EXHIBIT 13.3
FINANCIAL STATEMENTS
GENZYME BIOSURGERY
A DIVISION OF GENZYME CORPORATION
PAGE NO.
------------
Combined Selected Financial Data............................ GB-2
Management's Discussion and Analysis of Genzyme Biosurgery's
Financial Condition and Results of Operations............. GB-5
Combined Statements of Operations--For the Years Ended
December 31, 2000, 1999,
and 1998.................................................. GB-22
Combined Balance Sheets--December 31, 2000 and 1999......... GB-23
Combined Statements of Cash Flows--For the Years Ended
December 31, 2000, 1999
and 1998.................................................. GB-24
Notes to Combined Financial Statements...................... GB-26
Report of Independent Accountants........................... GB-49
GB-1
GENZYME BIOSURGERY
A DIVISION OF GENZYME CORPORATION
COMBINED SELECTED FINANCIAL DATA
These selected financial data have been derived from the audited combined
financial statements of Genzyme Biosurgery. You should read the following
information in conjunction with Genzyme Biosurgery's audited financial
statements and related notes contained elsewhere in this annual report.
Genzyme Biosurgery is our operating division that develops and markets
instruments, devices, biomaterials and biotherapeutic products to improve or
replace surgery, with an emphasis on the orthopaedic and cardiothoracic markets.
A series of our common stock, Genzyme Biosurgery Division Common Stock
(which we refer to as "Biosurgery Stock") is designed to reflect the value and
track the performance of this division. Biosurgery Stock is common stock of
Genzyme Corporation, not of Genzyme Biosurgery; Genzyme Biosurgery is a
division, not a company or legal entity, and therefore does not and cannot issue
stock. The chief mechanisms intended to cause Biosurgery Stock to "track" the
financial performance of Genzyme Biosurgery 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 Biosurgery into the determination of the amount available to pay
dividends on Biosurgery Stock; and
- requires us to exchange, redeem or distribute a dividend to the holders of
Biosurgery Stock if all or substantially all of the assets allocated to
Genzyme Biosurgery are sold to a third party.
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 Biosurgery Stock is defined in our charter
as the net income or loss of Genzyme Biosurgery determined in accordance with
generally accepted accounting principles and as adjusted for tax benefits
allocated to or from Genzyme Biosurgery in accordance with our management and
accounting policies. Our charter also requires that all income and expenses of
Genzyme be allocated among its 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.
Because the earnings allocated to Biosurgery Stock are based on the income
or losses attributable to Genzyme Biosurgery, we include financial statements
and management's discussion and analysis of Genzyme Biosurgery to aid investors
in evaluating its performance.
On December 18, 2000, we created Genzyme Biosurgery by combining two of our
divisions, Genzyme Surgical Products and Genzyme Tissue Repair to form one new
division, and simultaneously acquiring Biomatrix, Inc. in a tax-free exchange of
stock and cash. These financial statements reflect the financial position,
results of operations and cash flows allocated to Genzyme Biosurgery as if it
had been accounted for as a separate division of the corporation for all periods
presented, as it relates to Genzyme Surgical Products and Genzyme Tissue Repair.
We accounted for the acquisition as a purchase and accordingly, the results of
operations of Biomatrix are included in our consolidated financial statements
and the combined financial statements of Genzyme Biosurgery from the date of
acquisition. The aggregate purchase price of $426.2 million has been allocated
to the fair value of the acquired assets and liabilities as of the acquisition
date.
GB-2
GENZYME BIOSURGERY
A DIVISION OF GENZYME CORPORATION
COMBINED SELECTED FINANCIAL DATA (CONTINUED)
COMBINED STATEMENTS OF OPERATIONS DATA (1)
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------
2000 1999 1998 1997 1996
--------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
Revenues:
Net product sales...................... $ 121,870 $111,951 $103,958 $100,835 $ 50,714
Net service sales...................... 23,321 20,305 17,008 10,856 7,312
Revenue from research and development
contracts............................ 23 97 109 -- --
--------- -------- -------- -------- --------
Total revenues....................... 145,214 132,353 121,075 111,691 58,026
Operating costs and expenses:
Cost of products sold (2).............. 69,489 67,212 72,274 59,802 32,654
Cost of services sold.................. 12,298 13,237 13,438 11,788 11,193
Selling, general and administrative.... 92,238 87,841 81,876 79,632 55,510
Research and development............... 37,000 36,075 29,050 22,132 18,573
Amortization of intangibles............ 7,096 5,750 5,748 5,647 2,984
Purchase of in-process research and
development (3)...................... 82,143 -- -- -- 24,170
Charge for impaired asset (4).......... 4,321 -- -- -- --
--------- -------- -------- -------- --------
Total operating costs and expenses..... 304,585 210,115 202,386 179,001 145,084
--------- -------- -------- -------- --------
Operating loss....................... (159,371) (77,762) (81,311) (67,310) (87,058)
Other income (expenses):
Equity in net loss of unconsolidated
affiliates (5)....................... -- (3,403) (7,680) (6,797) (1,725)
Charge for impaired investments (6).... (7,300) -- -- -- --
Investment income...................... 5,833 4,808 1,320 1,077 1,516
Interest expense....................... (1,364) (1,858) (2,631) (2,930) (206)
Other.................................. (15) 138 60 236 8
--------- -------- -------- -------- --------
Total other income (expenses)........ (2,846) (315) (8,931) (8,414) (407)
--------- -------- -------- -------- --------
Loss before income taxes................. (162,217) (78,077) (90,242) (75,724) (87,465)
Tax benefit.............................. -- -- -- -- 837
--------- -------- -------- -------- --------
Division net loss........................ $(162,217) $(78,077) $(90,242) $(75,724) $(86,628)
========= ======== ======== ======== ========
GB-3
GENZYME BIOSURGERY
A DIVISION OF GENZYME CORPORATION
COMBINED SELECTED FINANCIAL DATA (CONTINUED)
COMBINED BALANCE SHEET DATA (1)
DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
Cash and investments...................... $ 78,163 $135,498 $ 7,732 $ 32,890 $ 18,412
Working capital........................... 98,819 110,577 26,253 65,902 54,788
Total assets.............................. 811,600 390,572 253,170 299,792 296,202
Long-term debt and capital lease
obligations............................. 229,453 18,000 12,579 31,089 18,000
Division equity........................... 511,106 350,463 210,692 255,172 257,124
- ------------------------
(1) We formed Genzyme Biosurgery as a separate division of Genzyme on
December 18, 2000 by combining two of our divisions, Genzyme Surgical
Products and Genzyme Tissue Repair, and simultaneously acquiring
Biomatrix, Inc. These data reflect the financial position, results of
operations and cash flows attributable to Genzyme Biosurgery as if it had
been accounted for as a separate division of the corporation for all periods
presented as it relates to Genzyme Surgical Products and Genzyme Tissue
Repair, and from the date of acquisition for Biomatrix.
(2) Cost of products sold for 1998 includes a $10.4 million charge to write-down
our Sepra-TM- products inventory to net realizable value.
(3) Charges for in-process research and development were incurred in connection
with the following acquisitions:
- 2000--$82.1 million from the acquisition of Biomatrix; and
- 1996--$24.2 million from the acquisition of Deknatel Snowden Pencer, Inc.
(4) Represents a charge to write off abandoned equipment at our Springfield
Mills manufacturing facility.
(5) Operations of Diacrin/Genzyme LLC, our joint venture with Diacrin, Inc.,
commenced in October 1996 and was allocated to Genzyme Tissue Repair. In
May 1999, we reallocated our ownership interest in the joint venture from
Genzyme Tissue Repair to Genzyme General.
(6) Represents a charge for the write-down of a strategic equity investment
whose decline in market value was deemed as "other than temporary."
GB-4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF GENZYME BIOSURGERY'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 Biosurgery 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 Biosurgery and
Genzyme.
On December 18, 2000, we acquired Biomatrix, Inc., a public company engaged
in the development and commercialization of viscoelastic products made of
biological polymers called hylans for use in therapeutic medical applications
and skin care. We accounted for the acquisition as a purchase. Immediately prior
to the acquisition, we combined two of our operating divisions, Genzyme Surgical
Products and Genzyme Tissue Repair, to form a new division called Genzyme
Biosurgery. We allocated the acquired assets and liabilities of Biomatrix to
Genzyme Biosurgery. The combination of Genzyme Surgical Products and Genzyme
Tissue Repair to form Genzyme Biosurgery did not result in any adjustments to
the book values of the net assets of the divisions because they remained
divisions of the same corporation. We present the financial statements of
Genzyme Biosurgery as though the divisions had been combined for all periods
presented, and include the operations of Biomatrix from the date of acquisition.
In connection with the formation of Genzyme Biosurgery, we created Genzyme
Biosurgery Division common stock, which we refer to as "Biosurgery Stock."
Biosurgery Stock is designed to track the performance of Genzyme Biosurgery.
Each outstanding share of Genzyme Surgical Products Division common stock, or
"Surgical Products Stock," was converted into 0.6060 of a share of Biosurgery
Stock, and each outstanding share of Genzyme Tissue Repair Division common
stock, or "Tissue Repair Stock," was converted into 0.3352 of a share of
Biosurgery Stock. All outstanding options to purchase Surgical Products Stock
and Tissue Repair Stock were converted into options to purchase Biosurgery Stock
at the applicable conversion rates.
We prepare the combined financial statements of Genzyme Biosurgery in
accordance with generally accepted accounting principles. We present financial
information and accounting policies specific to Genzyme Biosurgery 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 combined financial
statements of Genzyme Biosurgery. Note A., "Summary of Significant Accounting
Policies," to our consolidated financial statements contains a summary of our
accounting policies.
Genzyme Biosurgery Division common stock, which we refer to as "Biosurgery
Stock," is a series of our common stock that is designed to reflect the value
and track the performance of Genzyme Biosurgery. The chief mechanisms intended
to cause Biosurgery Stock to "track" the financial performance of Genzyme
Biosurgery 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 Biosurgery into the determination of the amount available to pay
dividends on Biosurgery Stock; and
- requires us to exchange, redeem or distribute a dividend to the holders of
Biosurgery Stock if all or substantially all of the assets allocated to
Genzyme Biosurgery are sold to a third party (a dividend or redemption
payment must equal in value the net after-tax proceeds from the sale;
GB-5
an exchange must be for Genzyme General Stock at a 10% premium to the
average market price of Biosurgery Stock following the announcement of the
sale).
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 Biosurgery Stock is defined in our charter as the net
income or loss of Genzyme Biosurgery determined in accordance with generally
accepted accounting principles and as adjusted for tax benefits allocated to or
from Genzyme Biosurgery 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 Biosurgery Stock are based on the income
or losses attributable to Genzyme Biosurgery, we include financial statements
and management's discussion and analysis of Genzyme Biosurgery to aid investors
in evaluating its performance.
While Biosurgery Stock is designed to reflect Genzyme Biosurgery's
performance, it is common stock of Genzyme Corporation and not Genzyme
Biosurgery; Genzyme Biosurgery is a division, not a company or legal entity, and
therefore does not and cannot issue stock. Consequently, holders of Biosurgery
Stock have no specific rights to assets allocated to Genzyme Biosurgery. Genzyme
Corporation continues to hold title to all of the assets allocated to Genzyme
Biosurgery and is responsible for all of its liabilities, regardless of what we
deem for financial statement presentation purposes as allocated to Genzyme
Biosurgery. Holders of Biosurgery 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 Biosurgery Stock and other tracking stockholders
would only have the rights of common stockholders in the combined assets of
Genzyme.
Our charter sets forth what programs and businesses were initially allocated
to Genzyme Biosurgery and states that going forward the division will also
include all businesses, products or programs, developed by or acquired for the
division, as determined by our board of directors. We then manage and account
for transactions between Genzyme Biosurgery 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.
We present earnings per share data for Biosurgery Stock in our consolidated
financial statements. We present financial information and accounting policies
specific to Genzyme Biosurgery 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, therefore, read this discussion and analysis
of Genzyme Biosurgery's financial position and results of operations in
conjunction with the financial statements and related notes of Genzyme
Biosurgery, the discussion and analysis of Genzyme's financial position and
results of operations, and the consolidated financial statements and related
notes of Genzyme, all of which are included in this annual report.
GB-6
RESULTS OF OPERATIONS
The following discussion summarizes the key factors our management believes
are necessary for an understanding of Genzyme Biosurgery's financial statements.
The components of Genzyme Biosurgery'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.......................... $ 145,214 $132,353 $121,075 10% 9%
--------- -------- --------
Cost of products sold................... 69,489 67,212 72,274 3% (7%)
Cost of services sold................... 12,298 13,237 13,438 (7%) (1%)
Selling, general and administrative..... 92,238 87,841 81,876 5% 7%
Research and development................ 37,000 36,075 29,050 3% 24%
Amortization of intangibles............. 7,096 5,750 5,748 23% 0%
Purchase of in-process research and
development........................... 82,143 -- -- 100% N/A
Charge for impaired asset............... 4,321 -- -- 100% N/A
--------- -------- --------
Total operating costs and
expenses.......................... 304,585 210,115 202,386 45% 4%
--------- -------- --------
Operating loss.......................... (159,371) (77,762) (81,311) 105% (4%)
Other expenses, net..................... (2,846) (315) (8,931) 803% (96%)
--------- -------- --------
Division net loss....................... $(162,217) $(78,077) $(90,242) 108% (13%)
========= ======== ========
REVENUES
00/99 99/98
INCREASE/ INCREASE/
(DECREASE) (DECREASE)
2000 1999 1998 % CHANGE % CHANGE
-------- -------- -------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Cardiothoracic........................... $ 76,406 $ 77,936 $ 74,545 (2%) 5%
Orthopaedics............................. 22,388 15,213 10,978 47% 39%
Biosurgical Specialties.................. 46,397 39,107 35,443 19% 10%
-------- -------- --------
Total product and service revenues... 145,191 132,256 120,966 10% 9%
Research and development revenue......... 23 97 109 (76%) (11%)
-------- -------- --------
Total revenues....................... $145,214 $132,353 $121,075 10% 9%
======== ======== ========
2000 AS COMPARED TO 1999
Cardiothoracic products include fluid management (chest drainage) systems,
surgical closures, biomaterials, and instruments for conventional and minimally
invasive cardiac surgery. The decrease in cardiothoracic product revenue was due
to competitive pricing pressures in the chest drainage market. These factors
were offset, in part, by the continued growth in minimally invasive
cardiothoracic products and the revenue generated from
FocalSeal-Registered Trademark--L, which was added to the cardiothoracic product
line in 2000.
GB-7
The increase in orthopaedics revenue was due to the continued growth in
sales of Carticel-Registered Trademark- chondrocytes and the sales of
Synvisc-Registered Trademark-, which was added to the orthopaedics line in 2000
as a result of the acquisition of Biomatrix. The increase in sales of
Carticel-Registered Trademark- chondrocytes was a result of continued increases
in the numbers of patients treated and surgeons trained as well as an increase
in the number of insurance reimbursement approvals.
Biosurgical specialties revenue increased as a result of continued revenue
growth in sales of Seprafilm-TM- bioresorbable membrane and Sepramesh-TM-
biosurgical composite, which are used to limit the incidence and severity of
post-operative adhesions. An increase in revenues from Genzyme Biosurgery's
Snowden-Pencer-Registered Trademark- line of instruments for general and plastic
surgery and products sold to original equipment manufacturers, including
sutures, also contributed to the overall increase in biosurgical specialties
product revenue.
International sales as a percentage of total sales in 2000 were 25% as
compared to 28% in 1999.
1999 AS COMPARED TO 1998
The increase in cardiothoracic product revenues was primarily attributable
to increased sales of instruments for minimally invasive cardiac surgery.
The increase in orthopaedics revenue is due primarily to the increase in
sales of Carticel-Registered Trademark- chondrocytes. This increase was
attributable to the same factors to which the increases in 2000 are
attributable.
Biosurgical specialties revenue increased primarily as a result of an
increase in sales of Seprafilm-TM- bioresorbable membrane as well as an increase
in the sales of Genzyme Biosurgery's Snowden-Pencer-Registered Trademark- line
of instruments for general and plastic surgery and products sold to original
equipment manufacturers, including sutures.
International sales as a percentage of total sales in 1999 and 1998 were
28%.
MARGINS
00/99 99/98
INCREASE/ INCREASE/
(DECREASE) (DECREASE)
2000 1999 1998 % CHANGE % CHANGE
-------- -------- -------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Product margins............................. $52,381 $44,739 $31,684 17% 41%
% of product revenue........................ 43% 40% 30%
Service margins............................. 11,023 7,068 3,570 56% 98%
% of service revenue........................ 47% 35% 21%
Total product and service gross margins..... $63,404 $51,807 $35,254 22% 47%
% of total product and service revenues..... 44% 39% 29%
2000 AS COMPARED TO 1999
Genzyme Biosurgery provides a broad range of healthcare products and
services. As a result, Genzyme Biosurgery's gross margins may vary significantly
depending on the market conditions of each product or service.
Product margins increased during the period due to sales of higher margin
products such as instruments for minimally invasive cardiac surgery. An increase
in service margins is a result of certain cost reduction initiatives as well as
increased sales of Carticel-Registered Trademark- chondrocytes during 2000.
GB-8
1999 AS COMPARED TO 1998
During 1998, Genzyme Biosurgery revised its forecasted sales of Sepra-TM-
products and, in accordance with our policy, analyzed the Sepra-TM- products
inventory to determine whether the carrying value exceeded the net realizable
value. The revised forecast showed slower sales growth as well as higher
manufacturing and sales and marketing costs than originally expected. In
addition, the Sepra-TM- products inventory on-hand had a relatively high cost
per unit because production was significantly less than originally planned. As a
result, in the third quarter of 1998, Genzyme Biosurgery recorded a
$10.4 million charge to cost of products sold to write down its inventory of
Sepra-TM- products to net realizable value. Without the effect of this charge,
Genzyme Biosurgery's product margin for 1998 would have been 40%.
Excluding the charge described above, product margins remained relatively
stable. Service margins increased slightly in 1999, primarily a result of
increased sales of Carticel-Registered Trademark- chondrocytes, a reduction in
labor and manufacturing expenses and a decrease in material expenses.
SG&A AND R&D EXPENSES
2000 AS COMPARED TO 1999
Genzyme Biosurgery's selling, general and administrative expenses increased
in 2000 due to increased spending for marketing of cardiothoracic products,
including the launch of three new products for the cardiothoracic market and
corporate branding efforts associated with the creation of Genzyme Biosurgery.
The increase was offset, in part, by efforts to streamline operations relating
to the provision of Carticel-Registered Trademark- chondrocytes and
Epicel-Registered Trademark- skin grafts.
Research and development expenses remained relatively stable for 2000 as
compared to 1999.
1999 AS COMPARED TO 1998
Genzyme Biosurgery's selling, general and administrative expenses increased
in 1999 as a result of an increase in professional service fees and higher
fringe benefit expenses and other costs associated with the creation of Genzyme
Surgical Products as a separate division of Genzyme in June 1999.
Genzyme Biosurgery's research and development expenses for 1998 includes a
$1.7 million charge taken in the third quarter of 1998 to write off certain
costs related to equipment that it used to manufacture the Sepra-TM- products.
Excluding this charge, the increase in research and development costs was a
result of the increased spending for Genzyme Biosurgery's cell and gene therapy
programs as well as the initiation of several clinical trials for its products.
The increase in research and development costs was also attributable to a
$2.0 million milestone payment to a collaborator that was recorded in
June 1999. These increases were partially offset by the termination of Genzyme
Biosurgery's TGF-b and some of its other research and development programs.
PURCHASE OF IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with the purchase of Biomatrix, Genzyme Biosurgery allocated
approximately $82.1 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.
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. A 38% discount rate was used, which is
consistent with the risks of each project. In estimating future cash flows,
management considered other tangible and intangible assets, including core
technology, required
GB-9
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 Biomatrix 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 Biomatrix's
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 Biosurgery's financial statements for the year
ended December 31, 2000. Genzyme Biosurgery is amortizing the remaining acquired
intangible assets arising from the acquisition on a straight-line basis over
their estimated lives, which range from 1.5 years to 11 years.
Below is a brief description of the IPR&D projects, including an estimation
of when management believes Genzyme Biosurgery 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)
Viscosupplementation Use of elastoviscous - Expect to complete $33.8 $ 9.5
solutions and viscoelastic clinical studies
gels in disease conditions demonstrating
to supplement tissues and efficacy as a
body fluids, alleviating treatment for chronic
pain and restoring normal hip pain, with
function potential market
approval expected
later in 2001
Viscoaugmentation Use of viscoelastic gels to - U.S. clinical studies 8.6 6.8
provide scaffolding for for
tissue regeneration or as Hylaform-Registered Trademark-
an inert elastic filler for expected to be
tissues of the skin and the complete in 2001 with
subcutaneous and product launch
intermuscular connective expected in late 2001
tissues -
Hylagel-Registered Trademark-
Uro expected to be
submitted for FDA
approval and for
approval in Canada
and Europe in 2002,
with product launch
in 2003
GB-10
VALUE AT ESTIMATED
ACQUISITION COST TO
PROGRAM PROGRAM DESCRIPTION DEVELOPMENT STATUS DATE COMPLETE
------- ------------------- ------------------ ------------- -------------
(IN MILLIONS) (IN MILLIONS)
Viscoseparation Use of viscoelastic gels - Clinical studies have 39.7 8.3
(Anti-Adhesion) and membranes to separate been initiated in the
tissues and to decrease U.S., Germany,
formation of adhesions and France, the United
excessive scars after Kingdom and Belgium.
surgery Completion is
expected by the
fourth quarter of
2001, with
submissions for
regulatory approvals
in the United States,
Canada and Europe
thereafter.
- Expected product
launch in Europe by
the second quarter of
2002 and in the
United States by the
fourth quarter of
2002
----- -----
$82.1 $24.6
===== =====
As of December 31, 2000, the technological feasibility of the 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 Biosurgery 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.
CHARGE FOR IMPAIRED ASSET
In 2000, Genzyme Biosurgery recorded a $4.3 million charge for the write-off
of abandoned equipment at our Springfield Mills manufacturing facility located
in the United Kingdom. The write-off of equipment related to the Sepra-TM-
product line and did not have other alternative uses.
GB-11
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................................. $ -- $(3,403) $(7,680) (100%) (56%)
Charge for impaired investments.............. (7,300) -- -- 100% N/A
Investment income............................ 5,833 4,808 1,320 21% 264%
Interest expense............................. (1,364) (1,858) (2,631) (27%) (29%)
Other........................................ (15) 138 60 (111%) 130%
------- ------- -------
Total other income (expenses)............ $(2,846) $ (315) $(8,931) 803% (96%)
======= ======= =======
2000 AS COMPARED TO 1999
Genzyme Biosurgery recorded a $7.3 million charge in 2000 in connection with
the write-down of Genzyme Biosurgery's investment in the common stock of
Focal, Inc., because we considered the decline in the value of this investment
to be other than temporary.
The charge was partially offset by an increase in investment income and a
decrease in equity in net loss of unconsolidated affiliates. Investment income
increased because Genzyme Biosurgery had a higher average cash balance during
2000. Equity in net loss of joint venture decreased as a result of the
reallocation of Genzyme's ownership interest in Diacrin/Genzyme LLC from Genzyme
Biosurgery to Genzyme General in May 1999.
1999 AS COMPARED TO 1998
The decrease in other expenses is primarily due to an increase in investment
income. Investment income increased because Genzyme Biosurgery had a higher
average cash balance as a result of the allocation to Genzyme Biosurgery in
June 1999 of $150.0 million in cash from Genzyme General.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, Genzyme Biosurgery had cash, cash equivalents, and
short- and long-term investments of $78.2 million, a decrease of $57.3 million
from December 31, 1999.
Genzyme Biosurgery used $54.8 million in cash for operations in 2000. This
is primarily due to Genzyme Biosurgery's net loss of $162.2 million for the year
offset by a non-cash charge for in-process research and development of
$82.1 million.
Genzyme Biosurgery's investing activities in 2000 used $113.5 million,
primarily consisting of $196.3 million of net cash used in connection with the
acquisition of Biomatrix, $5.0 million to purchase shares of Focal common stock
and $2.9 million to fund capital expenditures, offset by $102.1 million in cash
generated from its investment portfolio.
As a result of the allocation of assets from Genzyme General in connection
with the creation of Genzyme Biosurgery as a separate division of Genzyme,
financing activities generated $214.6 million in 2000.
In November 2000, we exercised our option to purchase all of the outstanding
Class A limited partnership interests of Genzyme Development Partners, L.P. for
approximately $26.0 million in cash. This payment was made in January 2001, at
which time significant control passed to Genzyme Biosurgery. Genzyme
Biosurgery's cash reserves were diminished as a result of this purchase. We are
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also required to pay royalties to the former holders of the Class A interests on
sales of the Sepra-TM- products for ten years.
In connection with our acquisition of Biomatrix, Genzyme Biosurgery assumed
a 6.9% convertible subordinated note due May 14, 2003. At December 31, 2000,
$10.0 million of this note remained outstanding. Genzyme Biosurgery will use a
part of its cash flow to satisfy debt service on this note. If all or a portion
of the note is not converted at the option of the holder into Biosurgery Stock,
at maturity Genzyme Biosurgery's cash reserves will be diminished by the amount
necessary to repay the outstanding principal of the note.
Prior to our acquisition of Biomatrix, Biomatrix sold 744,000 shares of its
common stock to certain of its employees, directors and consultants in exchange
for ten-year, full recourse promissory notes. The notes accrue interest at rates
ranging from 5.30% to 7.18% and mature at various dates from May 2007 through
September 2009, upon which all outstanding principal and accrued interest
becomes payable. As a result of the acquisition, these shares were converted
into 532,853 shares of Biosurgery Stock and Genzyme Biosurgery recorded
$14.7 million of outstanding principal and accrued interest to division equity
because the notes were received in exchange for the issuance of stock.
Genzyme Biosurgery, 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 which matures in December 2003. At
December 31, 2000, $350.0 million was outstanding under the portion of the
facility that matures in December 2003, $200.0 million of which was allocated to
Genzyme Biosurgery in connection with the financing of a portion of the cash
component of the Biomatrix merger consideration. Borrowings under this facility
bear interest at LIBOR plus a margin. Genzyme Biosurgery will use a large part
of its cash flow to make principal and interest payments on this debt. If
Genzyme Biosurgery's cash flow from operations is insufficient to meet these
obligations, it may need to borrow additional funds to make these payments.
In May 1998, our board of directors made $50.0 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, its 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 to $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 Tissue Repair designated shares. Upon the formation of Genzyme
Biosurgery in December 2000, these designated 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. At December 31, 2000,
$10.0 million of Genzyme General's cash remained available to Genzyme Biosurgery
under this arrangement.
In March 2001, Genzyme General announced its preliminary analysis of results
from the phase 2 trial of NeuroCell-TM--PD. 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 may, at its election, 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
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Genzyme General's notice of its election. This payment may be made in cash,
Biosurgery designated shares, or a combination of both, at Genzyme Biosurgery's
option. If Genzyme Biosurgery elects to repay Genzyme General in cash, Genzyme
Biosurgery's cash reserves will be diminished.
We believe that Genzyme Biosurgery's cash resources, together with the
revenues generated from its products and distribution agreements, will be
sufficient to finance its planned operations and capital requirements through
2001. Genzyme Biosurgery intends to use substantial portions of its available
cash for:
- research and development;
- product development and marketing, including for
Synvisc-Registered Trademark-;
- expanding facilities; and
- working capital.
Genzyme Biosurgery's cash needs may differ from those planned as a result of
many factors, including the:
- results of research and development efforts;
- ability to establish and maintain strategic alliances;
- ability to enter into and maintain licensing arrangements and additional
distribution arrangements;
- ability to share costs of product development with research and marketing
partners;
- costs involved in enforcing patent claims and other intellectual property
rights;
- market acceptance of novel approaches and therapies;
- success of its initiatives to reduce expenses and streamline its
operations;
- development of competitive products; and
- ability to satisfy regulatory requirements of the FDA and other
governmental authorities.
In February 2001, Genzyme Biosurgery announced its intention to divest the
Snowden-Pencer-Registered Trademark- surgical instruments product lines. These
product lines include hand-held reusable instruments and endoscopic instruments
for general plastic and gynecological surgery. We are currently assessing which
assets will be offered for sale. Genzyme Biosurgery also announced its intention
to terminate the production of Synvisc-Registered Trademark- in Canada and sell
its manufacturing facility in Pointe-Claire, Canada. We expect to complete these
transactions in the second half of 2001.
Genzyme Biosurgery may require significant additional financing to continue
operations beyond 2001. We cannot guarantee that Genzyme Biosurgery will be able
to obtain any additional financing, extend any existing financing arrangement,
or find either on terms that we consider favorable. If Genzyme Biosurgery has
insufficient funds or is unable to raise additional funds, it may delay, scale
back or eliminate certain of its programs. Genzyme Biosurgery may also have to
give third parties rights to commercialize technologies or products that it
would otherwise have sought to commercialize itself.
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.
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FACTORS AFFECTING FUTURE OPERATING RESULTS
The future operating results of Genzyme Biosurgery 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.
A FAILURE TO INCREASE SALES OF SYNVISC-REGISTERED TRADEMARK- COULD HAVE A
NEGATIVE EFFECT ON OUR BUSINESS.
Genzyme Biosurgery expects to generate a substantial portion of its product
revenues from sales of Synvisc-Registered Trademark-, a treatment of
osteoarthritis of the knee. Revenues from Synvisc-Registered Trademark- could be
impacted negatively if competitive treatments for osteoarthritis of the knee are
deemed more efficacious or cost effective. Some companies are developing
competitive products, and other companies may do so in the future.
The commercial success of Synvisc-Registered Trademark- also will depend on
many other factors, including:
- THE AVAILABILITY OF THIRD PARTY REIMBURSEMENT.
Many third party payers in the United States and abroad cover
Synvisc-Registered Trademark-. Genzyme Biosurgery will continue to
discuss reimbursement for Synvisc-Registered Trademark- with European
government agencies. We cannot guarantee that any third party payers
will continue to cover Synvisc-Registered Trademark- or that
additional third party payers will begin to provide reimbursement.
- CONTINUED RELATIONS WITH MARKETING PARTNERS.
Genzyme Biosurgery has entered into several distribution agreements
for marketing and distributing Synvisc-Registered Trademark-. Genzyme
Biosurgery has in the past and may in the future periodically
reacquire distribution rights in some territories if partners cease
to perform under agreements relating to these territories. Genzyme
Biosurgery may not be able to maintain or replace these marketing
partners. In this event, there may be disruptions in sales associated
with restructuring Genzyme Biosurgery's distribution arrangements.
The future commercial success of Synvisc-Registered Trademark-, as well as
the other marketed products allocated to Genzyme Biosurgery, is highly
uncertain. For additional details concerning the risks associated with
commercializing novel biotechnology products, we encourage you to review the
factors described 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.
THE COMMERCIAL SUCCESS OF CARTICEL-REGISTERED TRADEMARK- CHONDROCYTES IS
UNCERTAIN.
Carticel-Registered Trademark- cartilage repair service involves a
proprietary process for growing autologous chondrocytes (a patient's own
cartilage cells) to replace those that are damaged or lost. Revenues from
Carticel-Registered Trademark- chondrocytes represented approximately 13% of
Genzyme Biosurgery's total revenue during 2000. The commercial success of
Carticel-Registered Trademark- chondrocytes will depend on many factors,
including the following:
- POSITIVE RESULTS FROM POST-MARKETING STUDIES.
If two ongoing post-marketing studies do not demonstrate that
treatment with Carticel-Registered Trademark- chondrocytes is
superior to the alternatives studied, the FDA may suspend or withdraw
its approval of Carticel-Registered Trademark- chondrocytes.
- FDA APPROVAL OF RELATED DEVICE.
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Genzyme Biosurgery has developed a device to improve the procedure
for implanting Carticel-Registered Trademark- chondrocytes and has
filed for marketing approval with the FDA. We cannot guarantee that
the FDA will approve this device, that this device will improve the
procedure for implanting Carticel-Registered Trademark- chondrocytes,
or that this device will gain commercial acceptance.
- THE AVAILABILITY OF THIRD PARTY REIMBURSEMENT.
Since the FDA approved Carticel-Registered Trademark- chondrocytes,
Genzyme has seen a substantial increase in the number of third party
payers who cover it. Some third party payers, however, do not cover
Carticel-Registered Trademark- chondrocytes. Genzyme cannot guarantee
that any third party payers will continue to cover it or that
additional third party payers will begin to provide reimbursement.
Although FDA approval is a crucial factor in insurance plans deciding
to cover new treatments, a number of major insurance plans also base
such decisions on their own or third party evaluations of treatments.
One independent association that conducts evaluations is the Blue
Cross Blue Shield Association. The Blue Cross Blue Shield Association
has determined that its Technology Assessment Committee does not
believe that Carticel-Registered Trademark- chondrocytes meets all of
its published criteria for new treatments. We believe that
Carticel-Registered Trademark- chondrocytes does in fact meet all of
these criteria and are discussing the evaluation with the Blue Cross
Blue Shield Association. While individual Blue Cross Blue Shield
plans representing more than 50% of Blue Cross Blue Shield
policyholders have provided policy coverage for
Carticel-Registered Trademark- chondrocytes without a favorable
evaluation by the Blue Cross Blue Shield Association, many Blue Cross
Blue Shield plans have delayed approving
Carticel-Registered Trademark- chondrocytes from coverage under their
policies as a direct result of this unfavorable ruling. Since these
remaining plans represent a significant percentage of insured lives
in the United States, this ruling has restricted our access to a
substantial portion of the market for Carticel-Registered Trademark-
chondrocytes.
- THE SUCCESS OF COMPETITIVE PRODUCTS.
The process we use to grow a patient's cartilage cells is not
patentable, and we do not yet have significant patent protection
covering the other processes used in providing
Carticel-Registered Trademark- chondrocytes. Consequently, we cannot
prevent a competitor from developing the ability to grow cartilage
cells and from offering a product or service that is similar or
superior to Carticel-Registered Trademark- chondrocytes. If a
competitor were to develop such ability and obtain FDA approval for a
competitive product or service, Genzyme Biosurgery's results of
operations would be negatively impacted. We are aware of at least two
other companies that are growing autologous cartilage cells for
cartilage repair in the European market. Also, several pharmaceutical
and biotechnology companies are developing alternative treatments for
knee cartilage damage. One or more of these companies may develop
products or services superior to the Carticel-Registered Trademark-
chondrocytes.
- MARKET ACCEPTANCE BY ORTHOPAEDIC SURGEONS.
We are marketing Carticel-Registered Trademark- chondrocytes to
orthopaedic surgeons. We cannot guarantee that we will train enough
surgeons who incorporate Carticel-Registered Trademark- chondrocytes
into their practice to make it commercially successful.
- FLUCTUATING REVENUES DUE TO SEASONAL FACTORS.
Genzyme expects that the revenues from the sale of the
Carticel-Registered Trademark- chondrocytes will fluctuate based on
Genzyme Biosurgery's success in penetrating the market, the
availability of competitive procedures and the availability of third
party reimbursement.
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Genzyme cannot predict the timing or magnitude of these fluctuations.
Furthermore, Genzyme expects that revenues from
Carticel-Registered Trademark- chondrocytes will be lower in the
summer months because fewer operations are typically performed during
those months.
- RELIANCE ON KEY COLLABORATORS.
Carticel-Registered Trademark- chondrocytes were developed based on
the work of a group of Swedish physicians. These physicians and other
individuals who are familiar with the know-how underlying
Carticel-Registered Trademark- chondrocytes through their association
with these physicians, may disclose the information to our
competitors. This event could have an adverse effect on Genzyme
Biosurgery's results of operations.
Genzyme Biosurgery will have a sponsored research agreement with the
University of Gothenburg in Sweden and certain physicians, including
the two physicians who lead the group that developed
Carticel-Registered Trademark- chondrocytes. The purpose of the
agreement is to conduct additional research on
Carticel-Registered Trademark- chondrocytes. The agreement will
prohibit members of the research team from disclosing any information
relating to Genzyme Biosurgery or its business that they acquire in
connection with their work under the agreement. The agreement also
will state that all inventions that the members conceive or reduce to
practice during the course of the research program will be Genzyme
Biosurgery's property, with royalties payable to the inventing
member. We cannot guarantee that these members will honor their
obligations under the sponsored research agreement.
GENZYME BIOSURGERY WILL DEVOTE SIGNIFICANT RESOURCES TO DEVELOP NOVEL PRODUCTS
AND TREATMENTS THAT MAY NOT BE COMMERCIALLY SUCCESSFUL.
Genzyme Biosurgery has devoted a significant amount of money to developing
products that will represent alternatives to traditional surgical procedures or
treatments. These products will likely require several years of aggressive and
costly marketing before they might become widely accepted by the surgical
community. Genzyme Biosurgery expects to develop products that are designed to
enable surgeons to perform minimally invasive cardiovascular surgery. The
medical conditions that can be treated with minimally invasive cardiovascular
surgery are currently being treated with widely accepted surgical procedures
such as coronary artery bypass grafting and catheter-based treatments, including
balloon angioplasty, atherectomy and coronary stenting. To date, minimally
invasive cardiovascular surgery has been performed on a limited basis and its
further adoption by the surgical community will partly depend on Genzyme
Biosurgery's ability to educate cardiothoracic surgeons about its effectiveness
and to facilitate the training of cardiothoracic surgeons in minimally invasive
cardiovascular surgery techniques.
Similarly, until recently surgeons have not used products designed to reduce
the incidence and extent of postoperative adhesions. Since 1996, when
Seprafilm-TM- bioresorbable membrane was introduced, market acceptance of
anti-adhesion products has been slow. To increase sales of the Sepra-TM-
products, Genzyme Biosurgery has had to educate surgeons and hospital
administrators about the problems of, and costs associated with, adhesions and
the benefits of preventing adhesions. Genzyme Biosurgery also has had to, and
continues to have to, train surgeons on the proper handling and use of these
products.
We cannot guarantee that Genzyme Biosurgery's continued efforts in educating
and training the surgical community will result in the widespread adoption of
minimally invasive cardiovascular surgery and anti-adhesion products or that
surgeons adopting these procedures and products will use Genzyme Biosurgery's
products.
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ADVERSE EVENTS IN THE FIELD OF GENE THERAPY MAY NEGATIVELY AFFECT REGULATORY
APPROVAL OR PUBLIC PERCEPTION OF GENZYME BIOSURGERY'S GENE THERAPY PRODUCTS.
The death of a patient undergoing gene therapy using an adenoviral vector to
deliver a therapeutic gene has been widely publicized. Although this patient was
not part of a Genzyme Biosurgery clinical trial, deaths and any other adverse
events in the field of gene therapy that may occur in the future may result in
greater governmental regulation and potential regulatory delays relating to the
testing or approval of Genzyme Biosurgery's gene therapy products. As a result
of the death, the U.S. Senate has conducted hearings to determine whether
additional legislation is required to protect volunteers and patients who
participate in gene therapy clinical trials. Additionally, the Recombinant DNA
Advisory Committee, which acts as an advisory body to the National Institutes of
Health (NIH), has extensively discussed the use of adenoviral vectors in gene
therapy clinical trials and recently issued a draft report on the safety of
adenoviral vectors. While this draft report recommends that clinical trials
using adenoviral vectors should continue with caution, it also suggested a
number of changes in the way gene therapy clinical trials are conducted. If any
new guidelines are adopted by the NIH, Genzyme Biosurgery's gene therapy
clinical trials could be delayed or become more expensive to conduct.
The commercial success of any gene therapy products that Genzyme Biosurgery
develops will depend in part on public acceptance of the use of gene therapies
for the prevention or treatment of human diseases. Public attitudes may be
influenced by claims that gene therapy is unsafe, and gene therapy may not gain
the acceptance of the public or the medical community. Negative public reaction
to gene therapy could result in:
- greater government regulation;
- stricter clinical trial oversight;
- tighter commercial product labeling requirements of gene therapies; and
- a decrease in the demand for any gene therapy product that Genzyme
Biosurgery may develop.
Recently, the NIH and FDA have issued proposed rules regarding the public
disclosure of information from gene therapy trials. If these rules become
regulation, additional public disclosure requirements may affect public
perception of gene therapies.
BECAUSE GENZYME BIOSURGERY HAS SIGNIFICANT FIXED PAYMENTS, IT WILL NEED TO
DEVOTE A SUBSTANTIAL PORTION OF ITS CASH FLOW TO MAKE THE PAYMENTS AND MAY NEED
TO BORROW MONEY IN THE FUTURE TO MAKE DEBT PAYMENTS AND OPERATE ITS BUSINESS.
As of December 31, 2000, we had allocated to Genzyme Biosurgery
approximately $218.0 million borrowed under a credit facility. Genzyme
Biosurgery will use a large part of its cash flow to make principal and interest
payments on this debt. If Genzyme Biosurgery's cash flow from operations is
insufficient to meet these obligations, the division may need to borrow to make
these payments. We cannot guarantee that such additional financing will be
available or available on favorable terms.
In addition to amounts borrowed under the credit facility, significant cash
obligations allocated to Genzyme Biosurgery include the following:
- GENZYME GENERAL.
In 1999, Genzyme Biosurgery received $25.0 million in cash from Genzyme
General in connection with the transfer to Genzyme General of our
interest in a joint venture with Diacrin, Inc. If the joint venture does
not initiate a phase 3 clinical trial of NeuroCell-TM--PD by June 30,
2001, Genzyme Biosurgery will be required to repay Genzyme General
$20.0 million plus accrued interest at 13.5% per year in cash, Biosurgery
designated shares, or a
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combination of both, at its option, provided that Genzyme General
notifies Genzyme Biosurgery of its intent to require this repayment. If
these milestones are not achieved, and Genzyme Biosurgery elects to repay
Genzyme General in cash, Genzyme Biosurgery's cash reserves will be
diminished. If Genzyme Biosurgery elects to repay Genzyme General in
shares of Biosurgery designated shares, this would dilute the rights of
the holders of Biosurgery Stock and could adversely affect the market
price of Biosurgery Stock.
- UBS WARBURG LLC.
In connection with our acquisition of Biomatrix, Genzyme Biosurgery
Corporation, a wholly-owned subsidiary of ours, assumed a 6.9%
convertible subordinated note due May 14, 2003 in favor of UBS Warburg
LLC. At December 31, 2000, $10.0 million of this note remained
outstanding. Genzyme Biosurgery will use a part of its cash flow to
satisfy debt service on this note. If all or a portion of the note is not
converted at the option of the holder into Biosurgery Stock, at maturity
Genzyme Biosurgery's cash reserves will be diminished by the amount
necessary to repay the outstanding principal of the note.
GENZYME BIOSURGERY ANTICIPATES FUTURE LOSSES AND MAY NEVER BECOME PROFITABLE.
Genzyme Biosurgery expects to have operating losses before amortization of
intangibles and goodwill through at least the second quarter of 2001 as it
combines the operations of Genzyme Surgical Products, Genzyme Tissue Repair and
Biomatrix, and as it continues to spend substantial amounts of money on, among
other things, conducting research, development, regulatory and commercialization
activities to support its expanded product lines. This strategy involves risks,
which include supporting higher levels of operating expenses, attracting and
retaining employees, and dealing with other management difficulties that arise
from rapid growth. If Genzyme Biosurgery cannot manage growth effectively, it
may not become profitable.
IF GENZYME BIOSURGERY FAILS TO OBTAIN CAPITAL NECESSARY TO FUND ITS OPERATIONS,
IT WILL BE UNABLE TO FUND DEVELOPMENT PROGRAMS AND COMPLETE CLINICAL TRIALS.
We anticipate that Genzyme Biosurgery's current cash resources, together
with revenues generated from products sales, will be sufficient to fund its
operations through at least 2001.
Genzyme Biosurgery's cash needs may differ from those planned because of
many factors, including the:
- ability to become profitable;
- results of research and development efforts and clinical testing;
- ability to share costs of product development with research and
marketing partners;
- ability to establish strategic alliances and licensing arrangements for
research and development programs;
- achievement of milestones under strategic alliances;
- ability to establish and maintain additional distribution arrangements;
- costs of protecting its intellectual property rights;
- market's acceptance of novel approaches and therapies;
- success of its initiatives to reduce expenses and streamline its
operations;
- development of competing products; and
- ability to satisfy regulatory requirements of the FDA and other
government authorities.
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Genzyme Biosurgery may require significant additional financing to continue
operations at anticipated levels. We cannot guarantee that it will be able to
obtain additional financing or find it on favorable terms. If Genzyme Biosurgery
has insufficient funds or is unable to raise additional funds, it may have to
delay, reduce or eliminate certain of its programs. Genzyme Biosurgery may also
have to give third parties rights to attempt to commercialize technologies or
products that it would otherwise have sought to commercialize itself.
CHANGES IN GENZYME BIOSURGERY'S MANUFACTURING CAPABILITIES COULD SIGNIFICANTLY
REDUCE ITS ABILITY TO DELIVER ITS PRODUCTS.
Genzyme Biosurgery is engaged in the production of a wide variety of
products and services. Genzyme Biosurgery's manufacturing processes are highly
complex and are regulated by the government. It is possible that Genzyme
Biosurgery will have problems maintaining or expanding its facilities in the
future. These problems could cause delays in production or delivery. Any
significant disruption in Genzyme Biosurgery's manufacturing operations or in
its ability to manufacture products cost effectively could have an adverse
effect on its business, results of operations, and financial condition.
COMPETITION FROM OTHER MEDICAL DEVICE AND TECHNOLOGY COMPANIES COULD HURT
GENZYME BIOSURGERY'S PERFORMANCE.
The human health care products and services industry is extremely
competitive. Major medical device and technology companies compete or may
compete with Genzyme Biosurgery. These include such companies as:
- Atrium Medical Corporation and Sherwood-Davis & Geck, a division of
Tyco International, Ltd., in the cardiovascular fluid management
market;
- The Ethicon division of Johnson & Johnson Ltd. and U.S. Surgical
Corporation, a division of Tyco, in the cardiovascular closure market;
- CardioThoracic Systems, Inc., Medtronic, Inc., U.S. Surgical, Guidant
Corporation, Baxter Healthcare Corporation and Ethicon in the minimally
invasive cardiovascular surgery market;
- Ethicon, Lifecore Biomedical, Inc., Life Medical Sciences, Inc. and
Gliatech, Inc. in the anti-adhesion market;
- Karl Storz Endoscopy America, Inc., Scanlan International, Inc.,
Pilling Weck Surgical Instruments and the Codman division of Johnson &
Johnson Ltd. in the reusable instruments market; and
- Fidia S.p.A., Sanofi and OrthoLogic Corp., Anika Therapeutics, Inc. and
Zimmer, Inc., and Seikagiku Corporation and Smith & Nephew in the visco
supplementation products market.
These competitors may have superior research and development, marketing and
production capabilities. Some competitors also may have greater financial
resources than Genzyme Biosurgery. The division is likely to incur significant
costs developing and marketing new products without any guarantee that they will
be competitively successful in one or more markets. The future success of
Genzyme Biosurgery will depend on its ability to effectively develop and market
its products against those of its competitors.
THE TREND TOWARD CONSOLIDATION IN THE SURGICAL DEVICES INDUSTRY MAY ADVERSELY
AFFECT GENZYME BIOSURGERY'S ABILITY TO MARKET SUCCESSFULLY ITS PRODUCTS TO SOME
SIGNIFICANT PURCHASERS.
The current trend among hospitals and other significant consumers of
surgical devices is to combine into larger purchasing groups to increase their
purchasing power and thus reduce their
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purchase price for surgical devices. Partly in response to this development,
surgical device manufacturers have been consolidating to be able to offer more
comprehensive product lines to these larger purchasing groups. In order to
market successfully its products to larger purchasing groups, Genzyme Biosurgery
may have to expand its product lines or enter into joint marketing or
distribution agreements with other manufacturers of surgical devices. We cannot
guarantee that it will be able to employ either of these initiatives or that,
when employed, these initiatives will increase the marketability of its
products.
BIOMATRIX FACES LITIGATION THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON GENZYME
BIOSURGERY'S BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
We encourage you to read the material under "--Risks Related to Genzyme--In
connection with our acquisition of Biomatrix, our subsidiary assumed litigation
faced by Biomatrix." That material describes a securities lawsuit filed against
Biomatrix prior to Genzyme's acquisition of Biomatrix.
SUBSEQUENT EVENTS
In January 2001, Focal, Inc. exercised its option to require Genzyme
Biosurgery to purchase $5.0 million in Focal common stock at a price of $2.06
per share at which time its investment in Focal became an equity interest.
Genzyme Biosurgery is committed, at Focal's option, to make an additional equity
investment in June 2001 of $5.0 million subject to certain conditions.
In February 2001, Genzyme Biosurgery announced its intention to divest the
Snowden-Pencer-Registered Trademark- surgical instruments product lines. These
product lines include hand-held reusable instruments and endoscodic instruments
for general plastic and gynecological surgery. We are currently assessing which
assets will be offered for sale. Genzyme Biosurgery also has announced its
intention to terminate the production of Synvisc-Registered Trademark- in Canada
and to sell its manufacturing facility in Pointe Claire, Canada. We expect to
complete these transactions in the second half of 2001.
In March 2001, Genzyme General announced its preliminary analysis of results
from the phase 2 trial of NeuroCell-TM--PD. 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 notice of its election. The payment may be made in cash,
Biosurgery designated shares, or a combination of both, at Genzyme Biosurgery's
option.
GB-21
GENZYME BIOSURGERY
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......................................... $ 121,870 $111,951 $103,958
Net service sales......................................... 23,321 20,305 17,008
Revenue from research and development contracts........... 23 97 109
--------- -------- --------
Total revenues.......................................... 145,214 132,353 121,075
Operating costs and expenses:
Cost of products sold..................................... 69,489 67,212 72,274
Cost of services sold..................................... 12,298 13,237 13,438
Selling, general and administrative....................... 92,238 87,841 81,876
Research and development.................................. 37,000 36,075 29,050
Amortization of intangibles............................... 7,096 5,750 5,748
Purchase of in-process research and development........... 82,143 -- --
Charge for impaired assets................................ 4,321 -- --
--------- -------- --------
Total operating costs and expenses...................... 304,585 210,115 202,386
--------- -------- --------
Operating loss.............................................. (159,371) (77,762) (81,311)
Other income (expenses):
Equity in net loss of unconsolidated affiliates........... -- (3,403) (7,680)
Charge for impaired investments........................... (7,300) -- --
Investment income......................................... 5,833 4,808 1,320
Interest expense.......................................... (1,364) (1,858) (2,631)
Other..................................................... (15) 138 60
--------- -------- --------
Total other income (expenses)........................... (2,846) (315) (8,931)
--------- -------- --------
Division net loss........................................... $(162,217) $(78,077) $(90,242)
========= ======== ========
Comprehensive loss, net of tax:
Division net loss........................................... $(162,217) $(78,077) $(90,242)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments.................. (332) -- --
Unrealized gains (losses) on securities:
Unrealized losses arising during the period............. (5,558) (1,839) 9
Reclassification adjustment for losses included in
division net loss..................................... 7,300 -- --
--------- -------- --------
Unrealized gains (losses) arising during the period..... 1,742 (1,839) 9
--------- -------- --------
Other comprehensive income (loss)......................... 1,410 (1,839) 9
--------- -------- --------
Comprehensive loss.......................................... $(160,807) $(79,916) $(90,233)
========= ======== ========
The accompanying notes are an integral part of these combined financial
statements.
GB-22
GENZYME BIOSURGERY
A DIVISION OF GENZYME CORPORATION
COMBINED BALANCE SHEETS
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(AMOUNTS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 78,163 $ 32,046
Short-term investments.................................... -- 41,606
Accounts receivable, net.................................. 38,952 24,854
Inventories............................................... 61,574 32,885
Prepaid expenses and other current assets................. 9,543 1,068
-------- --------
Total current assets.................................... 188,232 132,459
Property, plant and equipment, net........................ 57,409 20,166
Long-term investments..................................... -- 61,846
Intangibles, net.......................................... 562,635 172,833
Investment in equity securities........................... 1,603 3,140
Other non-current assets.................................. 1,721 128
-------- --------
Total assets............................................ $811,600 $390,572
======== ========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable.......................................... $ 6,074 $ 4,624
Accrued expenses.......................................... 46,245 10,169
Due to Genzyme General.................................... 18,645 7,089
Current portion of long-term debt and capital lease
obligations............................................. 18,449 --
-------- --------
Total current liabilities............................... 89,413 21,882
Long-term debt and capital lease obligations................ 211,004 18,000
Noncurrent liabilities...................................... 77 227
-------- --------
Total liabilities....................................... 300,494 40,109
Commitments and contingencies (See Notes)
Division equity (Note L).................................... 511,106 350,463
-------- --------
Total liabilities and division equity................... $811,600 $390,572
======== ========
The accompanying notes are an integral part of these combined financial
statements.
GB-23
GENZYME BIOSURGERY
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 loss........................................... $(162,217) $(78,077) $(90,242)
Reconciliation of division net loss to net cash used in
operating activities:
Depreciation and amortization............................. 11,622 9,367 9,765
Write-off of purchased in-process research and
development............................................. 82,143 -- --
Provision for bad debts................................... 1,359 559 423
Equity in net loss of unconsolidated affiliates........... -- 3,403 7,680
Accrued interest/amortization of marketable securities.... 2,294 -- --
Charge for impaired investments........................... 7,300 -- --
Other..................................................... 443 1,305 (180)
Increase (decrease) in cash from working capital:
Accounts receivable..................................... (6,904) (5,898) (4,009)
Inventories............................................. (7,561) (8,233) 3,479
Prepaid expenses and other current assets............... (1,178) 2,365 (1,469)
Accounts payable, accrued expenses and income taxes
payable................................................ 6,975 2,558 1,311
Due to Genzyme General.................................. 10,906 6,541 (665)
--------- -------- --------
Net cash used in operating activities................. (54,818) (66,110) (73,907)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments.................................... (96,456) (15,161) --
Sales and maturities of investments......................... 198,593 36,878 10,614
Investment in joint venture................................. -- (3,594) (7,163)
Purchase of equity securities............................... (5,000) (4,000) --
Purchase of property, plant and equipment................... (2,850) (4,771) (2,629)
Acquisition, net of acquired cash and assumed liabilities... (196,284) -- --
Purchase of technology rights............................... (75) (1,400) --
Sale of property, plant and equipment to Genzyme General.... 26 -- 16,500
Other....................................................... (11,479) 471 (673)
--------- -------- --------
Net cash provided by (used in) investing activities... (113,525) 8,423 16,649
CASH FLOWS FROM FINANCING ACTIVITIES:
Net cash allocated from Genzyme General..................... 9,910 79,451 41,639
Allocated proceeds from issuance of Biosurgery Stock, net... 299 -- --
Allocated proceeds from issuance of Surgical Products Stock,
net....................................................... 910 -- --
Allocated proceeds from issuance of Tissue Repair Stock,
net....................................................... 797 462 2,204
Proceeds from issuance of debt.............................. 200,000
Payments of debt and capital lease obligations.............. -- (96) (597)
Bank overdraft.............................................. 2,783 2,405 --
Other....................................................... (54) (221) (351)
--------- -------- --------
Net cash provided by financing activities............. 214,645 82,001 42,895
Effect of exchange rate changes on cash..................... (185) -- --
--------- -------- --------
Increase (decrease) in cash and cash equivalents............ 46,117 24,314 (14,363)
Cash and cash equivalents at beginning of period............ 32,046 7,732 22,095
--------- -------- --------
Cash and cash equivalents at end of period.................. $ 78,163 $ 32,046 $ 7,732
========= ======== ========
Supplemental disclosure of cash flows:
Cash paid during the year for:
Interest.................................................. $ 1,620 $ 1,629 $ 2,274
Supplemental disclosure of non-cash transactions:
Biomatrix acquisition -- Note D.
The accompanying notes are an integral part of these combined financial
statements.
GB-24
GENZYME BIOSURGERY
A DIVISION OF GENZYME CORPORATION
COMBINED STATEMENTS OF CASH FLOWS (CONTINUED)
In conjunction with the acquisition of Biomatrix, liabilites were assumed as
follows:
Fair value of assets acquired............................... $ 375,732
Goodwill.................................................... 112,262
Acquired in-process research and development................ 82,143
Deferred compensation....................................... 66
Issuance of common stock and options........................ (217,895)
Net cash paid for acquisition and acquisition costs......... (208,371)
Liabilities for exit activities and integration............. (6,716)
Net deferred tax liability assumed.......................... (106,122)
---------
Net liabilities assumed............................... $ 31,099
---------
The accompanying notes are an integral part of these combined financial
statements.
GB-25
GENZYME BIOSURGERY
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Genzyme Biosurgery is our operating division that develops and markets
instruments, devices, biomaterials and biotherapeutic products to improve or
replace surgery, with an emphasis on the orthopaedic and cardiothoracic markets.
BASIS OF PRESENTATION
On December 18, 2000, we acquired Biomatrix, Inc., a public company engaged
in the development and commercialization of viscoelastic products made of
biological polymers called hylans for use in therapeutic medical applications
and skin care. We accounted for the acquisition as a purchase. Immediately prior
to the acquisition, we combined two of our operating divisions, Genzyme Surgical
Products and Genzyme Tissue Repair, to form a new division called Genzyme
Biosurgery. We allocated the acquired assets and liabilities of Biomatrix to
Genzyme Biosurgery. The combination of Genzyme Surgical Products and Genzyme
Tissue Repair to form Genzyme Biosurgery did not result in any adjustments to
the book values of the net assets of the divisions because they remained
divisions of the same corporation. We present the financial statements of
Genzyme Biosurgery as though the divisions had been combined for all periods
presented, and include the operations of Biomatrix from the date of acquisition.
In connection with the formation of Genzyme Biosurgery, we created Genzyme
Biosurgery Division common stock, which we refer to as "Biosurgery Stock."
Biosurgery Stock is designed to track the performance of Genzyme Biosurgery.
Each outstanding share of Genzyme Surgical Products Division common stock, or
"Surgical Products Stock," was converted into 0.6060 of a share of Biosurgery
Stock, and each outstanding share of Genzyme Tissue Repair Division common
stock, or "Tissue Repair Stock," was converted into 0.3352 of a share of
Biosurgery Stock. All outstanding options to purchase Surgical Products Stock
and Tissue Repair Stock were converted into options to purchase Biosurgery Stock
at the applicable conversion rates.
The combined financial statements of Genzyme Biosurgery for each period
include the balance sheets, results of operations and cash flows of the
businesses we allocate to Genzyme Biosurgery. We also allocate a portion of our
corporate operations to Genzyme Biosurgery 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 and 1998 data to conform with
the 2000 presentation.
We prepare the combined financial statements of Genzyme Biosurgery in
accordance with generally accepted accounting principles. We present financial
information and accounting policies specific to Genzyme Biosurgery 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 Biosurgery. 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.
GB-26
GENZYME BIOSURGERY
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TRACKING STOCK
Genzyme Biosurgery Division common stock, which we refer to as "Biosurgery
Stock," is a series of our common stock that is designed to reflect the value
and track the performance of Genzyme Biosurgery. The chief mechanisms intended
to cause Biosurgery Stock to "track" the financial performance of Genzyme
Biosurgery 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 Biosurgery into the determination of the amount available to
pay dividends on Biosurgery Stock; and
- requires us to exchange, redeem or distribute a dividend to the holders
of Biosurgery Stock if all or substantially all of the assets allocated
to Genzyme Biosurgery are sold to a third party (a dividend or
redemption payment must equal in value the net after-tax proceeds from
the sale; an exchange must be for Genzyme General Stock at a 10%
premium to the average market price of Biosurgery Stock following the
announcement of the sale).
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 Biosurgery Stock is defined in our charter
as the net income or loss of Genzyme Biosurgery determined in accordance with
generally accepted accounting principles and as adjusted for tax benefits
allocated to or from Genzyme Biosurgery in accordance with our management and
accounting policies. Our charter also requires that all income and expenses of
Genzyme 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.
Because the earnings allocated to Biosurgery Stock are based on the income
or losses attributable to Genzyme Biosurgery, we include financial statements
and management's discussion and analysis of Genzyme Biosurgery to aid investors
in evaluating its performance.
While Biosurgery Stock is designed to reflect Genzyme Biosurgery's
performance, it is common stock of Genzyme Corporation and not Genzyme
Biosurgery; Genzyme Biosurgery is a division, not a company or legal entity, and
therefore does not and cannot issue stock. Consequently, holders of Biosurgery
Stock have no specific rights to assets allocated to Genzyme Biosurgery. Genzyme
Corporation continues to hold title to all of the assets allocated to Genzyme
Biosurgery and is responsible for all of its liabilities, regardless of what we
deem for financial statement presentation purposes as allocated to Genzyme
Biosurgery. Holders of Biosurgery 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 Biosurgery Stock and other tracking stockholders
would only have the rights of common stockholders in the combined assets of
Genzyme.
GB-27
GENZYME BIOSURGERY
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ALLOCATION POLICY
Our charter sets forth what operations and assets were initially allocated
to Genzyme Biosurgery and states that going forward the division will also
include all businesses, products or programs, developed by or acquired for the
division, as determined by our board of directors. We then manage and account
for transactions between Genzyme Biosurgery 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.
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 services 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
- 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.
GB-28
GENZYME BIOSURGERY
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TRANSLATION OF FOREIGN CURRENCIES
We translate the financial statements of foreign subsidiaries allocated to
Genzyme Biosurgery from local currency into U.S. dollars and record translation
adjustments for these subsidiaries to division equity. Genzyme Biosurgery
records gains and losses in foreign currency transactions in income.
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.
REVENUE RECOGNITION
Genzyme Biosurgery 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 Biosurgery recognizes revenue
from service sales when it has finished providing the service. Genzyme
Biosurgery recognizes revenue from research and development contracts over the
term of the applicable contract and as it incurs costs related to that contract.
Genzyme Biosurgery recognizes up-front license fees over the related performance
period or at the time it has no remaining performance obligations. Milestone
payments are recognized as revenue upon achievement of the milestone only if
there are no remaining performance obligations and the fees are non-refundable.
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 the consolidated
financial statements. We present earnings per share data only in our
consolidated financial statements 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
interdivision asset transfers at book value. The consideration paid for an asset
transfer generally must be fair value as determined by our board of
GB-29
GENZYME BIOSURGERY
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS
(CONTINUED)
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 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 products 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 in
the case of a program under development:
- the commercial potential of the program;
- the phase of clinical development of the program;
GB-30
GENZYME BIOSURGERY
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS
(CONTINUED)
- 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 Genzyme Biosurgery, our board of directors may elect instead to account for
the reallocation as an increase in Genzyme Biosurgery designated shares in
accordance with the provisions of our charter. Biosurgery designated shares are
authorized but unissued shares of Biosurgery Stock that our board of directors
may from time to time issue, sell or otherwise distribute without allocating the
proceeds to Genzyme Biosurgery. 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
Biosurgery Stock voting as a separate class unless the policy change does not
affect Genzyme Biosurgery.
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. 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. These transactions are subject to the conditions described
below:
- 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. To perform this calculation, we determine gross
fixed assets for the facility used at the beginning of each fiscal year
and apply our short-term borrowing rate. 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.
GB-31
GENZYME BIOSURGERY
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS
(CONTINUED)
- 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 of directors 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 of directors 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 $1.0 million
or less matures within 18 months and accrues interest at the best
borrowing rate available to the corporation for a loan of like type and
duration. Our board of directors must approve any loan in excess of
$1.0 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.
On December 31, 2000, Genzyme Biosurgery owed Genzyme General $18.6 million
in connection with these services. On December 31, 1999, approximately
$7.1 million was owed.
TAX ALLOCATIONS
We file a consolidated tax return and allocate income taxes to Genzyme
Biosurgery based upon the financial statement income, taxable income, credits
and other amounts properly allocable to it 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 Genzyme Biosurgery 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.
ACCESS TO TECHNOLOGY AND KNOW-HOW
Genzyme Biosurgery 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.
GB-32
GENZYME BIOSURGERY
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE C. OTHER CHARGES
In 2000, Genzyme Biosurgery recorded a $4.3 million charge for the write-off
of abandoned equipment at our Springfield Mills manufacturing facility located
in the United Kingdom. The write-off of equipment related to the Sepra-TM-
product line and did not have other alternative uses.
During the third quarter of 1998, Genzyme Biosurgery revised its forecasted
sales of Sepra-TM- products and, in accordance with our policy, analyzed the
Sepra-TM- products inventory to determine whether the carrying value exceeded
the net realizable value. The revised forecast showed slower sales growth as
well as higher manufacturing and sales and marketing costs than originally
expected. In addition, the Sepra-TM- products inventory on-hand had a relatively
high cost per unit because production was significantly less than originally
planned. As a result, in the third quarter of 1998, Genzyme Biosurgery took a
$10.4 million charge to cost of products sold to write down its Sepra-TM-
products inventory to net realizable value.
NOTE D. ACQUISITION OF BIOMATRIX AND FORMATION OF GENZYME BIOSURGERY
On December 18, 2000, we completed the acquisition of Biomatrix, a public
company engaged in the development and manufacture of viscoelastic biomaterials
for use in orthopaedic and other medical applications.
Concurrently with the acquisition, Genzyme Biosurgery was created as a new
division. We reallocated the businesses of two of our operating
divisions--Genzyme Surgical Products and Genzyme Tissue Repair--to Genzyme
Biosurgery and allocated the acquired businesses of Biomatrix to Genzyme
Biosurgery. As a result of this transaction, we amended our charter to create
Biosurgery Stock and eliminate Genzyme Surgical Products Division common stock,
which we refer to as "Surgical Products Stock", and Genzyme Tissue Repair
Division common stock, which we refer to as "Tissue Repair Stock". Each
outstanding share of, and option to purchase, Surgical Products Stock was
converted into the right to receive 0.6060 of a share of, or option to purchase,
Biosurgery Stock and each outstanding share of, or option to purchase, Tissue
Repair Stock was converted into the right to receive 0.3352 of a share of, or
option to purchase, Biosurgery Stock.
We accounted for the acquisition as a purchase and, accordingly, the results
of operations of Biomatrix are included in our consolidated financial statements
and the combined financial statements of Genzyme Biosurgery from the date of
acquisition.
GB-33
GENZYME BIOSURGERY
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE D. ACQUISITION OF BIOMATRIX AND FORMATION OF GENZYME BIOSURGERY
(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)............................ $196,284
Issuance of 17.5 million shares of Biosurgery Stock......... 206,522
Issuance of options and warrants to purchase 1.7 million
shares of Biosurgery Stock................................ 11,373
Acquisition costs........................................... 12,087
--------
Total purchase price........................................ $426,266
========
Current assets.............................................. $ 37,639
Property, plant and equipment............................... 38,479
Intangible assets (to be amortized straight-line over 1.5 to
11 years)................................................. 284,854
Goodwill (to be amortized straight-line over 11 years)...... 112,262
In-process research and development......................... 82,143
Deferred tax asset.......................................... 922
Deferred compensation....................................... 66
Assumed liabilities......................................... (31,099)
Liabilities for exit activities and integration............. (6,716)
Notes receivable from stockholders.......................... 14,760
Deferred tax liability...................................... (107,044)
--------
Allocated purchase price.................................... $426,266
========
The value of the 17.5 million shares of Biosurgery Stock issued in exchange
for all of the outstanding shares of Biomatrix common stock were valued using
the combined five day average closing prices of Surgical Products Stock and
Tissue Repair Stock, divided by the exchange ratios. Options and warrants to
purchase approximately 1.7 million shares of Genzyme Biosurgery Stock were
valued at $11.4 million using the Black-Scholes model. The intrinsic value of
the portion of the unvested options related to the future service period was DE
MINIMIS.
At the date of acquisition, we began to formulate plans for certain exit and
integration activities including workforce reductions and the closure of
Biomatrix's Canadian facility. Accordingly, liabilities of $6.7 million for
severance and related costs were recorded at the date of acquisition and
Biomatrix's Canadian facility was assigned a value equal to the estimated amount
to be obtained upon disposal or sale. We expect that the termination of
employees and the facility closure will be substantially complete within one
year. At December 31, 2000, $0.8 million has been spent in respect of this
liability.
In connection with the purchase of Biomatrix, Genzyme Biosurgery allocated
approximately $82.1 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.
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. A 38% discount rate was used, which is
consistent with the risks of each project. In estimating future cash
GB-34
GENZYME BIOSURGERY
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE D. ACQUISITION OF BIOMATRIX AND FORMATION OF GENZYME BIOSURGERY
(CONTINUED)
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 Biomatrix 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 Biomatrix's
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 Biosurgery's financial statements for the year
ended December 31, 2000. Genzyme Biosurgery is amortizing the remaining acquired
intangible assets arising from the acquisition on a straight-line basis over
their estimated lives, which range from 1.5 years to 11 years.
GB-35
GENZYME BIOSURGERY
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE D. ACQUISITION OF BIOMATRIX AND FORMATION OF GENZYME BIOSURGERY
(CONTINUED)
Below is a brief description of the IPR&D projects, including an estimation
of when management believes Genzyme Biosurgery 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)
Viscosupplementation Use of elastoviscous solutions - Expect to complete $33.8 $ 9.5
and viscoelastic gels in clinical studies
disease conditions to demonstrating efficacy
supplement tissues and body as a treatment for
fluids, alleviating pain and chronic hip pain with
restoring normal function potential market
approval expected in
2001
Viscoaugmentation Use of viscoelastic gels to - U.S. clinical studies 8.6 6.8
provide scaffolding for tissue for
regeneration or as an inert Hylaform-Registered Trademark-
elastic filler for tissues of expected to be complete
the skin and the subcutaneous in 2001 with product
and intermuscular connective launch expected in late
tissues 2001
-
Hylagel-Registered Trademark-
Uro expected to be
submitted for FDA
approval and for
approval in Canada and
Europe in 2002, with
product launch in 2003
Viscoseparation Use of viscoelastic gels and - Clinical studies have 39.7 8.3
(Anti-Adhesion) membranes to separate tissues been initiated in the
and to decrease formation of U.S., Germany, France,
adhesions and excessive scars the United Kingdom and
after surgery Belgium. Completion is
expected by the fourth
quarter of 2001, with
submissions for
regulatory approvals in
the United States,
Canada and Europe
thereafter.
- Expected product launch
in Europe by the second
quarter of 2002 and in
the United States by
the fourth quarter of
2002
----- -----
$82.1 $24.6
===== =====
As of December 31, 2000, the technological feasibility of the 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
GB-36
GENZYME BIOSURGERY
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE D. ACQUISITION OF BIOMATRIX AND FORMATION OF GENZYME BIOSURGERY
(CONTINUED)
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 Biosurgery 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 Biomatrix 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 and development
charge of $82.1 million, are not reflected in the following pro forma financial
summary.
FOR THE YEARS ENDED
DECEMBER 31
-----------------------
2000 1999
---------- ----------
(AMOUNTS IN THOUSANDS)
Total revenues.......................................... $220,836 $212,053
Division net loss....................................... (126,090) (113,256)
Prior to the acquisition, Biomatrix sold 744,000 shares of its common stock
to certain of its employees, directors and consultants in exchange for ten-year,
full recourse promissory notes. The notes accrue interest at rates ranging from
5.30% to 7.18% and mature at various dates from May 2007 through
September 2009, upon which all outstanding principal and accrued interest
becomes payable. As a result of the acquisition, these shares were converted
into 532,853 shares of Biosurgery Stock and Genzyme Biosurgery recorded
$14.7 million of outstanding principal and accrued interest to division equity
because the notes were received in exchange for the issuance of stock.
NOTE E. ACCOUNTS RECEIVABLE AND INTANGIBLE ASSETS
Genzyme Biosurgery's trade receivables primarily represent amounts due from
healthcare service providers. Genzyme Biosurgery performs credit evaluations of
its customers on an ongoing basis and generally does not require collateral.
Genzyme Biosurgery states accounts receivable at fair value after reflecting an
allowance for doubtful accounts. This allowance was $2.4 million at
December 31, 2000 and $1.3 million at December 31, 1999.
GB-37
GENZYME BIOSURGERY
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE E. ACCOUNTS RECEIVABLE AND INTANGIBLE ASSETS (CONTINUED)
The following table contains information of Genzyme Biosurgery's intangible
assets for the periods presented:
WEIGHTED WEIGHTED
AVERAGE AVERAGE
ESTIMATED ESTIMATED
DECEMBER 31, USEFUL DECEMBER 31, USEFUL
2000 LIFE (YEARS) 1999 LIFE (YEARS)
------------ ------------ ------------ ------------
(AMOUNTS IN THOUSANDS, EXCEPT USEFUL LIFE DATA)
Goodwill....................... $242,109 27 $129,847 40
Tradenames..................... 94,624 25 45,878 40
Distribution agreements........ 13,950 8 -- --
Patents........................ 75,196 11 15,319 12
Technology..................... 159,624 11 -- --
Other.......................... 4,622 7 1,890 9
-------- --------
590,125 192,934
Less accumulated
amortization................. (27,490) (20,101)
-------- --------
Intangible assets, net......... $562,635 $172,833
======== ========
NOTE F. INVENTORIES
DECEMBER 31,
-----------------------
2000 1999
-------- --------
(AMOUNTS IN THOUSANDS)
Raw materials.......................................... $21,271 $15,901
Work-in-process........................................ 25,640 3,967
Finished products...................................... 14,663 13,017
------- -------
Total inventory...................................... $61,574 $32,885
======= =======
NOTE G. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(AMOUNTS IN THOUSANDS)
Plant and equipment................................... $22,506 $14,951
Land and buildings.................................... 40,039 8,268
Leasehold improvements................................ 3,083 3,031
Furniture and fixtures................................ 7,023 4,192
Construction-in-progress.............................. 564 1,407
------- -------
73,215 31,849
Less accumulated depreciation......................... (15,806) (11,683)
------- -------
Property, plant and equipment, net.................... $57,409 $20,166
======= =======
GB-38
GENZYME BIOSURGERY
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE G. PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
Genzyme Biosurgery's depreciation expense was $4.3 million in 2000,
$3.6 million in 1999, and $4.3 million in 1998.
NOTE H. INVESTMENTS
Investments in marketable securities consisted of the following:
DECEMBER 31,
-----------------------------------------
2000 1999
------------------- -------------------
MARKET MARKET
COST VALUE COST VALUE
-------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
Cash equivalents(1):
Corporate notes....................... $ -- $ -- $16,930 $16,915
Money market fund..................... 74,035 74,035 4,317 4,317
------- ------- ------- -------
$74,035 $74,035 $21,247 $21,232
======= ======= ======= =======
Short-term:
Corporate notes....................... $ -- $ -- $41,757 $41,606
======= ======= ======= =======
Long-term:
Corporate notes....................... $ -- $ -- $37,598 $36,878
Federal............................... -- -- 4,081 4,026
U.S. Treasury notes................... -- -- 20,979 20,942
------- ------- ------- -------
-- -- $62,658 $61,846
======= ======= ======= =======
Investment in equity securities....... $ 1,603 $ 1,603 $ 4,000 $ 3,140
======= ======= ======= =======
(1) Cash equivalents are included as part of cash and cash equivalents on our
balance sheets.
Genzyme Biosurgery records gross unrealized holding gains and losses in
division equity. The following table sets forth the amounts recorded:
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(AMOUNTS IN THOUSANDS)
Unrealized holding losses............................. $-- $1,839
GB-39
GENZYME BIOSURGERY
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE H. INVESTMENTS (CONTINUED)
The following table contains information regarding the range of contractual
maturities of Genzyme Biosurgery's investments in debt securities:
DECEMBER 31,
-----------------------------------------
2000 1999
------------------- -------------------
MARKET MARKET
COST VALUE COST VALUE
-------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
Within 1 year......................... $74,035 $74,035 $ 63,004 $ 62,838
1-2 years............................. -- -- 62,658 61,846
------- ------- -------- --------
$74,035 $74,035 $125,662 $124,684
======= ======= ======== ========
Note I., "Investments," to our consolidated financial statements contains
information regarding Genzyme Biosurgery's equity investment in Focal, Inc. We
incorporate that information into this note by reference.
GB-40
GENZYME BIOSURGERY
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE I. DIACRIN JOINT VENTURE
In May 1999, we reallocated our ownership interest in Diacrin/Genzyme LLC,
our joint venture with Diacrin, Inc. to develop and commercialize
NeuroCell-TM--PD for the treatment of Parkinson's disease and NeuroCell-TM--HD
for the treatment of Huntington's disease, from Genzyme Biosurgery to Genzyme
General in exchange for $25.0 million in cash. For the period October 1996
through May 1999, Genzyme Biosurgery provided a total of $19.5 million of
funding to the joint venture, $5.1 million of which was provided by Genzyme
General in exchange for 489,810 Genzyme Biosurgery designated shares. Genzyme
Biosurgery realized net losses from the joint venture of $3.4 million in 1999
and $7.7 million in 1998.
In connection with the reallocation, it was agreed that Genzyme General, at
its election, could require Genzyme Biosurgery to pay to Genzyme General
$20.0 million plus accrued interest at an annual rate of 13.5% if the joint
venture had not initiated a phase 3 clinical trial of NeuroCell-TM--PD by
December 31, 2000. In October 2000, our board of directors extended the
milestone timeline to initiate a phase 3 clinical trial of NeuroCell-TM--PD from
December 31, 2000 to June 30, 2001. The milestone date and related financial
obligation were extended to enable the companies to extend the current blinded
phase 2 clinical trial to 18 months from 12 months and allow investigators time
to complete and review the results of the trial. See Note S., "Subsequent
Events."
Condensed financial information and allocation of the losses of the
Diacrin/Genzyme LLC are summarized below:
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
1999 1998
-------- --------
(AMOUNTS IN THOUSANDS)
Operating expenses..................................... $(10,718) $(9,595)
Net loss............................................... (10,713) (9,595)
DECEMBER 31, 1999
-----------------
(AMOUNTS IN THOUSANDS)
Current assets.......................................... $443
Noncurrent assets....................................... 192
Current liabilities..................................... 972
NOTE J. ACCRUED EXPENSES
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(AMOUNTS IN THOUSANDS)
Compensation.......................................... $12,180 $ 4,381
Income taxes payable.................................. 6,303 --
Professional fees..................................... 1,367 800
Royalties............................................. 3,200 707
Acquisition related costs............................. 8,897 --
Restructuring costs................................... 5,970 --
Other................................................. 8,328 4,281
------- -------
$46,245 $10,169
======= =======
GB-41
GENZYME BIOSURGERY
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE K. LONG-TERM DEBT AND LEASES
Our long-term debt and capital lease obligations consist of the following:
DECEMBER 31,
-----------------------
2000 1999
-------- --------
(AMOUNTS IN THOUSANDS)
Revolving credit facility maturing in December 2003... $200,000 $ --
Revolving credit facility maturing in November 2002... -- 18,000
Revolving credit facility maturing in December 2001... 18,000 --
6.9% convertible subordinated note due in May 2003.... 10,000 --
Capital leases........................................ 1,453 --
-------- -------
$229,453 $18,000
Less current portion.................................. (18,449) --
-------- -------
$211,004 $18,000
======== =======
Note K. "Long Term Debt and Leases," to our consolidated financial
statements contains information regarding our:
- revolving credit facilities;
- 6.9% convertible subordinated note; and
- capital leases resulting from the acquisition of Biomatrix.
We incorporate that information into this note by reference.
OPERATING LEASES
Genzyme Biosurgery leases facilities and personal property under operating
leases with terms in excess of one year. Genzyme Biosurgery's total expense
under operating leases was:
2000 1999 1998
---- ---- ----
$ 2.7
million..... $1.9 million $2.4 million
Over the next five years, Genzyme Biosurgery will be required to repay the
following amounts under operating leases:
2001 2002 2003 2004 2005 AFTER 2005
---- ---- ---- ---- ---- ----------
$3.5 million $3.4 million $3.3 million $3.3 million $2.7 million $2.6 million
NOTE L. DIVISION EQUITY
The following table contains the components of division equity for Genzyme
Biosurgery for the periods presented:
DECEMBER 31,
-------------------------------
2000 1999 1998
--------- -------- --------
(AMOUNTS IN THOUSANDS)
Balance at beginning of period.............................. $ 350,463 $210,692 $255,172
Division net loss........................................... (162,217) (78,077) (90,242)
GB-42
GENZYME BIOSURGERY
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE L. DIVISION EQUITY (CONTINUED)
DECEMBER 31,
-------------------------------
2000 1999 1998
--------- -------- --------
(AMOUNTS IN THOUSANDS)
Allocation of proceeds from issuance of Tissue Repair Stock
under stock plans......................................... 798 461 2,109
Allocated tax benefits...................................... 448 -- --
Allocation of proceeds from issuance of Surgical Products
Stock under stock plans................................... 910 -- --
Allocation of proceeds from issuance of Biosurgery Stock
under stock plans......................................... 298 -- --
Allocation of cash from Genzyme General to Genzyme Surgical
Products for designated shares............................ -- 176,706 41,975
Allocation of cash from Genzyme General to Genzyme Tissue
Repair for designated shares.............................. 9,910 5,001 --
Allocated value of Biosurgery Stock issued upon acquisition
of Biomatrix.............................................. 217,895 -- --
Tax benefit related to acquisition.......................... 107,044 -- --
Notes receivable from stockholders.......................... (14,760) -- --
Payment from Genzyme General for research program........... -- 100 250
Payment from Genzyme General for transfer of interest in
joint venture............................................. -- 25,000 --
Allocated stock compensation expense........................ -- -- 108
Allocated value of Tissue Repair Stock issued upon
conversion of convertible debt............................ -- 12,483 600
Allocated gain on transfer of facility...................... -- -- 711
Issuance of Tissue Repair Stock in connection with research
programs.................................................. 289 -- --
Allocated equity adjustments................................ 28 (1,903) 9
--------- -------- --------
Balance at end of period.................................... $ 511,106 $350,463 $210,692
========= ======== ========
As a result of recording a deferred tax liability related to the purchase of
Biomatrix, Genzyme Biosurgery released a corresponding deferred tax asset
valuation allowance totalling $107.0 million. This reversal was recorded to
division equity.
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 loss data for Genzyme Biosurgery
as if compensation expense for our stock-based compensation plans was determined
in accordance with SFAS 123 based on
GB-43
GENZYME BIOSURGERY
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE L. DIVISION EQUITY (CONTINUED)
the fair value at the grant dates of the awards, and the compensation expense
related to Biosurgery Stock awards would be allocated to Genzyme Biosurgery in
accordance with our allocation policies:
DECEMBER 31,
-------------------------------
2000 1999 1998
--------- -------- --------
(AMOUNTS IN THOUSANDS)
Net loss:
As reported................................. $(162,217) $(78,077) $(90,242)
Pro forma................................... $(166,623) $(83,875) $(94,337)
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.
INTERDIVISION FINANCING ARRANGEMENT
In May 1998, our board of directors made $50.0 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, its 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 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 to
$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 Tissue Repair designated shares. Upon the formation of Genzyme
Biosurgery in December 2000, these designated 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. At December 31, 2000,
$10.0 million of Genzyme General's cash remained available to Genzyme Biosurgery
under this arrangement.
NOTE M. 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 Biosurgery's results of operations,
financial condition, or liquidity.
NOTE N. GENZYME DEVELOPMENT PARTNERS
Genzyme Development Partners, L.P., or "GDP," was formed in September 1989
to develop, produce and derive income from the sale of the Sepra-TM- products.
One of our wholly-owned subsidiaries is the general partner of GDP. In
September 1989, we also formed a joint venture with GDP to manufacture and
market the Sepra-TM- products in the United States and Canada for use in
GB-44
GENZYME BIOSURGERY
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE N. GENZYME DEVELOPMENT PARTNERS (CONTINUED)
human clinical trials or human clinical procedures. We refer to this joint
venture as GVII. We consolidate GVII for financial statement purposes and
allocate it to Genzyme Biosurgery.
In November 2000 we exercised our option to purchase all of the outstanding
Class A limited partnership interests in the partnership for approximately
$26.0 million in cash. We paid this amount in January 2001, at which time
significant control passed to Genzyme Biosurgery. We are also required to pay
royalties to the former holders of the Class A interests on sales of the
Sepra-TM- products for ten years.
NOTE O. INCOME TAXES
Genzyme Biosurgery'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)%
State taxes, net....................................... (1.9)% (1.2)% (3.0)%
Benefit of tax credits................................. 0.0% 0.0% (1.5)%
Nondeductible amortization............................. 1.5% 1.4% 1.2%
Other, net............................................. 0.4% 0.2% 0.3%
Deductions subject to deferred tax valuation........... 35.0% 34.6% 38.0%
----- ----- -----
Effective tax rate..................................... 0.0% 0.0% 0.0%
===== ===== =====
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.................... $ 125,386 $ 130,167
Tax credits......................................... 2,366 2,360
Intangible amortization............................. -- 2,261
Reserves and other.................................. 14,271 11,468
--------- ---------
Gross deferred tax asset.............................. 142,023 146,256
Valuation allowance................................... (34,104) (143,939)
--------- ---------
Net deferred tax asset................................ $ 107,919 $ 2,317
Deferred tax liabilities:
Intangible amortization............................. $(105,770) --
Depreciable assets.................................. (2,149) (2,317)
--------- ---------
Net deferred tax liabilities.......................... $ -- $ --
========= =========
As a result of uncertainty surrounding our ability to realize certain tax
benefits that primarily relate to operating loss carryforwards, and capital
losses from the purchase of in-process research and development, we placed
valuation allowances of $34.1 million in 2000 and $143.9 million in 1999 against
otherwise recognizable deferred tax assets.
GB-45
GENZYME BIOSURGERY
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE O. INCOME TAXES (CONTINUED)
As Genzyme Biosurgery recognizes these deferred tax assets in accordance
with generally accepted accounting principles, the benefits of those assets will
be reflected in its tax provision. However, the benefit of these deferred tax
assets has previously been allocated to Genzyme General in accordance with our
management and accounting policies, and will be reflected as a reduction of
Genzyme Biosurgery's net income to determine net income attributable to
Biosurgery Stock.
NOTE P. 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 Q. SEGMENT 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
Biosurgery has three reportable segments:
- Cardiothoracic, which includes chest drainage systems, instruments and
closures used in coronary artery bypass, valve replacement, and other
cardiothoracic surgeries;
- Orthopaedics, which includes Synvisc-Registered Trademark- and
Carticel-TM- chondrocytes; and
- Biosurgical Specialties, which includes the Sepra-TM- products,
instruments for general and plastic surgery, and
Epicel-Registered Trademark- skin grafts.
We have provided information concerning the operations in these reportable
segments in the following table:
DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(AMOUNTS IN THOUSANDS)
Revenues:
Cardiothoracic.............................. $ 76,406 $ 77,936 $ 74,545
Orthopaedics................................ 22,388 15,213 10,978
Biosurgical Specialties..................... 46,397 39,107 35,443
Other....................................... 23 97 109
-------- -------- --------
Total......................................... $145,214 $132,353 $121,075
======== ======== ========
Gross Profit:
Cardiothoracic.............................. $ 30,536 $ 33,360 $ 29,560
Orthopaedics................................ 9,998 5,693 615
Biosurgical Specialties..................... 22,870 12,754 5,079
Other....................................... 23 97 109
-------- -------- --------
Total......................................... $ 63,427 $ 51,904 $ 35,363
======== ======== ========
The Other category includes revenue from our research and development
contracts. We do not allocate assets within Genzyme Biosurgery for purposes of
segment information.
GB-46
GENZYME BIOSURGERY
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE Q. SEGMENT INFORMATION (CONTINUED)
The following table contains revenue information by geographic area:
DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(AMOUNTS IN THOUSANDS)
Revenues:
U.S......................................... $109,132 $ 95,124 $ 87,684
Europe...................................... 24,554 28,234 26,007
Other....................................... 11,528 8,995 7,384
-------- -------- --------
Total..................................... $145,214 $132,353 $121,075
======== ======== ========
All long-lived assets are in the United States.
Genzyme Biosurgery markets its products directly to physicians and
hospitals. Genzyme Biosurgery also markets its products through distributors and
had the following sales as a percentage of total revenue to two unaffiliated
distributors:
DECEMBER 31,
------------------------------------
2000 1999 1998
-------- -------- --------
(AMOUNTS IN THOUSANDS)
Revenues:
Distributor A....................................... 12.1% 15.3% 16.5%
Distributor B....................................... 6.8% 7.6% 8.5%
NOTE R. QUARTERLY RESULTS (UNAUDITED)
1STQUARTER 2NDQUARTER 3RDQUARTER 4THQUARTER
2000 2000 2000 2000
---------- ---------- ---------- ----------
(AMOUNTS IN THOUSANDS)
Net revenue.......................... $ 34,949 $ 36,256 $ 34,607 $ 39,402
Gross profit......................... 15,887 16,641 13,165 17,734
Net loss............................. (15,014) (14,398) (19,524) (113,281)
1STQUARTER 2NDQUARTER 3RDQUARTER 4THQUARTER
1999 1999 1999 1999
---------- ---------- ---------- ----------
(AMOUNTS IN THOUSANDS)
Net revenue.......................... $ 31,376 $ 31,346 $ 33,037 $ 36,594
Gross profit......................... 12,534 10,686 12,711 15,973
Net loss............................. (20,361) (26,040) (17,101) (14,575)
NOTE S. SUBSEQUENT EVENTS
In January, 2001, Focal, Inc. exercised its option to require Genzyme
Biosurgery to purchase $5.0 million in Focal common stock at a price of $2.06
per share at which time its investment in Focal became an equity interest.
Genzyme Biosurgery is committed, at Focal's option, to make an additional equity
investment in June 2001 of up to $5.0 million, subject to certain conditions.
GB-47
GENZYME BIOSURGERY
A DIVISION OF GENZYME CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE S. SUBSEQUENT EVENTS (CONTINUED)
In February 2001, Genzyme Biosurgery announced its intention to divest the
Snowden-Pencer-Registered Trademark- surgical instruments product lines. These
product lines include hand-held reusable instruments and endoscopic instruments
for general plastic and gynocological surgery. We expect this sale to be
completed during the second half of 2001. We are currently assessing which
assets will be offered for sale. Genzyme Biosurgery also has announced its
intention to terminate the production of Synvisc-Registered Trademark- in Canada
and to sell its manufacturing facility in Ponte-Claire, Canada. We expect to
complete these transactions in the second half of 2001.
In March 2001, Genzyme General announced its preliminary analysis of results
from the phase 2 trial of NeuroCell-TM--PD. 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 may, at its election, 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 notice of its election. The payment may be made in cash,
Biosurgery designated shares, or a combination of both, at Genzyme Biosurgery's
option.
GB-48
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 Biosurgery (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
Biosurgery is a division of Genzyme Corporation; accordingly, the combined
financial statements of Genzyme Biosurgery 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 S.,
as to which the date is March 16, 2001
GB-49