issues Task Force."”
GENZYME CORPORATION AND SUBSIDIARIESRelevant Requirements Issued Date/Our Effective ASU Number of ASU Dates Status Update amends existing guidance by requiring disaggregated disclosures about the credit quality of our financing receivables and our allowance for credit losses. These disclosures will provide the user with additional information about the nature of credit risks inherent in our financing receivables, how we analyze and assess credit risk in determining our allowance for credit losses, and the reasons for any changes we may make in our allowance for credit losses. Issued July 2010. Generally effective for interim and annual reporting periods ending on or after December 15, 2010, however, certain aspects of the update pertaining to activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. We will adopt the provisions of this update beginning in the fourth quarter of 2010 or, for activity that occurs during a reporting period, the first quarter of 2011. Besides an increase in disclosures, we don’t believe that this update will materially impact our consolidated financial statements. Update requires the measurement basis used in the disclosure of charity care to be cost and that cost be identified as the direct and indirect costs of providing the charity care. Disclosure of the method used to identify or determine direct and indirect costs must be disclosed. Existing guidance does not prescribe a specific measurement basis of charity care for disclosure purposes. This would improve U.S. GAAP by requiring all entities to use the same measurement basis, which will enhance comparability. Issued August 2010. Effective for fiscal years beginning after December 15, 2010 and should be applied retrospectively to all periods presented. Early adoption is permitted. We will adopt the provisions of this update beginning January 1, 2011. We are currently assessing the impact the provisions of this update will have, if any, on our consolidated financial statements. 3. Held for Sale and Discontinued Operations 3. Fair Value Measurements Three Months Ended Nine Months Ended September 30, September 30, 2010 2009 2010 2009 Total revenues $ 126,848 $ 133,748 $ 385,707 $ 395,897 Income (loss) before income taxes $ (15,279 ) $ 3,840 $ (27,461 ) $ (8,456 ) Benefit from (provision for) income taxes 9,987 (1,487 ) 15,862 2,028 Income (loss) from discontinued operations, net of tax $ (5,292 ) $ 2,353 $ (11,599 ) $ (6,428 ) September 30, December 31, 2010 2009 Accounts receivable, net $ 84,800 $ 106,175 Inventories 60,075 58,729 Other current assets 3,871 5,463 Total assets held for sale-current $ 148,746 $ 170,367 Property, plant and equipment, net $ 209,146 $ 182,118 Goodwill, net 42,927 42,386 Other intangible assets, net 41,090 49,113 Other noncurrent assets 341 422 Total assets held for sale-noncurrent $ 293,504 $ 274,039 Accounts payable $ 18,053 $ 14,749 Accrued expenses 40,828 39,207 Current portion of debt and capital leases(1) 4,712 1,250 Liabilities held for sale-current $ 63,593 $ 55,206 Long-term debt(1) $ — $ 4,598 Liabilities held for sale-noncurrent $ — $ 4,598 (1) In July 2005, as a result of our acquisition of Equal Diagnostics, Inc., or Equal Diagnostics, we issued promissory notes to the three former shareholders of Equal Diagnostics totaling $10.0 million in principal and interest. The promissory notes were payable over eight years in equal annual installments commencing in March 2007, and ending in March 2014. We were also obligated to make additional cash payments during this period, which we refer to as contingent additional consideration, or CAC, to the three former shareholders based upon the gross margin of the acquired business, as defined by the purchase agreement. In October 2010, we entered an agreement with the three former shareholders of Equal Diagnostics to accelerate payment in full of the notes and estimated CAC. The total payment amount was $7.1 million, which included $4.7 million in principal and interest on the promissory notes and $2.4 million in CAC.
184. Fair Value Measurements •fixed income investments;•investments in publicly-traded equity securities;•derivatives; and•contingent consideration obligations.• fixed income investments; • investments in publicly-traded equity securities; • derivatives; and • contingent consideration obligations. Measurement—Measurement — Definition and Hierarchy"exit price"“exit price”) in an orderly transaction between market participants at the measurement date. In determining fair value, we are permitted to use various valuation approaches, including market, income and cost approaches. We are required to follow an established fair value 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.•Level 1—These valuations are based on a "market approach" using quoted prices in active markets for identical assets. Valuations of these products do not require a significant degree of judgment. Assets utilizing Level 1 inputs include money market funds, U.S. government securities, bank deposits and exchange-traded equity securities.•Level 2—These valuations are based primarily on a "market approach" using quoted prices in markets that are not very active, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. Fixed income assets utilizing Level 2 inputs include U.S. agency securities, including direct issuance bonds and mortgage-backed securities, asset-backed securities, corporate bonds and commercial paper. Derivative securities utilizing Level 2 inputs include forward foreign-exchange contracts.•Level 3—These valuations are based on various approaches using inputs that are unobservable and significant to the overall fair value measurement. Certain assets and liabilities are classified within Level 3 of the fair value hierarchy because they have unobservable value drivers and therefore have little or no transparency. The fair value measurement of the contingent consideration obligations related to the acquisition from Bayer is valued using Level 3 inputs.• Level 1 — These valuations are based on a “market approach” using quoted prices in active markets for identical assets. Valuations of these products do not require a significant degree of judgment. Assets utilizing Level 1 inputs include money market funds, U.S. government securities, bank deposits and exchange-traded equity securities. • Level 2 — These valuations are based primarily on a “market approach” using quoted prices in markets that are not very active, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. Fixed income assets utilizing Level 2 inputs include U.S. agency securities, including direct issuance bonds and mortgage-backed securities, asset-backed securities, corporate bonds and commercial paper. Derivative securities utilizing Level 2 inputs include foreign exchange forward contracts. • Level 3 — These valuations are based on various approaches using inputs that are unobservable and significant to the overall fair value measurement. Certain assets and liabilities are classified within Level 3 of the fair value hierarchy because they have unobservable value drivers and therefore have little or no transparency. The fair value measurement of the contingent consideration obligations related to our acquisition of certain assets from Bayer, in 2009, is valued using Level 3 inputs. GENZYME CORPORATION AND SUBSIDIARIESNotes to Unaudited, Consolidated Financial Statements (Continued)3. Fair Value Measurements (Continued)threenine months ended March 31,September 30, 2010, none of our instruments were reclassified between Level 1, Level 2 or Level 3.
19March 31,September 30, 2010 and December 31, 2009 (amounts in thousands): Balance as of September 30, Description 2010 Level 1 Level 2 Level 3 Fixed income investments(1): Cash equivalents: Money market funds/other $ 814,503 $ 814,503 $ — $ — Short-term investments: U.S. Treasury notes 13,374 13,374 — — Non U.S. Governmental notes 6,754 — 6,754 — U.S. agency notes 23,926 — 23,926 — Corporate notes — global 36,423 — 36,423 — Commercial paper 21,484 — 21,484 — Total 101,961 13,374 88,587 — Long-term investments: U.S. Treasury notes 70,391 70,391 — — Non U.S. Governmental notes 1,511 — 1,511 — U.S. agency notes 26,490 — 26,490 — Corporate notes — global 66,993 — 66,993 — Total 165,385 70,391 94,994 — Total fixed income investments 1,081,849 898,268 183,581 — Equity holdings(1): Publicly-traded equity securities 29,385 29,385 — — Derivatives: Foreign exchange forward contracts 230 — 230 — Contingent liabilities(2): Contingent consideration obligations (966,363 ) — — (966,363 ) Total assets (liabilities) at fair value $ 145,101 $ 927,653 $ 183,811 $ (966,363 ) Balance as of December 31, Description 2009 Level 1 Level 2 Level 3 Fixed income investments(1): Cash equivalents: Money market funds/other $ 603,109 $ 603,109 $ — $ — Short-term investments: U.S. Treasury notes 41,040 41,040 — — Non U.S. Governmental notes 4,114 — 4,114 — U.S. agency notes 56,810 — 56,810 — Corporate notes — global 54,825 — 54,825 — Commercial paper 6,841 — 6,841 — Total 163,630 41,040 122,590 — Long-term investments: U.S. Treasury notes 29,793 29,793 — — Non U.S. Governmental notes 4,873 — 4,873 — U.S. agency notes 28,015 — 28,015 — Corporate notes — global 81,143 — 81,143 — Total 143,824 29,793 114,031 — Total fixed income investments 910,563 673,942 236,621 — Equity holdings(1): Publicly-traded equity securities 40,380 40,380 — — Derivatives: Foreign exchange forward contracts 4,284 — 4,284 — Contingent liabilities(2): Contingent consideration obligations (1,015,236 ) — — (1,015,236 ) Total assets (liabilities) at fair value $ (60,009 ) $ 714,322 $ 240,905 $ (1,015,236 ) (1) Changes in the fair value of our fixed income investments and investments in publicly-traded equity securities are recorded in accumulated other comprehensive income, a component of stockholders’ equity, in our consolidated balance sheets. (2) Changes in the fair value of our contingent consideration obligations are recorded as contingent consideration expense, a component of operating expenses in our consolidated statements of operations. We recorded a total of $69.4 million of contingent consideration
20Description Balance as of
March 31,
2010 Level 1 Level 2 Level 3 Money market funds/other $ 534,143 $ 534,143 $ — $ — U.S. Treasury notes 30,420 30,420 — — Non U.S. Governmental notes 7,229 — 7,229 — U.S. agency notes 62,393 — 62,393 — Corporate notes—global 60,969 — 60,969 — Commercial paper 1,000 — 1,000 — Total 162,011 30,420 131,591 — U.S. Treasury notes 66,179 66,179 — — Non U.S. Governmental notes 1,624 — 1,624 — U.S. agency notes 16,906 — 16,906 — Corporate notes—global 71,642 — 71,642 — Total 156,351 66,179 90,172 — 852,505 630,742 221,763 — 44,255 44,255 — — 701 — 701 — (1,033,677 ) — — (1,033,677 ) $ (136,216 ) $ 674,997 $ 222,464 $ (1,033,677 )
GENZYME CORPORATION AND SUBSIDIARIES3. Fair Value Measurements (Continued)Description Balance as of
December 31,
2009 Level 1 Level 2 Level 3 Money market funds/other $ 603,109 $ 603,109 $ — $ — U.S. Treasury notes 41,040 41,040 — — Non U.S. Governmental notes 4,114 — 4,114 — U.S. Government agency notes 56,810 — 56,810 — Corporate notes—global 54,825 — 54,825 — Commercial paper 6,841 — 6,841 — Total 163,630 41,040 122,590 — U.S. Treasury notes 29,793 29,793 — — Non U.S. Governmental notes 4,873 — 4,873 — U.S. Government agency notes 28,015 — 28,015 — Corporate notes—global 81,143 — 81,143 — Total 143,824 29,793 114,031 — 910,563 673,942 236,621 — 40,380 40,380 — — 4,284 — 4,284 — (1,015,236 ) — — (1,015,236 ) $ (60,009 ) $ 714,322 $ 240,905 $ (1,015,236 ) expense for the nine months ended September 30, 2010 in our consolidated statements of operations, of which $(11.4) million was allocated to our Hematology and Oncology reporting segment and $80.8 million was allocated to our Multiple Sclerosis reporting segment. We recorded $37.3 million of contingent consideration expense for the nine months ended September 30, 2009 in our consolidated statements of operations, including $18.5 million for our Hematology and Oncology reporting segment and $18.8 million for our Multiple Sclerosis reporting segment. (1)Changes in the fair value of our fixed income investments and investments in publicly-traded equity securities are recorded in accumulated other comprehensive income, a component of stockholders' equity, in our consolidated balance sheets.(2)Changes in the fair value of the contingent consideration obligations are recorded as contingent consideration expense, a component of operating expenses in our consolidated statements of operations. We recorded a total of $62.5 million of contingent consideration expense in our consolidated statements of operations for the three months ended March 31, 2010, including $21.4 million for our Hematology and Oncology reporting segment and $41.1 million for our Multiple Sclerosis reporting segment, for which there were no comparable amounts in the same period of 2009.threenine months ended March 31,September 30, 2010 were as follows (amounts in thousands): Balance as of December 31, 2009 $ (1,015,236 ) Payments 114,786 R&D reimbursement received (14,618 ) Contingent consideration expense(1) (69,436 ) Effect of foreign currency translation adjustments 18,141 Fair value at September 30, 2010 $ (966,363 ) $ (1,015,236 ) 31,600 (62,549 ) 12,508 $ (1,033,677 ) (1)Includes $35.5(1) For the nine months ended September 30, 2010, includes: • $6.8 million of contingent consideration expense attributable to transaction gains and losses resulting from fluctuations in foreign currency exchange rates on liabilities that will be settled in a currency other than the entity’s functional currency; and • a $20.9 million reduction in contingent consideration expense related to changes in estimates. contingent consideration expense forour 3.625% senior notes due in June 2015, which we refer to as our 2015 Notes, and $500.0 million aggregate principal amount of our 5.000% senior notes due in June 2020, which we refer to as our 2020 Notes, and, together with our 2015 Notes, as the three months ended March 31,Notes, as described in Note 12., “Long-Term Debt,” to these consolidated financial statements. As of September 30, 2010, related to changes in estimates.our:Table• 2015 Notes had a fair value of $530.0 million and a carrying value of $498.4 million; and • 2020 Notes had a fair value of $555.8 million and a carrying value of $495.9 million. ContentsGENZYME CORPORATION AND SUBSIDIARIESto Unaudited, Consolidated Financial Statements (Continued)3. Fair Value Measurements (Continued)selling, general and administrative expenses, or SG&A in our consolidated statements of operations. We do not have any derivatives designated as hedging instruments and we do not use derivative instruments for trading or speculative purposes.
21March 31,September 30, 2010 and December 31, 2009 had maturities of 1 to 2 months. We report these contracts on a net basis. Net asset derivatives are included in other current assets and net liability derivatives are included in accrued expenses in our consolidated balance sheets.March 31,September 30, 2010 and December 31, 2009 (amounts in thousands): Unrealized Gain/Loss on Foreign Exchange Forward Contracts As Reported Gross Net Asset Liability Asset Liability Derivatives Derivatives Derivatives Derivatives Other Accrued Other Accrued As of: Current Assets Expenses Current Assets Expenses September 30, 2010 $ 4,020 $ 3,790 $ 230 $ — December 31, 2009 $ 9,834 $ 5,550 $ 4,284 $ — Unrealized Gain/Loss on Foreign Exchange Forward Contracts As Reported Gross Net Asset
Derivatives Liability
Derivatives Asset
Derivatives Liability
Derivatives Other
current assets Accrued
expenses Other
current assets Accrued
expenses $ 1,338 $ 637 $ 701 $ — $ 9,834 $ 5,550 $ 4,284 $ — for both the three months ended March 31, 2010 and 2009 was not significant. Three Months Ended Nine Months Ended September 30, September 30, 2010 2009 2010 2009 Net impact of our overall unrealized and realized foreign exchange (gains) losses $ (14,223 ) $ (2,735 ) $ (13,732 ) $ 3,386 gainslosses related to our foreign exchange forward contracts on our consolidated statements of operations for the three and nine months ended March 31,September 30, 2010 and 2009 (amounts in thousands): Net Loss Reported Three Months Ended Nine Months Ended Statements of September 30, September 30, Derivative Instrument Operations Location 2010 2009 2010 2009 Foreign exchange forward contracts SG&A $ 23,623 $ 16,275 $ 23,242 $ 24,173
22 Three Months Ended
March 31, Statement of
Operations Location 2010 2009 SG&A $ (5,041 ) $ (10,828 )
GENZYME CORPORATION AND SUBSIDIARIES4. Net Income (Loss) Per Share5. Net Income (Loss) Per Share Three Months Ended Nine Months Ended September 30, September 30, 2010 2009 2010 2009 Income (loss) from continuing operations, net of tax-basic and diluted $ 74,246 $ 13,642 $ (38,168 ) $ 405,483 Income (loss) from discontinued operations, net of tax-basic and diluted (5,292 ) 2,353 (11,599 ) (6,428 ) Net income (loss) — basic and diluted $ 68,954 $ 15,995 $ (49,767 ) $ 399,055 Shares used in computing net income (loss) per common share — basic 255,359 268,957 262,293 269,923 Effect of dilutive securities(1): Stock options 5,678 3,209 — 4,106 Restricted stock units 2,313 1,565 — 1,335 Other 436 10 — 11 Dilutive potential common shares 8,427 4,784 — 5,452 Shares used in computing net income (loss) per common share — diluted(1) 263,786 273,741 262,293 275,375 Net income (loss) per share-basic: Income (loss) from continuing operations, net of tax $ 0.29 $ 0.05 $ (0.15 ) $ 1.50 Income (loss) from discontinued operations, net of tax (0.02 ) 0.01 (0.04 ) (0.02 ) Net income (loss) $ 0.27 $ 0.06 $ (0.19 ) $ 1.48 Net income (loss) per share-diluted: Income (loss) from continuing operations, net of tax $ 0.28 $ 0.05 $ (0.15 ) $ 1.47 Income (loss) from discontinued operations, net of tax (0.02 ) 0.01 (0.04 ) (0.02 ) Net income (loss) $ 0.26 $ 0.06 $ (0.19 ) $ 1.45 Three Months Ended
March 31, 2010 2009 $ (114,948 ) $ 195,486 266,251 270,854 — 5,553 — 1,138 — 83 — 6,774 266,251 277,628 $ (0.43 ) $ 0.72 $ (0.43 ) $ 0.70 (1)For the three months ended March 31, 2010, basic and diluted net loss per share are the same. We did not include the securities described in the following table in the computation of diluted net loss per share because these securities would have an anti-dilutive effect due to our net loss for the period (amounts in thousands):(1) Three Months EndedMarch 31, 2010Stock options2,949Restricted stock units2,534Other247Total shares excluded from calculationWe did not include the securities described in the following table in the computation of diluted lossearnings (loss) per share5,730 because these securities were anti-dilutive during the corresponding period (amounts in thousands): (2)We did not include the securities described in the following table in the computation of diluted earnings (loss) per share because these securities were anti-dilutive during the corresponding period (amounts in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2010 2009 2010 2009 Shares excluded from calculation of diluted loss per share 4,438 20,851 22,419 16,411
23 Three Months Ended
March 31, 2010 2009 20,648 8,650
GENZYME CORPORATION AND SUBSIDIARIES5. Comprehensive Income (Loss)6. Comprehensive Income (Loss) Three Months Ended Nine Months Ended September 30, September 30, 2010 2009 2010 2009 Net income (loss) $ 68,954 $ 15,995 $ (49,767 ) $ 399,055 Other comprehensive income (loss): Foreign currency translation adjustments 174,636 48,546 (92,731 ) 82,178 Pension liability adjustments, net of tax(1) 13 — (8 ) — Unrealized gains (losses) on securities, net of tax: Unrealized gains (losses) arising during the period, net of tax 247 6,358 246 (4,592 ) Reclassification adjustment of (gains) losses included in net income (loss), net of tax (3,533 ) (378 ) (5,405 ) (538 ) Unrealized gains (losses) on securities, net of tax(2) (3,286 ) 5,980 (5,159 ) (5,130 ) Other comprehensive income (loss) 171,363 54,526 (97,898 ) 77,048 Comprehensive income (loss) $ 240,317 $ 70,521 $ (147,665 ) $ 476,103 Three Months Ended March 31, 2010 2009 $ (114,948 ) $ 195,486 (125,477 ) (120,148 ) (9 ) — 3,638 (20,607 ) (1,178 ) (197 ) 2,460 (20,804 ) (123,026 ) (140,952 ) $ (237,974 ) $ 54,534 (1)Tax amounts for all periods were not significant.(2)Net of $(1.4) million of tax for the three months ended March 31, 2010 and $11.9 million of tax for the three months ended March 31, 2009.6. Strategic Transactions(1) Tax amounts for all periods were not significant. (2) Net of $1.9 million of tax for the three months ended and $3.0 million of tax for the nine months ended September 30, 2010 and $(3.4) million of tax for the three months ended and $2.9 million of tax for the nine months ended September 30, 2009. 7. Strategic Transactions 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 genetics business unit and 3,000,000 shares of EXACT Sciences common stock. We paid EXACT Sciences total cash consideration of $22.7 million at that time. 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 investments in equity securities in our consolidated balance sheet as of March 31, 2009. As the purchased assets did not qualify as a business combination 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 statements of operations in March 2009. Additional amounts we paid during the first quarter of 2010 and will pay in the future to EXACT Sciences under this agreement are not significant.GENZYME CORPORATION AND SUBSIDIARIESNotes to Unaudited, Consolidated Financial Statements (Continued)6. Strategic Transactions (Continued)March 31,September 30, 2010 (amounts in millions): Discount Rate Used in Year of Purchase Estimating Expected Company/Assets Acquired Price IPR&D Programs Acquired Cash Flows Launch Bayer Assets (2009) $ 1,006.5 $ 458.7 alemtuzumab for MS — US 16 % 2012 174.2 alemtuzumab for MS — ex-US 16 % 2013 $ 632.9 (1) Bioenvision, Inc., or Bioenvision (2007) $ 349.9 $ 125.5 (2) Clolar(3) 17 % 2010-2016(4) AnorMED Inc., or AnorMED (2006) $ 589.2 $ 526.8 (2) Mozobil(5) 15 % 2016 (1) Capitalized as an indefinite-lived intangible asset. (2) Expensed on acquisition date.
24
Company/Assets Acquired | Purchase Price | IPR&D | Programs Acquired | Discount Rate Used in Estimating Cash Flows | Year of Expected Launch | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Bayer (2009) | $ | 1,006.5 | $ | 458.7 | alemtuzumab for MS—US | 16 | % | 2012 | |||||||
| 174.2 | alemtuzumab for MS—ex-US | 16 | % | 2013 | |||||||||||
| $ | 632.9 | (1) | |||||||||||||
Bioenvision, Inc., or Bioenvision (2007) | $ | 349.9 | $ | 125.5 | (2) | Clolar(3) | 17 | % | 2010-2016 | (4) | |||||
AnorMED Inc., or AnorMED (2006) | $ | 589.2 | $ | 526.8 | (2) | Mozobil(5) | 15 | % | 2016 | ||||||
Pro Forma Financial Summary
The following pro forma financial summary is presented as if the acquisition from Bayer was completed as of January 1, 2009. 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 financial summaries for the period presented (amounts in thousands, except per share amounts):
| | Three Months Ended March 31, 2009 | ||||
|---|---|---|---|---|---|
Total revenues | $ | 1,197,060 | |||
Net income | $ | 175,262 | |||
Net income per share: | |||||
Basic | $ | 0.65 | |||
Diluted | $ | 0.63 | |||
Weighted average shares outstanding: | |||||
Basic | 270,854 | ||||
Diluted | 277,628 | ||||
GENZYME CORPORATION AND SUBSIDIARIES
7. Inventories
| (3) | Clolar is approved for the treatment of relapsed and refractory pediatric acute lymphoblastic leukemia, or ALL. The IPR&D projects for Clolar are related to the development of the product for the treatment of other indications. | |
| (4) | Year of expected launch reflects both the ongoing launch of products for currently approved indications and the anticipated launch of products in the future for new indications. | |
| (5) | Mozobil received marketing approval for use in stem cell transplants in the United States in December 2008 and in Europe in July 2009. Mozobil is also being developed for tumor sensitization. |
| 8. | Inventories |
| September 30, | December 31, | |||||||
| 2010 | 2009 | |||||||
| (Amounts in thousands) | ||||||||
| Raw materials | $ | 104,314 | $ | 103,410 | ||||
| Work-in-process | 303,455 | 279,848 | ||||||
| Finished goods | 188,961 | 166,035 | ||||||
| Total | $ | 596,730 | $ | 549,293 | ||||
| | March 31, 2010 | December 31, 2009 | ||||||
|---|---|---|---|---|---|---|---|---|
| | (Amounts in thousands) | |||||||
Raw materials | $ | 113,567 | $ | 123,434 | ||||
Work-in-process | 298,235 | 288,653 | ||||||
Finished goods | 196,840 | 195,935 | ||||||
Total | $ | 608,642 | $ | 608,022 | ||||
We capitalize
| • | $5.6 million of charges during the three months ended September 30, 2010 for manufacturing-related costs associated with various inventory write offs; |
25
| • | $16.4 million of charges during the first and second quarters of 2010 to write off Cerezyme and Fabrazymework-in-process material that was unfinished when the interruption occurred in March 2010, based on our determination that such material could not be finished, and other inventory for these products that did not meet the necessary quality specifications; and | |
| • | $7.1 million of charges during the first and second quarters of 2010 to write off certain lots of Thyrogen that did not meet the necessary quality specifications. |
receive approval, it would likely result in the write off of the inventory and a charge to earnings.
GENZYME CORPORATION AND SUBSIDIARIES
Notes to Unaudited, Consolidated Financial Statements (Continued)
7. Inventories (Continued)
Renagel and Renvela related to the remediation cost of our Haverhill, England manufacturing facility, including repairs and idle capacity expenses. Remediation of this facility is substantially complete and we anticipate that any remaining costs related to the remediation will not be significant.
26
8. Goodwill and Other Intangible Assets
| 9. | Goodwill and Other Intangible Assets |
| Personalized | Hematology | |||||||||||||||||||||||
| Genetic | Renal and | and | Multiple | |||||||||||||||||||||
| Health | Endocrinology | Biosurgery | Oncology | Sclerosis | Total | |||||||||||||||||||
| Goodwill | $ | 339,563 | $ | 319,882 | $ | 110,376 | $ | 375,889 | $ | 318,059 | $ | 1,463,769 | ||||||||||||
| Accumulated impairment losses(1) | — | — | (102,791 | ) | — | — | (102,791 | ) | ||||||||||||||||
| Balance as of December 31, 2009 | 339,563 | 319,882 | 7,585 | 375,889 | 318,059 | 1,360,978 | ||||||||||||||||||
| Changes in carrying amounts during the period | — | — | — | — | — | — | ||||||||||||||||||
| Balance as of September 30, 2010 | $ | 339,563 | $ | 319,882 | $ | 7,585 | $ | 375,889 | $ | 318,059 | $ | 1,360,978 | ||||||||||||
| Goodwill | $ | 339,563 | $ | 319,882 | $ | 110,376 | $ | 375,889 | $ | 318,059 | $ | 1,463,769 | ||||||||||||
| Accumulated impairment losses(1) | — | — | (102,791 | ) | — | — | (102,791 | ) | ||||||||||||||||
| Balance as of September 30, 2010 | $ | 339,563 | $ | 319,882 | $ | 7,585 | $ | 375,889 | $ | 318,059 | $ | 1,360,978 | ||||||||||||
| (1) | Accumulated impairment losses consists of a $102.8 million pre-tax charge recorded in 2003 to write off the goodwill of our Biosurgery reporting segment’s orthopaedics reporting unit. |
27
| | Personalized Genetic Health | Renal and Endocrinology | Biosurgery | Hematology and Oncology | Multiple Sclerosis | Other | Total | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Goodwill | $ | 339,563 | $ | 319,882 | $ | 110,376 | $ | 375,889 | $ | 318,059 | $ | 261,631 | $ | 1,725,400 | ||||||||
Accumulated impairment losses(1) | — | — | (102,792 | ) | — | — | (219,245 | ) | (322,037 | ) | ||||||||||||
Balance as of December 31, 2009 | 339,563 | 319,882 | 7,584 | 375,889 | 318,059 | 42,386 | 1,403,363 | |||||||||||||||
Net exchange differences arising during the period | — | — | — | — | — | 494 | 494 | |||||||||||||||
Other changes in carrying amounts during the period | — | — | — | — | — | 296 | 296 | |||||||||||||||
Balance as of March 31, 2010 | $ | 339,563 | $ | 319,882 | $ | 7,584 | $ | 375,889 | $ | 318,059 | $ | 43,176 | $ | 1,404,153 | ||||||||
Goodwill | $ | 339,563 | $ | 319,882 | $ | 110,376 | $ | 375,889 | $ | 318,059 | $ | 262,421 | $ | 1,726,190 | ||||||||
Accumulated impairment losses(1) | — | — | (102,792 | ) | — | — | (219,245 | ) | (322,037 | ) | ||||||||||||
Balance as of March 31, 2010 | $ | 339,563 | $ | 319,882 | $ | 7,584 | $ | 375,889 | $ | 318,059 | $ | 43,176 | $ | 1,404,153 | ||||||||
GENZYME CORPORATION AND SUBSIDIARIES
Other Intangible Assets
| As of September 30, 2010 | As of December 31, 2009 | |||||||||||||||||||||||
| Gross | Net | Gross | Net | |||||||||||||||||||||
| Other | Other | Other | Other | |||||||||||||||||||||
| Intangible | Accumulated | Intangible | Intangible | Accumulated | Intangible | |||||||||||||||||||
| Assets | Amortization | Assets | Assets | Amortization | Assets | |||||||||||||||||||
Finite-lived other intangible assets: | ||||||||||||||||||||||||
| Technology(1) | $ | 1,901,744 | $ | (950,023 | ) | $ | 951,721 | $ | 2,142,211 | $ | (845,047 | ) | $ | 1,297,164 | ||||||||||
| Distribution rights(2) | 446,584 | (274,017 | ) | 172,567 | 440,521 | (227,726 | ) | 212,795 | ||||||||||||||||
| Patents | 187,780 | (141,013 | ) | 46,767 | 187,780 | (131,140 | ) | 56,640 | ||||||||||||||||
| License fees | 98,698 | (52,081 | ) | 46,617 | 98,647 | (47,052 | ) | 51,595 | ||||||||||||||||
| Customer lists | 868 | (796 | ) | 72 | 838 | (559 | ) | 279 | ||||||||||||||||
| Trademarks | 60,227 | (51,471 | ) | 8,756 | 60,227 | (47,464 | ) | 12,763 | ||||||||||||||||
| Total finite-lived other intangible assets | 2,695,901 | (1,469,401 | ) | 1,226,500 | 2,930,224 | (1,298,988 | ) | 1,631,236 | ||||||||||||||||
Indefinite-lived other intangible assets: | ||||||||||||||||||||||||
| IPR&D | 632,912 | — | 632,912 | 632,912 | — | 632,912 | ||||||||||||||||||
| Total other intangible assets | $ | 3,328,813 | $ | (1,469,401 | ) | $ | 1,859,412 | $ | 3,563,136 | $ | (1,298,988 | ) | $ | 2,264,148 | ||||||||||
| | As of March 31, 2010 | As of December 31, 2009 | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 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) | $ | 1,939,700 | $ | (896,937 | ) | $ | 1,042,763 | $ | 2,180,232 | $ | (877,611 | ) | $ | 1,302,621 | ||||||
Distribution rights(2) | 446,374 | (246,832 | ) | 199,542 | 440,521 | (227,726 | ) | 212,795 | ||||||||||||
Patents | 188,652 | (135,209 | ) | 53,443 | 188,651 | (131,898 | ) | 56,753 | ||||||||||||
License fees | 98,586 | (48,576 | ) | 50,010 | 98,647 | (47,052 | ) | 51,595 | ||||||||||||
Customer lists | 88,448 | (46,306 | ) | 42,142 | 87,423 | (43,822 | ) | 43,601 | ||||||||||||
Trademarks | 60,621 | (48,984 | ) | 11,637 | 60,608 | (47,623 | ) | 12,985 | ||||||||||||
Total finite-lived other intangible assets | 2,822,381 | (1,422,844 | ) | 1,399,537 | 3,056,082 | (1,375,732 | ) | 1,680,350 | ||||||||||||
Indefinite-lived other intangible assets: | ||||||||||||||||||||
IPR&D | 632,912 | — | 632,912 | 632,912 | — | 632,912 | ||||||||||||||
Total other intangible assets | $ | 3,455,293 | $ | (1,422,844 | ) | $ | 2,032,449 | $ | 3,688,994 | $ | (1,375,732 | ) | $ | 2,313,262 | ||||||
| (1) | For the year ended December 31, 2009, includes a gross technology intangible asset of $240.3 million and related accumulated amortization of $(24.0) million related to the consolidated results of BioMarin/Genzyme LLC. Effective January 1, 2010, under new guidance we adopted for consolidating variable interest entities, we no longer consolidate the results of this joint venture and no longer include this gross technology asset and the related accumulated amortization or a related other noncurrent liability in our consolidated balance sheets. | |
| (2) | Includes an additional $6.1 million for the nine months ended September 30, 2010 for additional payments made or accrued in connection with the reacquisition of the Synvisc sales and marketing rights from Pfizer in January 2005. As of September 30, 2010, the contingent royalty payments to Pfizer payable under the agreement are substantially complete. We completed the contingent royalty payments to Pfizer related to North American sales of Synvisc in the first quarter of 2010 and anticipate completing the remaining contingent royalty payments to Pfizer related to sales of the product outside of the United States by the first quarter of 2011. |
28
8. Goodwill and Other Intangible Assets (Continued)
| Estimated | ||||||||||||
| Revenue- | Estimated | Total | ||||||||||
| Based | Other | Estimated | ||||||||||
| Amortization | Amortization | Amortization | ||||||||||
| Year Ended December 31, | Expense(1) | Expense | Expense(1) | |||||||||
| 2010 (remaining three months) | $ | 36,449 | $ | 35,223 | $ | 71,672 | ||||||
| 2011 | 119,026 | 165,043 | 284,069 | |||||||||
| 2012 | 94,173 | 140,355 | 234,528 | |||||||||
| 2013 | 29,552 | 124,721 | 154,273 | |||||||||
| 2014 | 26,315 | 106,135 | 132,450 | |||||||||
| Thereafter | 21,667 | 344,062 | 365,729 | |||||||||
Year Ended December 31, | Estimated Revenue- Based Amortization Expense(1) | Estimated Other Amortization Expense | Total Estimated Amortization Expense(1) | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
2010 (remaining nine months) | $ | 82,704 | $ | 137,218 | $ | 219,922 | ||||
2011 | 119,184 | 175,081 | 294,265 | |||||||
2012 | 87,705 | 148,272 | 235,977 | |||||||
2013 | 28,970 | 131,432 | 160,402 | |||||||
2014 | 23,696 | 109,116 | 132,812 | |||||||
Thereafter | 19,992 | 352,984 | 372,976 | |||||||
9. Investment in BioMarin/Genzyme LLC
We and BioMarin Pharmaceutical
| (1) | Includes estimated future amortization expense for: |
| • | the Synvisc distribution rights based on the forecasted respective future sales of Synvisc and the resulting future contingent payments we may be required to make to Pfizer and the Myozyme/Lumizyme patent and technology rights pursuant to a license agreement with Synpac (North Carolina), Inc., or Synpac, based on forecasted future net sales of Myozyme/Lumizyme and the milestone payments we may be required to make to Synpac. These contingent payments will be recorded as intangible assets when the payments are accrued; and | |
| • | the technology intangible assets resulting from our acquisition of the worldwide rights to Fludara, which are being amortized based on the forecasted future sales of Fludara. |
| 10. | Investment in BioMarin/Genzyme LLC |
GENZYME CORPORATION AND SUBSIDIARIES
Notes to Unaudited, Consolidated Financial Statements (Continued)
9. Investment in BioMarin/Genzyme LLC (Continued)
| • | consolidated the income (losses) of BioMarin/Genzyme LLC and recorded BioMarin’s portion of BioMarin/Genzyme LLC’s income (losses) as minority interest in our consolidated statements of operations; and | |
| • | recorded the assets and liabilities of BioMarin/Genzyme LLC in our consolidated balance sheets at fair value. |
29
| 11. | Investments in Equity Securities |
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| Gross gains (losses) on investments in equity securities | $ | 6,125 | $ | (36 | ) | $ | 8,370 | $ | 422 | |||||||
| Less: charges for impairment of investments | (1,477 | ) | (615 | ) | (35,120 | ) | (1,754 | ) | ||||||||
| Gains (losses) on investments in equity securities, net | $ | 4,648 | $ | (651 | ) | $ | (26,750 | ) | $ | (1,332 | ) | |||||
| 12. | Long-Term Debt |
30
11. Stockholders' Equity
| • | a $7.7 million increase to other noncurrent assets for the capitalized debt offering costs, including $6.3 million for commissions and $1.4 million of other offering expenses; and | |
| • | a $1.0 billion increase to long-term liabilities for the principal of the Notes, offset by $5.7 million for the debt discount on the Notes. |
| • | 100% of the principal amount of the Notes redeemed; or | |
| • | the sum of the present values of the remaining scheduled payments of interest and principal thereon discounted at the Treasury Rate plus 25 basis points in the case of our 2015 Notes and 30 basis points in the case of our 2020 Notes. |
31
| 13. | Stockholders’ Equity |
| • | $800.0 million, or 80%, represents the value, based on the closing price of our common stock on June 17, 2010, of the 15.6 million shares of our common stock that Goldman Sachs delivered to us; and | |
| • | $200.0 million, or 20%, represents an advance payment that covers a higher effective per share purchase price than the price on June 17, 2010 and additional shares Goldman Sachs delivered to us at the end of the program in October 2010. |
| New | Original | |||||||
| Post-Termination | Post-Termination | |||||||
| Period | Period | |||||||
| Grant date fair value as of May 26, 2010 | $ | 50.00 | $ | 50.00 | ||||
| Term | 19 months | 10 months | ||||||
| Dividend | 0 | 0 | ||||||
| Volatility | 38.00 | % | 30.00 | % | ||||
| Risk-free interest rate | 0.63 | % | 0.32 | % | ||||
| • | acceleration of the unvested portions of the RSUs granted in May 2008; and | |
| • | pro-ration of the vesting of the RSUs granted in May 2009 over a19-month, instead of a three-year, period. |
32
| • | an $8.2 million reduction for the reversal of the cumulative to-date stock-based compensation expenses recorded through May 25, 2010, prior to the modifications; offset, in part, by | |
| • | $13.2 million of additional stock-based compensation expenses for the period from May 26, 2010 through September 30, 2010 based on the new, reduced grant date fair value of these awards. |
| • | time vesting stock options; and | |
| • | performance and market vesting awards comprised of PSUs, tied to the achievement of pre-established performance and market goals over a three-year performance period, and cash. |
GENZYME CORPORATION AND SUBSIDIARIES
Notes to Unaudited, Consolidated Financial Statements (Continued)
11. Stockholders' Equity (Continued)
| • | cash flow return on invested capital; and | |
| • | R-TSR measured against the performance of a subset of biotechnology peer companies (currently 28 companies) in the S&P 500 Health Care Index. |
33
| ||||
| Percentile | |||
| Performance Level | Rank | |||
| Threshold | ||||
| 65th | |||
| Maximum | 75th | |||
GENZYME CORPORATION AND SUBSIDIARIES
Notes to Unaudited, Consolidated Financial Statements (Continued)
11. Stockholders' Equity (Continued)
forfeitures. Compensation expense for our PSUs is recognized over the applicable performance period, adjusted for the effect of estimated forfeitures.
| ||||
| 0% | ||||
Range of risk free rate of return | 1.33% | - 1.45% | ||
Range of our expected stock price volatility | 35.11% | - 36.06% | ||
Range of Peer Group expected stock price volatility | 21.27% | - 60.32% | ||
Range of our average closing stock prices on the grant dates | $ | 51.83 - $56.50 | ||
Range of Peer Group average closing stock prices on the grant dates | $ | 7.22 - $348.13 | ||
Range of our historical total shareholder return on the grant dates | 5.75% | - 15.28% | ||
Range of historical total shareholder return for the Peer Group on the grant dates | (19.78)% | - 23.22% | ||
11. Stockholders' Equity (Continued)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| Pre-tax stock-based compensation expense, net of estimated forfeitures(1) | $ | (40,807 | ) | $ | (41,089 | ) | $ | (126,019 | ) | $ | (140,320 | ) | ||||
| Less: tax benefit from stock options | 13,366 | 11,151 | 37,640 | 35,602 | ||||||||||||
| Total stock-based compensation expense, net of tax | $ | (27,441 | ) | $ | (29,938 | ) | $ | (88,379 | ) | $ | (104,718 | ) | ||||
| | Three Months Ended March 31, | |||||||
|---|---|---|---|---|---|---|---|---|
| | 2010 | 2009 | ||||||
Pre-tax stock-based compensation, net of estimated forfeitures | $ | (47,641 | ) | $ | (44,606 | ) | ||
Less: tax benefit from stock options | 13,072 | 12,589 | ||||||
Total stock-based compensation expense, net of tax | $ | (34,569 | ) | $ | (32,017 | ) | ||
Effect per common share: | ||||||||
Basic and Diluted | $ | (0.13 | ) | $ | (0.12 | ) | ||
| | Three Months Ended March 31, | ||||||
|---|---|---|---|---|---|---|---|
| | 2010 | 2009 | |||||
Stock-based compensation expense capitalized to inventory | $ | 3,802 | $ | 3,412 | |||
| (1) | We also capitalized the following amounts of stock-based compensation expense to inventory, all of which is attributable to participating employees that support our manufacturing operations (amounts in thousands): |
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| Stock-based compensation expense capitalized to inventory | $ | 3,955 | $ | 3,623 | $ | 11,795 | $ | 12,764 | ||||||||
12. Commitments and Contingencies
| 14. | Commitments and Contingencies |
In March
Table efforts required in connection with the consent decree as identified by Quantic, who we have retained to be the third-party expert under the consent decree. The plan, as revised, which will be subject to FDA approval, is expected to take approximately three to four years to complete and will include a timetable of Contentsspecified compliance milestones. If the milestones are not met in
35
12. Commitments and Contingencies (Continued)
actions relating to overall GMP compliance are not met by deadlines over
We expect that Upon satisfying the FDA will allow us to continue to ship our Cerezyme, Fabrazyme and Myozyme products that are produced or fill-finished at our Allston facility because the FDA has determined that these products meet the definition of "medical necessity" that would justify continued production of these products at Allston during the enforcement period. The FDA, however, has made a preliminary determination that Thyrogen, which is fill-finished at our Allston facility, does not meet the FDA's definition and may require us to cease fill-finishing the product at Allston when we enter into the consent decree. We are actively negotiatingcompliance requirements in accordance with the FDA the terms of the consent decree, and presenting our view that there is also patient need for uninterrupted supply of Thyrogen. We expect that the negotiationswe will be completed duringrequired to retain an auditor to monitor and oversee ongoing compliance at the second quarterAllston facility for an additional five years. The consent decree is subject to, and effective upon, approval by the U.S. District Court for the District of 2010.
Massachusetts. The consent decree was filed with the U.S. District Court on May 24, 2010 and we are awaiting the court’s approval.
36
37
38
GENZYME CORPORATION AND SUBSIDIARIES
Notes to Unaudited, Consolidated Financial Statements (Continued)
12. Commitments and Contingencies (Continued)
determination that it was in our best interest to institute an action against any officers or directors, any monetary recovery would be to the benefit of Genzyme Corporation.our benefit. The special committee'scommittee’s investigation is ongoing.
the shareholders demand.
39
GENZYME CORPORATION AND SUBSIDIARIES
Notes to Unaudited, Consolidated Financial Statements (Continued)
12. Commitments and Contingencies (Continued)
providing non-conforming products. Kayat further claims that due to the alleged breach, it suffered lost profits that Kayat claims it would have received under agreements it alleges it had entered into with subdistributors. Kayat also alleges common law fraud and violations of Mass. Gen. L. c. 93A and the Racketeer Influenced and Corrupt Organizations Act. Kayat filed its suit on August 8, 2002 and a trial began in Cyprus in December 2009. Kayat seeks damages for its legal claims and for expenses it claims it has incurred, including legal fees and advertising, promotion and otherout-of-pocket expenses. We believe we acted appropriately in all regards, including properly terminating the agreement when we decided to exit the melatonin business, and we intend to defend this lawsuit vigorously.
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 statements of operations for the three 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 insurers have denied coverage, and therefore, we have not recorded a receivable for any potential recovery from our insurers. In our lawsuit against our primary insurer, the court granted the insurer's motion to dismiss the suit in October 2009. We have appealed this judgment.
13. Benefit from (Provision for) Income Taxes
| 15. | Benefit from (Provision for) Income Taxes |
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| (Amounts in thousands) | ||||||||||||||||
| Benefit from (provision for) income taxes | $ | (17,385 | ) | $ | 965 | $ | 58,493 | $ | (160,305 | ) | ||||||
| Effective tax rate | 19 | % | (8 | )% | (61 | )% | 28 | % | ||||||||
| | Three Months Ended March 31, | ||||||
|---|---|---|---|---|---|---|---|
| | 2010 | 2009 | |||||
| | (Amounts in thousands) | ||||||
Benefit from (provision for) income taxes | $ | 61,799 | $ | (78,884 | ) | ||
Effective tax rate | 35 | % | 29 | % | |||
Our effective tax rate for bothall periods presented varies from the U.S. statutory tax rate as a result of:
| • | income and expenses taxed at rates other than the U.S. statutory tax rate; | |
| • | our provision for state income taxes; | |
| • | domestic manufacturing benefits; | |
| • | benefits related to tax credits; and | |
| • | non-deductible stock-based compensation expenses totaling $10.3 million for the three months ended and $30.1 million for the nine months ended September 30, 2010, as compared to $8.7 million for the three months ended and $38.3 million for the nine months ended September 30, 2009. |
GENZYME CORPORATION AND SUBSIDIARIES
Notes to Unaudited, Consolidated Financial Statements (Continued)
13. Benefit from (Provision for) Income Taxes (Continued)
40
14. Segment Information
| 16. | Segment Information |
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| Revenues: | ||||||||||||||||
| Personalized Genetic Health(1) | $ | 404,183 | $ | 369,878 | $ | 1,147,227 | $ | 1,501,566 | ||||||||
| Renal and Endocrinology | 270,431 | 260,418 | 781,233 | 750,163 | ||||||||||||
| Biosurgery | 156,732 | 145,647 | 458,080 | 404,496 | ||||||||||||
| Hematology and Oncology(2) | 167,296 | 143,593 | 500,103 | 344,156 | ||||||||||||
| Multiple Sclerosis(2) | — | — | — | 12,357 | ||||||||||||
| Other | 3,082 | 3,737 | 9,835 | 24,759 | ||||||||||||
| Corporate | 76 | 493 | 377 | 1,501 | ||||||||||||
| Total | $ | 1,001,800 | $ | 923,766 | $ | 2,896,855 | $ | 3,038,998 | ||||||||
| Income (loss) before income taxes: | ||||||||||||||||
| Personalized Genetic Health(1,3) | $ | 135,274 | $ | 124,758 | $ | 176,283 | $ | 806,664 | ||||||||
| Renal and Endocrinology | 138,398 | 119,193 | 366,358 | 336,361 | ||||||||||||
| Biosurgery | 47,369 | 40,277 | 137,972 | 102,360 | ||||||||||||
| Hematology and Oncology(2) | 19,719 | (24,155 | ) | 59,915 | (44,170 | ) | ||||||||||
| Multiple Sclerosis(2) | (28,203 | ) | (45,423 | ) | (170,483 | ) | (64,030 | ) | ||||||||
| Other(4) | (1,429 | ) | (153 | ) | (5,123 | ) | 190 | |||||||||
| Corporate(5) | (219,497 | ) | (201,820 | ) | (661,583 | ) | (571,587 | ) | ||||||||
| Total | $ | 91,631 | $ | 12,677 | $ | (96,661 | ) | $ | 565,788 | |||||||
| (1) | Includes the impact of: | |
| • increased shipments of Cerezyme for the three months ended September 30, 2010; and | ||
| • supply constraints for Cerezyme and Fabrazyme for the nine months ended September 30, 2010 and the three and nine months ended September 30, 2009. | ||
| (2) | On May 29, 2009, we acquired the worldwide rights to the oncology products Campath, Fludara and Leukine and alemtuzumab for MS from Bayer. As of that date, we ceased recognizing research and development revenue for Bayer’s reimbursement of a portion of the development costs for alemtuzumab for MS. The fair value of the research and development costs for alemtuzumab for MS that will be reimbursed by Bayer is accounted for as an offset to the contingent consideration obligations for alemtuzumab for MS. |
41
| | Three Months Ended March 31, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| | 2010 | 2009 | |||||||
Revenues: | |||||||||
Personalized Genetic Health(1) | $ | 392,504 | $ | 549,960 | |||||
Renal and Endocrinology | 252,423 | 242,468 | |||||||
Biosurgery | 137,366 | 119,522 | |||||||
Hematology and Oncology(2) | 156,310 | 88,573 | |||||||
Multiple Sclerosis(2) | — | 7,291 | |||||||
Other | 135,859 | 140,603 | |||||||
Corporate | 11 | 454 | |||||||
Total | $ | 1,074,473 | $ | 1,148,871 | |||||
GENZYME CORPORATION AND SUBSIDIARIES
14. Segment Information (Continued)
Income (loss) before income taxes: | |||||||||
Personalized Genetic Health(1,3) | $ | (27,024 | ) | $ | 351,795 | ||||
Renal and Endocrinology | 114,542 | 106,062 | |||||||
Biosurgery | 28,993 | 28,332 | |||||||
Hematology and Oncology(2) | 8,388 | (2,985 | ) | ||||||
Multiple Sclerosis(2) | (89,925 | ) | (16,445 | ) | |||||
Other(4) | 4,228 | (4,798 | ) | ||||||
Corporate(5) | (215,949 | ) | (187,591 | ) | |||||
Total | $ | (176,747 | ) | $ | 274,370 | ||||
Includes contingent consideration expense of $21.4 million
GENZYME CORPORATION AND SUBSIDIARIES
Notes to Unaudited, Consolidated Financial Statements (Continued)
14. Segment Information (Continued)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| Contingent consideration expenses: | ||||||||||||||||
| Hematology and Oncology | $ | 1,661 | $ | 14,157 | $ | (11,413 | ) | $ | 18,487 | |||||||
| Multiple Sclerosis | (4,795 | ) | 14,040 | 80,849 | 18,800 | |||||||||||
| Total contingent consideration expenses | $ | (3,134 | ) | $ | 28,197 | $ | 69,436 | $ | 37,287 | |||||||
| �� | ||||||||||||||||
Segment Assets(1): Personalized Genetic Health(2) Renal and Endocrinology Biosurgery Hematology and Oncology Multiple Sclerosis Other Corporate(3) TotalIn addition, income (loss) before income taxes for our Multiple Sclerosis reporting segment includes a gain on acquisition of business of $24.2 million for the nine months ended September 30, 2009 for which there were no comparable amounts in 2010. 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. (3) Includes a charge of $175.0 million recorded to SG&A for the nine months ended September 30, 2010 for the upfront disgorgement of past profits provided for in the consent decree we entered into with the FDA. For more information about the consent decree, see Note 14., “Commitments and Contingencies,” to these consolidated financial statements. (4) Excludes the results for our genetic testing and diagnostic products business units which have met the criteria for discontinued operations and, accordingly, are included in discontinued operations for all periods presented. (5) Loss before income taxes for Corporate includes our corporate, general and administrative and corporate science activities, our stock-based compensation expenses for our continuing operations, as well as net gains (losses) on our investments in equity securities, investment income, interest expense and other income and expense items that we do not specifically allocate to a particular reporting segment. September 30, December 31, 2010 2009 Segment Assets(1): Personalized Genetic Health(2,3) $ 1,856,507 $ 1,987,916 Renal and Endocrinology 1,282,564 1,283,731 Biosurgery 522,029 509,064 Hematology and Oncology 1,398,140 1,406,684 Multiple Sclerosis 951,372 956,448 Other(1) 442,250 444,406 Corporate(3,4) 3,966,259 3,472,475 Total $ 10,419,121 $ 10,060,724 March 31, 2010 December 31, 2009 $ 1,356,806 $ 1,525,602 1,230,601 1,283,731 482,487 509,064 1,388,832 1,406,684 951,327 956,448 460,917 462,978 3,983,825 3,916,217 $ 9,854,795 $ 10,060,724 (1)Assets for our five reporting segments and Other include primarily accounts receivable, inventory and certain fixed and intangible assets, including goodwill.(2)(1) Assets for our five reporting segments and Other include primarily accounts receivable, inventory and certain fixed and intangible assets, including goodwill. Assets for Other includes the assets of our genetic testing, diagnostic products and pharmaceutical intermediates business units, all of which have met the held for sale criteria. As a result, we now report the assets for these three business units under the captions “assets held for sale” and “assets held for sale-noncurrent” in our consolidated balance sheets. (2) For the year ended December 31, 2009, includes a gross technology intangible asset of $240.3 million and related accumulated amortization of $(24.0) million related to our consolidation of the results of BioMarin/Genzyme LLC. Effective January 1, 2010, under new guidance we adopted for consolidating variable interest entities, we no longer consolidate the results of this joint venture and no longer include this gross technology asset and the related accumulated amortization or a related other noncurrent liability in our consolidated balance sheet. (3) As of September 30, 2010, reflects there-allocation of plant and equipment (and associated accumulated depreciation) from Corporate to PGH based on changes in how we review our business.
42
| (4) | Includes the assets related to our corporate, general and administrative operations, and corporate science activities that we do not allocate to a particular segment. Segment assets for Corporate consist of the following (amounts in thousands): |
| September 30, | December 31, | |||||||
| 2010 | 2009 | |||||||
| Cash, cash equivalents, short- and long-term investments in debt securities | $ | 1,166,511 | $ | 1,049,700 | ||||
| Deferred tax assets, net | 775,425 | 555,242 | ||||||
| Property, plant & equipment, net | 1,560,813 | 1,344,664 | ||||||
| Investments in equity securities | 64,961 | 74,438 | ||||||
| Other | 398,549 | 448,431 | ||||||
| Total | $ | 3,966,259 | $ | 3,472,475 | ||||
| 17. | Supplemental Guarantor Information |
43
| Genzyme | Guarantor | Non-Guarantor | ||||||||||||||||||
| Corporation | Subsidiary | Subsidiaries | Eliminations | Total | ||||||||||||||||
| Revenues: | ||||||||||||||||||||
| Net product sales | $ | 604,776 | $ | 14 | $ | 386,757 | $ | — | $ | 991,547 | ||||||||||
| Net service sales | 7,734 | — | 1,874 | — | 9,608 | |||||||||||||||
| Research and development revenue | 335 | — | 310 | — | 645 | |||||||||||||||
| Total revenues | 612,845 | 14 | 388,941 | — | 1,001,800 | |||||||||||||||
| Operating costs and expenses: | ||||||||||||||||||||
| Cost of products sold | 226,569 | 22,147 | 53,150 | — | 301,866 | |||||||||||||||
| Cost of services sold | 5,591 | — | 1,816 | — | 7,407 | |||||||||||||||
| Selling, general and administrative | 54,687 | 151,206 | 131,990 | — | 337,883 | |||||||||||||||
| Research and development | 129,973 | 28,587 | 48,491 | — | 207,051 | |||||||||||||||
| Amortization of intangibles | 48,159 | — | 13,602 | — | 61,761 | |||||||||||||||
| Contingent consideration expense | 12,838 | — | (15,972 | ) | — | (3,134 | ) | |||||||||||||
| Total operating costs and expenses | 477,817 | 201,940 | 233,077 | — | 912,834 | |||||||||||||||
| Operating income (loss) | 135,028 | (201,926 | ) | 155,864 | — | 88,966 | ||||||||||||||
| Other income (expenses): | ||||||||||||||||||||
| Equity in loss of equity method investments | (643 | ) | — | — | — | (643 | ) | |||||||||||||
| Gains on investments in equity securities, net | 4,648 | — | — | — | 4,648 | |||||||||||||||
| Other | (906 | ) | — | 521 | — | (385 | ) | |||||||||||||
| Inter-subsidiary income (expense) | (30,232 | ) | 77,366 | (47,134 | ) | — | — | |||||||||||||
| Investment income | 261 | 1,670 | 472 | — | 2,403 | |||||||||||||||
| Interest expense | (4,808 | ) | — | 1,450 | — | (3,358 | ) | |||||||||||||
| Total other income (expenses) | (31,680 | ) | 79,036 | (44,691 | ) | — | 2,665 | |||||||||||||
| Income (loss) from continuing operations before income taxes | 103,348 | (122,890 | ) | 111,173 | — | 91,631 | ||||||||||||||
| Benefit from (provision for) income taxes | (31,735 | ) | 44,151 | (29,801 | ) | — | (17,385 | ) | ||||||||||||
| Income (loss) from continuing operations, net of tax | 71,613 | (78,739 | ) | 81,372 | — | 74,246 | ||||||||||||||
| Income (loss) from discontinued operations, net of tax | (7,190 | ) | (6 | ) | 1,904 | — | (5,292 | ) | ||||||||||||
| Income from subsidiaries | 4,531 | — | — | (4,531 | ) | — | ||||||||||||||
| Net income (loss) | $ | 68,954 | $ | (78,745 | ) | $ | 83,276 | $ | (4,531 | ) | $ | 68,954 | ||||||||
44
| Genzyme | Guarantor | Non-Guarantor | ||||||||||||||||||
| Corporation | Subsidiary | Subsidiaries | Eliminations | Total | ||||||||||||||||
| Revenues: | ||||||||||||||||||||
| Net product sales | $ | 489,115 | $ | 9 | $ | 422,770 | $ | — | $ | 911,894 | ||||||||||
| Net service sales | 8,774 | — | 1,706 | — | 10,480 | |||||||||||||||
| Research and development revenue | 1,302 | — | 90 | — | 1,392 | |||||||||||||||
| Total revenues | 499,191 | 9 | 424,566 | — | 923,766 | |||||||||||||||
| Operating costs and expenses: | ||||||||||||||||||||
| Cost of products sold | 215,939 | 5,613 | 50,414 | — | 271,966 | |||||||||||||||
| Cost of services sold | 3,337 | — | 4,579 | — | 7,916 | |||||||||||||||
| Selling, general and administrative | 205,058 | 363 | 118,092 | — | 323,513 | |||||||||||||||
| Research and development | 137,376 | 28,632 | 49,917 | — | 215,925 | |||||||||||||||
| Amortization of intangibles | 49,787 | — | 18,291 | — | 68,078 | |||||||||||||||
| Contingent consideration expense | 17,633 | — | 10,564 | — | 28,197 | |||||||||||||||
| Total operating costs and expenses | 629,130 | 34,608 | 251,857 | — | 915,595 | |||||||||||||||
| Operating income (loss) | (129,939 | ) | (34,599 | ) | 172,709 | — | 8,171 | |||||||||||||
| Other income (expenses): | ||||||||||||||||||||
| Gains (losses) on investments in equity securities, net | (651 | ) | — | — | — | (651 | ) | |||||||||||||
| Other | 805 | — | (191 | ) | — | 614 | ||||||||||||||
| Inter-subsidiary income (expense) | (21,000 | ) | 135,046 | (114,046 | ) | — | — | |||||||||||||
| Investment income | 524 | 3,579 | 440 | — | 4,543 | |||||||||||||||
| Interest expense | (2,479 | ) | — | 2,479 | — | — | ||||||||||||||
| Total other income (expenses) | (22,801 | ) | 138,625 | (111,318 | ) | — | 4,506 | |||||||||||||
| Income (loss) from continuing operations before income taxes | (152,740 | ) | 104,026 | 61,391 | — | 12,677 | ||||||||||||||
| Benefit from (provision for) income taxes | 60,259 | (37,197 | ) | (22,097 | ) | — | 965 | |||||||||||||
| Income (loss) from continuing operations, net of tax | (92,481 | ) | 66,829 | 39,294 | — | 13,642 | ||||||||||||||
| Income from discontinued operations, net of tax | 1,038 | — | 1,315 | — | 2,353 | |||||||||||||||
| Income from subsidiaries | 107,438 | — | — | (107,438 | ) | — | ||||||||||||||
| Net income (loss) | $ | 15,995 | $ | 66,829 | $ | 40,609 | $ | (107,438 | ) | $ | 15,995 | |||||||||
45
| Genzyme | Guarantor | Non-Guarantor | ||||||||||||||||||
| Corporation | Subsidiary | Subsidiaries | Eliminations | Total | ||||||||||||||||
| Revenues: | ||||||||||||||||||||
| Net product sales | $ | 1,648,428 | $ | 53 | $ | 1,213,698 | $ | — | $ | 2,862,179 | ||||||||||
| Net service sales | 26,560 | — | 5,610 | — | 32,170 | |||||||||||||||
| Research and development revenue | 1,940 | — | 566 | — | 2,506 | |||||||||||||||
| Total revenues | 1,676,928 | 53 | 1,219,874 | — | 2,896,855 | |||||||||||||||
| Operating costs and expenses: | ||||||||||||||||||||
| Cost of products sold | 573,241 | 3,895 | 256,823 | — | 833,959 | |||||||||||||||
| Cost of services sold | 15,501 | — | 7,014 | — | 22,515 | |||||||||||||||
| Selling, general and administrative | 636,247 | 153,317 | 414,354 | — | 1,203,918 | |||||||||||||||
| Research and development | 429,786 | 73,759 | 141,642 | — | 645,187 | |||||||||||||||
| Amortization of intangibles | 149,426 | — | 44,901 | — | 194,327 | |||||||||||||||
| Contingent consideration expense | (79,893 | ) | — | 149,329 | — | 69,436 | ||||||||||||||
| Total operating costs and expenses | 1,724,308 | 230,971 | 1,014,063 | — | 2,969,342 | |||||||||||||||
| Operating income (loss) | (47,380 | ) | (230,918 | ) | 205,811 | — | (72,487 | ) | ||||||||||||
| Other income (expenses): | ||||||||||||||||||||
| Equity in loss of equity method investments | (2,210 | ) | — | — | — | (2,210 | ) | |||||||||||||
| Losses on investments in equity securities, net | (26,750 | ) | — | — | (26,750 | ) | ||||||||||||||
| Other | (2,725 | ) | — | 2,082 | — | (643 | ) | |||||||||||||
| Inter-subsidiary income (expense) | (24,954 | ) | 300,475 | (275,521 | ) | — | — | |||||||||||||
| Investment income | 595 | 6,987 | 1,205 | — | 8,787 | |||||||||||||||
| Interest expense | (7,336 | ) | — | 3,978 | — | (3,358 | ) | |||||||||||||
| Total other income (expenses) | (63,380 | ) | 307,462 | (268,256 | ) | — | (24,174 | ) | ||||||||||||
| Income (loss) from continuing operations before income taxes | (110,760 | ) | 76,544 | (62,445 | ) | — | (96,661 | ) | ||||||||||||
| Benefit from (provision for) income taxes | 70,179 | (41,456 | ) | 29,770 | — | 58,493 | ||||||||||||||
| Income (loss) from continuing operations, net of tax | (40,581 | ) | 35,088 | (32,675 | ) | — | (38,168 | ) | ||||||||||||
| Income (loss) from discontinued operations, net of tax | (13,048 | ) | (6 | ) | 1,455 | — | (11,599 | ) | ||||||||||||
| Income from subsidiaries | 3,862 | — | — | (3,862 | ) | — | ||||||||||||||
| Net income (loss) | $ | (49,767 | ) | $ | 35,082 | $ | (31,220 | ) | $ | (3,862 | ) | $ | (49,767 | ) | ||||||
46
| Genzyme | Guarantor | Non-Guarantor | ||||||||||||||||||
| Corporation | Subsidiary | Subsidiaries | Eliminations | Total | ||||||||||||||||
| Revenues: | ||||||||||||||||||||
| Net product sales | $ | 1,631,600 | $ | 11 | $ | 1,355,817 | $ | — | $ | 2,987,428 | ||||||||||
| Net service sales | 27,346 | — | 5,312 | — | 32,658 | |||||||||||||||
| Research and development revenue | 18,441 | — | 471 | — | 18,912 | |||||||||||||||
| Total revenues | 1,677,387 | 11 | 1,361,600 | — | 3,038,998 | |||||||||||||||
| Operating costs and expenses: | ||||||||||||||||||||
| Cost of products sold | 654,739 | (174,635 | ) | 272,267 | — | 752,371 | ||||||||||||||
| Cost of services sold | 8,641 | — | 13,200 | — | 21,841 | |||||||||||||||
| Selling, general and administrative | 566,242 | 1,376 | 336,406 | — | 904,024 | |||||||||||||||
| Research and development | 407,047 | 70,992 | 130,896 | — | 608,935 | |||||||||||||||
| Amortization of intangibles | 145,831 | — | 37,439 | — | 183,270 | |||||||||||||||
| Contingent consideration expense | 23,629 | — | 13,658 | — | 37,287 | |||||||||||||||
| Total operating costs and expenses | 1,806,129 | (102,267 | ) | 803,866 | — | 2,507,728 | ||||||||||||||
| Operating income (loss) | (128,742 | ) | 102,278 | 557,734 | — | 531,270 | ||||||||||||||
| Other income (expenses): | ||||||||||||||||||||
| Losses on investments in equity securities, net | (1,332 | ) | — | — | — | (1,332 | ) | |||||||||||||
| Gain on acquisition of business | 23,068 | — | 1,091 | — | 24,159 | |||||||||||||||
| Other | 388 | — | (2,735 | ) | — | (2,347 | ) | |||||||||||||
| Inter-subsidiary income (expense) | (32,222 | ) | 406,365 | (374,143 | ) | — | — | |||||||||||||
| Investment income | 2,247 | 10,507 | 1,284 | — | 14,038 | |||||||||||||||
| Interest expense | (7,282 | ) | — | 7,282 | — | — | ||||||||||||||
| Total other income (expenses) | (15,133 | ) | 416,872 | (367,221 | ) | — | 34,518 | |||||||||||||
| Income (loss) from continuing operations before income taxes | (143,875 | ) | 519,150 | 190,513 | — | 565,788 | ||||||||||||||
| Benefit from (provision for) income taxes | 70,935 | (175,877 | ) | (55,363 | ) | — | (160,305 | ) | ||||||||||||
| Income (loss) from continuing operations, net of tax | (72,940 | ) | 343,273 | 135,150 | — | 405,483 | ||||||||||||||
| Income (loss) from discontinued operations, net of tax | (12,231 | ) | — | 5,803 | — | (6,428 | ) | |||||||||||||
| Income from subsidiaries | 484,226 | — | — | (484,226 | ) | — | ||||||||||||||
| Net income (loss) | $ | 399,055 | $ | 343,273 | $ | 140,953 | $ | (484,226 | ) | $ | 399,055 | |||||||||
47
| Genzyme | Guarantor | Non-Guarantor | ||||||||||||||||||
| Corporation | Subsidiary | Subsidiaries | Eliminations | Total | ||||||||||||||||
ASSETS | ||||||||||||||||||||
| Current assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | 396,570 | $ | 52,068 | $ | 450,527 | $ | — | $ | 899,165 | ||||||||||
| Short-term investments | — | 101,961 | — | — | 101,961 | |||||||||||||||
| Accounts receivable, net | 435,279 | (11 | ) | 499,926 | — | 935,194 | ||||||||||||||
| Inventories | 210,147 | 84,241 | 302,342 | — | 596,730 | |||||||||||||||
| Assets held for sale | 94,230 | — | 54,516 | — | 148,746 | |||||||||||||||
| Other current assets | 50,298 | (376 | ) | 174,475 | — | 224,397 | ||||||||||||||
| Intercompany accounts and notes receivable | 202,946 | 60,940 | 542,083 | (805,969 | ) | — | ||||||||||||||
| Deferred tax assets | 166,185 | 6,916 | 11,561 | — | 184,662 | |||||||||||||||
| Total current assets | 1,555,655 | 305,739 | 2,035,430 | (805,969 | ) | 3,090,855 | ||||||||||||||
| Property, plant and equipment, net | 1,369,266 | 209,068 | 1,288,613 | — | 2,866,947 | |||||||||||||||
| Long-term investments | — | 165,385 | — | — | 165,385 | |||||||||||||||
| Intercompany notes receivable | 52,048 | — | 211,925 | (263,973 | ) | — | ||||||||||||||
| Goodwill | 1,271,120 | — | 89,858 | — | 1,360,978 | |||||||||||||||
| Other intangible assets, net | 1,262,716 | — | 596,696 | — | 1,859,412 | |||||||||||||||
| Deferred tax assets-noncurrent | 539,205 | (815 | ) | 52,373 | — | 590,763 | ||||||||||||||
| Investment in equity securities | 64,961 | — | — | — | 64,961 | |||||||||||||||
| Investment in subsidiaries | 2,757,255 | — | — | (2,757,255 | ) | — | ||||||||||||||
| Assets held for sale-noncurrent | 216,557 | — | 76,947 | — | 293,504 | |||||||||||||||
| Other noncurrent assets | 66,990 | — | 59,326 | — | 126,316 | |||||||||||||||
| Total assets | $ | 9,155,773 | $ | 679,377 | $ | 4,411,138 | $ | (3,827,197 | ) | $ | 10,419,121 | |||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||
| Current liabilities: | ||||||||||||||||||||
| Accounts payable | $ | 89,733 | $ | 296 | $ | 82,021 | $ | — | $ | 172,050 | ||||||||||
| Accrued expenses | 380,783 | (3,931 | ) | 589,751 | — | 966,603 | ||||||||||||||
| Intercompany accounts and notes payable | 48,161 | (85,726 | ) | 843,534 | (805,969 | ) | — | |||||||||||||
| Deferred revenue | 26,297 | — | 12,570 | — | 38,867 | |||||||||||||||
| Current portion of contingent consideration obligations | 79,540 | — | 83,323 | — | 162,863 | |||||||||||||||
| Current portion of long-term debt and capital lease obligations | 7,350 | — | 70 | — | 7,420 | |||||||||||||||
| Liabilities held for sale | 54,013 | 52 | 9,528 | — | 63,593 | |||||||||||||||
| Total current liabilities | 685,877 | (89,309 | ) | 1,620,797 | (805,969 | ) | 1,411,396 | |||||||||||||
| Long-term debt and capital lease obligations | 1,100,738 | — | 39 | — | 1,100,777 | |||||||||||||||
| Long-term debt intercompany | — | — | 263,973 | (263,973 | ) | — | ||||||||||||||
| Deferred revenue-noncurrent | 21,616 | — | 27 | — | 21,643 | |||||||||||||||
| Long-term contingent consideration obligations | 326,913 | — | 476,587 | — | 803,500 | |||||||||||||||
| Other noncurrent liabilities | 19,392 | 17,250 | 43,926 | — | 80,568 | |||||||||||||||
| Total liabilities | 2,154,536 | (72,059 | ) | 2,405,349 | (1,069,942 | ) | 3,417,884 | |||||||||||||
| Commitments and contingencies | ||||||||||||||||||||
| Stockholders’ equity: | ||||||||||||||||||||
| Preferred stock, $0.01 par value | — | — | — | — | — | |||||||||||||||
| Common stock, $0.01 par value | 2,573 | — | — | — | 2,573 | |||||||||||||||
| Additional paid-in capital | 5,354,075 | — | — | — | 5,354,075 | |||||||||||||||
| Share purchase contract | (200,000 | ) | — | — | — | (200,000 | ) | |||||||||||||
| Accumulated earnings | 1,620,329 | — | — | — | 1,620,329 | |||||||||||||||
| Accumulated other comprehensive income | 224,260 | — | — | — | 224,260 | |||||||||||||||
| Total stockholders’ equity | 7,001,237 | — | — | — | 7,001,237 | |||||||||||||||
| Subsidiary equity | — | 751,436 | 2,005,819 | (2,757,255 | ) | — | ||||||||||||||
| Total liabilities and stockholders’ equity: | $ | 9,155,773 | $ | 679,377 | $ | 4,411,168 | $ | (3,827,197 | ) | $ | 10,419,121 | |||||||||
48
| Genzyme | Guarantor | Non-Guarantor | ||||||||||||||||||
| Corporation | Subsidiary | Subsidiaries | Eliminations | Total | ||||||||||||||||
ASSETS | ||||||||||||||||||||
| Current assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | 358,759 | $ | 103,119 | $ | 280,368 | $ | — | $ | 742,246 | ||||||||||
| Short-term investments | 11,649 | 151,981 | — | — | 163,630 | |||||||||||||||
| Accounts receivable, net | 310,731 | — | 482,825 | — | 793,556 | |||||||||||||||
| Inventories | 226,730 | 76,205 | 246,358 | — | 549,293 | |||||||||||||||
| Assets held for sale | 120,967 | — | 49,400 | — | 170,367 | |||||||||||||||
| Other current assets | 112,614 | 251 | 92,419 | — | 205,284 | |||||||||||||||
| Intercompany accounts and notes receivable | — | 798,907 | 272,166 | (1,071,073 | ) | — | ||||||||||||||
| Deferred tax assets | 169,615 | 3,486 | 5,326 | — | 178,427 | |||||||||||||||
| Total current assets | 1,311,065 | 1,133,949 | 1,428,862 | (1,071,073 | ) | 2,802,803 | ||||||||||||||
| Property, plant and equipment, net | 1,147,549 | 189,320 | 1,290,362 | — | 2,627,231 | |||||||||||||||
| Long-term investments | 11,668 | 132,156 | — | — | 143,824 | |||||||||||||||
| Intercompany notes receivable | 207,891 | 25 | 200,407 | (408,323 | ) | — | ||||||||||||||
| Goodwill | 1,271,120 | — | 89,858 | — | 1,360,978 | |||||||||||||||
| Other intangible assets, net | 1,746,607 | — | 517,541 | — | 2,264,148 | |||||||||||||||
| Deferred tax assets–noncurrent | 372,408 | — | 4,407 | — | 376,815 | |||||||||||||||
| Investment in equity securities | 74,438 | — | — | — | 74,438 | |||||||||||||||
| Investment in subsidiaries | 4,264,074 | — | — | (4,264,074 | ) | — | ||||||||||||||
| Assets held for sale–noncurrent | 192,762 | — | 81,277 | — | 274,039 | |||||||||||||||
| Other noncurrent assets | 91,412 | — | 45,036 | — | 136,448 $ | |||||||||||||||
| Total assets | $ | 10,690,995 | $ | 1,455,450 | $ | 3,657,749 | $ | (5,743,470 | ) | $ | 10,060,724 | |||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||
| Current liabilities: | ||||||||||||||||||||
| Accounts payable | $ | 43,807 | $ | — | $ | 131,073 | $ | — | $ | 174,880 | ||||||||||
| Accrued expenses | 447,099 | 9,603 | 201,131 | — | 657,833 | |||||||||||||||
| Intercompany accounts and notes payable | 1,408,904 | (323,590 | ) | (14,241 | ) | (1,071,073 | ) | — | ||||||||||||
| Deferred revenue | 13,736 | — | 10,194 | — | 23,930 | |||||||||||||||
| Current portion of contingent consideration obligations | 69,037 | — | 92,328 | — | 161,365 | |||||||||||||||
| Current portion of long-term debt and capital lease obligations | 6,874 | — | 42 | — | 6,916 | |||||||||||||||
| Liabilities held for sale | 62,688 | — | (7,482 | ) | — | 55,206 | ||||||||||||||
| Total current liabilities | 2,052,145 | (313,987 | ) | 413,045 | (1,071,073 | ) | 1,080,130 | |||||||||||||
| Long-term debt and capital lease obligations | 111,795 | — | 41 | — | 111,836 | |||||||||||||||
| Long-term debt intercompany | — | 144,382 | 263,941 | (408,323 | ) | — | ||||||||||||||
| Deferred revenue–noncurrent | 13,356 | — | 29 | — | 13,385 | |||||||||||||||
| Long-term contingent consideration obligations | 582,050 | — | 271,821 | — | 853,871 | |||||||||||||||
| Liabilities held for sale–noncurrent | 4,598 | — | — | — | 4,598 | |||||||||||||||
| Other noncurrent liabilities | 243,399 | 21,798 | 48,055 | — | 313,252 | |||||||||||||||
| Total liabilities | 3,007,343 | (147,807 | ) | 996,932 | (1,479,396 | ) | 2,377,072 | |||||||||||||
| Commitments and contingencies | ||||||||||||||||||||
| Stockholders’ equity: | ||||||||||||||||||||
| Preferred stock, $0.01 par value | — | — | — | — | — | |||||||||||||||
| Common stock, $0.01 par value | 2,657 | — | — | — | 2,657 | |||||||||||||||
| Additional paid-in capital | 5,688,741 | — | — | — | 5,688,741 | |||||||||||||||
| Accumulated earnings | 1,670,096 | — | — | — | 1,670,096 | |||||||||||||||
| Accumulated other comprehensive income | 322,158 | — | — | — | 322,158 | |||||||||||||||
| Total stockholders’ equity | 7,683,652 | — | — | — | 7,683,652 | |||||||||||||||
| Subsidiary equity | 1,603,257 | 2,660,817 | (4,264,074 | ) | — | |||||||||||||||
| Total liabilities and stockholders’ equity: | $ | 10,690,995 | $ | 1,455,450 | $ | 3,657,749 | $ | (5,743,470 | ) | $ | 10,060,724 | |||||||||
49
| | March 31, 2010 | December 31, 2009 | ||||||
|---|---|---|---|---|---|---|---|---|
Cash, cash equivalents, short- and long-term investments in debt securities | $ | 961,699 | $ | 1,049,700 | ||||
Deferred tax assets, net | 582,688 | 555,242 | ||||||
Property, plant & equipment, net | 1,813,697 | 1,787,054 | ||||||
Investments in equity securities | 79,881 | 74,438 | ||||||
Other | 545,860 | 449,783 | ||||||
Total | $ | 3,983,825 | $ | 3,916,217 | ||||
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF GENZYME CORPORATION AND SUBSIDIARIES' FINANCIAL CONDITIONSUBSIDIARIES
| Genzyme | Guarantor | Non-Guarantor | ||||||||||||||||||
| Corporation | Subsidiary | Subsidiaries | Eliminations | Total | ||||||||||||||||
Cash Flows from Operating Activities: | ||||||||||||||||||||
| Net income (loss) | $ | (49,767 | ) | $ | 35,082 | $ | (31,220 | ) | $ | (3,862 | ) | $ | (49,767 | ) | ||||||
| Reconciliation of net income (loss) to cash flows from operating activities: | ||||||||||||||||||||
| Depreciation and amortization | 255,855 | — | 115,155 | — | 371,010 | |||||||||||||||
| Stock-based compensation | 118,589 | — | 23,465 | — | 142,054 | |||||||||||||||
| Provision for bad debts | 16,315 | — | 180 | — | 16,495 | |||||||||||||||
| Contingent consideration expense | (79,893 | ) | — | 149,329 | — | 69,436 | ||||||||||||||
| Equity in loss of equity method investments | 2,210 | — | — | — | 2,210 | |||||||||||||||
| Intercompany | 639,261 | (149,412 | ) | (491,488 | ) | 1,639 | — | |||||||||||||
| Losses on investments in equity securities, net | 26,750 | — | — | — | 26,750 | |||||||||||||||
| Deferred income tax benefit | (72,581 | ) | — | (22,969 | ) | — | (95,550 | ) | ||||||||||||
| Tax benefit from employee stock-based compensation | 47,982 | — | — | — | 47,982 | |||||||||||||||
| Excess tax benefit from stock-based compensation | 15,481 | — | — | — | 15,481 | |||||||||||||||
| Other | 28,885 | — | (24,744 | ) | — | 4,141 | ||||||||||||||
| Increase (decrease) in cash from working capital changes (excluding impact of acquired assets and assumed liabilities): | ||||||||||||||||||||
| Accounts receivable | (68,337 | ) | 11 | (94,292 | ) | — | (162,618 | ) | ||||||||||||
| Inventories | 65,158 | (8,036 | ) | (118,928 | ) | — | (61,806 | ) | ||||||||||||
| Other current assets | (19,317 | ) | 627 | (59,072 | ) | — | (77,762 | ) | ||||||||||||
| Accounts payable, accrued expenses and deferred revenue | (673,591 | ) | 43,867 | 945,614 | — | 315,890 | ||||||||||||||
| Cash flows from operating activities | 253,000 | (77,861 | ) | 391,030 | (2,223 | ) | 563,946 | |||||||||||||
Cash Flows from Investing Activities: | ||||||||||||||||||||
| Purchases of investments | — | (305,784 | ) | — | — | (305,784 | ) | |||||||||||||
| Sales and maturities of investments | 685 | 340,404 | — | — | 341,089 | |||||||||||||||
| Purchases of equity securities | (4,724 | ) | — | — | — | (4,724 | ) | |||||||||||||
| Proceeds from sales of investments in equity securities | 14,208 | — | — | — | 14,208 | |||||||||||||||
| Purchases of property, plant and equipment | (371,082 | ) | (1,163 | ) | (125,687 | ) | — | (497,932 | ) | |||||||||||
| Investments in equity method investment | (2,915 | ) | — | — | — | (2,915 | ) | |||||||||||||
| Purchases of other intangible assets | (6,166 | ) | — | (174 | ) | — | (6,340 | ) | ||||||||||||
| Other | (1,809 | ) | — | (7,632 | ) | — | (9,441 | ) | ||||||||||||
| Cash flows from investing activities | (371,803 | ) | 33,457 | (133,493 | ) | — | (471,839 | ) | ||||||||||||
Cash Flows from Financing Activities: | ||||||||||||||||||||
| Proceeds from issuance of common stock | 274,469 | — | — | — | 274,469 | |||||||||||||||
| Repurchases of our common stock | (800,000 | ) | — | — | — | (800,000 | ) | |||||||||||||
| Payments under shares purchase contract | (200,000 | ) | — | — | — | (200,000 | ) | |||||||||||||
| Excess tax benefit from stock-based compensation | (15,481 | ) | — | — | — | (15,481 | ) | |||||||||||||
| Proceeds from issuance of debt, net | 994,368 | — | — | — | 994,368 | |||||||||||||||
| Payments of debt and capital lease obligations | (6,245 | ) | — | — | — | (6,245 | ) | |||||||||||||
| Decrease in bank overdrafts | (43,373 | ) | — | — | — | (43,373 | ) | |||||||||||||
| Payment of contingent consideration obligation | (28,027 | ) | — | (72,141 | ) | — | (100,168 | ) | ||||||||||||
| Other | 3,695 | (6,647 | ) | 669 | — | (2,283 | ) | |||||||||||||
| Cash flows from financing activities | 179,406 | (6,647 | ) | (71,472 | ) | — | 101,287 | |||||||||||||
| Effect of exchange rate changes on cash | (22,792 | ) | — | (15,906 | ) | 2,223 | (36,475 | ) | ||||||||||||
| Increase (decrease) in cash and cash equivalents | 37,811 | (51,051 | ) | 170,159 | — | 156,919 | ||||||||||||||
| Cash and cash equivalents at beginning of period | 358,759 | 103,119 | 280,368 | — | 742,246 | |||||||||||||||
| Cash and cash equivalents at end of period | $ | 396,570 | $ | 52,068 | $ | 450,527 | $ | — | $ | 899,165 | ||||||||||
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| Genzyme | Guarantor | Non-Guarantor | ||||||||||||||||||
| Corporation | Subsidiary | Subsidiaries | Eliminations | Total | ||||||||||||||||
Cash Flows from Operating Activities: | ||||||||||||||||||||
| Net income (loss) | $ | 399,055 | $ | 343,273 | $ | 140,953 | $ | (484,226 | ) | $ | 399,055 | |||||||||
| Reconciliation of net income (loss) to cash flows from operating activities: | ||||||||||||||||||||
| Depreciation and amortization | 236,295 | 1,103 | 91,961 | — | 329,359 | |||||||||||||||
| Stock-based compensation | 156,141 | — | — | — | 156,141 | |||||||||||||||
| Provision for bad debts | 14,177 | — | 523 | — | 14,700 | |||||||||||||||
| Contingent consideration expense | 23,629 | — | 13,658 | — | 37,287 | |||||||||||||||
| Intercompany | 36,777 | (344,151 | ) | (163,875 | ) | 471,249 | — | |||||||||||||
| Gain on acquisition of business | (23,068 | ) | — | (1,091 | ) | — | (24,159 | ) | ||||||||||||
| Losses on investments in equity securities, net | 1,332 | — | — | — | 1,332 | |||||||||||||||
| Deferred income tax benefit | (35,971 | ) | — | (38,978 | ) | (74,949 | ) | |||||||||||||
| Tax benefit from employee stock-based compensation | 10,956 | — | — | — | 10,956 | |||||||||||||||
| Excess tax benefit from stock-based compensation | (3,309 | ) | — | — | — | (3,309 | ) | |||||||||||||
| Other | 12,241 | (9,400 | ) | 5,676 | — | 8,517 | ||||||||||||||
| Increase (decrease) in cash from working capital changes (excluding impact of acquired assets and assumed liabilities): | ||||||||||||||||||||
| Accounts receivable | 9,782 | 10 | 43,252 | — | 53,044 | |||||||||||||||
| Inventories | 39,633 | (961 | ) | (18,133 | ) | — | 20,539 | |||||||||||||
| Other current assets | 3,822 | 370 | (16,493 | ) | — | (12,301 | ) | |||||||||||||
| Accounts payable, accrued expenses and deferred revenue | (97,186 | ) | 15,994 | 121,561 | — | 40,369 | ||||||||||||||
| Cash flows from operating activities | 784,306 | 6,238 | 179,014 | (12,977 | ) | 956,581 | ||||||||||||||
Cash Flows from Investing Activities: | ||||||||||||||||||||
| Purchases of investments | — | (244,101 | ) | (107 | ) | — | (244,208 | ) | ||||||||||||
| Sales and maturities of investments | — | 336,918 | — | — | 336,918 | |||||||||||||||
| Purchases of equity securities | (7,548 | ) | — | — | — | (7,548 | ) | |||||||||||||
| Proceeds from sales of investments in equity securities | 2,365 | — | — | — | 2,365 | |||||||||||||||
| Purchases of property, plant and equipment | (249,507 | ) | (44,802 | ) | (186,127 | ) | — | (480,436 | ) | |||||||||||
| Acquisitions | (27,867 | ) | — | (29,371 | ) | — | (57,238 | ) | ||||||||||||
| Purchases of other intangible assets | (29,838 | ) | — | — | — | (29,838 | ) | |||||||||||||
| Other | (4,509 | ) | — | (2,587 | ) | — | (7,096 | ) | ||||||||||||
| Cash flows from investing activities | (316,904 | ) | 48,015 | (218,192 | ) | — | (487,081 | ) | ||||||||||||
Cash Flows from Financing Activities: | ||||||||||||||||||||
| Proceeds from issuance of common stock | 76,125 | — | — | — | 76,125 | |||||||||||||||
| Repurchases of our common stock | (413,874 | ) | — | — | — | (413,874 | ) | |||||||||||||
| Excess tax benefit from stock-based compensation | 3,309 | — | — | — | 3,309 | |||||||||||||||
| Payments of debt and capital lease obligations | (5,922 | ) | — | 14 | — | (5,908 | ) | |||||||||||||
| Decrease in bank overdrafts | (17,552 | ) | — | — | — | (17,552 | ) | |||||||||||||
| Other | (1,679 | ) | 559 | (4,117 | ) | — | (5,237 | ) | ||||||||||||
| Cash flows from financing activities | (359,593 | ) | 559 | (4,103 | ) | — | (363,137 | ) | ||||||||||||
| Effect of exchange rate changes on cash | (11,788 | ) | (2,098 | ) | 1,999 | 12,977 | 1,090 | |||||||||||||
| Increase (decrease) in cash and cash equivalents | 96,021 | 52,714 | (41,282 | ) | — | 107,453 | ||||||||||||||
| Cash and cash equivalents at beginning of period | 330,277 | 11,647 | 230,182 | — | 572,106 | |||||||||||||||
| Cash and cash equivalents at end of period | $ | 426,298 | $ | 64,361 | $ | 188,900 | $ | — | $ | 679,559 | ||||||||||
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| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF GENZYME CORPORATION AND SUBSIDIARIES’ FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
| • | Personalized Genetic Health, which develops, manufactures and distributes therapeutic products with a focus on products to treat patients suffering from genetic diseases and other chronic debilitating diseases, including a family of diseases known as LSDs, and cardiovascular disease. The unit derives substantially all of its revenue from sales of Cerezyme, Fabrazyme, Myozyme/Lumizyme, Aldurazyme and Elaprase and royalties earned on sales of Welchol; | |
| • | Renal and Endocrinology, which develops, manufactures and distributes products that treat patients suffering from renal diseases, including chronic renal failure, and endocrine and immune-mediated diseases. The unit derives substantially all of its revenue from sales of Renagel/Renvela (including sales of bulk sevelamer), Hectorol and Thyrogen; | |
| • | Biosurgery, which develops, manufactures and distributes biotherapeutics and biomaterial-based products, with an emphasis on products that meet medical needs in the orthopaedics and broader surgical areas. The unit derives substantially all of its revenue from sales of Synvisc/Synvisc-One and the Sepra line of products; | |
| • | Hematology and Oncology, which develops, manufactures and distributes products for the treatment of cancer, the mobilization of hematopoietic stem cells and the treatment of transplant rejection and other hematologic and auto-immune disorders. The unit derives substantially all of its revenue from sales of Mozobil, Thymoglobulin, Clolar, Campath, Fludara and Leukine; and | |
| • | Multiple Sclerosis, which is developing products, including alemtuzumab, for the treatment of MS and other auto-immune disorders. |
| • | our former Genetic Diseases reporting segment is now referred to as ���Personalized Genetic Health,” or “PGH,” and now includes our cardiovascular business unit, which previously was reported under the |
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| caption “Cardiometabolic and Renal,” and our Welchol product line, which previously was reported as part of our pharmaceutical intermediates business unit under the caption “Other;” |
| • | our former Cardiometabolic and Renal reporting segment is now referred to as “Renal and Endocrinology” and now includes the assets that formerly comprised our immune-mediated diseases business unit, which previously was reported under the caption “Other,” but no longer includes our cardiovascular business unit; and | |
| • | our former Hematologic Oncology segment is now referred to as “Hematology and Oncology” and now includes our transplant business unit, which previously was reported under the caption “Other,” but no longer includes our multiple sclerosis business unit, which is now reported as a separate reporting segment called “Multiple Sclerosis.” |
“Corporate.”
STRATEGIC TRANSACTIONS
Acquisition On August 24, 2010, our financial advisors met with Sanofi’s financial advisors and provided certain non-public information relating to our business operations and projected financial results. On August 29, 2010, we received a second letter from Bayer
On May 29, 2009, we completedSanofi that contained a transaction with Bayer to:
Priorcash. Also on October 4, 2010, our board of directors urged shareholders to this transaction, we shared with Bayer the development and certain commercial rights to alemtuzumab for MS and Campath and received two-thirds of Campath net profits on U.S. sales and a royalty on foreign sales. Under our new arrangement with Bayer, prior to regulatory approval of alemtuzumab for MS, we have primary responsibility for the product's development while Bayer continues to fund development at the levels specified under the previous agreement and participates in
a development steering committee. We have worldwide commercialization rights, with Bayer retaining an option to co-promote alemtuzumab for MS. In exchange for the above, Bayer is eligible to receive contingent purchase price payments based on revenues from sales of the products and achievement of sales-based milestones. We will also pay Bayer to acquire the Leukine manufacturing facility following its FDA approval. The terms of these contingent purchase price payments are described in more detail in our 2009 Form 10-K. These contingent purchase price payments could amount to over $2.9 billion in total and extend, in certain circumstances, over more than ten years.
The transaction was accounted for as a business combination and is included in our results of operations beginning on May 29, 2009, the date of acquisition. The results for Campath, Fludara and Leukine are included in our Hematology and Oncology reporting segment and the results for alemtuzumab for MS are included in our Multiple Sclerosis reporting segment. The fair value of the total consideration for this transaction was $1.01 billion, consisting of $42.4 million of cash payments net of refundable cash deposits, and $964.1 million of contingent consideration obligations. We allocated the purchase price to the identifiable assets acquired in this transaction based on their estimated fair values as of the date of acquisition, of which $136.4 million was allocated to inventory and $894.3 million was allocated to intangible assets. We recognized a gain on acquisition of business of $24.2 million in our consolidated statements of operations for the second quarter of 2009 representing the amount by which the fair value of the acquired assets of $1.03 billion exceeded the fair value of the purchase price of $1.01 billion.
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 adjustmentstake no action with respect to regulatory approval of alemtuzumab for MS.
As of December 31, 2009, the fair valuetender offer. Our board announced that it intended to take a formal position within 10 business days of the total contingent consideration obligationscommencement of the tender offer. On October 7, 2010, our board voted unanimously to reject the unsolicited tender offer and further recommended that our shareholders not tender their shares to Sanofi pursuant to the tender offer. The full basis for our board’s recommendation was $1.02 billion. During the three months ended March 31, 2010:
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As of March 31, 2010, the fair value of the total contingent consideration obligations increasedplan pursuant to $1.03 billion primarily duewhich we expect to changes in the assumed timing and amount of revenue and expense estimates. Accordingly, we recordedeliminate a total of $62.5 million1,000 positions by the end of contingent consideration expense, of which $35.5 million is related to changes in estimates, in our consolidated statements of operations for the three months ended March 31, 2010 to reflect the increase in fair value,2011. The first phase will eliminate 392 positions, including $21.4 million for our Hematologyboth filled and Oncology reporting segmentunfilled positions, across various functions and $41.1 million for our Multiple Sclerosis reporting segment. In April 2010, we received $7.6 million of funding from Bayer for the development of alemtuzumab for MS.
Purchase of Intellectual Property from EXACT Sciences Corporation
On January 27, 2009, we purchased certain intellectual propertylocations. Employees whose positions are eliminated in the fieldsfirst phase were notified beginning on November 4, 2010. In the United States, affected employees are being offered severance packages, including severance payments, temporary healthcare coverage assistance and outplacement services. Similar packages will be offered to affected employees outside of prenatalthe United States in accordance with local laws. In connection with the elimination of filled positions in the first phase of the workforce reduction plan, we estimate incurring total charges of $24 million to $27 million, primarily for one-time severance benefits and facilities-related costs. These charges are expected to occur in the fourth quarter of 2010. The 1,000 positions expected to be eliminated exclude positions within our genetic testing and reproductive health from EXACT Sciences for our genetics business unit, and 3,000,000 shares of EXACT Sciences common stock. We paid EXACT Sciences total cash consideration of $22.7 million at that time. 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,for which we recordedhave entered into an agreement to sell, and positions within our diagnostic products and pharmaceutical intermediates business units, for which similar transactions are targeted by the end of 2010. The workforce reduction plan is being implemented to reduce costs and increase efficiencies as anpart of a larger plan to increase to investmentsshareholder value announced in equity securities in our consolidated balance sheet as of March 31, 2009. As the purchased assets did not qualify as a business combination 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 statements of operations in March 2009. Additional amounts we paid during the first quarter of 2010 and amounts we will pay in the future to EXACT Sciences under this agreement are not significant.
| • | Contractual adjustments — We offer chargebacks and contractual discounts and rebates, which we collectively refer to as contractual adjustments, to certain private institutions and various government agencies in both the United States and international markets. We record chargebacks and contractual discounts as allowances against accounts receivable in our consolidated balance sheets. We account for rebates by establishing an accrual for the amounts payable by us to these agencies and institutions, which is included in accrued liabilities in our consolidated balance sheets. We estimate the allowances and accruals for our contractual adjustments based on historical experience and current contract prices, using both internal data as well as information obtained from external sources, such as independent market research agencies and data from wholesalers. We continually monitor the adequacy of these estimates and adjust the allowances and accruals periodically throughout each quarter to reflect our actual experience. In evaluating these allowances and accruals, we consider several factors, including significant changes in the sales performance of our products subject to contractual adjustments, |
54
| inventory in the distribution channel, changes in U.S. and foreign healthcare legislation impacting rebate or allowance rates, changes in contractual discount rates and the estimated lag time between a sale and payment of the corresponding rebate; |
cash discounts by reducing accounts receivable by the full amounts of the discounts. We consider payment performance and adjust the accrual to reflect actual experience; and
| • | Discounts — In some countries, we offer cash discounts for certain products as an incentive for prompt payment, which are generally a stated percentage off the sales price. We account for cash discounts by reducing accounts receivable by the full amounts of the discounts. We consider payment performance and adjust the accrual to reflect actual experience; and | |
| • | Sales returns — We record allowances for product returns at the time product sales are recorded. The product returns reserve is estimated based on the returns policies for our individual products and our experience of returns for each of our products. We also consider the product’s lifecycle and possible competition pending, including generic products. If the price of a product changes or if the history of product returns changes, the reserve is adjusted accordingly. We determine our estimates of the sales return accrual for new products primarily based on the historical sales returns experience of similar products, or those within the same or similar therapeutic category. |
| Three Months Ended | Increase/ | Nine Months Ended | Increase/ | |||||||||||||||||||||||||||||
| September 30, | Increase/ | (Decrease) | September 30, | Increase/ | (Decrease) | |||||||||||||||||||||||||||
| 2010 | 2009 | (Decrease) | % Change | 2010 | 2009 | (Decrease) | % Change | |||||||||||||||||||||||||
| Product sales allowances: | ||||||||||||||||||||||||||||||||
| Contractual adjustments | $ | 211,790 | $ | 159,281 | $ | 52,509 | 33 | % | $ | 611,815 | $ | 442,863 | $ | 168,952 | 38 | % | ||||||||||||||||
| Discounts | 7,628 | 6,628 | 1,000 | 15 | % | 22,132 | 19,668 | 2,464 | 13 | % | ||||||||||||||||||||||
| Sales returns | 3,749 | 7,019 | (3,270 | ) | (47 | )% | 19,005 | 22,917 | (3,912 | ) | (17 | )% | ||||||||||||||||||||
| Total product sales allowances | $ | 223,167 | $ | 172,928 | $ | 50,239 | 29 | % | $ | 652,952 | $ | 485,448 | $ | 167,504 | 35 | % | ||||||||||||||||
| Total gross product sales | $ | 1,214,714 | $ | 1,084,822 | $ | 129,892 | 12 | % | $ | 3,515,131 | $ | 3,472,876 | $ | 42,255 | 1 | % | ||||||||||||||||
| Total product sales allowances as a percent of total gross product sales | 18 | % | 16 | % | 19 | % | 14 | % | ||||||||||||||||||||||||
| | Three Months Ended March 31, | | | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Increase/ (Decrease) | Increase/ (Decrease) % Change | |||||||||||||
| | 2010 | 2009 | |||||||||||||
Product sales allowances: | |||||||||||||||
Contractual adjustments | $ | 180,296 | $ | 136,180 | $ | 44,116 | 32 | % | |||||||
Discounts | 6,630 | 6,275 | 355 | 6 | % | ||||||||||
Sales returns | 7,809 | 6,523 | 1,286 | 20 | % | ||||||||||
Total product sales allowances | $ | 194,735 | $ | 148,978 | $ | 45,757 | 31 | % | |||||||
Total gross product sales | $ | 1,166,360 | $ | 1,186,222 | $ | (19,862 | ) | (2 | )% | ||||||
Total product sales allowances as a percent of total gross product sales | 17 | % | 13 | % | |||||||||||
Total product sales allowances increased for both the three and nine months ended March 31,September 30, 2010, primarily due to:
| • | increased contractual adjustments totaling $38.8 million for the three months and $115.9 million for the nine months for our Renal and Endocrinology reporting segment, and $12.5 million for the three months and $42.7 million for the nine months for our Biosurgery reporting segment; | |
| • | $3.6 million for the three months and $30.1 million for the nine months of increased product sales allowances for our Hematology and Oncology reporting segment primarily due to contractual adjustments related to sales of Campath, Fludara and Leukine, which we acquired from Bayer in May 2009; and | |
| • | changes in our overall product mix. |
55
Renagel, Renvela and oral Hectorol, and our product Leukine, but be insignificantly impacted for our other products. Total accounts receivable in ourasinclude accounts receivable, net of March 31, 2010 and December 31, 2009 includereserves, held by our subsidiary in Greece related to sales to government-owned or supported healthcare facilities in Greece. These sales areGreece of approximately $65 million as of September 30, 2010 and approximately $57 million as of December 31, 2009. Payment of these accounts is subject to significant payment delays due to government funding and reimbursement practices. We believe that this is an industry-wide issue for suppliers to these facilities. The outstandingIn May 2010, the government of Greece announced a plan for repayment of its debt to international pharmaceutical companies, which calls for immediate payment of accounts receivable balances netthat were established in 2005 and 2006. For accounts receivable established between 2007 and 2009, the government of reserves,Greece will issue non-interest bearing bonds, expected to be exchange tradable, with maturities ranging from one to three years. We recorded a charge of $7.2 million to bad debt expense, a component of SG&A in our consolidated statements of operations for the second quarter of 2010 to write down the accounts receivable balances held by our subsidiary in Greece related to such sales were approximately $57 million aspresent value using a 10% risk adjusted discount rate.March 31, 2010the European Union and December 31, 2009.the IMF to avoid defaulting on its sovereign debt. If significant additional changes occur in the availability of government funding in Greece, we may not be able to collect on amounts due from these customers. We do not expect this concentration of credit risk to have a material adverse impact on our financial position or liquidity.States.States, which contains several provisions that impact our business. Although many provisions of the new legislation do not take effect immediately, several provisions became effective in the first quarter of 2010. These include:•an increase in the minimum Medicaid rebate to states participating in the Medicaid program from 15.1% to 23.1% on our branded prescription drugs and an increase of 17.1% for our drugs that are approved exclusively for pediatric patients;•the extension of the Medicaid rebate to managed care organizations that dispense drugs to Medicaid beneficiaries;•the expansion of the 340(B) PHS drug pricing program, which provides outpatient drugs at reduced rates, to include additional hospitals and healthcare centers (this provision, however, does not apply to orphan drugs); and•a requirement that the Medicaid rebate for a drug that is a "line extension" of a preexisting oral solid dosage form of the drug be linked in certain respects to the Medicaid rebate for the preexisting oral solid dosage form, such that the Medicaid rebate for most line extension drugs will be higher than it would have been absent the new law, especially if the preexisting oral solid dosage form has a history of significant price increases.These provisions did not have a significant impact on our results of operations or financial position for the first quarter of 2010.• an increase in the minimum Medicaid rebate to states participating in the Medicaid program from 15.1% to 23.1% on branded prescription drugs and an increase from 15.1% to 17.1% for drugs that are approved exclusively for pediatric patients; • the extension of the Medicaid rebate to managed care organizations that dispense drugs to Medicaid beneficiaries; • the expansion of the 340(B) PHS drug pricing program, which provides outpatient drugs at reduced rates, to include additional hospitals and healthcare centers (this provision, however, does not apply to orphan drugs); and • a requirement that the Medicaid rebate for a drug that is a “line extension” of a preexisting oral solid dosage form of the drug be linked in certain respects to the Medicaid rebate for the preexisting oral solid dosage form, such that the Medicaid rebate for most line extension drugs will be higher than it would have been absent the new law, especially if the preexisting oral solid dosage form has a history of significant price increases. consequently, theour injected/infused drugs, and such that Medicaid rebaterebates are expected to increase for some of our oral drugs, in particular those that offer discounted pricing to customers."donut hole"“donut hole”. Also beginning in 2011, clinical laboratory fee schedule payments will be reduced 1.75% over a period of five years and we will be required to pay our share of a new fee assessed on all branded prescription drug manufacturers and importers. This fee will be calculated based
56
excise tax will be imposed on sales of all medical devices except retail purchases by the public intended for individual use.
adopted by other countries facing budget constraints.
| • | the vendor receives, or will receive, an identifiable benefit (goods or services) in exchange for the consideration; and | |
| • | the vendor can reasonably estimate the fair value of the benefit received. |
57
| Three Months Ended | Increase/ | Nine Months Ended | Increase/ | |||||||||||||||||||||||||||||
| September 30, | Increase/ | (Decrease) | September 30, | Increase/ | (Decrease) | |||||||||||||||||||||||||||
| 2010 | 2009 | (Decrease) | % Change | 2010 | 2009 | (Decrease) | % Change | |||||||||||||||||||||||||
| Distributor fees: | ||||||||||||||||||||||||||||||||
| Included in contractual adjustments and recorded as a reduction to product sales | $ | 7,347 | $ | 4,987 | $ | 2,360 | 47 | % | $ | 19,919 | $ | 17,144 | $ | 2,775 | 16 | % | ||||||||||||||||
| Charged to SG&A | 1,020 | 3,371 | (2,351 | ) | (70 | )% | 5,913 | 10,400 | (4,487 | ) | (43 | )% | ||||||||||||||||||||
| Total distributor fees | $ | 8,367 | $ | 8,358 | $ | 9 | — | $ | 25,832 | $ | 27,544 | $ | (1,712 | ) | (6 | )% | ||||||||||||||||
| | Three Months Ended March 31, | | | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Increase/ (Decrease) | Increase/ (Decrease) % Change | |||||||||||||
| | 2010 | 2009 | |||||||||||||
Distributor fees: | |||||||||||||||
Included in contractual adjustments and recorded as a reduction to product sales | $ | 6,060 | $ | 4,247 | $ | 1,813 | 43 | % | |||||||
Charged to SG&A | 3,346 | 3,547 | (201 | ) | (6 | )% | |||||||||
Total distributor fees | $ | 9,406 | $ | 7,794 | $ | 1,612 | 21 | % | |||||||
Stock-Based Compensation
58
| Three Months Ended | Increase/ | Nine Months Ended | Increase/ | |||||||||||||||||||||||||||||
| September 30, | Increase/ | (Decrease) | September 30, | Increase/ | (Decrease) | |||||||||||||||||||||||||||
| 2010 | 2009 | (Decrease) | % Change | 2010 | 2009 | (Decrease) | % Change | |||||||||||||||||||||||||
| Product revenue | $ | 991,547 | $ | 911,894 | $ | 79,653 | 9 | % | $ | 2,862,179 | $ | 2,987,428 | $ | (125,249 | ) | (4 | )% | |||||||||||||||
| Service revenue | 9,608 | 10,480 | (872 | ) | (8 | )% | 32,170 | 32,658 | (488 | ) | (1 | )% | ||||||||||||||||||||
| Total product and service revenue | 1,001,155 | $ | 922,374 | 78,781 | 9 | % | 2,894,349 | 3,020,086 | (125,737 | ) | (4 | )% | ||||||||||||||||||||
| Research and development revenue | 645 | 1,392 | (747 | ) | (54 | )% | 2,506 | 18,912 | (16,406 | ) | (87 | )% | ||||||||||||||||||||
| Total revenues | $ | 1,001,800 | $ | 923,766 | $ | 78,034 | 8 | % | $ | 2,896,855 | $ | 3,038,998 | $ | (142,143 | ) | (5 | )% | |||||||||||||||
| | Three Months Ended March 31, | | | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Increase/ (Decrease) | Increase/ (Decrease) % Change | ||||||||||||
| | 2010 | 2009 | ||||||||||||
Product revenue | $ | 971,625 | $ | 1,037,244 | $ | (65,619 | ) | (6 | )% | |||||
Service revenue | 101,915 | 101,499 | 416 | — | ||||||||||
Total product and service revenue | $ | 1,073,540 | $ | 1,138,743 | $ | (65,203 | ) | (6 | )% | |||||
Research and development revenue | 933 | 10,128 | (9,195 | ) | (91 | )% | ||||||||
Total revenues | $ | 1,074,473 | $ | 1,148,871 | $ | (74,398 | ) | (6 | )% | |||||
Product Revenue
| Reporting Segments | Products | Approved Indications | |||||||
| Personalized Genetic Health | Cerezyme | Gaucher disease | |||||||
Fabrazyme | Fabry disease | ||||||||
Pompe disease | |||||||||
Aldurazyme | MPS I | ||||||||
Elaprase | MPS II | ||||||||
Royalties earned on sales of and product sales of Welchol | Reduction of LDL in patients with hypercholesterolemia | ||||||||
| Cholestagel | Reduction of LDL in patients with hypercholesterolemia | ||||||||
| Renal and Endocrinology | Renagel/Renvela and bulk sevelamer | Control of serum phosphorus in patients with chronic kidney disease, or CKD, on dialysis and in Europe in CKD patients both on and not on dialysis with serum phosphorus above a certain level | |||||||
Hectorol | Secondary hyperparathyroidism in CKD patients | ||||||||
Thyrogen | An adjunctive diagnostic agent used in the follow-up treatment of patients with well-differentiated thyroid cancer and an adjunctive therapy in the ablation of remnant thyroid tissue in patients that have undergone thyroid removal | ||||||||
Biosurgery | Synvisc/ | Treatment of pain associated with osteoarthritis | |||||||
Sepra products | Prevention of adhesions following various surgical procedures in the abdomen and pelvis |
Hematology and Oncology | Mozobil | Mobilization of hematopoietic stem cells |
59
Reporting Segments | Approved Indications | |||
| Thymoglobulin | Immunosuppression of certain types of cells responsible for organ rejection in transplant patients and treatment of aplastic anemia | |||
Clolar | ||||
Campath | ||||
Fludara | Leukemia and lymphoma | |||
Leukine | Reduction of the incidence of severe and life-threatening infections in older adult patients with | |||
Other | ||||
Pharmaceutical intermediates products | Pharmaceutical intermediates |
| Three Months Ended | Increase/ | Nine Months Ended | Increase/ | |||||||||||||||||||||||||||||
| September 30, | Increase/ | (Decrease) | September 30, | Increase/ | (Decrease) | |||||||||||||||||||||||||||
| 2010 | 2009 | (Decrease) | % Change | 2010 | 2009 | (Decrease) | % Change | |||||||||||||||||||||||||
| Personalized Genetic Health | $ | 404,151 | $ | 369,873 | $ | 34,278 | 9 | % | $ | 1,147,152 | $ | 1,501,481 | $ | (354,329 | ) | (24 | )% | |||||||||||||||
| Renal and Endocrinology | 270,297 | 260,262 | 10,035 | 4 | % | 780,783 | 749,986 | 30,797 | 4 | % | ||||||||||||||||||||||
| Biosurgery | 147,140 | 134,557 | 12,583 | 9 | % | 425,208 | 370,798 | 54,410 | 15 | % | ||||||||||||||||||||||
| Hematology and Oncology | 167,295 | 143,586 | 23,709 | 17 | % | 500,076 | 341,076 | 159,000 | 47 | % | ||||||||||||||||||||||
| Other product revenue | 2,664 | 3,616 | (952 | ) | (26 | )% | 8,960 | 24,087 | (15,127 | ) | (63 | )% | ||||||||||||||||||||
| Total product revenue | $ | 991,547 | $ | 911,894 | $ | 79,653 | 9 | % | $ | 2,862,179 | $ | 2,987,428 | $ | (125,249 | ) | (4 | )% | |||||||||||||||
| | Three Months Ended March 31, | | | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Increase/ (Decrease) | Increase/ (Decrease) % Change | ||||||||||||
| | 2010 | 2009 | ||||||||||||
Personalized Genetic Health | $ | 392,484 | $ | 549,923 | $ | (157,439 | ) | (29 | )% | |||||
Renal and Endocrinology | 252,257 | 242,455 | 9,802 | 4 | % | |||||||||
Biosurgery | 126,261 | 109,128 | 17,133 | 16 | % | |||||||||
Hematology and Oncology | 156,291 | 86,644 | 69,647 | 80 | % | |||||||||
Other product revenue | 44,332 | 49,094 | (4,762 | ) | (10 | )% | ||||||||
Total product revenue | $ | 971,625 | $ | 1,037,244 | $ | (65,619 | ) | (6 | )% | |||||
Personalized Genetic Health
In March
the FDA, the draft provides for payment of $15,000 per day per violation until the compliance milestones are met.
We expect that the FDA will allow us to continue to ship our Cerezyme, Fabrazyme and Myozyme products that are produced or fill-finished at our Allston facility because the FDA has determined that these products meet the definition of "medical necessity" that would justify continued production of these products at Allston during the enforcement period. The FDA, however, has made a preliminary determination that Thyrogen, which is fill-finished at our Allston facility, does not meet the FDA's definition and may require us to cease fill-finishing the product at Allston when we enter into the consent decree. We are actively negotiating with the FDA the terms of the consent decree, we may continue to ship Cerezyme and presentingFabrazyme, which are manufactured, filled and finished at the facility, as well as Thyrogen, which is filled and finished at the facility. In the United States, Thyrogen that is filled and finished at our viewAllston facility will only be distributed based on medical necessity, in accordance with FDA criteria. The consent decree requires us to move our fill-finish operations out of our Allston facility for Thyrogen sold within the United States by November 22, 2010 and for Fabrazyme sold within the United States by November 24, 2010. We must move our fill-finish operations for all products sold outside of the United States by August 31, 2011. If we are not able to meet these deadlines, the FDA can require us to disgorge 18.5% of the revenue from the sale of any products that there isare filled and finished at our Allston facility after the applicable deadlines.
60
the consent decree, we will be required to retain an auditor to monitor and oversee ongoing compliance at our Allston facility for an additional five years. The consent decree is subject to, and effective upon, approval by the U.S. District Court for the District of Massachusetts. The consent decree was filed with the U.S. District Court on May 24, 2010 and we are awaiting the court’s approval.
We resumed Cerezyme shipments in the fourth quarter of 2009. In February 2010, we began shipping Cerezyme at a rate equal to 50% of estimated product demand in order to build a small inventory buffer to help us more consistentlybetter manage delivery of the resupply of Cerezyme to patients in approximately 100 countries and reduce interruptions inavailable. We continued shipping that occur in the absence of inventory, we began shippingat 50% of Cerezymeestimated product demand atthrough the end of February 2010. Although we achieved our goal of building a small inventory buffer during the firstsecond quarter of 2010, we announceddue in April 2010 thatpart to the 50% shipping allocation will be extended due to animpact of a second interruption in operations at our Allston facility at the end ofproduction in March 2010. The interruption resulted2010 resulting from an unexpected citya municipal electrical power failure that compounded issues with the plant'sfacility’s water system. The issues have been corrected andWe increased supply of Cerezyme in the facility is operational.
We resumed shipments of vials of Fabrazyme at the beginning of the firstthird quarter of 2010 and have beenCerezyme patients in the United States were able to begin to return to normal dosing levels in September. We expect Cerezyme patients on a global basis to be able to return to normal dosing during the fourth quarter of 2010.
On April 21, 2010,the United States, and we announced our estimate that we would needexpect Fabrazyme patients on a global basis to continuebe able to do so in the 50% shipping allocation for Cerezyme for two to three months and the 30% shipping allocation for Fabrazyme through the thirdfourth quarter of 2010. At that time, we also announced that weWe expect to provide more precise supply updates for Cerezyme and Fabrazyme within a month, once additional information is available about whether we arebe able to finish approximately $7 million infully supply global Fabrazyme demand during the aggregatefirst half of Cerezyme and Fabrazyme work-in-process material, the majority of which is Cerezyme, that was unfinished when the interruption of operations occurred at our Allston facility, the productivity and timing for regulatory clearance of the new Fabrazyme working cell bank, the impact of the pending consent decree on product release timelines and our assessment for global demand.
2011.
We are pursuing
61
| Three Months Ended | Increase/ | Nine Months Ended | Increase/ | |||||||||||||||||||||||||||||
| September 30, | Increase/ | (Decrease) | September 30, | Increase/ | (Decrease) | |||||||||||||||||||||||||||
| 2010 | 2009 | (Decrease) | % Change | 2010 | 2009 | (Decrease) | % Change | |||||||||||||||||||||||||
| (Amounts in thousands) | ||||||||||||||||||||||||||||||||
| Cerezyme | $ | 179,781 | $ | 93,599 | $ | 86,182 | 92 | % | $ | 497,664 | $ | 687,656 | $ | (189,992 | ) | (28 | )% | |||||||||||||||
| Fabrazyme | 33,882 | 115,161 | (81,279 | ) | (71 | )% | 126,607 | 371,664 | (245,057 | ) | (66 | )% | ||||||||||||||||||||
| Myozyme/Lumizyme | 106,223 | 85,980 | 20,243 | 24 | % | 284,336 | 232,645 | 51,691 | 22 | % | ||||||||||||||||||||||
| Aldurazyme | 40,766 | 40,331 | 435 | 1 | % | 124,314 | 116,358 | 7,956 | 7 | % | ||||||||||||||||||||||
| Other Personalized Genetic Health | 43,499 | 34,802 | 8,697 | 25 | % | 114,231 | 93,158 | 21,073 | 23 | % | ||||||||||||||||||||||
| Total Personalized Genetic Health | $ | 404,151 | $ | 369,873 | $ | 34,278 | 9 | % | $ | 1,147,152 | $ | 1,501,481 | $ | (354,329 | ) | (24 | )% | |||||||||||||||
| | Three Months Ended March 31, | | | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Increase/ (Decrease) | Increase/ (Decrease) % Change | ||||||||||||
| | 2010 | 2009 | ||||||||||||
| | (Amounts in thousands) | | ||||||||||||
Cerezyme | $ | 179,147 | $ | 295,970 | $ | (116,823 | ) | (39 | )% | |||||
Fabrazyme | 53,241 | 122,201 | (68,960 | ) | (56 | )% | ||||||||
Myozyme | 86,059 | 67,392 | 18,667 | 28 | % | |||||||||
Aldurazyme | 39,897 | 36,837 | 3,060 | 8 | % | |||||||||
Other Personalized Genetic Health | 34,140 | 27,523 | 6,617 | 24 | % | |||||||||
Total Personalized Genetic Health | $ | 392,484 | $ | 549,923 | $ | (157,439 | ) | (29 | )% | |||||
PGH product revenue increased for the three months ended September 30, 2010 due to the increased shipments of Cerezyme in the third quarter of 2010 offset, in part, by unfavorable exchange rate fluctuations for the three months ended September 30, 2010. PGH product revenue decreased for the threenine months ended March 31,September 30, 2010, primarily due to:
| • | continued growth in sales volume for Aldurazyme and other PGH products, primarily Elaprase; and | |
| • | the addition of sales of Lumizyme after it received FDA approval in May 2010. |
Cerezyme and Fabrazyme
| • | approximately 18% of our total revenues for the three months ended September 30, 2010, as compared to approximately 10% of our total revenues for the three months ended September 30, 2009; and | |
| • | approximately 17% of our total revenues for the nine months ended September 30, 2010, as compared to approximately 23% of our total revenues for the nine months ended September 30, 2009. |
62
against the U.S. dollar had no significant impact on Fabrazyme revenue for the three months ended September 30, 2010. Exchange rate fluctuations positively impacted Fabrazyme revenue by $2.1$1.9 million for the threenine months ended March 31,September 30, 2010.
We are aware that some“fast track” designation, to consider updating it with additional clinical data.
Cerezyme and Fabrazyme may be negatively impacted by patients switching to our competitors’ therapies and by long-term adoption by patients of lower treatment or dosage levels.
Myozyme
63
We have provided alglucosidase alfa free of charge since 2007 under a temporary access program,September 30, 2010 and in December 2009 we agreed with the FDA to work with the 81 active study sites in the United States to enroll additional patients into this program. We plan to keep open the temporary access program until commercial approval of Lumizyme produced using the 4000L scale process in the United States. We are currently providing therapy free of charge to more than 200 patients in the United States. We have received a June 17, 2010 PDUFA date in connection with our supplemental BLA for Lumizyme produced at the 4000L scale. If the FDA approves Lumizyme, we would expect revenuesby $5.7 million for the product to increase in 2011.
nine months ended September 30, 2010.
Other Personalized Genetic Health
| Three Months Ended | Increase/ | Nine Months Ended | Increase/ | |||||||||||||||||||||||||||||
| September 30, | Increase/ | (Decrease) | September 30, | Increase/ | (Decrease) | |||||||||||||||||||||||||||
| 2010 | 2009 | (Decrease) | % Change | 2010 | 2009 | (Decrease) | % Change | |||||||||||||||||||||||||
| (Amounts in thousands) | ||||||||||||||||||||||||||||||||
| Renagel/Renvela (including sales of bulk sevelamer) | $ | 178,755 | $ | 181,702 | $ | (2,947 | ) | (2 | )% | $ | 513,428 | $ | 527,699 | $ | (14,271 | ) | (3 | )% | ||||||||||||||
| Hectorol | 49,285 | 36,869 | 12,416 | 34 | % | 133,173 | 98,880 | 34,293 | 35 | % | ||||||||||||||||||||||
| Thyrogen | 42,257 | 41,691 | 566 | 1 | % | 134,182 | 123,377 | 10,805 | 9 | % | ||||||||||||||||||||||
| Other Renal and Endocrinology | — | — | — | N/A | — | 30 | (30 | ) | (100 | )% | ||||||||||||||||||||||
| Total Renal and Endocrinology | $ | 270,297 | $ | 260,262 | $ | 10,035 | 4 | % | $ | 780,783 | $ | 749,986 | $ | 30,797 | 4 | % | ||||||||||||||||
| | Three Months Ended March 31, | | | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Increase/ (Decrease) | Increase/ (Decrease) % Change | ||||||||||||
| | 2010 | 2009 | ||||||||||||
| | (Amounts in thousands) | | ||||||||||||
Renagel/Renvela (including sales of bulk sevelamer) | $ | 164,607 | $ | 170,599 | $ | (5,992 | ) | (4 | )% | |||||
Hectorol | 42,025 | 33,030 | 8,995 | 27 | % | |||||||||
Thyrogen | 45,625 | 38,826 | 6,799 | 18 | % | |||||||||
Total Renal and Endocrinology | $ | 252,257 | $ | 242,455 | $ | 9,802 | 4 | % | ||||||
Sales of Renagel/Renvela, including sales of bulk sevelamer, decreased slightly for the three months ended March 31,September 30, 2010, primarily due to a volume decrease in Brazil offset by a volume increase in the United States. Sales of Renagel/Renvela, including sales of bulk sevelamer, decreased slightly for the nine months ended September 30, 2010, primarily due to the effect of Renagel pricing in Brazil and the conversion of patients to Renvela in the United States. These effects were offset, in part, by increased end-user demand.Brazil. In 2009, we decreased the price of Renagel in Brazil in connection with successfully negotiating aan agreement with the government tender in the face of Brazil despite competition from two similar products that had been approved in that country. This agreement was successfully negotiated again in the third quarter of 2010. Total revenue for Renagel/Renvela, including sales of bulk sevelamer, reflects the increasing percentage of Renvela sales within the United States. The strengtheningweakening of foreign currencies, primarily the Euro, against the U.S. dollar, positively impactedadversely affected Renagel revenue by $6.4$3.2 million for the three months ended March 31,September 30, 2010.
Exchange rate fluctuations positively impacted Renagel revenue by $3.4 million for the nine months ended September 30, 2010.
64
Remediation of this facility is substantially complete and we anticipate that any remaining costs related to the remediation will not be significant.
In addition, our ability to maintain sales of Renagel/Renvela and Hectorol will depend on many other factors, including the availability of coverage and reimbursement under patients' health insurance and prescription drug plans and the ability of health care providers to improve patients' compliance with their prescribed doses. Also, the accuracy of our estimates of fluctuations“Risk Factors” 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 Renal and Endocrinology reporting segment that we record from period to period.
this filing.
65
| Three Months Ended | Increase/ | Nine Months Ended | Increase/ | |||||||||||||||||||||||||||||
| September 30, | Increase/ | (Decrease) | September 30, | Increase/ | (Decrease) | |||||||||||||||||||||||||||
| 2010 | 2009 | (Decrease) | % Change | 2010 | 2009 | (Decrease) | % Change | |||||||||||||||||||||||||
| (Amounts in thousands) | ||||||||||||||||||||||||||||||||
| Synvisc/Synvisc-One | $ | 99,998 | $ | 87,526 | $ | 12,472 | 14 | % | $ | 287,191 | $ | 233,114 | $ | 54,077 | 23 | % | ||||||||||||||||
| Sepra products | 40,858 | 37,831 | 3,027 | 8 | % | 116,970 | 108,173 | 8,797 | 8 | % | ||||||||||||||||||||||
| Other Biosurgery | 6,284 | 9,200 | (2,916 | ) | (32 | )% | 21,047 | 29,511 | (8,464 | ) | (29 | )% | ||||||||||||||||||||
| Total Biosurgery | $ | 147,140 | $ | 134,557 | $ | 12,583 | 9 | % | $ | 425,208 | $ | 370,798 | $ | 54,410 | 15 | % | ||||||||||||||||
| | Three Months Ended March 31, | | | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Increase/ (Decrease) | Increase/ (Decrease) % Change | ||||||||||||
| | 2010 | 2009 | ||||||||||||
| | (Amounts in thousands) | | ||||||||||||
Synvisc/Synvisc-One | $ | 79,507 | $ | 63,171 | $ | 16,336 | 26 | % | ||||||
Sepra products | 37,177 | 34,304 | 2,873 | 8 | % | |||||||||
Other Biosurgery | 9,577 | 11,653 | (2,076 | ) | (18 | )% | ||||||||
Total Biosurgery | $ | 126,261 | $ | 109,128 | $ | 17,133 | 16 | % | ||||||
Biosurgery product revenue increased for the three and nine months ended March 31,September 30, 2010, primarily due to increased sales forof Synvisc/Synvisc-One due to the addition of Synvisc-One sales in the United States. We received marketing approval for Synvisc-One in the United States in February 2009. Exchange rate fluctuations positively impacted Biosurgery revenue by $2.6 million for the nine months ended September 30, 2010. The strengtheningweakening of foreign currencies, primarily the Euro against the U.S. dollar, positively impactedhad no significant impact on Biosurgery revenue by $1.6 million for the three months ended March 31,September 30, 2010. Sales of Synvisc/Synvisc-One are subject to seasonality in demand and typically decline in the first quarter.
Mozobil Thymoglobulin Clolar Other Hematology and Oncology Total Hematology and Oncology Hematology and Oncology product revenue increased for the three and nine months ended Total Other product revenue Other product revenue decreased for the three and nine months ended Three Months Ended Increase/ Nine Months Ended Increase/ September 30, Increase/ (Decrease) September 30, Increase/ (Decrease) 2010 2009 (Decrease) % Change 2010 2009 (Decrease) % Change (Amounts in thousands) Mozobil $ 23,630 $ 12,896 $ 10,734 83 % $ 64,737 $ 35,383 $ 29,354 83 % Thymoglobulin 56,891 53,412 3,479 7 % 168,033 157,699 10,334 7 % Clolar 26,129 21,182 4,947 23 % 76,337 59,050 17,287 29 % Other Hematology and Oncology 60,645 56,096 4,549 8 % 190,969 88,944 102,025 >100 % Total Hematology and Oncology $ 167,295 $ 143,586 $ 23,709 17 % $ 500,076 $ 341,076 $ 159,000 47 % Three Months Ended
March 31, Increase/
(Decrease) Increase/
(Decrease)
% Change 2010 2009 (Amounts in thousands) $ 18,966 $ 10,837 $ 8,129 75 % 52,910 50,655 2,255 4 % 24,688 18,160 6,528 36 % 59,727 6,992 52,735 >100 % $ 156,291 $ 86,644 $ 69,647 80 % March 31,September 30, 2010, primarily due to:•• increased sales of Mozobil due to increased penetration of the product in the United States and the launch of the product in Europe in August 2009; and • increased demand for Clolar, Campath and Leukine. increased penetration of the product in the United States and the launch of the product in Europe in August 2009;•increased demand for Clolar globally; and•in the second quarterend of May 2009 as a result of our acquisition from Bayer.strengtheningweakening of foreign currencies, primarily the Euro against the U.S. dollar, positivelyadversely impacted Hematology and Oncology revenue by $2.2$2.4 million for the three months ended March 31,September 30, 2010 and by $2.1 million for the nine months ended September 30, 2010. Three Months Ended Increase/ Nine Months Ended Increase/ September 30, Increase/ (Decrease) September 30, Increase/ (Decrease) 2010 2009 (Decrease) % Change 2010 2009 (Decrease) % Change (Amounts in thousands) Other product revenue $ 2,664 $ 3,616 $ (952 ) (26 )% $ 8,960 $ 24,087 $ (15,127 ) (63 )% Three Months Ended
March 31, Increase/
(Decrease) Increase/
(Decrease)
% Change 2010 2009 (Amounts in thousands) $ 44,332 $ 49,094 $ (4,762 ) (10 )% March 31,September 30, 2010 primarily due to decreased demand for pharmaceutical intermediates products, offset, in part, by increased demand for diagnostic products.
66
| Three Months Ended | Increase/ | Nine Months Ended | Increase/ | |||||||||||||||||||||||||||||
| September 30, | Increase/ | (Decrease) | September 30, | Increase/ | (Decrease) | |||||||||||||||||||||||||||
| 2010 | 2009 | (Decrease) | % Change | 2010 | 2009 | (Decrease) | % Change | |||||||||||||||||||||||||
| Personalized Genetic Health | $ | 32 | $ | 5 | $ | 27 | >100 | % | $ | 75 | $ | 85 | $ | (10 | ) | (12 | )% | |||||||||||||||
| Biosurgery | 9,392 | 10,443 | (1,051 | ) | (10 | )% | 31,709 | 31,619 | 90 | — | ||||||||||||||||||||||
| Hematology and Oncology | — | — | N/A | N/A | — | 737 | (737 | ) | (100 | )% | ||||||||||||||||||||||
| Other service revenue | 184 | 32 | 152 | >100 | % | 386 | 217 | 169 | 78 | % | ||||||||||||||||||||||
| Total service revenue | $ | 9,608 | $ | 10,480 | $ | (872 | ) | (8 | )% | $ | 32,170 | $ | 32,658 | $ | (488 | ) | (1 | )% | ||||||||||||||
| | Three Months Ended March 31, | | | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Increase/ (Decrease) | Increase/ (Decrease) % Change | ||||||||||||
| | 2010 | 2009 | ||||||||||||
Personalized Genetic Health | $ | 20 | $ | 37 | $ | (17 | ) | (46 | )% | |||||
Biosurgery | 10,546 | 9,832 | 714 | 7 | % | |||||||||
Hematology and Oncology | — | 445 | (445 | ) | (100 | )% | ||||||||
Other service revenue | 91,349 | 91,185 | 164 | — | ||||||||||
Total service revenue | $ | 101,915 | $ | 101,499 | $ | 416 | — | |||||||
Service revenue was relatively consistentdecreased slightly for the three and nine months ended September 30, 2010. Biosurgery service revenue decreased for the three months ended March 31,September 30, 2010 as comparedand increased slightly for the nine months ended September 30, 2010 primarily due to the same period of 2009. The strengthening of foreign currencies, primarily the Euro, against the U.S. dollar,fluctuations in demand. Exchange rate fluctuations had no significant impact on service revenue for the three and nine months ended March 31,September 30, 2010.
| Three Months Ended | Increase/ | Increase/ | ||||||||||||||||||||||||||||||
| September 30, | Increase/ | (Decrease) | Nine Months Ended September 30, | Increase/ | (Decrease) | |||||||||||||||||||||||||||
| 2010 | 2009 | (Decrease) | % Change | 2010 | 2009 | (Decrease) | % Change | |||||||||||||||||||||||||
| International product and service revenue | $ | 474,298 | $ | 476,848 | $ | (2,550 | ) | (1 | )% | $ | 1,454,713 | $ | 1,600,554 | $ | (145,841 | ) | (9 | )% | ||||||||||||||
| % of total product and service revenue | 47 | % | 52 | % | 50 | % | 53 | % | ||||||||||||||||||||||||
| | Three Months Ended March 31, | | | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Increase/ (Decrease) | Increase/ (Decrease) % Change | |||||||||||
| | 2010 | 2009 | |||||||||||
International product and service revenue | $ | 513,459 | $ | 551,111 | $ | (37,652 | ) | (7 | )% | ||||
% of total product and service revenue | 48 | % | 48 | % | |||||||||
International product and service revenue decreased for the three months ended March 31,September 30, 2010, primarily due to a decrease in international sales volume for Cerezyme and Fabrazyme for the three months ended March 31,September 30, 2010 due to supply constraints.
This decrease was offset, in part, by:
Table These decreases were offset, in part, by growth in the international sales volume of ContentsCerezyme, Myozyme, Aldurazyme, Thyrogen, Synvisc, Mozobil, Thymoglobulin and Clolar for the three months ended September 30, 2010.
| • | growth in the international sales volume of Myozyme, Aldurazyme, Elaprase, Thyrogen, Synvisc, Seprafilm, Thymoglobulin and Clolar for the nine months ended September 30, 2010; | |
| • | the addition of international product sales of Campath as of May 29, 2009 in lieu of and in excess of international royalties formerly earned on sales of Campath prior to our transaction with Bayer; |
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| • | the addition of international sales of Fludara and additional sales of Campath as of May 2009 and sales of Mozobil in Europe beginning in the third quarter of 2009; and | |
| • | exchange rate fluctuation, primarily the Euro against the U.S. dollar, which positively impacted total product and service revenue by $7.4 million for the nine months ended September 30, 2010. |
| Three Months Ended | Increase/ | Nine Months Ended | Increase/ | |||||||||||||||||||||||||||||
| September 30, | Increase/ | (Decrease) | September 30, | Increase/ | (Decrease) | |||||||||||||||||||||||||||
| 2010 | 2009 | (Decrease) | % Change | 2010 | 2009 | (Decrease) | % Change | |||||||||||||||||||||||||
| Renal and Endocrinology | $ | 134 | $ | 156 | $ | (22 | ) | (14 | )% | $ | 450 | $ | 177 | $ | 273 | >100 | % | |||||||||||||||
| Biosurgery | 200 | 647 | (447 | ) | (69 | )% | 1,163 | 2,079 | (916 | ) | (44 | )% | ||||||||||||||||||||
| Hematology and Oncology | 1 | 7 | (6 | ) | (86 | )% | 27 | 2,343 | (2,316 | ) | (99 | )% | ||||||||||||||||||||
| Multiple Sclerosis | — | — | — | N/A | — | 12,357 | (12,357 | ) | (100 | )% | ||||||||||||||||||||||
| Other | 310 | 90 | 220 | >100 | % | 566 | 471 | 95 | 20 | % | ||||||||||||||||||||||
| Corporate | — | 492 | (492 | ) | (100 | )% | 300 | 1,485 | (1,185 | ) | (80 | )% | ||||||||||||||||||||
| Total research and development revenue | $ | 645 | $ | 1,392 | $ | (747 | ) | (54 | )% | $ | 2,506 | $ | 18,912 | $ | (16,406 | ) | (87 | )% | ||||||||||||||
| | Three Months Ended March 31, | | | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Increase/ (Decrease) | Increase/ (Decrease) % Change | ||||||||||||
| | 2010 | 2009 | ||||||||||||
Renal and Endocrinology | $ | 166 | $ | 13 | $ | 153 | >100 | % | ||||||
Biosurgery | 559 | 562 | (3 | ) | (1 | )% | ||||||||
Hematology and Oncology | 19 | 1,484 | (1,465 | ) | (99 | )% | ||||||||
Multiple Sclerosis | — | 7,291 | (7,291 | ) | (100 | )% | ||||||||
Other | 189 | 282 | (93 | ) | (33 | )% | ||||||||
Corporate | — | 496 | (496 | ) | (100 | )% | ||||||||
Total research and development revenue | $ | 933 | $ | 10,128 | $ | (9,195 | ) | (91 | )% | |||||
Total research and development revenue decreased for the three and nine months ended March 31,September 30, 2010, primarily due to a decrease in Multiple Sclerosis research and development revenue as a result of our acquisition from Bayer of the rights to alemtuzumab and termination of the Campath profit share arrangement. As of May 29, 2009, the effective date of our acquisition from Bayer, we ceased recognizing research and development revenue for Bayer'sBayer’s reimbursement of a portion of the development costs for alemtuzumab for MS. The fair value of the research and development costs to be reimbursed by Bayer is accounted for as an offset to the contingent consideration obligations for alemtuzumab for MS.
| Three Months Ended | Increase/ | Increase/ | ||||||||||||||||||||||||||||||
| September 30, | Increase/ | (Decrease) | Nine Months Ended September 30, | Increase/ | (Decrease) | |||||||||||||||||||||||||||
| 2010 | 2009 | (Decrease) | % Change | 2010 | 2009 | (Decrease) | % Change | |||||||||||||||||||||||||
| Gross product profit | $ | 689,681 | $ | 639,928 | $ | 49,753 | 8 | % | $ | 2,028,220 | $ | 2,235,057 | $ | (206,837 | ) | (9 | )% | |||||||||||||||
| Product margin | 70 | % | 70 | % | 71 | % | 75 | % | ||||||||||||||||||||||||
| Gross service profit | $ | 2,201 | $ | 2,564 | $ | (363 | ) | (14 | )% | $ | 9,655 | $ | 10,817 | $ | (1,162 | ) | (11 | )% | ||||||||||||||
| Service margin | 23 | % | 24 | % | 30 | % | 33 | % | ||||||||||||||||||||||||
| Total gross product and service profit | $ | 691,882 | $ | 642,492 | $ | 49,390 | 8 | % | $ | 2,037,875 | $ | 2,245,874 | $ | (207,999 | ) | (9 | )% | |||||||||||||||
| Total product and service margin | 69 | % | 70 | % | 70 | % | 74 | % | ||||||||||||||||||||||||
| | Three Months Ended March 31, | | | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Increase/ (Decrease) | Increase/ (Decrease) % Change | |||||||||||
| | 2010 | 2009 | |||||||||||
Gross product profit | $ | 691,886 | $ | 801,682 | $ | (109,796 | ) | (14 | )% | ||||
Product margin | 71 | % | 77 | % | |||||||||
Gross service profit | $ | 36,043 | $ | 41,249 | $ | (5,206 | ) | (13 | )% | ||||
Service margin | 35 | % | 41 | % | |||||||||
Total gross product and service profit | $ | 727,929 | $ | 842,931 | $ | (115,002 | ) | (14 | )% | ||||
Total product and service margin | 68 | % | 74 | % | |||||||||
Gross Product Profit and Product Margin
| • | increased sales volumes for Cerezyme, Myozyme, Aldurazyme, Elaprase, Hectorol, Synvisc, Seprafilm, Mozobil and Clolar; | |
| • | the addition of sales of Lumizyme after it received FDA approval in May 2010; and |
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| • | charges of $8.4 million for the three months ended September 30, 2010 for the amortization of inventorystep-up of Campath, Fludara and Leukine resulting from our transaction with Bayer in May 2009 as compared to $17.7 million for the three months ended September 30, 2009. |
| • | decreased sales volume for Cerezyme and Fabrazyme due to supply constraints; | |
| • | price decreases for Renagel outside of the United States, primarily in Brazil in connection with successfully negotiating an agreement with the government of Brazil despite competition from two similar products that had been approved in that country; and | |
| • | charges of $27.3 million for the nine months ended September 30, 2010 for the amortization of inventorystep-up of Campath, Fludara and Leukine resulting from our transaction with Bayer in May 2009 as compared to $24.4 million for the nine months ended September 30, 2009. |
| • | increased sales volumes for Myozyme, Aldurazyme, Elaprase, Hectorol, Synvisc, Seprafilm, Mozobil and Clolar; and | |
| • | the addition of sales of Lumizyme after it received FDA approval in May 2010. |
| • | a shift in product mix to lower margin products attributable to the supply constraints for Cerezyme and Fabrazyme for the nine months ended September 30, 2010; | |
| • | the increase in sales volume for Myozyme, Aldurazyme and Elaprase, all of which are lower margin products; | |
| • | the addition of sales of Fludara and Leukine and additional sales of Campath as of the end of May 29, 2009, all of which are lower margin products; and | |
| • | charges of $27.3 million for the nine months ended September 30, 2010 for the amortization of inventorystep-up of Campath, Fludara and Leukine resulting from our transaction with Bayer in May 2009 as compared to $24.4 million for the nine months ended September 30, 2009. |
Our grosscharges of which:
| • | $5.6 million was for manufacturing-related costs associated with various inventory write offs; and | |
| • | $9.1 million, for which there was no insurance reimbursement, was for the temporary suspension of production of sevelamer hydrochloride and sevelamer carbonate and subsequent remediation of our Haverhill, England facility resulting from an explosion and fire in December 2009. |
| • | $5.6 million was for manufacturing-related costs associated with various inventory write offs; | |
| • | $16.4 million was for the write off of Cerezyme and Fabrazyme inventory; | |
| • | $22.8 million, net of $5.4 million of insurance reimbursements, was related to the temporary suspension of production of sevelamer hydrochloride and sevelamer carbonate and subsequent remediation of our Haverhill, England facility resulting from an explosion and fire in December 2009; and | |
| • | $7.1 million was for the write off of Thyrogen inventory. |
Our gross product profit and product margincharges for both the three months ended March 31, 2010September 30, 2009 and 2009 includes the effect$37.9 million of manufacturing-related charges of:
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For purposesit meets appropriate quality specifications. As of September 30, 2010, we had approximately $10 million of inventory that is being evaluated or tested. If we determine that this discussion,inventory, or any portion thereof, does not meet the amortizationnecessary quality standards, it may result in a write off of product related intangible assets is included in amortization expensethe inventory and as a result, is excluded from cost of products sold and the determination of product margins described above.
charge to earnings.
as a result of fluctuations in demand.
| Three Months Ended | Increase/ | Nine Months Ended | Increase/ | |||||||||||||||||||||||||||||
| September 30, | Increase/ | (Decrease) | September 30, | Increase/ | (Decrease) | |||||||||||||||||||||||||||
| 2010 | 2009 | (Decrease) | % Change | 2010 | 2009 | (Decrease) | % Change | |||||||||||||||||||||||||
| Selling, general and administrative expenses | $ | 337,883 | $ | 323,513 | $ | 14,370 | 4 | % | $ | 1,203,918 | $ | 904,024 | $ | 299,894 | 33 | % | ||||||||||||||||
| % of total revenue | 34 | % | 35 | % | 42 | % | 30 | % | ||||||||||||||||||||||||
| | Three Months Ended March 31, | | | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Increase/ (Decrease) | Increase/ (Decrease) % Change | |||||||||||
| | 2010 | 2009 | |||||||||||
Selling, general and administrative expenses | $ | 553,310 | $ | 317,961 | $ | 235,349 | 74 | % | |||||
% of total revenue | 51 | % | 28 | % | |||||||||
SG&A increased for the three months ended March 31,September 30, 2010, primarily due to spending increases of:
expense and severance charges.
| • | $178.0 million for PGH, primarily due to a charge of $175.0 million relating to the consent decree we entered into with the FDA that provides for an upfront disgorgement of past profits; | |
| • | $9.7 million for Renal and Endocrinology, primarily due to an increase in sales and marketing expenses related to the Renvela product launch and increased litigation expenses for Renagel/Renvela and Hectorol; | |
| • | $25.5 million for Hematology and Oncology, primarily due to an increase in sales and marketing expenses to support the addition of Campath, Fludara and Leukine and sales force expansion to support the launch of Mozobil in Europe beginning in the third quarter of 2009; and | |
| • | $80.5 million for Corporate, primarily due to increased spending related to upgrading our information technology systems, including installation and implementation of a new enterprise resource planning system worldwide, the costs for which did not meet the criteria for capitalization, as well as increased employee benefit costs and stock based compensation expense and expenses related to our contested 2010 director elections. |
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| Three Months Ended | Increase/ | Nine Months Ended | Increase/ | |||||||||||||||||||||||||||||
| September 30, | Increase/ | (Decrease) | September 30, | Increase/ | (Decrease) | |||||||||||||||||||||||||||
| 2010 | 2009 | (Decrease) | % Change | 2010 | 2009 | (Decrease) | % Change | |||||||||||||||||||||||||
| Research and development expenses | $ | 207,051 | $ | 215,925 | $ | (8,874 | ) | (4 | )% | $ | 645,187 | $ | 608,935 | $ | 36,252 | 6 | % | |||||||||||||||
| % of total revenue | 21 | % | 23 | % | 22 | % | 20 | % | ||||||||||||||||||||||||
| | Three Months Ended March 31, | | | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Increase/ (Decrease) | Increase/ (Decrease) % Change | |||||||||||
| | 2010 | 2009 | |||||||||||
Research and development expenses | $ | 220,930 | $ | 206,925 | $ | 14,005 | 7 | % | |||||
% of total revenue | 21 | % | 18 | % | |||||||||
| • | a $4.4 million decrease for the three months ended September 30, 2010 on our PGH research and development programs, primarily due to decrease in expenses as a result of the completion of the ATAP in August 2010; | |
| • | a $10.3 million decrease in spending for the three months ended September 30, 2010 on our Renal and Endocrinology research and development programs, primarily due to a decrease in spending as a result of the termination of our clinical trial for next generation advanced phosphate binders. |
Research and development expense increased by $2.8 million for the three months ended March 31, 2010 due to the unfavorable impact of the strengthening of foreign currencies, primarily the Euro, against the U.S. dollar.
| • | an $18.9 million increase in spending for the nine months ended September 30, 2010 on our PGH research and development programs, primarily due to expenses related to the ongoing eliglustat tartrate phase 3b study; | |
| • | an $8.6 million increase in spending for the nine months ended September 30, 2010 on our Hematology and Oncology research and development programs, primarily due to increase in research and development spending related to Campath, Fludara and Leukine; and | |
| • | a $24.2 million increase in spending for the nine months ended September 30, 2010 for Corporate, primarily due to increases in personnel, support services and consulting expenses. |
| Three Months Ended | Increase/ | Nine Months Ended | Increase/ | |||||||||||||||||||||||||||||
| September 30, | Increase/ | (Decrease) | September 30, | Increase/ | (Decrease) | |||||||||||||||||||||||||||
| 2010 | 2009 | (Decrease) | % Change | 2010 | 2009 | (Decrease) | % Change | |||||||||||||||||||||||||
| Amortization of intangibles | $ | 61,761 | $ | 68,078 | $ | (6,317 | ) | (9 | )% | $ | 194,327 | $ | 183,270 | $ | 11,057 | 6 | % | |||||||||||||||
| % of total revenue | 6 | % | 7 | % | 7 | % | 6 | % | ||||||||||||||||||||||||
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| | Three Months Ended March 31, | | | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Increase/ (Decrease) | Increase/ (Decrease) % Change | |||||||||||
| | 2010 | 2009 | |||||||||||
Amortization of intangibles | $ | 70,984 | $ | 57,598 | $ | 13,386 | 23 | % | |||||
% of total revenue | 7 | % | 5 | % | |||||||||
Amortization of intangibles expense increased for the threenine months ended March 31,September 30, 2010, primarily due to the acquisition of the 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.
Pfizer.
| Three Months Ended | Increase/ | Nine Months Ended | Increase/ | |||||||||||||||||||||||||||||
| September 30, | Increase/ | (Decrease) | September 30, | Increase/ | (Decrease) | |||||||||||||||||||||||||||
| 2010 | 2009 | (Decrease) | % Change | 2010 | 2009 | (Decrease) | % Change | |||||||||||||||||||||||||
| Contingent consideration expense | $ | (3,134 | ) | $ | 28,197 | $ | (31,331 | ) | >(100 | )% | $ | 69,436 | $ | 37,287 | $ | 32,149 | 86 | % | ||||||||||||||
| % of total revenue | — | 3 | % | 2 | % | 1 | % | |||||||||||||||||||||||||
| | Three Months Ended March 31, | | | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | Increase/ (Decrease) | Increase/ (Decrease) % Change | |||||||||
| | 2010 | 2009 | |||||||||
Contingent consideration expense | $ | 62,549 | $ | — | $ | 62,549 | N/A | ||||
% of total revenue | 6 | % | N/A | ||||||||
In June 2009, we recorded contingent consideration obligations totaling $964.1 million for the acquisition date fair value of the 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.
estimates. Accordingly, we recorded a total of $62.5$(3.1) million for the three months and $69.4 million for the nine months ended September 30, 2010 of contingent consideration expenses, of which $35.5$(11.4) million is relatedwas allocated to changes in estimates, for the three months ended March 31, 2010 in our consolidated statements of operations to reflect the increase in the fair value, including $21.4 million for our Hematology and Oncology reporting segment and $41.1$80.8 million forwas allocated to our Multiple Sclerosis reporting segment. Contingent consideration expense of $20.9 million relates to changes in estimates for the nine months ended September 30, 2010.
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| Discount Rate | ||||||||||||||||||||||
| Used in | Year of | Estimated | ||||||||||||||||||||
| Company/Assets | Purchase | Estimating | Expected | Cost to | ||||||||||||||||||
| Acquired | Price | IPR&D | Programs Acquired | Cash Flows | Launch | Complete | ||||||||||||||||
| Bayer Assets (2009) | $ | 1,006.5 | $ | 458.7 | alemtuzumab for MS — US | 16 | % | 2012 | $ | 148.4 | (1) | |||||||||||
| 174.2 | alemtuzumab for MS — ex-US | 16 | % | 2013 | $ | 56.4 | (2) | |||||||||||||||
| $ | 632.9 | (3) | ||||||||||||||||||||
| Bioenvision (2007) | $ | 349.9 | $ | 125.5 | (4) | Clolar(5) | 17 | % | 2010-2016 | (6) | $ | 17.3 | ||||||||||
| AnorMED (2006) | $ | 589.2 | $ | 526.8 | (4) | Mozobil(7) | 15 | % | 2016 | $ | 12.1 | |||||||||||
Company/Assets Acquired | 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 | $ | 458.7 | alemtuzumab for MS—US | 16 | % | 2012 | $ | 175.4 | (1) | |||||||
| 174.2 | alemtuzumab for MS—ex-US | 16 | % | 2013 | $ | 88.8 | (2) | |||||||||||
| $ | 632.9 | (3) | ||||||||||||||||
Bioenvision (2007) | $ | 349.9 | $ | 125.5 | (4) | Clolar(5) | 17 | % | 2010-2016 | (6) | $ | 23.7 | ||||||
AnorMED (2006) | $ | 589.2 | $ | 526.8 | (4) | Mozobil(7) | 15 | % | 2016 | $ | 18.3 | |||||||
| (1) | Does not include anticipated reimbursements from Bayer totaling approximately $44 million. | |
| (2) | Does not include anticipated reimbursements from Bayer totaling approximately $16 million. | |
| (3) | Capitalized as an indefinite-lived intangible asset. | |
| (4) | Expensed on acquisition date. | |
| (5) | Clolar is approved for the treatment of relapsed and refractory pediatric ALL. The IPR&D projects for Clolar are related to the development of the product for the treatment of other indications. | |
| (6) | Year of expected launch reflects both the ongoing launch of the products for currently approved indications and the anticipated launch of the products in the future for new indications. | |
| (7) | Mozobil received marketing approval for use in stem cell transplants in the United States in December 2008 and in Europe in July 2009. Mozobil is also being developed for tumor sensitization. |
| Three Months Ended | Increase/ | Nine Months Ended | Increase/ | |||||||||||||||||||||||||||||
| September 30, | Increase/ | (Decrease) | September 30, | Increase/ | (Decrease) | |||||||||||||||||||||||||||
| 2010 | 2009 | (Decrease) | % Change | 2010 | 2009 | (Decrease) | % Change | |||||||||||||||||||||||||
| (Amounts in thousands) | ||||||||||||||||||||||||||||||||
| Equity in loss of equity method investments | $ | (643 | ) | $ | — | $ | (643 | ) | N/A | $ | (2,210 | ) | $ | — | $ | (2,210 | ) | N/A | ||||||||||||||
| Gains (Losses) on investment in equity securities, net | 4,648 | (651 | ) | 5,299 | >100 | % | (26,750 | ) | (1,332 | ) | (25,418 | ) | >(100 | )% | ||||||||||||||||||
| Gain on acquisition of business | — | — | — | N/A | — | 24,159 | (24,159 | ) | (100 | )% | ||||||||||||||||||||||
| Other | (385 | ) | 614 | (999 | ) | >(100 | )% | (643 | ) | (2,347 | ) | 1,704 | 73 | % | ||||||||||||||||||
| Investment income | 2,403 | 4,543 | (2,140 | ) | (47 | )% | 8,787 | 14,038 | (5,251 | ) | (37 | )% | ||||||||||||||||||||
| Interest Expense | (3,358 | ) | — | (3,358 | ) | N/A | (3,358 | ) | — | (3,358 | ) | N/A | ||||||||||||||||||||
| Total other income (expenses) | $ | 2,665 | $ | 4,506 | $ | (1,841 | ) | (41 | )% | $ | (24,174 | ) | $ | 34,518 | $ | (58,692 | ) | >(100 | )% | |||||||||||||
| | Three Months Ended March 31, | | | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Increase/ (Decrease) | Increase/ (Decrease) % Change | ||||||||||||
| | 2010 | 2009 | ||||||||||||
| | (Amounts in thousands) | | ||||||||||||
Equity in loss of equity method investments | $ | (697 | ) | — | $ | (697 | ) | N/A | ||||||
Other | (439 | ) | (1,555 | ) | 1,116 | 72 | % | |||||||
Investment income | 3,300 | 5,350 | (2,050 | ) | (38 | )% | ||||||||
Total other income | $ | 2,164 | $ | 3,795 | $ | (1,631 | ) | (43 | )% | |||||
Equity in Loss of Equity Method Investments
BioMarin/Genzyme LLC is a variable interest entity, but does not have a primary beneficiary because the power to direct the activities of BioMarin/Genzyme LLC that most significantly impact its performance, is, in fact, shared equally between us and BioMarin through our commercialization rights and BioMarin'sBioMarin’s manufacturing rights. Effective January 1, 2010, we no longer consolidate the results of BioMarin/Genzyme LLC and instead record our portion of the
73
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| Gross gains (losses) on investments in equity securities | $ | 6,125 | $ | (36 | ) | $ | 8,370 | $ | 422 | |||||||
| Less: charges for impairment of investments | (1,477 | ) | (615 | ) | (35,120 | ) | (1,754 | ) | ||||||||
| Gains (losses) on investments in equity securities, net | $ | 4,648 | $ | (651 | ) | $ | (26,750 | ) | $ | (1,332 | ) | |||||
74
our 2020 Notes totaling $500.0 million in principal, a portion of which was not capitalizable.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| (Amounts in thousands) | ||||||||||||||||
| Benefit from (provision for) income taxes | $ | (17,385 | ) | $ | 965 | $ | 58,493 | $ | (160,305 | ) | ||||||
| Effective tax rate | 19 | % | (8 | )% | (61 | )% | 28 | % | ||||||||
| | Three Months Ended March 31, | ||||||
|---|---|---|---|---|---|---|---|
| | 2010 | 2009 | |||||
| | (Amounts in thousands) | ||||||
Benefit from (provision for) income taxes | $ | 61,799 | $ | (78,884 | ) | ||
Effective tax rate | 35 | % | 29 | % | |||
Our effective tax rate for bothall periods presented varies from the U.S. statutory tax rate as a result of:
| • | income and expenses taxed at rates other than the U.S. statutory tax rate; | |
| • | our provision for state income taxes; | |
| • | domestic manufacturing benefits; | |
| • | benefits related to tax credits; and | |
| • | non-deductible stock-based compensation expenses totaling $10.3 million for the three months ended and $30.1 million for the nine months ended September 30, 2010, as compared to $8.7 million for the three months ended and $38.3 million for the nine months ended September 30, 2009. |
75
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| Total revenues | $ | 126,848 | $ | 133,748 | $ | 385,707 | $ | 395,897 | ||||||||
| Income (loss) from discontinued operations before income taxes | $ | (15,279 | ) | $ | 3,840 | $ | (27,461 | ) | $ | (8,456 | ) | |||||
| Benefit from (provision for) income taxes | 9,987 | (1,487 | ) | 15,862 | 2,028 | |||||||||||
| Loss from discontinued operations, net of tax | $ | (5,292 | ) | $ | 2,353 | $ | (11,599 | ) | $ | (6,428 | ) | |||||
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2010 | 2009 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | (49,767 | ) | $ | 399,055 | |||
| Non-cash charges, net | 600,009 | 455,875 | ||||||
| Net income, excluding net non-cash charges | 550,242 | 854,930 | ||||||
| Increase in cash from working capital changes | 13,704 | 101,651 | ||||||
| Cash flows from operating activities | $ | 563,946 | $ | 956,581 | ||||
| | Three Months Ended March 31, | |||||||
|---|---|---|---|---|---|---|---|---|
| | 2010 | 2009 | ||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | (114,948 | ) | $ | 195,486 | |||
Non-cash charges, net | 210,142 | 130,775 | ||||||
Net income, excluding net non-cash charges | 95,194 | 326,261 | ||||||
Increase (decrease) in cash from working capital changes | 31,270 | (68,486 | ) | |||||
Cash flows from operating activities | $ | 126,464 | $ | 257,775 | ||||
Cash provided by operating activities decreased $131.3$392.6 million for the threenine months ended March 31,September 30, 2010, driven by a $231.1$304.7 million decrease in net income, excluding net non-cash charges, offset, in part, by a $99.8and an $87.9 million decrease in working capital, primarily due to the Cerezyme and Fabrazyme supply constraints and a corresponding reduction in collection activities for these products. We also recorded a liability of $175.0 million for the nine months ended September 30, 2010 related to the consent decree we entered into with the FDA that provides for an upfront disgorgement of past profits, for which there was no comparable liability for the same period of 2009.
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| • | a $41.7 million increase in depreciation and amortization expenses; | |
| • | a $32.1 million increase in contingent consideration expenses related to an increase in the fair value of the contingent consideration obligations recorded as a result of our acquisition of certain assets from Bayer in May 2009; and | |
| • | a $25.4 million increase in gains (losses) on investments in equity securities, net, primarily due to a charge of $32.3 million recorded in June 2010 to write down our investment in Isis to fair value as the unrealized losses were determined to be other than temporary, offset in part, by a gain of $7.3 million recorded on the sale of our investment in EXACT Sciences. |
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2010 | 2009 | |||||||
| Cash flows from investing activities: | ||||||||
| Net sales of investments, excluding investments in equity securities | $ | 35,305 | $ | 92,710 | ||||
| Net sales (purchases) of investments in equity securities | 9,484 | (5,183 | ) | |||||
| Purchases of property, plant and equipment | (497,932 | ) | (480,436 | ) | ||||
| Acquisitions, net of acquired cash | — | (57,238 | ) | |||||
| Investments in equity method investment | (2,915 | ) | — | |||||
| Purchases of other intangible assets | (6,340 | ) | (29,838 | ) | ||||
| Other investing activities | (9,441 | ) | (7,096 | ) | ||||
| Cash flows from investing activities | $ | (471,839 | ) | $ | (487,081 | ) | ||
| | Three Months Ended March 31, | |||||||
|---|---|---|---|---|---|---|---|---|
| | 2010 | 2009 | ||||||
Cash flows from investing activities: | ||||||||
Net sales (purchases) of investments, excluding investments in equity securities | $ | (14,323 | ) | $ | 61,766 | |||
Net purchases of investments in equity securities | (225 | ) | (3,606 | ) | ||||
Purchases of property, plant and equipment | (152,220 | ) | (161,561 | ) | ||||
Investments in equity method investment | (1,466 | ) | — | |||||
Purchases of other intangible assets | (5,885 | ) | (8,056 | ) | ||||
Other investing activities | (10,547 | ) | (47 | ) | ||||
Cash flows from investing activities | $ | (184,666 | ) | $ | (111,504 | ) | ||
For the threenine months ended March 31,September 30, 2010, net purchases of capital expenditures accounted for significant cash outlays for investing activities. During the threenine months ended March 31,September 30, 2010, we used $152.2$497.9 million inof cash to fund the purchase of property, plant and equipment, primarily related to the ongoing expansion of our manufacturing capacity in the Republic ofWaterford, Ireland, Lyon, France and Geel, Belgium, planned improvements at our Allston facility, the additional manufacturing capacity we are constructing in Framingham, Massachusetts and capitalized costs related to the implementation of an internally developed enterprise softwareresource planning system.
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| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2010 | 2009 | |||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from the issuance of our common stock | $ | 274,469 | $ | 76,125 | ||||
| Repurchases of our common stock | (800,000 | ) | (413,874 | ) | ||||
| Payments under share purchase contract | (200,000 | ) | — | |||||
| Excess tax benefit from stock-based compensation | (15,481 | ) | 3,309 | |||||
| Proceeds from the issuance of debt | 994,368 | — | ||||||
| Payments of debt and capital lease obligations | (6,245 | ) | (5,908 | ) | ||||
| Decrease in bank overdrafts | (43,373 | ) | (17,552 | ) | ||||
| Payment of contingent consideration obligation | (100,168 | ) | — | |||||
| Other financing activities | (2,283 | ) | (5,237 | ) | ||||
| Cash flows from financing activities | $ | 101,287 | $ | (363,137 | ) | |||
| | Three Months Ended March 31, | |||||||
|---|---|---|---|---|---|---|---|---|
| | 2010 | 2009 | ||||||
Cash flows from financing activities: | ||||||||
Proceeds from the issuance of our common stock | $ | 30,075 | $ | 34,526 | ||||
Repurchases of our common stock | — | (107,134 | ) | |||||
Excess tax benefits from stock-based compensation | (480 | ) | 3,492 | |||||
Payments of debt and capital lease obligations | (3,092 | ) | (2,653 | ) | ||||
Decrease in bank overdrafts | (20,728 | ) | (3,392 | ) | ||||
Payment of contingent consideration obligations | (31,600 | ) | — | |||||
Other financing activities | 116 | 1,995 | ||||||
Cash flows from financing activities | $ | (25,709 | ) | $ | (73,166 | ) | ||
Cash used by financing activities decreased by $47.5$464.4 million for the threenine months ended March 31,September 30, 2010, as compared to the same period of 2009, primarily drivenas a result of $994.4 million of proceeds, net of a $5.6 million discount, from the issuance in June 2010 of $1.0 billion in principal of debt, including $500.0 million in aggregate principal amount of our 2015 Notes and $500.0 million in aggregate principal amount of our 2020 Notes. These proceeds were offset by a $107.1$800.0 million decrease in cash used to repurchase shares of our common stock, underan increase of $386.1 million from 2009. Also, cash used by financing activities increased as a result of an advance payment to Goldman Sachs of $200.0 million recorded in June 2010 as part of the repurchase of our stock repurchase programcommon stock. Finally, the proceeds from issuance of debt were also offset by $31.6$100.2 million in contingent consideration payments to Bayer in the threenine months ended March 31,September 30, 2010, for which there were no comparable payments for the same period of 2009.
| • | 100% of the principal amount of the Notes redeemed; or | |
| • | the sum of the present values of the remaining scheduled payments of interest and principal thereon discounted at the Treasury Rate plus 25 basis points in the case of our 2015 Notes and 30 basis points in the case of our 2020 Notes. |
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The disclosure
| Payments Due by Period | ||||||||||||||||||||||||||||
| October 1, 2010 | ||||||||||||||||||||||||||||
| through | ||||||||||||||||||||||||||||
| Contractual Obligations | Total | December 31, 2010 | 2011 | 2012 | 2013 | 2014 | After 2014 | |||||||||||||||||||||
| Long-term debt obligations(1,2,3) | $ | 1,022.0 | $ | 4.9 | $ | 0.5 | $ | 0.5 | $ | 0.6 | $ | 0.6 | $ | 1,014.9 | ||||||||||||||
| Capital lease obligations(3) | 138.0 | 3.7 | 15.5 | 15.5 | 16.9 | 18.9 | 67.5 | |||||||||||||||||||||
| Operating leases(3,4) | 354.3 | 20.0 | 69.4 | 52.6 | 33.8 | 27.5 | 151.0 | |||||||||||||||||||||
| Contingent payments(5,6) | 1,752.7 | 89.3 | 211.6 | 117.1 | 297.8 | 481.2 | 555.7 | |||||||||||||||||||||
| Interest obligations(7) | 337.7 | 12.9 | 44.1 | 44.0 | 44.0 | 44.0 | 148.7 | |||||||||||||||||||||
| Defined pension benefit plans payments | 30.8 | 0.5 | 1.9 | 2.2 | 2.4 | 2.9 | 20.9 | |||||||||||||||||||||
| Unconditional purchase obligations(8) | 79.4 | 20.7 | 28.1 | 19.6 | 7.0 | 2.0 | 2.0 | |||||||||||||||||||||
| Capital commitments(9) | 750.0 | 174.2 | 383.9 | 138.9 | 49.8 | 3.2 | — | |||||||||||||||||||||
| Total contractual obligations | $ | 4,464.9 | $ | 326.2 | $ | 755.0 | $ | 390.4 | $ | 452.3 | $ | 580.3 | $ | 1,960.7 | ||||||||||||||
| (1) | Includes $4.7 million in principal and interest on promissory notes payable to three former shareholders of Equal Diagnostics. These notes were paid in full in October 2010. See Note 3., “Held for Sale and Discontinued Operations,” to our consolidated financial statements included in this Form 10-Q for more information on the payment of the notes. | |
| (2) | Includes $500.0 million in principal of our 2015 Notes and $500.0 million in principal of our 2020 Notes. | |
| (3) | See Note L., “Long-Term Debt and Leases” to our consolidated financial statements included in Item 8 of Exhibit 99 to ourForm 8-K filed with the SEC on June 14, 2010 for additional information on long-term debt and lease obligations. | |
| (4) | Includes a total of $57.5 million of operating leases associated with discontinued operations, primarily our genetic testing business. Leases related to our diagnostic products business were not significant. |
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| (5) | For all periods presented consists primarily of contingent royalty and milestone payments, the value of which has not been risk adjusted or discounted, that we are obligated to pay to Bayer based on future sales and the successful achievement of certain sales volumes for Campath, Fludara and Leukine and alemtuzumab for MS. Bayer is also eligible to receive a payment between $75.0 million and $100.0 million for a new Leukine manufacturing facility located in Lynnwood, Washington upon the facility receiving FDA approval, which is expected in 2011. We have not included any amounts for the contingent payments for this facility because we cannot be certain that the FDA will approve the facility or do so in the anticipated timeframe. Contingent payments also exclude 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. | |
| Contingent payments also include a $20.0 million milestone payment to Synpac estimated to occur in 2010 once net sales of Myozyme/Lumizyme reach $400.0 million. | ||
| 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, the EMA 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 included amounts for contingent payments that we believe are probable of being paid in our contractual obligations table. See Note C., “Strategic Transactions,” to our consolidated financial statements included in Item 8 of Exhibit 99 to ourForm 8-K filed with the SEC on June 14, 2010 for additional information on our transaction with Bayer. | ||
| (6) | Includes $2.4 million in contingent additional consideration payable to three former shareholders of Equal Diagnostics. This consideration was paid in full in October 2010. See Note 3., “Held for Sale and Discontinued Operations,” to our consolidated financial statements included in thisForm 10-Q for more information on the payment of this consideration. | |
| (7) | Represents interest payment obligations related to the senior notes that we issued in June 2010, promissory notes to three former shareholders of Equal Diagnostics and the mortgage payable we assumed in connection with the purchase of land and a manufacturing facility we formerly leased in Framingham, Massachusetts. | |
| (8) | Includes a total of $17.4 million of unconditional purchase obligations associated with our genetic testing business unit, which is included in our discontinued operations. See Note 2., “Basis of Presentation and Significant Accounting Policies —Basis of Presentation,” to our consolidated financial statements included in thisForm 10-Q for more information on the discontinued operations. | |
| (9) | Consists of contractual commitments to vendors that we have entered into as of September 30, 2010 related to our outstanding capital and internally developed software projects. These commitments include $61.7 million related to our discontinued operations, primarily our genetic testing business. Cost to complete for our diagnostic products business were not significant. Our estimated cost of completion for assets under construction as of September 30, 2010 is as follows (amounts in millions): |
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| Cost to | ||||
| Complete at | ||||
| Location | September 30, 2010 | |||
| Framingham, Massachusetts, United States (approximately 31% for software development). | $ | 237.4 | ||
| Westborough, Massachusetts, United States (primarily software development) | 61.7 | |||
| Lyon, France | 3.4 | |||
| Geel, Belgium | 307.3 | |||
| Waterford, Ireland | 31.8 | |||
| Allston, Massachusetts, United States | 61.7 | |||
| Ridgefield, New Jersey, United States | 12.3 | |||
| Haverhill, England | 6.7 | |||
| Other | 27.7 | |||
| Total estimated cost to complete | $ | 750.0 | ||
| • | expanding and maintaining existing and constructing additional manufacturing operations, including investing significant funds to expand our Allston, Massachusetts, Geel, Belgium and Waterford, Ireland facilities and constructing a new manufacturing facility in Framingham, Massachusetts with capacity for Cerezyme and Fabrazyme; | |
| • | implementing process improvements and system updates for our biologics manufacturing operations; | |
| • | product development and marketing; | |
| • | strategic business initiatives; | |
| • | upgrading our information technology systems, including installation and implementation of a new enterprise resource planning system worldwide; | |
| • | contingent payments under business combinations, license and other agreements, including a milestone payment to Synpac if net sales of Myozyme/Lumizyme reach $400.0 million, as well as payments related to our license of mipomersen from Isis, ataluren from PTC Therapeutics, Inc., or PTC, and Prochymal and Chondrogen from Osiris Therapeutics, Inc., or Osiris, as well as contingent consideration obligations related to our acquisition of the worldwide rights to the oncology products Campath, Fludara and Leukine and alemtuzumab for MS from Bayer; | |
| • | consulting and other fees related to our compliance with the consent decree; | |
| • | working capital and satisfaction of our obligations under capital and operating leases; and | |
| • | repayment of our 2015 Notes and our 2020 Notes. |
On May 6, 2010, we announced that we will initiatedirectors authorized a $2.0 billion stockshare repurchase program, under whichplan. In June 2010, we plan to purchaseexecuted an accelerated share repurchase agreement with Goldman Sachs for the repurchase of $1.0 billion of our common stock, inwhich we financed with the near term and financed by debt.net proceeds of our $1.0 billion senior note offering. On October 18, 2010, we completed the first half of the planned share repurchase, repurchasing 15.7 million shares at an average price of $63.79 per share under the accelerated share repurchase agreement. We plan to repurchase the additionalremaining $1.0 billion duringof shares authorized under the next twelve months.plan before June 2011.
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exercise significant influence over the entity. We account for our portion of the income (losses) of these entities in the line item "Equity“Equity in loss of equity method investments"investments” in our consolidated statements of operations. We also acquire companies under agreements in which we agree to pay contingent consideration based on attaining certain thresholds.
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| Relevant Requirements | Issued Date/Our Effective | ||||||||||||
ASU Number | of ASU | Dates | Status | ||||||||||
2009-13 | Establishes the accounting and reporting guidance for arrangements under which a vendor will perform multiple | Issued October 2009. Effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. | We will adopt the provisions of this update for the first quarter of 2011. We are currently assessing the impact the provisions of this update will have, if any, on our consolidated financial statements. | ||||||||||
|
|
|
| Requires new disclosures and clarifies some existing disclosure requirements about fair value measurements, | Issued January 2010. Effective for the first interim or annual reporting period beginning after December 15, 2009, except for the additional information in the roll forward of Level 3 investments. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim reporting periods within those fiscal years. | We adopted the applicable provisions of this update, except for the additional information in the roll forward of Level 3 investments (as previously noted), in the first quarter of 2010. Besides a change in disclosure, the adoption of this update does not have a material impact on our consolidated financial statements. | |||
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| Relevant Requirements | Issued Date/Our Effective | |||||
| ASU Number | of ASU | Dates | Status | |||
| will have a material impact on our consolidated financial statements or disclosures. | ||||||
2010-11, | Update provides amendments to Subtopic 815-15, | Issued March 2010. Effective at the beginning of each reporting | We | |||
2010-17, | Update provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research and development transactions. | Issued April 2010. Effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early adoption is permitted. | We will adopt the provisions of this update beginning January 1, 2011. We are currently assessing the impact the provisions of this update will have, if any, on our consolidated financial statements. | |||
2010-20, “Receivables: Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” | Update amends existing guidance by requiring disaggregated disclosures about the credit quality of our financing receivables and our allowance for credit losses. These disclosures will provide the user with additional information about the nature of credit risks inherent in our financing receivables, how we analyze and assess credit risk in determining our allowance for credit losses, and the reasons for any changes we may make in our allowance for credit losses. | Issued July 2010. Generally effective for interim and annual reporting periods ending on or after December 15, 2010, however, certain aspects of the update pertaining to activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. | We will adopt the provisions of this update beginning in the fourth quarter of 2010 or, for activity that occurs during a reporting period, the first quarter of 2011. Besides an increase in disclosures, we don’t believe that this update will materially impact our consolidated financial statements. | |||
2010-23, “Health Care Entities: Measuring Charity Care for Disclosure.” | Update requires the measurement basis used in the disclosure of charity care to be cost and that cost be | Issued August 2010. Effective for fiscal years beginning after December 15, 2010 and should be applied | We will adopt the provisions of this update beginning January 1, 2011. We are currently assessing the impact the |
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| Relevant Requirements | Issued Date/Our Effective | |||||
| ASU Number | of ASU | Dates | Status | |||
| identified as the direct and indirect costs of providing the charity care. Disclosure of the method used to identify or determine direct and indirect costs must be disclosed. Existing guidance does not prescribe a specific measurement basis of charity care for disclosure purposes. This would improve U.S. GAAP by requiring all entities to use the same measurement basis, which will enhance comparability. | retrospectively to all periods presented. Early adoption is permitted. | provisions of this update will have, if any, on our consolidated financial statements. |
Fabrazyme. Cerezyme and Fabrazyme inventories were not sufficient to meet global demand. 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 BelgiumGeel 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 are in the process of adding steps to increase the robustness of
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have a similarly material financial impact.
anticipated in late 2011.
Outsidecompetitors and have resulted in a decrease in the number of the United States, Fabrazymepatients using our products and a loss of our overall market share of Gaucher and Fabry patients. Cerezyme currently competes with Replagal®VPRIV, a product made by Shire Human Genetic Therapies Inc., a business unit of Shire. In addition, Protalix is also currently developing, UPLYSO, a product marketed by Shire plc. The FDA has approved acandidate for the treatment protocol for Replagal and Shire has submitted a BLA withof Gaucher disease. In response to the FDA for Replagal and been granted "fast track" designation. For Cerezyme shortages, Shire and Protalix were ableallowed, prior to receiving marketing approval to offer, their developmental therapies for the treatment of Gaucher disease to patients in the United States through an FDA-approved treatmentT-IND protocol and to patients in the European Union and other countries through pre-approval access programs. In February 2010, Shire received marketing approval for VPRIV from the FDA approval of its therapy to treat Gaucher diseaseand, in FebruaryAugust 2010, and announced that it will price this therapy at a 15% savings over Cerezyme. Shire submitted a MAA toreceived marketing authorization for VPRIV from the EMA for its therapy in November 2009. Shire also has announced that it has accelerated its manufacturing timeline for its therapy by almost 18 months.European Commission. Protalix submitted itsan NDA for UPLYSO to the FDA in December 2009 and has beenwas granted "fast track" designation. Also“fast track” designation and assigned a PDUFA date in DecemberFebruary 2011. In November 2009, Protalix andentered an agreement with Pfizer entered intopursuant to which Pfizer was granted an agreementexclusive, worldwide license to develop and commercialize Protalix's therapy.UPLYSO. The FDA has granted orphan drug status to both Shire'sShire’s and Protalix'sProtalix’s therapies for the treatment of Gaucher disease. In addition, Zavesca® isFabrazyme currently approved incompetes with Replagal, a product marketed by Shire, outside the United States. In the United States, Replagal is available under aT-IND approved by the FDA in December 2009. In June 2010, Shire closed enrollment in the T-IND and announced that it will continue to support a limited number of emergency new drug requests. In August 2010, Shire reported that it had withdrawn its BLA for patientsReplagal that it had submitted in December 2009 to the FDA, and for which it had been granted “fast track” designation, to consider updating it with Gaucher disease for whom enzyme replacement therapy is unsuitable.
The approval of treatment protocols and access programs for Shire's and Protalix's therapies has allowed physicians to treat Fabry and Gaucher disease patients with the therapies ahead of their commercial availability. additional clinical data.
Table Our revenues from the sale of ContentsCerezyme and Fabrazyme may be negatively impacted by patients switching to our competitors’ therapies and by long-term adoption by patients of lower treatment or dosage levels.
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Products that have received regulatory approval for
| • | issuing warning letters; | |
| • | levying fines and other civil penalties; | |
| • | imposing consent decrees; | |
| • | suspending regulatory approvals; | |
| • | refusing to approve pending applications or supplements to approved applications; | |
| • | suspending manufacturing activities or product sales, imports or exports; | |
| • | requiring us to communicate with physicians and other customers about concerns related to actual or potential safety, efficacy, and other issues involving our products; | |
| • | mandating product recalls or seizing products; and | |
| • | criminal prosecution. |
In a Form 483 issued in October 2008, a follow up warning letter issued in February 2009, and a Form 483 issued in November 2009, the FDA has detailed observations from its 2008 and 2009 inspections ofrelating to our Allston facility considered to be significant deviations from GMP compliance. In March 2010,facility. Under the FDA notified us that it intended to take enforcement action to ensure that products manufactured at our Allston facility are made in compliance with GMP. We have received a draftterms of the consent decree, from the FDA, which provides forwe will pay an upfront disgorgement of past profits of $175.0 million, for disgorgementmillion. The consent decree requires us to move all of our fill-finish operations out of our Allston facility by certain deadlines. If we are not able to meet these deadlines, the FDA can require us to disgorge 18.5% of revenuesthe revenue from future salesthe sale of any products manufactured,that are filled and finished at our Allston facility if fill-finishafter the applicable deadlines. The consent decree also requires us to implement a plan to bring our Allston facility operations into compliance with applicable laws and regulations. The plan must address any deficiencies previously reported to us or identified as part of a comprehensive inspection conducted by a third-party expert, who we are still conducted there for domesticrequired to retain, and exported products after dateswho will monitor and oversee our implementation of the plan. In 2009, we began implementing a comprehensive remediation plan, prepared with assistance from our compliance consultant, Quantic, to improve quality and compliance at our Allston facility. We intend to revise that plan to include any additional remediation efforts required in connection with the consent decree as identified by Quantic, who we have retained to be negotiated,the third-party expert under the consent decree. The plan, as revised, which will be subject to FDA approval, is expected to take approximately three to four years to complete and paymentwill include a timetable of specified compliance milestones. If the milestones are not met in accordance with the timetable, the FDA can require us to pay $15,000 per day, for products manufactured atper affected drug, until these compliance milestones are met. Upon satisfying the facility but filled and finished elsewhere if certain GMP remediation actions are not met by dates to be negotiated. We are actively negotiating with the FDA all of the terms of the consent decree. If we are unable to complycompliance requirements in accordance with the terms of the consent decree, we may incur substantialwill be required to retain an auditor, which can be Quantic, to monitor and oversee ongoing compliance at our Allston facility for an additional expenses and may not be ablefive years. If we are unable to produce somesatisfy the terms of the consent decree, or allif satisfaction of our products.
obligations takes longer than expected, our business would be adversely impacted.
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opportunity to receive marketing approval in the United States for their products earlier than April 2013.
| • | conduct substantial research and development; | |
| • | undertake preclinical and clinical testing, sampling activity and other costly and time-consuming measures; | |
| • | develop andscale-up manufacturing processes; and | |
| • | pursue marketing and manufacturing approvals and, in some jurisdictions, pricing and reimbursement approvals. |
| • | failure of the product candidate in preclinical studies; | |
| • | delays or difficulty enrolling patients in clinical trials, particularly for disease indications with small patient populations; | |
| • | patients exhibiting adverse reactions to the product candidate or indications of other safety concerns; | |
| • | insufficient clinical trial data to support the effectiveness or superiority of the product candidate; | |
| • | our inability to manufacture sufficient quantities of the product candidate for development or commercialization activities in a timely and cost-efficient manner, if at all; | |
| • | our failure to obtain, or delays in obtaining, the required regulatory approvals for the product candidate, the facilities or the process used to manufacture the product candidate; or | |
| • | changes in the regulatory environment, including pricing and reimbursement, that make development of a new product or of an existing product for a new indication no longer desirable. |
our collaboration partner Osiris, to whom we have made substantial nonrefundable upfront payments, announced that its two phase 3 trials evaluating Prochymal for the treatment of acute Graft-versus-Host Disease failed to meet their primary endpoints, drawing into question the size of the market that may benefit from use of the product.
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products.
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 several delays in receiving marketing
approval in the United States for alglucosidase alfa produced using a larger scale process, which has adversely impacted our revenues and earnings. We could face additional delays with this product or other products.
| • | our ability, and the ability of our collaborators, to efficiently manufacture sufficient quantities of each product to meet demand and to do so in a timely and cost efficient manner; | |
| • | acceptance by the medical community of each product or service; | |
| • | the availability of competing treatments that are deemed safer, more efficacious, more convenient to use, more cost effective, or having a more reliable source of supply; | |
| • | compliance with regulation by regulatory authorities of these products and services and the facilities and processes used to manufacture these products; | |
| • | the scope of the labeling approved by regulatory authorities for each product and competitive products or risk management activities, including a Risk Evaluation and Mitigation Strategy, which we call the Lumizyme ACE Program; | |
| • | the effectiveness of our sales force; | |
| • | the availability and extent of coverage, pricing and level of reimbursement from governmental agencies and third-party payors; and | |
| • | the size of the patient population for each product or service and our ability to identify new patients. |
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Replagal®
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Competition for Campath for patients with B-CLL includes single agent and combination chemotherapy regimens; Rituxan®/MabThera®, which is marketed globally; Treanda®, which is marketed globally; and Arzerra™, which is marketed in the United States and recently received a conditional approval recommendation by the EMA. There are also other therapies under clinical study for the treatment of B-CLL, including lumiliximab and lenalidomide. Competition for Clolar for the treatment of pediatric patients 1 to 21 years old with relapsed or refractory ALL after at least two prior regimens includes cytarabine and mitoxantrone, which are available as generics with no significant commercial promotion, and Arranon®, which is 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. In addition, there are anti-cancer agents in clinical trials for the treatment of relapsed pediatric ALL. Leukine primarily competes with two colony stimulating growth factors, Neupogen® and Neulasta®. The primary competition for Fludara is generic drugs.
and services from third partythird-party payors, demand forsales of our products and services will be significantly limited.third partythird-party payors. These third partythird-party payors may not provide adequate insurance coverage or reimbursement for our products, and services, which could reduce demand for our products and services and impair our financial results. Third party•challenging the prices charged for healthcare products and services;•limiting both the coverage and the amount of reimbursement for new therapeutic products;•reducing existing reimbursement rates for commercialized products and services;•denying or limiting coverage for products that are approved by the FDA, EMA or other governmental regulatory bodies but are considered experimental or investigational by third party payors; and•refusing in some cases to provide coverage when an approved product is used for disease indications in a way that has not received FDA, EMA or other applicable marketing approval.• challenging the prices charged for healthcare products and services; • limiting both the coverage and the amount of reimbursement for new therapeutic products; • reducing existing reimbursement rates for commercialized products; • refusing to provide insurance coverage for a commercialized product if there is a lower cost alternative; • denying or limiting coverage for products that are approved by the FDA, EMA or other governmental regulatory bodies but are considered experimental or investigational by third-party payors; and • refusing in some cases to provide coverage when an approved product is used for disease indications in a way that has not received FDA, EMA or other applicable marketing approval. third partythird-party payors to reduce costs could decrease demand for our products and services.products. In March 2010, the U.S. Congress enacted healthcare reform legislation that imposes cost containment measures on the healthcare industry. Some states are also considering legislation that would control the prices of drugs. We believe that federal and state legislatures and health agencies will continue to focus on additional healthcare reform in the future.
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pricing levels on prescription drugs through the end of 2013.
The American Recovery and Reinvestment Act of 2009 provided significant funding for the federal government to conduct comparative effectiveness research. Although the U.S. Congress indicated that these studies are intended to improve the quality of health care, outcomes of such studies could influence reimbursement decisions. If, for example, any of our products or services were determined to be less cost-effective than alternatives, reimbursement for those products or services could be affected.
Building All of these events would likely cause the market value of our facilities is expensive, and our abilitysecurities to recover these costs will depend on increased revenue from the productsdecline.
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earnings.
Renagel, for example, we have encountered problems in the past managing inventory levels at wholesalers. Another example is with Myozyme/Lumizyme, where we underestimated the level of initial product demand. 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 cause similar fluctuations. In addition, some of our products, including Synvisc/Synvisc-One are subject to seasonal fluctuation in demand.
our products to be sold must also be licensed by the applicable regulatory authorities. As a result, alternative third partythird-party providers may not be available on a timely basis or at all.
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| • | terminate the agreements covering the strategic alliance or limit our access to the underlying intellectual property; | |
| • | fail to devote financial or other resources to the alliances and thereby hinder or delay development, manufacturing or commercialization activities; | |
| • | fail to successfully develop, manufacture or commercialize any products; | |
| • | do not agree on the development, regulatory, filing or commercialization strategy; or | |
| • | fail to maintain the financial resources necessary to continue financing their portion of the development, manufacturing, or commercialization costs of their own operations. |
investment, as we did with our Isis holdings in June 2010.
litigation and other proceedings in the ordinary course of our business. 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 thathave several ongoing legal proceedings on which we will failcontinue to realizeexpend substantial sums. For example, we have initiated patent infringement litigation against a number of generic manufacturers. In addition, we are the benefits we anticipate when we decide to undertake the transaction.
We have in the past taken significant charges for impaired goodwilltwo consolidated securities class action lawsuits, two consolidated securities derivative lawsuits, and for impaired assets acquired in business combination transactions.several other federal and state securities law lawsuits. We may be requiredsubject to take similar chargesadditional actions in the future. We enter into most such transactions with an expectationFor 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 acquired assets will enhance the long-term strengthcompanies may 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.
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| • | pay monetary damages; | |
| • | stop commercial activities relating to the affected products or services; | |
| • | obtain a license in order to continue manufacturing or marketing the affected products or services; or | |
| • | compete in the market with a different product or service. |
eventual outcome, investigations and litigation can result in:
| • | the diversion of management’s time and attention; | |
| • | the expenditure of large amounts of cash on legal fees, expenses, and payment of damages; | |
| • | limitations on our ability to continue some of our operations; | |
| • | decreased demand for our products and services; and | |
| • | injury to our reputation. |
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We may incur substantial costs aspatent infringement. If such patent infringement lawsuit is brought within a resultstatutory45-day period, then a30-month stay of litigation or other proceedings.
We are or may become a partyFDA approval for the ANDA is triggered. In recent years, generic manufacturers have used Paragraph IV certifications extensively to litigation or other proceedingschallenge the applicability of patents listed in the ordinary courseFDA’s Approved Drug Products List with Therapeutic Equivalence Evaluations, commonly referred to as the Orange Book, on a wide array of innovative therapeutic products. We expect this trend to continue and to implicate drug products with even relatively modest revenues.
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| • | Focusing on our core businesses and on establishing operational excellence in manufacturing; | |
| • | Capitalizing on near-term revenue growth drivers, including maximizing the potential of products that are early in their launch stages, as well as important therapies in development that are expected to be launched over the next three to five years; | |
| • | Balancing revenue and earnings growth with cash flow return on investment; | |
| • | Improving our operating margins by reducing costs across the company; and | |
| • | Optimizing our capital structure by implementing a $2.0 billion share repurchase plan. |
We have several ongoing legal proceedings on whichperiod of time we will continue to expand substantial sums. For example, we have initiated patent infringement litigation against several generic manufacturers. In addition,expect.
Someunits as part of our products are prescribed by healthcare providers for uses not approved by the FDA, the EMA or comparable regulatory agencies. Although healthcare providers may lawfully prescribeplan to focus on 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 misconstrued 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, orcore business, we may be unable to do socomplete such transactions on favorable terms.the timeframes expected or at all. Our insurersagreement with LabCorp to sell our genetic testing business also remains subject to customary closing conditions, including approval pursuant to theHart-Scott-Rodino Antitrust Improvements Act of 1976. Failure to meet these closing conditions could result in the delay of the sale or termination of the purchase agreement.
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Regardlessbe time consuming and expensive. The impact of meritSanofi’s acquisition efforts due to these or eventual outcome, investigationsother factors may undermine our business and litigation can result in:
stock price may decline.
| • | economic problems that disrupt foreign healthcare payment systems; | |
| • | the imposition of governmental controls, including foreign exchange and currency restrictions; | |
| • | less favorable intellectual property or other applicable laws; |
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| • | the inability to obtain any necessary foreign regulatory or pricing approvals of products in a timely manner; | |
| • | the inability to obtain third-party reimbursement support for products; | |
| • | product counterfeiting and intellectual property piracy; | |
| • | parallel imports; | |
| • | anti-competitive trade practices; | |
| • | import and export license requirements; | |
| • | political or economic instability; | |
| • | terrorist activities, armed conflict, or a pandemic; | |
| • | restrictions on direct investments by foreign entities and trade restrictions; | |
| • | changes in tax laws and tariffs; | |
| • | difficulties in staffing and managing international operations; and | |
| • | longer payment cycles. |
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Some of our drug products, for example Renagel, Renvela, Hectorol, Clolar, Fludara and Mozobilservices are approved under the provisions of the United States Food, Drug and Cosmetic Act, or FDCA, that render them susceptible to potential competition from generic manufacturers via the 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 innovator's patent protection by submitting "Paragraph IV" certifications to the FDA in which the generic manufacturer 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 brought 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, on a wide array of innovative therapeutic products. 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 ANDAs submitted by four companies, and Renvela is the subject of ANDAs submitted by three companies, containing Paragraph IV certifications. We have initiated patent litigation against the four ANDA applicants with respect to Renagel and against two ANDA applicants with respect to Renvela. At issue in the lawsuits is U.S. Patent No. 5,667,775, which expires in 2014 (the "'775 Patent"). See "Legal Proceedings" in Part I., Item 3. of our 2009 Form 10-K. If we are unsuccessful in these lawsuits, a generic manufacturer may launch its generic product prior to the expiration of the '775 Patent, but not before the expiration in 2013 of our other Orange Book-listed patents covering Renagel and Renvela. We are currently evaluating the Paragraph IV notice received from the third ANDA applicant with respect to Renvela.
Our Hectorol (doxercalciferol) products (vial and capsule) are collectively the subject of ANDAs containing Paragraph IV certifications submitted by six companies. We have initiated patent litigation against four of these ANDA applicants. See "Legal Proceedings" in Part I., Item 3. of our 2009 Form 10-K. In all four cases we are pursuing claims with respect to our U.S. Patent No. 5,602,116 related to the use of Hectorol to treat hyperparathyroidism secondary to ESRD, which expires in 2014 (the "'116 Patent"). In one of the four cases, we are also pursuing claims with respect to our U.S. Patent No. 7,148,211 related to the formulation of our Hectorol vial product, which expires in 2023 (the "'211 Patent"). Our Hectorol capsule product is labeled for the treatment of secondary hyperparathyroidism in patients with CKD on dialysis and for those patients not on dialysis. In one of the four cases relating to our Hectorol capsule products, the ANDA filer is seeking approval of its generic 0.5µg capsule only for the treatment of patients with CKD who are not on dialysis, thereby attempting to avoid our '116 Patent. If we are unsuccessful in the patent infringement lawsuits that we have chosen to pursue against the ANDA filers, a generic manufacturer may launch its generic product prior to the expiration of our Orange-Book listed patents covering our Hectorol products.
As for the two ANDA applicants against whom litigation was not initiated, they submitted Paragraph IV certifications with respect to only the '211 Patent. Because we did not initiate litigation, the FDA could approve the applicants' generic products upon the later of expiration or invalidation of the '116 Patent or expiration of the 180-day exclusivity, if any, accorded to the first ANDA filer. In April 2010, we received notice of another ANDA applicant seeking approval of generic versions of all three dosage strengths of our Hectorol capsules. This ANDA contained a Paragraph IV certification with respect to the '116 Patent. We are currently evaluating this notice.
We also have two biologic products approved under the FDCA, Cerezyme and Thyrogen. This renders them susceptible to potential competition from follow-on or biosimilar manufacturers via the "505(b)2" pathway of the FDCA. As with an ANDA, the sponsor of a 505(b)2 application is permitted to rely, at leastdependent, in part, on the safetyavailability and efficacy dataextent of reimbursement from third-party payors, including governments and private insurance plans. As a result of the innovator. For that reason, 505(b)(2) applicantscurrent volatility in the financial markets, third-party payors may have a shorter timedelay payment or be unable to approval than an applicant filing an NDA.
Tablesatisfy their reimbursement obligations. A reduction in the availability or extent of Contents
Otherreimbursement could negatively affect our product and service revenues.
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If an ANDA filer or any biosimilar manufacturer were to receive approval to sell a generic or biosimilar version of one of our products, that product would become subject to increased competition and our revenue for that product would be adversely affected.
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. In addition, we may need to revise our research and development plans if a program or programs no longer are commercially viable. 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, new healthcare legislation or fiscal challenges faced by government health administration authorities. In the United States, enactment of health reform legislation in March 2010 is expected to adversely affect our revenues through, among other provisions, the imposition of fees on certain elements of our businesses and an increase in the Medicaid rebate.
On September 27, 2007, the Food and Drug Administration Amendment Act of 2007 was enacted, giving the FDA enhanced authority over products already approved for sale, 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 or distribution of approved products.
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 payors, including governments and private insurance plans. As a result of the current volatility in the financial markets, third-party payors 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 revenues.
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 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 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
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
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| • | expanding and maintaining existing and constructing new manufacturing operations, including investing significant funds to expand our Allston, Massachusetts, Geel, Belgium and Waterford, Ireland facilities and constructing a new manufacturing facility in Framingham, Massachusetts with capacity for Cerezyme and Fabrazyme; | |
| • | implementing process improvements and system updates for our biologics manufacturing operations; | |
| • | product development and marketing; | |
| • | strategic business initiatives; | |
| • | upgrading our information technology systems, including installation and implementation of a new enterprise resource planning system worldwide; | |
| • | contingent payments under business combinations, license and other agreements, including a milestone payment to Synpac if net sales of Myozyme/Lumizyme reach $400.0 million, as well as payments related to our license of mipomersen from Isis, ataluren from PTC, and Prochymal and Chondrogen from Osiris, as well as contingent consideration obligations related to our acquisition of the worldwide rights to the oncology products Campath, Fludara, Leukine and alemtuzumab for MS from Bayer; | |
| • | consulting and other fees related to our compliance with the consent decree; | |
| • | working capital and satisfaction of our obligations under capital and operating leases; and | |
| • | repayment of our 2015 Notes and our 2020 Notes. |
On May 6, 2010, we announced that we will initiatedirectors authorized a $2.0 billion stockshare repurchase program, under whichplan. In June 2010, we plan to purchaseexecuted an accelerated share repurchase agreement with Goldman Sachs for the repurchase of $1.0 billion of our common stock, inwhich we financed with the near term and financed by debt.net proceeds of our $1.0 billion senior note offering. On October 18, 2010, we completed the first half of the planned share repurchase, repurchasing 15.7 million shares at an average price of $63.79 per share. We plan to repurchase the additionalremaining $1.0 billion duringof shares authorized under the next twelve months.
plan before June 2011.
business couldoperating results and financial position may be negatively affected as a resultimpacted when we attempt to grow through business combination transactions.a proxy fight. Icahn Partners LP and certain of its affiliates have begun a proxy contest relating to our 2010 annual meeting of shareholders, nominating their own slate of four nominees for election to our board of directors. If the proxy contest continues, our business could be adversely affected because:•responding to proxy contests and other actions by activist shareholders can be costly and time-consuming, disrupting our operations and diverting the attention of management and our employees;•perceived uncertainties as to our future direction may result inunknown liabilities, the loss of potentialkey employees, and the diversion of management attention. Furthermore, in any business opportunities,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
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
incur significant debt.
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
investment in Isis to its market value in June 2010. This estimate assumes no change in foreign exchange rates from quarter-end spot rates.
| ITEM 4. | CONTROLS AND PROCEDURES |
— As of March 31,September 30, 2010, we evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined inRules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"“Exchange Act”)). Based on that evaluation, our Chief Executive Officer and Chief
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our supply chain and financial transaction processes. The gradual implementation is expected to occur in phases over the next several years. The implementation of a worldwide ERP system will likely affect the processes that constitute our internal control over financial reporting and will require testing for effectiveness.TableContentsITEM 1. LEGAL PROCEEDINGS attorneys'attorneys’ and experts'experts’ fees. In November 2009, the lawsuits were consolidated inIn Re Genzyme Corp. Securities Litigation and a lead plaintiff was appointed. In March 2010, the plaintiffs filed a consolidated amended complaint that extended the class period from October 24, 2007 through November 13, 2009.2009 and named additional individuals as defendants. In June 2010, we filed a motion to dismiss the class action. The plaintiffs filed an opposition to our motion to dismiss in August 2010 and we filed a reply in support of our motion to dismiss in September 2010. A hearing on the motion to dismiss is scheduled to be held in January 2011.
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The District Court Actions have been consolidated inIn Re Genzyme Derivative Litigationand the plaintiffs have agreed to a joint stipulation staying these cases until our board of directors has had sufficient time to exercise its duties and complete an appropriate investigation, which is ongoing. InOn July 9, 2010, one of the State Court Actions was dismissed without prejudice for plaintiffs’ failure to serve process on the parties are working to consolidate all three lawsuits. We intend to defend these lawsuits vigorously.
ANDAdefendants. The Middlesex Court also ordered transfer and consolidation of the remaining two State Court Actions in the Suffolk Superior Court Business Litigation
As disclosed Session. The court has indicated that discovery in that action also will be stayed for some period pending our 2009 Form 10-K, we have initiated patent litigation against a numberboard of companies that submitteddirector’s completion of its ongoing investigation in response to the FDA ANDAs containing Paragraph IV certifications seeking approval
to market generic versions of Renagel, Renvela and Hectorol. One of the ANDA filers, Sandoz, Inc., is seeking approval to market generic 400mg and 800mg sevelamer hydrochloride tablets after the expiration of the patents protecting Renagel that expire in 2013.
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alleged breach, it suffered lost profits that Kayat claims it would have received under agreements it alleges it had entered into with subdistributors. Kayat also alleges common law fraud and violations of Mass. Gen. L. c. 93A and the Racketeer Influenced and Corrupt Organizations Act. Kayat filed its suit on August 8, 2002 and a trial began in Cyprus in December 2009. Kayat seeks damages for its legal claims and for expenses it claims it has incurred, including legal fees and advertising, promotion and otherout-of-pocket expenses. We believe we acted appropriately in all regards, including properly terminating the agreement when we decided to exit the melatonin business, and we intend to defend this lawsuit vigorously.
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| ITEM 1A. | RISK FACTORS |
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
| ITEM 6. | EXHIBITS |
| By: | ||||
/s/ MICHAEL S. WYZGA |
| Exhibit No. | Description | |||
| *2 | .1 | Asset Purchase Agreement, dated September 13, 2010, between Genzyme Corporation and Laboratory Corporation of America Holdings. Filed as Exhibit 2.1 to Genzyme’sForm 8-K filed on September 19, 2010. | ||
| *3 | .1 | Restated Articles of Organization of Genzyme Corporation, as amended. Filed as Exhibit 3.1 to Genzyme’sForm 8-K filed on June 22, 2010. | ||
| *3 | .2 | By-laws of Genzyme Corporation, as amended. Filed as Exhibit 3.2 to Genzyme’sForm 8-K filed on June 22, 2010. | ||
| 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. | ||
| 101 | The following materials from Genzyme Corporation’sForm 10-Q for the quarter ended September 30, 2010, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Statements of Operations, (ii) Consolidated Balance Sheets, (iii) Consolidated Statements of Cash Flows and (iv) Notes to Unaudited, Consolidated Financial Statements. | |||
| * | |||
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