Genzyme 10Q 2004 Q3 Quarterly report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission file number 0-14680

GENZYME CORPORATION
(Exact name of registrant as specified in its charter)

Massachusetts (State or other jurisdiction of incorporation or organization)		06-1047163 (I.R.S. Employer Identification No.)
500 Kendall Street, Cambridge, Massachusetts (Address of principal executive offices)		02142 (Zip Code)
(617) 252-7500 (Registrant's telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the Registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act). Yes ý No o

The number of shares of Genzyme Stock outstanding as of October 31, 2004: 229,469,403

NOTE REGARDING REFERENCES TO GENZYME DIVISIONS AND SERIES OF STOCK

Throughout this Form 10-Q, the words "we," "us," "our" and "Genzyme" refer to Genzyme Corporation as a whole, and "our board of directors" refers to the board of directors of Genzyme Corporation.

Through June 30, 2003, we had three operating divisions, which we refer to as follows:

•: Genzyme General Division = "Genzyme General;"
•: Genzyme Biosurgery Division = "Genzyme Biosurgery;" and
•: Genzyme Molecular Oncology Division = "Genzyme Molecular Oncology."

Through June 30, 2003, we also had three outstanding series of common stock. Each series was designed to reflect the value and track the performance of one of our divisions. We referred to each series of common stock as follows:

•: Genzyme General Division Common Stock = "Genzyme General Stock;"
•: Genzyme Biosurgery Division Common Stock = "Biosurgery Stock;" and
•: Genzyme Molecular Oncology Division Common Stock = "Molecular Oncology Stock."

Through June 30, 2003, we allocated earnings or losses to each series of tracking stock based on the net income or loss attributable to the corresponding division determined in accordance with accounting principles generally accepted in the United States of America, as adjusted for the allocation of tax benefits.

Effective July 1, 2003, we eliminated our tracking stock capital structure by exchanging, in accordance with the provisions of our charter, each share of Biosurgery Stock for 0.04914 of a share of Genzyme General Stock and each share of Molecular Oncology Stock for 0.05653 of a share of Genzyme General Stock. Options and warrants to purchase shares of Biosurgery Stock and options to purchase shares of Molecular Oncology Stock were converted into options and warrants to purchase shares of Genzyme General Stock. Effective July 1, 2003, we have one outstanding series of common stock. From July 1, 2003 through May 27, 2004, we referred to our outstanding series of common stock as Genzyme General Stock. At our annual meeting of shareholders on May 27, 2004, our shareholders approved an amendment to our charter that eliminated the designation of separate series of common stock, resulting in 690,000,000 authorized shares of a single series of common stock, which we now refer to as Genzyme Stock.

Effective July 1, 2003, as a result of the elimination of our tracking stock capital structure, all of our earnings or losses are now allocated to Genzyme Stock. Earnings or losses allocated to Biosurgery Stock and Molecular Oncology Stock prior to that date remain allocated to those series of stock in the preparation of our consolidated financial statements and are not affected by the elimination of our tracking stock structure. Accordingly, earnings or losses allocated to Biosurgery Stock and Molecular Oncology Stock represent earnings allocated to those tracking stocks through June 30, 2003. Earnings or losses allocated to Genzyme Stock through June 30, 2003 represent the earnings or losses of Genzyme General, as adjusted for the allocation of tax benefits. Earnings or losses allocated to Genzyme Stock after June 30, 2003 represent the earnings or losses for the corporation as a whole. Accordingly, earnings allocated to Genzyme Stock for the three and nine months ended September 30, 2004 and the three months ended September 30, 2003, reflect the earnings for the corporation as a whole. Earnings allocated to Genzyme Stock for the nine months ended September 30, 2003 reflect the earnings allocated to Genzyme General for the period from January 1, 2003 through June 30, 2003 and do not include the losses allocated to Biosurgery Stock and Molecular Oncology Stock for that period. Earnings allocated to Genzyme Stock for the period from July 1, 2003 through September 30, 2003 reflect earnings for the corporation as a whole.

On July 1, 2003, we reclassified the Biosurgery Stock and Molecular Oncology Stock equity accounts into the Genzyme Stock equity accounts. The elimination of our tracking stock capital structure had no effect on our consolidated net income or loss. Because we now have only one series of common stock outstanding, we rescinded the management and accounting policies that governed the relationships between our former divisions. In this Quarterly Report on Form 10-Q, and future Quarterly and Annual Reports, we will not provide separate financial statements and management's discussion and analysis for each of our former divisions, but will continue to provide our consolidated financial statements and management's discussion and analysis for the corporation as a whole.

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-Q contains forward-looking statements, including statements regarding our:

•: projected timetables and costs for the preclinical and clinical development of, regulatory submissions and approvals for, and market introduction of, our products and services;
•: merger and acquisition activity, including the anticipated timing of our merger with ILEX Oncology, Inc., or ILEX, and potential in-process research and development, or IPR&D, charges related to that merger, as well as the anticipated timing of our acquisition of Synvisc sales and marketing rights from Wyeth;
•: entries into new collaborations and licensing agreements;
•: estimates of the potential markets for our products and services, including the anticipated drivers for future growth;
•: sales and marketing plans;
•: assessment of competitors and potential competitors and the anticipated impact of potentially competitive products on our revenues;
•: estimates of the capacity of, and the projected timetable of approvals for, manufacturing and other facilities to support our products and services;
•: expected future revenues, operations and expenditures;
•: projected future earnings and earnings per share;
•: assessment of the outcome and financial impact of litigation and other governmental proceedings and the potential impact of unasserted claims;
•: projected cash needs;
•: intention to repay the outstanding indebtedness under our revolving credit facility within a year;
•: IRS audit, including our provision for liabilities and potential for reduction of future tax provisions;
•: assessment of the impact of recent tax legislation and accounting pronouncements;
•: expected future payments related to employee benefits and leased facilities acquired from IMPATH, Inc., or IMPATH, and SangStat Medical Corporation, or SangStat;
•: completion of a post-closing working capital assessment and final valuation for our acquisition of the pathology/oncology testing assets related to the Physician Services and Analytical Services business units of IMPATH; and
•: plans to record an impairment charge related to our investment in the common stock of BioMarin Pharmaceutical Inc., or BioMarin, if the value of the stock does not recover within the next three months.

These statements are subject to risks and uncertainties, and our actual results may differ significantly from those that are described in this report. These risks and uncertainties include:

•: our ability to successfully complete preclinical and clinical development of our products and services;
•: our ability to manufacture sufficient amounts of our products for development and commercialization activities and to do so in a timely and cost-effective manner;
•: our ability to obtain and maintain adequate patent and other proprietary rights protection of our products and services and successfully enforce our proprietary rights;
•: the scope, validity and enforceability of patents and other proprietary rights held by third parties and their impact on our ability to commercialize our products and services;
•: the accuracy of our estimates of the size and characteristics of the markets to be addressed by our products and services, including growth projections;
•: market acceptance of our products and services;
•: our ability to consummate, on the expected timetable, our merger with ILEX, which remains subject to clearance by the Federal Trade Commission, commonly referred to as the FTC, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, which we refer to as the Hart-Scott-Rodino Act, and our success at integrating that business;
•: our ability to consummate, on the expected timetable, our acquisition of Synvisc sales and marketing rights from Wyeth, our success at managing that product and the accuracy of our estimate that Synvisc revenues will increase after closing;
•: the use of cash in business combinations or other strategic initiatives;
•: our ability to identify new patients for our products and services;
•: our ability to satisfy the post-marketing commitments made as a condition of the marketing approvals of Fabrazyme and Aldurazyme;
•: the accuracy of our information regarding the products and resources of our competitors and potential competitors;
•: the content and timing of submissions to and decisions made by the United States Food and Drug Administration, commonly referred to as the FDA, and other regulatory agencies;
•: the availability of reimbursement for our products and services from third-party payors, and the extent of such coverage and the accuracy of our estimates of the payor mix for our products;
•: our ability to increase market penetration outside the United States for Fabrazyme, Thyrogen and Renagel;
•: market acceptance of Thymoglobulin in expanded areas of use and new markets;
•: our ability to optimize dosing and improve patient compliance with Renagel;
•: our ability to effectively manage wholesaler inventories of Renagel and the levels of compliance with our inventory management programs;
•: our ability to successfully increase market penetration for Synvisc product as a treatment for osteoarthritis of the knee and to expand its use in other joints;
•: our ability to establish and maintain strategic license, collaboration and distribution arrangements and to successfully manage our relationships with collaborators, distributors and partners;

iii

•: the continued funding and operation of our joint ventures by our partners;
•: the resolution of litigation related to the consolidation of our tracking stocks;
•: the initiation of legal proceedings by or against us;
•: decisions made by the United States District Court, arbitrators for the American Arbitrators Association, the FTC, and other judicial bodies and regulatory authorities;
•: the impact of changes in the exchange rate for the Euro and other currencies on our product and service revenues and related costs, in future periods;
•: our ability to successfully integrate the business acquired from IMPATH;
•: the number of diluted shares considered outstanding, which will depend on business combination activity, our stock price, and potential changes in accounting rules;
•: the outcome of our IRS audit; and
•: the possible disruption of our operations due to terrorist activities or armed conflict, including as a result of the disruption of operations of regulatory authorities, our subsidiaries, our manufacturing facilities and our customers, suppliers, distributors, couriers, collaborative partners, licensees and clinical trial sites.

We have included more detailed descriptions of these and other risks and uncertainties under the heading "Factors Affecting Future Operating Results" in Item 2 to Part I of this Form 10-Q. We encourage you to read those descriptions carefully. We caution investors not to place substantial reliance on the forward-looking statements contained in this report. These statements, like all statements in this report, speak only as of the date of this report (unless another date is indicated) and we undertake no obligation to update or revise the statements.

NOTE REGARDING INCORPORATION BY REFERENCE

The Securities and Exchange Commission allows us to disclose important information to you by referring you to other documents we have filed with the SEC. The information that we refer you to is "incorporated by reference" into this Form 10-Q. Please read that information.

NOTE REGARDING TRADEMARKS

Genzyme®, Renagel®, Cerezyme®, Ceredase®, Fabrazyme®, Thyrogen®, Synvisc®, IMPATH® and Myozyme® are registered trademarks of Genzyme. Sepra™ is a trademark of Genzyme. Aldurazyme® is a registered trademark of BioMarin/Genzyme LLC. Thymoglobulin® and Lymphoglobuline® are registered trademarks of SangStat Medical Corporation. CAMPATH® is a registered trademark of ILEX Pharmaceuticals, L.P. WelChol® is a registered trademark of Sankyo Pharma, Inc. Gengraf® is a registered trademark of Abbott Laboratories. All rights reserved.

GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, SEPTEMBER 30, 2004

TABLE OF CONTENTS

		PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1.	Financial Statements	1
	Unaudited, Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2004 and 2003	1
	Unaudited, Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003	3
	Unaudited, Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2004 and 2003	4
	Notes to Unaudited, Consolidated Financial Statements	5
ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	28
ITEM 3.	Quantitative and Qualitative Analysis of Market Risk	60
ITEM 4.	Controls and Procedures	60
PART II. OTHER INFORMATION
ITEM 1.	Legal Proceedings	61
ITEM 2.	Changes in Securities and Use of Proceeds and Issuer Purchases of Equity Securities	62
ITEM 6.	Exhibits	62
Signatures		63

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GENZYME CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income (Loss)
(Unaudited, amounts in thousands)

				Three Months Ended September 30,						Nine Months Ended September 30,
				2004			2003			2004			2003
Revenues:
	Net product sales			$	505,415		$	394,285		$	1,451,044		$	1,124,006
	Net service sales				61,327			33,888			150,885			96,936
	Revenues from research and development contracts:
		Related parties			—			714			—			1,836
		Other			2,487			8,091			8,139			14,962

			Total revenues		569,229			436,978			1,610,068			1,237,740

Operating costs and expenses:
	Cost of products sold				110,001			95,210			323,544			290,350
	Cost of services sold				44,858			19,653			101,145			55,902
	Selling, general and administrative				147,886			127,340			443,956			372,371
	Research and development (including research and development related to contracts)				92,188			82,974			284,374			237,668
	Amortization of intangibles				27,657			19,267			81,147			54,413
	Purchase of in-process research and development				—			158,000			—			158,000
	Charge for impairment of goodwill				—			—			—			102,792
	Charge for impaired asset				—			7,996			—			10,894

			Total operating costs and expenses		422,590			510,440			1,234,166			1,282,390

Operating income (loss)					146,639			(73,462	)		375,902			(44,650	)

Other income (expenses):
	Equity in loss of equity method investments				(4,362	)		(5,503	)		(12,467	)		(14,501	)
	Minority interest				1,589			—			3,715			—
	Gain (loss) on investments in equity securities				(2,706	)		1,183			(2,282	)		(2,437	)
	Loss on sale of product line				—			—			—			(29,367	)
	Other				(19	)		(338	)		(733	)		1,181
	Investment income				4,566			11,422			17,845			35,464
	Interest expense				(5,429	)		(4,382	)		(33,250	)		(17,207	)

			Total other income (expenses)		(6,361	)		2,382			(27,172	)		(26,867	)

Income (loss) before income taxes					140,278			(71,080	)		348,730			(71,517	)
Provision for income taxes					(42,479	)		(24,653	)		(104,861	)		(53,377	)

Net income (loss)				$	97,799		$	(95,733	)	$	243,869		$	(124,894	)

Comprehensive income (loss), net of tax:
	Net income (loss)			$	97,799		$	(95,733	)	$	243,869		$	(124,894	)

	Other comprehensive income (loss), net of tax:
		Foreign currency translation adjustments			13,388			11,857			(1,897	)		70,751
		Gain on affiliate sale of stock, net of tax			—			—			—			2,856
		Other			291			200			743			123
		Unrealized gains (losses) on securities:
			Unrealized gains (losses) arising during the period		(659	)		(10,012	)		(2,798	)		1,521
			Reclassification adjustment for losses included in net income (loss)		21			(737	)		111			1,551

		Unrealized gains (losses) on securities, net of tax			(638	)		(10,749	)		(2,687	)		3,072

	Other comprehensive income (loss)				13,041			1,308			(3,841	)		76,802

Comprehensive income (loss)				$	110,840		$	(94,425	)	$	240,028		$	(48,092	)

The accompanying notes are an integral part of these unaudited, consolidated financial statements.

GENZYME CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income (Loss) (Continued)
(Unaudited, amounts in thousands, except per share amounts)

			Three Months Ended September 30,					Nine Months Ended September 30,
			2004		2003			2004		2003
Net income (loss) per share:
Allocated to Genzyme Stock(1):
	Genzyme General net income (loss)		$	97,799	$	(95,733	)	$	243,869	$	24,841
	Tax benefit allocated from Genzyme Biosurgery			—		—			—		8,720
	Tax benefit allocated from Genzyme Molecular Oncology			—		—			—		3,420

	Net income (loss) allocated to Genzyme Stock		$	97,799	$	(95,733	)	$	243,869	$	36,981

	Net income (loss) per share of Genzyme Stock:
		Basic	$	0.43	$	(0.43	)	$	1.08	$	0.17

		Diluted	$	0.42	$	(0.43	)	$	1.05	$	0.17

	Weighted average shares outstanding:
		Basic		228,156		222,000			226,815		217,801

		Diluted		234,720		222,000			232,727		223,972

Allocated to Biosurgery Stock(1):
	Genzyme Biosurgery net loss									$	(166,656	)
	Allocated tax benefit										14,005

	Net loss allocated to Biosurgery Stock									$	(152,651	)

	Net loss per share of Biosurgery Stock—basic and diluted									$	(3.76	)

	Weighted average shares outstanding										40,630

Allocated to Molecular Oncology Stock(1):
	Net loss allocated to Molecular Oncology Stock									$	(9,224	)

	Net loss per share of Molecular Oncology Stock—basic and diluted									$	(0.54	)

	Weighted average shares outstanding										16,958

(1): Effective July 1, 2003, in connection with the elimination of our tracking stock structure, we ceased allocating earnings to Genzyme Biosurgery and Genzyme Molecular Oncology. From that date forward, all of our earnings are allocated to Genzyme General. Earnings or losses allocated to Genzyme Biosurgery and Genzyme Molecular Oncology prior to July 1, 2003 remain allocated to those divisions and are not affected by the elimination of our tracking stock structure.
The accompanying notes are an integral part of these unaudited, consolidated financial statements.

GENZYME CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited, amounts in thousands, except par value amounts)

				September 30, 2004			December 31, 2003
ASSETS
Current assets:
	Cash and cash equivalents			$	331,232		$	292,774
	Short-term investments				24,785			120,712
	Accounts receivable, net				501,990			397,439
	Inventories				266,478			267,472
	Prepaid expenses and other current assets				88,574			110,872
	Deferred tax assets				134,977			133,707

		Total current assets			1,348,036			1,322,976
Property, plant and equipment, net					1,231,775			1,151,133
Long-term investments					467,429			813,974
Notes receivable—related parties					9,588			12,318
Goodwill, net					801,350			621,947
Other intangible assets, net					868,008			895,844
Investments in equity securities					116,124			110,620
Other noncurrent assets					70,404			75,716

		Total assets		$	4,912,714		$	5,004,528

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable			$	63,533		$	97,474
	Accrued expenses				330,750			267,304
	Deferred revenue and other income				12,722			6,837
	Current portion of long-term debt, convertible notes and capital lease obligations				119,184			20,410

		Total current liabilities			526,189			392,025
Long-term debt and capital lease obligations					147,094			150,349
Convertible notes and debentures					690,000			1,265,000
Deferred revenue—noncurrent					7,792			3,388
Deferred tax liabilities					177,084			205,923
Other noncurrent liabilities					51,724			51,431

			Total liabilities		1,599,883			2,068,116

Commitments and contingencies (Note 10)
Stockholders' equity:
	Preferred stock, $0.01 par value				—			—
	Common stock, $0.01 par value				2,293			2,247
	Additional paid-in capital				3,094,350			2,957,578
	Notes receivable from stockholders				(13,711	)		(13,285	)
	Accumulated earnings (deficit)				45,309			(198,560	)
	Accumulated other comprehensive income				184,590			188,432

		Total stockholders' equity			3,312,831			2,936,412

		Total liabilities and stockholders' equity		$	4,912,714		$	5,004,528

The accompanying notes are an integral part of these unaudited, consolidated financial statements.

GENZYME CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited, amounts in thousands)

					Nine Months Ended September 30,
					2004			2003
Cash Flows from Operating Activities:
	Net income (loss)				$	243,869		$	(124,894	)
	Reconciliation of net income (loss) to net cash provided by operating activities:
		Depreciation and amortization				153,580			111,089
		Provision for bad debts				8,144			2,421
		Charge for purchase of in-process research and development				—			158,000
		Charge for impairment of goodwill				—			102,792
		Charge for impaired asset				—			10,894
		Equity in loss of equity method investments				12,467			14,501
		Minority interest				(3,715	)		—
		Loss on investments in equity securities				2,282			2,437
		Loss on sale of product line				—			29,367
		Write off of unamortized debt fees				5,329			—
		Deferred income tax benefit				(27,885	)		(25,402	)
		Tax benefit from employee stock options				32,258			22,073
		Other				4,419			1,395
		Increase (decrease) in cash from working capital changes (excluding impact of acquired assets and assumed liabilities):
			Accounts receivable			(101,076	)		(51,450	)
			Inventories			7,915			28,714
			Prepaid expenses and other current assets			1,155			(12,281	)
			Accounts payable, accrued expenses and deferred revenue			46,518			16,069

				Cash flows from operating activities		385,260			285,725

Cash Flows from Investing Activities:
	Purchases of investments					(460,324	)		(528,468	)
	Sales and maturities of investments					892,291			807,843
	Purchases of equity securities					(3,359	)		(19,933	)
	Purchases of property, plant and equipment					(129,255	)		(169,535	)
	Sale of product line					—			32,388
	Investments in equity method investees					(22,736	)		(19,070	)
	Purchases of intangible assets					(4,900	)		(20,267	)
	Acquisitions, net of acquired cash					(265,246	)		(537,037	)
	Other					1,935			3,990

				Cash flows from investing activities		8,406			(450,089	)

Cash Flows from Financing Activities:
	Proceeds from issuance of common stock					104,549			83,382
	Proceeds from draws on credit facility					135,000			316,000
	Payments of debt and capital lease obligations					(614,547	)		(312,528	)
	Bank overdraft					12,521			(17	)
	Minority interest payable					4,622			—
	Other					962			(115	)

				Cash flows from financing activities		(356,893	)		86,722

Effect of exchange rate changes on cash						1,685			19,739

Increase (decrease) in cash and cash equivalents						38,458			(57,903	)
Cash and cash equivalents at beginning of period						292,774			406,811

Cash and cash equivalents at end of period					$	331,232		$	348,908

The accompanying notes are an integral part of these unaudited, consolidated financial statements.

GENZYME CORPORATION AND SUBSIDIARIES

Notes To Unaudited, Consolidated Financial Statements

1. Description of Business

We are a global biotechnology company dedicated to making a major impact on the lives of people with serious diseases. Our broad product and service portfolio is focused on rare genetic disorders, renal disease, osteoarthritis, organ transplant, and diagnostic and predictive testing. We are organized into five financial reporting units, which we also consider to be our reportable/reporting segments:

•: Renal, which develops, manufactures and distributes products that treat patients suffering from renal diseases, including chronic renal failure. The unit derives substantially all of its revenue from sales of Renagel (including sales of bulk sevelamer);
•: Therapeutics, which develops, manufactures and distributes therapeutic products, with an expanding 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 other specialty therapeutics, such as Thyrogen. The unit derives substantially all of its revenue from sales of Cerezyme, Fabrazyme and Thyrogen;
•: Transplant, which develops, manufactures and distributes therapeutic products for the treatment of immune-mediated diseases, with a focus on products that address pre-transplantation, prevention and treatment of acute rejection in organ transplantation, as well as other auto-immune disorders. The unit derives its revenue primarily from sales of Thymoglobulin and Lymphoglobuline;
•: Biosurgery, which develops, manufactures and distributes biotherapeutics and biomaterial products, with an emphasis on products that meet medical needs in orthopaedics and broader surgical areas. The unit derives its revenue primarily from sales of Synvisc, the Sepra line of products and, through June 30, 2003, sales of cardiac device products; and
•: Diagnostics/Genetics, which develops, manufactures and distributes diagnostic products, with a focus onin vitro diagnostics, and provides genetic and pathology/oncology testing services.

We report the activities of our bulk pharmaceuticals, oncology, cardiovascular and drug discovery and development business units under the caption "Other." We report our corporate, general and administrative operations, and corporate science activities that we do not allocate to our financial reporting units, under the caption "Corporate."

2. Basis of Presentation and Significant Accounting Policies

Basis of Presentation

Our unaudited, consolidated financial statements for each period include the statements of operations, balance sheets and statements of cash flows for our corporate operations taken as a whole. We eliminate all significant intercompany items and transactions in consolidation. We prepare our unaudited, consolidated financial statements following the requirements of accounting principles generally accepted in the United States of America and the SEC for interim reporting. As permitted under these rules, we condense or omit certain footnotes and other financial information that are normally required by accounting principles generally accepted in the United States. We have reclassified certain 2003 data to conform to our 2004 presentation.

These financial statements include all normal and recurring adjustments that we consider necessary for the fair presentation of our financial position and operating results. Since these are interim financial statements, you should also read our audited, consolidated financial statements and notes included in

our 2003 Form 10-K. Revenues, expenses, assets and liabilities can vary from quarter to quarter. Therefore, the results and trends in these interim financial statements may not be indicative of results for future periods.

Elimination of Tracking Stock Structure

Through June 30, 2003, we had three outstanding series of common stock—Genzyme General Stock, Biosurgery Stock and Molecular Oncology Stock. We also referred to these series of common stock as "tracking stock." Unlike typical common stock, each of our tracking stocks was designed to reflect the value and track the financial performance of a specific subset of our business operations and its allocated assets, rather than the operations and assets of our entire company. Through June 30, 2003, we allocated earnings or losses to each series of tracking stock based on the net income or loss attributable to the corresponding division determined in accordance with accounting principles generally accepted in the United States as adjusted for the allocation of tax benefits.

Effective July 1, 2003, we eliminated our tracking stock capital structure by exchanging, in accordance with the provisions of our charter, each share of Biosurgery Stock for 0.04914 of a share of Genzyme General Stock and each share of Molecular Oncology Stock for 0.05653 of a share of Genzyme General Stock. In the aggregate, 1,997,392 shares of Genzyme General Stock were exchanged for the outstanding shares of Biosurgery Stock and 959,045 shares of Genzyme General Stock were exchanged for the outstanding shares of Molecular Oncology Stock. Options and warrants to purchase shares of Biosurgery Stock were converted into options and warrants to purchase 401,257 shares of Genzyme General Stock, with exercise prices ranging from $24.27 to $2,356.12, and options to purchase shares of Molecular Oncology Stock were converted into options to purchase 198,855 shares of Genzyme General Stock, with exercise prices ranging from $26.01 to $478.27. Effective July 1, 2003, we have one outstanding series of common stock, which we now refer to as Genzyme Stock.

decide if and when to declare dividends, subject to certain limitations. To the extent that the following amount did not exceed the funds that would be legally available for dividends under Massachusetts law, the dividend limit for a stock corresponding to a division was the greater of:

•: the amount that would be legally available for dividends under Massachusetts law if the division were a separate legal corporation; or
•: the amount by which the greater of the fair value of the division's allocated net assets, or its allocated paid-in capital plus allocated earnings, exceeded its corresponding stock's par value, preferred stock preferences and debt obligations.

The provisions in our charter governing dividends and distributions factored the assets and liabilities and income or losses attributable to a division into the determination of the amount available to pay dividends on the associated tracking stock. Through June 30, 2003, we calculated the income tax provision of each division as if such division were a separate taxpayer, which included assessing the realizability of deferred tax assets at the division level. Our management and accounting policies in effect at the time provided that if, at the end of any fiscal quarter, a division could not use any projected annual tax benefits attributable to it to offset or reduce its current or deferred income tax expense, we could allocate the tax benefit to other divisions in proportion to their taxable income without any compensating payments or allocation to the division generating the benefit. Through June 30, 2003, Genzyme Biosurgery and Genzyme Molecular Oncology had not generated taxable income, and thus had not had the ability to use any projected annual tax benefits. Genzyme General had generated taxable income, providing it with the ability to utilize the tax benefits generated by Genzyme Biosurgery and Genzyme Molecular Oncology. Consistent with our policy, we allocated the tax benefits generated by Genzyme Biosurgery and Genzyme Molecular Oncology through June 30, 2003 to Genzyme General without making any compensating payments or allocations to the division that generated the benefit.

The tax benefits allocated to Genzyme General and included in earnings attributable to Genzyme Stock for the nine months ended September 30, 2003, reflecting allocations through June 30, 2003, were (amounts in thousands):

		Nine Months Ended September 30, 2003
Tax benefits allocated from:
Genzyme Biosurgery		$	8,720
Genzyme Molecular Oncology			3,420

	Total	$	12,140

Deferred tax assets and liabilities can arise from purchase accounting and relate to a division that does not satisfy the realizability criteria of Statement of Financial Accounting Standards, or SFAS, No. 109, "Accounting for Income Taxes." Through June 30, 2003, such deferred tax assets and liabilities were allocated to the division to which the acquisition was allocated. As a result, the periodic changes in these deferred tax assets and liabilities did not result in a tax expense or benefit to that division. However, the change in these deferred tax assets and liabilities impacted our consolidated tax provision. These changes were added to division net income (loss) for purposes of determining net income (loss) allocated to a tracking stock.

Within the general limits under our charter and Massachusetts law, the amount of any dividend payment will be at the board of directors' discretion. To date, we have never declared or paid a cash dividend on shares of any of our series of common stock, nor do we anticipate paying or declaring a cash dividend on shares of Genzyme Stock in the foreseeable future. Unless declared, no dividends will accrue on shares of Genzyme Stock.

The elimination of our tracking stock capital structure had no effect on our consolidated net income or loss. In this Form 10-Q, and future Quarterly and Annual Reports, we will not provide separate financial statements for each of our former divisions, but will continue to provide our consolidated financial statements for the corporation as a whole.

Net Income (Loss) Per Share

Through June 30, 2003, we calculated earnings per share for each series of stock using the two-class method. To calculate basic earnings per share for each series of stock, we divided the earnings allocated to each series of stock by the weighted average number of outstanding shares of that series of stock during the applicable period. When we calculated diluted earnings per share, we also included in the denominator all potentially dilutive securities outstanding during the applicable period if inclusion of such securities was not anti-dilutive. We allocated our earnings to each series of our common stock based on the earnings attributable to that series of stock. Through June 30, 2003, the earnings attributable to Genzyme Stock, as defined in our charter, were equal to the net income or loss of Genzyme General determined in accordance with accounting principles generally accepted in the United States and as adjusted for tax benefits allocated to or from Genzyme General in accordance with our management and accounting policies in effect at the time. Earnings attributable to Biosurgery Stock and Molecular Oncology Stock were defined similarly and, as such, were based on the net income or loss of the corresponding division as adjusted for the allocation of tax benefits.

Effective July 1, 2003, in connection with the elimination of our tracking stock structure, we ceased allocating earnings or losses to Biosurgery Stock and Molecular Oncology Stock. From that date forward, all of our earnings or losses are allocated to Genzyme Stock. Earnings or losses allocated to Biosurgery Stock and Molecular Oncology Stock prior to July 1, 2003 will remain allocated to those stocks and are not affected by the elimination of our tracking stock structure.

Accounting for Stock-Based Compensation

In accounting for stock-based compensation, we do not recognize compensation expense for qualifying options granted to our employees and directors under the provisions of our stock-based compensation plans with fixed terms and an exercise price greater than or equal to the fair market value of the underlying series of our common stock on the date of grant. All stock-based awards to non-employees are accounted for at their fair value in accordance with SFAS No. 123, as amended, and Emerging Issues Task Force, or EITF, Issue No. 96-18, "Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services."

The following table sets forth our net income (loss) data as if compensation expense for our stock-based compensation plans was determined in accordance with SFAS No. 123, as amended, based on the fair value at the grant dates of the awards (amounts in thousands):

		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
Net income (loss):
	As reported	$	97,799		$	(95,733	)	$	243,869		$	(124,894	)
	Add: employee stock-based compensation included in as reported, net of tax		—			65			6			370
	Deduct: pro forma employee stock-based compensation expense, net of tax		(21,151	)		(17,803	)		(74,219	)		(62,946	)

	Pro forma	$	76,648		$	(113,471	)	$	169,656		$	(187,470	)

The following table sets forth the impact to our historical net income (loss) per share data as if compensation expense for our stock-based compensation plans was determined in accordance with SFAS No. 123:

			Three Months Ended September 30,					Nine Months Ended September 30,
			2004		2003			2004		2003
Net income (loss) per share allocated to Genzyme Stock(1):
	Basic:
		As reported	$	0.43	$	(0.43	)	$	1.08	$	0.17

		Pro forma	$	0.34	$	(0.51	)	$	0.74	$	(0.10	)

	Diluted:
		As reported	$	0.42	$	(0.43	)	$	1.05	$	0.17

		Pro forma	$	0.33	$	(0.51	)	$	0.73	$	(0.10	)

Net loss per share allocated to Biosurgery Stock—basic and diluted(1):
		As reported								$	(3.76	)

		Pro forma								$	(3.82	)

Net loss per share allocated to Molecular Oncology Stock—basic and diluted(1):
		As reported								$	(0.54	)

		Pro forma								$	(0.63	)

(1): Effective July 1, 2003, in connection with the elimination of our tracking stock structure, we ceased allocating earnings to Genzyme Biosurgery and Genzyme Molecular Oncology. From that date forward, all of our earnings are allocated to Genzyme General. Earnings or losses allocated to Genzyme Biosurgery and Genzyme Molecular Oncology prior to July 1, 2003 remain allocated to those divisions and are not affected by the elimination of our tracking stock structure.

The effects of applying SFAS No. 123 are not necessarily representative of the effects on reported net income (loss) in future years. Additional awards in future years are anticipated.

Recent Accounting Pronouncements

EITF Issue No. 03-6, "Participating Securities and the Two-Class Method Under FASB Statement No. 128, Earnings Per Share." In April 2004, the EITF issued Statement No. 03-6, "Participating Securities and the Two-Class Method Under FASB Statement No. 128, Earnings Per Share." EITF 03-6 addresses a number of questions regarding the computation of earnings per share by a company that has issued securities other than common stock that contractually entitle the holder to the right to participate in dividends when, and if, declared. The issue also provides further guidance in applying the two-class method of calculating earnings per share, clarifying the definition of a participating security and how to apply the two-class method. EITF 03-6 was effective for fiscal periods beginning after March 31, 2004 and was required to be retroactively applied. We evaluated the terms of our convertible notes and debentures and determined that none of these instruments qualified as participating securities under the provisions of EITF 03-6. As a result, the adoption of EITF 03-6 had no effect on our earnings per share for the three and nine months ended September 30, 2004 or 2003.

EITF Issue No. 04-8, "The Effect of Contingently Convertible Debt on Diluted Earnings Per Share." In September 2004, the EITF reached a consensus on Issue No. 04-8, "The Effect of Contingently Convertible Debt on Diluted Earnings Per Share." EITF 04-8 requires that all contingently convertible debt instruments be included in diluted earnings per share using the if-converted method, regardless of whether the market price trigger (or other contingent feature) has been met. EITF 04-8 is effective for reporting periods ending after December 15, 2004 and requires that prior period earnings per share amounts presented for comparative purposes be restated. Under the provisions of EITF 04-8, the $690.0 million in principal under our 1.25% convertible senior notes, which represent 9.7 million potential shares of common stock, will be included in the calculation of diluted earnings per share using the if-converted method regardless of whether or not the contingent requirements have been met for conversion to common stock. We will adopt EITF 04-8 during the fourth quarter of 2004, and have determined that the adoption of EITF 04-8 will not have a significant impact on prior periods' earnings per share calculations.

EITF Issue No. 04-10, "Determining Whether to Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds." In September 2004, the EITF reached a consensus on Issue No. 04-10, "Determining Whether to Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds." EITF 04-10 requires that operating segments that do not meet the quantitative thresholds can be aggregated to produce a reportable segment if: (i) the aggregation is consistent with the objective and basic principles of SFAS No. 131, "Segment Reporting"; (ii) the segments have similar economic characteristics; and (iii) the segments have a majority of other aggregation criteria, such as similar products and services, production processes, types of customers, distribution methods and regulatory environment. EITF 04-10 is effective for reporting periods ending after December 15, 2004 and requires that corresponding information for earlier periods, including interim periods, be restated unless it is impractical to do so. We are currently evaluating the impact that the adoption of EITF 04-10 will have on our financial statements and results of operations.

Proposed SFAS, "Share-Based Payment, an amendment of FASB Statements Nos. 123 and 95." In March 2004, the Financial Accounting Standards Board, or FASB, issued an exposure draft of a new

standard entitled "Share-Based Payment, an amendment of FASB Statements Nos. 123 and 95," which would amend SFAS No. 123, "Accounting for Stock Based Compensation," and SFAS No. 95, "Statement of Cash Flows." The Exposure Draft would eliminate the ability to account for share-based compensation transactions using Accounting Principles Board, or APB, Opinion No. 25, "Accounting for Stock Issued to Employees," and generally would require such transactions be accounted for using a fair-value-based method and the resulting cost recognized in our financial statements. Throughout most of 2004, the FASB has continued to deliberate on different aspects of a new standard, and currently expects to issue a final standard before December 31, 2004. The new standard, as proposed, would be effective for awards that are granted, modified or settled in cash in interim and annual periods beginning after June 15, 2005. Although we have not yet completed an analysis to quantify the exact impact the new standard will have on our future financial performance, the disclosures in this note, under the caption,"Accounting for Stock-Based Compensation, " provide detail as to our financial performance as if we had applied the fair value based method and recognition provisions of SFAS No. 123 to stock-based employee compensation to the current reporting periods. We are monitoring developments related to the exposure draft and will adopt the final standards, if any, upon issuance.

3. Net Income (Loss) Per Share

Genzyme Stock(1):

The following table sets forth our computation of basic and diluted net income (loss) per share of Genzyme Stock (amounts in thousands, except per share amounts):

				Three Months Ended September 30,					Nine Months Ended September 30,
				2004		2003			2004		2003
Net income (loss)				$	97,799	$	(95,733	)	$	243,869	$	24,841
Tax benefit allocated from Genzyme Biosurgery					—		—			—		8,720
Tax benefit allocated from Genzyme Molecular Oncology					—		—			—		3,420

Net income (loss) allocated to Genzyme Stock—basic and diluted				$	97,799	$	(95,733	)	$	243,869	$	36,981

Shares used in computing net income (loss) per common share—basic					228,156		222,000			226,815		217,801
	Effect of dilutive securities:
		Stock options(2,3)			6,554		—			5,902		6,161
		Warrants and stock purchase rights(2)			10		—			10		10

			Dilutive potential common shares		6,564		—			5,912		6,171

Shares used in computing net income (loss) per common share—diluted(2,3,4,5)					234,720		222,000			232,727		223,972

Net income (loss) per share of Genzyme Stock:
	Basic			$	0.43	$	(0.43	)	$	1.08	$	0.17

	Diluted			$	0.42	$	(0.43	)	$	1.05	$	0.17

(1): Effective July 1, 2003, in connection with the elimination of our tracking stock structure, we ceased allocating earnings to Genzyme Biosurgery and Genzyme Molecular Oncology. From that date forward, all of our earnings are allocated to Genzyme General. Earnings or losses allocated to Genzyme Biosurgery and

Genzyme Molecular Oncology prior to July 1, 2003 remain allocated to those divisions and are not affected by the elimination of our tracking stock structure.

(2): For the three months ended September 30, 2003, basic and diluted net loss per share of Genzyme Stock are the same. We did not include the securities described in the following table in the computation of diluted net loss per share of Genzyme Stock because these securities would have an anti-dilutive effect due to our net loss for the period (amounts in thousands):

		Three Months Ended September 30, 2003
Shares of Genzyme Stock issuable for options		6,608
Shares of Genzyme Stock issuable for warrants and stock purchase rights		10

Total shares excluded from the computation of diluted earnings per share		6,618

(3): We did not include the securities described in the following table in the computation of diluted earnings per share because these securities had an exercise price greater than the average market price of Genzyme Stock during each such period (amounts in thousands):

		Three Months Ended September 30,				Nine Months Ended September 30,
		2004		2003		2004		2003
Shares of Genzyme Stock issuable upon exercise of outstanding options		5,159		13,948		7,845		14,261

(4): We did not include the potentially dilutive effect of the assumed conversion of the $575.0 million in principal of 3% convertible subordinated debentures in the computation of dilutive earnings per share for Genzyme Stock for the nine months ended September 30, 2004 and for the three and nine months ended September 30, 2003, because the conditions for conversion had not been met. The debentures were contingently convertible into approximately 8.2 million shares of Genzyme Stock at an initial conversion price of $70.30 per share. We redeemed all of the outstanding debentures for cash in June 2004.
(5): We did not include the potentially dilutive effect of the assumed conversion of the $690.0 million in principal of 1.25% senior convertible notes, issued in December 2003, in the computation of diluted earnings per share for Genzyme Stock for the three and nine months ended September 30, 2004 because the conditions for conversion had not been met. The notes are contingently convertible into approximately 9.7 million shares of Genzyme Stock at an initial conversion price of $71.24 per share.

Biosurgery Stock(1):

For the period presented, basic and diluted net loss per share of Biosurgery Stock are the same. We did not include the securities described in the following table in the computation of Biosurgery Stock diluted net loss per share because these securities would have an anti-dilutive effect due to the net loss allocated to Biosurgery Stock (amounts in thousands):

		Six Months Ended June 30, 2003
Shares of Biosurgery Stock issuable for options		7,796
Warrants to purchase shares of Biosurgery Stock		7
Biosurgery designated shares(2)		3,128
Biosurgery designated shares reserved for options(2)		62

	Total	10,993

(1): Effective July 1, 2003, in connection with the elimination of our tracking stock structure, we ceased allocating earnings to Genzyme Biosurgery and Genzyme Molecular Oncology. From that date forward, all of our earnings are allocated to Genzyme General. Earnings or losses allocated to Genzyme Biosurgery and Genzyme Molecular Oncology prior to July 1, 2003 remain allocated to those divisions and are not affected by the elimination of our tracking stock structure.
(2): Biosurgery designated shares were authorized shares of Biosurgery Stock that were not issued and outstanding, but which our board of directors could have issued, sold or distributed without allocating the proceeds to Genzyme Biosurgery. Effective July 1, 2003, all Biosurgery designated shares were cancelled in connection with the elimination of our tracking stock structure.

Molecular Oncology Stock(1):

For the period presented, basic and diluted net loss per share of Molecular Oncology Stock are the same. We did not include the securities described in the following table in the computation of Molecular Oncology Stock diluted net loss per share because these securities would have an anti-dilutive effect due to the net loss allocated to Molecular Oncology Stock (amounts in thousands):

		Six Months Ended June 30, 2003
Shares of Molecular Oncology Stock issuable for options		3,465
Molecular Oncology designated shares(2)		1,651

	Total	5,116

(1): Effective July 1, 2003, in connection with the elimination of our tracking stock structure, we ceased allocating earnings to Genzyme Biosurgery and Genzyme Molecular Oncology. From that date forward, all of our earnings are allocated to Genzyme General. Earnings or losses allocated to Genzyme Biosurgery and Genzyme Molecular Oncology prior to July 1, 2003 remain allocated to those divisions and are not affected by the elimination of our tracking stock structure.
(2): Molecular Oncology designated shares were authorized shares of Molecular Oncology Stock that were not issued and outstanding, but which our board of directors could have issued, sold or distributed without allocating the proceeds to Genzyme Molecular Oncology. Effective July 1, 2003, all Molecular Oncology designated shares were cancelled in connection with the elimination of our tracking stock structure.

4. Mergers and Acquisitions

Pending Mergers and Acquisitions

Merger with ILEX

In February 2004, we entered into an Agreement and Plan of Merger with ILEX, an oncology drug development company. The business combination will take the form of a stock-for-stock merger. Under the terms of the merger agreement, ILEX shareholders will receive shares of Genzyme Stock for each ILEX share owned based on an exchange ratio. This exchange ratio will equal $26.00 divided by the average (rounded to the nearest cent) of the per share closing prices of Genzyme Stock as reported by Nasdaq during the 20 trading days ending on the fifth trading day prior to the closing of the transaction, provided that if this average is greater than $59.88, then the exchange ratio will be 0.4342, and if this average is less than $46.58, then the exchange ratio will be 0.5582. Cash will be paid for fractional shares. The transaction has a total value of approximately $1 billion, based on ILEX's 39.0 million shares outstanding on February 26, 2004, and our offer price of $26.00 per share. The transaction is expected to be accounted for as a purchase and to qualify as a tax-free reorganization. The business combination has been approved by the board of directors of both companies, and on July 1, 2004, was approved by the holders of a majority of the shares of ILEX common stock. The transaction is subject to clearance under the Hart-Scott-Rodino Act. In April 2004, the FTC requested additional information from us and ILEX related to our proposed transaction. This "second request" extended the waiting period under the Hart-Scott-Rodino Act during which the FTC is permitted to review the transaction. We are working closely with the FTC to resolve outstanding issues regarding a proposed consent decree focused around certain solid organ transplant applications for CAMPATH (alemtuzumab for injection). We expect the transaction to close in the fourth quarter of this year.

Acquisition of Synvisc Sales and Marketing Rights from Wyeth

On November 3, 2004, we entered into an arrangement with Wyeth under which we will buy back, from Wyeth, the sales and marketing rights to Synvisc in the United States, as well as Germany, Poland, Greece, Portugal and the Czech Republic. The closing of this transaction is conditioned on the parties obtaining clearance under the Hart-Scott-Rodino Act, as well as the satisfaction of other customary closing conditions. In exchange for the sales and marketing rights, we are obligated to make upfront cash payments to Wyeth totaling $121.0 million, as well as contingent payments that, depending on the level of Synvisc sales in the covered territories, could reach a maximum of $293.7 million in cash. The agreements underlying this arrangement terminate on June 30, 2012.

Completed Mergers and Acquisitions

Acquisition of the Physician Services and Analytical Services Business Units of IMPATH

The purchase price and the allocation of the purchase price to the estimated fair value of the acquired tangible and intangible assets and assumed liabilities as follows (amounts in thousands):

Cash paid			$	212,093
Acquisition costs				3,183

		Total purchase price.	$	215,276

Accounts receivable			$	14,483
Inventory				1,956
Deferred tax assets—current				541
Other current assets				2,524
Property, plant & equipment				24,079
Goodwill				148,465
Other intangible assets (to be amortized straight-line over 0.4 to 10 years)				34,760
Deferred tax assets—noncurrent				835
Other noncurrent assets				213
Assumed liabilities:
	Customer credit balances			(6,674	)
	Unfavorable lease liability			(2,269	)
	Liabilities for exit activities			(1,470	)
	Other assumed liabilities			(2,167	)

	Allocated purchase price		$	215,276

The purchase price was allocated to the intangible assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the purchase price over the estimated fair value of the assets acquired and liabilities assumed amounted to $148.5 million, which was allocated to goodwill. We perform an impairment test for the goodwill on a periodic basis in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets."

The allocation of the purchase price to the estimated fair values remains subject to the completion of a post-closing assessment of the working capital of the acquired business units as of April 30, 2004, and to the completion of a final valuation, which we expect to complete in the fourth quarter of 2004. Pro forma results are not presented for our acquisition of the pathology/oncology testing assets of IMPATH because the acquisition did not have a significant effect on our results of operations.

In connection with the acquisition of these assets, we initiated an integration plan to consolidate and restructure certain functions and operations, including the relocation and termination of certain personnel and the closure of certain of the facilities leased by these business units of IMPATH. These costs have been recognized as liabilities assumed in connection with the purchase of the IMPATH assets in accordance with EITF Issue No. 95-3, "Recognition of Liabilities in Connection with Purchase

Business Combinations." The following table summarizes the liabilities established for exit activities related to this acquisition (amounts in thousands):

	Employee Related Benefits			Closure of Leased Facilities		Total Exit Activities
Recorded at acquisition date	$	1,434		$	36	$	1,470
Payments in 2004		(192	)		—		(192	)

Balance at September 30, 2004	$	1,242		$	36	$	1,278

We expect to pay employee related benefits to the former employees of the Physician Services and Analytical Services business units of IMPATH and make payments related to the closure of certain of the facilities leased by these business units through the end of 2005.

Alfigen, Inc.

In February 2004, we acquired Alfigen, Inc., or Alfigen, a national genetic testing provider based in Pasadena, California, for an aggregate purchase price of $47.5 million in cash. We accounted for the acquisition as a purchase and accordingly, the results of operations of Alfigen are included in our consolidated financial statements from February 21, 2004, the date of acquisition.

The purchase price and the allocation of the purchase price to the estimated fair value of the acquired tangible and intangible assets and assumed liabilities are as follows (amounts in thousands):

Cash paid		$	47,500

	Total purchase price.	$	47,500

Current assets		$	155
Property, plant & equipment			1,244
Goodwill			33,235
Other intangible assets (to be amortized straight-line over 5 to 10 years)			13,000
Assumed liabilities—employee related benefits			(134	)

	Allocated purchase price	$	47,500

The purchase price was allocated to the intangible assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the purchase price over the estimated fair value of the assets acquired and liabilities assumed amounted to $33.2 million, which was allocated to goodwill. We will perform an impairment test for the goodwill on a periodic basis in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets." Pro forma results are not presented for the acquisition of Alfigen because the acquisition did not have a significant effect on our results of operations.

In connection with the acquisition of Alfigen, we initiated an integration plan to consolidate and restructure certain functions and operations of Alfigen, including the termination of certain Alfigen personnel. These costs have been recognized as liabilities for employee related benefits assumed in connection with the acquisition of Alfigen in accordance with EITF 95-3. The amount of assumed

liabilities for employee related benefits was not significant and, as of September 30, 2004, all employee related benefits have been paid to the eligible former employees of Alfigen.

SangStat

In September 2003, we completed an all cash tender offer for the outstanding common stock (and associated preferred stock purchase rights) of SangStat for $22.50 per outstanding SangStat share. The aggregate consideration paid was $636.6 million in cash. We accounted for the acquisition as a purchase. Accordingly, the results of operations of SangStat are included in our consolidated financial statements from September 11, 2003, the day after the expiration of the successful tender offer.

In connection with the acquisition of SangStat, we initiated an integration plan to consolidate and restructure certain functions and operations of SangStat, including the relocation and termination of certain SangStat personnel and the closure of certain of SangStat's leased facilities. These costs have been recognized as liabilities assumed in connection with the purchase of SangStat in accordance with EITF 95-3. The following table summarizes the liabilities established for exit activities related to the acquisition of SangStat (amounts in thousands):

	Employee Related Benefits			Closure of Leased Facilities(1)			Other Exit Activities			Total Exit Activities
Recorded at acquisition date	$	7,118		$	2,561		$	49		$	9,728
Revision of estimate		1,315			(233	)		257			1,339
Payments in 2003		(831	)		—			—			(831	)

Balance at December 31, 2003		7,602			2,328			306			10,236
Revision of estimate		(459	)		(444	)		(184	)		(1,087	)
Payments in 2004		(5,032	)		(975	)		(122	)		(6,129	)

Balance at September 30, 2004	$	2,111		$	909		$	—		$	3,020

(1): Includes costs associated with the closure of leased facilities in the United States, Germany, Spain and Canada.

We expect to pay employee related benefits through the end of 2004 and make payments related to leased facilities through the first half of 2005.

Pro Forma Financial Summary

The following pro forma financial summary is presented as if the acquisition of SangStat was completed as of the beginning of each period presented. The pro forma combined results are not necessarily indicative of the actual results that would have occurred had the acquisition been consummated on those dates, or of the future operations of the combined entities. Material nonrecurring charges related to this acquisition, such as acquired IPR&D charges of $158.0 million, are

included in both periods of the following pro forma financial summary (amounts in thousands, except per share amounts):

		Three Months Ended September 30, 2003			Nine Months Ended September 30, 2003
Total revenue		$	461,879		$	1,323,987

Net loss		$	(107,664	)	$	(153,315	)

Net income (loss) allocated to Genzyme Stock		$	(107,664	)	$	8,560

Net income (loss) per share of Genzyme Stock:
	Basic	$	(0.48	)	$	0.04

	Diluted	$	(0.48	)	$	0.04

Weighted average shares outstanding:
	Basic		222,000			217,801

	Diluted		222,000			223,972

5. Inventories

		September 30, 2004		December 31, 2003
		(Amounts in thousands)
Raw materials		$	60,044	$	53,056
Work-in-process			80,187		96,088
Finished products			126,247		118,328

	Total	$	266,478	$	267,472

We capitalize inventory produced for commercial sale, which may result in the capitalization of inventory that has not yet been approved for sale. If a product is not approved for sale, it would likely result in the write-off of the inventory and a charge to earnings. At September 30, 2004, our total inventories included $3.1 million of inventory for products that have not yet been approved for sale. At December 31, 2003 our inventory for products not yet approved for sale was not significant.

6. Goodwill and Other Intangible Assets

Goodwill

The following table contains the changes in our net goodwill during the nine months ended September 30, 2004 (amounts in thousands):

	As of December 31, 2003		Acquisition		Adjustments			As of September 30, 2004
Renal	$	76,753	$	—	$	—		$	76,753
Therapeutics		354,709		—		—			354,709
Transplant(1)		132,550		—		(2,288	)		130,262
Biosurgery		7,585		—		—			7,585
Diagnostic/Genetics(2,3)		49,249		181,700		(1	)		230,948
Other(3)		1,101		—		(8	)		1,093

Goodwill, net	$	621,947	$	181,700	$	(2,297	)	$	801,350

(1): Represents the goodwill resulting from our acquisition of SangStat in September 2003. We recorded additional adjustments to the goodwill in the first three quarters of 2004 related to the finalization of the purchase price allocations and revisions of estimates of liabilities established for exit activities.
(2): Includes $148.5 million of goodwill resulting from our acquisition of the pathology/oncology testing assets of IMPATH in May 2004 and $33.2 million of goodwill resulting from our acquisition of Alfigen in February 2004.
(3): The adjustments to goodwill relate to foreign currency revaluation adjustments for goodwill denominated in foreign currencies.

We completed the annual impairment tests for our $801.4 million of net goodwill in the third quarter of 2004, as provided by SFAS No. 142, and determined that none of the goodwill allocated to our reporting units was impaired and, therefore, no impairment charges were required. We are required to perform impairment tests under SFAS No. 142 annually and whenever events or changes in circumstances suggest that the carrying value of an asset may not be recoverable.

Other Intangible Assets

The following table contains information on our other intangible assets for the periods presented (amounts in thousands):

		As of September 30, 2004							As of December 31, 2003
		Gross Other Intangible Assets		Accumulated Amortization			Net Other Intangible Assets		Gross Other Intangible Assets		Accumulated Amortization			Net Other Intangible Assets
Technology		$	785,944	$	(188,822	)	$	597,122	$	785,991	$	(138,404	)	$	647,587
Patents			183,360		(53,905	)		129,455		183,360		(43,413	)		139,947
Trademarks			58,027		(19,463	)		38,564		58,027		(15,606	)		42,421
License fees			42,972		(11,679	)		31,293		38,072		(9,400	)		28,672
Distribution agreements			13,950		(6,602	)		7,348		13,950		(5,294	)		8,656
Customer lists(1)			83,578		(21,721	)		61,857		38,038		(11,895	)		26,143
Other			11,420		(9,051	)		2,369		9,200		(6,782	)		2,418

	Total	$	1,179,251	$	(311,243	)	$	868,008	$	1,126,638	$	(230,794	)	$	895,844

(1): Includes customer lists valued at $34.5 million resulting from our acquisition of the pathology/oncology testing assets of IMPATH in May 2004 and $11.0 million resulting from our acquisition of Alfigen in February 2004. The value assigned to these customer lists will be amortized over a weighted average period of ten years.

All of our other intangible assets are amortized over their estimated useful lives. Total amortization expense for our other intangible assets was:

•: $27.7 million for the three months ended September 30, 2004;
•: $19.3 million for the three months ended September 30, 2003;
•: $81.1 million for the nine months ended September 30, 2004; and
•: $54.4 million for the nine months ended September 30, 2003.

The estimated future amortization expense for our other intangible assets as of September 30, 2004, for the remainder of fiscal year 2004 and the five succeeding fiscal years is as follows (amounts in thousands):

Year ended December 31,	Estimated Amortization Expense
2004 (remaining three months)	$	27,899
2005		104,388
2006		95,899
2007		95,899
2008		95,127
2009		94,086

7. Investments in Equity Securities

We review the carrying value of each of our strategic investments in equity securities on a quarterly basis for potential impairment. In September 2004, we recorded a $2.9 million impairment charge in connection with our investment in MacroGenics, Inc. and in June 2003, we recorded a $3.6 million impairment charge in connection with our investment in the common stock of ABIOMED, Inc. because we considered the decline in value of these investments to be other than temporary. Given the significance and duration of the decline in value of these investments as of September 30, 2004, with respect to our investment in MacroGenics, and as of June 30, 2003, with respect to our investment in ABIOMED, we concluded that it was unclear over what period the recovery of the stock price for these investments would take place, and, accordingly, that any evidence suggesting that the investments would recover to at least our historical cost was not sufficient to overcome the presumption that the current market price was the best indicator of the value of these investments.

At September 30, 2004, our stockholders' equity includes $24.9 million of unrealized gains and $7.1 million of unrealized losses related to our investments in strategic equity securities. The unrealized losses are related to our investment in the common stock of BioMarin, and we believe the losses are temporary. Despite our view that the decline is temporary, our practice is to record impairment charges for investments that remain below cost for an extended duration. We plan to record an impairment charge related to our investment in BioMarin based on this practice if the value of the stock does not recover within the next three months.

8. Joint Venture with BioMarin

We formed BioMarin/Genzyme LLC, a joint venture with BioMarin, to develop and market Aldurazyme, a recombinant form of the human enzyme alpha-L-iduronidase, to treat an LSD known as mucopolysaccharidosis I, or MPS I. We record our portion of the losses of BioMarin/Genzyme LLC in equity in loss of equity method investments in our consolidated statements of operations. Our portion of the losses were:

•: $2.6 million for the three months ended September 30, 2004, as compared to $4.4 million for the same period of 2003; and
•: $9.2 million for the nine months ended September 30, 2004, as compared to $12.9 million for the same period of 2003.

Condensed financial information for BioMarin/Genzyme LLC is summarized below (amounts in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
Revenue	$	10,332		$	3,434		$	26,968		$	4,884
Gross margin		6,497			(20	)		17,186			1,145
Operating expenses		(11,737	)		(8,789	)		(35,861	)		(26,299	)
Net loss		(5,195	)		(8,797	)		(18,589	)		(25,104	)

9. Long-Term Debt

Revolving Credit Facility

In December 2003, we entered into a three year $350.0 million revolving credit facility. As of September 30, 2004, $110.0 million in principal remained outstanding under this credit facility. This amount is included in current portion of long-term debt and capital lease obligations in our consolidated balance sheet because we plan to repay the outstanding principal balance within a year. Borrowings under this credit facility bear interest at LIBOR plus an applicable margin, which was 2.2% at September 30, 2004. The terms of our revolving credit facility include various covenants, including financial covenants, that require us to meet minimum liquidity and interest coverage ratios and to meet maximum leverage ratios. We currently are in compliance with these covenants.

3% Convertible Subordinated Debentures

On June 1, 2004, we redeemed our outstanding 3% convertible subordinated debentures for $580.1 million, which amount includes $575 million of principal, $4.3 million of premium and $0.8 million of accrued interest. In connection with the redemption, we also recorded a non-cash charge of $5.3 million to interest expense in our consolidated statements of operations in June 2004 to write off the unamortized debt fees incurred with the original issuance of these debentures.

10. Other Commitments and Contingencies

Legal Proceedings

We periodically become subject to legal proceedings and claims arising in connection with our business.

Four lawsuits have been filed against us regarding the exchange of all of the outstanding shares of Biosurgery Stock and Molecular Oncology Stock for shares of Genzyme Stock. The first case, filed in Massachusetts Superior Court in May 2003, was a purported class action on behalf of holders of Biosurgery Stock alleging a breach of the implied covenant of good faith and fair dealing in our charter and a breach of our board of directors' fiduciary duties. The plaintiff in this case was seeking an injunction to adjust the exchange ratio for the tracking stock exchange. The Court dismissed the complaint on November 12, 2003 for failure to state a claim. The plaintiff in this case has appealed the dismissal of the complaint. Two substantially similar cases were filed in Massachusetts Superior Court in August 2003 and October 2003. These cases were consolidated in January 2004, and in July 2004, the consolidated case was stayed pending disposition of a fourth case. The fourth case, filed in the U.S. District Court for the Southern District of New York in June 2003, was brought by two holders of Biosurgery Stock alleging, in addition to the state law claims contained in the other cases, violations of federal securities laws, common law fraud, and a breach of the merger agreement with Biomatrix, Inc. The plaintiffs are seeking an adjustment to the exchange ratio, the rescission of the acquisition of Biomatrix, and unspecified compensatory damages. We believe each of these cases is without merit and continue to defend against them vigorously.

On March 27, 2003, the Office of Fair Trading, which we refer to as the OFT, in the United Kingdom issued a decision against our wholly-owned subsidiary, Genzyme Limited, finding that Genzyme Limited held a dominant position and abused that dominant position with no objective justification by pricing Cerezyme in a way that excludes other delivery/homecare service providers from the market for the supply of home delivery and homecare services to Gaucher patients being treated

with Cerezyme. In conjunction with this decision, the OFT imposed a fine on Genzyme Limited and required modification to its list price for Cerezyme in the United Kingdom. Genzyme Limited appealed this decision to the Competition Appeal Tribunal. On May 6, 2003, the Tribunal issued an order that stayed the OFT's decision, but required Genzyme Limited to provide a homecare distributor a discount of 3% per unit during the appeal process. The Tribunal issued its judgment on Genzyme Limited's appeal on March 11, 2004, rejecting portions of the OFT's decision and upholding others. The Tribunal found that the list price of Cerezyme should not be reduced, but that Genzyme Limited must negotiate a price for Cerezyme that will allow homecare distributors an appropriate margin. The Tribunal also reduced the fine imposed by the OFT for violation of U.K. competition laws. In response to the Tribunal's decision, we recorded an initial liability of approximately $11 million in our 2003 financial statements and additional liabilities totaling approximately $1 million during the nine months ended September 30, 2004, all of which remain in accrued expenses in our consolidated balance sheet as of September 30, 2004. On April 13, 2004, Genzyme Limited filed an application with the Tribunal for permission to appeal to the High Court.

In June 2003, we filed suit in U.S. District Court for the District of Massachusetts, as co-plaintiff with Biogen IDEC and Abbott Laboratories against Columbia University seeking a declaration that Columbia's U.S. Patent 6,455,275 is invalid. The patent relates to the manufacture of recombinant proteins in Chinese hamster ovary, or CHO, cells, which are the cells we use to manufacture Cerezyme, Fabrazyme and Thyrogen, and which our joint venture partner BioMarin uses to manufacture Aldurazyme. This new patent was issued by the United States Patent and Trademark Office, or USPTO, in September 2002 from a family of patents and patent applications originally filed in 1980. We are licensed under the patent family for a royalty of 1.5% of sales but, because we were confident that the new patent was mistakenly issued by the USPTO and is invalid, we did not pay the royalty pending the outcome of the litigation. We then received notice from Columbia that we were in breach of our license agreement. A hearing on motions for summary judgment was scheduled for November 2004; however, Columbia recently rescinded the breach notification and filed with the Court a covenant not to enforce its patent 6,455,275 against any plaintiff in the litigation. In view of this covenant, the Court granted Columbia's motion to dismiss the plaintiff's main claim for lack of subject matter jurisdiction.

We are not able to predict the outcome of the pending cases or estimate with certainty the amount or range of any possible loss we might incur if we do not prevail in the final, non-appealable determinations of these matters. Therefore, except for approximately $11 million in liabilities established in 2003 and approximately $1 million in additional liabilities arising during 2004 from the Tribunal's decision regarding Cerezyme pricing in the United Kingdom, we have not accrued any amounts in connection with these potential contingencies.

11. Provision for Income Taxes

	Three Months Ended September 30,								Nine Months Ended September 30,
	Three Months Ended September 30,						Increase (Decrease) % Change		Nine Months Ended September 30,						Increase/ (Decrease) % Change
	2004			2003			Increase (Decrease) % Change		2004			2003			Increase/ (Decrease) % Change
	(Amounts in thousands, except percentage data)
Provision for income taxes	$	(42,479	)	$	(24,653	)	72	%	$	(104,861	)	$	(53,377	)	96	%
Effective tax rate		30	%		(35	)%				30	%		(75	)%

Our tax rates for all periods vary from the U.S. statutory tax rate as a result of:

•: our provision for state income taxes;
•: tax benefits from export sales;
•: the impact of the write off of nondeductible goodwill in June 2003;
•: nondeductible charges for IPR&D recorded in September 2003; and
•: our use of tax credits.

We are currently under IRS audit for tax years 1996 to 1999. We believe that we have provided sufficiently for all audit exposures. A favorable settlement of this audit or the expiration of the statute of limitations on the assessment of income taxes for any tax year may result in a reduction of future tax provisions, which could be significant. Any such benefit would be recorded upon final resolution of the audit or expiration of the statute.

In 2001, the World Trade Organization, or WTO, determined that the tax provisions of the FSC Repeal and Extraterritorial Income Exclusion Act of 2000, or ETI, constitute an export subsidy prohibited by the WTO Agreement on Subsidies and Countervailing Measures Agreement. As a result, in October 2004, the U.S. enacted the American Jobs Creation Act of 2004, or the Act, which repeals the ETI export subsidy for transactions after 2004 with two years of transition relief (2005-2006). The Act also provides a 9% deduction for income from domestic production activities which will be phased in over the years 2005-2010. While we are still evaluating the net impact of this new legislation, we do not expect it to have a material effect on our ongoing effective tax rate.

In addition, the Act creates a temporary incentive for U.S. multinational corporations to repatriate accumulated income earned outside the U.S. While we are still evaluating this provision, we do not expect to benefit from the repatriation provisions under this Act.

12. Defined Benefit Pension Plans

In December 2003, the FASB issued SFAS No. 132 (revised) "Employers' Disclosures about Pensions and Other Postretirement Benefits." This statement revises employers' disclosures about pension plans and other postretirement benefit plans. It requires additional disclosures related to the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. For U.S. defined benefit pension plans and other defined benefit postretirement plans, SFAS No. 132 (revised) is effective for fiscal years ending after December 15, 2003. Disclosure of information about foreign plans required under SFAS No. 132 (revised) is effective for fiscal years ending after June 15, 2004. The adoption of SFAS No. 132 (revised) did not have a material impact on our disclosures about pensions and other postretirement benefits for the three and nine months ended September 30, 2004, because we only have one U.S. defined benefit plan, which has been frozen since December 1995 and is fully funded as of September 30, 2004.

We have defined benefit pension plans for certain employees in foreign countries. These plans are funded in accordance with requirements of the appropriate regulatory bodies governing each plan.

Components of Net Periodic Benefit Costs

The components of net pension expense for the three and nine months ended September 30, 2004 and 2003 are as follows (amounts in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
Service cost	$	605		$	451		$	1,833		$	1,354
Interest cost		567			441			1,714			1,322
Expected return on plan assets		(670	)		(331	)		(2,030	)		(994	)
Amortization and deferral of actuarial loss		148			137			449			412

Net pension expense	$	650		$	698		$	1,966		$	2,094

Employer Contributions

At December 31, 2003, we recorded net prepaid benefit costs of $4.9 million related to our defined benefit pension plans. For the three and nine months ended September 30, 2004, we contributed $0.6 million and $1.4 million to our pension plan in the United Kingdom. We anticipate making $0.6 million of additional contributions to this plan in 2004 to satisfy our annual funding obligation.

13. Segment Information

In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," we present segment information in a manner consistent with the method we use to report this information to our management. Applying SFAS No. 131, we have five reportable segments as described in Note 1., "Description of Business," to this Form 10-Q.

We have provided information concerning the operations of these reportable segments in the following table (amounts in thousands):

			Three Months Ended September 30,						Nine Months Ended September 30,
			2004			2003			2004			2003
Revenues:
	Renal		$	93,308		$	75,468		$	264,448		$	200,236
	Therapeutics			282,377			222,579			813,968			622,126
	Transplant(1)			41,272			7,319			114,001			7,319
	Biosurgery			56,756			59,395			164,038			200,051
	Diagnostics/Genetics(1)			77,582			46,646			201,422			142,277
	Other			17,273			24,828			49,990			63,747
	Corporate			661			743			2,201			1,984

		Total	$	569,229		$	436,978		$	1,610,068		$	1,237,740

Income (loss) before income taxes:
	Renal		$	31,170		$	15,675		$	73,045		$	30,175
	Therapeutics			154,486			106,974			428,408			294,137
	Transplant(1)			(2,421	)		(159,519	)		(15,550	)		(159,519	)
	Biosurgery			3,047			(11,397	)		4,115			(159,741	)
	Diagnostics/Genetics(1)			(7,447	)		884			(8,558	)		7,077
	Other			(17,942	)		(17,735	)		(58,961	)		(60,557	)
	Corporate			(20,615	)		(5,962	)		(73,769	)		(23,089	)

		Total	$	140,278		$	(71,080	)	$	348,730		$	(71,517	)

(1): Results of operations for companies we acquire and amortization of intangible assets related to these acquisitions are included in segment results beginning on the date of acquisition. Acquisitions completed since January 1, 2003 include:

Company/Assets Acquired	Date Acquired	Reporting Segment(s)
Pathology/oncology testing assets of IMPATH	May 1, 2004	Diagnostics/Genetics
Alfigen	February 21, 2004	Diagnostics/Genetics
SangStat	September 11, 2003	Transplant and Corporate

Segment Assets

We provide information concerning the assets of our reportable segments in the following table (amounts in thousands):

			September 30, 2004		December 31, 2003
Segment Assets(1):
	Renal(2)		$	588,114	$	598,164
	Therapeutics			903,268		866,676
	Transplant			419,996		441,948
	Biosurgery			313,198		324,254
	Diagnostics/Genetics(3)			466,045		177,740
	Other			228,323		252,481
	Corporate(2,3)			1,993,770		2,343,265

		Total	$	4,912,714	$	5,004,528

(1): Assets for our five reportable segments and Other include primarily accounts receivable, inventory and certain fixed and intangible assets.
(2): In June 2004, we reallocated $50.0 million of property, plant and equipment related to our manufacturing facilities in the United Kingdom from Corporate to our Renal reporting segment. Accordingly, we have also reallocated $46.4 million of assets from Corporate to Renal as of December 31, 2003 to conform the prior year segment asset disclosure to the new presentation of these assets.
(3): Includes the assets related to our corporate, general and administrative operations and corporate science activities that we do not allocate to a particular segment, including cash, cash equivalents, short- and long-term investments, net property, plant and equipment and deferred tax assets.

Segment assets for Corporate consist of the following (amounts in thousands):

		September 30, 2004		December 31, 2003
Cash, cash equivalents, short- and long-term investments		$	823,446	$	1,227,460
Deferred tax assets—current			134,977		133,707
Property, plant & equipment, net			755,660		730,107
Investments in equity securities			116,124		110,620
Other			163,563		141,371

	Total	$	1,993,770	$	2,343,265

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that characterize our business. In particular, we encourage you to review the risks and uncertainties described under "Factors Affecting Future Operating Results" below. These risks and uncertainties could cause actual results to differ materially from those forecasted in forward-looking statements or implied by past results and trends. Forward-looking statements are statements that attempt to project or anticipate future developments in our business; we encourage you to review the examples of forward-looking statements under "Note Regarding Forward-Looking Statements" at the beginning of this report. These statements, like all statements in this report, speak only as of the date of this report (unless another date is indicated) and we undertake no obligation to update or revise the statements in light of future developments.

INTRODUCTION

•: Renal, which develops, manufactures and distributes products that treat patients suffering from renal diseases, including chronic renal failure. The unit derives substantially all of its revenue from sales of Renagel (including sales of bulk sevelamer);
•: Therapeutics, which develops, manufactures and distributes therapeutic products, with an expanding focus on products to treat patients suffering from genetic diseases and other chronic debilitating diseases, including a family of diseases known as LSDs, and other specialty therapeutics, such as Thyrogen. The unit derives substantially all of its revenue from sales of Cerezyme, Fabrazyme and Thyrogen;
•: Transplant, which develops, manufactures and distributes therapeutic products for the treatment of immune-mediated diseases, with a focus on products that address pre-transplantation, prevention and treatment of acute rejection in organ transplantation, as well as other auto-immune disorders. The unit derives its revenue primarily from sales of Thymoglobulin and Lymphoglobuline;
•: Biosurgery, which develops, manufactures and distributes biotherapeutics and biomaterial products, with an emphasis on products that meet medical needs in orthopaedics and broader surgical areas. The unit derives its revenue primarily from sales of Synvisc, the Sepra line of products and through June 30, 2003, sales of cardiac device products; and
•: Diagnostics/Genetics, which develops, manufactures and distributes diagnostic products, with a focus onin vitro diagnostics, and provides genetic and pathology/oncology testing services.

Through June 30, 2003, we had three outstanding series of common stock—Genzyme General Stock, Biosurgery Stock and Molecular Oncology Stock. We also referred to our series of stock as "tracking stock." Unlike typical common stock, each of our tracking stocks was designed to reflect the value and track the financial performance of a specific subset of our business operations and its allocated assets, rather than the operations and assets of our entire company. Through June 30, 2003,

we allocated earnings or losses to each series of tracking stock based on the net income or loss attributable to the corresponding division determined in accordance with accounting principles generally accepted in the United States as adjusted for the allocation of tax benefits.

Effective July 1, 2003, we eliminated our tracking stock capital structure by exchanging, in accordance with the provisions of our charter, each share of Biosurgery Stock for 0.04914 of a share of Genzyme General Stock and each share of Molecular Oncology Stock for 0.05653 of a share of Genzyme General Stock. Options and warrants to purchase shares of Biosurgery Stock, and options to purchase shares of Molecular Oncology Stock were converted into options and warrants to purchase shares of Genzyme General Stock. Effective July 1, 2003, we have one outstanding series of common stock. From July 1, 2003 through May 27, 2004, we referred to our outstanding series of common stock as Genzyme General Stock. At our annual meeting of shareholders on May 27, 2004, our shareholders approved an amendment to our charter that eliminated the designation of separate series of common stock, resulting in 690,000,000 authorized shares of a single series of common stock, which we now refer to as Genzyme Stock.

Through June 30, 2003, the chief mechanisms intended to cause each tracking stock to "track" the financial performance of each division were provisions in our charter governing dividends and distributions. The provisions governing dividends provided that our board of directors had discretion to decide if and when to declare dividends, subject to certain limitations. To the extent that the following amount did not exceed the funds that would be legally available for dividends under Massachusetts law, the dividend limit for a stock corresponding to a division was the greater of:

•: the amount that would be legally available for dividends under Massachusetts law if the division were a separate legal corporation; or
•: the amount by which the greater of the fair value of the division's allocated net assets, or its allocated paid-in capital plus allocated earnings, exceeded its corresponding stock's par value, preferred stock preferences and debt obligations.

The provisions in our charter governing dividends and distributions factored the assets and liabilities and income or losses attributable to a division into the determination of the amount available to pay dividends on the associated tracking stock. Through June 30, 2003, we calculated the income tax provision of each division as if such division were a separate taxpayer, which included assessing the realizability of deferred tax assets at the division level. Our management and accounting policies in effect at the time provided that if, at the end of any fiscal quarter, a division could not use any projected annual tax benefit attributable to it to offset or reduce its current or deferred income tax expense, we could allocate the tax benefit to other divisions in proportion to their taxable income without any compensating payments or allocation to the division generating the benefit. Through June 30, 2003, Genzyme Biosurgery and Genzyme Molecular Oncology had not generated taxable income, and thus had not had the ability to use any projected annual tax benefits. Genzyme General had generated taxable income, providing it with the ability to utilize the tax benefits generated by Genzyme Biosurgery and Genzyme Molecular Oncology. Consistent with our policy, we allocated the tax benefits generated by Genzyme Biosurgery and Genzyme Molecular Oncology through June 30,

2003 to Genzyme General without making any compensating payments or allocations to the division that generated the benefit.

Deferred tax assets and liabilities can arise from purchase accounting and relate to a division that does not satisfy the realizability criteria of SFAS No. 109, "Accounting for Income Taxes." Through June 30, 2003, such deferred tax assets and liabilities were allocated to the division to which the acquisition was allocated. As a result, the periodic changes in these deferred tax assets and liabilities did not result in a tax expense or benefit to that division. However, the change in these deferred tax assets and liabilities impacted our consolidated tax provision. These changes were added to division net income (loss) for purposes of determining net income (loss) allocated to a tracking stock.

The elimination of our tracking stock capital structure had no effect on our consolidated net income (loss). In this Form 10-Q, and future Quarterly and Annual Reports, we will not provide separate financial statements for each of our former divisions, but will continue to provide our consolidated financial statements for the corporation as a whole.

MERGERS AND ACQUISITIONS

Pending Mergers and Acquisitions

Merger with ILEX

Acquisition of Synvisc Sales and Marketing Rights from Wyeth

occur in January 2005, is conditioned on the parties obtaining clearance under the Hart-Scott-Rodino Act, as well as the satisfaction of other customary closing conditions. In exchange for the sales and marketing rights, we are obligated to make upfront cash payments to Wyeth totaling $121.0 million, as well as contingent payments that, depending on the level of Synvisc sales in the covered territories, could reach a maximum of $293.7 million in cash. The agreements underlying this arrangement terminate on June 30, 2012. Upon closing this transaction, we will begin to record all revenue from sales of Synvisc to end-users in these territories. We will continue to record all of the research and development expenses related to Synvisc and will also now record selling, general and administrative, or SG&A, expenses related to the additional Synvisc sales force we expect to assume from Wyeth.

Completed Mergers and Acquisitions

Acquisition of Physician Services and Analytical Services Business Units of IMPATH

In May 2004, we acquired substantially all of the pathology/oncology testing assets related to the Physician Services and Analytical Services business units of IMPATH, a national medical testing provider, for total cash consideration of $215.3 million. The acquisition allows us to leverage our genetic testing expertise with IMPATH's testing and medical experience in improving diagnosis, treatments and outcomes for cancer patients. We accounted for the acquisition as a purchase and accordingly, included its results of operations in our consolidated statements of operations from May 1, 2004, the date of acquisition. The purchase price is subject to adjustment based upon the completion of a post-closing assessment of the working capital of the acquired business units as of April 30, 2004, and the completion of a final valuation, which we expect to complete in the fourth quarter of 2004.

The purchase price was allocated to the estimated fair value of the acquired tangible and intangible assets and assumed liabilities as follows (amounts in thousands):

Accounts receivable		$	14,483
Other current assets			5,021
Property, plant and equipment			24,079
Goodwill			148,465
Other intangible assets (to be amortized straight-line over 0.4 to 10 years)			34,760
Other noncurrent assets			1,048
Assumed liabilities			(12,580	)

	Allocated purchase price	$	215,276

Alfigen

In February 2004, we acquired Alfigen, a national genetic testing provider based in Pasadena, California, for an aggregate purchase price of $47.5 million in cash. We accounted for the acquisition as a purchase and accordingly, the results of operations of Alfigen are included in our consolidated financial statements from February 21, 2004, the date of acquisition.

The purchase price was allocated to the estimated fair value of the acquired tangible and intangible assets and assumed liabilities as follows (amounts in thousands):

Current assets		$	155
Property, plant and equipment			1,244
Goodwill			33,235
Other intangible assets (to be amortized straight-line over 5 to 10 years)			13,000
Assumed liabilities			(134	)

	Allocated purchase price	$	47,500

SangStat

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES

Our critical accounting policies and significant estimates are set forth under the heading "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations—Critical Accounting Policies and Significant Estimates" in Exhibit 13.1 to our 2003 Form 10-K. There have been no changes to these policies and no significant changes to these estimates since December 31, 2003.

A. RESULTS OF OPERATIONS

The following discussion summarizes the key factors our management believes are necessary for an understanding of our consolidated financial statements. In connection with the elimination of our tracking stock structure and associated changes in how we view our business, we revised our reportable segments. We have reclassified our segment presentation for the nine months ended September 30, 2003 to conform to our new segment presentation.

REVENUES

The components of our total revenues are described in the following table:

		Three Months Ended September 30,						Nine Months Ended September 30,
		Three Months Ended September 30,				Increase/ (Decrease) % Change		Nine Months Ended September 30,				Increase/ (Decrease) % Change
		2004		2003		Increase/ (Decrease) % Change		2004		2003		Increase/ (Decrease) % Change
		(Amounts in thousands, except percentage data)
Product revenue		$	505,415	$	394,285	28	%	$	1,451,044	$	1,124,006	29	%
Service revenue			61,327		33,888	81	%		150,885		96,936	56	%

	Total product and service revenue		566,742		428,173	32	%		1,601,929		1,220,942	31	%
Research and development revenue			2,487		8,805	(72	)%		8,139		16,798	(52	)%

	Total revenues	$	569,229	$	436,978	30	%	$	1,610,068	$	1,237,740	30	%

Product Revenue

We derive product revenue from sales of:

•: Renagel for the reduction of elevated serum levels in end-stage renal disease patients on hemodialysis and bulk sevelamer;
•: Therapeutics products, including Cerezyme for the treatment of Gaucher disease, Fabrazyme for the treatment of Fabry disease and Thyrogen, which is an adjunctive diagnostic agent used in the follow-up treatment of patients with well-differentiated thyroid cancer;
•: Transplant's therapeutic products for the treatment of immune-mediated diseases, including Thymoglobulin and Lymphoglobuline, each of which induce immunosuppression as a result of T-cell depletion and immune modulation;
•: Biosurgery products, including orthopaedic products such as Synvisc and the Sepra line of products, and through June 30, 2003, cardiac device products;

•: Diagnostic products, including infectious disease and cholesterol testing products; and
•: Other products, including bulk pharmaceuticals and WelChol, which is a mono and adjunctive therapy for the reduction of LDL cholesterol in patients with primary hypercholesterolemia.

The following table sets forth our product revenue on a segment basis:

			Three Months Ended September 30,						Nine Months Ended September 30,
			Three Months Ended September 30,				Increase/ (Decrease) % Change		Nine Months Ended September 30,				Increase/ (Decrease) % Change
			2004		2003		Increase/ (Decrease) % Change		2004		2003		Increase/ (Decrease) % Change
			(Amounts in thousands, except percentage data)
Renal:
	Renagel (including sales of bulk sevelamer)		$	93,308	$	75,468	24	%	$	264,448	$	200,236	32	%

Therapeutics:
	Cerezyme			208,378		189,223	10	%		620,719		541,134	15	%
	Fabrazyme			57,996		21,452	170	%		145,719		48,728	199	%
	Thyrogen			15,428		11,405	35	%		45,723		30,909	48	%
	Other Therapeutics			575		499	15	%		1,807		1,354	33	%

		Total Therapeutics		282,377		222,579	27	%		813,968		622,125	31	%

Transplant:
	Thymoglobulin/Lymphoglobuline			28,342		4,898	479	%		78,614		4,898	1,505	%
	Other Transplant			12,669		2,421	423	%		35,126		2,421	1,351	%

		Total Transplant		41,011		7,319	460	%		113,740		7,319	1,454	%

Biosurgery:
	Synvisc			24,630		28,228	(13	)%		74,513		84,199	(12	)%
	Sepra products			15,085		11,951	26	%		44,876		33,723	33	%
	Other Biosurgery			11,138		5,776	93	%		23,837		53,548	(55	)%

		Total Biosurgery		50,853		45,955	11	%		143,226		171,470	(16	)%

Diagnostics/Genetics:
	Diagnostic Products			21,667		21,116	3	%		67,954		66,866	2	%
	Other Diagnostics/Genetics			288		432	(33	)%		599		540	11	%

		Total Diagnostics/Genetics		21,955		21,548	2	%		68,553		67,406	2	%

Other product revenue				15,911		21,416	(26	)%		47,109		55,450	(15	)%

		Total product revenue	$	505,415	$	394,285	28	%	$	1,451,044	$	1,124,006	29	%

Renal

Worldwide sales of Renagel, including sales of bulk sevelamer, the raw material used to formulate Renagel, increased 24% to $93.3 million for the three months and increased 32% to $264.4 million for the nine months ended September 30, 2004, as compared to the same periods in 2003, primarily due to:

•: a $12.3 million increase in the three month period and a $39.8 million increase in the nine month period in net sales related to increased customer volume, driven primarily by increased end-user demand in the United States and Europe;
•: a $5.7 million increase in the three month period and a $16.2 million increase in the nine month period in revenue due to an 8% price increase that became effective in January 2004; and
•: a 9% increase in the average exchange rate for the Euro for the three month period, which positively impacted Renagel revenue by $1.8 million, and a 10% increase in the average exchange rate for the Euro for the nine month period, which positively impacted Renagel revenue by $6.1 million.

Sales of Renagel, including sales of bulk sevelamer, are 18% of our total product revenue for both the three and nine months ended September 30, 2004 as compared to 19% for the three month period and 18% for the nine month period ended September 30, 2003. We expect sales of Renagel to increase, driven primarily by the continued adoption of the product by nephrologists worldwide. Renagel currently competes with several products and we are aware of other product candidates in development. In addition, in October 2004, Shire Pharmaceutical Group plc received FDA approval for Fosrenol, a product designed to reduce elevated levels of phosphate in the blood in patients with end-stage renal disease. Our future sales may be impacted negatively by these products and product candidates.

Therapeutics

The increase in our Therapeutics product revenue for the three and nine months ended September 30, 2004, as compared to the same periods of 2003, is primarily due to continued growth in sales of Cerezyme, Fabrazyme and Thyrogen.

The growth in sales of Cerezyme for the three and nine months ended September 30, 2004, as compared to the same periods of 2003, is attributable to our continued identification of new Gaucher disease patients, particularly internationally. Our price for Cerezyme has remained consistent for all periods presented. Although we expect Cerezyme to continue to be a substantial contributor to revenues in the future, it is a mature product and we do not expect the current new patient growth trend to continue. The growth in sales of Cerezyme for the three months ended September 30, 2004, as compared to the same period of 2003, was also positively impacted by a 9% increase in the average exchange rate, which positively impacted sales of Cerezyme by $5.4 million. During the first nine months of 2004, the average exchange rate for the Euro increased 10%, as compared to the same period of 2003, which positively impacted sales of Cerezyme by $19.0 million.

Our results of operations are highly dependent on sales of Cerezyme and a reduction in revenue from sales of this product would adversely affect our results of operations. Sales of Cerezyme are 41% of our total product revenue for the three months ended September 30, 2004, as compared to 48% for the same period of 2003, and 43% of our total product revenue for the nine months ended September 30, 2004, as compared to 48% for the same period of 2003. Revenue from Cerezyme would be impacted negatively if competitors developed alternative treatments for Gaucher disease and the alternative products gained commercial acceptance, if our marketing activities are restricted, or if reimbursement is limited. Although orphan drug status for Cerezyme, which provided us with exclusive marketing rights for Cerezyme in the United States, expired in May 2001, we continue to have patents protecting our method of manufacturing Cerezyme until 2010 and the composition of Cerezyme as made by that process until 2013. The expiration of market exclusivity and orphan drug status will likely subject Cerezyme to increased competition, which may decrease the amount of revenue we receive from this product or the growth of that revenue. We are aware of companies that have initiated efforts to develop competitive products, and other companies may do so in the future.

The increase in sales of Fabrazyme for the three and nine months ended September 30, 2004, as compared to the same periods of 2003, is primarily attributable to:

•: a $10.9 million increase for the three month period and a $29.5 million increase for the nine month period in European sales of Fabrazyme resulting from our continued identification of patients in Europe;
•: a $7.0 million increase in the three month period and a $12.7 million increase in the nine month period due to the launch of Fabrazyme in Japan during the second quarter of 2004;

•: $15.6 million of additional sales in the three month period and $50.5 million of additional sales in the nine month period resulting from the launch of Fabrazyme in the United States during the second quarter of 2003; and
•: an increase in the average exchange rate of the Euro of 9% for the three month period, which positively impacted sales by $1.4 million, and 10% for the nine month period, which positively impacted sales of the product by $4.6 million.

The increase in sales of Thyrogen in both the three and nine months ended September 30, 2004, as compared to the same periods of 2003, is primarily attributable to volume growth, particularly in Europe, where sales increased 37% to $5.3 million for the three month period and 54% to $18.4 million for the nine month period.

Transplant

We began recording product revenue for our Transplant business unit on September 11, 2003, the day that we completed the acquisition of SangStat and began including its results of operations in our consolidated financial statements. Other Transplant revenues for 2004 include $9.7 million in sales for the three month period and $30.1 million in sales for the nine month period of Gengraf, which we co-promote with Abbott Laboratories under an agreement which expires on December 31, 2004.

Biosurgery

Biosurgery's product revenue increased 11% to $50.9 million for the three months ended September 30, 2004, as compared to the same period of 2003. The increase is largely attributable to a $3.1 million increase in sales of Sepra products, primarily due to increased market penetration, and a $5.4 million increase in Other Biosurgery product revenue primarily due to a one-time, $5.0 million royalty recognized in September 2004 under an agreement with Q-Med AB, which we refer to as Q-Med. The increase was partially offset by a 13% decrease in sales of Synvisc to $24.6 million. The decrease is primarily due to competitive pricing pressures and price discounts by Wyeth, our U.S. marketing partner, in response to Medicare pricing rate changes.

Biosurgery's product revenue decreased 16% to $143.2 million for the nine months ended September 30, 2004, as compared to the same period of 2003. The decrease is primarily due to the absence of revenues from our line of cardiac device products following our sale of this product line in June 2003. Revenues from sales of cardiac device products for the first half of 2003 were $39.2 million and were included in Biosurgery product revenue for the nine months ended September 30, 2003. Additionally, sales of Synvisc decreased 12% to $74.5 million for the nine months ended September 30, 2004, as compared to the same period of 2003. The decrease is primarily due to inventory reductions in the first half of 2004, as well as competitive pricing pressures and price discounts, by Wyeth in response to Medicare pricing rate changes. These decreases were partially offset by an $11.2 million increase in sales of Sepra products, primarily due to increased market penetration, and the recognition of a one-time $5.0 million royalty from Q-Med. We are aware of several competitive viscosupplementation products on the market and in development that could adversely affect our sales of Synvisc in the future.

Diagnostics/Genetics

Diagnostics/Genetics product revenue increased slightly for the three months ended September 30, 2004, as compared to the same period of 2003. The increase is attributable to a 9% increase in the combined sales of infectious disease testing products and HDL and LDL cholesterol testing products to $17.2 million. This increase was partially offset by a 14% decrease in sales of point of care rapid diagnostic tests for pregnancy and infectious diseases to $4.5 million.

Diagnostics/Genetics product revenue increased slightly for the nine months ended September 30, 2004, as compared to the same period of 2003. The increase is attributable to a 16% increase in the combined sales of infectious disease testing products and HDL and LDL cholesterol testing products to $51.7 million. This increase was partially offset by a 14% decrease in sales of point of care rapid diagnostic tests for pregnancy and infectious diseases to $16.2 million, and the expiration of our royalty agreement with Techne Corporation in June 2003, which resulted in no royalty revenue being recorded in 2004, as compared to $3.3 million for the nine months ended September 30, 2003.

Other Product Revenue

The decrease in Other product revenue for both the three and nine months ended September 30, 2004, as compared to the same periods of 2003, is primarily attributable to a decrease in bulk sales of and royalties earned on sales of WelChol. Bulk sales of and royalties earned on WelChol decreased 48% to $5.6 million for the three month period and 42% to $16.7 million for the nine month period as a result of a decrease in demand from our U.S. marketing partner, Sankyo Pharma, Inc. Sales of bulk pharmaceuticals decreased slightly for the three month period primarily due to product mix shifts and increased 14% to $30.4 million for the nine month period primarily due to increased demand for liquid crystals.

Service Revenue

We derive service revenue primarily from genetic and pathology/oncology testing services, which are included in our Diagnostics/Genetics reporting segment.

The following table sets forth our service revenue on a segment basis:

		Three Months Ended September 30,						Nine Months Ended September 30,
		Three Months Ended September 30,				Increase/ (Decrease) % Change		Nine Months Ended September 30,				Increase/ (Decrease) % Change
		2004		2003		Increase/ (Decrease) % Change		2004		2003		Increase/ (Decrease) % Change
		(Amounts in thousands, except percentage data)
Biosurgery		$	5,676	$	8,719	(35	)%	$	17,962	$	21,940	(18	)%
Diagnostics/Genetics			55,627		25,098	122	%		132,869		74,871	77	%
Other service revenue			24		71	(66	)%		54		125	(57	)%

	Total service revenue	$	61,327	$	33,888	81	%	$	150,885	$	96,936	56	%

Service revenue attributable to our Diagnostics/Genetics reporting segment increased 122% to $55.6 million in the three months ended and 77% to $132.9 million in the nine months ended September 30, 2004, as compared to the same periods of 2003. This increase is primarily attributable to:

•: $25.0 million for the three months and $41.9 million for the nine months of additional service revenue resulting from our acquisition of the pathology/oncology testing assets of IMPATH in May 2004;
•: additional service revenue resulting from our acquisition of Alfigen in February 2004;
•: continued growth in the prenatal screening and diagnosis market; and
•: increased sales of DNA testing services, primarily due to growth in the cystic fibrosis screening and diagnosis market.

International Product and Service Revenue

A substantial portion of our revenue was generated outside of the United States. The following table provides information regarding the change in international product and service revenue as a percentage of total product and service revenue during the periods presented:

	Three Months Ended September 30,								Nine Months Ended September 30,
	Three Months Ended September 30,						Increase/ (Decrease) % Change		Nine Months Ended September 30,						Increase/ (Decrease) % Change
	2004			2003			Increase/ (Decrease) % Change		2004			2003			Increase/ (Decrease) % Change
	(Amounts in thousands, except percentage data)
International product and service revenue	$	245,873		$	186,827		32	%	$	715,651		$	529,889		35	%
% of total product and service revenue		43	%		44	%				45	%		43	%

The increase in international product and service revenue for both the three and nine months ended September 30, 2004, as compared to the same periods of 2003, is primarily due to:

•: a $46.2 million increase for the three month period and a $145.8 million increase for the nine month period in the combined international sales of Renagel, Cerezyme and Fabrazyme;
•: a $7.3 million increase for the three month period and a $24.1 million increase for the nine month period in international sales of Thymoglobulin and Lymphoglobuline due to the acquisition of SangStat on September 11, 2003; and
•: an increase in the average exchange rate for the Euro of 9% for the three month period, which positively impacted sales by $10.4 million, and 10% for the nine month period, which positively impacted sales by $35.9 million.

International sales of Renagel increased 56% to $36.7 million for the three months and 65% to $100.0 million for the nine months ended September 30, 2004, primarily due to:

•: the expansion of the worldwide Renagel sales force;
•: favorable reception of published clinical data that has increased international adoption of the product, particularly in Europe, where unit sales increased 36% in the three month period and 44% in the nine month period as compared to the same periods of 2003; and
•: an increase in the average exchange rate of the Euro, which positively impacted sales of Renagel by $1.8 million for the three month period, and $6.1 million for the nine month period.

International sales of Cerezyme increased 11% to $122.8 million for the three months and 19% to $373.8 million for the nine months ended September 30, 2004, primarily due to an increase in the

average exchange rate of the Euro, which positively impacted sales by $5.4 million for the three month period, and $19.0 million for the nine month period.

International sales of Fabrazyme increased 140% to $35.9 million for the three months and 111% to $88.3 million for the nine months ended September 30, 2004, primarily due to:

•: our continued identification of patients in Europe;
•: the launch of Fabrazyme in Japan during the second quarter of 2004; and
•: an increase in the average exchange rate of the Euro which positively impacted sales of Fabrazyme by $1.4 million for the three month period, and $4.6 million for the nine month period.

MARGINS

The components of our total margins are described in the following table:

	Three Months Ended September 30,								Nine Months Ended September 30,
	Three Months Ended September 30,						Increase/ (Decrease) % Change		Nine Months Ended September 30,						Increase/ (Decrease) % Change
	2004			2003			Increase/ (Decrease) % Change		2004			2003			Increase/ (Decrease) % Change
	(Amounts in thousands, except percentage data)
Product margin	$	395,414		$	299,075		32	%	$	1,127,500		$	833,656		35	%
% of total product revenue		78	%		76	%				78	%		74	%
Service margin	$	16,469		$	14,235		16	%	$	49,740		$	41,034		21	%
% of total service revenue		27	%		42	%				33	%		42	%
Total product and service gross margin	$	411,883		$	313,310		31	%	$	1,177,240		$	874,690		35	%
% of total product and service revenue		73	%		73	%				73	%		72	%

Product Margin

Our overall product margin increased $96.3 million, or 32% for the three months and $293.8 million, or 35% for the nine months ended September 30, 2004, as compared to the same periods in 2003. This is primarily due to a $78.0 million, or 24%, increase for the three month period and a $257.2 million, or 29% increase for the nine month period, in the combined sales of Renal, Therapeutics and Diagnostics/Genetics products as well as an increase for the three and nine month periods in sales of our newly acquired SangStat products beginning in September 2003.

Product margin for our Renal reporting segment increased 43% for the three months and 44% for the nine months ended September 30, 2004, as compared to the same periods of 2003. The increase is primarily due to a 24% increase for the three month period and a 32% increase for the nine month period in sales of Renagel (including bulk sevelamer), an 8% price increase, which became effective in January 2004, and the scale up of our global manufacturing facilities. In March 2003, we began shipping Renagel tablets manufactured at our facility in Ireland to the European market upon receiving approval from the European Agency for the Evaluation of Medicinal Products to commence production of Renagel at the plant. In October 2003, we received final approval of this plant from the FDA, allowing shipment to the U.S.

Product margin for our Therapeutics reporting segment increased 26% in the three months ended September 30, 2004, as compared to the same period of 2003. The increase is primarily due to a 10% increase in sales of Cerezyme, a 170% increase in sales of Fabrazyme and a 35% increase in sales of Thyrogen in the three months ended September 30, 2004. Product margin for our Therapeutics reporting segment increased 31% in the nine months ended September 30, 2004, as compared to the same period of 2003. The increase is primarily due to a 15% increase in sales of Cerezyme, a 199% increase in sales of Fabrazyme and a 48% increase in sales of Thyrogen in the nine months ended

September 30, 2004. In addition, product margin for our Therapeutics reporting segment for the nine months ended September 30, 2003, includes the write off of $2.3 million of Cerezyme finished goods in 2003 due to production issues, for which there is no similar write off in the nine months ended September 30, 2004.

Product margin for our Biosurgery reporting segment increased 43% for the three months ended September 30, 2004, as compared to the same period of 2003. The increase is primarily due to a 26% increase in sales of Sepra products and a one-time, $5.0 million royalty recognized in September 2004, for which there was no comparable amount recognized in 2003. These increases were partially offset by a 13% decrease in Synvisc sales. Product margin for our Biosurgery reporting segment increased 7% for the nine months ended September 30, 2004, as compared to the same period of 2003. The increase is primarily due to a 33% increase in sales of Sepra products and our recognition of a one-time, $5.0 million royalty in September 2004, for which there was no comparable amount recognized in 2003. These increases were partially offset by a 12% decrease in Synvisc sales and a 55% decrease in Other Biosurgery product revenue resulting from the sale of substantially all of the assets related to our cardiac devices business in June 2003.

Product margin for our Diagnostics/Genetics reporting segment decreased 31% for the three months ended and 21% for the nine months ended September 30, 2004, as compared to the same periods of 2003. The decrease is primarily due to a 26% increase for the three month period and a 20% increase for the nine month period in cost of diagnostic products sold resulting from a one-time royalty payment of $1.2 million and manufacturing capacity variances attributable to a decline in the demand for certain diagnostic rapid test kits.

Service Margin

Service margin for our Biosurgery reporting segment decreased 57% in the three months and 36% in the nine months ended September 30, 2004, as compared to the same periods of 2003, primarily due to the absence of service revenue related to Synvisc in 2004. This decrease was a result of $1.5 million for the three month period and $4.7 million for the nine month period of reimbursed expenses from our Synvisc distribution partner that had been classified as revenue for which there were no comparable amounts in 2004.

Service margin for our Diagnostics/Genetics reporting segment increased 55% for the three months ended and 45% for the nine months ended September 30, 2004, as compared to the same periods of 2003. The increases are primarily due to a 122% increase for the three month period and a 77% increase for the nine month period in service revenue resulting from our acquisition of the pathology/oncology testing assets of IMPATH in May 2004, our acquisition of Alfigen in February 2004, the continued growth in the prenatal screening and diagnosis market and increased sales of DNA testing services. These increases were offset by a 161% increase for the three month period and a 98% increase for the nine month period in costs associated with these services, including a one-time royalty payment of $3.3 million.

OPERATING EXPENSES

Selling, General and Administrative Expenses

The following table provides information regarding the change in SG&A during the periods presented:

	Three Months Ended September 30,						Nine Months Ended September 30,
	Three Months Ended September 30,				Increase/ (Decrease) % Change		Nine Months Ended September 30,				Increase/ (Decrease) % Change
	2004		2003		Increase/ (Decrease) % Change		2004		2003		Increase/ (Decrease) % Change
	(Amounts in thousands, except percentage data)
Selling, general and administrative expenses	$	147,886	$	127,340	16	%	$	443,956	$	372,371	19	%

SG&A increased $20.5 million for the three months ended and $71.6 million for the nine months ended September 30, 2004, as compared to the same periods of 2003, primarily due to:

•

increases of $5.4 million for the three month period and $15.0 million for the nine month period in SG&A for Renagel largely attributable to additional selling and marketing activities aimed at increasing market penetration in Europe;

•

increases of $9.6 million for the three month period and $36.3 million for the nine month period in SG&A for Therapeutics products, including:

•: $5.6 million for the three month period and $17.3 million for the nine month period attributable to additional selling and marketing activities for Fabrazyme in Europe and the launch of the product in the United States during the second quarter of 2003; and
•: $4.0 million for the three month period and $19.0 million for the nine month period attributable to an increase in expenditures related to other Therapeutics selling initiatives, including $0.4 million for the three month period and $7.9 million for the nine month period for Cerezyme and $1.6 million for the three month period and $6.3 million for the nine month period for Thyrogen;

•

increases of $5.4 million for the three month period and $22.4 million for the nine month period in SG&A for Transplant resulting from our acquisition of SangStat on September 11, 2003; and

•

increases of $10.0 million for the three month period and $19.8 million for the nine month period in SG&A for Diagnostics/Genetics, primarily due to our acquisition of Alfigen in February 2004 and our acquisition of the pathology/oncology testing assets of IMPATH in May 2004.

These increases were offset by decreases of:

•: $3.3 million for the three month period and $19.3 million for the nine month period in SG&A for Biosurgery, primarily driven by the sale of the cardiac device business in June 2003;
•: $1.4 million for the three month period and $4.0 million for the nine month period in Other SG&A, primarily due to a decrease in spending for our cardiovascular and oncology businesses; and
•: $5.1 million in Corporate SG&A for the three month period resulting from an increase in the amount of SG&A allocated from Corporate to the reportable segments in 2004.

Research and Development Expenses

The following table provides information regarding the change in research and development expense during the periods presented:

	Three Months Ended September 30,						Nine Months Ended September 30,
	Three Months Ended September 30,				Increase/ (Decrease) % Change		Nine Months Ended September 30,				Increase/ (Decrease) % Change
	2004		2003		Increase/ (Decrease) % Change		2004		2003		Increase/ (Decrease) % Change
	(Amounts in thousands, except percentage data)
Research and development expenses (including research and development related to contracts)	$	92,188	$	82,974	11	%	$	284,374	$	237,668	20	%

Research and development expenses increased $9.2 million for the three months ended September 30, 2004, as compared to the same period of 2003, primarily due to:

•: a $2.9 million increase in spending on Transplant research and development programs resulting from the acquisition of SangStat in September 2003;

•: a $2.6 million increase in spending on Biosurgery research and development programs mainly for future Synvisc products; and
•: a $6.9 million increase in spending for Corporate research and development efforts related to our corporate science activities that we do not allocate to our reporting segments.

These increases were offset, in part, by a slight decline in spending for Therapeutics research and development programs for the three month period primarily due to the capitalization of costs associated with the manufacturing of inventory for Myozyme, an investigational enzyme replacement therapy in late-stage development for Pompe disease. The capitalization of these costs offset increased spending on Therapeutics research and development programs, including three clinical trials for Myozyme, and from the consolidation of Dyax-Genzyme LLC, our joint venture with Dyax for the development of DX-88 for the treatment of hereditary angioedema and other chronic inflammatory diseases.

Research and development expenses increased $46.7 million for the nine months ended September 30, 2004, as compared to the same period of 2003, primarily due to:

•: an $11.5 million increase in spending on Therapeutics research and development programs including three clinical trials for Myozyme and from the consolidation of Dyax-Genzyme LLC;
•: an $11.7 million increase in spending on Transplant research and development programs resulting from the acquisition of SangStat in September 2003; and
•: a $24.2 million increase in spending for Corporate research and development efforts related to our corporate science activities that we do not allocate to our reporting segments.

Amortization of Intangibles

The following table provides information regarding the change in amortization of intangibles expense during the periods presented:

	Three Months Ended September 30,						Nine Months Ended September 30,
	Three Months Ended September 30,				Increase/ (Decrease) % Change		Nine Months Ended September 30,				Increase/ (Decrease) % Change
	2004		2003		Increase/ (Decrease) % Change		2004		2003		Increase/ (Decrease) % Change
	(Amounts in thousands, except percentage data)

Amortization of intangibles	$	27,657	$	19,267	44	%	$	81,147	$	54,413	49	%

Amortization expense increased by $8.4 million for the three months ended and $26.7 million for the nine months ended September 30, 2004, as compared to the same periods of 2003, primarily due to additional amortization expense attributable to the intangible assets acquired in connection with our acquisition of SangStat in September 2003, our acquisition of Alfigen in February 2004 and our acquisition of the pathology/oncology testing assets of IMPATH in May 2004.

Purchase of In-Process Research and Development

In connection with the acquisitions of SangStat in 2003 and Novazyme Pharmaceuticals, Inc. in 2001 we have acquired various IPR&D projects. Substantial additional research and development will be required prior to any of our acquired IPR&D programs and technology platforms reaching technological feasibility. In addition, once research is completed, each product candidate acquired from SangStat and Novazyme will need to complete a series of clinical trials, and receive FDA or other regulatory approvals, prior to commercialization. Our current estimates of the time and investment required to develop these products and technologies may change depending on the different applications that we may choose to pursue. We cannot give assurances that these programs will ever reach feasibility or develop into products that can be marketed profitably. In addition, we cannot guarantee that we will be able to develop and commercialize products before our competitors develop and commercialize products for the same indications. If products based on our acquired IPR&D

programs and technology platforms do not become commercially viable, our results of operations could be materially adversely affected.

SangStat

In connection with our acquisition of SangStat, we acquired IPR&D related to two projects, RDP58 and cyclosporine capsule. RDP58 is a novel inhibitor of several inflammatory cytokines. Cyclosporine capsule is a novel smaller size formulation of generic cyclosporine, an immunosuppressive agent. As of the acquisition date, neither project had reached technological feasibility nor had an alternative future use. Accordingly, we allocated to IPR&D, and charged to expense in our consolidated statements of operations in September 2003, $158.0 million, representing the portion of the purchase price attributable to these two projects, of which $138.0 million is attributable to RDP58 and $20.0 million is attributable to cyclosporine capsule.

In March 2004, we received marketing authorization for both 25mg and 100mg cyclosporine capsules in a European country. Also in March 2004, we entered into an agreement with Proctor & Gamble Pharmaceuticals, Inc. (PGP), a subsidiary of The Proctor & Gamble Company, under which we granted to PGP an exclusive, worldwide license to develop and market RDP58 for the treatment of gastrointestinal and other disorders. We retained development and commercialization rights to RDP58 in pulmonary and other disorders that were not specifically licensed to PGP and also retained co-promotion rights with PGP in oncology-related disorders, such as chemo-therapy-induced diarrhea. In exchange for the grant of the license, PGP paid us an upfront fee, and agreed to make milestone payments and pay royalties on product sales.

As of September 30, 2004, we estimated that it will take approximately ten years and an investment of approximately $75 million to $100 million to complete the development of, obtain approval for and commercialize the first product based on the RDP58 technology for pulmonary and other disorders not licensed to PGP.

Novazyme

In September 2001, in connection with our acquisition of Novazyme, we acquired a technology platform that we believe can be leveraged in the development of treatments for various LSDs. As of the acquisition date, the technology platform had not achieved technological feasibility and would require significant further development to complete. Accordingly, we allocated to IPR&D and charged to expense $86.8 million, representing the portion of the purchase price attributable to the technology platform. We recorded this amount as a charge to expense in our consolidated statements of operations for the year ended December 31, 2001.

The platform technology is specific to LSDs and there is currently no alternative use for the technology in the event that it fails as a platform for enzyme replacement therapy for the treatment of LSDs. As of September 30, 2004, we estimated that it will take approximately four to eight years and an investment of approximately $100 million to $125 million to complete the development of, obtain approval for and commercialize the first product based on this technology platform.

OTHER INCOME AND EXPENSES

		Three Months Ended September 30,								Nine Months Ended September 30,
		Three Months Ended September 30,						Increase/ (Decrease) % Change		Nine Months Ended September 30,						Increase/ (Decrease) % Change
		2004			2003			Increase/ (Decrease) % Change		2004			2003			Increase/ (Decrease) % Change
		(Amounts in thousands, except percentage data)

Equity in loss of equity method investments		$	(4,362	)	$	(5,503	)	(21	)%	$	(12,467	)	$	(14,501	)	(14	)%
Minority interest			1,589			—		N/A			3,715			—		N/A
Gain (loss) on investments in equity securities			(2,706	)		1,183		(329	)%		(2,282	)		(2,437	)	(6	)%
Loss on sale of product line			—			—		N/A			—			(29,367	)	(100	)%
Other			(19	)		(338	)	(94	)%		(733	)		1,181		(162	)%
Investment income			4,566			11,422		(60	)%		17,845			35,464		(50	)%
Interest expense			(5,429	)		(4,382	)	24	%		(33,250	)		(17,207	)	93	%

	Total other income (expenses)	$	(6,361	)	$	2,382		(367	)%	$	(27,172	)	$	(26,867	)	1	%

Equity in Loss of Equity Method Investments

Under this caption, we record our portion of the results of our joint ventures with BioMarin and Diacrin, Inc., and our investments in Peptimmune, Inc. and Therapeutic Human Polyclonals, Inc., which we refer to as THP.

Our equity in loss of equity method investments decreased 21% to $4.4 million for the three months ended September 30, 2004, as compared to $5.5 million for the same period of 2003 and decreased 14% to $12.5 million for the nine months ended September 30, 2004 as compared to $14.5 million for the same period of 2003. The largest component of our equity in loss of equity method investments was net losses from our joint venture with BioMarin, which decreased 41% to $2.6 million for the three month period and 29% to $9.2 million for the nine month period, primarily due to increased sales of Aldurazyme, which was launched in the U.S. in April 2003 and in Europe in June 2003.

Minority Interest

As a result of our adoption of FASB Interpretation No., or FIN, 46, "Consolidation of Variable Interest Entities," we have consolidated the results of Dyax-Genzyme LLC, formerly known as Kallikrein LLC, and Excigen Inc., a collaboration partner. Our consolidated balance sheet as of September 30, 2004 includes assets of $2.1 million related to Dyax-Genzyme LLC, substantially all of which are included in other current assets. We have recorded Dyax's portion of this joint venture's losses as minority interest in our consolidated statements of operations. The results of Excigen are not significant.

Gain (Loss) on Investment in Equity Securities

We review the carrying value of each of our strategic investments in equity securities on a quarterly basis for potential impairment. In September 2004, we recorded a $2.9 million impairment charge in connection with our investment in MacroGenics and in June 2003, we recorded a $3.6 million impairment charge in connection with our investment in the common stock of ABIOMED because we considered the decline in value of these investments to be other than temporary. Given the significance and duration of the decline in value of these investments as of September 30, 2004, with respect to our investment in MacroGenics, and as of June 30, 2003, with respect to our investment in ABIOMED, we concluded that it was unclear over what period the recovery of the stock price for these investments would take place, and, accordingly, that any evidence suggesting that the investments would recover to

at least our historical cost was not sufficient to overcome the presumption that the current market price was the best indicator of the value of these investments.

Other

We periodically enter into foreign currency forward contracts, all of which have a maturity of less than three years. These contracts have not been designated as hedges and, accordingly, unrealized gains or losses on these contracts are reported in current earnings. The notional settlement value of foreign currency forward contracts outstanding as of September 30, 2004 is $72.3 million. The contracts' fair value, representing unrealized losses, was not significant at September 30, 2004.

Investment Income

Our investment income decreased 60% for the three months ended and 50% for the nine months ended September 30, 2004, as compared to the same periods of 2003, due to a decrease in the overall size of our investment portfolio for the three month period due primarily to a decline in our average portfolio yield for both periods of 2004 and a decrease in unrealized gains on our portfolio for both periods of 2004.

Interest Expense

Our interest expense increased 24% for the three months ended September 30, 2004, as compared to the same period of 2003, primarily due to an increase in average debt balances outstanding in 2004 resulting from:

•: $690.0 million in principal of our 1.25% convertible senior notes issued in December 2003 and due December 2023;
•: $130.2 million capital lease obligation related to our corporate headquarters in Cambridge, Massachusetts recorded in November 2003; and
•: $110.0 million currently outstanding under the revolving credit facility.

In addition, in June 2004, we completed the redemption of our 3% convertible subordinated debentures for cash. This included charges of $4.3 million for premium paid upon redemption and $5.3 million to write off the unamortized debt fees associated with these debentures. These charges were recorded as interest expense in our consolidated statements of operations for the nine months ended September 30, 2004. There were no similar charges in the same period of 2003.

The increases for the three months ended September 30, 2004, were offset, in part, by lower interest expense associated with our revolving credit facility due to a decrease in the amount outstanding under that facility in 2004 as compared to the same period of 2003, and lower interest rates on our outstanding $690 million convertible senior notes as compared to the interest rate on our $575 million convertible subordinated debentures, which were redeemed in June 2004.

Our interest expense increased 93% for the nine months ended September 30, 2004, as compared to the same period of 2003, primarily due to an increase in average debt balances outstanding in 2004 resulting from the factors listed above plus $11.3 million in principal of a 6.5% convertible note due

and paid on March 29, 2004 in favor of UBS AG London, which we assumed in connection with our acquisition of SangStat in September 2003.

The increases for the nine months ended September 20, 2004, were offset, in part, by lower interest expense associated with the 6.9% convertible subordinated note that we assumed in connection with our acquisition of Biomatrix and paid off in May 2003.

Provision for Income Taxes

	Three Months Ended September 30,								Nine Months Ended September 30,
	Three Months Ended September 30,						Increase (Decrease) % Change		Nine Months Ended September 30,						Increase/ (Decrease) % Change
	2004			2003			Increase (Decrease) % Change		2004			2003			Increase/ (Decrease) % Change
	(Amounts in thousands, except percentage data)

Provision for income taxes	$	(42,479	)	$	(24,653	)	72	%	$	(104,861	)	$	(53,377	)	96	%
Effective tax rate		30	%		(35	)%				30	%		(75	)%

Our tax rates for all periods vary from the U.S. statutory tax rate as a result of:

•: our provision for state income taxes;
•: tax benefits from export sales;
•: the impact of the write off of nondeductible goodwill in June 2003;
•: nondeductible charges for IPR&D recorded in September 2003; and
•: our use of tax credits.

In 2001, the WTO determined that the tax provisions of the ETI constitute an export subsidy prohibited by the WTO Agreement on Subsidies and Countervailing Measures Agreement. As a result, in October 2004, the U.S. enacted the American Jobs Creation Act of 2004, or the Act, which repeals the ETI export subsidy for transactions after 2004 with two years of transition relief (2005-2006). The Act also provides a 9% deduction for income from domestic production activities which will be phased in over the years 2005-2010. While we are still evaluating the net impact of this new legislation, we do not expect it to have a material effect on our ongoing effective tax rate.

B. LIQUIDITY AND CAPITAL RESOURCES

We continue to generate cash from operations. At September 30, 2004, we had cash, cash equivalents and short- and long-term investments of $823.4 million, a decrease of $404.0 million from cash, cash equivalents and short- and long-term investments of $1.2 billion at December 31, 2003. This decrease in our cash balance is due primarily to our expenditure of $580.1 million in connection with the redemption of our 3% convertible subordinated debentures in June 2004.

The following is a summary of our statements of cash flows for the nine months ended September 30, 2004 and 2003.

Cash Flows from Operating Activities

Cash flows from operating activities are as follows (amounts in thousands):

			Nine Months Ended September 30,
			2004			2003
Cash flows from operating activities:
	Net cash provided by operating activities before working capital changes		$	430,748		$	304,673
	Increase (decrease) in cash from working capital changes (excluding impact of acquired assets and assumed liabilities)			(45,488	)		(18,948	)

		Cash flows from operating activities	$	385,260		$	285,725

Cash flows from operating activities increased $99.5 million, or 35%, for the nine months ended September 30, 2004, as compared to the same period in 2003, primarily due to growth in earnings, adjusted for non-cash items (including depreciation, amortization, deferred income taxes and impairment charges), which increased $126.1 million, or 41%, to $430.7 million for the nine months ended September 30, 2004, as compared to the same period of 2003. This increase was offset, in part, by a $26.5 million, or 140%, increase in cash used to fund working capital changes. This increase is primarily due to a $49.6 million increase in accounts receivable and a $20.8 million increase in inventory, offset in part by a $13.4 million decrease in prepaid expenses and other current assets and a $30.4 million increase in accounts payable, accrued expenses and deferred revenue.

Cash Flows from Investing Activities

Cash flows from investing activities are as follows (amounts in thousands):

			Nine Months Ended September 30,
			2004			2003
Cash flows from investing activities:
	Net sales of investments, including investments in equity securities		$	428,608		$	259,442
	Purchases of property, plant and equipment			(129,255	)		(169,535	)
	Sale of product line			—			32,388
	Investments in equity method investees			(22,736	)		(19,070	)
	Acquisitions, net of acquired cash			(265,246	)		(537,037	)
	Other investing activities			(2,965	)		(16,277	)

		Cash flows from investing activities	$	8,406		$	(450,089	)

For the nine months ended September 30, 2004, net sales of investments, including investments in equity securities, provided $428.6 million in cash. For the same period, acquisitions and capital expenditures accounted for significant cash outlays. For the nine months ended September 30, 2004, we used:

•: $129.3 million in cash to fund purchases of property, plant and equipment, primarily related to the ongoing expansion of our manufacturing capacity in Ireland, the United Kingdom, Belgium and the United States, ongoing tenant improvements at our corporate headquarters facility in Cambridge, Massachusetts and expenditures related to other manufacturing expansions and relocations; and

•: $265.2 million in cash for acquisitions, including $47.5 million to acquire Alfigen in February 2004 and $215.3 million to acquire the pathology/oncology testing assets of IMPATH in May 2004.

Cash Flows from Financing Activities

Our cash flows from financing activities are as follows (amounts in thousands):

			Nine Months Ended September 30,
			2004			2003
Cash flows from financing activities:
	Proceeds from issuance of common stock		$	104,549		$	83,382
	Proceeds from draw on credit facility			135,000			316,000
	Payment of debt and capital lease obligations			(614,547	)		(312,528	)
	Bank overdraft			12,521			(17	)
	Minority interest			4,622			—
	Other financing activities			962			(115	)

		Cash flows from financing activities	$	(356,893	)	$	86,722

For the nine months ended September 30, 2004, financing activities generated $257.7 million of cash primarily due to $104.5 million of proceeds from the issuance of common stock under our stock plans and $135.0 million drawn under our revolving credit facility that matures in December 2006. This source was offset by $614.5 million in cash utilized to repay debt and capital lease obligations, including $575.0 million of cash used to redeem our 3% convertible subordinated debentures, $25.0 million of cash used to repay a portion of the principal balance drawn under our revolving credit facility and $11.3 million to repay the 6.5% convertible note that we assumed in September 2003 in connection with the acquisition of SangStat.

For the nine months ended September 30, 2003, financing activities generated $399.4 million of cash primarily due to $83.4 million of proceeds from the issuance of common stock under our stock plans and $316.0 million drawn under our revolving credit facility that matured in December 2003. This source was primarily offset by $312.5 million in cash utilized to repay debt and capital lease obligations, including $300.0 million of cash used to repay the amount outstanding under our revolving credit facility that matured in December 2003 and $10.0 million to repay the 6.9% convertible subordinated note we assumed in connection with our acquisition of Biomatrix.

Revolving Credit Facility

In December 2003, we entered into a three year, $350.0 million revolving credit facility. In June 2004, we drew down $135.0 million under this facility to maintain a certain level of cash balances. In September 2004, we repaid $25.0 million of the outstanding principal balance and as of September 30, 2004, $110.0 million in principal remained outstanding under this credit facility. This amount is included in current portion of long-term debt and capital lease obligations in our consolidated balance sheet because we plan to repay the remainder of this borrowing within a year. Borrowings under this credit facility bear interest at LIBOR plus an applicable margin, which was 2.2% at September 30, 2004. The terms of our revolving credit facility include various covenants, including financial covenants, that require us to meet minimum liquidity and interest coverage ratios and to meet maximum leverage ratios. We currently are in compliance with these covenants.

3% Convertible Subordinated Debentures

Contractual Obligations

The disclosure of payments we have committed to make under our contractual obligations is set forth under the heading "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations—Liquidity and Capital Resources" in Exhibit 13.1 to our 2003 Form 10-K. Excluding the $110.0 million outstanding under our revolving credit facility at September 30, 2004, the redemption of our 3% convertible subordinated debentures for cash in June 2004, the payment of the 6.5% convertible note in March 2004, and contingent on the closing of the transaction, the upfront and contingent payments to Wyeth for Synvisc sales and marketing rights, all described above, there have been no material changes to our contractual obligations since December 31, 2003.

Financial Position

We believe that our available cash, investments and cash flow from operations will be sufficient to fund our planned operations and capital requirements for the foreseeable future. Although we currently have substantial cash resources and positive cash flow, we intend to use substantial portions of our available cash for:

•: product development and marketing;
•: business combinations and other strategic business initiatives, including the purchase of Synvisc sales and marketing rights from Wyeth;
•: expanding existing and constructing new facilities;
•: expanding staff; and
•: working capital, including satisfaction of our obligations under capital and operating leases.

Our cash reserves may be further reduced to pay principal and interest on the $690.0 million in principal under our 1.25% convertible senior notes due December 1, 2023. The notes are initially convertible into Genzyme Stock at a conversion price of approximately $71.24 per share. Holders of the notes may require us to repurchase all or any part of the notes for cash, common stock, or a combination, at our option, on December 1, 2008, 2013 or 2018, at a price equal to 100% of the principal amount of the notes plus accrued and unpaid interest through the date prior to the date of repurchase. Additionally, upon a change of control, each holder may require us to repurchase for cash at 100% of the principal amount of the notes plus accrued interest, all or a portion of the holder's notes. On or after December 1, 2008, we may redeem for cash at 100% of the principal amount of the notes plus accrued interest, all or part of the notes that have not been previously converted or repurchased.

In addition, we have several outstanding legal proceedings. Involvement in investigations and litigation can be expensive and a court may ultimately require that we pay expenses and damages. As a result of legal proceedings, we also may be required to pay fees to a holder of proprietary rights in order to continue certain operations. We have provided you detail on certain of these legal proceedings in the notes to our financial statements and under the heading "Legal Proceedings" in Item 1. to Part II of this Form 10-Q.

To satisfy these and other commitments, we may have to obtain additional financing. We cannot guarantee that we will be able to obtain any additional financing, extend any existing financing arrangement, or obtain either on favorable terms.

Off-Balance Sheet Arrangements

We do not use special purpose entities or other off-balance sheet financing arrangements. We enter into guarantees in the ordinary course of business related to the guarantee of our own performance and have joint ventures and certain other arrangements that involve research, development, and the commercialization of products resulting from the arrangements. Entities falling within the scope of FIN 46 are included in our consolidated results if we qualify as the primary beneficiary. Entities not subject to consolidation under FIN 46 are accounted for under the equity method of accounting if our ownership percentage exceeds 20% or if we exercise significant influence over the entity. We account for our portion of the losses of these entities in the line item "Equity in loss of equity method investments" in our statements of operations.

Recent Accounting Pronouncements

EITF Issue No. 03-6, "Participating Securities and the Two-Class Method Under FASB Statement No. 128." In April 2004, the EITF issued Statement No. 03-6, "Participating Securities and the Two-Class Method Under FASB Statement No. 128, Earnings Per Share." EITF 03-6 addresses a number of questions regarding the computation of earnings per share by a company that has issued securities other than common stock that contractually entitle the holder to the right to participate in dividends when, and if, declared. The issue also provides further guidance in applying the two-class method of calculating earnings per share, clarifying the definition of a participating security and how to apply the two-class method. EITF 03-6 was effective for fiscal periods beginning after March 31, 2004 and was required to be retroactively applied. We evaluated the terms of our convertible notes and debentures and determined that none of these instruments qualified as participating securities under the provisions of EITF 03-6. As a result, the adoption of EITF 03-6 had no effect on our earnings per share for the three and nine months ended September 30, 2004 and 2003.

regulatory environment. EITF 04-10 is effective for reporting periods ending after December 15, 2004 and requires that corresponding information for earlier periods, including interim periods, shall be restated unless it is impractical to do so. We are currently evaluating the impact that the adoption of EITF 04-10 will have on our financial statements and results of operations.

Proposed SFAS, "Share-Based Payment, an amendment of FASB Statements Nos. 123 and 95." In March 2004, the FASB issued an exposure draft of a new standard entitled "Share-Based Payment, an amendment of FASB Statements Nos. 123 and 95," which would amend SFAS No. 123, "Accounting for Stock Based Compensation," and SFAS No. 95, "Statement of Cash Flows." The Exposure Draft would eliminate the ability to account for share-based compensation transactions using APB Opinion No. 25, "Accounting for Stock Issued to Employees," and generally would require such transactions be accounted for using a fair-value-based method and the resulting cost recognized in our financial statements. Throughout most of 2004, the FASB has continued to deliberate on different aspects of a new standard, and currently expects to issue a final standard before December 31, 2004. The new standard, as proposed, would be effective for awards that are granted, modified or settled in cash in interim and annual periods beginning after June 15, 2005. Although we have not yet completed an analysis to quantify the exact impact the new standard will have on our future financial performance, the disclosures in Note 2.,"Basis of Presentation and Significant Accounting Policies—Accounting for Stock-Based Compensation," provide detail as to our financial performance as if we had applied the fair value based method and recognition provisions of SFAS No. 123 to stock-based employee compensation to the current reporting periods. We are monitoring developments related to the exposure draft and will adopt the final standards, if any, upon issuance.

FACTORS AFFECTING FUTURE OPERATING RESULTS

Our future operating results could differ materially from the results described in this report due to the risks and uncertainties related to our business, including those discussed below.

Our financial results are highly dependent on sales of Cerezyme.

We generate a significant portion of our revenue from sales of Cerezyme, our enzyme-replacement product for patients with Gaucher disease. Sales of Cerezyme totaled $620.7 million for the nine months ended September 30, 2004, representing approximately 43% of our consolidated product revenue for the first nine months of 2004. Because our business is highly dependent on Cerezyme, negative trends in revenue from this product could have a significant adverse effect on our operations and cause the value of our securities to decline substantially. We will lose revenue if alternative treatments gain commercial acceptance, if our marketing activities are restricted, or if reimbursement is limited. In addition, the patient population with Gaucher disease is not large. Because a significant percentage of that population already uses Cerezyme, opportunities for future sales growth are constrained. Furthermore, changes in the methods for treating patients with Gaucher disease, including treatment protocols that combine Cerezyme with other therapeutic products or reduce the amount of Cerezyme prescribed, could limit growth, or result in a decline, in Cerezyme sales.

If we fail to increase sales of several products and services, we will not meet our financial goals.

Over the next few years, our success will depend substantially on our ability to increase revenue from many different products and services. The products include Fabrazyme, Renagel, Synvisc, Thymoglobulin, Thyrogen and Diagnostic/Genetics testing services. Our ability to increase sales will depend on a number of factors, including:

•: acceptance by the medical community of each product;
•: the availability of competing treatments that are deemed more efficacious, more convenient to use, or more cost effective;

•: 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 cost efficient manner;
•: regulation by the U.S. Food and Drug Administration, commonly referred to as the FDA, and the European Agency for the Evaluation of Medicinal Products;
•: the scope of the labeling approved by regulatory authorities for each product and competitive products;
•: the effectiveness of our sales force;
•: the availability of reimbursement from governmental agencies and third party payors, and the extent of coverage; and
•: the size of the patient population for each product.

Part of our growth strategy involves conducting additional clinical trials to support approval of expanded uses of some of our products and pursuing marketing approval for our products in new jurisdictions. With Synvisc, for example, we are pursuing marketing approval in Japan and are seeking to expand approval in the United States to cover use as a treatment of pain from osteoarthritis in the hip. The success of this component of our growth strategy will depend on the content and timing of our submissions to regulatory authorities and whether and when those authorities determine to grant approvals.

Because the healthcare industry is extremely competitive and regulatory requirements are rigorous, we spend substantial funds marketing our products and attempting to expand approved uses for them. These expenditures depress near-term profitability, with no assurance that the expenditures will generate future profits that justify the expenditures.

Our future success will depend on our ability to effectively develop and market our products and services against those of our competitors.

The human healthcare products and services industry is extremely competitive. Other organizations, including pharmaceutical firms and biotechnology companies, have developed and are developing products and services that compete with our products, services, and product candidates. If doctors or patients prefer these competitive products or these competitive products have superior safety, efficacy, pricing or reimbursement characteristics, we will have difficulty maintaining or increasing the sales of our products.

Celltech Group plc and Actelion Ltd. have developed Zavesca®, a small molecule for the treatment of Gaucher disease, the disease addressed by Cerezyme. Zavesca has been approved by both the FDA and the European Commission as an oral therapy for use in patients with mild to moderate Type 1 Gaucher disease for whom enzyme replacement is unsuitable. Teva Pharmaceuticals Industries Ltd., a licensee of Celltech, has received marketing approval of Zavesca in Israel. In addition, in July 2004, Transkaryotic Therapies Inc. (TKT) announced that it has completed enrollment of its phase I/II study of its gene-activated glucocerebrosidase program, also to treat Gaucher disease.

Nabi Biopharmaceuticals is currently marketing PhosLo®, a calcium based phosphate binder. Like Renagel, PhosLo is approved for the control of elevated phosphate levels in patients with end-stage kidney failure. In addition, Shire Pharmaceuticals Group plc recently received FDA approval for Fosrenol®, a non-calcium based phosphate binder, and has filed for marketing approval of Fosrenol in the European Union and Canada. Renagel also competes with over-the-counter calcium carbonate products such as TUMS®.

Outside the United States, TKT is marketing a competitive enzyme replacement therapy for Fabry disease, the disease addressed by Fabrazyme. In addition, while Fabrazyme has received Orphan Drug

designation, which provides us with seven years of market exclusivity for the product in the United States, other companies may seek to overcome our market exclusivity and, if successful, compete with Fabrazyme in the United States.

Smith & Nephew Orthopaedics, Anika Therapeutics, Inc., Sanofi-Synthelabo Inc. and Ortho Biotech, L.P. are selling products that compete directly with Synvisc, and we believe other directly competitive products are under development. Furthermore, several companies market products designed to relieve the pain associated with osteoarthritis. Synvisc will have difficulty competing with any of these products to the extent the competitive products are considered more efficacious, less burdensome to administer, or more cost-effective.

The examples above are illustrative. Almost all of our products face competition. Furthermore, the field of biotechnology is characterized by significant and rapid technological change. Discoveries by others may make our products or services obsolete. For example, competitors may develop approaches to treating lysosomal storage disorders that are more effective or less expensive than our products and product candidates. Because a significant portion of our revenue is derived from products that address this class of diseases and a substantial portion of our expenditures is devoted to developing new therapies for this class of diseases, such a development would have a material negative impact on our operations. Furthermore, our recent acquisition of SangStat Medical Corporation and collaborations with MacroGenics, Inc. and Cortical Pty Ltd., all in 2003, reflect our commitment to the immune-mediated disease area. Several pharmaceutical and biotechnology companies are pursuing programs in this area, and these organizations may develop approaches that are superior to ours.

If we fail to obtain adequate levels of reimbursement for our products from third party payors, the commercial potential of our products will be significantly limited.

A substantial portion of our revenue comes from payments by third-party payors, including government health administration authorities and private health insurers. As a result of the trend toward managed healthcare in the United States, as well as governmental actions and proposals to reduce payments under government insurance programs, third party payors are increasingly attempting to contain healthcare costs by:

•: challenging the prices charged for healthcare products and services;
•: limiting both the coverage and the amount of reimbursement for new therapeutic products;
•: shifting payments for products and services through co-payments, co-insurance and other risk sharing arrangements;
•: denying or limiting coverage for products that are approved by the FDA 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 marketing approval.

Government and other third party payors may not provide adequate insurance coverage or reimbursement for our products and services, which would impair our financial results. In addition, third party payors may not reimburse patients for newly approved healthcare products, which could decrease demand for our products. Furthermore, legislatures, including the U.S. Congress, occasionally discuss implementing broad-based measures to contain healthcare costs. If third party reimbursement is further constrained, or if legislation is passed to contain healthcare costs, our profitability and financial condition will suffer.

We may encounter substantial difficulties managing our growth.

Several risks are inherent to our plans to grow our business. Achieving our goals will require substantial investments in research and development, sales and marketing, and facilities. With respect to Renagel, for example, we have spent considerable resources building out and seeking regulatory approvals for our tableting facility in Waterford, Ireland and manufacturing plants in Haverhill, UK. We cannot assure you that these facilities will prove sufficient to meet demand for Renagel, or that we will sell sufficient quantities of Renagel to recoup our investment in these facilities. In addition, we have invested in building a new manufacturing plant in Geel, Belgium for the production of recombinant proteins and monoclonal antibodies for clinical trials and commercial products. We cannot assure you that the facility will obtain the required approvals to begin operations, or that its output will allow us to recoup our investment. We incur similar costs for our other products and product candidates with comparable risks.

If we are able to grow sales of our products, we may have difficulty managing inventory levels. Marketing new therapies is a complicated process, and gauging future demand is difficult. With Renagel, for example, we have encountered problems managing inventory levels at wholesalers. Comparable problems may arise with our other 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:

•: wholesaler buying patterns;
•: reimbursement rates;
•: physician prescribing habits;
•: the availability or pricing of competitive products; and
•: currency exchange rates.

We may also experience fluctuations in our quarterly results due to price changes and sales incentives. For example, purchasers of our products, particularly wholesalers, may increase purchase orders in anticipation of a price increase and reduce order levels following the price increase. We occasionally offer sales incentives and promotional discounts on some of our products and services that could have a similar impact. In addition, some of our products are subject to seasonal fluctuation in demand.

Our operating results and financial position also may be impacted when we attempt to grow through business combination transactions. We may encounter problems assimilating operations acquired in these transactions. Business combination transactions often entail the assumption of unknown liabilities, the loss of key employees, and the diversion of management attention. Furthermore, in any business combination, including our recent acquisition of SangStat, our proposed merger with ILEX and our recent acquisition of the pathology/oncology testing assets of IMPATH, there is a substantial risk that we will fail to realize the benefits we anticipate when we decide to undertake the transaction. We have in the past taken significant charges for impairment of goodwill and for impaired assets acquired in business combination transactions. We may be required to take similar charges in the future.

Manufacturing problems may cause product launch delays, inventory shortages, excess capacity and unanticipated costs.

In order to generate revenue from our approved products, we must be able to produce sufficient quantities of the products at approved facilities. In connection with our efforts to avoid supply

constraints with Renagel, we have built two new manufacturing plants in Haverhill, UK and a tableting facility in Waterford, Ireland. In addition, we have invested in a recombinant protein and monoclonal antibodies manufacturing plant in Geel, Belgium. Building these, and our other production facilities, is expensive, and our ability to recover these costs will depend on increased revenue from the products produced at the facilities. Furthermore, we may encounter production interruptions at our production facilities, which could lead to inventory shortages and other problems. A number of factors could cause production interruptions, including equipment malfunctions, labor problems, natural disasters, power outages, terrorist activities, or disruptions in the operations of our suppliers.

Manufacturing is subject to extensive government regulation. Regulatory authorities must approve the facilities in which human healthcare products are produced. In addition, facilities are subject to ongoing inspections and minor changes in manufacturing processes may require additional regulatory approvals, either of which could cause us to incur significant additional costs and lose revenue.

The manufacturing processes we employ to produce small quantities of material for research and development activities and clinical trials may not be successfully scaled up for production of commercial quantities at a reasonable cost or at all. Many of our products are difficult to manufacture. Our products that are biologics, for example, require product characterization steps that are more onerous than those required for most chemical pharmaceuticals. Accordingly, we employ multiple steps to attempt to control the manufacturing processes. Minor deviations in these manufacturing processes could result in unacceptable changes in the products that result in lot failures, product recalls, or product liability.

If our strategic alliances are unsuccessful, our operating results will be negatively impacted.

Several of our strategic initiatives involve alliances with other biotechnology and pharmaceutical companies. These include a joint venture with BioMarin Pharmaceutical Inc. with respect to Aldurazyme, and a joint venture with Dyax Corporation with respect to DX-88. The success of these and similar arrangements is largely dependent on technology and other intellectual property contributed by our strategic partners or the resources, efforts, and skills of our partners. Disputes and difficulties in such relationships are common, often due to conflicting priorities or conflicts of interest. Merger and acquisition activity may exacerbate these conflicts. The benefits of these alliances are reduced or eliminated when strategic partners:

•: terminate the agreements 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; or
•: fail to maintain the financial resources necessary to continue financing their portion of the development, manufacturing, or commercialization costs or their own operations.

In addition, payments we make under these arrangements may exacerbate fluctuations in our financial results. Furthermore, under some of our strategic alliances, we make milestone payments well in advance of commercialization of products with no assurance that we will ever recoup these payments. We also may make equity investments in our strategic partners, as we did with Cambridge Antibody Technology Group plc. and MacroGenics, Inc. in 2003. Our strategic equity investments are subject to market fluctuation, access to capital and other business events, such as initial public offerings, the completion of clinical trials and regulatory approvals, which can impact the value of these investments. As a result, if any of our strategic equity investments decline in value and remain below cost for an extended duration, we will incur financial statement charges related to the decline in value of that investment.

The development of new biotechnology products involves a lengthy and complex process, and we may be unable to commercialize any of the products we are currently developing.

We have multiple products under development and devote considerable resources to research and development, including clinical trials. For example, we are currently conducting three clinical trials for Myozyme, an enzyme replacement therapy intended to treat Pompe disease, and we are spending considerable resources attempting to develop new treatments for Gaucher disease.

Before we can commercialize our development-stage products, we will need to:

•: conduct substantial research and development;
•: undertake preclinical and clinical testing;
•: develop and scale-up manufacturing processes; and
•: pursue regulatory approvals and, in some jurisdictions, pricing approvals.

This process involves a high degree of risk and takes several years. Our product development efforts with respect to a product candidate may fail for many reasons, including:

•: failure of the product candidate in preclinical studies;
•: difficulty enrolling patients in clinical trials, particularly for disease indications with small populations;
•: patients exhibiting adverse reactions to the product candidate or other safety concerns;
•: insufficient clinical trial data to support the effectiveness 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; or
•: our failure to obtain the required regulatory approvals for the product candidate or the facilities in which it is manufactured.

Few research and development projects result in commercial products, and success in preclinical studies or early clinical trials often is not replicated in later studies. We may decide to abandon development of a product or service candidate at any time or we may be required to expend considerable resources repeating clinical trials or conducting additional trials, either of which would adversely impact the timing for generating possible revenue from those product candidates.

Our efforts to expand the approved indications for our products and to gain marketing approval in new jurisdictions also may fail. These expansion efforts are subject to many of the risks associated with completely new products, and, accordingly, we may fail to recoup the investments we make pursuing these expansions.

Government regulation imposes significant costs and restrictions on the development and commercialization of our products and services.

Our success will depend on our ability to satisfy regulatory requirements. We may not receive required regulatory approvals on a timely basis or at all. Government agencies heavily regulate the production and sale of healthcare products and the provision of healthcare services. In particular, the FDA and comparable agencies in foreign jurisdictions must approve human therapeutic and diagnostic products before they are marketed, as well as the facilities in which they are made. This approval process can involve lengthy and detailed laboratory and clinical testing, sampling activities and other costly and time-consuming procedures. Several biotechnology companies have failed to obtain regulatory approvals because regulatory agencies were not satisfied with the structure or conduct of clinical trials or the ability to interpret the data from the trials. Similar problems could delay or prevent

us from obtaining approvals. Furthermore, regulatory authorities, including the FDA, may not agree with our interpretations of our clinical trial data, which could delay, limit or prevent regulatory approvals.

Therapies that have received regulatory approval for commercial sale may continue to face regulatory difficulties. If we fail to comply with applicable regulatory requirements, regulatory authorities could take actions against us, including:

•: issuing warning letters;
•: issuing fines and other civil penalties;
•: suspending regulatory approvals;
•: refusing to approve pending applications or supplements to approved applications;
•: suspending product sales in the United States and/or exports from the United States;
•: mandating product recalls; and
•: seizing products.

Furthermore, the FDA and comparable foreign regulatory agencies may require post-marketing clinical trials or patient outcome studies. We have agreed with the FDA, for example, to a number of post-marketing commitments as a condition to U.S. marketing approval for Fabrazyme and Aldurazyme. In addition, regulatory agencies subject a marketed therapy, its manufacturer and the manufacturer's facilities to continual review and periodic inspections. The discovery of previously unknown problems with a therapy or the facility used to produce the therapy could prompt a regulatory authority to impose restrictions on us, including withdrawal of one or more of our products or services from the market.

Legislative or regulatory changes may adversely impact our business.

The FDA has designated some of our products and candidates, including Fabrazyme, Aldurazyme, and Myozyme, as orphan drugs under the Orphan Drug Act. The Orphan Drug Act provides incentives to manufacturers to develop and market drugs for rare diseases, generally by entitling the first developer that receives FDA marketing approval for an orphan drug to a seven-year exclusive marketing period in the United States for that product. In recent years Congress has considered legislation to change the Orphan Drug Act to shorten the period of automatic market exclusivity and to grant marketing rights to simultaneous developers of a drug. If the Orphan Drug Act is amended in this manner, any approved drugs for which we have been granted exclusive marketing rights under the Orphan Drug Act will face increased competition, which may decrease the amount of revenue we receive from these products.

In addition, the United States government and other governments have shown significant interest in pursuing healthcare reform. Any government-adopted reform measures could adversely impact:

•: the pricing of therapeutic products and medical devices in the United States or internationally;
•: the ability of consumers residing in the United States to purchase therapeutic products and medical devices that have been imported from manufacturers and distributors located outside of the United States; and
•: the amount of reimbursement available from governmental agencies or other third party payors.

New laws, regulations and judicial decisions, or new interpretations of existing laws, regulations and decisions, which relate to health care availability, methods of delivery or payment for products and

services, or sales, marketing or pricing may cause our revenue to decline, and we may need to revise our research and development programs.

We may require significant additional financing, which may not be available to us on favorable terms, if at all.

As of September 30, 2004, we had $823.4 million in cash, cash equivalents and short- and long-term investments, excluding investments in equity securities.

We intend to use substantial portions of our available cash for:

•: product development and marketing;
•: business combinations and other strategic business initiatives, including the purchase of sales and marketing rights for Synvisc from Wyeth;
•: expanding existing and constructing additional facilities;
•: expanding staff; and
•: working capital, including satisfaction of our obligations under capital and operating leases.

We may further reduce available cash reserves to pay principal and interest on outstanding debt, including:

•: our $690.0 million in principal of 1.25% convertible senior notes due December 2023; and
•: $110.0 million in principal under our revolving credit facility with a syndicate of commercial banks, which is due in December 2006.

To satisfy our cash requirements, we may have to obtain additional financing. We may be unable to obtain any additional financing, extend any existing financing arrangements, or obtain either on terms that we or our investors consider favorable.

We may fail to adequately protect our proprietary technology, which would allow competitors or others to take advantage of our research and development efforts.

Our long-term success largely depends on our ability to market technologically competitive products. If we fail to obtain or maintain adequate intellectual property protection, we may not be able to prevent third parties from using our proprietary technologies. Our currently pending or future patent applications may not result in issued patents. In the United States, patent applications are confidential for 18 months following their filing, and because third parties may have filed patent applications for technology covered by our pending patent applications without us being aware of those applications, our patent applications may not have priority over patent applications of others. In addition, our issued patents may not contain claims sufficiently broad to protect us against third parties with similar technologies or products, or provide us with any competitive advantage. If a third party initiates litigation regarding our patents, our collaborators' patents, or those patents for which we have license rights, and is successful, a court could declare our patents invalid or unenforceable or limit the scope of coverage of those patents.

The United States Patent and Trademark Office (USPTO), and the courts have not consistently treated the breadth of claims allowed or interpreted in biotechnology patents. If the USPTO or the courts begin to allow or interpret claims more broadly, the incidence and cost of patent interference proceedings and the risk of infringement litigation will likely increase. On the other hand, if the USPTO or the courts begin to allow or interpret claims more narrowly, the value of our proprietary rights may be reduced. Any changes in, or unexpected interpretations of, the patent laws may adversely affect our ability to enforce our patent position.

We also rely upon trade secrets, proprietary know-how, and continuing technological innovation to remain competitive. We attempt to protect this information with security measures, including the use of confidentiality agreements with our employees, consultants, and corporate collaborators. These individuals may breach these agreements and any remedies available to us may be insufficient to compensate our damages. Furthermore, our trade secrets, know-how and other technology may otherwise become known or be independently discovered by our competitors.

We may be required to license technology from competitors or others in order to develop and commercialize some of our products and services, and it is uncertain whether these licenses will be available.

Third party patents may cover some of the products or services that we or our strategic partners are developing or testing. A United States patent is entitled to a presumption of validity, and, accordingly, we face significant hurdles in any challenge to a patent. In addition, even if we are successful in challenging the validity of a patent, the challenge itself may be expensive and require significant management attention.

To the extent valid third party patent rights cover our products or services, we or our strategic collaborators would be required to seek licenses from the holders of these patents in order to manufacture, use, or sell these products and services, and payments under them would reduce our profits from these products. We may not be able to obtain these licenses on acceptable terms, or at all. If we fail to obtain a required license or are unable to alter the design of our technology to fall outside the scope of a third party patent, we may be unable to market some of our products and services, which would limit our profitability.

We may incur substantial costs as a result of litigation or other proceedings.

A third party may sue us or one of our strategic collaborators for infringing the third party's patent or other intellectual property rights. Likewise, we or one of our strategic collaborators may sue to enforce intellectual property rights or to determine the scope and validity of third party proprietary rights. If we do not prevail in this type of litigation, we or our strategic collaborators may be required to:

•: 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 substantially similar product.

We are also currently involved in litigation and investigations that do not involve intellectual property claims, such as shareholder suits and government investigations regarding certain of our business decisions and practices, and may be subject to additional actions in the future. For example, we are currently defending several lawsuits brought in connection with the elimination of our tracking stock in June 2003, some of which claim considerable damages.

The federal government, state governments and private payors are investigating and have begun to file actions against numerous pharmaceutical and biotechnology companies, including Genzyme, alleging that the companies have overstated prices in order to inflate reimbursement rates. In addition, enforcement authorities have instituted actions under health care "fraud and abuse" laws, including anti-kickback and false claims statutes. Moreover, individuals who use our products or services, including our diagnostic products and genetic testing services, sometimes bring product and professional

liability claims against us or our subsidiaries. Those actions may have a significant negative impact on our business.

We have only limited amounts of insurance, which may not provide coverage to offset a negative judgment or a settlement payment. We may be unable to obtain additional insurance in the future, or we may be unable to do so on acceptable terms. Any additional insurance we do obtain may not provide adequate coverage against any asserted claims.

Regardless of merit or eventual outcome, investigations and litigations may result in:

•: diversion of management's time and attention;
•: 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.

Changes in the economic, political, legal and business environments in the foreign countries in which we do business could cause our international sales and operations, which account for a significant percentage of our total revenue, to be limited or disrupted.

Our international operations accounted for approximately 45% of our consolidated product and service revenues for the nine months ended September 30, 2004. We expect that international product and service sales will continue to account for a significant percentage of our total revenue for the foreseeable future. In addition, we have direct investments in a number of subsidiaries outside of the United States, primarily in the European Union, Latin America and Japan. Our international sales and operations could be limited or disrupted, and the value of our direct investments may be diminished, by any of the following:

•: economic problems that disrupt foreign healthcare payment systems;
•: fluctuations in currency exchange rates;
•: the imposition of governmental controls;
•: less favorable intellectual property or other applicable laws;
•: the inability to obtain any necessary foreign regulatory approvals of products in a timely manner;
•: import and export license requirements;
•: political instability;
•: terrorist activities and armed conflict;
•: 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.

A significant portion of our business is conducted in currencies other than our reporting currency, the U.S. Dollar. We recognize foreign currency gains or losses arising from our operations in the period in which we incur those gains or losses. As a result, currency fluctuations among the U.S. Dollar and the currencies in which we do business have caused foreign currency transaction gains and losses in the past and will likely do so in the future. Because of the number of currencies involved, the variability of

currency exposures and the potential volatility of currency exchange rates, we may suffer significant foreign currency transaction losses in the future due to the effect of exchange rate fluctuations.

Our level of indebtedness may harm our financial condition and results of operations.

At September 30, 2004, we had $805.2 million of outstanding indebtedness, excluding capital lease obligations. We may incur additional indebtedness in the future. Our level of indebtedness will have several important effects on our future operations, including:

•: increasing our vulnerability to adverse changes in general economic and industry conditions; and
•: limiting our ability to obtain additional financing for capital expenditures, acquisitions, general corporate and other purposes.

Our ability to make payments of principal and interest on our indebtedness depends upon our future operating and financial performance.

ITEM 3. QUANTITATIVE AND QUALITATIVE ANALYSIS OF MARKET RISK

We are exposed to potential loss from financial market risks that may occur as a result of changes in interest rates, equity prices and foreign currency exchange rates. Our exposure to the risks associated with equity prices and foreign currency exchange rates has not materially changed since December 31, 2003. However, our interest rate risk has increased $7.5 million since December 31, 2003. The increase is primarily due to a 46% decrease in our fixed income investment portfolio, which resulted in a $7.7 million, or 46% decrease in the fair value of the sensitivity of the interest rate risk of our investment portfolio to a 100 basis point fluctuation in interest rates since December 31, 2003.

We incorporate by reference our disclosure related to market risk which is set forth under the heading "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations—Market Risk," "—Interest Rate Risk," "—Foreign Exchange Risk" and "—Equity Price Risk" in Exhibit 13.1 to our 2003 Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES

At the direction of our Chief Executive Officer and Chief Financial Officer, we evaluated our disclosure controls and procedures and internal control over financial reporting and concluded that (1) our disclosure controls and procedures were effective as of September 30, 2004 and (2) no change in internal control over financial reporting occurred during the quarter ended September 30, 2004 that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We periodically become subject to legal proceedings and claims arising in connection with our business. We do not believe that there were any asserted claims against us as of September 30, 2004 that will have a material adverse effect on our results of operations, financial condition or liquidity.

Four lawsuits have been filed against us regarding the exchange of all of the outstanding shares of Biosurgery Stock and Molecular Oncology Stock for shares of Genzyme Stock. The first case, filed in Massachusetts Superior Court in May 2003, was a purported class action on behalf of holders of Biosurgery Stock alleging a breach of the implied covenant of good faith and fair dealing in our charter and a breach of our board of directors' fiduciary duties. The plaintiff in this case was seeking an injunction to adjust the exchange ratio for the tracking stock exchange. The Court dismissed the complaint on November 12, 2003 for failure to state a claim. The plaintiff in this case has appealed the dismissal of the complaint. Two substantially similar cases were filed in Massachusetts Superior Court in August and October 2003. These cases were consolidated in January 2004, and in July 2004, the consolidated case was stayed pending disposition of a fourth case. The fourth case, filed in the U.S. District Court for the Southern District of New York in June 2003, was brought by two holders of Biosurgery Stock alleging, in addition to the state law claims contained in the other cases, violations of federal securities laws, common law fraud, and a breach of the merger agreement with Biomatrix. The plaintiffs are seeking an adjustment to the exchange ratio, the rescission of the acquisition of Biomatrix, and unspecified compensatory damages. We believe each of these cases is without merit and continue to defend against them vigorously.

On March 27, 2003, the OFT in the United Kingdom issued a decision against our wholly-owned subsidiary, Genzyme Limited, finding that Genzyme Limited held a dominant position and abused that dominant position with no objective justification by pricing Cerezyme in a way that excludes other delivery/homecare service providers from the market for the supply of home delivery and homecare services to Gaucher patients being treated with Cerezyme. In conjunction with this decision, the OFT imposed a fine on Genzyme Limited and required modification to its list price for Cerezyme in the United Kingdom. Genzyme Limited appealed this decision to the Competition Appeal Tribunal. On May 6, 2003, the Tribunal issued an order that stayed the OFT's decision, but required Genzyme Limited to provide a homecare distributor a discount of 3% per unit during the appeal process. The Tribunal issued its judgment on Genzyme Limited's appeal on March 11, 2004, rejecting portions of the OFT's decision and upholding others. The Tribunal found that the list price of Cerezyme should not be reduced, but that Genzyme Limited must negotiate a price for Cerezyme that will allow homecare distributors an appropriate margin. The Tribunal also reduced the fine imposed by the OFT for violation of U.K. competition laws. In response to the Tribunal's decision, we recorded an initial liability of approximately $11 million in our 2003 financial statements and additional liabilities totaling approximately $1 million during the nine months ended September 30, 2004, all of which remain in accrued expenses in our consolidated balance sheet as of September 30, 2004. On April 13, 2004, Genzyme Limited filed an application with the Tribunal for permission to appeal to the High Court.

notice from Columbia that we were in breach of our license agreement. A hearing on motions for a summary judgment was scheduled for November 2004; however, Columbia recently rescinded the breach notification and filed with the Court a covenant not to enforce its patent 6,455,275 against any plaintiff in this litigation. In view of this covenant, the Court granted Columbia's motion to dismiss the plaintiff's main claim for lack of subject matter jurisdiction.

We are not able to predict the outcome of these cases or estimate with certainty the amount or range of any possible loss we might incur if we do not prevail in the final, non-appealable determinations of these matters. Therefore, except for approximately $11 million in liabilities established in 2003 and approximately $1 million in additional liabilities arising during 2004 from the Tribunal's decision regarding Cerezyme pricing in the United Kingdom, we have not accrued any amounts in connection with these potential contingencies. We cannot provide you with assurance that the matters listed above, or other legal proceedings, will not have a material adverse impact on our financial condition or results of operations.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

The following table provides information with respect to purchases we made of our common stock during the first nine months of our 2004 fiscal year. We purchased these shares from employees who sold them to us to satisfy payments due for stock option exercises:

		Total Number of Shares (or Units) Purchased	Average Price Paid per Share (or Unit)		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased Under the Plans or Programs
January 1-31, 2004		1,146	$	54.07	—	—
February 1-29, 2004		1,139	$	55.90	—	—
March 1-31, 2004		—		—	—	—
April 1-30, 2004		—		—	—	—
May 1-31, 2004		—		—	—	—
June 1-30, 2004		—		—	—	—
July 1-31, 2004		—		—	—	—
August 1-31, 2004		—		—	—	—
September 1-30, 2004		—		—	—	—

	Total	2,285	$	54.99	—	—

ITEM 6. EXHIBITS

(a): Exhibits

See the Exhibit Index following the signature page to this report on Form 10-Q.

GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, SEPTEMBER 30, 2004

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	GENZYME CORPORATION
	By:	/s/ MICHAEL S. WYZGA Michael S. Wyzga Executive Vice President, Finance, Chief Financial Officer, and Chief Accounting Officer
DATE: November 9, 2004

GENZYME CORPORATION AND SUBSIDIARIESFORM
FORM 10-Q, SEPTEMBER 30, 2004

EXHIBIT INDEX

Exhibit No.		Description
10.1		Form of Indemnification Agreement between Genzyme and directors and senior executive officers. Filed herewith. Current schedule identifying the directors and executives also filed herewith.
10.2		Amendment to Collaboration Agreement, effective as of April 17, 2001, to the Collaboration Agreement dated December 23, 1999 between GelTex and Sankyo Pharma, Inc. Filed herewith.
10.3		Amendment to Collaboration Agreement, dated January 1, 2004, to the Collaboration Agreement dated December 23, 1999 between Genzyme and Sankyo Pharma, Inc. Filed herewith.†
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.

†: Confidential treatment has been requested for the deleted portions of Exhibit 10.3.

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TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GENZYME CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited, amounts in thousands)
GENZYME CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations and Comprehensive Income (Loss) (Continued) (Unaudited, amounts in thousands, except per share amounts)
GENZYME CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited, amounts in thousands, except par value amounts)
GENZYME CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited, amounts in thousands)
GENZYME CORPORATION AND SUBSIDIARIES Notes To Unaudited, Consolidated Financial Statements

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FACTORS AFFECTING FUTURE OPERATING RESULTS

ITEM 3. QUANTITATIVE AND QUALITATIVE ANALYSIS OF MARKET RISK

ITEM 4. CONTROLS AND PROCEDURES

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

ITEM 6. EXHIBITS

SIGNATURES
EXHIBIT INDEX

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman Good

Genzyme (GZTR) Inactive 10-Q2004 Q3 Quarterly report

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