EXHIBIT 13.2
FINANCIAL STATEMENTS
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
PAGE NO.
--------
Combined Selected Financial Data............................ GG-2
Management's Discussion and Analysis of Genzyme General's
Financial Condition and Results of Operations............. GG-6
Combined Statements of Operations--For the Years Ended
December 31, 2000, 1999 and 1998.......................... GG-23
Combined Balance Sheets--December 31, 2000 and 1999......... GG-24
Combined Statements of Cash Flows--For the Years Ended
December 31, 2000, 1999 and 1998.......................... GG-25
Notes to Combined Financial Statements...................... GG-27
Report of Independent Accountants........................... GG-57
GG-1
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
COMBINED SELECTED FINANCIAL DATA
These selected financial data have been derived from the audited combined
financial statements of Genzyme General. You should read the following
information in conjunction with Genzyme General's audited financial statements
and related notes contained elsewhere in this annual report.
Genzyme General is our operating division that develops and markets:
- therapeutic products, with an expanding focus on products to treat
patients suffering from lysosomal storage disorders and other specialty
therapeutics;
- diagnostic products, with a focus on IN VITRO diagnostics; and
- other products and services, such as genetic testing services and lipids
and peptides for drug delivery.
A series of our common stock, Genzyme General Division Common Stock, (which
we refer to as "Genzyme General Stock,") is designed to reflect the value and
track the performance of this division. Genzyme General Stock is common stock of
Genzyme Corporation, not of Genzyme General; Genzyme General is a division, not
a company or legal entity, and therefore does not and cannot issue stock. The
chief mechanisms intended to cause Genzyme General Stock to "track" the
financial performance of Genzyme General are provisions in our charter governing
dividends and distributions. Under these provisions, our charter factors the
assets and liabilities and income or losses attributable to Genzyme General into
the determination of the amount available to pay dividends on Genzyme General
Stock.
To determine earnings per share, we allocate our earnings to each series of
our common stock based on the earnings attributable to that series of stock. The
earnings attributable to Genzyme General Stock is defined in our charter as the
net income or loss of Genzyme General determined in accordance with generally
accepted accounting principles and as adjusted for tax benefits allocated to or
from Genzyme General in accordance with our management and accounting policies.
Our charter also requires that all of our income and expenses be allocated among
our divisions in a reasonable and consistent manner. Our board of directors,
however, retains considerable discretion in determining the types, magnitude and
extent of allocations to each series of common stock without shareholder
approval.
On December 14, 2000, we acquired GelTex Pharmaceuticals, Inc., a public
company engaged in developing therapeutic products based on polymer technology.
The acquisition was structured as a merger of GelTex with and into one of our
wholly-owned subsidiaries. We accounted for the acquisition as a purchase and
allocated it to Genzyme General. Accordingly, the results of operations of
GelTex are included in our consolidated financial statements and the combined
financial statements of Genzyme General from the date of acquisition. We have
allocated the aggregate purchase price of $1.0 billion to the fair value of the
acquired assets and liabilities as of the acquisition date.
As part of the acquisition of GelTex, we acquired all of GelTex's interest
in RenaGel LLC, our joint venture with GelTex. Prior to the acquisition of
GelTex, we accounted for our investment in RenaGel LLC under the equity method.
The financial statements found herein reflect the consolidation of RenaGel LLC
into our financial statements and accounting for our purchase of GelTex's 50%
interest in the joint venture using the purchase method of accounting. Because
we already owned a 50% interest in RenaGel LLC, the assets of RenaGel LLC were
adjusted to fair value only to the extent of the 50% interest we acquired. We
intend that, as our wholly-owned subsidiary, GelTex will operate the same
business it operated before the merger.
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GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
COMBINED SELECTED FINANCIAL DATA (CONTINUED)
Because the earnings allocated to Genzyme General Stock are based on the
income or losses attributable to Genzyme General, we include financial
statements and management's discussion and analysis of Genzyme General to aid
investors in evaluating its performance.
As market or competitive conditions warrant, we may create new series of
tracking stock or change our earnings allocation methodology. However, at the
present time, we have no plans to do so.
COMBINED STATEMENTS OF OPERATIONS DATA
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
Revenues:
Net product sales....................... $690,027 $571,531 $509,727 $429,092 $373,769
Net service sales....................... 61,161 57,223 55,445 55,835 61,638
Revenues from research and development
contracts:
Related parties....................... 509 1,516 3,568 8,041 23,011
Other................................. 786 5,096 579 3,400 2,310
-------- -------- -------- -------- --------
Total revenues...................... 752,483 635,366 569,319 496,368 460,728
-------- -------- -------- -------- --------
Operating costs and expenses:
Cost of products sold(1)................ 162,894 115,125 138,802 146,226 123,276
Cost of services sold................... 37,879 35,637 34,240 35,451 42,889
Selling, general and administrative..... 166,462 149,427 126,172 118,616 107,219
Research and development (including
research and development related to
contracts)............................ 112,792 97,746 73,139 62,905 62,276
Amortization of intangibles............. 10,928 8,106 7,610 6,887 5,865
Purchase of in-process research and
development(2)........................ 118,048 5,436 -- -- 106,469
Other................................... -- -- -- -- 1,000
-------- -------- -------- -------- --------
Total operating costs and
expenses............................ 609,003 411,477 379,963 370,085 448,994
-------- -------- -------- -------- --------
Operating income.......................... 143,480 223,889 189,356 126,283 11,734
-------- -------- -------- -------- --------
Other income (expenses):
Equity in net loss of unconsolidated
affiliates............................ (44,965) (37,423) (19,739) (5,782) (3,656)
Gain on affiliate sale of stock(3)...... 22,689 6,683 2,369 -- 1,013
Gain on sale of investments in equity
securities(4)......................... 23,173 1,963 3,391 -- 1,711
Minority interest....................... 4,625 3,674 4,285 -- --
Gain on sale of product line(5)......... -- 8,018 31,202 -- --
Charge for impaired investments......... -- (5,712) (3,397) -- --
Other(6)................................ 5,203 14,389 -- (2,000) --
Investment income....................... 38,549 30,881 22,953 9,940 13,825
Interest expense........................ (14,159) (19,885) (16,994) (8,074) (6,784)
-------- -------- -------- -------- --------
Total other income (expenses)....... 35,115 2,588 24,070 (5,916) 6,109
-------- -------- -------- -------- --------
Income before income taxes.............. 178,595 226,477 213,426 120,367 17,843
Provision for income taxes.............. (92,639) (84,400) (80,374) (43,725) (28,530)
-------- -------- -------- -------- --------
Division net income (loss).............. $ 85,956 $142,077 $133,052 $ 76,642 $(10,687)
======== ======== ======== ======== ========
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GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
COMBINED SELECTED FINANCIAL DATA (CONTINUED)
COMBINED BALANCE SHEET DATA
DECEMBER 31,
------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- --------
(AMOUNTS IN THOUSANDS)
Cash and investments................ $ 531,326 $ 513,905 $ 556,097 $ 192,222 $169,543
Working capital..................... 438,733 487,561 381,685 273,697 340,817
Total assets........................ 2,499,053 1,399,583 1,410,391 960,490 975,910
Long-term debt, capital lease
obligations and convertible
debt(7)........................... 455,684 272,702 357,214 118,713 224,672
Division equity..................... $1,750,280 $1,007,614 $ 939,967 $ 745,895 $645,185
- ------------------------
(1) Cost of products sold for 1998 includes a $14.8 million charge to write-down
excess Ceredase-Registered Trademark- enzyme inventory. Cost of products
sold for 1997 includes a $18.1 million charge in connection with the
discontinuance of our melatonin, bulk pharmaceuticals and fine chemicals
product lines.
(2) Charges for in-process research and development were incurred in connection
with the following acquisitions:
- 2000--$118.0 million from the acquisition of GelTex;
- 1999--$5.4 million from the acquisition of Peptimmune, Inc.; and
- 1996--$106.4 million from the acquisition of Neozyme II Corporation.
(3) During 2000, in accordance with our policy pertaining to affiliate sales of
stock, we recorded gains of $22.7 million relating to public offerings of
common stock by our unconsolidated affiliate, Genzyme Trangenics
Corporation. In 1999, our gain on affiliate sale of stock represents the
gain on our investment in Genzyme Transgenics as a result of Genzyme
Transgenics' various issuances of additional shares of its common stock.
(4) In the second quarter of 2000, we recorded a gain of $5.5 million upon the
sale of a portion of our investment in Genzyme Transgenics common stock. The
tax effect of this gain was fully offset by the reversal of a $1.9 million
valuation allowance related to previously recognized capital losses. In the
third quarter of 2000, we recorded a gain of $10.9 million upon the sale of
a portion of our investment in Genzyme Transgenics common stock. In 2000, we
also recognized a $7.6 million gain relating to our investment in Celtrix
Pharmaceuticals, Inc. when it was acquired in a stock-for-stock transaction.
We recorded gains of $2.0 million in 1999 and $3.4 million in 1998 upon the
sales of shares of Techne Corporation common stock that we received when we
sold our research products business to Techne.
(5) Gain on sale of product line in 1999 consists of $7.5 million representing
the payment of a note receivable that we received as partial consideration
for the sale of Genetic Design, Inc. to Laboratory Corporation of America in
1996, and $0.5 million relating to the sale of our immunochemistry business
assets to an operating unit of Sybron Laboratory Products Corp. Gain on sale
of product line of $31.2 million in 1998 relates to the sale of our research
products business assets to Techne.
GG-4
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
COMBINED SELECTED FINANCIAL DATA (CONTINUED)
(6) Other income in 2000 includes a $5.1 million payment received in connection
with the settlement of a lawsuit. Other income in 1999 includes the receipt
of a $14.4 million payment associated with the termination of our agreement
to acquire Cell Genesys, Inc., net of acquisition related expenses.
(7) In 2000 consists primarily of $250.0 million in principal of our 5 1/4%
convertible subordinated notes, $150.0 million of debt drawn under our
revolving credit facility, and a $25.0 million capital lease obligation. In
1999 and 1998 consists primarily of $250.0 million in principal of 5 1/4%
convertible subordinated notes due June 2005. In 1997 consists primarily of
$100.0 million outstanding under a revolving credit facility and in 1996
consists primarily of $200.0 million outstanding under that facility.
GG-5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF GENZYME GENERAL'S FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
This discussion contains forward-looking statements. These forward-looking
statements represent the expectations of our management as of the filing date of
this annual report. Actual results could differ materially from those
anticipated by the forward-looking statements due to the risks and uncertainties
described under the caption "Factors Affecting Future Operating Results" for
Genzyme General and Genzyme Corporation included in this annual report. You
should consider carefully each of these risks and uncertainties in evaluating
the financial condition and results of operations of Genzyme General and
Genzyme.
We prepare the combined financial statements of Genzyme General in
accordance with generally accepted accounting principles. We present financial
information and accounting policies specific to Genzyme General in the
accompanying combined financial statements. We present financial information and
accounting policies relevant to the corporation and our operating divisions
taken as a whole in our consolidated financial statements. You should read our
consolidated financial statements in conjunction with the combined financial
statements of Genzyme General. Note A., "Summary of Significant Accounting
Policies," to our consolidated financial statements contains a summary of our
accounting policies.
Genzyme General Division common stock, which we refer to as "Genzyme General
Stock," is a series of our common stock that is designed to reflect the value
and track the performance of Genzyme General. The chief mechanisms intended to
cause Genzyme General Stock to "track" the financial performance of Genzyme
General are provisions in our charter governing dividends and distributions.
Under these provisions, our charter factors the assets and liabilities and
income or losses attributable to Genzyme General into the determination of the
amount available to pay dividends on Genzyme General Stock.
To determine earnings per share, we allocate our earnings to each series of
our common stock based on the earnings attributable to that series of stock. The
earnings attributable to Genzyme General Stock is defined in our charter as the
net income or loss of Genzyme General determined in accordance with generally
accepted accounting principles and as adjusted for tax benefits allocated to or
from Genzyme General in accordance with our management and accounting policies.
Our charter also requires that all of our income and expenses be allocated among
our divisions in a reasonable and consistent manner. However, subject to its
fiduciary duties, our board of directors can, at its discretion, change the
methods of allocating earnings to each series of common stock. We intend to
allocate earnings using our current methods for the foreseeable future.
Because the earnings allocated to Genzyme General Stock are based on the
income or losses attributable to Genzyme General, we include financial
statements and management's discussion and analysis of Genzyme General to aid
investors in evaluating its performance.
While Genzyme General Stock is designed to reflect Genzyme General's
performance, it is common stock of Genzyme Corporation and not Genzyme General;
Genzyme General is a division, not a company or legal entity, and therefore does
not and cannot issue stock. Consequently, holders of Genzyme General Stock have
no specific rights to assets allocated to Genzyme General. Genzyme Corporation
continues to hold title to all of the assets allocated to Genzyme General and is
responsible for all of its liabilities, regardless of what we deem for financial
statement presentation purposes as allocated to Genzyme General. Holders of
Genzyme General Stock, as common stockholders, are therefore subject to the
risks of investing in the businesses, assets and liabilities of Genzyme as a
whole. For instance, the assets allocated to Genzyme General are subject to
company-wide claims of creditors, product liability plaintiffs and stockholder
litigation. Also, in the event of a Genzyme
GG-6
liquidation, insolvency or similar event, holders of Genzyme General Stock and
other tracking stockholders would only have the rights of common stockholders in
the combined assets of Genzyme.
Our charter requires us to manage and account for transactions between
Genzyme General and our other divisions and with third parties, and any
resulting reallocations of assets and liabilities, by applying consistently
across divisions a detailed set of policies established by our board of
directors. We publicly disclose our divisional management and accounting
policies, which are filed as Exhibit 99.1 to this annual report. Our charter
requires that all of our assets and liabilities be allocated among our
divisions. Our board of directors, however, retains considerable discretion in
determining the types, magnitude and extent of allocations to each series of
common stock without shareholder approval.
In June 1999, we established Genzyme Surgical Products as a separate
division of Genzyme. Genzyme General transferred $150.0 million in cash, cash
equivalents and investments, and certain other assets, to Genzyme Surgical
Products in connection with the creation of Genzyme Surgical Products. The
business of Genzyme Surgical Products previously operated as a business unit of
Genzyme General. These financial statements reflect the financial position,
results of operations and cash flows allocated to Genzyme General as if the
operations of Genzyme Surgical Products had been separately accounted for as its
own division of the corporation for all periods presented. By excluding Genzyme
Surgical Products' results of operations, and therefore its operating losses,
from Genzyme General's results, the net income of Genzyme General has increased
for all periods presented. Genzyme General's tax provision also increased
because the tax benefits associated with Genzyme Surgical Products losses are
not reflected in Genzyme General's tax provision. Although such benefits are
allocated to Genzyme General Stock in the determination of Genzyme's earnings
allocations, those benefits do not enter into the determination of Genzyme
General's tax provision under generally accepted accounting principles.
The impact on Genzyme General's net income of the exclusion of Genzyme
Surgical Products' results of operations, through June 1999, were as follows (in
thousands):
1999 1998
-------- --------
Genzyme Surgical Products net loss.......................... $48,037 $49,856
Tax benefit................................................. (16,128) (17,936)
------- -------
Increase in Genzyme General's net income.................... $31,909 $31,920
======= =======
These increases represented 22% and 24% of Genzyme General's net income for
the years ended December 31, 1999 and 1998, respectively.
On December 18, 2000, we completed our acquisition of Biomatrix. The
acquisition was structured as a merger of Biomatrix with and into one of our
wholly-owned subsidiaries pursuant to an Agreement and Plan of Merger dated as
of March 6, 2000, as amended. Concurrent with the completion of our acquisition
of Biomatrix, we amended our charter to create Biosurgery Stock and to eliminate
Surgical Products Division common stock and Genzyme Tissue Repair Division
common stock. The combination reduces the segregation of assets among our
divisions and reduces the number of series of our common stock outstanding.
Following the merger, the tax benefits generated by Genzyme Biosurgery are being
allocated to Genzyme General Stock pursuant to our management and accounting
policies.
We present earnings per share and earnings allocation data for Genzyme
General Stock in our consolidated financial statements. We present financial
information and accounting policies specific to Genzyme General in the
accompanying combined financial statements. We present financial information and
accounting policies relevant to the corporation and our operating divisions
taken as a whole in our consolidated financial statements. You should,
therefore, read this discussion and analysis of Genzyme General's financial
position and results of operations in conjunction with the financial statements
and related notes of Genzyme General, the discussion and analysis of Genzyme's
financial
GG-7
position and results of operations, and the consolidated financial statements
and related notes of Genzyme, all of which are included in this annual report.
RESULTS OF OPERATIONS
The following discussion summarizes the key factors our management believes
are necessary for an understanding of Genzyme General's financial statements.
The components of Genzyme General's combined statements of operations are
described in the following table:
00/99 99/98
INCREASE/ INCREASE/
(DECREASE) (DECREASE)
2000 1999 1998 % CHANGE % CHANGE
-------- -------- -------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Total revenues............................ $752,483 $635,366 $569,319 18% 12%
Cost of products and services sold........ 200,773 150,762 173,042 33% (13)%
Selling, general and administrative....... 166,462 149,427 126,172 11% 18%
Research and development (including
research and development related to
contracts).............................. 112,792 97,746 73,139 15% 34%
Amortization of intangibles............... 10,928 8,106 7,610 35% 7%
Purchase of in-process research and
development............................. 118,048 5,436 -- 2,072% N/A
-------- -------- --------
Total operating costs and expenses.... 609,003 411,477 379,963 48% 8%
-------- -------- --------
Operating income.......................... 143,480 223,889 189,356 (36)% 18%
Other income, net......................... 35,115 2,588 24,070 1,257% (89)%
-------- -------- --------
Income before income taxes................ 178,595 226,477 213,426 (21)% 6%
Provision for income taxes................ (92,639) (84,400) (80,374) 10% 5%
-------- -------- --------
Division net income....................... $ 85,956 $142,077 $133,052 (40)% 7%
======== ======== ========
REVENUES
00/99 99/98
INCREASE/ INCREASE/
(DECREASE) (DECREASE)
2000 1999 1998 % CHANGE % CHANGE
-------- -------- -------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Product revenue........................... $690,027 $571,531 $509,727 21% 12%
Service revenue........................... 61,161 57,223 55,445 7% 3%
-------- -------- --------
Total product and service revenue... 751,188 628,754 565,172 19% 11%
Research and development revenue.......... 1,295 6,612 4,147 (80)% 59%
-------- -------- --------
Total revenues...................... $752,483 $635,366 $569,319 18% 12%
======== ======== ========
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The following table describes Genzyme General's product and service revenue
on a segment basis:
00/99 99/98
INCREASE/ INCREASE/
(DECREASE) (DECREASE)
2000 1999 1998 % CHANGE % CHANGE
-------- -------- -------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Product Revenue:
Therapeutics:
Cerezyme-Registered Trademark-/Ceredase-Registered Trademark-
enzyme................................ $536,868 $478,538 $411,060 12% 16%
Renagel-Registered Trademark-
phosphate binder...................... 47,891 -- -- 100% N/A
Thyrogen-Registered Trademark-
hormone............................... 13,709 8,300 2,585 65% 221%
Other therapeutic products............ 1,869 1,867 -- -- 100%
-------- -------- --------
Total Therapeutics.................. 600,337 488,705 413,645 23% 18%
Diagnostic Products..................... 61,469 57,971 65,683 6% (12)%
Other................................... 28,221 24,855 30,399 14% (18)%
-------- -------- --------
Total product revenue............... 690,027 571,531 509,727 21% 12%
Service Revenue:
Other................................... 61,161 57,223 55,445 7% 3%
-------- -------- --------
TOTAL PRODUCT AND SERVICE REVENUE......... $751,188 $628,754 $565,172 19% 11%
======== ======== ========
THERAPEUTICS
The increases in Genzyme General's product revenue for both the periods
ended December 31, 2000 as compared to the period ended December 31, 1999 and
December 31, 1999 as compared to December 31, 1998, were primarily due to
increased sales of Cerezyme-Registered Trademark- enzyme. The increases were
attributable to Genzyme General's continued identification of new Gaucher
disease patients worldwide, coupled with significant investment in our global
infrastructure that resulted in increased international sales. In addition,
Genzyme General continues to market Ceredase-Registered Trademark- enzyme for
the treatment of Gaucher disease, although it has successfully converted
virtually all Gaucher disease patients to a treatment regimen using
Cerezyme-Registered Trademark- enzyme.
Genzyme General's results of operations are highly dependent upon sales of
Cerezyme-Registered Trademark- enzyme. Consequently, a reduction in revenue from
sales of this product would adversely affect its results of operations.
The following table provides information regarding the change in sales of
Genzyme General's Gaucher disease therapies as a percentage of total product
revenue during the periods presented:
00/99 99/98
INCREASE/ INCREASE/
(DECREASE) (DECREASE)
2000 1999 1998 % CHANGE % CHANGE
-------- -------- -------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Sales of Cerezyme-Registered Trademark-
enzyme and
Ceredase-Registered Trademark- enzyme... $536,868 $478,538 $411,060 12% 16%
% of total product revenue................ 78% 84% 81%
Although sales of Genzyme General's Gaucher disease therapies continue to
increase, the decline as a percentage of total product revenue is a trend we
expect will continue in 2001. We expect that growth in the sales of
Renagel-Registered Trademark- phosphate binder (sevelamer hydrochloride) will
increase substantially in 2001, driven primarily by the accelerating adoption of
the product by nephrologists worldwide, coupled with an increase in prescribed
dosage levels.
GG-9
Genzyme General began recording revenues from Renagel-Registered Trademark-
phosphate binder during the second quarter of 2000 under an amended distribution
arrangement with GelTex, who we have since acquired. Revenues from
Renagel-Registered Trademark- phosphate binder were previously recorded by the
joint venture. Renagel-Registered Trademark- phosphate binder is used to reduce
serum phosphorus levels in patients with end-stage renal disease on dialysis.
Revenues from sales of Renagel-Registered Trademark- phosphate binder include
sales of Renagel-Registered Trademark- capsules and the new tablet formulation,
which was launched in the United States in September 2000.
Therapeutics revenues include sales of Thyrogen-Registered Trademark-
hormone, which is an adjunctive diagnostic tool for well differentiated thyroid
cancer. Revenues for Thyrogen-Registered Trademark- hormone increased in the
period ended December 31, 2000 due primarily to increased market penetration. We
commenced commercial sales of Thyrogen-Registered Trademark- hormone in
January 1999.
DIAGNOSTIC PRODUCTS
The increase in diagnostic products revenue for the period ended
December 31, 2000 as compared to the period ended December 31, 1999 resulted
primarily from increases in sales of HDL and LDL cholesterol testing products.
This increase more than offset the decrease in diagnostic products revenue for
the period ended December 31, 1999 as compared to the period ended December 31,
1998, which reflected the sale of the research products business to Techne
Corporation in July 1998 and the sale of our immunochemistry (e.g., bioreagent
and ELISA) product lines to an operating unit of Sybron Laboratory Products
Corp. in July 1999. Diagnostic product revenue includes royalties on product
sales by Techne's biotechnology group.
OTHER
The increases in other revenue for both periods ended December 31, 2000 as
compared to December 31, 1999 and December 31, 1999 as compared to December 31,
1998, were primarily attributable to increases in genetic testing services.
Other revenue also includes revenue generated from the sale of lipids, peptides
and liquid crystals for drug delivery.
INTERNATIONAL PRODUCT AND SERVICE REVENUE
A substantial portion of Genzyme General's revenue was generated outside of
the United States, as described in the following table. These revenues were
attributable primarily to sales of Cerezyme-Registered Trademark- enzyme. The
increases for both the periods ended December 31, 2000 as compared to
December 31, 1999 and December 31, 1999 as compared to December 31, 1998 were
primarily attributable to Genzyme General's continued identification of new
Gaucher disease patients worldwide, coupled with significant investment in our
global infrastructure that resulted in increased international sales.
00/99 99/98
INCREASE/ INCREASE/
(DECREASE) (DECREASE)
2000 1999 1998 % CHANGE % CHANGE
-------- -------- -------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
International product and service
revenue................................. $314,914 $273,851 $248,363 15% 10%
% of total product and service revenue.... 42% 44% 44%
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MARGINS
00/99 99/98
INCREASE/ INCREASE/
(DECREASE) (DECREASE)
2000 1999 1998 % CHANGE % CHANGE
-------- -------- -------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Product margin............................ $527,133 $456,406 $370,925 15% 23%
% of product revenue.................... 76% 80% 73%
Service margin............................ 23,282 21,586 21,205 8% 2%
% of service revenue.................... 38% 38% 38%
Total gross margin........................ 550,415 477,992 392,130 15% 22%
% of total product and service
revenue................................. 73% 76% 69%
Genzyme General provides a broad range of healthcare products and services.
As a result, Genzyme General's gross margin varies significantly based on the
category of product or service. Sales of therapeutic products, including
Cerezyme-Registered Trademark- enzyme, typically result in higher margins than
sales of diagnostic products.
PRODUCT MARGIN:
Product margin for both the periods continued to increase primarily as a
result of increased sales of Cerezyme-Registered Trademark- enzyme in both 2000
and 1999 and Renagel-Registered Trademark- phosphate binder in 2000. While this
trend continued, the decrease in product margin as a percentage of product
revenue for the period ended December 31, 2000 was attributable to the addition
of Renagel-Registered Trademark- phosphate binder, a lower margin product. In
addition, in the fourth quarter of 2000 Genzyme General recorded a $1.5 million
credit to cost of products sold as a result of a reduction in a royalty
liability to a collaborator. This credit was taken when it became apparent that,
based on the contractual terms and timing of certain events, we would not be
required to pay that portion of the royalty obligation. The increase in product
margin as a percentage of product revenue for the period ended December 31, 1999
resulted from increased efficiency and process improvements in manufacturing
Cerezyme-Registered Trademark- enzyme.
During 1998, Genzyme General recorded a $14.8 million charge to cost of
products sold to write down excess inventory used to make
Ceredase-Registered Trademark- enzyme. Without the effect of this charge,
Genzyme General's product margin for 1998 would have been 76% and its total
gross margin during that period would have been 72%.
SERVICE MARGIN:
Service margin for both periods ended December 31, 2000 as compared to
December 31, 1999 and December 31, 1999 as compared to December 31, 1998,
continued to increase primarily as a result of increased sales of our DNA and
cancer testing services. While this trend continued, service margin as a
percentage of service revenue for both periods remained flat as the cost of
services sold increased at a rate comparable to the increase in service revenue.
OPERATING EXPENSES
The increase in selling, general and administrative expenses for the period
ended December 31, 2000 as compared to the period ended December 31, 1999 is
primarily related to:
- increased staffing to support the growth in several of Genzyme General's
product lines, including Renagel-Registered Trademark- phosphate binder;
and
- increased expenditures to support the increased sales of
Cerezyme-Registered Trademark- enzyme and Thyrogen-Registered Trademark-
hormone.
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The increase in selling, general and administrative expenses for the period
ended December 31, 1999 as compared to the period ended December 31, 1998 is
related to:
- increased staffing to support the growth in several of Genzyme General's
product lines;
- a $3.0 million increase to the reserve for doubtful accounts in Genzyme
General's genetic testing business as a result of a comprehensive review
of contract receivables and self-pay receivables during 1999;
- costs associated with the market introduction of
Thyrogen-Registered Trademark- hormone in January 1999; and
- increased expenditures to support the increased sales of
Cerezyme-Registered Trademark- enzyme.
In the fourth quarter of 2000, Genzyme General reversed $2.6 million of our
allowance for bad debt, much of which had been accrued during 2000. This
reversal was made due to changes in circumstances regarding, and estimates for,
certain domestic and foreign receivables. The increase in research and
development expense for the period ended December 31, 2000 as compared to the
period ended December 31, 1999 is primarily related to:
- a charge of $19.5 million during the first quarter of 2000 for the initial
amounts payable to Synpac (North Carolina), Inc. under a license agreement
granted to us by Synpac to develop and commercialize a human
alpha-glucosidase enzyme replacement therapy for Pompe disease, offset by
a $10.3 million research and development reimbursement from Pharming
Group, N.V.
- a charge of $2.0 million in the third quarter of 2000, representing the
15% premium to the market price that we paid for ordinary shares of
Cambridge Antibody Technology Group plc concurrently with entry into a
strategic alliance to develop and commercialize human monoclonal
antibodies directed against TGF-beta ;
- increased spending on our program to develop
Fabrazyme-Registered Trademark- enzyme for the treatment of Fabry disease;
- increased costs in connection with the operations of ATIII LLC, our
consolidated joint venture with Genzyme Transgenics Corporation to develop
and commercialize recombinant human antithrombin III; and
- increased spending in our cell and gene therapy programs.
The increase in research and development expense for the period ended
December 31, 1999 as compared to the period ended December 31, 1998 is a result
of:
- increased costs for the program to develop transgenic recombinant
humanantithrombin III, which is conducted through our consolidated joint
venture, ATIII LLC, discussed in "--Minority Interest" below;
- increased spending on Genzyme General's program to develop
Fabrazyme-Registered Trademark- enzyme for the treatment of Fabry disease;
and
- increased spending on Genzyme General's cell and gene therapy programs.
In the fourth quarter of 1998, Genzyme General began amortizing a milestone
payment that it made to GelTex upon FDA approval of
Renagel-Registered Trademark- capsules. As a result, amortization of intangibles
increased slightly during 1999 as compared to 1998.
PURCHASE OF IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with the purchase of GelTex, Genzyme General allocated
approximately $118.0 million of the purchase price to in-process research and
development, or IPR&D. Although
GG-12
management ultimately is responsible for determining the fair value of the
acquired IPR&D, we engaged an independent third-party appraisal company to
assist in the valuation of the intangible assets acquired.
The fair value assigned to purchased IPR&D was estimated by discounting, to
present value, the cash flows expected to result from each project once it has
reached technological feasibility. The discount rates used were consistent with
the risks of each project, and ranged from 35% to 40%. In estimating future cash
flows, management considered other tangible and intangible assets, including
core technology, required for successful exploitation of the technology
resulting from each purchased IPR&D project and adjusted future cash flows for a
charge reflecting the contribution to value of these assets. The value assigned
to purchased research and development was the amount attributable to the efforts
of GelTex up to the time of acquisition. This amount was estimated through
application of the "stage of completion" calculation, which calculation involves
multiplying total estimated revenue for IPR&D by the percentage of completion of
each purchased research and development project at the time of acquisition.
The significant assumptions underlying the valuations included potential
revenues, costs of completion, the timing of product approvals and the selection
of appropriate probability of success and discount rate. None of the GelTex
IPR&D projects had reached technological feasibility at the date of acquisition,
nor did they have any alternative future use. Consequently, in accordance with
generally accepted accounting principles, the amount allocated to IPR&D was
charged as an expense in Genzyme General's financial statements for the year
ended December 31, 2000. Genzyme General is amortizing the remaining acquired
intangible assets arising from the acquisition on a straight-line basis over
their estimated lives, which range from five years to 15 years.
GG-13
Below is a brief description of the IPR&D projects, including an estimation
of when management believes Genzyme General may realize revenues from the sale
of these products in the respective application:
ESTIMATED
VALUE AT TO
ACQUISITION COST
DATE COMPLETE
(IN (IN
PROGRAM PROGRAM DESCRIPTION DEVELOPMENT STATUS MILLIONS) MILLIONS)
- ------- ----------------------- ----------------------- ----------- ---------
Renagel-Registered Trademark- Non-absorbed polymer - Clinical studies $ 19.7 $ 20.0
phosphate binder phosphate binder for scheduled for
the treatment of completion in
hyperphosphatemia 2002, 2003 and
2004
C. DIFFICILE Colitis Program to develop a - Phase 2 studies 37.4 37.0
toxin-binding polymer initiated in 2000
for the treatment and - Approval to
prevention of market this
antibiotic induced C. product in the
DIFFICILE colitis U.S. is expected
by 2005
Oral Mucositis Focuses on the - IND expected to 17.8 25.0
development of a be filed in the
topical mouth rinse fourth quarter of
that combines barrier 2001
material and - Product launch
antimicrobial polymers expected in 2006
to create an anti-
infective mechanism
against oral mucositis,
a common side effect of
radiation therapy and
chemotherapy
DENSPM Focuses on the - Phase 1 safety 3.4 30.0
development of a and dose-ranging
compound for the studies scheduled
treatment of mild to for 2001
moderate psoriasis - Product launch is
anticipated in
2005
Iron Chelation Focuses on the - Expect to file an 15.7 31.0
prevention and IND in 2001
treatment of - Expected product
transfusional or launch in 2006
hereditary iron
overload
GG-14
ESTIMATED
VALUE AT TO
ACQUISITION COST
DATE COMPLETE
(IN (IN
PROGRAM PROGRAM DESCRIPTION DEVELOPMENT STATUS MILLIONS) MILLIONS)
- ------- ----------------------- ----------------------- ----------- ---------
Anti-Obesity Builds on GelTex's - Expect to file an 17.8 39.0
expertise in non- IND early in 2002
absorbed polymers and - Expected product
focuses on the launch in 2006
development of a
compound that will
inhibit lipase and bind
fat
GT102-279 Second generation - Completion of 6.2 N/A(1)
lipid-lowering compound clinical studies
with attributes of expected in late
GelTex's WelChol-TM- 2003 with product
lipid lowering agent, launch in 2004
but requires 50% fewer
tablets.
------ ------
$118.0 $182.0
====== ======
- ------------------------
(1) Future development costs will be funded by our collaborator partner
In 1999, we acquired Peptimmune, Inc., a privately held company whose lead
development program was a preclinical research stage program focused on a
treatment for pemphigus vulgaris, a rare genetic disease, and allocated it to
Genzyme General. Because the technology acquired had narrow utility and no
application to our ongoing programs, we considered it to have no alternative
future use. As a result, we allocated $5.4 million of the purchase price to
in-process technology. We recorded this amount as a one-time charge to
operations in 1999.
We record our expenses related to the development of the acquired technology
as research and development expense until the time at which it reaches
technological feasibility. Given the inherent risk in developing early-stage
biotechnology products, we may never demonstrate the feasibility of that
technology. For more information about these risks, you should read the
subsection "--Factors Affecting Future Operating Results" below. In addition,
given the history of consolidation in the biotechnology industry, we expect that
we will probably complete additional acquisitions in the future. Some of these
acquisitions will probably result in a further investment by us in in-process
technology.
As of December 31, 2000, the technological feasibility of the above projects
had not yet been reached and no significant departures from the assumptions
included in the valuation analysis had occurred. Substantial additional research
and development will be required prior to reaching technological feasibility. In
addition, each product needs to successfully complete a series of clinical
trials and to receive FDA or other regulatory approval prior to
commercialization. There can be no assurance that these projects will ever reach
feasibility or develop into products that can be marketed profitably, nor can
there be assurance Genzyme General will be able to develop and commercialize
these products before its competitors. If these products are not successfully
developed and do not become commercially viable, our results of operations could
be materially affected.
GG-15
OTHER INCOME AND EXPENSES
00/99 99/98
INCREASE/ INCREASE/
(DECREASE) (DECREASE)
2000 1999 1998 % CHANGE % CHANGE
-------- -------- -------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Equity in net loss of unconsolidated
affiliates............................... $(44,965) $(37,423) $(19,739) 20% 90%
Gain on affiliate sale of stock............ 22,689 6,683 2,369 240% 182%
Gain on sale of investments in equity
securities............................... 23,173 1,963 3,391 1,080% (42)%
Minority interest in net loss of
subsidiary............................... 4,625 3,674 4,285 26% (14)%
Gain on sale of product line............... -- 8,018 31,202 (100)% (74)%
Charge for impaired investments............ -- (5,712) (3,397) (100)% 68%
Other...................................... 5,203 14,389 -- (64)% N/A
Investment income.......................... 38,549 30,881 22,953 25% 35%
Interest expense........................... (14,159) (19,885) (16,994) (29)% 17%
-------- -------- --------
Total other income, net................ $ 35,115 $ 2,588 $ 24,070 1,257% (89)%
======== ======== ========
EQUITY IN NET LOSS OF UNCONSOLIDATED AFFILIATES:
Genzyme General records in equity in net loss of unconsolidated affiliates
its portion of the results of its joint ventures with GelTex, BioMarin
Pharmaceutical Inc., Pharming and Diacrin, Inc. Genzyme General also records a
portion of the results of Genzyme Transgenics in equity in net loss of
unconsolidated affiliates.
Genzyme General's equity in net loss of unconsolidated affiliates increased
in both the years ended December 31, 2000 as compared to December 31, 1999 and
December 31, 1999 as compared to December 31, 1998 as a result of:
- increased losses from RenaGel LLC, our joint venture with GelTex to
develop and commercialize Renagel-Registered Trademark- capsules and
tablets;
- increased losses from our joint venture with BioMarin to develop and
commercialize Aldurazyme-TM- enzyme for the treatment of
mucopolysaccharidosis-I, which was formed in September 1998;
- increased losses from our joint ventures with Pharming to develop a
therapy for Pompe disease;
- the reallocation of our joint venture with Diacrin from Genzyme Biosurgery
to Genzyme General in May 1999; and
- increased losses from Genzyme Transgenics.
GAIN ON AFFILIATE SALE OF STOCK
In February 2000, Genzyme Transgenics, an unconsolidated affiliate,
completed an offering of 4.0 million shares of Genzyme Transgenics common stock,
resulting in net proceeds to Genzyme Transgenics of $75.0 million after the
exercise of the underwriter overallotment option. In accordance with our policy
pertaining to affiliate sales of stock, Genzyme General recognized a gain of
$20.3 million and recorded a net deferred tax expense of $3.9 million in the
first quarter of 2000. The deferred tax expense is net of a $3.4 million credit
for the reversal of the valuation allowance on a deferred tax asset. In
September 2000, Genzyme General recorded an additional gain of $2.4 million on
our investment in Genzyme Transgenics as a result of the issuance of additional
shares of common stock by Genzyme Transgenics.
GG-16
Genzyme General recorded a $6.7 million gain in 1999 and a $2.4 million gain
in 1998. The issuance of additional shares by Genzyme Transgenics in 1999
reduced our ownership interest in Genzyme Transgenics from 40% to 33%. The
issuance of additional shares by Genzyme Transgenics in 1998 reduced our
ownership interest in Genzyme Transgenics from 43% to 40%. As of December 31,
2000, our ownership interest in Genzyme Transgenics was 26% as compared to 33%
as of December 31, 1999.
GAIN ON SALE OF INVESTMENTS IN EQUITY SECURITIES
In June 2000, Genzyme General recorded a gain of $5.5 million upon the sale
of a portion of our investment in Genzyme Transgenics common stock. During the
second quarter of 2000, the tax effect of this gain was fully offset by the
reversal of a $1.9 million valuation allowance related to previously recognized
capital losses. In the third and fourth quarters of 2000, Genzyme General
recorded gains of $10.9 million and $1.3 million, respectively, upon additional
sales of portions of our investment in Genzyme Transgenics common stock.
In June 2000, Celtrix Pharmaceuticals, Inc. was acquired by Insmed
Pharmaceuticals Inc. At that time, our shares of Celtrix common stock were
exchanged on a 1-for-1 basis for shares of Insmed common stock. We recognized a
$7.6 million gain upon this exchange in the second quarter of 2000.
Genzyme General recorded gains of $2.0 million in January 1999 and
$3.4 million in December 1998 upon the sales of shares of Techne Corporation
common stock that it received when it sold its research products business to
Techne Corporation.
MINORITY INTEREST IN NET LOSS OF SUBSIDIARY
Due to our combined direct and indirect ownership interest in ATIII LLC,
Genzyme General consolidates the results of ATIII LLC and records Genzyme
Transgenics' portion of the losses of that joint venture as minority interest.
Minority interest for both periods increased due to increased losses incurred by
ATIII LLC.
In 1998, we formed ATIII LLC, a joint venture with Genzyme Transgenics for
the development and commercialization of transgenic recombinant human
antithrombin III. The collaboration agreement provides that Genzyme General fund
70% of the first $33.0 million in development costs, excluding facility costs,
under this program, 50% of all development costs thereafter and 50% of all new
facility costs incurred by ATIII LLC. However, under an interim funding
agreement, Genzyme General shared the costs of this program incurred between
January 1, 2001 and February 2, 2001 equally with Genzyme Transgenics. Under
this agreement, Genzyme Transgenics is funding 100% of the costs incurred
between February 3, 2001 and April 30, 2001 unless the agreement is terminated
sooner. All profits of ATIII LLC will be split equally; losses are allocated
based on the amount of funding provided by each venturer. Because Genzyme
General's combined direct and indirect interest in ATIII LLC is in excess of
50%, it consolidates the results of ATIII LLC and records Genzyme Transgenics'
portion of the ATIII LLC's losses as minority interest. In 2000, ATIII LLC had
losses of $14.8 million, of which Genzyme Transgenics' portion was
$4.6 million. ATIII LLC had losses of $12.2 million in 1999, of which Genzyme
Transgenics' portion was $3.7 million. In 1998, ATIII LLC had losses of
$12.0 million, of which Genzyme Transgenics' portion was $4.3 million.
GAIN ON SALE OF PRODUCT LINE
There were no product line sales transacted during the year ended
December 31, 2000.
In July 1999, Genzyme General recorded a gain of $0.5 million in connection
with the sale of its immunochemistry product lines to an operating unit of
Sybron Laboratory Products Corporation.
GG-17
In June 1999, Genzyme General recorded a gain of $7.5 million representing
the receipt of a payment of a note receivable that it received as partial
consideration for the sale of Genetic Design in 1996. Genzyme General had
previously fully reserved the amount of this note because it considered the
repayment of the note to be uncertain.
In July 1998, Genzyme General recorded a gain of $31.2 million in connection
with the sale of its research products business to Techne.
CHARGE FOR IMPAIRED INVESTMENTS
There were no impairment charges for investments allocated to Genzyme
General during the year ended December 31, 2000.
Genzyme General recorded a $5.7 million charge in 1999 in connection with
its investments in the common stock of Pharming and IntegraMed America, Inc.,
and a $3.4 million charge in 1998 in connection with its investment in the
common stock of Celtrix because we considered the decline in the value of those
investments to be other than temporary.
In connection with these assessments, we concluded that substantial evidence
existed that the value of the investments would recover to at least its cost.
This evidence included:
- continued positive progress in the issuers' scientific programs;
- ongoing activity in Genzyme General's collaborations with the issuer; and
- a lack of any substantial company-specific adverse events causing the
declines in value.
However, given the significance and duration of the declines as of the end of
the applicable quarter, we concluded that it was unclear over what period any
price recoveries would take place and that, accordingly, the positive evidence
suggesting that the investments would recover to at least Genzyme General's
purchase price was not sufficient to overcome the presumption that the current
market price was the best indicator of the value of these investments.
OTHER
In December 2000, Genzyme General recorded a $2.1 million charge in
connection with our uncertainty in collecting a note receivable that we issued
in May 1999 to a strategic collaborator. We concluded that collectibility was
uncertain as a result of the FDA's ruling to deny approval of the collaborator's
New Drug Application for a key product. The ruling has subsequently resulted in
the collaborator announcing that it will be taking steps to reserve cash by
reducing its workforce and other operating expenses.
In April 2000, Genzyme General received net proceeds of approximately
$5.1 million in connection with the settlement of a lawsuit. The lawsuit,
initiated in 1993, pertained to insurance coverage for an accidental spill of
Ceredase-Registered Trademark- enzyme at a fill facility operated by a
contractor to Genzyme General.
In December 1999, Genzyme General recorded a net gain of $14.4 million upon
receipt of a payment associated with the termination of an agreement to acquire
Cell Genesys.
INVESTMENT INCOME
The increase in investment income for both the years ended December 31, 2000
as compared to December 31, 1999 and December 31, 1999 as compared to
December 31, 1998 was primarily attributable to higher average cash and
investment balances. The increase in cash balances was partially attributable to
the May 1998 issuance of $250.0 million in principal of 5 1/4% convertible
subordinated notes coupled with increased cash generated from operations for the
last three periods.
GG-18
INTEREST EXPENSE
The decrease in interest expense for the year ended December 31, 2000 as
compared to the year ended December 31, 1999 is the result of our November 1999
repayment of $82.0 million outstanding under our revolving credit facility,
which had been allocated to Genzyme General.
The increase in interest expense for the year ended December 31, 1999 as
compared to the year ended December 31, 1998 is primarily the result of the
issuance of the $250.0 million in principal of our 5 1/4% convertible
subordinated notes.
TAX PROVISION
00/99 99/98
INCREASE/ INCREASE/
(DECREASE) (DECREASE)
2000 1999 1998 % CHANGE % CHANGE
-------- -------- -------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Provision for income taxes................ $(92,639) $(84,400) $(80,374) 10% 5%
Effective tax rate before certain
charges................................. 31% 36% 38%
Effective tax rate........................ 44% 37% 38%
Genzyme General's tax rates for all periods vary from the U.S. statutory tax
rate as a result of its:
- share of losses of foreign subsidiaries and unconsolidated affiliates with
no current tax benefit;
- provision for state income taxes;
- use of a foreign sales corporation;
- nondeductible amortization of intangibles; and
- use of tax credits.
Genzyme General's 2000 effective tax rate was adversely impacted by charges for
purchased in-process research and development resulting from our acquisition of
GelTex in December 2000.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, Genzyme General's cash, cash-equivalents, and short-
and long-term investments increased $17.4 million to $531.3 million as compared
to $513.9 million at December 31, 1999.
Genzyme General generated $244.3 million in cash from operations for the
year ended December 31, 2000 as compared to $284.8 million for the year ended
December 31, 1999.
Genzyme General's investing activities utilized $424.7 million for the year
ended December 31, 2000 as compared to $192.7 million for the year ended
December 31, 1999. Investing activities in 2000 include:
- $447.5 million of cash used to fund the acquisition of GelTex in December
2000;
- $72.6 million of cash used to fund capital expenditures; and
- $23.5 million of cash used to fund Genzyme General's investments in joint
ventures.
The foregoing amounts were offset by:
- the sale of a portion of our investments in equity securities that
provided $33.1 million in cash, of which $14.9 million represented the net
proceeds from the sale of a portion of our investment in Genzyme
Transgenics common stock;
GG-19
- the net of investment purchases and sales that provided $106.6 million in
cash.
During the year ended December 31, 2000, Genzyme General was allocated
$85.3 million in cash from exercises of options to purchase shares of Genzyme
General Stock and issuances of Genzyme General Stock under our employee stock
purchase plan.
Genzyme General, together with our other operating divisions, has access to
our $500.0 million revolving credit facility, $150.0 million of which matures in
December 2001 and $350.0 million of which matures in December 2003. At
December 31, 2000, $18.0 million was outstanding under the facility that matures
in December 2001. In addition, $350.0 million was outstanding under the facility
that matures in December 2003, $150.0 million of which was allocated to Genzyme
General in connection with the financing of a portion of the cash component of
the GelTex merger consideration. Borrowings under this facility bear interest at
LIBOR plus a margin.
At December 31, 2000, $15.0 million of Genzyme General's cash remained
available to Genzyme Molecular Oncology under a $30.0 million interdivisional
financing arrangement with Genzyme General. In April 2000, Genzyme Molecular
Oncology drew $15.0 million in cash under this arrangement in exchange for
676,254 Molecular Oncology designated shares. Molecular Oncology designated
shares are shares of Molecular Oncology stock that are created when cash or
other assets are transferred from Genzyme General to Genzyme Molecular Oncology.
The proceeds from the sale of these shares will be allocated to Genzyme General.
At December 31, 2000, $10.0 million of Genzyme General's cash remained
available to Genzyme Biosurgery under a $20.0 million interdivisional financing
arrangement with Genzyme General. This arrangement was assumed by Genzyme
Biosurgery from Genzyme Tissue Repair upon the formation of Genzyme Biosurgery
in December 2000. In March and September 2000, Genzyme Tissue Repair made
$5.0 million draws under this arrangement in exchange for an aggregate of
1,692,657 Genzyme Tissue Repair designated shares. Upon the formation of Genzyme
Biosurgery, these shares were converted into 567,379 Biosurgery designated
shares. Biosurgery designated shares are shares of Biosurgery Stock that are
created when cash or other assets are transferred from Genzyme General to
Genzyme Biosurgery. The proceeds from the sale of these shares will be allocated
to Genzyme General.
We believe that Genzyme General's available cash, investments and cash flows
from operations will be sufficient to fund its planned operations and capital
requirements for the foreseeable future. Although Genzyme General currently has
substantial cash resources and positive cash flow, it intends to use substantial
portions of its available cash for:
- product development and marketing;
- expanding facilities;
- working capital; and
- strategic business initiatives.
Genzyme General's cash reserves may be further reduced to pay principal and
interest on the following debt that has been allocated to Genzyme General:
- $21.2 million in principal under our 5% convertible subordinated
debentures that mature in August 2003 and are convertible into shares of
Genzyme General Stock; and
- $250.0 million in principal under our 5 1/4% convertible subordinated
notes that mature in June 2005 and are convertible into shares of Genzyme
General Stock, Biosurgery Stock and Molecular Oncology Stock.
If Genzyme General uses cash to pay or redeem all or a portion of this debt,
including the principal and interest due on it, its cash reserves will be
diminished. In addition, Genzyme General's cash
GG-20
resources will be reduced to the extent that the liabilities of Genzyme
Molecular Oncology or Genzyme Biosurgery affect our consolidated results of
operations.
To satisfy these and other commitments, we may have to obtain additional
financing for Genzyme General. We cannot guarantee that we will be able to
obtain any additional financing, extend any existing financing arrangement, or
obtain either on favorable terms.
NEW ACCOUNTING PRONOUNCEMENTS, EURO AND MARKET RISK
See "Management's Discussion and Analysis of Genzyme Corporation and
Subsidiaries' Financial Condition and Results of Operations" included in this
annual report.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The future operating results of Genzyme General could differ materially from
the results described above due to the risks and uncertainties described below
and under the heading "Management's Discussion and Analysis of Genzyme
Corporation and Subsidiaries' Financial Condition and Results of
Operations--Factors Affecting Future Operating Results" included in this annual
report.
GENZYME GENERAL IS SUBSTANTIALLY DEPENDENT UPON SALES OF
CEREZYME-REGISTERED TRADEMARK- ENZYME.
Genzyme General derives a majority of its revenue from sales of
Cerezyme-Registered Trademark- enzyme, our enzyme-replacement therapy for the
treatment of Gaucher disease. Accordingly, the risks described above under
"--Risks Related to Genzyme--A reduction in revenue from sales of products that
treat Gaucher disease would have an adverse effect on our business" are
particularly important in considering an investment in Genzyme General Stock or
in a security that is convertible or exchangeable for Genzyme General Stock.
SALES OF RENAGEL-REGISTERED TRADEMARK- PHOSPHATE BINDER MAY NOT INCREASE.
We encourage you to read the material under "--Risks Related to Genzyme--
Our ability to significantly increase sales of Renagel-Registered Trademark-
brand phosphate binder will substantially determine whether and how quickly our
acquisition of GelTex improves our future earnings growth". That material
describes the factors on which the commercial success of
Renagel-Registered Trademark- phosphate binder depends.
WE MAY NOT SUCCESSFULLY COMMERCIALIZE GENZYME GENERAL'S PRODUCT CANDIDATES.
Genzyme General is developing or collaborating on the development of
treatments for Fabry disease, mucopolysaccharidosis I (MPS I) disease, and Pompe
disease, among others. Our ability to secure regulatory approvals for marketing
these product candidates is highly uncertain, as is our ability to successfully
commercialize those that receive regulatory approvals. Because the commercial
success of these product candidates will substantially determine future revenue
and profit growth at Genzyme General, we encourage you to review the factors
described under "--Risks Related to Genzyme" for details regarding risks that
characterize commercialization of our biotechnology product candidates.
GENZYME GENERAL MAY NOT BE ABLE TO SUCCESSFULLY COMMERCIALIZE
THYROGEN-REGISTERED TRADEMARK- HORMONE.
In January 1999, Genzyme General launched U.S. sales of
Thyrogen-Registered Trademark- recombinant thyroid stimulating hormone used to
diagnose thyroid cancer. The commercial success of
Thyrogen-Registered Trademark- hormone will depend on a number of factors,
including:
- regulation by the FDA;
- our ability to obtain regulatory approvals in foreign countries;
- the development and commercial success of competitive products; and
GG-21
- the availability of reimbursement from third-party payers.
Genzyme General cannot be sure that market penetration of
Thyrogen-Registered Trademark- hormone will increase.
IF GENZYME GENERAL'S STRATEGIC ALLIANCES TO DEVELOP AND COMMERCIALIZE ITS
PRODUCTS ARE UNSUCCESSFUL, GENZYME GENERAL'S EARNINGS GROWTH WILL BE LIMITED.
Several of Genzyme General's strategic initiatives involve alliances with
other biotechnology companies. These include:
- an agreement with Biogen, Inc. for the marketing of
AVONEX-Registered Trademark- (Interferon beta1a), Biogen's treatment for
relapsing forms of multiple sclerosis, in Japan following regulatory
approval;
- a joint venture with BioMarin Pharmaceutical Inc. for the development and
commercialization of alpha-L-iduronidase for the treatment of the
lysosomal storage disorder known as mucopolysaccharidosis I;
- a strategic alliance with Pharming Group N.V. for the development and
commercialization of human alpha-glucosidase produced using a Chinese
hamster ovary cell line for the treatment of Pompe disease; and
- a joint venture with Diacrin, Inc. to develop and commercialize products
and processes using porcine fetal cells for the treatment of Parkinson's
disease.
Genzyme General plans to enter into additional alliances in the future. The
success of many of these arrangements is largely dependent on technology and
other intellectual property contributed by Genzyme General's strategic partners
to the alliances or the resources, efforts and skills of Genzyme General's
partners. Genzyme General's strategic partners may:
- terminate their agreements and Genzyme General's access to the underlying
intellectual property;
- fail to devote significant financial or other resources to the alliances
and thereby significantly hinder or delay development, manufacturing or
commercialization activities; and
- fail to successfully develop or commercialize any products.
If any of these alliances are terminated and Genzyme General loses access to
the underlying intellectual property, or if Genzyme General and its partners are
unable to successfully develop or commercialize products, Genzyme General's
future earnings' growth potential will be limited.
SUBSEQUENT EVENT
In March 2001, Genzyme General announced its preliminary analysis of results
from the phase 2 trial of NeuroCell-TM--PD, a treatment for Parkinson's disease.
We are developing NeuroCell-TM--PD with Diacrin. Based on the results of the
trial and the need for additional analysis of those results, a Phase 3 clinical
study of NeuroCell-TM--PD will not be initiated before June 30, 2001. As a
result, Genzyme General, at its election, may require Genzyme Biosurgery to
repay Genzyme General $20 million of the $25 million Genzyme Biosurgery received
from Genzyme General in connection with the transfer to Genzyme General of
Genzyme Biosurgery's interest in the joint venture. This refund, together with
accrued interest at 13.5% per year, will be due within 90 days of receipt of
Genzyme General's election. The payment may be made in cash, Biosurgery
designated shares, or a combination of both, at Genzyme Biosurgery's option.
GG-22
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(AMOUNTS IN THOUSANDS)
Revenues:
Net product sales......................................... $690,027 $571,531 $509,727
Net service sales......................................... 61,161 57,223 55,445
Revenue from research and development contracts:
Related parties......................................... 509 1,516 3,568
Other................................................... 786 5,096 579
-------- -------- --------
Total revenues........................................ 752,483 635,366 569,319
-------- -------- --------
Operating costs and expenses:
Cost of products sold..................................... 162,894 115,125 138,802
Cost of services sold..................................... 37,879 35,637 34,240
Selling, general and administrative....................... 166,462 149,427 126,172
Research and development (including research and
development relating to contracts)...................... 112,792 97,746 73,139
Amortization of intangibles............................... 10,928 8,106 7,610
Purchase of in-process research and development........... 118,048 5,436 --
-------- -------- --------
Total operating costs and expenses.................... 609,003 411,477 379,963
-------- -------- --------
Operating income............................................ 143,480 223,889 189,356
-------- -------- --------
Other income (expenses):
Equity in net loss of unconsolidated affiliates........... (44,965) (37,423) (19,739)
Gain on affiliate sale of stock........................... 22,689 6,683 2,369
Gain on sale of investments in equity securities.......... 23,173 1,963 3,391
Minority interest in net loss of subsidiary............... 4,625 3,674 4,285
Gain on sale of product line.............................. -- 8,018 31,202
Charge for impaired investments........................... -- (5,712) (3,397)
Other..................................................... 5,203 14,389 --
Investment income......................................... 38,549 30,881 22,953
Interest expense.......................................... (14,159) (19,885) (16,994)
-------- -------- --------
Total other income.................................... 35,115 2,588 24,070
-------- -------- --------
Income before income taxes.................................. 178,595 226,477 213,426
Provision for income taxes.................................. (92,639) (84,400) (80,374)
-------- -------- --------
Division net income......................................... $ 85,956 $142,077 $133,052
======== ======== ========
Comprehensive income, net of tax:
Division net income....................................... $ 85,956 $142,077 $133,052
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments................ (14,236) (14,883) 7,681
Unrealized gains (losses) on securities:
Unrealized gains (losses) arising during the period... 15,434 26,785 (6,059)
Reclassification adjustment for (gains) losses
included in division net income..................... (3,512) 2,092 2,100
-------- -------- --------
Unrealized gains (losses) on securities, net............ 11,922 28,877 (3,959)
-------- -------- --------
Other comprehensive income (loss)......................... (2,314) 13,994 3,722
-------- -------- --------
Comprehensive income........................................ $ 83,642 $156,071 $136,774
======== ======== ========
The accompanying notes are an integral part of these combined financial
statements.
GG-23
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
COMBINED BALANCE SHEETS
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(AMOUNTS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 135,841 $ 94,523
Short-term investments.................................... 96,644 214,240
Accounts receivable, net.................................. 165,911 141,949
Inventories............................................... 108,767 84,384
Prepaid expenses and other current assets................. 28,012 17,632
Due from Genzyme Molecular Oncology....................... 4,660 3,793
Due from Genzyme Biosurgery............................... 18,645 7,089
Deferred tax assets--current.............................. 46,836 41,195
---------- ----------
Total current assets.................................... 605,316 604,805
Property, plant and equipment, net........................ 446,759 362,548
Long-term investments..................................... 298,841 205,142
Notes receivable--related party........................... 10,350 --
Intangibles, net.......................................... 977,147 75,370
Deferred tax assets--noncurrent........................... -- 19,844
Investments in equity securities.......................... 119,648 94,719
Other noncurrent assets................................... 40,992 37,155
---------- ----------
Total assets............................................ $2,499,053 $1,399,583
========== ==========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable.......................................... $ 20,091 $ 23,229
Accrued expenses.......................................... 98,201 62,514
Income taxes payable...................................... 40,442 27,946
Deferred revenue.......................................... 6,401 3,475
Current portion of long-term debt and capital lease
obligations............................................... 1,448 80
---------- ----------
Total current liabilities............................... 166,583 117,244
Long-term debt and capital lease obligations................ 180,556 --
Convertible notes and debentures............................ 273,680 272,622
Deferred tax liability...................................... 124,613 --
Other noncurrent liabilities................................ 3,341 2,103
---------- ----------
Total liabilities....................................... 748,773 391,969
---------- ----------
Commitments and contingencies (See Notes)
Division equity (Note M).................................... 1,750,280 1,007,614
---------- ----------
Total liabilities and division equity....................... $2,499,053 $1,399,583
========== ==========
The accompanying notes are an integral part of these combined financial
statements.
GG-24
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------
2000 1999 1998
--------- --------- ---------
(AMOUNTS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Division net income......................................... $ 85,956 $ 142,077 $ 133,052
Reconciliation of division net income to net cash provided
by operating activities:
Depreciation and amortization........................... 41,206 42,235 37,758
Note received from related party and related accrued
interest.............................................. (10,350) -- --
Loss on disposal of fixed assets........................ 532 971 108
Non-cash compensation expense........................... 2,185 58 8,519
Provision for bad debts................................. 2,918 12,216 5,059
Accrued interest/amortization of marketable
securities.............................................. 213 (1,647) (7,242)
Accretion of debt conversion feature.................... -- -- 705
Deferred income tax benefit............................. (6,188) (3,414) (3,022)
Charge for in-process research and development.......... 118,048 5,436 --
Equity in net loss of unconsolidated affiliates......... 44,965 37,423 19,739
Gain on affiliate sale of stock......................... (22,689) (6,683) (2,369)
Gain on sale of investments in equity securities........ (23,173) (1,963) (3,391)
Minority interest in net loss of subsidiary............. (4,625) (3,674) (4,285)
Gain on sale of product line............................ -- (8,018) (31,202)
Charge for impaired investments......................... -- 5,712 3,397
Other................................................... 2,376 556 26
Increase (decrease) in cash from working capital:
Accounts receivable................................... (26,929) (18,459) (36,437)
Inventories........................................... (1,988) 6,542 30,982
Prepaid expenses and other assets..................... (7,682) 9,925 (10,785)
Due from Genzyme Molecular Oncology................... (938) 980 (553)
Due from Genzyme Biosurgery........................... (10,906) (6,541) 665
Accounts payable, accrued expenses, income taxes
payable and deferred revenue........................ 61,397 71,026 52,275
--------- --------- ---------
Net cash provided by operating activities........... 244,328 284,758 192,999
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments.................................... (426,875) (494,016) (439,431)
Sales and maturities of investments......................... 533,461 400,630 118,871
Purchase of equity investments.............................. (24,102) (13,700) (25,783)
Proceeds from sale of investments in equity securities...... 33,124 11,090 9,564
Purchase of property, plant and equipment................... (72,591) (52,910) (53,312)
Sales of property, plant and equipment...................... -- -- 1,795
Proceeds from sale of product line.......................... -- 5,000 24,760
Acquisitions, net of cash acquired.......................... (447,495) (6,500) (9,949)
Purchase of technology rights............................... -- (10,000) (15,100)
Investments in unconsolidated affiliates.................... (23,497) (43,027) (14,811)
Loans to affiliates......................................... -- -- (1,000)
Proceeds from notes receivable.............................. -- 8,360 --
Repayment of loans by affiliates............................ -- -- 3,019
Other....................................................... 3,319 2,388 (4,431)
--------- --------- ---------
Net cash used in investing activities............... (424,656) (192,685) (405,808)
--------- --------- ---------
The accompanying notes are an integral part of these combined financial
statements.
GG-25
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
COMBINED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(AMOUNTS IN THOUSANDS)
CASH FLOWS FROM FINANCING ACTIVITIES:
Allocated proceeds from issuance of Genzyme General Stock... $ 85,345 $ 59,216 $ 74,649
Proceeds from issuance of debt.............................. 150,000 -- 250,000
Payments of debt............................................ -- (84,985) (33,236)
Net cash allocated to Genzyme Biosurgery.................... (9,910) (79,451) (41,639)
Net cash allocated to Genzyme Molecular Oncology............ (15,000) -- (5,000)
Bank overdraft.............................................. 9,523 7,220 --
Other....................................................... 2,130 2,510 2,412
-------- -------- --------
Net cash provided by (used in) financing activities..... 222,088 (95,490) 247,186
Effect of exchange rate changes on cash..................... (442) (2,072) 334
-------- -------- --------
Increase (decrease) in cash and cash equivalents............ 41,318 (5,489) 34,711
Cash and cash equivalents at beginning of period............ 94,523 100,012 65,301
-------- -------- --------
Cash and cash equivalents at end of period.................. $135,841 $ 94,523 $100,012
======== ======== ========
Supplemental disclosures of cash flows:
Cash paid during the year for:
Interest.................................................. $ 44,191 $ 18,508 $ 15,047
Income taxes.............................................. $ 34,014 $ 30,992 $ 24,463
Supplemental disclosures of non-cash transactions:
Transfer of investments to Genzyme Surgical Products--Note A.
Other gains and charges--Note C.
Dispositions of assets--Note D.
Peptimmune acquisition--Note E.
Investment in unconsolidated affiliate--Note J.
Conversion of 5% convertible subordinated notes--Note L.
Conversion of 6% convertible subordinated debentures into 5% convertible
subordinated debentures--
Note L.
Warrant exercise--Note M.
In conjunction with the acquisition of GelTex, liabilities were assumed as
follows:
Fair value of assets acquired............................... $618,749
Goodwill.................................................... 449,634
Acquired in-process research and development................ 118,048
Deferred compensation....................................... 10,206
Issuance of common stock and options........................ (556,563)
Net cash paid for acquisition and acquisition costs......... (451,816)
Net deferred tax liability assumed.......................... (140,469)
--------
Net liabilities assumed................................... $ 47,789
========
The accompanying notes are an integral part of these combined financial
statements.
GG-26
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Genzyme General is our operating division that develops and markets:
- therapeutic products, with an expanding focus on products to treat
patients suffering from lysosomal storage disorders and other specialty
therapeutics;
- diagnostic products, with a focus on IN VITRO diagnostics; and
- other products and services, such as genetic testing and lipids and
peptides for drug delivery.
BASIS OF PRESENTATION
The combined financial statements of Genzyme General for each period include
the balance sheets, results of operations and cash flows of the businesses we
allocate to Genzyme General. We also allocate a portion of our corporate
operations to Genzyme General using methods described in our allocation policy
below. These combined financial statements are prepared using amounts included
in our consolidated financial statements included in this annual report. We have
reclassified certain 1999 data to conform with the 2000 presentation.
We prepare the financial statements of Genzyme General in accordance with
generally accepted accounting principles. We present financial information and
accounting policies specific to Genzyme General in the accompanying combined
financial statements. We present financial information and accounting policies
relevant to the corporation and its operating divisions taken as a whole in our
consolidated financial statements. You should read our consolidated financial
statements in conjunction with the financial statements of Genzyme General.
Note A., "Summary of Significant Accounting Policies," to our consolidated
financial statements contains a summary of our accounting policies. We
incorporate that information into this note by reference.
TRACKING STOCK
Genzyme General Division common stock, which we refer to as "Genzyme General
Stock," is a series of our common stock that is designed to reflect the value
and track the performance of Genzyme General. The chief mechanisms intended to
cause Genzyme General Stock to "track" the financial performance of Genzyme
General are provisions in our charter governing dividends and distributions.
Under these provisions, our charter factors the assets and liabilities and
income or losses attributable to Genzyme General into the determination of the
amount available to pay dividends on Genzyme General Stock.
To determine earnings per share, we allocate Genzyme's earnings to each
series of our common stock based on the earnings attributable to that series of
stock. The earnings attributable to Genzyme General Stock is defined in our
charter as the net income or loss of Genzyme General determined in accordance
with generally accepted accounting principles and as adjusted for tax benefits
allocated to or from Genzyme General in accordance with our management and
accounting policies. Our charter requires that all income and expenses of
Genzyme Corporation be allocated among its divisions in a reasonable and
consistent manner. However, subject to its fiduciary duties, our board of
directors can, at its discretion, change the methods of allocating earnings to
each series of common stock. We intend to allocate earnings using our current
methods for the foreseeable future.
GG-27
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Because the earnings allocated to Genzyme General Stock are based on the
income or losses attributable to Genzyme General, we include financial
statements and management's discussion and analysis of Genzyme General to aid
investors in evaluating its performance.
While Genzyme General Stock is designed to reflect Genzyme General's
performance, it is common stock of Genzyme Corporation and not Genzyme General;
Genzyme General is a division, not a company or legal entity, and therefore does
not and cannot issue stock. Consequently, holders of Genzyme General Stock have
no specific rights to assets allocated to Genzyme General. Genzyme Corporation
continues to hold title to all of the assets allocated to Genzyme General and is
responsible for all of its liabilities, regardless of what we deem for financial
statement presentation purposes as allocated to Genzyme General. Holders of
Genzyme General Stock, as common stockholders, are therefore subject to the
risks of investing in the businesses, assets and liabilities of Genzyme as a
whole. For instance, the assets allocated to each division are subject to
company-wide claims of creditors, product liability plaintiffs and stockholder
litigation. Also, in the event of a Genzyme liquidation, insolvency or similar
event, holders of Genzyme General Stock and other tracking stockholders would
only have the rights of common stockholders in the combined assets of Genzyme.
ALLOCATION POLICY
Our charter requires us to manage and account for transactions between
Genzyme General and our other divisions and with third parties, and any
resulting reallocations of assets and liabilities, by applying consistently
across divisions a detailed set of policies established by our board of
directors. We publicly disclose our divisional management and accounting
policies, which are filed as Exhibit 99.1 to this annual report. Our charter
requires that all of our assets and liabilities be allocated among our
divisions. Our board of directors, however, retains considerable discretion in
determining the types, magnitudes and extent of allocations to each series of
common stock without shareholder approval.
Allocations to our divisions are based on one of the following
methodologies:
- specific identification--assets that are dedicated to the production of
goods of a division or which solely benefit a division are allocated to
that division. Liabilities incurred as a result of the performance of
services for the benefit of a division or in connection with the expenses
incurred in activities which directly benefit a division are allocated to
that division. Such specifically identified assets and liabilities include
cash, investments, accounts receivable, inventories, property and
equipment, intangible assets, accounts payable, accrued expenses and
deferred revenue. Revenues from the licensing of a division's products or
services to third parties and the related costs are allocated to that
division;
- actual usage--expenses are charged to the division for whose benefit such
expenses are incurred. Research and development, sales and marketing and
direct general and administrative services are charged to the divisions
for which the service is performed on a cost basis. Such charges are
generally based on direct labor hours;
- proportionate usage--costs incurred which benefit more than one division
are allocated based on management's estimate of the proportionate benefit
each division receives. Such costs include facilities, legal, finance,
human resources, executive and investor relations; or
GG-28
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- board directed--programs and products, both internally developed and
acquired, are allocated to divisions by the board of directors. The board
of directors also allocates long-term debt and strategic investments.
Note B., "Policies Governing the Relationship of Genzyme's Operating
Divisions," further describes our policies concerning interdivisional
transactions and income tax allocations.
We believe that the divisional allocations are reasonable and have been
consistently applied. However, a division's results of operations may not be
indicative of what would have been realized if the division was a stand-alone
entity.
PRINCIPLES OF COMBINATION
In June 1999, we created Genzyme Surgical Products as a separate division of
Genzyme. Genzyme General transferred $150.0 million in cash, cash equivalents
and investments, and certain other assets, to Genzyme Surgical Products in
connection with the creation of Genzyme Surgical Products as a separate division
of Genzyme. The business of Genzyme Surgical Products previously operated as a
business unit of Genzyme General. These financial statements reflect the
financial position, results of operations and cash flows allocated to Genzyme
General as if the operations of Genzyme Surgical Products had been separately
accounted for as its own division of the corporation for all periods presented.
We use the equity method to account for investments in entities in which
Genzyme General has a substantial ownership interest (20% to 50%), or in which
it participates in policy decisions. Genzyme General's consolidated net income
includes its share of the earnings of these entities. We report at fair value
investments in entities in which Genzyme General's ownership interest is less
than 20%.
TRANSLATION OF FOREIGN CURRENCIES
We translate the financial statements of foreign subsidiaries allocated to
Genzyme General from local currency into U.S. dollars and include translation
adjustments for these subsidiaries in division equity. Genzyme General's
division equity includes cumulative foreign currency translation charges of
$33.9 million at December 31, 2000 and $19.7 million at December 31, 1999.
We include exchange gains and losses on intercompany balances which are
long-term in nature in division equity. Gains and losses on all other
transactions are included in results of operations. Genzyme General recorded net
losses of $2.0 million in 2000 and net gains of $0.6 million in 1999 and
$0.3 million in 1998.
REVENUE RECOGNITION
Genzyme General recognizes revenue from product sales when it ships the
product and title and risk of loss have passed, net of any applicable third
party contractual allowances and rebates. Genzyme General recognizes revenue
from service sales when it has finished providing the service. Genzyme General
recognizes revenue from research and development contracts over the term of the
applicable contract and as it incurs costs related to that contract.
Non-refundable up-front license fees are recognized over the related performance
period or at the time there are no remaining performance
GG-29
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
obligations. Milestone payments are recognized as revenue only if there are no
remaining performance obligations and the fees are non-refundable.
Genzyme General receives royalties related to the manufacture, sale or use
of products or technologies under license arrangements with third parties. For
those arrangements where royalties are reasonably estimable, Genzyme General
recognizes revenue based on estimates of royalties earned during the applicable
period and adjusts for differences between the estimated and actual royalties in
the following quarter. Historically, these adjustments have not been material.
For those arrangements where royalties are not reasonably estimable, Genzyme
General recognizes revenue upon receipt of royalty statements from the licensee.
We believe our revenue recognition policies are in compliance with Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements."
NET INCOME (LOSS) PER SHARE
Earnings per share is calculated for each series of Genzyme stock using the
two-class method, as further described in the notes to our consolidated
financial statements. We present earnings per share data only in our
consolidated financial statements of Genzyme because Genzyme Corporation is the
issuer of the securities. Our divisions do not and cannot issue securities
because they are not companies or legal entities.
NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS
Because each of our operating divisions is a part of a single company, our
board of directors has adopted policies to address issues that may arise among
divisions and to govern the management of and the relationships between each
division. With some exceptions that are mentioned specifically in this note, our
board of directors may modify or rescind these policies, or adopt additional
policies, in its sole discretion without stockholder approval, subject only to
our board of directors' fiduciary duty to stockholders. Generally accepted
accounting principles require that any change in policy be preferable (in
accordance with these principles) to the previous policy.
INTERDIVISION ASSET TRANSFERS
Our board of directors may at any time reallocate any program, product or
other asset from one division to any other division. We account for
interdivisional asset transfers at book value. The consideration paid for an
asset transfer generally must be fair value as determined by our board of
directors. The difference between the consideration paid and the book value of
the assets transferred is recorded in division equity.
Our board of directors determines fair value using either a risk-adjusted
discounted cash flow model or a comparable transaction model.
The risk-adjusted discounted cash flow model estimates fair value by taking
the discounted value of all the cash inflows and outflows related to a program
or product over a specified period of time, generally the economic life of the
project, adjusted for the probabilities of certain outcomes occurring
GG-30
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS
(CONTINUED)
or not occurring. In performing this analysis, we consider various factors that
could affect the success or failure of the program including:
- the duration, cost and probability of success of each phase of
development;
- the current and potential size of the market and barriers to entry into
the market;
- the maximum number of patients likely to be treated with the product and
the speed with which that maximum number will be reached;
- reimbursement policies and pricing limitations;
- current and potential competitors;
- the net proceeds received by us upon the sale of the program or product;
and
- the costs of manufacturing and marketing the product or program.
The comparable transaction model estimates fair value through comparison to
valuations established for other transactions within the biotechnology and
biosurgical areas involving similar programs and products having similar terms
and structure. In identifying comparable transactions, we consider, among other
factors, the following:
- the similarity of market opportunity;
- the comparability of the medical needs addressed;
- the similarity of the regulatory, reimbursement and competitive
environment;
- the stage of product or program development; and
- the risk profile of successfully commercializing the product or program.
We customarily use the comparable transaction model to corroborate
valuations derived under the risk-adjusted discounted cash flow model.
When determining the fair value of a program under development using either
model, our board of directors also takes into account the following criteria:
- the commercial potential of the program;
- the phase of clinical development of the program;
- the expenses associated with realizing any income from the program and the
likelihood and time of the realization; and
- other matters that our board of directors and its financial advisors, if
any, deem relevant.
One division may compensate another division for a reallocation with cash or
other consideration having a value equal to the fair market value of the
reallocated assets. In the case of a reallocation of assets from Genzyme General
to another division, our board of directors may elect instead to account for the
reallocation as an increase in the designated shares representing the division
to which the assets are reallocated in accordance with the provisions of our
charter. Designated shares are authorized but
GG-31
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS
(CONTINUED)
not-issued shares of our common stock that our board of directors may from time
to time issue, sell or otherwise distribute without allocating the proceeds to
the division tracked by the stock. No gain or loss is recognized as a result of
these transfers.
Our policy regarding transfers of assets between divisions may not be
changed by our board of directors without the approval of the holders of Genzyme
General Stock voting as a separate class unless the policy change does not
affect Genzyme General.
OTHER INTERDIVISION TRANSACTIONS
Our divisions may engage in transactions directly with one or more other
divisions or jointly with one or more other divisions and one or more third
parties. These transactions may include agreements by one division to provide
products and services for use by another division, license agreements and joint
ventures or other collaborative arrangements involving more than one division to
develop new products and services jointly and with third parties. These
transactions are subject to the conditions described below. The division
providing these products and services does not recognize revenue on any of these
transactions unless it provides them to unrelated third parties in the ordinary
course of business.
- We charge research and development (including clinical and regulatory
support), distribution, sales, marketing, and general and administrative
services (including allocated space) performed by one division for another
division to the division for which the services are performed on a cost
basis. We charge direct costs to the division for which we incur them. We
allocate direct labor and indirect costs in reasonable and consistent
manners based on the use by a division of relevant services.
- We charge the manufacturing of goods and performance of services by one
division exclusively for another division to the division for which it is
performed on a cost basis. We include in manufacturing costs an interest
charge (based on our short-term borrowing rate at the beginning of the
fiscal year) on the gross fixed assets used in the manufacturing process.
We determine gross fixed assets for the facility used at the beginning of
each fiscal year. We allocate direct labor and indirect costs in
reasonable and consistent manners based on the benefit received by a
division of related goods and services.
- Other than transactions involving research and development, manufacturing,
distribution, sales, marketing, general and administrative services, which
are addressed above, all interdivision transactions are performed on terms
and conditions obtainable in arm's length transactions with third parties.
- Our board must approve interdivision transactions that are performed on
terms and conditions other than as described above and are material to one
or more of the participating divisions. In giving its approval, our board
must determine that the transaction is fair and reasonable to each
participating division and to holders of the common stock representing
each participating division.
- Divisions may make loans to other divisions. Any loan of $1 million or
less matures within 18 months and accrues interest at the best borrowing
rate available to the corporation for a loan
GG-32
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS
(CONTINUED)
of like type and duration. Our board of directors must approve any loan in
excess of $1 million. In giving its approval, our board of directors must
determine that the material terms of the loan, including the interest rate
and maturity date, are fair and reasonable to each participating division
and to holders of the common stock representing each such division.
- All material interdivision transactions are set forth in a written
agreement that is signed by an authorized member of the management team of
each division involved in the transaction.
TAX ALLOCATIONS
We file a consolidated return and allocate income taxes to each division
based upon the financial statement income, taxable income, credits and other
amounts properly allocable to each division under generally accepted accounting
principles as if it were a separate taxpayer. We assess the realizability of our
deferred tax assets at the division level. As a result, our consolidated tax
provision may not equal the sum of the divisions' tax provision. As of the end
of any fiscal quarter, however, if a division cannot use any projected annual
tax benefit attributable to it to offset or reduce its current or deferred
income tax expense, we may allocate the tax benefit to the other divisions in
proportion to their taxable income without any compensating payment or
allocation. Tax benefits allocated to Genzyme General are recorded as a credit
to division equity.
ACCESS TO TECHNOLOGY AND KNOW-HOW
Genzyme General has unrestricted access to all technology and know-how owned
or controlled by Genzyme Corporation that may be useful in its business, subject
to any obligations or limitations that apply to the corporation generally.
NOTE C. OTHER GAINS AND CHARGES
In the fourth quarter of 2000, Genzyme General recorded a $2.1 million
charge in connection with our uncertainty in collecting a note receivable that
we issued in May 1999 to a strategic collaborator. We concluded that this
uncertainty existed as a result of the FDA's ruling to deny approval of the
collaborator's New Drug Application for a key product. The ruling has
subsequently resulted in the collaborator announcing that it will be taking
steps to preserve cash by reducing its workforce and other operating expenses.
During the second quarter of 2000, we received net proceeds of approximately
$5.1 million in connection with the settlement of a lawsuit. We allocated these
proceeds to Genzyme General and recorded them as other income. The lawsuit,
initiated in 1993, pertained to insurance coverage for an accidental spill of
Ceredase-Registered Trademark- enzyme at a fill facility operated by a
contractor to Genzyme General.
During the fourth quarter of 1999, Genzyme General recorded a net gain of
$14.4 million upon receipt of a payment associated with the termination of an
agreement to acquire Cell Genesys, Inc. Genzyme General recorded this gain as
other income.
During the third quarter of 1998, Genzyme General recorded a $14.8 million
charge to cost of products sold to write down excess inventory used to make
Ceredase-Registered Trademark- enzyme. We took this charge
GG-33
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE C. OTHER GAINS AND CHARGES (CONTINUED)
following a determination that, based on the status of efforts to convert
Gaucher disease patients to a treatment regimen using
Cerezyme-Registered Trademark- enzyme, the existing supply of
Ceredase-Registered Trademark- enzyme was sufficient to meet estimated patient
needs.
NOTE D. DISPOSITIONS OF ASSETS
In July 1998, we sold the assets of our research products business to Techne
Corporation in exchange for:
- $24.8 million in cash;
- approximately 987,000 shares of Techne common stock; and
- royalties on product sales by Techne's biotechnology group through
June 2003.
In 1998, we recorded a $31.2 million gain in connection with the sale of this
business and an additional $3.4 million gain upon the sale of a portion of our
investment in Techne common stock. In 1999, we recorded a gain of $2.0 million
upon the sale of our remaining shares of Techne common stock. The $3.4 million
and $2.0 million gains were recorded as gains on sale of investments in equity
securities. The research products business had been allocated to Genzyme
General.
Note C., "Dispositions of Assets," to our consolidated financial statements
contains information regarding:
- the sale of Genzyme General's immunochemistry product lines to an
operating unit of Sybron Laboratory Products Corp.; and
- the sale of Genetic Design to Laboratory Corporation of America.
We incorporate that information into this note by reference.
NOTE E. ACQUISITIONS
GELTEX
In December 2000, we acquired GelTex, a public company engaged in developing
therapeutic products based on polymer technology. We accounted for the
acquisition as a purchase and allocated it to Genzyme General. Accordingly, the
results of operations of GelTex are included in our consolidated financial
statements and the combined financial statements of Genzyme General from the
date of acquisition.
GG-34
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE E. ACQUISITIONS (CONTINUED)
The purchase price and the allocation of the purchase price to the fair
value of the acquired tangible and intangible assets and liabilities is as
follows (in thousands):
Cash paid (net of cash acquired)............................ $ 447,495
Issuance of 7.9 million shares of Genzyme General Stock..... 491,181
Issuance of options and warrants to purchase 1.6 million
shares of Genzyme General Stock........................... 62,882
Existing equity investment in GelTex........................ 2,500
Acquisition costs........................................... 4,321
----------
Total purchase price........................................ $1,008,379
==========
Short-term investments...................................... $ 75,338
Prepaid expenses and other assets........................... 24,669
Inventory................................................... 8,156
Property, plant and equipment............................... 45,477
Intangible assets (to be amortized straight-line over five
to 15 years).............................................. 465,109
Goodwill (to be amortized straight-line over 15 years)...... 449,634
In-process research and development......................... 118,048
Deferred tax asset.......................................... 35,016
Deferred compensation....................................... 10,206
Assumed liabilities......................................... (47,789)
Deferred tax liability...................................... (175,485)
----------
Allocated purchase price.................................... $1,008,379
==========
The 7.9 million shares of Genzyme General Stock issued in exchange for
outstanding shares of GelTex common stock were valued at $491.2 million using
the average trading price of Genzyme General Stock over three days before and
after the September 11, 2000 announcement of the merger. Options and warrants to
purchase approximately 1.6 million shares of Genzyme General Stock were valued
at $62.9 million using the Black-Scholes model. In accordance with FIN 44, the
intrinsic value of the portion of the unvested options related to the future
service period of $10.2 million has been allocated to deferred compensation in
stockholders' equity. The unvested portion is being amortized to operating
expense over the remaining vesting period of approximately one year.
As part of the acquisition of GelTex, we acquired all of GelTex's interest
in RenaGel LLC, our joint venture with GelTex. Prior to the acquisition of
GelTex, we accounted for the investment in RenaGel LLC under the equity method.
Because we already owned a 50% interest in RenaGel LLC, the assets of RenaGel
LLC were adjusted to fair value only to the extent of the 50% interest we
acquired.
In connection with the purchase of GelTex, Genzyme General allocated
approximately $118.0 million of the purchase price to in-process research and
development, or IPR&D. Although management ultimately is responsible for
determining the fair value of the acquired IPR&D, we engaged an independent
third-party appraisal company to assist in the valuation of the intangible
assets acquired.
GG-35
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE E. ACQUISITIONS (CONTINUED)
The fair value assigned to purchased IPR&D was estimated by discounting, to
present value, the cash flows expected to result from each project once it has
reached technological feasibility. The discount rates used were consistent with
the risks of each project, and ranged from 35% to 40%. In estimating future cash
flows, management considered other tangible and intangible assets, including
core technology, required for successful exploitation of the technology
resulting from each purchased IPR&D project and adjusted future cash flows for a
charge reflecting the contribution to value of these assets. The value assigned
to purchased research and development was the amount attributable to the efforts
of GelTex up to the time of acquisition. This amount was estimated through
application of the "stage of completion" calculation, which calculation involves
multiplying total estimated revenue for IPR&D by the percentage of completion of
each purchased research and development project at the time of acquisition.
The significant assumptions underlying the valuations included potential
revenues, costs of completion, the timing of product approvals and the selection
of appropriate probability of success and discount rate. None of the GelTex
IPR&D projects had reached technological feasibility at the date of acquisition
nor did they have any alternative future use. Consequently, in accordance with
generally accepted accounting principles, the amount allocated to IPR&D was
charged as an expense in Genzyme General's financial statements for the year
ended December 31, 2000. Genzyme General is amortizing the remaining acquired
intangible assets arising from the acquisition on a straight-line basis over
their estimated lives, which range from 5 years to 15 years.
Below is a brief description of the IPR&D projects, including an estimation
of when management believes Genzyme General may realize revenues from the sale
of these products in the respective application:
VALUE AT ESTIMATED
ACQUISITION COST TO
PROGRAM PROGRAM DESCRIPTION DEVELOPMENT STATUS DATE COMPLETE
- ------- ------------------- ------------------ ------------- -------------
(IN MILLIONS) (IN MILLIONS)
Renagel-Registered Trademark- Non-absorbed polymer phosphate - Clinical studies scheduled for $ 19.7 $ 20.0
phosphate binder for the treatment of completion in 2002, 2003 and 2004
binder hyperphosphatemia
C. DIFFICILE Program to develop a - Phase 2 studies initiated in 2000 37.4 37.0
Colitis toxin-binding polymer for the - Approval to market this product in the
treatment and prevention of U.S. is expected by 2005
antibiotic induced
C. DIFFICILE colitis
Oral Focuses on the development of a - IND expected to be filed in the fourth 17.8 25.0
Mucositis topical mouth rinse that quarter of 2001
combines barrier material and - Product launch expected in 2006
antimicrobial polymers to create
an anti-infective mechanism
against oral mucositis, a common
side effect of radiation therapy
and chemotherapy
DENSPM Focuses on the development of a - Phase 1 safety and dose-ranging studies 3.4 30.0
compound for the treatment of scheduled for 2001
mild to moderate psoriasis - Product launch is anticipated in 2005
GG-36
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE E. ACQUISITIONS (CONTINUED)
VALUE AT ESTIMATED
ACQUISITION COST TO
PROGRAM PROGRAM DESCRIPTION DEVELOPMENT STATUS DATE COMPLETE
- ------- ------------------- ------------------ ------------- -------------
(IN MILLIONS) (IN MILLIONS)
Iron Focuses on the prevention and - Expect to file an IND in 2001 15.7 31.0
Chelation treatment of transfusional or - Expected product launch in 2006
hereditary iron overload
Anti-Obesity Builds on GelTex's expertise in - Expect to file an IND early in 2002 17.8 39.0
non-absorbed polymers and - Expected product launch in 2006
focuses on the development of a
compound that will inhibit
lipase and bind fat
GT102-279 Second generation lipid-lowering - Completion of clinical studies expected 6.2 N/A(1)
compound with attributes of in late 2003 with product launch in
GelTex's WelChol-TM- lipid 2004
lowering agent, but requires 50%
fewer tablets
------ ------
$118.0 $182.0
====== ======
- ------------------------------
(1) Future development costs will be funded by our collaboration partner.
As of December 31, 2000, the technological feasibility of the above projects
had not yet been reached and no significant departures from the assumptions
included in the valuation analysis had occurred. Substantial additional research
and development will be required prior to reaching technological feasibility. In
addition, each product needs to successfully complete a series of clinical
trials and to receive FDA or other regulatory approval prior to
commercialization. There can be no assurance that these projects will ever reach
feasibility or develop into products that can be marketed profitably, nor can
there be assurance Genzyme General will be able to develop and commercialize
these products before its competitors. If these products are not successfully
developed and do not become commercially viable, our results of operations could
be materially affected.
The following unaudited pro forma financial summary is presented as if the
acquisition of GelTex was completed as of January 1, 2000 and 1999,
respectively. The unaudited pro forma combined results are not necessarily
indicative of the actual results that would have occurred had the acquisition
been consummated at that date, or of the future operations of the combined
entities. Nonrecurring charges, such as the acquired in-process research and
development charge of $118.0 million, are not reflected in the following pro
forma financial summary.
FOR THE YEARS ENDED
DECEMBER 31
-----------------------
2000 1999
---------- ----------
(AMOUNTS IN THOUSANDS)
Total revenues.............................................. $ 796,817 $ 665,267
Division net income......................................... 107,863 24,410
GG-37
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE E. ACQUISITIONS (CONTINUED)
PEPTIMMUNE
In July 1999, we acquired Peptimmune, Inc., a privately-held company whose
lead development program focuses on a treatment for pemphigus vulgaris. We
allocated this acquisition to Genzyme General and accounted for it as a
purchase. We allocated the aggregate purchase price of $6.5 million and assumed
liabilities of $0.3 million to the tangible and intangible assets we acquired
from Peptimmune based on their respective fair values (amounts in thousands):
Property, plant & equipment................................. $ 128
Deferred tax asset.......................................... 1,229
In-process technology....................................... 5,436
------
Total................................................... $6,793
======
The $5.4 million allocated to in-process research and development represents
the value we assigned to Peptimmune's programs that were still in the
development stage and for which there was no alternative future use. We recorded
this amount as a charge to operations. As of December 31, 2000, these products
are still under development.
NOTE F. DERIVATIVE FINANCIAL INSTRUMENTS
Note E., "Derivative Financial Instruments," to our consolidated financial
statements contains information regarding interest rate swap contracts that are
allocated to Genzyme General. We incorporate that information into this note by
reference.
NOTE G. ACCOUNTS RECEIVABLE AND INTANGIBLE ASSETS
Genzyme General's trade receivables primarily represent amounts due from
distributors, healthcare service providers and companies and institutions
engaged in research, development or production of pharmaceutical and
biopharmaceutical products. Genzyme General performs credit evaluations of its
customers on an ongoing basis and generally does not require collateral. Genzyme
General states accounts receivable at fair value after reflecting an allowance
for doubtful accounts. This allowance was $16.9 million at December 31, 2000 and
$19.0 million at December 31, 1999.
GG-38
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE G. ACCOUNTS RECEIVABLE AND INTANGIBLE ASSETS (CONTINUED)
The following table contains information on Genzyme General's intangible
assets for the periods presented:
WEIGHTED WEIGHTED
AVERAGE AVERAGE
ESTIMATED ESTIMATED
USEFUL USEFUL
DECEMBER 31, LIFE DECEMBER 31, LIFE
2000 (YEARS) 1999 (YEARS)
------------ --------- ------------ ---------
(AMOUNTS)IN THOUSANDS, EXCEPT USEFUL LIFE DATA
Goodwill........................................ $ 518,205 15 $ 69,376 13
Acquired technology............................. 340,484 15 -- --
Patents......................................... 116,732 15 960 Varies
License fees.................................... 25,075 15 25,092 15
Customer lists.................................. 8,324 10 8,324 10
Trademarks...................................... 6,526 15 -- --
Non-compete agreements.......................... 6,000 5 6,000 5
Other........................................... 6,799 8 4,145 5
---------- --------
1,028,145 113,897
Less accumulated amortization................... (50,998) (38,527)
---------- --------
Intangible assets, net.......................... $ 977,147 $ 75,370
========== ========
GG-39
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE H. INVENTORIES
DECEMBER 31,
-------------------
2000 1999
-------- --------
(AMOUNTS IN
THOUSANDS)
Raw materials............................................ $ 30,275 $24,057
Work-in-process.......................................... 47,880 40,592
Finished products........................................ 30,612 19,735
-------- -------
Total................................................ $108,767 $84,384
======== =======
NOTE I. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(AMOUNTS IN THOUSANDS)
Plant and equipment................................... $ 240,779 $ 230,151
Land and buildings.................................... 212,750 180,624
Leasehold improvements................................ 103,301 90,128
Furniture and fixtures................................ 13,534 13,169
Construction-in-progress.............................. 93,534 26,964
--------- ---------
663,898 541,036
Less accumulated depreciation......................... (217,139) (178,488)
--------- ---------
Property, plant and equipment, net.................... $ 446,759 $ 362,548
========= =========
Genzyme General's depreciation expense was $29.1 million in 2000,
$36.9 million in 1999 and $34.9 million in 1998.
Genzyme General capitalizes costs it incurs in validating the manufacturing
process for products which have reached technological feasibility. As of
December 31, 2000, capitalized validation costs, net of accumulated
depreciation, were $11.6 million. Genzyme General has capitalized the following
amounts of interest costs incurred in financing the construction of
manufacturing facilities:
2000 1999 1998
- ------------ ------------- -------------
$2.2 million $1.2 million $0.7 million
The estimated cost of completion for assets under construction was $46.6
million as of December 31, 2000.
GG-40
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE J. INVESTMENTS
MARKETABLE SECURITIES
DECEMBER 31,
-----------------------------------------
2000 1999
------------------- -------------------
COST MARKET COST MARKET
-------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
Cash equivalents(1):
Corporate notes................................... $ 50,922 $ 50,922 $ 34,108 $ 34,108
Money market fund................................. 52,456 52,456 22,210 22,210
-------- -------- -------- --------
$103,378 $103,378 $ 56,318 $ 56,318
-------- -------- -------- --------
Short-term:
Corporate notes................................... $ 82,988 $ 83,191 $210,954 $210,173
Federal agencies.................................. 13,175 13,207 4,085 4,067
U.S. Treasury notes............................... 246 246 -- --
-------- -------- -------- --------
$ 96,409 $ 96,644 $215,039 $214,240
-------- -------- -------- --------
Long-term:
Corporate notes................................... $186,904 $190,542 $137,482 $135,509
Federal........................................... 99,549 100,803 -- --
U.S. Treasury notes............................... 7,432 7,496 69,925 69,633
-------- -------- -------- --------
293,885 $298,841 $207,407 $205,142
======== ======== ======== ========
$493,672 $498,863 $478,764 $475,700
======== ======== ======== ========
Investments in equity securities.................. $ 73,117 $119,648 $ 59,983 $ 94,719
-------- -------- -------- --------
- ------------------------
(1) Cash equivalents are included as part of cash and cash equivalents on our
balance sheets.
REALIZED AND UNREALIZED GAINS AND LOSSES ON MARKETABLE SECURITIES AND
INVESTMENTS IN EQUITY SECURITIES
Genzyme General recorded gains of $16.4 million resulting from sales of
portions of our investment in Genzyme Transgenics common stock. We also
recognized a $7.6 million gain, resulting from the Ismed acquisition of Celtrix,
in which our shares of Celtrix common stock were exchanged on a 1-for-1 basis
for shares of Insmed common stock. The tax effect of these gains were offset by
the reversal of a $1.9 million valuation allowance related to previously
recognized capital losses.
Genzyme General recorded gains of $2.0 million in 1999 upon the sale of its
investment in shares of Techne common stock. Genzyme General also recorded a
$5.7 million charge in 1999 in connection with its investments in the common
stock of Pharming and IntegraMed America, Inc. because we considered the decline
in the value of those investments to be other than temporary. In connection with
these assessments, we concluded that evidence existed that the value of the
investments would recover to at least its cost. This included:
- continued positive progress in the issuers' scientific programs;
GG-41
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE J. INVESTMENTS (CONTINUED)
- ongoing activity in Genzyme General's collaborations with the issuers;
and
- a lack of any substantial company-specific adverse events causing the
declines in value.
However, given the significance and duration of the declines as of the end of
the applicable quarter, we concluded that it was unclear over what period any
price recoveries would take place and that, accordingly, the positive evidence
suggesting that the investments would recover to at least Genzyme General's
purchase price was not sufficient to overcome the presumption that the current
market price was the best indicator of the value of these investments.
Genzyme General records gross unrealized holding gains and losses in
division equity. The following table sets forth the amounts recorded:
DECEMBER 31,
-----------------------------
2000 1999
------------- -------------
Unrealized holding gains........................ $60.7 million $37.1 million
Unrealized holding losses....................... $7.9 million $5.0 million
The following table contains information regarding the range of contractual
maturities of Genzyme General's investments in debt securities:
DECEMBER 31,
-----------------------------------------
2000 1999
------------------- -------------------
COST MARKET COST MARKET
-------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
Within 1 year....................... $199,787 $200,021 $271,357 $270,558
1-2 years........................... 85,712 86,686 106,046 104,306
2-10 years.......................... 208,173 212,156 101,361 100,836
-------- -------- -------- --------
$493,672 $498,863 $478,764 $475,700
======== ======== ======== ========
Note I., "Investments," to our consolidated financial statements contains
information regarding Genzyme General's:
- Equity investments in:
- Abiomed, Inc.;
- Aronex Pharmaceuticals, Inc.;
- BioMarin;
- Cambridge Antibody Technology Group plc;
- Crucell, N.V.;
- Healthcare Ventures, L.P.;
- Pharming;
- Targeted Genetics Corp.;
GG-42
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE J. INVESTMENTS (CONTINUED)
- Investments in and relationships with Dyax Corporation, Genzyme
Transgenics and ATIII LLC; and
- Investments in the following joint ventures:
- BioMarin/Genzyme LLC;
- Diacrin/Genzyme LLC;
- Pharming/Genzyme LLC;
- Genzyme/Pharming Alliance LLC; and
- RenaGel LLC.
We incorporate that information into this note by reference.
NOTE K. ACCRUED EXPENSES
DECEMBER 31,
-----------------------
2000 1999
-------- --------
(AMOUNTS IN THOUSANDS)
Compensation........................................... $20,811 $21,363
Distributor fees....................................... 3,499 --
Professional fees...................................... 3,259 2,938
Acquisition costs...................................... 4,698 --
Purchase accrual....................................... 11,468 --
Payable to joint ventures.............................. 7,743 --
Royalties.............................................. 7,318 6,891
Rebates................................................ 6,482 7,126
Other.................................................. 32,923 24,196
------- -------
$98,201 $62,514
======= =======
GG-43
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE L. LONG-TERM DEBT AND LEASES
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(AMOUNTS IN THOUSANDS)
5 1/4% convertible subordinated notes due in
June 2005............................................. $250,000 $250,000
Revolving credit facility maturing in December 2003..... 150,000 --
5% convertible subordinated debentures due in
August 2003........................................... 23,680 22,622
Notes payable........................................... 5,493 --
Capital lease obligations............................... 26,511 --
-------- --------
$455,684 272,622
-------- --------
Less current portion.................................... (1,448) --
-------- --------
$454,236 $272,622
======== ========
Over the next five years, Genzyme General will be required to repay the
following principal amounts on its long-term debt (excluding capital leases):
2001 2002 2003 2004 2005 AFTER 2005
- --------------------- ------------ -------------- -------- -------------- ----------
-- $5.5 million $173.7 million -- $275.0 million --
REVOLVING CREDIT FACILITY; CONVERTIBLE DEBT; NOTES PAYABLE
Note K, "Long Term Debt and Leases," to our consolidated financial
statements contains information regarding our:
- 5 1/4% convertible subordinated notes due June 2005;
- revolving credit facilities;
- 5% convertible subordinated debentures due August 2003; and
- notes payable from the acquisition of GelTex.
We incorporate that information into this note by reference.
CAPITAL LEASES
In connection with our acquisition of GelTex, we assumed a capital lease
obligation pursuant to an October 1998 lease agreement for the construction of
GelTex's administrative offices. The lease provides for the lessor to fund the
construction of the facility in exchange for interest-only lease payments equal
to the total amount funded by the lessor multiplied by the LIBOR rate plus 1.8%.
The construction was completed in October 1999 and the construction costs funded
by the lessor aggregated $25.0 million. After giving effect to an interest swap
agreement, we make monthly interest payments of $187,000 based on a fixed rate
of 8.99% and an outstanding principal amount of $25.0 million. Therefore, we
will make annual interest payments under this lease of approximately
$2.2 million each year through 2005. The $25.0 million capital lease obligation
and corresponding building is recorded in
GG-44
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE L. LONG-TERM DEBT AND LEASES (CONTINUED)
Genzyme General's combined balance sheet at December 31, 2000. The building is
being depreciated over its estimated useful life.
During the term of the lease, we have the option to purchase the building
and improvements for a purchase price equal to the total amount funded by the
lessor of $25.0 million, plus any accrued and unpaid lease payments and certain
other costs, which aggregate amount is referred to as the Purchase Option Price.
At the end of the lease term of October 31, 2005, we have the option to:
- purchase the building and improvements for the Purchase Option Price;
- arrange for the facility to be purchased by a third party; or
- return the building and improvements to the lessor.
In the case of the latter two options, however, we are contingently liable
to the extent the lessor is not able to realize 85% of the Purchase Option Price
upon the sale or disposition of the property.
OPERATING LEASES
Genzyme General leases facilities and personal property under
non-cancellable operating leases with terms in excess of one year. Genzyme
General's total expense under operating leases was:
2000 1999 1998
- ------------- ------------- -------------
$20.7 million $20.7 million $16.3 million
Over the next five years, Genzyme General will be required to repay the
following amounts under non-cancellable operating leases:
2001 2002 2003 2004 2005 AFTER 2005
- --------------------- ------------- ------------- ------------- ------------ -------------
$16.1 million $15.1 million $13.2 million $12.6 million $8.8 million $91.3 million
In June 1992, one of our wholly-owned subsidiaries entered into a 65-year
land lease with an unaffiliated lessor. Annual expenses under this lease, which
are allocated to Genzyme General, were $1.5 million in 2000, 1999 and 1998. Our
rent under this lease increases every five years based on the consumer price
index or, at a minimum, 3% per year.
GG-45
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE M. DIVISION EQUITY
The following table contains the components of division equity for Genzyme
General for the periods presented:
2000 1999 1998
---------- ---------- --------
(AMOUNTS IN THOUSANDS)
Balance at beginning of period............................. $1,007,614 $ 939,967 $745,895
Division net income...................................... 85,956 142,077 133,052
Allocation of tax benefits generated by:
Genzyme Molecular Oncology............................. 7,476 7,812 3,527
Genzyme Biosurgery..................................... 28,023 26,994 34,330
Allocated proceeds from issuance of Genzyme General Stock
under stock plans...................................... 85,345 59,587 74,360
Allocated proceeds from exercise of warrants to purchase
Genzyme General Stock.................................. -- -- 289
Allocation of cash:
To Genzyme Molecular Oncology for designated
shares(1)............................................ (15,000) -- (5,000)
To Genzyme Surgical Products for designated
shares(1)............................................ -- (176,706) (41,975)
To Genzyme Tissue Repair for designated shares(1)...... (9,910) (4,937) --
To Genzyme Biosurgery for research program............. -- (100) (250)
To Genzyme Biosurgery for transfer of interest in joint
venture.............................................. -- (25,000) --
Allocated tax benefit from disqualifying dispositions...... 17,041 24,238 18,561
Allocation for the acquisition of GelTex................... 541,615 -- --
Conversion of debentures for Genzyme Molecular Oncology
designated shares(1)..................................... -- -- (19,802)
Conversion of note receivable for Genzyme Molecular
Oncology designated shares(1)............................ -- -- (2,696)
Loss on purchase of facility from Genzyme Biosurgery....... -- -- (711)
Allocated stock compensation expense....................... 1,682 58 48
Allocated equity adjustments............................... 438 13,624 339
---------- ---------- --------
Balance at end of period................................... $1,750,280 $1,007,614 $939,967
========== ========== ========
- ------------------------
(1) Designated shares are shares of our common stock that are not issued and
outstanding, but which our board of directors may issue, sell or distribute
without allocating the proceeds to the division corresponding to that series
of stock. As of December 31, 2000, there were 2,000,198 Genzyme Molecular
Oncology designated shares and 1,990,364 Genzyme Biosurgery designated
shares.
INTERDIVISIONAL FINANCING ARRANGEMENTS
GENZYME MOLECULAR ONCOLOGY
In August 1998, our board of directors made $30.0 million of Genzyme
General's cash available to Genzyme Molecular Oncology. Under the terms of this
arrangement, Genzyme Molecular Oncology may draw down funds as needed cash
quarter in exchange for Molecular Oncology designated shares
GG-46
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE M. DIVISION EQUITY (CONTINUED)
based on the fair market value of Molecular Oncology Stock (as defined in our
charter) at the time of the draw. In April 2000, Genzyme Molecular Oncology drew
$15.0 million of cash under this arrangement in exchange for 676,254 Molecular
Oncology designated shares. As of December 31, 2000, $15.0 million remained
available to Genzyme Molecular Oncology under this arrangement.
GENZYME BIOSURGERY
In October 1996, our board of directors made $20.0 million of Genzyme
General's cash available to Genzyme Tissue Repair in order for Genzyme Tissue
Repair to fund its obligations under Diacrin/ Genzyme LLC, our joint venture
with Diacrin, Inc. to develop and commercialize NeuroCell-TM--PD, a treatment
for Parkinson's disease. Under this arrangement, Genzyme Tissue Repair was able
to draw down funds as needed each quarter in exchange for Genzyme Tissue Repair
designated shares based on the fair market value of Tissue Repair Stock (as
defined in our charter) at the time of the draw. Genzyme Tissue Repair made a
$5.0 million draw in February 1999. In May 1999, the amount available under this
arrangement was reduced by $25.0 million in connection with the reallocation of
our ownership interest in Diacrin/Genzyme LLC from Genzyme Tissue Repair to
Genzyme General.
In each of March and September 2000, Genzyme Tissue Repair made
$5.0 million draws under this arrangement in exchange for an aggregate of
1,692,657 Genzyme Tissue Repair designated shares. Upon the formation of Genzyme
Biosurgery, these shares were converted into 567,379 Biosurgery designated
shares. Biosurgery designated shares are shares of Biosurgery Stock that are
created when cash or other assets are transferred from Genzyme General to
Genzyme Biosurgery. The proceeds from the sale of these shares will be allocated
to Genzyme General. As of December 31, 2000, $10.0 million remained available to
Genzyme Biosurgery under this arrangement.
STOCK COMPENSATION PLANS
We apply APB Opinion 25 and related interpretations in accounting for our
five stock-based compensation plans: the 1990 Equity Incentive Plan and the 1997
Equity Incentive Plan (both of which are stock option plans), the 1990 Employee
Stock Purchase Plan, the 1999 Employee Stock Purchase Plan and the 1998 Director
Stock Option Plan. We do not recognize compensation expense for options granted
and shares purchased under the provisions of these plans for options granted to
employees with an exercise price greater than or equal to fair market value.
The following table sets forth division net income data for Genzyme General
as if compensation expense for our stock-based compensation plans was determined
in accordance with SFAS 123 based on the fair value at the grant dates of the
awards, and the compensation expense related to Genzyme General Stock awards
would be allocated to Genzyme General in accordance with our allocation
policies:
2000 1999 1998
-------- -------- --------
(AMOUNTS IN THOUSANDS)
Division net income:
As reported.................................. $85,956 $142,077 $133,052
Pro forma.................................... $60,562 $124,417 $119,477
GG-47
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE M. DIVISION EQUITY (CONTINUED)
Note L., "Stockholders' Equity," to our consolidated financial statements
contains information regarding the assumptions we made in calculating pro forma
compensation expense in accordance with SFAS 123. The effects of applying
SFAS 123 are not likely to be representative of the effects on reported division
net income in future years.
NOTE N. RESEARCH AND DEVELOPMENT AGREEMENTS
Genzyme General's revenue from research and development agreements with
Genzyme Transgenics Corporation was:
2000 1999 1998
- ------------ ------------- -------------
$0.5 million $1.5 million $3.6 million
Note M., "Research and Development Agreements," to our consolidated
financial statements contains information regarding Genzyme General's:
- relationships with Genzyme Transgenics; and
- investments in the following joint ventures:
- BioMarin/Genzyme LLC;
- Diacrin/Genzyme LLC;
- Pharming/Genzyme LLC;
- Genzyme/Pharming Alliance LLC; and
- RenaGel LLC.
We incorporate that information in this note by reference.
NOTE O. COMMITMENTS AND CONTINGENCIES
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 December 31, 2000 which, if adversely decided, would
have a material adverse effect on Genzyme General's results of operations,
financial condition or liquidity.
GG-48
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE P. INCOME TAXES
Genzyme General's income before income taxes and the related income tax
expense (benefit) are described in the following table:
2000 1999 1998
-------- -------- --------
(AMOUNTS IN THOUSANDS)
Domestic(1)................................................. $165,266 $210,097 $204,182
Foreign..................................................... 13,329 16,380 9,514
-------- -------- --------
Total................................................... $178,595 $226,477 $213,696
======== ======== ========
Currently payable:
Federal..................................................... $ 90,483 $ 77,779 $ 69,567
State....................................................... 4,737 4,302 9,354
Foreign..................................................... 3,607 5,733 4,016
-------- -------- --------
Total................................................... 98,827 87,814 82,937
-------- -------- --------
Deferred:
Federal..................................................... (5,928) (3,036) (1,734)
State....................................................... (260) (378) (829)
-------- -------- --------
Total................................................... (6,188) (3,414) $ (2,563)
-------- -------- --------
Provision for income taxes.................................. $ 92,639 $ 84,400 $ 80,374
======== ======== ========
- ------------------------
(1) Includes purchased research and development charges of $118.0 million in
2000 and $5.4 million in 1999.
Genzyme General's provisions for income taxes were at rates other than the
U.S. federal statutory tax rate for the following reasons:
2000 1999 1998
-------- -------- --------
Tax at U.S. statutory rate.................................. 35.0% 35.0% 35.0%
Losses in foreign subsidiary and less than 80% owned
subsidiaries with no current tax benefit.................. (1.1) 0.1 0.8
State taxes, net............................................ 1.2 1.2 3.1
Foreign sales corporation................................... (2.7) (2.2) (1.5)
Nondeductible amortization.................................. 0.7 0.7 0.8
Benefit of tax credits...................................... (1.1) (1.4) (1.0)
Other, net.................................................. (0.8) 2.2 0.5
---- ---- ----
Effective tax rate before certain charges................... 31.2% 35.6% 37.7%
Charge for impaired investment.............................. -- 0.5 --
Charge for purchased research and development............... 12.7 0.5 --
---- ---- ----
Effective tax rate.......................................... 43.9% 36.6% 37.7%
==== ==== ====
GG-49
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE P. INCOME TAXES (CONTINUED)
The components of net deferred tax assets are described in the following
table:
DECEMBER 31,
----------------------
2000 1999
---------- ---------
(AMOUNTS IN THOUSANDS)
Deferred tax assets:
Net operating loss carryforwards.......................... $ 35,769 $ 3,164
Tax credits............................................... 13,304 9,413
Intangible amortization................................... -- 36,496
Investments in unconsolidated subsidiary.................. -- 3,396
Realized and unrealized capital losses.................... -- 10,088
Reserves, accruals and other.............................. 42,819 37,055
Allocation of tax asset from Genzyme Biosurgery........... 12,123 15,510
Allocation of tax asset from Genzyme Molecular Oncology... 437 3,787
--------- --------
Gross deferred tax asset.................................... $ 104,452 $118,909
Valuation allowance......................................... (13,592) (17,646)
--------- --------
90,860 101,263
Deferred tax liabilities:
Depreciable assets........................................ (21,149) (22,591)
Realized and unrealized capital gains..................... (7,530) (12,686)
Deferred gains............................................ (878) (878)
Intangibles............................................... (134,684) --
Investments in unconsolidated subsidiaries................ (4,396) --
Allocation of tax liability from Genzyme Biosurgery....... -- (4,069)
--------- --------
Net deferred tax asset (liability).......................... $ (77,777) $ 61,039
========= ========
As a result of uncertainty surrounding our ability to realize certain tax
benefits that primarily relate to capital losses from the purchase of in-process
research and development, we placed valuation allowances of $13.6 million in
2000 and $17.6 million in 1999 against otherwise recognizable deferred tax
assets.
Our ability to realize the benefit of net deferred tax assets is dependent
on our generating sufficient taxable income before loss carryforwards expire.
While it is not assured, we believe that it is more likely than not that we will
be able to realize all of our net deferred tax assets. The amount we can
realize, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.
At December 31, 2000, Genzyme General had for U.S. income tax purposes
allocated net operating loss carryforwards of $105.1 million and an allocated
tax credit carryforward of $13.3 million. The net operating loss carryforwards
expire between 2003 and 2020 and, prior to expiration, Genzyme General's ability
to use this carryforward may be limited under U.S. tax laws. Tax credits of
$10.3 million will carryforward indefinitely and approximately $3.0 million of
the tax credit carryforwards will expire from 2007 to 2020. Approximately
$10.3 million of the tax credit carryforwards
GG-50
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE P. INCOME TAXES (CONTINUED)
relate to exercises of non-qualified stock options and disqualifying
dispositions of incentive stock options, the tax benefit of which, if realized,
will be credited to additional paid-in-capital.
NOTE Q. BENEFIT PLANS
Note P., "Benefit Plans," to our consolidated financial statements contains
information regarding our 401(k) and other pension plans. We incorporate that
information into this note by reference.
NOTE R. SEGMENT INFORMATION
In accordance with Statement of Financial Accounting Standards No. 131, or
SFAS 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 131, Genzyme General
has two reportable segments:
- Therapeutics, which develops, manufactures and distributes human
therapeutic products for significant unmet medical needs. The business
derives substantially all of its revenue from sales of
Cerezyme-Registered Trademark- enzyme; and
- Diagnostic Products, which provides diagnostic products to niche markets
focusing on IN VITRO diagnostics.
GG-51
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE R. SEGMENT INFORMATION (CONTINUED)
We have provided information concerning the operations in these reportable
segments in the following table:
2000 1999 1998
-------- -------- --------
(AMOUNTS IN THOUSANDS)
Revenues:
Therapeutics(1)............................. $600,679 $488,705 $413,645
Diagnostics Products........................ 61,469 57,971 65,683
Other....................................... 89,371 86,409 85,846
Eliminations/Adjustments(2)................. 964 2,281 4,145
-------- -------- --------
Total......................................... $752,483 $635,366 $569,319
======== ======== ========
Depreciation and amortization expense:
Therapeutics(1,3)........................... $ 8,913 $ 13,069 $ 10,862
Diagnostics Products........................ 4,940 1,909 4,715
Other....................................... 7,226 6,422 11,470
Eliminations/Adjustments(2)................. 20,127 20,835 10,711
-------- -------- --------
Total......................................... $ 41,206 $ 42,235 $ 37,758
======== ======== ========
Equity in net loss of unconsolidated
affiliates:
Therapeutics(4)............................. $(42,801) $(30,094) $(12,480)
Diagnostics Products........................ -- -- --
Other....................................... (64) 56 (107)
Eliminations/Adjustments(5)................. (2,100) (7,385) (7,152)
-------- -------- --------
Total......................................... $(44,965) $(37,423) $(19,739)
======== ======== ========
Income tax (expense) benefits:
Therapeutics(1)............................. $(53,046) $(84,859) $(76,606)
Diagnostics Products........................ (2,056) (2,485) (13,755)
Other....................................... 1,006 2,952 2,134
Eliminations/Adjustments(2)................. (38,543) (8) 7,853
-------- -------- --------
Total......................................... $(92,639) $(84,400) $(80,374)
======== ======== ========
Division net income:
Therapeutics(1,6)........................... $ 94,065 $133,854 $120,832
Diagnostics Products(7)..................... 3,004 3,915 21,694
Other(8).................................... (1,790) (4,661) (3,367)
Eliminations/Adjustments(9)................. (9,323) 8,969 (6,107)
-------- -------- --------
Total......................................... $ 85,956 $142,077 $133,052
======== ======== ========
- ------------------------
(1) On December 14, 2000 we acquired GelTex, a developer of therapeutic products
based on polymer technology. The operations of GelTex is included in our
Therapeutics segment for the period from December 14, 2000 through
December 31, 2000. See Note E., "Acquisitions," above.
GG-52
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE R. SEGMENT INFORMATION (CONTINUED)
(2) Consists primarily of amounts related to Genzyme General's research and
development and administrative activities that we do not specifically
allocate to a particular segment of Genzyme General.
(3) Depreciation and amortization expense for 2000 includes the amortization of
the intangible assets generated by the GelTex acquisition for the period
from December 14, 2000 through December 31, 2000. See Note E.,
"Acquisitions," above.
(4) Equity in net loss of unconsolidated affiliates for Therapeutics in 2000
includes Genzyme General's 50% portion of the losses of RenaGel LLC through
December 13, 2000. In connection with the acquisition of GelTex, we acquired
GelTex's 50% interest in RenaGel LLC and, as a result, consolidated the
activities of the joint venture for the period from December 14, 2000
through December 31, 2000. See Note E., "Acquisitions," above.
(5) Represents our portion of the net loss of Genzyme Transgenics, an
unconsolidated affiliate, which we do not specifically allocate to a
particular segment of Genzyme General.
(6) Therapeutics net income includes charges for in-process technology of
$118.0 million in 2000 related to the acquisition of GelTex and
$5.4 million in 1999 related to the acquisition of Peptimmune. See Note D.,
"Acquisitions," above. Therapeutics' net income for 1998 includes a
$14.8 million pre-tax charge to write down excess inventory used to make
Ceredase-Registered Trademark- enzyme. See Note C., "Other Gains and
Charges," above.
(7) Diagnostic Products' net income for 1999 and 1998 includes pre-tax gains on
the sale of product lines of $0.5 million in 1999 and $31.2 million in 1998.
See Note D., "Dispositions of Assets" above.
(8) Other income for 1999 includes a $7.5 million pre-tax gain on the sale of a
product line. See Note D., "Dispositions of Assets," above.
(9) Includes the net income (loss) of Genzyme General's corporate administrative
and research and development activities which we do not specifically
allocate to a particular segment of Genzyme General including the following
(pre-tax):
- gains on affiliate sale of stock of $22.7 million in 2000,
$6.7 million in 1999 and $2.4 million in 1998, recognized in accordance
with our policy pertaining to affiliate sales of stock, all of which
resulted from the sale of common stock by Genzyme Transgenics, an
unconsolidated affiliate;
- net gains on sales of investment in equity securities of $23.2 million
in 2000, $2.0 million in 1999 and $3.4 million in 1998 resulting from
sales of a portion of our investment portfolio in each period; and
- in 2000, net proceeds of $5.1 million received in connection with the
settlement of a lawsuit and in 1999, a $14.4 million gain upon receipt
of a payment associated with the termination of the agreement to
acquire Cell Genesys, Inc.
GG-53
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE R. SEGMENT INFORMATION (CONTINUED)
We provide information concerning the assets of the reportable segments in
the following table:
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(AMOUNTS IN THOUSANDS)
Segment Assets(1):
Therapeutics(2).................................... $1,341,656 $ 338,960
Diagnostics Products............................... 89,236 40,266
Other.............................................. 77,153 83,088
Eliminations/Adjustments(3)........................ 991,008 937,269
---------- ----------
Total................................................ $2,499,053 $1,399,583
========== ==========
- ------------------------
(1) Segment assets for Genzyme General include primarily accounts receivable,
inventory and certain fixed and intangible assets.
(2) Segment assets for Therapeutics include $1.1 billion of additional assets
resulting from the acquisition of GelTex, including $465.1 million of
intangible assets, $449.6 million of goodwill and $45.5 million of property,
plant and equipment. See Note E., "Acquisitions," above.
(3) Eliminations/Adjustments for Genzyme General consists of the differences
between the total assets for Genzyme General's segments and the total
combined assets for Genzyme General as follows:
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(AMOUNTS IN THOUSANDS)
Cash, cash equivalents, and short- and long-term
investments......................................... $339,259 $513,905
Due from Genzyme Biosurgery........................... 18,645 7,089
Due from Genzyme Molecular Oncology................... 4,660 3,793
Deferred tax assets--current.......................... 46,836 41,195
Intangibles, net...................................... 30,197 34,341
Property, plant and equipment, net.................... 332,423 172,165
Investment in equity securities....................... 119,648 94,719
Deferred tax assets--noncurrent....................... -- 18,631
Other................................................. 99,340 51,431
-------- --------
Total Eliminations/Adjustments...................... $991,008 $937,269
======== ========
Genzyme General operates in the healthcare industry and manufactures and
markets its products primarily in the United States and Europe. Genzyme
General's principal manufacturing facilities are located in the United States,
United Kingdom, Switzerland and Germany. It purchases products from our
subsidiaries in the United Kingdom and Switzerland for sale to customers in the
United States. Genzyme General sets transfer prices from our foreign
subsidiaries to allow it to produce profit margins commensurate with its sales
and marketing effort. Our subsidiary in the Netherlands is Genzyme General's
primary distributor of therapeutic products in Europe.
GG-54
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE R. SEGMENT INFORMATION (CONTINUED)
No subsidiary in any individual foreign country has revenue from sales of
Genzyme General's products and services to external customers in excess of 10%
of Genzyme General's total revenue. The following contains certain financial
information by geographic area:
The following table contains certain financial information by geographic
area:
2000 1999 1998
-------- -------- --------
(AMOUNTS IN THOUSANDS)
Revenues:
U.S......................................... $436,001 $412,611 $371,587
Europe...................................... 223,933 158,428 147,088
Other....................................... 92,549 64,327 50,644
-------- -------- --------
Total..................................... $752,483 $635,366 $569,319
======== ======== ========
Long-lived assets:
U.S......................................... $868,916 $647,024 $755,023
Other....................................... 47,674 52,541 57,247
-------- -------- --------
Total..................................... $916,590 $699,565 $812,270
======== ======== ========
Genzyme General's results of operations are highly dependent on sales of
Ceredase-Registered Trademark- and Cerezyme-Registered Trademark- enzymes. Sales
of these products represented 78% of Genzyme General's product revenue in 2000,
84% of product revenue in 1999 and 81% of product revenue in 1998. Genzyme
General sells these products directly to physicians, hospitals and treatment
centers as well as through an unaffiliated distributor. Distributor sales
represented 28% of Ceredase-Registered Trademark- and
Cerezyme-Registered Trademark- enzyme revenues in each of 2000, 1999 and 1998.
We believe that our credit risk associated with trade receivables is mitigated
as a result of the fact that these products are sold to a large number of
customers in a number of different industries and over a broad geographic area.
GG-55
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE S. QUARTERLY RESULTS (UNAUDITED)
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER(1)
-------- -------- -------- ----------
(AMOUNTS IN THOUSANDS)
2000
Net revenue......................................... $170,626 $186,694 $192,165 $202,998
Gross profit........................................ 129,411 140,536 137,651 142,817
Division net income................................. 45,309 63,990 50,973 (74,316)
1999
Net revenue......................................... $150,766 $154,205 $157,669 $172,726
Gross profit........................................ 113,519 117,557 120,693 126,223
Division net income................................. 33,505 27,913 29,971 50,688
- ------------------------
(1) Includes the reversal of reserves in the fourth quarter of 2000 totalling
$4.1 million, before taxes, that were established in the prior three
quarters of 2000. These reserves were considered in excess of requirements
at December 31, 2000.
NOTE T. SUBSEQUENT EVENT
On March 16, 2001, Genzyme General announced its preliminary analysis of
results from the phase 2 trial of NeuroCell-TM--PD, a treatment for Parkinson's
disease. Genzyme General is developing NeuroCell-TM--PD with Diacrin. Based on
the results of the trial and the need for additional analysis of those results,
a Phase 3 clinical study of NeuroCell-TM--PD will not be initiated before
June 30, 2001. As a result, Genzyme General, at its election, may require
Genzyme Biosurgery to repay Genzyme General $20.0 million of the $25.0 million
Genzyme Biosurgery received from Genzyme General in connection with the transfer
to Genzyme General of Genzyme Biosurgery's interest in the joint venture. This
refund, together with accrued interest at 13.5% per year, will be due within 90
days of receipt of Genzyme General's election. The payment may be made in cash,
Biosurgery designated shares, or a combination of both, at Genzyme Biosurgery's
option.
GG-56
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Genzyme Corporation:
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations and of cash flows present fairly, in all
material respects, the financial position of Genzyme General (as described in
Note A) at December 31, 2000 and 1999, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As more fully described in Note A. to these financial statements, Genzyme
General is a division of Genzyme Corporation; accordingly, the combined
financial statements of Genzyme General should be read in conjunction with the
audited consolidated financial statements of Genzyme Corporation and
Subsidiaries.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 23, 2001, except for Note T.,
as to which the date is March 16, 2001.
GG-57